On August 28, 2014, Prime Minister Narendra Modi announced the implementation of the Jan-Dhan Yojana (People’s Wealth Program), a national initiative to provide bank accounts to all Indians to reduce poverty. Modi’s goal is ending financial untouchability which will help the government save money on social spending programs.
The push toward universal banking for all Indians is not new. The previous launch of the No-Frills Savings Account (NFA) program in India, a government-mandated program that required banks to open a requisite number of bank accounts for low-income populations, was much anticipated.
Unfortunately, the previous program failed to reach its potential. Many banks, viewing NFA as a CSR obligation rather than a business opportunity, made little or no effort to motivate NFA customers, and the features of the NFA account itself was less attractive to customers than their already well-established informal Self-Help Groups.
Given this challenge, how will the new People’s Wealth Program differ from the NFA program?
Under the new program, social benefits will be paid directly into a family’s bank account rather than by direct handouts. Account holders will get a debit card and accident insurance cover of up to 100,000 rupees ($1,654). They will also get an overdraft facility of up to 5,000 Indian rupees: many borrowers in the “unbanked” segment such as small-time traders who need overnight loans of $25-30 that are not offered by commercial banks, making them turn to informal financing channels.
With the launch of the program, the country realized the opening of more than 15 million new bank accounts in a single day. The goal is to open 75 million accounts in the first phase, which ends in August of 2015.
Although there are potentially many benefits to the Jan-Dhan Yojana, the program may be confronted with some of the same issues faced by prior initiatives:
- Financial Literacy – Approximately 40% of Indians do not have access to banking. Without a concerted effort from the banks to understand and effectively serve these populations, the program runs the same risks as the NFA program – lack of sustained usage due to lack of understanding and real interest in serving the bottom of the pyramid.
- Overdraft Coverage: Banks do not have a mechanism for collecting bad debts amongst low income populations. The chance of overdrafts not being repaid is therefore extremely high.
Recent statistics seem to confirm doubts: although the number of accounts opened has been stated as high as 75 million, as many as 75% of the accounts so far do not have any cash balance, and only 58% have been provided with the debit card. Banks are finding that it does not make economic sense to operate these accounts – with a basic minimum cost of at least Rs 200 on opening each account, a number of banks have reported that average deposits across new accounts are about the same.
Although well-intentioned, this initiative shows the signs of having been launched without carefully thought out development of value propositions for all stakeholders.
There is undoubtedly a need among low income populations for formal financial services – but they must be the right kind of financial services, with features and benefits that will offer a clear value proposition when compared to existing informal products. Similarly, there is a business case for banks to offer financial services to low income populations: but without their being educated on how this can be achieved, they will continue offering irrelevant products without any motivation or enthusiasm.
The key learning here could therefore be that it is the bank, not the customer, that needs educating….