rural financial services and institutions (4)

8/3/2019 Rural Financial Services and Institutions (4)

1/21

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 ruralclients (domain is rural area)

Prof. Rushen Chahal


2/21

Rural Financial Services

& Institutions Market segmentation is very clear

rural clients

It is therefore, very important tounderstand characteristics of suchclients and their implications for

delivering financial products andservices by the institutions.

Prof. Rushen Chahal


3/21

Characteristics of rural

clientsWhat 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

Prof. Rushen Chahal


4/21


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

Prof. Rushen Chahal


5/21


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

Prof. Rushen Chahal


6/21

Financial

Services/Products What types of financial products

needed by rural clients

What are the different attributes ofthese products? Basis for productdifferentiation and development

Importance of these products torural clients - Need

Prof. Rushen Chahal


7/21

Financial

Products/ServicesCredit

Savings

Insurance

Remittance services

Pension and Provident Funds

Prof. Rushen Chahal


8/21

DEMAND FOR FINANCIAL

SERVICES IN RURAL AREASAdjust 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 reliableplace)

Prof. Rushen Chahal


9/21

DEMAND FOR FINANCIAL

SERVICES IN RURAL AREAS To transfer remittances reliable

method

Hedging against various risks personal, crop, livestock and assetsinsurance

Prof. Rushen Chahal


10/21

Role of Financial ServicesTo balance the income & expenditure over

life cycle reallocate expenditure acrosstime

Saving up keeping cash now to spend infutureSaving down borrowing against future

income

Savings as the basis of all financial services

Prof. Rushen Chahal


11/21

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

Prof. Rushen Chahal


12/21


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

Prof. Rushen Chahal


13/21


products - insurance Coverage

Premium

Frequency of premium

Benefit

Formalities required on claim

Individual or group

Prof. Rushen Chahal


14/21

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 relativeto that of agriculture sector

Agricultural employment declines relative to non-agricultural employment

Expenditure on agricultural products fall relativeto industrial and service sectors products.

Prof. Rushen Chahal


15/21


Institutions These changes occur because

1. Low income elasticity of demand for foodand other agriculture products2. Specialization process in which many

economic functions performed by farm

households are transferred to specialistproducers

Prof. Rushen Chahal


16/21


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 theagro-industry sector. Increase in agricultural productivity permitted the release

of agricultural labor to rural non farm economy and urbanindustries.

Agricultural growth generated foreign exchange required

for industrialization

Prof. Rushen Chahal


17/21


Institutions Structural transformation process requires

supportive specialized institutions in the form ofland, labor, finance and trade, in order to reducethe information cost.

These Institutions allow the specializedproducers and consumers to integrate and engagein transactions of heterogeneous set of goods andservices produced across space and time.

Over time, these markets multiply and become

more complex in response to greater variety ofdemand for goods and services.

Prof. Rushen Chahal


18/21

Role of financial

Institutions Mobilization of savings

Allocation of financial resources in

most productive way across spaceand time

Facilitate risk management

Facilitate the exchange of goods andservices

Prof. Rushen Chahal


19/21

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

Prof. Rushen Chahal


20/21

Promotion of Rural

Financial InstitutionsMultiple 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?

Prof. Rushen Chahal


21/21

Rural Financial System

Demand for Financial

Services by Rural

Clients

Marketing of

Financial Services /

Products

Need for Financial

Products

Characteristics of

Demand for financialproducts

Characteristics of Rural

Clients

Institutions

Policies

Products

Channels

Regulation

Innovations

Intermediation

Prof. Rushen Chahal