Selection of Research Proposals for the NSE-IFF Financial Deepening and Household Finance Research Initiative

By Dr Santadarshan Sadhu, Coordinator, NSE-IFF Financial Deepening and Household Finance Research Initiative

The NSE-IFF Financial Deepening and Household Finance Research Initiative is very pleased to announce its final set of proposals selected for funding in this round. We expect, through this initiative, to catalyse a body of high quality research pertaining to critical questions of household finance, financial inclusion and financial deepening. We would like to thank all the researchers who applied to this initiative, making it extremely competitive and setting a high benchmark for future rounds. We would like to congratulate all the researchers whose proposals have been selected for funding and wish them the very best. Here are the selected proposals with a short description of each:

1. Getting our priorities right: Targeted agricultural credit and technology adoption in India by Andre Butler and Camille Boudot, Centre for Micro Finance

Access to agricultural credit directly influences production through two main channels: Primarily, credit can raise investment in input use and hence productivity; Secondly, credit provides farmers with the opportunity to smooth consumption and thereby increase the willingness to take risks and engage in productive agricultural investments. However, existing evidence on agricultural lending through formal institutions has questioned the effectiveness of priority sector lending as a pathway from poverty. India’s progressive financial inclusion agenda, including the promotion of a wide network of rural bank branches as well as encouraging priority sector lending, provides a unique setting in which to examine the constraints of these hypotheses. We will build on existing research and methods to determine if and how credit influences production decisions and investment, and ultimately productivity. The specific questions we consider are:

i. Does reducing liquidity constraints through formal credit flows encourage farmers to adopt widely available technologies? Does adoption of these improved technologies increase aggregate productivity of major crops?
ii. What is the impact of credit on farmers’ production decisions? Specifically, does credit enable farmers to cultivate more high-risk-high-return cash crops?
iii. Does formal credit allow farmers to make more long-term investments?

2. Quality of investment advice in retail banking in India: An assessment by Renuka Sane, ISI Delhi and Monika Halan, Mint Money

Understanding that opening of the bank account is but the first step in a much longer journey to financial inclusion, this paper seeks to analyse the efficacy of banks as vendors of retail financial products. The study aims to evaluate if bank based relationship managers sell financial products that are high fee generating regardless of the products that may be more suitable for the customer. The theoretical literature on financial distribution makes a distinction between sophisticated and naive customers and considers naive customers to be particularly susceptible to mis-selling. In this study, we evaluate if even informed customers, i.e. those that understand their financial requirements, and the gaps in their portfolio, are vulnerable to mis-selling in the absence of a regulatory framework that recognises specific customer rights, or requires basic suitability checks in advice and sale of financial products. The study proposes to evaluate the extent and pervasiveness of mis-selling in the banking channel in India. This allows us to measure advisers response when we exogenously vary the types of clients, especially in their financial sophistication in the form of knowledge of and demand for specific products.

3. Examining the adequacy of MFI multiple lending directive by RBI: A study of slum dwellers’ loan choices by Kanish Debnath and Priyanka Roy, IIM Ahmedabad

While a significant number of households in India do not have access to credit, parts of the country have already experienced crises of over borrowing. Similarly though credit is used for many purposes, it is still not taken as a signal to launch new financial products or product bundles. Though Indian financial inclusion experts in their eagerness to push credit into low-income households have received multiple setbacks, their pursuit has remained relentless. With multiple credit agencies often competing in the same geographical area, over-borrowing and even ghost borrowing has become rampant. In order to put a plug on the rising Non-Performing Assets, the Reserve Bank of India issued new directives for all Non Banking Financial Companies in December 2011 with further modifications in August 2012, restricting the borrower’s freedom in a bid to control over indebtedness. However, we reason that restraining borrowers to borrow only from two MFIs or less will create further problems for both borrowers and MFIs. In a market of illiteracy and informational asymmetries, people with a tendency to cheat can still defect, households may be denied loans at the time of need and rogue MFIs may pre-empt members from other MFIs, thus increasing their retention costs. We therefore aim to study the borrowing behaviour of slum-dwelling households in the city of Pune to gauge the adequacy of the RBI directives in containing over-borrowing and understand whether other financial products can contain their need for multiple loans other than income generation.

4. The Technology of lending: Contract design of informal credit products by Amy Jensen Mowl, IFMR Finance Foundation

The stubborn persistence of high levels of informal credit penetration, and comfortable coexistence of formal and informal credits markets, have re-emerged as important policy and research questions. Potential answers to these research questions have come from scholars in multiple fields, many of whom have focused on South Asia and India. Within economics, a vast literature has explored the causes and consequences of credit market failures, the unintended impacts of policy change, and the interaction of formal and informal credit markets. Within the field of anthropology and economic anthropology, scholars have made major advances in understanding household financial behavior, as well as the social norms embedding informal, semi-formal, and formal credit practices. Despite much excellent work, the research examining credit markets and informal practices have not yet fully explored the role of contract design in informal credit products as a cause and consequence of financial exclusion. Without such understanding, we are left with an incomplete analysis that both inhibits the opportunity for formal sector providers to learn from informal product innovations, and inhibits the clear framing of financial inclusion strategies and policy analysis. This study hopes to remedy the gap in the literature by analyzing the contract features of a clearly defined set of informal credit products in rural and urban Tamil Nadu. Through a careful analysis of the specific contract features of currently available informal credit products, I will show that in contrast to the assumption that access to formal, cheaper credit will result in households shifting away from informal credit options, the notions of access and price should be re-examined, as informal credit products rapidly adapt to changing conditions in the formal sector with a surprising set of contract innovations

5. A Framework for Financial Behaviour Modelling in a Rural, Low-Income Environment by Nandan Sudarsanam, IIT Chennai

The objective of this action research study is to create an empirically driven normative framework for business decision-making. The research design associated with this objective would be conclusive and not exploratory in nature. Additionally, given that we intend to use observational data as opposed to experimental data, this study will fit under the broad umbrella of a descriptive research design. Our research intends to use both longitudinal and cross-sectional data. Specifically, we intend to use data analysis methods to infer behaviour (defaults on loans, late-payment, cessation of service, etc.) from various attributes demographic details and past financial transactions. We intend to use a series of methods termed as ‘supervised learning’ to achieve this goal. While building credit scores from past transactional and demographic history is the bedrock of modern retail banking, a preliminary literature investigation by the researchers found little academic research in the space of developing such scores in a low-income, sparse transactional history environment. There are also problems in applying the traditional credit scoring models like FICO, CIBIL etc. to score low-income households. The major concerns are that existing prescriptive models were not built for this demographic, and existing methodologies lack the appropriate data to build a robust model. This motivates us to develop novel changes to the existing supervised learning methods, to make them more useful in this domain. The study also intends to validate the created scores with field case studies of mock implementations, and actual pilots.

The final research output upon completion of these projects will be published as working papers by March 2016.


Top 5 Game changers for the Indian Financial System in 2014

Our picks (in reverse chronological order):

Suitability becomes a Customer Right:

The RBI published the final Charter of Customer Rights for banking customers in December 2014. This Charter has introduced the Right to Suitability for all banking customers, in addition to the rights to fair treatment, transparency, privacy and grievance redressal. While all other rights have been captured to varying degrees in current customer protection rules and banking industry codes, the Right to Suitability has been enshrined by the RBI for the first time for retail customers of banks. The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS) had recommended that ‘every low-income household and small business must have a legally protected right to be offered only ‘suitable’ financial services’. The RBI has in its press release, also pointed out that all scheduled commercial banks, regional rural banks and urban cooperative banks are expected to prepare their own board-approved policy incorporating the five Rights of the Charter, and that such a policy must also contain monitoring and oversight mechanisms to be followed for ensuring that rights are not violated. This will pave the way for customer protection to shift from being an ex-post redressal process at the Banking Ombudsman along with self-regulation through industry bodies, to becoming an ex-ante prerogative of the Boards of banks.

Payments Banks become a reality:

The RBI published the final Guidelines for Licensing of Payments Banks in India in November 2014. The CCFS report had proposed developing a vertically differentiated banking structure, in addition to the horizontally differentiated model in place currently, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee recommended licensing of new categories of specialised banks including Payments Banks that would be engaged in collecting demand deposits (ie, savings bank deposits and current deposits) and provide payments and remittance services, but not credit services. The RBI Guidelines state that the “primary objective of setting up of Payments Banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology driven environment”.

Guidelines for Licensing of “Small Banks”:

With a view that small local banks can play an important role in the supply of credit to micro and small enterprises, agriculture and banking services in unbanked and under-banked regions in the country, the RBI in November 2014 issued guidelines for licensing of “Small Banks” in the private sector.

Pradhan Mantri Jan Dhan Yojana:

In August, the Prime Minister announced the Pradhan Mantri Jan Dhan Yojna (PMJDY) programme in his first Independence Day speech at the Red Fort. Launched with a mission to provide universal access to banking facilities, the program has brought unprecedented spotlight on the financial inclusion agenda. As of 24 Dec 2014, 100 million bank accounts have been opened under the PMJDY. In its first phase (15 August 2014 to 14 August 2015), the PMJDY aims to cover all households with at least one Basic Banking Account with RuPay debit card, accident insurance cover of Rs.1 lakh and an overdraft facility of Rs.5000 permitted in Aadhaar-enabled accounts. In its second phase from 15 August 2015 to 14 August 2018, the scheme expects to provide micro-insurance and pensions.

‘In-principle’ approval of Bank Licenses to IDFC & Bandhan:

From amongst a pool of 25 applicants, RBI shortlisted the two applicants to set-up full-services banks in India. These institutions have been given a time frame of 18 months to comply with the Guidelines of RBI, following which the RBI would consider granting a licence for commencement of banking operations. Terming its approach as conservative in this round, RBI has indicated that it intends to use the learning from this licensing exercise and issue subsequent licenses “on-tap” going forward.

We would like to wish our readers a very happy and peaceful new year and look forward to your continued readership in the coming year. You can follow us via Twitter or subscribe to receive email updates from our blog by signing up here.

Once again, happy new year!


Video: Best Way to Interact with Clients: High-Touch or Low-Touch

The Master Card Foundation recently organised a Symposium on Financial Inclusion that explored the theme of “Clients at the Center” by focusing on the “Client Journey”. The event brought together key industry professionals ranging from practitioners, influencers and thinkers who are actively involved in the space. You can read the proceeds from the Symposium here.

Bindu Ananth participated in one of the panel discussions that was organised to debate on the Best Way to Interact with Clients: High-Touch or Low-Touch. Kim Wilson of Tufts University moderated the debate on the following proposition: The future of financial services for the poor will rest primarily in highly automated, low-touch models for reaching clients.

Arguing for the high-touch approach, watch Bindu participate in the panel discussion with other participants in the below video:


Storytelling & Evidence

We often dismiss stories, saying “anecdotes aren’t data,” but data enriched with anecdotes can be far more effective than just data in changing minds and getting people to pay attention. In the concluding post of our blog series on the latest Spark edition, Amy Jensen Mowl & Vaishnavi Prathap, as part of their session, highlighted a few examples where just adding some narrative elements to data can have a big impact in overall communication.

Outlining different facets of storytelling, the session focussed on how stories can be a powerful medium to help us understand and engage better, and in addition how effective storytelling can aid in moulding complex ideas into a form that lot more people could understand better of.

Having said this, the session also provided an equally important perspective that while storytelling does provide an interesting dimension, it is equally important to use the right stories – stories that are authentic and speak to the truth without in any way camouflaging the inherent reality that may exist beneath.

Watch below the video & presentation from the session.

Presentation (updated):



Designing a Framework for Event Risk & Loss Estimation

By Vaibhav Anand, IFMR Capital

This post is the first post in a new blog series that would delve and deliberate on different aspects of designing a framework that would enable a credit institution to identify the exposure to extreme events and to estimate the potential losses due to such events. 

Risk premium is one of the components of the cost of providing credit. It is important to understand the nature of underlying risk for estimating the real cost of credit. Historical repayment behaviour may provide significant insights to enable reasonable estimation of credit risk; however, the estimates may be limited to losses experienced in the past. For example, it is possible for a credit institution based in North-West India to have never experienced losses due to a devastating earthquake in its ten year long vintage. But it is not prudent to rule out the potential losses due to an earthquake in future; particularly when the geography is prone to experience devastating earthquakes. The key is to assess the potential risk of events which may have low probability of occurrence, in fact may not have occurred in last 20-30 years at all, but have potential for high impact.

Natural disasters come to mind immediately but these are not the only ones that should be reckoned with to estimate the real risk. Man-made disasters such as industrial accidents, terrorist attacks, and riots are some obvious examples of non-natural disasters. However, other man-made activities such as deforestation, mining, and construction may also lead to seemingly natural disasters. An article in The Hindu daily provides an interesting discussion on this causal relationship.

The focus of this blog series is not to delve into the reasons of such extreme events but rather to initiate a discussion on the design of a framework which would enable a credit institution to identify the exposure to extreme events and to estimate the potential losses due to such events. However, before designing a framework it is important to identify events the framework should address.

Extreme Events

The extreme events discussed here typically have following characteristics:

  • Uncertainty on the time of occurrence: There is usually a reasonable uncertainty on when the event could occur. For example it may be known 72 hours before a cyclone could hit the eastern coast but there may not be any inkling of the cyclone, say, a week in advance. Scientific advances have made it possible to predict some of these events but the time frame between the warning and the occurrence is usually very small.
  • Nature of Impact: Impact is almost always disastrous in nature. However, an unexpected technological innovation could effectively throw an established technology giant out of business, hence a disastrous event for the company, but nevertheless a positive event in a broader frame of reference! But, in this blog we are not focussing on such good-bad or bad-good events.
  • Large scale of impact: The event has to have an impact on a very large scale. A land slide impacting a couple of houses, though tragic and disastrous for the families, may not qualify as an extreme event.

However, the impact need not be instantaneously realised. For example, droughts qualify as extreme events but usually make the impact over a longer period of time, unlike earthquakes.

Also, an event, disastrous in nature on a large scale, may occur periodically, e.g. floods in certain rivers may impact the geography almost every year. Such events, though classified as extreme events, will need different approach for risk measurement. Residents and institutions in geographies regularly affected by periodic events develop, over the time, various mitigation strategies to minimize economic losses. We plan to discuss in some detail such cases in a later post in this series.


The framework should enable a credit institution to measure its portfolio exposure to extreme events and to estimate the expected and unexpected losses due to such events. Ideally it should mimic the linkages between the occurrence of the event and the eventual losses in the portfolio.

Figure 1: Linkages between the event and the eventual losses

The key components of such a framework should include:

  • Mapping Module: To standardize and map the exposure and risk factors like location vulnerability and industry clusters to geographies at a granular level. This is a data intensive module and forms the backbone of the framework.
  • Impact Module: To estimate the loss if an event actually occurs. This, in our opinion, is the trickiest bit to put in place; partly because the loss data is not available always and partly because the nature of impact and the eventual response depend on various factors such as asset class, underlying industry, credit policies, relief activities, past experience, and risk mitigation tools available to borrowers and institutions.
  • Simulation Module: To simulate! Based on the probability and severity assumptions, the module can use the Monte Carlo simulations to generate various extreme event scenarios and estimate the eventual loss distribution.

In the subsequent blog posts we plan to discuss in detail each of the above modules.

As part of our blog series on the recently held Spark sessions, Vaibhav presented his thoughts on the framework at one of the talks. You can view the video & the presentation from his session below: