Thumbs up, thumbs down for Microfinance

Thumbs up: Obopay and Grameen Solutions partner together to provide microfinance services to clients. The initiative will be called the “Bank A Billion Initiative.”

The premise of the project is to provide access to basic financial services through cell phones, reducing the need for costly personal contact between financial institutions and their customers. The initiative hopes to take advantage of the rapid spread of cell phones in developing areas, especially in areas without access to microfinance services.

Thumbs down: Hot off the heels of their decision to stifle mobile banking services, the RBI has now increased the capital adequacy requirements for MFIs, which have concerned many of them in the field.

The Reserve Bank of India (RBI) recently tightened capital adequacy standards governing microfinance institutions (MFIs) in India, and several local MFIs worry the change may lead to the need to raise additional capital and increase interest rates.

Mobile Banking asked to take a breather by RBI

So yesterday the Reserve Bank of India called for banks to halt mobile banking services until it can release its operative guidelines. A significant number of Indian banks have already begun offering such services to its clients in an effort to expand their user base and to provide previously untapped populations access to banking.

But A P Hota, chief general manager at the RBI, advises banks to put plans for mobile payments on hold and to “dissociate themselves from any mobile based money transfer service which has not received explicit approval of RBI or not covered by any of the guidelines issued”. []

Hopefully such standards will come out sooner than later, as we have seen how poorly India performs with regard to financial inclusion.

[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.

Continue reading

Pioneers in Microfinance, Part 2: MYRADA

Today, published the second part of their “Pioneers in Microfinance” series, in which they continued their interview of a pioneer in microfinance, Aloysius P. Fernandez, Executive Director MYRADA and Chairman of the Board of Microfinance Institution Sanghamithra Rural Financial Services.   To refresh your memory on Part One of this series, read this earlier post by Vinay.

The interview continues where it left off in Part One by outlining both the impetus and the process involved in establishing linkages between the Reserve Bank of India (RBI) and Self-Help Affinity Groups (SAG).  In the interview, Fernandez describes how MYRADA attempted to implement changes on a policy level by approaching RBI and the National Bank for Agriculture and Rural Development (NABARD) regarding the lending process:

In 1989, he [NABARD President and CEO P. R. Nayak] asked me, “Now, what policy change do you want?” I said, “Allow the banks to give loans without asking for the purpose. Why are you so particular about giving based on viable loans and unit costs?” They would give loans for sheep. There would have to be 20 female sheep and one male sheep, so that was supposed to be a viable unit. But, if you give such a big unit to a single woman, she has to leave all her other work and look after this. So, in order to survive she will sell two sheep. There goes your viable unit. We found that 60 percent of the recovery didn’t come from the asset, so why are you wasting your time? Let people decide [how to use their loans].

Fernandez then goes on to talk about the proliferation of NGOs based on the SHG model in India, and their perceived limitations, including potential for growth in the future: Continue reading

Midday Newsfeed

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Some bits of tid for you all:

Forget that judicial system is not accessible to the vast majority of people in India, even worse is the fact that it is increasingly acquiring an elitist and anti-poor character. A recently held convention in New Delhi talked of reclaiming and reinventing the judiciary for the poor.

The government on Thursday acknowledged that there was a public demand for lowering of interest rates on home loans up to Rs 20 lakh, but said it was for the banks and RBI to take a call. 

In a significant, albeit token gesture, the impoverished eastern Indian state becomes perhaps the first state to offer monthly benefits of this nature to people living with HIV/AIDS.

When local populace and officials work in tandem, the chances of any conservation efforts succeeding are more. This became clear when villagers in the hilly state of Uttarakhand in northern India and forest department came together to help protect wildlife in the famous Jim Corbett National Park.

Mobile Banking May Get Watchdogs

Looks like mobile banking has hit the critical mass where bureaucrats feel the need to regulate it:

RBI Executive Director R B Barman said this week that a central bank committee is examining the regulatory challenges raised by mobile banking. The committee is expected to report recommendations next month, leading next to RBI drafting the requisite changes to the country’s regulatory framework.

In addition to regulation, RBI is also looking at new ways to use mobile banking to reach greater users. Mark Pickens of CGAP writes:

RBI is also closely watching several pilot schemes using mobile connectivity to improve access to financial services among low-income Indians. As the Economist reported earlier this month, one program in Andhra Pradesh is testing how to deliver pensions and unemployment benefits to around half a million people in villages, via specially-equipped mobile phones in the hands of local payment agents and smart cards issued to recipients. A parallel POS-based system is also being tested. So far, 40,000 cards have been issued.