The Development Divide

The recent announcement of the cheapest mobile phone handsets by Reliance set me thinking. This is development. Telecom has been one of the hallmarks of our development. The growth and reach have been so dramatic that today mobile phones have tremendous outreach, to all sections of the society. Be it a business tycoon, a housewife, a school teacher, college going students, a housemaid, rickshaw puller......it has made communication within reach to all and sundry. Not to mention the dropping call rates that have made distances shorter.

The same trend can be seen across many sectors. Things once viewed as luxury items are all within the common man’s reach. Be it television sets, refrigerators, computers, branded clothing, air travel (another major revolution) and the like. The sharp reduction in the prices of all these items within a short span of time has brought all these within reach of the common man. Now, my contention here with all this is, who do we consider to be the common man.

While it is true that the prices of the above items have been coming down, at the same time it is also true that inflation rates have been going up drastically, and prices of essential commodities have been going up. Cost of food grains and vegetables have gone up. Real estate prices are at an all time high. Costs of day to day household goods are increasing. Subsidies are coming down. This now means that sustaining the household at the basic level is becoming more expensive. After this basic level of sustenance is achieved, it becomes much easier for the household to then acquire the items that were once supposed to be more prohibitively priced like telephones, televisions, air travel etc. The different trends across these two segments of products point towards a dangerous trend. While it is becoming more and more difficult for the poor to sustain even the basic needs of the household, the standard of living of the lower middle class to the higher classes keep on increasing, and yet we talk about bridging the gap between the haves and the have-nots.

What efforts are we taking to correct the above anomaly? Practically nothing, in fact, in our scramble for development, we are fuelling this divide even more. While it is true that mobile telephony, real estate and aviation are revolutions of our time, and the cost of automobiles, air conditioners internet usage etc. have brought them within reach of a large mass, and that is a healthy trend, it is also true that there is some correlation between the trends of the two segments.

With the retail boom, industrialization, urbanization, the property prices have soared, which has made it difficult for a common man to acquire shelter for himself. Also, with acquisition of more and more land (including agricultural land) for industrialization, the costs of agricultural produce have gone up. Rapid urbanization has led to migration from traditionally agricultural belts. This again leads to rise in prices of agricultural produce. It does not help that with increasing population, the sizes of land holdings are coming down, making agriculture unviable. Government support for SEZs, in agricultural areas, not only leaves the farmers to fend with more problems with livelihoods, it also gives industries more incentives, hence bringing down their prices but leaves lesser land for agriculture and increasing the costs for farm produce. Also, with subsidies coming down in agriculture, there are lesser incentives and increasing costs in agriculture.

While it is true that support to industry is imperative for growth and development, it should not come at the cost of agriculture and the primary sector. We need development, and costs of mobile phones to come down, but the development has to be balanced and not increase the divide between the haves and have-nots. Only if there is a balance can we say that we are truly developing and only that will lead to a healthy society and sustainable development.

It’s a Quality vs. Price debate, Even for the Poor

While most people believed that the poor are highly price sensitive, microfinance has proved that this might not always be the case. Yes, the poor will choose the best deal on offer, and that may not always be the service that is available at the lowest price, and they are ready to pay a premium. There are various reasons and issues why this happens.

Let us first see what would happen if the poor do not have access to financial services at all as against paying for an expensive service. The poor has acute need for these services and even a high price justifies their opting for an expensive service. In case of emergencies like illness or death, there is no other option but to avail of such services, as not having any access to finance at such situations would have highly negative consequences. The other kind of need is that for education, housing, festivals, weddings etc. Just because someone is poor does not mean that he/she does not have any aspirations. Spending on these assumes great importance for these people and they do not mind paying higher rate of interest as long as they can access such services. The third, and probably the most frequent and important cause for which the need for such services arise is that of working capital or income generation needs. It has often been observed that the small businesses yield high returns, not on an absolute basis but on a percentage basis, and these returns are much higher than the high rates of interest charged on loans for these purposes, which is why the client is ready to pay that rate rather than go without doing the business. It is exactly for this reason that many people borrow from moneylenders rather than go without credit, even though the rates maybe usurious. Thus there is a huge scope for MFIs to operate, even at a little higher rate of interest, if they provide a high quality service and provided there are no political issues.

Let us take the other case, where there are many financial service providers in an area. On what basis do the poor choose their ‘bank’? I have been a part of many discussions with the clients as well as in various forums, and have found that the price charged for the services are very low on the priority list for selecting a service provider. While in many cases the clients demand a lower rate of interest, it is often seen that while actually selecting a financial product, they mostly go for a service that provided them more convenience and reliability, even if at a slight premium. While going for the financial products, the following is mostly the order of priority for the clients:

· Reliability

· Timeliness

· Adequacy

· Relevance and suitability

· Time taken to process applications

· Collateral requirements

· Simplicity

· Ease of repayment terms

· Product delivery mechanisms

· Bouquet of services available

· Behavior of staff

· Returns/Interest rates

We can thus see that price is at the bottom of their concerns, though it must be said that it is an important consideration. Now let us see what choices are there in front of the clients in terms of financial service providers. Let us start with banks. While it is inaccessible to most from the segment we are talking about, there are some who are eligible for such loans. Even those who are, I have seen most of them opt for loans either from MFIs or even from moneylenders. This is, even though the rates charged are the lowest of all available options. This is the classic example of clients preferring quality over price. Let us analyze the reasons. Taking up from the list of priorities, while a bank might be the best in terms of the topmost concern, in reliability, and best in terms of the price, and for many products it might also have very flexible repayment terms, all other factors go against it. A bank may not have products catering specifically to the needs of this segment of clientele, which makes the suitability, adequacy and timeliness a big issue. Time is a critical concern for these clients as well as doorstep delivery of services. Typically at a bank, it takes a lot of time for the applications of this segment of clients to be processed, during which time they need to visit the bank frequently. Not only does this means cost to them in terms of travel to and fro the bank, it also means loss of work for the days when they come to the bank, which results in loss of income. Hence the opportunity cost is also very high in this case. The other major factor is the complexity of the entire process with complicated processes and documentation which the clients do not always understand. Many times they might not even have all the documents that might be required. Another important aspect is the behavior of the bank staff and their acceptability in the bank. It is often seen that clients are overawed by the bank infrastructure and size and all the complex processes and they need to be relaxed. Many a times, the behavior of bank staff is not very good to these people and their needs are not paid much heed to, as the size of the transactions are small and the work of the staff gets increased. This is a reason why many clients do not prefer a bank inspite of its very low costs.

If we look at a moneylender, he is great in terms of timeliness and adequacy, as loans are available on the spot whenever required and mostly fulfills the entire requirement. The processes are also very simple and there is no fancy paperwork that a client needs to go through. All these make a moneylender highly flexible. As the moneylender is mostly a local person and available in the area itself, the product delivery is also smooth. The moneylender has knowledge of the credit history of the clients and based on that he charges differential rates and collateral terms. This makes the moneylender non transparent also. The rates of interest are very high and many a times there are very high collateral requirements. Most moneylenders have very unfavorable terms and conditions for loan repayment, like the loan can only be repaid at one go and not in instalments. This makes it very difficult for the clients to repay and leads them to a debt trap, and that trap very often follows them for generations. A moneylender also is not able to provide a wide array of products and services, like insurance and pensions, which is another reason why they are not the most preferred service provider.

We now come to the MFIs, which have over the last few years become the most preferred choice for financial services for the poor. This is despite the fact that they charge more than double the price of what the banks charge them, which is only because of the convenience and quality of the services provided by them. These institutions are also more popular than the moneylenders, and that is not just because of the lower interest rates that these institutions charge. There are a lot of other factors also that contribute to them being the preferred choice. This is not to say that all MFIs will be very popular, or can charge very high rates of interest. I am talking of those MFIs which cater to the needs of the clients, provide better and quality service and only against that do they charge a premium for their products. An MFI deals only with this segment of clientele, and it is more likely that their products would be timelier, adequate and suited to the clients’ needs. Successful MFIs are those which are market led, and have changed themselves to suit themselves to the needs of the clients, rather than being product led and thrusting their products on them. Time taken to process applications is usually lower than the banks, and the client need not go to the branch very often to follow up as the appraisal and the procedures are done at the doorstep of the client itself. The documentation is very simple and minimal and there are no collateral requirements. MFIs today offer a wide variety of products and services and a client can solve most of their financial needs with on institution itself like credit, savings, insurance, pensions, money transfers, even investments etc. It has been noticed that MFIs that offer a wider array of products are more popular than single product MFIs even if they charge a little higher than the others. Clients would not like to be part of one institution for one service and of another for another service, even if it cost them a little less, they are more than willing to pay a little higher to access more services from one provider itself. What is more, the other services might not even be available to them from any provider. There is another very important factor which is the ease of repayment terms. MFIs have easy repayment terms wherein the loans can be repaid in small instalments and are paid within a fixed time period. The loans are also usually waived off in case of death of the client so that the family does not have to bear the burden of such loans. The staff of MFIs is also usually trained in how to behave and deal with the clients. Many times the staff is picked from the community itself, which gives them a sense of belongingness. Because of these factors, clients are ready to pay a premium for a market led good MFIs products; hence we see that it is the quality of the products that the clients value more than the price they need to pay on such products.

This does not mean that MFIs should charge usurious rates of interest or they should pass on the cost of their inefficiencies to the clients. MFIs should, by all means, charge reasonable interest rates. This article is not about justifying high rates of interest by MFIs but it says that MFIs can cover the cost of providing quality service by charging it to their clients. Many MFIs, on the pretext that providing more to the clients will mean more costs which will increase the interest rate which the clients will not be ready to pay, do not improve the quality of their service, which, in the competitive scenario today, is suicidal, as clients prefer quality over low price. This article is about making this fact clear.

Criteria for Selection	Wt.	Banks		Product Led MFIs with Single Product		Moneylenders		Market Led MFIs with Multiple Products
		Score	Total Score	Score	Total Score	Score	Total Score	Score	Total Score
Reliability	12	4	48	3	36	2	24	3	36
Timeliness	11	1	11	3	33	4	44	3	33
Adequacy	10	1	10	2	20	4	40	3	30
Suitability	9	1	9	2	18	4	36	3	27
Processing Time	8	1	8	3	24	4	32	3	24
Collateral	7	2	14	4	28	1	7	4	28
Simplicity	6	1	6	3	18	4	24	3	18
Repayment	5	4	20	2	10	1	5	4	20
Delivery	4	1	4	4	16	4	16	4	16
Service Bouquet	3	2	6	2	6	1	3	4	12
Staff behavior	2	2	4	4	8	2	4	4	8
Interest Rates	1	4	4	3	3	1	1	2	2
Total			144		220		236		254

The above table tries to show which service provider a client will prefer when he/she has the choice. The criteria that a client uses are listed in the order of preference and in importance that they attach to each criterion, which is reflected in the weight column. The scoring has been done on a 4 point scale with 4 being the most preferred option for a particular criterion and 1 being the least preferred. It must be mentioned though that the importance of these criteria may vary in some places and in some places there might be additional criteria. From the above table we can see that even if clients have the option of going to a bank, they put it at the last choice, even though it has the lowest interest rate. Again, a moneylender, who is much despised, would be the second best option for the clients even if they charge very high interest rates. This is because of the various flexibilities and conveniences offered. A product led MFI is worse than a moneylender as it may create more problems than it might actually solve. The best option is that of a market led MFI providing multiple products. It charges higher rates of interest than banks and single product MFIs, yet is popular for the quality of service and the suitability of service. It scores above the moneylenders not just in price but in many other factors which makes it the ideal choice for a poor client, even at a premium price.

Hence we see that it is the quality and convenience of services that matter more to a poor client than the price that they have to pay for it.