Pyramids have most of their mass towards the bottom and this stabilizes the structure. 42% of India’s population is below International Poverty Line. This distribution of poverty in population resembles a pyramidal structure minus the stability. And this lower stratum has almost negligible economic contribution.
Through the 11th Five Year Plan (2007-12) of the Government of India has emphasized the initiatives on financial inclusion with its greater focus on ‘inclusive’ growth through its various initiatives such as the Rural Employment Guarantee Scheme (NREGS), the Bharat Nirmaan programme, the Sarva Shiksha Abhiyan, and the like. But, there is no coordinated effort and we find that today, out of 604 districts in the country, only 68 districts have so far been covered by so-called financial inclusion.
Around 80% of the population is without life insurance, health insurance, non-life insurance cover. In April 2009, India had around 403 million mobile users but about 46% of them, or 187 million, did not have bank accounts. Ironically though telecom inclusion is on the expressway, financial inclusion has lagged behind and is still somewhere in the service lanes.
One of most successful models - Grameen Bank has been partly effective and has certain weakness which needs to be addressed. It’s still hinged on government subsidies rather than on leveraging people’s resources. The repayment system of 50 weekly equal installments is not practical because the poor do not have a stable job and have to migrate to other places for jobs. The communities are mostly agrarian and during lean seasons it becomes impossible for them to repay the loan. This pressure for high repayment drives members to money lenders. Also Micro-finance is time taking process.
Even other models in India like: ASA, SHEPHERD and SPANDANA are plagued by dearth in availability of skilled people for local level accounting. All the models lack in appropriate legal and financial structure. There is a need to have a sub-group to brainstorm on statutory structure/ ownership control/ management/ taxation aspects/ financial sector prudential norms. A forum/ network of micro-financier (self regulating organization) is desired.
A New Paradigm:
Rural poor have little faith on Banks because of complex forms and procedures. Policies like group loan schemes are hard to obtain because of tough guidelines. Also banks encourage loan repayment within the week. But local money lenders give flexible repayment options and customized solutions. This is one of the biggest reasons that lures the rural poor to obtaining credit from money lenders. Solution to this is an increase in awareness and decrease in complexity of application procedures. An offshoot of this solution is to branch out into two more spheres of possible paradigms.
Agricultural Produce as Collateral:
Agriculture in India employs 60% of our workforce but contributes just 16% to the economy. This concept in finding few takers in Asia primarily because of the following three reasons:
- No sophisticated commodities market,
- the banks not matured enough to diversify into this field and
- there’s a dearth of storage facilities.
So the investing on these three deficiencies should be the main focus on any government aiming to encourage flow of credit among its poor.
A current example from the harsh recessionary times is from Italy. Credito Emiliano is a bank in south-eastern Milan, in the Emilia-Romagna region. This bank has been accepting parmesan as collateral for cheese makers since 1953 and has recently been citied in many studies as a successful model of agricultural produce being accepted as collateral. This paradigm is especially important in some Asian countries like India where agriculture still remains the mainstay of the economy.
Son(s) / Daughter(s) as Co-signers:
Due to lack of work opportunities in villages, many rural poor see their children migrating to cities to earn better wages. Statistics state that these migrants earn more than Rs.85 per day. Setting aside the costs for their sustenance, this money is enough to act as collateral to loans which could be made available to their parents.
This paradigm if implemented would greatly increase the ambit onto which credit could be made available by banks.
Shubham Jaiswal is a MBA first year student at IIIFT Kolkata having previously worked as a Software Engineer at IBM India Private Ltd., Bangalore
for three years