Monday, May 25, 2015

Banking the unbanked, insuring the uninsured

Prime Minister Narendra Modi has been giving a major push to the following schemes:
  1. Pradhan Mantri Jan Dhan Yojana: A no-frills zero balance bank account
  2. Pradhan Mantri Suraksha Bima Yojana: An accident insurance cover of Rs 2 lakh for an annual premium of Rs 12 (or a monthly premium of Rs 1)
  3. Pradhan Mantri Jeevan Jyoti Yojana: A life cover of Rs 2 lakh for an annual premium of Rs 330 (or roughly a daily premium of Rs 1)
  4. Atal Pension Yojana: A sort of annuity with a promised return of 9.6% per annum.
Any adult having a bank account is eligible for 2 & 3. For the pension scheme (4), one has to be between 18 and 40 to be eligible. The monthly premium paid is determined based on the pension one opts for (capped at Rs 5,000 a month) and one's age. The monthly pension will be paid once you hit the age of 60. There is also a one-time annuity purchase if one has already hit the age of 60. This gives a guaranteed return of 9.6%.

It is very clear that 2, 3 and 4 are the best possible deals in their respective categories. Though I believe I have sufficient insurance cover, I will be insuring myself and my spouse in 2 & 3.

Modi and BJP PR talk about Jan Dhan as a unique scheme which they introduced. This is incorrect. P Chidambaram had introduced this no-frills account during the UPA rule. It was not promoted that heavily then. It was seen as a drain on their P&L by the Nationalised banks. Now it is promoted heavily, but it is not clear how the common folks see value in this. The Nationalised banks probably still see this as a drain but cannot complain given that the PM has made it his pet scheme. It is quite likely that many banks have registered the same person in their books (after all, it is a zero balance, no-fee account!) and Modi's PR bandwagon is trotting out numbers to show that this scheme is a big success. This is unfortunately part of any politically driven scheme in India.

Despite these PR stunts, I think this package above is a fantastic one. Forcing people to have at least a no-frills account to be eligible for the very attractive accident insurance and life insurance will encourage them to understand and use the banking and the insurance systems in the country. Then, they can slowly be moved to start using these systems better. It appears that some degree of traction has happened with the insurance schemes.

Indian life insurance sector dominated by LIC mostly used to sell endowment and money back policies. Private players pushed unit linked policies (market driven). Risk coverage has not been the priority. Life insurance policies are mainly seen as investment instruments. A senior insurance expert who runs an insurance industry magazine made me see the light a few years back. I was randomly taking whole life policies, unit linked policies and the usual LIC endowment policies. She explained that the best value for money was to go for a pure risk term insurance plan combined with an investment in a mutual fund (or a fixed deposit) instead of investing in any unit linked insurance policy. You get better liquidity, better returns and the best risk coverage. LIC's term insurance plans are the most awful in the country. Today, the best deal you get from a private insurer is around 200 times the premium (for my age ~ 45 yrs). The Pradhan Mantri Jeevan Jyoti Yojana offers 600 times the premium. Quite unbeatable, but limited to a cover of only 2 lakh Rs.

What is to be appreciated is, for the first time, instead of the usual dole-outs that Indians are so used to, our government is coming up with a scheme which rewards action and initiative on the part of the individual. You enroll, open a no-frills bank account and pay up the premium and only then you will get the benefit. You can't just sit there doing nothing and be compensated for your losses.

One worry however is, whether the insurer will find it breaking even. Finance ministry is providing sovereign guarantees but that is generally not a good idea. One has to also see whether private players will be happy to participate in a scheme like this.

Another problem is bridging the gap between these government schemes and the available market schemes that can help the middle class. The current government schemes are all targeted at the poor mostly.

However, the success of schemes like these may encourage private players to start offering interesting products to the public, to graduate them upwards.