On microfinance
(and technology)
“Dhobis (washermen), tailors and barbers contribute more to the GDP of Andhra
Pradesh than the IT sector.”
(Vikram Akula, SKS; Source CSO, 2004-05)
Aishwarya Ratan, MSR India, March 2007
Our reference segment
Low income
households
Rural
Urban
>$2000
/year
$1-2000
/year
<$1000
/year
Both rural and
urban areas
29
17
8
Photo source: CCD Mahakalasam & Ekgaon
Data source: NCAER
Source: Indian National Survey Sample Organization 2001-2002 HH survey
Aishwarya Ratan, MSR© India,
March
2007
2007 Microsoft
Corporation
Aishwarya Ratan, MSR India, March 2007
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 …
• Growth (60%)
– Enterprise (30%)
– Buildup assets: education,
home (30%)
Survey of 64 LI & LMI urban and rural HHs, 2006
• Sustenance (40%)
– Fulfill basic consumption
– Protect against shocks
– Access lump sums for
lifecycle needs
Aishwarya Ratan, MSR India, March 2007
… but face very high prices for finance.
9-12%
APR
0-60%
APR
24-120%
APR
•
•
•
•
•
No ‘acceptable’ collateral/ surety
No unique ID
No record of previous borrowings/ repayments
Irregular income flows
Low literacy
Aishwarya Ratan, MSR India, March 2007
So they turn to a variety of old and new
providers to fill the gap…
Banks,
Insurance co.s
Microfinance
Institutions
18%
37%
Formal
Semi – Formal
Employers, relatives,
neighbors. friends
16%
Moneylenders,
pvt financiers
4%
Informal 1-on-1 personal
26%
Informal 1-on-1 impersonal
Informal mutual
(Chit funds )
• Microfinance targets urban and rural low-income (<$2000
annual HH income) clients
• Uses joint-liability social contracts
• Provides affordable finance
Survey of 64 LI & LMI urban and rural HHs, 2006
Aishwarya Ratan, MSR India, March 2007
India used to offer targeted financial
services to the poor & excluded…
Growth of Bank Branches in India
• Priority Sector Lending
• The 1:4 rule for bank branch expansion
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)
Banks’ reasons:
• High transaction costs in finding and servicing smallticket clients at high frequency
• Regulatory cap on prices banks can charge
• Profitability vs. outreach (post-liberalization)
Aishwarya Ratan, MSR India, March 2007
Hence the rising importance of the
microfinance industry, characterised by…
• 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
Aishwarya Ratan, MSR India, March 2007
Current models of microfinance delivery
Commercial
RS.
@ 9-12% APR
Cooperative
RS.
NGO
facilitator
@ 9-12% APR
MFI
RS.
@ 24-36% APR
5
members
External provider is the MFI
Interest accrues to 3rd party intermediary
~8 mn outreach in India
More profitable
More commercially focused – EMI payments
Most common model worldwide
12-20
members
24-36%
APR
The group is the MFI
Interest accrues to member-borrowers
~33 mn outreach in India
Less profitable
More welfare focused – flexible payments
Most common model in India
Aishwarya Ratan, MSR India, March 2007
Can technology enable microfinance?
Back-end IS
Front-end IS
1. Aggregation of client data
1. Account creation (loan, savings
& insurance)
1.
2.
Actuarial analysis
Target offerings
1.
2.
GRAMEEN
TECHNOLOGY
CENTRE
Collecting client data
Screening/ verification
2. Transaction data
3. Processing claims (savings,
transfers & insurance)
m-banking
E-payments
Enabling cashless/ electronic payments
1.
2.
Disbursal of amount (loan)
Collection of dues/ payments (loan, savings & insurance)
CGAP
Aishwarya Ratan, MSR India, March 2007
Case: PRADAN’s Computer Munshi experiment
(90,000 rural clients, EAST/CENTRAL India)
Original workflow
Problem area
• Poor quality of financial data
• No aggregate record
Annual auditing by NGO
Book-keeping done locally
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
Weekly collections
Improved workflow
Copy of transaction record
put in drop-box
CM updates records & prints
balances & dues
•Results
•Weekly meeting time cut by half
•Instant evaluation of financial performance of large
group of SHGs possible
Weekly collections
Annual auditing by NGO
Pradan’s ‘Computer Munshi’ system (SHG)
Rs. 30/ SHG/ mth
100200
SHGs
1
1
12b
4
5
CM
Peon
2
Drop box
30-50 SHGs
6
3
7
14
1
2
12a
2
2
8
13
Rs. 3/ SHG/ wk
2
9
11b
11a
10
15
PRADAN (NGO)
Cluster
meeting
or
1
Aishwarya Ratan, MSR India, March 2007
Can technology enable microfinance?
Back-end IS
Front-end IS
1. Aggregation of client data
1. Account creation (loan, savings
& insurance)
1.
2.
Actuarial analysis
Target offerings
1.
2.
GRAMEEN
TECHNOLOGY
CENTRE
Collecting client data
Screening/ verification
2. Transaction data
3. Processing claims (savings,
transfers & insurance)
m-banking
E-payments
Enabling cashless/ electronic payments
1.
2.
Disbursal of amount (loan)
Collection of dues/ payments (loan, savings & insurance)
CGAP
Aishwarya Ratan, MSR India, March 2007
MSRI Urban pilot with UJJIVAN
Existing workflow
(25,000 urban clients, SOUTH India)
Problem area
New Customer Profile Creation
Customer Profile form
filled on paper in field
Issues
Post all forms to Head Office
Branch Manager Approval
Head Office enters
info to database
Customer is approved!
Costs associated with:
• Double data entry
• Error correction
• Data transport
• Stationery
• Back-office staff
COST
SAVINGS?
-Low labour cost
Piles of extra paper and
money gone to waste
-Relative efficiency
Experiment
Improved workflow
Goals
• Reduce costs
• Improve client data quality
Customer Profile form
filled electronically in
field
Customer is approved!
Manager Approval
SMS all forms to Head Office
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
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
Thanks!
Others involved:
Ujjivan and Pradan staff & members, Shabnam Aggarwal,
Mahesh Gogineni, Sean Blagsvedt, Kentaro Toyama, Vibhore Goyal,
Jonathan Donner, Indrani Medhi, Rajesh Veeraraghavan
? aratan@microsoft.com