Using Customer Information to take a Household Approach to Lending

By Shweta Aggarwal, IFMR Rural Finance

There has been a lot of stress on assessing a customer’s cash-flows before sanctioning a specific loan, for instance a home loan or a crop loan. However, there hasn’t been enough stress on assessing a customer’s cash-flows before sanctioning a Jewel or a JLG loan. What causes the discriminatory use of cash-flow assessments for the same household given the same provider? For the customer, in both cases he/she has borrowed money and has the responsibility to repay it in a given time period along with the added cost of borrowing (interest rate and processing fee etc).

In the KGFS-way of operations, we have designed a simple process that enables the institution to collect and store customer information and assess a household’s cash-flows before sanctioning any product, not only loans but also insurance, savings and investment products. Let’s go through this process step by step:

Step 1: Know Your Household

As a part of the KGFS model, each household in a KGFS service area (in the plains, typically a 5km radius around the branch with approximately 2,000 households) is enrolled. The enrolment process involves detailed collection and verification of household information ranging from occupation and income details of all members, household expenses, asset ownership and most importantly outstanding liabilities of each household member. This information is collected and stored in an online customer management system that is accessible to each member of the KGFS ground staff (henceforth: Wealth Manager).

Step 2: Cash-flow Assessment

With this information we arrive at the annual surplus available with each household. While each Wealth Manager is equipped to calculate surplus, as a cross-verification, this analysis is also available through the online systems. This is a household’s debt servicing capability (DSC) or amount of surplus the household has, as one unit, to service debt, buy insurance, save, invest and meet other short term/long term goals. After a thorough Wealth Management conversation, we shift towards a need specific conversation.

Step 3: Need Specific Conversation

Now that we have a clear assessment of a household’s current financial position and future goals, it is easier to have this conversation. Let’s take a 4 member household with an annual DSC of INR 20,000 with two short-term needs highlighted during the Wealth Management conversation:

  1. Farmer getting ready for the next season of paddy needs INR 25,000
  2. Entire household worried about meeting current month’s daily expenses needs INR 15,000

As explained in the Paddy Financing blog-post we collect details about the farmers cropping cycle and calculate expected expenses and income from cultivating that season. Since the loan is for financing crop expenses of INR 25,000 (excluding 20% equity brought in by the farmer), net income should be sufficient to:

  • Meet the financing cost of taking the loan (interest + processing fee)
  • Contribute to proportional household expenses

If net income is more than sufficient, the loan is sanctioned and remaining income is added back to the household’s DSC. However, if net income is insufficient, the household has the option of digging into its current surplus but is made aware that the cost of taking a loan is now greater than returns earned from the activity. This approach aims at incentivising the household to engage in income generating activities to increase their annual DSC and gain access to higher ticket size loans.

Now, the household still has to meet its daily needs and requires INR 15,000. Given that the household has an unused DSC of INR 20,000 the household can take any of the generic purpose loans like JLG, Jewel or Personal loans from their local KGFS. In case annual DSC of the household was INR 10,000, the household would get the option of structuring a loan for INR 15,000 over two years. This would ensure the household has access to the much needed finance and at the same time is not over-burdened by stress of repaying the entire sum the same year.

This framework is still being refined and future work hopes to address:

1. Creating a liquidity buffer – Is the entire surplus available for servicing debt or should some be kept aside for unexpected circumstances?
2. Accounting for seasonality – Is there more surplus available in some months than others?

* – Graphic illustrations by Roshni Jesudoss, IFMR Rural Finance


Designing a financial product for paddy farmers

By Arun Kumar & Balajee GE, IFMR Rural Finance

How can we design a financial product for a farmer that is exactly suited to his requirement? The answer lies in understanding the utilisation of the product. So, it became clear to us that if we were to design a crop loan for a farmer, we had to understand the exact utilisation of the loan. This also meant we had to understand everything about the crop for which the loan would be utilised for. Which is exactly what we did.

Instead of designing a generic crop loan that any farmer could avail, we designed a very specific loan that only paddy farmers could avail. Here’s what we did:

First we studied the paddy farming cycles in Tamil Nadu, which included the seasonality, varieties and duration of the cropping cycle. Then we mapped the entire supply chain for the paddy farming activity, keeping the farmer as the focal point. This included:

  • Identifying the inputs and sources (Seeds, fertilisers, pesticides)
  • Costs associated with each of them
  • Costs associated with infrastructure such as electricity and water

We then mapped out the different activities of paddy farming over a timeline. Here’s what a typical paddy farming cycle looks like:

Based on a combination of our own primary research and various secondary data, we developed our own template to calculate the financing requirement to cultivate paddy. The inputs for the template are:

  • Size of land holding
  • Nature of electricity (free or paid)
  • Source of water (Borewell/bought/free)
  • Extent of mechanisation (Partial/complete)

Based on the combination of inputs, the template recommends an approximate cost of cultivation and a recommended loan amount. The template also recommends the disbursement to be made in multiple tranches (ideally 2).

The first tranche (60% of the sanctioned loan) is disbursed on Day 15 and the second tranche (remaining 40%) is disbursed on Day 45. The days were decided based on our interaction with farmers. The farmer could use the first disbursement to pay wage labourers for transplantation, purchase of fertiliser for first round application.

The second disbursement will help the farmer to meet the expenses he will incur during purchase of fertiliser for subsequent applications, pesticides, and will also take care of harvesting expenses (manual or mechanised).

As is usual in loans, the farmer is expected to bring in equity. This equity is deployed in the first few days of the cycle to meet the sowing expenses (seeds + labour).

The farmer will repay the loan (principal + interest) post harvest and sales.

We believe it is important to offer a credit product that is structured around the cash flows of the customer, making credit available exactly when needed and repayment when cash is available at the household. The exact timing helps in reducing the interest cost and also eliminates the uncertainty surrounding the credit availability.

This pilot is a step in that direction. Our pilot is underway in four branches of Pudhuaaru KGFS. We also aim to roll out customised loans for farmers growing other crops.

Track our progress and findings from the pilot on our Facebook page or via Twitter.


Consumer Finance Innovations in India

Nachiket Mor and Bindu Ananth were invited by Columbia University to share some of our thinking and work on consumer finance in India. In the talk, they explored the shift from a product-driven standardised approach to one characterised by customised sale of suitable financial services and the KGFS experience of doing this at scale.

Click here for presentation from the talk


PFRDA Aggregators’ Meet

By Deepti George, IFMR Finance Foundation

IFMR Finance Foundation worked with Pension Fund Regulatory and Development Authority of India (PFRDA) as Knowledge Partners to help organise their first NPS-Lite Aggregators’ Meet in New Delhi, on 21st November, 2011. The meet brought together aggregators and other stakeholders under one roof, to address issues and concerns faced while distributing NPS-Lite and Swavalamban benefits to their customers.

The Meet was attended by all senior members of PFRDA along with representatives from over 25 different organisations, including Nitin Chaudhary and Anil SG from IFMR Rural Finance who were also part of separate panels. PFRDA used this opportunity to announce a new incentive scheme for the Aggregators where they increased the fixed incentive from INR 50 to INR 100. PFRDA also released new communication material that was designed specific to each aggregator’s need and could be used for creating awareness about pensions, NPS-Lite and Swavalamban benefits.

The Meet kicked off with an opening statement by Mr.P Upadyay, Chief General Manager, PFRDA, and was followed by an overview of the two pension schemes, NPS Lite and Swavalamban, by Ms.Padma Iyer Kaul, Executive Director, PFRDA. She set the tone of the conference by highlighting the importance of pensions and guided the participants in practically addressing the issues they may have with the two schemes. Mr.Yogesh Agarwal, Chairperson, PFRDA, also graced the conference with his presence and thanked the aggregators for their efforts.

The Meet brought critical issues to the table resulting in lively discussions on product design, need for a standardised method of delivery through technology and the inherent necessity for a nation-wide awareness campaign to highlight pensions as an important financial planning tool.

In response to the concerns highlighted, some fascinating suggestions and innovations, few already being implemented by Aggregators, were brought to light. Some of these are:

1) The need to develop communication and marketing collateral that can be deployed to create awareness and educate people on pensions – in order to create the market for pensions
In this context, Nitin Chaudhary, explained the Wealth Management approach of KGFS entities that has enabled it to become the leading aggregator in terms of penetration of NPS Lite. He also shared training materials and flipcharts currently being used at KGFS. South Indian Bank also shared their ideas they had successfully implemented, where they used the NPS-Lite logo on all receipts and envelopes. A few aggregators like Bandhan Financial Services and Department of Women and Child Development (DWCD) had even developed their own passbooks to record transactions and help customers keep track of their contributions.

2) The importance of building technology platforms which help to reduce transaction and process costs along with reducing operational risk
Mr. Amit Sinha, from NSDL suggested that using mobile phones for transactions would encourage portability across aggregators and increase efficiency. It was also suggested that creating applications that could be shared with all Points of Purchase was cost-effective and easy to build, also paving way for inter-operability between aggregators, and across locations. Inter-operability was especially important given that the access to this long-term product must not be aggregator-dependent.

3) Concerns relating to delayed issuance of PRAN (Permanent Retirement Account Number) cards and data errors
IFMR Rural Finance shared its feat of being the first aggregator to generate PRAN directly in collaboration with the CRA (Central Recordkeeping Agency), thereby reducing TAT to less than 24 hours. Data errors could also be minimized by IFMR Rural Finance as the application forms get pre-populated with customer details directly from the Customer Management System rather than by a manual data-entry process.

4) KYC requirements contribute to exclusion of segments of the population, especially the migrant population
Ms. Gayathri of Labour Net suggested that given the essentially floating nature of migrant populations that could potentially enroll for NPS-Lite, a more diverse set of documents could be included for KYC norms to enhance outreach. It was also suggested that a “one-size-fits-all” strategy should not be adopted for the given target population, but rather there is a need to develop different strategies for different segments such as the stable urban poor, the daily wage migrants, seasonal migrants, and so on.

5) Increase benefits and attractiveness of NPS Lite and Swavalamban for the customer
It was suggested by Anil SG of IFMR Rural Finance that NPS-Lite may be clubbed with health insurance products like RSBY to take care of a gamut of eventualities that the individual or household may face, which may otherwise force them to dip into their pension corpus. This would provide customers with multiple benefits, mitigating not only longevity risk but also addressing to an extent, health shocks.

Going forward, IFMR Finance Foundation is drafting a report collating recommendations of participants from the Meet and suggesting ways forward for the NPS-Lite and Swavalamban schemes.


The urgent need for high-quality distributors in the Indian financial system

By Bindu Ananth

I had a fascinating meeting today with Gayathri, CEO of LabourNet Services that reminded me of some fundamental challenges in financial inclusion. So, here is a company deeply wedded to its mission of providing essential services and skills to urban informal sector workers. Over the years, they have realised that identity and basic financial services (savings and insurance) is an important need for the informal sector worker and started getting involved in facilitating access. However, 23000 accounts later, they find themselves in the familiar ‘bewilderment zone’ in dealing with multiple financial institutions and the lack of connect between existing products/processes and their sense of what their typical client requires.

This meeting reiterated for me the need for many-many more specialised distributors of financial services in India. These cannot be individuals or kirana shops, but formal institutions with the processes and understanding to effectively intermediate between the clients on the one hand and the product manufacturer (bank, insurance company, mutual fund) on the other. Like we are creating a set of new-generation distributors called KGFS to serve remote rural India, there is a similar need for high-quality distributors for the urban poor, for seasonal migrants and other demographic profiles with fundamentally different demand characteristics.

At IFMR, we think that pushing manufacturers to build last-mile distribution is a losing battle (one we have waged as a financial system for decades). Instead, we need to create several more institutional distributors in India with incentives aligned to the financial well-being of customers.