Thoughts & Ideas

Friday, September 05, 2014

Pradhan Mantri Dhan Jan Yojana & Financial Inclusion

The GOI has with a tremendous amount of fanfare announced the Pradhan Mantri Dhan Jan Yojana (PMDJY) a scheme for financial inclusion. To learn a little more about the mechanics of the scheme, I searched the net. To my surprise, I found that no details of “Sampoorn Vittiyea Samaveshan, An Approach Paper for Comprehensive Financial Inclusion”, the fore-runner of the PMDJY is available on the website of Department of Financial Services, GOI. Even more surprising is that the link to the circular on PMDJY does not respond! Checking with some friends who are involved in implementing the scheme, I was told that full scheme details are  still awaited. Meanwhile we have opened 1.5 crore accounts without having much clarity as to what is the aim of the scheme and how it would be operated!

A cursory search of recent opinion / news articles on the subject seems to suggest that most Indian policy makers and academicians still believe that the primary thrust of financial inclusion should be on providing credit. The use of credit as a developmental tool may have once upon a time seemed clear and straightforward with the belief that increases in the volume of cheap credit is necessary and sufficient to boost incomes and that the poor can be brought into the mainstream of development through supervised credit programs. However, this has not been borne out by the adverse experiences over the last 40-50 years, across the globe. Over this period substantial research and literature on the subject suggests that such a course of action has various pitfalls and there is a lot of life on the subject of either Economic Development or Financial Inclusion beyond giving cheap loans.

Moreover, an added quantum of debt burden cannot and does not replace availability of clean drinking water, functional schools and primary health centers, motorable roads and bridges, regular supply of electricity etc. However, it does add to the phenomenon of farmer’s suicides.

Popular discussion on the scheme seems to concentrate solely on the freebies, such as the clean Overdraft and Insurance. The aim of the government seems to be on ensuring a means for direct cash transfers. There is little on how to provide secure, safe, convenient savings facilities to the un-banked millions without the transaction costs going through the roof for the banks implementing the scheme.  If some of the transactions costs cannot be wished away, what portion the government is willing to pick up and for how long also needs to be addressed upfront. Providing such saving mechanism is a critical need as it would not only help to build savings (and capital accumulation) but also provide a hedge against vagaries of earnings which varies from day to day, month to month, and season to season for vast multitudes. 

In case, the intended beneficiaries of the accounts opened under PMDJY do not find it convenient (in terms of time, effort, cost) to transact on these accounts continuously over time, it would be very irrational for them not to avail the freebies and scoot!

Contrary to popular conception the poor also save; in cash, by purchasing liquid assets (jewellery, cattle etc.), by delaying selling farm produce, not insisting on receiving full payment for services or goods upfront, giving to friends / relatives for safe keeping etc. Savings in cash when not stolen, lost, or borrowed (without expectation of return) loses value over time. But there seems to be little interest or market research on the subject on how or why do the bottom 30% save and what can be done to improve on the present position.

In all probability we seem to be bent on squandering another opportunity. But life goes on, and of course the soul is immortal as stated by Lord Krishna himself in the Bhagwad Geeta. So why worry!


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