The Urban Poor and their Financial Needs

In India, the major interventions and discourses on financial services in the context of poor and low income households and most of the development schemes with poverty finance focus have centred on rural areas. While the commercial banking sector in the country has grown considerably, bulk of the benefits of this growth has been accrued to high income individuals in large cities. Financial services, thus, have largely remained inaccessible to the lower income households in urban areas, who have been sidelined by the traditional banking sector due to lack of formal employers or fixed income, while microfinance institutions have traditionally avoided urban spaces due to presence of transient population without any homogeneity of culture, causing difficulties in following the tested approach to microlending. However, this does not necessarily make them undeserving of receiving financial services, or an unprofitable market for the same.

The urban poor ought to be recognised as income generators, who need to be given structured financial services, including and beyond simply microcredit. The first and foremost amongst such services required is an efficient system for helping migrant workers send remittances back home. Since majority of the earning poor in urban areas are rural migrants, a gigantic amount of money flows in the form of remittances to rural areas, and has been found to be a major factor in supporting rural economies. However, a large portion of these flows through unofficial channels, and the lack of tailor-made formal money transfer services leave much to be desired.

Other services such as financial solutions for savings, pensions and minimal social security measures may be provided as well. Shree Mahila Gram Udyog’s initiative in this regard, dubbed “Lijjat Papad Model” by some, deserves a mention here. Having 63 Branches across the country employing 32,000 women for manufacturing of papads, Shri mahila Gram Udyog has pioneered a model to encourage and mandate savings for their piecemeal earnings. The earnings are Rs.17 per kg of papad rolled. On an average a woman rolls 6 kgs of papad daily. The organization has a policy of compulsory savings of Rs.2 per kg per participant which is deposited in a bank as recurrent deposit till she leaves the organization. Weekly savings are sent to the bank via cheque from the branch. Individual accounts are credited and organization's account is debited. These savings can be made through volunteers and the bank can deal with the mother organization at macro level and thus reduce costs and make the process more transparent.

Besides savings, financial solutions to address lifecycle needs like education, healthcare, housing etc. may be explored. These are especially requisite keeping the high cost of living in the urban economy in mind. Even super-specialised financial services such as child care plans etc. may be provided.

Along with these, credit may be offered mainly to finance the different needs associated with housing (upgrading, rental advance payment and construction), working capital need of micro enterprises and consumption gap. In fact, according to a study conducted by Sa-Dhan, an Indian NGO that serves as a trade association for MFIs, recent experiences in urban microfinance show that success is possible despite higher start-up costs necessitating larger loans.

Equitas, a for-profit MFI, operates exclusively in Urban areas and contends that “Urban India was never considered suitable for MFI operations, as urban poor were supposed to be a migrating lot. It was also assumed that there would be no bonding within groups to enable them to stand guarantee for one another. All these have proved to be myths.”

Besides these, some other microfinance institutions that have had a favourible experience in the field of urban Microfinance include Ujjivan, SEWA Bank, Working Women’s Forum (WWF), Indian Bank’s Microsate Branch, Village Welfare Society (VWS), and Sharada’s Women’s Association for Weaker Sections (SWAWS).

While the urban poor has now become a target customer for many financial service providers, with SKS microfinance and Bandhan, two of the largest MFIs in India, joining the bandwagon, the market is enormous, as concluded by a study by the Centre of Microfinance at the Institute of Financial Management and Research, titled “Reaching the Other 100 Million Poor in India.”

Considering the enormous potential and lack of competition, along with the obvious advantages of availability of adequate infrastructure as well as concentrated markets, provision of financial services to the urban poor is an extremely lucrative opportunity in the Sociopreneurship space, waiting to be realised.