International remittances are always a big subject in capital flows, capturing the eye for diverse reasons such as their contributions to a country?s foreign reserves. Not quite as glamorous are the domestic migrant remittance flows that take place within the country, that are equally, if not, more important because of the economic groups they represent.

By some estimates, India has a domestic migrant population of about 100 million. Not only is this a large number, these migrants represent the poorest segments from states such as Bihar, Uttar Pradesh and Orissa, who travel to other regions for better work opportunities. According to the UNDP Human Development Report 2009, domestic migrants are estimated to contribute 10% of India?s GDP. Despite their contribution to the national income, migrants typically form a part of those excluded from the formal financial system. It goes without saying that financial inclusion, one of the most important goals of the RBI, can be achieved only when the needs and drivers of these flows are well understood.

So, how does this money flow across the country? Formal channels, of course, include banks, as well as money transfer agencies and the massive postal network, which has 1,50,000 offices across the country. The main channel amongst the informal channels is the hawala network, which relies on the honour of money brokers, who receive the money at one end and have their agents pay it out at the other end, and charge a commission for this. Other informal means include door to door cash couriers and, of course, physically sending it with travelling family or friends.

A 2010 IFMR study ?Putting Money in Motion: How much do migrants pay for domestic transfers?? looked at migrant transfers across four corridors?from Bihar to Hoskote in Karnataka, from semi-urban areas in Tamil Nadu to Mumbai, from rural Orissa to Surat, and from rural West Bengal to New Delhi. The survey found that about half the respondents listed banks as the preferred means to transfer money. Clearly, banks enjoy high levels of trust in the Indian society and they have relatively low transfer fees that come to about 3% including indirect costs.

However, only about 30% of the respondents stated that they actually used banks to remit money. The main reason for this is the low penetration of banks?only 9% of India?s 6,00,000 villages are covered by banks. What this low penetration means is that the average transaction time for sending and receiving a transfer comes to about 2.5 hours including travelling to the nearest branches. This is a huge disincentive, pushing people away from banking to other less reliable channels. Further, as transferring money through banks involves mainly fixed costs, banks are relatively attractive only as the amounts transferred get bigger. Unsurprisingly, there is then a positive correlation between the people who transfer money through banks and their income levels.

Post offices, with their wide network are not very popular either, accounting for just 13% of the transfers. They are very expensive and their total costs come to about 6% of the remittance value, including informal costs such as tips and bribes. Consequently, only 43% of the people covered in the IFMR study used formal channels for remittance, while the balance 57% used a mix of hawala networks, cash couriers and physically sending money through friends/relatives. Amongst these informal channels, the cash courier route seems to be the most preferred, since its total costs are scarcely greater than those imposed by banks, but the speed of delivery is almost a tenth of the latter?s at a total of 18 minutes spent transacting by the sender and receiver.

As the RBI prefers a bank-led model of financial inclusion, it is important to see where banks are losing out when it comes to remittance transfers. The IFMR survey notes that for migrants the most important attribute of a remittance system is security, followed by speed of delivery. Security concerns imply that informal networks are not the way people should be transacting, while time concerns disqualify banks from currently filling this need.

While banks are the preferred means of transactions, due to strict KYC norms and the fact that any person can make deposits in another?s account so long as he/she has the destination account holder?s information, without needing an account him/herself, 51% of remittance receivers have an account as opposed to only 22% of senders. Further, since the primary reason for opening an account amongst 40% of the respondents was to receive payments (remittances or government payments), clearly policy must be directed at improving banking services and awareness at the recipient?s end.

It isn?t unreasonable to assume if India has 100 million domestic migrants and if the average size of an Indian household is five members, that 400 million people are dependent, at least to some extent, on remittances. In other words, remittances are a crucial source of income for a third of the country?s population, and yet their value remains neglected. If the commissions charged on money transfers could be brought down by say 2%, by shifting to formal channels, a population segment contributing 10% of GDP and sending a quarter of its money home stands to save about $750 million annually (own estimates).

To some extent, this activity is receiving greater focus now. Unbanked districts are being covered on a priority basis and the rise in branch network is increasingly being augmented by the agent networks of business correspondents, facilitated by ICT. The advantage of bringing people into formal financial networks is not just on the savings side, but also on the credit side as transaction histories can be used to develop records for credit worthiness. However, at the current pace of expansion, it will still take years before these steps achieve the sort of total penetration that will obviate the need for informal networks.

Tapping the rising mobile phone density could be one way towards speedier adoption of the formal channel as this can fulfill all the needs for security, speed, cost and access. This clearly calls for carefully drafted, mutually coherent and properly enforced policies that will ensure the development of our $35-billion domestic remittance market.

The writers are with the Centre for Financial Inclusion,

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