Interest Rate, Government Deposit Schemes, Chit Funds, PM Jan Dhan Yojana

Interest rate decisions are taken by the Reserve Bank of India's (RBI) Central Board of Directors. The official interest rate is the benchmark repurchase rate, which is better known to as REPO rate. It may be defined as the discount rate at which Reserve Bank of India repurchase government securities from Commercial Banks, depending on the level of money supply it decides to maintain in the country’s monetary system. Interest Rate in India averaged 6.68 percent from 2000 until 2015, reaching an all-time high of 14.50 percent in August of 2000 and a record low of 4.25 percent in April of 2009. Presently, interest rate in India is 7.75 percent.

Most of the time we see the REPO rate is used to control inflation in India (Inflation is defined as a sustained increase in the general level of prices for goods and services, it is measured as an annual percentage increase). How it controls inflation?  In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates increase, consumers tend to have less money to spend. With less spending, the economy slows and inflation decreases.Usually with the increase or decrease in REPO rate, the commercial banks also increase or decrease its loan interest rate and deposit interest rate to pass on the benefit or disadvantage to its customer.

 

Hope we could explain REPO rate, inflation and its relation with deposit interest rate and loan interest rate in short and in layman’s language. Now let us try to understand small savings schemes also.

 

Commercial Banks and Post Offices play a major role in in small savings in India. Small savings schemes are designed to provide safe and attractive investment options to the public and at the same time to mobilise resources for development. These schemes operate through about 1.54 lakh post offices throughout the country. Public Provident Fund Scheme is also operated through about 8000 branches of public sector banks in addition to the post offices. Deposit Schemes for Retiring Employees operate through selected branches of public sector banks only.Rural India is more dependent on Post Offices for savings scheme as opening accounts in Bank so far had been a cumbersome process which asks for more documentation than Post Offices.

It is evident from the graph above that interest rate had gone through the roller coaster ride since 2000, majorly it declined. With the hassles of opening and operating account in Banks and Post Offices propelled by a decline in interest rate many small savings scheme lost its attractiveness which paved way for the so called Chit Fund to become a player in this segment.

 

Ponzi Schemes in India is popularly known as Chit Fund, though it is not. They were able to woo the investors with their promise of exorbitant high return on investment. They promised to double the invested amount in 3 years. 25.99 percent return per annum compounded annually!! This bluff was easily accepted by small and poor investors who were not connected to the commercial banks and post offices and due to lack of their awareness. Many Post Office, Insurance and Mutual Fund agents worked as an agent for these Chit funds also. With their earlier record of good services these agents were able to mop up a huge collection from the market. It reduced the collection in small savings schemes by 80% in states like West Bengal!! Well the role of leaders and members of the ruling party of West Bengal for Chit Fund Scam is under CBI scanner right now. Needless to say that these Chit Fund companies were there to cheat the investors, but the distributors, i.e. the agents should have been more careful while promoting Chit Fund schemes as they were aware of the prevailing interest rate in India and the promised interest rate of these chit fund companies, when compared, were too high! Chit Funds are now a history; CBI and ED are now resolving that mystery. The irreparable damage was done to the Indian economy as small savings schemes got a major blow from it.

 

Chit Funds were able to do their activity as most of India was excluded from the financial system and lack of awareness. Despite various measures for financial inclusion earlier, poverty and financial exclusion continued to dominate socio-economic and political discourse in India even after six decades of post economic independence era. Though the economy has shown impressive growth during the post liberalization era of 1991, impact yet to percolate to all sections of the society and therefore, India is still home of one-third of the world's poor. Census, 2011 estimated that only 58.7% of the households have access to banking services.The banking network of the country, as of 31.03.2014, comprised of a bank branch network of 1,15,082 and an ATM network of 1,60,055. Of these, 43,962 branches (38.2%) and 23,334 1 ATMs (14.58%) are in rural areas.

 

After becoming Prime Minister, Mr Narendra Modi announced Prime Minister’s Jan Dhan Yojana (PMJDY) – a plan for financial inclusion.  PMJDY is planned to be executed in mission mode, which comprises of the following six pillars:

 

·         Universal access to banking facilities: Mapping of each district into Sub Service Area (SSA) catering to 1000-1500 households in a manner that every habitation has access to banking services within a reasonable distance say 5 km by 14 August, 2015. Coverage of parts of J&K, Himachal Pradesh, Uttarakhand, North East and the Left Wing Extremism affected districts which have telecom connectivity and infrastructure constraints would spill over to the Phase II of the program (15 August, 2015 to 15 August, 2018)

·         Providing Basic Banking Accounts with overdraft facility and RuPay Debit card to all households: The effort would be to first cover all uncovered households with banking facilities by August, 2015, by opening basic bank accounts. Account holder would be provided a RuPay Debit Card. Facility of an overdraft to every basic banking account holder would be considered after satisfactory operation / credit history of six months.

 

·         Financial Literacy Program: Financial literacy would be an integral part of the Mission in order to let the beneficiaries make best use of the financial services being made available to them.

·         Creation of Credit Guarantee Fund: Creation of a Credit Guarantee Fund would be to cover the defaults in overdraft accounts.

 

·         Micro-Insurance:To provide micro- insurance to all willing and eligible persons by 14 August, 2018, and then on an ongoing basis.

 

·         Unorganized sector Pension schemes like Swavalamban: By 14 August, 2018 and then on an ongoing basis. Under the mission, the first three pillars would be given thrust in the first year. 

Timeline for Financial Inclusion Plan:

Comprehensive Financial Inclusion of the excluded sections is proposed to be achieved by 14 August, 2018 in two phases as under:

 

Phase I (15 Aug, 2014 - 14 Aug, 2015)

 

·         Universal access to banking facilities in all areas except areas with infrastructure and connectivity constrains like parts of North East, Himachal Pradesh, Uttarakhand, J&K and 82 Left Wing Extremism (LWE) districts.

·         Providing Basic Banking Accounts and RuPay Debit card which has inbuilt accident insurance cover of Rs 1 lakh. Aadhaar number will be seeded to make account ready for DBT payment.

·         Financial Literacy Program

 

Phase II (15 Aug, 2015 - 14 Aug, 2018)

 

·         Overdraft facility up to Rs 5000/- after six months of satisfactory operation / history

·         Creation of Credit Guarantee Fund for coverage of defaults in A/Cs with overdraft limit up to Rs 5,000/-.

·         Micro Insurance

·         Unorganized sector Pension schemes like Swavalamban

 

The number of accounts opened from 15August 2014 on 31 January 2015 along with the amount collected, despite being a zero-balance account, given below

Giunness Book of World Record recognized the achievement made under PMJDY for opening 18096130 accounts from 23 to 29 August 2014!!

 

PMJDY has already included 12.47 Crores accounts which means 12.47 Crores more people are aware of the banking system by now, which will further increase with time. At least one thing can be assumed that with more and more people undergoing financial inclusion the lesser is the chance for Chit Fund Companies to do their fraudulent activities in future.