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Financial inclusion in India: Jan Dhan Yojana and beyond

Financial inclusion in India: Jan Dhan Yojana and beyond

By Dr Moin Qazi

India has recently concluded a weeklong lesson in financial education by hosting a Financial Literacy Week shepherded by the Reserve Bank of India. The entire financial sector was galvanised to bring awareness of basic financial knowledge to those unlettered in financial skills. It is a laudable step towards making the entire population a financially inclusive society.

What is financial inclusion?

Ideal financial societies are those which provide safe and convenient ways of managing simple monetary affairs. This philosophy is known as financial inclusion. It means providing financial tools to people—tools that they can afford, that are safe and properly regulated, that people can access conveniently from institutions that treat them with respect. These tools enable them to save and to responsibly borrow—allowing them to build their assets and improve their livelihoods. The term most buzzed in this respect is ‘the unbanked,’ usually defined as people who do not possess a traditional savings account. These are the people who have to be brought into the orbit of formal finance.

Failure to popularise digital payment methods

Today, digital technology and mobile phones offer unprecedented opportunity to connect poor people to services such as savings, loans, insurance and payments. However, owning a phone or even opening a digital account does not ensure that the account is used. Two-thirds of the world’s 299 million mobile money accounts are dormant. A lack of comfort with technology or low literacy may discourage use, and products are not always designed with the unique needs of financially poor users in mind.

In India, financial inclusion received a steroidal boost with Prime Minister’s Jan Dhan Yojana (PMJDY). By January 04, 2017, there were over 265 million accounts under the scheme. India earned a place in the Guinness Book of World Records with a citation“Most bank accounts opened in one week as part of the Financial Inclusion Campaign is 18,096,130.” But a disquieting feature is that public banks, regional rural banks (RRBs) and 13 private lenders have reported that as of 24 March 2017, 92,52,609 accounts were frozen under the PMJDY due to lack of transaction in the last one year.

Lack of knowledge among Indians

Merely opening physical accounts as flag posts of financial identity cannot help unless they are actively used by people for managing their money. To make this possible, people have to be provided with the knowledge to understand and execute matters of personal finance, including basic numeracy and literacy, budgeting, investing, and risk diversification. This skill is known as financial literacy. It is a combination of financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately achieve individual financial well-being. According to a global survey by Standard & Poor’s Financial Services LLC (S&P) less than 25% of adults are financially literate in South Asian countries. For an average Indian, financial literacy is yet to become a priority. India is home to 17.5% of the world’s population but nearly 76% of its adult population does not understand even the basic financial concepts. Financial regulators in India—Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA)—have created a joint charter called ‘National Strategy for Financial Education,’ to achieve changes in the perceptions that an average Indian has about financial management.

Proposed solutions to ensure financial literacy

The National Bank for Agriculture and Rural Development (NABARD) has initiated a survey of primarily 40,000 households to study the impact of financial inclusion. The survey will track savings patterns, card usage, mobile payments and changes in patterns of usage between the young and the old. These surveys should be used for designing modules for enhancing the financial literacy of people.

To use financial services to their full potential, to protect their families and improve their lives, low-income groups need products well suited to their needs as well as appropriate training and education. Bringing this about requires attention to human and institutional issues, such as quality of access, affordability of products, familiarity and comfort in use, sustainability for the provider of these services, and outreach to the most excluded populations.

The issue is a lot more nuanced than seen today. The consumer will enter the formal financial sector and embrace new opportunities believing that if he takes the effort to understand a more technologically dominated world, then certain specific pains will disappear. We have thus to address real pains, not just offer benefits.

Featured Image Credits: Visual Hunt

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