TnD:1:Pradhan Mantri Jan Dhan Yojana

[Economics Club IIT Delhi]

Pradhan Mantri Jan Dhan Yojana

Introduction

It is a financial inclusion program launched by Prime Minister Narendra Modi on 28th August 2014 which aims at improving the lives of millions of India's poor by bringing them into the financial mainstream and freeing them from the clutches of usurious moneylenders, while giving them a modicum of insurance cover.

It is basically a step towards mainstreaming banking system in the country by involving and including more and more number of people.

In the Independence day speech, the Honorable PM said -"The Pradhan Mantri Jan Dhan Yojana lies at the core of our development philosophy of Sab Ka Sath Sab Ka Vikas. As we move rapidly forward in this knowledge era with modern banking and financial systems, it is untenable that a large majority of our population is deprived of basic banking facilities. I sometimes wonder whether we have made matters so complicated that the poor and the marginalized are those who are trapped in a perpetual cycle of exclusion and deprivation. We need to break that cycle and the Jan Dhan Yojana is the first step in that direction. With a bank account, every household gains access to banking and credit facilities. This will enable them to come out of the grip of moneylenders, manage to keep away from financial crises caused by emergent needs, and most importantly, benefit from a range of financial products."

Aim or Need

Strengthing the banking structure

Only 58 per cent of Indian households have access to banking services. By reaching to more and more people through bank accounts, there will be more money in the banks to loan. Thus it will increase the liquidity of money and will help in economic growth because now there is more money available than before.

Reaching to the poor

Today, the poor people do not have any safe place to save their money. They have to always keep cash with themselves. Often there are instances of theft of the money, in such cases they need a place where they can safely store their money. This scheme will provide them security of keeping their money.

Providing insurance to each family

Linking bank accounts to the insurance is a thing that has been missing a lot. Today for a poor person opening a bank account is such a big thing for him. Thus, insurance is an out of world thing for him/her. By linking this, there will be stability as well as security of future in the lives of these people.

Reducing corruption in distribution

Today, if there is a scheme for public, a large amount of money is not able to reach them because of the corruption in the intermediate steps. So, there is a need for direct transfer of money to the people without any externalities such as corruption.

Scheme Details1

 Each family will have a bank account opened in the countries best bank free of cost and quite easily. This will help them find a place to save their earnings easily

 With a new bank account each family will be getting a RuPay ( Rupay is India’s own unique domestic card network owned by National Payments Corporation of India and has been created as an alternative to Visa and Mastercard.) debit card that they can use to withdraw money from the account.

 The new opened account will be a zero balance account and thus the account holder will not be required to have a minimum balance in the account.

 Each people getting into this scheme people will be getting an Rs 30,000 life cover.

 Along with the life cover one will also get an accidental cover of 1 lakh. This will add up a value to the various lives in the country.

 Once the bank account has been active for 6 months and has been linked to account holders Aadhar identity , they would become eligible for an overdraft of up to Rs 2,500 , which would further be enhanced by the bank to Rs 5000 over time.

 The Jan Dhan Yojana also seeks to provide incentives to business and banking correspondents who serve as link for the last mile between savings account holders and the bank by fixing a minimum monthly remuneration of Rs 5000.

 1 Source: Press Information Bureau, Government of India

Benefits of the Program

Banking the unbanked

As previously mentioned, this scheme will bank the people who do not have a bank account leading to a greater financial inclusion.

Targeting households

The earlier financial inclusion scheme targeted villages. This scheme is one step ahead and targets directly households. Thus a family as a whole is being addressed rather than a village or an individual.

Technology backed banking

All banks and telecom operators have been suggested to collaborate greatly to provide quick mobile banking facilities to these beneficiary households. Not only smartphones but even ordinary phones of beneficiaries would be able to perform tasks like balance inquiry and money transfer. This is in line with Mr. Modi's emphasis on technology backed governance be it allocation of natural resources or integration of financial systems.

Indianization of payment methods

The scheme with its provision of Rupay debit card is a clear indication for promotion of Indian payment cards as against Master or Visa. This is in line with our PM's 'Make in India' approach. With this, a huge amount of financial resources would be geared towards Rupay backed systems.

Systematic approach

The fundamental scheme approach focuses in first phase on savings and credit (insurance given is free here) and in second phase on micro insurance and pension. This is an important feature aimed at avoiding any sort of clutter at any level - household, bank or administration.

Disadvantages / Faults

Huge burden on PSBs

In the current macroeconomic ecosystem, all PSBs are cash-strapped, have loads of stressed assets (bad loans and restructured loans) and are mostly performing inefficiently due to number of reasons. The program implementation relies heavily on financial and administrative efficiency of PSBs which don't have produced credentials to do so.

Financial literacy

We have not been able to produce effective financial literacy tools so far. This scheme will require the involving people to be financially literate which is a challenge as most poor people are not.

Support infrastructure

The present availability of bank branches in rural areas or BCs and ATMs poses critical challenge for government. Nevertheless, lack of support services to beneficiary households like product counseling and micro-entrepreneurship training will have great potential to overshadow the benefits of the scheme.

Keeping the accounts "Live"

After opening account, keeping them active is also one of the important challenges. As lot of people’s account will be opened but to regulate the account, checking and monitoring it regularly will only help them in the long run.

P.S. - The prepared document for the TnD on 20th Jan is attached.

[Suryank Gupta]

Nicely compiled both the articles.

Keep up the good work!!!

Regards ,

Suryank

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[aviral marwal]

Good job dude :)

[swarna parameswaran]

Very informative. Good work:)

Regards

Swarna

M.A. Economics 

University of Hyderabad

[Abhishek Puri]

Very Informative..

On Tue, Jan 20, 2015 at 1:01 AM, Economics Club IIT Delhi <economic...@gmail.com> wrote:

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[Akarsh Singhal]

Very Very Informative ! Good Job. Pls undertake such write-ups on more issues like Bond Crisis in Latin America :)

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Akarsh Singhal

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