https://orcid.org/0000-0001-6292-1161
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Abstract
The paper focuses on supply side funding gaps inherent to financial inclusion schemes that threaten their efficacy and sustainability. We model the double bind problem that providers of banking services for the poor face as they struggle to achieve economies of scale to drive down average fixed financial infrastructure costs, while average account balances are low due to insufficient income. This model is applied to the Prime Minister Jan-Dhan Yojna (PMJDY) financial inclusion scheme in India, that was started in 2014. An innovative approach based on cross sectional bank level data from 2014 till 2017 is used to quantify the incentives and costs involved in targeting unbanked households. This gives a monetary estimate of the economic shortfalls or surpluses for participating banks, measured as bank balances relative to outlay costs and subsidies per PMJDY beneficiary. A lack of economic viability of PMJDY accounts is found in the majority of Indian public sector banks, a matter which is problematic in view of their extant financial fragility. We provide evidence for cross subsidization of rural bank accounts by urban accounts. We use fixed effects panel methods to determine what cost public sector banks bear and also quantify the extent to which account ineffectiveness is ameliorated by exogenous factors, primarily the tie up of PMJDY accounts with bio-metric Aadhar cards and electronic direct benefit transfer of G2P payments.
Acknowledgement
We thank two anonymous referees and the journal editor for their incisive feedback, which has improved the paper immensely. We are also grateful for comments and discussions with participants at the August 2018 IIMB XII CCP Conference in New Delhi, Seminar at IIM Kozhikode in September 2018 and the SOAS Financial Inclusion and FinTech Conference in March 2019. The funding from UGC-UKIERI ((IND/CONT/G/16-17/67)for the study on ‘Mainstreaming of Financial Inclusion in India' has supported the research on this paper.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
2 In 2014, the World Bank reports that the number of unbanked to be around 2 billion (see Global Findex Citation2019). However, around this period only 54 percent of adults in developing countries report having a bank account, in contrast to 94 percent in the Organisation for Economic Co-Operation and Development (OECD) countries (Demirgüç-Kunt et al. Citation2015)
5 Raghuram Rajan, the Governor of the Reserve Bank of India in 2014, is reported to have highlighted this problem of burdening public sector banks with the costs of the PMJDY programme (see, Misra and Tankha Citation2018).
6 Due to top down pressures, in a bid to report a reduction of zero balance accounts, a number of public sector bank officials have said to have seeded these PMJDY accounts with INR1. https://indianexpress.com/article/business/banking-and-finance/how-banks-cut-their-zero-balance-jan-dhan-accounts-one-rupee-trick-3028190/
7 Humphrey (Citation1990) lists the cases when the average cost curve approach gives good evidence for economies of scale in the chosen bank output. He says this has been found to feature more prominently for fixed/operational costs rather than when interest rate returns and costs are also included.
8 This can be verified by taking first order conditions for with respect to #Totit in (8) and on setting it equal to zero.
9 Note these are empirically determined numbers for 2014 with bank A data, in Figure 1, being that of Oriental Bank of Commerce and bank B data corresponds to that for Canara Bank.
10 This is a figure given by T M Bhasin, Chairman of Indian Banks Association (IBA) and Chairman and Managing Director, Indian Bank in 2015. https://www.business-standard.com/article/finance/banks-spent-around-rs-2-000-crore-for-opening-accounts-under-jan-dhan-yojana-iba-chairman-115020300116_1.html#:~:text=The%20Pradhan%20Mantri%20Jan%2DDhan,and%20managing%20director%2C%20Indian%20Bank.
11 “Public-sector banks are having to incur the charges of opening and maintaining an account -- which does not have the cash flows to justify that expense. While they might have to do this as part of their social-sector-priority-sector initiatives, the same compulsions do not govern private banks,” said Vishwas Utagi, vice-president, AIBEA. https://timesofindia.indiatimes.com/business/india-business/public-sector-banks-bear-brunt-of-jan-dhan-union/articleshow/63602226.cms
13 It is interesting to note that Bakshi, Sharma, and Wright (Citation2015) make the case that this subsidy is insufficient to incentivize bank mitras to process DBTs to rural accounts and hence “could potentially derail the entire financial inclusion effort.”
14 ‘The cost of issuance of RuPay cards alone is about Rs 100; all operational costs put together it comes to Rs 200 per year per account' – as noted by Harvinder Singh, general secretary, All India Bank Officers' Confederation, https://timesofindia.indiatimes.com/business/india-business/public-sector-banks-bear-brunt-of-jan-dhan-union/articleshow/63602226.cms
15 Based on the Global Findex Survey as no more than 1% of PMJDY account holders or 3.1 million beneficiaries–use overdraft facilities available to them, we do not incorporate this as an explicit cost to banks in their PMJDY roll out till 2017.
16 This is about $14 per month ($0.46 per day) in rural areas and $17 per month ($0.56 per day) in urban areas, https://en.wikipedia.org/wiki/Poverty_in_India.
17 At present the cost for RuPay card is INR 0.40 per transaction at an ATM and INR 0. 90 at the POS. This is about one third less than the transaction cost charged by Visa, Mastercard.
18 The annual bank financial accounts were obtained from https://www.moneycontrol.com/annual-report/allahabadbank/AB15/2014
19 An example of the shortfall calculation is given here for the public sector bank Allahabad Bank for 2014, using the Table 4 Panel Regression Column 3 OLS coefficients and equation (12) with unit costs/subsidy and average balance given in INR: AvBalit – Estimated Breakeven Average Balance = AvBalit – |+ 18.5 x AvSubRit - 137.52x AvBMCit – 42.05 x AvUCit - 9.631x AvRuCIt | = 228.22 - |+ 18.5 x 1.027 - 137.52x 0.75 – 42.05 x 43.45 - 9.631x 190.82| = - INR 3520.87. Note Table 2 reports the average values for the subsidy and infrastructure costs for public sector banks in 2014 to be INR 4.91 (AvSubRt), INR 36.46 (AvBMCt), INR61.38 (AvUCt) and INR 182.57 (AvRuCt).
20 The per PMJDY estimated shortfall for each of the public sector banks that registered negative positions in 2015 when summed up gave INR80982 (for 24 banks) in 2014; INR 61427.9 (for 23 banks) in 2015; INR25648.2 (16 banks) in 2016; INR 28984 (19 banks) in 2017. The averages per PMJDY account for public sector banks suffering shortfalls are given in row 1 of Table 5.
21 Average surplus balance bank accounts are truncated at 0.