polity : good governance : What are the pros and cons of the Indian Government's Jan Dhan Yojna -4
Answer by Arushi Jamar:
PMJDY is a HUGE step towards improving the state of Financial Inclusion in India. I've been actively involved in a research project on Financial Inclusion for the past 8 months. I've studied all the old schemes, their success, their loopholes and their insufficiencies. That's why I'm pretty excited about this scheme.
This is going to be a long answer covering:
- Need for inclusion
- GOI's efforts for inclusion
- Why the efforts failed
- How is PMJDY different
(You can find the details of the scheme in, not repeating all that)
Part 1: Why is inclusion such a big deal?
Equality of Opportunity
Availability of cheap credit is an essential requirement for escaping poverty.
Imagine a bright and hard working 20-year old, Hari. He has no land or money. He'd left school after class 8, because, it wasn't free any more. He lives in a village with little economic activity. The only way he can earn any money is through manual labour.
Does that pay him enough to start and provide for a family or build a house? No.
Is he going to see any growth in his income? No.
He is stuck in an unending vicious cycle of poverty, and so will be his kids.
Now imagine a situation where Hari is able to get a loan.
- He can buy a rickshaw/auto/taxi and drive it around to earn a better income. He can even expand to 2 of these vehicles later
- He can buy land and cultivate it
- He can start a trading business
- He can buy any capital good to start production, like a sewing machine, an atta chakki, etc.
- He can get education or any skill-based training and use these skills to get a decent job
Credit will not necessarily improve his economic condition, but with credit he has the OPPORTUNITY to come out of poverty.
What happens in the absence of inclusion?
Hari has no option but to turn to a money lender for credit. This money lender can charge Hari anything from 24% to 60% interest per annum for this credit, as against 12%-18% charged by a bank. The money lender will also threaten or hurt Hari if he fails to pay.
The high cost and the threat will deter Hari from taking the loan, so he'll continue looking for manual labour. He may be bright or hard working, but he still has no OPPORTUNITY to get a better life.
Imagine another situation, where Hari has a piece of land. But he has no money to cultivate it. He'll either end up selling the land or going to a money lender for credit. If the crop fails, it's possible that the moneylender takes away his land.
Same applies to Insurance.
If Hari is the only earning member in his family, and he meets an accident. He can be cured, but since he has no money to afford treatment, he may end up dying. In the absence of a life insurance, his death with leave his family with no money, no income and no earning member.
Part 2: GOI's efforts:
There have been many. To name a few:
- Regional Rural Banks
- Kisan Credit Card
- Bhoomiheen Credit Card (Bank Of India and Dena Bank)
- Banking Correspondent – Banking Facilitator Model
- Ultra – Small Braches
- SHG-Bank Linkage Program
- Direct Benefits Transfer
- USSD Mobile Banking
- Swabhimaan Campaign
- Rashtriya Swastha Bima Yojana
- Rashtriya Mahila Kosh
Since 1975, the GOI has been actively trying to 'include' people in the financial system.
Part 3: Why couldn't the schemes deliver?
All these schemes were brilliant in principle. They HAVE improved the situation in some regions. Banks have expanded their network and their customer base. But in general the schemes failed to deliver the expected results. Why?
Mostly because previously, the govt focussed mainly on getting the statistics right, paying less attention to actual welfare. They talked about the number of bank accounts opened, the proximity of bank branches to people, the amount of credit extended, etc.
What's wrong with this quantitative approach is that 'bank accounts' is only the means of inclusion, not the ends. Ends is welfare.
Have these bank accounts prevented people from going to money lenders? Not if 43% rural households still borrow from informal sources.
Have they promoted the habit of saving at a bank? Not if only 11% of total account holders have saved any money in these accounts in the year 2011-12.
Does the increase in number of bank accounts mean inclusion? Not when most of these accounts are dormant.
The amount of credit dispersed seems like a big achievement till you find out how a villager has to bribe the bank employees something like 4/5% of the loan amount to get the loan sanctioned.
Insurance, is one thing that could never penetrate because the poor just can't afford it.
The schemes also had individual limitations.
For example, The SHG-Bank Linkage program work brilliantly in some villages of Gujarat & Maharashtra, where the Self Help Groups were functioning well. But in states like Uttar Pradesh, women are not empowered enough to form an SHG. The scheme completely failed there.
The Banking Correspondent model faced challenges like a very high attrition rate among these correspondents. Also, villagers found it difficult to trust a random person enough to give him their savings.
(Disclaimer: Kisan Credit Card made the agricultural credit readily available and affordable, that one is not a failed scheme)
Part 4: How is PMJDY different?
- Rupay card. The overdraft (credit) is withdrawn through an ATM using this card. No scope for any corruption on the part of bank employees. Every card holder get the overdraft facility
- Free Insurance. Wow. Just Wow. No more affordability issues
- Attractiveness. Bank is not going to people to try to get them to open an account. The scheme is so attractive with its free insurance and overdraft facility that people are coming themselves to get an account
- Marketing. The scheme is being marketed extremely well through multiple channels
- Subsidy through this account. There is no default risk because people receive their subsidies through the same account
- Focussed. The scheme specifically focusses on the BPL families
- Ambitious targets. The scheme aims to open 7.5 crore accounts till January 26th, 2015
Overall, the scheme has tried to plug multiple loopholes in the existing schemes, like leakages due to corrupt middlemen, KYC requirements for opening an account, unwillingness on the part of customers, etc.
But the implementation challenges remain. The scheme wouldn't succeed if the government is unable to implement all that it has planned. I'm hoping it is able to.
Thanks for the A2A!