Informal Economies

Pradhan Mantri Jan Dhan Yojana (PMJDY): Implications for Microfinance

Women holding their PMJDY account debit cards
New beneficiaries display their PMJDY accounts' Rupay debit cards. Photo: PTI
PMJDY has many useful and commendable elements. However, its low withdrawal limit prevents integration with microfinance forcing duplicate bank accounts and parallel systems.

PMJDY has many useful and commendable elements. However, its low withdrawal limit prevents integration with microfinance forcing duplicate bank accounts and parallel systems.

Financial inclusion aims to bring the poor into the larger financial system of the formal economy, bringing access to finance and making it easier to transact across distances.  Without the ability to buy and sell across distances, economies remain local, goods cannot find upmarket prices, and local producers miss out on economic opportunities.

The PMJDY scheme

Pradhan Mantri Jan Dhan Yojana (PMJDY) is one element in the larger financial inclusion agenda.

Launched in August 2014, PMJDY is an ambitious, well-funded program designed to bring India’s poorest citizens into the country’s financial folds. The bank accounts provided through PMJDY require no minimum balance to remain active and include debit cards as well overdraft protection and mobile banking options. Account holders can also access credit, pensions and government aid disbursements.

15 million accounts were opened on the day PMJDY was launched. As of September 2017, more than 300 million accounts had been opened. Of these, 67 percent are estimated to be opened by previously unbanked clients and 72 percent are active accounts. Perhaps more importantly, activity is increasing over time. This trend is not mirrored in non-PMJDY accounts, indicating a true success story in this public sector scheme. PMJDY accounts are also seeing larger balances and larger transactions. Though benefits transfers accounts for some of this usage – 22.6 percent of PMJDY transfers –  it does not explain the entire phenomenon. Users are moving from the informal to the formal market. This process was perhaps expedited by India’s demonetization program, which preceded a doubling of PMJDY balance holdings.

PMJDY and Microfinance: Unable to integrate

One challenge PMJDY needs to address, however, is the issue of account duplication. Not all PMJDY users were without bank accounts before taking advantage of the program, which may have inflated  the program’s statistics of success. Indeed, all of Madura’s borrowers, who are rural poor targeted by the scheme, have alternate bank accounts – not necessarily by choice.

In terms of the program’s integration with microfinance, the usefulness of PMJDY accounts as a loan dispersal mechanism has been limited by its usage terms. Account holders are only able to withdraw Rs 10,000 each month. Like most microfinance lenders, our minimum loan size exceeds Rs. 10,000, meaning that our rural clients would need to travel twice over two months to a bank branch in order to collect these funds rather than have access to them all at once for investment.  Consequently, Madura borrowers (and borrowers from other MFIs) must have a second no-frills bank account to receive their loans.  The withdrawal limit also has implications beyond microfinance. In case of any medical or urgent expenses of more than 10,000, an individual cannot depend on the PMJDY account even if their account balance is in excess of 10,000. Given that account balances among these populations are small and therefore relatively more expensive to service, it makes little sense for borrowers to have to maintain multiple bank accounts and results in an overall inefficiency of the financial system.

Indirect benefits of PMJDY for Microfinance

Despite this limitation, microfinance does benefit from PMJDY success indirectly.  The financial literacy that accompanies PMJDY has positive spillover effects in the microfinance sector. As people become more knowledgeable of the tools available to them and begin applying positive financial habits such as budgeting and conscious savings, they become better able to take advantage of microfinance opportunities. As one study reports, “Overall, the data indicate that the unbanked learn by doing, and increase usage of accounts for transactions, liquidity management, and increasingly, balance accumulation.” In other words, PMJDY is good news for the future of microfinance.

Accompanying financial inclusion is an increase in credit and loans. As previously unbanked people prove themselves capable of financial literacy and competency, the formal credit industry is more likely to provide inclusive loans to those previously left out of the system. PMJDY could well be paving the road for future microfinance clients.

Better integration of PMJDY with Microfinance and other financial inclusion elements

Removing account withdrawal limitations and further integrating the PMJDY program with other schemes would go a long way toward bolstering the program’s benefits. As recently noted by Microsave, PMJDY is not well integrated with other welfare schemes. Part of this also has to do with its stringent withdrawal limitations. If welfare schemes and microfinance organizations cannot incorporate these accounts, the financial inclusion agenda is compromised by inefficiency. If we work together, microfinance and PMJDY can help each other to succeed.

The future of financial inclusion depends on dialogue and communications across industries and government schemes. All the major players need to be included. Only by working together can we create a brighter financial future for India that is inclusive of all peoples.

About the author

Shirralan Thirumeni

Shirralan Thirumeni

Shirralan is part of the process excellence team at Madura Microfinance
Limited. He is responsible for building applications for meeting the
business needs.
He holds a PGDM from IFMR, Chennai.

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