Financial Inclusion

Contents

• Why Financial Inclusion
• Previous attempts at Financial Inclusion

• Nationalization of Banks 1969

• Positives

• Negatives

• Changed scenarios

• Jan Dhan Yojana

• Phase I (15th August, 2014-14th August,2015)

• Phase II, beginning from 15th August 2015 upto15th August,2018

• Aim of CFIP

• Facilities provided by PMJDY
• Implementation of CFIP
• For the Jan-Dhan Yojana to succeed the following steps are indicated
• Criticism of PMJDY
• What proponents say

Why Financial Inclusion

• To improve efficiency in public service delivery by trickling down the public funds such as subsidies, direct transfers, etc., to the intended ones
• Efficiency in public service is the key to narrow down poverty and establish an egalitarian society
• Financial inclusion has the potential to liberate the poor from the clutches of moneylenders
• Financial inclusion creates awareness towards social security schemes related to pension etc. creating an avenue to engage in savings for the old age
• Financial inclusion creates awareness regarding Alternate Investment Options like mutual funds, government securities and other such investment options.
• This will make inflation targeting easy as banks will have to greatly depend on the money form RBI.

Previous attempts at Financial Inclusion

Nationalization of Banks 1969

• Indira Gandhi’s bold move to nationalise 14 banks in 1969 (with another six being nationalised in 1980).
• Bank nationalisation was denounced as populist, a socialist gimmick, politically-motivated and worse
• Today, not many would question the beneficial impact nationalisation had on banking and the Indian economy
• An analysis post-Nationalization

Positives

• Bank nationalisation saw a huge expansion in branches into the hinterland.
• It improved formal credit system and reduced the influence of moneylenders.
• Despite initial setbacks, it benefited both the economy and the PSBs.

Negatives

• Investments in branches and the servicing of millions of small accounts pushed up operational costs in nationalised banks.
• Combined with bad loans, the investment resulted in the net worth of public sector banks turning negative by the early 1990s.

Changed scenarios

• At the same time, India’s economic growth began to accelerate in the 1990s.
• In these new conditions, the long-run benefits of financial inclusion began to kick in.

Jan Dhan Yojana

PMJDY consists of 6 pillars.

Phase I (15th August, 2014-14th August,2015)

1. Universal access to banking facilities
2. Financial Literacy Programme
3. Providing Basic Banking Accounts with overdraft facility of Rs.5000 after six months and RuPay Debit card with inbuilt accident insurance cover of Rs 1 lakh and RuPay Kisan card

Phase II, beginning from 15th August 2015 upto15th August,2018

1. Creation of Credit  Guarantee Fund  for coverage of defaults in overdraft  A/Cs
2. Micro Insurance
3. Unorganized sector Pension schemes like Swavlamban.

• Comprehensive Financial Inclusion Plan (CFIP) is the latest move towards Financial inclusion
• The Pradhan Mantri Jan-Dhan Yojana is a part of Comprehensive Financial Inclusion Plan (CFIP)

Aim of CFIP

• CFIP hopes to extend coverage of basic financial services to all excluded households.

Facilities provided by PMJDY

• After satisfactory conduct of accounts it is proposed to offer reasonable need-based credit facilities
• A smart card (RuPay card) will be issued to enable customers to operate their accounts even without Banking Correspondents (visit mrunal.org for basics).

Implementation of CFIP

For the Jan-Dhan Yojana to succeed the following steps are indicated

• Technology adaptation
• Improving the system of business correspondent

• Extended to include entities such as kirana shops, corporates and others.

• It is obvious that BCs need to be properly remunerated and have the full support of banks.

• E-KYCs with the help of Aadhaar

• Insistence on KYC (know your customer) norms has hindered the opening of new accounts even in urban areas.

• Improving Mobile banking service

• Since mobile banking through phones is to play an increasingly important role in a scenario where physical bank branches will be few, greater co-ordination between mobile telephone companies and banks will be necessary.

• Support from state governments
• Commercial viability

• It will be the key to the programme’s success.

• Past experience suggests that without proper incentives, the facilities on offer will not be used by the really needy.

• Banks will be saddled with a large number of dormant accounts.

Criticism of PMJDY

• Costly and unviable.
• It will create huge stresses in the banking system.
• Many of the new accounts created by inclusion initiatives in recent years have low balances or remain inoperative.
• The scheme only fooled the poor by making their hard earned savings vulnerable to external financial shocks
• The government is risking poor man’s financial security by making them vulnerable to banking system marred with non-performing assets.
• Most of the facilities like accident insurance cover, overdraft facility etc. have money loopholes which the common man doesn’t understand.

What proponents say

• It brings in low-cost deposits through savings and current accounts.
• For PSBs, the high proportion of low-cost deposits in total deposits turned out to be a source of competitive advantage.
• It could see the household saving rate go up and boost the overall saving rate.
• Improve PSBs which have been losing market share to new private sector banks.
• Financial inclusion entails upfront costs but begins to pay off once a certain scale has been reached.
• Large amounts are poised to flow into bank accounts, thanks to the direct benefit transfer scheme (DBT).

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