Roles of Public and Private Banks and other Financial
Institutions for Effective scaling up of the Insurance Products
Introduction
To achieve the ambitious average GDP growth of 9 per cent per annum target set in the Eleventh Plan, it is important to revitalise and revamp not only the agricultural sector but also rural financial institutions. The directed lending norms that require commercial banks to allocate 40 per cent of their lending to the `priority sector’ have not generated the intended results, since most of the banks get around this requirement by subscribing to other eligible instruments. Large farmers and agri-businesses seem to be able to obtain financial services from modern financial institutions but small and marginal farmers continue to depend, largely, on indigenous money-lenders. As the scenario is not expected to change without some focused intervention, it needs to become a focal point for both Government and financial sector.
In the modern context of global competition, looming food shortage, environmental disasters and population pressure on land, the farmer’s interest (especially the small and marginal farmers) need to be looked at as a bundle and not microscopically. The sectors suffers from a number of ailments with respect to finance, insurance, technology, sustainability, fertilizers and water resources, among others. Two of the problems that are most easily addressed together are finance and insurance. Financial Institutions—private and public scheduled banks, grameen banks, self help groups, rural banking correspondents can all be extended part of the rural financial system. Coming to insurance, the need for extended scope and coverage of agricultural risk insurance, in the interest of sustained growth of agriculture and well-being of the farmers, can hardly be over-emphasized. India’s tryst with agri-risk insurance cover is nearly four decades old, but the progress in this respect, either in terms of number of farmers covered or cropped area covered or even in terms of activities covered, remains very limited. Till recently, the task of providing risk insurance for agriculture was considered a total responsibility of the state, and it is only recently that private sector has been allowed to enter into this field. It is a welcome change in approach that the government now understands the imperative of wider participation in the task of extending the scope and coverage of agri-risk insurance.
Current Agri-Insurance Scenario
Over the last four decades, the panorama of Indian agriculture has also changed drastically, even as the agricultural economy of the country remains semi-developed, and is infested with many structural constraints that are holding back growth and productivity. It is now realized that the context before the agri-risk insurance has also changed, and no single insurance product can meet the requirement across the crops or regions or farm households. As the issue of upscaling of insurance coverage is addressed, it is important that we keep the divergent needs in mind. But then assuming that no single insurance agency has all the necessary expertise under one roof, it can
also be inferred that for an effective and maximum coverage of risk insurance in agriculture there is need for multiple players.
Further, in view of the growing problem of indebtedness among the farmers, it is felt that there is perhaps a need for a comprehensive approach that combines agricultural credit and risk insurance programmes into an integrated whole. It is in this context that we need to explore the role that banks (public as well as private sector) and other financial institutions can play in upscaling of insurance products, by which we would generally mean (i) acceptability of the products and (ii) sustainability of the products, so that both the scope and reach of insurance products can be enhanced. As we say this, it must be emphasized that the responsibility for development of suitable and appropriate products, however, lies with the insurance companies. Since the nature and form of
risks have expanded, the scope has also expanded for introduction of a wide variety of appropriate products.
Just to mention, the comprehensive approach of combining credit with insurance is already present but largely in the MSP crops where banks bundles insurance with any loans as minimum support price is assured for the farmers. The payment towards premium is either deducted from the loaned amount or the farmer pay after harvest, depending on the credit worthiness of the individual.
Economically, for the banks, bundling of the insurance can also help to reduce the cost. For example, the cost to serve a customer who takes a loan is as high as 25 per cent. If the banks are selling health insurance, weather insurance and other financial products to the same customer, which will substantially reduce the cost to serve the customer to 7-8 per cent.
Role of Schedule Commercial Banks
Agriculture insurance is a product that is not yet sold by demand but rather by convincing and push-selling. So, as insurance products are developed, it may be wrong to assume that these can be automatically sold to the farmers. Saleability of risk insurance products depends on a number of factors such as cost (i.e. premium), suitability, incentives, etc. In this context, the commercial banks can play a very important role.
Commercial banks, especially in India where it is mandatory for the banks to provide a specified percentage of credit to the farmers, have, over the years, developed considerable experience in extension of agricultural credit. The Know Your Customer (KYC) norms actually allow them to have access over significant information and data base with regard to agro-economic conditions and financial-cum-economic status of the farming households. In fact, they are a virtual storehouse of a lot of critical information and data base, which usually remains untapped.
The banks would need to ‘systematize’ such information into easily accessible formats. On the strength of this, each bank can provide useful advisory-cum-research services on commercial basis to the insurance companies. Thus, a formal link can be established between banks and the insurance companies. Given the difficulties in increasing penetration of risk insurance, a link between the two is considered very vital. Accordingly, advantages available with the commercial banks need to be harnessed to the fullest possible extent.
Since the banks are in direct touch with the farmers on a day-to-day basis, they themselves have and can enter into risk insurance business by forming subsidiaries. They can link disbursement of farm credit with insurance products after assessing the needs of the farmers and offer an appropriate package. The insurance companies, in their turn, can use the banks as vehicles for launching and marketing of their products. Rural banks and currently the rural banking representatives can actually hand out personalized extension services to the poor and marginal farmers.
But as the cost is high and return expected is low, banks will need to work as an institution in data mining, sharing individual KYC details and also sharing the banking representatives. The focal marginal and poor farmers can only be covered if the cost basis is minimum possible in approaching them.
These apart, banks can play another vital role in promotion of risk insurance business by way of providing various support services, especially when the insurance unit (IU) is small. For instance, if the insurance unit is Gram Panchayat (GP) it is possible for the bank branch operating in the area to undertake risk mapping exercise for that IU, prepare roasters of land records, weather history and so on. These then can be profitably used by the insurance companies. At the same time, banks can also guide the farmers on appropriateness of an insurance product. Actually, it is very much possible to establish a framework for trilateral partnership, between banks, Gram Panchayat and insurance companies, that is needed for propagating risk insurance.
There is no distinction between the role that can be played by both public sector and private sector banks. The public sector banks, however, do not enjoy the necessary autonomy that would encourage them to take the necessary initiatives. It is for the government to realize that in the absence of autonomy given to the PSU banks, we are actually subjecting accumulated experience and expertise within the banking system to gross misuse and underuse. And this will only lead to slower penetration of agricultural risk insurance.
While the scope for PSU banks, foray into agri-risk insurance business is limited by the degree of autonomy enjoyed by them and encouragement provided by the government, the private sector banks suffer from their urban-centric approach and limited exposure
to rural banking. An increasing exposure in rural banking is a necessity in order to handle rural credit and insurance product. Agricultural risks and issues in risk assessment cannot be adequately understood otherwise. However, there are two approaches before them. One, private sector banks can form partnership with public sector banks. Second, they can get into partnership mode with insurance companies in the public or private sector (e.g. ICICI – Lombard). Agriculture and agro-community needs financial management—and the private banks in future can adapt the role to address the requirement.
A point that needs mention here is that non-banking private sector companies too can be tapped for exploring the possibility of entering into the agri-risk insurance market. In recent years, many such companies (especially the FMCG companies) have vastly expanded their rural marketing network and gained considerable experience and knowledge of rural economy. Private sector banks can explore the possibility of forming appropriate joint ventures with such companies—insurance companies need to engage agents with minimum cost and greater awareness and penetration.
To bring in examples, the micro-finance experience of Philippines and Banking Correspondents in Brazil had been very successful models. The banking correspondents here have been the small outlets, which provide basic banking services, like drug stores, petrol pump, small stores in the neighbourhood, etc. The widely spread post-offices network in the country can also be used to deliver banking services. Banks and regulators need to look at these models and their feasibility in the Indian scenario to bridge the banking divide. Agri-insurance product can be built in as another banking product. To develop this, it would need training and management of the rural educated—another work that both private and public banks can undertake.
Other Agencies / Institutions
However, we must not lose sight of the perspective. The ultimate goal is ‘increase penetration of risk insurance’, and for this purpose it is important that greater awareness and involvement is created. It is felt that it may be necessary to propagate the importance of insurance, and not confine the initiatives only to agricultural risk insurance. The focus may have to be enlarged to cover rural insurance programme. The question that we need to address is: Is it possible to develop comprehensive
package of insurance for rural areas? If we think this way, it may be possible to imagine a case for multi-pronged approach, and in that case it is possible to see role for several other agencies such as (i) life insurance companies, (ii) general insurance
companies, (iii) health insurance companies, etc, besides rural credit agencies such as cooperative societies, micro finance companies and rural cooperative banks.
Thinking, a little bit bolder, we could go ahead and suggest rural stock market institutions. Rural Household Fund is not a very small amount with nearly 70%
population residing there. The requirement is to take financial sector there with new products suited to agricultural and rural requirements for better fund mobilization and credit disbursement. The need is for comprehensive products with more flexibility in repayment schedules in order to bring rural credit to the mainstream. A wider network of specialised ATMs suited to rural needs may make the spread of rural banking easier. Products like Kisan Credit Cards (KCC), which address the needs of farmers and cultivators, have been very successful, as it empowers them. Similar products, which will empower the farmers, mainstream their returns and give them, return on their sparse savings needs to be introduced in rural market.
Conclusion
Agri-insurance in India is still weather oriented, where we are trying to mitigate the natural risks to farmers. However, risks to farmers, especially the poor and marginal farmers are varied—mostly family and social pressure. For example, if a farmer has taken an insurance to cover his rice crop and a family member falls sick, he will not have access to any policy/ credit as his creditworthiness is already covered. Thus inspite of insurance, the farmer will have to access moneylenders and thus the whole cycle of high interest rate and unavailability of institutional credit begins.
The answer to the problem is three fold:
1) Comprehensive Long Term Insurance Policy—covering life, health and market uncertainty
2) Investment in affordable infrastructure (both agricultural and social) by Government/ Private which farmers can use
3) Strong banking agents network, affordable and shared database on poor and marginal families, with bankers advising the insurance companies on the insurance requirement of farmers
Even after charting out the three fold route to penetrate the rural mass with effective insurance products, we need to say that without training and capacity building of educated rural youth it will not be feasible to leverage any product—insurance or banking. Thus management and training will need to be the main focus for effective scaling up of insurance products.
Recommendation
In the modern context of global competition, looming food shortage, environmental disasters and population pressure on land, the farmer’s interest (especially the small and marginal farmers) needs to be looked at as a bundle and not microscopically as finance, insurance, technology, sustainability, fertilizers or water resource problems.
As the issue of upscaling of insurance coverage is addressed, it is important that the divergent needs are kept in mind. As no single insurance agency has all the necessary expertise under one roof, for an effective and maximum coverage of risk insurance in agriculture there is need for multiple players.
Upscaling of insurance products, means to enhance both acceptability and sustainability of the products. As the product development onus lies with insurance companies and marketing is coming to banks, the products could be developed in discussion with the financial institutions.
Banks are the best extension service facilitator as through KYC norms they have understanding of the financial position of most of the households. They can link disbursement of farm credit with insurance products after assessing the needs of the farmers and offer an appropriate package more efficiently.
Also as for rural operations costs are high and return expected is low, banks will need to work as an institution in data mining, sharing individual KYC details and also sharing the banking representatives.
Establish a framework for trilateral partnership, between banks, Gram Panchayat and insurance companies that are needed for propagating risk insurance. The partnership can undertake risk mapping exercise for that IU, prepare roasters of land records, weather history and so on. These then can be profitably used by the insurance companies.
Post offices, retail outlets, health centers can all be exploited towards becoming banking and insurance agents
Proper training imparted to educated local youth towards effective penetration of credit and insurance products.
