Implementation key to Jan Dhan Yojana success
Decades after India outlawed the abominable social practice of untouchability, the ambitious Pradhan Mantri Jan Dhan Yojana has the potential to achieve something similar — end the country's financial apartheid. The ambitious scheme aims to give all citizens equal access to formal financial institutions through a no-frills bank account, which also comes with an accident insurance policy, thereby widening the insurance net to protect vulnerable sections. If implemented effectively, this scheme can revolutionise the manner in which India saves, spends and invests its money. As of now, much of the country, including more than half the farming community which forms India's economic base, is excluded from the formal financial sector; an even larger percentage of farmers don't have access to formal credit sources. This explains why across rural India, unscrupulous moneylenders, who give loans at exorbitant rates, still hold sway. Improved access to formal financial institutions will not only free the rural poor from the clutches of middlemen but will also have a definitive impact on generating and mobilising small savings. Because the poor often don't have proper channels to effectively invest their money, they resort to less productive economic activities such as buying gold or lending out surplus cash to friends and family members.
While the situation has improved somewhat over the past decade, financial inclusion is still pretty low — notching up just 40 points on a scale of one to 100, prepared by the Credit Rating Information Services of India limited. There are several reasons for this. First, the poor and the marginalised usually cannot meet the paperwork needed to open even a simple bank account. Occasionally, banks have relaxed their ‘Know Your Customer' norms to cater to these groups, but this has not been enough. The PMJDY does away with many of these barriers — beneficiaries don't even need an Aadhaar card to open an account. Another problem is the poor banking coverage of rural areas. Although the number of bank branches has increased in recent times, most of the new establishments are located in urban India. The rural poor remain as under-served as ever. Also, the banking system, with its legalese, many rules and endless fine print, can often seem daunting to those who can barely read and write.
If the PMJDY has to be really successful, it has to address these issues. Or else, even if the Government may goad a few million to open bank accounts now, financial inclusion will remain a pipe dream. Without a follow-up plan and sustained state support, the new accounts will just lie dormant, burdening the banks in the process. The authorities have to encourage, indeed educate, new users in the ways of banking; they have to help the people understand financial concepts so that customers can eventually make informed decisions on how best to employ the available products and services. Bankers at the grassroots level, who are notorious for ignoring small account holders, will have to contribute to this process as well. Most importantly, the Government will have to spur productive activity that can bring in more money into the accounts and make the small account holders eligible for benefits such as overdraft facilities.