NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, September 3, 2015

When India launched the Jan Dhan (people’s wealth) program a year ago, many observers regarded it as an experiment that would fail. But while the program may not have measured up to the claims of its proponents, evidence shows it has had some positive impacts.

Jan Dhan was launched on August 28, 2014. It envisaged making every Indian a holder of a bank account. Similar attempts had been made earlier, but the programs were not attractive enough to yield results. The literacy rate in India is defined as those who can read and write with understanding. Numeracy is defined as the ability to do basic math. Only 30% of Indians qualify as being financially literate based on that yardstick.

But, according to numbers on the ground, so far 174.5 million bank accounts have been opened from an overall population of nearly 1.3 billion. Some 46.25% are zero-balance, which means the account holder withdrew the entire balance on the same day it was deposited (like the character in the 1910 Stephen Leacock essay, My Financial Career). In Leacock’s case, this behavior was the result of fear of the bank; in India, the reason has to do with the way the program is structured.

All subsidy payments to the poor go directly into the bank account. This is what makes it imperative to have one. Jan Dhan saw the opening of 10 million accounts in a single day, a fact that quieted the army of skeptics wondering whether white collar bankers could succeed in the villages where most of the unbanked live. This was indeed a challenge. But as former ICICI chairman K.V. Kamath said at a Wharton India Economic Forum meeting in Mumbai, India cannot progress until millions of poor people are able to participate in the banking industry.

The process of financial inclusion in India is much older than the Jan Dhan program. The Reserve Bank of India (RBI) licensed several new banks like HDFC Bank, which were successes, and Global Trust Bank, which were failures. The second phase saw the opening of banks such as Kotak Mahindra Bank and Yes Bank. Now, the third phase is underway. Bandhan Bank, which received an RBI license in 2014, began operations on August 25. A license has also been granted to the Infrastructure Development Finance Company (IDFC).

In another move with far-reaching consequences, the RBI has permitted 11 payment banks to open shop. These are new stripped-down type of banks, which are expected to reach customers mainly through mobile phones rather than traditional bank branches. “The payment banks are not allowed to offer lending facilities,” says the RBI.