Parvati sells vegetables in the weekly market of Mhaswad in Satara, Maharashtra. She has a savings account with the Mann Deshi Sahakari Bank. But whenever she needs money, she takes a loan from the local moneylender. One day, while buying vegetables at the weekly market, I struck up a conversation and asked her why. She responded, “Yes, I know I am paying Rs 10 interest per day on every Rs 100 I borrow from the moneylender, which is exorbitant. But I do not want to take a loan from your bank because I require a loan in the morning and want to repay it in the evening or maybe next week. I also would like to take the second loan immediately. And all this flexibility is given to me by the moneylender and not by your bank.”
Parvati’s situation is not unique. Her business is one of the 63.4 million MSMEs in India, 99 per cent of which are micro enterprises with less than Rs 10 lakh in investment. These tiny businesses are run by nano-entrepreneurs, a burgeoning segment that is absolutely critical to the growth of our rural economy.
What is being done to bring these businesses into the formal economy? If we assess our progress against the definition of “financial inclusion”, which refers to the accessibility of banking and availability of credit, we can congratulate ourselves on significant progress. However, if we question the adequacy of the financial products that they find access to, we fall short. Parvati might be financially “included” but she is not financially “integrated”. The journey from inclusion to integration is not only about making products available and accessible, but also about making them relevant, applicable, and acceptable.
The first challenge in making products broadly available is bridging the gap between supply and demand of capital. In a financially integrated world, capital is agile. Yet owing to a limited risk appetite, low or thin-file data on customers and challenging regulatory oversight, capital remains a constraint in designing bespoke products. For India to overcome these challenges, the existing infrastructure must be adapted to our new purpose, providing easy-to-use, customer-centric experiences.
Bankers and private financial institutions erroneously believe that a poor person takes a microcredit loan because she cannot save. In reality, if you go to any remote area in India and ask any woman how much she has saved in the post office, you will find huge numbers. They are able to save because of village postal agents who collect their savings from their doorstep. Greater accessibility has major benefits for not only the customer but also the supplier.
It is also critical we recognise that the conventional method of one-size-fits-all is no longer viable. Products must be designed and delivered intelligently to meet the customer where they are, and by keeping in mind that they use products to reach their goals. This involves tailoring the products to the needs and income profile of the customer, including being cognisant of their environment, geography, and demography. Parvati’s case became an inspiration for the Mann Deshi Bank to design and launch a cash credit product for women. Since its launch, hundreds of women vendors in the area have benefited from the product.
In the traditional financial system, the design and distribution cost on financial products at sachet size is high. Expensive technology development and brick-and-mortar infrastructure all contribute to an impractical model. Financial service providers are consequently dissuaded from attempting to reach rural, financially excluded groups, and the availability of financial services, therefore, remains an urban privilege. By using the power of machine learning and cloud infrastructure, we can significantly lower operating costs while offering customers affordable, bespoke financial products that help them reach their goals.
While the above are supply side issues, the demand side has its own set of challenges. Financial literacy and technology readiness are two critical issues. Financial education assists people in making sound financial decisions. These are not just challenges of the Indian market, but other economies too.
Despite constraints, rural women entrepreneurs follow the motto “my courage, my capital”. It is our responsibility as financial service providers to create an ecosystem for them to deploy this capital of courage.
This column first appeared in the print edition on September 14, 2021 under the title ‘Capital for their courage’. The writer is the founder of Mann Deshi Mahila Sahakari Bank