Remittances-Are they Really Helping in financial Development?

Ajay Kumar Contact No.9971881009 Ajay.110092@gmail.com Shaheed Sukhdev College of Business Studies, University of Delhi

Abstract
This paper investigates the impact of remittances received by developing countries and financial development. This is an important issue given recent studies showing that financial inclusion can have significant beneficial effects on households. Using household-level survey data, the impact of remittances on households use of savings and credit instruments from formal financial institutions. They find that although remittances have a positive impact on financial inclusion by promoting the use of deposit accounts, they do not have a significant and robust effect on the demand for and use of credit from formal institutions. If anything, by relaxing credit constraints, remittances might reduce the need for external financing from financial institutions, while at the same time increasing the demand for savings instruments. For example in Sub-Saharan Africa only 24% of adults have a bank account even though Africa's formal financial sector has grown in recent years. It is argued that as banking services are in the nature of public good; the availability of banking and payment services to the entire population without discrimination is the prime objective of financial inclusion public policy.

Introduction
Remittances have become a significant source of external financing for developing countries. They reached US$307 billion in 2009 and In 2012, according to the World Bank Report, $401 billion went to developing countries (a new record) with overall global remittances at $514 billion more than double the amount of official development assistance and over two-thirds of the private capital flows received by developing countries in that year. Remittances are especially significant for small developing countries neighboring large rich economies. For example, remittances account for approximately 17 percent of GDP and they represent the second most important source of external flows after exports. A World Bank report has placed India at the top of a list of countries that receive remittances from their citizens working abroad. Indians in service abroad had remitted as much as $71 billion last year. The remittances have risen from $3.27 billion in 1991 to $8.45 billion in 1996 which again rose to $71 billion in 2013, enabling India to the top slot. The amount was 55.6 billion US dollar in 2010-11. Gulf countries followed closely by North America accounted for the maximum amount of remittances with the former adding $24.93 billion to the Indian kitty in the previous fiscal. Around 40% of the international remittances flow to the three states of Kerala, Punjab, Uttar Pradesh and Goa which are among the top international remittance-dependent economies of the world. And, Bihar, Uttar Pradesh and Rajasthan on domestic remittances. Internal labour migration has a long history in India, and is increasing rapidly as differences in the rate of growth between and within states, and between the urban and rural areas, increase. Huge flows of migrants the country in search of a better life for themselves and their families, who mostly stay behind in their villages. One of the problems migrants face is the need for a fast, low -cost, convenient, safe, and widely accessible money transfer or remittance service so that they can send their earnings back to their families and dependents for meeting vital consumption needs, including support and sudden medical emergencies, as well as important investment requirements. At present options available to a poor migrant are limited. The postal money order charge of 5% means parting with a full day's wages about once a month to send one's meagre savings home. This is unacceptable in this day of modern electronic communications. A second option is bank drafts, which are cheaper, but most recipients do not have access to the banks to cash drafts easily. A third option is sending money in cash through returning friends and relatives, but this means waiting till someone who can be trusted enough is returning home, and even then there is the risk of theft. The idea of remitting money back home probably never occurred to India's first migrants - the labour that travelled to Mauritius, Fiji and the West Indies in the mid-1800s. Those who did

manage to return to India after 10 years of hard work under extremely tough conditions considered themselves lucky if they managed to bring back a few rupees as savings .Thankfully, things have now changed for the better. The World Bank's October report that India will have received remittances worth $71 billion the highest among developing countries by end-2013 is testimony to changing times. In 2012 too, India was the leading recipient of remittances, accounting for $69 billion, or 3.7% of the country's dollar GDP in 2012. Notwithstanding the seemingly low contribution of remittances, its significance, even for an economy such as India, ought not to be discounted. Remittances in 2012 covered two-fifths of the merchandise trade deficit recorded that year. For a country faced with a widening trade deficit that has consistently showed the current account deficit .Equally noteworthy is the steady trend migrant remittances have shown when compared to extreme swings in inflows of foreign direct investment, portfolio capital and external debt. Our remittance figures despite the global recession have been consistently rising since 1990. India, of course, receives remittances from both unskilled and/or semi-skilled migrants (largely from the Gulf countries) and highly skilled workers (largely from the US and Europe). While more Indians working in Europe and the US are increasingly adopting modern methods such as electronic funds transfer for sending money back home, a considerable percentage of their counterparts in the Middle East haven't taken advantage of money management and financial inclusion. This trend could be attributed to the lack of financial literacy in these segments. Finding the way
First, remittances might increase the demand for savings instruments. The fixed costs of sending remittances make the flows lumpy, providing households with excess cash for some period of time. This might potentially increase their demands for deposit accounts, since financial institutions offer households a safe place to store this temporary excess cash. Second, remittances might increase households likelihood of obtaining a loan. Processing remittances flows provides financial institutions with information on the income of recipient households. This information might make financial institutions better willing and able to extend loans to otherwise opaque borrowers. On the other hand, since remittances might help relax households financing constraints, the demand for credit might fall as remittances increase. There are only three papers that examine the direct link between remittances and the domestic financial system. They find strong evidence indicating that remittances promote financial development, measured by the ratio bank deposits to GDP, and the share of bank credit to GDP. Focusing exclusively on Mexico and using municipality-level data, find that municipalities where a higher proportion of households receive remittances have a higher number of bank branches and

accounts per capita, and larger shares of deposits to GDP. The report of the Rangarajan committee on financial inclusion had included remittances along with credit, savings and insurance facilities as financial services that needed to be delivered at low cost to relatively weaker sections of society, which includes migrant labour. My estimate is that the formal sector handles just 50% of the migrant labour remittance market, while the major share continues to be channelled through informal means and trusted friends or relatives.

Government does Recognised the desperation of unskilled and/or semi-skilled migrants. The fact that these individuals not only need an organised channel to send money back to India, but also require a channel that can provide such services at the cheapest cost possible is not lost on the government. Initiatives such as asking banks to improve infrastructure and extending the scope of electronic payment mechanism is a step towards reducing the costs of remittance. Increased convenience to migrant labour can be provided by setting up centralised receiving centres for all branches of money transfer agencies and banks. Improved technology will also increase efficiency and help reduce costs further. Reduced costs always prove to be a clear incentive for bringing more people into the official remittance channels, thereby creating an avenue for extending banking to the unbanked. Apart from the reducing costs illegal nature of informal money transfer and the threat of thefts should be looked after. Thus, cheap and accessible remittance services provided by banks or reputed money transfer companies are an urgent need.

More Banks & Banking Services What is interesting is that most receivers of small-ticket size cash remittances actually want to open bank accounts in order to receive these transfers. Thus, offering them an opportunity to access the banking channel and linking payments received to savings accounts will promote financial Development. After all, one must not forget the efforts and contribution of the over 11-million-strong migrant worker population towards the country's social and economic development. SMS alert facility for remitter and beneficiary is the highlight apart from instant credit to Federal Bank accounts. The agreement was exchanged between A. Surendran, general manager, retail & international business, Federal Bank and George M. Jacob, vice president, legal corporate affairs and marketing, Muthoot Group. Reserve Bank of India allowed various services such as payments to utility service providers, tax payments, and EMI payments in India with a view to expand the scope of cross-border inward remittances.

RBI also introduced facilities such as payments to utility service providers in India, for services such as water supply, electricity supply, telephone (except for mobile top-ups), internet, television, tax payments and EMI payments in to Banks and Non-Banking Financial Companies (NBFCs) for repayment of loans, would be allowed under RDA. Under RDA the existing arrangement, credit to non-resident (External) rupee accounts maintained by NRI in Indian rupees, payments to families of NRIs, payments in favour of Insurance companies, Mutual Funds and the Post Master for premia/ investments, and payments in favour of bankers for investments in shares, debentures are allowed under RDA. Among others, payment to cooperative housing societies, government Housing Schemes or estate developers for acquisition of residential flats in India in individual names by the NRIs, payments of tuition/boarding, examination fee to schools, colleges and other educational institutions under RDA. RDA also includes Payments to medical institutions and hospitals for medical treatment of NRIs/their dependents and nationals of Gulf countries in India, payments to hotels by nationals of Gulf countries/NRIs for their stay are allowed under the arrangement. Payments to travel agents for booking of passages of NRIs and their families residing in India towards their travel in India by domestic airlines/rail and trade transactions up to Rs 2 lakh per transaction are also a part of the existing RDA. Reserve Bank constituted an advisory group to implement a national bill payment system that will enable households to pay utility bills, school fees, remittances and other bills using their bank accounts. The RBI also announced the constitution of a GIRO Advisory Group (GAG) to implement a national GIRO-based Indian Bill Payment System such that households will be able to use bank accounts to pay school fees, utilities, medical bills and make remittances electronically," RBI said in a notification. A GIRO is a payment instruction from one bank account to another bank account initiated by a payer. It facilitates payment through cash, cheque, credit/debit cards and prepaid payment instruments in transfer of funds to the bank account of a beneficiary. As the importance of remittances for developing countries has grown. An issue which has received little attention is the effect of remittances on the financial system. This issue is important given the evidence that financial development matters for growth and poverty alleviation and financial inclusion has many beneficial effects for households. since 1993, remittance dependency appears to have grown in India as well as in different States such as Kerala, Goa and Punjab. It estimates the domestic remittance market to be roughly $10 billion in 2007-08, 60% being Inter-State transfers and around 70% being channelled through the informal sector as against 25% in China. Further, around 50% of these remittances went to households in the top consumption quintile suggesting that remittances could be increasing source region inequality and its role in enhancing financial Development. Recent studies on India have highlighted the positive impacts of domestic remittances on wealth creation and asset accumulation as well as in increasing teen schooling attendance. More research on India would

be required to understand the direct and indirect effects of remittances on poverty alleviation and inequality.

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