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Monday, April 11, 2011

The petty neighbourhood shopkeeper is your new banker, savior


IN ADARSH Nagar, a small slum district in north Delhi, Sandeep Kumar, a 30-year-old small-time shopkeeper, attends to a line of customers. But they — local ricshawaallahs, other small shopkeepers and housewives — are not looking to buy their daily groceries. They want to withdraw money from or deposit it into their bank accounts.

This may seem unusual, but it is a sign of how the business correspondent model launched by the Reserve Bank of India four years ago is gaining traction. Financial Information Network and Operations Ltd, or FINO, the business correspondent company operating in Kumar’s locality, has more than 25,000 customers, split between 15 agents, in the district. Kumar himself gets about 60 to 70 customers per day.
FINO’s plan is aimed at improving the reach of the services to the unbanked sections of the population. Lenders are allowed to hire intermediary companies that deploy agents in rural and underdeveloped areas to open accounts for people. FINO has been hired by 16 banks and has 15 million customers.
It is a win-win situation for all concerned. Banks are able to reach remote areas without incurring the heavy expenses that opening a branch entails. For the customers, it means a safe place to keep their money, an easier access to loans and a proof of identity by way of their bank cards.
Kasim, a customer at Kumar’s shop who gave only his first name, says he likes to keep his money safe in a bank, but cannot afford to spend half a day every time he needs to deposit his cash. That is not the case with the business correspondent, where he is able to put in and take out small amounts without thinking twice. He also saves on the Rs 10 bus fare to his regular bank.
Punit Bist, FINO’s district coordinator for the area, says that in unsafe neighbourhoods like this one, depositing their money gives people security. Additionally, since most of these people do not have guarantors and an official proof of residence, they cannot open accounts with banks the regular way. He claims that 80 percent of FINO customers are first-time account holders.

The system of withdrawing and depositing money at a FINO outlet is easy. Agents keep about Rs 5,000 with them at all times. Customers come to the agent, who is open for business 12 hours a day, to either deposit money or withdraw small amounts. But first, the person identifies himself or herself through a small ‘point of transfer’ machine by inserting a smart card and using the thumb impression, instead of a PIN. The money is then shown as withdrawn from or deposited into the customer’s account. The agent links the machine to FINO servers through the Internet at the end of the day. Where such connection is not available, the machine can link through wireless GPRS.




On Sundays and holidays, the agent even goes door-to-door to customers, so they can operate their accounts, and get more people to open accounts.

The business correspondent model is fast catching on, with several companies using different technologies.

EKO is one such company. It has tied up with the State Bank of India (SBI) and has over 70,000 customers and 500 service points in Delhi, Bihar and Jharkhand. EKO uses the mobile phone to offer similar service. When a customer makes a deposit with the agent, he or she enters a code and his account number on the agent’s cellphone, and the money is instantly shown as having been deposited in a customer’s account. Further, money can be transferred from an EKO customer’s account to any person with an SBI account, using the phone. This is useful for migrant workers who may work in different areas and may need to send money home.
THERE ARE between 1,500 and 2,000 transactions (deposits, withdrawals and transfers) per day, totalling between Rs 12 lakh and Rs 20 lakh, according to Abhishek Sinha, chief executive officer of EKO. He says cellphones have made financial transactions possible on the move, and his company is making a difference in rural areas.
In India, where only 40 percent of the population has bank accounts, the potential for such no-frills accounts may be large. Whether this potential will be realised will depend on how fast the business correspondent model spreads, but for people who now have a place to keep their savings, and an easy way to send money to their families, this has come as a blessing.

By VILASINI ROY

Friday, March 11, 2011

Overview of efforts for Financial Inclusion



Financial Inclusion includes meeting the small credit needs of the people, giving them access to the payments system and providing remittance facilities. This has led to some notable developments:No Frills Accounts: In November 2005, RBI asked banks to offer a basic banking ‘no-frills’ account  with low or zero minimum balances and minimum charges to expand the outreach of such accounts to  the low income groups.  As on 31st March, 2009 there were 3.3 crore no frill accounts.


Easier Credit facility: Banks were asked to introduce a General Purpose Credit Card (GCC) facility  up to Rs. 25,000. The total number of GCCs issued by banks as on end March, 2009 was  0.15 million.


Simpler KYC Norms:  In order to ensure that people belonging to the low income groups, both in  urban and rural areas, do not encounter difficulties in opening bank accounts, the 'Know Your  Customer' (KYC) procedure for opening accounts was simplified for those accounts with balances not exceeding Rs 50,000 and credits thereto not exceeding Rs.100,000 in a year.


Use of Information Technology: Banks have been urged to scale up IT initiatives for financial  inclusion speedily while ensuring that solutions are highly secure, amenable to audit, and follow widely-accepted open standards to ensure eventual inter-operability among the different systems.


Electronic Benefit Transfer (EBT) through Banks: To encourage banks to adopt Information and Communication Technology (ICT) solutions for enhancing their outreach, the RBI formulated a scheme to quicken the pace of adoption of the smart card-based Electronic Benefit Transfer (EBT)  mechanism by banks and rolled out the EBT system in the States that are ready to adopt the scheme.As per the scheme, the RBI would reimburse the banks a part of the cost of opening accounts with bio-metric access/smart cards at the rate of Rs.50 per account through which payment of social security benefits, National Rural Employment Guarantee Act (NREGA) payments and payments under other Government benefit programmes would be routed to persons belonging to below poverty line (BPL) families.  The scheme was implemented in Andhra Pradesh. So far, seven banks have been  paid Rs.1.8 crore for smart cards issued by banks in Andhra Pradesh during July-December 2008.
The process is at different stages of implementation in other States such as Karnataka and  Uttarakhand and the scheme of partial reimbursement by the Reserve Bank has been extended by  one year up to June 30, 2010. Banks are advised to work in co-ordination with the respective government departments at the Central and State levels to ensure that all State benefits are delivered  to individuals only through bank accounts within a specific timeframe.


Business Correspondent (BC) Model :  The BC Model ensures a closer relationship between poor people and the organized financial system. Reorganizing this, in 2006, RBI permitted banks to use the services of non-governmental organizations, micro-finance institutions, retired bank employees, exservicemen, retired  government employees, Section 25 companies, and other civil society  organizations as  Business Correspondents in providing  financial  and banking  services. In addition to the entities presently permitted, RBI has also permitted banks  to appoint the following entities as BCs (i) Individual kirana/medical /fair price shop owners (ii) individual Public Call Office (PCO)  operators (iii) Agents of Small Savings schemes of Government of India/Insurance Companies (iv) Individuals who own Petrol Pumps (v) Retired teachers and (vi) Authorised functionaries of well run Self Help Groups (SHGs) linked to banks.


Bank Branch and ATM Expansion Liberalized: Reserve Bank of India has  totally freed the location of ATMs from prior authorization.  Further, in the October 2009 RBI took another big step by freeing branch opening in towns and villages with  a population below 49,999.  After examining the recommendations of the Working Group constituted to review the extant Branch Authorization Policy, RBI has permitted domestic scheduled commercial banks (other than Regional Rural Banks) to open branches in Tier 3 to Tier 6 centres (with population upto 49,999 as per Census 2001) without having the need to take permission from RBI in each case. The detailed RBI circular is available at its website www.rbi.org.in.  Domestic scheduled commercial banks (other than RRBs) are enjoined to ensurethat at least one-third of such branch expansion happens in the underbanked districts of underbanked states. This will be one of the criteria in the Reserve Bank’s consideration of proposals by banks to open branches in major city (Tier 1 and Tier 2) centres.


Expansion of Banks in the North-East:  To improve banking penetration in the North-East, the Reserve Bank asked the State Governments and banks to identify centres where there is a need for setting up either full fledged branches or those offering forex facilities, handling government business or for meeting currency requirements.


Project Financial Literacy :Financial literacy is a stepping-stone toward financial inclusion. Moreover, as financial markets are becoming increasingly complex with serious problems of information asymmetry, the need for financial literacy has become even more acute. The Reserve Bank of India has initiated a "Project Financial Literacy" with the objective of disseminating information regarding the central bank and general banking concepts to various target groups.  RBI’s ‘Financial Education’ web site link offers basics of banking, finance and central banking for children of all ages. In a comic book format, RBI simplifies the complexities of banking, finance and central banking, with the goal of making the learning fun and interesting.


Financial Literacy and Credit Counseling : RBI has advised the convener-bank of each State Level Bankers’ Committee(SLBC) to set up a financial literacy-cum-counseling centre in any one district on a pilot basis, and based on that experience, to extend the facility to other districts in due course. So far, 154 credit counseling centres have been set up in various states of the country. These centres are expected to provide free financial education to people in rural and urban areas on the various financial products and services, while maintaining an arm's-length relationship with the parent bank.


Source:-Ministry of Finance

Monday, February 28, 2011

Boosting the Business Case for Agents


This is the second piece in the five-part series launching CGAP’s Agent Management Toolkit. The toolkit is based on more than a year of research that yielded data on more than 16,000 agents in Brazil, India, and Kenya. In-depth interviews were conducted with 466 agents, agent network managers and providers, including mobile network operators, banks, MFIs and technology companies.

Today’s guest blogger is Prakash Lal, from Financial Inclusion Network & Operations Ltd. (FINO), which we found to have sophisticated insights on managing agents. FINO agents and technology connect more than 27 million Indians with 23 banks, 10 MFIs, 5 insurance companies and 15 government entities, via more than 11,000 POS terminals covering one-third of India. We’ve asked FINO to shed some light on how they boost the business case for their agents (referred to in India as “Business Correspondents”).

FINO was founded on 13th July, 2006 with the single objective of building technologies to enable financial institutions (FIs) to serve the under-served and the unbanked sector and also to service the technology requirements of entities engaged in servicing the bottom of the pyramid customers. Every step we’ve taken on technology, we’ve taken an equally important step forward in developing a highly-distributed, reliable network of Business Correspondents (BCs), whom we fondly call “Bandhus”, connecting clients to our technology and onward to the financial institution of their choice.

BCs are a critical link in our service delivery channel, and we invest a great deal in ensuring that working as a BC is attractive. Most of our BCs have other sources of income as well, meaning FINO needs to provide enough income to ensure that BCs will devote an adequate share of their time to the FINO business. We calculate that extra income to be, on average, INR 2500-3000 (USD 55-65) per month. This amounts to around USD 2 per day, which may not sound significant, but for a rural Indian it is welcome incremental income. Further, many of our BCs are also motivated by the desire to help their community and the social standing which comes with being allied with a high-tech product.

In addition, there are four points which strengthen the business case for our BCs:

Multiple Products: FINO has a complete suite of products to meet the financial inclusion needs of financial institutions. A multiple product suite roll-out enhances a BC’s option of increasing the number of transactions, hence an increase in their commission, as per the varied customer requirements. Product innovation in FINO is derived from its deep insight into the requirements of the client segment gained from pioneering work done with MFIs, banks and research organizations.

Financial Literacy: A regular saving habit by the customer will ensure regular transactions and thus more commission for the BC. FINO is doing various financial literacy projects with World Bank, International Finance Corporation (IFC), Microfinance Opportunities (MFO), UNDP and NABARD. FINO puts up the capital for our BCs and our staff play a large role in helping agents manage liquidity. FINO Block Coordinators manage approximately a dozen BCs and typically visits them every one to two days to retrieve excess cash or deliver new cash. In other words, if we look at the 9 drivers of the agent business case in CGAP’s Agent Management Toolkit, FINO removes the first two: upfront capital, liquidity management. We internalize that into our own business, making it much easier and more attractive for our BCs. We also pay our agents a fixed salary, in addition to per transaction commissions. This creates some certainty for our BCs as far as their income is concerned. We believe these are the best ways to build a viable network of agents in rural areas.

Take the case of one of FINO’s BC in Uttar Pradesh state, Md. Saleem. He runs a general store and also works with FINO. He handles 24 transactions on a typical day. His largest cash transaction on any given day is US$107 (INR 5,000), which effectively determines his cash-on-hand required to handle the largest transaction. A FINO Block Coordinator usually visits daily to pick up and deliver cash, and can get there within a few hours in case extra liquidity is needed for a very large deposit or withdrawal. Saleem uses his place of work—the general store—to conduct most agent transactions, obviating the need (and expense) for a dedicated agent location. As part of FINO’s “doorstep banking” model, Saleem also travels to client homes in three surrounding villages, incurring a transport expense. He nets a daily profit of US$1.84, which is very close to our target for BCs.

By FINO'S Prakash Lal for CGAP blog

Tuesday, February 1, 2011

Do the poor need financial literacy?


Olga Morawczynski is Project Manager for Grameen Foundation’s financial literacy project in Uganda.

When I started the financial literacy project at the Grameen Foundation in Uganda, I was faced with some very fundamental questions—what exactly is financial literacy? And do the poor really need it, or even want it? Aside from my own questions, I also faced some reservations from colleagues in the field. Many were very frank in their opinions. There is no need for financial literacy, they told me. What the industry needs is appropriate financial products. The learning bit will take care of itself.

I have spent the last months travelling around Uganda and speaking with individuals who depend on a wide variety of livelihoods, from fishing to trading and farming. And I have made some extremely interesting discoveries. Amongst the people I spoke to, there was a clear demand for financial information. Many of my informants did not have a lot of money, and their inflows of cash were extremely irregular. But they had many questions on how to manage it better. A significant portion wanted advice on savings and budgeting. As one farmer explained, “when you have so little, you have to become an expert at managing it. If not, it will disappear from your hands before you even had the time to count it”.

But what makes one an expert at managing their cash? “When times are good, you put cash away”, the farmer explained. “So when the cash is not flowing, you have something saved”. I asked what happens if you don’t have something little saved. The farmer pointed to a small herd of his cows. “You sell one of them”, he said. So maybe that brings us a little bit closer in our understanding of what financial literacy is and what it should do. That is, helping people to plan accordingly so they are prepared for the periods of cash deficits. And when you are an expert, you get to keep your cows.

Source:-Grameen Foundation

Thursday, January 27, 2011

A Humble question to Muhammed Yunus


The business model of for profit MFI-NBFCs – some of whom claim to follow the Grameen Model – is increasingly being questioned as an effective tool for poverty alleviation.

In a previous post [ Link ] I had presented a case for two strategies:

1. The SHG strategy (together with the SHG Bank Linkage program) which, from my experience over the past 27 years is appropriate to include poor families into the growth trajectory and also to increase their incomes in a sustained manner over a period of 6-8 years. Though the role of SHGs in the provision of credit has been highlighted, credit is only one factor; others are building self confidence and skills to negotiate and decide, joint action for lobbying to neutralize power relations which are oppressive and prevent entry into the growth trajectory (not only to credit institutions).These strengths are all incorporated in the word “empowerment” which well functioning SHGs generate. The dynamics of interaction among members generates the confidence and skills to take decisions and forge networks and federations of SHGs – these together provide the “power” to overcome hurdles and equip the poor to find entry into growth. The poor are in the status of “Pre-Clients” and need to equip themselves with the skills and resources required to be able to demand and access resources and entitlements which is the strength of “clients” who are the not poor.

However the SHG strategy (like any other strategy) cannot achieve its objective in isolation. It needs adequate investment in the area of operation from the Govt., private sector or NGOs which provides options for investment and/or reduces risk; it requires various support services to support value creation; it also needs up front investment in institutional capacity building (ICB) which includes training in at least 12 modules including how to analyse society, to foster participation, to arrive at consensus, to resolve conflict, what are the essential features of an SHG, the importance of sanctions etc – all this training in ICB takes time and money. Unfortunately this investment in ICB has been neglected in the rush to include the poor only in the financial system through no frills accounts etc. This is based on the mistaken assumption that the only reason to form SHGs is to access credit. Andhra Pradesh is a classic example of the rush to form SHGs and extend credit without adequate ICB and support services. Most of them were weak institutions. This was perhaps the major reason why the MFI-NBFC strategy to form JLGs - many of which were formed by poaching the SHGs - succeeded so well in the state.

2. The for profit MFI-NBFC model, I dared to suggest, is more appropriate for the not poor who have difficulty to access credit from formal institutions because of several reasons including distance to banks, long delays and paperwork required, no proper land records, previous defaults etc. They have the skills and resources - like good land 2-6 acres often irrigated or in good rainfall areas and/or potential to invest in non farm activities; but have to rely on money lenders who hold a monopoly situation. Apart from lack of access to formal credit, their major problems are poor infrastructure, corruption etc.

This paper attempts to take a step further - to raise a doubt that the MFI-NBFC strategy as practised by the major MFI-NBFCs in India is appropriate to create value even for the not poor. Since many of them claim to follow the Grameen Bank Model - more correctly the Grameen II model which was launched around 1999-2000 and which opened the door for the neo liberal features of Grameen Phase II - the question I raise is relevant. All evidence emerging from AP indicates that under the pressure from the neo liberal market forces and venture capital to commercialise micro finance - which means to grow fast, to earn high profits and offer high salaries, with an eye on valuations and IPOs , all the while stressing that self help and privatization is the best strategy to eradicate poverty - the business model of Grameen II very quickly begins to move from focusing on the objective of achieving financial sustainability of the MFI-NBFC to one where profit is maximized. And if office bearers in our national institutions support this model on the grounds that it is the fastest to include the poor in financial services and if the governance of these MFIs sees nothing amiss, then the business model becomes entirely driven by the profit motive; without any effective regulatory framework the course is clear. Both the private sector and the MFIs sniffed profit at the bottom of the pyramid; both looked at the poor as opportunities rather than responsibilities ; both ended up by catering to consumption aspirations and making profits higher than the most valued private banks.

Muhammed Yunus has done a fantastic job, but the Grameen bank he founded in 1983 is not the one that emerged after the Grameen II Project which was launched around 1999-2000. Though the ownership of the capital structure did not change, the delivery model did. Under the Grameen II framework, Phase II commercialized the business model: the poor have to pull themselves up by their bootstraps and by implication Government should keep its distance . Music to the ears of neo liberals and columnists who are given prominence in the Indian newspapers. Savings became compulsory – and compulsion whether of savings or in repayments adds a new dimension of power to the MFI. Commercial relations were established with MNCs like Telenor and Danone which surely rubbed off on Grameen since their representatives surely had a greater impact on governance than the client share holders. Yunus himself began to distance himself from day to day involvement in GB which came under others who did not share his convictions. Today GB is no longer eradicating poverty but bringing financial services to people many of whom are not poor. The original social mission of Muhammed Yunus has been consigned to the museum, not poverty. My question to Muhammed Yunus is this:

“ Why did you not react strongly to Grameen II –or Grameen Phase II when it had begun to develop all the markings of a neo liberal product... and when it was aggressively promoted as a model to be replicated all over the world?”

Perhaps Yunus did not react because he thought that good governance and commitment to the poor which characterized the first 15 years of GB would balance or neutralise these neo liberal structural features. But my experience is that once you plant an ‘Aam’ (mango) you will not get an Anaar (pomegranate) no matter how much you want one. You may say all the prayers and apply all types of fertilizer but you will still get a mango. So what do the supporters of Grameen II do? They paint the mango like an anaar. This can throw dust in peoples eyes for some time with aggressive PR - and GB has it - besides there are too many reputations in international financial institutions at stake; but the rains do come and the paint washes off and you are back to the mango!

It is easy to say as some international organizations promoting micro finance do: “Let us learn from the mistakes and move on”. Unfortunately they have not learned from their mistakes as is clear from their reaction to Mexico’s Compartamos experience as recently as 2007. Apart from continuing to aggressively promote the business model which maximizes profits, there are increasing signs that funds will start to pour in to AP from abroad to rescue the MFI-NBFCs without any structural change in the model being required. There is no evidence that international organizations are learning from the mistakes; no structural changes in the model are being envisaged; a few superficial changes will suffice ; the aam will again be painted like an anaar This is perhaps a bigger threat than the crisis that emerged a few months ago. The structural changes required are mentioned below.

The experience in AP adds weight to my position. In 2004-05 when the Krishna District crisis emerged, the MFI- NBFCs all agreed to change some features of their business model. A code of conduct was drawn up and agreed to. Did they observe it? No. ACCION and CGAP were involved in coming up with similar codes earlier as a fall out of their experience with Banco Sol and Compartemos. But their subsequent actions did not show that the code had any impact on the structure of the MFIs. In AP, as soon as funds started flowing again after the Krishna crisis, initially leveraged by private capital, the code of conduct was consigned to the museum. My contention is that the very structure (or business model) of the MFI NBFCs lends itself to the features which precipitated the Krishna crisis as well as the crisis in 2010 and will continue to lead to further crises in future if structural features are not addressed.

The major structural features of the NBFC- MFI model which lead to these crisis because it is inappropriate even for the not poor are:

1. The inability of the Grameen II model to cope with diversity because of standardisation – same size loans to all and same intervals ; if small differences are made in the second round it is mainly due to confidence levels in the client not on the potential for income from the activity proposed; the same repayment period for loans whether for agriculture, business or off farm activities . This in turn is conditioned by the software (ICT) which is often been promoted as a solution to most of the woes faced by the sector. So far ICT has helped to cut costs of the MFI; on the other hand it has imposed a standardised system on the clients (yet we celebrate diversity in other sectors). Together with standardisation, comes speed –including topping up with similar amounts which will be discussed later. In a second part of this post I will give some profiles of the livelihood strategy of SHG members who started out as poor but came out of poverty after 6-8 years; these livelihood strategies indicate that the requirements in all cases are diverse and that it takes at least 6-8 years with around 15 loans for various purposes and of various sizes amounting to Rs 2-4 lacs before people are firmly into the growth trajectory.The software of MFIs has to be made compatible with the diversity reflected in the livelihood strategies of the poor.

2. MFIs do not have the space or time to provide support to ensure that even the non poor have the services and information required to make investments productive. MFIs need to provide this support themselves from their profits or partner with others who can - like NGOs, Private sector or government institutions. The high rates of failure in income generating activities is due to this lack of timely, appropriate and adequate support. The present approach of MFIs however is entirely driven by competition - not by partnership and by speed to provide the next loan. I am not referring here to the practice of some MFIs to start health programs to present a soft and caring image to clients. This does not change the model. Rather the model must include partners who can add value to the investment.

3. The potential for rapid growth and high profits of the business model reduces the interest from financial institutions in investing in second level institutions which takes time, has higher risks and is not as profitable. Yet second level institutions to aggregate and add value to various farm products and to develop linkages with industry for design and marketing of farm and off farm products are a crucial step to sustain growth. This gap is increasing daily and must be addressed if growth in the rural sector is to take off. Financial institutions need to give this priority.

4. The MFI practice of weekly/monthly repayments at the doorstep (or nearby) does not jell with the cash flow of income activities which is lumpy. This in turn forces them to take up daily wage labour or petty business or borrow from one MFI to pay another—most resort to the last option. This structural feature results in multiple borrowing. The doorstep offer which is touted as a major plus is a double ended sword especially when there is pressure from the MFI to grow rapidly backed up by incentives to staff. As a result multiple lending has been a feature in every country where the Grameen II model (or prior to it the commercialised model) has been introduced be it Mexico, Boliva or Bangladesh and now India. In the SHGs, (the real ones), there is no such pressure from incentives and further at least a third of the common fund is owned by the group in the form of savings and interest, hence they assess each loan request carefully and make sure that here is no multiple borrowing which will affect their group interests.

5. The pressure exerted by MFI staff on clients to repay; one study has identified 9 ways in which MFI staff exercised pressure which need not be described here . This is not socially acceptable and will continue to cause negative reactions from society. There are only four sources which exert pressure to repay: a) physical collateral; b) affinity among members which exists prior to MFI entry and which needs to be discovered by the MFI - on the basis of which SHGs are formed; the members self select themselves. This affinity is a strength and is further developed by institutional capacity building and management of a group common fund consisting of their own savings, interest earned on loans, fines, donations; the pressure to repay comes from the group. When social pressure does not work the group decides to go further ;there are several examples of the SHG group lodging police complaints against defaulters, seizing assets like agri or horticultural commodities or bullocks ; but because it was the group that acted there was no reaction from society; this shows that pressure may be required at times but the source of the pressure must be from the peoples institutions and d) the expectations of another loan within a short time even though there is no potential for investment.

6. MFI-NBFCS hide under the myth that JLGs which are formed by MFIs who select the members provide joint liability and build social solidarity. The question is - if the JLGs worked effectively (as the MFIs claim) why did the staff have to exert pressure. Further in many cases the clients who are members of JLGs are forced to pay up when others default; it does not come willingly; and in such cases the JLG breaks up.

7. Very high interest rates (often well hidden) on the grounds that transaction costs in micro lending are high. The experience of a Not For profit MFI called Sangamithra over the past 10 years does not validate this. I do not have the expertise or resources to conduct further studies on the reasons behind high interest rates. But I was referred to one study made by a D. Richardson who studied the high interest rates in Compartemos. He found that the high interest, bonuses etc, were required mainly to ensure that high salaries and other allowances were paid to senior management and share holders (“Compartemos IPO issues”). There needs to be a regulatory cap on interest rates.

By:-By Aloysius P. Fernandez,

*The author is Chairperson, Nabard Financial Services and Member Secretary Myrada; the views expressed here are personal .

Monday, January 24, 2011

What Do We Know About the Impact of Remittances on Financial Development?


Remittances, funds received from migrants working abroad, to developing countries have grown dramatically in recent years from U.S. $3.3 billion in 1975 to close to U.S. $338 billion in 2008. They have become the second largest source of external finance for developing countries after foreign direct investment (FDI) and represent about twice the amount of official aid received (see Figure 1). Relative to private capital flows, remittances tend to be stable and increase during periods of economic downturns and natural disasters. Furthermore, while a surge in inflows, including aid flows, can erode a country’s competitiveness, remittances do not seem to have this adverse effect.

Figure 1: Inflows to developing countries (billions of USD), 1975-2008
As researchers and policymakers have come to notice the increasing volume and stable nature of remittances to developing countries, a growing number of studies have analyzed their development impact along various dimensions, including: poverty, inequality, growth, education, infant mortality, and entrepreneurship. However, surprisingly little attention has been paid to the question of whether remittances promote financial development across remittance-recipient countries. Yet, this issue is important because financial systems perform a number of key economic functions and their development has been shown to foster growth and reduce poverty. Furthermore, this question is relevant since some argue that banking remittance recipients will help multiply the development impact of remittance flows.

Whether and how remittances might affect financial development—banking in particular—isa priori unclear. On the one hand, money transferred through financial institutions might pave the way for recipients to demand and gain access to other financial products and services that they might not have otherwise. As an added benefit, providing remittance transfer services allows banks to “get to know” and reach out to unbanked recipients or recipients with limited financial intermediation. For example, remittances might have a positive impact on credit market development if banks become more willing to extend credit to remittance recipients because the transfers they receive from abroad are perceived to be significant and stable (i.e., serve as collateral, at least informally). However, even if bank lending to remittance recipients does not materialize, overall credit in the economy might increase if banks’ loanable funds surge as a result of deposits linked to remittance flows.

Furthermore, because remittances are typically lumpy, recipients might have a need for financial products that allow for the safe storage of these funds, even if most of these funds are not received through banks. In the case of households that receive their remittances through banks, the potential to learn about and demand other bank products is even larger.

On the other hand, because remittances can help relax individuals’ financing constraints, they might lead to a lower demand for credit and have a dampening effect on credit market development. A rise in remittances also might not translate itself into an increase in credit to the private sector if these flows are instead channeled to finance the government or if banks are reluctant to lend and prefer to hold liquid assets. Finally, remittances might not increase bank deposits if they are immediately consumed or if remittance recipients distrust financial institutions and prefer other ways to save these funds.

Two recent studies provide evidence in favor of the first hypothesis. They show that remittances have a positive and significant impact on financial development. Using municipality-level data for Mexico for 2000, my coauthors (Demirguc-Kunt, Lopez-Cordova, and Woodruff) and I show that remittances are strongly associated with greater banking breadth and depth, increasing the number of branches and accounts per capita and the ratio of deposits to GDP. These effects are significant both statistically and economically, and are robust to the potential endogeneity of remittances. The most conservative estimate suggests that a one-standard deviation change in the percentage of households receiving remittances—roughly a doubling of the mean remittance rate—leads to an increase of 1 branch per 100,000 inhabitants (against a mean of 1.79), 31 accounts per one thousand residents (relative to a mean of 42 accounts), and an increase of 3.4 percentage points in the deposit/GDP ratio (compared to a mean of 4.2).

Source:-MARIA SOLEDAD MARTINEZ PERIA

TURNING THE TIDE: ENABLING POVERTY REDUCTION


It is rare to find a woman shoulder the responsibility of farming. It is usually the male counterpart who takes up the farm responsibility, but it is not so in the life of Kamatchi. She owns around 4.5 acres of rainfed land, and lives with her husband and their two sons in Sengapadai village of Madurai district, Tamil Nadu. As Kamatchi says, “He (her husband) never has once stepped on the land for farming.” She has to run the family all alone with the income she earns from the farm and from the income she earns as a coolie. Further, vagaries of monsoon and lack of effective coping mechanism, farming itself is loosing its lustre as viable livelihood option for many in this area. Adding to this, lack of suitable financial services pushes resource-poor farmers like Kamatchi into the depths of poverty.
She says, “… one has to walk four to five times to their house (the well-offs and moneylenders) to get a loan for urgent needs. They didn’t trust us for we are from Kallar community, and even if one could get a loan, it was at the exorbitant rate of 5 to 10%.” She was unable to enterprise herself due to such lack of support and an enabling environment.

A Ray of Hope
It was during this time that Kamatchi joined the Kaliamman Uzhavar khulu (or rainfed farmers’ groups) promoted DHAN Foundation in that area. With a bit of hope in her heart, she plunged ahead, and the group helped her all along the way. The group, thus formed, proved to be a safe platform to save, to access timely credit services. This helped her meet various household needs and supported her in farming activities.

An Array of Achievements
As of today, she has a total savings of Rs.5600 in the group, and had availed a total loan amount of Rs.70191 from her group, with the current loan outstanding of Rs.21360. “In earlier days, none of the banks cared us of our credit needs. Now, the bankers they themselves invite us to take loan from their bank, for they know our group’s credibility and discipline, and trust us,” says Kamatchi. And these loans were used for variety of purposes like to purchase goats and a milch animal. She also got a loan of Rs.15000 to purchase an acre of rainfed land and to purchase oil engine to pump water. She has recently taken a loan of Rs.12000 to construct a farm house in her land. Apart from this she has taken a variety of loans for various consumption needs like medical expenses, marriage expenses, outside debt redemption and household expenses. Further, time and time again, she had also taken loans for working capital requirement of her farm activities.
As part of the watershed project, an amount of Rs.54146 was invested in her land for the construction of farm ponds and to plant dryland horticulture crops in 0.75 acres of her land. The farm pond harvests around 14.4 lakhs litres of rainwater, and with that, she cultivates around 1 acres of paddy, and gets an yield of 1400 kg of paddy that is used for household consumption.
In the past five and half-years, Kamatchi found that little spark in herself, and with the support from the group, she had made major changes in her life and livelihood. The various intervention activities resulted in the following outcomes in the lives and livelihood of Kamatchi and her family.

·         Increased income
o    Brought more area under cultivation
o    Brought more area under irrigation

·         Reduced vulnerabilities and risks
o    Increased land holding size
o    Increased food security by increased paddy cultivation
o    Crop diversification with cultivation of dryland horticulture crops
o    Reduced vulnerabilities to risks–insured in human life insurance programme, and also insured goats
o    Reduced dependency on money lenders and increased access to mainstream financial institutions

·         Increased fixed asset holdings, and asset value appreciation
o    Conversion of rainfed to irrigated land
o    Purchase of land
o    Invested in farm assets like oil engine
o    Purchase of livestock–goat rearing and milch animal purchase

Beacon of Hope
Thus, DHAN Foundation and the group promoted by DHAN, had increased Kamatchi’s access to institutional credit facilities, and reduced dependency on money-lenders. There has been an increased level of awareness and social respect that she had gained. She speaks to bankers to get loan for her group; “Now the bankers, themselves, approach us; we have shown our trustworthiness,” she says.

With the additional income from the farm, she had further invested in purchasing a pair of cattle, and a bullock cart; she is also planning to complete her little farm house. This shows a positive trend in moving towards a farming-based livelihood options, which was once a not so dependable source of income. She has gained confidence to face the future.
Through the support rendered by DHAN Foundation, and with the confidence in her heart, Kamatchi proved it could be done–to come out of poverty with a sustainable source of income. She is now a beacon of hope, and a source of inspiration, for her own villagers and the community at large.

Source:-Dhan Foundation