Gold Over PPF
Gautam Chikermane writes in the Indian Express:
The villager in Nu, about 100 km off Delhi, is unconcerned with anything beyond his crop and capital. As and when he generates a surplus, if it is large enough, he buys land; if it is smaller, gold. Now, there are more than 150,000 post offices, four out of every five catering exclusively to rural areas, according to Department of Posts. They are supposed to offer small saving schemes like PPF to small savers. As we all know, these are instruments that offer artificially high returns that are guaranteed by the government.
And still, farmers, farm workers, petty traders, the whole village economy buys gold, not PPF. The reason? Access. Try opening a PPF account there and you face a process, a bureaucracy, a system that forces you to hit gold. Try opening a bank account with a public sector bank in the closest town and there are no cheque books. Simple matters that we take for granted in cities turn into full-fledged projects. Are these instruments, these banks (for now, we’re not even talking about mutual funds) the exclusive preserve of the educated, wealthy, urban citizens?
Surely, there is a logic why people buy small amounts of gold for their daughters in these villages—gold, for them, is a means of last resort. But here lies the surprise: most of rural India does not, as analysts imagine, buy gold jewellery, but gold coins.
Read the full piece.
Intention, PPF. Outcome, gold. Reason, system of government: unaccountable, centrally governed, no incentives to perform, few disincentives from slacking off. You can use Chikermane’s example as an analogy for so many other areas in which our government fails us.
And in many of them, the option of gold isn’t there.
Amit, I wonder why is it that private sector banks and NBFCs not moving into the rural areas? Surely, there is a market there that needs to be tapped, given that the consumer is thoroughly frustrated with the services available. I’ve read stories about HLL was aggressively pursuing the rural market with innovative strategies, may be the banks can look at that example.
On a related note, I was thinking about the way Barclays Bank attempted to replace rural branches in the UK with counters set up at post offices (because of high overheads), and then thought why it couldn’t work in India. Of course, the postal department would not entertain any such thing here.
Comment by Nanda Kishore — December 16, 2005 @ 2:49 pm
Nanda Kishore, I couldn’t agree with you more, and I wonder about the same things. Would any banker reading this, or anyone in the know, like to shed more light on this? Isn’t there a fortune at the bottom of the pyramid, as the phrase goes?
Comment by Amit Varma — December 16, 2005 @ 5:48 pm
Personally, I think major banks in India are avoiding the foray into rural and agribusiness banking because a majority of the farming is for self-sustenance. For a profit-oriented financial institution seeking to increase its lending base, or deposit growth, this is an economically unviable alternative, as there is a high chance that potential borrowers are almost certain defaulters, even as customer savings wouldn’t even meet break-even levels.
Then comes the issue of educating the farmer about the benefits of investing in a superannuation/provident fund. It might be an idea for the government/postal department/financial institutions to hire extension experts and impart some form of finance-related education, and maybe even serve as facilitators of change, w.r.t. the primary sector.
Maybe India could take a cue from Japan ( http://news.bbc.co.uk/2/hi/asia-pacific/4340756.stm ) and restructure its postal system, to create a banking giant?!
Comment by cow tse tung — December 16, 2005 @ 8:02 pm
i want to sell gold: i goto the market, check the price around, sell, get my money, come back.
i want to withdraw from my PF/PPF account: i goto the babu’s office, grease some hands, get my money less a percentage. they deserve the money, afterall they’re paying me, so what if its my money!
Comment by raven — December 17, 2005 @ 2:39 am
Cow,
Nicely put. The default levels are high among rural sector borrowers.
Banks have to follow risk management standards. Suppose any European bank , say barclays comes and opens shops in rural india. All lending will be tagged with a high risk of default and their figures will look bad. BASSEL II ranking will tank for that bank. So forget foreign private banks coming to rural India.
Let the farmers carry on buying gold - whats wrong with it ? :-)
Comment by Navin — December 17, 2005 @ 2:44 am