Champions of Financial Inclusion

Tuesday, December 21, 2010

AP MFI Bill: A Regulation?

In the state of unrest, the MFI bill recently passed in the state of Andhra Pradesh has proved to be a relief for the customers of MF industry.  The bill which clearly defines the collection period and registration rules for MFI branches was passed in December second week in response to complaints over high interest rates, aggressive loan recovery practices and overextended borrowers. So, while the customers rejoice the result, the microfinance institutions are relieved over the state Governments silence on putting a cap on interest rates till now.

It has been pointed out that since the issue of the ordinance two months ago, collections of microfinance institutions in Andhra Pradesh have dropped.  Also, microfinance institutions are also struggling with liquidity crunch due to reduced bank lending and lessened equity infusion in the sector.( Follow the article at: http://www.microfinancefocus.com/ap-microfinance-news/ap-govt-may-pass-microfinance-bill-tuesday?quicktabs_4=2)  As quoted in Business Standard- Spandana’s CEO Ms. Padmaja Reddy said that many MFIs will close down their businesses. Operating costs would increase and profits margins would spread thin, she added. The company's recoveries have fallen to 30-50 per cent in the last two months and no fresh group loans have been given. (follow the news at: http://business-standard.com/india/storypage.php?autono=418396)

While the bill is seen as disturbing to microfinance institutions, it is anticipated by the stakeholders that reduction in the number of repayment collection meetings per month to 1 will reduce a lot of overhead charges of travelling to the client centers which in-turn can either be seen as profit for the institution or, a factor for reducing the overall interest rate. It is also believed that this bill is, in a way, empowering the clients- especially the rural women.

But the basic questions here go unanswered. Is the bill of transitory nature as was the MFI ordinance that had come out in October this year? Is this bill achieving a win-win situation for both customers and service providers? And the answers here are not so simple. There are a lot of elements at play while we ponder over the state of things.

A lot of discussions are taking place at state and centre over the scope of bill and its outcomes. Even slightest gestures of customers to political parties are changing the fate of microfinance without knowing. 

I believe, in a move to revolutionize the microfinance industry, a lot of bills and amendments have to be passed before a true balance between social good and profit making is achieved.
-By Chitra Nayak

Wednesday, December 15, 2010

Financial Literacy: 5 Basic Questions Answered

What is Financial Literacy

Financial Literacy is the buzz word today. Many organizations are making serious efforts to promote it. A big information asymmetry exists which prevents many individuals to make informed choices about their current and future financial engagements.



Financial literacy is an informal understanding of risks and rewards involved in handling financial assets and liabilities. It is not a formal or certified education. It is the basic knowledge required to manage personal finance.

Why is Financial Literacy Important

It is said that prevention is better than cure. Prevention of financial crisis is necessary than its cure to save the individual, and to save the nation. With credit being available hassle free in the market, the thin line between need and desire is vanishing. Therefore, it is important to have knowledge and related skills to calculate the consequences before investment.

When and Who started Financial Literacy

There is no formal record of when was financial literacy started, but it has been gaining momentum in recent years. Organization for Economic Co-operation and Development (OECD), which was founded to stimulate economic progress and world trade, started a program in 2003 which was believed to mark the start of financial education. In India, RBI has been a key player in creating awareness of programs related to financial literacy.



How to achieve financial literacy

As the definition says, financial literacy comes with simple understanding of how finances can affect the present and future. A simple guideline described below can be followed to achieve financial literacy:
1. Set financial goals for a time-period (days, months, years)
2. Creating a budget for the same
3. Itemize the expenditures in a detailed manner.
4. Focusing and accordingly planning for high-budget expenditures
5. Basics of banking and investment
6. Plan for retirement
7. Know about Insurance and its premium
8. Be aware about taxes that might have to be paid
9. Understand inflation and interest in terms of financial assets and liabilities.

-Chitra Nayak



Thursday, December 2, 2010

Corporate Social Engagement: A Strategical Move or a Need?

The clear definition of CSR is that, the Community is not just another stakeholder in our business but the very purpose of our existence.’
 Jamshedji Tata
Businesses are constantly growing conscious of their presence in the societal and environmental spaces. Effort to reduce their footprint on the environment and increase the same on society is visible throughout the globe by their small and big efforts. Here we’re talking about the hottest trend in industry- the ‘corporate social engagement’. Simply put, Corporate Social Engagement is a business entity’s engagement in its society, environment and community for achieving results that are beyond its scope of profit. According to Wikipedia, Corporate Social Responsibility/Engagement policy functions as a built-in, self-regulating mechanism whereby business would monitor and ensure its support to law, ethical standards, and international norms.

As the world is increasingly getting conscious about the energy and environment sustainability, corporate houses are getting more focused on their efforts to mainstream CSE.  Business entities are taking responsibility for the impact of their activities on environment as well as the customers, suppliers, employees, shareholders, communities and other stakeholders. These responsible acts have many methods and approaches. Among them, three main approaches which are commonly adopted by companies are discussed here. These approaches are:

Community-based development approach: In this approach, corporations work with local communities to better themselves. For example, the Shell Foundation's involvement in the Flower Valley, South Africa by setting up an Early Learning Centre to help educate the community's children as well as develop new skills for the adults has achieved a stupendous result.

Second is philanthropy. This includes monetary donations and aid given to local organizations and impoverished communities in developing countries.

The third approach is to incorporate the CSE strategy directly into the business strategy of an organization. For instance, procurement of Fair Trade tea and coffee has been adopted by various businesses including KPMG.

A Strategy or a Need

In recent times, to achieve a more integrated approach to Corporate Social Engagement, business houses have started incorporating social missions.  For example, social mission of Bharti Airtel is to get cell phones into the hands of the hundreds of millions of people in India who otherwise have no way to communicate with each other. Tata Motors has a similar goal with respect to providing low-cost transportation in the form of the Nano. The social mission of the pharmaceutical and healthcare company, Dr. Reddy’s, is to address the unmet medical needs of the poor in India as well as around the world. Hindustan Unilever’s “Project Shakti” uses microfinance principles to create a sales force in the poorest regions of the country.

While corporates are realizing that CSE is more than a mere voluntary act, some countries have turned it to a legislative requirement. The formal origin of social responsibility goes back to the era of industrialization where businesses were ‘expected’ to be active not only in alleviating societal problems but also in providing solutions to them. Since then, the form of social engagement has come to include many more things in its scope. But there has always been a divided opinion on existence of CSE. While one school of thought supports that the rise of industrialization is the root of many societal problems, the other believes that solving societal and moral issues is not the responsibility of corporate.

For some industries, it may look like a need to get involved in a corporate social act. It is said that the companies in these industries have a low threshold for CSR and that’s why have to abide by these kinds of social responsibilities. For others, its just a mere strategy to achieve the intended. But what makes companies strategize for CSE??

In the annual general meeting of CII in 2007, Prime Minister Manmohan Singh had addressed in his speech about the CSR as “corporate social responsibility must not be defined by tax planning strategies alone. Rather, it should be defined within the framework of a corporate philosophy which factors the needs of the community and the regions in which a corporate entity functions.”

Amidst all these hustle-bustle, there are various underlying reasons for companies to engage in such action. The main reasons of corporate social engagement could be:
·         Commercial Benefit: Increased visibility among consumers and employees
·         Green Washing: Focusing the attention of consumers on certain actions only. To reposition the company’s image in the market.
·         Political-social relationships: To enjoy certain social and political benefits.
The motives for CSR actions are often mixed, it is impossible to claim either one motive or another. There are no particular motives that can be authorized to have an advantage over another (Haugland & Nystad, 2006).

The long Term Achievement

To think of it, what differentiates these companies from others?? Well, companies with motives to really help the society, gain more than just mere good marketing. They gain a long term reputation and trust of people at large which seeps into their employees too. CSR first starts at home with ones’ own employees. These companies often have level 5 leaders heading the organizations. These are the companies that have modeled themselves in ways different from the norm; quite often, particular practices that work well enough in business terms to be genuinely embraced; charitable endeavors that happen to be doing real good, and on a meaningful scale. For them CSR is much more than a cosmetic treatment. 

-Chitra Nayak

Friday, November 26, 2010

Changing Dimensions of Information Accessibility

Knowledge is power. It was true when brain, which is believed to have a storage capacity of 4Tb, was the only storage device with man for 24 hrs. With the constantly changing world and changing habits, man came to know about his new best friend-the mobile and thus changed the saying to ‘Information is Power’.

When Dr. APJ Abdul Kalam openly dreamed of bridging the digital divide among Indians, little had it occurred to anybody that mobile holds the potential to fulfill this dream. Mobile being the only device known to be with their owners for almost 24 hrs a day has changed the definition of information accessibility for human history. Information is now available on the fingertips.
According to India Telecommunications Q3 Report published by Business Monitor International, mobile customer base reached 584.3 millions in March 2010 and which is close to 50% growth over last year. Mobiles are now the most commonly used means to connect to the digital community. For a common user, a mobile is affordable, has a strong battery system, needs no huge and continuous supply of power and is easy to carry around when compared to a PC.

 Browsing internet is a rapidly growing trend in many developing countries. For many, their first internet browsing has come through a mobile. Juniper Research quotes that ‘in 2008, 90% of the internet users in India used a mobile to access internet.’  Mobile network operators offering a range of data plans enable users even from far off lands to connect to the world without any hurdles. While email was most common form of communication some times ago, social network and other forms of networking are drastically changing the messaging habits of people. People are now more connected to each other around the world through a small mobile than anything else.


Today, it is era of business gadgets. Gadgets like Androids, Blackberry mobiles, Nokia E-series and many more brands are doing quite well in market. They have totally changed the way companies operate, especially in case of small and medium businesses. It is now easier to put advertisements, check for orders and tenders, stay connected to certain communities of interest and much more. Business owners across the globe are now thankful to this explosion of mobile growth which allows them to do more things in less time and less cost. Also, advanced network services like 3G lined up to roll out soon, the chances of using networking services though PC still might go down.

FINO has been quite active in exploiting this explosion in number of mobile phone users to benefit the society. One of the services- FINO Seva is a mobile application which simplifies all kinds of ticketing, recharging and bill payment requirements without going to the service provider's offices/outlets, is a revolutionary product in the arena of mobile applications. This reduces the requirement of consumers to stand in long lines or travelling to the needed stations for availing any above mentioned services. Moreover, people in remote areas can now avail these services by just visiting the nearest BC without having to travel far off places for any recharging, ticketing or billing requirements etc.  

The dimension of accessing information has been truly and completely changed by mobiles.


-By Chitra Nayak

Tuesday, November 23, 2010

Social Performance Management: CSR of Microfinance OR more than that?

Social performance management has been in existance for quite some time now. However, it is assuming new significance in recent times due to the negativity caused by the recent cases of suicides and harassment; as also by the increasing consciousness amongst investors to measure the social impact generated. Add to this, the increasing competition in a maturing industry. In such conditions, an MFI’s best bet is to retain its old clients while attracting new clients. This is possible by being responsive to the customers’ needs and requirements. At the same time, looking after the staff is of prime importance in order to achieve the social objectives of the institution.

In steps the concept of Social Performance Management (SPM) which is about making an organisation’s social mission a reality. Many times, focus on social performance is seen as being lenient on the aspects of financial sustainability and vice versa. However, that’s a fallacy. On the contrary, strong financial performance will enable an MFI to pursue its social objectives in an effective and efficient way. And the strong emphasis on social objectives will help in providing better, client-focused services and improve organisational culture. This in turn will lead to increased client satisfaction and retention; and reduced staff attrition rate.

SPM is beneficial to all stakeholders:

- Clients:
SPM involves taking into consideration the clients’ requirements and thereby innovating, developing and monitoring products & services and delivery systems which are more appropriate to the target customers’ needs and conditions. Better products and services would result in satisfied clients leading to customer loyalty and increased outreach.

- Employees:
Employees form a vital part of the entire process of microfinance. SPM focuses on human resource management including incentive plans, welfare actitivities, skill development, retention plan which would help in developing a motivated field force and reducing the high attrition rate prevalent in the microfinance industry.

- Investors:
In the absence of widely accepted social performance measures, donors and socially responsible investors typically base funding decisions on financial performance alone. Managing social performance allows MFIs to demonstrate their competitive blended returns, thereby providing a simple and cost-effective tool to assess social results of the MFI leading to an improved position in a competitive funding market.
Organisation:

• SPM system will aid in balancing financial and social objectives to make better business decisions based on a more thor¬ough understanding of the trade-offs each involves.
• SPM will aid in improving higher customer satisfaction and in developing demand driven products and services which would make the institution more attractive thereby leading to program growth and better financial performance.
• SPM is necessary to ensure that MFI doesn’t experience mission drift and remains true to its goals and objectives.
• With so much negativity surrounding the field of microfinance, many players are turning to ways through which the good work carried out by them is highlighted. The effective implementation of SPM system will not only fufill double bottom line of the organisation but will also enhance the reputation and brand image of the company while avoiding the negative impact on operations (reputational risk).

Thus, active monitoring and assessment of the SPM system will help an MFI to maximise both social and financial performance.

Monday, November 15, 2010

Sustainable and responsible finance

Despite what one may believe to the contrary; today we live in a world where finance is no longer about mere profits and financial institutions cannot merely confine themselves to the traditional task of being profit making while ignoring their social commitments. What i imply to say by this is that financial organizations can no longer be entities that are insulated from the social consequences of their actions and the impact that social stasis or transformation have on them and their operations.This was made more than apparent by the recent financial crisis that sent organizations that were considered secure and supposed stalwarts of the financial world to their graves and left others gasping for the breath of bailouts from state even as they left the socieities in which they operated reeling by their actions. In an arena like finance where trust is everything the consequences of the repeat of such events can be devastating.



More recently the events in Andhra Pradesh with respect to the suicides amongst people who have borrowed from microfinance institutions has been devastating to the micro finance sector. While profit is essential (for no organization can function for long under recurring losses) the profit also needs to be responsible.  The result of these recent events has been to once again bring the focus on to the concept that is popularly known as "sustainable finance"    

Sustainable finance implies a commitment to sustainability in the operation of financial institutions whereby Financial institutions (FIs) expand their missions from ones that prioritise profit maximisation to a vision that also incorporates social sustainability. It requires FIs to fully integrate the consideration of social limits, equity and economic justice into corporate strategies and core business areas (including credit, investing, underwriting, advising), so that sustainability objectives are placed on an equal footing with shareholder maximisation and client satisfaction. It implies financial institutions creating policies, procedures and standards based on the principle of precaution to minimise social harm, improve social conditions where transactions that undermine sustainability; in this regard a delicate mix corporate and social sustainability; are avoided.Such a reality is possible only if the twin elements of responsibility and accountablity are ingrained into all aspects of the FI's operation right from the top to the groundlevel.



This is possible even without the everseeing eye of government watching over the operations of FI's. It will require FI's to have better understand the social "limits" of the environments in which they operate; be able to differentiate between needs, wants and capabilities of their customers and pay their full and fair share of the risks they accept and create. These include financial risks, as well as social and environmental costs that are borne by the communities who are forced to pay a price for unsustainable financial decisions and investments. Responsible finance also requires FI's to ensure that the lives of people; in terms of life itself and the quality of life;  are protected. This can be ensured through making sure that stakeholders’ rights are protected through practices and procedures voluntarily adopted by the FI.

Most importantly Financial Institutions are capable of and should ensure that the markets that they create or operate in are capable of fostering sustainability. This can be done by the FI's supporting public policy, regulatory and/or market mechanisms which facilitate sustainability and foster the full cost accounting of social and environmental externalities.

Friday, November 12, 2010

Mobiles: Beyond Communication and Entertainment

The structural constraints on the existing banks in providing a low cost service to all classes of people have led to a number of innovative and new business models. Among those, mobile platforms are increasingly being thought of an option for providing easy and secure financial services to those who are un(der) banked. Mobiles act as a secure card less alternative which is not only easy to use, but also always present with the customers.   

Mobile banking opens up a plethora of opportunities which is limited to the imaginative use of such services.  Spread of mobile phones across all socio-economic classes and geographical areas ensures that penetration of mobile banking wouldn’t be limited to only some classes of the society like the conventional banking models. From the user’s point of view, the success of such a service would always depend on factors like ease of use, high levels of security of transaction, the affordability and the availability of the service at all time. All of these characteristics are dependent on the key stakeholders who are involved in making available such a service end users - Network operators, financial institutions, solution providers, mobile handset manufacturers and regulatory bodies.

Mobile banking when successful can be transformational in completely bridging the digital divide. But what really matters now is that the policy divide which been created protecting the existing banks and telecom service providers should be put to use of benefit of same institutions but with BOP customers included in the scope.

- Chitra Nayak

Thursday, November 4, 2010

Fair Finance or Finance Fair!!

The coming of age of rural finance industry with the introduction of BC network in as many or more as 1/3rd of the districts present in India within such a small period of time has changed the perception of stakeholders about the asset holding pattern of rural citizens. This new tool of delivery of finance not only changed the debt holding pattern, but also their asset holding pattern. Men and women now have access to fair financial services promoted by PSU banks. It somewhere tickles a bone when thought that dominance of men in such condition was merely a loss of opportunity of women to travel far to access those services.
The BC network mode of delivery promotes not only products of banks which have RBI sitting on their heads, but also all those who have a financial product where all classes of society can participate. It isn’t hard to imagine that there would be a long line of player in the market enthused about investing money in the “Country Side” now that mode is established and customers are just a BC away. Expecting fair finance in finance fair isn’t unfair after all!! 

Monday, November 1, 2010

Its Transition Time !!

The opening of Indian economy in 1990s’ brought about a new age of reforms. Reforms which is not just led by Government, but reforms in which both public and private participated through mutually complementary and beneficial relationship. During this period it was realized that while the Government controlled vast amount of resources, the technical and technological expertise was more effectively harnessed by the private sector. This led to a transition phase for the government.

Government realized the importance of not only physical, financial and human resources but most importantly the technological support. Technology which would not only help reducing cost and increasing efficiency but also bring in more transparency and controls in the process.

Technology can play a vital role in delivery of essential services to its citizens. This has proved to be a boon both for the beneficiaries as well as a lot of companies, who can leverage their competency in technology to benefit society at large. The primary drivers for this technological wave in the public sector are:
  1. Increased efficiency of the programs.
  2. Reduced fake/fraud recipients.
  3. Avoid forced sharing of the benefits with the end service provider.
  4. Provide employment opportunities to many individuals even in remote parts of the country.
  5. And most importantly, through technology, increase of outreach of various products through  financial institutions to the un(der) banked

However like any system, it is not perfect and suffers from certain lacunas. This makes it extremely important for the government who is driver for the change and companies at large to understand these shortcomings and risks involved and develop a more effective roadmap to reduce any risk to the beneficiaries.

There is a saying that the only thing constant is “CHANGE”. Change is a process that will evolve everything towards a perfect world. And that what shall be after this change and all the changes that come along!!

Friday, October 22, 2010

Suicidal Microfinance, Desperate Actions: Why Business Correspondent Model Is an Effective Policy Prescription for Micro-banking Customers in India?

Recent spate of Suicides committed by reportedly 30 microfinance customers or their relatives in Mecca of the Indian microfinance - Andhra Pradesh has shaken the policy echelons at all levels. The Government machinery flung into action with an extraordinary swiftness and resulted into issuing  a   Special ordinance to rein so called rouge MFIs which is in addition to the Reserve Bank of India’s sub committee to look into MFI functioning . Thankfully, the Ministry of finance’s response has been cautious but with discernable strong signals about introduction of legislation on MFI sector in the parliament.
 The first glance and most of us would appreciate the public policy response of state actors to tighten noose around ‘Suicidal Microfinance’ amid of high passions for the breavered families; for which like all of you my heart also goes with the family members of those who committed suicides in Nizamabad and other places. But the question I pose here is slightly contrasting one: Is the fire fighting action initiated by the state Government going to create more problems than solutions for poor? Not only that, what could be the impact of ripples effects on MFI clients in days to come?  Especially at a point in time when the sector is gradually making transition to integrate itself with the mainstream capital market and lower its dependency on lenders for high cost of capital which ultimately factors into higher interest rates for micro clients.  The first market signal is 9% bottom dip in the share value of SKS microfinance - The only India listed Microfinance Company which had lent micro loans to 17 of those who committed suicide. All this is a reason for concern, but the policy response may also not be a welcome move for the Indian microfinance sector, particularly for those players which may plan to go public in coming days.
If suicide is a parameter, I would like to share some pieces of data here, According to the National Crime Records Bureau, between 1997-2009 reportedly 2 lakh farmers in India have committed suicides due to reasons like crop failure and inability to repay  bank loan, but we not seen similar “supra regulatory” actions against lending banks, instead Government actions were  mature  and no one can deny role of  policy  in enabling  the Indian mainstream financial system (which consists of Commercial and Scheduled Banks ,Regional Rural Banks, PACS and cooperative credit structure) to deal with the farmer suicide crisis . Not only was credit bailout option offered to farmers, rescheduling of loans was also carried out and debit refinanced by the Government – worth noting here no bank faced stifling noose of regulations. Basically, Policy actions empowered the end customer to choose her lender and thus reinforced tenets of free market and rational choice theory.
Unfortunately, actions in the microfinance saga are diagrammatically opposite as these signals lead to ‘more regulations and less free market’. Here it is worth mentioning about success story of the Indian Mobile telephony where supra regulations did not create fetters for MNOs at least in formative years and facilitated market competition due to which today mobile phone penetration in India is more than 670 million and is growing exponentially.   Defining role of Public Policy in free market is facilitation of business and ensuring fair competition for firms and offering choices to customers without creating distortions.
Finally, the question one might be tempted to ask; what is an alternative?  . Answer is, a dedicated Business correspondent (B.C) which offers door step banking facility to micro customers.  
The B.C is an ultra low cost technology driven banking channel which acts as extended arm of prudentially regulated financial institutions like banks and insurance companies and take their products and services to the nooks and corners of India – Product and service ranges from No frills savings accounts to remittance and insurance to low cost micro credit and payment solutions. B.C plays an important role in creating healthy competition in the micro-market and provides choice options for end customer to choose her financial service provider. On the top of this, BC is fully complaint to banking rules and regulations and works on razor thin margins.
Dedicated BCs which offer doorstep services have potential to transform not only “scenarios of suicide” but face of unbanked and under banked in India. Therefore, strengthen free market competition   that too, without low or no distortions if facilitated adequately by policy, can be a sustainable solution.  If we compare cost of delivery of services, BC’s cost to serve a customer at her doorstep is around INR 4 -5 per Customer whereas typical MFI cost is much higher. A BC earns average revenue of INR 100 per customer per year and still survives but a typical MFI at present is not designed to operate on such thin margins, it earns on an average 5% of net profit per loan (which is around INR 500 for INR 10,000 loan size).
Finally, what will address the issue adequately and sustainably is not more stringent regulations or predatory policies but policy actions enabling free market principles and offering more supply side choices to the end customer.
                                                                                                                                             -  Jatinder Handoo.

Tuesday, October 12, 2010

SRI inflows and the Micro finance sector - a positive development


Socially Responsible Investments are those investments that consider both the financial returns from an investment and the potential social, environmental and ethical consequences these investments might have. Broadly socially responsible investment can involve either (1) screening of the investment such that its social/ environmental impacts can be deemed “responsible” as per international standards (2) shareholder advocacy for social or environmental causes or (3) investment in communities that bring about growth in those communities. While today a majority of SRI’s are in the form  of assets held in socially screened investment funds or managed accounts ; internationally , community investments; particularly into microfinance; are enjoying strong growth rates, with such investments coming not merely from  foundations and NGOs as it used to be previously but also from individual investors and, increasingly, professional institutional investors. The importance of this trend lies in the fact that world over with greater volume of investor money flowing into what were once the territory of NGO’s and charities rapid transformations are happening in microfinance sectors forcing them to become more leaner, efficient,  transparent and by becoming more responsible, profitable



Microfinance is based on the recognition that the working poor can act in an entrepreneurial manner and are, in principle, creditworthy. In this respect it poses an attractive opportunity for investors who are pulled towards it primarily by the fact that investing in microfinance allows investors to adopt a social investment strategy geared toward poverty alleviation and social development while at the same time offering an attractive risk-return profile that is marked by largely stable financial returns, low credit default rates and low correlation to the general domestic economy. This is actively aided by fact that in many countries Microfinance institutions are themselves exploring new opportunities to obtain funding and in the process making themselves attractive to investors through means like securitizing their loan portfolios and in some cases by even going public. Critics are of the opinion that such transformations will only erode the microfinance sector and force it to become more profit centric in the process forcing it to move away from the people who constitute its customer base today. Is this true?


The answer is that it is a false argument and the advantages of the transformation process have been manifold. Firstly, it is an acknowledged fact that the microfinance sector in many countries has reached a point where the subsidized loans they are dependent on for funding is no longer sufficient to cover a large many of their funding needs. By securitizing their loans and inviting market investments into their portfolios the MFI’s are not only broadening their funding structure but also are mobilizing additional monetary resources to facilitate in the expansion of their lending activities. Secondly, external funding from investors has in most cases eliminated the disincentive that had slowly crept in to MFI operations in many countries. This disincentive wrought by subsidized money; had been forcing MFI’s to curtail many of their lending activities to meet non core requirements.

The transformation wrought by investment inflows into the MFI sector has not only forced the MFI’s to become more transparent; by virtue of the fact that investors constantly want to know where their investments are going; it has also forced them to significantly reduce the degree of bureaucratic red tape that had come to characterize their functioning; simply because investors prefer their money be spent on lending and portfolio expansion rather than on administrative expenses. Alongside the transformation has also forced the MFI’s to become more efficient and profitable in their operation; which in most cases has implied becoming leaner, more efficient  operations as they are now accountable to investors whose money is being lent. 

Friday, October 1, 2010

India ripe for large scale Conditional Cash Transfers

Whether one likes it or not safety nets are at the core of emerging understandings and practices of inclusive growth worldwide and an important instrument of social safety across the world has been cash transfers. Conditional cash transfer (CCT) programs are increasingly being perceived worldwide as an effective tool for poverty alleviation and have been highly successful in Latin American countries. In CCT’s the idea is to transfer cash to the poor “on condition” that the poor will commit to use the money transferred to them to empower themselves. The advantage of such a program lies in the fact that CCT’s can be tailored to have a positive gender bias while also being targeted at achieving specific goals



Where it has been implemented in India the CCT schemes have come in for much criticism from critics who have challenged their effectiveness primarily on the grounds of inability to monitor whether or where utilization is happening and the threat of large scale leakages and delays in transfer. These concerns have consequently prevented the large scale uptake of CCT schemes in India; and in most cases the government continues to subsidize numerous sectors through other means. The result has been the inability to directly monitor the impact the subsidies are having and lack of transparency along the subsidy chain. Things are not the same today. Rapid developments over the past few years have seen significant transformations happening in India and made the environment more conducive to implement direct CCT schemes in the country. So what are these developments?

Not only has the MGNREGS significantly tested and fine tuned government’s ability to handle transfers of money to citizens across the country under challenging geographical and socio-economic as well as political conditions, it has, despite its many glitches,  proven that suitable methods of oversight and control can be exercised to identified and eliminate delays and discrepancies in cash transfers.

The financial landscape in the country too has undergone significant change. Many bank branches have been opened in semi urban and rural areas improving the population to bank branch ratio.  More post offices, micro finance institutions, self-help groups and other NBFI’s have also come up across India. This has significantly increased the number of institutional channels through which money can be transferred. Another significant development has been the opening of large numbers of No frill banks accounts under schemes like the Lead Bank Scheme etc that have brought previously unbanked and under banked segments of our population within the ambit of financial inclusion.


But most important of all has been the evolution of the Business Correspondent model and the technological innovations the many BC’s have brought to the financial inclusion space; examples being biometrics, Point of Transaction machines that work in offline mode, use of mobile phones to carry out enrollments and disbursements etc that have extended formal financial coverage to the doorsteps of people where even bank branches do not exist.

Though much elaboration can be made and should be made on each of the aspects mentioned above and how they have vastly improved the situation prevailing in India, making the environment more conducive for implementation of Conditional Cash Transfer schemes, the fact remains that today we are better poised; in terms of hard infrastructure and technological capability as well as experience to successfully implement CCT’s and ensure transparency and accountability. 

Sunday, August 22, 2010

Financial Literacy required to stimulate demand for financial inclusion

Being in the social sector, one becomes aware of the disadvantages poor face for accessing financial services. Many a times they are not even aware of the various benefit schemes introduced by Govt. A major reason for this existing scenario is information gap. In these terms, financial literacy assumes paramount importance.

Financial literacy is a prerequisite for effective financial inclusion, which will ensure that financial services reach the un(der) banked sections of the society, leading to consumer protection through self-regulation. By making people aware of the exsiting products and services and the ways and means to utilise them to their advantage, financial literacy helps in stimulating the demand side of financial markets.

In recent years, as the financial markets have become increasingly complex with the risk shifting from governments/corporations to individuals, managing risks require individuals to be able to access information that enabled comparison of the various available choices. Both developed and developing countries, therefore, are focusing on programmes for financial literacy/education. In India, the need for financial literacy is even greater considering the low levels of literacy and financial capabilities, and the large section of the financially excluded population.

For this purpose, Govts and financial institutions across the world are involved in developing and implementing programs on these lines. Recently, the Reserve Bank of Fiji launched the Green Ribbon Campaign as a partnership between the public and private sectors and non- government agencies to promote financial literacy. OECD has been quite active in this direction having implemented its Project on Financial Education, and established the International Network on Financial Education and the International Gateway for Financial Education (the first international clearinghouse on financial education).

In India, Reserve Bank of India (RBI), with the assistance of Organization of Economic Development (OECD) has issued a concept paper, promoted a financial literacy website, and set up credit counseling centers to provide advice on personal finance. RBI’s ‘Project Financial Literacy’ aims at disseminating information about the central bank and basic banking concepts through various media like films, games, cartoons and comic books, and essay writing competitions, specifically target school and college-going students. Various corporate banking organizations have also promoted financial literacy drive, mostly as part of their Corporate Social Responsibility.

However, there is still a lot to be done. India is a diverse country with different regional profiles in terms of language and culture, accessibility and reach. There is a wide divergence in literacy levels across and within the States. Penetration levels of the formal financial sector, especially between rural and urban areas are quite wide. This diversity makes a standard pan-India program redundant.

The need of the hour is to design and implement programs specific to the target audience and involving use of suitable media; bring out publications in vernacular and simple language and ensure distribution of the material to the people in both urban and rural areas. Also appoint instuctors/counsellors from local areas who have the requiste qualifications as well as the trust of the people. One possible solution is the training of Business Correspondents to pass on the financial information to the customers. At the same time, monitoring and evaluation systems need to be build up so that the programs effectively reach the intended.

Friday, August 20, 2010

Technology ensuring accountability in social programme implementation in india

Today the buzzword that is doing the rounds of circles of legislation, policy and regulation in our country is Accountability. This sudden focus on accountability can best be described as the outcome of two factors (1) the evolution of a relatively active civil society in India and its calls for action against the corruption that has always characterized policies and programs in our country (a program that has been supported significantly by the resurgent Indian media despite its many faults) and (2) international pressure (a) to incorporate good governance into administration in India as a precondition for funding or joint engagements and (b) manifested in the form of the need to present India as a place that is easy to do business in; to attract foreign players, clients and investors who are absolutely critical for our country in today’s Globalized market led economy. Thus in their implementation of massive schemes involving many hundred crores of rupees, covering wide swathes of territory and encompassing millions of people whose lives they are supposed to impact (examples being Social Security Plan, MGNREGS, RSBY, JNNURM etc) governments have been forced to incorporate structures and frameworks to ensure accountability. This does not mean that corruption has come to an end in these schemes. Massive amounts of corruption still continue and huge leakages continue to happen but at least to an extent the civil society critics have been quietened and international organizations and foreign governments are satisfied that the Indian state is serious about tackling corruption and ensuring accountability in governance.

This brings us to the question. If corruption is still going on what has been achieved? If the purpose of these frameworks is only appeasement and to act as pressure valves why focus so much on these frameworks as role models? The answer to this question lies in the fact that though these frameworks; in the ways they were evolved have numerous loopholes that facilitate corruption to go on unhindered, they have acted, in numerous cases, as pedestals for further developments that have significantly gone ahead to ensure transparency and accountability in these programs. Take for example MGNREGA  (Mahatma Gandhi National Rural Employment Guarantee Act) and how it has been implemented in Andhra Pradesh. Despite having a significantly better system of ensuring audits and accountability than other states Andhra Pradesh, often hailed as one of the states where MGNREGA has been implemented best was still hit by a scam involving grassroots level workers for MGNREGA who stole crores of rupees.

The solution the state implemented subsequently was an innovative mix of policy prioritizing accompanied by private involvement. They introduced a smart card based system for MGNREGA wage payments.It is understood that at the heart of any system of accountability lies the process of specifying a set of responsibilities, clearly recording activities of participants, cross verifying information and records and holding concerned individuals accountable if there are breaches in performance. What the smart card technology that has been implemented in Andhra Pradesh has ensured is the facilitation of these very tasks. First of all, the use of smart cards has ensured that every transaction is recorded accurately including the time, place and amount. To begin with, in the earlier system of MGNREGA cross verification and auditing it was extremely time consuming to process the long trail of paper data. It involved meeting a beneficiary and finding out how many days they worked in a particular project and how much money they received.

With the smart card system and the electronic records that are generated during its usage the process of cross verification of data has become much less cumbersome. Not only has the smart card based system of NREGA payments made accurate record keeping possible at multiple points (thereby facilitating cross verification) It has also helped address the problems associated with fake signatures and helped clarify on entitlements of people (as money cannot be transferred without accessing an individual’s card and confirming ownership by matching against biometrics data stored on that card)
Another equally important feature that this system has facilitated is that it has helped remove the control of information from the hands of those who indulge in corruption. It was a trend with the earlier system of payments that to access paper records auditors would have to approach precisely those who fudged them, and naturally they would resist making it difficult to monitor their activities. Officials were more willing to part with their lives than part with their papers. By taking information out of their control, it has been made more difficult for them to resist providing information or doing damage control with records when they sense trouble as records of payments are also available in the hands of the Business Correspondents and banks.

Technology has thus reduced the costs of cross-verification dramatically and significantly altered the terrain of the politics of accountability. In partnership with RTI (Right to Information) which ensures that information is easily, quickly and cheaply accessible to those who wish to ensure accountability; effective inroads are being made to combat corruption and leakage. The ready availability of information; facilitated by technological innovation and partnered implementation; has thus given a ready fillip to civil society’s quest to ensure transparency and accountability in financial aspects of programs and policies in India.

Thursday, August 19, 2010

Technology as a transformative force in financial inclusion


 “what according to you has been the benefit of today’s modern technology”. “What do you use it for”. these are questions that we constantly encounter nowadays in surveys after surveys that seek to identify the perceptions of different age groups on technology and its uses. Think about it and the first thought the hits one is that technology has made faster communication and information exchange possible and hence brought people closer; reducing time and cost of communication and information exchange. When we say so our thoughts are motivated by that which we regularly use; mobile phones and the internet and email ; that have facilitated our communication to be faster and allowed us to exchange data across vast distance at a fraction of the time it used to take earlier. our answers are touched by a  tinge of bias that lies rooted in an understanding of technology as a possession of the privileged and those able to afford it and capable (in terms of possessing education and the technical know how) of using it. even our understandings of the associations between technology and banking and finance is colored  to a large extent by how it has allowed for international trade and commerce; cross country economic information exchange and planning, global stock trading and electronic money transfers of massive amounts between countries etc.
But today when we look around us what we see is something far more expansive; the ability of technology to be not only a plaything of the privileged but also its ability to transform; in combination with innovative ideas and genuine social concern; the lives of millions of people across the world who constitute the very bottom of the development pyramid and who in no way can be called privileged. It is not charity but business with a social conscience that seeks to earn even while transforming the lives of millions of people for the good. Be it the biometric smart card based branchless banking system that is employed by FINO in bringing financial inclusion to the rural poor across the geography of India (which has opened bank accounts for 17 million + bottom of the pyramid customers and linked them to formal financial system) or the mobile banking technology that today has revolutionized the way people do banking in countries like  Kenya, Brazil and South Africa; technology has today made it possible to overcome geographical, social and economic barriers to take banking to people previously unbanked and under-banked and integrate them into formal financial systems. Added to this is the fact that as far as the customer is concerned these technologies are not complicated or difficult to use; despite the immense sophistication and complexity that characterizes the networks and back end processing systems into which the front end customer interfaces and data input devices in these systems are integrated.
Take for example the system being employed by FINO in India which is the Business correspondent model (BC). Important characteristics of this system currently in place include (1) access to the most remotest regions of the country through agents (bandhus) drawn from these communities and regions who go to customers villages with equipment to facilitate branchless banking processes (2) ability to Capture Customer details including biometric  and non biometric details easily (using fingerprint reader, webcam, mobile software interface, computer interface) and facilitate Unique Identification using the equipment in the hands of the Agent that satisfies banking KYC norms(2) ability to provide non-repudiable and user-friendly authentication mechanism that ensure individuals identity during transactions (3) ability to ensure reliable connectivity up to the last mile supported by the ability of the system to operate in online and offline mode (4) ability to offer Financial products tailored for the specific target group and system ability to be adapted to add on other financial and non financial products (5) ability to support the use of innovative User Interfaces and work in harsh rural environmental conditions and (6) Low Capital and Maintenance costs as compared to costs that would be incurred was a bank to set up branches in rural areas.  By virtue of its inherent features this model being employed in India possesses distinct advantages not merely over the brick and mortar model but also over other models being practiced in other countries
Technology provides numerous solutions to bring financial inclusion to the millions of  teaming masses who are outside the formal financial system. But the fact also remains that technology is never and can never be a standalone solution. It needs to be supported by favorable regulatory frameworks that allow flexibility, growth and innovation while also spearheaded by comprehensive understandings of the geographical, social and economic characteristics of the environment in which it is going to be implemented. If these enabling conditions are ensured then financial inclusion for all is not far away.

Tuesday, August 10, 2010

Philanthrocapitalism: the new way to go for development finance?

One often hears that a major constraint involved in the expansion of development activities is the lack of adequate finance. Some others also contend that it is the lack of business acumen and financial efficiency which restrict the spread of the good work done by the non-governmental organisations. A new phenomenon called Philanthrocapitalism addresses these concerns.

Recently, a lot of furore was generated in media when Bill Gates and Warren Buffet managed to convince 38 other billionaires to sign The Giving Pledge to give away at least half of their wealth during their lifetime or after their death for humanitarian causes. The article also stated that if the 400 richest Americans were to give away ½ of their assets, the charity would amount to nearly $ 600 billion. And it is this figure and the accompanying people’s voices which makes it an interesting piece of news.

The debate about Philanthrocapitalism as any debate runs along the similar lines of whether it is needed or not, whether it is good or bad.

Michael Edwards, who wrote ‘Small Change: Why Business won’t save the world’ entirely rejects the notion that applying business principles to solve global problems is more effective than the traditional approaches, stating that philanthrocapitalism will make the organisations ‘ignore the costs and tradeoffs involved’ in applying business approach to civil society actions and will ultimately undermine social transformation process, which doesn’t adher to deadlines and returns.

On the other hand, Mathew Bishop and Michael Green in their book, ‘How the Rich Can Save the World’ examine this notion from a more positive viewpoint. They cite the examples of various ‘social investors’ who are involved in how their money is utilized, who want accountability and efficiency as outcomes in the process of social change.

People on the other hand voiced entirely different kind of viewpoints; many even labelled it as a gimmick to garner publicity, to evade taxes, to increase social station. Nevertheless there were some interesting ideas which came out of these reactions.

Philanthrocapitalists like Bill Gates are concentrating their energies on the issues in third-world countries; however there are no. of problems in their respective countries as well. For example, the general concern in USA, which recently recovered from recession, seems to be the current lack of employment opportunities, a situation which many felt could be rectified if the corporates invested in business expansion rather than on donations.

Another idea was that though it is highly noble that capitalists are involved and promoting the notion of ‘effective charities’, they should work towards sustainable solutions arising out of their businesses. Increasing the productivity of poor through skill development and capacity building would help in reducing their dependencies on donations. The classic case of helping how to fish…

At the end of it, Philanthrocapitalism is still an evolving concept and judging its effectiveness is too early. However it can be said that this need not be a case of either/or, but can be seen as an opportunity to generate innovative solutions to reach out to the poor – integrate the efficiency of business with the social commitment of non-profits.

Friday, August 6, 2010

Engagement of For Profit Companies as Business Correspondents: Winners and Losers?

By Jatinder Handoo
Published in Microfinance Focus on August 6, 2010

The Reserve Bank of India (RBI) has recently put up a discussion paper in public space for engagement of “for profit” companies as business correspondents (BC) in India. This was on cards after a series of developments like August 2009 Working Group’s review of the BC guidelines which paved path for relaxing entry barriers for new entities and individuals as BCs. It also entailed provision of allowing banks to charge a “reasonable” user fee followed by Government’s acceptance of Inter Ministerial Group’s recommendations for use of mobile phones to further financial inclusion and now the latest one – Prime minister’s high power committee on financial inclusion which includes Industry captains from sectors like telcom, retail,BFSI,IT etc.

Finally, we have a 22 page document on the bank’s website cobbled up with familiar arguments for a business case to facilitate entry of “for profit corporate BCs” citing reasons like “risk mitigation and organizational capabilities” and “too big to fail” as pros and a few cons as well. But the conventional public policy reasoning reminds: “Behind every policy decision there are winners and losers”. I leave it to the wisdom of esteemed readers to find out the set of winners and losers in this case.

The paper shores up case for quashing entry barriers in favour of corporate BCs who would be either telcos or organized retail players (organized retailing in India is less than 2-3 percent in India) or “bankers to poor” NBFC –MFI . The pivotal argument put forth in the draft arrows that there is a paucity of organizational innovation and technology adoption by the existing players for furthering the “business of financial inclusion” in India, hence the entry of corporate BCs for speeding financial inclusion.

By mentioning this, does proponents find a technology and innovation vacuum in the current network of BCs? And thus expects “for profit corporate delivery channels” to employ these engines of commercial viability?. If this is the case, then it becomes interesting to foresee how would a for profit corporate channel solve commercial viability jigsaw on its own which is primarily the outcome of “low take up rates” of financial services and products at bottom of the pyramid; particularly when end customers have erratic cash flows and there are not enough better designed and properly priced micro banking products and services available which is the domain specialization of financial institutions and not telcos and retailers .

Commercial viability of the model as a factor is cited in the draft to buttress the case, but there are no pointers as to how “for profit” BCs will make the model commercially viable. Finally a global overview of Business Correspondents and need for adhering to principles of client protection is also touched upon despite of the fact that globally celebrated telco led model of M-Pesa is also largely a remittance service oriented and Safaricom makes no or extremely razor thin profits from this business stream. In Brazil BCs are in picture since 1970s, they are commercial entities but still more than 95 percent revenues are generated from checking accounts, utility bill payments and remittances and they have to cross subsidize their operations.

Finally, it is an open secret that the RBI despite of its herculean endeavors to go with bank led model at present seems to be under tremendous pressure from various quarters to accommodate corporate interests. Retailer-Telco-Technology interest groups and corporate lobbying at high echelons has taken the debate of financial inclusion beyond obvious.

It needs to be understood clearly that business of banking is of bankers and not of telcos or retailers. In the Indian context is visible on ground that the regulator has been proactive and Banks have demonstrated serious intentions and vision for enabling universal financial inclusion. However the missing link is investment gap. To fund the gap, policy can play a defining role here by incentivizing banks monetarily and this could be done by propounding a clear cut financial support policy for banks.

Non banking Players like retailers and telcos have along way to go in demonstrating some scalable and profitable models of micro banking for bottom billion junta. BC model is just on the verge of stabilization after four years. Let the existing system be incentivized without further experimentation and keep the debate on technology for future.