Street Food: IIM-A studies show why chits & informal channels are still popular

Convenience and reliability, not costs, are seen as key factors in financial behaviour, affirm two recent studies

The currency move by the Narendra Modi government, widely known as demonetisation, has put the focus on various channels of finance used by Indians in different parts of the country. While banks are bearing the brunt and the government seems to be partial towards digital tools, various traditional channels have been active in their own way.

Two studies by IIM-Ahmedabad professors Jayanth R Varma, Joshy Jacob, Samir K Barua and Sobhesh Kumar Agarwalla on such non-formal channels were issued recently at the Inclusive Finance Summit organised by Access Assist in the capital. Both these almost came to a conclusion that functional convenience endeared such services to the consumers -- they were almost not worried about incurring the additional cost that might come with intermediation.

The first study, titled 'Chit fund participation and sources of economic value', examined the pattern of chit fund usage in Kerala. Analysing its attractiveness as both a saving vehicle and a borrowing one, the study said it was among the top three savings options, along with investments in land and gold. Though not known for offering the highest rate of return, it ranked over bank deposits in both rate of return and ease of operation.

On ease of using, it was second only to gold. About 18 per cent of the respondents said the collection agent ensured they saved periodically. "The intermediation cost of five per cent appears to be high, relative to the net interest margin of Indian banks. However, comparison of the intermediation cost of chit funds and banks must take into account, (a) the collection services through agents from the premises of members which save their time and resources and, (b) the lower average ticket size of chit fund subscriptions."

While concluding that chits and the formal financial sector are not 'largely substitutable', users like the commitment to savings that these enforce and the flexibility in borrowing. Groups with lower or unstable incomes are likely to see chits as an insurance mechanism. The widespread participation suggest "chit funds are offering valuable functional features that are non-existent" in their formal sector counterparts, the study concluded.

The second one, 'Savings, borrowings and remittance behavior of migrant workers in urban India', also underlines the widespread use of non-formal channels, despite having access to formal ones. It covered a sample of 801 migrant workers in Delhi and Ahmedabad with monthly income less than Rs 20,000; it found that holding a bank account was not an issue. About 92 per cent already had one.

However, the study found significantly high use of informal channels for transferring resources to one's native place. The use of post offices was low. "Carrying cash by the individual himself or sending cash through a friend were also much in vogue, despite the obvious risk of loss inherent in such manner of remitting money." Mobile phones were hardly used.

Convenience and reliability were the dominant attributes in the choice of channel for remitting money. "What was noteworthy was that the cost was not even close to being as important as these two attributes in the reason for choice of channel." This response, coupled with the extensive use of non-banking channels, imply that banks need to put in efforts to change the perception on these two attributes.

The migrant worker probably found more in common with the paan-chewing hawala operator, with whom he can discuss local politics and even job opportunities, than the suited and booted private bank executive. This might be a key factor that influenced his choice of remittance channel. Banks and fin-tech professionals might do with some reverse makeover.