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!!

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.

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. 

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. 

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.