Prime Minister’s Jan Dhan Yojana: The long arc of financial inclusion in India

One major goal of financial policy was to increase the share of institutional sources in rural credit.

August 28, 2024, marked a decade of Prime Minister’s Jan Dhan Yojana (PMJDY). It is a continuation of years of efforts to promote financial inclusion. In fact, history of financial inclusion runs parallel with history of financial/banking development in India. Though, historically the term financial inclusion was not used, we identify financial inclusion policies in terms of expansion of banking to rural areas and agricultural sectors.

Banks and banking existed in India long before the British arrived. Indigenous banks and moneylenders dotted the country. In the 19th century, East India Company promoted three Presidency banks and both Indians and British established their own banks. Though, several banking organisations provided credit, financial inclusion was never really their core agenda.

Targetted policies began in 1904

The first policy to look at inclusive financial development was Cooperative Credit Societies Act in 1904. Even before Cooperatives Act, India, especially southern India, was home to nidhis and chit funds whose core purpose was financial cooperation. The three Presidency Banks were merged to form the Imperial Bank in 1921 and the new entity was given the task to open 100 new branches to push inclusion. The RBI was established in 1935 and perhaps is the only central bank to have had an Agricultural Credit Department at its inception.

Post-independence, the first All-India Rural Credit Survey Report (1953) recommended that cooperative banks should be the main agencies for promoting financial inclusion. The government also started publishing decadal All India Debt and Investment Survey (AIDIS) which provided very useful data- sources of credit to rural households.

There were two broad sources of credit: institutional sources such as banks, cooperative banks, NBFCs (later) etc. and non-institutional sources (landords, moneylenders, friends etc.). One major goal of financial policy was to increase the share of institutional sources in rural credit.

The 1951 survey showed non-institutional sources contributed nearly 93 percent and institutional avenues contributed just 7 percent of total credit. Within non-institutional, moneylenders (both agricultural and professional) accounted for 72 percent of total rural credit. In the next two decades, the share of institutional sources increased to 17 and 29 percent respectively. Much of the rise in institutional credit was due to rise of share of cooperatives which touched 20 percent in 1971.

Banks drive inclusion in the 1970s

In 1981, the share of institutional credit doubled to 61 percent due to share of commercial banks jumping from 2 percent in 1971 to 28 percent in 1981. This fourteen-fold jump in share of commercial banks was due to bank nationalisation in 1969, followed by another round in 1980. Apart from political reasons, the government nationalised banks to spread financial inclusion.  Even though the share of institutional sources changed since 1950s, at first commercial banks played a negligible role in inclusion. In 1967, the share of agriculture in total commercial bank credit was just 2 percent. The share of rural branches in total branches was around 17 percent.

Post-bank nationalisation and several other policies in 1970s (priority sector loans, regional rural banks, interest rate ceilings etc.) the government changed the game and pushed the onus of inclusion to commercial banks.

Inclusion comes at a cost

However, there is no free lunch in economics. The inclusion policies created a hole in financial position of nationalised or public sector banks (PSB).

Post 1991 reforms, policymakers shifted attention to improving financials of PSBs and licencing new private sector banks. This change in approach reflected in the IADIS survey as well share of institutional credit, which declined from 64 percent in 1991 to 56-57 percent in the next two surveys.

After reorienting priorities in the early liberalisation phase, the government and RBI again scrambled to promote financial inclusion by introducing no-frills bank account, self-help groups, microfinance etc.

Technology turns out to be the game changer

However, what changed significantly for financial inclusion was the coming together of the trinity of Aadhaar, digital technology and mobile phones. In the late 2000s, Indian government announced a national identity project named Aadhaar. The founders of Aadhaar were not just interested in creating an identity card but envisaged a much wider vision of integrating Aadhaar with public services.

One such service which made immediate connection was banking. Banks require some kind of identity to open an account and most Indians lacked identity. With an Aadhaar identity card, one could now open a bank account.

The policymakers did not just stop there and integrated Aadhaar and bank accounts with mobile technology. Mobile telephony was licenced in India in the 1990s and has become very cheap and affordable after decades of competition. Despite decades of financial inclusion, the last mile connectivity issued remained and branches could not reach out to customers for bank accounts. With mobile phone and Aadhaar, it was possible to break or weaken this last mile challenge significantly.

PMJDY, the fruition

PMJDY was a culmination of all these years of ideas and policies coming together. The now world-famous JAM Trinity of Jan Dhan Yojana, Aadhaar and Mobile enabled people to open and operate bank accounts from their mobile phones. The government also added more features to the scheme: a free-of-cost RuPay Debit card, in-built accident insurance cover of Rs 2 lakh and an overdraft of up to Rs. 10,000 to cover exigencies.

In 10 years, 54 crore new accounts have been opened under the scheme, of which 55.6 percent account holders are women and 66.6 percent from rural areas. The total deposits are Rs 2.3 lakh crore which may appear large as an absolute number but is just 1.15 percent of overall deposits.

It is also interesting to note how the usually criticized PSBs are behind majority of these PMJDY accounts. PSBs contribute nearly 74 percent of total accounts followed by RRBs at 24 percent. The private sector banks share in PMJDY accounts is just 2 percent.

A question to be asked is without PSBs would PMJDY have achieved its success?

Again, the point is history of financial inclusion has been a continuous journey and PMJDY marks a major milestone in this major journey. PMJDY along with other policies of 2000s pushed the share of institutional credit to 66 percent in 2018 survey.

The 2018 Nobel Prize in Economics was awarded to Paul Romer and William Nordhaus for their work on Growth Theory. In the Nobel Citation, Romer and Nordhaus are shown as climbing on shoulders of Robert Solow, the earlier laureate of 1987. Most (I would say all) economic policies that meet success are similar and PMJDY is no different as it rides on shoulders of previous financial inclusion policies.