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GS Paper: GS3

  • Financial Inclusion in India and Its Challenges

    From Jan Dhan to Jan Suraksha: A Journey towards Financial Inclusion and Security

    The budget 2015-16 had announced 3 Social Security Schemes:

    #1. Pradhan Mantri Suraksha BimaYojna (PMSBY)
    #2. Pradhan MantriJeevan Jyoti Bima Yojana (PMJJBY)
    #3. Atal Pension Yojana (APY)

    Why the schemes?

    • India faces the biggest challenge of providing banking facilities and insurance coverage to all
    • Having access to institutional finance has so far remained a far cry to a vast chunk of rural population
    • As of May 2015, only 20% of India’s population has any kind of insurance and only 11% has any kind of pension scheme
    • Insurance is a way of managing risks & give necessary protections in case of financial loss
    • When one has an insurance policy, certain rights and protections are derived out of it to the person and his family
    • There is a dire need for providing social security at a very nominal cost to the millions and economic empowerment of the poor Answer in comments.>
    • PMJDY is a major step to bring people across the country closer to institutionalized finance, and save them from the clutches of informal financiers
    • However, most of the PMJDY accounts had zero balance initially. The government aims to reduce the number of such zero balance accounts by using these schemes Answer in comments.>

    PMSBY & PMJJBY:

     

     

    • Implementation: The scheme will be offered by all Public Sector General Insurance Companies and all other insurers who are willing to join the scheme and tie-up with banks for this purpose
    • Govt Contribution: Various Ministries can co-contribute premium for various categories of their beneficiaries from their budget or from Public Welfare Fund created in this budget from unclaimed money
    • Auto-debit: The premium amount will be auto debited from subscriber’s bank account
    • The schemes will be linked to the bank accounts opened under the Pradhan Mantri Jan Dhan Yojana scheme

    Criticisms of PMSBY:

    • Private banks have complained that the Govt should focus on upper middle class instead of the poorer section
    • Western scholars have argued that financial inclusion is a myth and serving such large number of people would only increase the burden and work-load of public sector

    Criticisms of PMJJBY:

    • The banks have complained that revenue received will be very low
    • Some bankers have claimed that amount they are receiving is not sufficient to cover the service costs
    • Insurers have also pointed out that no health certificate or information of pre-existing disease is required for joining

    Atal Pension Yojana

    • It focuses on the unorganized sector where nearly 400 million employees representing more than 80% of all employees are engaged Answer in comments.>
    • The aim is to make sure that needy people could get fixed amount when they get old
    • It is the improved version of Swavalamban scheme, launched in 2010-11, which has been found lacking in clarity with regard to pension benefits at the age after 60

    Features:

    • All citizen of India aged between 18-40 years are eligible
    • A guaranteed minimum monthly pension will be provided to the subscribers varying from Rs. 1000 to Rs. 5000 per month
    • The pension amount depends on contribution by subscriber
    • Government of India will guarantee the minimum benefit of pension
    • Most interesting part of the scheme is that the government will contribute 50% of the contribution made by the subscriber or Rs. 1000 whichever is lower
    • However, contribution by the govt is available for only those who are not income tax payers and are not covered by any Statutory Social Security Schemes
    • Bank account holder of Any Bank account is eligible

    Suraksha Bandhan drive- Spreading the social security message

    • Aim: To take forward the Govt’s objective of creating a universal social security system in the country, targeted especially at the poor and the under-privileged
    • Participating Banks supported by the participating Insurance Companies are carrying out local outreach, awareness building and enrolment facilitation under the drive
    • Public service organizations supported by peoples representatives are participating in these efforts through various outreach activities such as enrolment drives, camps etc. in large numbers during this period

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  • GI(Geographical Indicator) Tags

    GI status is an indication that identifies goods as produced from a particular area, which has special quality or reputation attributable to its geographical origin.

    India, as a member of the World Trade Organization (WTO), enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 has come into force with effect from 15 September 2003

    The GI tag ensures that none other than those registered as authorised users (or at least those residing inside the geographic territory) are allowed to use the popular product name.

    In India, a GI’s registry operates in Chennai in accordance with the provisions of the Geographical Indications of Goods (Registration and Protection) Act 1999, which came into effect in September 2003.

    India has 236 GI products registered so far and over 270 more products have applied for the label. Let’s take a look at 10 such geographical indicators in India.

    To follow up with latest developments on GI tags –

  • Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

  • Banking Sector Reforms

  • Differentiated Banks – Payment Banks, Small Finance Banks, etc.

    Payment Banks are the new stripped-down type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches. They are expected to increase the financial inclusion in the country by providing banking services to the people who are currently out of the reach of banking services.

    source
    • Features of Payment Banks
    • Why these Banks were set up?
    • Requirements for payment banks
    • Major difference between the payment banks, PPI and Commercial banks
    • Approved payment banks in India
    • Why does India need payment banks when we already have so many PSB?
    • How these Payment Banks Will Survive, when they cannot lend?
    • How can we make Payment Banks Viable?
    • Way ahead

    Features of Payment Banks

    • Payments Banks can accept demand deposits (only current account and savings accounts) with a ceiling limit of Rs.1 lakh per customer.
    • Payment Banks will pay interest at the rate notified by the RBI.
    • Payment Banks can issue Debit Cards but not credit cards.
    • Payment Banks cannot engage in lending services i.e. they cannot give loans, thus phasing out the fear of NPA.
    • The Deposit up to Rs.1 lakh is insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation), same as in bank accounts.
    • Payment banks cannot involve in any credit risk and can only invest in less than one year G-Secs or treasury bills.
    • Payment Banks will charge a fee as commission. This will be the sole earning for the banks.
    • Payment bank will also have to maintain CRR (Cash reserve ratio) just like other Scheduled commercial banks (SBI, PNB, BoB, Dena, ICICI etc)

    source

    What’s the need for Payment banking in India?

    • The goal behind creating these payment banks is to bring about financial inclusion, by making it easier for anyone to get a bank account. That’s also why the cash limit in the accounts is set to just Rs. 1 lakh.
    • The Reserve Bank expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost.
    • These banks will enable poorer citizens who transact only in cash to take their first step into formal banking. The innovation is also expected to accelerate India’s journey into a cashless economy.

    Approved payment banks in India

    source

    How will these banks will survive, when they cannot lend?

    The questions are being raised as to how these new banks will be able to survive in absence of income from lending.

    • The payments banks are expected to bring in to their fold millions of customers who are currently not within the fold of the formal financial system.  This would lead to large volumes of transactions fetching the payments banks fees – a charge of even 1 or 2 per cent on a large volume can be lucrative on normal cash transfers, which will include government’s direct benefits transfer programmes.
    • Moreover, new payments banks can also earn 7.0% or so on their investments in government securities.
    • With no need for any provisions or losses on NPAs for these payment banks, they may become fitter banks than existing banks.

    How can we make Payment Banks viable?

    • Payment Banks will need to be more like these innovative consumer products businesses (particularly digital businesses).
    • Digital technology, coupled with a rigorous approach to user interface/user experience and an asset-light strategy, making good use of cloud-based services, will play an important role in enabling Payment Banks to develop simple solutions and acquire customers at low marginal cost.
    • The success of payment banks will depend on low-cost technology and high volume of transactions so that charges are reasonable and yet, profits are made.
    • If the model is to be a success, a payment bank should neither offer fixed-deposit products nor savings bank accounts.
    • Payment banks should offer small-ticket loan products because these products are required in rural areas, as these will discourage borrowers from approaching local moneylenders.
    • If payments banks aren’t mandated to have a capital adequacy ratio, it will provide them relief.
    • RBI should also reconsider an entry capital of Rs 100 crore for smaller banks, since such low entry-capital requirement may let non-serious players to throw their hat in the ring. This will also help weed out non-serious players from the bank licence fray.

    Way ahead

    The concept of new payments bank is compelling as it opens another route for inclusive banking. While time will tell how successful this model will be in incremental terms, the RBI on its part has given permission to probably the best players who are capable of making this a reality.

    References:

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