By Ananya mishra

Edited by Namrata Caleb, Senior Editor, The Indian Economist

State is expected to offer the public not only better infrastructure, better health but also social empowerment. Social empowerment is possible by education or by providing financial inclusion. Increasing financial depth in  the society will work in empowering the lowest strata of the society which in turn can reduce the disparities among the different sections of the society. The scheme also aims to provide financial accessibility to members of the informal sector who do not get finances for any enterprise, and have to bank on borrowings from family and friends which inherently lack any scope for upward mobility. Further insurance seeks to absorb shocks like accidents and seeks to instil resilience and protect the society against vulnerabilities, which was a critical factor in the recent Human Development Report.

Financial inclusion is defined as providing financial services like banking, insurance, credit and opportunities of investment. Government has made policies for financial inclusion at State and Centre level. The most recent of them being the Jan Dhan Yojana released this August. An ambitious target of registering 75 million households in the scheme by next Independence Day is set, 15 million of which were done on the day of the launch. While many schemes have been released in the past like the Swabhimaan and the Bhamshaah by the Rajasthan government, this scheme is one of its kinds. It’s multi-faceted, multi-dimensional and the features are unprecedented. It aims at providing a RuPay debit card, an accident insurance policy cover one lac, a life insurance policy of thirty thousand for those enrolled before Independence Day 2015. An overdraft facility will be monitored. The scheme is aimed to be carried forward in two phases.

In phase 1, all households will be provided with a basic account and financial literacy is to be propagated and the process of direct cash benefits will be implemented. Phase 2, aims to provide financial services to these account holders and provide services like insurance. As expanding infrastructure on such a large scale in unbanked rural areas, in such a short time requires time and high capital, Bank Correspondents (BCs) are being deployed on large scale in unbanked areas.

 The challenges which the scheme faces are basically infrastructure constraints, financial constraints, and the rigid time frame. Under ordinary circumstances, bank takes twenty minutes to open an account, which means 24 accounts in a day by one employee in one branch, that too after a very zealous eight hours in the bank. May be mathematically it would add up to the requisite numbers, but it would be an idealistic case and would need proper functioning of rural bank centres. This case also is of a simple bank account, but the scheme targets to provide a range of services, activation of which may need extra time.

Another constraint is expansion of banking network. Since the scheme proposes to issue debit cards it would imply ATM network should be strengthened. A parallel chain across the post offices may be one of the methods, as post offices remain to be one of the most widespread state institutions in the country. Across the world, in emerging economies such schemes had developed innovations in technology or infrastructure. By integrating technology, services which are not viable by physical infrastructure can be made available by telecommunications or any other technical centre in each local units like the M-PESA services in Kenya.

While the launch has been enthusiastic and promising, implementation holds the key. Accessibility remains an issue evident from the fact that more modest targets recommended by RBI were deemed improbable by Shikha Sharma, and S.S. Mundra, members of the Nachiket Mor committee on financial inclusion.  Infrastructure for providing services to all the account holders is underdeveloped and opening the accounts would pose a challenge even with relaxed KYC norms and introduction of no-frill accounts. The idea of Banking Correspondents is reasonable, but the qualifications of the BCs, and their wages are issues that need to be addressed. A monthly income of 10000 would seem appropriate but the implementation would mean high capital required on monthly basis for years till such time physical infrastructure is in place. Moreover lack of labour could also pose problems.

  While one can dismiss such schemes as populist, the idea behind the scheme has to be acknowledged, and more so if the scheme is implemented partially, achieving even sixty per cent of its target, the scheme would make a difference.

Ananya Mishra is currently pursuing his BSc in Physical Sciences. He is a KVPY scholar and is into active research in data analysis. Apart from these, he is also an active student member of Institute of Actuaries India. His interest spans financial mathematics, investments, current politics and international affairs. Other hobbies include chess and computing. 

Posted by The Indian Economist | For the Curious Mind