Independent Research and Policy Advocacy

International remittance for rural India

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Remittances are the second largest source of funding for developing countries, contributing more than capital flows and development assistance. An additional 40%-100% of this amount is estimated to pass through informal channels. International remittances differ from other sources of funds because they tend to be relatively stable, even in the face of economic adversity.  Remittances have been found to off-set some of the output losses that may arise from migration of a country’s skilled workforce. In most developing countries, they also make good for the loss of tax revenue. India alone received USD 55 billion in international remittances last year, making it the largest recipient in the world.

From a household’s perspective, remittances act as a risk transfer mechanism, helping them cope with domestic income shocks ex-post. In many developing countries, remittances have been found to vary inversely with domestic income shocks; increasing in periods of low income and decreasing at other times. In this sense, they take on an insurance role and facilitate consumption smoothing. By relaxing financial constraints ex-post, remittances provide households with a greater ability to take risk ex-ante. In this sense they have also been credited for promoting investment in human capital and physical assets and increasing credit demand.

Several criteria need to be considered in the design of transfer mechanisms for remote rural locations and particularly for low-income households. The requirement of opening a bank account or excessive documentation can affect demand for such services as much as the delay involved in getting the cash in hand. It is also important to understand existing remittance corridors in areas where the Financial Service Provider (FSP) is operating. Within the recipient country, the channel of delivery thus becomes important. From an FSP’s perspective, regulatory constraints can determine the use of traditional money transfer methods like cheques and money orders. The physical infrastructure that an FSP has in place will also determine how effectively it can address the last mile problem.

Kshetriya Gramin Financial Service (KGFS), with its physical presence in remote rural locations is ideally suited to do this. When KGFS chose to partner with Western Union, the focus was on addressing all these issues. Apart from their extensive presence world-wide, one key factor was their network in UAE, Singapore and Malaysia where a majority of migrants from KGFS customers’ family members are located. Our localised, branch-based delivery model enables us to almost replicate the convenience of informal delivery channels, thereby reducing costs and time involved for the recipient.

The first transaction took place in Sahastradhara KGFS on 16th September 2010 and since then we have acquired around 1344 regular customers with close to 2200 transactions as of May 2011. Over Rs. 25 million have been remitted so far with the average remittance amount being Rs.11,700 across geographies. These remittance amounts are larger for Uttarakhand, around Rs.27,000 on an average owing to the migrant population working largely in the hospitality industry as compared to our(KGFS’) other geographies where migrants work in production and related categories.

As we expand our product suite into products like the education loan, money transfer products like domestic and international remittances will play a major role in facilitating repayments of borrowers, thereby helping reduce credit risk.

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  1. Nice blogpost. Two points to ponder over: i) remittances from domestic migrant workers also are a significant amount though the average ticket size for transfers are probably smaller. ii) there is a large holding of savings in gold lying pretty useless (in terms of monetized running returns) in the rural side. plus a large desire to use gold as a savings tool. a lot of it comes through informal channels with shady quality (I’d imagine the gold is not assayed for purity). it should be interesting figuring out how to make this play for the rural families. 

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