Based only on the headline numbers, India’s financial inclusion program seems like a remarkable success. Less than one year after Prime Minister Modi launched the financial inclusion initiative called Jan Dhan Yojana (Hindi for “People Money Scheme”), 158,600,000 bank accounts have been opened. This progress has garnered international headlines, and even set a Guinness World Record for the most new accounts opened in one week (18,096,130 between August 23 and 29 of last year). Multiple Indian states are now claiming 100% financial inclusion under the program, with at least one bank account registered for each household.
Yet those numbers don’t tell the whole story. Though the trend is improving, over half of these accounts still remain dormant. Some analysts estimate that up to two-thirds of new accounts opened under the program may belong to people who were already banked, and who opened an additional account just to take advantage of government incentives for enrollment. And poor customers are so far failing to use many of the features that were built into the program specifically to help them. For instance, only about 8,000 customers have used the overdraft facility provided to qualifying account holders, and fewer than 200 have used either the accident or life insurance coverage it prescribes.
What’s more, banks have had grave reservations about the burdens of servicing so many low-income customers. These concerns have been exacerbated by public misconceptions about the program, with many customers initially believing the overdraft protection was an automatic subsidy rather than a loan with eligibility and repayment requirements. In response to these issues, banks have been documented using obstacles like illegal fees and paperwork to discourage the poor from opening an account. Some fear that Jan Dhan Yojana will meet the fate of previous public financial inclusion initiatives in India, which have struggled to reach underserved (and less profitable) customers with products they would actually use, without placing undue burdens on banks.
Like its predecessors, Jan Dhan Yojana is hoping to avoid these pitfalls in part through government-to-person (G2P) payments. By depositing public pension, wages and other payments into these new accounts, the government hopes to make them more profitable for banks, and less likely to lie dormant. Yet when previous financial inclusion drives attempted this, they encountered a common problem: poor customers tended to simply withdraw the funds in their entirety rather than leaving them with the bank. For instance, a 2009 study in the state of Tamil Nadu found that only 5% of G2P recipients had left the money in their government-prescribed bank accounts, with the remainder cashing out as soon as the payments arrived, then often funneling the money into informal savings mechanisms. For poor customers, it just wasn’t convenient to use the bank: the study found that G2P recipients paid almost 50% of their daily wage to travel to the bank, with 70% reporting that the trip cost them an entire work day.
This problem almost inevitably plagues efforts to propel financial inclusion through G2P payments – but it hasn’t stopped governments from trying: a 2012 study on 84 G2P programs in 43 developing countries found that the use of e-payments to boost financial inclusion had risen from 25% to 61% in the preceding years. Yet due to customers’ tendency to immediately withdraw the funds, analysts have found that regular G2P payments haven’t provided an effective customer acquisition strategy to make it easier for banks to serve low-income people. This has caused tension between banks and governments, with policy makers often pressuring financial services providers to modify or expand their programs for the poor, without taking into account the business challenges this implies. Meanwhile, banks must maintain the extensive branch or agent networks poor customers require – a losing proposition if that infrastructure is used only to cash out government payments.
So what’s the way forward? A solution would likely require both financial institutions and policy makers to adjust their approaches:
- Financial institutions should provide convenient and affordable channels for accessing funds, leveraging digital tools like payments cards and mobile money when possible. They should also invest in the staff training, marketing and outreach required to familiarize poor customers with their services and encourage sustained usage. Payments channels should be both reliably available and easy for last-mile customers to access. And financial institutions should complement G2P payments with affordable, intelligently designed products that simultaneously incentivize savings, while allowing easy access to funds when needs arise. Finally, they should ensure and communicate customer privacy, so account holders don’t fear the government will cut off benefits payments if it learns they have a growing savings balance.
- Governments should design G2P schemes that allow and encourage savings – including by not penalizing successful savers by cancelling their benefits. They should make enrollment and KYC requirements easy to navigate, and deliver payments reliably on time. They should make a greater effort to leverage card and mobile payments channels, which can dramatically reduce costs – as well as allowing more non-traditional actors like banking agents to process G2P payments, which can dramatically increase access. Finally, they should make a greater effort to take banks’ business needs into account, in particular by paying them a high enough commissions for distributing G2P payments to ensure the viability of their distribution network – at least until interest on the float or profits from cross-selling make the network self-sustaining.
The Indian government has incorporated practically all of these measures into Jan Dhan Yojana – except, disturbingly, the need to pay banks a more generous initial commission for G2P payments. As the program approaches its one-year milestone with a head full of steam, it will be interesting to see if G2P payments will become the lynchpin of financial inclusion efforts in India – or an albatross around banks’ necks.