Tài liệu Informal Savings of the Poor : Prospects for Financial Inclusion doc

Even today, 100 million households have informal saving which are outside the fold of the formal financial system.. Gross Domestic Saving GDS comprises savings of public sector, private

When the poor have a choice, they choose to save Saving safely provides them with a cushion against shocks Even today, 100 million households have informal saving which are outside the fold of the formal financial system Tapping the informal saving

of the poor and using these resources for development is necessary Designing deposit products appropriate to the needs of the poor, ensuring convenience and developing mechanisms to mobilise the informal saving is required.

Informal Savings

of the Poor : Prospects for

Financial Inclusion

M.L Sukhdeve*

Introduction

It is recognised that high domestic savings and investment are crucial for sustenance of high stable rates of growth of the economy India continues to remain one of the highest savers among the emerging market economies Gross Domestic Saving (GDS) comprises savings of public sector, private corporate sector and household sectors In India, it is the household sector which occupies a position of dominance over the institutional sectors like private corporate sector and the public sector in terms of generating savings This sector comprises individuals, non-government, non-corporate enterprises, off-farm business and non-farm business like sole proprietorships and partnership The savings are for smoothening

* General Manager, National Bank for Agriculture & Rural Development, Mumbai

The estimated magnitude of savings indicated above mainly

comprise formal saving by households, corporate savings

and public savings with the formal financial system Beyond

this, there is a scope from household savings of the poor who

are still outside the financial system

National Council of Applied Economic Research (NCAER)

and Max New York Life Inc conducted a survey in 2005 -

'How India Earns, Spends and Saves' to gain deeper

insights into the motives for financial savings, the degree of

financial security of Indian households and the degree of

sophistication that households bring to bear on their saving

and investment decisions According to the findings of the

survey, for meeting unforeseen expenses, over 81% of the

How Indians Save?

consumption across one's lifespan in the face of any

expected or unexpected fluctuation in the level of income

and acts as a net saver during his / her working years and

dis-saver in the post retirement life

The rate of GDS as a proportion of Gross Domestic Product

at current market prices has more than doubled from an

average of around 10% in the 1950s to over 23% in the

1990s, scaling a peak of 25.1% in 1995-96 After dipping to

23.6% in 2001-02, it recovered to 26% in 2002-03 and

reached a new peak of 29.1% in 2004-05, the highest saving

rate ever achieved in India since 1950-51

As per the Eleventh Five Year Plan Approach Paper

Projection, rates of GDS sectoral and overall for Eleventh

Five Year Plan (2007-08 to 2011-12) has been estimated as

under :

Source: Working Group on Savings for the XI Five Year Plan -

2007-08 to 2011-12 - RBI Bulletin - May 2007

Particulars Real Gross Domestic Product

Growth

XI Plan Approach

Paper Projections

(Rate of Gross

Domestic Saving)

27.1 29.6 31 32.3

households save Over a third of the 205.9 million households still prefer to stash cash at home, which does not earn any return About 51% or close to 103 million household park their savings in banks In other words, 49% are still outside the coverage of the formal financial system It is further observed that 58% of the labourers and 20% of salary earners prefer to keep their saving at home The survey has observed the saving of various types of households per year

as under:

Type of Household Savings per annum (Rs.)

Medium sized land owners 22,370

Landless form 40% of the total households From the above findings it is apparent that landless, marginal and small farmers, agricultural labourers also save Although 51% households park their saving in banks, remaining save their money in informal ways When poor have a choice, they save Another encouraging revelation of the survey is that poor households saved despite being in debt

Poor can be classified into two categories - Rural poor and Urban poor Rural poor include small and marginal farmers, small fishermen, landless labour, agricultural tenants, micro entrepreneurs, destitutes - both women and men, while urban poor include labourers, artisans, and micro entrepreneurs As per June 2000 estimate, 37.3% and 22.5% of the total population are below the poverty line in rural and urban areas respectively If this is converted to family size of 5, around 100 million households who have informal savings can be the potential depositors who could

be brought under the banking fold These household need mechanisms, products and facilities for coverage under the financial system

Saving is defined as consumption foregone Money saved is for future use When people have a choice, they often choose

to save Savings is made by the poor out of the income from economic activities In rural areas, money is saved from sale

of agricultural produce, wages and income from enterprise while urban poor save mainly from wages earned and

Who Are Poor?

How Do People Save?

income from enterprise and services Due to seasonality of

cash flow in rural area mainly through sale of agricultural

produce, availability of work, source of income, saving is

seasonal and irregular As regards urban poor, they migrate

to urban areas from rural areas after completing agricultural

operations - sowing and harvesting Their income depends

on the availability of work and also the income they receive

From the income received, they have the tendency to save

for future On account of seasonality, the savings motive of

the poor is irregular

The poor prefer informal savings which offer easy access

and convenience Informal savings mechanism prevailing

in India can be summarised as under:

(i) Stashing cash at home: The poor men and women save

out of their income and keep in the house sometimes in the

backyard of the houses, in pots

(ii) Keeping money with neighbours: The poor keep money

with neighbours Wherever the poor are engaged with

contractors or work providers, they keep money with the

contractors / neighbours/relatives

(iii) Community savings: Community saving prevailing in

the rural area as well as urban area through contribution by

members of group is observed as under

i Contribution of equal amount by members on

weekly / monthly basis and collection given to one

of the members through draw

ii Contribution of equal amount by members and loan

given to members on interest Amount collected is

distributed together with interest at the end of the

year

ii Contribution of equal amount by members on

weekly/monthly basis and amount given to the

highest bidder for interest Interest is distributed

among the members

(iv) Investment in kind: Purchase of gold, silver or

household goods through contributing fixed amount on

weekly / monthly basis

Different households had different reasons for keeping away

some money as savings - ranging from emergencies to

marriages and social events, children's education and gifts

Saving for old age is not the important drive for setting aside

some cash, though India does not have a social security

Why Do the Poor Save?

system The priorities of households for using their savings

as per the NCAER-Max New York Life Inc survey findings are:

81% for education 69% for old age financial security 63% to meet future expenses like marriage, births, and other social ceremonies

47% to buy or build houses 47% to improve their business 22% to buy consumer durables and 18% for expenses towards gifts, donation and pilgrimage

Based on the observations made by various surveys / social workers, the usage of savings by the poor can be classified

as under:

Emergency - sickness, injury, death, natural

disaster Social - birth, education, marriage, funerals,

festivals Investment - jewellery (gold or silver), animals

(milch animals, goat, sheep, poultry), land, home improvement

The informal saving system is fraught with many risks:

Savings in kind is illiquid, indivisible, price fluctuations

At home Theft and destruction Relatives demand Trivial spending

No returns Community Savings Scope of money depending on fund availability Wait for turn

Pay high interest Rigid rules Limited sources

Risks Involved in Informal Saving

Total Branches Urban Branches

Regional Rural Banks 14506 13925

-Bank (31)

District Co-operative 12729 12529

Bank (369)

Primary Agricultural 106376 106376

Credit Societies

Urban Co-operative 7453

Banks (1813)

Rural and Semi

The coverage of population by saving deposit accounts of

scheduled commercial banks was lower in rural areas at

24.4 accounts per 100 persons as against 41.6 in urban

areas at end - March 2005; the number of saving deposit

accounts was 29.2 per 100 persons at all India level

Besides banks, post offices in India also provide certain

financial services The India postal service with 155516 post

offices (March 2005) was one of the most widely spread post

office systems in the world The number of post offices was

more than two times the number of bank branches in the

country with large presence in remote areas Number of

post offices in rural areas at 139120 (89.5% of the total post

offices) far exceeded those in the urban areas 16396

(10.5%) Indian post offices offer various small savings

Financial System in India

Indian banking system comprises Commercial Banks,

Regional Rural Banks and Co-operative Banks The

co-operative banking system consists of Urban Co-co-operative

Banks (UCB) and Rural Co-operative Credit Institutions The

rural operative credit system is divided into short term

co-operative credit institutions - State Co-co-operative Ban (SCB),

at state level, District Central Co-operative Banks (DCCBs) at

district level and Primary Agriculture Co-operative Society

(PACs) at village level and the long term co-operative credit

institutions - State Co-operative Agriculture and Rural

Development Banks (SCARDBs) at state level and Primary

Co-operative and Rural Development Banks (PCARDBs)

The network of branches of the banking structure is as under:

Source: Report on Trend and Progress of Banking in India - 2006-07

schemes and other financial services to their customers Small Saving Schemes include Saving Bank, Recurring Deposits, Time Deposits, Monthly Income Scheme, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate and Senior Citizens Savings Scheme The number of savings accounts in various schemes in operation aggregated about 160 million with an outstanding balance of Rs.4,59,760 crore as at end March 2005

Despite the rapid expansion of network of bank branches, particularly after nationalisation of banks in 1969 and 1970 and establishment of RRBs in 1975, and large number of post offices, financial services are yet to reach the poor both in urban and rural areas Various studies conducted show that 49% of the households are outside the purview of the banking fold Various limitations have been observed in bringing the informal saving into the formal financial system

They are mainly:

Inconvenient location of bank branches Operating norms - timings

Time consuming procedures Inappropriate transaction size Minimum balance requirement for Savings Bank account Non-availability of transport

Loss of daily wages

The requirement of poor for saving with the financial system has manifold constraints, problems and limitations Taking into account their seasonal inflow of income from agricultural operations, migration from one place to another, seasonal and irregular work availability and income; the existing financial system needs to be designed to suit their requirements The expectations of the poor to encourage saving in the financial system is as under:

I Security and safety of deposits

ii Low transaction cost

-a Proximity

b Convenient operating time

c Minimum paper work iii Appropriate design for

d Frequent deposits

e Quick and easy access

f Product suitable to income and consumption and

g Reasonablereturn Steps Taken for Financial Inclusion

What Poor Savers Expect?

Steps Taken for Financial Inclusion

Role of Banks and Microfinance Institutions in

Mobilising Informal Savings

Various steps have been taken by the RBI and banks to bring

more and more people within the fold of banking sector like

introduction of basic banking "No-frills" account with nil or

low balances in November 2005 By end March 2007, the

number of “no-frills” accounts was 67,32,335 by public

sector banks, private sector banks and foreign banks

Similarly, business facilitators, business correspondents,

door-step banking, Self Help Group concept, etc have also

been introduced to facilitate the poor to have access to the

banking network Besides these measures, different

approach is required to bring informal saving of the poor into

the formal financial system

The formal financial system, despite various measures, may

not reach the poor because of locational disadvantages,

rules, regulations, approach towards poor, cost

effectiveness, staff constraints, etc MFIs can play an

important role in mobilising informal savings Local feel and

understanding, easy approach, convenience, product

safety and faith are important to tap the resources from the

poor The issues that need to be addressed both by banking

institutions and MFIs to suit the requirements of poor are:

a Develop mechanism to allow for frequent and small

savings and withdrawals - collection of money on

weekly/monthly basis

b Develop deposit product keeping in view their

seasonality of income - weekly collection schemes

c Develop purpose centric saving product for medium and long term like

Education requirement Marriage

Old age plan Replacement of assets

d Door-step / work place service so that depositor need not travel for depositing money/withdrawal more than a kilometre

e Use of technology for spot collection and withdrawal of money

f Mobile financial services on fixed day / market day

g Promotion of Self Help Groups and linkage with banks

h Postmen / Postmasters as business facilitators

i Awareness and education on financial services

The Committee on Financial Inclusion headed by Dr C Rangarajan, Chairman, Economic Advisory Council to Prime Minister has made various recommendations for ensuring access to financial system by the poor and vulnerable groups In fact, providing access to finance is a form of empowerment of poor people The financial services like saving, credit insurance, remittance of fund will be ensured to the poor Bringing informal savings into financial system will also help utilize the resource for developmental activities

Conclusion

Financial Inclusion - Working Definition

Holding a bank account itself confers a sense of identity, status and empowerment and provides access to the national payment system Therefore, having a bank account becomes a very important aspect of financial inclusion Further, financial inclusion, apart from opening and providing easy access to a No Frills account, should also provide access to credit, perhaps in the form of a General Credit Card (GCC) or limited OD against the no frills account It should encompass access to affordable insurance and remittance facilities It should also include credit counseling and financial education / literacy While financial inclusion, in the narrow sense, may be achieved to some extent by offering any one of these services, the objective of “comprehensive financial inclusion” would be to provide a holistic set of services encompassing all of the above

Based on the above discussions, the

following working definition of

“Financial Inclusion” was considered

by the Committee :

”Financial inclusion may be defined

as the process of ensuring access

to financial services and timely and

adequate credit where needed by

vulnerable groups such as weaker

sections and low income groups at

an affordable cost.”

[Source: Report of the Committee on Financial Inclusion (Chairman: Dr C Rangarajan)]