Giz bankerbooklet lr

Financial Capability Of Rural Low-Income Households

An Approach for Effective Financial Inclusion

Relevance and Practical Ideas for Financial Service Providers

T h e

Rural, low-income households who lack the proper integration into the formal financial system are numerous.

This indicates a huge unused potential of clients and transactions to be integrated into the formal financial sector. While they may not be considered high value customers yet, proper support and understanding their economic needs can help them evolve into mature bank clients in the future.

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Financial Capability Can it be the key to open the twin locks of Financial Inclusion and expanding the business of Banks & Financial Service Providers?

Financial Inclusion attempts to close the gap between the formal banking sector and the poor and low-income part of the population.

>120 Million NFAs

The numbers of No-Frill Accounts (NFAs) for example have increased significantly over the past few years, more than doubling between 2010 and 2012 alone.

50 Million

The actual beneficial USE of financial services by the client is however not ensured.

147 Million

2010

2012

Bank Outlets

54 Million

Change over the years. Source: NDTV Profit

97 Thousand BCs

33 Thousand

150 million unbanked households in rural areas

Bottom-of-the-pyramid market potential is significant.

Without supporting households to become financially capable, financial inclusion efforts such as • Opening new branches in remote areas • Appointing business correspondents and facilitators as extended service agents of branchless banking • Opening No-Frill Accounts are likely to be short lived.

T A P P ING

Only financially capable customers will be active clients in the long run.

T HE

P O T EN T IA L

Effective use of Financial Services ensures longterm clients

For rural households to become lasting customers of a bank, they have to develop a set of abilities, allowing them to make informed choices to ensure beneficial use of the financial services offered.

Mamta Devi

Umesh Behera

She took a loan to open up a small business and thus prevent her husband from having to migrate to support the family’s income. While small at first, the couple’s business is growing and a second loan is planned to finance the expansion.

Paraplegic and successful entrepreneur, he and his wife took productive loans repeatedly, availing financing from a local NGO who knew more about him then the basic KYC.

What happens if customers are NOT FINANCIALLY CAPABLE, if products are neither understood nor used to the client’s benefit, became painfully clear during two major financial crises over past few years. Both the AP Microfinance and the US Subprime Mortgage crisis resulted in large volumes of non-repayment, substantial losses and increased risks and mistrust between banks and customers.

A

The way households make financial decisions, use financial services and benefit from them depends on a variety of factors.

The Financial Capability approach allows banks to ensure: • A better understanding of the economic and social environment rural households are taking decisions in • A better impact measurement of financial products and services on household level by identifying the reasons for their uptake or rejection • A better refinement of product and service features • And a better adjustment of delivery channels to become viable and cost-effective

L OOK

T H R OUGH

T HE

F INANCIA L

CA P A B I L I T Y

L ENSE

Generating, Managing and Using Money

Planning for the Future

How households generate income

How households invest

How households handle money

How households plan for the future

How households spend money

FINANCIAL CAPABILITY

Using Financial Services How households use loans How households save How households use bank accounts How households use insurance

Using Social Capital, Assets and Competencies How people interact within family and community How households use assets How households gain knowledge and skills

M a k i n g

KYC 2 – Really Know Your Customer • Understand the client’s financial behavior • Cash flow (income, outflows & seasonality) • Source of income & livelihoods • Consumption spending pattern • Financial targets (e.g. wedding, home improvement, etc.)

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Strategies for Bankers Increase OUTREACH and become the Nº 1 PARTNER for the 60% of the country’s yet unbanked households The findings of the Financial Capability approach show the need for a more effective client-provider relationship. Building and keeping this relationship active is an investment. Yet, it is an investment that pays off through a long term relationship based on adequate financial advice that comes from knowing more about the customer than merely the address and ID proof.

Demand-based Products & Delivery Channels Better knowledge of the clients’ personal, livelihood and financial situation can support more adequate product & service design. In the long run, even more technology based approaches such as mobile banking may become a viable option for cost-effective delivery channels.

In practice – an example A simple budget review sheet for the last 7 days, multiplied by 4, can serve as a good proxy for a monthly cash flow, rendering in and outflows more visible.

Household Income (per month) INR Household Expenditure (per month) INR M T W Food Communications Transportion Education Health Religion Etc

T

F

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Refine Financial Literacy & Awareness Interventions Financial Capability can be used to shape existing financial literacy and education materials.

Investing in capacity development of clients in form of financial literacy will not only increase their understanding of banking products and services and their own budget and requirements but also improve overall customer-bank communication.

Risk Mitigation The proper matching products and services to clients’ needs through Financial Capability helps reducing Non Performing Assets and thus a better risk management.

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Daily earni ng, da shorta ily sp ges, endin no pla g wit ns an h ac d bu ute dgets earni ng, dai ly spe Prepar nding es plans with sho but doe rtage sn’t fo s llow bu dget Manage s balance between expenditu inco me and re. Prepar es plans and bud gets Spends accor ding to incom e Uses plans and budgets

2

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Knows how to manage

The ‘ability to handle money’ depends on how households are able to balance income and expenditure, and the knowledge to use budget planning instruments.

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Ability to invest

Ability to save

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The ‘ability to use insurance’ has been mainly associated with life insurance for all family members, while life insurance cover for only one family member was seen as low financial capability.

Ability to bank accounts

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Ability to use loans

Ability to plan for the future

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The ‘ability to use bank accounts’ has been associated with households which have access to saving or loan accounts, and actually make use of banking services.

The ‘ability to invest’ refers to the identification and use of investment opportunities.

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The ‘ability to use loans’ refers to access to loans from diverse sources such as banks and PACS, to be able to repay on time, and to use loans for business development.

The ‘ability to save’ has been mainly associated with households that deposit money in a bank, save regularly, save for emergencies and retirement, and for building assets.

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Ability to use insurance Ability to coordinate within the family

and decisions are made by taking into account the responsibilities and needs of all members.

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The ‘ability to generate sufficient income’ is

ing affected by the number earn one e of income sources, the type rk, ut wo ge ntrib e of income sources, the number y wa ren co som dail of earners who contribute to ng, child ing, ult ggi ber, income generation, the farm g ad in be ct mem rnin aged ntra old regularity of income and the ea co eh e Eng , us on ss te way time is managed. t ho bu sine work, re adul bu ntri ltu e u co tty rs r ic wag ren in pe be ag ily ild ed ch ss, mem d da lts ag e r, es, du be sin old Eng n an bu ess g a h ratio d mem sin rnin tty) ouse u mig ol e h eh (p ea nb us in , ult ow or 3 ho ad es ed

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Ability to handle money on daily basis

they The ‘ability to take part tation, Has repu in community life’ has been associated with the they reputation, respect and rt, contacts, and suppo dignity households reputation help others Has good enjoy.

Ability to paticipate in community life

Has good reputation

Uses plans and budgets

The ‘ability to spend money wisely’ has been associated with households which spend money for items that generate a benefit for the whole household and help the family to improve its living conditions.

pital, Assets and Com ial Ca pe t Soc e nci ing es Us

Ac tiv ely ve se st ek s in s n bu sin ew in es ve s, ho stm No us en th es t ink , la op ing bo po an r ur d , la tun p No lan nd itie futu s nin re g fo pla r th n e fu Ho tu use re ho ld pla ns for the Has futu fore re sigh t an d pl The ‘ability to plan for ans for Plan the future’ requires the s lo futu ng taking into account term re , fo longer-term aspects of r ch ildre income and expenditure. n an d em erge ncie s

Saves irregularly,

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s from borrow es l loans, st rat forma ere int ess to high m No acc pays ws fro ers, orro ylend ns, b ces mone l loa l sour forma orma s to Gs, r inf cces , SH othe no a and PACS Has ers from ylend rrows mone s s, bo PACS loan nd ss to sa ank acce mb Has ity fro s mun ans ce ur com to lo s so cess ou y ac vari eas om Has s fr loan to CS ss PA t acce and en sy ea stm nks ba ve Has as o in ,N such on pti oo s nt sn e es ei stm sin om ve bu inc in in ing No as sts t, re s, es ve I nc es In inv sin es m y to bu cit co in in pa g sts ca sin ve No In ea s cr nd se es ), la sin ers bu th w fo ne t (o of en ks in ym Th plo em

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The complexity in which a household/client is making financial decisions is reflected in the financial capability concept. It shows that not any one institution can alone be responsible.

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Once the gaps in the households’ financial capability are identified, partnerships need to be formed with government, civil society, support and promotion agencies and others.

F o rw a r d

Ability to spend more responsibly /wisely Ability to generate sufficient income

Ability to use assets

Ability to gain knowledge and skills

Has no property, no land,

The ‘ability to use assets’ has been associated with the ownership of houses, land, farming assets and household items.

The focus is on ownership and usage.

Has very little

3

4

5

, influence in the community

1

Owns no other assets

land, Owns

very few anima

Has som e land Owns (up to bullock 3 acres) s and househ Has a old item lot of s lande land d pro (up to perty, 10 acr owns es) a tract nd la nded ors and Has a lot power of lan motor tiller d an s vehic d lande les, tracto d pro perty rs an , ow d ot ns her equip ment

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Levels of knowledge and skills are outcomes of investments into education and an environment conducive to learning.

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Has no ed uc atio the n y ar e sk ille ed d la we uc bo ll e ate ure du da rs ca nd te ha d s an kn d ow po led ss ge es se ss pe cia ls kil ls

Is

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P u bl i s h e d B y Deutsche Gesellschaft F端r Internationale Zusammenarbeit (GIZ) Gmbh Rural Financial Institutions Programme C o n ta c t Dr. Detlev Holloh, GIZ Programme Director A-2/18, 4th Floor, Safdarjung Enclave, New Delhi 110029 India T : +91 11 49495353 F : +91 11 49495393 E : Detlev.Holloh@Giz.De W : Giz.De Photographs Enrico Fabian C o n c e pt a n d L a y o u t Quicksand and Design Route R e s p o n s i bl e Dr. Detlev Holloh New Delhi, March 2014

Deutsche Gesellschaft f端r Internationale Zusammenarbeit (GIZ) GmbH Rural Financial Institutions Programme A-2/18, 4th Floor, Safdarjung Enclave, New Delhi 110029 India www.giz.de

T : +91 11 49495353 F : +91 11 49495393 E : detIev.holloh@giz.de