The right combination of product, delivery and awareness is critical to the Jan Dhan Yojana’s success, notes Subir Gokarn
Inclusion essentially means expanding the bounded space, so that those who were earlier outside can now come inside.
The recently launched Jan Dhan Yojana, the government’s big push towards financial inclusion, aims to rapidly expand that space.
Let me use a triangular approach to assess its prospects. The three sides of my inclusion triangle are product, delivery and awareness.
On the product side of the triangle, the JDY could potentially make a quantum leap.
The first stage of the inclusion strategy was focussed on opening bank accounts, logically seen as creating the last-mile channels for financial access.
But, the fact that the channel existed was no guarantee that anything meaningful would flow through it.
Consequently, the policy rhetoric moved to something referred to as 'meaningful financial inclusion'.
This meant that the channels created were actually being used to deliver financial products -- savings, credit, insurance and pensions.
In November 2012, the Ernakulam district in Kerala was recognised as being the first to achieve meaningful inclusion, which essentially meant that virtually all households had at least one account and a non-negligible number of them were consuming one or more of these four categories of products.
What the JDY does is to compress the two-stage process into one.
By offering an overdraft facility as well as both life and accident insurance with every account, it significantly increases the appeal of plugging into the financial system.
I think that the most important aspect of this packaging, at least in the short term, is the overdraft facility.
It can compete directly with the credit services that the informal sector currently provides people with relatively small requirements of capital.
However, in order to do this effectively, two factors need to be considered.
The first is pricing.
The general perception about informal credit is that it is extremely expensive.
But, a correct assessment of its effectiveness cannot be made on the absolute level of the interest rate charged.
It must be based on the return on capital (in textbook terms, the marginal product of capital) that the borrower is able to generate.
At very low levels of capital employed, returns tend to be very high, therefore justifying the interest rates charged.
The organised sector may be able to deliver credit to this constituency of borrowers at a price lower than the informal sector, but commercial viability will require a price much higher than that charged to traditional borrowers.
The second, which also relates to the next side of the triangle, i.e. delivery, is the issue of who bears the risk.
Banks may provide the conduit and can presumably bear the credit risk intrinsic to the product, but the insurance risks will clearly have to be borne by insurance companies.
An additional dimension to this issue is that the programme will inevitably have to use non-banking channels for delivery, for reasons that I will come to later.
The ability of such channels to bear risks will vary, for both structural and regulatory reasons.
Therefore,
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