Misplaced priorities

The NDAs financial inclusion programme, Pradhan Mantri Jan Dhan Yojana, targets poor households unlike similar schemes of the UPA, which focussed on villages. The scheme targets rural and urban unbanked households. That said, the scheme too has its own share of flaws.

Misplaced enthusiasm

A chat with poor casual workers after the launch of the Yojana gave the impression that many think it would be available to all, even if they don’t hold an account. We detected a hint of inflated, unrealistic expectations — almost a sense of entitlement. Would the promised accidental insurance cover of ₹1 lakh, the additional life insurance cover of ₹30,000 and the overdraft facility of ₹5,000 be available to all such existing account holders as well?

Another issue is, who would bear the costs of such inclusion? Also, what about the risks associated with repayment of such overdrafts available on ‘zero-balance’ accounts? What would be the stress on the banking sector of such non-performing assets?

Such misplaced enthusiasm at promoting inclusiveness may hamper the objective of financial stability, as also the fiscal imperative of keeping down deficit.

Teach them first Financial literacy initiatives are as important as financial inclusion. While financial inclusion may be viewed as the supply-side element of the ‘inclusiveness’ need, financial literacy forms the demand side. The emphasis on the supply side to the exclusion of the demand side can impact financial stability. In particular, those being brought into the inclusiveness net need to understand the benefits of financial services; they should also know there is no free lunch.

However, used to a culture of freebies and politically expedient subsidies, this class may still equate financial inclusion with unlimited government bounties. Dissemination of financial literacy, which would affect the demand for financial services by the target group, is relatively time-consuming. In a temporal sense, the supply-side perspective may then gain dominance.

Again, the concept of inclusiveness should emphasise the use of such accounts as a means of small savings, and not just as a means of availing overdraft facilities or obtaining insurance cover. However, India’s household savings have been on the wane since 2009-10, together with strong compositional shifts from financial to physical savings. How far will such accounts be perceived as a means of savings among the target group remains a moot point.

Thus, financial inclusion can be seen a means of expanding the resource base of India’s financial system, protecting low-income groups from moneylenders and increasing the effectiveness of monetary policy by reducing the scope of the unorganised sector.

As a matter of fact, the Jan Dhan Yojana is not the first attempt at financial inclusion in India. Measures such as bank nationalisation, setting up of cooperatives and regional rural banks, priority-sector lending requirements, lead bank scheme, as also the adoption of the business correspondent (BC) model to provide doorstep delivery of banking services have been tried at various stages.

Despite such a legacy of measures, financial exclusion in India — measured through bank branch density, ATM density, bank credit to GDP or bank deposit to GDP ratios — remains low compared to other developing countries. The attempt at financial inclusion through the Yojana will need to move beyond the supply-side orientation for it to make a dent in financial untouchability and move the country onto a path of financial growth and development.

The writer teaches at the SP Jain Institute of Management, Mumbai

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