RDI ASSIGNMENT - 2

Payment and Banking System in Village

Mithrau, Barmer District, Rajasthan

SUBMITTED TO:

Prof. H. S. Shylendra

Submitted BY:
Ruchi Shinde (P39045)
 CONTENTS

S.NO. TOPIC PAGE

1 Introduction 3

2 About Mithrau 4

3 Methodology and key findings 6

4 Inferences and problems identified 8

5 Proposed alternatives 9

6 Conclusion 11
 INTRODUCTION

This report summarizes our work and findings under the Rural Action Component
(RAC) assigned to us by Rangsutra Crafts India Ltd. during our stay at village
Mithrau, Barmer District, Rajasthan.

The study involved studying the current status of financial inclusion in Mithrau and
proposing a mechanism for Rangsutra to be able to make payments to the artisans by
transferring money directly into their bank accounts. The purpose of this study is to
eliminate the issues involved in immediate cash payments which enforce short
payment cycles for Rangsutra. Shorter payment cycles lead to inefficiencies in the
system.
 ABOUT MITHRAU

Mithrau is located in Barmer, the western-most district of Indian state Rajasthan and is
a part of Chohtan tehsil. The village is settled near the Indo-Pak international border.
History of the village dates back to Indo-Pak wars in 1965 and 1971 which shaped the
current settlement patterns of areas in and around this village. The place was named
‘Mithrau’ (‘meetha pani’ is how soft water is referred to as in hindi, hence the name
‘Mithrau’

Spread across an area of 9212.38 acres, the village comprises of approximately 1200
households with an estimated population of 8000 individuals. Since the region
receives rainfall below potential evapotranspiration but not as low as a desert climate,
the climate here is considered to be semi-arid.

The village has its own Atal Seva Kendra (panchayat office), a PHC, a veterinary
hospital, a post-office, six Anganwadi, five government schools- two primary, one
middle, and a senior secondary school, and a secondary private school. There is
absence of any formal or informal financial structure in the village. The nearest
counter-service is available in Choutan which is approximately 40 km from the village
and it takes roughly 4 hours for a round trip, excluding waiting time. For money
withdrawal purpose, there is a banking correspondent appointed in the village.

Currently, most of the households in the village have a diverse livelihood portfolio.
The members of the households are engaged in various activities with agriculture and
animal husbandry being the ones most practiced. The village also has a mix of salaried
workers (teachers, postman, medical officer and nurses) and daily-wage agricultural
labourers. The village has a large number of skilled artisans, mostly women, who
specialize in special form of embroidery called ‘Kasheeda’ and many of them are
working under a tie-up with organizations which provide them a source of income.
 METHODOLOGY & KEY FINDINGS

In order to financially include the unbanked region, banking correspondent (BC)

model was implemented in the village. At the outset, literature review was conducted
to understand various issues related to financial viability of the BCs, special focus was
placed on customer service, existing regulatory framework, issues of clients.

Of the two BCs and two CSPs in the village, we approached and interviewed two of
them. The methodology we used was semi-structured interview. Before conducting
interviews, we prepared an interview guide to help us direct the conversation towards
the topics and issues we wanted to learn, which included the following questions.

I. How BC model works and problems faced by them.

J. What is the process and eligibility for CSP appointment?
K. How frequently villagers approach them and for which services.
L. What is the commission structure and which services are rendered, etc.

According to the CSP and BC, number of CSPs have increased in the village thereby
increasing the competition among them and reducing the commission rates that they
take from clients. BCs or CSPs transfer money from client’s to their own bank account
and give money kept with them to client. Although services that they render are
withdrawal and deposit, people of the village only approach them for withdrawal.

The third methodology that we adopted was focus group discussion (FGD). Female
FGD was conducted amongst 11 women of the future work centre of Roshni and male
FGD was conducted amongst government officials (principal of government school,
gram sewak), private school teacher, and cultivators. Mostly people approached BC
only for withdrawal of money related to MNREGA and scholarships. All the females
and nearly about half of the men were unaware about the deposit services provided by
the BC model. Males who were aware about the deposit services also preferred
withdrawals only. Some males were even reluctant to use BC model as CSPs
sometimes takes a day or two in handing over the money to them.
 INFERENCES AND PROBLEMS IDENTIFIED

Agents are facing a multitude of problems, of which the most prominent are cash
management and liquidity issues. Despite the immense potential of the BC model in
promoting financial inclusion in India, surprisingly little effort has been made to
promote the model and its benefits in rural areas. This is because neither the banks,
BCs nor CSPs are willing to invest time or money in promoting the model and its
product and services. Moreover there is a dearth of financial literacy amongst clients
regarding the usability of the services.

Agents are struggling to make their work profitable and financially sustainable as the
current commission structure is inadequate to cover agents’ costs. This is the main
reason of corruption amongst service providers or agents. Agents are charging
commission from the clients and this commission rates depends on the service
rendered and on the amount deposited or withdrawn. This practice of taking
commission is taken as a norm in the village as there is lack of financial literacy and
awareness amongst villagers.

BCs are supposed to provide tiered commission structures and remunerate the agents a
percentage of the value of deposit or withdrawal facilitated. These commission
percentages vary from 0.2 % to 0.5% or a flat rate per transaction can also be paid and
these rates are usually higher for withdrawals than deposits. The agents in the village
are not getting any commission from the BC for the transactions, this led CSPs to take
commission from clients. No commission from BC leaves CSPs with lack of
motivation to work, hence low efficiency.

As observed from the FGDs, some villagers do not trust BC model. Earlier there has
been incidences of fraud and looting villagers by the then BC, which has created
mistrust amongst them. Later on that BC left the village but mistrust for the BC model
still persists to some extent. Due to this mistrust villagers do not prefer depositing
money via BC model rather they go to the nearest bank in chohtan (40 km away).
 PROPOSED ALTERNATIVES

Even though the BC model is present in the village and functional, sustainability of
the model in near future may be difficult. The absence of any kind of financial service
in the village would create a predicament for the households. They would have to
travel forty kilometres from the village to Choutan just to withdraw or deposit cash.
This would mean loss of a day’s wage. In order to counter this problem, we have come
across few feasible solutions which are discussed in this section.

 ATM-on-wheel
“ATM-on-wheels” is a part of bank’s financial inclusion plan to promote banking
services in remote villages. The idea is to provide door-step services to the villagers.
This proposal would not only benefit the village in study, but also, its neighbouring
villages.
This plan can be implemented in such a way that the ATM is operated at a specified
time in a particular village and then provide the services in other nearby villages as
well. The ATM can visit the village weekly or fortnightly as per the plans of the bank.
There are few disadvantages to this plan, one of them being the low frequency of
services. Since the villages we are talking about are very remote, there might be safety
risks involved in sending the ATM vans this far. Also, the banks would incur huge
costs if this plan is to be implemented.

 Private Payments Banks

This is an initiative taken up by RBI to promote financial inclusion. Payments bank is
different from a traditional bank in a sense that it doesn’t require physical presence in
the area in order to render its services. The cost of setting up a payments bank is
negligible, as it can be operated through the existing business points (for example,
Airtel recharge stores in case of Airtel Payments Bank). A person can withdraw money
and transfer money to another bank.
The disadvantage with this plan is that the customers are charged for inter-banking
transactions and withdrawals. Also, unexpected cash crunch at shops can be a
problem.

 India Post Payment Bank

A very recent initiative, governed by the RBI, where the Indian government holds
100% equity. Through this initiative, the government seeks to leverage the
infrastructure, personnel and reach of Indian Post. It offers a range of products and
services including savings and current account, money transfer, direct benefit
transfers. These products, and related services will be offered across multiple
channels. Since this plan is in its very initial phase, it is difficult to comment on its
functionality and success probability. But this seems to be a promising initiative.
 CONCLUSION

Based on our findings, it was concluded that the BC-Model is currently functional in
the village and is being actively used by the villagers. The problem lies in the
inefficiencies involved in this model.

The BC model fails to appropriately incentivize the correspondents for rendering their
services. This results in low retention rate and degradation in quality of service. Since
the job is perceived to be unrewarding due to unprofitable returns for correspondents,
the motivation levels are poor. This can safely be termed as a ‘system failure’ for this
model. Lack of a supervision mechanism makes this system highly vulnerable to
corruption which may discourage villagers from making use of this facility.

Rangsutra engages with female artisans, mainly housewives and young women of
employable age. The demography of Mithrau is such, that every household has fair
number of women of whom most are educated but do not take up jobs due to
constraints imposed by their social norms. This factor should be leveraged by taking
such educated artisans as point of contact for payment purposes. These individuals are
relatively comfortable with technology and can use the BC model services effectively.
Based on the responses we received during interviews, receipt of payments for the
villagers often involves long and irregular waiting periods. This is majorly due to their
dependence on a third person involved in facilitating this cash transfer from Rangsutra
head office to the village.
SHORTER TERM SOLUTION
According to our suggestion, Rangsutra should switch to bank transfers in place of
cash. Instead of transferring the payments to every artisan’s account, they can rather
transfer it to the accounts of POCs (person of contact). This can be the same individual
to whom the cash amount is handed-over currently, the household that artisans already
trust. The educated POCs who are also ones working amongst these artisans, can
manage the distribution of payments at the other end.

Since the BC’s receive their commissions from banks based on number and amount of
transactions they facilitate, they would be eager to undertake these regular transactions
that would help them increase their earnings. As number of BC’s available for this is
also fairly good, this will give the villagers bargaining power and open-up the
opportunity for negotiation. Hence, providing bargaining power along with incentives,
the reduction of their costs should be left to the beneficiaries themselves and with
opportunity for the BCs, how they maximise their share of business from it should be
left to them.

Using this methodology, Rangsutra can remove an extra step involved in making the
payments (through middlemen) which will reduce delay as well as cash transactions.
Since this also reduces the artisans’ dependency on a third party for receiving their
pay, this system will be supported by the end users. To verify this, the same questions
were posed to the artisans during their interviews. The responses received were
positive thus substantiating the aforementioned argument.
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