New products, processes and technologyfor rural access to finance in India p. 1

Transcription

1 New products, processes and technology for rural access to finance in India Susan Thomas susant IGIDR Bombay New products, processes and technologyfor rural access to finance in India p. 1

2 Background New products, processes and technologyfor rural access to finance in India p. 2

3 Background India has a large rural population, spread over a large area. Regulatory pressures have had banks attempt to build a rural network for financial access. But this has not proved to be a viable alternative to the age old network of local money lenders. Need to examine alternative mechanisms for rural access to cheaper finance. New products, processes and technologyfor rural access to finance in India p. 3

4 Issues The barriers to ready rural access to finance are: 1. Transactions costs are very high Transaction sizes are small. The frequency of transactions is high. Geographical spread is high. There is little standardisation of services: wide heterogeniety of users. 2. Credit information asymmetry 3. High uncertainty or risk : a combination of (a) lack of transparency of prices and (b) agriculture has a very high systemic risk exposure. New products, processes and technologyfor rural access to finance in India p. 4

5 Promise of better things to come: three case studies The agricultural agency model: M&M ShubhLabh ICICI Bank project Commodity futures markets Weather insurance, monsoon derivatives New products, processes and technologyfor rural access to finance in India p. 5

6 M&M ShubhLabh New products, processes and technologyfor rural access to finance in India p. 6

7 The model A ShubhLabh office starts by identifying a set of farmers with good credit history. The farmers sign on for their services for a consulting fee: this covers consulting on farming practices, crop advice, sourcing of inputs, pickup of produce, delivery to the final buyer. The ShubhLabh interfaces with ICICIBank for the financing wrt the fertiliser and seeds firm, as well as for the delivery of produce to the end buyer and payment to the farmer. Offices submit a database of the farmers and their performance on delivery of the produce which is maintained as a database at ShubhLabh. New products, processes and technologyfor rural access to finance in India p. 7

8 Overcoming the economic issues Reducing counterparty/credit information asymmetries: (a) ShubhLabh leverages on the M&M credit information on farmers, (b) ShubhLabh influences the farming decisions which impacts upon the risk of the quantity and the quality of the produce. Reducing transactions costs: ShubhLabh intermediates the cashflow between (a) bank and farmers, (b) input providers and farmers, and (c) end buyer and farmers. Improving transparency of information: ShubhLabh has the potential to get access to better prices on the market as compared with an individual farmer. New products, processes and technologyfor rural access to finance in India p. 8

9 Pros and cons of this model Pros: Cost of funding for the farmer does work out to be lower than the local money lenders. Pros: It has the potential to scale. Another extremely successful implementations of a similar model is ITC s e-chaupal. ICICI Bank s offers farmer financing coupled with crop insurance in Tamil Nadu and also has a tie up with Rallis who sources produce for HLL through a farmer network. Cons: This network can be used to sell a large number of financial services on a larger scale, especially insurance like services. Today, it is largely an access to credit model, which still leaves the money lender with a stronghold in the lending New products, processes and technologyfor rural access to finance in India p. 9

10 Role for policy This seems to be a case study pointing to the importance of reducing credit information asymmetries. These models run well off developing good credit information about farmers. Development of credit information bureaus, even at a regional/district level, if done in a cost-efficient manner, would be a good starting point for allowing more financial institutions into the lending business in rural regions. New products, processes and technologyfor rural access to finance in India p. 10

11 Commodity futures markets New products, processes and technologyfor rural access to finance in India p. 11

12 Motivation Finance can touch millions of households through the mechanism of agricultural spot and futures markets. We have gone far on the equity market; can we make similar progress on the commodities markets? In India, commodity futures markets were banned in the 1960s. Now we seek a greater role for commodity futures. New products, processes and technologyfor rural access to finance in India p. 12

13 Where can futures markets play a role? Price discovery and dissemination/establishment of a uniform price. Eg. The impact of the NSE on price discovery. Market-based risk hedging mechanism: It works! The example of castor futures in Ahmedabad and Bombay. A nation-wide market can be a source for heding inter-geographical zone price risk. New products, processes and technologyfor rural access to finance in India p. 13

14 Current scenario Many small exchanges; three new national multi-commodity exchanges. All the national exchanges have clearing corporations which is the central counterparty to all trades. All transactions are cash settlement on a reference rate for each of the commodity. New products, processes and technologyfor rural access to finance in India p. 14

15 Overcoming the economic issues Reducing counterparty/credit information asymmetry: The national exchanges are a more equal opportunity trading platform than the earlier system of open outcry markets. Reducing uncertainty: The exchanges provide price information in real-time, which can become the benchmark price for any financial transaction. This can also have a negative impact on the spreads offered by lending agencies. Reducing transactions costs: National exchange foster competition amongst intermediaries which help reduce the costs of transactions. Once warehouse receipts become established, costs to the New products, processes and technologyfor rural access to finance in India p. 15 farmer of trading, as well as borrowing, could drop

16 What needs to be done Physical delivery of commodities is beset with problems of grade verification. Ideally, the warehouse industry should do grade verification, and issue warehouse receipts Settlement in the spot/derivatives markets should be based on warehouse receipts. This would reduce the costs of transacting in the market dramatically. Warehouse receipts from certified warehouses could also be used as a more efficient form collateral by farmers, which would reduce their borrowing rates with banks. This requires growth of the warehousing industry. New products, processes and technologyfor rural access to finance in India p. 16

17 Pros and Cons Pros: Commodity futures markets can offer farmers a robust mechanism to smooth their own income volatility, by reducing their exposure to commodity price volatility. Pros: These markets can also enable lending institutions to lower their costs of business and lower spreads on loans to agriculturalists. Cons: While futures and options have been traditionally been traded in India, the current institutions and mechanisms for trading these instruments is new. There has to be a strong effort to train both the farmer community and the lending community on the uses of these instruments. New products, processes and technologyfor rural access to finance in India p. 17

18 Weather derivatives New products, processes and technologyfor rural access to finance in India p. 18

19 The monsoon factor One of the largest factors driving systemic risk in India is the monsoon. The rural population has even more exposure to this risk compared with the rest of the country. How can we use advances in technology and institutions to address this risk? New products, processes and technologyfor rural access to finance in India p. 19

20 Weather derivatives: monsoon futures Monsoon derivatives can be a market instrument that can enable them to hedge against an excess of rainfall or a dearth of the amount of rainfall received in a region over a fixed period of time. The derivative will derive value as a multiple in rupees of the difference in the level of rainfall that fell over a period of time. New products, processes and technologyfor rural access to finance in India p. 20

21 Economic impact Since these contracts can be traded and settled on a national exchange, farmers can hedge their earnings against a good or a bad monsoon. Different climatic regions of the country can have different rainfall indexes. This can permit farmers in regions which had good rainfall to compensate farmers that received bad rainfall. This can be a market instrument for insuring against the monsoon risk! New products, processes and technologyfor rural access to finance in India p. 21

22 Overcoming the economic issues When these are traded on a national exchange, we will derive all the benefits of the commodity futures markets. Since the monsoon is a systemic risk that all participants in the rural finance area are exposed to, any instrument that can mitigate the impact of this risk will have the effect of reducing the cost of business in this region. New products, processes and technologyfor rural access to finance in India p. 22

23 What needs to be done Since the derivatives will be settled on an index, there will have to be an amendment to the SCRA before trading can be permitted on it. There has to be timely and accurate collection and dissemination of rainfall data if this is to be implemented. The derivatives market will only prove useful if it becomes a liquid with fair pricing. For this, contract has to be designed to suit the needs of the market well. Since the monsoon is a climatic event with a fair amount of vagaries, the issue of design of the contract becomes an important and difficult issue. New products, processes and technologyfor rural access to finance in India p. 23

24 Conclusion New products, processes and technologyfor rural access to finance in India p. 24

25 There has been progress made! Developments in both institutions and the spread of cheap telecom has had an impact in improving access to rural finance in the last five years. New products, processes and technologyfor rural access to finance in India p. 25

26 Missing holes In certain segments, the cost of funds has become lower for a set of the participants in the rural regions. Some of the case studies here addressed solutions in reducing income uncertainties of farmers, some addressed solutions that would enable collateralised credit. None of these solutions can actually replace the money lender in the rural regions today they still have a role to play. We need to develop institutions to get better access to financial services in the rural regions that will disintermediate/compete against the local money lender. New products, processes and technologyfor rural access to finance in India p. 26

27 Thank you New products, processes and technologyfor rural access to finance in India p. 27