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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 • • • • • • • • • 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 • • • • • • • • • 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 • • • • • • 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