Given the effort put in by the government to get Jan Dhan Yojana going—12.5 crore accounts have been opened so far and have a balance of nearly R10,500 crore it is not surprising prime minister Narendra Modi exhorted RBI to set out a roadmap for financial inclusion, to ensure that in RBI’s centenary year, every Indian had some access to financial services. While the prime minister’s speech was a nuanced one, it is important to underscore the real levers for financial inclusion lie with the government and not RBI or the PSU banks. Indeed, this is why all past attempts at financial inclusion through no-frills accounts have failed. Technology has made banking the unbanked a lot cheaper through banking correspondents armed with nothing but a smartphone connected to bank’s servers, but it still costs money. If the banking correspondent in a village doesn’t make sufficient money, she is not going to be engaged in that activity for long. This is where the Jan Dhan Yojana and direct benefit transfers (DBT) fitted in so well. The government would give the poor R10,000 per year—that’s the annual spend on subsidies divided by the number of poor in the country—by way of DBT into their JanDhan accounts. The cash flowing in the accounts as well as the commission paid by the government to banks would make it worth their while to service these accounts and to pay their banking correspondents—and if the banks gave an overdraft like the Jan Dhan mandated, the repayment of this would be guaranteed by the money the government was putting into these accounts anyway. The whole scheme, however, has become a non-starter since it doesn’t appear DBT is going to be used for food subsidies in a hurry, and that is the main subsidy item.
Also, while the prime minister did well to mention the role of cooperative banks and micro finance institutions (MFIs), it is vital to keep in mind it is these organisations that are best suited for financial inclusion, not large banks. While RBI has gone ahead and proposed that banks lend more to small and marginal farmers within their mandated priority-sector lending, banks are piling up NPAs here—if PSU banks are to be made competitive, they can’t be mandated to lend to certain categories of borrowers. These areas as well as lending to the poor, to get them out of the clutches of moneylenders, are areas that more nimble MFIs understand better. It would be a mistake to force, to try and persuade, PSU banks to lend more to these areas. And while MFIs have to be encouraged, it has to be understood that high-risk lending has to carry higher interest rates—this is the mistake Andhra Pradesh made with its MFI law which, with some correctives, got applied to the entire MFI sector. If the unbanked are to get financial inclusion, the most important lesson is that the business has to be viable—direct government subsidies as well as channelising existing subsidies through banking channels is one way to facilitate this viability.