Monday, June 8, 2015

Increasing the utilization of JDY accounts

The biggest concern with India's Jan Dhan Yojana (JDY), in which no-frills accounts with zero-balance are opened to achieve financial inclusion, is with its actual utilization. A large majority of accounts have not been transacted on and very few have had meaningful enough transactions.

In fact, acknowledging this possibility, the government had designed the JDY with multiple incentives. In fact, the scheme has atleast five incentives as top-ups - a zero-balance facility (against the Rs 1000 minimum deposit requirement in regular accounts), a RuPay debit card, a Rs 1 lakh accident insurance, and Rs 30,000 medical insurance for the poor, and an over-draft facility of upto Rs 5000 per household. It was premised that these incentives would promote the bank account utilization. Now that incentives have not proved sufficient, the next dimension is being pursued is to enable access - through increased banking correspondents and even mobile telephones. 

Both incentives and access are doubtless essential to improving account utilization. But if experience from across the world is any indicator, this is unlikely to bridge the last mile gap and get households to use the accounts. Such persistent last mile gaps are more amenable to nuanced behavioral interventions or nudges. Here are atleast three nudges that have the potential to complement incentives and access and bridge the last mile gaps, thereby increasing the actual utilization of JDY accounts.

1. Multi-tier accounts - Behavioral psychologists highlight the importance of mental accounting, whereby people mentally categorize their incomes into different use-directed buckets. Accordingly, people are more likely to save when they desperately want to save for something and have a mechanism to save for it - eg. people use piggy-banks or lock-boxes to save for buying a bicycle or mixer-grinder. In fact, at any time, most poor people use some version of this to save for certain highly valued purposes. Therefore, a multi-tier savings bank account, where people can customize tiers based on their needs, has the potential to be a powerful nudge to get people to start using bank accounts.
2. Lotteries - People, poor and rich, are instinctively attracted to gambling. Lotteries find great attraction among poor people, in particular. In fact, the vast majority of lottery customers come from the lower half of the income ladder. Lottery schemes, like chit funds, which offer investors in recurring payment savings schemes with defined tenures the possibility of windfall payouts are wildly popular among poor people. A periodic lottery offered to active users, through prize-linked savings bank account, can be a powerful nudge to get them to start using the JDY accounts. There is growing evidence of lottery schemes being successful in increasing savings.

3. Commitment contracts - People have a time inconsistency problem whereby they have different preferences on current and future choices on the same issue. Accordingly, while the current-self attaches a high-value to exercising tomorrow morning, the future-self discounts it heavily when tomorrow morning arrives. Consider this example. When they receive their lumpy harvest income, farmers are committed to saving enough to buy fertilizers for the next crop and not fritter it away on festivals or temptation goods. But come the festival or another temptation need, this resolve breaks down, leaving the farmer with too little to buy the fertilizers or make ends meet till the next harvest arrives. So how about a harvest annuity scheme or fertilizer savings account, with attractive enough savings returns, attached to the JDY account, that helps farmers amortize atleast a part of their incomes till the next harvest thereby optimizing their income management or pay for fertilizers for the next harvest. These are examples of commitment contracts that help tide over the time inconsistency problem. Successful outcomes from some such commitment contracts are summarized in a recent report in Science journal highlighted by this WSJ report.   

These are not to be seen as stand-alone strategies, but part of a menu of choices linked to the JDY account and readily available for the account holder to choose from based on their preferences and needs. Their enrollment/subscription processes should be extremely simple and user-friendly, so as to lower the access barriers and costs. Finally, they have to be aggressively marketed through information and education campaigns that reach these customers. Though the potential for their abuse is considerable, the predominantly public nature of banking sector, especially those servicing the poor, should mitigate those risks. 

None of this is to argue that this can be a guarantee to increasing the utilization of JDY accounts. It is just that this approach, coupled with incentives and access that is being promoted by the government, stands a greater likelihood of success with promoting real financial inclusion.

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