1. 1 Adapting India’s Financial System To Serve the Distressed Majority A Presentation to the Conference on Adapting India’s Financial System In a Globalising World Vijay Mahajan BASIX Nov 2002

2. 2 Who Constitute the Distressed Majority?  Agricultural and allied sector workers - 120 million  Small and marginal farmers - 85 million  Rural non-farm sector workers - 45 million  Urban informal sector workers - 50 million  Total 300 million, of whom 75% live below the poverty line  Growing at 3 percent pa in numbers with huge unmet demand  Note: Numbers are rounded off projections for 2002

3. 3 Limited Financial Services to the Distressed Majority  A 100 years of state intervention has not managed to get timely and adequate credit to farmers.  Economic Census 1998, showed that only 4.7% of all enterprises got funds from institutional sources (Banks, SFCs, SC/ST Finance Corpns)  Earlier, Nayak Committee had estimated that tiny sector units were getting only 2.7% of their working capital requirements from banks.  Coverage of insurance services is below 10%  Thus study after study shows that banks and FIs are not able to reach the distressed majority.

4. 4 Regional (Mal)Distribution of outstanding credit (RBI, 2001)  Western and Southern regions account for 32 % and 28 % respectively.  Northern region accounts for another 21.3 %.  Central region (MP+UP) for another 8.5 %  Eastern region accounted for only 9.3 %, while  North-eastern region accounted for only 0.8 %.  Yet, in terms of population, the central, eastern and N-E regions account for 60% + of India  Eastern and N-E region CD ratios are <20% and the banking and coop credit system is defunct there

5. 5 Gender and Social (Mal)Distribution of outstanding credit  Due to a variety of reasons, access to financial services is even lower among:  Women  Dalits  Tribals  This leads to a vicious cycle of low access to capital, low income, low savings, low access

6. 6 Who should the FS Serve?  Farms: 110 million, over 80% belonging small and marginal (<2ha of land)  Firms: 33 million “unorganised” enterprises in the rural non-farm sector and the urban informal sector, including services  Women in Low-income Households: 170 million, rural and urban, all of whom want to save, need insurance and a number of them could use credit to enhance their income  (Note: the above three categories overlap)

7. 7 How big is the market? $45 billion pa!. Rs Crore per annum by category Savings Addl, pa Credit Usage pa Insurance premia pa Farms22000550005500 Firms16500660003300 Low-income H/holds 17000340005100 Total5550015500013900

8. 8 In addition the following financial services needed – Money transfer services for migrant workers – Commodity micro-futures – Investments in productive infrastructure and common facilities – Equity financing for the SME sector, which creates a lot of employment investments – Micro-venture capital funds and a stock exchange for the SME sector like OTCEI – Pensions, as traditional mechanisms break down

9. 9 Why Can’t the FS Reach the Distressed Majority?  Because, in spite of 30 years in this market, the FS has not learnt to deal with small micro, unregistered, unlettered, asset-less borrowers.  The distressed majority needs a mix of savings, consumption and productive credit, and insurance services, in a flexible, customer-friendly manner.  Belief/policy that micro loans/insurance should be given below cost, makes it unprofitable.  FS staff have little or no incentive to deal with the distressed majority, only hassles.

10. 10 How About the Alternatives?  “NABARD’s SHG-Bank Linkage Program” has reached 7 million households with avg credit of Rs 2000 per household. Needs to reach 100 million with Rs 10,000 per h/h (Achievement is 1.4% of potential demand)  MFIs like SEWA, PRADAN, DHAN, MYRADA, SHARE, RGVN, BASIX, etc. have each reached 50-1,00,000 households each. MF sector achievement is only 0.25%.  Expansion in other areas needs to be done by the FS, with their extensive networks, financial strength and human resources. They need to link with structures of the poor.

11. 11 Recommendations  We firmly believe that the poor need to be enabled to build their own self-help/mutual financial institutions and the mainstream should link with these.  For adapting the FS to serve the distressed majority, changes are needed at four levels: – Policy and Regulation – Ownership and Governance of banks/FIs – Institutional Culture and Incentives – Products, Procedures, Channels

12. 12 Recommendations  Interest rate on smaller loans and Insurance premia on smaller policies, will have to higher as a percentage, to cover transaction costs fully  Deregulate interest rates on loans <Rs 200,000  RBI needs to find an urgent solution for extending savings services to the poor. One way to extend outreach is permitting MFIs to take deposits on behalf of banks, with due safeguards  Equity financing for SMEs – SEBI to revive OTCEI and encourage Micro Venture Funds  Mutual insurance should be allowed and larger companies can act as re-insurers (lower risk, lower TC and better service levels)