Jan-Dhan has been announced from the ramparts of Red Fort on August 15, 2014 and quickly made inroads into the field on no-holds barred approach the first ever, since the announcement of Financial Inclusion by Y. V. Reddy, the former Governor, RBI in 2005. The Committee on Financial Inclusion under the Chairmanship of Dr Rangarajan said: ‘Financial Inclusion is no longer an option, but a necessity.’ NABARD Report in 2008 gave a working definition later: “Financial inclusion may be defined 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.” Had the Banks implemented the Differential Rate of Interest Scheme[1] (still in the RBI statutes) been implemented by the banks, monitored and regulated by the RBI, the Prime Minister Modi would not have had the good luck of taking this lame duck of financial inclusion under the new garb with such gusto. The credit limit for the Jan-Dhan scheme second dose is incidentally the same as the revised DRI limit of Rs.15,000 in 2010. What R.K. Hazare proposed in 1970s has been disposed by M.V. Nair in 2012.
Now a different story is being unfolded. The questions that remain are: have the banks boldly put forward the risk profile of the portfolio in all its ramifications with over six important players – banks, business correspondents and their agents; NGOs, SHGs, MFIs and the technology players in the game of financial inclusion? The same staff –quantitatively and qualitatively that could not open no-frill and GCC accounts for nearly a decade beyond 7.3cr had opened a hopping 1.3crore accounts on just one day, the 28th August. The Chairpersons of the Banks were on their toes and liberally posed for photographs with the political leaders to be in the media glare on par with the euphoria that we had seen in the glorious initial days of IRDP until Rajiv Gandhi told that only 16 paise of the IRDP rupee only reached the intended population. Several procedural issues and implementation issues have been for once put in the cupboards of the top executives of the Banks. But it is necessary to discuss them sooner than later.
Regulator -driven financial inclusion effort made only marginal impact during the period 2002-2011. Financial inclusion was full of sound and fury during the effective years of its efforts - 2005 to 2011. The reason would appear to be that the initiative is strongly driven by the central bank and hypocritically led by the Government. The constituent banks, most in the public sector, continue to make an apology of the effort in financial literacy and financial inclusion indulging in numbers to make believe that they are now serious about it. Again, with the Prime Minister making a strong pitch for financial inclusion drive, would it make a difference to the banks? It is not with pessimism that I allude into the past but to draw lessons for rectifying the approaches in the beginning of the massive drive.
The National Pilot Project of Financial Inclusion of 2006 had a few similarities and also had a few success stories like those in ‘Neravy’ village in Karaikal Region of Union Territory of Puducherry through the Indian Bank branch at Karaikal. (Remember, this is the constituency of the former Finance Minister, Chidambaram)
Salient Features of the National Pilot Project for Financial Inclusion (2006):
Objective:
Opening of SB accounts - All the eligible willing individuals of age group 18 to 70 are allowed to open savings bank account. Simplified KYC norms and documentation may be followed. Bank branches have to ensure that entire population of the allotted areas are covered without any omission.
Sanction of Overdraft - Overdraft has to be sanctioned to all eligible needy persons. The OD may be a minimum of Rs.500/- extending up to a maximum of Rs.5000/- per person. The rate of interest is around Prime Lending Rate (PLR).
Issue of General Credit Card - General Credit cards are supposed to be issued to traders, self-employed persons and others apart from individuals having Kisan Credit Cards. A maximum limit of Rs.2.00 lacs is allowed based on the activity and its feasibility / viability of the proposed project.
Line of Credit to SHGs - General Line of Credit may be provided to the Self Help groups having a good track record. This enabled reduction of transaction cost as well as providing flexibility in the credit delivery system.
Insurance products - All the account holders are covered by various Insurance products to provide social security.
IT connectivity
The Indian Banks Association has also constituted technology committees in order to formulate uniform open standards for the technologies at play so as to ensure interoperability between banks and other service providers for the benefit of the customers. Presently, the lack of common technical standards has impaired the pace of ICT deployment and has led to vendor dependence for technology components. This has made the solutions deployed by even a particular bank for financial inclusion, solution- provider specific, thus not allowing the bank customer the ability to interoperate across all outlets of the same bank.
Technology up gradation such as implementation of core banking solution is an important initiative taken by banks for taking the project to rural and interior areas. This should be accelerated in order to implement the project within the time frame. Since BSNL is now expanding the connectivity in rural areas, the implementation of Financial Inclusion is subject to availability of the connectivity.
Federal Bank Ltd., though in private sector, has a successful model in Financial Inclusion that carried the financial literacy, financial education, dedicated team of business correspondents and business facilitators, biometric facilitated credit card for availing credit in addition to specially designed village branches to steam up the effort. This model in private sector is cost-effective and delivery intensive.
A word about Mor Committee Report would be in order at least for the academic content. It is not long ago that the RBI appointed Nachiket Mor Committee to suggest ways to accelerate the Financial Inclusion efforts of banks. It produced a report that had two voices of dissent from the members and these are from Bank of India and Axis Bank Ltd. The Mor committee pitched for a radically new approach to recognize the singularity of purpose, but plurality of approaches. While the past policy interventions have been in the nature of incremental and cumulative achievements, the Mor committee seems to adopt the residual and saturation approach. While this aggressive approach is welcome, the committee does seem to underestimate the task involved in covering the residue of uncovered population.
The approach of the Mor committee is to look at the larger structure available for delivery of financial services, the supporting systems needed and the legal and regulatory framework under which such a system could operate. The approach is neutral to institutional forms. The committee also seeks to externalize all the costs of delivery. It advocates interoperability at the last mile. The interoperability is not only about the access to banking services at a touch point that is 15 minutes away by walk, but also about other financial services. These services are to be delivered ethically without any mis-selling through a concept of suitability. While it has been a challenge to open plain vanilla accounts and get the direct benefit transfers for these customers rolling out, the task of offering a product that passes the suitability criteria is daunting indeed. Clearly the costs of these products as per the tone of the committee report are to be borne by the customer.
The next cost in this rather complex world pertains to the client protection framework. The Mor committee at the base level advocates informed consent and transparency. Let us take the informed consent aspect. All microfinance institutions, including the ones in Andhra Pradesh, always took informed consent of the borrowers, through a public recital of an oath and through reciting the terms and conditions of the loans. Ultimately when the crisis hit the roof, the biggest allegation was about client protection. This concern remains with the Jan-Dhan no less.
The cost of implementation has been undermined by none other than the aggressive advocate of financial inclusion during the last seven years, K.C. Chakraborthy, the former Dy. Governor of the RBI when he told Latha Venkatesh of CNBC-TV18 reported in Money Control on the 4th September (http://www.moneycontrol.com/india/newsarticle...04/09/2014) that for banks to incur Rs.18000cr in this gigantic effort in the next four years cannot be a big issue. Banks would be gainers in the long run. Several CEOs may be hiding their anguish in the exposed smiles.
Even before the RBI could realise that the suggested action requires a practical approach, the present government jumped at the Modi-stroke, notwithstanding the deep concern of the RBI once again over inclusive banking in preference to incremental banking.
It is obvious that with a fortnight of effort that such large clientele in Jan-Dhan could not have reached the banks’ multiple windows without non-banker intermediation. IBT reports that as on October 22, 2014, 64.7million accounts with savings of Rs.48135.9million have been opened by the banks. On average, 115,000 accounts are getting opened every day! The energetic retired bankers, the village opinion leaders (an euphemism for local politician), friends and relatives, and the existing and prospective BCs as well as their agents, insurance agents, mobile operators who have good connections with the local banks could all have been roped in to help the KYC form filled. But behind the counter, it is only the bank staff that has to open two accounts – one SB and one overdraft account of Rs.5000 for each account holder with all the photographs and signatures/LTIs with witnesses for biometric application on Rupay cards, captured.
Intermediation of a host of persons did occur. After six months of savings bank account opening, if all these persons are granted the overdraft facility and such facility has no relationship whatsoever with either livelihood creation or enhancing the existing livelihood opportunities there are two possibilities. One, the borrower spends as he wishes; two, an agent or the intermediary gets the access to these persons with a bait that he would fulfil the overdraft conditions in due course once the major amount of this OD is passed on to him. Even if 50 percent of these accounts are directed in this gaming process, it would be a hopping Rs.200bn reckoning the numbers of Jan-Dhan accounts thus far. There is scope for ‘ponzi’ schemes waiting to operate!! Now they would move to villages from the cities.
If, on the other hand, there are no leakages and if there are no intermediaries other than banks and all the people secure the livelihoods on sustainable basis, the prospects of growth in terms of financial assets are immense.
The scheme also tells us that each account is insured simultaneously. No warrantee conditions are either announced or on display. Bank linked insurance schemes actually did not have a good track record. There is little evidence to show how many claims have been there against either the credit cards or the savings bank account holders allegedly covered by the insurance thus far.
Suggestions for making the effort effective in terms of cost and delivery:
Ø Make the Primary Cooperative Credit Societies the major partners not through a BC model but making them part of the mainstream banking with the required investment in technology to enable them part of payment and settlement systems of the RBI and improving governance through immediate legal changes suggested in the 97th Constitution Amendment Act on a Mission mode;
Ø Make the Urban Cooperative Banks also as much a part;
Ø Take the MFIs and NBFCs registered with the RBI also as partners;
Ø All Commercial Banks, private, public and foreign also take on this effort on village adoption mode;
Ø Widely display the scheme on the media in all vernacular channels, all the terms and conditions of opening and operating the accounts – both savings and credit – through a specific time slot for financial literacy and education for an hour;
Ø Widely announce the fine print of Insurance cover;
Ø Incentivise staff engaged in this massive effort at the end of an year after evaluating the intended processes and results appropriately;
Ø Each SLBC should devote half a day for reviewing the efforts as a separate item on the agenda.
Each bank’s internal review mechanisms and transparency coupled with regulatory impact assessment at half-yearly intervals by external agencies would go a long way in stabilising the scheme of such magnitude. India needs inclusive growth more than ever now, as the country will be under corporate seize in its global economic agenda and the Modi master stroke could not have waited any more. But all the players in the field have to play their role consciously well.
Published in Business Advisor, Vol IX, Part 3, November 10, 2014.
[1] Yerram Raju B, DRI Scheme Needs a Second Look: Eastern Economist, May 15, 1971 pp1230-34
Now a different story is being unfolded. The questions that remain are: have the banks boldly put forward the risk profile of the portfolio in all its ramifications with over six important players – banks, business correspondents and their agents; NGOs, SHGs, MFIs and the technology players in the game of financial inclusion? The same staff –quantitatively and qualitatively that could not open no-frill and GCC accounts for nearly a decade beyond 7.3cr had opened a hopping 1.3crore accounts on just one day, the 28th August. The Chairpersons of the Banks were on their toes and liberally posed for photographs with the political leaders to be in the media glare on par with the euphoria that we had seen in the glorious initial days of IRDP until Rajiv Gandhi told that only 16 paise of the IRDP rupee only reached the intended population. Several procedural issues and implementation issues have been for once put in the cupboards of the top executives of the Banks. But it is necessary to discuss them sooner than later.
Regulator -driven financial inclusion effort made only marginal impact during the period 2002-2011. Financial inclusion was full of sound and fury during the effective years of its efforts - 2005 to 2011. The reason would appear to be that the initiative is strongly driven by the central bank and hypocritically led by the Government. The constituent banks, most in the public sector, continue to make an apology of the effort in financial literacy and financial inclusion indulging in numbers to make believe that they are now serious about it. Again, with the Prime Minister making a strong pitch for financial inclusion drive, would it make a difference to the banks? It is not with pessimism that I allude into the past but to draw lessons for rectifying the approaches in the beginning of the massive drive.
The National Pilot Project of Financial Inclusion of 2006 had a few similarities and also had a few success stories like those in ‘Neravy’ village in Karaikal Region of Union Territory of Puducherry through the Indian Bank branch at Karaikal. (Remember, this is the constituency of the former Finance Minister, Chidambaram)
Salient Features of the National Pilot Project for Financial Inclusion (2006):
Objective:
- To cover the entire population of Union Territory for opening zero or low balance account.
- To sanction overdraft to all eligible persons for consumption needs.
- To sanction General Credit Card (GCC)/Kisan Credit Cards (KCC) for economic activities.
- 75% of the population has to be brought under overdraft /KCC/GCC
Opening of SB accounts - All the eligible willing individuals of age group 18 to 70 are allowed to open savings bank account. Simplified KYC norms and documentation may be followed. Bank branches have to ensure that entire population of the allotted areas are covered without any omission.
Sanction of Overdraft - Overdraft has to be sanctioned to all eligible needy persons. The OD may be a minimum of Rs.500/- extending up to a maximum of Rs.5000/- per person. The rate of interest is around Prime Lending Rate (PLR).
Issue of General Credit Card - General Credit cards are supposed to be issued to traders, self-employed persons and others apart from individuals having Kisan Credit Cards. A maximum limit of Rs.2.00 lacs is allowed based on the activity and its feasibility / viability of the proposed project.
Line of Credit to SHGs - General Line of Credit may be provided to the Self Help groups having a good track record. This enabled reduction of transaction cost as well as providing flexibility in the credit delivery system.
Insurance products - All the account holders are covered by various Insurance products to provide social security.
IT connectivity
The Indian Banks Association has also constituted technology committees in order to formulate uniform open standards for the technologies at play so as to ensure interoperability between banks and other service providers for the benefit of the customers. Presently, the lack of common technical standards has impaired the pace of ICT deployment and has led to vendor dependence for technology components. This has made the solutions deployed by even a particular bank for financial inclusion, solution- provider specific, thus not allowing the bank customer the ability to interoperate across all outlets of the same bank.
Technology up gradation such as implementation of core banking solution is an important initiative taken by banks for taking the project to rural and interior areas. This should be accelerated in order to implement the project within the time frame. Since BSNL is now expanding the connectivity in rural areas, the implementation of Financial Inclusion is subject to availability of the connectivity.
Federal Bank Ltd., though in private sector, has a successful model in Financial Inclusion that carried the financial literacy, financial education, dedicated team of business correspondents and business facilitators, biometric facilitated credit card for availing credit in addition to specially designed village branches to steam up the effort. This model in private sector is cost-effective and delivery intensive.
A word about Mor Committee Report would be in order at least for the academic content. It is not long ago that the RBI appointed Nachiket Mor Committee to suggest ways to accelerate the Financial Inclusion efforts of banks. It produced a report that had two voices of dissent from the members and these are from Bank of India and Axis Bank Ltd. The Mor committee pitched for a radically new approach to recognize the singularity of purpose, but plurality of approaches. While the past policy interventions have been in the nature of incremental and cumulative achievements, the Mor committee seems to adopt the residual and saturation approach. While this aggressive approach is welcome, the committee does seem to underestimate the task involved in covering the residue of uncovered population.
The approach of the Mor committee is to look at the larger structure available for delivery of financial services, the supporting systems needed and the legal and regulatory framework under which such a system could operate. The approach is neutral to institutional forms. The committee also seeks to externalize all the costs of delivery. It advocates interoperability at the last mile. The interoperability is not only about the access to banking services at a touch point that is 15 minutes away by walk, but also about other financial services. These services are to be delivered ethically without any mis-selling through a concept of suitability. While it has been a challenge to open plain vanilla accounts and get the direct benefit transfers for these customers rolling out, the task of offering a product that passes the suitability criteria is daunting indeed. Clearly the costs of these products as per the tone of the committee report are to be borne by the customer.
The next cost in this rather complex world pertains to the client protection framework. The Mor committee at the base level advocates informed consent and transparency. Let us take the informed consent aspect. All microfinance institutions, including the ones in Andhra Pradesh, always took informed consent of the borrowers, through a public recital of an oath and through reciting the terms and conditions of the loans. Ultimately when the crisis hit the roof, the biggest allegation was about client protection. This concern remains with the Jan-Dhan no less.
The cost of implementation has been undermined by none other than the aggressive advocate of financial inclusion during the last seven years, K.C. Chakraborthy, the former Dy. Governor of the RBI when he told Latha Venkatesh of CNBC-TV18 reported in Money Control on the 4th September (http://www.moneycontrol.com/india/newsarticle...04/09/2014) that for banks to incur Rs.18000cr in this gigantic effort in the next four years cannot be a big issue. Banks would be gainers in the long run. Several CEOs may be hiding their anguish in the exposed smiles.
Even before the RBI could realise that the suggested action requires a practical approach, the present government jumped at the Modi-stroke, notwithstanding the deep concern of the RBI once again over inclusive banking in preference to incremental banking.
It is obvious that with a fortnight of effort that such large clientele in Jan-Dhan could not have reached the banks’ multiple windows without non-banker intermediation. IBT reports that as on October 22, 2014, 64.7million accounts with savings of Rs.48135.9million have been opened by the banks. On average, 115,000 accounts are getting opened every day! The energetic retired bankers, the village opinion leaders (an euphemism for local politician), friends and relatives, and the existing and prospective BCs as well as their agents, insurance agents, mobile operators who have good connections with the local banks could all have been roped in to help the KYC form filled. But behind the counter, it is only the bank staff that has to open two accounts – one SB and one overdraft account of Rs.5000 for each account holder with all the photographs and signatures/LTIs with witnesses for biometric application on Rupay cards, captured.
Intermediation of a host of persons did occur. After six months of savings bank account opening, if all these persons are granted the overdraft facility and such facility has no relationship whatsoever with either livelihood creation or enhancing the existing livelihood opportunities there are two possibilities. One, the borrower spends as he wishes; two, an agent or the intermediary gets the access to these persons with a bait that he would fulfil the overdraft conditions in due course once the major amount of this OD is passed on to him. Even if 50 percent of these accounts are directed in this gaming process, it would be a hopping Rs.200bn reckoning the numbers of Jan-Dhan accounts thus far. There is scope for ‘ponzi’ schemes waiting to operate!! Now they would move to villages from the cities.
If, on the other hand, there are no leakages and if there are no intermediaries other than banks and all the people secure the livelihoods on sustainable basis, the prospects of growth in terms of financial assets are immense.
The scheme also tells us that each account is insured simultaneously. No warrantee conditions are either announced or on display. Bank linked insurance schemes actually did not have a good track record. There is little evidence to show how many claims have been there against either the credit cards or the savings bank account holders allegedly covered by the insurance thus far.
Suggestions for making the effort effective in terms of cost and delivery:
Ø Make the Primary Cooperative Credit Societies the major partners not through a BC model but making them part of the mainstream banking with the required investment in technology to enable them part of payment and settlement systems of the RBI and improving governance through immediate legal changes suggested in the 97th Constitution Amendment Act on a Mission mode;
Ø Make the Urban Cooperative Banks also as much a part;
Ø Take the MFIs and NBFCs registered with the RBI also as partners;
Ø All Commercial Banks, private, public and foreign also take on this effort on village adoption mode;
Ø Widely display the scheme on the media in all vernacular channels, all the terms and conditions of opening and operating the accounts – both savings and credit – through a specific time slot for financial literacy and education for an hour;
Ø Widely announce the fine print of Insurance cover;
Ø Incentivise staff engaged in this massive effort at the end of an year after evaluating the intended processes and results appropriately;
Ø Each SLBC should devote half a day for reviewing the efforts as a separate item on the agenda.
Each bank’s internal review mechanisms and transparency coupled with regulatory impact assessment at half-yearly intervals by external agencies would go a long way in stabilising the scheme of such magnitude. India needs inclusive growth more than ever now, as the country will be under corporate seize in its global economic agenda and the Modi master stroke could not have waited any more. But all the players in the field have to play their role consciously well.
Published in Business Advisor, Vol IX, Part 3, November 10, 2014.
[1] Yerram Raju B, DRI Scheme Needs a Second Look: Eastern Economist, May 15, 1971 pp1230-34
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