The next step

As the Pradhan Mantri Jan Dhan Yojana (PMJDY) completes its second anniversary, a lot of public attention has focused on the recent discovery that some bank officials have been dressing up zero-balance accounts by making token deposits of ₹1. The Centre has already announced an investigation into the public sector banks embroiled in this controversy and hopefully, such practices will be nipped in the bud. However, this episode should not prevent us from acknowledging the real economic benefits unleashed by this watershed inclusion initiative. In barely two years, the 24-crore new bank accounts opened under the Jan Dhan Yojana have swept hitherto excluded sections such as women and the urban poor into the formal financial system. The scheme has functioned as a key cog in Aadhar-linked benefit transfers and opened up a new savings avenue for low-income earners, who have parked ₹42,500 crore in these accounts.

But having enabled basic financial access, the PMJDY must now strategise on how these accounts can be effectively used to deliver financial services to the poor, while ensuring that this is a paying proposition for banks. This is no longer as difficult as it sounds. Traditionally, Indian banks have been quite wary of lending to small borrowers as their small ticket sizes and lack of credit history were seen as adding to costs and risks on the loan book. But with large industrial borrowers reneging on their loans and posing a concentration risk to the entire banking system, there’s now a rethink on this score. While the Reserve Bank of India (RBI) has mooted rules to cap banks’ large corporate exposure, State-owned banks are looking to the fast-growing retail and SME segments to grow. Apart from a large unaddressed market, small borrowers and SMEs offer immense scope for banks to expand their yields and net interest margins. Yes, a shift to small-ticket lending may entail credit risks and require banks to significantly tweak their current business models. But the recent successes of the microfinance industry (loan books have expanded threefold in three years, without a spike in bad loans) show that the challenges are surmountable. New digital technologies based on big data are throwing up innovative new ways to assess creditworthiness, without large investments in physical infrastructure or manpower.

But it would be a mistake to assume that those at the bottom of pyramid are interested only in cheap credit. So far, Indian banks, mutual funds and insurers — as a part of their financial inclusion initiatives — have focused too much on peddling the same standard menu of products to the rich and poor, urban and rural savers. But it is time they designed investment and savings products specifically with their target audiences in mind. The low-cost, no-frills template used by Central schemes such as the Jan Suraksha Bima Yojana, Jeevan Jyoti Bima Yojana and Atal Pension Yojana is a good one to emulate.

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