In today’s Finshots, we look back at the Pradhan Mantri Jan Dhan Yojana (PMJDY) and how far it has come to bring financial inclusion.

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The Story

Before PMJDY, there was BSBDA.

See, a little over a decade ago, on Independence Day, Prime Minister Manmohan Singh made a bold statement. He said, “It will be our endeavour to ensure all households benefit from bank accounts in the next 2 years.”

And a week after that, the RBI announced a massive rebrand of the “no-frills” account. They decided to call it the Basic Savings Bank Deposit Account. Make it seem more official and important. Now think of these as the plain vanilla accounts. They have simplified KYC norms. They need no initial deposits. They have no minimum balance compulsions. They’re basically simplified versions of regular bank accounts. Simple enough to attract the unbanked Indian population.

And there was a massive push for financial inclusion back then. Bank accounts were being opened left right and centre and had doubled to 10 crores between March 2010 and March 2012.  The establishment felt that a rebrand would get banks to step on the pedal and open even more accounts.

Then came 2014. The government changed. And with it, a new scheme — the Pradhan Mantri Jan Dhan Yojana (PMJDY). And the efforts for financial inclusion took on a greater frenzy. It would build on the achievements of BSBDA and have more features — such as a debit card, insurance, and social security schemes. In the past 9 years, the number of bank accounts under the scheme has topped 50 crores.

Yeah, we’re still not at 100% banking inclusion. But there’s progress.

Even if banks bicker about the fact that it’s quite expensive to maintain these accounts and are not enthusiastic about it, things are picking up. One reason for this is that most subsidies doled by the government are now linked directly to Aadhar cards and bank accounts. It’s a Direct Benefit Transfer (DBT) and people aren’t really left with any other alternative if they want to get their due.

But here’s the thing. This isn’t just a celebratory milestone but also a point where we look back and ask “Hey, does a bank account actually mean financial inclusion? And what’s next?”

So first things first. We need to check if people are using these bank accounts for real. And as of today, about 20% of these accounts remain inoperative. That means the real figure is that we have around 40 crore bank accounts under the scheme.

And there’s probably a reason why so many accounts are inoperative — low earnings.

You see, over 65% of PMJDY account holders are from banks in rural or semi-urban zones. Now, although the average deposit per account has quadrupled to about ₹4,000 over the years, there’s a problem with how these folks are able to manage their savings. As per the India Protection Quotient survey, nearly 55% of the earnings in rural India go towards managing daily expenses. And what’s left may be too little to actually deposit in a bank account, or access it any time they want.

Another way to filter through the noise is by checking debit cards associated with a bank account. And since there are free RuPay debit cards that come with PMJDY accounts, you’d at least expect it to match up to how many accounts exist today. But, it appears that nearly a third of PMJDY account holders don’t have debit cards associated with their accounts. And this data gap could be because of two things. Account holders might not be coming back to renew their existing debit cards. Or they may also be refusing to opt for debit cards that come with their accounts simply because they cannot or are unable to use them.

And this is a bit of a problem because the usage of cards can indicate financial literacy as well. It’s a much needed precursor to inclusion. Because these cards even carry features such as an accident insurance cover. Without awareness of these benefits, people are missing out. So that hurts inclusivity too.

And finally, financial inclusion also includes access to credit facilities. And according to a joint study by the Bank of Baroda and Women’s World Banking, PMJDY account users aren’t using their bank accounts to deepen their financial engagement such as accessing credit histories or other financial products such as microinsurance, pensions or micro-loans. Heck, less than 1% of PMJDY account holders have also accessed the ₹10,000 overdraft facility available. They’re probably not even aware of the option and end up going to unscrupulous money lenders.

So yeah, just having a bank account isn’t really a hallmark of true financial inclusion. And an easy way to gauge it is RBI’s financial inclusion index or what’s called the FI index which was introduced in 2021.

In FY21*, the value of the FI Index was 53.9. For context, if an index inches closer to 100, it indicates complete financial inclusion. And anything close to 0 means full financial exclusion. Now to arrive at this singular figure, the RBI takes into account 97 indicators across 3 key metrics — access, usage and quality. And that’s where things get interesting.

The number derived for the sub-index “Access” rose from 61.7 to 73.3 between 2017 and 2021. That means the available financial infrastructure was becoming increasingly more accessible to Indians during this period. But sadly, the two other sub-indices pulled the final FI index down. In 2021, we scored only 43 for Usage. So despite making the infrastructure more accessible, the RBI noted that people simply weren’t using them enough. And on the other sub-index of Quality (that measures literacy etc.) we only scored 50.7.

That’s what we need to fix.

And the only way to do that is through financial literacy and awareness. For instance, nearly half of rural India uses the internet now. And most experts think that a full-fledged effort in sharing financial pointers in regional languages through the phones in most people's hands would be a good place to start.

What do you think?

Until then…

*The RBI FI Index has not yet been updated for FY23. And the FY22 press release did not provide a breakup of the subindices.

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