The Impact of KGFS in Rural Tamil Nadu: Early Evidence from a Randomised Control Trial


By Santadarshan Sadhu, IFMR Finance Foundation

The Kshetriya Gramin Financial Services (KGFS) model since its inception has focused on providing a range of high quality financial services through its geographically-focused community financial institutions using a customised wealth management approach.

Utilising an experimental approach based on randomised rollout of KGFS branches in Pudhuaaru, Vellaru and Thenaaru in rural Tamil Nadu, an impact evaluation is presently being conducted by researchers from Harvard and Duke University in partnership with the Centre for Microfinance and IFMR Rural Channels to rigorously evaluate the impact of rural bank branch expansion at both the household and village levels. Specifically, this unique evaluation will identify how household financial behavior (including household borrowing, savings, purchase of various financial instruments etc.), livelihood choices, agricultural decision-making, social networks and stress related health outcome are impacted by the provision of comprehensive financial services through a localized financial service provider like KGFS.

Out of 160 proposed study sites, KGFS branches are being rolled out in one half (i.e. the treatment group) while the other half (i.e. the control group) will receive KGFS branches after the completion of the study. The assignment to treatment has been done such that each treatment branch has been matched with a control branch based on a variety of geographic traits mitigating the effects that may result from seasonality or geography rather than the introduction of banking services.

Before the rollout of each KGFS branch, a baseline survey is conducted; in total, the study which will cover approximately 6,800 households in the experimental area including 3,400 households in the treatment group and the remainder 3,400 households from the control group. To date, approximately 1300 households have been surveyed.

Among the baseline households which have already been surveyed, a follow-up survey of 673 households was conducted between October 2011 and January 2012 covering eight treatment branches where Pudhuaaru KGFS (PKGFS) offered financial service starting 2010 and corresponding eight control areas. The data from 673 household in the follow up survey was used to compare the borrowing patterns of the areas served by Pudhuaaru KGFS with the respective control areas without Pudhuaaru KGFS. The findings from this follow up survey as published in a recent policy memo present interesting results on the impact of Pudhuaaru KGFS on the borrowing patterns in the treatment areas as compared to the control areas.

This post presents the main findings that researchers identified in the policy memo.

Impact on the Borrowing from Formal Sources1

Comparison of formal borrowing (from scheduled commercial banks, MFIs, Self Help Groups and credit cooperatives) between treatment and control groups (Figure 1) indicates that the average outstanding amount of formal borrowing per household in areas served by a Pudhuaaru KGFS branch is 38% higher than the areas without a Pudhuaaru KGFS branch. Also, the average number of formal loans outstanding per household in the treatment branches is approximately 20% more than in the control branches (Figure 2). Comparing the average amount of borrowing from formal sources including repaid and outstanding, it seems that the average amount of formal loans repaid by the treatment households was almost twice more than the control household (Rs. 7264 by the treatment households as compared to Rs. 3628 by the control). Data on average number of formal loans repaid in the past year indicates that 28% of households in the treatment area have repaid formal loan as compared to 20% in the control areas. These findings clearly demonstrate that the extent of formal borrowing increased in the branch service areas as compared to the similar areas that do not have a KGFS branch. Thus opening of Pudhuaaru KGFS branches positively impacted households’ borrowing from the formal sources.

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Impact on the Borrowing from Informal Sources

Comparison of borrowing from informal sources (Figure 3) which include friends, relative, neighbours, shopkeepers, moneylenders, pawnbrokers, landlords and employers shows that average informal borrowing per household in the treatment branches is significantly lower than the average informal borrowing per household in the control branches. As shown in Figure 3 the average amount of informal outstanding per household in treatment areas is 19% lower as compared to the control areas, while the average amount of informal loans per household including outstanding and repaid is 35% lower in treatment areas as compared to the control areas.

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The comparison of total loan outstanding in the treatment and control samples (Figure 4)2 indicates that total amount of borrowing from moneylenders in the treatment areas is 11% lower than in the control areas, while the total amount of borrowing from friends, relatives and neighbours in the treatment areas is 22% lower than in the control areas. The results also show that not only the amount of indebtedness, but also the proportion of households reporting any informal loan outstanding is significantly lower in treatment areas (63% with any informal outstanding) as compared to the control areas (71% with any informal outstanding). So, these findings suggest that the opening of Pudhuaaru KGFS branches has significantly reduced the proportion and amount of households’ indebtedness to moneylenders, friends, relatives and neighbours.

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Combining the findings related to formal and informal borrowing, the results provide strong evidence that arrival of Pudhuaaru KGFS branches has significantly shifted households’ dependence from informal sources of loan to formal sources of loan. Thus, the interim results from this impact assessment study clearly demonstrate that geographically-focused community financial institutions like Pudhuaaru KGFS can play very effective role in reducing households’ dependence on informal sources of borrowing by providing effective access to formal sources of finance.

  1. Households were asked to only report loans greater than Rs.2,000 so these estimates are likely to underestimate the total effect on borrowing.
  2. The formal loan in figure 4 excludes SHGs as it is separately categorized in the figure.


Funding to the microfinance sector: Review of options

This article first appeared in the May edition of Center for Microfinance, IFMR Research‘s Newsletter.

By Jayshree Venkatesan, CEO, IFMR Mezzanine and Vineet Sukumar, Head, Treasury and Origination, IFMR Capital

The Indian microfinance sector has seen a series of rapid changes in the past decade. The sector grew rapidly in the period 2004-2009, with an average increase in number of clients year-on-year being 91%, while size of portfolio outstanding grew by almost 100% Y-o-Y1. During the same period, one also saw a number of Non-Banking Finance Companies (NBFCs) being established with a corresponding spike in interest from private equity investors. For instance, between 2007 and 2009 alone, the number of systemically important NBFCs, i.e., those with a balance sheet size greater than INR 100 crores (USD 20 mn)2, grew from 7 to 25. Much of this growth can be attributed to increase in the number and quantum of equity investments during the same period. In FY 2009-10 alone, a total of 17 deals were closed, valued at INR 8.67 billion3 (USD 173.4 million).

The other impact of the inflow of commercial capital to the sector was the expansion of MFIs beyond the southern states. For instance, in 2005, 48% of all clients were concentrated in the state of Andhra Pradesh. At the end of FY 2009-10, MFIs were present in 436 of the 621 districts in India, including 70% of the poorest districts4. Access to capital led MFIs, both existing players and new entrants to begin operations in the North and North-east, in some of the poorest districts of India. MFIs also began expanding to states like Orissa, Bihar and Uttar Pradesh. Utkarsh Microfinance operating in eastern Uttar Pradesh and parts of Bihar is one such example of this expansion.

The funding space today

In the months succeeding the AP ordinance in October 2010, there has been a steady decline in the number of equity investments made in the sector. The equity deals at the close of FY 2010-11 were valued at about 41% of the previous year i.e. about INR 3.55 billion (USD 71 million).

In December 2011, the Reserve Bank of India (RBI) issued a circular that recognised the existence of entities called “NBFC-MFIs”, leading to an increase in investor confidence in the sector. This was manifested through the resumed equity investments to the sector. In the FY 2011-12, eight MFIs received equity investments. While equity investments in 2010-2011 were lower than the previous year, it should be pointed out that the sector has also seen investments from reputed foreign investors such as IFC, DWM and Citi Ventures Capital. The recent Ujjivan deal is significant because it saw the participation of Wolfensohn Capital Partners, promoted by former World Bank president James D. Wolfensohn, and a first time investor in the sector. The transactions in the post AP ordinance period indicated that equity investors still believe that select high quality institutions can do well. However, due to significantly lower valuation multiples, cost of equity is much higher for MFI promoters.

Debt funding has also seen a simultaneous drop. The top 25 MFIs reported a growth rate of 43% for borrowers and 76% for portfolio in 2009-10. In comparison, the figures for 2010-11 are 7.5% for borrowers and 7.2% for portfolio growth5. The estimated total size for micro-credit in India is about INR 3.3 trillion (USD 66 billion) and 650 million borrowers (~53% of the population that does not access formal financial institutions of any kind)6. MFIs currently meet about 6% of this demand. At the beginning of FY 2012-13, we are still at under 50 million borrowers and INR 200 billion (~ USD 4 billion) of portfolio outstanding.

On comparing the pre AP ordinance period with the post AP ordinance period, it is observed that the share of MFIs that had portfolio outstanding greater than INR 10 billion has dropped to 58% from 67% (see chart 1 above)7. Even of this 58%, about one third is estimated in corporate debt restructuring (CDR) proceedings. The direct implication of this observation is that a much higher share of the future growth is likely to be met by the Tier 2 and Tier 3 MFIs (defined respectively as MFIs with a portfolio size of INR 5-10 billion and INR 1-5 billion), who have continued to display high quality origination in the past year.

Potential for hybrid capital

With recent regulatory changes imposing a margin cap on MFIs, promoters are re-examining their business models with the objective of increasing customer reach, reducing operating costs and increasing branch / staff efficiency. With the advent of credit bureaus, MFIs have the benefit of external risk infrastructure but need to work harder at finding new customers.

Under conservative growth scenarios, our estimates indicate a cumulative equity requirement of over INR 5 billion (~USD 100 million) over the next 2 years for the universe of Tier 2 and Tier 3 MFIs8. A quick analysis indicates that this entire requirement can be met through Tier 2 capital instruments. This indicates an opportunity to re-look at the capital structure of MFIs.

In order to attain their complete potential and transform their businesses to retain competitiveness, MFIs today require access to ‘patient’ capital, i.e. capital infusion from a source that does not impinge upon the organisation’s ability to take necessary business decisions and retain focus on the long term. Hybrid capital would address all the issues of being ‘patient’, providing the necessary capital benefits while at the same time allowing the MFI promoter to retain control on the business.

With banks resuming lending to the sector, albeit cautiously, a well-capitalised entity is likely to attract bank borrowings. Availability of long tenor hybrid capital would provide the necessary impetus for high quality originators to improve their creditworthiness and attract debt capital.

Conventional subordinated debt assumes immediate leveraging ability, which MFIs lack at present. In the context of capped asset rates, MFIs would require time to reduce operational ratios to a more comfortable level during which it is necessary that cost of funds remain within acceptable levels. Hybrid capital is a structural solution that provides capital benefit without imposing an immediate high cost on the investee company.

Further, MFIs require equity-like capital that could be leveraged for further growth, without the dilution that accompanies equity infusion. In the current context, with valuations at medium / low multiples, equity infusion would imply rapid dilution. Our estimates indicate that this dilution can be as high as 66%, given current valuations and demand for growth capital. Delaying early dilution is important to build robust organisations since it ensures that the promoters play an active role in building the organisation. Too little ‘skin in the game’ could potentially also lead to governance challenges as the promoter’s stake and hence commitment towards the organisation might be insignificant.

Therefore, the need for the hour is well structured hybrid capital, possessing equity-like characteristics while at the same time permitting promoters to retain stake and providing MFIs time to adapt to the current regulatory and funding environment without diluting the strength of their origination process.


1. ‘Inverting the Pyramid’, Third Edition, Intellecap Publication
2. Assuming USD 1 = INR 50
3. Based on various press reports
4. Ibid
5. M-CRIL report dated November 2011
6. ‘Inverting the Pyramid’., op cit
7. Based on IFMR Capital estimates
8. This includes only NBFC-MFIs and does not take into account NGOs / non-profits. Further, this analysis assumes a growth rate of 30% for Tier 2 MFIs and 75% for Tier 3 MFIs over the next 2 years (which is lower than the growth achieved in H2 2012)


A Randomized Evaluation of Financial Services in Tamil Nadu

By Kenny Roger, Center for Microfinance, IFMR Research

A recent report titled “Latest findings from Randomized Evaluations of microfinance” by Jonathan Bauchet, Cristoball Marshall, Laura Starita, Jeanette Thomas and Anna Yalouris, throws a lot of interesting insights into the realm of randomized evaluations and how they are being increasingly used by researchers across the globe to better understand financial services for the poor and the impacts achieved when an appropriate financial intervention is introduced.

Some of the recent interventions include the following:

  • Researchers evaluated the impact of access to credit by randomizing the placement of MFI branches across a particular region in India. Though its early days to say there has been a considerable impact, it is notable that some households increased non-durable consumption, others reduced expenditure on temptation goods and instead invested in their business or bought more durable goods.
  • Fingerprinting intervention in Malawi saw borrowers take smaller loans for instance, when they knew they could be identified, and were more likely to repay as well because of the fingerprinting.
  • Changing term structure of debt actually witnessed borrowers investing a greater portion of their loans in businesses and thus registering higher average profits.
  • One study in Kenya showed that access to formal savings accounts for market stallholders led to increased business investment and personal income growth.
  • There are also instances wherein farmers who had access to rainfall insurance began to shift more towards risky and rain-sensitive crops owing to its capability of generating high profits.

These studies have however studied only one financial product or aspect at a time. The needs of the poor are varied like any other income group and the scope of availability of a wide range of financial services to the same as we all know may not be good enough.

To put things into perspective, consider, Mr A, a farmer by profession who has a bank account, has taken an MFI loan, borrowed money from moneylenders, has remittances from a direct relation and has a life insurance policy. We need to realise that Mr. A, like anyone, is involved in a wide range of financial products or services regardless of whether the provider is formal or informal. A study looking at such a wide set of financial services and how access to the same impacts a person has not been done yet.

To address this, the Center for Microfinance (CMF), IFMR Research, along with Harvard University is studying the impact of access to a broad range of financial services provided by Kshetriya Gramin Financial Services (KGFS) in two districts of Tamil Nadu. KGFS uses a thin customer-facing front-end with robust back-end technology to bring a full range of financial services, along with wealth management advice, to entire communities under its coverage area.

Using a randomized control trial methodology the study aims to understand the specific pathways in which access to a range of financial services can impact not only individual households but also the entire village economy. The outcomes of this study will help in designing products and delivery channels for low income households, as well as inform policy on financial inclusion both for India and the rest of the world.

Highlights of this study will be shared as a series in subsequent blog posts.


Five Years of Researching Financial Services for the Poor – CMF Report

The Centre for Micro Finance, IFMR Research, published its latest report “Five Years of Researching Financial Services for the Poor” at its recently concluded annual conference held in association with RBI’s College of Agricultural Banking.

Founded in 2005, the report presents the different research studies, which CMF has undertaken over the years in the area of financial services for the poor. The report, organised thematically, under its broad focus areas of “Financial Inclusion”, “Livelihoods” & “Social Objectives”, describes the organisation’s current work and summarises key findings from completed studies. The report also identifies potential areas for future research and recommends ways that financial services practice could evolve to meet the needs of low-income households.

Some of the studies that are profiled in the report include:

  • Miracle of Microfinance? Evidence from a Randomized Evaluation
  • The Impact of Access to Finance in Rural Tamil Nadu: Evidence from a Randomized Control Trial
  • The Economic Returns to Social Interaction: Experimental Evidence from Microfinance
  • Targeting the Hard-Core Poor: An Impact Assessment
  • Measuring the Impact of Providing Futures and Spot Prices of Crops to Farmers

To read the full report click here.


Microfinance: Translating Research into Practice – Conference

RBI’s College of Agricultural Banking together with the Centre for Micro Finance, IFMR Research will host their fifth annual conference, “Microfinance: Translating Research into Practice” on January 9th and 10th 2012 in Pune. The objective of the conference is to actively engage stakeholders and researchers in discussions relevant to current and future microfinance practice. This year renowned development economists Professor Rohini Pande (Harvard Kennedy School), Professor Erica Field (Duke University), Annie Duflo, Executive Director, IPA, Prof. Susan Thomas, IGIDR will be present to discuss results from a number of recent studies conducted in the area of financial services for the poor.

The 5 thematic sessions of the conference are:

  • Government’s New Rural Employment Generating Initiatives and Programmes
  • The psychology behind mass default in joint liability loans
  • Way Forward: Future of Financial Services for the Poor
  • Financial Literacy: Can financial literacy accelerate financial inclusion and help customers make rational decisions?
  • Financing Microfinance: Scope and opportunities
Read the full conference schedule by clicking here.