In its three years in power, the Modi government has ensured financial inclusion. Now, in the remainder of its term, can it build a system which delivers the benefits of it?
Much has been written about how Prime Minister Narendra Modi has failed the economic right. For instance, he has so far been reluctant to privatise public sector enterprises. But when it comes to the banking sector he has at least put the government banks to good use - to achieve financial inclusion.
Within three months of assuming office, Modi showed his determination to use financial inclusion as a vehicle for economic progress when he announced the Jan Dhan Yojana in his first Independence Day speech. After entering the Guinness Book for opening 18 million bank accounts in a week, the scheme has so far led to the opening of 285 million bank accounts for poor people. The percentage of Indian households with at least one bank account holder that was 59 per cent in 2012 has jumped to a whopping 99 per cent.
By any account the scheme has been an extraordinary success. Critics question the low balance in these accounts (even though their aggregate balance stands at $10 billion) and the futility of opening savings accounts for poor persons with very little savings. But they ignore the fact that all Jan Dhan accounts come with free insurance, RuPay card and access to other financial products such as overdraft, pension and money transfer. Most importantly, these bank accounts have facilitated leakage-free transfer of cash benefits ranging from subsidies to MGNREGA wages.
The next big challenge is to provide the poor access to credit which they can use to invest in economic activities. The government’s flagship programme for this is the MUDRA loan scheme launched in 2015 that offers up to Rs 10 lakh to micro and small units to support the Stand Up India campaign. MUDRA loans stand out for their quick processing and come with cards that can be used to access working capital from ATMs. The government says that the MUDRA scheme has been very successful with more than 40 million borrowers taking Rs 1.8 trillion worth of loans this year.
However, it is not clear whether all these loans have indeed happened because of MUDRA or are banks simply classifying some of the loans they would have given anyway as MUDRA loans because of the stiff targets. Second, MUDRA loans are collateral-free which puts banks’ balance sheets at risk and we will get to know in the next year or two how these loans affect the already alarming bad loans situation.
Targets for opening accounts may be a good idea for savings accounts (such as for the Jan Dhan scheme) but may not turn out to be such a great idea when it comes to unsecured credit as it puts pressure on bankers to give loans without sufficiently due diligence. Even with this push, aggregate banking sector data shows that credit to micro and small enterprises has grown by only 6.5 per cent in 2017 that is lower than the growth in overall credit.
In any case, the growth in deposits and credit have been achieved with the help of commercial banks. But they have limited reach. There are 13 commercial bank branches per 100,000 adults in India which is much lower than many developing (Brazil, Russia) and developed countries (US, UK). Clearly commercial banks will struggle to meet the entire financing needs of our 1.3 billion population. For financial inclusion to be complete, we need growth in all types of banking institutions including cooperative banks, Grameen banks as well as non banking financial companies and new age banks. Here the new types of banks viz. small finance banks and payments banks would play a significant role.
A few such institutions have recently commenced operations and their effects on financial inclusion will be felt in the years to come. But there is already a lot of excitement in this space with banners and advertisement boards of these new banks appearing even in the rural landscape. The untapped market for credit and remittances is huge and these nimble footed tech-driven institutions would help to bridge the last mile gap in many places.
The government’s push for Aadhaar enrolment has helped the cause of financial inclusion as it is now very easy to open accounts at any banking or non-banking financial institution. The troika of social security schemes for the poor launched in 2015 (pension, life insurance and accident insurance) have succeeded in enrolling more than 100 million people and are crucial pieces of the government’s financial inclusion agenda.
Microfinance institutions and self help groups play an important role in rural areas. Poor people are often forced to approach exploitative money lenders because they quickly disburse small loans with zero documentation or security. Microfinance can effectively fill this gap with a little bit of encouragement. Unfortunately, the Modi government, perhaps on account of its faith in formal institutions, has not done enough for the microfinance industry.
Finally, progress in financial inclusion cannot be assessed in terms of numbers alone but must include awareness generation among citizens right from their formative years. School curricula have to be revamped to include basic financial education at primary to high school levels. The CBSE has taken some steps in this regard, but the government should push states to incorporate financial literacy in state board syllabuses.
One note of caution is that the Reserve Bank of India (RBI) has not paid enough attention to people’s apprehension over the rising fees charged by commercial banks for their services. If left unaddressed, it can lead to a return to cash dependence and also keep away low income customers from using formal banking. Demonetisation along with United Payments Interface (UPI) and Bharat Interface for Money (BHIM) payment platforms have given a significant boost to digital payments that is helping to boost the usage of banking channels. The government should not let the momentum go by letting banks penalise digital transactions. I am hopeful that the government recognises that Digital India is integral to fostering financial inclusion which should not be allowed to be stalled by creeping bank charges.