Microfinance - Reflection

Microfinance deals not just with providing credit to the poor, but also brings forth the element of micro
savings, implying that if the poor can repay loans, they should also be able to save and earn interest on
those small savings. Traditional and informal savings means like ROSCAs, investing in jewels, livestock
etc are unsafe, and hence micro savings platforms are needed. I had earlier believed that a savings
instrument for the poor did not make much sense, thinking they barely had any disposable income to
make savings possible, especially in the long term.

Another revelation for me was the discussion of a study which talked about how alcoholism, gambling
and poverty do not show a major correlation. Rather, I learnt that a major cause of poverty is unplanned
expenses such as those for weddings and social events, medical expenses and loss of livelihood or
productivity due to an unforeseen event such as a draught. The poor use multiple channels to cater to
their financial needs, which vary from time to time and hence require careful planning.

While instruments to cater to planned expenses can be planned and provided easily (e.g. collateral
based lending), the poor remain at the mercy of money lenders and the informal sector to address
unplanned expenditure. This leads to an increase in their helplessness and gives more authority to the
money lenders who use their power to establish their dominance and further strengthen it based on
caste, class, and kinship to exert pressure on the borrowers.

It was also surprising to note that the government regulations make it easier to give out loans than
provide services for savings. Given the high risk involved in loans, one would imagine it to be more
strictly regulated. Instead, we discussed how designing savings products is tougher. Banks are
considered safe and savings cannot be paced out unlike loans since the only controlling factor banks
have, to encourage or discourage people to use their savings schemes are interest rates.

The phenomenon of savings and loans being a continuum is applicable to multiple factions of the
society, most commonly pensioners. The SHG model encouraged savings first as well. Various savings
approaches, such as the box approach in Green Bank aim to provide a savings platform for the poor.
Their needs are like traditional customers requiring access, safety, returns and flexibility. But the high
transaction costs and lesser products make it difficult for banks to provide a sustainable solution. Also,
due to the uncertain nature of expenses that periodically come up, it is difficult for the poor to
effectively use these savings mechanisms since the temptation to spend the money or draw it
prematurely are high. Commitment savings products address this requirement, but in my opinion, it
would be difficult to get the poor to use these. For someone with a relatively steady income, it is easier
to put aside savings but for a poor family, whose expenses and income are both uncertain, it is difficult
to design a product that effectively addresses these issues. The need is for products that incentivize
savings while assuring the poor that the funds would be available to them if needed prematurely for an
emergency and educating them to ensure they use this provision judiciously.

Insurance is another approach that can help with respect to providing for the poor in unforeseen
circumstances. However, it needs higher participation and diversity to succeed. The issue is that the
poor require multiple types of protection theft, livelihood, health, life etc. bundled as a single product
to protect them from possible risks, but cannot pay separate premiums for each. Sewa banks approach
of addressing this through reinsurance addressed this but loss assessment difficulties made the product
unviable. It is surprising that insurance companies are letting go of the opportunity to create a product
like this that would address the need of thousands of people. When done on a large scale, with more
people and greater diversity, a sustainable approach to create a product for the poor may be identified.

Finally, I got a lot of insights from the Ramanagram Diary Ladies session , inspired by the Rutherford
diaries model where the gap between the researchers and researched was considerably bridged.
Subjects owned and drove the data collection and research. It made me realize that even instruments
like SHGs can fail to make families self-sufficient. Families were taking loans from multiple SHGs paying
one by borrowing from the other, thus making the debt cycle longer and more difficult. It also showed
how the spending patterns of the poor reflect their poverty. They spend on snacks to save time and how
TV and addictives serve as means of avoiding the drudgery of the job rather than recreation. To them, a
loan is a tradeoff between spending on food and the next loan installment which highlights the dire
conditions they are in. Malnutrition is a better alternative in their view than failing to pay an installment
- since the latter would mean no access to future loans. The initiatives by the authors, although small
scale serve as an example to show that alternative means of livelihood can be identified for similar
villages, and make people more self-sufficient, which in turn would help finances and even future loan
opportunities since models such as Grameen cater to the strata that has the means to repay through
some income source.

Financial institutions need to therefore recognize the importance of both savings and credit products for
the poor, and work towards creating tailor made products suited to their needs. They require credit to
match consumption with the lumpy incomes