{"id":90978,"date":"2017-04-24T12:00:37","date_gmt":"2017-04-24T11:00:37","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=90978"},"modified":"2017-04-21T16:35:07","modified_gmt":"2017-04-21T15:35:07","slug":"what-indias-poor-really-need-is-microsavings-not-microcredit","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2017\/04\/what-indias-poor-really-need-is-microsavings-not-microcredit\/","title":{"rendered":"What India\u2019s Poor Really Need Is Microsavings, Not Microcredit"},"content":{"rendered":"

\u201cWhen people have reliable access to savings, they don\u2019t risk total destitution if there\u2019s a death in the family or a bad crop.\u201d<\/em>
\n— Melinda Gates<\/p>\n

\u00a024 Apr 2017 – <\/em>There\u2019s an old saying about poverty:\u00a0<\/em>Give me a fish, and I\u2019ll eat for a day. Give me a fishing rod, and I\u2019ll eat for a lifetime.<\/em><\/p>\n

There are many variations in this theme.<\/p>\n

But these days, particularly in India, there\u2019s evidence that one of the most effective tools to fight \u00a0\u00a0poverty may not be \u00a0\u00a0a fishing rod, but a savings account. What we need is a savings revolution.<\/p>\n

India\u2019 Prime Minister Narendra Modi was the first world leader who recognized the enormous power of a saving account. His dream project -Jan Dhan Yojana -magically transformed the Indian saving account landscape and set an epochal milestone. Within three years, more than\u00a0270 million\u00a0bank accounts have been opened. Modi himself signaled the new revolution as an end to \u2018financial apartheid\u2019.<\/p>\n

Policymakers often do not figure in stories of innovation, disruption and change. In fact, they are often seen as stewards of the status quo, enemies of progress. Not anymore. The Jan Dhan Yojana has proved they could be game-changers for financial inclusion. Until now, even state-owned banks have balked at reaching rural and poorer parts of India.<\/p>\n

I remember in my secondary school days we saw a bank as a place to save; they would take good care of \u00a0\u00a0money, and might even add a little to it, and perhaps we could take some of the money out one day.<\/p>\n

When I first opened the account of my own I received a little booklet, the ubiquitous passbook, in which every deposit and withdrawal was acknowledged by the bank staff. I learned that keeping track of the transactions was the personal hygiene of finance, like brushing your financial teeth. The implicit message, not just for me, but I think for society at large, was that the bank account was the locus of money management. All one\u2019s main financial transactions would pass through the account, and the account would serve as a barometer of our financial health.<\/p>\n

So my own and maybe most the people\u2019s first view of a financial institution was that it was a place to save. Borrowing might come later, but much later, and the purpose of saving was not to qualify for borrowing; it was a useful thing to do for its own sake.<\/p>\n

Why should it be any different for \u2018the poor\u2019?<\/p>\n

Much of the world is in trouble today because of debt, too much borrowing, presumably not enough saving.<\/p>\n

More than three decades back the most popular retail banking product was the pygmy deposit account. Housewives would scrape together few rupees every day to give to a savings collector who would visit their homes. The money was deposited in a bank account that paid interest and was insulated from the daily demands of life.\u00a0 The depositors squirreled away a decent sum by the end of a year\u2014 enough to buy a home appliance. The simple enough motivation was: Saving money, even if it\u2019s only pennies at a time, is a guaranteed way to build wealth.<\/p>\n

The field of microcredit was born from a radical concept: poor people, when lent small amounts of money, pay it back in a timely manner. In the meantime, that money can be put to use in ways that help boost income \u2014 goat-farming, say, or carpet-weaving \u2014 and, ostensibly, raise a family’s standard of living.<\/p>\n

The great global rush to pour billions of dollars into microcredit to help the poor all but bypassed the basic building block of financial health: microsavings. The tide is now turning, sparked in part by microcredit’s discredit. We all now know that there may be families who have the savvy to benefit from loans, but there may be many\u00a0\u00a0 who can be ruined. On the contrary, every family in the poor world can benefit from a pad of savings. Sadly enough, microfinance is still mainly microcredit, that is, as David Hulme, the great microfinance specialist has been emphasizing \u2018microdebt\u2019.<\/p>\n

As\u00a0impoverished borrowers began defaulting on debts at alarming rates\u00a0in recent years \u2014 sometimes with fatal consequences \u2014 many organizations began questioning the power of credit. It led to some industry soul-searching and to the rediscovery of a new radical idea: that the thing people really need, more than business loans is a safe place to save their money. It’s what development expert Robert Vogel famously called the “forgotten half of rural finance.” \u00a0It is now being universally acknowledged that the most basic and universal instrument of personal finance is: the piggy bank.<\/p>\n

One of microfinance\u2019s leading industry experts Elizabeth Rhyne echoes the chorus: \u201cwe have discovered that some of the basic premises of microfinance that we took for granted were flawed or incomplete. I was a big proponent of microfinance for many years, and I accepted all these premises \u2014 and now when I look back, I think it should have been obvious that there were some problems.\u201d<\/p>\n

She says: \u201cPeople also need savings as a way to build assets; savings is the flip side of credit. If you have more savings, you need less credit. And if you have more savings, you can qualify for more credit.<\/p>\n

Access to the right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. The poor don\u2019t need simple banking tools; they need\u00a0\u00a0 tools that can help them navigate their complex financial lives that are marked by many financial needs and inconsistent income. \u00a0The reasons for erratic income streams are many, including seasonal unemployment related to the agricultural labor cycle. Given the variability \u00a0\u00a0of their income, the poor \u00a0\u00a0are vulnerable to a number of disruptive events like sickness or death in the family or weather shocks among many others which overwhelm family finances and may prevent families from hanging on to accumulated assets (including productive assets). These adverse shocks can quickly sink families into spells of extreme duress. As a result, the poor lead precarious, anxiety-ridden lives with risks looming much larger than opportunities.<\/p>\n

The benefits of microcredit are often extolled, but debt remains debt \u2014 it always increases risk and borrowers are sometimes overstretched… Savings help people manage risk. And savings matter, especially to women. Even in traditional societies, no matter how oppressed women are or how unschooled, they are often stewards of the family savings.<\/p>\n

Villagers cope with a veritably biblical range of hazards. Nature delivers snakes, scorpions, malaria droughts, floods, hurricanes, tuberculosis and diseases that ravage crops and animals. And then there are the less natural risks from wildly fluctuating commodity prices to environmental shocks. Families are normally financially prepared for education and marriages but health tragedies are usually wild surprises.<\/p>\n

Credit can be both an opportunity and a risk for low-income families .It is necessary to open doors, but it can also be a barrier. You can dig yourself into a lot of debt, and that keeps you from moving up financially\u00a0Loans can be malignant.\u00a0 Some people shouldn\u2019t take on debt.\u00a0 Some businesses are too risky.\u00a0 And the temptation is always present to take these costly loans and scrimp on groceries. When they miss loan payments because a lingering illness keeps them away from their business, they get into regular default cycle .That\u2019s acute <\/em>over-indebtedness.<\/p>\n

Painting all the women in the world as a creative entrepreneur doesn\u2019t actually make them so. They are tenacious, heroic and gritty, all right- given the struggle they lead against\u00a0\u00a0 poverty \u2013 but we all know that entrepreneurial ventures have a high mortality rate in villages. And\u00a0\u00a0 few can deliver the kind of returns one requires to be able to pay back interest rates of around 24% .Given that much of the\u00a0\u00a0 money is actually used for consumption, the chances of getting into debt are always high. Many women admit that while they pick up the loan money, their husbands control it; that they lie to the loan officer, or he is complicit, when they say they will start a small poultry business but actually use the loan for dowry for their daughters; that they have been victims of harsh collection practices by ruthless loan officers.<\/p>\n

The proponents of savings argue that\u00a0\u00a0 what people really need, more than business loans, is a safe place to save their money. It’s what development expert Robert Vogel calls the “forgotten half of rural finance.” Early adopters of what’s sometimes called savings-led microfinance find that the demand for savings accounts far outstrips the demand for loans. \u00a0Research shows that when they are offered side by side with loans, people chose savings over loans at rates of up to 12:1.<\/p>\n

Saving is a vital way for poor for cushioning such shocks .Savings increase their capacities to manage\u00a0\u00a0 cash-flow,, smooth the bumpiness of uneven incomes, reduce the impact of the lean season, become more resilient in the face of unexpected shocks, build assets or invest in a family business and most importantly, perhaps, become empowered to\u00a0\u00a0 improve their status in their households and communities.. A safe and smart savings account can transform villagers\u2019 lives.<\/p>\n

Savings also serve as a form of self-insurance and enhance the sense of well-being. They are a gateway to self-employment and job creation \u2013 \u00a0\u00a0encouraging and enabling families to imagine a future better than the present, and to prepare and plan for that future. Lower-income families can convert savings into home purchases, education and microenterprise.<\/p>\n

The key to effective financial inclusion is a safe and confidential savings account for every woman. The older ones advise the younger ones to keep a store of value that other family members don\u2019t know about. When there is an emergency, they will appreciate you.<\/p>\n

Despite conventional wisdom, poor people actually do save, even if it’s just pennies each day. They use a variety of informal mechanisms: hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors, buying livestock or other physical goods such as jewellery or construction materials. This surprising diversity of savings mechanisms is in fact because none of them is reliable and safe.<\/p>\n

For many, the answer is to tie up money in livestock, which can be sold if necessary .In agricultural economies which are served by patchy banking networks that make access to banking quite difficult, the most preferred investment is a cow. There are\u00a0\u00a0 seven ways a cow can help poor people restrict spending and save:<\/p>\n