Understanding Financial Needs of Urban Migrants

Mohan Kumar, a 19-year-old Rickshaw puller migrant in Delhi, used to deposit his daily savings amount with a local shopkeeper. One day, when he needed the money, the shopkeeper refused to give him his deposit. Mohammad Waris, another migrant, lost all his savings, when a stranger who had just befriended him stole his bag.

Stories of Mohan and Mohammad are not exceptional cases for Rickshaw pullers in Delhi. A CMF-IFMR report (Nandhi 2011) shows that while 95% of 176 interviewed Rickshaw pullers reported to save small amounts, most of them do it without any formal bank account (only 1% reported using bank accounts). Fifty-five percent reported of using personal instruments such as the home or on person, 31% were saving with neighborhood shopkeepers, and 17% were using other saving mechanisms such as lending to friends, saving with relatives, and even burying money under soil. Not surprisingly, many reported that their money was frequently stolen. Why do they keep money with themselves when they sleep on the streets, or give it to shopkeepers who can always deceive them, or bury money under the soil? This is because most cannot open a bank account as a result of Know Your Customer (KYC) regulations.

What is worse is that when most migrants remit money to their native places they do it without bank accounts. Mohammad Islam, who remits around Rs. 2500 ($45) every month through a courierwallah, knows that the courierwallah is expensive (5% of remitted money compared to Business Correspondent Company’s 2% if the remitted amount is between Rs 1250- 5000[1]). However, Mohammad is happy with it because he finds this service safe and reliable. Sunil Kumar, who also remits around Rs. 3000 to his mother every month, has tried multiple times to open a bank account but failed. He has no option but to rely on the expensive courierwallah.

Rickshaw driving is the second largest occupation after farming in the country. Ninety percent of the rickshaw drivers do not own their own vehicles.

Cases like Mohammad and Sunil are not unique. The CMF-IFMR report (Nandhi 2011) shows that 43% of interviewed Rickshaw pullers used the informal system commonly termed courier or courierwallah.

Only 16% of pullers reported using formal channels to remit money mainly bank accounts of friends or relatives, or post offices. Likewise, another CMF-IFMR research study (Tannirkulam 2010) that selected 274 Indian migrants from four major migrant corridors of India found that 57% of respondents had recently used an informal mechanism to transfer money, usually a hawala network, which is an informal banking system based on trust where money is remitted without any official record of the transactions.

Only 30% of sample respondents used banks to transfer money. Those who do not use a bank account to transfer money, 19% would like to use banks but are currently unable to. When asked what migrants value in a payment system, by far the most common answer was security (72%) followed by the speed of delivery (37%). The cost of transferring money was not a first-order concern (17%).

This study also found that remitting money through these informal mechanisms is quite expensive. The median cost of transmitting a normal remittance of Rs. 2000 was Rs. 80 (4% of the remitted value). For the typical domestic remittance of Rs. 2000, transferring money through a bank account costs Rs. 60 (or 3%) on average, including all direct and indirect costs.

This is significantly cheaper than other commonly used methods, such as India Post (6%) (by far the most expensive transfer method in our survey), or informal hawala networks (4.6%). The study points out that if migrants had access to formal banking systems upon which they could rely for transferring money, they would save a staggering amount of almost Rs. 1000 crore.

What can be done?

For many migrants, there is a clear trade-off between the cost of remitting money and the convenience of remitting. Banks have the security, speed of delivery, and cost-effectiveness that migrants most want, but they are often far from migrants’ homes, and require onerous documentation many migrants do not have. More convenient informal mechanisms that do not require as much time, effort, literacy, or documentation continue to be pervasive, despite being more expensive and less desired.

It has been found that when government benefits are being distributed through banks, people use those same accounts to transfer money reliably amongst each other. Government could ensure that households receiving payments from the government have bank accounts to receive these payments and that they are encouraged to use them. Targeting bank services in geographical areas that produce migrants may be a good policy for making migrant remittances more efficient.

In order for the poor to transact with formal financial institutions effectively, these services need to be close to them. This can possibly be done by:

• Making it easier for banks and non-banks to propagate business correspondent networks to expand physical proximity to payment outlets
• Building more bank branches and widely distributing ATMs and debit cards
• Expanding the range of institutions that are enabled to process payments safely and efficiently. These small improvements in the formal banking system can have big implications. It would, first of all, give migrants peace of mind that their hard-earned money can be stored and remitted safely, securely, and at a reasonable cost. More importantly, it would allow migrants to shift from risky sources to a more streamlined ecosystem of formal financing for the poor.