Aug 5, 2016

Money, Credit & Banking in Rural India



Excerpts from a conversation with a person who works as a cleaning staff in Dubai. Actual conversation happened in Hindi. 

Me: So how do you save money in India?
Him: I transfer money to my uncle’s bank account. He takes it and gives it to my father. He keeps it.

Me: So, a person keeps the all the money of earning members in your family?
Him: Yeah, and he lends out money at 2% interest to our immediate & extended family members & friends when someone needs it

Me: (My finance mind starts to work) Well, why don’t you open an NRE account? You get 4% interest tax free on savings account and 7.5% on fixed deposit (Thank God, I didn't advise Stocks & Mutual Funds)
Him: Banking doesn’t work for us Sir. Our financial needs are different

Me: Can you explain?
Him: Sometimes for my daughter’s school fees, I need some money urgently. Maybe for some agricultural expenses, I may have some unanticipated need. If I go to banks, they ask for many paperwork.  Not at all easy.  Not fast.  

Me: So, your family based financing model works for you in these situations?
Him: Mostly yes. The lending is not based on my savings. It is based on need

Me: So, how does your family system ensure that the people whom you lend to, return the money back with interest?
Him: Sometimes people make delays in payments. But, no one defaults. We don’t lend to everyone. It is within a circle of extended family & friends in village.

Me: But does this lending business make profit? Lending at 2% won’t make much money.
Him: Sir, this is not done for profit. This is a system to manage our financial needs of everyone in the family with the little money that we save. If everyone puts money in their individual bank accounts, when need comes, no one in the family can raise a huge sum quickly

Me: So, is this how most of the savings are done in your area?
Him: Yes. Wherever these kind of arrangements are not there, commercial money lenders exploit people.

As I sat bank and thought about that, I felt it made eminent sense. Modern banking works on the basis of “individual”. And all economic theories over that are fundamentally based on the concept of maximizing profit. When the capital available with individual is limited, and the needs are very much basic like health, education & food, you cannot really work on the basis of a person-based banking. A collective usage of capital, even though the returns are limited works best to satisfy the needs of an extended group of people, who otherwise might not be eligible for normal bank credit. The extended group factor is another way of ensuring low probability of default as the defaulter will have much more to lose in an extended family setup.  As profit maximization on lender’s side is not the objective, he doesn’t jack up the lending rates, doesn’t go after new customers and so on. Probably this is the reason why modern banking is yet to take a strong foothold in rural India. Rural India will get financial inclusion when some business model emerges to tap into this kind of credit functioning. I can think of Co-Operative banking prevalent in some parts of India as a close-by model. But that’s a bit higher on the value chain where the needs addressed are for starting a business, setting up a shop, buying a vehicle etc.. This is a problem where needs are much more basic and the time to raise money is quite limited.

Aug 2, 2016

Travelogue - Cyprus




Let me start with a caveat. We could not even cover one-third of Cyprus. The country, even though it looks to be a tiny island in Mediterranean, has a lot to offer for more than a week. We were there just for 4 days including the travel dates.

We landed at Larnaca on a Wednesday morning. Took our rental car and drove straight to our wonderful hotel @ Latchi  .. The cross country drive from South East of Island to the Western side took about 4+ hours ( 170 odd KM ).  Cyprus represents a unique fusion of Greek, Turkish & Continental European cultures. Its cuisine is distinctively Mediterranean. Not just fish & squid, but the European influenced beef & pork as well.  You drive on the left side of the road ( i.e, British system ) .

One of the many view-points in Cyprus
Cypriot beach areas are of two-three distinct kinds . If you are a party-hopper , would suggest you to look for options near Aiya Napa  . Cities like Larnaca & Limassol offer good beaches, but often crowded as per reviews. If you are looking for a reasonably quiet & calm place, I would suggest Paphos / Latchi / Polis areas ( where we stayed ) .  

Legend says that Aphrodite and Adonis met in the beaches of Cyprus. There is an area which is kept as Baths of Aphrodite. Interesting thing is that there are many nearby areas which has the Geological formations similar to the Aphrodite rocks.  But when you have an interesting story in mythology, why not market it and make a hype  :)

The specialty of many of these beaches is that these are pebble filled beaches.You take a dip and lie down on the shore, there is virtually no sand that sticks on to your body. The salt content of the water is very high. In general, Mediterranean has high rates of evaporation thereby making the water much more saltier. So, when you swim, if you are not wearing goggles, you'll experience a strong burning sensation in your eyes because of the high-saline nature. This feeling is much more than any of the beaches that I've been to.  But doesn't make the experience bad.  Infact, I'd rate Cyprus beaches perhaps as the best that I've been to.
Blue Lagoon @ Latchi - Best place to swim in Cyprus

Donkeys are valued very much in Cyprus. There is a Donkey sanctuary, a soap that the locals produce out of Donkey milk and lot of other handicrafts centered around Donkey.  Cyprus being a mountainous terrain, locals used donkeys to transport the cultivation into different parts of the island. Donkey's importance is highlighted in many of the wineries that you come across. We visited one in the quaint surroundings of a village



Modern day Cyprus is a financial & legal center which gained fame as a base of many investment funds,but which came crashing in the infamous Cyprus financial crisis a few years back. It is a classic case study for anyone interested in Macro-Economics as to what would happen when banks become much more financially large than the country's economy itself.

The scars of the financial crisis still remain. As you exit Larnaca, you see a notice stating that Cypriots are allowed to take out only 1000 Euros when they go out.  But you can see plenty of signs indicating that the economy is picking up. Many Property Ads, Villas under construction, latest BMW models in Limassol, restaurants & hotels filled with tourists even in the blazing July climate and much more.  It is not a cheap place to holiday either .

Cyprus is a divided nation. Those scars still remain. We didn't go to Nicosia. But from what we heard, it is a very different world on the other side of the border.

Cyprus is perhaps one of the few small-islands which has something to offer on history , culture, partying, cuisine. What you have on offer is not a deep historical or profound cultural experience like Rome and Berlin.  You should not expect depth in anything, but those glimpses itself would leave plenty of pleasant memories for a lifetime :)

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