What kinds of financial products do poor people need?

Editor's note: This is the fifth post in a series on Grameen Foundation India’s journey with an Indian microfinance institution, Margdarshak Financial Services Pvt. Ltd, (Margdarshak) as we help it transform from an organization focused on credit alone into a sustainable and scalable business correspondent of a commercial bank, serving poor customers. You can read blog 1, blog 2, blog 3 and blog 4 here.

With support from the MetLife Foundation, Grameen Foundation India is helping Margdarshak to work with commercial banks, providing needed savings and other services to at least 40,000 poor women clients in the northern state of Uttar Pradesh. One of the first questions we have addressed is: What kind of financial products do the poor need?

There is no simple answer. Developing financial services for people who live on less than $2.50 a day requires deeply understanding their situations and perspectives.  It requires research.

Therefore, in preparation for the project pilot, in December 2015 we spent four days with our research partner Propellerfish, in and around the city of Lucknow. We interviewed more than 69 women rural and urban borrowers of Margdarshak, their husbands and their sons to better understand the financial needs of Margdarshak’s clients. We spent time with them in their homes, at their businesses and in their communities to understand how they go about managing their finances and planning for their futures. Our research goal was to uncover opportunities for new non-credit financial services that Margdarshak could offer in partnership with banks. 

Lucknow is the capital and largest city in the state of Uttar Pradesh. Historically, the city has been an important administrative and cultural center. It is now emerging as an important manufacturing and information technology hub. The city is also known for its artisans and handicrafts, and accounts for 60 percent of Uttar Pradesh’s handicrafts exports. Some one-in-five residents live  below India’s National Tendulkar poverty line (2009). The city’s poor are primarily employed in the handicrafts sector or are self-employed and earn daily wages  as hawkers,  mechanics, drivers, carpenters, and construction laborers. 

Here is what our research told us about the financial services needed by poor people in Lucknow and Uttar Pradesh.

Progress is relative
Most of the women we spoke to had experienced some form of economic  progress, but women in urban areas enjoyed relatively more freedom, and benefitted from higher financial literacy and higher standard of living than their rural counterparts.

“It would be nice to have a place where we can store the statues we make. Then we could make more of them.” Margdarshak borrower
 

Enterprising. Not Entrepreneurs

Many of the women we spoke to, particularly in urban areas, supplement the family income by making and selling crafts, but talk of scaling those activities into a business was rare. Some women desired bigger loans in order to buy more raw materials in order to expand their businesses.

“This guy came in and sold us a product. It sounded good.” Husband of Margdarshak borrower who lost INR 26,000 in a  scheme

Lack of information puts poor borrowers at high risk of mistakes
A lack of information and exposure to fraudulent financial products left many borrowers feeling more vulnerable to scams and less confident in their ability to make good decisions. Rural borrowers suffered the most from a lack of information, which likely drives the disparity in proactive financial behaviours between urban and rural borrowers.

“If I pay this money for the insurance, do I get interest on that money when I withdraw?” Husband of Margdarshak borrower 

The concept of insurance is abstract
Many of the rural and urban poor consider savings as their key strategy for managing risks, while insurance products come across as fairly abstract. The idea of paying now for protection against a future uncertain event is not something that these borrowers intuitively accept.  

The unexpected always undermines ambitions to save
Rural and urban borrowers voice common financial goals – they save for their children’s education and marriage. However, unforeseen life events such as medical emergencies often cause families to dip into their savings, foiling their financial goals. A single family medical emergency can cost as much as INR 30,000, which amounts to almost six months of carefully saved money.  

“We always try to save for things like education but then someone gets sick and you have to withdraw.” Margdarshak borrower 

“I like Margdarshak. We know them, but we don’t have good experiences with private institutions and savings so I would hesitate unless you start with something small.”  Husband of Margdarshak borrower 

A general distrust of private institutions
While borrowers hold very positive feelings towards Margdarshak, past experience and stories from friends have left them with little trust in private financial institutions when it comes to savings. As a result, a public bank would be a preferred partner for Margdarshak for this type of venture from a perception standpoint.

“I like that we only have meetings once a month because I don’t have time to sit in centre meetings, but I wish we could get larger loans.” Margdarshak borrower, Urban Center 

Graduating out of MFI, but not quite ready for a bank
Many borrowers, especially urban ones, want services beyond what microfinance institutions offer (i.e., bigger loans) but feel unqualified or uncomfortable to borrow from a bank due to documentation and collateral requirements. They primarily want higher ticket size loans to finance their enterprises. Currently, they fulfill such requirement by borrowing from multiple microfinance institutions, however, the amount is still not sufficient. 

“I use my phone to access Facebook” Only Margdarshak borrower with smart phone

Technology usage remains limited
Phones are still mostly in the hands of husbands, and wives only rarely have access. However, women in cities are more likely than rural women to have basic mobile phones, or even the occasional smart phone and social media account.

Based on these and other research findings, we have distilled seven key principles that need to be incorporated into a successful non-credit product offer from Margdarshak. They will guide our product design efforts. 

1. Make savings easy. Borrowers want to save but find it hard to remain on track towards their savings goals. There is an opportunity for a savings offering that delivers the ease they need to get started, by allowing women to regularly save small amounts that are committed to a particular goal, such as college tuition for their children. 
    
2. Help mitigate the biggest financial risks (i.e., medical emergencies). Many borrowers view their savings accounts as insurance first and goal-oriented savings plans second. A simple insurance product can address their pain points, but borrowers lack awareness and education about insurance as a concept, especially for non-life (general) insurance products such as health insurance. However, most of them are aware and have invested in savings cum life insurance (endowment plans) products offered by Life Insurance Corporation of India (LIC).
    
3. Reassure people that they will achieve their most important financial goals. Goal-based savings products would be highly relevant to this group of borrowers.  Products whose goals align to clients’ biggest family priorities--their children’s education, weddings and family health--would be especially valuable.
    
4. Give clients products that reflect their financial progress. Many of the clients we interviewed expressed loan requirements beyond the limits of the services offered by microfinance institutions, but were not ready to approach banks directly for the loans they need. Margdarshak could bridge this gap by graduating  its group client for higher ticket size financial services targeted at individuals.
    
5. Build trust by partnering with public institutions. Leveraging the trust borrowers already place in it, Margdarshak could partner with a public bank to launch its non-credit products.
    
6. Educate clients on a range of financial products. Borrowers need to be educated on the value of financial services in building a more prosperous future so they can engage with non-credit financial products with confidence.
    
7. Give people--particularly rural borrowers--the confidence of feeling smarter and safer together. The people we spoke to, especially those in rural areas, feel more comfortable borrowing alone and saving in groups. Designing non-credit products that people can access through group settings helps them overcome their initial hesitation.

Our assessment is that the most useful financial products for this population would be those that help them to save more effectively, while also allowing them to manage unexpected threats. If we are able to protect their savings from unpredictable life events (especially medical emergencies), we can help these clients take a more empowered approach to planning their futures.

We are currently exploring opportunities to partner with mainstream financial institutions to offer non-credit financial services to Margdarshak clients. To start with, we plan to roll-out a commitment savings product.  

Watch this video to learn more about our research findings.