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

India is rapidly urbanizing and the rate of urbanization is expected to climb steeply over the next few decades. The urban population of India will be close to 600 million by 2030, as compared to 340 million in 2008. The next three decades will, therefore, see the unfolding of a variety of urban issues, the responses to which will ultimately determine the long-term course of India’s development. Therefore, the design and implementation of appropriate urban policies based on data and evidence will be crucial in addressing these emerging urban issues and providing the ballast for sustained, long-term development of the nation.

In this backdrop, the India Urban Conference 2011 was envisaged as a series of events designed to raise the salience of urban challenges and opportunities in the ongoing debate on India’s development. The conference intended to bring together central, state and local policy makers, policy implementers, academics, students, civil society, and industry stakeholders to identify challenges and chart strategies for India’s urban development. The Conference saw the successful completion of its first year with three events that took place at Yale (April 2011), Mysore and Delhi (November 2011). It was jointly organised by Janaagraha Centre for Citizenship and Democracy, and the Indian Institute of Human Settlements, in partnership with Yale University.

IFMR Finance Foundation anchored one of the eight themes covered in the India Urban Conference, namely “Financial Inclusion and the Urban Economy” . In recent times, with the growing realisation that financial services are in the nature of a public good, this was an opportunity to accelerate the national economic and financial policy towards ensuring complete access to financial services for all Indians. Therefore, the theme delved in detail, into issues underlying access to finance to the three critical segments: low-income households, small and medium enterprises and local governments.

The sessions were organized into three main plenary sessions and four smaller workshop or deep-dive sessions. All these sessions delved deep into a number of issues such as: (i) quality of financial access to households and enterprises in the informal sector; (ii) challenges faced by practitioners in operationalising financial inclusion; (iii) city government finances and the issues in public infrastructure and service delivery; and (iv) efficacy of data generation through participatory planning processes.

The rich discussions yielded a number of insights into the types of data gaps that prevent: (a) the development of high-quality financial products to serve the needs of the informal economy and (b) the design of optimal policy responses for financial inclusion.

These data gaps include: household level financial information, government banking data and official statistics that are not public, real costs of service delivery to the bottom of the pyramid, housing arrangements of the urban poor, city level finances, public infrastructure quality and performance levels among others. While this lack of data emerged as a major constraint in promoting the cause of financial inclusion, it also became apparent that institutions with available data sets were not translating this data, through analysis, into meaningful and usable insights. In the context of data generation for public infrastructure, the discussions revealed that the processes of planning needed to be re-looked at so as to ensure meaningful citizen participation in generating data about cities.

The detailed outcomes of the day’s discussions will be presented in the form of conference proceeds in the coming months.

We have covered in our earlier posts, two of the three functional sessions of the IFMR Financial Systems Design Conference 2011, namely Origination and Risk Aggregation. This post summarises the third: Risk Transmission.

Scope

Risk transmission in the financial system involves the movement/assignment of risk from one entity to another, in return for a compensatory payment at a market-determined rate. In a well-functioning financial system, risk moves in an orderly manner between those who are originating it and those who are best placed to manage it, thus improving the overall capability to manage risk. The conference reviewed the existence and robustness of risk transfer mechanisms for individuals, firms and financial institutions in the Indian financial system.

The Conference participants discussed in particular, the process by which risk is transferred from originators (of financial services) to risk aggregators (financial institutions and capital markets) and the types of risks that must be retained versus the types of risks that must be transferred.

While a number of obstacles impede the creation of well-functioning risk transmission markets, its creation will fundamentally hinge on:

(a) Clearly understanding and identifying the risks to be transferred;
(b) Developing appropriate instruments for transferring risks;
(c) Creating capability to measure and price risks; and
(d) Designing and implementing a legal and regulatory framework for contract enforceability and resolution.

Characterising the present state of risk transmission in India

Conference participants highlighted the extent to which risk transmission markets in India remain under-developed, for firms, financial institutions and, particularly, for individuals. They attributed the present gaps in the infrastructure for risk transmission to a variety of reasons:

• For households, while risk transfer products exist, the key gap seems to be in high-quality distribution of those. Concerns with insurance and mutual fund selling processes and incentives have become severe in recent times. Absent this distribution infrastructure, households will continue to under-insure and under-invest.
• There continue to be barriers for broad-based participation in a number of these markets.
• Unavailability of certain risk transmission products on account of regulatory reasons (ex: Indian Treasury Bill Futures, inflation indexed bonds).
• Absence of enabling public infrastructure for designing some risk transmission products. For instance, India has not invested enough in high quality rainfall measurement stations and this has impacted the availability of good data for designing rainfall insurance contracts.
• Limited availability of certain risk transmission products on account of various environmental and infrastructural hurdles affecting accurate and efficient discovery of their prices. (ex: catastrophe insurance)

Watch video of Dr. Rangarajan K. Sundaram‘s keynote address on Risk Transmission.

Key themes

Several ideas emerged during the course of participants’ discussions on how best risk transmission mechanisms can be reinforced to function at an optimal level.

1. Make transparent the quantum and nature of risks assumed by market participants

An important overall observation was that development of risk transfer mechanisms must be preceded by much more “paranoia” regarding risk management, particularly by government owned financial entities. There was a need to make transparent the embedded risks (ex: ALM mismatch) for large financial institutions, so that risk management and risk transfer are taken seriously.

Participants felt that current regulatory approaches (particularly for banks) use caps, limits and other such fiat-based measures disproportionately and do not adequately leverage market-based mechanisms to manage risk. While rating agencies provide an important third-party view on risk, conference participants felt there was really no alternative to building robust internal risk management capabilities. Financial Institutions must focus on putting in place plans for dealing with reasonably expected failures (“known unknowns”).

2. Manage moral hazard in credit risk transfer markets

Participants felt that it was important to keep in mind moral hazard while designing risk transfer products, particularly for credit risk. In the specific context of securitisation markets, conference participants felt there was a need to be cautious about pure “originate to distribute” models. The concern was that this would create excessive moral hazard for the originator. It was discussed that the originator must retain ownership of credit risk in some form, thereby ensuring that it has the incentive to monitor credit risk, thus rooting out an instance of moral hazard in risk transmission.

3. Continue to focus on addressing missing markets for risk transmission

While important steps have been taken, participants felt that building risk transmission markets must continue to be an important financial policy objective. From a legal perspective, development of good resolution mechanisms is integral to the development of risk transfer markets. While the SARFAESI Act has been beneficial for banks vis-a-vis corporate lending, a lot more work is required on this front. Participants also noted the near total absence of thinking on the issue of household/personal bankruptcies, and the need to meet unaddressed risks, such as inflation.

Vision statement

In developing a vision for risk transmission within the financial system, participants formulated the following:

“To design, develop and sustain effective mechanisms that enable transfer of risk from households and originators to institutions than can better manage these risks.”

A more detailed summary of the deliberations on Transmission is available here.

On November 22nd and 23rd, IFMR Capital held its first partners meet, a two day meet with all its partners to re-envision access to finance for institutions that impact low income households. Industry participants and researchers came together to discuss a broader vision for the industry. While the two day event saw active participation and debate on issues that currently concern the sector, the emphasis of the meet was largely on the way forward. Held at a critical juncture, participants brainstormed and discussed strategies for reshaping the sector towards a shared vision.

The meet followed the appreciative inquiry format and drew out the best from the participants. The first part was designed to shift the focus of participants from being short-term reactive to long-term proactive. The second part focused on the positives of the industry and on what was valuable about the way the sector has functioned in the past. The participants broke into groups of two and interviewed each other. Each person described their high points and success stories, sharing instances of how and why being in this sector made them feel glad they belonged here.

The third part of the approach sought to use the output from the interviews to get a clear sense of what were the most important factors that contributed to the success in the sector. Later, organised in groups of six, participants worked on a vision of what the sector would be like in five years if the root causes of success were leveraged in specific areas of focus such as governance, customer focus, risk management, product development, etc. The end result was a shared vision that institutions in the sector could look up to.

Some important questions that emerged during the meet are listed below:

1. How should we position MFIs so that they become an indispensable part of the financial system?
2. How do we engage with the political groups more effectively?
3. What are the unique and additional responsibilities of MFI boards, given that they deal with a segment that is financially and otherwise excluded?
4. As a sector, what data do we need to collect and disseminate, internally and externally, to enable holistic risk management?
5. What investments in training will organizations and the industry make in:
• Moving from mono-line to a multi product model
• Ensuring common minimum values are shared across the sector
• Taking on the new role of a financial advisor
6. How do we use technology or other disruptive methods to dramatically improve operating efficiencies?
7. What is the regulatory framework which will allow MFIs to flourish and serve a wider range of financial needs?
8. How do we resolve short-term funding & liquidity issues for the sector?

In the last part of the meet, the groups focused on developing tactical strategies on four areas : brand management, product development, political engagement and ensuring common minimum values, areas that needed immediate action to take the industry from where it is today to where the group would like to see it in the future.

Here is a brief summary of the themes that emerged from the meet.

a) Customer centric approach: The MFI industry’s main strength is its ability to reach out to and serve a vast number of clients. Client engagement is continuous and services provided are valuable. There was a clear consensus that going forward this customer centric approach must continue to be of key importance.

b) Innovation: Every growing sector continuously evolves. Institutions must be able to respond to the changes in the sector. The need is for an innovative and flexible approach which ensures sustainability and works in the interest of its end customers. The idea of MFIs offering multi-products was discussed at length. This was the way forward and MFIs must invest time, effort and capital towards this. MFIs already possess large amounts of granular financial data pertaining to their clients. This could help them understand the needs and capacities of their clients better and in turn aid the design of relevant financial products.

c) Operating efficiencies: The cost to serve low income households can potentially be dramatically reduced by disruptive innovations. Key pieces of infrastructure such as the UID have the potential of making KYC a public good. Enormous strides in technology such as the use of biometric identification, automated payment systems, mobile technology with improved authentication through the UID can also ensure that local branch staff leverages technology to perform their most repetitive day-to-day tasks, freeing up their time to perform their core duty of understanding the needs of clients and recommending appropriate solutions. There was a clear consensus that business models need to evolve and leverage such innovations.

d) Importance of the mission: While sustainability of business was crucial, it was agreed that the commitment to social and economic well-being of the client was crucial to the sector. Given the profile of the average client, MFIs perform the important role of giving access to finance to the most excluded segment of society. Going forward, organizations must not lose sight of this fact. Further, it is necessary that there is an alignment of objectives and vision across the entire company.

e) Positioning of the industry: Concerns were raised about the response of the industry to the recent crisis and the lack of a unified voice. The role of the board was stressed in this respect, many felt that the board should play a role in ensuring customer metrics are tracked continuously and senior management is held accountable to performance as measured against the metrics. This would also ensure that MFIs are collecting enough information during good times as well as bad, so an accurate picture can be presented to the media, investors and regulators.

f) Holistic risk management: The current business model of organisations in the inclusive finance sector is strong on operations and therefore manages operations related risks very well. However, in order to evolve into universal financial service providers, organisations need to focus on risk in a more holistic manner, ie look at all aspects of risk such as operational risk, credit risk, interest rate risk, liquidity risk, political and regulatory risk. Capacities need to be built internally, for instance, risk departments need to be set up, people need to be hired and adequate training needs to be provided, investment needs to be made in risk management systems. However, it was agreed that senior management buy-in was critical to the implementation of “holistic risk management”.

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 first IFMR Conference on Financial Systems Design was held at our office in Chennai on Aug 5-6, 2011. The objective of the conference was to engage in an in-depth conversation on the future of the Indian financial system and some of the underlying design challenges being faced in various markets.

In order to retain a functional perspective, the conference was organised into three main sessions for discussion — Origination, Transmission and Aggregation — as three broad buckets of questions and concerns – one involving customers and customer protection issues, the other involving markets and derivatives and the third involving large, nationally important financial institutions and systemic risk concerns.

In the introductory session, Nachiket shared some of his thoughts on the Indian financial system.

The format of the conference allowed for collaborative work and visioning by the participants. Following a lead presentation for each of the main sessions that identified key themes, each table came up with vision statements for that theme which were then shared across the room and discussed. Following the visioning, there was an exercise to identify the pathways for us to get to the desired end-state. These pathways were categorised into Research, Regulation, Innovation and Public Infrastructure.

The conference yielded very rich discussions and the participants identified several interesting issues and priorities for the Indian financial system. In the following weeks, we will share the summary of discussions and identified pathways for each of the three sessions.

On May 7th 2010, the University of Chicago and Northwestern University hosted the sixth annual Chicago Microfinance Conference.  I represented IFMR Capital at the event to discuss the evolution of microfinance as an asset class in the Indian context. Below are some of the highlights from the many panels and speakers, but here is the 30 second summary of what I found most interesting:

• A greater amount of intellectual honesty around the discussion of microfinance’s impact on poverty. Nearly everyone now agrees control groups are necessary to study the impacts of micro-credit properly. Consumption smoothing is recognized as important.
• Interest rates are coming down and will continue to fall at a faster pace.
• There’s a danger of short-term money in some microfinance equity markets. Longer term investors are needed, but the pension fund/large institutional funding channel needs better vehicles to invest in.
• Microfinance bubbles in Morocco, Pakistan, and Bosnia could have been prevented with more discerning investment (on the part of multilaterals mainly) and credit bureaus.
• Reaching more remote populations is the next frontier. BRI is one of the few success stories.
• M-Pesa (the mobile payment platform) now has over 9 million clients in Kenya. Wow.

Impact Debate

The “impact of microfinance debate” has been a popular one over the past year, especially after the publication of the first few randomized evaluations in microfinance (e.g. CMF and MIT’s Spandana study) have shed light on how limited our knowledge of microcredit’s impact really is. During a panel entitled, “Impact Monitoring and Reporting,” the panelists (each from high-profile microfinance funders and networks) admitted that we do not know whether microfinance alleviates poverty. Even though some of the panelists’ websites and marketing materials do not yet reflect this admission, it is refreshing to hear in public a greater agreement upon the limitations of most previous impact evaluations, primarily due to the lack of control groups in past evaluations. Speakers also noted that even if it does not lift people out of poverty, microfinance’s ability to help smooth consumption is a praiseworthy accomplishment – an insight that many credit to Morduch, et al’s Portfolios of the Poor.

David Roodman from the Center for Global Development hosted a session discussing his Open Book Blog, in which he “shares the writing of a book about the history and impact of microfinance.” Some of the main points Roodman made in his presentation can be seen in this post he made last month. (I think the “OK Go” video really drives home his point on selection bias!)

Investment and Interest rates

Panel discussion; Peter, second from right at the panel.

On the “Microfinance and Wall St” panel, we discussed the evolution of MFI funding in recent years (e.g. more commercially driven, a bifurcation between top-tier and smaller MFIs) and how IFMR Capital is having early success working with small and medium sized MFIs to access domestic debt markets. Some panelists characterized the current global funding environment as, “too much money going after too few opportunities,” but I only see this as true if one limits the focus to the world’s 50 largest MFIs. In reality there are many underfunded but strong MFIs.

What is needed are: 1) More technical assistance providers to work with high-potential small MFIs, and 2) More conduits such as IFMR Capital to create structures linking smaller high-quality MFIs with the investment appetite of larger investors, who cannot individually go after relatively small-ticket deals.

Carlos Castello from ACCION International, and a Board Member of Banco Compartamos, was on the panel so there was a question from the audience on whether interest rates charged to customers are too high and MFIs too profitable. Mr. Castello pointed out that Compartamos has lowered their rates by about 10% the past year and reiterated their belief that high-returns will invite more competition, and that competition will be the driver for lower rates. I am still seeking to better understand why the flood of new MFI competition that markets such as India have seen is not occurring in Mexico, where Compartamos and others have proven microfinance can be a very profitable business (Compartamos’ ROE is approximately 40%).

I was pleased to highlight Bandhan’s recent interest rate slashing and drew a comparison to the Indian telecom sector as a more mature market that microfinance can continue to look to for a number of comparisons. As the Indian mobile market has shown, it is certainly exciting to see the pro-customer innovations that come once businesses realize their market will be require a low-margin, high-volume business model. This of course requires a different kind of equity investor – one with a long-term horizon vs. short-term – and will likely rattle some of the current private equity money investing in the Indian market.

Interview with IFC’s Microfinance Chief Investment Officer

The last session of the day was an interview with Martin Holtmann, who helps oversee IFC’s $1.4 billion portfolio of microfinance investments. Given how unique each country’s microfinance market is around the world, it was fascinating to hear the perspective of someone with investments in dozens of countries. When asked point blank whether multilateral organizations were responsible for the recent microfinance bubbles seen in countries like Pakistan, Bosnia, and Morocco (Nicaragua is a crisis but of a different kind), Mr. Holtmann provided an interesting response.

Given their mandate to work directly with private companies, he said the IFC had been as careful as possible to make investments where institutions had the capacity to absorb liquidity and grow, but funding from organizations like the World Bank (IFC’s parent) made subsidized loans directly to governments, such as a $100 million soft loan to Bosnia’s government, which then disbursed the funds as the government saw fit. In some cases this led to overheating the sector and damaging the market for all participants.

Turning to India, Mr. Holtmann expressed concern about the amount and kind of money chasing MFI equity ownership, and drew comparisons to the U.S. residential real estate market a few years ago, where investors looked for opportunities to “flip” investments within only a 12-24 months of investing.

I am not aware of many exits made in the Indian private equity market within two or three years of investing, with the exception of a few transactions such as Sequoia’s purchase of Kalpathi Suresh’s stake in Equitas in mid-2009. My sense is most of the PE money looking at MFIs today realize exits are at least 4+ years post-investment, but if quick exits are in fact expected by investors, then the aforementioned interest rate cut by Bandhan will hopefully spook some of this money out of the sector and allow long-term oriented investors better valuations at which to enter.

Here are my takeaways from the rest of Mr. Holtmann’s interview:

On Credit Bureaus: They make little sense in a pure group-lending environment, but in urban or individual/SME lending markets, they are crucial. In fact he thinks credit bureaus could have prevented much of the problems in Bosnia, Pakistan, and Morocco.

On Repayment Crises: In a stress situation, repayments only fall off a cliff if the growth of an MFI has been undisciplined. Contrary to prevalent opinions, if group lending is done properly then it is reasonable to believe delinquencies at an MFI could hit 10-15% and still recover. An MFI like FINCA Uganda would be almost impossible to destroy even if delinquencies were over 10% because of the overall strong culture.

What WON’T we be talking about in five years? Interest rates. They have come down globally by 150-200 bps the past two years (according to CGAP) and will continue to fall.

What WILL we be talking about in five years? We will still be talking about the difficult to reach populations/sectors (e.g. in Bosnia only 4% of MFI portfolio is in agriculture). Bank Rakyat Indonesia (BRI) is able to setup branches to serve areas with a population as small as 4,000 but for most MFIs the average population has to be much higher number in order to be profitable. Going to more remote, dispersed populations will be the next frontier.

If Mr. Holtmann is right, then kudos to KGFS and IFMR Rural Finance for taking on the next frontier (on many fronts) today.

—
Peter Bremberg of IFMR Capital contributed to this post.

The success of an organization greatly depends on its Human Resource (HR), where HR plays a vital role in maintaining and enhancing its human capital. As with any organization, Micro Finance Institutions (MFIs) too need a solid HR base to scale up their activities and contribute towards the larger quest of achieving financial inclusion for all.

In tune with this, FICCI organized a HR conference on “Scaling MFI Activity by Strengthening Human Resource” on 21st & 22nd January 2010. The conference was focused on sharing the best HR practices across industries that MFIs can adapt to ramp up their activities.

The four broad areas that were addressed in the conference were:

• Recruitment & Training: Focused on hiring and training methodologies needed for Human Resource development in the microfinance sector.

• Compensation & Benefits: On structuring compensation and incentives in a manner, which would drive the right behavior

• Organizational Structure & Succession Planning: Creating leadership and grooming personnel to reach higher levels

• Culture & Ethics: Understanding the crucial nature of ethics and culture of the company.

The conference had a format of panel discussions followed by four workshops on the topics discussed by the panel. Bindu Ananth, President, IFMR Trust, moderated the panel discussion on ‘Recruitment and Training’.

Bindu moderating the panel discussion

The four workshops acted as a platform to brainstorm on how the corporate experiences can translate into ground realities for MFIs.  Of the four workshops, one on Benchmarks and best practices in up-scaling recruitment was facilitated by Madhuri Menon and another workshop on Meeting future training demands and competencies/skills gaps of exploding organizations was facilitated by Udaya Kumar.

On the closing day, FICCI’s financial committee’s chairperson Ms. Naina Lal Kidwai moderated the session on ‘Culture and Ethics’.

The conference was extremely insightful and had participants from across the industry including key members from Fullerton India Credit company, Ujjivan, Unitus, Cocoon, Sequoia capital, Canara, HSBC, OBC, Life insurance company amongst others, who shared their experiences on different topics.

The HR and Training team from IFMR attended the conference.

—
Poorna Chandrasekaran, IFMR Rural Finance, contributed to this post.

Last week a group of microfinance practitioners and investors gathered in New York City at the 2nd Microfinance Summit to discuss recent developments within the microfinance industry, as well as opportunities in providing healthcare, clean water, and renewable energy to low-income populations.  Panelists discussed topics such as the prospect of MFI mergers in some regions and industry consolidation, the importance of foreign exchange hedging & risk management by MFIs and foreign investors, and the role that government & development finance institutions have played the past 18 months as many MFIs required timely refinancing.

When discussing evolutionary steps within the industry, Michael Hokenson of Minlam Asset Management, a fund providing local currency debt to MFIs, referenced IFMR Capital’s recent multi-originator securitisation of micro-loans into tradable securities (Mosec I), as a promising advancement toward a secondary market for microfinance assets.

During a panel on the state of private equity (PE) in microfinance, panelists posited that when considering the microfinance landscape for equity investment, “there is India, and then there’s the rest of the world.” What the panelists alluded to is that India’s microfinance opportunity is relatively unique and makes it a highly attractive investment destination for a combination of reasons. The potential size of the Indian microfinance market (“demand for microfinance”), in addition to access to large pools of educated professionals, a robust public equity market, and a banking sector compelled to lend to MFIs via priority sector lending (“capacity” and “supply”), makes for a highly attractive opportunity. And it is largely these ingredients that have compelled investors to give Indian MFIs valuations that seem relatively high versus international peers.

Bhakti Mirchandani of Unitus Capital, the Bangalore-based financial advisor to MFIs, did point out that even though Indian MFIs continue to receive relatively high price-to-book value multiples, on a price-to-earnings basis Indian MFIs are being valued in-line with their international peers. (To read more about MFI equity valuation and pricing, see this in-depth analysis by Nitin Chaudhary of IFMR Rural Finance and Suyash Rai of IFMR Advocacy Unit.)

As with any discussion of India’s microfinance opportunities, the topic of multiple-borrowing and other risks came up in more than one panel. The self-regulatory steps taken by Indian MFIs, such as the establishment of a credit bureau serving the microfinance industry, named Alpha, is one sign of how MFIs are reacting to the risks of over-lending in select regions of the country. (More on the topic of “Microfinance Credit Bubbles and Self-Regulation” available over at Microfinance Focus.)

The presentation below was delivered during a panel entitled, “Innovative Solutions for New Financing,” in order to highlight some of the structured finance techniques IFMR Capital is utilising to allow MFIs to tap domestic debt markets in an orderly and efficient manner.  Participants were also given an intro to ATMNE’s commodity trading and financing pilot program in Kadi, Gujarat.

Following the presentation, Nancy Barry, former President of Women’s World Banking, noted that the securitisation transactions described are particularly encouraging because they point to the development of local, domestic capital markets with the capacity to fund the growth of its own microfinance sector over the long term. (Likely a prerequisite if India’s 100+ million unbanked households are to be reached in a timely manner.) There are certainly benefits to having access to international funding sources as well, but the ability for Indian MFIs to fund their operations by tapping into a variety of domestic investors (mutual funds, treasury desks at banks, a guarantee company such as IFMR Capital), allows MFIs to avoid currency risks, capital flight in times of international crisis, and other risks derived from depending disproportionately upon international financing.

Emboldened by the lessons from the recent financial crisis and encouraged by its early successes, IFMR Capital is continuing to work to ensure that its partner MFIs will have efficient and reliable access to debt capital, while seeking to grow its model to reach more MFIs and eventually other high-quality asset originators serving low-income households.

—
Peter Bremberg of IFMR Capital contributed to this post.

Last week I attended a conference titled “Microfinance: Translating Research into Practice”, hosted by the Centre for Microfinance in partnership with the College of Agricultural Banking (CAB) in Pune.

Among the varied things that were discussed in the conference, the underlying and oft repeated theme was microfinance sector’s need for effective research, which was well articulated by many participants. For example, Dr. Nachiket Mor felt that because the rapidly growing microfinance industry in India is quite different from the rest of the world in many ways (in terms of loan size, involvement of the banking industry etc), its challenges are also unique, and to address them effective research can play a crucial role.

Another important point was raised by Mr. Mathew Titus, who observed that to promote high quality research in the country there has been little or no funding to build a cadre of professionals who are capable of understanding the field realities and doing good research.

I have described some of the research works pertaining to microfinance that were discussed during the conference:

• Impact of Microfinance

Professor Abhijeet Banerjee of MIT presented the results of a randomized evaluation of Spandana’s microfinance programme in Hyderabad.  The main conclusions from the study were – microfinance has no clear impact on women empowerment, health or education; the accessibility to microfinance helps in setting up of new businesses; investing in durable goods by those who have existing businesses and more consumption by those who do not intend to start new business.

Results such as no impact on women empowerment, health and education might disappoint microfinance enthusiasts who think that microfinance is an antidote to many social and economic problems of the poor. However, one needs to understand that impact on health, education and women empowerment needs sustained interventions over a longer period.

Mr. B.B.  Mohanty of NABARD took forward the Impact session by highlighting the enhanced financial access of the poor, especially of the women, due to the SHG-Bank linkage programme promoted by NABARD. He made an interesting point that SHG members should graduate after a certain time period and become clients of regular banking system. While I agree with him that low-income people should come into mainstream, I disagree that there should be an exit from the programme. SHG programme is not just meant for micro credit, rather it is a social movement providing poor women a platform for addressing the social and economic problems, and giving them solidarity and strength so that their voices can be heard.

• Microfinance, Social Capital and Empowerment

Professor Rohini Pandey of Harvard University shared her research done with VWS, Kolkata, which revolved around the question of whether social interactions facilitate cooperative behavior among group members.

The research, done in an urban setting, revealed that after group formation women develop trust among each other and participate in social events. Opportunity for such association was absent for women before microfinance group formation. The results surely strengthen our belief that microfinance groups are not just credit associations; rather their role clearly goes beyond the financial transactions.

• Microfinance and Government Programs

The findings of CMF research conducted on the impact of participation in MGREGA (Mahatma Gandhi Rural Employment Guarantee Act) in Andhra Pradesh were presented in this session.

Important findings of the study are – MGREGA helps participants cope with stress periods such as those caused by bad weather; no difference in wages based on caste and gender; and getting a job card to avail the scheme is not a hurdle for people.

I wished the study could be extended to some other states to give us a comparative analysis of the impact of MGREGA in other places, as we often hear about the mismanagement and misappropriation of the scheme in various states. But it was heartening to see many positive results of the scheme in Andhra Pradesh.

• Tailoring Financial Services to Meet the Needs of the Poor

Professor Rohini Pandey presented another interesting research addressing the question of ‘what are the results of using a flexible credit repayment product for clients’.

The experiments examined differences from moving weekly (frequent) to monthly (less frequent) repayment, and effect of introducing grace period of two months before the repayment starts. Bindu Ananth of IFMR trust provided practitioners’ perspective emphasizing that the structure of the loan is crucial, and getting the lenders and savers together is very important while designing the financial products.

• Portfolios of the Poor

Professor Jonathan Morduch gave insights on how poor survive on less than $2 a day from his very famous book Portfolios of the Poor.

He said poor face triple whammy of low income, irregular/unpredictable income and lack of inappropriate tool to deal with the ups and downs of life; however, the poor are active money managers and they can and do save. He mentioned about the SEED Savings Account in Philippines and some Grameen Bank II products as good example of suitable products to the poor, and urged to scale up/learn from these ideas.

Anil SG from IFMR Trust made an interesting presentation on similar lines. By taking an example of a typical low-income household, Anil showed the volatility in cash flow, and the dreams and fears of the household. He through the LIWE (Life Wealth Envelop) tool explained what different types of risks households face and what can be the financial strategies for managing various risks.

• Competition, Multiple Borrowing and Information Sharing among MFIs

As we all know that nearly Rs. 600 million MFIs loan was reportedly involved in defaults in Kolar (Karnataka); the Kolar case was one of the important points of discussion in the conference. From a study on the Kolar case done by Mr. N. Srinivasan, factors such as clients’ behavior and MFIs’ practices were found responsible for the crisis. It was also discussed that the Kolar crisis resulted out of a Fatwa issued by a religious group. This was a larger risk that is beyond a MFIs’ capability to deal with.

The conference raised some of the very important issues prevailing in the microfinance industry and gave a platform to various stakeholders such as academicians, practitioners and policy makers to learn from the various experiments and discuss the policy implications.

PS: For notes and presentations from the conference click here

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Anita Sharma, from IFMR Trust contributed to this post.