The rich invest in the poor

– G E Balajee, IFMR Blog Team

The recent securitisation transaction completed by IFMR Capital was a landmark deal in the microfinance sector. It was a Rs. 108 Mn rated securitisation transaction backed by microloans originated by Grama Vidiyal Micro Finance Limited. This is not the first time that a transaction such as this has been executed by IFMR Capital. What makes this transaction special is that, this is the first time private wealth investors have invested in microfinance. In other words, this is one of the best examples of the wealth of the richest being directed towards the poorest in the country.

IFMR Capital already has some innovations in the area of securitisation to its credit. Its Multi-Originator (MOSEC) structures have focused on smaller but high quality microfinance institutions (MFIs) that deserved capital market exposure. It has also arranged the first mutual fund investment in microfinance. “We have always been on the lookout for new investor classes for our clients”, says Vineet Sukumar, who heads Origination and Treasury at IFMR Capital.

Though a lot of private investors would have liked to invest in the sector, lack of publicly available information about the MFIs has been an important reason that has kept them away. “Efforts by IFMR Capital in collecting granular data, success in transaction placement, and engagement with a strong private wealth advisor like Avendus has ensured that a good start has been made”, explains Meenal Madhukar who heads Investor Relations at IFMR Capital.

While a commercial institutional investor has the resources to verify information about a company before investing, a private wealth investor relies on, and is very sensitive to, public opinion and information released in the press. Ever since SKS IPO filed its draft red herring prospectus, the sector has been beset with negative press coverage. It is well known that bank funding to MFIs had dried up after the Andhra Pradesh (AP) ordinance. If traditional sources were apprehensive of the future of the sector, private investors were even more wary of investing in the sector.

“This investment, coming in the backdrop of the AP Ordinance and liquidity shortfall in the sector, conveys a strong message that the sector is able to diversify fund sources even at such tough times. Further, funds from such non-traditional sources are being availed at commercial rates that are well comparable with other fund sources. Separately, IFMR Capital’s success in inculcating a new investor class into the sector at this time underscores the success of our business model and strategy”, says Vineet.

So what does this do to the microfinance sector? The earlier securitisation transactions arranged by IFMR Capital have consistently helped smoothen out the seasonality of the funding pattern that is prevalent in the MFI sector, or for that matter, even in the priority sector as a whole.

“This opens up a vast opportunity for microfinance. In general, private wealth investors have higher risk-taking ability and able to invest in times when mainstream investors take a back seat. So this deal not only opens a large investor base, but also a diversification opportunity to raise funding in tougher times”, explains Meenal.

This investment by private wealth investor is expected to form the base for more High Networth Individuals (HNI) and family offices to evaluate this sector. Family offices are substantial sources of funds in today’s market. While microfinance presents a good opportunity for social investing with commercial returns, the disclosures, monitoring and transparency associated with a structure of this nature makes the transaction attractive.

Here’s hoping that this transaction helps scale up private wealth investment into microfinance.


UIDAI and Financial Inclusion – Unlimited Possibilities

Suyash Rai of IFMR Finance Foundation, Raghav Narayana of IFMR Rural Finance in an informal conversation with Mr. Praveen Chakravarty, who is a volunteer in the Financial Inclusion team of UIDAI. Mr. Chakravarty was involved in the Jharkhand pilot project on the ground in Ranchi and Hazaribagh which was an important milestone for demonstrating a model for financial inclusion as a viable opportunity.


SR: Praveen, what are the different efforts for financial inclusion by the UIDAI?

Broadly, I would say 3 aspects on how UID can impact financial inclusion. First is a change that can be facilitated at the public policy level. Second, a change at the technology level. Third, a change at the business model level.

If there is a notification by the RBI that the UID suffices as a KYC proof for opening a bank account, then that is a change at the public policy level. Second, UIDAI has said that it will provide authentication information and identity services to help enable payment infrastructure in this country. This will be provided as a government good which will be free or minimally priced. Third, on the business model side, the combination of Business Correspondents [BC], along with the public policy and technology changes, can now fundamentally alter banking and financial inclusion. Now, through a combination of these three, is financial inclusion still an obligation that is mandated by the RBI on the banks or can this now be truly an economic opportunity?

UIDAI is expected to do 600 million enrolments across the country by 2014. As per the Request For Empanelment of banks with the UIDAI process, UIDAI will offer the residents a choice of whether they need a bank account, and if they say they do, UIDAI will give them multiple choices of banks that have expressed interest in being a partner bank. Once they choose a bank, UIDAI will then transfer the demographic data electronically to that bank, which will use it to open the accounts for these customers. This means banks can now open accounts in a batch process. The cost of customer acquisition becomes almost zero. In the last 60 years or so, we have opened around 120 million bank accounts. So out of the 600 million enrolments, even if 60 million bank accounts are opened, this can be a big fillip.

SR: How many banks have you already got this coordination done with?

This is open to all Scheduled banks in the country.

SR: Sp how is the interoperability? Banks are creating different platforms, to develop their BC channels. So the interoperability of BC touch points itself for multiple banks to transact is still a question isn’t it?

BCs have been deploying their own authentication and transaction technology. Now, UIDAI has developed a set of standards called the Micro-ATM standards. Any device manufacturer can build to these specifications. There is no need to collect, or verify identification information, or issue biometric cards at the BC level. So now, it can be made interoperable. From a technology perspective, all the elements are there to make it interoperable.

SR: What kind of authentication will be possible through UID?

The authentication policy is being worked out currently and will be released soon. Currently there are tests and pilots being conducted on biometric as well as demographic authentication using devices made to a standard set of specifications.

RN: Can you brief us about the Jharkhand pilot that the UID recently carried out?

We picked a few district blocks in Jharkhand like Hazaribagh. We wanted to do UID enrolments there, and see how we can demonstrate the potential for financial inclusion. These are villages with very little banking access. We identified 3 partner banks – ICICI Bank, Bank of India and Union Bank of India across 30-35 villages. These banks in turn appointed BCs. We went and told the people that they can enrol for Aadhar and while they do that, they can also get a bank account. Initially all the banks were of the mind-set that one family or household would require one bank account, but my field experience in Jharkhand now tells me that the woman in a household was very clear that she wanted a separate bank account. The result was that around 30,000 accounts were opened in Hazaribagh alone in a matter of 2-3 months.

Once these accounts were opened, we also worked with the Rural Development Department on the muster rolls. We tried to see if we could map every NREGA job card number to their Aadhar number, and the Aadhar linked bank account number. The NREGA wages can then be disbursed through these bank accounts.

Earlier, they would travel about 40km and lose a day’s wage just to withdraw their wages. Now banks  can deploy BCs who have devices made to the micro-ATM specifications so that villagers can do cash-in, cash-out and transfers at their doorstep.

RN:  How did the Jharkhand pilot do in terms of your own expectations?

The first question about the pilot was around connectivity, especially in places like Hazaribagh, because if we could do it there, we could do it any remote place. So it is now proved that connectivity was not an issue. Second, we proved that fingerprint based biometric authentication does work. Third, we worked through the NPCI, which acted as the inter-bank switch and the authentication agency through which all authentication requests were routed.

RN: Was there anything different in this pilot that the UID did from usual biometric data collection? Was any special device used?

We collect all ten fingerprints and we also collect iris scan, as opposed to only 2 or 3 fingerprints by some BCs. Over a population of 1.2 billion, a combination of ten sets of fingerprints and iris scan can make it unique and easily identifiable.

SR: What type of connectivity was available at these BC points?

We used GSM connections. Regular cell-phones were sufficient. If the cell-phones work, the micro-ATM also works.

SR: If a financial services provider, other than just asking for authentication, wants to access to client database, demographic information, to use it for client acquisition, will the information be provided?

Such information will not be provided. There will only be a yes or no answer for authentication.

RN: For your interface with the bank, once the Jharkhand pilot scales and goes across the country, is there a revenue model that the UIDAI is looking at, for the banks and BCs and for the UIDAI itself?

In my personal opinion, there could be various revenue models and incentive structures for this model of financial inclusion to work and scale. Currently, financial inclusion is more of a mandate that is being forced upon the banks by the RBI. The banks don’t see it necessarily as an economic opportunity and unless we make it one, we will not have a scalable model of financial inclusion.  Let us consider the economics of this.

On the cost side, currently banks and their BCs incur a significant customer acquisition cost through a combination of KYC checks, identity validation through their own biometric cards as well as marketing costs. By piggy-backing on the UIDAI’s enrolment efforts, banks and BCs can bring down their customer acquisition costs to almost zero.

On the revenue side for the banks and their BCs, there is a possible combination of revenue streams such as a disbursement fee for government subsidies,  a small float income from residents, opportunity for the BC to cross-sell multiple products such as micro-insurance, telecom SIM cards etc.


Why would an MFI need an Appreciative Inquiry process?

– By Balajee GE, IFMR Blog Team

“In 5 years, our village would have metal roads, hospitals and old-age homes to take care of the poor, the poor women who work for others now would become employers, giving employment opportunities to many other under-privileged people. We would become a model-village on self-sustenance.”

No, this is not a page out of an election manifesto nor is it a speech by a politician or a government official. This was a vision of a young MFI employee who unleashed his dreams during an Appreciative Inquiry process that we facilitated last week in a small MFI. A remote municipality in rural Andhra Pradesh, Yemmiganur, an hour’s drive from Kurnool (so remote that there was only this one MFI operating in this geography) was where I realised the power of dreams and the potential that lies untapped in rural India.

A big thanks to IFMR Mezzanine team (especially to Jayshree, Irfan and Jayanth) that was willing to experiment in what was otherwise a routine due-diligence process. I was privileged to accompany them and facilitate this AI process for the ten employees of the MFI. We were riding high on the success of our AI summit and wanted to see it applied over a smaller organisation.

Just before lunch, the Mezzanine team concluded the two-day due-diligence process (which in itself was a fascinating experience and a topic worthy enough to qualify as a separate blog post). Ushering all the employees into one room, we split the crowd into three groups. We could sense the participants (including the CEO) were a bit hesitant, as they had not gone through anything like this before, especially amongst their own colleagues. Sitting cross-legged on the floor, they started the AI process by interviewing each other and discussed their high-points in their life and in the job and what made it possible.

Before the session started, one of the participants had asked me what time it would all end, clearly he wanted to see this through and get on with his daily work. But later, when we went around asking them to close their interviews and get ready for the presentation, almost all of them were asking for more time. They were still getting to know their colleagues better and they were enjoying it!

While they were presenting the positive core of strengths of the MFI, there was an evident sense of pride in, not just what they had done but also, what their colleagues had done. They were genuinely appreciative of everything they had discussed.

The next exercise was something that turned out to be quite a revelation to all of us, including the CEO of the MFI. We asked them to dream ahead and come up with a vision for 2015. One hour and lots of drawings and paintings later, the teams went up to share their dreams. We were expecting the groups to share what the MFI would like in 5 years, but the groups had other plans.

Their dreams went way beyond the MFI’s growth. They presented plans to make their villages ‘model villages’. In their dreams there was better infrastructure, better facilities in the villages, better pension plans, and better schools. In 5 years, employees would become self-dependent employers, giving employment opportunities to others. And they tied all this neatly back to their MFI saying they would become an integral part of every household in the state, so much so, that even if the children didn’t take care of their parents, the MFI would!

Clearly, the MFI employees were on a high after dreaming ahead and visioning what the future would look like. It was evident from their repeated words of appreciation to us for having taken them through this process.

The employees had a clear picture of the future in their mind

One of them confessed that, usually when there was an investor visit, they would hope there was no feedback from them and would just wait for the investor to leave. But here, they began to see us as potential partners and not just as investors. They asked for feedback and were keen on learning from the inputs the Mezzanine team had for them post due-diligence.

The AI process had somewhere struck a chord with the MFI employees. It seemed to make the due-diligence process a more welcome exercise and most important of all, it unleashed some ideas from the employees that were powerful not just in scheme but in terms of scale as well. By the end of the process, the spirit of the organisation came out and the fact that they were there for the greater good of the society clearly stood out.

The most striking aspect of the day was the reinforcement of our belief based on which IFMR operates. That the rural folks are very clear in what they could do, given the resources. All they need is access to finance. The rest, they can take care of themselves.


“Wealth Management is the right approach”

– G E Balajee, IFMR Blog team

“In conversation” is a new series of Q & A blogs from the IFMR Blog team where we ask questions on behalf of our readers to leading personalities in the field of financial inclusion.

In the first episode of this new series, I spoke to Ignacio Mas-Ribo, Deputy Director, Financial Services for the Poor, Bill and Melinda Gates Foundation on his recent paper on financial inclusion.

You argue in your paper for a “safer” place for the rural people to save. Do you see the current informal options as unsafe? After all, these options have survived for many years now?

I would use the word “unreliable” over “unsafe” which is a more broader term, because a lot of the savings is in physical form. I don’t want to overstate the risk that things could get stolen and therefore they are unsafe. The second concept behind unreliability is the issue of “correlation”. For example, just when I need to liquidate my savings, because a lot of the informal options are very local, that could precisely be the time when most of the others in the neighbourhood would want to do the same thing. Or when I want to liquidate my savings in a group, probably every other member wants to do the same thing. So the notion of savings works better when the pooling of risks are more uncorrelated. The third concept is that savings options are just not liquid. In ROSCAs for example, it may not be your turn to liquidate or, if you have livestock, you cannot partially liquidate them. So there are many facets of unreliability. Each informal savings option may be right for a certain circumstance but it may not always give me access to my money when I need it most. But what if I had better options?

So you’re saying the rural people should have better options to save?

Yes. If you look at our program, our stated purpose is to put more emphasis on the savings side. And that is for three reasons – first, we think that the option to save is a basic option that everybody should have and that is because, options like credit or insurance may not be relevant for everyone but the option to save is definitely relevant for everyone. Secondly, from a donor point of view, we think savings is a neglected service. Thirdly, we think that by focusing on savings, we are naturally forced to deal with one of the major issues in microfinance, which is the high transaction cost. A customer will be willing to travel long distances to take a loan and repay it every week or month, but he or she would not do that for savings. So automatically, we are forced to look at efficient solutions for this problem.

Why do you think formal institutions don’t see profit in offering savings products to the rural people?

In a ‘credit world’, the focus is on two things – products (that have to be structured properly) and financial education (abuse of credit can hurt). In a ‘savings world’ these two become less important. Instead the focus would now be on ‘Brand’ and ‘Distribution’. The institution now has to sell itself, because there is no natural inclination by the customer to give you his/her money. So branding becomes an important exercise. Secondly, the institution needs to be so much more closer to the customer and so distribution of the institution at the right location becomes very important. I emphasise in my paper as well that there is no business case for banks to setup such an infrastructure.

Could the cost of technology or any other cost be a limiting factor?

The cost comes from two things – one is the marketing cost. Who is going to invest to tell the customers about the new service that has been rolled out and why they should be trying it out? That is precisely what the big banks in India are not doing. They are signing up BC’s [Business Correspondents] but they’re not funding them with adequate marketing costs. The second cost is signing up the stores and training them. Not just training them once, but supervising and re-training them every two or three weeks, consulting with them, helping them understand how to optimise the business. That is again is not happening in the BC model in India today. There is a lot of focus on the “card issuance” and not enough focus on acquiring the right stores and helping them through the process.

I think technology is perhaps the lowest cost in the system. Of course, there is always an expensive way to do things. But I strongly argue for leveraging on the existing infrastructure like stores that already exist, wireless network that already exist. Rest of the cost is negligible.

Do you think convincing people to move from hard cash to electronic cash will be a challenge? Would people be willing to experiment? Is that a concern?

I think the emphasis needs to be shifted from “education” to “marketing”. I would say the best way to deal with it is by creating compelling value propositions to the customer. Poor people are not that different from rich people in this respect. If you and I could use bank accounts and electronic money, why would they be more different from you and me? A classic case would be the M-PESA model where there was a compelling value proposition and result was 45% of the adult population of Kenya being enrolled as customers.

But many say that M-PESA’s success can be largely attributed to the already existing market share of Safaricom. India, on the other hand has many players in the telecom segment and getting everyone to talk to each other would be a challenge in itself?

Absolutely. It would not be done in the same as way it’s done in Kenya. Regulators would insist on different features, market structure is different and customer needs are different. The desire to understand the customer’s needs and serve him are perhaps most important. This is where I think the work of KGFS is very impressive. If I may say more on this…

Sure, please.

I really like the idea of a microfinance institution being almost like a private banker to the poor. As we emphasise on savings, ultimately what people want is not just savings but a broad range of financial services. In order to meet a broader range of financial needs, I think people will need much more of a financial advisor. I think “Wealth Management” is entirely the right approach and it’s my personal belief that that would not be done by banks. They would have much like a retail wealth management approach.

This wealth management approach would be even more powerful if microfinance institutions took “cash” out of the equation. I think cash is just a commodity end of the business and it would be a misallocation of manpower if trained microfinance staffs are delegated to just deal with cash. What makes the economics not very attractive for an MFI, is the combining of highly scalable activities like cash management with non-scalable activities like customer interaction. So if cash were taken out of the system and handled through a separate channel, MFIs could then focus on products and unleash the power of wealth management.

[The conversation with Ignacio will continue in the form of “Mobile Money” series of blogs starting next week. Watch this space for more!]

Got something to say? I want to hear it! Leave your thoughts in the comments section below or write to me at socialmedia@ifmr.co.in.