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> Posted by Bindu Ananth and Amit Shah, President of IFMR Trust and Head of Business Intelligence at IFMR Rural Finance

Bindu and Amit co-edited the recently published book Financial Engineering for Low-Income Households. An edited compilation of articles, the book focuses on using financial engineering to design financial services for low-income households. A Q&A with Bindu and Amit follows. 

For someone unfamiliar with the field, how would you describe financial engineering, and to what extent do you see financial engineering being applied by retail providers serving low-income households today?

In the Foreword to the book, Dr. Nachiket Mor, a mentor to us at IFMR Trust, observes that the retail finance industry the world over has gone in the direction of standardized products and transferring the burden of decision-making away from bankers and to the consumer. This is also true of providers serving low-income households. This, we think, misses the power of finance. The motivation of this book is to systematically compile principles from finance and economics theory and apply them to the context of design and delivery of financial services for low-income households. We use the term financial engineering in this context.

Do you think that this framework addresses any misapprehensions, gaps, or problems in the way that financial products are currently designed for low-income households?

I think it is safe to say that there is negligible design today – largely because so much of the energy and focus has been on sheer distribution. Just getting a small loan delivered in a remote context is hard enough, leave alone worrying about whether the loan is structured well to suit the customer. This book lays out an approach for a new generation of providers, who are concerned about distributing well-designed products to meet client needs, not just any product.

One of the goals of your book is to provide an understanding of the risk-reward trade-offs facing low-income households. In your experience, what is the most widespread risk barrier, perceived or actual, preventing greater financial services adoption in India?

I think one of the big challenges that we worry a lot about is that so much of the portfolio of low-income households is dominated by physical assets (land, house, and livestock). These are typically low return, high risk, and highly correlated with their human capital. The opportunities to do better than that are therefore infinite.

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