Tutorial Questions Week begin 7 March 2016

Case 1

The Deposit Collector (from The Poor and their Money by Stuart Rutherford pages x to xiv, available in LMS. You will need to read at least the five pages to get more clues on the answers to the tutorial questions. Ch. 7 The Economics of Lending to the Poor - also on LMS - will prove helpful as well)

We travel to India, in the slums of the south-eastern town of Vijayawada. Here we find Jyothi doing her rounds. Jyothi is a middle-aged semi-educated woman who makes her living as a peripatetic (i.e., wandering) deposit collector. Her clients are slum dwellers, mostly women.

This is how she works. She gives each of her clients a simple card, divided into 220 boxes (eleven rows and twenty columns). Clients commit themselves to saving a certain amount per box, in a certain period. For example, one client may agree to save five rupees, at the rate of one box a day. This means that at the end of 220 days (since there are 220 boxes) she will have deposited 220 times 5 rupees, or 1,100 rupees (thats about $25 US). Having made this agreement, it is now Jyothis duty to visit this client each day to collect the five rupees. In the card reproduced here the client has got as far as saving 47 times, for a total of 235 rupees to date. When the contract is fulfilled when the client has saved 5 rupees 220 times (which may actually take more or less than 220 days, because slum dwelling women are human beings and not slot machines), the client takes her savings back. However, she doesnt get it all back, since Jyothi needs to be paid for the service she provides. These fees vary, but in Jyothis case it is 20 out of the 220 boxes - or 100 rupees out of the 1,100 rupees saved up by the client in our example.

Questions:

1. What is Jyothis fee for the service she provides, expressed in percentage terms?
2. Why would a slum-dweller wish to use Jyothis services?
3. Do you think Jyothis fee is excessive, too low or just right?By way of comparison,a major Australian bank was offering personal rates at around 14% per annum. To answer this question, identify the costs that Jyothi has bear to provide her service and compare them to relative to the revenue she is likely to earn. You should also consider the scale of a loan.
4. What is the opportunity cost to Jyothis clients, i.e, if they didnt use her services, how else would they use their money?
5. Do you think it would be profitable for a large,commercial bank to enter the business of lending to slum- dwellers? If so, why? If not, why? You should give specific reasons expressed in economic terms. For example: Yes, they should because a bank would make significant profits: their expected profit would be 2x but their costs would be just 1x. Of course, you won't be able to give precise estimates of costs but you can make a good guess whether it is likely to be profitable or not.