The Jan Dhan Yojna: the key considerations in obtaining desired outcomes.

Accountable and transparent organisational structure for implementing PMJDY should be essential for realising the desired societal outcomes.
On the occasion of the 68th Independence Day, prime minister Narendra Modi announced an initiative, to be formally launched on August 28,2014, to enable those currently not having access to banking and other financial services to do so and thereby expand their options to generate better livelihoods and to improve household welfare.

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The name of this initiative, “Pradhan Mantri Jan Dhan Yojna” (PMJDY) was the result of a competition held through the MyGov platform. This platform is designed to solicit ideas and substantive material from the public society on variety of issues. This illustrates that the Prime Minister Modi led government understands the role of ideas, and sourcing them from as wide a network as possible, are among the most important drivers of economic growth and contributors to good public policies. It is hoped that the platform will also be used to provide inputs for a feedback mechanism for facilitating monitoring and requisite corrective measures as implementation of the PMJDY progresses.

Rationale: The main rationale for introducing PMJDY is that according to the 2011 Census, of the 250 million households in the country, only about 145 million, or about three-fifths of the total had access to basic banking services. Thus, about two-fifths of the households (105 million) do not have access to banking services, let alone to broader financial services. This result is in spite of many years of efforts to achieve financial inclusion by various government and non- government organisation over several decades. There is also substantial scope for improving the quality, affordability, and case of access to banking (as well as to broader financial services such as credit, insurance, and pensions).

It should however be stressed that access to banking and to financial services is not an end in itself, but it is an instrument, which when complemented by other appropriate policy initiatives, (such as Digital India initiatives) could enable households to obtain better livelihoods, and quality of living. Access to banking and financial services thus carries responsibilities by the beneficiary households and other stakeholders to utilise such access to improve their capabilities, and by government agencies and by service providers to perform their tasks competently, and with focus on desirable societal outcomes.

Main Features: Full details of the PMJDY are yet to be unveiled. The media reports suggest that the initiative will be operationalised in two phases. The end objective is for each of the 75 million identified families to have two bank accounts, for a total of 150 million new accounts, each account accompanied by a debit card, by August 2018, just four years away. Each bank account will have an overdraft facility of INR 5,000/-, and accident insurance cover of INR 1 Lakh.

A feature connecting the overdraft to a credit bureau to enable low-income households to build credit histories merits serious consideration. This feature could facilitate graduation by beneficiaries to more mainstream banking and financial services; and could mitigate information gaps leading to excess borrowing and corresponding higher credit risks by the lenders.

There is also a provision for minimum monthly income of INR 5,000/- for business correspondents who link account holders with the bank. It is however worth noting that there are still substantial numbers of villages with around 2000 people which lack a bank branch. The pace of opening branches in small towns and villages has been too modest to provide the requisite bank facilities to all villages by the year 2018 envisaged in PMJDY.

Analysis: The targets set for PMJDY are indeed very ambitious. The PMJDY increases the demand for banking and related services massively.  India’s insurance sector, both life insurance and non-life insurance components are not in robust health, while life insurance coverage at less than 10 percent of the population is low. The geographical coverage of branches of insurance companies also remains limited. The reforms of insurance sector, including modernising regulatory structure of this sector, remain high priorities. This creates a huge gap between the demand and supply of banking and financial services included in PMJDY.

It is evident that the current structure of the banking and finance sector, its technology levels, skill-sets and mind-set of the stakeholders in the sector, organisational capabilities, and regulatory structures are not equipped to attain the ambitious goals of the PMJDY. The wide demand-supply gap in any area of public policy (such as in Right to Education, RTE, Act) has the potential to impose high economic, social, and political costs. A sound practice in any public policy is to keep demand and supply of the relevant services (good and assets) in reasonable balance.

As the PMJDY substantially increases the demand for banking and other services, it is the pace at which greater effectiveness on the supply side can be attained which should determine the targets of PMJDY. The vision of having two accounts each for 75 million households must be tempered with the supply side capacities. In this context, reasons for two (rather than at least one) bank account per household need to be reexamined.

Supply side improvements are needed in the delivery systems through focused but flexible use of technologies, and through greater efficiencies and effectiveness by the banking, insurance, and other service provider organisations. Thus, too rigid a design mandated nationally is unlikely to be conductive to achieving the goals. Local context and household specific flexibility and innovations need to be encouraged.

The features of PMJDY outlined above suggest that from the society’s perspective, two types of costs will need to be managed. The first type is the initial capital and related costs of opening the bank account, and costs associated with pricing (costing) of the insurance cover based on rigorous actuarial projections.

Insurance is about micro-economic pricing in a dynamic context involving long term. When insurance cover is provided, society must bear the costs of this service. If these costs are to be borne through governments budgets, given India’s urgent need for fiscal consolidation and for reorienting government expenditure towards growth and fairness enhancing expenditure (called fiscal flexibility), estimates of fiscal and of economic costs to the society need to be estimated rigorously and transparently.

The second type of costs are those costs associated with operating bank accounts, servicing insurance claims and overdraft facilities, and maintaining records of beneficiaries to utilise the services. Unless the bank accounts are used, their full beneficial effects cannot be realised. Therefore transaction costs of access to banking services must be minimised.

An important avenue for obtaining the PMJDY initiative is to use the data-base generated and delivery systems constructed for more effectively implementing other government schemes, such as payments under various pension schemes, energy, food, fertiliser subsidies, and wage payments under employment schemes such as MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) which currently are inefficiently delivered.

With accessibility to the banking facilities, direct transfers of the benefits to the relevant accounts have the potential to reduce transaction costs, and minimise leakages. The resulting economic savings need to be competently estimated for a more complete social cost-benefit analysis of PMJDY.

The above indirect economic benefits however are not automatic. To obtain them, substantial enhancement of managerial and technical competency, and much better policy and organisational coherence will be required. Basic literacy levels, including financial literacy levels, will also need to be enhanced. These attributes, if developed in a focused and integrated manner, could potentially help generate positive net economic and social benefits, while helping to expand fiscal space.

The above analysis suggests that the considerations which have led to the introduction of the PMJDY have considerable merits. But achieving its goals will not be either quick or automatic.

The PMJDY should not be regarded as a standalone initiative but as one of several integrated initiatives designed to realise progress in financial inclusion to expand choices and capabilities of the beneficiary households for pursing better livelihoods. The success of the PMJDY should be measured by the progressive reduction in the number of households needing the assistance from this initiative after around 2020. Accountable and transparent organisational structure for implementing PMJDY in an integrated manner suggested in this column should be regarded as essential for realising the desired societal outcomes.

Photo: Sudipto Sarkar