S.Ananth

Overview of Rural Households in AP

A typical rural household in AP consists of at least two earning

members.

Existence of Assets and Savings among the rural.

Household Expenditures often exceed the incomes.

Assumption of debt often bridges the gap.

Major cash flows/receipts include:

Income from work (including agriculture, petty commodity

production or other services).

Cash Transfers from government welfare programmes.

Household Expenditure & Financial

Requirements

Typical Expenditure of Households Typical Financial Requirements

1. Daily Consumption Needs 1. Credit

2. Repay Debt 2. Remittances

3. Health 3. Savings

4. Education 4. Insurance

5. Housing

Household Expenditure: Growing Credit Needs

Incomes have grown but expenditure has risen faster.

Multiple sources of debt is common in rural AP – These sources include:

Banks and cooperatives (lucky few)

SHG (large numbers, but loans insufficient)

Private local moneylenders (predominant majority)

MFIs (Till 2010 AP Ordinance and Subsequent Bill)

Formal institutional structures (Banks, Cooperatives and SHGs) meet between 20-50% of the credit needs of the poor.

Forced to borrow money at high cost. Interest rates: usually 3% per month.

Large quantities of high cost debt assumed for health, education and education needs.

Typical Rural Indebtedness

Borrowings from Multiple sources Photo Credit: Identity Project, CSCS, Bangalore.

End Use of Loans: Case of MFI Debt in AP

End Use of Loans Percentage of Respondents

Daily Consumption needs 35.65

Purchase Various Assets 13.73

Repay Old Loans 12.88

Health 12.56

House Repairs 9.44

Working Capital for Existing Business 2.97

Purchase Consumer Durables 5.27

Agriculture (Mostly tenant farming) 7.50

Income Generation (about 15%)

Consumption Related (directly about 53%)

Problem of Access to Formal Institutions

Distance continues to be a major issue, though BCs have

started to provide succour in certain regions.

Navigating the Procedures remains a challenge;

Lack of knowledge (institutional as well as user level);

Insufficient infrastructure leading to long hours of waiting,

if banks are accessible;

Lack of customised products and services. In contrast

informal and quasi-legal entities win on this count.

Human resources of formal financial institutions

unequipped to deal with challenges of FI.

Nature of Current Access to Formal Institutions

Rural poor access combination of formal and informal service

provides.

Only about 25% of accounts in rural link branches are active.

Indirect Government Support Services

SHGs – Linked to Banks and transferred through banks accounts.

Direct Transfer of Welfare/subsides by Government

NREGs –Mostly Post Offices and Banks

Pensions in AP – Banks (in each district 2-3 lakh bank accounts

opened and linked to smart cards).

Drought Relief - Bank Accounts

Student scholarships – Bank accounts

Housing Subsidy – Bank Accounts.

Latent Demand for Financial Services Overwhelming Crowding to Withdraw money inside a ATM centre in Kalwakurthy

Mandal, Mahabunagar District, AP.

Use of Banking Services: Case of Remittances

Formal Banking Services are in great demand

Banks, with their ATMs have revolutionised small value

remittances in small towns and rural areas.

Poor adroitly use the present ‘online’ transfer facility in SBI for

remittances.

Migrants from AP deposit money in a branch of SBI in

Mumbai, or in other places. Relatives withdraw money in the

nearest ATM in AP.

Users Opinion: “cheapest, fastest and most reliable option”. In

the past it would cost upto 5%, now only nominal charges.

SBI’s online business (transfers within AP or from outside)

comprises of about 30% of the daily transactions in some

branches.

Access to Formal Services: Complexities

Issues while accessing formal banking services

Purported high transaction costs due to infrequent and small transaction size.

Infrastructure bottlenecks to meet latent demand.

Lack of Customised suite of products.

Difficulties in quantifying the ‘assets’ of the poor – assets often in forms that are not acceptable to the formal institutions though there is a market among peer group.

Banks often unwilling to lend: banks do not lend even for building houses in the villages(unless they are forced to lend).

Un-evolved business model of banking sector.

Measuring FI: Banking, Remittances & Role of

Government

Government welfare programmes have revolutionised access to

banking services.

Millions of accounts have been opened.

Relevance for Measuring FI:

Role of Government and inoperative accounts means that

existence of a bank account per se need not be construed as

inclusion.

Measuring the frequency of usage and/or what hinders frequent

use may be more useful.

Need to Capture Measure Direct and Indirect Access (through

friends and relatives as in the case of AP).

Savings: Latent demand, harnessed by dubious players It is thought poor have no savings.

Common for majority of households to own at least Rs.30,000 worth of gold.

Problem: Savings forms not acceptable to the formal markets.

Savings in chit funds, investments in houses (many of which do not have acceptable proprietary title deeds). Each household may be investing at least 2-3% of their incomes on a monthly basis.

More than 25% of households have savings in illegal plantation and real estate companies that are marketed as deposit products.

Deficiencies in the Formal Sector

Banking sector rarely used to park savings.

Banks have missed the opportunity due to the lack of customised products and inaccessibility.

Distance and convenience are often an issue.

Relevance for Measuring FI

Need to quantify and capture the quantum and nature of savings.

Proportion of formal and informal access for savings.

Savings: Latent demand, harnessed by

dubious players (contd)

Agrigold ‘Deposit’ Scheme Sahara Real Estate ‘Bond’

Tentative Questions for Survey 1. Cumulative Income of the Household

2. Sources of Income and number of earning members.

3. Periodicity of Income and Savings (daily, weekly, monthly, etc).

4. Assets of the household

5. Nature of Present Service Providers: (a) Formal, (b) Informal or (c) ‘quasi legal entities’.

6. Nature of access to banking services: direct, indirect (through family and friends).

7. If household has a bank account: Existence/Date of Opening account

8. Frequency of usage of bank account(s).

9. Details of banking services utilised – types of Products.

10. If using bank services through outreach - mode of usage and role of facilitating agencies

11. Type of formal services presently used and require but currently not available.

12. Percentage and Proportion of financial services requirements (not only credit but all) met by formal and informal sectors.

13. Type of savings products accessed, frequency of savings and nature of financial service providers.