Pradhan Mantri Jan Dhan Yojana (PMJDY) : A too Ambitious Scheme?

It was in his maiden Independence Day speech from the ramparts of the Red Fort  on August 15 this year that Prime Minister Narendra Modi announced  his ambitious plan of financial inclusion, the Pradhan Mantri Jan Dhan Yojana (PMJDY).

Following this announcement, the scheme was kicked off on August 28. The scheme is aimed at every habitation across India (barring hill states and the 82 Left-wing extremism-affected districts) to have a banking point — a bank or a banking correspondent — within a 5-km radius, by January 26, 2015. The rest of the country is to be covered by August 2016.

Features of Pradhan Mantri Jan Dhan Yojana

Pradhan Mantri Jan Dhan Yojana envisages a bank account and an ATM-enabled RuPay debit card to an estimated 10 crore unbanked households in the country. Besides, there are incentives to open the account such as:

• If one opens the account by January 26, 2015, he/she will be given life insurance cover of Rs 30,000 over and above that Rs 1 lakh accident cover.
• After six months of opening of the bank account, customers can avail Rs 5,000 loan from the bank.

On the very first day of the launch, an incredible 1.5 crore bank accounts opened which even prompted a senior Congress leader state: “Is it possible? The banks were given this task two days before and in a country like ours, is it possible to open 1.5 crore accounts?”

The Congress suspects many such accounts “were mostly opened before the NDA government came in”.

Why such Rush to Open the Accounts?

Yet, bankers concede there has been an unprecedented rush among the people to open their accounts largely because of

• The government’s announcement that all government benefits will now only flow through bank accounts.
• The fact that these accounts could be opened without paying a single penny.
• The growing public perception, as indicated in various media reports, that the government would deposit money in their accounts (though the fact is that the accounts would only give insurance benefits).

The last point merits a serious consideration as it will require an effort to dispel such misguided public expectations from Pradhan Mantri Jan Dhan Yojana.

It is a challenge also because of the scale of financial inclusion – only 58.7 per cent of households in India  avail  banking services, as of now.

Need for Banks to take Safeguards in Jan Dhan Yojana

Hence, the rush to implement the scheme without addressing such concerns and in the absence of proper screening can actually defeat the very purpose of the drive, giving credence to those who are already writing the scheme off as yet another populist measure. As of now, the banks are opening new accounts under the scheme for everyone approaching them and a top banker was quoted as saying “The screening will be done later”. What is also required is a survey at the rural level to identify the financially excluded population to avoid duplication of accounts and even fake accounts.

To make the scheme foolproof, banks, as well as the government, are now deliberating on steps to link accounts either with biometrics-based Aadhaar cards or creating a unique identity number!

Moreover, the government is using Census 2011 as the basis for the scheme. Of the 246.7 million households in the country, 144.8 million have access to banking. The Reserve Bank of India figures show India has over 900 million deposit accounts and over 770 million of these accounts were in the names of individuals. This suggests many households in the country have multiple bank accounts. Yet more than having bank accounts what is more important in any financial inclusion programme is to tackle the issue of lack of credit worthiness of the poor and to offer measures to raise the standards of living. A 2008 report of the C. Rangarajan Committee on Financial Inclusion showed that in 256 districts of India, over 95 per cent of adults did not have bank loans. “There are two aspects to financial inclusion: one is bank accounts and the second is access to credit. The scheme announced by the Prime Minister addresses the first problem. The issue of making credit available to small borrowers remains,” Rangarajan was quoted as saying in the media.

The Economics behind the Pradhan Mantri Jan Dhan Scheme

The Jan Dhan scheme is yet evolving. At the moment, it even conflicts with payment banks – meant to reach the unbanked customers – that were recommended to be created to give fillip to financial inclusion by the Nachiket Mor committee and accepted by the RBI. There are speculations now on the respective domains of payment banks and the Jan Dhan Yojana because of their overlapping nature.

Moreover, it is the economics of the scheme that has drawn attention the most. Experts are still figuring out the average monthly balance figures that could help banks meet the costs. Besides, the state-run Life Insurance Corporation (LIC) is still in the process of structuring the Rs 30,000-life cover to be offered under the scheme after the finance ministry asked it for the details. Preliminary reports suggest that even though the government is targeting to open 7.5 crore bank accounts under the scheme, the life policy could be issued to only around 2-3 crore people because of the following riders:

• Only those who are above 18 and below 59 will be eligible for the life cover.
• Though the accounts are not mandatorily linked to the Aadhaar numbers, the life cover is strictly open for only those who have the Aadhaar numbers

Can PMJDY (Pradhan Mantri Jan Dhan Yojana) be a Success Story ?

Indeed, given the scope of PMJDY and the unprecedented rush to implement the scheme requires a careful evaluation of the safeguards provided in the scheme for its success. Essentially, it is being argued that the scheme won’t place banks under undue financial burden for the following reasons:

• The scheme builds the business case for the banks due to Current And Savings Account (CASA) deposits from such accounts.
• The scheme makes the infrastructure ready for Direct Benefit Transfer (DBT) schemes to be rolled-out quickly. This will improve governance and plug leakages. In principle, approval of 2 percent commission to be paid for DBT scheme has already been granted.
• At present accidental insurance scheme is part of the RuPay Debit Card and it is the National Payments Corporation of India (NPCI) that will pay the premium out of the revenue generated from card transactions.
• There will be no burden on the banks on account of insurance payment.
• The overdraft up to the limit of Rs 5000 will be given only after satisfactory operation of the account for six months. And the Credit Guarantee Fund for defaults in such accounts is also envisaged under the scheme.

The task may not be all that impossible to achieve considering that the previous United Progressive Alliance (UPA) Government did add an additional 60.9 million accounts in 2013-14! The real challenge is of keeping the accounts alive! Overall, PMJDY requires meticulous planning before the rush.