Financial Inclusion - A Step Towards Rural Empowerment
Vivek Kumar Kaushik

Introduction

Lehman Brothers files for bankruptcy…
- news.bbc.co.uk

American Insurance Group (AIG) for sale…
- businessweek.com

Global recession due to American sub prime crisis…
- economywatch.com

While many of the biggest financial institutions are facing turmoil on the ground of credit crunch due to default of clients making payment, most of the Microfinance institutions (MFI) dealing with the lower strata of population is enjoying repayment ratios of more than 99% easily. It’s the vision of institutions to target the majority of population residing in rural areas & providing them services of need creating a win-win situation for both the clients as well as institutions.

Despite of the well proven fact that “Fortune lies at the bottom of pyramid” by leading strategist Prof C K Prahlad, many institutions have limited their reach to the urban saturated market leaving potential customers in rural areas or hinterland. One of the focus area in this regard is providing financial services to the rural population making them a part of financial inclusion. Financial Inclusion is the delivery of financial services at affordable cost to the vast section of disadvantaged and low-income groups. Access to financial services such as loans, savings, deposits, health insurance etc. by the population living in the rural and deep-rural segments has been limited and been the major deterrent of growth in these segments. Access to such services will help in improving the standard of living, health and hygiene through empowering the under privileged, thereby helping in social, political and economic stability. The idea is to empower poorer sections of the socie ty and provide them with greater financial security. This may necessitate specific products for rural markets as well.

If we talk about the current scenario of access to financial services in Rural India full 40% of the population (60% in rural areas) is denied access to basic banking facilities, only about 4% has any exposure to the capital market and 5% has insurance cover (3% in the case of health insurance). Can the country really march ahead when on one hand we talk about monetary policies, capital convertibility & on other hand majority of population are still living in 18th century with no access of financial services at all.

As may be expected, exclusion from credit markets is even more acute with only
9.5% of the population in rural areas getting any formal credit as against 14% in
urban areas. Indeed, despite the rapid spread of the public sector bank branch
network, the average population served per bank branch has increased rather than decreased with rural branches being more disadvantaged. As for credit, the share of non-institutional sources, after falling in the initial years, has again moved up. Specifically, the share of moneylenders in the debt of rural households has increased from 17.5% in 1991 to 29.6% in 2002.

Rural Finance- Need of the hour

Millions of people in the developing world's rural areas are poor not because they cannot manage money, but because they have too little of it. While studies show that rural micro-entrepreneurs produce high rates of return on the capital they invest, the problem is they lack access to sufficient funds, which means their aggregate return remains low, thus perpetuating a life in poverty. A key objective of rural finance is to provide those people with the funds and financial services they need to multiply their earnings and build a more prosperous future.

Rural finance comprises credit, savings and insurance (or insurance substitutes) in rural areas, whether provided through formal or informal mechanisms. The word 'credit' tends to be associated with enterprise development, whereas rural finance also includes savings and insurance mechanisms used by the poor to protect and stabilize their families and livelihoods (not just their businesses).

An understanding of rural finance helps explain the livelihood strategies and priorities of the rural poor. Rural finance is important to the poor. The poorest groups spend the highest proportion of their income on food – typically more than 60% and sometimes as much as 90%. Under these circumstances, any drop in earnings, or any additional expenditure (health or funeral costs, for instance) has immediate consequences for family welfare – unless savings or loans can be accessed. Financial transactions are therefore an integral part of the livelihood system of the poor.

Rural finance consists of informal and formal sectors. Examples of formal sources of credit include: banks; projects; and contract farmer schemes. Reference is often made to micro-credit. Micro underlines the small loan size normally associated with the borrowing requirements of poor rural populations, and micro-credit schemes use specially developed pro-poor lending methodologies. Rural populations, however, are much more dependent on informal sources of finance (including loans from family and friends, the local moneylender, and rotating or accumulating savings and credit associations).
Forms of rural finance

1. Informal financial institutions which are not regulated by banking sector such as rotating and savings groups of people.

2. Semi formal institutions which are not regulated by banking sector but are usually licensed and supervised by another government agency such as self help groups, NGOs involved in provision of financial services and microfinance organizations (in some instances).

3. Formal institutions which are subject to banking regulations and supervision such as microfinance institutions, banks. In order to enhance the quality of rural livelihoods a more holistic approach to development is needed. Governments need to design and implement agriculture friendly polices that will encourage the development of financial sector and market oriented enterprises. Governments and donors need to invest into human and institutional development in rural areas.

Reliance money qualifies as the Formal institution providing variety of financial services to rural population.

Potential product mix of Reliance Money for rural market

The needs of poor people are varied:

There are two major categories of products generally offered in this category

1) Credit Products ( Loans)
2) Non-credit products ( Life insurance, Health insurance, Crop insurance, Cattle insurance, Home insurance, Mutual funds, Remittances)

Credit Product

Group lending- In this product, Reliance money may form a group of 5 people & lend them some amount of money with a weekly repayment option with an obligation that if at any week any of the member of group is not able to repay the installment of loan, the other group members are liable to pay the loan. Most of the MFIs in India & abroad are following the same approach & enjoying a healthy repayment ratio of more than 95%.

Individual lending- The individual lending should be promoted based on collateral security. As the loan is backed by some security, the amount of loan may stood higher than the group lending which is totally collateral free loan. The repayment schedule should be taken as weekly or monthly.

Emergency loans- This product will be provided only to those customers who are dealing already with Reliance Money & should be for emergency purpose major related to health issues.

Non-credit Product

Life insurance- This is the product most in demand in rural areas. As the purchasing power of rural people is less as compared urban, Reliance money need to come up with tailor made insurance product for rural population with low & flexible premium. In this regard most of the organizations dealing in financial services in India are coming with Micro insurance product with an annual premium ranging from Rs.100 to Rs.1000.

Health insurance- Like the people in urban areas, rural population is also becoming aware about health issues thus making health insurance a successful future product in rural areas. Due to the lack of proper medical facilities in villages, they may have to move to cities where they can use the cashless treatment facility given by most of health insurers.

General insurance- As the majority of population in rural area depends on agriculture & crops, the yield of which may not be stable every year due to natural calamities, they are in great need of an insurance product which may provide a cover in the case of loss in agriculture due to unavoidable circumstances. In the form of asset, most of the villagers have only their house, so they extremely need home insurance to cover in the case of fire or other calamities.

Remittances- There is a huge demand of this product since there is substantial seasonal migration with large inter-regional financial flows. NSS surveys (’93) indicate 89% of permanent migrants send remittances back home. Likely to be higher among seasonal migrants. But high transfer costs associated with remittances limit propensity, distance and duration of migration. Cheap and reliable channels are rarely available in rural areas. Program run by Adhikar, Orissa: 1600 members remitted almost Rs. 6, 00, 00,000 in 2 years of launching program. Apart from being a viable program, NGOs can leverage existing client networks; provide cheap and safe transfer; add on services.

Marketing strategy followed by Edwell for rural penetration by Reliance Money

Edwell as a strategic partner will provide its full support & expertise of rural sector to promote the whole product range of financial services by Reliance Money. Edwell is working in more than 500 villages of Haryana & Uttaranchal with a marginal presence in Himachal Pradesh knowing the purchasing power, socio economic aspects of the whole area. The key responsibility area to be handled by Edwell is as follows:

1) Work as a distribution channel linking Reliance Money to the clients.
2) Conducting initial market research to recognize the need of customer.
3) Proper segmentation of clients to be served region wise.
4) Doing brand promotion activities in collaboration with Reliance Money to aware the population of brand Reliance Money.
5) Designing marketing communication mix in the form of advertising & public relations.

Edwell adopts a wholesome strategy for the marketing of financial product by Reliance Money

Eight P’s of Marketing Mix

Product- The product aspect will include which of the financial product related to credit or non credit is being launched by Reliance Money in identified geographies.It may include specific features of the product, such as terms and packaging, loan review and disbursement time, collateral or guarantees, grace periods, amortisation schedules and repayment structures.

Pricing- Includes the interest rate, loan fees, prepayment penalties, prompt payment incentives and for savings products ledger and withdrawal fees as well as interest paid to the account holder. It should consider three factors- Competition, cost & value before determining the price of product.

Place- It refers to the channel though which designed product reached to the identified customer segment. In this case Edwell is working as a channel partner with Reliance Money to promote the financial products designed for financial inclusion of poor.

Promotion- The way of promotion initially will be through advertisement campaigns in village haats. Also, the weekly gram panchayat meetings where maximum of the village population gathers will be used to communicate the benefits of product & to create brand awareness.

People- The staffs of Edwell shall be properly trained on the basics of all the product information so that they can handle the queries regarding the product well from customers & also provide right information.

Physical evidence- It will be made sure that people coming to buy the product or make inquiry will have enough space to wait if there is queue & they get all the brochures related to product on time.

Process- The staffs of Edwell will take care of collecting forms & other documents from nearby Reliance Money office & then giving these forms to the clients individually. Once the form is filled, they will submit it in the office of reliance Money.

Positioning- In the competitive market it’s the quality of service matters. Edwell will make sure that whatever be the service provide to the clients will be, it would be the best in category. It will try to occupy a positive perception in the mind of customers.

Competitive analysis

ICICI Pru Sarva Jan Suraksha ( Micro insurance)- ICICI Prudential has introduced it’s first micro insurance policy Sarv Jana Suraksha to provide protection and security to rural population at a very affordable cost. This policy ensures that your loved ones are adequately provided for and their lives are not effected, even if you are not around.

Birla Sunlife Bima Dhan Sanchay( Life insurance)- Birla Sun Life Insurance Bima Dhan Sanchay apart from providing the security of life insurance cover also guarantees the refund of premiums paid by you on maturity.

SWOT Analysis

Strengths
- High level of social capital and collateral substitutes
- Informal mechanisms used to enforce contracts

Weaknesses
- Assumption that credit is a binding constraint; rural finance is often treated as an equivalent for agricultural credit, which is used as 'input' for agricultural production

Opportunities
- Increasing demand for agricultural development because of population growth
- High demand for financial services in rural areas

Threats
-Vulnerability: systemic, market, credit risks, etc.
-Operational: low investment returns, low investment, low asset levels, geographical dispersion
- Capacity: infrastructural capacity, technical capacity and training, social exclusion and institutional capacity, etc.
- Political and regulatory: political and social interference and regulatory framework, export market protection, etc

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