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Monday, April 11, 2011
The petty neighbourhood shopkeeper is your new banker, savior
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.
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
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 .