The Need for Ruralization

“India lives in its villages”

-Mahatma Gandhi

After nearly sixty years, Gandhiji’s statement still holds true.  From the social, economic, and even the political perspective, India is still very much rural.

Gujarati women working as Agricultural Laborers

Constituting roughly 70% of India’s population, there’s an uneven distribution of basic but essential resources in rural India.  Rural India still lacks proper infrastructure, connectivity, markets, and access to quality education, sanitation, and medical services.  Through my field visits in Gujarat, I’ve learned that while there has been progress made with respect to connectivity and infrastructure, the rural are disproportionally affected during times of drought and natural disasters. 

During the 2012 monsoon season, Gujarat endured one of the worst droughts in recent years.  Living in Ahmedabad, I felt largely unaffected.  I read the news about farmer suicides in Saurasthra (western Gujarat), drove past the dried out Sabarmati River, and heard the phone calls from our AO study farmers asking our agronomist about coping mechanisms and when the rains would arrive.  But my life continued - as did the lives of most urban Indians.  I realized that even though I live in a developing nation, I’m protected from certain shocks since I live in an urban center.  Unsurprisingly, the rural inhabitants are acknowledging this too and migrating - either seasonally or permanently - to the urban areas in search of this protection.  They’re searching for the same things I am: employment opportunities, better infrastructure, education, and access to markets.  But as students of development economics, we know the problems of urban migration and the laws of supply and demand.

Before working on AO, rural India was a mystery to me.  My perception came solely through books/textbooks, media, and films.  On one hand, I found myself glorifying rural India (thanks to Bollywood); on the other, I wondered how someone could truly be “happy” living a “poor” rural life - especially if they had the option to move to a city and find work.  I assumed that most in rural India dreamed to migrate to the cities.  I made many assumptions. 

During my stay in Gujarat, I grappled with this question:  Is it better to live a rural life and face these potential shocks or is it better to migrate to an urban center and face the hardships of urban life and even urban poverty?  I understand that there is no correct answer to this question and it depends largely on the particular circumstance of an individual.  As we are taught in economics 101, individuals are rational thinkers and make decisions that ultimately benefit them; however, the problem arises when there is asymmetric information, which is often the case.

After working on the AO project, I’ve learned and come to appreciate rural India.  I’ve found that rural India is rich in culture and extremely welcoming.  I’ve also learned that “rural” doesn’t necessarily equate to “poor”.  Rural people are not a bunch of unhappy people struggling and trying to migrate to the urban areas.  They have deep-rooted histories and connections with the land they live on.  They live in communities, have support systems, and can trace their ancestry back to generations.  I barely know my neighbor's name, let alone my great grandparents’ names.  The rural lead dignified and often simpler lives.

During some of my field visits to Surendranager to visit our study farmers, I was amazed to see so many televisions.  Many of our farmers are uneducated and/or illiterate (the average years of education in our sample is 4 years and 40% are illiterate); however, everyone in our sample has a cell phone (they had to for our study) and most seem to have a decent income through agriculture (an average of Rs. 10,200 per month).  While many of these farmers are not financially poor, they appear to spend money in what I, coming from an urban area in a developed country, would think is irrational.  Instead of investing in education and food, I saw people investing in entertainment - but perhaps this is what the households value more?  Perhaps it’s simply a question of taste and preferences or maybe it is a lack of education?  With televisions and access to media and entertainment, the rural population is also becoming aware about the trends in the cities and is aspiring to lead a certain life - they often glorify the city life.

I think people are forgetting that rural India has potential and this potential should not be overlooked.  Development economists and the government should look more to “ruralization”.  We constantly hear about urbanization and helping the urban poor and migrants to cope, but we rarely hear about ruralization and so-called reverse migration.  There’s a limit in the capacity of our megacities; perhaps it’s time to see how we can make rural life more lucrative.  With better resources, infrastructure, and connectivity, we’ll naturally see improved access to goods and services.  It’s time for the government to invest in rural India because India lives in its villages.

Using “Case Studies through Participatory Evaluation” as a complement to Quantitative Research

One of the premises on which research is based, is the quality of the data collected. That is, the assurance that researchers are eliciting correct information from their respondents. We can be confident that this is the case for information related to age, education level, occupation, and income. However for topics related to more sensitive issues such as domestic violence, sex preferences, food security, and indebtedness, ensuring honest answers is far trickier.

Aware of this challenge, researchers have put in considerable efforts in developing very detailed and accurate questionnaires as well as methods of administering these, so as to encourage true responses. Nevertheless, we should always be looking towards new innovative methods to improve our data collection.

A recent approach gaining influence in general evaluation and monitoring of projects is the use of participatory filming. With this method, individuals from a targeted community are personally involved in evaluating and monitoring their own lives over time and space. Preeya and Murali Nair, film-makers and founders of Flying Elephant Films a company which produces a diverse range of their documentaries and fictional programmes, decided to dedicate their passion and knowledge to create the Art for Change Trust. Through this organisation, they train individuals from underprivileged communities to use the video-media in order to document their own lives. In one such project, aimed at Lambadi women workers in Hyderabad, the women took the camera and through this tool, their lives in their own hands. The intimate stories revealed during this process hinted at issues from indebtedness to female infanticide:

Using “Case Studies” alone cannot form the back-bone of research - the life of one person is not necessarily a reflection of the lives of 1000 others and focusing or suggesting answers from a case study is far from being rigorous. Furthermore, information from specific case studies is not necessarily free of any participatory bias. Clearly, the most efficient and cost-effective way of getting “on average” accurate and consistent information is through quantitative questionnaires. However, using participatory approaches such as filming can provide insights into issues which can be overlooked by traditional questionnaires, thereby guiding and improving quantitative research. 

Understanding the Long Term Objectives of Microfinance - A Study on Client Graduation

With recent developments in the banking Industry regarding the Reserve Bank of India’s call for applications for bank licenses, underlining financial inclusion as a criteria for assessment, the question rises as to whether MFIs (Microfinance Institutions) are likely to be good banks. So far, two MFIs have applied for bank licenses and Abhay Agarwal’s previous post conducted a SWOT analysis of both as well as another major candidate, the Indian Postal Service.

The question I’m interested in however, concerns a very niche part of the market. Namely, if MFIs become banks, what are the implications for mature client graduation to formal banking?

In its formative years, two schools of thought on microfinance prevailed. The first believed that long term clients would fulfill their working capital needs and would no longer need loans in the long term, a rather naïve idea given that every business needs to borrow in order to finance its working capital needs and expand. The second school of thought believed that the clients who are able to repay loans would eventually graduate out of poverty and no longer need MF loans and would possibly move on to borrowing from banks. This has not been the case as observed so far.

A Group Meeting in Gujarat

There is a significant lack of literature on the graduation of long term microfinance clients to formal banking, the reason being that very few do. The reasons for client exit however, have been studied in depth.

To discuss client exit, we must start with classifying loan holders by the type of loans they take - productive/working capital loans versus consumption loans. With respect to consumption loan clients, due to the nature of their monetary requirements being unsustainable as well as (typically) need focused, the loan cycles for these clients tend to peak at three (meaning they are able to engage in three consecutive loan cycles with their respective MFI). Typically, they tend to drop out of the MFI by the fourth loan cycle. Either they are unable to repay their future loans or, once their respective consumption requirement is fulfilled, they simply don’t require more loans. Working capital loan clients however, tend to engage in a larger number of loan cycles, assuming they are able to profitably manage their businesses. These clients also tend to be richer due to the profitability of their businesses and are the specific sub-group we refer to when we talk about graduation to formal banking. One may ask why we would be particularly concerned with this sub-group since they appear to clearly have the resources to graduate to banking and tend to benefit the most from microfinance, as recent impact evaluations suggest.

The reason is, conventional school of thought assumes that the financial sustainability of MFIs is dependent on these clients since they have successful credit histories and can take larger loans, which is more profitable for the MFIs as their cost of loan delivery is the same regardless of loan size. As such, there lies a conflict of interest between MFIs encouraging these clients to graduate to formal banking and retaining these clients to maintain financial sustainability.

I emphasize ‘conventional school of thought’ because there is a lack of analysis of what proportion of a typical MFIs portfolio consists of fourth to fifth cycle clients versus first to third cycle clients, in the current Indian microfinance climate.

As such, we are left with a few substantial questions:

1.  In practice, what percentage of the average MFI’s lending portfolio comes from larger working  

    capital loans to long-term clients? 

2. What resources do MFIs offer to long-term clients to graduate to formal banking? In turn, what 

     resources do banks offer these clients to help them graduate?

3. Most importantly, do these long-term clients express a demand for larger loans from formal 

    institutions? And if they do, what are the factors hindering them from taking up these loans?

4. What is the size of this client market, which wants to graduate?

These are questions we will try to address in CMF’s upcoming project, Vertical Mobility in Access to Finance. We plan to survey clients, MFI leader and banks in order to conduct a qualitative and quantitative study of this client market.

If the answer to the first question is insignificant, then it is imperative that MFIs be encouraged to help their clients graduate since a significant market gap has been previously identified for clients looking for larger loans for productive purposes. The data from question four could help us determine the size of this untapped and possibly profitable market comprising of long term microfinance clients with successful credit histories looking for loans larger than the amount MFIs are legally allowed to disburse.

However, if the answer is significant, and a demand for larger loans by these clients is observed, it implies that microfinance institutions could technically be discouraging their long-term clients from graduating formal banking institutions! What are the implications of this interpretation? It implies that microfinance may be imposing a credit constraint on this client niche instead of relaxing it, thus directly contradicting its social objectives.

With respect to MFIs becoming banks and the implications for client graduation; depending on regulation covering MFI-banks and the respective limitations on high-risk portfolios comprising of collateral-free loans, this client niche actually stands to gain significantly. Regardless of whether MFIs currently depend on this client group for financial sustainability or not, their long term clients could access larger loans, especially if they were allowed to easily switch between the microfinance and banking wings of these institutions with relaxed collateral requirements. 

Impact Evaluation Culture

One thing I like about Impact Evaluation is the discipline it imposes on your thinking. It makes you think twice before jumping to conclusions, and it makes you open to learning -- both qualities I think the world could use more of. I've also been surprised by the scope of application of this kind of thinking. Impact Evaluation is useful not just for large-scale, massively-funded studies, but even for structuring the everyday decisions that come up in the course of work. It becomes part of the culture of how you do things.

Here's a good example. Right now I'm in Thanjavur on the KGFS Impact Evaluation, making preparations for our Endline survey. Unlike the previous two rounds of surveying, this one will be done electronically, opening up a range of new possibilities. Recently we've been working on modifying the tablet's predictive text feature to improve accuracy and speed in spelling respondent names. Incorrect spellings of names can cause a number of problems in fieldwork and analysis, and we hoped we could leverage our new technology to help.

Our solution involved overwriting the tablet's in-built dictionary of words with a custom dictionary of 5000+ correctly spelled names that we had collected over the past year of fieldwork. Now when users type, the tablet automatically makes suggestions from our names database.

Implementing the new feature wasn’t costless. It added about 5 to 10 minutes to the set up time for each tablet (which, for 10 or so tablets, adds up to a significant chunk of time). Plus, for each new feature we implement, we add another source of potential problems and troubleshooting in the field.

To check whether this effort was worth our time, we tested it. We called 6 surveyors to the office and had them take a dictation test. From a list of 80 words, we randomly selected 30 for the 1st round and 30 for the 2nd. As a dictator read names aloud, the surveyors entered them on the tablets. In the second round, we equipped the tablets with the auto-suggest feature. We used our survey collection software -- SurveyCTO -- to help us collect the data, and keep track of the amount of time they spent typing each name.

We found that the auto-suggest feature does indeed improve spelling, but not necessarily consistently across surveyors. On the whole, it looks like gains are pretty modest, and has the greatest impact on surveyors who are already good spellers.

                                             Graph 1: Spelling Correctness by Surveyor

At the same time, the new feature doesn’t seem to help surveyors type names faster. If anything it looks like they get slightly slower. The p-value from a two-tailed t-test comparing the time taken to complete each word before and after implementing the user dictionary fails to find a statistically significant difference.

                                                 Table 2: Average Time to Write a Name

Before and After Introducing the Auto-suggest Feature (seconds)

	Before	After	P-value
All names	13.78	14.39	0.376
Only names in dictionary	12.92	13.30	0.601

Note: Not all of the names in dictation were included in the dictionary that populated the tablet’s auto-suggest. This was done to simulate conditions in the field, where it’s likely that we won’t have encountered a respondent’s name ahead of time. The second row considers the timing for only those names from dictation that appeared in the dictionary.

The results tell me that this feature is probably worth our while to implement, but that if we want to improve the spelling of the worst spellers (which is what I was hoping this feature would do), we'll have to brainstorm another strategy.

This experiment -- a little corner of work within the larger KGFS Impact Evaluation -- strikes me as a good metaphor of what we're trying to accomplish. In development there is still more scope for developing a culture around thinking critically about how we work. It's a mindset that can be applied to even the smallest of tasks.

Old and Poor

To continue the conversation from my earlier blogposts ( Link : 1 and 2 ) and the last CMF meet, this post will attempt to briefly summarize the micro-pensions market in India. This summary may be ambitious for a single post, the fact that it might just be accomplished says more about the market and less about my summarizing skills.

Historically, public pensions, in their modern form began in United Kingdom in 1908 a few decades after the Poor Laws. These were a set of liberal welfare reforms that targeted the poor (hitherto considered by society to be moral degenerates and only worthy of the workhouses).   This first pension scheme in the UK offered 5 shillings per week to every individual over 70 without the adequate means. While the majority of the worldwide pensions market is captured by the USA and the UK, countries like Canada, Australia, the Netherlands and Hong Kong are also notable for their pension plans. A remarkable feature of some of these schemes is that they are compulsory and linked to their employment benefits. The reason why this works is that almost everyone is employed in the formal sector so almost everyone has a pension plan.
A country like US can possibly afford to spend 5% of its GDP on social security because around 45% of its population pays taxes on income whereas the equivalent in India is only 3%. A universal pension scheme in India is considered to be unfeasible given the state of affairs (and by affairs, I mean the deficit). This drawback is an opportunity for private players to enter the market and for state governments to step up their role.
India has old age pension schemes (NOAPS) and EPF/PPF schemes but the new pension system (NPM) envisages a move toward defined contribution (DC) schemes from defined benefit (DB) schemes which are a burden on the exchequer.
Currently the most popular broad-based pension products in India are as follows:
• Provident Funds
• National Pension Scheme-Lite
• LIC pension plans
• UTI Retirement Benefit Fund
• ICICI Prudential Life Stage Pension

The rates of return on provident funds are fixed at around 8-8.5% (depending on whether it is an EPF or a PPF account). The rate of return on the latter three, while not fixed, have an average of 10%. The transaction cost (exit or entry load) is nil with provident funds but can be a flat fee or a percentage of the corpus. The payouts of the UTI pension scheme and the provident funds have better tax treatments (close to exempt) while there are deductions in the NPS and Life-Insurance scheme.
Successful penetration of the above mentioned products is hindered by several challenges:
• Low levels of literacy, specifically among the informal sector. This is linked with subsequently low levels of trust and awareness of such products.
• Lack of formal documentation. (One issue we are coming up against in the field is the lack of accurate ID proof and misrepresentation, therein)
• Lack of extensive distribution channels. Agent driven channels are more expensive due to issues of commissions.
• Lack of IT infrastructure that helps in facilitating transactions
• Problems with annuities when income flows aren’t constant.
• Problems with spreading the corpus at maturity over the benefit period
• Behavioural constraints

Currently, only 12% of India’s population is covered by a retirement plan. Almost all of them are in the organized sector. Improvements in health-care and increasing life-spans lead to increases in longevity risk. India’s elderly population is expected to constitute 20% of the total population by 2050 and at the way things are going, they might not have a way of sustaining themselves by then.

Banking Licenses in India - Inviting them all

It is well known by now that 26 applications (complete list given below and categorized according to my own whims) were received by the Reserve Bank of India last week for the fresh round of banking licenses which are expected to be issued in the near future. The list is fairly diverse, ranging from NBFC arms of business conglomerates to large brokerage houses, and from ambitious smaller financial services firms to large players in the financial services industry.

Much has been written about this process in Indian as well as global publications (Economic Times, Business Today, Business Standard, Hindu Business Line, Livemint, Wall Street Journal, Reuters), raising several debates ranging from credibility of corporate houses to sustain banking operations, reasons for fewer applicants when compared to earlier rounds in 1993 and 2003; whether banking is indeed a profitable business anymore given the extensive rural banking norms being put in place by the RBI and adverse economic environment; if new bank licenses can take India further down the path of increased financial inclusion thus reducing the unbanked population; restrictions on financial holding companies, existing NBFC and their current mandates.

Applicants from Diverse Business Houses	v  Tata Sons   v  Aditya Birla Nuvo   v  Reliance Capital   v  Bajaj Finserv   v  L&T Finance Holdings   v  Value Industries (Videocon subsidiary)   v  Indiabulls Housing Finance
Other Private Sector Financial Services Companies (Medium-Large)	v  JM Financial   v  Religare Enterprises   v  SREI Infrastructure Finance   v  Magma Fincorp   v  India Infoline   v  Edelweiss Financial Services   v  Muthoot Finance   v  Shriram Capital
Financial Services Companies (Small)	v  INMACS Management Services   v  UAE Exchange and Financial Services   v  Suryamani Financing Company   v  Smart Global Ventures
Government Owned Agencies and Organisations	v  LIC Housing Finance   v  Department of Posts   v  Tourism Finance Corporation of India   v  IFCI   v  IDFC
Grassroots Development Organizations/ Microfinance Institutions	v  Bandhan Financial Services   v  Janalakshmi Financial Services

From the given list, here’s a short SWOT analysis on 3 applicants: Bandhan, Janalakshmi, and India Post due to their relatively large rural base in their regions of operations. Since the focus of RBI’s intentions since the inception of this discussion has been on rural banking, these three players can potentially play a crucial role to further the cause of banking in rural India.

Bandhan Financial Services Pvt. Ltd. (NBFC MFI)
Based out of: Kolkata
Strengths:         Strong existing rural base in Eastern, Northern and Central India; social focus of organization has been retained despite rapid growth in their portfolio even during troubled times for the microfinance sector in the country; healthy balance sheet

Weaknesses:    Fewer years of operational experience when compared to other applicants

Opportunities:  As they have outshone most of their MFI peers in the past few years, the time may be ripe for them to take the plunge into full fledged banking operations

Threats:           Can their initiatives be scaled up and replicated without losing impact?

India Post (Department of Posts, Government of India)

Based out of: Everywhere in India
Strengths:         Mind-boggling network in the most rural regions; have provided deposit services in recent times

Weaknesses:    Lack of technological development and innovation, bureaucratic decision making process, training of postal department staff needs to be in sync with the generation

Opportunities:   If they can improve on their corporate governance, archaic delivery channels and appropriate training at the front and back-ends, they can potentially provide the much needed impetus in rural areas; existing trust within rural network

Threats:            Critics say that they haven’t quite done their job of being a good postal department, so do they deserve to be rewarded with a banking license,

Janalakshmi Financial Services Pvt. Ltd. (NBFC and Section 25 MFI)

Based out of: Bengaluru
Strengths:         Will be in a good position to meet priority sector lending norms, excellent group of investors for the organization; successful recent capital infusion

Weaknesses:    Loan Portfolio smaller than large MFI peers

Opportunities:  Use their base in Southern India to reach unbanked areas

Threats:            Need to scale up their NBFC operations to become a banking entity both geographically as well as at the product level