PMJDY: Improved Financial Inclusion, But Roadblocks Remain

Financial inclusion is a subject of national priority for the Government and regulators of the Indian financial system. Successive Governments have made efforts to achieve this long-held goal. The Pradhan Mantri Jan Dhan Yojana (PMJDY) is arguably the largest financial inclusion drive in the world. As of February 28, 2015, a total of 136.8 million accounts had been opened within just six months after the announcement of the scheme. An affirmation of this by the “Guinness Book of World Records” is a feather in cap of the Department of Financial Services, the implementing arm of Ministry of Finance. To service these accounts, all villages across the country are mapped to the “Service Area” of individual bank branches, and at least one fixed-point banking outlet caters to 1,000 to 1,500 households, known as a “sub service area.” The sub service areas are serviced through a combination of bank branches and fixed-point agents, known as Bank Mitrs.

At the request of Department of Financial Services, and financed by the Bill & Melinda Gates Foundation, MicroSave conducted a study on the progress of the PMJDY program in November 2014. The assessment focussed on the following issues:

1. How many Bank Mitrs  are available at the designated locations?
2. How many of those Bank Mitrs  are in a position to conduct transactions?
3. For how many PMJDY account holders is this their first  bank account?
4. What is the availability of Aadhaar for customers and what is the status of linkage between PMJDY accounts and Aadhaar?
5. How many account holders have received a RuPay card?

Photo Credit: Jeanette Thomas

The numbers tell a story of emerging success, except for the distribution of the RuPay cards:

• Sixty-nine percent of Bank Mitrs were physically present at the stated location. An additional 11% were working locally, but from a different location than that stated in the lists provided by banks. Therefore, 80% of Bank Mitrs could be considered “available”. However, it is unclear what portion of the 11% are at fixed-point locations and what portion are “roaming”.
• Forty-eight per cent Bank Mitrs were “transaction ready” when we visited. We define “transaction ready” as a customer being able to walk in and conduct a transaction. The 52% of Bank Mitrs who were not transaction ready cited several factors, including: the recentness of their appointment; lack of a transaction device; technology issues (e.g. downtime); and dormancy (often due to inadequate remuneration). Interestingly, lack of liquidity was not cited as a significant issue by Bank Mitrs, but this may emerge as a challenge once transaction volumes increase.
• Eleven percent of Bank Mitrs were untraceable - they were not found at the address mentioned in the official list, residents did not know about them, and their contact numbers were not reachable.
• Eighty-six percent of PMJDY account holders reported these as their first bank accounts. While this number is very encouraging, we should recognize that PMJDY services (e.g. overdraft, insurance) are reserved for “first time” account holders. PMJDY account holders have a strong incentive to report this as their first account even if that is not the case.
• Forty-five percent of account holders have an Aadhaar (national identity) number, of which 79% had linked to their PMJDY accounts. This group of people is ready for the proposed direct transfer of benefits into these accounts.
• Only 18% of account holders had received their RuPay card.

The results clearly show that availability of Bank Mitrs as improved significantly when compared to the situation a few months ago. This highlights the new seriousness-of-purpose among the public sector banks to make the PMJDY work.

It is, however, too early to declare the program an unqualified success. A few points deserve a mention here. Out of the total 136.8 million accounts, 85.9 million (63%) are still zero balance accounts. Account access alone does not create financial inclusion, which requires regular use of accounts.

The Government of India’s subsidy bill for its five largest schemes (employment guarantee through MNREGA, the NSAP social safety net, scholarships for the poor, the PDS food security programme and the fertiliser subsidy) is about Rs.2,900 billion ($48.3 billion). In the future, all these could be routed through the PMJDY accounts, thus driving some form of basic activity, and growing trust in the accounts and the Bank Mitrs that serve them.

To date, the sustainability of Bank Mitrs has been a real challenge for the banks: lack of adequate remuneration has rendered more than half of them dormant in the past. If this continues, the banking system will be saddled with a large number of accounts that have become dormant for want of front-end service points to market and provide services. DBT payments through this channel could help with the sustainability of Bank Mitrs but the recent Government announcement that it will only pay 1% commission on DBTs does not bode well. Furthermore, even if the commission rate was increased to the recommended 2-3%, it is unlikely that processing DBT will be sufficient to create adequate income for BMs. Ultimately, banks will need to tailor and deliver products through these agents, thus leveraging their outreach and local knowledge.