Financial Inclusion in India: Achieving Quantity, but Waiting for Quality

Shrikrishna Mahajan(ssm_commerce@unishivaji.ac.in) is a Senior Professor and Head of the Department of Commerce and Management at Shivaji University, Kolhapur.
17 January 2023

The government of India and the Reserve Bank of India have taken different initiatives to promote financial inclusion in India. Pradhan Mantri Jan Dhan Yojana is instrumental in universalising financial inclusion initiatives. It has resulted in the tremendous growth of several bank accounts. Only the quantitative parameter speaks volumes about unfair financial inclusion. It can be transformed into fair financial inclusion with qualitative characteristics. This paper aims to analyse financial inclusion from the perspective of the activeness of accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, which is analysed with the help of Financial Inclusion Quotient (FIQ) and Account Activeness Quotient (AAQ).

1. INTRODUCTION:

Indian financial system plays a vital role in a nation's economic development, involving multiple segments with financial institutions, agents, practices and markets. The report of the Committee on Financial inclusion defined financial inclusion as ‘the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost (GoI 2008). The committee identified different strata of the society excluded financially and intervened in the policy to improve financial inclusion. Consequently, the Government of India, RBI and NABARD are making consistent efforts to enhance financial inclusion in India. The policy on financial inclusion was implemented with a focus on the supply side of financial inclusion drives and programmes. However, involuntary exclusion (Tulasi et al. 2017) and quality of financial inclusion are issues on the demand side of financial inclusion which need to be addressed. Hence, this paper aims to analyse financial inclusion from the perspective of the activeness of accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, which is analysed with the help of the Financial Inclusion Quotient (FIQ) and Account Activeness Quotient (AAQ).

 

2. LITERATURE REVIEW:

The due course of the study reviews the literature on financial exclusion, financial inclusion, and PMJDY and compares the quantitative and qualitative dimensions of financial inclusion.

 

2.1 Financial Exclusion: Leyshon and Thrift (1995) defined financial exclusion as 'those processes that serve to prevent certain social groups and individuals from gaining access to the formal financial system.' According to Sinclair (2001), financial exclusion means the 'inability to access necessary financial services in an appropriate form. Exclusion can come about as a result of problems with access, conditions, prices, marketing or self-exclusion in response to negative experiences or perceptions.’ Carbo et al. (2005) define financial exclusion as "broadly the inability of some societal groups to access the financial system."

 

2.2 Financial Inclusion: Financial inclusion is access to safe, easy and affordable credit and other financial services by the poor and vulnerable groups, disadvantaged areas and lagging sectors. United Nations (2006) defined financial inclusion as the "provision of access to credit for bankable people and firms, to insurance for all insurable people and firms and savings and payments services for everyone.”Thus, recognising it as a precondition for accelerating growth and reducing income disparities and poverty. Everybody should have access to a financial system for fostering economic growth with an 'inclusive' approach. The RBI has taken initiatives for the promotion of financial inclusion through various steps such as opening 'no frill accounts', overdraft facility through RRBs, general purpose credit card, simplification of KYC norms, hundred percent financial inclusion drive, business facilitator and Business Correspondent Model, introducing technology products and services, liberalisation of policy for opening branches and ATM expansion, creation of special funds, financial literacy and credit counselling.

 

2.3 PMJDY: The Pradhan Mantri Jan-Dhan Yojana (PMJDY) has been launched as a national mission on financial inclusion. It has been the 'biggest financial inclusion initiative in the world'. PMJDY aims to give access to various financial services like the 'basic savings bank account, access to need-based credit, remittances facility, insurance and pension to the excluded sections i.e. weaker sections & low-income groups (GoI, 2021). The approach of PMJDY to financial inclusion aims not just to open accounts but to make accessible " financial services like basic savings bank account, need-based credit, remittances facility, insurance and pension to the weaker sections & low-income groups" (Ray 2019). There is an overwhelming response to open bank accounts under PMJDY. "In terms of the usage of these accounts, however, the initial spurt in average balances slowed down during 2017-18" (Ray 2019). Few studies (Kaur and Singh 2015; Pillai 2016; Yadav and Mazoomdar 2016; Tulasi et al. 2017; Deb and Das 2016) have been conducted particularly on PMJDY.

 

2.4 Quantitative v/s. Qualitative: Till January 27, 2021, 41.75 crore accounts have been opened under PMJDY, out of which 35.96 crore accounts are operative (GoI 2021). Till March 31, 2021, the total number of accounts opened under PMJDY reached 42.20 crores. RuPay debit cards were also issued to 30.90 crore beneficiaries of the same scheme (GoIb, 2021). While about 30% of PMJDY accounts remain unused, 70% of the accounts migrate out of dormancy into active use (Chopra et al. 2018). PMJDY scheme marginally improved the pace of economic growth but failed to improve the economic prosperity level across states. Poor usage of financial services and a rise in the number of dormant accounts after the PMJDY scheme's launch are the significant limitations of the PMJDY scheme's failure (Singh et al. 2021). There is a need to assess the quality of financial inclusion in the activeness of accounts under PMJDY. At a micro level, the quality of financial inclusion can be measured in terms of awareness and behaviour.

 

3. DATA AND METHODOLOGY:

This paper has attempted to review the progress of PMJDY and to study the activeness of accounts under the scheme by developing specific quotients.

 

3.1 Data: The primary data has been collected to assess the performance of PMJDY and its efficiency. The multi-stage sampling method is adopted for the present study. In the first stage, the Pune division (Western Maharashtra) is selected from six divisions regions of Maharashtra state. This division includes five districts, i.e. Pune, Satara, Kolhapur, Sangli and Solapur. In the second sampling stage, two spots of urban areas and three spots of rural areas from each district were selected. For every such spot, the researcher selected 50 beneficiaries of PMJDY. The sample size was 1250 by adopting purposive quota sampling. However, after data cleaning, the researcher could reach 1246 beneficiaries of PMJDY.

 

3.2 Construction of FIQ: The construction of FIQ includes factors (x1to x25) such as access to bank account, access to credit, money transfer facility, facility of paying bills, informing about credit from financial institution/banks, availability of smart card, availability of ATM/ debit card, availability of credit card, availability of life insurance policy, availability of general insurance policy, receipt of any subsidy from government, access to NBFC/ cooperative society, access to share market/ mutual funds, access to health insurance, response from bank employees for services, availability of financial services, availability of bank branch in the vicinity, awareness of saving facility of bank, awareness of credit facility of bank, awareness of no frill account facility of bank, awareness of money transfer facility of bank, awareness of insurance schemes, awareness of mutual funds, awareness of facility of collecting cheques and awareness of facility of collecting bills.

Financial Inclusion Quotient (FIQ):

FIQ = (∑x1 + x2 + x3 + x4 + x5+ x6+ x7+ x8+ x9....+x25)/n................(1)

where,       

x1 = access to a bank account

x2 = access to credit

x3 = money transfer facility

x4 = facility of paying bills

x5= informing about credit from financial institutions/banks

x6 = having a smart card

x7 = having an ATM/ debit card

x8 = having a credit card

x9 = having a life insurance policy

x10 = having a general insurance policy

x11 = received any subsidy from the government

x12 = access to NBFC/ cooperative society

x13= access to share market/ mutual funds

x14 = access to health insurance

x15 = response from bank employees for services

x16 = availability of financial services

x17 = availability of bank branch in the vicinity

x18 = awareness of the saving facility of the bank

x19 = awareness of credit facility of bank

x20= awareness of no frill account facility of the bank

x21 = awareness of the money transfer facility of the bank

x22 = awareness of insurance schemes

x23 = awareness of mutual funds

x24 = awareness of the facility of collecting cheques

x25 = awareness of the facility of collecting bills

n = number of factors

 

3.2 Construction of AAQ: The construction of AAQ includes factors (x1 to x20) such as awareness about PMJDY, timely bank service, KYC completed, received Rupay card, received pin of Rupay card, activated Rupay card, transacted through Rupay card, access to credit (loan taken), access to life insurance and access to general insurance.

Account Activeness Quotient (AAQ):

AAQ = (∑x1 + x2 + x3 + x4 + x5+ x6+ x7+ x8+ x9+ x10)/n................(2)

where,       

x1 = awareness about PMJDY

x2 = timely bank service

x3 = KYC completed

x4 = received Rupay card

x5= received pin of Rupay card

x6= activated Rupay card

 x7 = transacted through Rupay card

x8 = access to credit (loan taken)

x9= access to life insurance

x10 = access to general insurance

n = number of factors

 

FIQ measures the quality of financial inclusion, whereas, for the present study, the activeness of accounts under PMJDY was measured by AAQ.

4. RESULTS:

4.1 Level of financial inclusion: Financial inclusion is not just about opening a bank account. An individual's level of financial inclusion can be measured by their financial awareness and financial behaviour. The present researcher has developed FIQ (as described in Equation 1) and it has been measured (See Table 1). Table 1 shows 83.7 per cent of account holders have a low level of financial inclusion. A medium level of financial inclusion is observed with 12.5 per cent of account holders, whereas only 3.8 per cent have a high level of financial inclusion. Some researchers presumed that the account with zero balance is inactive. Some branch managers deposited Re.1 in each account, leading to the swelling of many active accounts. So we can not define active accounts in that way.

 

Under PMJDY, beneficiaries are expected to get the benefit of KYC, RuPay cards, life insurance, accident insurance and pension benefit etc. So we have to analyse the situation about PMJDY implementation. Table 3 shows that 39.2 per cent of beneficiaries have completed the KYC formality required under PMJDY, whereas 36.2 per cent of beneficiaries activated RuPay cards. However, only 21 per cent of them use RuPay cards for transactions. Under PMJDY, only 7.5 per cent have utilised the overdraft (loan) facility. As most people are unaware of insurance schemes under PMJDY, only 6.1 per cent benefitted from life insurance and 4.9 per cent from accident insurance schemes (See Annexure-1).

 

4.2 Level of activeness of accounts: Just opening an account under PMJDY is not sufficient. Such an account should be active as far as transactions are to be done by the customers. Hence, it is interesting to know the activeness of accounts under study. The present researcher has developed AAQ (Account Activeness Quotient) as described in Equation 2 (See Table 2). Table 2 shows that 67.6 per cent of account holders have AAQ below 0.40, indicating that most accounts have a low level of activeness. A medium level of activity has been observed in 14.9 per cent of accountholders, whereas only 17.4 per cent of account holders have a higher level of activeness.

H0: The number of inactive bank accounts and the number of active bank accounts are same.

H1: The number of inactive bank accounts and the number of active bank accounts are different.

This hypothesis has been tested by Mann-Whitney U Test. The sum of the ranks for Inactive accounts equals 355746, and for Active accounts, it is 421135. The value of the Z statistic in Table 3 is -29.031. The p-value is 0.000, which is less than 0.05, the assumed level of significance. It means that the null hypothesis is rejected in favour of the alternative hypothesis. Therefore, it can be concluded that the number of inactive bank accounts is more than that of active bank accounts.

 

5. DISCUSSION:

Nearly 21 per cent of beneficiaries are not using accounts which means their accounts are 'inactive' whereas 36.8 per cent of them make one transaction which means they rarely use their account. 39.2 per cent of beneficiaries have completed the KYC formality required under PMJDY, and 36.2 per cent of beneficiaries activated RuPay cards. However, only 21 per cent of them use RuPay cards for transactions. Under PMJDY, only 7.5 per cent have utilised the overdraft (loan) facility. As most people are unaware of insurance schemes under PMJDY, only 6.1 per cent of them benefit from life insurance and only 4.9 per cent under the accident insurance scheme. Only 0.8 per cent of beneficiaries have used the amount of loan for business purposes, and only 0.5 per cent of beneficiaries have used the amount of the loan for domestic purposes. There is significant growth in financial inclusion through PMJDY. However, the number of inactive bank accounts is more than the number of active ones. “Financial inclusion needs a long-term, steady and planned pathway of employment. There do not seem to be any shortcuts" (Kalhan, 2020).

6. CONCLUSION:

“PMJDY scheme in its current form is inadequate to address the problems of financial exclusion” (Sinha and Azad, 2018). People previously excluded now have their own accounts under PMJDY. Some accounts are not active because they need to have adequate income. Hence, micro-enterprise promotion is essential for income generation, which will help each household for its livelihood and sustainability. The activities under National Rural Livelihood Mission and National Urban Livelihood Mission should be linked with PMJDY. Micro-credit should be made available to PMJDY accountholders through distribution channels like Microfinance, Self Help Groups or Business Correspondents(BCs). A minimum of one of them should be linked with PMJDY account.

 

“Despite efforts under the Pradhan Mantri’s Jan Dhan Yojana (PMJDY) to expand financial inclusion, beneficiaries continue to face high opportunity costs for operating bank accounts. These opportunity costs come in the form of travel expenses and delays in bank transfers” (Mathew and Goswami, 2016). The beneficiaries of PMJDY accounts are mostly from the economically backward section. For access to financial services through digital technology, a minimum of an android mobile phone is required. Point of Sales Machine and Micro-ATMs may be provided to Business Correspondents through which banking services may be provided to accountholders at their doorsteps. Bank Mitras (BCs) are made available in rural areas already; however, it is also needed in urban areas for the financial inclusion of the excluded. BCs should also spread awareness about deposits and credit schemes of banks. BCs should be customer-friendly to mobilise deposits and make micro-credit and insurance facilities available at their doorsteps. BCs should visit PMJDY account holders and make them aware of improving income generation and savings, how to keep bank accounts active, and also help them understand digital technology for financial services.

 

Under the programme of PMJDY, 14.54 crore accounts were opened in banks up to March 25, 2015, and 12.99 crore RuPay cards were issued. Over a period of 6 years, we found tremendous growth in this programme. Up to March 31, 2021, 42.20 crore accounts were opened in banks, and 30.90 crore RuPay cards were issued. Over a period, there was a growth of 65.55 per cent. This programme of financial inclusion has definitely achieved quantitative growth. However, we are waiting for quality as far as the output of this programme is concerned. Considering the overall financial inclusion, 83.7 per cent of account holders have a low financial inclusion quotient (0 to 0.40). Considering the overall activeness of the account, 67.6 per cent of account holders have a low level of account activeness quotient. Quantitatively the PMJDY has fared well; however, qualitatively, it has not been able to do much. This speaks volumes about unfair financial inclusion. It can be transformed into fair financial inclusion with qualitative checks.

Annexure-1

Table 1 Financial Inclusion Quotient

FIQ Level

Frequency

Percent

 

0.00

126

10.1

 

83.7

0.01-0.20

625

50.2

0.21-0.40

292

23.4

0.41-0.60

156

12.5

12.5

0.61-0.80

43

3.5

3.8

0.81-1.00

4

0.3

Total

1246

100.0

100.0

Note: FIQ- Financial Inclusion Quotient

 

Table 2 Level of Activeness of Account under PMJDY

AAQ Level

Frequency

Percent

 

0

42

3.4

 

67.6

0.01-0.20

454

36.4

0.21-0.40

347

27.8

0.41-0.60

186

14.9

14.9

0.61-0.80

179

14.4

17.4

0.81-1.00

38

3.0

Total

1246

100.0

 

Note: AAQ- Account Activeness Quotient

Table-3 Activities under PMJDY (n = 1246)

Activities

Frequency

Percent

KYC norms completed as per PMJDY

488

39.2

RuPay cards are given under PMJDY scheme

412

33.1

RuPay cards received

388

31.1

PIN of RuPay card received

376

30.2

RuPay card activated

451

36.2

RuPay card transaction activated

262

21.0

Loan taken under PMJDY

93

7.5

Life Insurance benefit under PMJDY

76

6.1

Accident/ Vehicle Insurance under PMJDY

61

4.9

(Source: Field Survey)

 

Table-4 Ranks

 

Activeness

N

Mean Rank

Sum of Ranks

Account Activeness Quotient

Inactive

843

422.00

355746

Active

403

1045.00

421135

Total

1246

 

 

 

Table-5 Test Statistics

 

AAQ

Mann-Whitney U

.000

Wilcoxon W

3.557E5

Z

-29.031

Asymp. Sig. (2-tailed)

.000

a. Grouping Variable: Activeness

This paper is based on the outcome of a research project undertaken on the topic "Evaluation of Pradhan Mantri Jan Dhan Yojana and Roadmap ahead". I acknowledge the financial support to the research project under the IMPRESS scheme through ICSSR of the Ministry of Education (then MHRD), Government of India, New Delhi.

Shrikrishna Mahajan(ssm_commerce@unishivaji.ac.in) is a Senior Professor and Head of the Department of Commerce and Management at Shivaji University, Kolhapur.
17 January 2023