> Posted by Jayshree Venkatesan, Financial Inclusion Consultant

The Pradhan Mantri Jan Dhan Yojana (PMJDY) Indian national financial inclusion strategy was launched with much fanfare exactly a year ago by the government. As we pass the first year anniversary, there have been a number of reports that indicate that the program is not as successful as claimed, either in reaching the poorest of the poor, or in preventing dormancy of accounts. The World Bank’s latest Global Findex study says the number of people accessing a formal bank account in India increased from 35 percent in 2013 to 53 percent in 2014. The same study also indicates that India is among the countries with the highest percentage of dormant accounts at 43 percent, meaning the PMJDY accounts that have been opened have a high likelihood of becoming dormant.

The idea of opening bank accounts to financially include the poor is by no means a novel idea, and has been tried in various forms over the past decade in the Indian context. While there have been challenges with access, I argue the bigger issue is account dormancy. In India, it’s often the case that after access is extended, accounts remain dormant, which results in high costs for banks. This in turn tends to add to the perception that the poor are unbankable and supports a vicious cycle with bad behavior by bankers to dissuade poor customers.

My research across 368 households in four districts in Tamil Nadu, a state that has fairly high literacy rates, social security programs, and access to bank branches, indicates that awareness about the PMJDY remains low at 16 percent of the households surveyed. If this is the scenario in a state like Tamil Nadu, it is safe to say that the situation is far worse in states that have lower bank branch penetration and social indices.

So, why do accounts turn dormant? One of the explanations continuously cited is the inability of the poorest to save. Even if one were to accept this argument, in the Indian context, the government has begun transfer of subsidies and benefits directly to PMJDY accounts, so there should be at least two transactions every month – i.e. that of benefits being transferred in, and being withdrawn. In reality, dormancy of accounts might be closer linked to lack of awareness of how the account functions and how its use would benefit the customers, even the poorest. Almost all banks in India are promoting financial literacy through camps and group classes. However, the evidence from financial literacy initiatives shows mixed results.

The answer to solving this problem might well lie in thinking beyond traditional financial literacy. Most financial literacy programs are geared towards providing information about a financial product, or a set of products. But if clients cannot establish the relevance of these product features for their day-to-day lives, this information is soon forgotten. The concept of financial capability, on the other hand, includes financial literacy, but also equips customers with the skills to understand their own financial circumstances and use this information, resulting in the uptake of financial services.

There are two aspects to financial capability to keep in mind. The first is to ensure that financial service providers have a strong understanding of their customers and their attitudes on finance. Providers need to understand their clients to the extent that they are able to develop and deliver the required financial products in an accessible and reliable manner. The other aspect is ensuring that product delivery takes place in a manner that equips the customer with empowering financial knowledge and skills, and that these translate into usage of the product.

In the context of the PMJDY, this would mean customers being aware of the fact that their savings account is bundled with life insurance, personal accident insurance, and an overdraft facility, which can be availed only when the customers transact through the account’s accompanying RuPay card and have a clear credit history. Having financially capable account holders would also mean they’re saving, in small amounts, and are aware of how to withdraw such funds from an ATM in the case of an emergency. That awareness and active use being the rule, rather than the exception, in my mind, would be the PMJDY program living up to its full potential.

In order to get to this state, financial service providers have to begin thinking about better ways to understand and engage with their lower-income customers, for that is when the leap from financial literacy to financial capability will occur.

Jayshree Venkatesan is a consultant specializing in financial inclusion. Learn more about her work here.

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