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.

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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.

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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.

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Peter Bremberg of IFMR Capital contributed to this post.