The branding of Prime Minister Narendra Modi’s new financial inclusion vision—Pradhan Mantri Jan Dhan Yojana (JDY)—is direct and simple and should resonate positively with the masses. Another highly encouraging aspect, although it did not form an explicit part of his Independence Day address, is the intent to follow through with delivering a well-rounded set of essential financial tools to excluded low-income households. Over the first 12 months, the focus will be on issuing bank accounts and an accidental death insurance cover to 75 million unbanked households. A year later, these individuals could be provided an emergency credit facility through an overdraft on their bank accounts, a retirement savings plan (presumably using the NPS) and a life insurance cover. As ecosystem partners including banks, telcos, BCs, payment solution providers, distributors, regulators, UIDAI and government departments come together at the starting line, it may be pertinent to pause briefly and reflect on some questions. What have we learnt from past successes and failures in financial inclusion design and/or implementation? How can we avoid repeating past mistakes? And how can we minimise new mistakes during this new policy push?
Although a clear vision flowing from the top is invaluable, there are some inherent problems with setting and chasing numerical targets as the lines between policy intent and meaningful outcomes often tend to blur. Seventy-five million bank accounts could easily dissolve into mere statistics if stakeholders focus entirely on a particular number but lose sight of the underlying policy intention. After all, opening bank accounts for the poor is presumably not the end goal. Nor is it a new idea. Previous efforts at financial inclusion were similarly focussed on issuing no-frill bank accounts. But the majority of such accounts ended up with zero balances and zero transactions simply because households did not have any tangible reason to use banking services. As a result, previous financial inclusion efforts did not really benefit target beneficiaries. Neither did they benefit banks nor the thousands of BC outlets whose core business model depended heavily on revenues from banking transactions.
Real success of supply-side solutions, however well-intended or designed, will inevitably depend on demand-side understanding, adoption and utilisation. Therefore, before we run out and start opening 75 million bank accounts, it may be useful to understand the change that we are aiming to bring about at the level of one household. If everything that we intend today can work for that one household, we can be more confident that it can work for 75 million.
A good starting point may be to reflect on what happens when we ourselves buy a saving, pension or insurance product. First, we need someone to clearly explain the product and the underlying concepts, processes, features, benefits and risks. Once we are sure about the product and the amount that we are committing to periodically save, we need a simple and easy way to complete our enrollment formalities —filling up application forms and providing valid KYC documents. Thereafter, we need a secure and convenient mechanism to put money into our financial instrument—preferably through an ECS on our bank account along with a reminder ahead of the ECS due date. We need an equally simple, convenient and secure method to get back our savings and receive benefits when due. And finally, we need easy access to periodic statements and information regarding our savings, and an equally sound mechanism to file a complaint and get prompt redressal.
This is precisely what each of the 75 million JDY target beneficiaries will require. With perhaps three differences: (1) the number of zeros in the amounts that they will probably save, (2) the marked absence of enthusiastic agents eagerly knocking on their doors to sell them a financial solution, and (3) the high probability of frequent interruptions in committed savings flow due to health shocks, ongoing conflicts between current and future consumption, and/or spells of unemployment.
The JDY must see itself as a mission to deliver mainstream financial and risk management solutions, albeit in sachets instead of full bottles, to low income excluded households. The quality of the content of each sachet should be identical to the contents of the bottle. And the pricing should be proportional.
To start with, someone will need to meet the household to explain the importance of old age savings, emergency credit, life and health insurance, saving for known future expenses, etc. And also why, if the person wants these benefits, she will require a bank account. That way, banking will not be the end of the road. Simply the beginning of a genuinely useful journey towards financial empowerment and independence. In this way, a person would clearly see and therefore use her bank account not only for banking services, but more importantly as a channel to save for her old age or for her children’s education.
In all this, a target beneficiary should not interact with an army of institutions, each armed with its own unique supply-side piece of the financial inclusion ecosystem. Instead, her interface should be a simple and convenient single window through which she would get everything—product information, a bank account, multiple financial services, account statements, periodic information and reminders, and effective complaints resolution. There is a critical role, therefore, for front-end integration of the financial inclusion ecosystem from an individual’s perspective. And an equally critical role for someone to interface with the ecosystem providers at the back-end, periodically gather both supply- and demand-side data, and monitor implementation, adoption and utilisation from a policy goals perspective.
The UIDAI can play a pivotal role in this process as the glue that binds both demand and supply. Presumably, individual applications for a bank account, insurance, pension, savings or credit products would be linked to a person’s e-KYC at the front-end using her Aadhaar number. Thereafter, she could use her own prepaid card or mobile wallet to deposit cash into her bank account from any convenient BC location as per her unique cashflow—regardless of where she works or lives over time. At the back-end, her bank would periodically sweep her committed contributions from her account using a standing instruction mandate, and transmit her savings to each product provider selected by her.
When she needs her savings back or when her pension or insurance benefits are due, she would not need to go through a cumbersome process or wait endlessly. Her money would be swiftly and directly delivered into her own UID-linked bank account. She would simply use her debit card at an ATM to withdraw her money. She should have a toll-free helpline number to call if she has an insurance claim or a complaint or wants to know the balance in her pension account.
Although a clear vision flowing from the top is invaluable, there are some inherent problems with setting and chasing numerical targets as the lines between policy intent and meaningful outcomes often tend to blur. Seventy-five million bank accounts could easily dissolve into mere statistics if stakeholders focus entirely on a particular number but lose sight of the underlying policy intention. After all, opening bank accounts for the poor is presumably not the end goal. Nor is it a new idea. Previous efforts at financial inclusion were similarly focussed on issuing no-frill bank accounts. But the majority of such accounts ended up with zero balances and zero transactions simply because households did not have any tangible reason to use banking services. As a result, previous financial inclusion efforts did not really benefit target beneficiaries. Neither did they benefit banks nor the thousands of BC outlets whose core business model depended heavily on revenues from banking transactions.
Real success of supply-side solutions, however well-intended or designed, will inevitably depend on demand-side understanding, adoption and utilisation. Therefore, before we run out and start opening 75 million bank accounts, it may be useful to understand the change that we are aiming to bring about at the level of one household. If everything that we intend today can work for that one household, we can be more confident that it can work for 75 million.
A good starting point may be to reflect on what happens when we ourselves buy a saving, pension or insurance product. First, we need someone to clearly explain the product and the underlying concepts, processes, features, benefits and risks. Once we are sure about the product and the amount that we are committing to periodically save, we need a simple and easy way to complete our enrollment formalities —filling up application forms and providing valid KYC documents. Thereafter, we need a secure and convenient mechanism to put money into our financial instrument—preferably through an ECS on our bank account along with a reminder ahead of the ECS due date. We need an equally simple, convenient and secure method to get back our savings and receive benefits when due. And finally, we need easy access to periodic statements and information regarding our savings, and an equally sound mechanism to file a complaint and get prompt redressal.
This is precisely what each of the 75 million JDY target beneficiaries will require. With perhaps three differences: (1) the number of zeros in the amounts that they will probably save, (2) the marked absence of enthusiastic agents eagerly knocking on their doors to sell them a financial solution, and (3) the high probability of frequent interruptions in committed savings flow due to health shocks, ongoing conflicts between current and future consumption, and/or spells of unemployment.
The JDY must see itself as a mission to deliver mainstream financial and risk management solutions, albeit in sachets instead of full bottles, to low income excluded households. The quality of the content of each sachet should be identical to the contents of the bottle. And the pricing should be proportional.
To start with, someone will need to meet the household to explain the importance of old age savings, emergency credit, life and health insurance, saving for known future expenses, etc. And also why, if the person wants these benefits, she will require a bank account. That way, banking will not be the end of the road. Simply the beginning of a genuinely useful journey towards financial empowerment and independence. In this way, a person would clearly see and therefore use her bank account not only for banking services, but more importantly as a channel to save for her old age or for her children’s education.
In all this, a target beneficiary should not interact with an army of institutions, each armed with its own unique supply-side piece of the financial inclusion ecosystem. Instead, her interface should be a simple and convenient single window through which she would get everything—product information, a bank account, multiple financial services, account statements, periodic information and reminders, and effective complaints resolution. There is a critical role, therefore, for front-end integration of the financial inclusion ecosystem from an individual’s perspective. And an equally critical role for someone to interface with the ecosystem providers at the back-end, periodically gather both supply- and demand-side data, and monitor implementation, adoption and utilisation from a policy goals perspective.
The UIDAI can play a pivotal role in this process as the glue that binds both demand and supply. Presumably, individual applications for a bank account, insurance, pension, savings or credit products would be linked to a person’s e-KYC at the front-end using her Aadhaar number. Thereafter, she could use her own prepaid card or mobile wallet to deposit cash into her bank account from any convenient BC location as per her unique cashflow—regardless of where she works or lives over time. At the back-end, her bank would periodically sweep her committed contributions from her account using a standing instruction mandate, and transmit her savings to each product provider selected by her.
When she needs her savings back or when her pension or insurance benefits are due, she would not need to go through a cumbersome process or wait endlessly. Her money would be swiftly and directly delivered into her own UID-linked bank account. She would simply use her debit card at an ATM to withdraw her money. She should have a toll-free helpline number to call if she has an insurance claim or a complaint or wants to know the balance in her pension account.
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