Financial Products Accessibility By Rural Poor - Financial Exclusion
Posted in Finance Articles, Total Reads: 6375
, Published on 14 February 2012
“At 14, I first withdrew money from the nearby ATM; At 16, I had my own Savings Account and debit card; At 18, I started trading in Stock Markets; At 22, I have my own credit card and what’s appalling or rather surprising to hear is – even at 65, Mr. Ram Vilas, residing in a small village of Uttar Pradesh, haven’t seen a bank throughout his lifetime.”
The biggest losers in such a scenario are the banks which have failed to realize that “Fortune lies at the bottom of pyramid”.
Current Situation - Financial exclusion is the inability of individuals, households or groups to access necessary financial services in an appropriate form. It can stem from problems with access, prices, marketing or financial literacy, or from self-exclusion in response to negative experiences or perceptions.
Desired Situation- Financial Inclusion, which is the delivery of financial services at affordable cost to the vast section of disadvantaged and low-income groups. Access to financial services such as loans, savings, deposits, health insurance etc. by the population living in the rural and deep-rural segments has been limited and been the major deterrent of growth in these segments.
Broad Challenges to financial Inclusion
Socio Economic Factors: Constraints such as illiteracy, low income, low savings, unavailability of identification documents, and generally low levels of awareness has led to inaccessibility to funds.
Infrastructural Bottlenecks – Regional Disparities:Poor Infrastructure coupled with remoteness and sparse population in Eastern parts of India has resulted in limited access.
High operational costs: High Transaction Costs as a result of small value accounts has made the idea of providing financial services to unbanked areas financially unviable.
Fit-to-Use Technology is still not enabled: Proliferation of e-financial inclusion or the application of innovative, stable and reliable Information and Communication Technology (ICT) is indispensable for Rural Financial Inclusion. Integrating the daily transactions done through hand held devices with the bank’s main server is a challenge especially for products like savings cum overdraft accounts, pure savings products, remittance products and entrepreneurial credit such as KCC and GCC.
Reducing financial uncertainty for the poor: Natural calamities can have a devastating impact on rural areas and on basic needs of the poor. The losses are imposed upon the poor disproportionately and this may lead to permanent poverty.
Innovative ways to move money: Poor people often find it difficult to move money around safely and make small payments for their transactions. M-payment (Payment through mobile) can be very useful in this context but it requires educating the people and more technological development.
Governance Issue: Historical problems such as the governance issues facing the cooperative credit system and RRBs which need a substantial effort to discipline and reorient thinking, an effort that requires political will in short supply in a system that is geared to populist thinking on account of frequent elections at various levels of government.
Product Specific Challenges
No Frills Account
Location of banks at a distant place
Lack of Information
Seasonal and Irregular Flow of Income
Bank Correspondent Model
Limited use by banks of BCs
Huge costs of IT Infrastructure
Risk of Reputation Erosion
Cash Settlement within 24 hours by BCs
Credit Counseling Centers
Lack of Trained Staff
Serves as a Marketing Center
Limited Sensitization of Banks
Kisan Credit Cards
MIS related Operational Issues (NABARD Issue)
Limited Credit Availability for farmers
Security Breach Issues
Difficult to engage Mobile Service Providers(MSPs)
Difficulty to measure Risk
Inefficient Distribution Channel
Some Innovative Products
Index-based weather insurance: Nature can be disastrous at times for the rural people. It is one of the major reasons of trapping them in poverty. Small farmers are more vulnerable to these weather risks. Index based weather insurance can improve their financial security and protect them from the uncertainties of the weather.
Warehouse receipt system: Farmers have to sell their crops immediately as most of them have no place to store them. During the harvest season, crop prices are the lowest. As a result, most of the farmers have very small financial gains on their crops. To improve this condition, warehouse receipt system can be introduced. Farmers can store their products in a warehouse and they will be given a receipt for the same. This receipt can be used as collateral to get credit up to 70% value of the deposited stocks at reasonable rates. After some time, when the prices go up, the farmers can sell their crops improving their financial gains.
Business models for microfinance
Bank-MFI Partnership model
Business Facilitator model
SWOT Analysis of Rural Financing:
Private capital markets can provide finances for the rural financial products using donor future commitments as collateral to issue bonds.
Financial immunity can be provided to the rural people against various financial uncertainties.
Technological innovation can significantly reduce the cost, distance and access constraints for the poor and include them in the mainstream.
In India, the government has given highest priority to financial inclusion. It has set up UIDAI to improve delivery of public services and also revamp bank and post offices to become outreach units for financial inclusion completed by business correspondents aided by technology.
Big Ticket Idea:
While there are many challenges in sustainably meeting the needs of rural low-income population through microfinance, overcoming these challenges and ensuring that rural men & women have access to finance is critical to the development of the sector by providing services.