Wiping Every Tear from Every Eye: The Jan Dhan Yojana, Aadhaar and Mobile Numbers Provide the Solution JAM

Both the Central and State Government subsidize the price of wide range of products with the expressed intention of making them affordable for the poor. Rice, wheat, pulses, sugar kerosene, LPG, naptha, water, electricity, diesel, fertilizer, iron ore, railways- these are just a few of the commodities and services that the Government subsidises.

There is always a question over how much of these benefits actually reach the poor.

Ø Price subsidies are often regressive: It means that a rich household benefits more from the subsidy than a poor household.

·Price subsidies in electricity can only benefit the (relatively wealthy) 67.2 percent of household that are electrified.
·The poorest 50 percent of household consume only 25 percent of LPG.
·Majority (51 percent) of subsidized kerosene is consumed by the non-poor and almost 15 percent of subsidized kerosene is actually consumed by relatively well-off (the richest 40 percent).
·A large fraction of price subsidies allocated to water utilities- upto 85 percent- are spent on subsidizing private taps when 60 percent of poor household get their water from public taps.
·Controlled rail prices actually provide more benefits for wealthy household than poor households.

Ø Price subsidies can distort markets in ways that ultimately hurt the poor.

·This contributes to food price inflation that disproportionately hurts poor household who tend to have uncertain income streams and lack the assets to weather economic shocks.
·High MSPs and price subsidies for water together lead to water-intensive cultivation that causes water tables to drop, which hurts farmers, especially those without irrigation.
·In order to cross subsidise low passenger fares, freight tariffs in railways are among the highest in the world. This reduces the competitiveness of Indian manufacturing and raises the cost of manufactured goods that all households, including the poor, consume.
·Benefits from fertilizer price subsidies probably accrue to the fertilizer manufacturer and richer farmer, not the intended beneficiary, the farmer.

Ø Leakages seriously undermine the effectiveness of product subsidies.
·Recent academic research on the subject of PDS leakages (kerosene, rice, wheat etc.) has found that leakages are falling through still unacceptably high.

THE POSSIBILITIES OFFERED BY CASH TRANSFERS

Recent experimental evidence documents that unconditional cash transfers- if targeted well- can boost household consumption and asset ownership, reduce food security problems for the ultra-poor and opportunities for leakage.

THE JAM NUMBER TRINITY SOLUTION

The JAM Number Trinity- Jan Dhan Yojana, Aadhaar and Mobile numbers- allows the state to offer this support to poor households in a targeted and less distortive way.

·As of December 2013 over 720 million citizens had been allocated an Aadhaar card. By December 2015 the total number of Aadhaar enrolments in the country is expected to exceed 1 billion. Linking the Aadhaar Number to an active bank account is key to implementing income transfers.
·With the introduction of Jan Dhan Yojana, the number of bank accounts is expected to increase further and offering greater opportunities to target and transfer financial resources to the poor.

Two alternative financial delivery mechanisms below:

Ø Mobile Money

·With over 900 million cell phone users and close to 600 million unique users, mobile money offers a complementary mechanism of delivering direct benefits to a large proportion of the population. And this number is increasing at a rate of 2.82 million per month.
·Aadhaar registrations include the mobile numbers of a customer, the operational bottlenecks required to connect mobile numbers with unique identification codes is also small.

Ø Post Offices

·India has the largest Postal Network in the world with over 1,55,015 Post Offices of which (89.76 percent) are in the rural areas.
·Similar to the mobile money framework, the Post Office can seamlessly fit into the Aadhaar linked benefits-transfer architecture by applying for an IFSC code which will allow post offices to start seeding Aadhaar linked accounts.

Converting all subsidies into direct benefit transfers is therefore a laudable goal of government policy. Even as it focuses on second generation and third generation reforms in factor markets, India will then be able to complete the basic first generation of economic reforms.

INDRADHANUSH -PLAN FOR REVAMP OF PUBLIC SECTOR BANKS

Comprised of seven alphabets- ABCDEFG


A) Appointments:
The Government decided to separate the post of Chairman and Managing Director by
prescribing that in the subsequent vacancies to be filled up the CEO will get the designation
of MD & CEO and there would be another person who would be appointed as non-Executive
Chairman of PSBs. This approach is based on global best practices and as per the guidelines
in the Companies Act to ensure appropriate checks and balances. The selection process for
both these positions has been transparent and meritocratic. The entire process of selection for
MD & CEO was revamped. Private sector candidates were also allowed to apply for the
position of MD & CEO of the five top banks i.e. Punjab National Bank, Bank of Baroda,
Bank of India, IDBI Bank and Canara Bank. Three stage screening was done for the MD’s
position culminating into final interview by three different panels
B) Bank Board Bureau:
The announcement of the Bank Board Bureau (BBB) was made by Hon’ble Finance
Minister in his Budget Speech for the year 2015-16. The BBB will be a body of eminent
professionals and officials, which will replace the Appointments Board for appointment of
Whole-time Directors as well as non-Executive Chairman of PSBs. They will also constantly
engage with the Board of Directors of all the PSBs to formulate appropriate strategies for
their growth and development. The structure of the BBB is going to be as follows; the BBB
will comprise of a Chairman and six more members of which three will be officials and three
experts (of which two would necessarily be from the banking sector). The Search Committee
for members of the BBB would comprise of the Governor, RBI and Secretary (FS) and
Secretary (DoPT) as members. The BBB would broadly follow the selection methodology as
approved in relevant ACC guidelines. 
C) Capitalization:
As of now, the PSBs are adequately capitalized and meeting all the Basel III and RBI
norms. However, the Government of India wants to adequately capitalize all the banks to
keep a safe buffer over and above the minimum norms of Basel III. We have, therefore, 
estimated how much capital will be required this year and in the next three years till FY 2019.
If we exclude the internal profit generation which is going to be available to PSBs (based on
the estimate of average profit of the last three years), the capital requirement of extra capital
for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore. This estimate
is based on credit growth rate of 12% for the current year and 12 to 15% for the next three
years depending on the size of the bank and their growth ability. We are also presuming that
the emphasis on PSBs financing will reduce over the years by development of vibrant
corporate debt market and by greater participation of Private Sector Banks.
D) a) De-stressing PSBs
The infrastructure sector and core sector have been the major recipient of PSBs’ funding
during the past decades. But due to several factors, projects are increasingly stalled/stressed
thus leading to NPA burden on banks. In a recent review, problems causing stress in the
power, steel and road sectors were examined. It was observed that the major reasons
affecting these projects were delay in obtaining permits / approvals from various
governmental and regulatory agencies, and land acquisition, delaying Commercial Operation
Date (COD); lack of availability of fuel, both coal and gas; cancellation of coal blocks;
closure of Iron Ore mines affecting project viability; lack of transmission capacity; limited
off-take of power by Discoms given their reducing purchasing capacity; funding gap faced by
limited capacity of promoters to raise additional equity and reluctance on part of banks to
increase their exposure given the high leverage ratio; inability of banks to restructure projects
even when found viable due to regulatory constraints. In case of steel sector the prevailing
market conditions, viz. global over-capacity coupled with reduction in demand led to
substantial reduction in global prices, and softening in domestic prices added to the woes
E) Empowerment:
The Government has issued a circular that there will be no interference from Government
and Banks are encouraged to take their decision independently keeping the commercial
interest of the organisation in mind. A cleaner distinction between interference and
intervention has been made. With autonomy comes accountability, accordingly Banks have
been asked to build robust Grievances Redressal Mechanism for customers as well as staff so
that concerns of the affected are addressed effectively in time bound manner.
The Government intends to provide greater flexibility in hiring manpower to Banks. The
Government is committed to provide required professionals as NoDs to the Board so that
well-informed and well-discussed decisions are taken
F) Framework of Accountability:
(a) The present system for the measurement of bank’s performance was a system called SoI –
Statement of Intent. Based on certain criteria decided by Ministry of Finance, the banks used
to come up with their annual target figures which was discussed between the Ministry and
banks and finalized. The entire exercise took very long and sometimes the targets for banks
used to be finalized only towards the end of the year which is not a desirable thing to do. 
G) Governance Reforms:
The process of governance reforms started with “Gyan Sangam” - a conclave of PSBs
and FIs organized at the beginning of 2015 in Pune which was attended by all stake-holders
including Prime Minister, Finance Minister, MoS (Finance), Governor, RBI and CMDs of all
PSBs and FIs. There was focus group discussion on six different topics which resulted in
specific decisions on optimizing capital, digitizing processes, strengthening risk management,
improving managerial performance and financial inclusion. The decision to set up a Bank
Board Bureau which was subsequently announced in the Budget Speech of Hon’ble Finance
Minister, came out of the recommendations of Gyan Sangam. Also, at this conclave, Hon’ble
Prime Minister made a significant promise to the bankers that there would be no interference
from any Government functionary in the matter of their commercial decisions. 

Jana Dhan Yojana

Background - Only 59% of Indian have bank accounts

Components:

Each household will have a banking outlet within 5km
Each household will have at least one bank account along with INR 100,000 accident cover. Households will also be provided with Rupay debit card.
Financial literacy programmes to make public aware of benefits of saving and investing money properly.
Credit guarantee fund- to cover losses in overdrafts.
Account holders can buy micro insurance products
Scheme will be leveraged for DBT 

Positives - Aid financial inclusion + Boost household savings rates + DBT can reduce corruption/leakage + Increase insurance penetration + protection from predatory lenders. Financial literacy programmes will enable public to make more informed decisions. 

# Negatives

To get large insurance or overdraft facility, same person might open multiple accounts in multiple banks- one with Aadhar card, one with PAN card, one with voters card (Banks should establish a single information sharing system to weed out such multiple accounts)
It could be used for money laundering and hawala operations
Jan Dhan gives free accident insurance cover worth Rs.1 lakh but RuPay debit card must be used atleast once every 45 days. This is not be possible for poor families in remote tribal areas. So, they’ll lose the benefit due to inactivity.
Jana Dhan relies on BCs - RBI has recently highlighted several problems with this model. 
3/4th of accounts have no 0 deposit

# Maintaining momentum of Jana Dhan
First, it is crucial to structure incentives so that all those involved in implementing the PMJDY, right down the chain of command, are motivated to achieve universal financial inclusion.
Second, it is essential to provide financial education — and the right kind — to recipients of the new programme. Vast numbers of India’s unbanked live in rural areas, are financially and functionally illiterate, and have little experience with technology.
Third, in rolling out its national plan, the government must anticipate technical breakdowns.
India should explore and evaluate the best ways to utilise mobile phone service providers to grant users access to payments and account information.

Parliament’s Role in Financial Oversight

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Parliament’s Role in Financial Oversight