Financial inclusion for the rural poor: Rural Post Office Life Insurance

A version of the following appeared in DNA on June 1 at the following URL:

http://www.dnaindia.com/opinion/main-article_inclusion-of-the-rural-poor_1390325

Here is a PDF version of the same; DNA provided an absolutely fabulous photograph to go with it! inclusion of the rural poor jun 1

Financial inclusion for the rural poor: Rural Postal Life Insurance reaches out

Rajeev Srinivasan

Experts agree that bringing financial services to the rural masses is generally desirable. Significant value can be generated (both for individuals and for the nation) through providing services to the disadvantaged – for instance, the World Bank’s Christine Qiang estimates that national GDP grows by 0.8% for every 10 percentage-point increase in mobile telephony in emerging economies. Similarly financial services, such as micro-finance, can have a multiplicative effect on the unbanked.

The definition of ‘financial inclusion’ concerns the provision of financial services at an affordable cost. Both State-mandated interventions and market-driven efforts by the banks themselves have been tried. However, this has still left many strata of society under-served: a 2004 survey showed that there were only 59 deposit accounts for every 100 adults in the population. This also masks regional differences – from 17 in Manipur to 187 in Goa.

Most policymakers like some sort of dole – pensions, subsidies, etc., with the latest example being the NREGS scheme which guarantees 100 days-worth of wages to poor laborers. But these schemes are riddled with leakage. Subsidies are not sustainable in the long term, being most appropriate for short-term emergencies; they do not deal with underlying problems. Besides, the public sector has a reputation for callousness.

This is why it is all the more amazing that an innovative public sector initiative has had the effect of reaching many of the previously excluded in a short time. A conversation with the India Post Board member who dreamt up the program, Dr. Uday Balakrishnan, revealed two intriguing facts – one, the ability of the public sector to re-invent itself, and two, the willingness of poor cohorts to marshal their small savings and engage themselves in financial markets. It makes for a fine case study.

India Post is an underutilized player for financial inclusion, because it has reach and credibility. Given the 500,000 employees stationed in 155,000 outlets around the country, it is well placed as a distribution channel; it is the main payment conduit for 50 million NREGS participants. There is also trust in the institution, so that people are willing to incorporate it into their financial planning. As many as 200 million people hold Post Office Savings Bank (POSB) accounts.

It appears that India Post has been offering rural life insurance since 1995, but never emphasized it as a major line of business. When it began to focus on it recently, the results have been impressive: they empowered employees to think creatively and to innovate. A change management effort that also streamlined processes has enabled them to meet stiff targets. It is heartening that even staid government entities, with proper motivation, can be nimble.

Within a few months, some 12 million rural people have taken policies, with a majority of them opting for micro-insurance – for instance, life insurance policies that insure for up to Rs. 10,000, at a very affordable premium of one rupee a day. Larger policies are available for the price of a pack of beedis (Rs. 6) a day. The Post Office has become the largest player in this segment, covering more than twice as many people as all the other insurance companies put together, adding a million-plus new insurants a month.

Why have people opted to buy this level of insurance? Interviews suggest that the best reason is that the poor are aware of the opportunities that exist for their children, if only they could afford a decent education – in other words, there is an aspiration out there that the next generation must do better, and people are willing to sacrifice today’s consumption for children’s education tomorrow.

What is remarkable is that people are voluntarily spending their own tiny savings to buy this social security mechanism. Most of us think the great Indian public looks to the maa-baap government for everything, and that therefore doles, loan forgiveness, etc. are inevitable. It turns out the masses are willing to invest their small savings for the guarantee that a death in the family does not stunt their children’s future.

Once they hold this basic, fungible (if not liquid) financial asset (a life insurance policy), they use it as collateral to get loans from banks; that is, they are included in the system, and they become credit-worthy. In fact, the next thing they want is crop insurance, medical insurance, etc. – they are acting as rational economic players.

Furthermore, as a result of the law of unintended consequences, they are players in the broader financial market. Part of the premium (a prudent percentage, but still 1000s of crores)fs is invested in the market, and, over time, this should bring them better returns than those from the government-securities market.

The late C K Prahalad would be proud of them. The three billion at his ‘Bottom of the Pyramid’ are at last clawing their way out of poverty.

816 words, May 26, 2010