The Pros and Cons of Financial Inclusion Policy in Asia ... · The Pros and Cons of Financial...

The Pros and Cons of Financial Inclusion Policy in Asia: Evidence

from the PMJDY October 2015

Sumit Agarwal, Low Tuck Kwong Professor of Economics, Finance, and Real Estate, NUS

Consumer Credit Debt & Bank Account (Global Review)

Do consumers have access to banking? Account Penetration

Financial Account & Mobile Account Debit Card Credit Card Internet Payment Wage Payment Government Transfer Payments School Fee Payments Utilities Payment Saving Method Borrowing Behavior

Account Penetration (2014)

Source: The World Bank, Findex Data

Account Penetration (Account, Mobile Account 2014)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Brazil South America,ex. Brazil

Mexico Central America,ex. Mexico

East Asia &Pacific

Europe & CentralAsia

Developing High Income:OECD

Account at a financial institution

Mobile Money & Financial Inst account

Mobile Money account

Account Penetration (Debit Card 2014)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

World Developingeconomies

East Asia &Pacific

Europe &Central Asia

High-incomeOECD

economies

Latin America& Caribbean

Middle East South Asia Sub-SaharanAfrica

Did not have a debit card

Did not use a debit card

Used a debit card

Account Penetration (Credit Card 2014)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


East Asia &Pacific


High-incomeOECD

economies

Latin America &Caribbean


Did not have a credit card

Did not use a credit card

Used a credit card

Account Penetration (Wage Payment 2014)

0%

10%

20%

30%

40%

50%

60%

East Asia &Pacific


High-incomeOECD

economies



Developingeconomies

World

In cash only

Into an account

Account Penetration (Wage Payment, Latin America & Caribbean)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Poorest 20% Q2 Q3 Q4 Richest 20%

Account Penetration (Internet Payment 2014)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


East Asia &Pacific


High-incomeOECD

economies



Have access to the internet

at home

Make online payments

Account Penetration (Government Transfer 2014)

0%

10%

20%

East Asia &Pacific


High-incomeOECD

economies



Developingeconomies

World

In cash only

Into an account

Account Penetration (School Fees 2014)

0%

10%

20%

30%

40%



East Asia &Pacific

Europe & CentralAsia


Pay School fees in Cash

Pay School Fees from an

Account

Account Penetration (Utilities Payment 2014)

0%

10%

20%

30%

40%

50%

60%

70%

80%



East Asia &Pacific



Pay utilities in Cash

Pay utilities from an Account

Account Penetration (Saving Method 2014)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

High Income:OECD

China East Asia &Pacific (ex.

China)

India South Asia (ex.India)



Sub-SaharanAfrica

Saved using an account

Saved using a community

savings group

Did not save

Saved in other ways

Account Penetration (Borrowing Behavior)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

World Developing East Asia &Pacific


High Income:OECD

LatinAmerica &Caribbean


Family & Friends

Formal financial

institution

Private lender/ store

Did not borrow

Evidence from India

State of Financial Inclusion in India

The user’s perspective

Banks/BCs

NREGA Agents

Pension Agents Utility

Providers

Remittance Agents

Desired Outcome Current Situation

Insurance Agents

Insurance Agents

Banks/BCs

Remittance Agents Utility

Providers

NREGA Agents

Pension Agents

•Advent of SOCIAL banking •Nationalization of banks 1969 •Establishment of Regional Rural banks •Priority Sector lending norms

•Advent of MICROFINANCE •Emergence of SHGs and micro finance institutions

•First no-frills accounts •‘Swabhimaan’ Campaign •Business Correspondents as banking channel

I PHASE II PHASE III PHASE

1960 - 1990 1990 - 2005 2005 onwards

Background on State-led Financial Inclusion schemes in India

The Pradhan Mantri Jan Dhan Yojana • Launched on 28 August 2014 – First scheme to focus on households and non-credit financial inclusion

• Key features of PMJDY are: • Any individual above the age of 10 years can open a Basic Savings Bank Deposit Account (BSBDA) under

PMJDY • Interest on deposits in savings bank account • Accidental insurance cover of Rs.100,000 and life insurance cover of Rs.30,000 • No minimum balance required • Easy transfer of money across India • Direct Benefit Transfer for beneficiaries of government schemes • Overdraft facility after satisfactory operation of the account for 6 months • Access to pensions through the National Pension Scheme • Overdraft facility upto Rs.5000/- is available in only one account per household, preferably lady of the

household

2 Phases of PMJDY

Phase I (from 15 Aug 2014 -14 Aug 2015):

• Universal access to banking facilities.

• Providing Basic Banking Accounts with overdraft facility of up to Rs. 5000/-.

• RuPay Debit Card with inbuilt accident insurance cover of Rs. 1 lakh.

• Financial Literacy Programme.

Phase II (from 15 Aug 2015 -14 Aug 2018):

• Creation of Credit Guarantee Fund for coverage of defaults in overdraft accounts.

• Micro Insurance.

• Unorganized sector Pension schemes, like Swavlamban.

• Coverage of households in hilly, tribal and difficult areas, and coverage of remaining adults in the households and students.

Operation of the Scheme • All 600,000 villages across the country mapped to the “Service Area” of each bank

• At least one fixed point banking outlet for every 1,000 to 1,500 households, known as a “Sub Service Area” (SSA)

• The SSAs serviced through a combination of bank branches and fixed point Bank Mitrs (BMs) -business correspondents or agents

Progress under PMJDY

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

1800.00

Accounts Opened And Rupay Cards Issued Sep-14 to Apr-15 (in Lakhs)

Num of Rural Accounts(Cumulative)

Num of Urban Accounts(Cumulative)

No. Of Accounts with ZeroBalance (Cumulative)

No. Of Rupay Debit Card(Cumulative)

• 153 million accounts as of May 2015 – 18% of population above 15 years of age

• Wide disparity in State-wise and urban-rural coverage • Less than half accounts Adhaar seeded

Progress under PMJDY

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

Total Balance in Accounts (Rs. Lakhs)

Private Banks

Public Sector Bank

Rural Regional Bank

Overall

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Sep.14 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 Mar.15 Apr.15

Average Balance per Account (Rs.)

Private Banks

Public Sector Bank

Rural Regional Bank

Overall

• Overall balances have increased • Average balances per account still low – lowest for Public Sector Banks • Zero balance accounts still make up 57.9% of all accounts

Key Concerns

• Viability of scheme for banks • Duplication in account opening • Capacity of current BC framework to deliver multiple products and

ensure their optimal use, especially among low-income households

Can PMJDY be profitable? Let’s take example of ICICI bank

• No. of account opened under PMJDY is 2214299

• Cost of operating account: 2214299 * 150 = 3321.4485 lakhs

• Operating expense incurred by bank is 310739 lakhs

• So, PMJDY accounts for approximately 1% of operating expense incurred by banks.

Are banks earning Profit by PMJDY?

• Cost of maintaining total no of accounts: 2214299 * 150 = 3321.4485 lakhs

• Balance in account: 15174.79 lakhs

• After investing at 5% bank earn: 15174.79 *5% = 758.7395 lakhs

• So banks are making loss

• Loss = balance in account – cost of maintaining account = 758.7395 - 3321.4485 = -2562.709

• So banks are making loss of approximately 2500 lakhs.

Can banks make a profit in in future?

• Assuming the same trend of declining zero account balance in the subsequent quarters number of accounts with zero balance would reduce to nearly 0% by September 2016.Hopefully, this will reduce losses to some extent. But at current operating expenses, banks need at least 4 times the total balance to break even.

• This does not include the risk associated with defaults from overdrafts.

• Around Rs 52,000 crore would be distributed during the next fiscal year through these accounts in terms of subsidies. At 1% commission, subsidy transfer could cover losses.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Sep.14 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 Mar.15 Apr.15

Zero Balance Accounts as % of Total Accounts

Private Banks Public Sector Bank Rural Regional Bank Overall

BC as a channel Who can be a BC? Currently, banks have been permitted to engage individuals or entities like (i) Retired Bank Employees (ii) Retired Teachers (iii) Retired Govt. Employees (iv) Ex-Servicemen (v) Individual owners of kirana / medical/ fair price shops (vi) Individual Public Call Office (PCO) operators (vii) Agents of Small Savin Scheme of Government of India / Insurance Companies, ‘for profit’ companies registered under the

Indian Companies Act (viii) Since 24-06-2014, RBI has permitted Non Deposit taking NBFCs as BCs in addition to above Key issues: • Field research by College of Agricultural Banking, CGAP, and MicroSave suggest that over 75 per cent of accounts opened and over

25 per cent of BCs are dormant • It costs about Rs. 11,400 (USD 185) per month to maintain a transaction-ready BC channel, with the costs split between the BCNM,

the BCA, and the bank – currently BM paid Rs.5000 per month, 1% DBT commission for banks insufficient • Most traditional mechanisms of risk management (eg. collateral, scoring) will therefore not work for these clients and the

underwriting required will be more intensive in nature. On pensions and savings products, the issues will be in helping the clients with variable and low income to save adequately towards their goals-Most Bank Mitras not currently qualified for this, like kirana shop owners and retired teachers.

Average Monthly Balance (Rs)

0

200

400

600

800

1000

1200

1400

1600

1800

Aver

age

Mon

thly

Bal

ance

(Rs)

• Not surprisingly there is a drop in average account balance. In the post-JDY periods banks were mandated to open an account for every citizen irrespective of whether they had savings to deposit or not.

Access to Debit Cards

0

10

20

30

40

50

60

70

80

90

Bank

acc

ount

s with

deb

it ca

rds (

%)

• This graph represents the time trends in percentage of bank accounts with debit cards

• Consistent with JDY improving the ease of access to banking services

Frequency of transactions using cards

• This graph represents the time trends in percentage of bank account holders using debit cards for purchases.

• Very small proportion of the account holders use card to make purchases • However, there appears to be upward trend in the use of card in the post-JDY

period • This is consistent with JDY raising awareness and the ease of access to

banking services

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Freq

uenc

y of

Car

d Tr

ansa

ctio

ns(%

)

Average Transaction value for card purchases

0

100

200

300

400

500

600

700

Aver

gae

Tran

sact

ion

Valu

e (R

s)

• This graph represents the time trends in the transaction value of card purchases • Again, there appears to be an upward trend in the transaction value of purchases

made using debit cards.

Data

• Data from a local financial institution in India offering Savings Bank Account, Loans (individual and joint liability),remittances, pensions,insurance(live,accident,livestock,shop) and utility payments

• Products offered by multiple financial providers such as banks and insurance companies but available to the customer through a branch not more than 5km from his residence and serving about 2000 households surrounding it

• Data on 344,908 customers in the three Indian states of Tamil Nadu, Uttarakhand and Orissa

• 92% of sample working in unorganized sector and nearly 51% with a primary-level education or below

• 65% of customers are women

Factors influencing financial product take-up

• Seasonality • Household Factors • Provider related factors

• Access – Distance to Provider • Staff related factors – Transfers , efficicency • Product requirements and structure

Seasonality: Region-Specific Factors

In Uttarakhand(Sahastradhara), deposits are lowest in Dec-Apr when snowfall makes it difficult to reach branch. Withdrawals are higher during Jun-Sep when the area is prone to heavy rain and landslides .

In Orissa(Dhanei) deposits and withdrawals peak during February just before major harvest of Rabi Wheat and Summer Paddy.

Seasonality: Complementarity between products

Remittances are more or less spread out throughout the year in Pudhuaaru (Tamil Nadu) where most migrants are working in semi-skilled jobs abroad. However, in Dhanei(Orissa) and Sahastradhara(Uttarakhand) most migration is domestic and seasonal for wage labour. Hence we see lesser loans taken when remittances are higher and vice versa.

Seasonality: Product Eligibility Factors

For the Pension product, transactions peak during March deadline for government subsidy of Rs.1,000 offered if customer contributed at least Rs.1,000 in the financial year

The livestock insurance product, which is a requirement for some livestock loans sees greater purchase in the months when livestock loan disbursement is high

Seasonality: Product Eligibility Factors

Seasonality: Provider Targets

Disbursements of loans peak in March when priority sector lending targets are to be met at year-end closing

Treatment vs Control Overall

Treatment vs Control

Figure: Average Monthly Balance

Sumit Aggarwal (NUS) JDY 2 / 109



Figure: Cash Deposit Amount




Figure: Cash Withdrawal Amount




Figure: Outward Remmitance Amount




Figure: Proportion of account holders who deposited




Figure: Proportion of account holders who withdrew




Figure: Proportion of account holders who received remittance




Figure: Proportion of account holders who sent remittance




Figure: Proportion of account holders who used accounts for deposit, withdrawal or remittance




Figure: Proportion of Accounts with positive account balance


Age Quartiles Treatment Group

Treatment (By Age Quartiles)



Gender Treatment Group

Treatment (By Gender)





Figure: Accounts With Debit Card


Marital Status Treatment Group

Treatment (By Marital Status)



Mobile Ownership Treatment Group

Treatment (By Mobile Ownership)



GDP Quartiles Treatment Group

Treatment (By GDP Quartiles)





Figure: Outward Remmitance Amount




Figure: Proportion of account holders who used accounts for deposit, withdrawal or remittance


GDP Quartiles Control Group

Control (By GDP Quartiles)



Rural Quartiles Treatment Group

Treatment (By Rural Quartiles)



Rural Quartiles Control Group

Control (By Rural Quartiles)



Rural Quartiles Control Group

Control (By Rural Quartiles)

Figure: Accounts With Debit Card


Literacy Quartiles Treatment Group

Treatment (By Literacy Quartiles)



Literacy Quartiles Control Group

Control (By Literacy Quartiles)



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