What constrains access Key themes

1
What constrains access? Key themes

• Why formal financial institutions dont want to
  serve the underserved- A high-risk, high-cost
  proposition
• Problem of uncertainty about repayment capacity,
  given volatile income streams and expenditure
  patterns, high exposure to systemic risks
• Absence of credit information
• Lack of collateral, difficulties in contract
  design and enforcement
• Underserved lack information on marketing,
  technology, etc. necessary to make their
  business viable
• High transactions costs
• Lack of a conducive financial climate--policies
  on interest rates/credit subsidies, and
  government domination/interference has distorted
  banks risk-return signals

• Why the underserved cant get access to
  financial institutions
• Lack of flexible products and services small
  borrowers prefer to borrow frequently, repay in
  small installments, but most FIs dont offer such
  products.
• Small borrowers seek savings, lending and
  insurance (life, health, crop), which FIs do not
  generally offer.
• Transactions costs of dealing with formal banks
  are high. Procedures for opening an
  account/getting a loan are cumbersome and costly
  (with high rejection rates)
• FIs demand collateral, which poor borrowers
  lack.

2

• How to Scale-up Access to Finance for the
  Underserved?
• Overhaul government policies that distort the
  market
• Liberalizing interest rates, where controls exist
• Phasing out directed credit programs
• Governance, management, efficiency issues in
  state-owned banks and financial institutions

3

• Create an enabling environment/better financial
  infrastructure so that formal financial
  institutions can serve the underserved more
  efficiently

• Enhanced supervision/regulation to create further
  space for new, private sector entrants, thereby
  generating competition and its attendant benefits
  
• Legal framework to ensure better contract
  enforcement, recovery of non-performing loans.
• Better land titling and registration systems,
  ease of land use transfer
• Bankruptcy framework a critical element of
  promoting SME access to finance
• Regulation to support the development of price
  insurance products, price derivatives instruments
  and commodities futures markets
• Better credit information can directly increase
  the amount of financing for small borrowers, by
  reducing transactions costs and costs related to
  default risk
• Government-sponsored initiatives to promote lower
  cost technologies, e.g., ID Cards
• Educating the unbanked Savings and Lending
  education, working with NGOs

4
Innovations to reach the underserved
Public-private partnerships

• Introducing flexible and convenient products and
  services that allow for low-cost ways of reaching
  the underserved (e.g., savings and loan products
  that allow small clients to save small amounts,
  borrow frequently, and repay in small
  installments new types of mortgage insurance
  guarantee products can help improve access to
  housing finance risk sharing arrangements
  microinsurance products that help farmers buy
  cover against crop failure, weather risks)
• Simplification of procedures, better staffing
  policies to reduce transactions costs
• Use of technology Banks can use technology to
  drive down their transactions costs, for example,
  through the introduction of smart cards and
  biometrics, electronic transfer accounts, etc.
• Direct institutional support to microfinance
  Grants to microfinance companies (e.g.,
  PRONAFIM), Lending to finance corporations for
  housing, car and business loans, Grants to banks
  to encourage microfinance programs such as the
  SHG Bank Linkage program in India, Capacity
  building initiatives
• Attention to demand side

5
How can the Bank help?

• Public policy to create a more enabling
  environment for financial institutions to serve
  the underserved
• Better land titling, Legal framework for using
  collateral to secure transactions, Framework to
  support new types of price insurance products
• Public-private partnerships
• Smart subsidies, transparent and well-targeted,
  to promote new financing approaches, innovations
  in products and services use of technology
  development of a better financial infrastructure
• Risk sharing arrangements to catalyze financing
  for the underserved