Why Financial Inclusion in India Is Not Quite There Yet

I was in India on August 15 when the Prime Minister of India Narendra Modi announced an ambitious financial inclusion plan called Jan Dhan Yojana (JDY) in his Independence Day speech. I have been an avid campaigner of Financial Inclusion for the poor for many years now -- I co-founded and launched Financial Access at Birth (FAB) initiative five years ago. So the Prime Minister's plan to provide at least one bank account, possibly two, for every household in India delighted me. But a bank account represents only one leg of the three legs required to give financial inclusion stability and long-term viability. The other two required legs are incentives for people to use these accounts for savings and day-to-day transactions, and incentives for banks to provide ubiquitous and convenient mobile banking services at nearly zero costs to the users. How can we build this three-legged stool? By using the power of Incentives, Technology and Scale.

First, the incentives. JDY offers a life insurance cover of one lakh rupees and health insurance cover of thirty thousand rupees as an incentive to open a bank account. This is a clever use of incentives that will attract especially the poor and cost very little in aggregate. An aggressive campaign to open such bank accounts will also go a long way towards accomplishing the goal of a bank account for every household -- in just one day 15 million accounts were opened on the JDY launch day with a plan to open 75 million in just a few months.

But what good are bank accounts if people do not use them and if banks have little incentives to service them? If the accounts had sufficient minimum balance, because banks would earn interest and fees by relending unused balances, that could provide sufficient incentives for banks to service attached no-frills transaction accounts. In other words, we need to put some Dhan into these accounts that will not immediately be withdrawn. In the FAB initiative we suggested a one-hundred dollar deposit (roughly six thousand rupees) for each child born that will stay in the child's account until the child turns sixteen, precisely for this reason. JDY stipulates no such infusion of funds in bank accounts. Won't these bank accounts become dormant after they are opened as has happened in the past when other financial inclusion schemes were introduced? Many state-wide initiatives, such as the ones which provide funds for the girl child, could also be integrated with JDY to infuse Dhan in the bank accounts.

We also need a widespread use mobile payment technology so that using electronic payments for day-to-day use becomes far easier and safer than using cash. This will require standardization and use of simple and robust technology that is made available anytime, anywhere - from grocery stores, to buses and trains, wage payments, and easy, simple person-to-person transfer of funds using mobile phones, point-of-sale devices, micro-atm's and other technologies that leverage the instant electronic authentication provided by Aadhar. Introduction of RuPay card and associated authentication and clearing mechanism by National Payments Corporation of India (NPCI) are very promising steps in this direction.

Finally, to achieve scale, use of mobile payments must become widespread and ubiquitous. Use of mobile payments technology and associated authentication mechanism that might require use of thumbprints must not be seen as backward or a sign of illiteracy and lower social standing. Bollywood celebrities can help here. If Bollywood films were to include scenes in which rich and upper middle-class characters were shown to use thumbprints to withdraw funds or make quick payments in stores and to their household help, for instance, the younger generation will find it cool and sexy to emulate it and it will spread like wildfire. This will also lower the burden of financial literacy as others will quickly learn how to use this technology by imitation which is much more effective and cheaper than any formal financial literacy programs that bureaucrats can come up with. The large scale adoption will drive the transaction costs of mobile payment services negligible.

How will financial inclusion help the very poor section of the society, one might ask. There are at least two distinct mechanisms. A near-zero cost of transactions cam make small savings deposit easy and convenient which would be immensely helpful especially for a poor woman who need not take any residual cash home lest it is squandered away by her husband and children. But more importantly, mobile transactions that create a record of her earnings, spending and deposits will create a financial history that might be useful to her obtaining credit, insurance and other useful financial services in the future.