Financial Inclusion in India: Need and future; PMJDY; Payment Banks and Small Banks

Financial Inclusion in India

Financial Inclusion is about

  1. The broadening of financial services to those people who do not have access to financial services.
  2. The deepening of financial services for people who have minimal financial services.
  3. Greater financial literacy and consumer protection so that people can make appropriate choices.
  4. The importance of FI is both a moral one as well as economic efficiency one.

The need for Financial Inclusion

Reasons for Limited Success

How to Take Financial Inclusion Further?

                                Pradhan Mantri Jan Dhan Yojana

Jan Dhan Yojana was launched in 2014 to bring financial inclusion in India. The important features of Jan Dhan Yojana include

Zero Balance Account 

  • The accounts under PMJDY will be zero balance accounts which mean account holders do not need to maintain any bank balance. Most regular bank accounts require that a minimum balance which might vary from Rs 500 to Rs 5000 will have to be maintained in the bank account failing which a penalty will have to be the customer.
  • In April this year , RBI announced that banks could no longer charge a penalty for non-maintenance of average quarterly balance, this was after it received complaints from bank account holders that their bank balances had disappeared over several months. Keeping this in mind , banks have now introduced zero balance accounts under Pradhan Mantri Jan Dhan Yojana.

Insurance Cover of Rs 1 Lakh along with Rupay Cards

  • All account holders will receive a Rupay Debit Card so that they can withdraw money from any ATM and also use it to make payments at merchant establishments.
  • Each Rupay Card will also insure the Card Holder with accident insurance of up to Rs 1 Lakh from HDFC Ergo and Medical Insurance of up to Rs 30,000 for sick account holders. This money could be used for treatment and pay medical bills when the need arises.

Pass Book and Cheque Books

  • Some Banks are issuing additional pass books and cheque books to some users if they make an additional payment of Rs 100 to Rs 500. This is an additional feature and can be availed by account holders only if they feel the need for it.

Direct Benefit Transfers

  • Another valuable feature of Pradhan Mantri Jan Dhan Yojana is that bank accounts which are linked to Aadhaar ID’s can avail government subsidies by electronic transfer directly into their accounts. For Example, The government might transfer food subsidies, it provides to ration card holders directly into their bank account.

Overdraft / Loan 

  • Overdraft facility of Rs 5000 will be provided to account holders who transact regularly using their rupay card and maintain a good balance in their bank accounts.

Progress under PMJDY

  • As many as 20.38 crore bank accounts were opened under the PMJDY as per the latest data available. These 20.38 crore bank accounts had deposits of Rs 30,638.29 crore.
  • As per trends available, the percentage of accounts with ‘Zero Balance’ have actually shown a significant decline. Accounts with no balance in them were as high as 76.81 per cent of the total opened under the scheme as on September 30, 2015. They have come down to just about 32 per cent at the end of December 2015.
  • The Finance Ministry data further showed that 8.74 crores of the accounts were seeded with Aadhaar and 17.14 crore account holders were issued RuPay cards.
  • As on January 15, 2016, banks had offered 53.54 lakh account holders overdraft facility of which the sanction was issued for 27.56 lakh cases, and 12.32 lakh account holders availed it. The total amount availed was Rs 166.7 crore.

Payment Banks

What is the main objective of a Payments Bank?

  • Let us consider an example – You pay salary to your Car driver in cash because he does not have a bank account. Individuals like him generally send money to his family members (who might be residing in his native place, a small village) through known people or he may use Money-order facility to remit the cash. But, more and more people like him are becoming mobile phone savvy. The payments Banks applicants will look to unbanked people like your car driver as low-hanging fruit to harvest as their first customers.
  • (India has around 90 crore mobile users and out of which around 70 crores are active users. The total no of mobile subscribers in rural areas are 38 crores)
  • Don’t get surprised if your neighbourhood supermarket or even your mobile phone can soon be doubled up as a Bank.
  • So, the main objective of Payments Banks is to increase financial inclusion (to get more people into the banking system) by providing Small Savings Accounts, Payment or remittance services to low-income households / labour, small businesses etc.,
  • Payments banks will provide basic banking services to people who currently do not have a bank account, including millions of migrant workers. Almost half of India’s population is unbanked.
  • These banks will aim at providing high volume-low value transactions in deposits and Payments / remittance services in a secured technology-enabled environment.

Why do we need Payment bank?

  • As discussed above, payments bank allow you only to open savings and current accounts. But doesn’t a normal bank allow you to do that even now? Yeah, but the difference is a payments bank can now be your mobile service provider, supermarket chain or a non-banking finance company. (Bharti Airtel, with 20 crore subscribers, has nearly the same number of customers as State Bank of India. The transactions done through mobile wallets have tripled over the last two years to Rs 2,750 crore.)
  • Payment banks may make handling cash a lot easier. For example, you can transfer money using your mobile phone to another bank or to another mobile phone holder and also receive amounts through your device. Or you can transfer the amount to point-of-sale terminals at large retailers and take out cash.
  • Payment banks will pay an interest rate on savings accounts.
  • The deposits are covered by the DICGC (Deposit Insurance & Credit Guarantee Corporation), like your Bank Fixed Deposits.

Challenges Faced by Payment bank

  • The impact of these banks is not guaranteed, and they will face the same hurdles as any financial services provider that aims to serve the country’s low-income, rural communities. If it were simple to serve these customers, India’s previous Business Correspondent efforts – not to mention its experience with private services like M-PESA, which captures almost every payment in countries like Kenya and Tanzania – would have met with more resounding success.
  • A payment bank will be working on a thin margin. They are expected to go to the hinterland and tap the consumer base there. This is a cost-heavy structure and, therefore, financial viability for a bank will not be easy.

Small Banks

What is a small bank?

  • Small finance banks are a type of niche banks in India. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending.
  • The main purpose of the small banks will be to provide a whole suite of basic banking products such as bank deposits and supply of credit but in a limited area of operation. The objective for these Small Banks is to increase financial inclusion by the provision of savings vehicles to underserved and unserved sections of the population, the supply of credit to small farmers, micro and small industries, and other unorganized sector entities through high technology-low cost operations.

Why there is a need for small banks?

  • India has seven branches per 100,000 population compared with 40 branches per 100,000 population in developed countries.
  • The financial inclusion aims to have one bank account per member of the family. But, there are many families those have adult members without a bank account. Cent per cent financial literacy means one bank account per adult. Small banks can tap this population.
  • Independent studies have revealed that around 90 per cent of the micro and small businesses have no access to the formal mainstream financial institutions. Since their ticket size is small, these banks can bring micro and small entrepreneurs into their fold.
  • The main purpose of the small banks will be to provide a whole suite of basic banking products such as bank deposits and supply of credit but in a limited area of operation. The objective for these Small Banks is to increase financial inclusion by the provision of savings vehicles to underserved and unserved sections of the population, the supply of credit to small farmers, micro and small industries, and other unorganized sector entities through high technology-low cost operations.
  • Many people in rural areas lend or deposit their hard-earned monies with money lenders and financiers. Chit funds are also very popular. The main reason for all these things is that they do not have access to banks. Small Banks can change this scenario as According to the guidelines, at least 50% of a small bank’s loan portfolio should constitute loans and advances of up to Rs.25 lakh. Which means loans will be smaller in size.
  • The opening of small Banks would also increase competition in the Banking sector which could improve Monetary transmission for example Recently; RBI had cut the key policy rates. But, bank customers have not yet benefited from these interest rate cuts. Most of the banks have not yet passed on the benefits to its customers as they have an informal understanding with other Banks. However, they are fast enough to reduce deposits rates though. This situation could improve if more competition is introduced in the banking sector

Challenges Small Banks will face

  • Nowhere in the world so far have small banks been a roaring success. In the US, where they are called community banks, a few are doing well, such as State Bank of Texas and Prinz Bank, but overall, they hold less than 15 per cent of the country’s total banking assets.
  •  Small banks, apart from extending credit, will also have the job of mobilizing deposits. This requires inspiring immense trust. Neither MFIs nor NBFCs have experience in this aspect. “Building a retail deposit portfolio is a big challenge where existing public and private sectors banks have an advantage because of their strong brands.
  • 75% of net credits of small banks should be in the Priority Sector lending. However, the issue really is that priority sector loans tend to become vulnerable to becoming non-performing assets (NPAs) with the propensity being higher for them. In the past, the NPA ratio for priority sector loans has ranged from 4-5% while that of the non-priority sector has been around 3%. Thus this can affect the financial stability of the small banks.
  • The challenge would be to control NPAs here, as an unfavourable monsoon would have an impact on farm loans. Similarly, any slowdown in the industrial sector is first felt on the small and medium-sized enterprises (SMEs), which have payments problems. Therefore, on both scores, they would be at a disadvantage compared with the commercial banking system.
  • Banks are able to diversify their portfolio by lending to all sectors which include retail, services and manufacturing, while these banks would be left with dealing with the smaller ones only. Besides, given that these accounts would be small and well dispersed, the cost of monitoring would also be higher for them.


Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

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