Why we need to talk about financial inclusion and behaviour change

May 23, 2018
By Rang De Team

Under Swabhimaan, our program to promote financial inclusion in rural communities, we have linked the disbursal of a loan to a financial literacy and assessment module.

At Rang De, our aim when implementing projects has always been to bring about long-term change in the communities we work with. A similar motive guided us when we implemented Swabhimaan, our initiative to promote financial inclusion in rural India.

When we set up the first Swabhimaan centre at Yeshwantpura in Karnataka, it was decided that the loans would be linked to a financial literacy and assessment module. The reason behind this was simple: we wanted to see if we could bring positive change in the financial habits of the community members.

The need for change

In his influential book ‘Nudge’, the Nobel-prize winning economist Richard Thaler talks about using small changes in design of a program or product to help people make positive choices. In the introduction to the book, Thaler defends his model of designing programs to benefit people by saying

“The false assumption is that almost all people, almost all of the time, make choices that are in their best interest or at the very least better than the choices that would be made by someone else.”

In other words, Thaler argues that people do not always make rational economic choices.

In Yeshwantpura, where people had access to finance from Microfinance Institutions (MFIs) operating in the region, quite a few borrowers had taken on substantial debt. Despite other pressing needs, some of them had also used the money to invest in durable consumer goods. In the end, many had ended up with monthly instalments that was beyond their capacity to repay.

The Swabhimaan centre in Yeshwantpura, in the Kolar district of Karnataka. The large presence of MFIs had a substantial effect on the financial habits of the villagers.

One way to explain the choices made by the people could be found in the way existing credit programs were structured, which followed a ‘one size fits all’ approach. The immediate availability of money could also lead the most rational, judicious borrowers to lose self-control, a behaviour exhibited by credit card users around the world.

Another reason explaining this behaviour, as Thaler suggests in Nudge, is that the real cost of the borrowing credit — the processing fees, convenience charges — are not readily apparent to the borrowers.

For the villagers, despite the access to alternative credit, the formal financial institutions like banks have remained as far as ever. Thaler explains this by using the concept of the ‘status quo bias’, where people are really reluctant and slow to adapt to a new system, despite its efficiency. The MFIs conduct their operations in cash, citing convenience and the borrowers follow suit, despite having bank accounts to their name.

The way we see it, the current system of finance in the villages feeds into the biases of the people and thrives on maintaining the status quo.

‘Implementing’ financial inclusion in Yeshwantpura

When we started operations in Yeshwantpura, we offered loans to the borrowers at single-digit rates of interest, rates that were far more competitive than anyone else around, with one simple difference: the borrowers would have to undergo a simple financial literacy module and assessment.

We digitised the loan application process as well as the repayment of the loan. Apart from stressing on regular bank visits, we also insisted that the women regularly update their passbooks.

In the beginning, it was hard to get the women to sign up for some of these tasks. For many of the women, taking time from their packed daily schedules to travel to the bank seemed like far too much work, that too for a loan. Others found it hard to adapt to the digital payment system. While we were ‘implementing’ a financial inclusion program, we had assumed that the benefits would be obvious to the villagers. We had underestimated the power of habit.

A program to ‘induce’ change

To encourage the women to take up ‘good’ ‘financial habits, we came up with a simple plan involving a chalk and a board: we drew up a ‘score board’.

All the borrowers under Swabhimaan in the village were awarded points for their ‘good behaviour’: an updated passbook, timely repayments, using the Electronic Clearance System to pay back instalments etc. The score board was also updated every week. Of course, the position of the women on the table was in no way punitive: those scoring the low points would not be penalised for their behaviour.

The scoreboard at the Swabhimaan centre in Yeshwantpura

What we found was that a simple scoreboard fostered a competitive spirit among the borrowers in the community. As a part of this new system, the borrowers themselves found that approaching the bank manager, transacting using the bank account or even updating the passbook was not the chore that it seemed before.

Tying in the financial inclusion component into the loan application process also means that people were more open to the changes, especially when they approach us for a second loan cycle, which began a few months ago.

Given the way many financial companies operate at the grassroots in India, we definitely see the need to induce positive change in the financial behaviour of the communities. The past year has also made it evident to us that providing loans at low rates of interest is not enough to promote financial inclusion. It also requires that we work closely with the communities, to bring about a change in deeply entrenched habits and behaviour.