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On microfinance (and technology)
Aishwarya Ratan, MSR India, March 2007
“Dhobis (washermen), tailors and barbers contribute more to the GDP of Andhra Pradesh than the IT sector.”
(Vikram Akula, SKS; Source CSO, 2004-05)
Urban Rural
>$2000 /year
$1-2000 /year
<$1000 /year
29
8
17
Our reference segment
Low income households
Both rural and urban areas
© 2007 Microsoft CorporationSource: Indian National Survey Sample Organization 2001-2002 HH surveyAishwarya Ratan, MSR India, March 2007
Photo source: CCD Mahakalasam & Ekgaon
Data source: NCAER
Outline
• Microfinance and development– Demand – Supply
• Technology and microfinance– Nature of problems– Appropriate solutions
Aishwarya Ratan, MSR India, March 2007
The poor use finance for growth and survival …
• Sustenance (40%)– Fulfill basic consumption– Protect against shocks– Access lump sums for
lifecycle needs
• Growth (60%)– Enterprise (30%)– Buildup assets:
education, home (30%)
Survey of 64 LI & LMI urban and rural HHs, 2006
Aishwarya Ratan, MSR India, March 2007
… but face very high prices for finance.
• No ‘acceptable’ collateral/ surety• No unique ID• No record of previous borrowings/ repayments• Irregular income flows• Low literacy
9-12% APR
24-120% APR
0-60% APR
Aishwarya Ratan, MSR India, March 2007
So they turn to a variety of old and new providers to fill the gap…
• Microfinance targets urban and rural low-income (<$2000 annual HH income) clients
• Uses joint-liability social contracts
• Provides affordable finance
18%
37%
26%
4%
16%
Formal Semi – Formal Informal 1-on-1 personal
Informal 1-on-1 impersonal
Informal mutual (Chit
funds )
Survey of 64 LI & LMI urban and rural HHs, 2006
Banks, Insurance
co.s
Microfinance
Institutions
Employers, relatives,
neighbors. friends
Moneylenders, pvt
financiers
Aishwarya Ratan, MSR India, March 2007
India used to offer targeted financial services to the poor &
excluded…
• Priority Sector Lending• The 1:4 rule for bank branch expansion
Growth of Bank Branches in India
Source: Burgess and Pande, “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment.” 2003
Aishwarya Ratan, MSR India, March 2007
… but these are declining.
Direct formal credit to Small Borrowing Accounts (<$600 credit accounts) has shrunk since early 90s:
Number of SBAs: 62 mn (1992) 37 mn (2001)
Net Banking Credit to SBAs: 25% (1980s) 5% (2003)
• High transaction costs in finding and servicing small-ticket clients at high frequency
• Regulatory cap on prices banks can charge
• Profitability vs. outreach (post-liberalization)
Aishwarya Ratan, MSR India, March 2007
Banks’ reasons:
• High growth – India: $4 mn lent (1995-
96) to >$2.8 bn (2006-07)
• High potential growth– India: Market size estimated
at $16-22 bn
• Large outreach– India: >33 mn HHs
• Large number of players – India: >3000 MFIs
• Few industry leaders– Only 1% of providers WW
fully financially self-sustaining
Hence the rising importance of the microfinance industry,
characterised by…
Aishwarya Ratan, MSR India, March 2007
5members
Current models of microfinance delivery
12-20members
24-36% APR
NGO facilitator
Cooperative
RS.@ 9-12%
APR
The group is the MFIInterest accrues to member-borrowers~33 mn outreach in IndiaLess profitableMore welfare focused – flexible paymentsMost common model in India
Commercial
RS.
RS.
@ 9-12% APR
@ 24-36% APR
External provider is the MFIInterest accrues to 3rd party intermediary~8 mn outreach in IndiaMore profitableMore commercially focused – EMI paymentsMost common model worldwide
MFI
Aishwarya Ratan, MSR India, March 2007
Can technology enable microfinance?
Front-end IS1. Account creation (loan,
savings & insurance)1. Collecting client data2. Screening/ verification
2. Transaction data3. Processing claims (savings,
transfers & insurance)
E-paymentsEnabling cashless/ electronic payments
1. Disbursal of amount (loan)2. Collection of dues/ payments (loan, savings &
insurance)
Back-end IS1. Aggregation of client
data1. Actuarial analysis2. Target offerings
GRAMEEN TECHNOLOGY CENTRE
CGAP
Aishwarya Ratan, MSR India, March 2007
m-banking
Case: PRADAN’s Computer Munshi experiment
Problem area• Poor quality of financial data• No aggregate record
Issues• Costs associated with:
• Time spent on accounting each week• Mistakes discovered at annual audit
Experiment• Goals
• Improve SHG data quality & aggregate data• Outsource weekly accounting function – create sustainable business model
•Methods•Have an Accountant with a PC serve a Federation of SHGs•Charge nominal fee for data processing service•Use manual transport to ferry data back and forth
•Results•Weekly meeting time cut by half•Instant evaluation of financial performance of large group of SHGs possible
Original workflow
Improved workflow
(90,000 rural clients, EAST/CENTRAL India)
Weekly collections
Book-keeping done locally Annual auditing by NGO
Weekly collections
Copy of transaction record put in drop-box CM updates records &
prints balances & dues
Annual auditing by NGO
Aishwarya Ratan, MSR India, March 2007
Pradan’s ‘Computer Munshi’ system (SHG)
Drop box
2
11
2
2
2
or
1
1
2
3
45
6
7
8
9
10
11a
14 12a
13
11b
12b
15
PRADAN (NGO)
CM Peon
Cluster meeting
Rs. 30/ SHG/ mth
Rs. 3/ SHG/ wk
30-50 SHGs
100-200 SHGs
Can technology enable microfinance?
Front-end IS1. Account creation (loan,
savings & insurance)1. Collecting client data2. Screening/ verification
2. Transaction data3. Processing claims (savings,
transfers & insurance)
E-paymentsEnabling cashless/ electronic payments
1. Disbursal of amount (loan)2. Collection of dues/ payments (loan, savings &
insurance)
Back-end IS1. Aggregation of client
data1. Actuarial analysis2. Target offerings
GRAMEEN TECHNOLOGY CENTRE
CGAP
Aishwarya Ratan, MSR India, March 2007
m-banking
MSRI Urban pilot with UJJIVAN
Customer Profile form filled on paper in field
Branch Manager ApprovalPost all forms to Head Office
Head Office enters info to database
Piles of extra paper and money gone to waste
Customer is approved!
Problem areaNew Customer Profile Creation
IssuesCosts associated with:
• Double data entry• Error correction• Data transport
• Stationery• Back-office staff
ExperimentGoals
• Reduce costs• Improve client data quality
Methods•Simple mobile-phone
application to record client data in field
•Data transmission via SMS•Automatic upload of data into database using a smart phone
SMS-server
Existing workflow
Customer Profile form filled electronically in field
Manager Approval
Customer is approved!
SMS all forms to Head Office
Improved workflow
COST SAVINGS?-Low labour cost
-Relative efficiency
(25,000 urban clients, SOUTH India)
Aishwarya Ratan, MSR India, March 2007
Key take-aways
• Have a balanced appreciation of microfinance as one of many ‘killer apps’ to target poverty and/ or promote growth
• The value-addition of technology in enabling microfinance greatly depends on delivery model, operational efficiency and labour/ technology costs
• Hybrid, cost-aware approaches and accurate matching of device with target functionality are key
Photo sources: CCD Mahakalasam & Ekgaon; PRADAN
Aishwarya Ratan, MSR India, March 2007
Others involved: Ujjivan and Pradan staff & members, Shabnam Aggarwal, Mahesh Gogineni, Sean Blagsvedt, Kentaro Toyama, Vibhore Goyal, Jonathan Donner, Indrani Medhi, Rajesh Veeraraghavan
Thanks!