(IFMR) Trust Me

Editor’s note: In addition to being informative, this post also outlines what IFMR Trust is looking for in potential hires. If you would like to see that immediately, go after the jump.

Before Thanksgiving break I had the pleasure of sitting down at an informal roundtable with Dave Wallack, Senior Vice President of People to learn more about IFMR Trust‘s ambitious plans to provide financial inclusion to every person in India. Chaired by Dr Nachiket Mor, who is also the President of the ICICI Foundation for Inclusive Growth, the Trust’s mission is to “ensure that every individual and every enterprise has complete access to financial services.” In order to accomplish this goal, the Trust is looking at a rather unconventional business model that where the non-profit parent oversees multiple self-sufficient for-profit silos in various financial sectors.

The three ventures that the Trust has currently launched are the IFMR Trust Holding Company (ITHC), the IFMR Trust Advisory Services (ITAS) and the IFMR Trust Guarantee Company (ITGC). Each venture has a specific and distinct goal. The ITHC aims to build a network of Kshetriya Gramin Financial Services (KGFS) that will serve as low-cost, paperless branches providing access to financial products. According to Wallack, the goal is to have one of these branches for every 10,000 people or 2,000 households. Wallack emphasized the feasibility of such scale is due to the incredibly low-cost structure of each branch. By being completely paperless, transaction costs is on the scale of 20-30 rupees as opposed to $20 dollars. Wallack self-titled the initiative as the Starbucks of microfinance, as they are able to provide loans at only 11.5%, far less than the typical 20-30% charged by traditional MFIs.

The ITAS’ charge recognizes that microfinance is merely a stopgap or defensive measure and that more aggressive financial services will be needed to enable true inclusion. In order to do this, the ITAS has structured as essential a private equity firm and with the aim of raising $150 US. Utilizing this capital, ITAS will look at 14 different supply chains that reach the rural population and figure out ways of improving and fixing them through investments in operating companies along the product cycle. These investment strategies, organized as Network Enterprises, will operate in a for-profit fashion with the belief that the quest for profits will seek out the most efficient and effective ways to address the supply chain breakdowns.

One example is the current gap that exists between urban labor demand and rural supply. After some preliminary research, ITAS discovered that the major hurdle was that rurual workers could not afford to live anywhere in the city for their first 2 weeks, because they had yet to been paid. In order to resolve this ITAS partnered with a local temporary housing and staffing company in order to provide that stopgap housing for these workers.

Finally, the ITGC will focus on providing much needed debt capital to small and medium size enterprises throughout India to truly enable them to grow. Here, the organization is partnering with many existing financial providers to roll out their offerings more aggressively.

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Smart Cards for a Smart Nation

[Story source: Business Standard]

Recently, Business Standard carried three articles under the Smart Cards byline. The articles – “Smart choice, sloppy plan“, “Andhra villagers now have pension on their fingertips“, “From Dhenakal to Bellary” – track the introduction of smart cards in various states of India.

The first article mentions how the people of Rajasthan are caught up in the problem of plenty. Rajasthan government issued around 100,000 health cards to people in its state for health insurance – but in the process it stopped issuing the smart cards issued by the central government under the National Health Insurance Scheme(NHIS). The central government scheme holds many strengths. It is valid across all states. A lot of research has gone into designing the smart card under NHIS – for example, it will help the migrant labourer since it is acceptable at establishments across the nation. It was also an effort at national standardisation and would have also been an effective tool to collect statistics.

The second article narrates how smart cards have given a boost to financial inclusion efforts in Karimnagar and Warangal districts of Andhra Pradesh. The state government, in a bid to inclucate “banking habits among the poor”, distributed around 200,000 smart cards in the two districts. At the same time, it gave the list of receipients of the cards to the banks who agreed to be part of the project. The banks, consequently appointed Zero-Mass in Karimnagar and FINO (Financial Information Network and Operations Limited) in Warangal to disburse cash from social welfare schemes using the smart cards. This simple chain has helped in reducing chances of corruption and at the same time, drawn in people who were hitherto uncovered by traditional banks.

A FINO smart card

A FINO smart card

The concluding article talks about similar efforts in the Orissa and Karnataka. This time, Zeromassa and FINO are replaced by the ubiquitous postman and banker. Smart cards are being used to disburse money under the Social Security Pension and NREGP schemes. The project is expected to roll out in December 2008 and BSNL’s assisstance is being sought for connectivity.

The overall picture is that of optimism though the Rajasthan episode calls for eschewing populism. In a country like India where the budget for social welfare schemes are sizeable, smart cards will not only ensure that entire welfare money reaches the intended beneficiaries but will also help in reducing the delivery costs of such welfare schemes.

An F in Financial Inclusion

In a first of its kind survey, the Indian Council for Research on International Economic Relations (ICRIER) has released a study analyzing the level of financial inclusion currently in India relative to other nations. The results are unimpressive. The paper

ranks India at 29 in a list of 55 countries based on the country’s performance in banking penetration, availability of the banking services, and the usage of the banking system. India’s ranking goes down to 50 (out of 100 countries) if one removes the banking penetration as one of the determinants from the Index. This shows that even though there is a higher banking penetration, there are inefficiencies in making these services available to the financially excluded population. [Source: VC Circle]

We have written to this issue before. Particularly, I interviewed Gautum Ivatury of CGAP, and their efforts in addressing financial inclusion via mobile banking. This study is interesting because it highlights how building a bank is only part of the process. The drop in rankings when controlled for banking penetration emphasizes this need.

Due to this interesting dynamic, there is a definite need for innovative and unconventional methods to reach these otherwise excluded communities. Technological approaches like kiosks and mobile phones are one angle, but I also have an inkling that much of it stems from being uninformed or even skeptical of modern institutions.

Bank in a shop, Shop in a bank

Story source: Livemint

“Abhihlasha,” a pilot project being run in the Uttam Nagar area of Delhi is putting the mobile phone banking story in action. The initiative is a collaboration between Eko India and Centurion Bank of Punjab (now taken over by HDFC).

The modus operandi of the system has been designed simple. The mobile phone of the customer is his or her account number. To open an account, a customer needs to deposit an identity proof with an Eko retailer (Eko retailer is just a normal shop doubling up as a Eko cash point or Eko retailer), who then hands over a booklet that contains a welcome letter, the product leaflet, a manual and a small “signature” booklet, that has 100 signatures, each a 10-digit number that has four blank Xs, or digits to be filled in by the customer at the time of a transaction. [Livemint story excerpt]

The benefits of mobile phone banking, especially for India, are compelling and have been amply demonstrated by this pilot.

  • Transaction costs are close to nothing in terms of capital expenditure. Banks only need to pay the commission per transaction. Makes sense when Abhishek Sinha reveals that each physical banking transaction costs a bank more than Rs100 a customer and each ATM transaction more than Rs15.
  • Conditions like maintaining a minimum balance are done away with. This is a genuine step towards addressing the banking needs of the poor.
  • The Eko retailer gets secondary source of income – who knows, with its popularity it may be the primary source of income too!
  • Being highly accessible, one can deposit smaller denominations multiple times rather than wait to save a bigger amount.

Financial inclusion has been a focus area for the government for some time now. Abhilasha, without doubt, is an attractive idea for banks who have been trying to come up with viable ideas to serve the rural and the poor. It has beautifully changed the paradox of a large unbanked population but a high mobile phone penetration into a win-win situation.

[TC-I Changemaker]: CGAP’s Gautam Ivatury on the linkage between technology and financial empowerment of the poor

The ThinkChange India staff is committed to providing our readers with interviews with people we believe are at the brink of something special but have for the most part been overlooked by the mainstream media. Readers will be able to see other conversations under our TC-I Changemakers tab.

This week, Vinay sat down (over the phone) with Gautam Ivatury of the The Consultative Group to Assist the Poor (CGAP), a consortium of 33 private and public development agencies focused on working together to expand poor people’s access to financial services. Such services include but are not limited to microcredit and branchless banking. Within this organization, Gautam is the Manager of CGAP’s Technology Program (their blog on India can be read here), which focuses on researching, identifying and disseminating knowledge on how technology will help financial institutions deliver such services to the poor. The Technology Program is co-funded by the Bill and Melinda Gates Foundation.

Vinay Ganti: First, I want to thank you for taking the time to speak with ThinkChange India and its readership. Why don’t we start out generally. Can you speak more on CGAP’s goals and how the aspect of technology plays a role?

Gautam Ivatury: CGAP is about building financial systems that work for poor people. However, there is more to it than that as we want this financial system to be integrated with the mainstream financial system at large. We do not want to create a state where the poor bank in some parallel world completely disconnected from the resources and financial options that other people enjoy. In essence we envision one inclusive financial system that provides tailored products to all types of people, including the poor.

This desire for inclusion partly stems from the need to develop financial institutions for the poor that are sound and stable, and one of the most effective ways to do that is to link them to the mainstream financial architecture. Poor clients need to have the same level of security regarding their savings and deposits as do individuals elsewhere in the traditional banking structure.

To address the stability while also providing a wide array of financial products, CGAP recognizes that there must be an approach that moves beyond just microfinance institutions (MFIs) and includes other players in the space to maximize choice for the consumer and to help us attain scale. When one looks past the traditional MFI, one observes postal banks, agricultural banks and other actors that are already helping the poor.

This is where the technology program becomes so critical as it is charged to identify those technologies that will best assist this wide range of potential providers to reach out to the poor regardless of their location or personal circumstances. Right now, the one obvious solution is the mobile phone and the rise of branchless banking that can be done via that medium.

VG: CGAP’s website highlights three key players — financial service providers, public and private funding organizations, and government policymakers and regulators — that are stakeholders in CGAP’s work. Can we discuss the conflicts that emerge among these actors?

GI: All of these actors are critical. Without governments implementing the proper regulatory framework for banking, it cannot be done. Likewise, the other stakeholders also play a vital role. In fact, there is a fourth actor, whom CGAP does not deal with directly, who are the actual customers themselves. In any market these can at times become opposing forces. Government wants safety plus access; businesses want to make money. This forces CGAP to take a practical approach with each stakeholder.

Each player has different incentives and needs, and therefore when our conversations with them require differing skill sets that reflect these distinctions. When you sit down with a banker you have to understand their perspective. She will ask what services am I supposed to give and how should I give them? Do I want to provide them at the branch and encourage the poor people to come inside or do I want to do it in a way where it can happen remotely? What sort of incentives must I provide my employees to provide these services, and what is the structure in which the employees interact with these new clients?

In contrast, when we deal with an MFI, there concerns are more technical with regard to the management and oversight of their loans or disbursements. Questions regarding improvements to portfolio tracking software, customer relationships and external fund raising all dominate the conversation.

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Revisiting the Effectiveness of Financial Inclusion

In response to the Reserve Bank of India’s (RBI) call for financial inclusion – defined here as the “delivery of banking services at an affordable cost to sections of disadvantaged and low-income groups” – several banks launched “no frills” bank accounts, or “nil or low balance account[s] with charges that make [them] accessible to vast sections of the population.”  These initiatives, however, have faced significant limitations in rural areas, namely due to two reasons:

There are two obstacles to greater financial inclusion. The first is simply commercial. Transaction costs for both banks and clients remain high, particularly in disbursing credit, which is essentially a high cost, distributed business. Further, interest rates remain high in the absence of structured credit assessments. The second obstacle is policy requirements such as know your customer (KYC) procedures that limit the geographical reach of financial services beyond physical bank branches. 

In response to these limitations, the RBI has established an independent external agency in order to evaluate the progress of financial inclusion in certain districts.  According to the Business-Standard, the process will function in the following manner:

The State Level Bankers’ Committee (SLBC) will identify one district in each state for 100 per cent financial inclusion. He [RBI Deputy Governor V. Leeladhar] added that to bring more such districts under financial inclusion, RBI has asked banks to introduce more no-frill accounts and general purpose credit cards (GPCCs) with limits of up to Rs 25,000 in rural and semi-urban branches.

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