Download financial services - Xavier Institute of Management

Rural Financial Services
& Institutions
• What are we expecting in this course?
Part A: What are the financial services or
products?
Part B: Financial Institutions delivering
these products
Part C: Delivering financial products to rural
clients (domain is rural area)
Rural Financial Services
& Institutions
• Market segmentation is very clear –
rural clients
• It is therefore, very important to
understand characteristics of such
clients and their implications for
delivering financial products and
services by the institutions.
Characteristics of rural
clients
What is your understanding about
• Livelihood portfolio of rural clients
• Income and investment
• Marketing of farm and non-farm products
• Nature of borrowings and savings
• Nature of risk and risk bearing ability
• Rural Infrastructure
Characteristics of rural
clients
• Heterogeneous occupation: farm households, agribusiness,
non-farm enterprises, and landless workers
• Small, medium and large size of holdings
• Different cropping pattern
• Variety of non-farm enterprises
Implications:
• Demand for financial products/services vary considerably
among the clients
• Diversified loan portfolio for financial institutions as per
the needs of the clients
Characteristics of rural
clients
•
Production, consumption, trade, savings, borrowings and income
occur in a very small amount.
• Clients are dispersed in a large area.
• There are high levels of risks.
• Risk bearing ability is also very low.
Implications:
• Scale of business with individual client is very low
• High average transaction cost both for client and financial
institution.
• Loan default risk is high for financial institution.
• Need for insurance products along with credit products.
• Portfolio diversification or need for partnership with other
insurance agencies
Financial
Services/Products
• What types of financial products
needed by rural clients
• What are the different attributes of
these products? – Basis for product
differentiation and development
• Importance of these products to
rural clients - Need
Financial
Products/Services
Credit
Savings
Insurance
Remittance services
Pension and Provident Funds
DEMAND FOR FINANCIAL
SERVICES IN RURAL AREAS
Adjust to seasonal pattern of income and
expenditure - (smoothening the cash flow)
Adoption of new technology in farm sector
(removing vicious circle of poverty)
Investment in non-farm sector
(diversifying the livelihood portfolio)
Accumulation of savings (safe and reliable
place)
DEMAND FOR FINANCIAL
SERVICES IN RURAL AREAS
• To transfer remittances – reliable
method
• Hedging against various risks –
personal, crop, livestock and assets
insurance
Role of Financial Services
To balance the income & expenditure over
life cycle – reallocate expenditure across
time
Saving up – keeping cash now to spend in
future
Saving down – borrowing against future
income
Savings as the basis of all financial services
Attributes of financial
products - credit
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Purpose
Repayment period
Repayment Schedule
Collateral – Tangible or intangible
Minimum & maximum amount – ceiling
Documents needed
Interest rate and subsidy
Cash and kind component
Provision of Incentives and penalty
Attributes of financial
products - savings
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Opening balance
Minimum balance
Minimum amount deposited per transaction
Frequency of withdrawals
Overdraft facility
Interest paid on savings
Interest charged on overdrafts
Compulsory or optional
Documents needed
Attributes of financial
products - insurance
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Coverage
Premium
Frequency of premium
Benefit
Formalities required on claim
Individual or group
Emergence of Financial
Institutions
• Emergence of structural transformation in
agriculture and economy as a whole
Features of structural transformation in Economy:
• The size of non-agricultural sector rises relative
to that of agriculture sector
• Agricultural employment declines relative to nonagricultural employment
• Expenditure on agricultural products fall relative
to industrial and service sectors products.
Emergence of Financial
Institutions
•
1.
These changes occur because
Low income elasticity of demand for food
and other agriculture products
2. Specialization process in which many
economic functions performed by farm
households are transferred to specialist
producers
Emergence of Financial
Institutions
• As agricultural income increased, demand for non-farm
sector products increased.
• Through savings, large amounts of capital were transferred
from the agricultural sector to finance non-farm sector.
• Agriculture growth contributed to the emergence of the
agro-industry sector.
• Increase in agricultural productivity permitted the release
of agricultural labor to rural non farm economy and urban
industries.
• Agricultural growth generated foreign exchange required
for industrialization
Emergence of Financial
Institutions
• Structural transformation process requires
supportive specialized institutions in the form of
land, labor, finance and trade, in order to reduce
the information cost.
• These Institutions allow the specialized
producers and consumers to integrate and engage
in transactions of heterogeneous set of goods and
services produced across space and time.
• Over time, these markets multiply and become
more complex in response to greater variety of
demand for goods and services.
Role of financial
Institutions
• Mobilization of savings
• Allocation of financial resources in
most productive way across space
and time
• Facilitate risk management
• Facilitate the exchange of goods and
services
FINANCIAL MARKETS
 Rural Financial Institutions
- Structure
- Policies
- Products
- Regulation
- Innovations
 Nature of demand of financial services
 Clients of financial institutions and their
characteristics
 Intermediation between demand and supply
 Sustainability of Rural Financial Institutions
Promotion of Rural
Financial Institutions
Multiple versus single agencies?
Forms of organization of RFIs?
- Government
- Cooperative
- Private
- Specialized Agencies
Organizational structure of RFIs?
Density of field level RFIs?
Functional structure of RFIs?
Rural Financial System
Demand for Financial
Services by Rural
Clients
Intermediation
Marketing of
Financial Services /
Products
Institutions
Need for Financial
Products
Characteristics of
Demand for financial
products
Characteristics of Rural
Clients
Policies
Products
Channels
Regulation
Innovations