29
May

Barriers to basic banking in India

In a column published in Ideas for India, Camille Boudot of IFMR Lead & Amy Mowl of IFMR Finance Foundation write about the challenges customers face in availing basic banking services in India. The authors draw from their 2014 audit study “Barriers to Basic Banking: Results from an Audit Study in South India” and provide a perspective on why meaningful financial inclusion requires more than just a simple account, proof of ID, and a mobile phone, but in its essence, it starts with providers who are willing to serve low-income customers.

Abstract:

The Indian government is promoting the Jan Dhan Yojana, Aadhaar and mobile banking – or the “JAM trinity” — as the pathway to financial inclusion. But are banks capable or even willing take on their role in this ambitious agenda? Based on a field study in Chennai, this column highlights the range of costs and constraints imposed by banks on customers attempting to enter the formal financial sector.

To read the full column please click here.

21
May

Battle of Economic Ideas – Part II

By Ravi Saraogi, IFMR Investments

This is the second post in our blog series on the Battle of Economic Ideas. You can read the first post here.

The underlying theme in the previous post was the emergence of a rational and modern society during the Age of Enlightenment (1650s-1780s). Thinkers like Rene Descartes and John Locke questioned feudal doctrines of the past, paving the way for the rise of scientific thinking and political freedom. The subsequent era of the Classical Liberals (1750s to 1880s) witnessed the birth of modern economics through the works of Adam Smith. Smith’s ‘invisible hand’ hypothesis provided the justification for non-interference by the government in the workings of the market. This ‘free-market’, ‘laissez faire’[1] approach to economics coupled with political self-determination and the emphasis on ‘individual’ over ‘society’ was the hallmark of the Classical Liberal era.

Continuing from where we left, this post provides an overview on the subsequent era of the Marxian-Keynesian backlash against Classical Liberal ideas.

Economic Thinking

The Marxian-Keynesian Backlash (1850s to 1970s)

Not everybody was pleased with the Industrial Revolution. While the Classical Liberals saw in the Industrial Revolution the salvation for the masses through increase in per capita income, others viewed it as the enrichment of few at the cost of the poor. Others still viewed the Revolution as the degradation of society at the altar of material wealth. Critics drew attention to the following aspects of the Revolution– poor working conditions, child labour, rising inequality, environmental degradation and rise of materialism.

The Sadler Report[2] for instance, written in 1832 by Michael Sadler, a member of UK Parliament, highlighted the poor and exploitative conditions of child labour in English factories and sought to limit the hours of work for children. Historian Royston Pike commented that the Report is, “a mass of evidence, constituting a most formidable indictment of factory conditions …It is impossible not to be staggered by the revelations of human misery and degradation – impossible not to be moved by the dreadful stories of children and young persons (and adults, too, for that matter) who were bullied and cursed and tormented, pushed around and knocked about by those placed in authority over them.[3] The report drew public outrage and was a damning indictment on England’s factory system.

Another manifestation of a backlash against the Classical Liberal ideas was the rise of Romanticism (1800s-1850s), a movement which railed against the ‘evils’ of the factory system. This movement emphasized on the emotional over the rational, beauty over utility and subjectivity over specificity. Romanticism pitched itself squarely against the ‘materialistic’ ethos of the Industrial Revolution. Thinkers associated with this movement, which included artists, musicians and several literati, sought to highlight that society should strive for lofty ideals than mere accumulation of material wealth.

Even though Romanticism was on the rise, it took the revolutionary ideas of the “German scholar par excellence, slow, meticulous, and painstakingly, even morbidly, perfectionist[4] Karl Marx to provide “the gravest, most penetrating examination the capitalist system has ever undergone.[5] To fully comprehend Marx’s view of capitalism, we need to take a small detour to outline the conception of history embedded within the Marxian analysis. The Communist Manifesto, an 1848 political pamphlet by Marx and his life-long friend, collaborator and the co-founder of Marxism, Friedrich Engels, starts with the lines, “The history of all hitherto existing society is the history of class struggles…. The modern bourgeois society that has sprouted from the ruins of feudal society has not done away with class antagonisms. It has but established new classes, new conditions of oppression, new forms of struggle in place of the old ones.[6] Thus, Marx and Engels viewed history as a process of constant class antagonism with the oppressors and the suppressed changing depending on the epoch. Emanating from this conception of history is the Marxian view that while the capitalistic society has progressed from a feudal society, it still retains class antagonism- only the oppressors have changed. During the feudal ages it was the aristocratic class who were the oppressors, while in a capitalistic society the bourgeois (owners of the means of productions) are the new oppressors and the proletariat (working class) the suppressed.

But what is the genesis of this class antagonism? In the Marxian view, class antagonism is a function of the super-structure adopted by society for production and its distribution. In the words of Engels, “…production, and with production the exchange of its products, is the basis of every social order; that in every society that has appeared in history the distribution of the products, and with it the division of society into classes or estates, is determined by what is produced and how it is produced, and how the product is exchanged. According to this conception, the ultimate causes of all social changes and political revolutions are to be sought, not in the minds of men, in their increasing insight into eternal trust and justice, but in changes in the mode of production and exchange; they are to be sought not in the philosophy but in the economics of every epoch concerned.[7] (emphasis mine).

Thus, in the Marxist view, class antagonism in a capitalistic society cannot be ameliorated because such antagonism is embedded within the capitalistic system of production and distribution. Only if this system of production and distribution is changed (which is to say capitalism is discarded) can there be hope of establishing a classless society- the communist society.

It should be noted that Marx was not against capitalism. He viewed the emergence of capitalist mode of production as a necessary stepping stone to socialism and then to communism. Also, a fully developed capitalist structure was required to expand production for the implementation of the Marxist credo of “each according to his ability to each according to his need[8]. Under the Marxian analysis, the ascendancy of capitalistic forces during the Industrial Revolution would bring class struggles to its forefront and stoke a revolution for the overthrowing of the private ownership of means of production. Socialism would be the result of such a revolution where the ownership of the means of production would be assumed by the State. However, this too would not eliminate class struggle as there would be a new class of owners, and in a subsequent revolution, the concept of ‘ownership’ itself would be eliminated with the onset of a true classless communist society.

The contribution of Marx and Engels in changing the dominant discourse in the fields of politics, sociology and economics cannot be undermined. Marx’s theories inspired leaders like Lenin, who organized the Bolshevik revolution in Russia that led to the formation of the Soviet Union. Though there were differences in the ideas of Marx and Lenin, Lenin’s successor, Joseph Stalin, coined the term “Marxism-Leninism” and officially adopted it as the State ideology of the Soviet Union.

Marx’s ideas led to the complete decimation of the Classical Liberal ideas of laissez faire in countries which embraced communism. He died in 1883 in London. Coincidentally, the same year, not very far from London, an English economist, journalist and financier was born, who would play an equally staggering role in re-defining economics away from its Classical Liberal roots. This gentleman was John Maynard Keynes.

Before we proceed, it is important to clarify that though the theories of Marx and Keynes departed from the Classical Liberal approach, the similarity ends there. Keynes was hardly a socialist or communist. In 1931, he said, “How can I accept the [Communist] doctrine, which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world?[9]

Keynes central idea was that markets are not self-correcting[10] and he saw a large role for the government in stabilizing market forces. He was thus an ‘activist’ economist- his ‘activist’ streak most visible when he wrote, “Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.[11] He discredited the Classical Liberal ‘balanced budget hypothesis’, as per which a government should refrain from borrowing. On the contrary, Keynes’ theories advocated that government should regulate economic activity by running budget deficits in times of depression and budget surplus at times of heightened economic activity, thereby regulating aggregate demand and freeing the economy from the vicissitudes of business cycles.

Economics does not exist in a vacuum. If it did, then economic ideas will be exactly that, only ideas. The field of politics provides the outlet for economic ideas through the promulgation of State policies, and in the case of Keynes, his ideas were most visible in the policies adopted by Franklin D. Roosevelt, the 32nd President of the United States from 1933 to his death in 1945. Roosevelt assumed Presidency when the United States was in the midst of the Great Depression of the 1930s which also happened to be the decade in which Keynes published his magnum opus The General Theory of Employment, Interest and Money. His analysis that, “an economy in depression could stay there. There was nothing inherent in the economic mechanism to pull it out. One could have ‘equilibrium’ with unemployment, even massive unemployment[12] strongly resonated with the depression in the developed world. In line with the Keynesian prescription, Roosevelt’s New Deal[13] substantially increased the role of the government in the economy through social security laws combined with aggressive fiscal policy. Roosevelt also sought to dispel the misgivings regarding government intervention. In a 1938 speech, he said, “Let us never forget that government is ourselves and not an alien power over us. The ultimate rulers of our democracy are not a President and senators and congressmen and government officials, but the voters of this country.[14]

The Keynesian world had departed substantially from the Classical Liberal world of absolute free markets. Though Keynes diluted the Classical Liberal credo of zero government intervention, he was not against capitalism. In fact, Keynes actually saved capitalism from the growing influence of socialism. Keynes’ version of restricted capitalism provided a political-economic system that borrowed from socialism’s top-down economic planning, while retaining the basic fabric of unbridled capitalism. He salvaged capitalism by offering the world Capitalism Version 2, exactly at a time when there was a fear that capitalism as a political-economic system would be crushed under the growing influence of fascism and socialism as manifested in the rise of authoritarian leaders like Hitler in Germany, Benito Mussolini in Italy and Stalin in the Soviet Union.

Keynes was undoubtedly the most influential economist of the twentieth century. His influence was so wide reaching that in 1971, Richard Nixon, the 37th President of the United States, said “I am now a Keynesian in economics”. Ironically, as subsequent events would prove, the 1970s happened to be the decade during which Keynesian economics started to splutter. Just when it seemed Classical Liberalism has been crushed under the weight of Keynesian ideas, like a phoenix, it rose, albeit in a different avatar, to once again fight for primacy in the battle of economic ideas.

To be continued in the third and penultimate part of this blog series.


Credit: The young boy depicted in the graphic illustration utilises work of Canadian street artist iHeart’s “Nobody likes me” and Banksy’s “Angel Boy”.

[1] Laissez-faire (French) is an economic system in which transactions between private parties are free from government interference such as regulations, privileges, tariffs, and subsidies. The phrase laissez-faire is part of a larger French piece and literally translates “let (it/them) do,” but in this context usually means “let it be,” or “let it go.” http://en.wikipedia.org/wiki/Laissez-faire

[2] Report of the Select Committee on Factory Children’s Labour (Parliamentary Papers 1831-32, volume XV

[3] Royston Pike, E (1966). Human Documents of the Industrial Revolution in Britain. London: George Allen & Unwin

[4] Heilbroner, Robert L., 1999, The Worldly Philosophers, Simon & Schuster, p140

[5] Heilbroner, Robert L., 1999, The Worldly Philosophers, Simon & Schuster, p168

[6] Communist Manifesto, Chapter 1: Bourgeois and Proletarians

[7] Engels, Friedrich, 1878, Anti-Duhring, p. 294

[8] Marx, Karl, 1875, Critique of the Gotha Program, Part I

[9] Heilbroner, Robert L., 1999, The Worldly Philosophers, Simon & Schuster, p279

[10] Keynes had once remarked that “The market can stay irrational longer than you can stay solvent.” http://blogs.wsj.com/marketbeat/2011/02/11/keynes-he-didnt-say-half-of-what-he-said-or-did-he/

[11] Keynes, John Maynard, 1923, A Tract on Monetary Reform, Chapter 3

[12] Keynes, John Maynard, 1936, The General Theory of Employment, Interest and Money

[13] The New Deal refers to several policy initiatives by the Roosevelt administration in the United States between 1933 and 1938.

[14] Roosevelt, Franklin D., 1938, Address at Marietta, Ohia. July 8, 1938

7
May

Battle of Economic Ideas – Part I

Economist

By Ravi Saraogi, IFMR Investments

The power of ideas cannot be undermined. While the people and the events linked to them may wither, ideas can live for eternity. It is perhaps for this reason that John Maynard Keynes had written, “…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else…[1] In this blog series, we attempt to trace the evolution of economic ideas that have shaped history and influence policy discourse even today.

The evolution of economic ideas has been complex. The fundamental problem which these ideas try to answer is- how best to organize society so as to satisfy unlimited human wants with finite resources. The solution to this ‘economic problem’ differs based on different schools of economic thought and this sets the ground for these ideas to battle for primacy. It is, of course, a gargantuan task to trace the historical development of such ideas. In doing so, we are guilty of prioritizing brevity over detail.

Structure

This first post in this series will trace the origin of modern philosophy during the Age of Enlightenment (1650s-1780s) which was a precursor to the emergence of the modern economic thought during the Classical Liberal era (1750s to 1880s). The second post will give an overview of the Marxian and Keynesian backlash against the classical liberal ideas which reached a crescendo in the first half of the twentieth century. The third and final post will comment on the partial re-incarnation of classical liberal ideas through the neo-liberal counter-revolution and conclude with how the contemporary economic debate is poised.

Age of Enlightenment (1650s-1780s)

Prior to the Age of Enlightenment, the question of how to organize society was primarily answered through the doctrine of ‘Divine rights of the King to rule.’ Under this doctrine, kings and noblemen gained their political legitimacy by asserting that they derived their right to rule directly from God. James I, the King of England from 1603-1625, in a speech to the Parliament in 1610, said, “The state of monarchy is the supremest thing upon earth; for kings are not only God’s lieutenants upon earth, and sit upon God’s throne, but even by God himself they are called gods.” [2] Thus, the defining trait of this doctrine was that a king had divine powers to rule. Two important corollaries flow from this- there is no separation between the Church and the State and, reason is based on religion.

This changed during the Age of Enlightenment. The political legitimacy of an absolute monarch was challenged through the separation of the Church and the State, and scientific reasoning was given prominence in the discovery of truth over religion. A prominent figure in this era was Rene Descartes (1596-1650), a French philosopher and mathematician considered to be the father of modern philosophy[3]. In many ways, Descartes epitomized the zeitgeist of the Age of Enlightenment when he said he will research and write on philosophy “as if no one had written on these matters before.”[4] He famously remarked, “I think, therefore I am[5] and in his magnum opus, Discourse on Method, wrote that knowledge is built on the foundation of rules of thought, the first being, “never to accept anything for true which I did not clearly know to be such. [6]

It is not difficult to see that anybody adopting Descartes’ methodology would immediately call into question several “truths” of the Middle Ages[7]. In his pursuit for truth, Descartes considered any belief that did not “exclude all ground of doubt[8] as false. Thus, thinkers like Descartes laid the foundation for an intellectual renaissance during the Enlightenment era.

Another prominent thinker during the Enlightenment era was John Locke (1632-1704) who played a significant role in changing the political discourse. Locke, an English philosopher and physician, advocated the natural rights hypothesis, under which, all individuals have a natural right to life, liberty and property as long as they do not infringe on someone else’s rights. This was a radical thought which ran counter to how individual rights were perceived prior to the Enlightenment era – as being wholly subservient to the “divine” rights of kings. Locke further developed his ideas on natural rights through the doctrine of ‘social contract’ in which each individual enters into a contract with the State for the preservation of their rights.

The political doctrine which flows from Locke’s individual rights hypothesis is that of ‘government by consent’, an idea he detailed in his magnum opus Two Treatises of Government. Maurice Cranston, in his brief biography on Locke[9], wrote, “One key word in this whole book is ‘consent’. The idea that the authority of a king or other ruler rested on the consent of the people he ruled was a controversial one in the seventeenth century…. Indeed, the Divine Rights of Kings was a widely accepted belief throughout Europe….. it was Locke more than any other theorist who overthrew belief in the Rights of Kings.”

Though what Locke said would now appear commonplace, it must be understood that “a lot of things which we take for granted today were new and remarkable when he (Locke) first said them.”[10] Think about how revolutionary the ideas about natural rights of individuals were when society was just progressing from its feudal vestiges. Also, his views regarding government by consent was in stark opposition to the established doctrine of the divine rights of the kings.

A prominent event during the Enlightenment era was the Glorious Revolution (1688-1689) which was a battle between the notion of the divine rights of kings to rule and the Parliament of England. The outcome of this Revolution was the abolition of absolute monarchy in England through the promulgation of the Bill of Rights in 1689. Locke’s ideas played an important role in the Revolution and he is often referred to as the “philosopher of the Glorious Revolution.[11]

Locke’s ideas on natural rights of individuals and limited government also echoed prominently in the American Declaration of Independence in July 4, 1776, when thirteen erstwhile British colonies declared their independence and jointly formed the United States of America. The founding fathers of the United States of America were strongly influenced by Locke’s natural rights hypothesis as is evident in the drafting of the Declaration of Independence, which includes the following, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”[12]

Thus, the Age of Enlightenment was truly an era which took a decisive break from the past, particularly in ideas relating to political philosophy. The convulsions during this era served as a blow on the feudal institutions of the Middle Ages and a stepping stone towards the era of Classical Liberalism.

The Golden Age of Classical Liberalism (1750s to 1880s)

In continuation of the process of emancipation of the individual from his political masters, the Classical Liberal era was a time in history when ideas of individual liberty in all spheres of life – political, civil and economic, was gaining ascendancy. The Classical Liberal era also witnessed the birth of modern economic theory through the work of Adam Smith, a key figure in the Scottish Enlightenment movement of the eighteenth century. The credo of the Classical Liberal era is often summarized in Smith’s famous ‘invisible hand’ hypothesis, as per which, actions undertaken for individual benefits also leads to unintended social benefits. This is also captured in what is perhaps the best known quote from Smith’s magnum opus An Inquiry into the Nature and Causes of the Wealth of Nations, which was published in 1776[13], “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”[14]

In Smith’s world, individuals endowed with their natural rights trade with other such individuals based solely on their self-interest, and such voluntary individual actions in a marketplace feeds into betterment of the entire society. Thus, Smith’s theories provided a justification for the government not to intervene in the functioning of the market[15].

It would be important to ruminate here on how far the world had come from the pre-Enlightenment era. While thinkers like Locke set in motion the unshackling of the individual from political slavery, Smith’s theories provided a justification for the individual’s economic freedom. Thus, the classical liberal period saw a proliferation of two key ideas – political freedom through democratic ideas, and economic freedom through free-market laissez-faire ideas. A key event which encapsulated these ideas was the Industrial Revolution (1760-1820).

BEI_1
Source: Hoppe, Hans-Hermann, 2013, From the Malthusian Trap to the Industrial Revolution, Mises Circle Feature

The Industrial Revolution has rightly been categorized as one of the most important event in history[16]. Robert Emerson Lucas Jr., who won the Nobel Memorial Prize in Economic Sciences in 1995, said, “For the first time in history, the living standards of the masses of ordinary people have begun to undergo sustained growth…. Nothing remotely like this economic behaviour has happened before.”[17]  The reason for this “sustained growth” was that through the Industrial Revolution, mankind was able to, for the first time, break free from the ‘Malthusian trap’.

Elucidated by Thomas Robert Malthus, an English scholar, the trap refers to the gloomy conclusion one derives when the process of population growth is compared to the process of growth in the supply of cultivable land (or food supply)– while the former grows geometrically, the latter grows arithmetically. In his 1798 treatise[18], Malthus wrote, “…. the human species would increase in the ratio of 1,2,4,8,16,32,64,128,256,516, etc. and subsistence as 1,2,3,4,5,6,7,8,9,10, etc. In two centuries and a quarter the population would be to the means of subsistence as 512 to 10; in three centuries as 4096 to 13, and in two thousand years the difference would be incalculable.

Thus, for most of history, the increase in population was hostage to the rate of increase in food supply. Though there is a tendency for the population growth to outstrip growth in food supply (due to the former’s geometric rate of increase compared to the latter’s arithmetic increase), any “excess” growth in population resulted in famines, after which, the population again realigned with the growth in subsistence. What this also meant is that for most of history, per capita income remained stagnant as any increase is subsistence was accompanied by increase in population[19].

As highlighted by economic historian Gregory Clark, “….there is no sign of any improvement in material conditions for settled agrarian societies as we approach 1800. There was no gain between 1800 BC and AD 1800 — a period of 3,600 years.[20] This changed during the Industrial Revolution when the human race escaped from the Malthusian trap. The Industrial Revolution was characterized by rapid increase in both per capita income and population made possible by the attainment of a critical mass of technological improvements and capital stock not witnessed until then. This contributed to the ‘Great Divergence’, which refers to the rapid increase in the wealth and power of Western civilisation, leaving behind the civilizations of India, China, Japan and the Ottomans.

One cannot help but feel awed by a phenomenon so divergent from what had been observed for the entire recorded history. The factors responsible for the Industrial Revolution continue to be debated. However, even if one can disagree on the weightage, it cannot be denied that the emergence of reason and political liberty during the Enlightenment era and free trade policies of the Classical Liberal era were enabling factors for the Industrial Revolution. It was as if starting from the Enlightenment era, the lid on what Keynes termed as “animal spirits” blew off and set in motion a phenomenon never witnessed before.

The world was a very different place in the latter half of the nineteenth century as compared to the seventeenth century. Political ideas changed. Feudal institutions form the Middle Ages were attacked. Modern economics was born and the Industrial Revolution saw mankind finally break the gloomy Malthusian trap. One would almost have thought the future could only see a further strengthening of the classical liberal ideas of liberty through the deepening of the political-economic structure of democratic-capitalism. However, as subsequent events would reveal, beneath the rosy story of Industrial Revolution, another revolution was fomenting. And when it erupted, it shook the edifice of classical liberalism right down to its foundation.

To be continued in the second part of this blog series.


[1] Keynes, John Maynard, 1936, “The General Theory of Employment, Interest and Money”, Ch. 24, Concluding Notes, p. 383-384

[2] http://www.h-net.org/~hst201/SpeechParl.htm

[3] http://www.iep.utm.edu/descarte/

[4] Descartes, René, 1649, Passions of the Soul

[5] Descartes, René, 1637, Discourse on Method, Part II

[6] Ibid.

[7] The Middle Ages refers to the period from the 5th to the 15th century

[8] Descartes, René, 1637, Discourse on Method, Part II

[9] Cranston, Maurice (1966), John Locke and Government by Consent, Political Ideas – Edited by David Thomson, p. 75

[10] Ibid.

[11] Ibid.

[12] http://www.ushistory.org/declaration/document/

[13] Co-incidentally, the same year as the American Declaration of Independence

[14] Smith, Adam, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations, Book 1, Chapter 2

[15] It should be noted that Smith was not opposed to all government intervention. In his writings, he has expounded several areas where he sees a role for the government.

[16] Nardinelli, Clark, 2008, Industrial Revolution and the Standard of Living, The Concise Encyclopedia of Economics, Library of Economics and Liberty

[17] Lucas, Robert E., Jr., 2002, Lectures on Economic Growth. Cambridge: Harvard University Press. pp. 109–10

[18] Malthus, Thomas Robert, 1798, An Essay on the Principle of Population as It Affects the Future Improvement of Society

[19] Which is to say that any increase in numerator was accompanied by an increase in the denominator in the computation of per capital income

[20] Clark, Gregory, 2007, A Farewell to Alms: A Brief Economic History of the World, Princeton University Press

22
Apr

Insights from a Deep dive exercise in Sahastradhara KGFS, Uttarakhand

By Arjun Sood & Gayathri V, IFMR Rural Finance

Sahastradhara KGFS started its operations in the year 2008 with a mission “to maximise the financial wellbeing of every individual and every enterprise by providing complete financial services in remote rural Garhwal”. Currently, we have thirty one branches serving the districts of Uttrakashi, Chamoli, Rudraprayag, Tehri, Dehradun.

While Sahastradhara KGFS has gone where no private financial institution has gone before and proven its commercial case, we continue to think there is enormous untapped potential and room for improvement in the customer experience. This can be seen in terms of low activation rates, time delays between customer enrolment and activation and relatively low wealth manager productivity. Against this context, Sahastradhara KGFS commissioned an exercise which was internally dubbed as “Mission Deep Dive Sahastradhara” to uncover the root causes for this and suggest strategies for improvement.

Sahastradhara KGFS BranchLocation1
Sahastradhara KGFS Branch locations

In the extensive field engagement that followed, a cross functional team involving members from diverse roles dwelt deeper into the operations of the entity. Out of this extensive study three themes emerged as the ones that needed most attention immediately:

  1. Data Integrity – How well do we know our customers and how is this being leveraged for business decision making?
  2. Process improvements – How efficiently are we able to provide service to our customers?
  3. Organisation development and training – How well trained and empowered is the field staff to carry on branch operations smoothly?

The team came up with following suggestions and tools to address these gaps:

i) Beat plan for the Wealth Managers – The service area of a branch can go up to 25 kilometres from the branch location. Owing to the hilly terrain, the hamlets and habitations are not always accessible by road; they have to be accessed on foot. For a Wealth Manager to reach up to these villages a mix of options have to be chosen i.e. public or private transport and foot. Field visit to such villages[1] not only demand a significant investment of daily time but also physical effort. To plan the daily schedule of Wealth Managers and to maintain regular interface with the customers, a beat plan for each branch was proposed. As per the beat, Wealth Managers are expected to visit a particular village or set of villages on a pre-defined date.

ii) Prioritisation matrix – As part of the beat, once the Wealth Manager has reached a village, the prioritisation matrix[2] would suggest which customers have to be met and for what activity? The rules that govern the prioritisation matrix tool are flexible and can be defined/ altered on the basis of changing business priorities. As a starting point, we added the following rules:

  • customers whose data needs to be updated (re-enrolment),
  • high priority insurance customers (human capital, shop and livestock),
  • customers who have goals coming up in this year (lead for credit products) and
  • customers who have high surpluses and long term goals (lead for investment products)

iii) Focus on Tier 1 areas – Tier 1 areas, are the areas that are located within a range of 10 kms from the branch by road and where the Wealth Manager does not have to cover more than 3 kms on foot. In order to increase the business numbers, Tier 1 areas or the areas that are easily accessible by road or foot from the branch were shortlisted. The target was set at achieving a minimum of 50% household level activation for asset, insurance and investment products.

iv) Re-enrolment and data update of households – We defined metrics that measure the quality of enrolment data based on completeness, validations and vintage. Households that did not satisfy this data quality metric were to be re-enrolled/ data was to be updated for them in the systems. Priority was accorded to households based on their engagement with us – re-enrol active and overdue households first, then dropout households and then never active households. Having quality information about the financial lives of these households would enable the Wealth Manager to offer high quality wealth management advice and hence, the right financial products suited to the household profile.

v) Credit process improvement strategies –

  • Introduction of Cash flow appraisal template – The existing loan appraisal template used to capture data about a business at a point in time i.e. on the day of appraisal. Due to this, we had limited understanding on the seasonality of cash flows of the customers. Appraisal sheet that will capture the month on month cash flows of the business was introduced with an objective to understand the seasonality of cash flows of the customers, eventually leading to us designing customized products.
  • De-centralisation of loan approvals – Loan sanction up to a certain amount was decentralised to the branch staff. This would lead to an increase in ownership of loan underwriting at the branch level and reduce the loan processing time.

The deep dive exercise at Sahastradhara KGFS gave us valuable insights into the running of a KGFS. It allowed us to reassess some of the contours of the KGFS model and align it to our larger mission. Some of the key insights are:

  1. Importance of having recent, triangulated and complete enrolment-appraisal data about our customers: In order to offer suitable financial products to the households it is important to understand their financial profile fully – income, expense, goals, assets and liabilities. We are working to make the KGFS enrolment process a work-flow based data collection system which will ask a limited set of key questions to the customer to understand their financial lives completely. To make the best use of finite customer interaction time, the data declared by the customer will be validated and triangulated at the backend using external data sources and our own historical data.
  1. Importance of understanding month on month cash flows of the households before product sale: Any credit product being given to a household is based on a thorough appraisal of the loan purpose and the asset being created from the loan. This deep dive exercise taught us that while it is important to do that, it is equally important to assess the current cash flows of the household which will support regular repayments. Given the rural markets we operate in, it is also important to be cognizant of the seasonality associated with these incomes. We are working to build this knowledge about income generating assets and the cash flows from that asset into the enrolment-appraisal process.
  1. Better use of the Wealth Manager time and improved customer experience: We are also building predictive models that would assign a score to a customer at every stage of his/ her interaction with us. This would provide better targeting strategies and specific engagement paths based on customer type, thereby improving activation rates, predicting delinquencies and customer attrition over time.
  1. Assessing the quality of enrolment data in other KGFSs: Data quality as a topic has garnered a lot of interest and we are working to come up with a standard set of data quality metrics which will then be published thereby incentivising the branch to collect good data. The branch staffs are also being trained on the importance of having quality data and some methods by which they can prompt the same from the customers at the time of enrolment.
  1. Significance of a process audit: The audit process is a key tool in identifying two things: if the process that has been prescribed is being followed on the ground (voice of process) and if there are any gaps in the process that hinder the customer experience (voice of customer). After the Sahastradhara exercise, we are trying out a couple of methods by which any prescribed process can be audited. This is being tried out in multiple KGFSs and a refined audit process is expected to be launched pan India.
  1. Learning about the roles of the frontend staff: The Sahastradhara deep dive reiterated the role that our field staffs play in the customer experience. It is absolutely crucial that the frontend of the organisation be empowered and owns the success of each of their branches. Decentralising certain amount of decision making will go a long way in bringing about that cultural shift.
  1. Leveraging existing technology: The backbone of the KGFS model is the initial investment we make in technology and how we leverage it to provide quality service to the customers. In this regard, we pushed the branches to use the mobile platform to make on-the-spot product sales and other transactions at the customers’ homes. This coupled with real time biometric authentication, thermal receipts and IVR messages provide a secure way to move product sales closer to the customers.

[1] Village Sangrola under the service area of Lambgaon branch is 25 kms from the branch. It takes 2 hours to cover 23 kms by road and an additional 30 minutes to walk 2 kms uphill, to reach the village. A to and fro journey to the village will consume 5 hours. Customer interaction and transaction time will take additional time. The time and distance were mapped during a field visit in May 2014.

[2] A prioritisation matrix is a demand chart equivalent in an MFI. But unlike MFIs, our Wealth Managers perform a multitude of tasks ranging from enrolment to product sale to appraisal. The prioritisation matrix helps the Wealth Manager keep track of the tasks to be completed while the tasks themselves and the priorities can be dictated from a central level.

5
Apr

GDP Mapping Exercise – Illustrations from recent studies

By Surabhi Mall, IFMR Rural Finance

In the previous blog post of the KGFS Model Incubation series, we drew out the implications of mapping the GDP of a branch’s service area on strategic decisions related to district selection, branch potential, product suitability and customer centricity. In this context, some of the pertinent follow-up questions that arise are – How much will this activity cost? Should this capability be harnessed indigenously or simply outsourced? What is a statistically approved research design to follow? This post essentially focusses on understanding the ABC of executing this study with relevant elaborations and learning from the past.

The GDP exercise can serve different purposes and based on the objective use and nature of requirement the scope of the study can be defined. The following two studies conducted in two different districts in Tamil Nadu attempt to illustrate this.

The objective of the first study was to compare the gross potential of a branch in the Krishnagiri district, Tamil Nadu, to that of a model KGFS branch[1] wherein ‘comparable’ was defined as a range with an acceptable degree of error from the estimates of the model branch. In this case, focus of the study was to get the aggregate number and not necessarily its constituents. Simply put, this means that while sector-wise distribution of the branch economy could be insightful, it was not the focus of the study per se. Resources used as part of this included a full-time staff that spent one day in assimilating secondary data, three working days on the field to collect primary data as well as to validate the secondary data. The staff was actively supported by a Wealth Manager at the branch location.

The second study at Ellakuruchi village in Ariyalur district, Tamil Nadu, was done with an objective of profiling the district as well as the branch service area. District profiling required a thorough review of the district’s demography, geography, economic status, main crops, enterprises and occupations. Profiling the branch service area required field insights on aspects such as different occupations that thrive in the area so as to map each economic activity with its volume; cash-flows associated with the occupation so as to map business potential; formal and informal financial providers so as to understand current and potential gaps in the financial landscape among others. This objective required one data analyst responsible for secondary data collection, methodology design, primary data collection, data collation and presentation of the findings. Primary data collection was actively supported by 1-2 Wealth Managers in the field for 6-8 working days. The entire exercise was executed in one month. In order to add greater rigour and sanctity to the estimates, a similar study was executed in another branch in the district.

Below are pie-charts depicting the findings from both GDP studies in Krishnagiri and Ariyalur districts respectively.

GDP Mapping Exercise

One of the big challenges in initiating such a study is that the data records of this kind are not methodical, very contextual and mainly absent from conventional databases for any triangulation. The other concern may be related to the design of the research methodology for the intended purpose of the study. Often, simple doubts such as the size of a representative sample directly impact the resource requirements and rigour of the study. To address these issues simple project management tools such as defining the objective, scope and research design a priori through a clear project plan will be quintessential. In the first study, since the objective was clearly identified as “compare the gross potential of the branch to that of a model KGFS branch,” an exhaustive sector-distribution map of the branch’s economy was not required. Conversely, in the second study, to “profile the district and branch service area”, there was need for profound understanding of the demographic and economic constitution of the area. This in turn required information about the share of each activity in the total economic pie.

In cases wherein the objective of the exercise is to design a customer engagement strategy or an optimal capacity plan for the branch by projecting lean and peak cash requirement periods, activity mapping will need to be extremely exhaustive. This would imply that aspects such as the ‘crop net income’ component of the GDP pie be further broken down to list the main crops, their seasonality, and cash flow projections related to each crop.

It is also important to acknowledge the homogeneity in variables during the study. For example, if a service area constitutes of four villages of 300 households each[2], the economic map of one village can be multiplied to give the macroeconomic map of the branch. This adds to operational efficiency in the execution whilst minimizing scope for error.

Since the KGFS model is designed to entrench itself in the community it serves by developing a deep understanding of the geography, the local culture, the economic activities and dominant customer segments, the GDP exercise is perfectly tailored for the KGFS model. Understanding its benefits as a principal and inaugural step in model incubation and thereby budgeting for the costs involved will lead towards deepening the very foundation of the model.

The next blog post in the series will discuss the heuristics of site selection in a rural village context. By illustrating the KGFS’ experience across diverse geographies, it will attempt to showcase the various components that may play a foundational role in the science of site selection.

[1] The model KGFS branch is conceived and defined based on the KGFS mission, the business requirements and past learning experience.
[2] Unit of aggregation may vary from a household, a village, a panchayat or a block.