INDIA
28 September 2015
Boosting the Developmental Payoffs of India's Remittance Flows
The full developmental potential of India's migrants' remittances has not been realised argues S. K. Sasikumar.
India is currently the largest recipient of remittances in the world. According to data recently released by the World Bank, India received US $ 70 billion remittance flows in 2014, accounting for 12 per cent of the total global remittance flows and 16 per cent of the flows to developing countries. What is striking is that the quantum of remittance inflows to India has almost tripled over the period from 2005 to 2014.
One of the most important dimensions of remittance flows is their remarkable stability. While foreign direct investment, portfolio investment and other capital flows rise and fall cyclically, remittances show remarkable trend stability over time and have increased even during economic slowdowns. At the micro level, remittances have had a stabilising effect on household income and contributed significantly to raising consumption expenditure, thus bringing down the poverty level. At the individual level, the quality of life, as manifested in education and health indicators, has markedly improved as a result of such flows.
However, the full developmental potential of remittances has not been realised as the country’s policy frameworks have focused more on macro financial stability rather than on the migrant households and individual economic choices and behaviour. Therefore issues relating to remittance transfers and costs as well as utilisation have largely remained outside the policy architecture. We highlight certain strategies to maximise the developmental payoffs from remittances, particularly in the context of some recent and major developments in the remittance industry.
A notable recent development related to remittance flows has been the attempt to decipher the cost of sending remittances. This was a hitherto extremely neglected area, resulting in minimal policy initiatives to reduce such costs. What is heartening is that the costs of sending remittances in almost every region of the world, including India, have registered a decline during 2009-2014.
The latest estimates, based on Remittances Prices Worldwide, indicate that the average cost of sending US $ 200 to the South Asian region, including India, has reduced from around 7.3 per cent in 2009 to 6.0 per cent in 2014. The reduction in transfer costs in recent years can be attributed to factors like the entry of new players in the market and the resultant competition, and the use of advanced technologies supporting digital payments.
There has been a sizable growth and spread of Remittance Service Providers (RSPs) across the world in recent years. A recent mapping of the remittance industry identified nearly 96,000 payment locations in India, with banks accounting for 64 per cent of the total. However, the shares of other RSPs are becoming increasingly significant, with several global and regional institutions like Western Union and Money Gram becoming prominent players in this field. The growing competition, particularly in major remittance-originating regions like the Gulf, are encouraging RSPs to increasingly deploy modern technologies to diversify payment options, reduce transaction time as well as reduce remittance costs.
Another striking dimension of the Asian remittance industry is that though banks are overwhelmingly dominant at the receiving end as payment points of remittances, as originators they account for only 21 per cent of all RSPs transferring remittances to Asia. Additionally, all the banks offering remittance-sending services partner only with banks on the payment side.
A disconcerting feature of the remittance industry is that more than two-thirds of the remittance payment points are based in urban centres, while the majority of the remittance-receiving households are located in rural areas. This means that a substantial majority of migrants and their households remain excluded from easy access to formal remittance transfer systems and thus continue to depend on informal systems to transfer remittances.
Given that transfer of remittances using mobile technology is the least expensive option available to migrants and their households, there is an urgent need to expand the use of mobile financial transactions by all RSPs. Though mobile remittance-sending technology is widely used by payment points in sending regions like the Gulf countries, their outreach is limited in payment points in the remittance-receiving regions in India. One of the key requirements for universalising the use of mobile transfer technology is to support the modernisation of all RSPs, particularly non-banking financial institutions, post offices and microfinance institutions.
Financial literacy programmes targeted at migrants and remittance-receiving households are one of the most neglected aspects of migration management in India. Provision of basic skills to manage finances can have a considerable impact on the choice of modes of remittance transfers, expenditure preferences, savings behaviour and options for converting remittances into assets. Playing the role of facilitators, concerned government authorities can encourage banks/financial institutions, employers’ associations, local business leaders and migrant associations to form networks at the local level to impart the necessary skills to the migrants and their households.
Even today, a substantial amount of remittances reaching India are transferred through informal means; this puts the migrants at risk as they can be found guilty under the new and stringent money-laundering regulations. Expanding the outreach of RSPs to backward and rural areas, reducing the costs of transfer through formal systems, and making formal transfers faster are the surest means to encourage a switch to formal modes of transferring remittances.
New models are being evolved to promote micro and small business enterprises among migrants. For instance, in some countries remittance-receiving households are being offered access to microfinance to start or expand a business, using remittance income streams as collateral. Reportedly, such initiatives are contributing significantly to household income, generating employment and helping local development. Participating families are being provided entrepreneurship training and capacity building to improve their ability to run micro and small businesses. Such innovative and development-oriented programmes must be initiated in the various regions in India which reporting high migration density.
Such strategies, which are premised on the need to situate the migrant and the household—and her/his experience and economic decisions—at the centre, can ensure the maximisation of developmental benefits of remittance flows.
One of the most important dimensions of remittance flows is their remarkable stability. While foreign direct investment, portfolio investment and other capital flows rise and fall cyclically, remittances show remarkable trend stability over time and have increased even during economic slowdowns. At the micro level, remittances have had a stabilising effect on household income and contributed significantly to raising consumption expenditure, thus bringing down the poverty level. At the individual level, the quality of life, as manifested in education and health indicators, has markedly improved as a result of such flows.
However, the full developmental potential of remittances has not been realised as the country’s policy frameworks have focused more on macro financial stability rather than on the migrant households and individual economic choices and behaviour. Therefore issues relating to remittance transfers and costs as well as utilisation have largely remained outside the policy architecture. We highlight certain strategies to maximise the developmental payoffs from remittances, particularly in the context of some recent and major developments in the remittance industry.
A notable recent development related to remittance flows has been the attempt to decipher the cost of sending remittances. This was a hitherto extremely neglected area, resulting in minimal policy initiatives to reduce such costs. What is heartening is that the costs of sending remittances in almost every region of the world, including India, have registered a decline during 2009-2014.
The latest estimates, based on Remittances Prices Worldwide, indicate that the average cost of sending US $ 200 to the South Asian region, including India, has reduced from around 7.3 per cent in 2009 to 6.0 per cent in 2014. The reduction in transfer costs in recent years can be attributed to factors like the entry of new players in the market and the resultant competition, and the use of advanced technologies supporting digital payments.
There has been a sizable growth and spread of Remittance Service Providers (RSPs) across the world in recent years. A recent mapping of the remittance industry identified nearly 96,000 payment locations in India, with banks accounting for 64 per cent of the total. However, the shares of other RSPs are becoming increasingly significant, with several global and regional institutions like Western Union and Money Gram becoming prominent players in this field. The growing competition, particularly in major remittance-originating regions like the Gulf, are encouraging RSPs to increasingly deploy modern technologies to diversify payment options, reduce transaction time as well as reduce remittance costs.
Another striking dimension of the Asian remittance industry is that though banks are overwhelmingly dominant at the receiving end as payment points of remittances, as originators they account for only 21 per cent of all RSPs transferring remittances to Asia. Additionally, all the banks offering remittance-sending services partner only with banks on the payment side.
A disconcerting feature of the remittance industry is that more than two-thirds of the remittance payment points are based in urban centres, while the majority of the remittance-receiving households are located in rural areas. This means that a substantial majority of migrants and their households remain excluded from easy access to formal remittance transfer systems and thus continue to depend on informal systems to transfer remittances.
Given that transfer of remittances using mobile technology is the least expensive option available to migrants and their households, there is an urgent need to expand the use of mobile financial transactions by all RSPs. Though mobile remittance-sending technology is widely used by payment points in sending regions like the Gulf countries, their outreach is limited in payment points in the remittance-receiving regions in India. One of the key requirements for universalising the use of mobile transfer technology is to support the modernisation of all RSPs, particularly non-banking financial institutions, post offices and microfinance institutions.
Financial literacy programmes targeted at migrants and remittance-receiving households are one of the most neglected aspects of migration management in India. Provision of basic skills to manage finances can have a considerable impact on the choice of modes of remittance transfers, expenditure preferences, savings behaviour and options for converting remittances into assets. Playing the role of facilitators, concerned government authorities can encourage banks/financial institutions, employers’ associations, local business leaders and migrant associations to form networks at the local level to impart the necessary skills to the migrants and their households.
Even today, a substantial amount of remittances reaching India are transferred through informal means; this puts the migrants at risk as they can be found guilty under the new and stringent money-laundering regulations. Expanding the outreach of RSPs to backward and rural areas, reducing the costs of transfer through formal systems, and making formal transfers faster are the surest means to encourage a switch to formal modes of transferring remittances.
New models are being evolved to promote micro and small business enterprises among migrants. For instance, in some countries remittance-receiving households are being offered access to microfinance to start or expand a business, using remittance income streams as collateral. Reportedly, such initiatives are contributing significantly to household income, generating employment and helping local development. Participating families are being provided entrepreneurship training and capacity building to improve their ability to run micro and small businesses. Such innovative and development-oriented programmes must be initiated in the various regions in India which reporting high migration density.
Such strategies, which are premised on the need to situate the migrant and the household—and her/his experience and economic decisions—at the centre, can ensure the maximisation of developmental benefits of remittance flows.