Ratan mf tech_path_bmgf

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

• ICTs and microfinance– Nature of problems– Appropriate solutions


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


… 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


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


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


… 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)


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…


5members

Current models of microfinance delivery

12-20members24-36% 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


Can ICTs 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-/M-paymentsEnabling cashless transactions

1. Disbursal of amount (loan)2. Collection of dues/ payments (loan, savings &

insurance)3. Transfers

Back-end IS1. Aggregation of client

data1. Actuarial analysis2. Target offerings

GRAMEEN TECHNOLOGY CENTRE

CGAP


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


Can ICTs enable microfinance?

Front-end IS1. Account creation (loan,

savings & insurance)1. Collecting client data2. Screening/ verification

2. Transaction data3. Processing claims (savings,

transfers & insurance)

Back-end IS1. Aggregation of client

data1. Actuarial analysis2. Target offerings

GRAMEEN TECHNOLOGY CENTRE


m-bankingE-/M-payments

Enabling cashless transactions1. Disbursal of amount (loan)2. Collection of dues/ payments (loan, savings &

insurance)3. Transfers

CGAP

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)


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 ICTs 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


Others involved: Ujjivan and Pradan staff & members, Shabnam Aggarwal, Mahesh Gogineni, Sean Blagsvedt, Kentaro Toyama, Vibhore Goyal, Jonathan Donner, Indrani Medhi, Rajesh Veeraraghavan

? [email protected]

Thanks!

Economy & Finance

Ratan mf tech_path_bmgf