Date: 24/08/2022

Relevance: GS-3: Inclusive Growth and issues arising from it.

Key Phrases: Financial inclusion, sustainable economic development, priority sector lending, Swabhiman scheme, business correspondent (BC), financial literacy, RuPay debit card, Pradhan Mantri Jan Dhan Yojana, JAM trinity, Unified Payments Interface (UPI).

Context:

• Financial inclusion is a key driver of sustainable economic development and has been featured as a separate target in eight (SDG1, SDG2, SDG3, SDG5, SDG8, SDG9, SDG 10, and SDG 17) of the 17 Sustainable Development Goals of 2030.

Numerous initiatives of RBI and the government:

• Nationalisation of 14 major banks in 1969
• The lead bank scheme
• Introduction of priority sector lending requirements for banks
• Establishment of regional rural banks and expansion of bank branch network
• Banks and self-help group linkages program
• A nationwide program for financial inclusion under the Swabhiman scheme
• Initiating the business correspondent (BC) model
• Providing credit and remittance facilities
• Introducing financial literacy programs

The limited success of financial inclusion initiatives:

• However, the benefits of these policy measures have not reached large sections of the population, especially the low-income group, women, and informal workers.
• According to Census 2011, around 42 percent of households in all, and a little less than half of the households in rural India, did not have access to banking/financial facilities (PMJDY 2014).

Objectives of Pradhan Mantri Jan Dhan Yojana (PMJDY)

• Launched on August 28, 2014.
• Objective: To provide universal access to banking facilities to every household, and access to credit, insurance, and pension facilities to every adult individual.
• Unlike previous initiatives on financial inclusion, PMJDY targets households and sub-service areas comprising 1,000-1,500 households.
• Covers both rural and urban areas
• Other services:
  • RuPay debit card with inbuilt insurance cover of ₹1 lakh
  • Life cover of ₹30,000
  • Overdraft facility of up to ₹5,000

Changes made over time:

• This scheme was extended beyond 2018 with some changes, which include:
  • A shift in focus from ‘every household’ to ‘every unbanked adult’
  • An increase in accidental insurance cover on RuPay cards from ₹1 lakh to ₹2 lakh for accounts opened after August 28, 2018
  • An increase in overdraft facility from ₹5,000 to ₹10,000
  • Increase in the upper age for an overdraft from 60 to 65 years

JAM trinity:

• Subsequently, to reach out to the un- and under-served sections of society, the JAM trinity (linking of Jan Dhan Yojana, Aadhaar, and mobile numbers) was initiated to transfer government subsidies and benefits directly into the accounts of the intended beneficiary.
• These changes have resulted in a three-fold growth in PMJDY accounts from 17.9 crores in August 2015 to 43.04 crores in August 2021, with a CAGR of 14.62 percent in seven years of its operation.
• The JAM trinity was further leveraged by the government to mitigate the impact of the Covid pandemic through immediate Direct Benefit Transfer (DBT) to rural households under Gareeb Kalyan Yojana, stimulus package under the AtmaNirbhar package, loans to MSMEs, etc.

Reach of the scheme:

• More than 12.5 crore accounts were opened in the first nine months of the launch of the scheme.
• Out of 43.04 crore Jan Dhan accounts, 55.47 percent (23.87 crores) account-holders are women and 66.9 percent (28.70 crores) of such accounts are in rural and semi-urban areas.
• Remarkably, the proportion of inoperative Jan Dhan accounts has also declined substantially from 24 percent to 14 percent during 2015-2021.
• Also, total deposits in such accounts increased 6.38 times and RuPay debit cards issued almost doubled from August 2015 to August 2021.
• Presently, around 72.5 percent of such account-holders have a RuPay card.

Unified Payments Interface (UPI):

• The UPI system has played a crucial role in bringing large excluded sections within the ambit of financial services, lowering the overall infrastructure cost of banking services in remote and underserved areas through its instant single-click app-based transfer.
• There is robust customer protection through a two-factor authentication system.
• Despite its slow start in 2016, the total number of transactions on UPI has reached 6.2 billion, worth ₹10.62 trillion, in July 2022.
• Clearly, the volume and frequency of digital financial services have accelerated recently.

Challenges:

• Challenges hindering the growth in access to banking services, especially in rural areas include:
  • A large number of dormant accounts,
  • Lack of training for banking correspondents,
  • Lack of knowledge about the functioning of ATMs, e-banking, and government schemes among customers
  • Require heavy documentation and many formalities in the banking procedure
  • Low-income levels
  • Poor digital infrastructure,
  • Risk of cyber frauds,
  • Data privacy, etc.

Suggestions to improve Financial Inclusion:

• Fix credibility:
  • To address the issue of credibility of BCs, banks could take advantage of a wide network of post offices and fair price shops and provide banking counters for the unbanked population.
  • Multi-language ATMs with audio-video services could be considered.
  • To address the high attrition rate, ascribed to low commission/earnings, banks could consider nominating housewives, and owners of fair price shops, retired people, and people with limited disabilities to become BCs to supplement their regular income.
• Offer diverse products to suit different sections:
  • Given the regional and occupational diversity in India, it is necessary to have diverse products for its unbanked population.
  • There is a need to have granular schemes, preferably different schemes for rural areas and urban areas.
  • Distinct schemes can be made based on the nature of employment of people. For example, daily wage laborers can be allowed to make tiny deposits daily.
• Innovations backed by financial literacy:
  • Technological innovations like an integrated machine that has the functionality of cash withdrawal and deposit and biometric identification of users, voice commands, and narration for all facilities in multi-language format could help increase banking penetration.
  • To increase awareness and interest in products offered under various schemes of FIs, increase in an advertisement in the local language, on radio and television, and in print media, with local icons and artists as brand ambassadors of the campaign, could help in building public confidence.
• Local bodies' role:
  • To achieve 100 percent success, there is a need to seek help from local governments, both in villages and cities.
  • The Panchayati raj institutions, municipalities, and city councils can help not only in identifying but encouraging the unbanked to start operating in formal banking channels.

Conclusion:

• To achieve the cherished goal of providing access to financial services to each adult, emphasis should be given to quality rather than quantity, financial literacy, and credit counseling programs, the adoption of secure digital technology with adequate safeguards, and consumer protection measures.

Source: The Hindu BL

Mains Question:

Q. What are the opportunities and challenges to financial inclusion in India? Suggest some measures to improve financial inclusion in India.