rural financial services and institutions (4)
TRANSCRIPT
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8/3/2019 Rural Financial Services and Institutions (4)
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Rural Financial Services
& Institutions What are we expecting in this course?
Part A: What are the financial services or
products?Part B: Financial Institutions delivering
these products
Part C: Delivering financial products to ruralclients (domain is rural area)
Prof. Rushen Chahal
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Rural Financial Services
& Institutions Market segmentation is very clear
rural clients
It is therefore, very important tounderstand characteristics of suchclients and their implications for
delivering financial products andservices by the institutions.
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Characteristics of rural
clientsWhat is your understanding about
Livelihood portfolio of rural clients
Income and investment Marketing of farm and non-farm products
Nature of borrowings and savings
Nature of risk and risk bearing ability Rural Infrastructure
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Characteristics of rural
clients Heterogeneous occupation: farm households, agribusiness,
non-farm enterprises, and landless workers Small, medium and large size of holdings Different cropping pattern
Variety of non-farm enterprises
Implications: Demand for financial products/services vary considerably
among the clients Diversified loan portfolio for financial institutions as per
the needs of the clients
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Characteristics of rural
clients Production, consumption, trade, savings, borrowings and income
occur in a very small amount. Clients are dispersed in a large area. There are high levels of risks.
Risk bearing ability is also very low.Implications: Scale of business with individual client is very low High average transaction cost both for client and financial
institution. Loan default risk is high for financial institution. Need for insurance products along with credit products. Portfolio diversification or need for partnership with other
insurance agencies
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Financial
Services/Products What types of financial products
needed by rural clients
What are the different attributes ofthese products? Basis for productdifferentiation and development
Importance of these products torural clients - Need
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Financial
Products/ServicesCredit
Savings
Insurance
Remittance services
Pension and Provident Funds
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DEMAND FOR FINANCIAL
SERVICES IN RURAL AREASAdjust to seasonal pattern of income and
expenditure - (smoothening the cash flow)
Adoption of new technology in farm sector(removing vicious circle of poverty)
Investment in non-farm sector(diversifying the livelihood portfolio)
Accumulation of savings (safe and reliableplace)
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DEMAND FOR FINANCIAL
SERVICES IN RURAL AREAS To transfer remittances reliable
method
Hedging against various risks personal, crop, livestock and assetsinsurance
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Role of Financial ServicesTo balance the income & expenditure over
life cycle reallocate expenditure acrosstime
Saving up keeping cash now to spend infutureSaving down borrowing against future
income
Savings as the basis of all financial services
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Attributes of financial
products - credit Purpose Repayment period Repayment Schedule
Collateral Tangible or intangible Minimum & maximum amount ceiling Documents needed Interest rate and subsidy
Cash and kind component Provision of Incentives and penalty
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Attributes of financial
products - savings Opening balance Minimum balance Minimum amount deposited per transaction
Frequency of withdrawals Overdraft facility Interest paid on savings Interest charged on overdrafts
Compulsory or optional Documents needed
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Attributes of financial
products - insurance Coverage
Premium
Frequency of premium
Benefit
Formalities required on claim
Individual or group
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Emergence of Financial
Institutions Emergence of structural transformation in
agriculture and economy as a whole
Features of structural transformation in Economy:
The size of non-agricultural sector rises relativeto that of agriculture sector
Agricultural employment declines relative to non-agricultural employment
Expenditure on agricultural products fall relativeto industrial and service sectors products.
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Emergence of Financial
Institutions These changes occur because
1. Low income elasticity of demand for foodand other agriculture products2. Specialization process in which many
economic functions performed by farm
households are transferred to specialistproducers
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Emergence of Financial
Institutions As agricultural income increased, demand for non-farm
sector products increased. Through savings, large amounts of capital were transferred
from the agricultural sector to finance non-farm sector.
Agriculture growth contributed to the emergence of theagro-industry sector. Increase in agricultural productivity permitted the release
of agricultural labor to rural non farm economy and urbanindustries.
Agricultural growth generated foreign exchange required
for industrialization
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Emergence of Financial
Institutions Structural transformation process requires
supportive specialized institutions in the form ofland, labor, finance and trade, in order to reducethe information cost.
These Institutions allow the specializedproducers and consumers to integrate and engagein transactions of heterogeneous set of goods andservices produced across space and time.
Over time, these markets multiply and become
more complex in response to greater variety ofdemand for goods and services.
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Role of financial
Institutions Mobilization of savings
Allocation of financial resources in
most productive way across spaceand time
Facilitate risk management
Facilitate the exchange of goods andservices
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FINANCIAL MARKETS Rural Financial Institutions
- Structure- Policies
- Products- Regulation- Innovations
Nature of demand of financial services Clients of financial institutions and their
characteristics Intermediation between demand and supply Sustainability of Rural Financial Institutions
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Promotion of Rural
Financial InstitutionsMultiple versus single agencies?Forms of organization of RFIs?
- Government- Cooperative- Private- Specialized Agencies
Organizational structure of RFIs?Density of field level RFIs?Functional structure of RFIs?
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Rural Financial System
Demand for Financial
Services by Rural
Clients
Marketing of
Financial Services /
Products
Need for Financial
Products
Characteristics of
Demand for financialproducts
Characteristics of Rural
Clients
Institutions
Policies
Products
Channels
Regulation
Innovations
Intermediation
Prof. Rushen Chahal