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Why Financial Literacy Is Must For Financial Inclusion

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Of all the announcements made by Prime Minister Narendra Modi on Friday (15 August), "Pradhan Mantri Jan Chan Yojana", the financial inclusion plan, meant to ensure bank accounts for all 266.7 million households in the country in the next four years is perhaps the least surprising and the most ambitious.

The least surprising because the coming of this announcement was known from July 10, the day when Finance Minister Arun Jaitley made his maiden budget speech. The most ambitious because it is not the first time that a government at the Centre is trying to achieve this objective. The programme itself is a modified version of an existing scheme introduced by the previous government without much success.

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The scheme envisages the opening of online bank accounts with debit card facility for every poor citizen and an insurance cover of Rs 100,000 per family.

"We want to integrate the poorest of the poor with bank accounts...", Modi said in his Independence Day address on Friday.

Going by the broad contours of the scheme spelled out by Jaitley in his budget speech, the scheme will "particularly focus to empower the weaker sections of the society, including women, small and marginal farmers and labourers". Two bank accounts per household will be opened for every household by August 2018.

The National Financial Inclusion Mission is thus be time bound and target oriented.

The enormousness of the task at hand will become evident that despite all the efforts, 40 per cent of the country's households are still out of the formal banking system. While 75 million households do not have a bank account at all, a much bigger number of households, who were introduced to the banking system through no-frills accounts by the previous government are inactive or dormant accounts. Further, every reason for the low take off earlier financial inclusion plans remain valid even today.

The "Jan Dhan Yojana", will thus have multiple, major challenges to overcome. While the first one will be to bring in more households into the banking system, the second is to make bank transaction meaningful for the millions of poor people who have a hand to mouth existence. The third is to make the whole exercise meaningful for the banking institutions.

Modi will have to have the twin focus of financial inclusion and financial literacy. And a financial literacy that goes beyond creating awareness, but to make such transactions meaningful for the poor.

From the government side, a two-phase financial inclusion scheme to open accounts for 75 million households with an overdraft facility of Rs 5,000 and accident insurance of Rs 100,000 per family, has already been approved. The debit cards are to be powered by Ru Pay, the government's own version of Master and Visa credit card platforms. It has also asked the banks to drive the programme through business correspondents (BC), the last link between the account holder and the bank in the rural areas. The banks will have to ensure a minimum monthly remuneration of Rs 5,000 for these BCs to make the job sustainable.

As the next step, the government will have to pump in money to these accounts to make these services sustainable for the banks. The money should also be sufficient enough for the account holder to have interest in operating it.

The only way to do all this is by pursuing the direct cash transfer model for all welfare schemes and entitlements. The government will have to address the different kinds of operational problems associated with that too.

Assuming that Modi can streamline a steady flow of funds, banking institutions can reach out to every nook and corner of the country, and India's power and telecom infrastructure can provide the much needed backup for the technology push that is needed, and if a plethora of ifs and buts can be satisfied, Jan Chan Yojana will achieve its goal.

It could be a distant dream at the moment. But Prime Minister Modi is himself aware of the need to dream big. Let's hope actions will follow.