LOK SABHA SECRETARIAT PARLIAMENT LIBRARY AND REFERENCE, RESEARCH, DOCUMENTATION AND INFORMATION SERVICE (LARRDIS) MEMBERS REFERENCE SERVICE REFERENCE NOTE. No. 7 /RN/Ref./November /2014 For the use of Members of Parliament Not for Publication PRADHAN MANTRI JAN DHAN YOJANA.------------------------------------------------------------------------------------------------------- The reference material is for personal use of the Members in the discharge of their Parliamentary duties, and is not for publication. This Service is not to be quoted as the source of the information as it is based on the sources indicated at the end/in the text. This Service does not accept any responsibility for the accuracy or veracity of the information or views contained in the note/collection.
PRADHAN MANTRI JAN-DHAN YOJANA Introduction As a measure towards financial inclusion of the poor in the national mainstream, the government launched the Pradhan Mantri Jan-Dhan Yojana (PMJDY) on 28 August 2014. Financial inclusion: It has been defined, by the Committee on Financial Inclusion, 2008, as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. It primarily represents access to a bank account backed by deposit insurance, access to affordable credit and the payments system. Importance of Financial Inclusion: Financial inclusion, more particularly when promoted in the wider context of economic inclusion, can uplift financial conditions and improve the standards of lives of the poor and the disadvantaged. Access to affordable financial services would lead to increasing economic activities and employment opportunities for rural households with a possible multiplier effect on the economy. It could enable a higher disposable income in the hands of rural households leading to greater savings and a wider deposit base for banks and other financial institutions. It will enable the Government to provide social development benefits and subsidies directly to the beneficiary bank accounts, thereby drastically reducing leakages and pilferages in social welfare schemes. Further, expanding the reach of financial services to those individuals who do not currently have access would be an objective that is fully consistent with the people-centric definition of inclusive growth which attempts to bridge the various divides in an economy and society, between the rich and the poor, between the rural and urban populace, and between one region and another. Thus, financial inclusion could be an instrument to provide monetary fuel for economic growth and is critical for achieving inclusive growth 1. Financial Inclusion in India Background: The efforts to include the financially excluded segments of the society into formal financial system in India are not new. The concept was first mooted by the Reserve Bank of India in 2005 and Branchless Banking through Banking Agents called Bank Mitr (Business Correspondent) was started in the 1 Financial Inclusion and Financial Stability: Are they two sides of the same coin; Speech by H.R. Khan, Deputy Governor of RBI at BANCON, Chennai, 14 November 2011, RBI, Monthly Bulletin, March 2012, pp.554-55
2 year 2006. In the year 2011, the Government of India gave a serious push to the programme by undertaking the "Swabhimaan" campaign to cover over 74,000 villages, with population more than 2,000 (as per 2001 census), with banking facilities 2. Because of the RBI s drive for financial inclusion, the number of bank accounts increased by about 100 million during 2011-13 3. The Swabhimaan campaign, however, was limited in its approach in terms of reach and coverage. Convergence of various aspects of comprehensive Financial Inclusion like opening of bank accounts, digital access to money (receipt/credit of money through electronic payment channels), availing of micro credit, insurance and pension was lacking. The campaign focused only on the supply side by providing banking facility in villages of population greater than 2000 but the entire geography was not targeted. There was no focus on the households. Also some technology issues hampered further scalability of the campaign. Consequently the desired benefits could not be achieved and a large number of bank accounts remained dormant 4. Financial Inclusion: Current Status: Data from Census, 2011 estimates that only 58.7 percent of the households have access to banking services. The present banking network of the country (as on 31.03.2014) comprises of a bank branch network of 1,15,082 and an ATM network of 1,60,055. Of these, 43,962 branches (38.2 percent) and 23,334 ATMs (14.58 percent) are in rural areas. According to World Bank Findex Survey (2012) only 35 percent of Indian adults had access to a formal bank account and 8 percent borrowed from a formal financial institution in last 12 months 5. Access to formal financial institutions has improved gradually but thousand of villages still lack a bank branch; less than 10 percent of all commercial bank credit goes to rural areas, where around 70 per cent of the total population lives 6. Data from the RBI show that only 46,126 out of 640,867 villages in India were covered by banks in March 2014 7. Thus the need for financial inclusion is beyond question. 2 India. Ministry of Finance, Department of Financial Services, Pradhan Mantri Jan-Dhan Yojana (PMJDY); A National Mission on Financial Inclusion, p.5 http://pmjdy.gov.in/pdf/pmjdy_brochure_eng.pdf 3 Sahoo, Pravakar, Roadmap to Financial Inclusion: Pradhan Mantri Jan-Dhan Yojana, Yojana, October, 2014, p.30 4 op.cit. A National Mission on Financial Inclusion, (Foreword) 5 Ibid. p.13 6 op.cit. Roadmap to Financial Inclusion, p.30 7 Ramakumar, R, Mirage of inclusion, Frontline, 20 September-3 October 2014, p.35
3 Pradhan Mantri Jan Dhan Yojana A Fact Sheet: The scheme aims to provide at least one bank account to each household across the country, with a target of covering 75 million households by 26 January 2015. Targeted at those who have never had a bank account in their lives, the scheme has simplified the whole process of opening an account. The KYC (know-your customer) rules to open a bank account have been simplified; the only document required is either Aadhar card, voter s identity card, driving license, PAN card, or card issue under MGNREGA. Even if the address mentioned in the document is different from the current residence of the applicant, a self-declaration will suffice. For those who do not have any of above mentioned identity proofs, a small account could be opened with a self-attested photograph alongwith signature or thumb impression in the presence of the bank official. The PMJDY is being implemented in two phases. In the first phase (till August 14, 2015) every account holder will receive a RuPay debit card, and will be able to use basic mobile banking services, such as balance enquiry. Further, every account holder under the scheme will get an accident insurance cover of Rs.1 lakh. Bank accounts opened between 28 August 2014 and 26 January 2015 would also get life insurance cover worth Rs30,000/-. These accounts are also eligible for over draft facility of Rs.5,000/- based on performance during the first six months. There will also be a financial literacy programme, expansion of Direct Benefit Transfer under various schemes through the beneficiaries bank accounts, and issuance of RuPay Kisan Card. In the second phase (from August 2015 to 14 August 2018), micro insurance and unorganized sector pension schemes would also be provided. Bank accounts opened after 26 January 2015 would be eligible for life insurance cover and micro insurance in this phase. As it is difficult to spread bank branches across all unbanked areas, Business Correspondents (BCs) will be deployed on a large scale to help execute the plan 8. The programme for financial inclusion under the PMJDY is based on six pillars: 1. The country will be divided into a number of sub-service areas (SSA), each with 1,000-1,500 households. One banking outlet (branch or BC) will be established within a distance of five km from every SSA by August 2015; 2. One bank account will be ensured for every household by August 2015, along with a RuPay debit card and an accident cover worth Rs.1,00,000. If the credit history is satisfactory during the first six months, the account holder will become eligible for an overdraft worth Rs.5,000; 8 Sahoo, Pravakar, Roadmap to Financial Inclusion: Pradhan Mantri Jan Dhan Yojana, Yojana, October, 2014, p.33
4 3. Financial literacy programmes will be expanded by August 2015 to spread awareness about financial services; 4. A Credit Guarantee Fund will be created before August 2018 to cover potential defaults in overdrafts; 5. All willing and eligible persons will be provided with micro-insurance by August 2018; and 6. Pension payments under the Swavalamban Yojana scheme for workers in the unorganised sector will be paid through bank accounts by August 2018 9. Special Benefits under PMJDY Scheme a. Interest on deposit. b. Accidental insurance cover of Rs.1.00 lakh c. No minimum balance required. d. Life insurance cover of Rs.30,000/- e. Easy Transfer of money across India f. Beneficiaries of Government Schemes will get Direct Benefit Transfer in these accounts. g. After satisfactory operation of the account for 6 months, an overdraft facility will be permitted h. Access to Pension, insurance products. i. Accidental Insurance Cover, RuPay Debit Card must be used at least once in 45 days. j. Overdraft facility upto Rs.5000/- is available in only one account per household, preferably lady of the household 10. The implementation strategy: The implementation strategy of the plan is to utilize the existing banking infrastructure as well as expand the same to cover all households. While the existing banking network would be fully geared up to open bank accounts of the uncovered households in both rural and urban areas, the banking sector would also be expanding itself to set up an additional 50,000 Business correspondents (BCs), more than 7000 branches and more than 20,000 new ATMs in the first phase. Keeping the stiff targets in mind, in the first phase, the plan would focus on first three pillars in the first year starting from 15 th August, 2014.The target for setting up additional 50,000 BCs is quite challenging given the constraints of telecom connectivity. In order to achieve this plan, phase wise and State wise targets for Banks have been set up for Banks for the period 15th August, 2014 to 14th August, 2015. Roles of various stakeholders like other 9 op.cit. Mirage of inclusion, p.35 10 PMJDY.gov.in.schemedetails
5 Departments of the Central Government, State Governments, RBI, NABARD, NPCI and others have been indicated. Gram Dak Sewaks in rural areas are proposed as Business Correspondent of Banks. Department of Telecom has been requested to ensure that problems of poor and no connectivity are resolved. It is understood that of the 5.93 lakh inhabited villages in the country (2011 census) only about 50,000 villages are not covered with Telecom connectivity 11. Why is it important?: Right now, most Indian households rely on money-lenders for credit and on the Saradhas and Saharas for their savings needs. Bank accounts for all may solve this problem. Easy access to the banking system (and freedom from scamartists and moneylenders) can materially lift India s economic prosperity. Financial accessibility as promised by the PMJDY would certainly help generate higher saving. If bank accounts become the norm, it will also be easier for the Government to directly pay all subsidies into the accounts of the poor, instead of dispensing them through the vast, leaky network of government agencies. The PMJDY promises an overdraft or credit facility; this would expand the poor s access to credit, and thereby positively affect well-being, confidence of decision making, and trust in carrying economic activities. Further, insurance coverage of one lakh rupees would help poor account holders mitigate risk and manage shocks. Vulnerability to risk and the lack of instruments to absorb external shocks make it difficult for poor people to rise above the poverty line 12. Challenges before: A business correspondent is a representative of the bank that provides doorstep banking services through the use of smart card handling devices which are connected to the main servers of the bank. The RBI has allowed banks to use the services of NGOs, microfinance institutions, non-banking finance companies and post offices as BCs. Some caution is obviously warranted because the JDY relies heavily on the BC model for expanding the banking network in both the rural and urban areas. One of the primary reasons behind the unsatisfactory performance of the BC model is the poor remuneration (Rs 2000-3000 per month) paid to business correspondents. For such a meager amount, it is unfair to expect a BC to visit villages or slums at regular intervals, 11 Dr. Keshavamurthy, H. R. PMJDY- Sab Ka Sath Sab Ka Vikas, PIB Features dated 28.8.2014 http://pib.nic.in/newsite/efeatures.aspx?relid=109140 12 op.cit. Roadmap to Financial Inclusion. p.31
6 open new bank accounts for the poor people, process financial trans-actions, educate customers about banking services and answer all queries of the customers. Under the JDY, the BCs will get a minimum compensation of Rs.5000 per month. This is a welcome move but there are several other important factors which act as a barrier in the delivery of banking services through the BC model. Some of these factors include inordinate delay in issuing smart cards to customers (three to six months); limited utility of smart cards as services such as remittance are not loaded; inadequate cash handling limit given to BCs; devices not working properly due to technical problems or poor network connectivity; lack of trust in BCs; lack of customer-centric banking products and services; poor governance and inadequate supervision of BCs; and absence of a comprehensive strategy for financial education 13. The expanded financial architecture will need personnel, which is lacking, and could be important supply side deficit. Banks have been advised under the PMJDY to open 200 accounts a day in each of their existing rural branches, but they are wary, as the existing infrastructure in those branches cannot handle the extra load. Therefore, banking reach should be increased gradually and along with the capacity of banking infrastructure, so that the customer base at any time can be serviced well and the system is not pressurized at any time 14. Financial inclusion can not be achieved only by meeting the target numbers. The RBI Governor, Raghuram Rajan had cautioned banks on the risks involved in just hunting for number with regard to Jan-Dhan Scheme, asking them not to compromise on core objective of the programme. When we roll out the scheme, we have to make sure it does not go off the track. The target is universality, not just speed and numbers. The scheme can be a waste if it leads to duplication of accounts, if no transaction happens on the new accounts and if the new users get bad experiences 15. In Prime Minister s own words this Pradhan Mantri Jan-Dhan Yojana lies at the core of this government s development philosophy of Sab Ka Sath Sab Ka Vikas. 13 Kawaljeet Singh, Jan Dhan Yojana; Ambitious but Ambiguous Plan, Mainstream, Vol.LII, No.44. October 25, 2014, pp.8-9 14 op.cit. Roadmap to Financial Inclusion, p.34 15 The Hindu, dated 19.9.2014