Banking and Finance Practices of Rural People: an Empirical Study
Dr. Abdul Motin Ostagar
In India, financial exclusion is commonplace in rural populace. A very common excuse for the financial exclusion of the rural marginal people is lack of income. This study categorized financial need and identified the financial practices across the demographic profiles in rural areas. The dynamic characteristic of income and expenditure creates the surplus and shortage of fund. With the risk assessment and personal preferences people are availing accessible financial services. Among all financial services, savings plays the key role in the success of the financial inclusion. An empirical study has been done to understand the rural financial practices. Unstructured interviews are conducted with open ended questionnaires in rural West Bengal. The qualitative data has been analysed to model the money management practices.
Keywords: financial inclusion, banking, rural finance, development, india.
The debate of weather rural marginal people have potential to save is almost obsolete. Even in the last decade in rural financial services emphasis was given in the rural credit. Successively there is a paradigm shift towards the broadening of financial services, enhancing the outreach and capabilities were also given a thrust in the financial inclusion policies (Rajan, 2017). Rural finance is the informal finance in nature, which is more vibrant that the formal or semi-formal financial sectors. The requirement of rural finance is featured by small in amount and speedy in delivery. Reciprocity in financial transaction often plays a major role here. They are innovative in terms of speed, flexibility and suppleness. In case of credits, features like low transaction cost and unwavering repayment disciplines are the major challenge for the formal sector. The proximity is the nature which formal institutions are trying to meet with the outreach. Here the basis of the transactions is savings not the subsidised outside cash (Adams & Fitchett, 1992). All the market participants in this field have understood the need for product driven business model than the market driven models. The power of client responsive financial services enable them to constantly trying to identify the finance need of the people and meet them profitably (Wright, 2004).
- ECONOMIC ENVIRONMENT OF POOR PEOPLE
Poor people operate in mini-economy. Production, consumption, trade and exchange, saving, borrowing as well as income all occurs in small amount. The effect of these is a high transaction cost. The implication of this is high in Financial Inclusion as it is unattractive for the people to bear extra charges and it also depletes the profit margin of the formal institutions (Matin, Hulme, & Rutherford, 1999).
In rural areas most of the poor and marginal class people are landless labourers and small, marginal and landless farmers engaged in sharecropping. The landless labourers mainly work as agricultural labourers on daily wages ranges from Rs. 250 to Rs. 350 depending upon the labour demand. The demand for labour rises in the farming season. People also have Job card of MGNREGA. But they do not get sufficient work. Many people already having the job card has not gotten any work till date. Those who have not having job card cited reasons like less wage i.e. Rs 136 or blamed the local administrator for discriminate them during allotment. People from some specific area revealed their concern for corruption in the system. A section of the rural people are striving to make their end meets. Those who are getting some old age pension utilise all those money in medicine as they are either retired or engaged in menial work.
- FINANCIAL NEED OF THE PEOPLE
When people are asked about their savings, the most frequent answer was that they do not have enough money to save. They say that whatever they earn all goes for various financial needs. Rutherford (1999) simplified the need basically into Life Cycle Needs, Emergencies and Opportunities. His study through financial diaries identified three needs. Firstly as the managing basics which deals with the cash flow management due to irregular income flows. Secondly coping with the risk in case of emergencies. Thirdly raising lump sums to meet the big ticket expenses and tapping opportunities (Ruthven, Morduch, & Rutherford, 2009).
- NEXUS OF FINANCIAL SERVICES
The nexus between savings credit and insurance is such for the poor that they cater the insurance need though the savings and credits. The ability of savings by the poor depends upon the innovative microcredit products. The image of poor people that they do not save due to wasteful consumption, gambling etc. Researchers do not consider then feckless. So, does the people who are not involved in those activities, has surplus money to save? Majority of the people are continuously seeking opportunities to improve their personal and household situation. Second image is that the income of the poor people is not sufficient to make the end meet. So how can they save? Paradoxically, they need to do and do that for survival. They also need to buy basic items like food and clothes. They save money from their income by keeping some portion. Even in case of expenses they seek opportunities to save some money from the expenses. Many poor housewives are saving in this mechanism. Depending upon the willingness and capacity they are also involved in reciprocal landings (Matin et al., 1999).
V. PARADIGM SHIFT TOWARDS NEED BASED SERVICES
The need based product designing involve a thorough understanding of the area of operation. The basis of all financial services is the savings of money. The accessibility and preference is important to understand the current practice of financing. The vulnerability of the financial services realised by the people is also considered for product designing. The accessibility of services to avail the current value of savings is one of the key features of financial services. Apart from meeting the regular financial transactions, people make financial planning for known life-cycle expenses. At the same time, provisioning expenses for securing themselves from any contingencies also have a significant weightage. The finance need of the entrepreneurs does include the finance for their business (Ruthven et al., 2009). Rural financial market has a pressing need to test with various market-led, alternative and innovative products and delivery systems. The preferences of rural households for attributes of savings products vary with different category of people namely farming, wage earners and petty business household. The wage earners exhibited higher preference on liquidity unlike other categories who have shown more preference on security (Kapoor, 2007).
- PATTERN OF MONEY MANAGEMENT
Poor people always face the difficulty to regularly save money. They do not have steady income let alone the regular job. That is in fact a challenge for engaging in any automated saving procedure (Rutherford, 2011).
6.1 Wage earners
When the rural wage earners are asked about their saving practices, they raised their concerned on the irregularity of income. They do not have work throughout the year. Especially on rainy days, they do not get any work. They do not depend on the MGNREGS work as number of works shrinking day by day. Even after the work their money gets pending for a significantly long time. So they keep some money to meet their daily needs. As they get the money in cash, they initially keep it at home and use it. Those who are keeping it at home stated that they will need the money soon or the amount is insufficient to deposit in Bank. Those who keep that money in a bank, generally deposit it after 6-8 weeks (one and a half to two months) so that they can accumulate around Rs 500-1000. After the scams of various ponzi schemes people are now aware of those schemes. They are cautious in depositing money in schemes other than recognised schemes.
The savings pattern of marginal farmers and sharecroppers is different from the daily wage earners. They keep certain portion of their agricultural outputs like paddy for consumption and sell their residual outputs. Those who bear the agricultural expenses may have some loans in the seeds and fertilizer retailers. In financially included regions which are close to cities and leading in agricultural, people have agricultural loans like Kisan Credit Cards. They repay the loan after sale of their outputs. The marginal farmers and fixed rent tenancy sharecroppers bear the agricultural expenses of agricultural inputs and labour. In some cases landlord bears cost of the agricultural inputs. Some landlords also have farm-houses (khamar) from where the post-harvest processing and sales support are provided. Under this system around 10-12 families work under that landlord. Even after transfer of land ownership from the landlord to the peasant they have been farming in the sharecropping system as they get the facilities of the farm-house.
A farmer of Shyampur area who is growing various crops throughout the year in a share cropping model, mostly run his business in cash. External finance is always a big liability for him. So he very much risk averse. He is having a small land. Rest of the land he leases for cultivation according to his personal fund. The micro unit of the banks in his area only has limited services of deposit and withdraw. But he thinks that the process is so cumbersome. Visiting a bank is a costly matter for him. A productive time get wasted in the waiting period at the bank branch. For him, loan from a moneylender is much more convenient than a bank. Although he queried for Bank loan, which was not formalised by the bank. The reason for the refusal was not clear. Either he did not understand it clearly or he has not been entertained by the bank official. He was continuing with the perception that bank loans are not for him. He purchases regularly from specific suppliers of various agricultural input items. He prefers to procure them in cash for some extra saving as they provide discount for cash payments. Else they provide items in credit without any discount. The suppliers hold bi-yearly “halkhata” program for account settlement. He is having a bank account but rarely use it. He keeps some money in his bank account for the sake of maintaining the account. Non-sharia compliance is an issue but absence of Sharia compliance financial services he accepts the conventional banking system of the area. But he does not have any insurance or investment plans. He feels satisfied by keeping the money in his own control. He has studied upto mid-school and farming is his only source of income. He is having a decent lifestyle and happy go lucky mentality. His kids will cultivate the land and will take his care in his old age. This person, in his early forties, uses a basic mobile phone and uses LPG for cooking. But he does not get the subsidy due to fault in Aadhaar linking of his account. He is aware that people gets compensation for the crop loss due to crop insurance.
6.3 Small traders
The small traders get their return from the business in the same day. They may get the goods on credit from the supplier in the morning. After the sales of the goods they pay the amount to the supplier and can realise the profit. Similar to agricultural labourer they accumulate money for the rainy days. The small traders are selling goods at the local village markets. Apart from local produces some also sales goods from local city or town. They earn on profit on the sales. They prominent portion of this group is in fact the women entrepreneurs. A vegetable seller in his early sixties has taken loan vehicle loan to purchase a van. The van tours everyday between Kashipur and Nagerbazar. A group of vegetable sellers regularly transport their buckets of Vegetable to Nagerbazar or nearby markets. After selling vegetables in the markets they return to Kashipur in the same vehicle. The aged seller visits the markets twice in a week. He is having a decent house and few bighas of land. He uses a basic mobile phone and happy to avail only basic utility citing his mid school qualification. He has given the impression of an honest and friendly person. He expressed that as a member of the gram panchayat he had always refused to accept his share of “cut-money”. He does not have any insurance or investment plans. A normal savings account with minimal balance and a vehicle loan from a private motor financer are the only financial services he is availing. His sons are also in the same trade. He is aware that they are availing private micro credit in their spouse’s name. As he goes up against those expensive loans, his family members keep secrecy on the micro credit matters.
6.3.1 Introduction to Formal Financial Institutions
PSU banks are predominantly catering the basic banks account needed of the people. Generally the earning members of the households are having a bank account with a PSU banks in the nearby area. The old account holders mainly opened it during the campaign of the newly opened Bank branches. Another thrust of opening of Bank accounts came during the application for MGNREGA Job cards. During the PMJDY another thrust came for opening of the bank accounts. People opened no frill Bank accounts during the PMJDY account opening campaign launched by the banks. People opened mainly to get the direct benefits from the Government. They mainly driven by the mass and word of mouth initiated during the campaign. They also cited reason for getting their share of Rs 15L from the Black Money kept in various foreign banks. People get into JAM for getting subsidies like LPG too.
People engaged in Joint Liability Groups are engaged with Private Banks or MFIs like Bandhan, Ujjiwan, Village Financial Services, opened Bank accounts to operate services. Self Help Group are formed to get group finance in their group bank accounts. Many self-help groups are also engaged in creating a fund, is also operating through a bank account.
6.3.2 Money collection of savings club
People understand the need of saving. They are open to saving opportunities which are backed banks. As they perceive that you need a significant amount to deposit in a PSU bank, they wait for the opportunity. The early concept of money guard is now getting replaced by saving collectors. People liked to keep money in safe custody of a very reliable person. But the amount does not have any interest income. Ponzi schemes were operating in this mechanism with the promises of high return. Within a couple of years their financial scams are exposed. Many of them lost significant amount in the scams. The main reason people trusted those schemes as the agents were known to them and many people were investing into the schemes.
Many micro finance institutes that are operating in the regions have emerged as money collectors. They are proving group loans to females for various productive purposes. Although the group lending terms varies with the companies. As they are providing loan at the upfront then the collect weekly savings of the people, it is perceived by the people that there is no chance of losing money. Those MFIs are lending in a group so that borrowers feel peer pressure to for repayments. In case of any default payment of a borrower, MFIs insist other group members to repay on behalf of the defaulter. They charge interest as high as 22% for the group loans. Due to interest expenses and repayment pressure some people avoid to take these loans. The MFIs also open a bank account of the borrower and disburse certain amount in that account. This is actually helping the MFIs to fulfill their priority sector lending targets.
Rural women are now forming self-help groups for their family welfare. Those groups are for creating a welfare fund with a bank, takes group loans and depute members for any menial work comes to them. While forming the group they select members who are known and trusted to each other. The size also varies among the regions. In some places, groups are formed from 5-6 members to 11-12. They regularly meet and select a different group leader for each month in a rotational term. In case of backward region, a fixed group leader for the entire group works as a manager in terms. The main responsibility of the leader is to collect the monthly savings from the members and to deal with the bank. The accounting is also done by the group leader. This is infact a modified version of Rotating Savings and Credit Organizations (ROSCO), where members are depositing as low as Rs 107 per month. Members in financial need seek loan from the fund. The group mutually decides the rate of interest which is generally around 10%. Those who will take loans will have to deposit the loan repayment amounts in addition to their regular deposits. Members who will not take any loan will only deposit the regular deposit amount and will get back their money with additional interest. People trust the model as their amount is getting deposited into a PSU bank.
6.3.3 Credit access by the households:
Apart from accumulate money by saving for a future financial need; people may need money for a present financial need which they repay from the future savings. Loan is a useful way to cater those current financial needs of the people. In rural areas, PSU banks are operating with a large number of small accounts. Their services are mostly limited to the transactions and other services related to savings bank accounts. The services of the advance department get compromised in this process. The study revealed that poor and marginal rural people have a perception about the PSU banks that they will not provide loan to them. They revealed that the process is too complicated. PSU banks only provide loans against security. They might not have any security with proper sales deeds. They think that banks are only for affluent people of the society. Although in financially included, people are taking KCC loans by providing the tax receipt of the land.
The MFI loans are only provided to the joint liability women groups for productive purposes. They show that they will start or use the money for small scale trading and similar businesses. Although it is revealed that very few borrowers are utilizing the amount exclusively for that purpose. Most of them are actually diverting the fund for various consumption purposes like house repairing, child marriage, buying land, medical expenses. The usage of group loans of the self-help group is similar to the MFI loans. In both the cases the loan is utilised for the household.
Landlords and some influential persons are also engaged in money lending business. They lend money without any security as the borrower is known to him. They are well versed about the character and repayment capability of the borrowers. In some cases when they are not able to disburse any loan without the security, they accept securities in exotic forms (Ray, 1998) like gold jewellery, brass and copper utensils, cow. Many local jewellers are also engaged in lending business by taking ornaments in their custody. The respondents confessed that in some cases they were not able to release the security due to non-payment.
Friends and relatives are also a source of loan. They can get a loan for a short period in a very convenient way. The term in this type of loan cannot be followed by any other lenders. But everyone does not have such network to avail loan in this model.
6.3.4 Provisioning for life-cycle expenses
People are also asked about how they cater to their investment needs, which are broadly for the life-cycle events like child marriage, old age pension, child education. In addition to these needs people also invest for new venture, land or property, house building or house extension.
Many people lost their hard earned money in Ponzi schemes. The generation has learned from the debacle and now cautious about the investments. People who are approa ched by the LIC agents are investing in the conventional LIC policies. The policies are actually an investment where a certain portion of the premium goes towards the insurance. Those who are into various services only have the retirement plans.
People who are actually not investing in any of those formal instruments were responded that they have potential assets like cow, goat and land. According to the need they will sell off those assets. They may take loan from a suitable source if the amount is not sufficient.
Insurance is catering the contingency needs in some select purposes. People who are running an insurance policy from LIC are actually not utilising the insurance need. In conventional LIC policies they keep their focus on the investment parts. Even the marginal and small farmers are reluctant to buy the crop insurance, as the insurance premium is too high. From their knowledge they may get Rs 2000-3000 from the insurance company. The poor and marginal households have left it on their fate. They are not ready to think for the future as they are struggling to survive in the present. Families headed by a widow, a retired person or a person suffering with prolonged illness are actually struggling to survive. The Swasthya Sathi Card is launched and distributed among the poor population for medical contingencies. Other than that, they are again relying on the assets like cow, goat, and land in addition to the informal quick loan.
- FINANCIAL APPROACHES
Financial services enable people to reallocate their finance need across time. A household need to meet the expenditure over time. In this household economy, there is a mismatch of inflow of income and outflow of expenditures. With their limited access and capability they adopt a suitable financial approach. There are three main approaches by which people tap into past and present income to finance their varied expenditures. In saving up approach people keep a certain portion from the expenditure so that they can use them in future. On the contrary, in saving down approach people try to tap the future income to finance the current need. Whereas, saving through approach is an intermediate arrangement where people regularly save and can borrow in need (Rutherford, 2000).
- SIMPLE CONSUMPTION FUNCTION FOR THE APPROACHES
C = f (Y) where C stands for consumption and Y stands for disposable income and there is no tax for the category.
Wage labourers and small traders earns daily basis. If we assume that in the present year average daily earning is w units, the number of working days is d, C is the total consumption and the autonomous consumption is c, then:
C= c + a (w.d) where w.d is the disposable income
For the small and marginal farmers it will be calculated on the sales of the residual farm output. For simplicity let's assume that the marginal farmer produces a single commodity and sales x units at a rate p, then the consumption function will be:
C=c + b (p.x) where px is the disposable income.
X. CONSUMPTION IN EXTREME POVERTY
Across the occupation, people will have the private saving, s=Y-C. People who are struggling to make ends meet and having a minimal s. In cases of extreme poverty we may observe Y<C. Families headed by a widow, retired person or a person suffering with prolonged illness are have a very low level of income in comparison to their household consumption. In those situations it is hardly possible for avail any financial services. Generally, these households lack an eligible member for earning. They will not have any money to save nor have any potential to repay any advance. They are actually depend on the welfare like old age pension, donation or alms. In West Bengal, scheme like Khadya Sathi have all the potential to reduce the consumption burden of the group. If we assume the social benefit as g then,
s=Y - (C-g)
Due to very low or no income the household consumption will lie near the autonomous consumption level. For them, welfare is essential for their survival, but it will not rescue them from poverty. In this situation they may not avail any saving up or savings down service, but a basic bank account enables them to receive any pension, subsidy or donation as relief.
- INCOME BOOST
Boost in income is another way to provide social security to the vulnerable people. In presence of an eligible member thrust in productivity increases household income. Thus, if we consider any secondary income or any employment guarantee scheme like MGNREGA increases the income by ΔY=(MGNREGA days) * (daily wage rate). Those who do not get the Job card, may engage in some secondary source of income. Thus,
s=(Y+ΔY) - (C-g)
In this situation people have certain private saving, so they can avail financial services with a certain approach.
11.1 Saving up Approach
In case of saving up, private savings gets accumulated with the household. For the poor and marginal class the private saving is not that significant so that people can go to a bank and deposit. They may need to wait for 1.5 to 2 months to accumulate Rs 500-Rs 1000. The Income effect on consumption shifts the consumption to a higher level. Due to a significant waiting period, the money will get exposed to the consumption of less necessity items to more luxury items. Any increase in consumption actually depletes the private saving. For the wage labourer and small traders this savings is actually smoothing their consumption.
s=(Y+ΔY) - (C-g) [C>>c; s→0]
The small and marginal farmers consume whatever they keep from their produce. They generally get a significant amount of money by selling the residual output. If he is farming for his own then throughout the agricultural process he has to pay for the expenses. Thus he prefers to keep the money in his own custody. Only the surplus money he may deposit in his bank account or any other money collector. Else it will get exposed to the consumption of less necessity items to more luxury items.
s=(Y+ΔY) - (C-g) [C~c; s→0]
Alternatively they look for the money collector who will take that small amount on a regular basis so that their consumption specifically on the luxury items get restricted. The accumulated money they use to keep in other asset form. Either they buy gold jewellery, goat, cow, etc. so that they can liquidate the asset for future use, or they create a fixed asset like a house or land. Number of households are getting funds in housing schemes of the Government like Pradhan Mantri Awas Yojana. So they build their house in several phases. Many of pucca houses we have observed without any plaster in the wall or without pucca floor.
Saving down approach
People with saving down approach generally keep a certain liability over the years. They do have a private saving. But due to their access to credit they take keep borrowing (Basu, 1997).
bt = (Y+ΔY) - (C-g) - (1+r)bt-1
where, bt is the current borrowing, bt-1 is the previous year borrowing and i is the interest rate of the loan.
Those who are settled into a pattern for many years the equilibrium can be expressed as:
b= (Y+ΔY) - (C-g)
This is a risky approach for the household, so risk averse population avoid the saving down approach. The obligation to repayment creates pressure to those people. On the other hand, another group of people favour the saving down approach as they are driven by the obligation. They consume less in their future cash flows to repay the loan. The Prospect theory explains the phenomenon as people who take the loan. For them the any extra interest or penalty for the non-payment has more utility to them than to the consumption of the same amount.
In case of big amount of loan this approach is not possible for the rural people. They do not get sufficient loan to build a Pucca House. Their income and financial condition is the main hindrance in getting a big amount of loan beyond.
An efficient financial system is not just the pre-requisite for enhancing the Income or alleviating poverty, but it also significantly improve the education, health and empowerment. This study helped to understand how and why various category of people interact and transact with different financial institutions. The influence of informal financial sources is so strong in some cases that they are hard to replace by the formal financial institutions. Because formal financial institutions cannot adopt those characteristic of informal financial sources.
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