The Status Of Financial Inclusion In India: P2P Lending Leverages Pradhan Mantri Jan Dhan Yojana

By Rajnish Venugopal | 25/01/2019

Financial Inclusion (FI) in India ensures that the unbanked and underbanked masses residing in the farthest hinterlands of the country are brought under the ambit of essential financial services. Financial inclusion was always in the agenda, albeit in spirit, during the nationalization of banks in 1969 and later in 1980. However, it was only after the Reserve Bank of India (RBI) emphasized the significance of FI in its annual policy statement of 2005-06 did the banks include it in their business objective. Later on, the recommendations of the Rangarajan Committee in 2008 spiked the interest of the stakeholders (banks, NBFCs, etc.) who realized its value addition in business growth.

Besides making credit and other financial services easily available to the people from low-income groups, FI is also a measure of how the outside world perceives the growth and development in India and imperative to achieve many of UN’s Sustainable Development Goals. The World Bank’s Global Findex (GFX) which measures the progress of FI in different countries has a positive outlook for India. However, China, Egypt and Mexico are far ahead in their FI initiatives.

Financial Inclusion – A Long Road Ahead

Although many metrics have been favourable to India the ground reality may be something different. There are many hurdles that have to be overcome by the authorities before India truly becomes financially inclusive.

• Financial Literacy: – The literacy rate of India is 74.04% with many States falling below the national average. The financial literacy rate is even more appalling. As per a survey by Standard & Poor’s, 76% of Indian adults (even in Tier-I and Tier-II) cities lack the basic financial understanding. Only when people are aware of the benefits of the services available to them will they be able make better financial decisions thereby increasing their trust in the institutions.
• Identification Documents: – Many people in rural India do not have the proper ID cards requisite for opening a bank account. The increase in Aadhar card registrations may solve this problem but other documents such as pay slips, etc. are needed to avail certain financial services.
• Digitization: – Digitization of financial services is the right step towards FI but many people are still sceptical towards data protection and regulation policies. Furthermore, internet connectivity and data speed are issues that the ISPs have to address.
• Gender Inequality: – Women in rural areas are part of some self-help group or are self-employed but they are still un/underbanked. And at times they have to dish out more interest rates than men while availing loans. Although many PSU banks are coming up with women-focused loan schemes, the facility is not fully utilized.
• Dormant Accounts: – A bank account should not be a place to hold one’s money, it should serve as a gateway to other financial services. Unfortunately, after opening an account most people let it lie idle thus nullifying the whole effort.

Pradhan Mantri Jan Dhan Yojana (PMJDY) – A Novel Initiative

An initiative by the Honourable Prime Minister of India, PMJDY aims to make financial services accessible to people from different strata of society. On the day of launch, August 15, 2014, over fifteen million bank accounts were opened. Although the initial reception was overwhelming, the scheme is not entirely devoid of hurdles.

PMJDY – Traversing The Difficulties

Malpractices have been reported at various stages of PMJDY – from account opening to operating the account. The main reason for malpractice is illiteracy, and women and elderly are the most at-risk group to fraud. There has also been one incidence where all the villagers had the same PIN code which could have caused a colossal data breach.

Another reason for underperformance of the scheme is the lack of products available. For instance, a recurring deposit offered by banks is only helpful to those with a regular source of income and not for the daily wage earners, who form a larger part of the rural populace.

Many of the accounts that were opened under this scheme lies dormant which rises an important question – were the data fudged and if not, who should be responsible for ensuring that the accounts are operational on a monthly or quarterly basis? The banks played a huge role in ensuring the initial success of PMDJY but they too are accountable to their shareholders and any drop in the quarterly or annual earnings will affect their market cap.

Lastly, even after the massive success of PMJDY moneylenders in rural areas continue to flourish. Why is this still happening? Is it because of the ease in getting credit from a moneylender rather than a bank?

The Emergence of P2P Lending – Leveraging PMDJY For Financial Inclusion

P2P lending companies in India are regulated by the RBI and help disburse loans to people who were previously untapped by banks owing to lack of sufficient credit history. So how can a nascent P2P lending industry help leverage PMJDY to drive financial inclusion?

Unlike the major banks operating under the PMJDY, P2P lending companies develops products specially for the unbanked and underbanked individuals. The stringent underwriting algorithms disburses loans to the suitable individual, regardless of traditional underwriting parameters.

Unlike the moneylenders who lend money at a high and uniform rate, the P2P firms calculate the credit worthiness of an individual and fixes the interest rate accordingly.

Lending money on a reasonable interest rate initiates a healthy borrowing culture thus activating the otherwise dormant accounts. Although still in a nascent phase, P2P lending will soon emerge as a prominent player in financial inclusion driving the growth story of India. P