By Mohan R, IFMR Rural Finance

Given the important role pensions play in the financial well-being of households, NPS-Lite, a pension plan geared towards economically disadvantaged populations, is crucial to achieving complete financial inclusion. It provides a mechanism for households to plan for their retirement years by saving and investing small amounts through their productive life stages.

Being one of the first aggregators appointed by the Pension Fund Regulatory and Development Authority (PFRDA) for the distribution of NPS-Lite, IFMR Rural Finance can appoint facilitators for itself to increase access to NPS-Lite. Correspondingly, to ensure that the selected facilitators are well equipped to distribute the product responsibly, it has also taken the initiative to develop content for creating awareness and providing relevant training that would aid the distribution of the product.

Towards this end IFMR Rural Finance recently completed its second modular replication with an MFI based in Bihar, Saija Finance Private Limited, by appointing it as a facilitator for IFMR Rural Finance; an important initial step towards appointing many other institutions who have shown interest in offering NPS-Lite. IFMR Rural Finance had earlier appointed Care NGO Partners as facilitators for NPS-Lite.

Commenting on being appointed as a facilitator, Purshottam Ranjan, Operations Manager, Saija Finance Private Limited, said “Having launched NPS Lite for pilot-test at our Danapur branch, we have provided exclusive training to our field staff about the product and have been promoting it at group meetings to our clients and non-clients in order to get their feedback and develop strategies based on it. Initially we are promoting the product within 5KM radius of our branch, but hope to expand as we gain experience in distributing it.“

Given that access to a complete suite of financial products is key to improving a household’s financial well-being, IFMR Rural Finance hopes to offer consulting/technical assistance/systems and training, that would help a range of institutions distribute mutual funds and insurance, amongst other products, over a period of time.

By Bindu Ananth

A recent article in the Economist notes approvingly about the growing phenomenon of Village Savings and Loans Association (VSLA) as a means for low-income clients to save securely and earn high returns. In brief, the mechanism entails a group, typically at a village level, pooling their savings together and lending out of this corpus to each other. The underlying principle is similar to that of chit funds and ROSCAs.

This whole design of VSLAs is missing a very fundamental point about the way in which savings operates and the value of financial intermediation. When an individual saves with an institution, she takes risk on the solvency of the institution (unlike in credit where the institution takes risk on the individual/borrower). She should be able to withdraw her savings at any time which in turn entails that the savings has been channelled and managed in a way that enables the institution to honour this. A VSLA tries to replicate this at the level of a village/community. Now imagine there is a drought in the village and there is a widespread need for liquidity. The savers will want to withdraw their money, but equally the borrowers will find it a hard time to make their repayments. Both groups are impacted by the same event (a covariate shock). Effectively, there will be a “run” on the VSLA. The VSLA, unlike a bank faced with a similar situation, does not have the diversification or the deep pools of capital to simultaneously bear the default and honour the savings withdrawals.

There is no question that access to traditional savings accounts is hard for low-income clients in all countries and innovations like the VSLAs are well-intentioned attempts to address that. However, we need to ensure that the financial inclusion designs we choose to scale do not end up creating newer types of systemic risk. The Business Correspondent approach, despite several tactical challenges, scores very highly on this count – it leverages the access of village level institutions/agents but the savings is channelled into the formal financial system through a bank.

- By Dr Ajay Shah, National Institute of Public Finance and Policy. [As posted on Ajay Shah's blog]

In February 2010, I had the opportunity to visit Pudhuaaru KGFS in Thanjavur. This is a remarkable project which helps us see the interface between households and the financial system in a wholly new light.

What a difference 17 months makes! On that visit, I had found a little tenuous Reliance CDMA cover at one place in Thanjavur city. On this visit, I found 3g or Edge cover in many remote places. On that visit, the ride from the airport at Tiruchirapalli to Thanjavur took two hours. This time, it got done in 30 minutes on the new NHAI road, with a peak velocity of 110 kph. While there are many reasons to be gloomy about the problems that India faces, some things are moving along merrily.

The KGFS approach to households and finance

KGFS emphasises the very important idea that for households to correctly engage with the financial system, this relationship must be (a) rooted in high quality advice, (b) which is grounded in a state of strong information about the household…click here to read more

-By Shilpa Sathe, IFMR Rural Finance

Remittances are the second largest source of funding for developing countries, contributing more than capital flows and development assistance. An additional 40%-100% of this amount is estimated to pass through informal channels. International remittances differ from other sources of funds because they tend to be relatively stable, even in the face of economic adversity.  Remittances have been found to off-set some of the output losses that may arise from migration of a country’s skilled workforce. In most developing countries, they also make good for the loss of tax revenue. India alone received USD 55 billion in international remittances last year, making it the largest recipient in the world.

From a household’s perspective, remittances act as a risk transfer mechanism, helping them cope with domestic income shocks ex-post. In many developing countries, remittances have been found to vary inversely with domestic income shocks; increasing in periods of low income and decreasing at other times. In this sense, they take on an insurance role and facilitate consumption smoothing. By relaxing financial constraints ex-post, remittances provide households with a greater ability to take risk ex-ante. In this sense they have also been credited for promoting investment in human capital and physical assets and increasing credit demand.

Several criteria need to be considered in the design of transfer mechanisms for remote rural locations and particularly for low-income households. The requirement of opening a bank account or excessive documentation can affect demand for such services as much as the delay involved in getting the cash in hand. It is also important to understand existing remittance corridors in areas where the Financial Service Provider (FSP) is operating. Within the recipient country, the channel of delivery thus becomes important. From an FSP’s perspective, regulatory constraints can determine the use of traditional money transfer methods like cheques and money orders. The physical infrastructure that an FSP has in place will also determine how effectively it can address the last mile problem. 

Kshetriya Gramin Financial Service (KGFS), with its physical presence in remote rural locations is ideally suited to do this. When KGFS chose to partner with Western Union, the focus was on addressing all these issues. Apart from their extensive presence world-wide, one key factor was their network in UAE, Singapore and Malaysia where a majority of migrants from KGFS customers’ family members are located. Our localised, branch-based delivery model enables us to almost replicate the convenience of informal delivery channels, thereby reducing costs and time involved for the recipient.
 
The first transaction took place in Sahastradhara KGFS on 16th September 2010 and since then we have acquired around 1344 regular customers with close to 2200 transactions as of May 2011. Over Rs. 25 million have been remitted so far with the average remittance amount being Rs.11,700 across geographies. These remittance amounts are larger for Uttarakhand, around Rs.27,000 on an average owing to the migrant population working largely in the hospitality industry as compared to our(KGFS’) other geographies where migrants work in production and related categories.

As we expand our product suite into products like the education loan, money transfer products like domestic and international remittances will play a major role in facilitating repayments of borrowers, thereby helping reduce credit risk.

Sahastradhara KGFS inaugurated its new Headquarters in Dehradun on Saturday. Two years after it set up its first branch in Agrakhal with the mission of providing access to finance in remote rural households in the Tehri and Dehradun districts of Uttarakhand, Sahastradhara KGFS today has 19 branches servicing 647 villages.

Anupama Joshi, CEO, Sahastradhara KGFS while speaking at the inauguration, said “The new Headquarters apart from being our own identity has given us lots of visibility and re-iterated our commitment towards our guiding principle that we will stay till our  mission is complete”. The design of the Headquarters has been done by team Sahastradhara. The structure has a local character and is a blend of traditional and modern elements. 

Dr Nachiket Mor, Chairman, IFMR Trust inaugurating the new Sahastradhara KGFS Headquarters

The Sahastradhara KGFS Team with Anupama Joshi, CEO, in the centre (sitting). To the left: Dr Nachiket Mor, Chairman, IFMR Trust, Bindu Ananth, President, IFMR trust, SG Anil Kumar, Senior Vice President, and Puneet Gupta, Senior Vice President, IFMR Trust