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									                            Institute for Financial Management and Research
                            Centre for Microfinance
                            Thematic Fact Sheet 4: Inclusive Financial Systems – Improving the Lives
                            of Workers and Migrants with Formal Banking
                            CMF Intern: Ashok Rao


                                                       systems such as informal lenders, shopkeepers,
In this fact sheet, financial systems will be dis-     and the Earth itself? Most cannot open a deposit
Inclusive Financial Systems – what are they?

cussed to the extent that they play a crucial role     account due to the bureaucratic challenges as a
in the flow of remitted money in the context of        result of Know Your Customer (KYC) regulations.
government systems such as the National Right          Furthermore, they forgo an income for interest of
to Employment Guarantee Act and the social phe-        nearly Rs. 100 a month, a not at all insignificant
nomenon of rural-to-urban migration in general.        sum.

The microcredit project has evolved from a pro-        While the Rickshaw Puller survey may be prone to
gram limited to providing credit for income-           a selection bias, another randomized study con-
generating activities to a full movement with the      ducted evidenced some similar reports. “Putting
objective of providing the most crucial financial      Money in Motion: How Much Do Migrants Pay for
services to even the most economically removed         Domestic Transfers” conducted by the Center for
members of society. This fact sheet tries to cover     Microfinance notes that there is an inverse cor-
the relationship between remittances and rural         relation between convenience of remittance and
inclusion to formal financial systems. It will fur-    cost thereof. It was found that the median cost
ther explore programs that have a significant im-      of transmitting a normal remittance of Rs. 2000
pact to this effect, such as NREGA and Business        was Rs. 80, or 4%, indicating a willingness to pay
Correspondence Models.                                 for security and convenience.

Insofar as developing countries are concerned,         The figures are staggering: if migrants had ac-
the “inclusive financial system” movement is           cess to formal banking systems upon which they
most importantly linked with a) the flow of mi-        could rely for transferring money, they would
grant workers and b) the e-payment movement.           save in total almost Rs. 1000 crore (Tannirkulam
It is suggested that these policy changes and          et al.). This underscores the need of a cheap and
revolutions could save approximately Rs. 1 lakh        effective manner of transferring money.
crore per annum (Tilman et al, 2012).
                                                       Migration, Remittances, and Financial Inclu-

A qualitative study conducted regarding rick-          Another study (Anzoategui et al., 2011) hypoth-
Rickshaw Pullers in Delhi – a story                    sion

shaw-pullers in Delhi (Nandhi, 2011) sheds light       esized that there should be some link between
on the importance of remittances, and financial        flow of remitted money and “financial inclusion”
systems, to many migrant workers. Many of them         as defined by access to some formal financial in-
may consider shelter an “avoidable expense” in         stitution. Indeed, as would be expected, it was
their quest to send money back home. They work         found that remittances have a positive effect on
seven hours a day, usually sleep on the streets, eat   financial inclusion as a whole. The increased
fewer than three meals a day, and spend thriftily      money flow resulted in a greater demand for de-
so that they may remit money to their families in      posit accounts. To note, however, is that demand
rural India. They do all this without a bank ac-       for credit decreased because the credit restraints
count. Many actually report storing cash bills “in     were alleviated as a result of remitted money.
the mud”.
                                                       Financial inclusion is not only for migrants, but
Not surprisingly, their money is frequently sto-       may help even permanent workers in urban ar-
len. Why do they use informal and dangerous            eas. A case study conducted by the Center for
      Centre for Microfinance Fact Sheet Series

Microfinance (“Rethinking Reserve Bank of India        tween rural-to-urban migrant workers and
      Inclusive Financial Systems – Improving the Lives of Workers and Migrants with Formal Banking



Regulations for MFIs”) noted that there was a          NREGA (Papp 2012) yields useful insights for
positive correlation between those who had ac-         policymakers and researchers studying financial
cess to a formal banking system and the savings        inclusion among the rural poor. Briefly, NREGA
rate. Although this does not indicate a causal re-     is India’s largest public works program – as the
lationship per se, the increase in demand for sav-     name indicates, it is an off-season guarantee of
ings accounts would at least partly support the        employment to the rural poor.
claim that it is.
                                                       As per mandate, the government is required to
A large subtopic of financial inclusion discusses      provide 100 days of employment to those who
the technical advances necessary to ensure sound       ask for it, but in practice most states only achieve
implementation of banking systems. To this end,        around 35 days worked per-capita. It was further
there is a wealth of literature regarding current      established in this survey that this is not due to
Indian projects that strive to enhance financial       a deficiency in demand, rather due to a poor im-
inclusion vis-à-vis modern technology, for exam-       plementation suggesting a broken transmission
ple the Unique ID or e-banking (which would ide-       mechanism and other supply-side factors includ-
ally work in concert). Although red-tape through       ing dearth of political will and sufficient adminis-
policies such as KYC is a big reason the poor do       trative capacity.
not have bank accounts, other reasons include
lack of awareness and perceived lack of need.          However, despite the questionable implemen-
                                                       tation of the program, the study showed that
Studies by McKinsey and Co., however, suggest          NREGA has had a relatively significant effect on
that there could be incredible financial windfall      migration patterns across northwest India. As
for many stakeholders across India were there to       would be expected, migration in rural India is
be an e-payment system, allowing for frictionless      seasonal. During the harvest and monsoon sea-
remittances, safe ID with biometric scanning,          sons there are relatively plentiful opportunities
removal of corruption, and vastly improved effi-       for the casual workers therefore limiting the
ciency overall.                                        need for either NREGA or short-term migration.

McKinsey estimates that for an initial investment      However, during the agricultural off-season there
of Rs. 1 lakh crore (~$25 billion), there would        is a far greater demand for work than available.
be an Rs. 1 lakh crore increase in efficiency per      This is partially alleviated by the implementation
year. Government expenditure would decrease,           of NREGA. However, there is still a significant
migrants would not fear using banking systems,         flux of workers in the off-season (with approxi-
and many economic frictions would be removed           mately 80% of families having reported at least
altogether.                                            one member partaking in short-term migration,
                                                       wherein short term is defined as more than two
Other methods of financial inclusion include the       consecutive days but less than 11 months outside
Business Correspondent Model (BC). BCs capi-           of the village ). The importance of this vis-à-vis
talize on existing networks to roll-out “last-mile”    domestic migration is compounded by another
financial services. In effect BCs are external agen-   study (Johnson, 2009) that indicates that NREGA
cies that represent formal banks and carry out         allowed workers to compensate for exogenous
the relevant transactions in remote areas. For ex-     income shocks usually due to weather related
ample, Airtel could act as a BC in a remote village    events. Had NREGA not existed, migration rates
as a conduit for flow of finances through SBI.         and poverty levels might have gone up.

                                                       Of interest is that the study shows insofar as
A comprehensive study on the correlation be-           NREGA strives to increase the income of the ru-
Migration and NREGA – what’s the question?
      Centre for Microfinance Fact Sheet Series


ral poor, other programs such as cash transfers
      Inclusive Financial Systems – Improving the Lives of Workers and Migrants with Formal Banking



may be more effective. This is suggested because
                                                                          References

many of the rural poor said that they did (or          •   Anzoategui, Diego, Asli Demirgüç-Kunt, and
would if they had the opportunity to do so) stay           María S. Pería. Remittances and Financial In-
back in the village with NREGA employment as               clusion: Evidence from El Salvador. Working
opposed to taking an urban job that pays almost            paper no. WPS5839. N.p.: World Bank, 2011.
double the wage.                                           Print.
                                                       •   Ehrbeck, Tilman, Rajiv Lochan, Supriyo Sinha,
This suggests that migrant workers are facing
                                                           Naveen Tahilyani, and Adil Zainulbhai. Inclu-
significant “flow costs” as a result of migration
                                                           sive Growth and Financial Security: The Ben-
– an estimated 75% of their income! Therefore,
                                                           efits of E-payments to Indian Society. Rep.
NREGA is an effective program not only in that
                                                           N.p.: McKinsey and, n.d. Print.
it aggressively redistributes income from the
rich to the poor in the village, but it also curbs     •   Johnson, Doug. Can Workfare Serve as a Sub-
the incidence of migration. As accepted by Papp,           stitute for Weather Insurance? The Case of
NREGA is successful to the extent that it strives          NREGA in Andhra Pradesh. Working paper
to mitigate the negative effects of migration.             no. 32. Chennai: Institute for Financial Man-
                                                           agement and Research, 2009. Print.

A CMF (Tannirkulam et al, 2011) study conclud-         •   Kc, Deepti and Rao, Ashok, Rethinking Re-
Conclusion

ed that the two most important factors migrant             serve Bank of India (RBI) Regulations for
workers consider while remitting money are se-             MFIs. Policy Memo, Center for Microfinance,
curity (by far) and then speed of delivery. Cur-           2012.
rently, the prevalent mode of transport are Ha-        •   Nandhi, Mani A. The Urban Poor and Their
wala Couriers. Banks are not used despite their            Money: A Study of Cycle Rickshaw Pullers in
lower costs, security, and speed as they are usu-          Delhi. Rep. N.p.: Microfinance Researchers Al-
ally not available in the villages to which money is       liance Program, 2011. Web.
being remitted. That being said, the proliferation
of the “Business Correspondent Model” might            •   Papp, John H. “Essays on India’s Employment
allow for money to be remitted through formal              Guarantee.” Diss. Princeton University, 2012.
banking systems with the current technology.               Print.
                                                       •   Sinha, Abhishek. Interview by GE Balajee.
Current policy recommendations follow the
                                                           IFMR Trust. Institute for Financial Man-
standard claim of increased access to a formal
                                                           agement and Research, 07 Apr. 2012. Web.
banking system, more bank branches, distribu-
                                                           <http://www.ifmr.co.in/blog/2011/04/07/
tion of ATMs, etc. However, modern technology
                                                           banks-can-do-more-on-the-business-corre-
will allow a villager to be “financially included”
                                                           spondent-front/>.
with nothing more than a phone and a finger-
print.                                                 •   Tannirkulam, Ajay, Shreyas Gopinath, Justin
                                                           Oliver, Supriyo Bhattacharya, and R.R. Kulkar-
                                                           ni. Putting Money in Motion: How Much Do
                                                           Migrants Pay for Domestic Transfers? Rep.
                                                           Chennai: Institute for Financial Management
                                                           and Research, 2011. Print
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