By Vivek Bhattacharyya

Edited by Shambhavi Singh, Senior Editor, The Indian Economist

Financial inclusion is still a glaring problem in India. According to Census 2011, a mere 59% of households have bank accounts. 50% of these accounts are not operated at all, as they are opened as MNREGA accounts or via some other social welfare programme. On the other hand, those who are deprived of access to banking are subject to the mercy of money-lenders, who charge exorbitantly high interest rates of 35% as an average. 25% is the average interest charged by private microfinance institutions, and in case they can’t recover their money, they hire local hoodlums to physically assault the helpless borrower.

Against this background, the government in sync with the Reserve Bank of India has implemented several schemes to curb the same and bring every Indian within the banking net. Bank Nationalization, cooperative banks, Regional Rural banks, Banking correspondence agent, Swavlamban, Swabhiman, No-frills accounts, Microfinance, 25% rural branch rule, Bharatiya Mahila Bank are some prominent examples. Pradhan Mantri Jan Dhan Yojana (PMJDY) is the latest effort towards this cause.

Run by Department of Financial Services under the Ministry of Finance, this programme kicked off on 15 August 2014, with a catchy motto “Mera Khata Bhagya Vidhata”. Its target is ambitious – open bank accounts for 7.5 crore families in the next one year.

The arguments in favour are obvious. It will aid financial inclusion and will rescue villagers from the clutches of evil money lenders. It will boost household savings rate similar to Bank Nationalization in the 1960s. Also, Direct Benefit transfer (DBT) money will flow into those accounts and subsidy leakage will decline. Insurance penetration which is currently poor because of absent banking infrastructure, will pick up steam.

However, the concept of PMJDY has some serious flaws. Raghuram Rajan, the current RBI governor,  is concerned that since the scheme gives Rs. 1 lakh insurance on each account, so to get large insurance or overdraft facility, the same person might open multiple accounts in multiple banks- one with PAN card, one with Aadhar Card, one with Voter ID and so on. Adding to that will be banks overlooking this duplication as it will help them meet their ‘targets’. So Mr. Rajan suggested that banks should establish a single information sharing system to weed out such multiple accounts. The author points out that State bank of India has already issued clear guidelines that even if multiple accounts are created of the same person, he/she will get only 1 lakh cover. And all accounts are put under Core banking solution (CBS) platform, duplication or such mischief is unlikely.

PMJDY accounts could be used for money laundering. Hawala operators can split the amount into several small units, deposit them under several PMJDY accounts and then send money overseas without coming under the radar of Income Tax authorities or Enforcement Directorate.

This scheme also reeks of ‘Insurance thug-ery in small fonts’. PMJDY gives you free accident insurance cover worth Rs.1 lakh, but there is a secret condition- you must use RuPay debit card at least once every 45 days – this is not be possible for poor families in remote tribal areas. So, they will lose this benefit out of account inactivity.

Why does such a secret condition exist? This is because insurance money has to generated somewhere. Even if the beneficiary is getting it for free, someone still has to pay the premium. In this case, the government is not paying it. The author predicts that this is possibly because the government doesn’t want to invite more criticism on yet another welfare scheme which adds to the fiscal deficit. Therefore, the premium is paid by National Payments Corporation of India which owns the RuPay card system. Therefore, it wants the beneficiary to frequently use the card.

PMJDY will divide every region into sub-service areas (SSA). Within those SSAs, each household will have a banking outlet within a radius of 5 km. But since banks cannot open branches everywhere, government aims to achieve these targets via Banking Business Correspondence Agents (BCA) or Bank Mitra – a model which has already failed. So piggybacking a new project on a failed model will possibly lead to the failure of this project as well.

PMJDY aims to make all scheme-subsidy payments directly to Jan-Dhan bank accounts. Though, Direct Benefit Transfer (DBT) itself is a failure on several fronts. Aadhaar project is yet to cover all residents. Aadhar project is also burdened by court cases, because UIDAI is not statutory. So much so the previous UPA-II government had to admit in court that “Aadhar-number” is not compulsory to get scheme benefits. With the incentive gone, the public won’t be motivated to get Aadhar cards, making PMJDY collapse.

In conclusion, PMJDY is just old wine in a new bottle. When earlier schemes did not improve financial inclusion, there is little hope a new one, identical to the ones before, will. Systematic and well planned reforms are necessary, such as those recommended by Nachiket Mor Committee – payment banks, wholesale banks, UEBA. However, the government seems to be in a haste to capture media attention, and is hence, resorting to schemes with little or no welfare value, but high on PR gimmick.


Vivek Bhattacharyya majored in Electronics Engineering, and is a Foreign Policy and International Relations enthusiast. He was formerly associated with Non-Traditional Security Research Centre (NTS-RC) at Institute for Defence Studies and Analyses (IDSA), and Observer Research Foundation, besides having written extensively to The Hindu and the Indian Express on similar issues. Other interests include constitutional and international law, socio-political issues and literature. He believes human stupidity is a far bigger threat to mankind than ISIS, and can be reached at https://www.facebook.com/Vivek.Bhattacharyya90 or vivek.bhattacharyya1990@gmail.com.

Posted by The Indian Economist | For the Curious Mind