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Getting the Jan to Manage Dhan

Implementing the new financial inclusion plan will be a huge challenge, but the payoff will be enormous

We’ve been hearing the phrase ‘financial inclusion’ for a long time now. For a couple of years to 2013, financial inclusion had been reduced to the a comical chase of targets for bank accounts that had to be opened. With the usual combination of minimal thought and maximum illusion of action, banks were stuffing their system with ‘no-frills’ accounts, which were actually no-use bank accounts.

However, over the last week, for the first time, a viable and useful shape of a real financial inclusion plan has emerged, along with an actual name, the Jan Dhan Yojana. While the PM’s Independence Day address made it clear that there is now tremendous political will behind the rethought financial inclusion program. Interestingly, four days before the PM’s address underscored the push that financial inclusion would get, some details about the plan had already been revealed by Reserve Bank Governor Raghuram Rajan.

On the 11th, while delivering the Lalit Doshi Memorial Lecture in Mumbai, Rajan said that government would announce a scheme for full financial inclusion on Independence Day. This would include ‘identifying the poor, creating unique biometric identifiers for them, opening linked bank accounts, and making government transfers into those accounts’. Interestingly, Rajan linked up the success of financial inclusion to a lot of things, including breaking the “link between poor public service, patronage, and corruption.”

While the larger impact of widespread financial inclusion will come in time, the description of actual financial services that will be included in the scheme was quite interesting. These are the five Ps of inclusion: Product, Place, Price, Protection, and Profit, “products that address their needs; a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the moneylender, easy-to-understand accident, life and health insurance, and an avenue to engage in saving for old age. ”

The adjectives used for each is quite revealing. In a way, it is an indicator of the main problem that the financially excluded face currently. A ‘safe’ way to invest, a ‘reliable’ way to send and receive money, a ‘quick’ way to borrow in times of need, and sadly, a ‘easy to understand’ insurance products. I say sadly because while the other services are often delivered by unregulated operators, it’s not surprising that they are not safe, reliable or quick. However, insurance is delivered by regulated entities and is still found wanting. Coming from the RBI governor, this is a serious indictment of IRDA’s continuing failure. But then, if the IRDA was bothered, it would have done something about this long ago.

Which brings us to the last and most problematic P of the five Ps of financial inclusion: profit. These services will be transformative, but cannot be delivered unless the service provider makes a profit, but is satisfied with a small profit. So far, retail financial services in India have been mostly provided either by providers who are unable to make money--and thus stay dependent on government rescues--or by providers who are unable to keep their hands out of their customers’ pockets. A big challenge in delivering these services will be in ensuring consumer protection, which is an area in which neither RBI nor IRDA have exactly covered themselves with glory in recent years.

A real, effective and widespread implementation of the Jan Dhan Yojana will probably be one of the most difficult--and most beneficial--things that an Indian government has ever attempted. To do this viably and sustainably would involve practically inventing fresh business models for banking, insurance and retirement savings. Can this be done? With creativity and commitment, yes. By just extending existing ways in which the financial industry works, no.

Nevertheless, when one thinks of the enormous transformation that it can bring, the Jan Dhan Yojana becomes a ‘has to be done’ reform.