Demonetization & Rural economy

In the mid 1960s, India faced a severe food shortage (mainly in Bihar) and nearly escaped from a major famine. Prime minister Lal Bahadur Shastri started lots of policy initiatives to curb food shortages and such initiatives in turn paved the way of Green Revolution. When India was throttled again economically in 1990, and that's what changed the country forever. The opinion of researcher Suyash Rai at the National Institute for Public Finance and Policy and Wharton School at the University of Pennsylvania on black economy is required to understand the depth of the situation.

The announcement of demonetization of Rs 500 and Rs 1000 notes came on 8th November 2016. Problem in rural economy had appeared as Kharif harvest is sold in hard cash, an investment is required for Rabi season and marriages in community will happen in this time of year. Farmers, landless labourers, domestic servants, pensioners, small traders, all these and many other groups have taken a terrible hit  First, there is huge liquidity crunch in the informal and rural sector. The effects is felt by both supply and demand side.

The MFI industry is a cash intensive with its large network base of 3.2 crore clients in India. Most of the borrowers take loans in cash and they repay loans in cash. MFI operations will be most affected due to this decision as there are for lot of women with loans between Rs 10000 to Rs 50000. The disbursements will be delayed and collections drops can lead to situation of operational paralysis in the rural sector. Even then fight for market share could lead to weakening of credit appraisal standards for achieving required sales target. Such conditions for the failure of the industry to defer payments temporarily will be milked by political class. MFI sector has already shown relative slowness towards going ‘cashless’. This can be attributed to fact that India is among the most cash-intensive economies in the world with a cash-to-GDP ratio of 12%, almost four times as much as other markets such as Brazil (3.93%), Mexico (5.3%) and South Africa (3.73%) .

There is huge requirements of seeds, fertiliser and pesticides for Rabi season. The farmer will be forced to buy on credit or take loan from informal credit sources at exorbitant interest rates. Even with decent monsoon rains, the farmers is willing to invest heavily this year as they were hit by drought in 2014 and 2015. Government has allowed withdrawal limit to Rs 25000 for the farmers but this will not solve problem as rural banks are already overloaded with responsibilities of exchange. Many people simply do not have active bank accounts and even ATMs are working under capacity.  A lot of housewives, artisans, and workers may have cash lying with them at home. This isn't part of hoarded illegal money but a traditional way of saving money for women without seeking permission from husband or other family members. This little amount, concealed from everyone, usually grows as time passes and is used in the time of needs. This revelation isn't "small price to pay" and can't be termed as collateral damage in fight against black money. This kind of policy debate ignoring women leads to is a less empathetic society .

The chaos spread in this time will be used by black money hoarders in rural areas too. The illegal exchange of currency notes with lesser monetary value notes will be the first move of brokers. Brokers will use KYC of common man for siphoning of money into Jan Dhan Accounts of illiterate populace for small time. The main challenge will be of cash logistics for banks in far and remote places. Rural economy will be forced to run on deferred payments and barter system for few months. Rice, wheat and other staple crops will be used as exchange currency. The slowdown of economy will wipe out a large number of small entrepreneurs from the market. There is an urgent need to tackle middleman-transporter nexus in this scenario that has always dominated rural marketplace. The issue with farm in India is not that farm income is exempt from tax but farmers don't even have to report it. The small traders in villages have agriculture land holdings and always can show the illicit wealth as farm income.

The short term effect will be slowdown of economy and hence a reverse exodus of labour will happen in upcoming months. NREGA expenditure must be increased in this financial years as there is lot of rural populace who have no asset base and mainly depend on wage labour as their primary source of income. MNREGS, ICDS and even NRHM are only source of livelihood for many women in an already crippled rural economy, with little avenues for non-agrarian work is fast depleting with the effect of demonetization.

The long term effects of this policy decision will surely lead to both innovation and protest. Most labour intensive businesses (such as tea-gardens, factories, transporters, cab services, construction and civil engineering works and so on) pay wages in cash. There will be impact on the mode of payment in near future. There will be promotion of financial transactions using digital, paper-less modes like mobile money, mobile wallets, debit cards, ATMs, and ePOS machines. MFI sector is focused on credit and maybe some insurance with , while the m-banking world is focused on transfers and payments with sophisticated back end systems. There will be convergence between them to avoid such situation again. MFI, customer and banks will ultimately move towards unison as a part of the financial inclusion drive of the government.

Reform is often waylaid by hidden priorities and even slow when implemented fairly. There is always unwanted effects due to complex nature in rolling out any new scheme. Structural reform in 90's have proven this mantra and the long term actions taken in cleansing financial sector by current government is no exception. There was always an urgent need to have radical changes keeping ten years time ahead. A strategy can't be sought with incremental thinking by the state. RuPay, Payment banks, Demonetization, Aadhar Cards & Jan Dhan Yojna has brought up winds of disruption and innovation through technology, regulations and government action, will fundamentally alter the banking sector. The future will belong to those who show speed, imagination and the boldness to embrace change towards cashless economy and targeting BOP clientele.

Still, I will argue that a rationally argued cause-and-effect connection within the limits of the evidence is required from experts, as it is essential to investigate facts while debunking fantasy element spread in social media. India has to understand and address positive changes, failures and externalities of demonetization drive in rural economy.

Default Management in CBFO

Microfinance means different things to different people. There is difference between working of regular MFI companies and Community-Based Financial Organizations (CBFO). Community based microfinance model, owned and governed by community members has always served cost-effectively and provided financial services to the end users. Too much scaling without proper assessment could drive CBFO to financial indiscipline at the SHG level, lead to over-borrowing and potential default. While working with few clients will be unsustainable for the CBFO itself.

Loans can benefit the poor and their community only if properly managed. In most of the default, the pressure on giving loans without proper risk assessment mounts on both supply and demand side. A debt becomes bad when it’s not paid for three consecutive months. Here are few pointers that are learnt with the experience -

How to avoid delinquency ?

• Peer monitoring and group pressure is the main influential factor in loan recovery performance of the SHGs. Even the family of loan applicant must be in the loop when loan is sanctioned.

• Due diligence must be carried out in loan appraisal to ensure the repayment capacity of the customer and assessing the customer's capacity to repay and avoid over-indebtedness. Educating clients on ill effects of over-borrowing will go a long way in reducing arrears and defaults.

• Recovery and repayments depend on the mutual trust between CBFO and its members. Agent dormancy, or inability to deliver service due to vacancy, has a corrosive effect on trust, which is the bedrock for any system of financial services.

• The clarity on installments, penalty & expected vs actual must be with agent as well as member for bringing clarity and smooth information flow.

• It is the responsibility of the staff to clear overdue and facilitate the grievances readdressal with the community. There must be refresher training for the staff and office bearers on risk management, sustainability, accountability and ownership.

• Knowledge dissemination of Panchasutra : Regular Meeting, Regular Saving, Inter Loaning, Timely Repayment, & Up to date Books of Accounts.

• Reminders or calls up the customer for recovery is common practice. Weekly SMS reminders before scheduled repayment date with detail of loan amount will serve as a nudge in the behavioral change of members.

• Documenting and communicating answers of questions like -What was the main single factor that motivated you to repay? Are they consistent or not? If not, why not?

Do’s of Overdue Recovery

• Try to motivate borrowers to repay and root cause analysis of the default must be filed. The default happens either due to fraud or real time emergency. The distinction between them makes easy for recovery down the road.

• Only one person must be Point of Contact (POC) for default/ delinquent group. Recovery for default must be done in the team of office bearers and members of SHG or cluster with the staff.

• There must be a notice served to members having defaulted loan before visit. Regular follow-ups with proper communication messages are the best way of ensuring recovery.

• The emotional factor must be utilized in recovery process by giving successful examples of other members in such position. There must be pressure exerted from two sides. One person must explain her social angle of the default while other person must focus on self interest and future options.

• The defaulted member must be invited in the meetings with respect. Staff must facilitate that positive environment is maintained in the meetings. There must be carefulness on the gender and caste issue.

• Recovery should normally be made only at a mutually agreed designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at the designated place on 2 or more successive occasions.

Don’t of Overdue Recovery

• Team especially consisting all men shouldn't go for recovery from women member and no abusive language should be used. The contact time is between 7am to 7pm excluding inappropriate occasions such as death. RBI norm must be followed with rigor in the recover process.

• Police complain is the last option to be used by the team. There should be strictly no mention of claiming Land/ Gold for recovery of default amount.

• Field staff shouldn't give any commitment of either rescheduling or restructuring of the loan without any consent to the superiors. To rework household budget and make provisions to accommodate changes in the repayment amount must be made in written agreement.

• A very high level of indebtedness and tough recovery techniques can led to many villagers seeking government intervention that will be political risk for the operations.

What people think of Microfinance?

Microfinance is financial services for poor and low-income communities, people who have been excluded from the mainstream financial system. Yet, there are the diverse opinions people have about Microfinance. I have encountered few in last 5-6 years and presenting them in summary format.

1. The MBA: "Truly amazing business model & poverty reduction tool."

2. The arrogant: “Unsustainable and too risky! Does it actually work?”

3. The over-informed: “Yes, I know about it, you give money to poor. Social enterprise!”

4. The ill-informed: “Thugs lending money to poor at high interest rates and brutal recovery techniques.”

5. The devout fan: "This is the future, only we need investment and scaling and may be P2P."

Microfinance is not panacea from all troubles, this also means that not any poor person can obtain the loan. I can vouch with my experience that only micro loans can't solve poverty. There is enough evidence to support my claim : Microloans Don’t Solve Poverty But research might reveal what will. I always go for the advice of Wayne Dyre before deciding for myself:"The highest form of ignorance is when you reject something you don't know anything about."

Distinct Honour to Chaitanya

Governor CH Vidyasagar Rao has appointed social researcher Dr Sudha Kothari and Founder of Dalit Chamber of Commerce and Industry (DICCI) Milind Kamble as expert members on the Rest of Maharashtra Development Board on 6th June 2016. Sudha Kothari serves as the Managing Trustee of Chaitanya, a developmental organization established by her in 1993. Chaitanya is one of the pioneers of community based microfinance institutions in Maharashtra state and promotes 42 SHG federation with an outreach of 1 Lakh women members across 18 districts of Maharashtra. Dr. Kothari also serves as a Member of Board of Trustees at FWWB India.

One of the great delights of my job is the daily encounter with Dr. Kothari. She is a great mentor and her whole life mirrors commitment to poor women. It’s an honor to work with people whose contributions make us proud and inspiring. 

Good Governance & Public Policy

What is Public Policy ? Public policy focuses on the processes by which various types of policies and regulations that affect members of the public are created and enforced. Public Policy deals with public goods delivery – political economy, taxation, law and order, good social and physical infrastructure, including better education and health facilities – and facilitate provision of private goods (cheaper power, flexible labour laws and other subsidies). The guiding principles for better public policy include building people’s ownership and participation in the governance and decisions affecting their lives. Regulation, Redistribution and Equity came to the forefront of policymaking.

Resources be it human, natural or financial are limited in a country and a government must utilize them in the most productive manner can achieve the best possible growth. That is the essence of good governance. The first and foremost requirement of good governance is broadly distributed political rights among citizens and the government accountability and and transparency in public administration. An ideal public service institutions will be decentralized, professional and autonomous management structures.

The theoretical framework however doesn't work smoothly in the real world. Governments in many developing & underdeveloped countries are corrupt and never work in favor of the people. They work for the interests of specific groups. It would be naive to think that governments work for the public all the time. Economics works alongside and interacts with social and political forces framing the policy. Politically motivated decisions, the undisclosed profiteering, the conflicts of interest, the vested interests, & the bad experiments with good intentions can lead to the flawed policy making process. So how the end objective is achieved ?

Policy makers must be open-minded and open-armed to combat such conflicting interests arising due to potentially corrupt motivation. They must have sound knowledge of the local context of a community – its history, politics, social structure, and culture, along with its economics. More the diverse the stakeholders in policy making, the probe in the issue will examine ground realities, re-validate assumptions on which our policies rest, and evaluating  new initiatives. The real impact of policy decisions are measured by three factors:

* Number of beneficiaries covered under the policy
* Number of beneficiaries who experience a positive change with the implementation
* Participation of the people and innovation springing from the outcomes.

Public opinion is varied and contested space, continually shaped and reshaped over time. Popular opinion in India generally overlook corrupt vested interests or don't want to go for long term reform. Hence, Indian state has always insulated public policy from open debate. The bureaucracy in India has never let the control of policy shifts to an autonomous institutions and public has suffered the ill results of lack of knowledge among civil servants. Bureaucracy seldom promotes creativity and, under the cover of neutrality, preserves the advantages of the powerful by dominating the weak. In the government systems, professionals are always crowded out by the imprisoning logic of bureaucracy. As described aptly by Prof Ajay Shah: In the West, leaders choose the direction of public policy. Government is like a car, which goes where the leader directs. But in India, the car is broken, and just turning the steering wheel is ineffective. To do public policy in India, the skill required is that of an engineer and not the driver. It is about opening the hood, understanding what is wrong with the institution, and fixing it.

Each policy must face several test: Are the policies realistic? How will they be implemented? What results will they produce in the long run? Were there more reasonable, less risky, cost effective, user friendly, & more inclusive policy measures that would have yielded as much benefit as the rolled out one ? There is no ultimate policy measure but always a solutions-oriented approach means more innovative outreach and trade-offs in a wiser way. I will be putting more on the non academic and self learned diagnosis of public policy in coming days. Watch this space and hear buzz words like committees, accountability, check and balances, transparency. Have I lost you yet? I will.