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Financial Services for the Poor Research Team | Posted On Thursday, September 11,2014, 03:03 PM

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Financial Services for the Poor



For the growth and development of the nation financial services (Think banking and insurance services) need to reach every nook and corner of the country.Banking and insurance services for the poor and rural masses at affordable rates is popularly called financial inclusion. It is commonly believed that banking and insurance services are for the rich and the people who live in cities.

For decades banking and insurance sectors neglected the rural areas but in the past few years banks have made an entry into villages .Life and general insurance penetration is around 4% in India and entry by the insurance sector into rural areas is a must both for insurance company and the people who live in villages.

Why People in Rural Areas Don't Trust Banks?

When you open a bank account you will have to submit an identity and an address proof and other documents for your KYC (Know Your Customer) norms. If you are from a village (rural area) this can be quite a burden. Imagine standing in a long line in a bank and when you finally reach the counter the officer tells you This document is not proper.....That document is not proper.You resolve never to come back again.

KYC (Know Your Customer) :

Norms (Conditions) are necessary to prevent black money and unaccounted cash who’s source is not known (money laundering) from passing through the banking channels. Those who have black money know how to pass it around and not much can be done to stop such determined individuals.

The people from rural areas rarely have this black money and have no need to fear the KYC norms. The documentation of the KYC where the rural people require to have a PAN card and other documents makes them run away from banks and availing banking services which are very necessary for them.

Bankers Have Targets :

(They have to get customers to open a certain number of bank accounts per month).At this moment bankers catch all possible customers including the rural ones and force them to open a bank account. After these accounts are opened no cash deposits are made in these accounts and they lie dormant (not in use) as the rural/village people do not use these accounts.

Bankers cannot force you to operate your accounts nor can they put cash in them. Bankers are least bothered whether you use your account or not as their target is mainly making you open the bank account.

Loans for the Rural People :

People who reside in villages such as farmers make bumper profits after a good harvest especially after a great monsoon. They buy gold jewelry and ornaments with these profits. Farmers can easily pledge gold ornaments with banks (take a gold loan) and raise cash for any emergency. Banks have strict conditions for lending and even though farmers may have the gold ornaments banks do not lend to them as they do not match CIBIL criteria and banks eligibility norms. Documentation is also a big barrier for these farmers.

Financial Inclusion

This is a process where all the people in India mainly the poor and needy are able to avail affordable financial services such as banking and insurance.

True growth can only be achieved when all the individuals of the nation contribute to its success making use of banking and insurance facilities.

What are Small Banks?

These banks are small in size compared to the commercial banks you see. The banks lend to farmers and rural people and service loans of small value (micro credit).

These banks accept deposits and lend to farmers and other rural people. These are people who are neglected by larger commercial banks but if India is to progress the rural people also need to avail banking and insurance services.

  • Small banks focus only on rural areas.
  • Small banks though small in size use excellent technology to make up for lack (shortage) of staff.
  • They deal with basic services such as collecting deposits and lending to farmers and the poor. High end services such as share trading are not provided.
  • The small banks service loans of average size INR 25 Lakhs .This means they lend money to the low income groups.
  • Non banking financial services (NBFC) which already have intensive rural lending operations can easily get licenses to become small banks.

Pradhan Mantri Jan Dhan Yojana (PMJDY)

The PMJDY aims to provide financial services (banking and insurance) to the poor and needy in all corners of the country. (Financial inclusion) at very affordable rates. Pradhan Mantri Jan Dhan Yojana (PMJDY) kicked off with 1.5 crore bank accounts opened on the very first day of its launch (August 28th 2014).

  • You can open a bank account at all private and public sector banks at designated branches which are part of the PMJDY scheme.
  • Even if you already have a savings bank account you can open a savings bank account under PMJDY .If you already have a savings bank account then open the PMJDY account at a different branch.
  • You get an account opening form which you fill and attach a photograph along with your signature.
  • The KYC norms are simple and you only need an identity proof.

Voter ID card
Driving license
PAN Card
Aadhaar card
NREGA Job card attested by State Government Official.

You need to submit your Aadhaar card and you get a unique id with which you can log into the system. This prevents you from opening multiple accounts under the PMJDY scheme.

You also get:

Accident insurance cover of INR 1 Lakh.
Life insurance cover worth INR 30000.
Rupay debit card

Free of cost if you open your savings account under the PMJDY before January 26th 2015. After six months of opening the PMJDY account you are allowed to overdraw an amount of INR 5000.

What if I Don’t Have a Valid ID Proof?

You can open a PMJDY without the above mentioned ID proofs but such accounts are called “small accounts”. You need to submit a self attested photograph along with a signature or a thumb impression.

You need to submit an address proof within 6 months of opening a small account. Small accounts are valid only for 12 months and are useful only for illiterate people and tribals who avail subsidy benefits from the Government.

You cannot maintain a balance of above INR 1 Lakh and you cannot withdraw more than INR 10000 per month. No cheque book facilities are provided.

How Does the Insurance Sector Benefit from PMJDY?

Under the PMJDY scheme 1.5 Crore bank accounts were opened on the first day of launch. This means 1.5 Crore accident policies and life insurance policies which can only be good for the insurers.

Financial inclusion is a win win situation for both the rural and the poor as well as insurance companies and banks.

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