Financial Inclusion in India and Its Challenges
NABARD Survey on Rural Financial Inclusion
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NABARD, NAFIS Survey
Why in the News?
The National Bank for Agriculture and Rural Development (NABARD) has published findings from its second All India Rural Financial Inclusion Survey (NAFIS) 2021-22.
About the NAFIS 2021-22
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Key Highlights from NAFIS 2021-22:
| Details | |
| 1. Increase in Average Monthly Income | • Average monthly income increased by 57.6% from Rs. 8,059 in 2016-17 to Rs. 12,698 in 2021-22, indicating a nominal CAGR of 9.5%. • Agricultural households earned slightly more, with an average income of Rs. 13,661, compared to Rs. 11,438 for non-agricultural households. • Salaried employment was the largest income source for all households, accounting for approximately 37% of total income. • For agricultural households, cultivation was the main income source, contributing about one-third of their monthly earnings. • For non-agricultural households, government/private services contributed 57% of the total household income. |
| 2. Rise in Average Monthly Expenditure | • Average monthly expenditure increased from Rs. 6,646 in 2016-17 to Rs. 11,262 in 2021-22. • Agricultural households had higher expenditure at Rs. 11,710, compared to Rs. 10,675 for non-agricultural households. • In states like Goa and Jammu & Kashmir, monthly household expenditure exceeded Rs. 17,000. • Overall, agricultural households demonstrated both higher income and expenditure levels than non-agricultural households. |
| 3. Increase in Financial Savings | • Annual average financial savings rose to Rs. 13,209 in 2021-22 from Rs. 9,104 in 2016-17. • 66% of households reported saving money in 2021-22, up from 50.6% in 2016-17. • 71% of agricultural households reported savings, compared to 58% of non-agricultural households. • States with 70% or more households saving money include Uttarakhand (93%), Uttar Pradesh (84%), and Jharkhand (83%). • States with less than half of households reporting savings are Goa (29%), Kerala (35%), Mizoram (35%), Gujarat (37%), Maharashtra (40%), and Tripura (46%). |
| 4. Kisan Credit Card (KCC) Usage | • 44% of agricultural households possessed a valid Kisan Credit Card (KCC). • Among those with land holdings greater than 0.4 hectares or who had taken agricultural loans from banks in the past year, 77% had a valid KCC. |
| 5. Insurance Coverage | • Households with at least one member covered by any form of insurance increased from 25.5% in 2016-17 to 80.3% in 2021-22. • 80.3% means that four out of every five households had at least one insured member. • Agricultural households had higher insurance coverage than non-agricultural households by about 13 percentage points. • Vehicle insurance was the most prevalent, with 55% of households covered. • Life insurance coverage extended to 24% of households, with agricultural households showing slightly higher penetration (26%) compared to non-agricultural ones (20%). |
| 6. Pension Coverage | • Households with at least one member receiving any form of pension increased from 18.9% in 2016-17 to 23.5% in 2021-22. • Overall, 54% of households with at least one member over 60 years old reported receiving a pension. • Pensions included old age, family, retirement, or disability pensions, highlighting their importance in supporting elderly members of society. |
| 7. Financial Literacy | • Respondents demonstrating good financial literacy increased from 33.9% in 2016-17 to 51.3% in 2021-22, a rise of 17% points. • Individuals exhibiting sound financial behavior increased from 56.4% to 72.8% during the same period. • When assessed on financial knowledge, 58% of rural respondents and 66% of semi-urban respondents answered all questions correctly. |
Key aspects that contribute to Rural Empowerment
- The survey shows significant progress in rural financial inclusion since the first survey in 2016-17.
- Rural households have seen improvements in income, savings, insurance coverage, and financial literacy.
- Government schemes like Pradhan Mantri Kisan Samman Nidhi, MGNREGS, and PMAY-G have contributed to the improvement in the lives of rural people.
PYQ:[2015] Pradhan Mantri Jan-Dhan Yojana was launched by the Prime Minister of India Narendra Modi on 28 August 2014. What is the main objective of the scheme? (a) To provide housing loan to poor people at cheaper interest rates (b) To promote women’s Self Help Groups in backward areas (c) To promote financial inclusion in the country (d) To provide financial help to marginalised communities |
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Financial Inclusion in India and Its Challenges
Is it time for India to introduce a Universal Basic Income?
Note4Students
From UPSC perspective, the following things are important :
Mains level: Impact of automation on the Indian economy;
Why in the News?
The rise in jobless growth, driven by automation and AI, has led to growing inequality, prompting discussions on implementing Universal Basic Income (UBI) in many countries.
What does the ILO say on Inflation and unemployment in India?
- The ILO reports that 83% of the unemployed population in India are youth, due to the rapidly changing economy influenced by automation and AI.
- This trend has exacerbated income inequality, with a 1.6% drop in global labour income share between 2004 and 2024, significantly affecting developing nations like India.
- The report indicates that persistent inflation and geopolitical tensions have led to aggressive monetary policies, which could further strain the labor market.
- The ILO anticipates a slight increase in global unemployment in 2024, reflecting ongoing structural issues in labor markets.
What will be its implications on Indian growth and development?
- Social Implications: Falling living standards and weak productivity due to automation could lead to greater inequality, undermining social justice efforts in India.
- The ILO suggests that increasing unemployment and inflation could result in social unrest and political instability without effective social safety nets.
- Political Implications: It makes it difficult for the decision making and governance due to the drop in global labour income, prompting India to increase budget allocations for welfare programs.
- Economic Implications: The emphasis on generating employment in labor-intensive sectors is crucial. The government policies should prioritize job creation to counteract the effects of automation and ensure that growth benefits a broader segment of the population.
What are the safety nets for India?
- Cash Transfer Schemes: Programs targeting farmers and women, as well as cash transfers for unemployed youth, represent existing safety nets that provide some level of income support.
- Employment Guarantee Schemes: Initiatives like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) aim to provide employment and income security to rural households, although funding and implementation have faced challenges.
- Universal Basic Social Safety Nets: Experts suggest that rather than a full UBI, India should focus on enhancing existing social safety nets to ensure they are more universal and effective in addressing the needs of the unemployed and underemployed populations.
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Financial Inclusion in India and Its Challenges
[pib] 10 Years of Jan Dhan Scheme
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Pradhan Mantri Jan Dhan Yojana (PMJDY)
Why in the News?
PM Modi launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) on 28th August 2014. It has now completed a decade of successful implementation.
About PMJDY
| Details | |
| Objective | • Banking the Unbanked: Open basic savings bank deposit (BSBD) accounts with minimal paperwork, relaxed KYC, e-KYC, account opening in camp mode, zero balance & zero charges. • Securing the Unsecured: Issue Indigenous Debit cards with free accident insurance coverage of ₹2 lakh. • Funding the Unfunded: Provide micro-insurance, overdraft, micro-pension, and micro-credit facilities. |
| Initial Features | • Universal Access to Banking Services: Access through branches and BCs. • Basic Savings Bank Accounts: With an overdraft facility of up to ₹10,000 for every eligible adult. • Financial Literacy Program: Promote savings and credit usage. • Insurance: Accident cover up to ₹1 lakh and life cover of ₹30,000 for accounts opened between Aug 2014 to Jan 2015. • Pension Scheme: For the unorganized sector. • Creation of Credit Guarantee Fund. |
| Key Provisions | • Inter-operability: Through RuPay debit card or Aadhaar-enabled Payment System (AePS). • Fixed-point Business Correspondents. • Simplified KYC / e-KYC. |
| Extension and New Features (Post-2018) | • Focus Shift: From ‘Every Household’ to ‘Every Unbanked Adult’. • RuPay Card Insurance: Increased accidental insurance cover to ₹2 lakh for new accounts. • Overdraft Facilities Enhanced: Limit doubled from ₹5,000 to ₹10,000; up to ₹2,000 without conditions. • Increase in upper age limit for OD: From 60 to 65 years. |
| Eligibility for Other Programs | PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), and Atal Pension Yojana (APY). |
Successes of PMJDY
- Financial Inclusion: PMJDY is recognized as the largest financial inclusion initiative globally, with over 53 crore bank accounts opened as of August 2024.
- It has facilitated access to credit for individuals without a formal financial history, as evidenced by the rise in Mudra loan sanctions at a compounded annual rate of 9.8% from FY 2019 to FY 2024.
- Social Empowerment: 55.6% of Jan Dhan account holders are women, and 66.6% of accounts are in rural and semi-urban areas, demonstrating the program’s reach among marginalized communities.
- Deposit Growth: The total deposits in PMJDY accounts have reached Rs. 2.31 lakh crore, showing a 15-fold increase since August 2015.
- Digital Transaction Growth: Digital transactions under PMJDY have surged, with UPI financial transactions growing from 535 crore in FY 2018-19 to 13,113 crore in FY 2023-24.
- Effective DBT Mechanism: The Jan-Dhan Aadhaar Mobile (JAM) trinity has enabled a diversion-proof subsidy delivery mechanism, with subsidies and social benefits directly transferred into the bank accounts of the underprivileged.
- Savings and Financial Discipline: The average deposit in the PMJDY account has increased 4 times since August 2015, indicating improved saving habits among account holders.
PYQ:[2015] ‘Pradhan Mantri Jan-Dhan Yojana’ has been launched for (a) Providing housing loan to poor people at cheaper interest rates. (b) Promoting women’s Self-Help Groups in backward areas. (c) Promoting financial inclusion in the country. (d) Providing financial help to the marginalized communities. [2016] Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion. |
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Financial Inclusion in India and Its Challenges
India’s Fintech funding plummets amid global slowdown, shows report
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Fintech Sector
Mains level: Challenges and significance of the fintech sector,
Why in the news?
Despite achieving a significant milestone in H1 2024, the fintech sector has encountered notable funding difficulties.
What is the Fintech Sector?
- The fintech sector encompasses technologies and innovations that aim to compete with traditional financial methods in the delivery of financial services. This includes a wide range of applications like mobile banking, online payments, digital lending, and blockchain technology.
Present Report Insights
- Funding Decline: The Indian fintech sector recorded $795 million in funding in H1 2024, a decrease of 11% from H2 2023 and 59% from H1 2023.
- Global Ranking: Despite the decline, the Indian fintech ecosystem ranked among the top three globally funded sectors alongside the US and UK in H1 2024.
- Major Transactions: Only two funding rounds exceeded $100 million in 2024, with Perfios becoming the only unicorn. Bengaluru led the funding, followed by Mumbai and Pune.
- Segment Performance: Alternative Lending, RegTech, and BankingTech were the top-performing segments, with Alternative Lending securing $646 million, making up 81% of the total funding.
- Acquisitions and IPOs: There were six acquisitions and five IPOs in H1 2024, marking significant activity despite the overall funding challenges.
Significance of Fintech Sector
- Financial Inclusion: Fintech innovations enhance financial inclusion by providing access to financial services to unbanked and underbanked populations.
- Economic Growth: The sector contributes significantly to economic growth by fostering innovation, creating jobs, and boosting consumer spending.
- Efficiency and Transparency: Fintech solutions improve efficiency and transparency in financial transactions, reducing costs and fraud.
- Support for Startups: The sector offers numerous opportunities for startups, driving entrepreneurship and competition.
Challenges
- Data Security: Fintech companies must implement strong security measures to protect sensitive customer data from cyber-attacks and data breaches. For example, Acko, a leading Indian fintech startup, has faced issues with data breaches in the past, highlighting the importance of robust data security protocols in the industry.
- Regulatory Compliance: The fintech industry is highly regulated, requiring companies to stay updated on the latest government policies and ensure compliance to avoid penalties. For example, the Reserve Bank of India (RBI) has issued guidelines to protect consumers from predatory lending practices by digital lenders, underscoring the need for fintech firms to navigate the evolving regulatory landscape.
- Customer Acquisition and Retention: Attracting and retaining customers is critical for fintech firms. For example, BharatPe, a prominent Indian fintech company, has faced challenges in customer retention due to its focus on merchant acquisition.
- Funding and Investment: Securing adequate funding and investments remains a challenge for many fintech startups. For example, Paytm, one of India’s largest fintech companies, has faced scrutiny from investors due to its inability to achieve profitability
How India Can Improve Its Fintech Sector
- Supportive Regulatory Environment: Create a regulatory framework that encourages innovation while ensuring consumer protection and systemic stability, facilitating a balanced growth of the fintech ecosystem.
- Infrastructure Development: Invest in digital infrastructure, such as high-speed internet and mobile connectivity, to support the widespread adoption and efficient functioning of fintech applications across the country.
- Focus on Cybersecurity: Ensure robust cybersecurity measures to protect against fraud and cyber-attacks, building trust among users and maintaining the integrity of fintech services.
Steps taken by the government:
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Conclusion: Fintech companies in India face challenges including data security, regulatory compliance, customer acquisition, and securing investments. Addressing these ensures sustainable growth and trust in a competitive market environment.
Mains PYQ:
Q Has digital illiteracy, particularly in rural areas, coupled with a lack of Information and Communication Technology (ICT) accessibility hindered socio-economic development? Examine with justification. (UPSC IAS/2021)
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Financial Inclusion in India and Its Challenges
Interest rates on small savings schemes like PPF, SCSS, and NSC are under review by Modi 3.0 government
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Small Savings Schemes
Mains level: Impact of Stable Interest Rates on Small Savings Schemes
Why in the news?
The central government of India is set to announce the interest rates for various small savings schemes, including the Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), and Post Office Monthly Income Scheme (POMIS), for the July-September 2024 quarter by June 30, 2024.
Current Interest Rates and Expected Changes
- Public Provident Fund (PPF)
- Current Rate: 7.1%
- Expected Rate: Despite the benchmark 10-year bond yield averaging 7.02% from March to May 2024, which would suggest a rate of 7.27% according to the formula, experts believe the government will likely maintain the status quo.
- Reason: Factors such as controlled inflation, stable 10-year G-Sec yields, and historical precedence of the government not strictly following the recommended formula indicate a low probability of rate hikes.
2. Senior Citizen Savings Scheme (SCSS)
- Current Rate: 8.2%
- Expected Rate: Unlikely to see significant changes.
- Reason: With a spread of 100 basis points, the SCSS offers a substantial return, and experts predict the government will maintain existing rates to manage fiscal policies effectively.
3. Sukanya Samriddhi Yojana (SSY)
- Current Rate: 8.0%
- Expected Rate: Expected to remain stable.
- Reason: The SSY enjoys a spread of 75 basis points. Given the controlled inflation and fiscal policies, a rate hike is not anticipated.
Factors Influencing Interest Rates
- Benchmark Yields: The interest rates for small savings schemes are linked to the yields of 10-year government securities.
- Market Conditions: Prevailing market yields and inflation rates play a crucial role in determining these rates.
- Government Policy: The central government’s fiscal strategy and policies, such as those outlined in the Union Budget, impact decisions on interest rates.
Impact of Stable Interest Rates on Small Savings Schemes
- Investor Sentiment and Returns
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- PPF: Investors in PPF may feel disappointed due to the stagnation in interest rates despite a slight uptick in benchmark yields. However, PPF still offers tax-free returns under the Exempt-Exempt-Exempt (EEE) status, making it an attractive long-term investment.
- SCSS and SSY: Stability in interest rates ensures a predictable income stream for senior citizens and parents of girl children, maintaining their trust in these schemes.
- Government Fiscal Management: Maintaining the current interest rates helps the government manage its fiscal deficit more effectively. Higher rates would increase the interest burden on the government, especially for widely subscribed schemes like PPF.
- Inflation Control: Stable interest rates reflect the government’s confidence in managing inflation. By not increasing rates, the government signals that it sees inflation as under control, thus aiming to keep borrowing costs stable for both the government and the public.
- Market Stability: Consistent interest rates contribute to market stability. Predictable returns on small savings schemes help in the planning of household finances, ensuring steady savings and investments. This stability can also foster overall economic stability by maintaining consumer confidence.
Conclusion: Investors in PPF, SCSS, and SSY should prepare for the possibility that interest rates will remain unchanged for the July-September 2024 quarter. While the formula indicates room for an increase in PPF rates, historical trends and expert opinions suggest that the government may maintain the current rates to balance fiscal control and market stability.
Mains PYQ:
Q Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing the unbanked to the institutional fiancé fold. Do you agree with this for the financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion. (UPSC IAS/2016)
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Financial Inclusion in India and Its Challenges
India’s Fintech Landscape: Challenges and Recommendations
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Fintech and their regulations
Mains level: Need for regulating Fintechs
Introduction
- The Standing Committee on Communications and Information Technology recently highlighted concerns regarding the dominance of foreign-owned fintech apps in India’s digital payment ecosystem.
- While UPI commands a significant share of digital payments in terms of volume, its value share remains relatively low, raising questions about the distribution and control of digital payment platforms.
What are Fintech?
- Fintech Definition: Fintech, a fusion of “financial” and “technology,” denotes businesses leveraging technology to enhance or automate financial services.
- Types of Fintech Companies: They encompass payment solutions (e.g., Bharatpe), lending platforms (e.g., CRED), insurance providers (e.g., Digit Insurance), investment platforms (e.g., Zerodha), and regulatory technology firms (e.g., Razorpay).
Regulatory Framework in India
- Regulatory Landscape: While direct RBI intervention in regulating fintech companies remains limited, initiatives like the Fin-Tech Regulatory Sandbox and Payment System Operators license aim to embrace and regulate aspects of the fintech sector.
- Future Regulatory Outlook: The RBI is developing a regulatory framework to support orderly growth in digital lending, emphasizing that lending activities should be conducted only by entities regulated by the central bank or under other applicable laws.
Why discuss Fintech?
- India is amongst the fastest growing Fintech markets in the world. Indian FinTech industry’s market size is $50 Bn in 2021 and is estimated at ~$150 Bn by 2025.
- The Indian Fintech industry’s total addressable market is estimated to be $1.3 Tn by 2025 and Assets Under Management & Revenue to be $1 Tn and $ 200 Bn by 2030, respectively
Analysis of Existing Ecosystem
- Regulatory Oversight: The Committee stresses the need for effective regulation of digital payment apps, noting the rising trend of digital transactions in India. It suggests that regulatory bodies like RBI and NPCI would find it more feasible to regulate local apps compared to foreign entities.
- Dominance of Foreign Fintech: Foreign-owned fintech companies, such as PhonePe and Google Pay, dominate the Indian market, commanding significant market shares in terms of transaction volume. In contrast, NPCI’s BHIM UPI holds a minimal market share.
- Regulatory Measures: The NPCI previously imposed a 30% volume cap on transactions facilitated through UPI by third-party apps to maintain market equilibrium and address risks. Compliance timelines were extended to December 2024 to facilitate market growth.
Concerns about Fraud
- Money Laundering: The Committee observed instances of fintech platforms being used for money laundering, citing examples like the Abu Dhabi-based app, Pyppl, administered by Chinese investment scamsters. This poses challenges for law enforcement agencies in tracking illegal money trails.
- Fraud Trends: Despite the rise in digital transactions, the fraud to sales ratio has remained relatively low. However, concerns persist regarding UPI frauds affecting a small percentage of users.
Impact on the Ecosystem
- Advantages of Local Players: Local fintech players possess a natural advantage in understanding customer needs and the broader market infrastructure. Foreign fintechs, on the other hand, bring in expertise in new technologies and global connectivity.
- Revenue Growth: McKinsey’s Global Payments Report suggests that instant payments, including UPI, may contribute less than 10% of future revenue growth due to minimal transaction fees. However, the shift towards digital payments enhances security and access to commerce channels, offsetting the costs associated with managing cash transactions.
Conclusion
- Balancing the dominance of foreign-owned fintech platforms with the promotion of local players is essential for the sustainable growth of India’s digital payment ecosystem.
- Effective regulation, along with efforts to combat fraud and promote financial inclusion, will be crucial in shaping the future trajectory of digital payments in the country.
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Financial Inclusion in India and Its Challenges
Surge in Farm Loan Disbursals
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Kisan Credit Card (KCC) Scheme
Mains level: Farm Loan
Introduction
- In the first nine months of the current fiscal year, farm loan disbursals have exceeded 90 percent of the Budget estimate, prompting expectations of a significant hike in the Interim Budget for the next fiscal year (2024-25).
- Finance Minister had set a target of ₹20 lakh crore for agriculture credit during the previous fiscal year (2023-24).
Budget Promises and Performance
- Credit Target Increase: Finance Minister Sitharaman had announced an agriculture credit target of ₹20 lakh crore for FY 2023-24. The current disbursement data indicates that this target is likely to be exceeded.
- Sectoral Focus: The Ministry reported that credit disbursed to the Animal Husbandry and Fisheries sector in FY 2023-24 reached ₹1,91,412 crore, constituting 65 percent of the ₹2.93 lakh crore target.
- Working Capital and Term Loans: Disbursements included over ₹77,000 crore as working capital and over ₹1.13 lakh crore as term loans.
Kisan Credit Card (KCC) Scheme Impact
- Significant Growth: Agricultural credit has witnessed substantial growth from ₹7.3 lakh crore in FY 2013-14 to ₹21.55 lakh crore in FY 2022-23, driven by the success of the KCC scheme.
- Operative KCC Accounts: The KCC scheme, facilitating timely and hassle-free credit, boasts over 7.36 crore operative accounts as of the end of 2023.
- Interest Subvention: Concessional interest rates, with a 7 percent lending rate and a 1.5 percent per annum interest subvention, were offered for short-term crop and allied activity loans up to ₹3 lakh through KCC.
About Kisan Credit Card (KCC) Scheme
| Details | |
| Objective | To provide timely and flexible credit support to farmers for various agricultural and related needs. |
| Launch | Introduced in 1998 to issue KCC to farmers, facilitating the purchase of agricultural inputs and cash withdrawals for production needs. |
| Credit Support |
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| Implementing Agencies | Commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks, and Cooperatives. |
| Eligible Farmers |
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| Maximum Permissible Limit (MPL) | The short-term loan limit for the 5th year, plus the estimated long-term loan requirement, determines the KCC limit. |
Regulatory Framework and Initiatives
- RBI Mandate: RBI mandates a priority sector lending target for banks, with a specific allocation of 18 percent for agriculture and a 10 percent sub-target for Small and Marginal Farmers (SMFs) for FY 2023-24.
- Prompt Repayment Incentive (PRI): An additional 3 percent PRI is provided for prompt and timely repayment, effectively reducing the interest rate to 4 percent per annum.
- Collateral-Free Agriculture Loans: RBI is set to raise the limit for collateral-free agriculture loans to ₹1.6 lakh from ₹1 lakh, aiming to enhance the coverage of small and marginal farmers.
- Streamlined Lending Practices: Banks have streamlined lending by eliminating ‘no dues’ certificates for small loans up to ₹50,000 and accepting alternative documentation or affidavits for loans to specific categories of farmers.
Financial Inclusion and NABARD Initiatives
- Joint Liability Groups (JLGs): NABARD’s creation of ‘Joint Liability Groups’ has facilitated lending without collateral to tenant/landless farmers and non-farm workers, fostering trust between banks and JLG members.
- JLGs Performance: By March 31, 2023, a total of 257.9 lakh JLGs had been formed and linked to credit, contributing to the broader financial inclusion agenda.
Conclusion
- The surge in farm loan disbursals indicates the success of various government initiatives, particularly the KCC scheme, in promoting financial inclusion and supporting the agricultural sector.
- The likely increase in the agriculture credit target in the upcoming Interim Budget underscores the continued commitment to rural financing and development.
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Financial Inclusion in India and Its Challenges
Progress track: PM Jan Dhan Yojana’s Milestones
Note4Students
From UPSC perspective, the following things are important :
Prelims level: PM Jan Dhan Yojana
Mains level: Financial Inclusion
Central Idea
- As the PM Jan Dhan Yojana (PMJDY) completes 9 years, its remarkable journey is marked by over 50 crore bank accounts and deposits exceeding ₹2 lakh crore.
- The scheme’s success lies in its commitment to financial inclusion, creating avenues for underprivileged segments to access banking services and government schemes.
What is PM Jan Dhan Yojana (PMJDY)?
- The PMJDY is a financial inclusion program launched by the Indian government in 2014.
- It is National Mission for Financial Inclusion to ensure access to financial services, namely, a basic savings & deposit accounts, remittance, credit, insurance, pension in an affordable manner.
- Under the scheme, a basic savings bank deposit (BSBD) account can be opened in any bank branch or Business Correspondent (Bank Mitra) outlet, by persons not having any other account.
Benefits under PMJDY
- One basic savings bank account is opened for unbanked person.
- There is no requirement to maintain any minimum balance in PMJDY accounts.
- Interest is earned on the deposit in PMJDY accounts.
- Rupay Debit card is provided to the account holder.
- Accident Insurance Cover of Rs.1 lakh (enhanced to Rs. 2 lakh to new PMJDY accounts opened after 28.8.2018) is available with RuPay card issued to the PMJDY account holders.
- An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available.
Is PMJDY a success?
- Dormancy of accounts: The PMJDY scheme has led to an increase in the number of bank accounts in rural areas. The percentage of zero-balance accounts has significantly decreased from 58% in March 2015 to a mere 8%, indicating a more active engagement with banking services.
- Low or no transactions: Insurance coverage for the account holder is linked to their transaction history, and many accounts remain frozen due to lack of transactions, taking several weeks or months to reactivate.
- False promise of overdraft: The promised overdraft facility of Rs 5000 for new account holders has not been provided as promised, leading to scepticism about the scheme’s success.
- Payments bottleneck: The lack of proper connectivity, electricity, internet, and ATM facilities in rural areas has hindered the activation of RuPay cards and PIN numbers, which should have been considered before implementing such a large-scale program.
Future prospects
- Voluntary Participation: The government aims to persuade PMJDY account holders to opt for voluntary micro-insurance schemes like PMJJBY and Pradhan Mantri Suraksha Bima Yojana.
- Persuasion over Compulsion: The focus is on financial literacy campaigns, special drives, and awareness programs conducted by banks to help account holders make informed choices.
- Multi-Level Coordination: Collaboration with line ministries, including Anganwadi and Asha workers, enhances awareness campaigns and ensures wider coverage.
- Leveraging Databases: Utilization of databases like the E-Shram portal for labour-related information aids in identifying potential beneficiaries.
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Financial Inclusion in India and Its Challenges
National Pension Scheme (NPS)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Pension Scheme (NPS)
Mains level: Not Much
Central Idea
- The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a new feature for systematic withdrawal from the National Pension Scheme (NPS).
National Pension Scheme (NPS): A Brief Overview
- The National Pension Scheme (NPS) is a voluntary retirement savings scheme launched by the Government of India in 2004.
- It is regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA).
- The primary objective of the NPS is to provide a pension income to individuals upon their retirement.
Key Features of the NPS:
- Contributions: Subscribers make regular contributions to their NPS account during their working years. These contributions accumulate and grow over time.
- Investment Options: The NPS offers two investment options: a) Auto Choice: where the funds are invested based on the subscriber’s age, and b) Active Choice: where the subscriber can select the asset classes (equity, corporate bonds, and government securities) and the fund manager.
- Portable Account: The NPS account is portable, allowing subscribers to maintain their account even if they change jobs or locations.
- Withdrawal Options: Upon retirement, subscribers have the flexibility to withdraw a portion of their accumulated corpus as a lump sum and use the remaining amount to purchase an annuity, which provides a regular pension income.
- Tax Benefits: NPS offers tax benefits at different stages. Contributions made by subscribers are eligible for tax deductions under Section 80C, while withdrawals are subject to certain tax exemptions.
- Regulated and Transparent: The NPS is regulated by the PFRDA, ensuring transparency and oversight of the scheme. It follows strict investment guidelines and has mechanisms in place to safeguard the interests of subscribers.
- Wide Coverage: The NPS is available to all Indian citizens, including salaried employees, self-employed individuals, and non-resident Indians (NRIs).
Benefits of the NPS
- Retirement Income: The NPS provides a retirement income to subscribers, ensuring financial security during their post-retirement years.
- Long-term Wealth Creation: The investment component of the NPS allows subscribers to accumulate wealth over time, potentially generating higher returns and building a substantial retirement corpus.
- Flexibility and Control: Subscribers have the flexibility to choose their investment options and actively manage their NPS accounts, providing a level of control over their retirement savings.
- Tax Efficiency: The NPS offers tax benefits both on contributions and withdrawals, making it a tax-efficient retirement savings option.
- Portability: The portability feature of the NPS allows subscribers to continue their account irrespective of job changes or relocations.
- Regulated and Secure: The NPS is regulated by the PFRDA, ensuring a secure and transparent framework for retirement savings.
Changes introduced: Systematic Withdrawal Plan
- NPS subscribers will be allowed to withdraw 60% of their contributions systematically post-retirement.
- The current system of one-time withdrawal will be replaced.
- 40% of the contributions must be in annuity.
- Systematic withdrawals can be customized by the subscriber based on their needs.
- Withdrawals can be made in lump sum or on a monthly, quarterly, half-yearly, or annual basis.
- This feature is applicable to individuals aged 60-75.
Benefits offered by this change
- Flexibility: Subscribers can customize their withdrawals based on their financial needs.
- Regular Income: Systematic withdrawals provide a regular income stream post-retirement.
- Enhanced Financial Planning: Allows for better financial planning and management.
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Financial Inclusion in India and Its Challenges
IRDAI’s ambitious plan ‘Bima Trinity’
Note4Students
From UPSC perspective, the following things are important :
Prelims level: BIMA Trinity
Mains level: Insurance sector reforms
Central Idea
- The Insurance Regulatory and Development Authority (IRDA) in India aims to implement ambitious plans to improve the insurance sector.
- The key objectives include offering affordable bundled policies that cover multiple risks and providing expedited claim settlements with value-added services.
“Bima Trinity” – A Comprehensive Plan
- The IRDA is collaborating with general and life insurance firms to develop a comprehensive plan called “Bima Trinity.”
- Bima Sugam
- Bima Vistar
- Bima Vaahaks
(1) Bima Sugam – One-Stop Shop Platform
- The IRDA is developing the Bima Sugam platform, which will integrate insurers and distributors onto a single platform.
- This platform will serve as a one-stop shop for customers, simplifying the process of purchasing policies and accessing services.
- Customers will be able to pursue service requests and settle claims through the same portal, enhancing convenience and efficiency.
(2) Bima Vistar
- The IRDA is working on the development of Bima Vistar, a bundled risk cover that encompasses life, health, property, and casualties or accidents.
- This bundled policy aims to provide comprehensive protection against a wide range of risks.
- Policyholders will have defined benefits for each risk, allowing for faster claim payouts without the need for surveyors.
- Bima Vistar will offer defined benefits for each risk category, ensuring clarity and ease of understanding for policyholders.
- If a loss occurs, the defined benefit will be promptly transferred to the policyholder’s bank account, eliminating unnecessary waiting periods.
(3) Bima Vaahaks: Women-Centric Workforce
- As part of the Bima Trinity plan, the IRDA envisions a women-centric workforce known as Bima Vaahaks.
- Bima Vaahaks will operate at the Gram Sabha level and engage with women heads of households.
- Their role will be to educate and convince women about the benefits of a comprehensive insurance product like Bima Vistar.
- They will emphasize the usefulness of a composite insurance product like Bima Vistar during times of distress.
- By highlighting the advantages and addressing concerns, these Bima Vaahaks will play a crucial role in empowering women and ensuring their financial security.
Other developments
- Leveraging Digitized Registries for Faster Claims: With the increasing digitization of birth and death registries in many states, the IRDA plans to integrate its platform with these registries. This integration would allow for seamless sharing of data and facilitate faster claim settlements.
- Streamlined Claim Settlement Process: Policyholders can access the platform, retrieve their policy from the insurers’ repository, and provide the necessary documents, such as the death certificate. This swift claim settlement process revolutionizes the insurance industry by significantly reducing the time taken for policyholders to receive their claims.
Expansion of Insurance Penetration
(1) Legislative Amendments for Increased Investments
- The IRDA plans to introduce legislative amendments to attract more investments into the insurance sector. These amendments would allow for differentiated licenses for niche players, similar to the banking sector.
- The objective is to encourage more participation, ultimately making insurance more accessible and affordable for citizens.
(2) Making Insurance Available, Affordable, and Accessible
- The IRDA is focused on adopting a multi-level approach to make insurance available, affordable, and accessible to a larger population.
- The aim is to address the low insurance penetration in the country and double the number of jobs in the sector.
- The regulator believes that by implementing these changes, insurance can become more inclusive and reach citizens at the Gram Sabha (village council), district, and state levels.
(3) Identifying Significant Protection Gaps
- The IRDA acknowledges the existence of significant protection gaps in various lines of insurance, including life, health, motor, property, and crops.
- These gaps highlight the need for comprehensive coverage and prompt claim settlements.
Proposed Amendments for Regulatory Reforms
The IRDA has proposed amendments to insurance laws to enable regulatory reforms that encourage increased investment and innovation.
- Differentiated capital requirements: These amendments aim to introduce differentiated capital requirements for niche insurers, attracting more investment into the sector.
- Other value-added services: Additionally, the proposed amendments will allow insurers to offer value-added services alongside policies, catering to the evolving needs and preferences of customers.
- Encouraging new players and services: The proposed amendments will pave the way for the entry of new players in the insurance sector. Micro, regional, small, specialized, and composite insurers will have the opportunity to operate and cater to different geographical areas and population segments.
Comparison with Banking Sector
- The IRDA draws parallels between the proposed changes in the insurance sector and the existing diversity in the banking sector.
- Similar to the banking sector, which includes various types of banks addressing different needs and geographies, the insurance sector can benefit from a diverse range of insurers.
- Payment banks, small finance banks, cooperative banks, and other specialized institutions serve specific purposes and cater to distinct segments of the population.
Way Forward
The IRDA’s initiatives, including bundled policies and expedited claim settlements, have the potential to significantly enhance insurance accessibility and affordability in India. To move forward effectively, the following steps can be considered:
- Collaborating with Insurers: The IRDA should work closely with insurance companies to refine and implement the Bima Trinity plan, ensuring the success of bundled policies and integrated platforms.
- Technological Integration: Prioritizing the integration of birth and death registries with the IRDA platform to expedite claim settlements. Emphasizing technological advancements and partnerships for seamless data sharing and processing.
- Awareness and Education: Launch a comprehensive awareness campaign in collaboration with insurers and stakeholders to educate the public, especially women, about the benefits of bundled policies and comprehensive insurance coverage.
- Regulatory Reforms: Expediting proposed amendments to insurance laws to enable differentiated capital requirements and value-added services. Active engagement with relevant government bodies to ensure smooth implementation.
- Monitoring and Evaluation: Establishing a robust framework for monitoring and evaluating the effectiveness of bundled policies, claim settlement processes, and insurance penetration in different regions.
- Continuous Innovation: Encouraging insurers to continuously innovate and develop new products and services that address emerging risks and meet evolving consumer preferences in the rapidly evolving insurance landscape.
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Financial Inclusion in India and Its Challenges
India’s Pension Reforms: Ensuring Pension Security
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPS, NPS and other alternatives
Mains level: pension system, ensuring security and stability
Central Idea
- The issue of government employees’ pension has emerged as a critical political concern, leading several states to consider reverting from the New Pension Scheme (NPS) to the defined-benefit (DB) Old Pension Scheme (OPS). Acknowledging the significance of this matter, the Government of India has established a committee to enhance the NPS.
What is pension?
- A pension is a retirement plan that provides a stream of income to individuals after they retire from their job or profession. It can be funded by employers, government agencies, or unions and is designed to ensure a steady income during retirement.
What is Old Pension Scheme (OPS)?
- The OPS, also known as the Defined Benefit Pension System, is a pension plan provided by the government for its employees in India.
- Under the OPS, retired government employees receive a fixed monthly pension based on their last drawn salary and years of service.
- This pension is funded by the government and paid out of its current revenues, leading to increased pension liabilities.
What is NPS?
- NPS is a market-linked, defined contribution pension system introduced in India in 2004 as a replacement for the Old Pension Scheme (OPS).
- NPS is designed to provide retirement income to all Indian citizens, including government employees, private sector workers, and self-employed individuals
Facts for prelims: Key differences between the two pension schemes
| Parameters | The Old Pension Scheme(OPS) | The New Pension Scheme (NPS) |
| Nature of the schemes | OPS offer pensions to government employees on the basis of their last drawn salary | NPS pays the employees for their investments in the NPS Scheme during their employment. |
| Amount of pension derived | 50 per cent of the last drawn salary | 60% lump sum after retirement and 40% to be invested in annuities for getting a monthly pension |
| Benefits in taxes | No tax benefits | The employee can claim tax deductions of 1.5 lakh under Section 80C of income tax and up to 50,000 on other investments under 80CCD (1b) |
| Tax on pension | No tax on pension | 60% of the NPS Corpus is tax-free while the remaining 40% is taxable |
| Option of Investment | No option | Two choices: Active and Automatic |
| Who can avail? | Only government employees | Any Indian Citizen between 18-65 years. |
| Switching Schemes | OPS scheme can be switched to NPS | NPS scheme cannot be switched back to OPS in general, but central government employees can switch back to OPS in case of death and disablement of the employee. |
Reasons behind the growing demand for reverting to OPS
- Stability and Predictability: One of the primary motivations for the demand to return to OPS is the desire for stability and predictability in pension benefits. Under the OPS, employees receive a fixed pension based on their last drawn salary, which is increased periodically to account for inflation. This offers a sense of security and certainty about post-retirement income, ensuring a stable financial future.
- Market Risk and Annuity Payouts: The NPS, being a market-linked pension scheme, exposes pensioners to market risks. The returns on the pension fund are subject to market fluctuations, which can impact the overall corpus and subsequently affect annuity payouts. This volatility raises concerns among employees who seek a more secure and reliable pension arrangement.
- Lower Annuity Prospects: With the NPS, pensioners bear the market risk and face the possibility of lower-than-expected annuity amounts. This uncertainty about future pension prospects prompts many employees to advocate for a return to OPS, which offers a predetermined pension amount.
- Comparisons with Other Pension Systems: Employees often compare the OPS with pension systems in other countries, particularly those in the Organisation for Economic Co-operation and Development (OECD) economies. These comparisons reveal that OPS provides higher pension replacement rates, lower retirement ages, and covers the entire family. Such favorable aspects of OPS generate a perception of better benefits and incentivize employees to demand its reinstatement.
- Perception of Unsustainability: While the NPS was introduced to address fiscal strains associated with the unfunded OPS, there are concerns about its long-term sustainability. Some argue that OPS can be sustained through effective fiscal management and reform, rather than completely abandoning it. The perception of unsustainability drives the demand for reverting to OPS as a viable alternative.
Challenges involved in reverting back to OPS
- Fiscal Sustainability: The OPS operates on a pay-as-you-go (PAYG) system, where present workers finance the retired. With declining birth rates and increased life expectancy, the burden on the future workforce to fund pensions will intensify. The OPS, being an unfunded scheme, poses challenges in maintaining fiscal sustainability in the long run.
- Demographic Shifts: The dependency ratio is expected to increase substantially, with fewer workers supporting a larger number of retirees. This demographic shift adds to the challenges of sustaining the OPS, as it puts additional strain on the funding mechanism and the ability to meet pension obligations.
- Inflationary Pressures: The OPS guarantees periodic increases in pension payouts through dearness allowance (DA) adjustments to account for inflation. However, relying on fixed increments tied to DA can pose challenges during periods of high inflation. Ensuring that pension payments keep pace with inflation without compromising fiscal stability can be a complex task for policymakers.
- Budgetary Constraints: The financial burden of reverting to OPS can put a significant strain on the government’s budget. Pension liabilities already account for a substantial portion of states’ revenue receipts and own revenues. Increasing pension obligations may lead to a reduction in development expenditure or necessitate additional borrowing, potentially exacerbating the issue of public debt.
- Inter-generational Equity: Maintaining inter-generational equity is a crucial consideration in pension reforms. Reverting to OPS might fulfill the aspirations of current employees, but it can impose a heavy burden on future generations. Striking a balance between providing reasonable pension security for present employees and ensuring the sustainability of the pension system for future generations is a key challenge that needs to be addressed.
- Economic Factors: The economic environment, including interest rates and investment returns, can impact the financial viability of OPS. Changes in economic conditions, such as low interest rates or inadequate returns on pension fund investments, can strain the financial resources needed to sustain OPS and meet pension obligations.
Way ahead: Building sustainable and inclusive pension systems
- Comprehensive Reform: Governments should undertake comprehensive reforms which may involve revisiting the pension architecture, introducing alternative pension models, and exploring hybrid schemes that combine elements of defined-benefit and defined-contribution systems. Reforms should be guided by a thorough analysis of demographic trends, fiscal constraints, and economic conditions.
- Adequate Funding Mechanisms: Pension systems must establish robust funding mechanisms to ensure that pension obligations can be met. This may involve setting up dedicated pension funds, implementing sound investment strategies, and establishing appropriate contribution rates for both employees and employers.
- Strengthening Pension Governance: Effective governance is crucial for the success of pension systems. Governments should strengthen the regulatory framework, improve transparency, and enhance accountability in the management of pension funds. Establishing independent oversight bodies and adopting international best practices can help ensure the integrity and efficiency of pension governance.
- Promoting Financial Literacy: Financial literacy programs should be implemented to educate individuals about the importance of retirement planning, investment strategies, and the risks and benefits associated with different pension options. Empowering individuals with financial knowledge will enable them to make informed decisions and take an active role in securing their retirement income.
- Encouraging Voluntary Savings: Governments should encourage voluntary retirement savings programs to complement the mandatory pension schemes. Providing incentives, such as tax benefits or matching contributions, can incentivize individuals to save for retirement beyond the mandatory contributions. Voluntary savings options, such as individual retirement accounts or employer-sponsored plans, can offer individuals greater flexibility and control over their retirement savings.
- Flexibility and Portability: Pension systems should adapt to the changing nature of work and support individuals with diverse employment patterns. Portable pension accounts that allow individuals to carry their accumulated benefits across jobs can ensure continuity of retirement savings. Flexibility in pension payout options, such as lump sum withdrawals or phased withdrawals, can accommodate different financial needs and preferences of retirees.
- Social Safety Nets: To address the needs of vulnerable populations, social safety nets should be incorporated into pension systems. These safety nets can provide minimum income guarantees or targeted assistance for individuals with limited or interrupted work histories, low-income earners, and those facing economic hardships in retirement.
Conclusion
- Amidst the debate between NPS and OPS, it is crucial to devise a pension system that ensures security without compromising fiscal sustainability and inter-generational equity.
Must read:
| Contributory Guaranteed Pension Scheme (CGPS): A Considerable Alternative |
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Financial Inclusion in India and Its Challenges
Contributory Guaranteed Pension Scheme (CGPS): A Considerable Alternative
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPS, NPS and CGPS
Mains level: Contributory Guaranteed Pension Scheme (CGPS) Analysis
Central Idea
- The debate on pensions is heating up as several state governments announce their reversion to the old pension scheme (OPS). However, economists have frowned upon this move, citing two major reasons. Firstly, since the state has to bear the full burden of pensions, it may become fiscally unsustainable in the long run. Secondly, an unsustainable rise in pension allocation in the budget can come at the cost of other welfare expenditures allocated to the poor and marginalized sections.
What is mean by pension?
- A pension is a retirement plan that provides a stream of income to individuals after they retire from their job or profession. It can be funded by employers, government agencies, or unions and is designed to ensure a steady income during retirement.
What is Old Pension Scheme (OPS)?
- The OPS, also known as the Defined Benefit Pension System, is a pension plan provided by the government for its employees in India.
- Under the OPS, retired government employees receive a fixed monthly pension based on their last drawn salary and years of service.
- This pension is funded by the government and paid out of its current revenues, leading to increased pension liabilities.
What is the National Pension System (NPS)?
- The Union government under PM Vajpayee took a decision in 2003 to discontinue the old pension scheme and introduced the NPS.
- The scheme is applicable to all new recruits joining the Central Government service (except armed forces) from April 1, 2004.
- On the introduction of NPS, the Central Civil Services (Pension) Rules, 1972 was amended.
What are two arguments against reverting to the old pension scheme?
- Fiscal Unsustainability: Since the State has to bear the full burden of pensions, it will become fiscally unsustainable in the medium to long run.
- Trade-Off with Welfare Expenditure: Such an unsustainable rise in pension allocation in the Budget can only come at the cost of other more pressing welfare expenditures allocated to the poor and marginalized sections.
The commonality between the two arguments
- Both arguments assume that the fiscal revenues are fixed, which is not necessarily the case if the government has its priorities right.
- Both arguments assume that unsustainable rise in pension allocation in the Budget can only come at the cost of other more pressing welfare expenditures allocated to the poor and marginalized sections.
Why Public sector workers are asking for a guaranteed pension in place of the NPS?
- Fluctuating pension returns: The NPS is market-based, which means that the pension returns fluctuate according to the returns prevailing in the market. This creates uncertainty and makes it difficult for employees to plan for their post-retirement life.
- Guaranteed pension: Public sector workers are looking for a guaranteed pension that will provide them with a fixed amount after retirement. This will ensure a stable and predictable post-retirement life for them.
- Employee contribution: In the new contributory guaranteed pension scheme (CGPS), a large part of the pension will be funded by the employees themselves. This is in contrast to the old pension scheme (OPS) where no contribution was required from the employees.
- Protection against market fluctuations: The CGPS provides protection to employees against market fluctuations. If the market return happens to be higher than the guaranteed pension, the State gets to pocket the difference. On balance, the additional burden on the CGPS may be marginal compared to the NPS.
- Burden-sharing: The CGPS ensures that the burden of uncertainty does not fall on employees alone. In the OPS, elite workers gain at the cost of their brethren lower on the income ladder. However, in the CGPS, the burden is only the employer’s contribution part, exactly as in the NPS.
Potential disadvantages of a CGPS
- Higher contribution burden on employees: Under the CGPS, employees will continue to contribute a fixed percentage of their basic pay towards their pension. This may put a higher burden on them compared to the current system, where their contribution fluctuates based on market returns.
- Additional administrative burden: Implementing a new pension scheme like CGPS may involve additional administrative burden and costs for the government, which could be challenging to manage efficiently.
- Uncertainty of market returns: While the CGPS guarantees a fixed pension amount, it does not provide any certainty on the market returns. If the market returns are lower than expected, the government will have to bear the burden of paying the difference between the guaranteed pension and the actual pension.
Facts for prelims: CGPS vs NPS
| Parameter | Contributory Guaranteed Pension Scheme (CGPS) | National Pension scheme (NPS) |
| Type of Scheme | Guaranteed Pension Scheme | Market-linked Pension Scheme |
| Contributions | Made by both employee and employer | Made by the employee only |
| Pension Amount | Guaranteed 50% of the last drawn salary, adjusted for inflation | Market-linked, varies according to returns |
| Risk | Risk is shared by both employee and employer | Risk is borne entirely by the employee |
| Burden on exchequer | Burden is only on the employer’s contribution part | Burden is on the entire pension amount |
| Upside | State gets to pocket the excess if the market return is higher | No upside for the State |
| Fiscal sustainability | Can be sustainable with proper rationalisation of taxes | Unsustainable in the medium to long run |
Way ahead
- The government could consider implementing the Contributory Guaranteed Pension Scheme (CGPS) as an alternative to the New Pension Scheme (NPS) for public sector workers.
- The CGPS would allow the state to pocket any excess returns from the market, rather than bearing the entire burden of uncertain market returns as in the NPS.
- The government should consider rationalizing taxes, such as implementing inheritance and wealth taxes, to increase its revenue and reduce its dependence on fixed fiscal revenues.
- The government should set up a special task force to rationalize pensions and address the issue of pension sustainability in the long run.
- A possible downside to the CGPS is that it may require a higher contribution from employees, which could affect their take-home pay during their working life. However, this could be addressed by offering tax breaks or other incentives to encourage employees to contribute to the scheme.
Conclusion
- The current debate on pensions in India has brought forth the need for a well-designed and sustainable pension scheme that can cater to the needs of public sector workers while being fiscally responsible. The CGPS presents a viable alternative to the OPS and the NPS providing public sector workers with a guaranteed pension after they retire while also being largely funded by the employees themselves. While there may be some challenges in implementing the CGPS, with proper planning and execution, the CGPS could serve as a model for sustainable and equitable pension schemes that can support the growing needs of an ageing workforce in India.
Mains question
Q. The debate on pensions is heating up as several state governments announce their reversion to the old pension scheme. Do you think Contributory Guaranteed Pension Scheme (CGPS) presents a viable alternative to the OPS and the NPS?
Also read:
| Reversal To Old Pension Scheme (OPS): Potential Impact |
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Financial Inclusion in India and Its Challenges
Only half PMJDY insurance claims settled in 2 years
Central idea: In an RTI reply, it is revealed that only 329 claims out of 647 filed were settled in the last two financial years under the Pradhan Mantri Jan Dhan Yojana (PMJDY).
What is PM Jan Dhan Yojana (PMJDY)?
- The PMJDY is a financial inclusion program launched by the Indian government in 2014.
- It is National Mission for Financial Inclusion to ensure access to financial services, namely, a basic savings & deposit accounts, remittance, credit, insurance, pension in an affordable manner.
- Under the scheme, a basic savings bank deposit (BSBD) account can be opened in any bank branch or Business Correspondent (Bank Mitra) outlet, by persons not having any other account.
Benefits under PMJDY
- One basic savings bank account is opened for unbanked person.
- There is no requirement to maintain any minimum balance in PMJDY accounts.
- Interest is earned on the deposit in PMJDY accounts.
- Rupay Debit card is provided to the account holder.
- Accident Insurance Cover of Rs.1 lakh (enhanced to Rs. 2 lakh to new PMJDY accounts opened after 28.8.2018) is available with RuPay card issued to the PMJDY account holders.
- An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available.
Why in news?
- In the financial year 2021-22, 341 claims were received for accident insurance cover under the PMJDY scheme.
- Out of these, 182 claims were settled and 48 were rejected.
- No information was provided on the status of the remaining 111 claims.
Is PMJDY a success?
- Dormancy of accounts: The PMJDY scheme has led to an increase in the number of bank accounts in rural areas, but this has not necessarily led to a corresponding increase in transactions due to limited transaction history of many account holders.
- Low or no transactions: Insurance coverage for the account holder is linked to their transaction history, and many accounts remain frozen due to lack of transactions, taking several weeks or months to reactivate.
- False promise of overdraft: The promised overdraft facility of Rs 5000 for new account holders has not been provided as promised, leading to scepticism about the scheme’s success.
- Payments bottleneck: The lack of proper connectivity, electricity, internet, and ATM facilities in rural areas has hindered the activation of RuPay cards and PIN numbers, which should have been considered before implementing such a large-scale program.
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Financial Inclusion in India and Its Challenges
Reversal To Old Pension Scheme (OPS): Potential Impact
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Overview of various pension schemes
Mains level: Issues with OPS and NPS
Central Idea
- The New Pension Scheme (NPS) implemented by the NDA government in 2003-04 was a far-sighted reform that moved towards a sustainable contributory pension system. However, some state governments have reversed the pension reform and returned to the financially burdensome and fiscally non-viable Old Pension Scheme (OPS).
What is pension?
- A pension is a retirement plan that provides a stream of income to individuals after they retire from their job or profession. It can be funded by employers, government agencies, or unions and is designed to ensure a steady income during retirement.
What is OPS?
- The OPS, also known as the Defined Benefit Pension System, is a pension plan provided by the government for its employees in India.
- Under the OPS, retired government employees receive a fixed monthly pension based on their last drawn salary and years of service.
- This pension is funded by the government and paid out of its current revenues, leading to increased pension liabilities.
What is NPS?
- NPS is a market-linked, defined contribution pension system introduced in India in 2004 as a replacement for the Old Pension Scheme (OPS).
- NPS is designed to provide retirement income to all Indian citizens, including government employees, private sector workers, and self-employed individuals.
Negative impacts of the reversal to OPS
- The reversal to OPS would have negative impacts, especially on the poor and vulnerable population, including women and children. Here are some potential impacts:
- Reallocation of resources: The reversal to OPS would lead to a reallocation of resources away from the state’s development expenditure, which benefits the poor, and towards a much smaller group of people who have benefited from a secured and privileged job throughout their working life. It could worsen inequality and lower economic growth in the states.
- Reduction in productivity: Going back to OPS would reduce the productivity of the poor, further diminishing their future economic prospects. Economic services such as infrastructure and rural and urban development would be affected more severely than social services.
- Fiscal burden: The old pension scheme (OPS) was financially burdensome and fiscally non-viable. As public employees’ life expectancy increased, the state’s fiscal burden under the OPS began to rise exponentially, necessitating pension reforms. Reversing to OPS would put the fiscal burden back on the government, which could have negative impacts on the state’s finances.
- Tradeoff between pensions and development expenditure: Pension reforms were a watershed moment for the states, and reversing to OPS would result in a tradeoff between pension and development expenditure of the states. The pension reforms aimed to finance the increased non-development expenditure related to pensions through taxes or borrowing. However, our analysis revealed that from 1990 to 2004, the states’ revenues did not match the state’s increased expenditure, resulting in a higher fiscal deficit.
Facts for prelims: NPS vs OPS
| Parameter | National Pension System (NPS) | Old Pension Scheme (OPS) |
| Type of System | Defined Contribution System | Defined Benefit System |
| Funding | Contributions from employee and employer | Government-funded |
| Investment | Market-linked investments in various asset classes | No direct investment involved |
| Returns | Subject to market risks | Predetermined and not market-linked |
| Pension Amount | Depends on accumulated corpus and investment returns | Based on last drawn salary and years of service |
| Annuity & Lump-sum Withdrawal | Minimum 40% corpus used to purchase annuity, remaining can be withdrawn as lump-sum | Fixed monthly pension, no annuity or lump-sum withdrawal |
| Portability | Portable across jobs and sectors | Limited to government employees |
| Flexibility | Choice of investment options, fund managers, and asset allocation | No flexibility, pension determined by predefined formula |
Conclusion
- The state governments should not ignore the impact of the OPS on the poor and vulnerable, particularly women and children. The reversal will deprive them of essential services such as health and education and prevent them from participating in growth opportunities. Therefore, state governments should not reverse the far-sighted pension reform and should continue to focus on development expenditure that benefits the poor.
Mains Question
Q. What is the New Pension Scheme (NPS) and how does it differ from Old Pension Scheme (OPS) Now states are reversing to OPS as a populist measure, discuss its the negative impacts.
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Financial Inclusion in India and Its Challenges
Old Pension Scheme (OPS): A Call for Equitable Distribution of Resources
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NPS
Mains level: Pension reforms and challenges
Central Idea
- The demand for the old pension scheme (OPS) is growing in India, particularly after some states announced plans to revert to it. The mainstream critique of OPS is centered around inefficiency and fiscal deficit concerns. However, it is crucial to examine the policy from the class and welfare perspectives.
What is pension?
- A pension is a retirement plan that provides a stream of income to individuals after they retire from their job or profession. It can be funded by employers, government agencies, or unions and is designed to ensure a steady income during retirement.
What is Old Pension Scheme (OPS)?
- The OPS, also known as the Defined Benefit Pension System, is a pension plan provided by the government for its employees in India.
- Under the OPS, retired government employees receive a fixed monthly pension based on their last drawn salary and years of service.
- This pension is funded by the government and paid out of its current revenues, leading to increased pension liabilities.
Did you know: The National Pension System (NPS)?
- NPS is a market-linked, defined contribution pension system introduced in India in 2004 as a replacement for the Old Pension Scheme (OPS).
- NPS is designed to provide retirement income to all Indian citizens, including government employees, private sector workers, and self-employed individuals.
Analyzing the Impact of OPS on India’s Socio-Economic Landscape
- Inequality and Regressive Redistribution: Under the National Pension System (NPS), the Sixth Pay Commission increased the basic salary of government employees to cover pension contributions and promote post-retirement savings. As a result, the salary of a government employee is higher than the income of more than 90% of the population. The OPS thus acts as a regressive redistribution mechanism favoring a better-off class.
- Rising Pension Liabilities: Pension liabilities of the government increased substantially due to the Sixth pay matrix, reaching 9% of total state expenditure. By 2050, pension expenditure will account for 19.4% of total state expenditures, assuming the current growth rate remains constant.
- Disproportionate Burden on the Lower Class: The bottom 50% of the population faces the inequitable burden of indirect taxation, six times more than their income. Due to OPS, they must bear the burden of supporting government employees’ pensions, which could push them further into poverty.
- Expenditure Challenges and Public Goods: As India’s population ages and public provision of education and healthcare becomes more critical, OPS poses expenditure challenges for providing public goods. This situation compels governments to compress already low social sector expenditures, pushing marginalized groups into further destitution.
- Monopolization of Future Labor Markets: The OPS facilitates the monopolization of future labor markets in the private sector by a proprietary class, allowing supervisory bureaucracy to consolidate its position and emerge as a dominant group.
Recommendations for Equitable Resource Distribution
- Opposition to the OPS should focus on equitable distribution of resources and expansion of universal provisions of public goods.
- Implement a participatory pension system for government employees to provide more egalitarian outcomes.
- Tweak the NPS to provide a guaranteed monthly return for lower-rung employees.
- Address unequal pay among various ranks of employees through administrative reforms.
- Advocate for progressive taxation of the top 10% and a rationalization of political executives’ pensions and profligacy.
Facts for prelims: NPS vs OPS
| Parameter | National Pension System (NPS) | Old Pension Scheme (OPS) |
| Type of System | Defined Contribution System | Defined Benefit System |
| Funding | Contributions from employee and employer | Government-funded |
| Investment | Market-linked investments in various asset classes | No direct investment involved |
| Returns | Subject to market risks | Predetermined and not market-linked |
| Pension Amount | Depends on accumulated corpus and investment returns | Based on last drawn salary and years of service |
| Annuity & Lump-sum Withdrawal | Minimum 40% corpus used to purchase annuity, remaining can be withdrawn as lump-sum | Fixed monthly pension, no annuity or lump-sum withdrawal |
| Portability | Portable across jobs and sectors | Limited to government employees |
| Flexibility | Choice of investment options, fund managers, and asset allocation | No flexibility, pension determined by predefined formula |
Conclusion
- It is essential to recognize the disenchantment with neoliberalism driving the demand for the OPS. Government employees and policymakers must work together to address the challenges posed by OPS and implement pension reforms that prioritize equitable resource distribution, efficient allocation, and social welfare.
Mains Question
Q. Compare and contrast OPS with the National Pension System (NPS) and discuss the impact of Old Pension Scheme (OPS) on India’s socio-economic landscape.
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Financial Inclusion in India and Its Challenges
What are White Label ATMs?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: White Label ATM
Mains level: Financial inclusion
The Reserve Bank of India (RBI) has extended the validity of authorization issued to Vakrangee to setup, own and operate White Label ATMs in India.
What is White Label ATM?
- Usually ATMs are managed by banks. But White Label ATMs are owned and operated by non-banking entities.
- ATMs operated under this business model allow customers to use them for banking transactions regardless of the bank they have an account with.
- RBI approved the operation and inclusion of WLA ATM by non-banking organisations under the Payment and Settlement Systems Act of 2007.
- It was introduced to expand India’s ATM network, especially in semi-urban and rural areas.
How does it work?
- White Label ATM companies work with banking networks to enable bank customers to use banking services like withdrawing funds, paying bills and depositing cash.
- White Label ATM (WLA) operators’ charge card-issuing bank fees to provide this facility to the bank’s clients.
- The transaction process in White Label ATM operators consists of a lending bank, a sponsor bank that handles settlements and an ATM network provider.
- The Sponsor bank provides the cash facility for the White ATM.
Significance of WLA: Financial Inclusion
- Financial inclusion is concerned with the availability of financial services and adequate financing to low-income individuals and other vulnerable segments of society.
- ATMs promote financial inclusion and provide customers with various banking services at any location and time.
White Label ATM Operators in India
- Non-banks set up and operate White ATMs as per the rules laid down by RBI for using ‘other bank’ ATMs.
- These ATMs accept all domestic debit cards and offer the first five or three transactions per month free of cost, depending on the location.
- Below mentioned are some examples of companies that operate white label ATMs:
- Indicash – India’s largest White Label ATM network responsible for ‘uberisation of ATMs.’
- India1 Payments (BTI Payments Pvt. Ltd.)
- Hitachi Payment Services Pvt. Ltd.
- Tata Communications Payment Solutions Ltd.
- Vakrangee Limited
Benefits of White Label ATMs
There are many benefits of White Label ATMs:
- Customers benefit from White Label ATMs since they eliminate the need to visit a bank branch on a regular basis
- ATMs are available 24 hours a day, seven days a week, including holidays
- Banks benefit from this because they do not have to maintain a huge staff/office (compared to a system without ATMs). It lowers their branch-operational costs
- Financial inclusion of rural, semi-urban, and low-income people
- It allowed ATM cards to be issued by any bank that can be used at White Label ATMs
- WLA atm also provides mobile recharge, energy bill payments, and other value-added services
Limitations of White Label ATMs
There are also a few limitations of White Label ATMs:
- The issue of unsuccessful transactions is a key source of concern. In the event of a dispute, the dispute resolution method will include three entities, namely the WLA operator, the WLA operator’s sponsor bank, and the customer’s bank.
- Customers will be discouraged by the cost issue, as they will be obliged to pay a price to use the White Label ATMs, as only a limited number of free transactions are permitted on the WLAs
- White label ATMs’ financial viability is questioned because of their low interchange charge and hefty operational expenses
- If there is a bank-managed ATM in the same area as a WLA ATM, the White Label ATMs may not be able to generate a profit
Differences Between Brown Label and White Label ATMs
The differences between Brown Label ATM and White Label ATMs are:
| Brown Label ATM | White Label ATM |
| Brown Label ATMs have their hardware and ATM machine leased by a service provider | Non-banking entities own and operate ATMs |
| The sponsor bank’s brand name appears on the Brown label ATM | There is no bank logo on a white label ATM machine |
| The RBI is not directly involved. These outsourcing firms are bound by contracts with their respective banks | The RBI is directly involved as white label companies must obtain a license or permission from the RBI in order to conduct business |
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Financial Inclusion in India and Its Challenges
In news: Small Savings Schemes
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Small Savings Schemes
Mains level: NA
The Central government raised interest rates on eight of the 12 small savings schemes by 20 to 110 basis points for the January to March 2023 quarter.
Small Savings Schemes
- Small Savings Schemes are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age.
- They are popular as they provide returns higher than bank fixed deposits, sovereign guarantee and tax benefits.
How are they managed?
- Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis.
- All deposits received under various schemes are pooled in the National Small Savings Fund.
- The money in the fund is used by the Centre to finance its fiscal deficit.
What are the different saving schemes?
The schemes can be grouped under three heads –
- Post office deposits
- Savings certificates and
- Social security schemes
(1) Post Office Deposits
- Under this we have the savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5 year maturities and the monthly income account.
- The savings account currently pays an interest of 4% per annum and can be opened individually or jointly with an initial investment of Rs 500.
- The recurring deposit that pays 5.8% a year compounded quarterly matures after 60 months from the date of opening.
- It allows investors to save on a monthly basis with a minimum deposit of Rs 100 per month.
- Investments under the 5-year time deposit up to Rs 1.5 lakh further qualifies for benefit under section 80C of Income Tax Act.
(2) Savings Certificates
- Under this, we have the National Savings Certificate and the Kisan Vikas Patra.
- The National Savings Certificate pays interest at a rate of 6.8% per annum upon maturity after 5 years. The interest that is earned is reinvested into the scheme every year automatically.
- The NSC also qualifies for tax saving under Section 80C of the income tax act.
- The Kisan Vikas Patra, which is open to everyone, doubles your one-time investment at the end of 124 months signifying a return of 6.9% compounded annually.
- The minimum investment amount is Rs 1000 while there is no upper limit.
(3) Social security schemes
- In the third head of social security schemes, there is Public Provident Fund, Sukanya Samriddhi Account and Senior Citizens Savings Scheme.
- Public Provident Fund
- The Public Provident Fund is a popular saving option for long term goals like retirement.
- It pays 7.1% a year and qualifies for tax benefit under Section 80C of the Income Tax Act.
- Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years.
- The accumulated amount and interest earned are exempt from tax at the time of withdrawal.
- Sukanya Samriddhi Account
- The Sukanya Samriddhi Account was launched in 2015 under the Beti Bachao Beti Padhao campaign exclusively for a girl child.
- The account can be opened in the name of a girl child below the age of 10 years.
- The scheme guarantees a return of 7.6% per annum and is eligible for tax benefit under Section 80C of the Income Tax Act.
- The tenure of the deposit is 21 years from the date of opening of the account and a maximum of Rs 1.5 lakh can be invested in a year.
- Senior Citizen Savings Account
- And finally, the 5-year Senior Citizen Savings Account can be opened by anyone who is over 60 years to age.
- It carries an interest of 7.4% per annum payable quarterly and qualifies for Section 80C tax benefit.
- These time-tested and safe modes of investments don’t offer quick returns, but are safer when compared to market-linked schemes.
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Financial Inclusion in India and Its Challenges
Financial Inclusion in Age of Digitization
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Financial inclusion and Digital divide
Context
- The use of technology in financial inclusion stands to be pertinent in today’s context as it paves the way towards inclusive growth through the upliftment of disadvantaged sections of society.
Importance of Financial Inclusion
- Meaning of Financial inclusion: It refers to the availability to both individuals and companies of useful and cost-effective financial goods and services, including payments, transactions, savings, credit, and insurance, that are sustainably and ethically provided.
- Provides social mobility: The importance of financial inclusion lies in the fact that it allows social mobility. These resources help empower individuals and foster communities, which can aid in promoting economic growth.
- More financial services: Moreover, account holders are more likely to utilize additional financial services such as credit and insurance to launch and grow enterprises, make investments in their children’s or own health or education, manage risk, and recover from financial setbacks, all of which can enhance their overall quality of life.
Challenges to the financial inclusion
- Inoperative bank accounts: Nearly 80 percent of the Indian population has a bank account, and nearly 18 percent (81.38 million) of bank accounts are inoperative, having “zero balance”. Moreover, up to 38 percent of accounts are inactive, which means that there have been no deposits or withdrawals in the past year, demonstrating that many Indians are still not fully integrated into the formal banking system.
- Poor telecommunication infrastructure: India still needs a robust telecommunication infrastructure with a stable broadband internet connection. Despite progress in increasing technological features with increasing speeds, the inability of the entire country to adapt to these innovations has widened the gap.
- All citizens are not cell phone users: India additionally faces the hurdle of getting its citizens online, with more than 310 million individuals needing a basic cell phone. This prevents account holders from receiving crucial information, such as details relating to account transactions.
- Increasing dependency on local agents: In addition, financial institutions also need to be more willing to deliver messages for transactions of small quantities. These factors have led to an increasing dependency on local agents.
The correlation between Technology, digital divide and financial inclusion
- Rural- Urban digital Divide: There is an evident divide between the urban-rural regions that dominate India. Only 4.4 rural families have computers, compared to 14.4 percent of urban households and 14.9 percent of rural homes have internet connectivity, compared to 42 percent of families in metropolitan regions. Meanwhile, only 13 percent of adults in rural regions have access to the internet, compared to 37 percent in metropolitan areas.
- High lending rates in rural area: Specifically, such gaps are associated with various factors in finance, starting with small-time lenders charging high-interest rates common in rural regions. Access to credit still needs to be solved. Government programmes are yet to reach more remote areas to improve loan availability efficiently.
- Unawareness about Online loans: Individuals find that online loans need more options from reliable financial institutions or digital lending. Additionally, rural clients need help accessing prospective financial services due to complicated banking procedures such as requiring identity credentials and maintaining a specific balance in an account.
- Limited access to technology: The digital divide is also a result of limited access to computer and communication technologies. In India, fewer people can afford the device needed to access digital information.
- Single nationwide approach is problematic: India additionally faces the burden of providing diversified content across different regions, as individuals across India have different mother tongues. Moreover, the number of individuals who have access to computers or are knowledgeable enough to utilise the internet varies too widely between states. Thus, a blanket approach cannot be implemented nationwide.
- Lack of Financial literacy: Indian citizens lack the potential to maximise technological interventions. About 266 million adults are illiterate. The lack of financial literacy has also greatly impeded the growth of financial inclusion, with many financial cyber-crimes peaking in proportion to the growing distrust among rural residents, leading to lower adoption rates and a 6-percent jump in cybercrimes in the same year.
- Concerns of data privacy: As Personal Identifiable Information (PII) guidelines are not strictly enforced and adhered to, large quantities of data are readily accessible to numerous parties, raising serious concerns about data privacy.
What can be done to bridge digital divide for financial inclusion?
- Digital inclusion strategies: It lies in the hands of the government to implement a financial inclusion policy and look at the reasons behind financial exclusion and effectively address them. Information and Communication Technology policies are primarily top-down and supply-focused. Thus, it is necessary to develop financial goods and services focused on the needs of citizens and the disadvantaged. These policies should focus on digital inclusion strategies to ensure that rural areas can access proper internet connectivity.
- Information in regional language: to ensure digital financial inclusion, the government should encourage the middle-aged bracket to educate themselves in reading and writing to use the various facilities they provide. Government websites have information primarily in Hindi and English, excluding large sections of the population. A systemic strategy focused on digital skills, and financial literacy should be implemented in each region, keeping in mind the language barrier and access to technology.
- Focus on vulnerable sections: To combat financial fraud, implementing a one-to-one Management of Financial Services (MFS) agent mentorship programme that focuses on vulnerable populations and teaches them the fundamentals of mobile and online interaction is possible. Additionally, removing the barriers to financial service access for low-income persons by reducing transaction costs could facilitate increased participation, as observed in Nepal, where free and easily accessible accounts were more prevalent among women
Conclusion
- The digital divide affects every area of life, including literacy, wellness, mobility, security, access to financial services, etc. Therefore, for a fast-growing nation such as India, the focus needs to shift from simple economic growth to equitable and inclusive growth.
Mains Question
Q. What are the challenges to Digital financial inclusion in India? Explain in detail the strategies needed to tackle the financial inclusion?
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Financial Inclusion in India and Its Challenges
Centre restores Modified Interest Subvention Scheme (MISS)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Modified Interest Subvention Scheme (MISS)
Mains level: Not Much
The Union Cabinet has decided to restore the interest subvention on short-term agriculture loans to 1.5% for all financial institutions, including cooperative banks.
What is the news?
- The Union Cabinet has approved to restore Interest Subvention on short term agriculture loans to 1.5% for all financial institutions.
- Thus, Interest Subvention of 1.5% will be provided to lending institutions for the financial year 2022-23 to 2024-25 for lending short term agri-loans upto Rs 3 lakh to the farmers.
What is MISS?
- Kisan Credit Card scheme was introduced for farmers, to empower them to purchase agriculture products and services on credit at any time.
- To ensure that the farmers have to pay a minimal interest rate to the bank, the GoI introduced Interest Subvention Scheme (ISS), now renamed as Modified Interest Subvention Scheme (MISS).
- It aims to provide short term credit to farmers at subsidized interest rates.
Features of MISS
- Under this scheme, short term agriculture loan upto Rs. 3.00 lakh is available to farmers engaged in Agriculture and other allied activities including Animal Husbandry, Dairying, Poultry, fisheries etc. at the rate of 7% p.a.
- An additional 3% subvention (Prompt Repayment Incentive – PRI) is also given to the farmers for prompt and timely repayment of loans.
- Therefore, if a farmer repays his loan on time, he gets credit at the rate of 4% p.a.
- For enabling this facility to the farmers, GoI provides Interest Subvention (IS) to the Financial Institutions offering this scheme.
- This support is 100% funded by the Centre, it is also the second largest scheme of DA&FW as per budget outlay and coverage of beneficiaries.
Benefits of MISS
- Ensuring hassle-free credit availability at cheaper rate to farmers has been the top priority of GoI.
- Increase in Interest Subvention will ensure sustainability of credit flow in the agriculture sector as well as ensure financial health and viability of the lending institutions.
- Banks will be able to absorb increase in cost of funds and will be encouraged to grant loans to farmers for short term agriculture requirements and enable more farmers to get the benefit of agriculture credit.
- This will also lead to generation of employment since short term agri-loans are provided for all activities including Animal Husbandry, Dairying, Poultry, fisheries.
- Farmers will continue to avail short term agriculture credit at interest rate of 4% per annum while repaying the loan in time.
Who gets the subvention?
- The lending institutions include- Public Sector Banks, Private Sector Bank, Small Finance Banks, Regional Rural Banks, Cooperative Banks and Computerized PACS directly ceded with commercial banks.
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Financial Inclusion in India and Its Challenges
What is Small Savings Scheme?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Small saving schemes
Mains level: Read the attached story
Economists expect the Centre to raise the interest rates paid on small savings schemes for the July to September 2022 quarter.
Small Savings Scheme
- Small Savings Schemes are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age.
- They are popular as they provide returns higher than bank fixed deposits, sovereign guarantee and tax benefits.
How is it managed?
- Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis.
- All deposits received under various schemes are pooled in the National Small Savings Fund.
- The money in the fund is used by the Centre to finance its fiscal deficit.
What are the different saving schemes?
The schemes can be grouped under three heads –
- Post office deposits
- Savings certificates and
- Social security schemes
(1) Post Office Deposits
- Under this we have the savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5 year maturities and the monthly income account.
- The savings account currently pays an interest of 4% per annum and can be opened individually or jointly with an initial investment of Rs 500.
- The recurring deposit that pays 5.8% a year compounded quarterly matures after 60 months from the date of opening.
- It allows investors to save on a monthly basis with a minimum deposit of Rs 100 per month.
- Investments under the 5-year time deposit up to Rs 1.5 lakh further qualifies for benefit under section 80C of Income Tax Act.
(2) Savings Certificates
- Under this, we have the National Savings Certificate and the Kisan Vikas Patra.
- The National Savings Certificate pays interest at a rate of 6.8% per annum upon maturity after 5 years. The interest that is earned is reinvested into the scheme every year automatically.
- The NSC also qualifies for tax saving under Section 80C of the income tax act.
- The Kisan Vikas Patra, which is open to everyone, doubles your one-time investment at the end of 124 months signifying a return of 6.9% compounded annually.
- The minimum investment amount is Rs 1000 while there is no upper limit.
(3) Social security schemes
- In the third head of social security schemes, there is Public Provident Fund, Sukanya Samriddhi Account and Senior Citizens Savings Scheme.
a. Public Provident Fund
- The Public Provident Fund is a popular saving option for long term goals like retirement.
- It pays 7.1% a year and qualifies for tax benefit under Section 80C of the Income Tax Act.
- Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years.
- The accumulated amount and interest earned are exempt from tax at the time of withdrawal.
b. Sukanya Samriddhi Account
- The Sukanya Samriddhi Account was launched in 2015 under the Beti Bachao Beti Padhao campaign exclusively for a girl child.
- The account can be opened in the name of a girl child below the age of 10 years.
- The scheme guarantees a return of 7.6% per annum and is eligible for tax benefit under Section 80C of the Income Tax Act.
- The tenure of the deposit is 21 years from the date of opening of the account and a maximum of Rs 1.5 lakh can be invested in a year.
c. Senior Citizen Savings Account
- And finally, the 5-year Senior Citizen Savings Account can be opened by anyone who is over 60 years to age.
- It carries an interest of 7.4% per annum payable quarterly and qualifies for Section 80C tax benefit.
- These time-tested and safe modes of investments don’t offer quick returns, but are safer when compared to market-linked schemes.
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Financial Inclusion in India and Its Challenges
Old Pension Scheme vs New Pension Scheme
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Defined Pension Benefit Scheme, NPS
Mains level: Issues with NPS
Many states are trying to restore Old Pension Scheme and discontinue the National Pension System (NPS).
What is the Defined Pension Benefit Scheme (old)?
- The scheme assures life-long income, post-retirement.
- Usually the assured amount is equivalent to 50% of the last drawn salary.
- The Government bears the expenditure incurred on the pension.
- The scheme was discontinued in 2004.
What is the National Pension System (NPS)?
- The Union government under PM Vajpayee took a decision in 2003 to discontinue the old pension scheme and introduced the NPS.
- The scheme is applicable to all new recruits joining the Central Government service (except armed forces) from April 1, 2004.
- On the introduction of NPS, the Central Civil Services (Pension) Rules, 1972 was amended.
Features of NPS
- It is a scheme, where employees contribute to their pension corpus from their salaries, with matching contributions from the government.
- The funds are invested in earmarked investment schemes through Pension Fund Managers.
- At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed.
- It can have two components — Tier I and II.
- Tier-II is a voluntary savings account that offers flexibility in terms of withdrawal, and one can withdraw at any point of time, unlike Tier I account.
- Private individuals can opt for the scheme.
What were the changes introduced in 2019?
- In 2019, the Finance Ministry said that Central government employees have the option of selecting the Pension Funds (PFs) and Investment Pattern in their Tier-I account.
- The default pension fund managers are the LIC Pension Fund Limited, SBI Pension Funds Pvt. Limited and UTI Retirement Solutions Limited in a predefined proportion.
Who is the regulatory authority?
- The Pension Fund Regulatory and Development Authority (PFRDA) is the regulator for NPS.
- PFRDA was set up through the PFRDA Act in 2013 to promote old age income security by developing pension funds to protect the interest of subscribers to schemes of pension funds.
What is the subscriber base?
- As on February 28, there were 22.74 lakh Central government employees and 55.44 lakh State government employees enrolled under the NPS.
Why in news now?
- In Feb, Rajasthan CM announced restoration of the old pension scheme for the government employees, who joined the service on or after January 1, 2004.
- The announcement meant that the National Pension System (NPS) would be discontinued in the State.
- The center had maintained that restoration of the old system would cause an unnecessary financial burden on the government.
Cons of NPS
- Forfeiture of pension: The NPS scheme was created by the Government of India, in order to stop all the defined pension related benefits that it gave to its employees.
- Withdrawal restrictions: NPS restricts all kinds of withdrawals, before the subscriber reaches the age of 60 years.
- No tax benefits: The NPS corpus, which the subscriber can use for buying annuity or for drawing pensions, is taxable, when the schemes matures.
- Limit on investment: The subscriber cannot invest more than 50% of his or her total investment in the NPS account, towards the equities.
- No guarantee: While NPS is a government scheme, the corpus is created according to the returns, which are generated under the corporate bonds, government securities, and equity.
Try this PYQ:
Q.Who among the following can join the National Pension System (NPS)?
(a) Resident Indian citizens only
(b) Persons of age from 21 to 55 only
(c) All-State Government employees joining the services after the date of notification by the respective State Governments
(d) All Central Governments Employees including those of Armed Forces joining the services on or after 1st April 2004
Post your answers here.
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Financial Inclusion in India and Its Challenges
India now ahead of China in financial inclusion metrics: SBI report
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Financial inclusion in India
India is now ahead of China in financial inclusion metrics, with mobile and Internet banking transactions rising to 13,615 per 1,000 adults in 2020 from 183 in 2015.
What does one mean by Financial Inclusion?
- Financial inclusion is defined as the availability and equality of opportunities to access financial services.
- It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services.
- These include banking, loan, equity and insurance products etc.
Key highlights of the Report
- Boosted by PM Jan-Dhan Yojana, the number of bank branches per 100,000 adults in India rose to 14.7 in 2020 from 13.6 in 2015.
- It is higher than Germany, China and South Africa.
- Data shows that states with higher Jan-Dhan accounts balances have seen a perceptible decline in crime.
How did India achieve financial inclusion?
- Financial inclusion policies have a multiplier effect on economic growth, reducing poverty and income inequality, while also being conducive for financial stability.
- India has stolen a march in financial inclusion with the initiation of PMJDY accounts since 2014.
- It was enabled by a robust digital infrastructure and also careful recalibration of bank branches and thereby using the BC model judiciously.
- Such financial inclusion has also been enabled by use of digital payments.
What is the BC Model?
- The report highlighted that the Banking Correspondent (BC) model in India is enabled to provide a defined range of banking services at low cost.
- The new branch authorisation policy of 2017 –recognises BCs that provide banking services for a minimum of 4-hours per day and for at least 5-days a week as banking outlets.
- The BCs are enabled to provide a defined range of banking services at low cost and hence are instrumental in promoting financial inclusion.
- This has progressively done away the need to set up brick and mortar branches.
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Financial Inclusion in India and Its Challenges
What gives rise to the rural debt trap?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Incidence of Indebtedness (IOI)
Mains level: Paper 3- Challenges in access to credit
Context
The AIDIS report published this month reveals that non-institutional sources have a strong presence in the rural credit market, notwithstanding the high costs involved in borrowing from them.
Highlights of AIDIS
- The All-India Debt and Investment Surveys (AIDIS) is carried out by the National Statistical Office.
- AIDIS is among the most important nationally representative data sources on the rural credit market in India.
- According to the latest report, the average debt per household in rural India is Rs 59,748, nearly half the average debt per household in urban India.
- IOI: As per the latest AIDIS report, the incidence of indebtedness (IOI) is 35 per cent in rural India — 17.8 per cent of rural households are indebted to institutional credit agencies, 10.2 per cent to non-institutional agencies and 7 per cent to both.
- Dependence on institutional source: The share of debt from institutional credit agencies in total outstanding debt in rural India is 66 per cent as compared to 87 per cent in urban India.
- Dependence on institutional sources is often seen as a positive development, signifying broadening financial inclusion, while reliance on non-institutional sources denotes vulnerability and backwardness.
- Purpose: Institutional credit is taken mainly for farm business and housing in rural India.
- A significant portion of debt from non-institutional sources is used for other household expenditures.
- Socio-economic inequality: The data indicates that better-off households have greater access to formal-sector credit and use it for more income-generating purposes.
- Access to institutional credit is largely determined by the ability of households to furnish assets as collateral.
- The report shows that the top 10 per cent of asset-owning households have borrowed 80 per cent of their total debt from institutional sources, whereas those in the bottom 50 per cent borrowed around 53 per cent of total debt from non-institutional sources.
- Debt-trap: the Debt-Asset Ratio (DAR) of the bottom 10 per cent asset-owning households in rural India is 39, much higher than the DAR of 2.6 estimated for the top 10 per cent households.
- This, coupled with higher borrowing from non-institutional sources, acts as a debt trap for households with fewer assets.
Way forward
- Inadequate access to affordable credit lies at the heart of the rural distress
- The credit policy needs to be revamped to accommodate the consumption needs of the rural poor and to find alternatives for collateral to bring the rural households within the network of institutional finance.
Conclusion
The solution to the problem of lack of access to credit in rural areas lies in policy changes.
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Financial Inclusion in India and Its Challenges
Financial inclusion
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Challenges in financial inclusion
Context
There are 63.4 million MSMEs in India and 99 per cent of which are micro-enterprises with less than Rs 10 lakh in investment. Financial inclusion and integration is key to bring these businesses into the formal economy.
Financial integration
- What is Financial inclusion? On the front of “financial inclusion”, which refers to the accessibility of banking and availability of credit, we have made significant progress.
- Financial integration: The journey from inclusion to integration is not only about making products available and accessible, but also about making them relevant, applicable, and acceptable.
Demand size challenges
1) Gap between demand and supply of capital
- Due to a limited risk appetite, low or thin-file data on customers and challenging regulatory oversight, capital remains a constraint in designing bespoke products.
- Way forward: For India to overcome these challenges, the existing infrastructure must be adapted to our new purpose, providing easy-to-use, customer-centric experiences.
2) Accessibility
- Greater accessibility has major benefits for not only the customer but also the supplier.
- For example, in rural India, people tend to save in the post office, because of village postal agents collect their savings from their doorstep.
3) Intelligent product design and delivery
- Products must be designed and delivered intelligently to meet the customer where they are, and by keeping in mind that they use products to reach their goals.
- This involves tailoring the products to the needs and income profile of the customer, including being cognisant of their environment, geography, and demography.
4) Lowering the operating costs
- In the traditional financial system, the design and distribution cost on financial products at sachet size is high.
- Financial service providers are consequently dissuaded from attempting to reach rural, financially excluded groups.
- By using the power of machine learning and cloud infrastructure, we can significantly lower operating costs while offering customers affordable, bespoke financial products.
5) Demand-side issues: Financial literacy and technology readiness
- Financial literacy and technology readiness are two critical issues on the demand size.
- Financial education assists people in making sound financial decisions.
Consider the question “Benefits of the financial inclusion remain unrealised without financial integration. In light of this, examine the challenge in financial integration in India and suggest the way forward”
Conclusion
It is our responsibility to create an ecosystem for them to deploy this capital of courage.
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Financial Inclusion in India and Its Challenges
Account aggregators
Note4Students
From UPSC perspective, the following things are important :
Prelims level: UPI
Mains level: Paper 3- Account Aggregators
Context
Account Aggregators will enable the use and enrich the quality of information needed for lenders to extend loans without collateral back-up.
Issue of preference for a collateralised loan in India
- Demand for credit in India far outstrips institutional supply.
- Financial Service Providers (FSPs) are well aware of this demand.
- And they have been looking for ways to provide credit without collateral back-up.
- Historically, financial service providers (FSPs) like banks and non-bank finance companies (NBFCs) have relied on collateral while making lending decisions.
- In the absence of collateral pledges, the only way to assess a consumer’s willingness and ability to repay is by examining the prospective borrower’s cash flows.
- Your bank account statement is a digital representation of your financial life.
- However, this bank account statement-driven process is highly manual, time-consuming, expensive and fraught with potential for abuse.
- These shortcomings have held back cash-flow based lending for too long in India.
- Borrowers in the country have been underserved because of the preference for collateralized loans.
- Both FSPs and consumers are in dire need of a seamless digital way of sharing account information.
Account Aggregator (AA) framework
- The account aggregator framework announced by the Reserve Bank of India (RBI) promises to solve these problems.
- It aims to make financial data sharing as easy as making a Unified Payments Interface (UPI) transfer.
- This is the promise of account aggregation, as envisaged by RBI.
- Account aggregators (AAs), with their user interface, will play a pivotal role in closing the trust deficit between FSPs and consumers.
Fenefits of Account Aggregator would work
- User control over data: They permit users to control who gets access to their data, track and log its movement and reduce the potential risk of leakage in transit.
- A single-window format allows user-friendly data movement and reduces the need for physical transfers and post-facto attestations.
- Industry-standard for consent: AAs create a default industry standard for consent that cuts through the dense fine print buried in most privacy policies.
- Wider data points to rely on: With the security of this data as a given, AAs allow lenders (or other FSPs for that matter) to rely on a wider selection of data points to determine the trustworthiness of a borrower.
- Through AAs, FSPs have a chance to provide cash-flow based credit, personalized financial management tools, robo-advisory services and many more innovative financial products and services to a wider cross-section of people.
Conclusion
By incorporating security, transparency and agility into data sharing, AAs could usher in the most significant transformation of India’s fintech landscape yet.
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Financial Inclusion in India and Its Challenges
RBI unveils Financial Inclusion Index
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Financial Inclusion Index
Mains level: Financial inclusion of masses
The Reserve Bank of India (RBI) has announced the formation of a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country.
Financial Inclusion Index
- The FI-Index will be published in July every year.
- The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.
- It has been conceptualized as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with the government and respective sectoral regulators.
- It has been constructed without any ‘base year’ and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion.
Parameters of the index
- The FI-Index comprises three broad parameters viz.,
- Access (35%),
- Usage (45%), and
- Quality (20%)
- These parameters are the identification of the customer, reaching the last mile, and providing relevant, affordable and safe products.
- The index is responsive to ease of access, availability and usage of services, and quality of services for all 97 indicators.
This year’s highlight
- The annual FI-Index for the period ended March 2021 stood at 53.9 compared with 43.4 for the period ended March 2017.
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Financial Inclusion in India and Its Challenges
Enabling financial inclusion
Note4Students
From UPSC perspective, the following things are important :
Prelims level: JAM trinity
Mains level: Paper 3- Digital payment boom in India
The article takes an overview of the progress made by India in the financial inclusion and role played by JAM trinity in it.
What is financial inclusion?
Financial inclusion is defined as the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products.
Growing adoption of digital payment in India
- India overtook China to register the highest number of countrywide digital payments.
- Real-time transactions crossed 25 billion, much higher than China’s 15 billion in 2020, as per the report of ACI Worldwide.
- The report also stated that digital payments in India are set to account for 71.7 per cent of all payments by volume by the year 2025.
- The digital payment boom is indicative of a larger paradigm shift in the ease of access to financial services.
What are the contributing factors
- More and more people, across all strata, are adopting digital payments as it is convenient, safe and limits exposure.
- It is also a result of the nudges and diligent policy and technology frameworks created by the central government in the last few years.
- By building the Jan-Dhan-Aadhar-Mobile (JAM) and Universal Payment Interface (UPI) platform, the government has been creating the ground for greater financial inclusion.
Significance of JAM trinity
- While Jan Dhan was the first pillar of the ambitious JAM trinity, Aadhaar card seeding and bank account linkages to mobile numbers have empowered people in hitherto unimagined ways.
- The JAM trinity has helped people know their account status, receive scholarships and fellowships, get fertiliser and LPG subsidy, disability pensions and farm income support — directly into their accounts.
- The trinity also helped eliminate middlemen, frauds, and leakages due to corruption.
- In the past one year alone, Rs 4.3 lakh crore was transferred, in over 477 crore transactions under 319 schemes.
- With an estimated saving of Rs 1.8 lakh crore, the success of DBT is a big thumbs up for the central government.
- The aid that reached people during the pandemic under the PM Garib Kalyan package is indicative of the success of the government’s financial inclusion and digitisation efforts.
Conclusion
The unmissable digital and financial revolution that has been unleashed is hard to miss for anyone. The digital journey, however, is long and one hopes to see the positive trends sustaining given their transformative impact on the lives of Indians.
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Financial Inclusion in India and Its Challenges
[pib] NITI Aayog and Mastercard Release Report on financial inclusion
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Report on ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’
About the report
- NITI Aayog and Mastercardtoday released a report titled ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’.
- The report identifies challenges in accelerating digital financial inclusion in India and provides recommendations for making digital services accessible to its 1.3 billion citizens.
- The report highlights key issues and opportunities, with inferences and recommendations on policy and capacity building across agriculture, small business (MSMEs), urban mobility and cybersecurity.
- This report looks at some key sectors and areas that need digital disruptions to bring financial services to everyone.
Key recommendations in the report include:
- Strengthening the payment infrastructure to promote a level playing field for NBFCs and banks.
- Digitizing registration and compliance processes and diversifying credit sources to enable growth opportunities for MSMEs.
- Building information sharing systems, including a ‘fraud repository’, and ensuring that online digital commerce platforms carry warnings to alert consumers to the risk of frauds.
- Enabling agricultural NBFCs to access low-cost capital and deploy a ‘phygital’ (physical + digital) model for achieving better long-term digital outcomes.
- Digitizing land records will also provide a major boost to the sector.
- To make city transit seamlessly accessible to all with minimal crowding and queues, leveraging existing smartphones andcontactless cards, and aim for an inclusive, interoperable, and fully open system such as that of the London ‘Tube’.
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Financial Inclusion in India and Its Challenges
Microfinance Institutions
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Role of microfinance in India and challenges sector faces
The article highlights the important role played by the microfinance sector in furthering financial inclusion in India and suggests measures to achieve holistic development of the sector.
Important role played by microfinance
- No other form of financial services has had the kind of far-reaching impact, in terms of fostering financial inclusion, as microcredit has.
- Access to small, collateral-free loans for economically productive purposes has helped transform the lives of millions at the bottom-of-the-pyramid—especially women.
- Over the past decade, India’s microfinance industry has grown at a compound annual growth rate of 26% to reach ₹2.36 trillion.
- It has helped 50 million economically vulnerable Indians, 99% of them women, live a life of dignity and financial independence.
- Assuming that these 50 million people who took a loan to start a small business employed at least one other person, it translates into 50 million additional jobs in the country.
- This creates a ‘network effect’ that has a social impact at scale.
Evolution of microfinance industry
- Recommendations of the Malegam Committee, which became regulations, and practices such as relying on credit bureau data to assess a borrower’s creditworthiness have helped the industry immensely.
- The vital role that microfinance plays in the last-mile delivery of financial services was acknowledged.
- Subsequently, eight out of the 10 small finance bank licences granted were also given to microfinance institutions.
- RBI has sought to undertake a comprehensive review of the sector again, after 10 years, to better align the regulatory framework with the sector’s current realities.
Steps for development of sector
- First, Entities should promote financial literacy through group meetings of borrowers.
- Second, organizations should complement their microcredit operations with social development projects and community-connect initiatives.
- Third, prospective borrowers’ indebtedness and ability to repay dues should be assessed properly.
- Fourth, loans must be given only for income-generation purposes.
- Fifth, every microfinance organization should devote time and resources for capacity building at the grassroots.
- Sixth, rather than focusing on taking over the existing debt of a borrower, or lending to her further, institutions should focus on bringing new-to-credit customers into the fold.
Consider the question “How can microcredit stimulate financial inclusion in India? Suggest the measures for the development of microfinance sector in India.”
Conclusion
There is much more that we, as a nation, collectively need to do in order to bring a vast population of unbanked and underbanked Indians into the fold of formal financial services.
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Financial Inclusion in India and Its Challenges
National Pension System (NPS)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NPS
Mains level: Various pension schemes in India
The National Pension System (NPS) will no longer compel investors to convert 40% of their accumulated retirement corpus into an annuity.
An annuity is a long-term investment that is issued by an insurance company and is designed to help protect you from the risk of outliving your income. Through annuitisation, your purchase payments (what you contribute) are converted into periodic payments that can last for life.
Why such a move?
- Poor yields on annuities and high inflation are translating into negative returns.
- Since annuities are taxable, deducting the tax and factoring in inflation means annuities are yielding negative returns.
Try this PYQ:
Q.Who among the following can join the National Pension System (NPS)?
(a) Resident Indian citizens only
(b) Persons of age from 21 to 55 only
(c) All-State Government employees joining the services after the date of notification by the respective State Governments
(d) All Central Governments Employees including those of Armed Forces joining the services on or after 1st April 2004
National Pension Scheme (NPS)
- NPS is a government-sponsored pension scheme. It was launched in January 2004 for government employees.
- It was extended to all citizens of Indian on a voluntary basis from May 2009 and to corporates in December 2011 and to Non-Resident Indians in October 2015.
- PFRDA is the statutory authority established by an enactment of the Parliament, to regulate, promote and ensure orderly growth of the NPS and pension schemes to which this Act applies.
- The scheme allows subscribers to contribute regularly in a pension account during their working life.
- On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.
Who can join NPS?
- Any Indian citizen between 18 and 60 years can join NPS.
- The only condition is that the person must comply with know your customer (KYC) norms.
- An NRI can join NPS. However, the account will be closed if there is a change in the citizenship status of the NRI.
- Now, any Indian citizen, resident or non-resident and OCIs are eligible to join NPS till the age of 65 years.
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Financial Inclusion in India and Its Challenges
Digital lending
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Digital lending and challenges
Digital lending has been on the rise in India. However, there are several concerns about the model. The article discusses these concerns and suggests the policy approach.
3 digital lending models
- Presently, there are three digital-lending models, seen through the regulatory-approach lens:
- 1) Bank/NBFC-owned digital platforms operating under the direct regulatory purview of RBI.
- 2) Fintech companies’ proprietary digital platforms, working in partnership with banks/NBFCs.
- Being mere intermediaries, these platforms are not required to seek any registration with RBI, and are only indirectly regulated through RBI’s outsourcing guidelines applicable to Banks/NBFCs.
- 3) Peer-to-peer (P2P) lending platforms, which usually involve the otherwise unregulated retail lenders.
- RBI has mandated such platforms to seek registration as NBFC-P2P; thus, they are directly regulated by RBI.
Issues with digital lending
- The specific issues are unauthorised lenders, exorbitant rates of interest, use of coercive repayment methods, and non-consensual collection or use of user data.
- These issues entail serious adverse implications for borrowers and have systemic implications, hampering the rise of legitimate fintech players.
Steps taken
- With a view to curb such practices, RBI, in 2020, issued a notification to Banks/NBFCs mandating additional disclosures/compliances, and an advisory to borrowers warning them against such platforms.
- Following the notification, Google removed several such loan apps from its PlayStore.
- The Digital Lenders’ Association of India (DLAI) also issued guidelines to help borrowers identify such unscrupulous platforms.
- In the regulatory pipeline on this front is the report of the working group on digital lending, constituted by RBI in January 2021.
Framing effective policy solutions
- Given the significant contribution of legitimate fintech players, it is important to ensure that any policy solutions to address such issues do not impede the growth of such players.
- The key to this lies in adoption of light-touch regulation, along with the effective implementation of the already proposed regulatory initiatives.
- For instance, the primary cause of the rising supply of unauthorised lending platforms is the existing credit information asymmetry that genuine lenders face in respect of small borrowers.
- Here, operationalising and on-scale implementation of RBI’s proposed ‘Public Credit Registry’ and the ‘Open Credit Enablement Network’ (an infrastructure protocol enabling digital low cost lending to small borrowers through access of consented data) would lead to increased participation of legitimate players and curb proliferation of unauthorised lenders.
- Another foundation for framing effective policy solutions lies in leveraging the interdependence and impact of each individual constituent of the digital lending ecosystem, on other constituents.
- Apart from lenders/platforms/borrowers, these constituents also include the digital lending industry associations, consent managers and technology developers.
- Regulators and industry associations working together can provide the necessary foundations for addressing these issues.
- Other solutions spear-headed by industry associations could be to establish ‘certification system’ based maintenance of a repository of lending platforms for easy identification of genuine players.
- Similarly, on the data protection aspect, a structural solution through coordinated efforts of various digital lending constituents is required.
Consider the question “Examine the factors aiding the growth of digital lending in India. What are the challenges the sector face? Suggest the measures to deal with these challenges.”
Conclusion
For the continued development of the Indian digital lending economy, it is important to implement policy solutions that adequately protect the borrowers from malpractices, while, at the same time, do not dampen innovation in this fast-evolving sector.
Source:-
https://www.financialexpress.com/opinion/soft-touch-regulation-for-digital-lending/2215702/
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Financial Inclusion in India and Its Challenges
Payment banks
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Payment Banks and Small Finance Bank
Mains level: Paper 3- Challenges in financial inclusion
The article highlights the important role Payment Banks could play in furthering the financial inclusion in India.
Financial inclusion and challenges
- Interventions, especially the JAM trinity—Jan Dhan accounts, Aadhaar and Mobile phones—have accelerated digital and financial inclusion in India.
- Four of every five Indian adults have a registered bank account.
- Financial inclusion is not only about opening accounts, it encompasses access to credit, insurance and micro-investment products in a simple and safe way.
- This remains a challenge for ‘weaker sections and low-income groups’.
- For instance, only 16% of micro, small and medium enterprises (MSMEs) have access to formal credit amid an estimated debt demand of ₹69.3 trillion.
High-technology, low-cost banking to accelerate financial inclusion
- In 2014, Nachiket Mor committee recommended setting up “high technology—low cost” banking models to accelerate financial inclusion to the last mile.
- Subsequently, the Reserve Bank of India licensed ‘vertically differentiated banking systems’, such as Payments Bank (PBs) and Small Finance Banks (SFBs).
- SFBs have grown profitably thanks to the yield spread between deposits and lending.
- Most of them started off as micro finance institutions with a ready asset base, and after converting into SFBs, they have got a better liability franchise but continue to operate in niche geographies.
- On the other hand, PBs have shown strong growth in revenues, while operating at a larger scale than SFBs.
- The high-tech PB model has shown more rigour than the cost-heavy branch-based SFB model in terms of its impact on inclusion.
Need for structural intervention
- If we intend to make a real move ahead on the inclusion front, PBs will have to play a larger role.
- However, to realize their full potential, they need certain structural interventions:
1) Liabilities
- PBs can take deposits only up to ₹1 lakh, which limits their ability to augment profit that can be further deployed to enhance efficiencies.
- For a few segments, such as self-help groups and MSMEs, the savings account limit blocks the adoption of highly-accessible bank accounts.
- Since the model has matured, it would be prudent to enhance the deposit limit to ₹5 lakh and benchmark it to Deposit Insurance and Credit Guarantee Corporation limits.
- Banking Correspondents (BCs) are a critical link in driving financial inclusion.
- PBs could offer low-value and simple fixed or recurring deposit products and sell to consumers through their BC distribution network, thus improving their viability.
2) Assets
- Currently, there is no national-level lender with the risk appetite for thin-credit consumers.
- PBs can evolve new micro-lending models through their BC networks and mobile apps and create an alternate credit score for these consumers.
- Allowing micro-lending by PBs could be a starting point. Thereafter, regulators may consider a transition path for them to become SFBs, or even Universal Banks.
3) Working together for collective impact
- PBs have an edge in technology and reach, while traditional players have a trust legacy.
- For collective impact on inclusion, two options can be evaluated with safeguards in place.
- One, PBs could co-originate loans with traditional institutions so that capital requirements are shared.
- Two, they can originate credit and allow it to mature, or securitize and turn it into a market-linked instrument.
- This could accelerate credit formalization.
Conclusion
We must remind ourselves that there is no one-size-fits-all solution to achieve complete financial inclusion for the diversified needs of our people. An enabling framework needs to be in place. Payments Banks, in particular, have the potential to bridge India’s financial inclusion gaps.
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Financial Inclusion in India and Its Challenges
[pib] Framework for Regulatory Sandbox
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Regulatory sandbox
Mains level: Paper 3- Regulatory sandbox
The International Financial Services Centres Authority (IFSCA) has introduced a framework for Regulatory Sandbox to tap into innovative Fin-tech solutions.
Try answering this simple question:
Q.What is Regulatory Sandbox? What are its salient features?
Regulatory Sandbox
- A regulatory sandbox usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may permit certain regulatory relaxations for the limited purpose of the testing.
- The objective of the sandbox is to foster responsible innovation in financial services, promote efficiency and bring benefit to consumers.
- It provides a secure environment for fintech firms to experiment with products under supervision of a regulator.
- It is an infrastructure that helps fintech players live test their products or solutions, before getting the necessary regulatory approvals for a mass launch, saving start-ups time and cost.
Its inception
- The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen.
- The panel submitted its report in Nov 2017 has called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
- If the product appears to have the potential to be successful, it might be authorised and brought to the broader market more quickly.
What is the new framework?
- IFSCA has introduced a framework for “Regulatory Sandbox”.
Under this Sandbox framework, entities operating in the capital market, banking, insurance and financial services space shall be granted certain facilities and flexibilities. - It will experiment with innovative FinTech solutions in a live environment with a limited set of real customers for a limited time frame.
- These features shall be fortified with necessary safeguards for investor protection and risk mitigation. The Regulatory Sandbox shall operate within the IFSC located at GIFT City (Gandhinagar).
- IFSCA shall assess the applications and extend suitable regulatory relaxations to commence limited purpose testing in the Sandbox.
Other propositions
- As additional steps towards creating an innovation-centric ecosystem, the IFSCA has proposed the creation of an “Innovation Sandbox”.
- It will be a testing environment where Fin-tech firms can test their solutions in isolation from the live market.
- This would be based on market related data made available by the Market Infrastructure Institutions (MIIs) operating in the IFSC.
- The Innovation Sandbox will be managed and facilitated by the MIIs operating within the IFSC.
Back2Basics: GIFT City, Gandhinagar
- GIFT city is India’s first operational smart city and international financial services centre (much like a modern IT park).
- The idea for GIFT was conceived during the Vibrant Gujarat Global Investor Summit 2007 and the initial planning was done by East China Architectural Design & Research Institute (ECADI).
- Currently approximately 225 units/companies are operational with more than 12000 professionals employed in the City.
- The entire city is based on concept of FTTX (Fibre to the home / office).The fiber optic is laid in fault tolerant ring architecture so as to ensure maximum uptime of services.
- Every building in GIFT City is an intelligent building. There is piped supply of cooking gas. India’s first city-level DCS (district cooling system) is also operational at GIFT City.
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Financial Inclusion in India and Its Challenges
National Strategy for Financial Education
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not Much
Mains level: Financial education
The National Strategy for Financial Education (NSFE): 2020-2025 documents has been released by the Reserve Bank of India (RBI).
Try this question for mains:
Q.What is the role of Financial Education in ensuring financial inclusion in India?
What is the Strategy?
- The NSFE for the period 2020-2025, the second one after the 2013-18 NSFE, has been prepared by the National Centre for Financial Education (NCFE) in consultation with all the Financial Sector Regulators (RBI, SEBI, IRDAI and PFRDA.
- Other stakeholders include (DFIs, SROs, IBA, and NPCI) under the aegis of the Technical Group on Financial Inclusion and Financial Literacy (TGFIFL) under the Chairmanship of Deputy Governor, RBI.
Key recommendations
- The strategy recommends the adoption of a multi-stakeholder approach to achieve financial well-being of Indians.
- The document has recommended a ‘5 C’ approach for dissemination of financial education in the country. These include an emphasis on:
- development of relevant content in the curriculum in schools, colleges and training establishments,
- developing capacity among the intermediaries involved in providing financial services,
- leveraging on the positive effect of the community-led model for financial literacy through appropriate communication strategy, and
- enhancing collaboration among various stakeholders
Other objectives
- The strategic objective is also towards improving usage of digital financial services in a safe and secure manner; as well as bringing awareness about rights, duties and avenues for grievance redressal.
- To achieve the vision of creating a financially aware and empowered India, certain strategic objectives have been laid down including:
- Inculcating financial literacy concepts among various sections of the population through financial education to make it an important life skill
- Encouraging active savings behaviour and developing credit discipline
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Financial Inclusion in India and Its Challenges
[pib] Atal Pension Yojana: Marking 5 Years of Implementation
Note4Students
From UPSC perspective, the following things are important :
Prelims level: APY, NPS, PFRDA
Mains level: Old age security concerns addressed by APY
The flagship social security scheme ‘Atal Pension Yojana’ (APY) has completed five years of successful implementation.
Five years of successfull implemention of APY is a significant feat. A statement based prelims question on terms of enrolment of the APY can be asked.
Atal Pension Yojana
- APY is a government-backed pension scheme, primarily targeted at the unorganised sector.
- It is a social security scheme launched by the government on 9th May 2015 to provide a defined pension between Rs 1,000 to Rs 5,000.
- It aims of delivering old age income security particularly to the workers in the unorganised sector with a guarantee of minimum pension after 60 years of age.
Terms of enrolment
- APY can be subscribed by any Indian citizen in the age group of 18-40 years having a bank account and its uniqueness is attributable to three distinctive benefits.
- First, it provides a minimum guaranteed pension ranging from Rs 1000 to Rs 5000 on attaining 60 years of age,
- Secondly, the amount of pension is guaranteed for a lifetime to spouse on death of the subscriber.
- And lastly, in the event of the death of both the subscriber and the spouse, entire pension corpus is paid to the nominee.
Success of the scheme
- The scheme has now 2.23 crores enrolment.
- Apart from remarkable enrolments, the scheme has been implemented comprehensively across the country covering all states and UTs with male to a female subscription ratio of 57:43.
About PFRDA
- Pension Fund Regulatory and Development Authority (PFRDA) is the statutory authority established by an enactment of the Parliament.
- It aims to regulate, promote and ensure orderly growth of the National Pension System (NPS) and pension schemes to which this Act applies.
- NPS was initially notified for central government employees recruits w.e.f. 1st Jan 2004 and subsequently adopted by almost all State Governments for its employees.
- NPS was extended to all Indian citizens (resident/non-resident/overseas) on a voluntary basis and to corporates for its employees.
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Financial Inclusion in India and Its Challenges
National Strategy for Financial Inclusion (NSFI)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Strategy for Financial Inclusion (NSFI)
Mains level: Financial inclusion in India
The Reserve Bank of India (RBI) has chalked out an ambitious strategy for financial inclusion of all till 2024.
National Strategy for Financial Inclusion (NSFI)
- Financial inclusion is increasingly being recognised as a key driver of economic growth and poverty alleviation the world over.
- The strategy aims to strengthen the ecosystem for various modes of digital financial services in all Tier-II to Tier VI centres to create the necessary infrastructure to move towards a less-cash society by March 2022.
- One of the objectives of the strategy includes increasing outreach of banking outlets of to provide banking access to every village within a 5-km radius or a hamlet of 500 households in hilly areas by March 2020.
- RBI said that the aim was also to see that every adult had access to a financial service provider through a mobile device by March 2024.
- With the aim of providing basic of financial services, a target has been set that every willing and eligible adult, who has been enrolled under the PM Jan Dhan Yojana, be enrolled under an insurance scheme and a pension scheme by March 2020.
- The plan is also to make the Public Credit Registry (PCR) fully operational by March 2022 so that authorised financial entities could leverage the same for assessing credit proposals from all citizens.
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From Jan Dhan to Jan Suraksha: A Journey towards Financial Inclusion and Security
The budget 2015-16 had announced 3 Social Security Schemes:
#1. Pradhan Mantri Suraksha BimaYojna (PMSBY)
#2. Pradhan MantriJeevan Jyoti Bima Yojana (PMJJBY)
#3. Atal Pension Yojana (APY)
Why the schemes?
- India faces the biggest challenge of providing banking facilities and insurance coverage to all
- Having access to institutional finance has so far remained a far cry to a vast chunk of rural population
- As of May 2015, only 20% of India’s population has any kind of insurance and only 11% has any kind of pension scheme
- Insurance is a way of managing risks & give necessary protections in case of financial loss
- When one has an insurance policy, certain rights and protections are derived out of it to the person and his family
- There is a dire need for providing social security at a very nominal cost to the millions and economic empowerment of the poor
Answer in comments.> - PMJDY is a major step to bring people across the country closer to institutionalized finance, and save them from the clutches of informal financiers
- However, most of the PMJDY accounts had zero balance initially. The government aims to reduce the number of such zero balance accounts by using these schemes
Answer in comments.>
PMSBY & PMJJBY:
- Implementation: The scheme will be offered by all Public Sector General Insurance Companies and all other insurers who are willing to join the scheme and tie-up with banks for this purpose
- Govt Contribution: Various Ministries can co-contribute premium for various categories of their beneficiaries from their budget or from Public Welfare Fund created in this budget from unclaimed money
- Auto-debit: The premium amount will be auto debited from subscriber’s bank account
- The schemes will be linked to the bank accounts opened under the Pradhan Mantri Jan Dhan Yojana scheme
Criticisms of PMSBY:
- Private banks have complained that the Govt should focus on upper middle class instead of the poorer section
- Western scholars have argued that financial inclusion is a myth and serving such large number of people would only increase the burden and work-load of public sector
Criticisms of PMJJBY:
- The banks have complained that revenue received will be very low
- Some bankers have claimed that amount they are receiving is not sufficient to cover the service costs
- Insurers have also pointed out that no health certificate or information of pre-existing disease is required for joining
Atal Pension Yojana
- It focuses on the unorganized sector where nearly 400 million employees representing more than 80% of all employees are engaged
Answer in comments.> - The aim is to make sure that needy people could get fixed amount when they get old
- It is the improved version of Swavalamban scheme, launched in 2010-11, which has been found lacking in clarity with regard to pension benefits at the age after 60
Features:
- All citizen of India aged between 18-40 years are eligible
- A guaranteed minimum monthly pension will be provided to the subscribers varying from Rs. 1000 to Rs. 5000 per month
- The pension amount depends on contribution by subscriber
- Government of India will guarantee the minimum benefit of pension
- Most interesting part of the scheme is that the government will contribute 50% of the contribution made by the subscriber or Rs. 1000 whichever is lower
- However, contribution by the govt is available for only those who are not income tax payers and are not covered by any Statutory Social Security Schemes
- Bank account holder of Any Bank account is eligible
Suraksha Bandhan drive- Spreading the social security message
- Aim: To take forward the Govt’s objective of creating a universal social security system in the country, targeted especially at the poor and the under-privileged
- Participating Banks supported by the participating Insurance Companies are carrying out local outreach, awareness building and enrolment facilitation under the drive
- Public service organizations supported by peoples representatives are participating in these efforts through various outreach activities such as enrolment drives, camps etc. in large numbers during this period