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The Modi-fied financial inclusion plan

Posted on August 30, 2014 by Sumita Kale


The Prime Minister's Jan Dhan Yojana was launched with great fanfare on 29th August 2014More than 1 crore banking accounts were reportedly opened on the very first day, a bureucratic triumph! The DFS has worked nonstop over the past two months to listen to stakeholders and bring out this schemeWhile it is an extension of the previous inclusion plan, there are key differences, which can make or break the mission.


The plan envisages giving each household a banking account within the year, by January 26th if the PM had his way, each account would be given a RuPay Debit Card, a Rs 1 lakh accident insurance cover (and a Rs30, 000 life insurance cover for accounts opened till January 26th 2015)In addition, accounts that have been operated for six months will get a benefit of a Rs5000 overdraft facilityThese are zero balance bank accounts, that can be easily opened with e-KYC, using the Aadhaar platform.


There are many reasons why and how this ambitious plan can go wrongThe issues at the last mile remain unadressed and will be a significant challengeAs I outlined in a piece in Financial Express early this month,


Remember that the bank-led model has repeatedly given mandates to the banks and then urged them to create viable business modelsYet, it must be recognised that commercial viability will take its time, and in many cases e.gremote, poor areas may not even materialiseSuch a comprehensive scheme, especially the overdraft, will place a considerable burden on already strained balance sheetsField surveys - CGAP/CAB, MicroSave, InterMedia- all show more than half of the basic savings bank accounts opened for inclusion lie dormant, a large number of banking correspondent agents are ‘missing’, existing only in bank records but untraceable on the groundAdding more accounts and agents will barely dent the reality of exclusion, unless the last mile issues are fixedThe key to viability lies in increasing transactions, and there is no clarity on whether this metric will be trackedWhere are the current pain points at the last mile? To begin with, low commercial viability of the BC agents, leading to high dormancyApparently the government understands this point and proposes a monthly remuneration at Rs.5,000, but it is not clear if banks will get any support to pay this out.


Government transfers form the fastest way to raise transactions and bring the unbanked into the networkHowever, the UPA’s Aadhaar-enabled Direct Benefits Transfer (DBT) programme had many lapses, mainly because the previous regime was in a rush to show it was doing somethingApart from the most basic issue of legal sanction for mandating Aadhaar, the programme was rolled out in districts before full enrolment, the recommended 3.14% processing fee was reduced to 2% and rarely paid to banks on time creating payment backlogs down the line etcFinally the programme that had been set out with much fanfare fizzled out.


If the present government wants to avoid the same fate, it has address the last mile challenges – sort out the Aadhaar imbroglio, target increasing transactions per agent, provide budgetary support to process timely DBT payments with appropriate share to the agents, clearly communicate down the line till the customer about the exact payment processes and usage of accounts etc.  


But all this still follows the mandate-model of inclusion and mandates can only take us so far as chalking up numbers on the boardThe irony is that while the poor are being forced to tap into informal sources, banks are being forced to create a touch point and are failing to go beyond thatIf these touch points are to become a real pathway to inclusion, the needs of both providers and customers must be matchedThe programme must proceed with a clear roadmap: get DBT right, use existing payment platforms and rope in all bank and non-bank networks, allow the transaction history to be used to frame appropriate products etc


So far, the Prime Minister has launched the programme with the right spirit, generating energy and coaxing all in the banking channel to rise to the challengeIt remains to be seen whether the personal mail he sent to more than 7 lakh bank employees will help pave the way to a more coordinated and cooperative approach, that will help banks build a business case, albeit over timeHowever, if these last mile challenges remain the yawning gaps they are currently, then all the costs in setting up the network - putting agents in place, ATM and POS terminal infrastructure to use those debit cards, insurance premia etc - all will be another drain on resouceThese costs will be justified only if and when rural and poor households are integrated into the banking system and the banks find this a viable business in the future.

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