Unveiling the unrecorded: understanding the complex financial lives of India’s poor

How do the poor manage their money on a daily and a monthly basis? To what extent are their needs fulfilled by institutions? What do they do when banks and NGOs fail to help? What is the unmet demand in the services required by the poor and what can financial service providers learn from the informal sector?

A paper from the University of Manchester’s Institute for Development Policy and Management highlights the financial strategies of poor squatter households in Delhi and landless villagers in Utter Pradesh. Financial diaries tracing the transactions, needs and preferences of households from a range of backgrounds in terms of wealth, caste and livelihood are combined with interviews with those who lend to the poor. They highlight the scope for institutions to respond better to the high – currently unmet – demand by the poor for financial services.

Over the year during which poor people’s financial lives were analysed, the study identified no less than 48 types of financial service or device used by respondents. These ranged from taking an interest-free loan or saving with a money guard, to borrowing from a microfinance institution, saving with a self-help group, borrowing from a bank or opening a post office deposit. Most frequent was interest-free lending between friends, relatives, neighbours and colleagues..

Among the key findings were:

• On average, each household made a deal every two and a half weeks.
• While the poorest have the will and capacity to save, money put aside is too often snapped up by everyday costs or claimed by friends, relatives and household members.
• There is no difference between the better-off and the poorest in the frequency of financial dealings: both groups lead equally busy financial lives.
• Counting up all money brought in to the household (through borrowing) and taken out (through savings deposits and lending), respondents borrowed, saved and lent an average of Rs 48,000, close to 130 per cent of their annual income.
• Only a tenth of respondents, those fortunate enough to have assets, borrowed from banks.
• Perhaps surprisingly, the landless rural poor have more contact with formal finance institutions than the urban poor.

The study argues that because they limit security to land, banks miss opportunities to lend to those with secure incomes and liquid assets, such as traders, tenant farmers and other small-business people who are borrowing and repaying successfully in the informal sector. For their part, Grameen-style microfinance institutions are reaching only some of the poor. Their high-cost and labour-intensive ‘joint-liability’ approach excludes the poorest, who cannot take the risk of debt or of entering into strict repayment schedules, while imposing a cost on reliable clients who could be more cheaply and conveniently served on an individual basis.

Banks and microfinance institutions are urged to:

• recognise that their borrowing criteria rule out the assetless poor
• learn from moneylenders, frequently unfairly maligned, how to secure repayment using neither group pressure nor assets pledged as security, but through sound appraisal of income flows and regular collection visits
• realise that they will never succeed in bringing the poorest groups into the market without first developing a savings (or insurance-linked savings) strategy through which people develop an asset base placing them in a position to bear risk and future shocks.

Source(s):
‘Money matters: uncovering the financial life of the poor in north India’, Institute for Development Policy and Management, University of Manchester, by Orlanda Ruthven, Meenal Patole and David Hulme, 2002

Funded by: DFID (SSRU)

id21 Research Highlight: 26 February 2003

Further Information:
David Hulme
Chronic Poverty Research Centre
Institute for Development Policy and Management
University of Manchester
Crawford House
Oxford Road
Manchester M13 9GH
UK

Tel: +44 (0)161 275 2825
Fax: +44 (0)161 273 8829
Contact the contributor: david.hulme@man.ac.uk

Chronic Poverty Research Centre, IDPM, UK

Orlanda Ruthven
Queen Elizabeth House
21 St Giles
Oxford
UK

Tel: +44 (0)1865 273595
Contact the contributor: orlanda.ruthven@wolfson.ox.ac.uk

Queen Elizabeth House, University of Oxford, UK

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