How ‘priority sector’ status can rev up Jan Dhan banking

Banking for all

The Pradhan Mantri Jan Dhan Yojana (PMJDY) stands as one of the monumental achievements in the country’s drive for financial inclusion. The Prime Minister has drawn attention to its success. The Finance Minister has lauded the efforts of banks in making this mission possible. The Reserve Bank of India Governor emphasises the progress achieved under the scheme.

When PMJDY was launched in August 2014, the expectation was that many from the marginalised sections of society would at least open “zero balance” accounts. In the early days of the scheme, the long queues of PMJDY applicants outside bank branches reflected the importance this ‘bank entry proclamation’ held for millions of Indians, especially in rural villages and urban chawls.

As of today, over 53 crore PMJDY accounts have been opened by previously unbanked individuals, ushering them into the formal financial system. Notably, 30 crore of these accounts belong to women, marking a significant stride towards gender-inclusive banking.

These newly banked individuals have, on average, deposited ₹4,200 into their savings account, which currently aggregates to ₹2.27 lakh crore. The government provides each Jan Dhan account holder an accident insurance cover of ₹2 lakh.

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Missing in action

However, a glaring disconnect mars the success of this financial inclusion initiative — the negligible participation of private sector banks. Despite reaping the benefits of governance, law and order, internal security, and regulatory support, private banks have largely distanced themselves from the government’s flagship programme. Data shows that public sector banks hold 41.53 crore, or 96 per cent, of Jan Dhan accounts, as against 9.91 crore in regional rural banks and 1.64 crore in private banks (as on August 28, 2024). 

This imbalance paints a broader picture of how private capital behaves when left unregulated. Whether it’s the nearly 100-year-old Federal Bank or newer players like Kotak Mahindra, private banks have consistently shown that, without mandates, they prefer to stay clear of social or development banking obligations. Their primary focus, as dictated by CEOs, remains aligned with share prices, employee stock options, and bonuses.

This brings us to the question of regulation. The RBI mandates that 40 per cent of all bank loans should go to the priority sector, with agriculture having a 45 per cent share of this. Penalties, such as low-interest contributions to the Rural Infrastructure Development Fund administered by NABARD, exist to enforce this

Regulated inclusivity

For financial inclusion, opening accounts for the unbanked is the first and most crucial step. The next step is extending appropriate credit. But when those on the fringes cannot even open basic accounts in private banks, how can we expect the lenders to extend livelihood credit to them?

So, how can we ensure that private banks become partners in social banking, rather than being mere cherry-pickers who turn to the system for bailouts when their operations falter? 

One solution could be to classify liability accounts as part of the priority sector, with due targets. It may be mandated that the basic financial inclusion (FI) accounts opened in each bank must be proportionate to its market share of deposits. Banks exceeding this threshold could trade PMJDY account certificates on platforms like e-Kuber, akin to the Priority Sector Lending Certificates (PSLC) system.

Only such regulatory mandates are likely to spur private banks to play a meaningful role in financial inclusion. The PMJDY experience has demonstrated that private banks cannot be relied upon to contribute to social goals without regulatory intervention, leaving the government to shoulder the entire responsibility.

As India stands on the threshold of becoming the world’s third-largest economy, it is imperative that the banking sector, including private banks, aligns with the country’s development goals. An “unsocial” banking culture, driven only by profits, is something the country can ill-afford.

(The writer is a commentator on banking and finance)