Tag: financial services

Financial inclusion and cash

Varad Pande and Nirat Bhatnagar have an interesting Op-Ed today in Mint about financial inclusion, and about how financial institutions haven’t been innovative to make products that are suited to the poor, and how better user interface can also drive financial inclusion. I found this example they took rather interesting:

Take, for instance, a daily wager who makes Rs200 on the days she gets work. Work is unpredictable, and expenses too can be volatile, so she has to borrow money for buying vegetables, or to pay the doctor’s fees when her children fall sick. Her real need is for a flexible—small ticket, variable amount, rapid approval—loan product that she can access instantly. Unfortunately, no institutional channel—neither the public sector bank where she has a “no frills” account, nor the MFI that she has previously borrowed from—offers such a product. She ends up borrowing from neighbours, often from the local moneylender.

Now, based on my experience in FinTech, it is not hard to design a loan product for someone whose cash flows are known. The bank statement is nothing but a continuing story of the account holder’s life, and if you can understand the cash flows (both in and out) for a reasonable period of time, it is straightforward to design a loan product that fits that cash flow pattern.

The key thing, however, is that you need to have full information on transactions, in terms of when cash comes in and goes out, what the cash outflow is used for, and all that. And that is where the cash economy is a bit of a bummer.

For a banker who is trying to underwrite, and decide the kind of loan product (and interest rate) to offer to a customer, the customer’s cash transactions obscure information; information that could’ve been used by the bank to design/structure/recommend the appropriate product for the customer.

For the case that Pande and Bhatnagar take, if all inflows and outflows are in cash, there is little beyond the potential borrower’s word that can convince bankers of the borrower’s creditworthiness. And so the potential borrower is excluded from the system.

If, on the other hand, the potential borrower were to have used non-cash means for all her transactions, bankers would have had a full picture of her life, and would have been able to give her an appropriate loan!

In this sense, I think so far financial inclusion has been going on ass-backwards, with most microfinance institutions (MFIs) targeting loans rather than deposits. And with little data to base credit on, it’s resulted in wide credit spreads and interest rates that might be seen as usurious.

Instead, if banks and MFIs had gone the other way, first getting customers to deposit, and then use the bank account for as much of their transactions as possible, it would have been possible to design much better financial products, and include more customers!

The current disruption in the cash economy possibly offers banks and MFIs a good chance to rectify their errors so far!

Work Etc.

There are these days when you wake up and start wondering what the fuck you are upto. You start asking yourself why you are where you are, doing what you are doing. You ask yourself why you are not on that monthlong roadtrip of rural Karnataka, with the hope of maybe producing a shelf of books at the end of it. You ask yourself why you haven’t been doing stuff that you had promised yourself that you would do.

That new guitar has already started rusting, and the left index finger that you had cut the last time you played has long healed. The car mileage grows only in small increments – which approximately represents the distance you go to work. Half the days you cook rice, and mix it with copious quantities of Mother Dairy Dahi, and some pickle that has been sent from home. The other days you go to the same restaurant, sit at the same table and order the same set of items.

You are doing it for the sake of your career, you tell yourself. Career. Tha FUBAR thing. Which you are trying to marginally resurrect and repair by doing what you are doing, and trying to bring back to it some vague sense of recognition. You meet your friends. You hear them shag about their jobs. You hear about all the cool things that they are doing, and about how they are fast moving up the corporate ladder. About how you are a failure in life if you don’t work hard at this stage of life, and if you can’t win the rat race.

You meet friends’ friends. The first thing they ask you is what you do – and you are likely to get judged on that. So you need to make sure that you have a good story to tell about your job, which makes you sound cool. Coming up with formulae to price the movement of sacks of rice is not cool, as I found out. Financial services is usually met with a question asking you to predict the direction of the index. Sales is usually met with “the sun is very hot nowadays, no?”. And IT is met with “are you a Java coder or a C# coder?”.

Occasionally you want to get away from all this. These are the times when you accept that you are doing what you are doing because of the increments it produces in your bank balance. Sometimes you realize that the monthly increments in your bank balance are not enough; and some of those times you console yourself saying that you are doing this in expectation of larger inflows in the future. You consider your job to be an investment – that the dough you are not getting now will get more than compensated for later in your life. 

So when on certain days you wake up and ask yourself why the fuck you are where you are and doing what you are doing, you usually don’t have an answer. In those states of mind, “career”, “development”, “investment”, “corporate” etc. all don’t matter at all. Neither does “net present value of expected future earnings”. Your total costs look inflated. Your benefits look deflated. Every line of thought that runs in your head then tells you that you should go off into the Himalayas. You go to office instead. 

I’ll stop this essay here. In a forthcoming essay I’ll explain about how a job is essentially about costs and benefits, and why they use the word “compensation” to describe your salary. I have occasionally argued in the other direction, but thinking about it again, I think the word “compensation” with reference to salary package does make a lot of sense.