Close on the heels of launching its fourth KGFS, IFMR Rural Channels launched its fifth KGFS yesterday – Thenaaru Kshetriya Gramin Financial Services (KGFS) which would be serving the districts of Pudukkotai, Karur and Namakkal in Tamil Nadu. The first branch has been opened at Nagarapatti in Pudukkottai District.

As an entity KGFS aims at delivering a complete suite of products and services to ensure financial wellbeing of households and enterprises in remote rural locations under its unique wealth management approach.

Apart from the recently launched Thennaru KGFS & Vellaru KGFS, the other operational KGFSs include Pudhuaaru KGFS (Thanjavur, Tamil Nadu), Dhanei KGFS (Ganjam, Orissa) and Sahastradhaara KGFS (Uttarakhand).

Images from the Nagarapatti branch launch:

IIM Ahmedabad recently interviewed Bindu Ananth and Nachiket Mor for their publication ‘The Efficient Frontier’. The publication was recently rebranded to mark the institute’s Golden Jubilee year.

In this interview, Bindu Ananth and Nachiket Mor discuss the applications of financial engineering to low income  households.

Excerpt from the interview

In your experience with low income households, what are some of the risks which you have seen them facing and which you feel could be solved by financial engineering? What are some of the products that can be used to mitigate these risks?

For most low-income households – human capital, in the sense of present value of lifetime net incomes, tends to be the biggest asset in their portfolio. Given fairly low levels of financial capital/wealth, the reliance on human capital is very high in order to successfully meet household goals over a period of time. Anything that impacts this human capital then tends to become very critical for these households….

Click here to download the publication.

IFMR Rural Channels launched its fourth KGFS – Vellaru Kshetriya Gramin Financial Services to serve Ariyalur, Perambalur and Cuddalore districts of Tamil Nadu. This is in addition to Pudhuaaru KGFS (Thanjavur), Dhanei KGFS (Ganjam, Orissa) and Sahastradhaara KGFS (Uttarakhand). The KGFS network has 106 branches that serve about 200,000 households in these regions.

The KGFS model is aimed at improving the financial well-being of households and enterprises in remote rural India by providing them access to a comprehensive range of financial services. Its wealth management approach emphasises understanding each household and customising a portfolio of financial services to meet its unique requirements.

At the Vilagam branch of Vellaru KGFS

Speaking at this occasion, Anil Kumar S.G, CEO, IFMR Rural Channels said, “This is another important milestone in our journey towards achieving our mission. Over the past few months we have worked on completing our suite of products, which now includes Pensions and term life among other products. We have also been able to make significant progress on our wealth management approach. The branches in the new entity would be offering this complete suite of products under the wealth management framework.”

By Mohan R, IFMR Rural Finance

Given the important role pensions play in the financial well-being of households, NPS-Lite, a pension plan geared towards economically disadvantaged populations, is crucial to achieving complete financial inclusion. It provides a mechanism for households to plan for their retirement years by saving and investing small amounts through their productive life stages.

Being one of the first aggregators appointed by the Pension Fund Regulatory and Development Authority (PFRDA) for the distribution of NPS-Lite, IFMR Rural Finance can appoint facilitators for itself to increase access to NPS-Lite. Correspondingly, to ensure that the selected facilitators are well equipped to distribute the product responsibly, it has also taken the initiative to develop content for creating awareness and providing relevant training that would aid the distribution of the product.

Towards this end IFMR Rural Finance recently completed its second modular replication with an MFI based in Bihar, Saija Finance Private Limited, by appointing it as a facilitator for IFMR Rural Finance; an important initial step towards appointing many other institutions who have shown interest in offering NPS-Lite. IFMR Rural Finance had earlier appointed Care NGO Partners as facilitators for NPS-Lite.

Commenting on being appointed as a facilitator, Purshottam Ranjan, Operations Manager, Saija Finance Private Limited, said “Having launched NPS Lite for pilot-test at our Danapur branch, we have provided exclusive training to our field staff about the product and have been promoting it at group meetings to our clients and non-clients in order to get their feedback and develop strategies based on it. Initially we are promoting the product within 5KM radius of our branch, but hope to expand as we gain experience in distributing it.“

Given that access to a complete suite of financial products is key to improving a household’s financial well-being, IFMR Rural Finance hopes to offer consulting/technical assistance/systems and training, that would help a range of institutions distribute mutual funds and insurance, amongst other products, over a period of time.

By Bindu Ananth

A recent article in the Economist notes approvingly about the growing phenomenon of Village Savings and Loans Association (VSLA) as a means for low-income clients to save securely and earn high returns. In brief, the mechanism entails a group, typically at a village level, pooling their savings together and lending out of this corpus to each other. The underlying principle is similar to that of chit funds and ROSCAs.

This whole design of VSLAs is missing a very fundamental point about the way in which savings operates and the value of financial intermediation. When an individual saves with an institution, she takes risk on the solvency of the institution (unlike in credit where the institution takes risk on the individual/borrower). She should be able to withdraw her savings at any time which in turn entails that the savings has been channelled and managed in a way that enables the institution to honour this. A VSLA tries to replicate this at the level of a village/community. Now imagine there is a drought in the village and there is a widespread need for liquidity. The savers will want to withdraw their money, but equally the borrowers will find it a hard time to make their repayments. Both groups are impacted by the same event (a covariate shock). Effectively, there will be a “run” on the VSLA. The VSLA, unlike a bank faced with a similar situation, does not have the diversification or the deep pools of capital to simultaneously bear the default and honour the savings withdrawals.

There is no question that access to traditional savings accounts is hard for low-income clients in all countries and innovations like the VSLAs are well-intentioned attempts to address that. However, we need to ensure that the financial inclusion designs we choose to scale do not end up creating newer types of systemic risk. The Business Correspondent approach, despite several tactical challenges, scores very highly on this count – it leverages the access of village level institutions/agents but the savings is channelled into the formal financial system through a bank.

- By Dr Ajay Shah, National Institute of Public Finance and Policy. [As posted on Ajay Shah's blog]

In February 2010, I had the opportunity to visit Pudhuaaru KGFS in Thanjavur. This is a remarkable project which helps us see the interface between households and the financial system in a wholly new light.

What a difference 17 months makes! On that visit, I had found a little tenuous Reliance CDMA cover at one place in Thanjavur city. On this visit, I found 3g or Edge cover in many remote places. On that visit, the ride from the airport at Tiruchirapalli to Thanjavur took two hours. This time, it got done in 30 minutes on the new NHAI road, with a peak velocity of 110 kph. While there are many reasons to be gloomy about the problems that India faces, some things are moving along merrily.

The KGFS approach to households and finance

KGFS emphasises the very important idea that for households to correctly engage with the financial system, this relationship must be (a) rooted in high quality advice, (b) which is grounded in a state of strong information about the household…click here to read more

-By Shilpa Sathe, IFMR Rural Finance

Remittances are the second largest source of funding for developing countries, contributing more than capital flows and development assistance. An additional 40%-100% of this amount is estimated to pass through informal channels. International remittances differ from other sources of funds because they tend to be relatively stable, even in the face of economic adversity.  Remittances have been found to off-set some of the output losses that may arise from migration of a country’s skilled workforce. In most developing countries, they also make good for the loss of tax revenue. India alone received USD 55 billion in international remittances last year, making it the largest recipient in the world.

From a household’s perspective, remittances act as a risk transfer mechanism, helping them cope with domestic income shocks ex-post. In many developing countries, remittances have been found to vary inversely with domestic income shocks; increasing in periods of low income and decreasing at other times. In this sense, they take on an insurance role and facilitate consumption smoothing. By relaxing financial constraints ex-post, remittances provide households with a greater ability to take risk ex-ante. In this sense they have also been credited for promoting investment in human capital and physical assets and increasing credit demand.

Several criteria need to be considered in the design of transfer mechanisms for remote rural locations and particularly for low-income households. The requirement of opening a bank account or excessive documentation can affect demand for such services as much as the delay involved in getting the cash in hand. It is also important to understand existing remittance corridors in areas where the Financial Service Provider (FSP) is operating. Within the recipient country, the channel of delivery thus becomes important. From an FSP’s perspective, regulatory constraints can determine the use of traditional money transfer methods like cheques and money orders. The physical infrastructure that an FSP has in place will also determine how effectively it can address the last mile problem. 

Kshetriya Gramin Financial Service (KGFS), with its physical presence in remote rural locations is ideally suited to do this. When KGFS chose to partner with Western Union, the focus was on addressing all these issues. Apart from their extensive presence world-wide, one key factor was their network in UAE, Singapore and Malaysia where a majority of migrants from KGFS customers’ family members are located. Our localised, branch-based delivery model enables us to almost replicate the convenience of informal delivery channels, thereby reducing costs and time involved for the recipient.
 
The first transaction took place in Sahastradhara KGFS on 16th September 2010 and since then we have acquired around 1344 regular customers with close to 2200 transactions as of May 2011. Over Rs. 25 million have been remitted so far with the average remittance amount being Rs.11,700 across geographies. These remittance amounts are larger for Uttarakhand, around Rs.27,000 on an average owing to the migrant population working largely in the hospitality industry as compared to our(KGFS’) other geographies where migrants work in production and related categories.

As we expand our product suite into products like the education loan, money transfer products like domestic and international remittances will play a major role in facilitating repayments of borrowers, thereby helping reduce credit risk.

Sahastradhara KGFS inaugurated its new Headquarters in Dehradun on Saturday. Two years after it set up its first branch in Agrakhal with the mission of providing access to finance in remote rural households in the Tehri and Dehradun districts of Uttarakhand, Sahastradhara KGFS today has 19 branches servicing 647 villages.

Anupama Joshi, CEO, Sahastradhara KGFS while speaking at the inauguration, said “The new Headquarters apart from being our own identity has given us lots of visibility and re-iterated our commitment towards our guiding principle that we will stay till our  mission is complete”. The design of the Headquarters has been done by team Sahastradhara. The structure has a local character and is a blend of traditional and modern elements. 

Dr Nachiket Mor, Chairman, IFMR Trust inaugurating the new Sahastradhara KGFS Headquarters

The Sahastradhara KGFS Team with Anupama Joshi, CEO, in the centre (sitting). To the left: Dr Nachiket Mor, Chairman, IFMR Trust, Bindu Ananth, President, IFMR trust, SG Anil Kumar, Senior Vice President, and Puneet Gupta, Senior Vice President, IFMR Trust

- By Arun Kumar D, IFMR Rural Finance

India is home to about 26 million small enterprises (with investments less than 50 million) that account for about 20 per cent of the country’s GDP . While small enterprises drive economic growth with their ability to innovate and employ in large numbers, the biggest challenge faced by them is access to finance.

Small enterprises, such as brick-kilns, grocery stores and small restaurants, need finance to purchase raw materials, procure stock, pay wages, meet other working capital requirements and support expansion plans.

Despite the efforts of Ministry of Small and Medium Enterprises, SIDBI and support from the RBI by inclusion under priority sector, there continues to be a huge demand-supply mismatch in small enterprise financing.

One of the major reasons for banks/financial institutions (FIs) being unable to bridge this gap is the perceived credit risk involved in financing small enterprises. This is primarily on account of non-availability of valid bills, proper accounting systems and lack of known buyers.

To mitigate such credit risk, banks typically look for enhanced collateral or traditional equity, both of which cannot be brought in by most entrepreneurs. Further, due to their small size and local presence, the transaction costs involved in financing them are very high.

ASSESSING LENDING RISKS

In the face of banks’/FIs’ reluctance to lend, these enterprises are compelled to resort to high cost, non-continuous financing from money lenders and other informal sources, or continue to operate at sub-scale. Banks charge an interest rate of 10-20 per cent, compared with 36-70 per cent from informal sources like money lenders. Risks faced by any business can be broadly classified as idiosyncratic or systemic. Idiosyncratic risks are specific to an enterprise, like location of business or skill of the entrepreneur.

Systemic risks, on the other hand, are beyond the control of any enterprise. Such risks make up the environment in which a business operates. Risks due to change in preference of customers, a catastrophic event, and changes in economy are all examples of systemic risks.

The key to financing any enterprise lies in the ability of the financier to evaluate and manage such business risks. High quality origination can help evaluate idiosyncratic risks well. Traditional equity acts as a cushion for such risks. A high quality local originator with geography and business specific information about such enterprises in the operational area will be able to evaluate and manage this risk well and will demand lesser traditional equity to be brought in by entrepreneurs.

Systemic risks, however, are a different ball game. No amount of traditional equity is sufficient when the financier is uncertain about an enterprise selling anything at all in an environment where demand patterns and economic situations can change very quickly.

A financier searches for cues to establish that the business has a current and future ability to service loans, even in an uncertain business environment. For small enterprises that have large number of cash transactions, poor record of sales, produce undifferentiated goods and lack known clients, assessment of systemic risk becomes very difficult.

Such challenges can be addressed through structures that allow financiers to trap cash flows, or by resorting to a stronger and well established sales pattern in a supply chain.

FINANCING METHODS

Some ways of financing small enterprises are as follows: Supply-chain financing, where a supplier and a buyer with known balance sheets can be financed.

For example, small enterprises that manufacture and supply jam to large players can be financed if their cash flows are trapped through bills, or by obtaining a collateral/guarantee/comfort letter from the company to which it supplies.

This can be adopted by many financial intermediaries, even large banks. The method has its limits because it requires careful mapping of supply chains. Lending through a local financial intermediary who can verify cash flows and income of the enterprise and finance them through relationship-based approach is another option.

A local financial intermediary who understands the working capital cycle, seasonality, procurement place and mode, point of sales, and demand for the product or service, can finance small enterprises based on an understanding of the geography in general and various aspects of the business in particular.

A local intermediary can ascertain turnover, income and other key financial information required to arrive at a credit decision about the enterprise.

Business-specific templates can be developed for each small enterprise and a master limit can be fixed taking into consideration the scale of business, projected sales turnover and surplus they would generate.

Depending on business requirements, FIs can provide working capital loans, term loans or both. Also, long-term, relationship-based lending helps mitigate credit risk by creating dynamic incentives for the enterprise to maintain a relationship with FIs.

PRODUCT INNOVATIONS

Innovation in product structuring is as important in addressing gaps in small enterprise financing as the channel itself. Innovative products such as equipment lease finance can help address the need for term debt, and products such as receivable financing, bills discounting and factoring could substitute requirements of working capital finance, addressing the unique needs of small enterprises.

Local originators are best placed to do this given their monitoring capability and knowledge of small enterprises, allowing structuring of products like working capital finance, channel finance and cash credits that meet needs of the enterprise, enabling scale.

This article first appeared in The Hindu Business Line

IFMR Rural Finance has been appointed as one of the first Interested Non-Governmental Agencies (INGA) by the Ministry of Labour and Employment, Government of India, to participate in its Rashtriya Swastya Bima Yojana (RSBY).

The RSBY is a Government of India flagship initiative to provide insurance coverage for Below Poverty Line (BPL) families. Hospitalisation coverage up to Rs. 30,000 (arising out of health shocks) is provided under RSBY. The RSBY has already enrolled close to 23.5 million households in the BPL category.

As a result of this appointment, customers of Kshetriya Gramin Financial Services (KGFS) can now avail health insurance under the RSBY. More than 170,000 rural households in Tamil Nadu, Orissa, and Uttarakhand that are already being serviced by IFMR Rural Finance can now benefit from the scheme.

 “Health shocks are a major threat to the income earning capacity of households and lack of access to affordable and quality health care systems in rural areas make these households even more vulnerable. Health insurance, which provides a safety net by protecting the human capital, plays an important role in ensuring the financial well-being of these rural households. Partnering with RSBY will help us offer this much needed product to our customers, who will also be able to benefit from the scheme’s technology driven platform to access an extensive network of quality health care services”, said SG Anil Kumar, CEO, IFMR Rural Finance

Under this arrangement, it is envisaged that the KGFS will be responsible for customer identification, creating awareness about the benefits and premium collection, while the insurers and RSBY will be responsible for managing the hospital network and administering of the insurance programme. The product portfolio of KGFS includes investment, credit, remittance and insurance products.IFMR Rural Finance is already an aggregator for PFRDA’s NPS-Lite. At present, customers can avail Personal Accident, Life, Livestock and Shopkeepers insurance through KGFS. The latest development offers the much needed protection against health shocks for remote rural households.