Mirage of inclusion

THE Pradhan Mantri Jan Dhan Yojana (PMJDY), announced on August 15, is the latest in a series of efforts taken by the government to ensure that financial services are extended to a larger proportion of the population. While the Narendra Modi government tries hard to sell the PMJDY as its own, the scheme is largely a continuation of the financial inclusion policy co-authored by the United Progressive Alliance (UPA) government and the Reserve Bank of India (RBI) after 2005. Consequently, much of the systemic fragilities in the UPA government’s policy are retained in the PMJDY as well.

Extent of financial exclusion

Data from the Census of India show that only 58.7 per cent of Indian households accessed banking services in 2011. In rural India, it was even fewer, at 54.4 per cent. The Census definition includes households with dormant bank accounts too. Studies show that about 50 per cent of the deposit accounts in the country are not operated at all. As a result, the actual extent of household-level financial exclusion is significantly higher than what the Census data show.

Data from the RBI show that only 46,126 out of the 640,867 villages in India were covered by banks in March 2014. The RBI claims that it has covered an additional 337,678 villages under its Banking Correspondent (BC) programme. However, a large proportion of the BCs are non-existent on the ground. As a result, the geographical spread of banking services is significantly lower than what the RBI claims.

The Jan Dhan Yojana

According to the official brochure released by the Department of Financial Services, the programme for financial inclusion under the PMJDY is based on six pillars:

1. The country will be divided into a number of sub-service areas (SSA), each with 1,000-1,500 households. One banking outlet (branch or BC) will be established within a distance of five km from every SSA by August 2015;

2. One bank account will be ensured for every household by August 2015, along with a RuPay debit card and an accident cover worth Rs.1,00,000. If the credit history is satisfactory during the first six months, the account holder will become eligible for an overdraft worth Rs.5,000;

3. Financial literacy programmes will be expanded by August 2015 to spread awareness about financial services;

4. A Credit Guarantee Fund will be created before August 2018 to cover potential defaults in overdrafts;

5. All willing and eligible persons will be provided with micro-insurance by August 2018; and

6. Pension payments under the Swavalamban Yojana scheme for workers in the unorganised sector will be paid through bank accounts by August 2018.

The responses to the PMJDY have been wide-ranging. The Governor of the RBI, Raghuram Rajan, implicitly warned the government against exposing banks to risks similar to the subprime risks in the West. He was referring to the overdrafts of up to Rs.75,000 crore that banks may have to provide under the PMJDY. Rajan also appeared piqued that Modi had preferred the PMJDY model, and not the RBI’s new market-oriented vision for financial inclusion outlined in the January 2014 report of the Nachiket Mor Committee.

Business journalists, who were until recently rooting for Modi as a neoliberal messiah, derided the scheme as “loan mela”. One journalist lamented about Modi: “Horror of horrors, he is getting Congressised.” At the other end of the spectrum, some economists have termed the scheme a “big bang reform” which “could replicate the effect that nationalisation had” on banks after 1969.

What all these readings miss is that there is very little that is new in the PMJDY when compared with the UPA government’s financial inclusion policy. Elements of continuity are too stark to be missed.

Financial inclusion policy after 2005

If the nationalisation of banks in 1969 was India’s first major effort at financial inclusion, the era of financial liberalisation which began in 1991 reversed many of the achievements of nationalisation. Firstly, 922 rural bank branches were closed down between 1995 and 2005 in the name of branch rationalisation. Out of these, 757 branches were closed down between 1998 and 2004, when the National Democratic Alliance (NDA) government was in power.

Secondly, a large proportion of the rural poor were shut out from the public banking system and forced to depend on informal sources like landlords or moneylenders.

For instance, the share of informal sources in the total outstanding debt of rural Dalit households rose from 37 per cent in 1992 to 55 per cent in 2002.

Thirdly, the cost of credit in rural areas increased sharply. The share of rural households that paid compounded annual interest rates of above 20 per cent increased from 15 per cent in 1992 to 34 per cent in 2002.

In 2005, the RBI announced its financial inclusion initiative. The RBI noted that it was “recognising the concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population”.

Banks were urged to review their practices and align them with the objective of financial inclusion. At this point, the RBI defined financial inclusion as just the opening of “no-frills” accounts.

The concept of financial inclusion was expanded in 2008 by the RBI’s Committee on Financial Inclusion, chaired by C. Rangarajan. This committee specified the constituent parts of financial inclusion: (a) a basic no-frills bank account to make and receive payments; (b) a savings product; (c) money transfer facilities; (d) small loans and overdrafts; and (e) an insurance product.

It also suggested that financial inclusion should be prioritised under a “National Mission on Financial Inclusion”. It was this refined definition of financial inclusion that the UPA government used when it launched its financial inclusion campaign in 2010-11.

The Modi government’s PMJDY borrows the definition; in fact, it even borrows the mission’s name. In the PMJDY brochure, Finance Minister Arun Jaitley introduces the PMJDY as “a National Mission on Financial Inclusion”.

Inclusion as business

The UPA government’s financial inclusion policy after 2005 differed from the post-1969 bank nationalisation policy in at least three ways. Firstly, true to the principles of financial liberalisation, banks were urged to approach financial inclusion not as a social task but “as a business opportunity”. Banks were encouraged to develop viable financial products for the poor that would also ensure adequate profits.

Secondly, private microfinance institutions (MFIs) were actively encouraged to expand financial inclusion. It was in the sphere of microfinance that “inclusion as business” was sought to be fully realised. In the 2000s, the average interest rates on lending by private MFIs were between 24 and 36 per cent per annum. The MFI bubble finally burst in 2010; today, the private MFI model of financial inclusion stands thoroughly discredited.

Thirdly, there was considerable reliance on “branchless banking” through the BC model. The BC model became an important medium to practice financial inclusion in a cost-effective manner. Instead of opening rural branches, BCs were appointed as intermediaries between banks and customers and were paid a salary/commission for their service. In 2010, to make the model more attractive, the RBI permitted the appointment of “for-profit companies” as BCs.

The introduction of the Aadhaar-linked DBT scheme in 2012 gave a wholly new dimension to the UPA’s financial inclusion policy. The assumption was that routing cash benefits through banks would force beneficiaries to register for Aadhaar and open Aadhaar-linked bank accounts.

In villages without bank branches, beneficiaries were to withdraw cash through BCs, who were to use Aadhaar-enabled biometric devices or mobile phones to authenticate beneficiaries. A 2 per cent share of the total transfer was fixed as commission for BCs.

The DBT scheme was a failure. Firstly, the Aadhaar project faced stiff resistance from citizens’ groups owing to its indirect compulsoriness and lack of legal backing and the fear of privacy violations. Secondly, the biometric technology used to authenticate beneficiaries at the BC level recorded high error rates, rising sometimes up to 25-30 per cent. Thirdly, the BC model itself proved to be a non-starter.

Reasons for failure

There are many reasons for the failure of the BC model. Corruption was pervasive among BCs. In March 2011, an internal circular of the State Bank of India noted that BCs were “found to indulge in malpractices, such as asking for unauthorised money, over and above the bank’s approved rates of charges from the customers”.

The circular noted that “gullible customers” were being “exploited”. According to bank unions, many BCs illegally extracted Rs.100 for every account opened and Rs.150 for every gold loan advanced. In October 2012, The Economic Times reported that the Finance Ministry was investigating BCs “demanding thousands of rupees in deposits” from account holders.

Further, the only way the BC model could stay viable was by being expensive. Banks complained that the commissions for cash transfers through BCs were too low. An editorial in TheEconomic Times noted: “The [BC] model has flopped, because the BCs are too few, get paid too little and are seldom there when people need them.” On an average, the salaries paid to BCs were less than Rs.2,000 a month.

PMJDY as continuity

The UPA’s financial inclusion policy achieved very little owing to its multiple infirmities and the urge to view inclusion as business. These infirmities have been imported into the PMJDY as well.

Firstly, upon directions from the then Finance Minister Pranab Mukherjee in 2011, banks had identified about 73,000 unbanked habitations in India with a population of above 2,000. In 2012, Mukherjee announced “Swabhimaan”, a multimedia campaign to inform, educate and motivate people to open bank accounts. Under Swabhimaan, there were also plans to “extend insurance and other services to the targeted beneficiaries”. In fact, by 2012, banks claimed to have covered about 70,000 habitations with banking facilities. The Modi government has just renamed the Swabhimaan scheme as PMJDY, extended the scheme to urban areas and made certain concrete announcements on adding insurance products to the scheme.

Secondly, both the Swabhimaan campaign and the PMJDY rely on the failed BC model. However, according to a recent RBI survey, about 47 per cent of the BCs were actually “untraceable”. The Modi government’s plan is to make the BC model viable by (a) raising the salaries of BCs to at least Rs.5,000 a month; and (b) increasing the commission to BCs.

Thirdly, following the UPA government, the Modi government also wants to use the DBT scheme as part of the PMJDY. The PMJDY brochure notes: “It is proposed that DBT, including DBT in LPG, should be pursued to make the programme of financial inclusion a success.” The DBT scheme of the UPA government had invited much public criticism. The introduction of DBT in LPG cylinder purchases and the proposed effort to convert in-kind food subsidies into cash subsidies had raised fears of a collapse of the subsidy system itself.

Then why does the Modi government continue with the DBT scheme? One, the Modi government is committed to the plan of dismantling subsidies, including LPG and food subsidies. Two, the only way to make the commission-based BC model of financial inclusion viable is to pack it with as much government transfers as possible. Thus, the PMJDY brochure notes that the government “proposes to channel all government benefits (from Centre/State/local bodies) to the beneficiaries to such accounts”.

Fourthly, the Modi government plans to mount the PMJDY on the UPA government’s much-maligned Aadhaar project. The PMJDY brochure notes that “Aadhaar number will be seeded to make account ready for DBT payment” and that the Aadhaar-linked account will be “the single point for receipt” for all DBT transfers. The Modi government’s faith in the Aadhaar project reveals the utility it sees in Aadhaar as a powerful instrument to restrict state subsidies, just as the UPA government did.

Finally, if it was the UPA Ministers who had called the DBT programme a game-changer in 2012, it is now the turn of Modi’s Ministers to call the PMJDY a game changer. What is clear is that there is a game. What is not clear is whether India’s unbanked poor—the pawns in these games—will benefit. Concrete benefits for India’s poor may have to wait until the policy of financial inclusion frees itself from the grip of financial liberalisation.

R. Ramakumar is with the Tata Institute of Social Sciences, Mumbai .