Sustainable Financing for Indian Cities

By Anand Sahasranaman & Vishnu Prasad, IFMR Finance Foundation

A version of this article was first published in the September 2014 edition of the monthly journal Yojana.

Municipal finances in India are characterised by the constant tension between the funds and functions of local governments. Cities in India have insufficient revenue tools to meet their expenditure requirements. While the 74th Constitutional Amendment Act (CAA) devolved a great deal of functional autonomy to local governments, a commensurate devolution of financial autonomy was absent. Out of the 18 functions to be performed by municipal bodies under the 74th CAA, less than half have a corresponding financing source. Furthermore, most local governments cannot set tax rates or change the bases of collection without the explicit concurrence of state governments. However, not all problems of municipal financing in India are attributable to the upper tiers of governments. Local governments have failed to utilize adequately even those tax and fee powers that they have been vested with, in particular by failing to put forth an adequate collection effort. The very low levels of own revenue generation in Indian cities have, thus, precluded them from providing even the most basic public services to their citizens.

While the thrust of urban policy in India has been on the metropolitan centres, the current state of public infrastructure and service delivery in India’s small and medium cities is, if anything, even more alarming than that in the larger ones. The central question that therefore confronts us, in the context of cities both big and small, is this: How can cities sustainably finance the development of public infrastructure to ensure service delivery that conforms to the laid-out benchmarks for all citizens in the next fifteen years? This article argues that in order to meet this challenge, Indian cities will need to increasingly generate higher levels of own source revenue and efficiently use market based financing mechanisms to ensure minimum levels of service delivery.

To read the full article please click here.


The Master Trainer Approach to Financial Education

Guest post by Karuna Krishnaswamy and Amit Arora, Rural Financial Institutions Programme, GIZ 

In recent years there has been rising interest among financial service providers, NGOs and policymakers in educating customers and potential customers to enable them to make informed decisions on taking up and using financial products. There is a view that knowledge gaps prevent optimal take-up and usage of financial products by the poor and that behavioural change could be effected by imparting appropriate education.

SEBI, RBI and NABARD have taken up the mandate to facilitate provisioning of financial education programmes and have issued enabling regulations. The Financial Stability and Development Council, set up by the Government of India, has come out with a ‘National Strategy on Financial Education’. The strategy recommends that product education should be provider-neutral and that the responsibility of educating the buyer about the suitability of the product should rest with the seller. In terms of policy, the new government is proposing that banks be mandated to open two savings account per household and that account holders undergo financial education training before they can avail of the credit facility. This implies potentially huge numbers of people to be trained in the next few years.

However, in spite of many years of efforts in consumer education and a trend of institutions increasing commitment to this cause, many questions still remain unanswered.

For one, it is unclear whether existing education efforts have brought about any substantive behavioural changes. A review of the global literature on the evaluation of financial education interventions reveals mixed results in terms of impact1. In India, although Calderone et al. (2014) found that financial education altered attitudes and increased amounts saved in Basic Savings Bank Deposit Accounts, there are few completed impact studies, especially where there is a bouquet of financial products on offer for the customer to exercise her choice if her behaviour has been influenced.

Secondly, existing interventions range all the way from short duration mass audience programmes to more expensive classroom courses and one-on-one interactions with the cost varying from less than INR 60 to INR 1500 per participant. It is unclear whether the benefits outweigh the costs and what the optimal mode of delivery is.

Thirdly, in NABARD’s and RBI’s FLC efforts, is there client value and a business case for a generic financial awareness counselling programme that does not endorse specific products as espoused by the regulator? If so, who should conduct the intervention – the financial service provider, a neutral organization or through a public-private partnership with the state? Who should pay for it? How can the considerable corpus of NABARD, RBI (Depositor Education and Awareness Fund), SEBI, the stock exchanges and other donor agencies be best utilized?

In a unique PPP, GIZ’s Rural Financial Institutions Programme (RFIP) partnered with IFMR Rural Channels (IRCS) through its Kshetriya Gramin Financial Services (KGFS) network on the ‘Master Trainer’ project, to answer some of these questions. While the evaluation is not completed, this post shares some early experiences.

The hypothesis
The hypothesis was that it would be feasible for a commercial financial services provider to conduct a product-neutral financial education programme with the intention of raising financial awareness in a sustained manner.

The intervention
Phase 1 of the project ran from October 2012 through 2013. The intervention consisted of a 45 minute presentation called the Community Connect Program (CCP). The CCPs are conducted by Master Trainers, handpicked, highly motivated and charismatic staff from the KGFS branches. They are not given incentives or business targets. They conducted the program for groups of 10 to 25 (largely) women in the villages.

IRCS found that a 45 minute presentation may not be sufficient to alter customer behaviour and that people still had a number of operational questions before they could translate interest into an informed decision to avail an appropriate product. Hence in Phase 2 in 2014, after the CCP, the Master Trainer started conducting individual household follow-up visits for those attendees that expressed interest in a particular product. The Master Trainer comes prepared to answer questions and to make suitable recommendations.

The CCP concept
The Master Trainer starts a CCP by clarifying that he is not here to sell products but to help them achieve their lives’ goals. He gets the audience to think about their households’ goals and how they would meet them, common risks that they face such as the death or unexpected loss of income of an earning member, coping with expense shocks and preparing for retirement in dignity. The Master Trainer then proceeds to discuss some of the mistakes they commit and provides simple suggestions such as:

  • Having clarity on monthly income and expenses
  • Using all available assets
  • Reducing unnecessary expenses
  • Not borrowing more than is needed

None of these ideas is unfamiliar to the audience, but it is not uncommon for a person living in economic uncertainty to turn a blind eye to her peccadilloes. The messages resonate well with some of the attendees because he has raised the salience of the risks, worries, inefficient practices and uncertainties that they face to the fore. As one participant said to us, “We were all blind then; at least we are awake to our issues now”.

The Master Trainer proceeds to suggest how using financial products such as taking insurance to protect income flows from disruptions due to perils and saving in a pension product could help. He also provides practical advice on implementing changes such as tips on comparing flat and declining interest rates in order to compare loans and hands out an accounts book. He then leaves without actively endorsing any products.

After this brief intervention, the audience may be none the wiser in terms of product literacy. They may not understand all the terms of an insurance or a pension product or how to compare a flat interest loan from a moneylender with KGFS’ declining rate loans. However, they trust that the Master Trainer’s advice is not motivated solely by sales interests and some are happy to try out the product after taking his help in figuring out operational questions such as:

  • Can they take policy on their spouse’s name?
  • What company should they take a policy from?
  • What amount should they insure themselves for?
  • What documents are needed for a loan application?

It helps that among the previously enrolled members (those whose financial profile has been assessed at the branch), both KGFS and the Master trainer are familiar to the audience. KGFS believes that the CCP helps to prepare the ground for sale of suitable financial services to customers in a one-on-one setting.

The CCP has reached out to more than 18,000 people, largely women, over the past 16 months.


Client feedback

A qualitative evaluation that GIZ conducted suggests that in the case of some of the participants, the concepts presented by the Master Trainer have been well received and implemented. Some illustrative anecdotes:

Saving and interest rates
“I am not literate but I want my children to have quality education and hence send them to a private school. The fees are high and I usually take a loan from my land owner. Now I understand I can plan and save through the year in regular instalments (recurring deposit). Not only do I save on the interest (paid to the moneylender), I earn an additional 4% interest on my deposits.” – Participant from Vellaaru.

“My husband is a cab driver besides being a farmer. He will make more money if we could invest in a second-hand car. I am going to discuss with the Wealth Manager to explore the possibility to take a loan if this will fall under ‘grow concept’. We have identified our goals, both individual and household, developed a business plan for us to purchase a vehicle of our own and thereafter expanding into a cab service with 5 – 6 cars in a few years.” – Member from Vellaaru

Financial diaries
“The financial diary will be very useful if we fill it regularly. It will help us understand how and on what our money is spent. I want to show my husband how much money he wastes because of his drinking habit. I don’t know the exact amount he spends as he usually keeps a certain portion of the money with him and gives me the balance for household expenses. I am going to ask my husband to fill this diary so he knows how much he is spending at the wine shop.” – A participant in Pudhuaaru.

Insurance against risks
Insurance expectedly was the most complicated concept to understand while pension was easier.
“I know a bit about loans but I did not know that I can plan for my future through the pension scheme and don’t have to depend on my children during my old age. Also, the insurance scheme for accidents will be very useful as most of the men folk in our community travel long distances on two wheelers and is fairly dangerous as we have too many trucks passing through these roads at high speed. A neighbour lost her son and their family could have benefited had they been insured.” – Enrolled customer from Vellaaru.

More details of the Master Trainer project are available here: Video & Project details.

Next steps

An evaluation is underway to answer the following questions:
a) What did the participants learn?
b) Is better learning correlated with improved financial management practices and product take-up and usage?
c) Has participation in CCPs led to improved product take-up and usage?
d) What is the business case for the provider?

1) Somasundaram, Usha. 2014. Mid-term evaluation of the Master Trainer Program, GIZ Report.
2) Margherita Calderone, Nathan Fiala, Florentina Mulaj, Santadarshan Sadhu, Leopold Sarr. 2014. When Can Financial Education Affect Savings Behaviour? Evidence from a Randomized Experiment among Low Income Clients of Branchless Banking in India
3) Address delivered by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the 35th SKOCH Summit in New Delhi on March 21, 2014
4) NABARD Website

1 – Margaret Miller, Julia Reichelstein, Christian Salas, Bilal Zia.2014. Can you help someone become financially capable? A meta-analysis of the literature. World Bank Policy Research Working Paper 6745
Daniel Fernandes, John G. Lynch, Jr., Richard G. Netemeyer. 2013. The Effect of Financial Literacy and Financial Education on Downstream Financial Behaviors. retrieved from http://www.nefe.org/Portals/0/WhatWeProvide/PrimaryResearch/PDF/CU%20Final%20Report.pdf on September 2, 2014


Revisiting the core ideas of CCFS

By Vishnu Prasad, IFMR Finance Foundation

The Report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS) was submitted to the Reserve Bank of India (RBI) in January this year. In the eight months that have passed, the RBI has accepted a number of the report’s recommendations including publishing of draft guidelines on licencing of payments banks, extending the right to suitability to customers of financial services, relaxation of Know Your Customer (KYC) norms, and restoring permission of ND-NBFCs to act as BCs of a bank, among others. These steps, in sum, represent the renewed vigour and focus on the financial inclusion and financial deepening agenda in the country. As we see progress on individual recommendations, however, it is important to keep in mind some of the larger themes and directional shifts that the report had recommended and to view each recommendation within the context of these.

The starting point for the report, in many ways, was to take stock of the previous and existing efforts on financial inclusion in the country. Over the years, India has seen many big ideas on financial inclusion; from cooperative banks, nationalisation of banks, self-help groups, and regional rural banks to business correspondents, India has moved from one big idea to another in addressing the country’s financial inclusion puzzle. In examining these programs, the CCFS recognised that the key, common weakness of previous efforts on financial inclusion was their over-reliance on the one big idea as the key to financial inclusion. In this light, the recommendations of the CCFS mark a significant break from the trend of “magic-bullet” solutions. The report recognises that in a country as large and diverse as India, a reliance on any single approach to solve problems is bound to fail. While acknowledging that the country will need to constantly explore new ideas, learn from new technology and successful strategies of other nations, the report argues that the best regulatory strategy is not be to push the design of the financial system towards one central approach. Rather, the CCFS proceeds to define a clear set of vision statements and establish core design principles that would enable multiple institutional frameworks and models, new and old alike, to thrive or wither away, based on their inherent strengths and weaknesses. (Page 5, Preface, Report of the CCFS)

Design Principles

Keeping in with this strategy, the report presented a set of four principles that should guide the evolution of the financial system design in India – Stability, Transparency, Neutrality, and Responsibility. To elaborate, the principle of Stability argues that any approach that seeks to achieve the goals of financial inclusion and deepening must be evaluated based on its impact on overall systemic risk and stability and at no cost should the stability of the system be compromised. A well-functioning financial system must also mandate participants to build completely transparent balance sheets that are made visible in a high-frequency manner, accurately reflecting both the current status and the impact of stress situations on this status. Furthermore, the treatment of each participant in the financial system must be strictly neutral and entirely determined by the role it is expected to perform in the system and not its specific institutional character. Lastly, the financial system must maintain the principle that the provider is responsible for sale of suitable financial services to customers and ensure that providers are incentivised to make every effort to offer customers only welfare-enhancing products and not offer those that are not.

In articulating these design principles, the report argues that any institutional model for the delivery of financial services should be encouraged as long as it passes the litmus test of adhering to these principles.

Let a hundred flowers bloom

At its core, then, the CCFS recommends an approach that moves away from an exclusive focus on any one model of financial inclusion and financial deepening to an approach where new and specialised entrants are permitted and multiple models and partnerships are allowed to emerge between these specialised entities. The recommendation on allowing NBFCs and now, payments banks to act as BCs of banks, perhaps, best represents fruitful partnerships among specialists. Thus, instead of focussing only on generalist institutions that are required to deliver on all functions of finance, the report recommends developing a vertically differentiated banking structure, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee, thus, recommended the licensing of new categories of specialised banks including Payments Banks and Wholesale Banks.

As the report mentions, India already has the elements for success in place – a wide range of institutional types, well-developed financial markets, a good regulatory framework, and large scale and high quality authentication and transaction platforms. The cause of financial inclusion and financial deepening would be better served if we could allow institutions to leverage on this and evolve naturally, in multiple directions.


Who owns social security schemes in India? – Principles for a robust framework

By Vishnu Prasad, IFMR Finance Foundation

This post is the third in a series on Social Security for the Indian Unorganised Sector. The series will look at the challenges in the current implementation of social security schemes in India, and aim to provide a comprehensive framework for effective design, ownership, governance and delivery. This series is based on the report “Comprehensive Social Security for the Indian Unorganised Sector: Recommendations on Design and Implementation” authored by IFMR Research – Centre for Microfinance & IFMR Finance Foundation.

The first post of this series identified several key issues in the design and implementation of social security schemes in India including fragmented ownership structure of social security schemes; the lack of coordination between different agencies precluding product innovation, development, and learning; multiple window architecture for accessing benefits; and problems with targeting and identification of beneficiaries. In this post, we propose principles and design elements for building a robust ownership and governance structure for social security programs in India.

Design Principles for an Effective Ownership and Governance Structure

There are three key design elements that will be essential in a well-functioning ownership and governance structure for CSS:

i. A unified agency to own schemes so as to ensure convergence,
ii. A degree of separation between the political set up and implementation, and
iii. Active coordination between the central implementing agency and states

The Unorganised Workers’ Social Security Act, 2008 (UWSSA) appears to have tried to address the issues mentioned above when it envisaged the creation of a National Social Security Board (NSSB) to own all social security schemes in the country and State Social Security Boards (SSSBs) in each state to ensure coordination. However, the implementation of the NSSB and SSSBs have been fraught with difficulty with only a handful of states having formed SSSBs and states like Tamil Nadu declining to create such an entity. This can be partially attributed to the one aspect that the UWSSA does not address – i.e. the separation between the political set up and implementation. This is not uncommon in traditional models that have always relied on the purchaser and the provider being the same entity. For instance, the Ministry of Health in most countries is provided the funding as well as the mandate for delivering public health services. Many countries have found that this yields sub-optimal results like inefficient delivery of health services, and have therefore moved towards separating the purchaser and provider of such public services. As a consequence, countries such as Thailand and the UK have moved towards creating a ‘Trust’ structure which creates a distinction between the purchaser and the provider of public services. These countries have found that the organisational and governance efficiencies provided by this structure have resulted in improved outcomes for citizens.

For example, in Thailand the National Health Security Office (NHSO) oversees the implementation of the Universal Coverage Scheme (UCS), a universal health coverage scheme that offers both curative and preventive care. The NHSO consists of two governing national boards, the National Health Security Board (NHSB) and a standards and quality control board. The NHSB is chaired by the Minister of Public Health and consists of a wide range of members and experts from various public and private organisations. This structure enabled a degree of separation from the political set up and the involvement of a wider range of agencies and stakeholders in decision-making processes which improved the efficiency, transparency, responsiveness and accountability of the scheme. Further, by acting as the purchaser on behalf of UCS, the NHSO ensured that the Ministry of Public Health no longer wielded control over government spending on health-care services.

In a similar vein, social security schemes in India must be governed by The National Social Security Administration, a special purpose vehicle (SPV) set up as a Trust. The Board of Trustees should be chaired by the Prime Minister, and the Board itself should be comprised of the Ministers (or other senior representatives) who head the Ministries relevant to social security schemes. The NSSA should aim to bring together a wide range of stakeholders as members of the Board, like independent experts on life insurance, health insurance and public health, and pensions; representatives of insurance companies, pension fund managers, distributors; a representative from Aadhaar; and representatives of unorganised sector workers such as from labour unions and welfare boards. The NSSA will act as a controlling vehicle and not an operating vehicle governing the social security schemes. It will act as a point of convergence for the scheme, provide clarity on the roles and responsibilities of various entities, monitor and evaluate progress, and seek to bring in innovation in design and delivery through robust data collection, and research and development.

Further, each state should constitute independent State Social Security Administrations (SSSA) or its equivalent that will own and govern the implementation of the scheme at the state level. Each State should have an independent SSSA or an equivalent entity responsible establishing the target beneficiaries, awareness creation and marketing, mobilising resources for enrolment, and grievance redress and monitoring.

Open Architecture & Universal Coverage

It is desirable that social security programs are not discriminatory in nature and are available to all citizens, so that a minimum level of protection is provided for all. Currently, social security schemes like Aam Aadmi Bima Yojana (AABY) and National Pension Scheme (NPS) are targeted to the heads of households. This is fundamentally inequitable and over time could result in outcomes such as discrimination against women in the provision of social security.

As a principle, therefore, we propose that the CSS must aspire to create an open architecture that aims at universal coverage. Since CSS is meant to provide minimal levels of social security, it is only appropriate that it be made available to all citizens of India. While budgetary resources will determine the extent of subsidy available under the program – and this subsidy should be used only for vulnerable poor households or graded for the entire unorganised sector – it is essential that an unsubsidised version of the program be available to all citizens, in the spirit of universal coverage under social security.

Identification of Beneficiaries through Self-Reporting

While the legal definition provides a broad sense of an ‘unorganised worker’1, the true challenge on the ground will revolve around the identification of these unorganised sector workers. There is no clear, fool-proof mechanism available to identify and separate organised sector and unorganised sector workers today. The principle for identifying unorganised sector workers should be based on self-reporting by individuals (as recommended under the UWSSA) but not at the district administration; instead self-reporting can be done by beneficiaries. This is the strategy that has been adopted by the PFRDA for the NPS-S currently. Beneficiaries under NPS-Swavalamban directly self-report with the aggregator that they are employed in the unorganised sector and are not covered under the Employee Provident Fund (EPF) scheme.

Additionally, the design of the CSS and the extent of protection offered provide a natural disincentive for middle and high income citizens from registering for CSS. For instance, consider the Rs. 30,000 quantum of life insurance cover available under the AABY – this works out to 0.5% and 1.17% of the human capitals of a 20-year old in the fifth and fourth income quintiles respectively. It is not at all apparent that middle and high income individuals will seek to enter into these schemes and this has been borne out by the experience of the NPS-S. Translating this self-reporting mechanism to the social security program can be an effective and cost efficient strategy for identification of unorganised sector workers.

1 – As per the Unorganised Workers’ Social Security Act (UWSSA) 2008, an unorganised worker is defined as: “a home based worker, self-employed worker, or a wage worker in the unorganised sector and includes a worker in the organised sector who is not covered by any of the Acts mentioned in Schedule II of this Act”. The Acts under Schedule II are: The Workmen’s Compensation Act, The Industrial Disputes Act, The Employees State Insurance Act, The Employees Provident Fund and Miscellaneous Provisions Act, The Maternity Benefit Act and The Payment of Gratuity Act.


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