Financial Inclusion, At What Cost? : Quantification of Economic Viability of A Supply Side Roll Out

The Prime Minster Jan-Dhan Yojna (PMJDY), started in 2014, follows in a long line of drives for financial inclusion in India, marked only by a much greater scope and ambition than previous roll outs. This top down approach to close the gap on the unbanked of India relies primarily on public sector banks with targets set for rural outreach. We develop an innovative approach using cross sectional bank level data from 2014 till 2017 to quantify the incentives and costs involved in targeting unbanked households. This gives a monetary estimate of the economic shortfalls or surpluses for participating banks, measured as bank balances relative to outlay costs and subsidies per PMJDY beneficiary. We model the double bind problem faced by banks to achieve economies of scale that arise from spreading the fixed infrastructure costs over the number of below poverty line (BPL) customers when there is a dearth of balances in these accounts. This lack of economic viability of PMJDY accounts is found in most public sector banks, a matter which is problematic in view of their extant financial fragility in India. We provide evidence for cross subsidization of rural bank accounts by urban accounts. We give estimates using fixed effects panel methods as to what cost public sector banks bear and also quantify the extent to which account ineffectiveness is ameliorated with exogenous factors, primarily the tie up of PMJDY accounts with bio-metric Aadhar cards and electronic direct benefit transfer of G2P payments