Indian Economy & Indian Financial System
PMJDY & BC Model
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PMJDY & BC Model
Introduction
Pradhan Mantri Jan Dhan Yojana (PMJDY) and the Business Correspondent (BC) Model are the twin pillars of India's financial inclusion strategy. PMJDY, launched in 2014, is one of the world's largest financial inclusion programmes, while the BC model extends banking services to the last mile. For JAIIB candidates, this topic is critical as it directly relates to banking operations, regulatory compliance, and government mandates for universal financial access.
Financial Inclusion: Background
The Digital India Revolution
The Digital India revolution catalysed by PMJDY, e-KYC, and UPI has led to a paradigm shift in how India interacts with and consumes financial services. Key technology enablers include:
- INFINET: Financial sector's communication backbone
- Negotiated Dealing System (NDS): Screen-based trading in government securities
- Real-Time Gross Settlement (RTGS): For high-value payments
- ATMs, card-based transactions, internet banking, mobile banking
- National Electronic Fund Transfer (NEFT)
- Express Cheque Clearing System (ECCS)
- AI and Machine Learning: Real-time data analysis for customised banking solutions
JAM Trinity
The JAM (Jan Dhan-Aadhaar-Mobile) trinity has been a game changer for India, enabling financial inclusion in a futuristic format.
Pradhan Mantri Jan Dhan Yojana (PMJDY)
PMJDY was launched in August 2014 as the world's largest financial inclusion programme.
Key Achievements
- 420 million bank accounts opened till date
- Dramatically expanded the banking network to previously unbanked populations
- Enabled Direct Benefit Transfer (DBT) of government subsidies
Banking Ombudsman Scheme
Established in 1995 to provide a quick and low-cost venue for bank clients to resolve grievances.
Business Correspondent (BC) Model
The BC model is RBI's mechanism for extending banking services to unbanked and underbanked areas through authorised agents.
How BCs Work
- BCs act as banking agents appointed by banks
- They provide doorstep banking services in remote areas
- Enabled by Aadhaar-based authentication and mobile technology
- Facilitate account opening, deposits, withdrawals, and fund transfers
Payments Banks
Objective
To take forward financial inclusion by offering banking and financial services to the unbanked and underbanked areas, helping migrant labour, low-income households, and small entrepreneurs.
Registration and Governance
- Registered under the Companies Act, 2013
- Governed by multiple legislations: Banking Regulation Act 1949, RBI Act 1934, FEMA 1999, Payment and Settlement Systems Act 2007
Key Features
| Feature | Details |
|---|---|
| Type | Differentiated bank (not universal bank) |
| Scale | Smaller scale operations |
| Minimum paid-up capital | Rs. 100 crore |
| Promoter contribution | At least 40% of paid-up equity for the first 5 years |
| Maximum deposit per customer | Rs. 2 lakh |
| Deposit types | Savings and current accounts (demand deposits) |
| Investments | Government securities eligible for SLR — must be 75% of demand deposit balance |
| Remaining deposits | 25% placed with other scheduled commercial banks |
| Permitted activities | Personal payments, cross-border remittances on individual accounts, issue debit cards |
| NOT permitted | Credit cards |
Banking Sector Reforms for Financial Inclusion
Institutional Reforms
| Institution/Mechanism | Purpose |
|---|---|
| Lok Adalats | Quick dispute resolution |
| Debt Recovery Tribunals | Faster recovery of dues |
| Asset Reconstruction Companies | Take over stressed assets |
| Settlement Advisory Committees | Settlement of disputes |
| Corporate Debt Restructuring | Restructuring of corporate loans |
| SARFAESI Act | Protect creditors' interests |
| Insolvency and Bankruptcy Code, 2016 | Resolution of stressed assets |
Technology Reforms
- IT Vision Document 2011-2017: Created by the High-Level Committee chaired by Dr. K.C. Chakrabarty with representatives from IIT, IIM, IDRBT, banks, and RBI
- Provided a roadmap for increased IT usage in banking
Competition Reforms
- Prior to reforms, banks were uncompetitive and inefficient due to excessive government control
- Government extended operational autonomy to PSBs
- PSBs allowed to obtain capital from stock market up to 49% of paid-up capital
- Private and international banks permitted to operate in India
- Transparent norms for entry of Indian private sector, foreign, and joint-venture banks
- FDI and FPI permitted in the financial sector
Market Reforms
- Removal of administered interest rates
- Sharp reduction in CRR and SLR from previously higher levels
- Discontinuation of ad hoc treasury bills
- Market-determined pricing for government securities
- Pure inter-bank call money market established
- Auction-based repos-reverse repos for short-term liquidity management
- Improved payments and settlement mechanisms
Private Sector Banks
Post-Liberalisation
- For nearly 25 years after 1969 nationalisation, no new private bank licenses were granted
- Following the Narasimham Committee Report of 1991, licenses were granted from 1994
- ICICI Bank was the first new private bank licensed in June 1994
- Currently India has 21 private sector banks (old and new)
Guidelines for Universal Banks (Private Sector)
| Requirement | Details |
|---|---|
| Minimum paid-up capital | Rs. 500 crore |
| Minimum net worth | Rs. 500 crore at all times |
| Promoter eligibility | Residents with 10+ years banking/finance experience |
| Industrial houses | NOT eligible to set up banks, but can invest up to 10% |
| Foreign shareholding | As per FDI guidelines (max 74%) |
| Listing | Within 6 years of commencing business |
| Rural branches | At least 25% in unbanked rural areas |
| PSL targets | Same as scheduled commercial banks |
Major Bank Mergers
| Merged Entity | Banks Merged |
|---|---|
| Bank of Baroda | + Dena Bank + Vijaya Bank |
| Punjab National Bank | + Oriental Bank + United Bank of India |
| Union Bank of India | + Andhra Bank + Corporation Bank |
| Canara Bank | + Syndicate Bank |
| Indian Bank | + Allahabad Bank |
Small Finance Banks (SFBs)
- Designed for financial inclusion of underserved segments
- Higher Priority Sector Lending target of 75% of ANBC (vs. 40% for commercial banks)
- Must lend at least 12% to weaker sections (by 2023-24)
Foreign Banks
Registered and headquartered abroad but operate branches in India. Examples: HSBC, Citibank, American Express, Standard Chartered.
Factors for approval:
- Economic and political linkages with home country
- Reciprocity of trade
- Financial soundness
- Ownership pattern and international ranking
- International presence
- Risk management systems
Key Points to Remember
- PMJDY launched in August 2014; 420 million accounts opened
- JAM Trinity = Jan Dhan + Aadhaar + Mobile — game changer for financial inclusion
- Payments Banks: Min capital Rs. 100 crore; max deposit Rs. 2 lakh; 75% in SLR-eligible G-Secs
- Payments Banks cannot issue credit cards; can issue debit cards
- Banking Ombudsman Scheme established in 1995
- ICICI Bank was the first new private sector bank licensed in June 1994
- Private bank minimum capital: Rs. 500 crore; listing within 6 years; 25% branches in unbanked rural areas
- Foreign bank shareholding limit: maximum 74% (as per FDI guidelines)
- Industrial houses: NOT eligible to set up banks, can invest up to 10%
- IT Vision Document 2011-2017: Dr. K.C. Chakrabarty committee
- IBC 2016 and bank recapitalisation are far-reaching reforms for the banking sector
- SFBs have PSL target of 75% of ANBC
- SARFAESI Act protects creditors' interests in asset recovery
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