COMMENTARY

Fin a n cia l In clu sio n

Differences between the Government
and RBI?
S L Sh et t y, Bipin K Deo ka r

The prime ministers mission on

nancial inclusion for all by 2018
is not a new programme, there
have been variants initiated by
the Reserve Bank of India and
there was another proposal of the
Ministry of Finance as well. The
new programme as it stands has
few details and does not seem to
recognise the enormity of the
infrastructural and human
resource challenges that must be
overcome and the scaling up
expected of the banking sector.
There also seems to be a lack of
coordination between the RBI and
the Government of India.

ith considerable fanfare and

prior publicity, Prime Minister Narendra Modi unveiled
on 15 August an ambitious programme
for the formal nancial system to embrace
the hitherto excluded segments of society.
Amongst the varied pronouncements
planned for the prime ministers Independence Day, this was the only programme for which advance publicity
was given. First, in Finance Minister Arun
Jaitelys budget speech for 2014-15, there
was a pointed reference to an impending
pronouncement on a time-bound programme on a Financial Inclusion Mission
with two bank accounts to be opened
for each household which will also be
eligible for credit. Second, a day prior
to Independence Day, it was revealed
to the media that there was cabinet
approval for such an ambitious nancial
inclusion scheme and that it would
be unveiled by the prime minister the
next day. And he did announce that
the Pradhan Mantri Jan-Dhan Yojana
a new revamped nancial inclusion programme would be launched to bring
75 million poor households into the
banking fold.
Ab s e n ce o f An y Of cia l Ou t lin e

S L Shetty and Bipin K Deokar are with the

EPW Research Foundation.

12

Interestingly, to date there has not been

any authentic ofcial document on the
revamped nancial inclusion plan. The
Finance Ministrys Department of Financial Services has released An Approach
Paper on Comprehensive Financial Inclusion but this version is two months old
and dated 16 June 2014. The approach
paper names the programme completely
differently as the Sampoorn Vittiyea
Samaveshan (SVS), very different from the
name given by the prime minister, JanDhan Yojana, though the June document
a u g u s t 30 , 20 14

had also envisaged that the launch of

the SVS would be on 15 August 2014.
The approach paper was written
somewhat thematically with denitive
timelines for implementation and it had
almost completely ignored the Nachiket
Mor Committee (RBI 2013) recommendations in its report Comprehensive
Financial Services for Small Businesses
and Low Income Households. It is
surprising that some World Bank staff
should be describing the governments
approach paper as the document describing the Pradhan Mantri Jan-Dhan Yojana
(Syed 2014), though there are many
signicant differences between the two.
No doubt, some of the provisions of the
approach paper have been drawn upon
and probably somewhat expanded in the
prime ministers outline of the nancial
inclusion scheme to make it appear more
ambitious; to an extent, the timeline
has been extended to accommodate the
expanded programme.
In the absence of any concrete ofcial
document describing the prime ministers
outline of a comprehensive nancial
inclusion programme, we can only piece
together details from the media coverage of the programme to understand its
vision, contents, the institutional framework for implementation, and the time
schedule. Before we come to building
such a framework, it is necessary to point
out that neither the prime ministers
outline nor the approach paper of the
Department of Financial Services of the
Ministry of Finance recognises the contents and suggestions put forth by the
Nachiket Mor Committee. The Nachiket
Mor Committee report is not the subject
matter of this article and we are broadly
in agreement with the critical comments
that have been made by eminent professionals on the report (Sriram 2014;
Viswanathan 2014; Indira Rajaraman
2014; Ram Mohan 2014).
The Mor Committee took a very
ideological position that the poor and
vulnerable sections have to be pushed
to the marketplace with marketable
instruments and products, but it is not
recognised that it is because the market
is oppressive that the poor require the
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crutches of directed credit arrangements.

The absence of retail lending by banks
has very often created social revulsion
and hence no ruling party in India,
whatever be its ideological persuasion,
can embrace such openly market-based
suggestions when it comes to addressing
the problems of the poor.
The Mor Committee recommendations were also not unanimous. Two
committee members (Shikha Sharma
and S S Mundra (2014), chiefs of Axis
Bank and Bank of Baroda, respectively)
make a valid observation that ubiquitous access to payment services by January 2016 would require a very large
number of access points which are evenly
spread out across the country such that
every single resident would be within a
15-minute walk of such a point anywhere in the country, as proposed in
the report. Looking at the enormity
of the task, particularly in low density
rural areas, and the need of supporting
physical as well as virtual infrastructure
vis--vis their present state, the timeline
did look onerous. The two bank chiefs
wrote: While January 2016 can be an
aspirational goal, given the scale of the
task a target date of January 2018 may
be more realistic and implementable.
Ne w Ou t lin e of Fin a n cia l In clu sion
Piecing together the available information, the Pradhan Mantri Jan-Dhan
Yojana will be implemented in two
phases but in a mission mode with the
nance minister as the mission head.
The total package of the mission envisages four key components:
(i) Opening of two bank accounts for
each of the estimated 75 million poor
bank households, that is a total of 150
million bank accounts;
(ii) Each bank account is to be provided
with an overdraft facility of Rs 5,000
accompanied by a RuPay debit card and an
accident insurance cover of Rs 1 lakh;
(iii) The bank accounts will be Aadhaar
card-linked and hence it would facilitate
the government agencies to directly
transfer cash benets to the intended
beneciaries; and these transfer payments of subsidies are said to be crucial
for the nancial inclusion plan to
be operationally viable and successful
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a u g u s t 30 , 20 14

because it will give banks some fee incomes which the banks will be forced to
share with the business correspondents
(BCs) in order to keep them interested in
this business. The eventual linking of
RuPay debit cards to Aadhaar numbers
would be a great advantage.
(iv) A minimum remuneration of Rs 5,000
for each of the BCs who will provide the
last link between the account holders
and the concerned bank.
There is no accurate information
regarding the phasing of the total package. One report has suggested that bank
accounts will be opened in the rst phase
which will cover the rst year (15 August
2014 to 14 August 2015) and the second
phase will be completed by 14 August 2018
that is, four years hence. The year 2018
as the target date was suggested by Shikha
Sharma and S S Mundra in their additional views appended to the Nachiket
Mor Committee report.
The nancial implications of the
prime ministers version of the nancial
inclusion scheme and more importantly,
its operational issues, are sure to pose
serious problems. While the Reserve
Bank of India (RBI) and the government
may play some promotional roles, effectively all the problems nancial and
operational will have to be faced by
the banking system. First, if the plan
runs its course, banks will have to provide overdraft facilities for 150 million
bank accounts to the extent of Rs 75,000
crore within the next four years or so.
Second, on the assumption of the need
to move forward the universal nancial
inclusion plan, the RBI has already identied 4,90,000 unbanked villages each
with a population of less than 2,000 and
allotted them to various banks for coverage in a time-bound manner. This coverage is expected to be completed in
the three-year period of 2013-16. Taking

into account the current criteria assigned

by the RBI of the distance between a
BC outlet and the base bank branch
ordinarily not exceeding 30 km in all areas except metropolitan areas (for which
the distance is 5 km), a ratio of roughly
1:6 between bank branches and BC outlets would imply that about 4.90 lakh villages would require over 80,000 additional rural branches to be opened by
banks. This compares with 7,459 bank
branches opened in the past three years
(RBI Annual Report 2012-13) that is,
less than one-tenth of the number of
branches required to be opened in the
next three years or so. Prima facie this
appears to be an impossible task for the
banking industry.
In s t it u t io n a l a n d
In fr a s t r u c t u r a l Bo t t le n e ck s
Finally, when it comes to implementing
the universal nancial inclusion plan,
there arise myriad institutional, infrastructural and behavioural bottlenecks
which can be resolved only with great
perseverance and coordination amongst
multiple agencies involved in the development process. In the rst place, as
suggested above, banks have to set up
a huge number of branches in and
around unbanked villages and they
have to recruit large numbers of rural
cadre to serve those branches. The
next institutional link is the BCs and
the requirements are a mindboggling
number, an additional coverage of
about 2 lakh villages almost doubling
the existing coverage of 2.21 lakh villages through BCs. Both bank branches
and BC outlets should have an integrated
link. To quote the RBI Annual Report
2012-13 (p 77):
for nancial inclusion to succeed, it is
important that quality services are provided
through the new ICT-based BC outlets.

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vo l x l IX n o 35

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COMMENTARY
Therefore, an intermediary low-cost brickand-mortar structure is required between
the base branches and BC locations. This
will provide timely support to BC outlets,
ensure close supervision of BC operations
and give them credibility and increase
peoples condence in BC services. Hence,
banks have been advised to plan for an increase in the proportion of branches that
cover unbanked villages.

Yet another requirement is the use of

information and communication technology (ICT) for banking transactions. The
RBI has reported that while the banks
themselves are facilitating ICT-based
basic savings bank deposit accounts
the proportion of ICT accounts to total
accounts increasing from 25% to 45% in
the three-year period (2010-13), the
number of transactions through ICT-based
BC outlets though increasing, is still very
low when compared with the manifold
increase in the number of banking
outlets and the number of accounts
(ibid: 81). The ICT transactions in turn
are linked to other infrastructural needs
such as the broadband connections and
electricity supply in remote villages. A
separate study done by us on rural infrastructure (EPW Research Foundation
2014b) has shown how the coverage of
villages through electricity has remained
only about 55%. Besides, there is an acute
interstate disparity in power supply:
Over 77% of the unelectried villages are in
Odisha, Uttar Pradesh, Bihar, Jharkhand
and Assam. The three states with the largest
number of unelectried villages Bihar,
Uttar Pradesh and Jharkhand are also the
lowest in per capita state domestic product
(IDFC Rural Development Network 2013,
pp 126-17).

Besides, in order to make the nancial

inclusion scheme an attractive proposition for banks, the RBI and the government have been emphasising the importance of Aadhaar-enabled Direct Benet
Transfer (DBT) of social welfare benets
by directly crediting beneciaries bank
accounts. Amongst others, a serious
question has been raised with regard
to the biometric-based Aadhaar cards.
Machines struggle to identify the biometrics of labourers and the old. And the
spread of ATMs, which is essential for the
Aadhaar-enabled direct transfers through
RuPay cards, has been weak in rural and
semi-urban areas (Table 1).
14

Table 1: Population Group-wise Number of ATMs

Population
Group

March
2013

Rural
11,564
Semi-urban
27,710
Urban
36,111
Metropolitan 38,629
Total
1,14,014

Percentage March Percentage

Share
2014
Share

10.1 23,334
24.3 43,200
31.7 47,641
33.9 45,880
100.0 1,60,055

14.6
27.0
29.8
28.7
100.0

Source: RBI'sReport onTrendandProgressof Bankingin

India2012-13.

No Fr e s h Th in k in g
We now have three blueprints on the
universal or comprehensive nancial
inclusion plan: (i) the prime ministers
Independence Day pronouncements;
(ii) the approach paper of the Department
of Financial Services; and (iii) the regular
three-year plans put out by the RBI
(2010-13 and 2013-16). It is amazing how
in such an important socio-economic
programme as bringing the unbanked
poor and vulnerable households into the
banking fold, there appears to be hardly
any coordination between the government and the RBI.
For instance, the nance ministrys
approach paper makes no reference to
the two recent nancial inclusion plans
evolved by the RBI and implemented
through the involvement of banks. Banks
have been advised to devise nancial
inclusion plans congruent with their
business strategies and to make nancial
inclusion plans an integral part of their

corporate plans. Banks have also been

advised to include the criteria on nancial inclusion as a parameter in the performance evaluation of their staff. The
implementation of these plans are closely
monitored by the RBI on a monthly basis
through a quantitative reporting format.
Besides, there is also the monitoring of
the qualitative aspects of nancial inclusion plans through a qualitative report
submitted by banks every quarter (RBI
Annual Report 2012-13, pp 79-80).
What is more, to continue the process
of ensuring access to banking services to
the excluded, banks have been advised
to draw up a three-year nancial inclusion
plan for the period 2013-16. Banks have
now been advised that their nancial inclusion plans should be disaggregated to
the branch level. The disaggregation of
the plans is being done to ensure the
involvement of all stake holders in the
nancial inclusion efforts (Annual Report
2012-13, p 81). With a view to involving
grass-root level institutions in a consultative process, the RBI has involved the
Lead Bank Scheme and its armoury of
state-level and district-level coordination
committees (SLBCs and DCC) as well as
the annual credit plans both at the state
and district levels.
With a view to lling the information
gap, the RBI has conducted a eld survey

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vo l x l IX n o 35

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COMMENTARY

using structured questionnaires and

covering 8,246 households and a total
population of 34,149. Revealing that 76%
of the villages were aware of services
offered by banks, the survey brought out
some interesting revelations (Table 2).

10% to 10.25%) plus 3% (out of this 1% is

for the fees to be paid to the Credit Guarantee Fund and 6% to be paid to the BC
for maintenance of the account). The
Credit Guarantee Fund is an interesting
device created to provide guarantee

Table 2: ASurvey-based Analysisof Financial Inclusion

Usageof Banking Products

(i)

Savingsaccount

(ii) Credit products

(iii) Remittance
(iv) ODin savingsaccount
(v) ElectronicBenefit Transfer (EBT)

Usage of savings accounts was the highest About 74% of the

villagershadasavingsaccount
Usage of credit productswassecond About 34%of the villagers
wereavailingof loan facilities(includingKCC/GCC)
Remittance facilities were the next About 24% of the villagers
wereavailing of theremittancefacility
Usage of ODwas most limited among villagers Only 12%of the
villagerswereavailing of theODfacilityin thesavingsbankaccount
Usageof EBTwasalso limited Only15%of villagerswereavailing
of theEBTfacility

Source: RBIsReport onTrendandProgressof BankinginIndia2012-13.

Despite such concerted efforts made

by RBI and known in the public domain,
the Department of Financial Services
pretends, if its approach paper is to be
believed, total ignorance except for culling out some data on the progress
of nancial inclusion from RBI annual
reports. This shows bureaucratic rivalry
at best or total callousness at its worst.
That apart, both the RBI and nance
ministry approaches involve some careful time-phasing of nancial inclusion
plans taking into account the serious
institutional and infrastructure bottlenecks. While the political system is
justied in putting pressures on the
government as well as the central bank
bureau cracies to speed up the progress
in nancial inclusion, blanket bureaucratic target-setting can give rise to
results which are not healthy as it has
happened in the policy of doubling of
bank credit for agriculture (EPWResearch
Foundation 2014a).
Assuming that the central governments approach paper will be the basis
for implementing the nancial inclusion
plan, many steps have to be taken. For
instance, each bank account holder has
to be provided with nancial literacy
training; it is only thereafter that the
overdraft of Rs 5,000 would be granted.
Also, there is a general impression
that this overdraft facility is free of cost.
It is not so. The approach paper has
proposed that the rate of interest on
these overdraft accounts drawn be xed
at a banks base rate (ranging from
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a u g u s t 30 , 20 14

the RBIs Annual Report 2012-13 which,

on the face of it, appears very laudable:
In order to spearhead efforts towards greater nancial inclusion, the Reserve Bank has
constituted a Financial Inclusion Advisory
Committee (FIAC) chaired by a Deputy Governor. The FIAC has a few Directors from
the Central Board of the Reserve Bank,
experts drawn from NGOs and civil society
representatives as members. The expertise
and experience of the members will be
leveraged: to develop viable and sustainable banking service delivery models that
provide accessible and affordable nancial
services; to develop products and processes
for rural as well as urban consumers who are
currently outside the banking network; and
to create an appropriate regulatory framework to ensure that nancial inclusion and
nancial stability move together (p 82).

against defaults in overdraft accounts

but at the same time, it would make
the whole exercise budget neutral for
the Government of India as the Fund
would be nanced by the Financial
Inclusion Fund (FIF) maintained by
National Bank for Agriculture and
Rural Development.

This language of the western markets

should appear as anathema to the minds
of the government bureaucracy as well
as the political leadership in India which
is endeavouring to grapple with the complex socio-economic problems of such a
large, unequal and oppressive society.

An As s e s s m e n t

Department of Financial Services (2014):

Sampoorn Vittiyea Samaveshan, An Approach
Paper for Comprehensive Financial Inclusion,
16 June.
EPW Research Foundation (2014a): Agricultural
Credit in India: Trends, Regional Spreads and
Database Issues, Occasional Paper 59, Department of Economic Analysis and Research,
National Bank for Agriculture and Rural Development (NABARD), Mumbai, 15 January.
(2014b): Construction of State-Wise Rural Infrastructure Indices A Final Report, April (A
research project completed for NABARD).
IDFC Rural Development Network (2013): India
Rural Development Report 2012-13 (Delhi:
Orient Blackswan).
Indira Rajaraman (2014): More Complete Financial
Inclusion, Business Standard, 24 March.
Planning Commission (2012): Draft Twelfth FiveYear Plan 2012-17, Government of India.
RBI (2013): Committee on Comprehensive Financial Services for Small Businesses and
Low Income Households A Report (Chair:
Nachiket Mor), December.
Ram Mohan, T T (2014): Mor on Financial Inclusion: A Few Baby Steps, Not a Great Leap Forward, HT Parekh Finance Column, Economic
& Political Weekly, Issue No 16, 19 April.
Sriram, M S (2014): Why the Nachiket Mor Committee Report on Financial Inclusion Disappoints, LiveMint, 10 January.
Shikha Sharma and S S Mundra (2014): Views on
Report from Committee on Comprehensive
Financial Ser vices for Small Businesses and Low
Income Households, Reserve Bank of India,
6 January.
Syed, Amir Hamza (2014): New Beginning for Financial Inclusion, 14 August, www.LIVEMINT.com
Viswanathan, R (2014): RBI Report on Financial
Inclusion: A Review, Economic & Political
Weekly, Issue No 9, 1 March.

Ref er en c es

A close reading of the recent writings of

the RBI suggests that there have been some
signicant qualitative changes in its
thinking on the approach to be adopted
to attain the objectives of nancial inclusion. It appears that the earlier nancial
inclusion plans of 2010-13 and 2013-16
were based on the traditional approach
to banking development through egalitarian objectives and strategies. Whereas
the current thinking in the RBI appears
to be moving towards a market-led policy
framework. And therefore, the possibility
is that there has arisen a serious cleavage between the government machinery
which is generally adhering to the traditional developmental objectives and
strategies with a tinge of egalitarianism
and the RBIs new leadership which is
increasingly trying to sell the language
of the market. Governor Raghuram
Rajans theme of ve Ps of nancial inclusion speaks volumes for this theme:
product, place, price, protection and
prot (20th Lalit Doshi Memorial Lecture
on 11 August 2014 in Mumbai).
Interestingly, the same neoclassical
thinking is discernible in a statement in
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