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

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

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

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

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

We had the pleasure of hosting Dr. Subir Gokarn, Deputy Governor, RBI, on a branch visit to the Pudhuaaru KGFS recently. At the branch, Dr. Gokarn interacted with the team and participated in the wealth management ritual. He remarked on the need to find ways to help customers bridge the gap between their financial goals and what their current surpluses were as well as the need to manage risks arising from livelihood shocks. He emphasised the importance of product design based on an understanding of household insights and internalising some of these insights across the organisation.

Dr. Subir Gokarn (left) interacting with Bindu Ananth, President, IFMR Trust;  Anil SG, CEO, IFMR Rural Finance; and the Wealth Managers.

By Shweta Aggarwal, IFMR Finance Foundation

The KGFS model is structured around the concept of financial well-being and aims to maximize the financial well-being of every individual and every enterprise. Among the questions that immediately arise are: What is financial well-being? How do we know that it is being maximized?

These questions are not always easy to answer as there is no one universally accepted definition and method of measuring financial well-being. IFMR Rural Finance and IFMR Finance Foundation is working together to develop the notion of financial well-being in order to assess the impact and viability of the KGFS model. The team is also developing an index to measure changes in financial well-being of households on an ongoing basis. This is a complex task as financial decisions are intricately linked and extremely dependent on each other and hence, not easy to discern.

We define financial well-being as:

The state in which a household can optimally choose patterns of consumption over time and in uncertain states of the world

In other words, a household’s ability to grow, manage liquidity and weather downturns across different periods of time and states of the world can be used to determine its financial well-being. Using this working definition, we structure the index around four domains: Protection, Liquidity Management, Diversification and Growth. The core wealth management methodology adopted by KGFS is designed around these four domains, allowing and encouraging households to achieve their goals and dreams over time.

Developing the Index

Each of the four domains is specified by indicators that capture a household’s ability to maximize its financial well-being. All the indicators have identical underlying characteristics:

1.    Efficiency: Relying largely on institutional data (i.e. CMS, CBS), rather than survey data. This will make data collection process continuous and cost effective
2.    Reliability and Validity: Ensuring consistency and exactness of measurement of the intended variable
3.    Timeliness: Easy to obtain and amenable for periodic updation
4.    Comparability: Fair measure of comparison across regions, taking into consideration region specific factors that may affect outcomes

Effort has been made to ensure that all indicators have these characteristics. However, efforts at refining and fine-tuning them, specifically for comparability, are underway.

The Domains

The table below gives an overview of the four domains and potential indicators. Column 3 offers the underlying rationale for using these indicators in assessing financial well-being of a household, while column 4 highlights how a movement in these indicators will effect the overall index. We discuss some of these indicators later.

*Assumptions for measuring the Sharpe Ratio will take into consideration diversification across financial and non-financial assets along with geographical diversification of physical assets, such as accounting for land within the district as opposed to land owned in another district.
**We account for value of human capital in NAV and include investments in education and other vocational courses made as contributing to human capital.

Protection: The ability of households to safeguard their assets and spread and manage their liabilities effectively.

To capture a household’s level of protection, independent of growth, and taking into account optimality and, individual needs and preferences, proved much harder than expected.

We decided to use the Life Wealth Envelope (LIWE) simulator developed by IFMR Trust, for advising households on the optimal levels of financial services they need, depending on their current and future financial needs. The graph below highlights how we can use the simulator to measure protection levels of a household.

The optimal level of protection is reflected through minimizing the area between the line reflecting cash flows in the best and worst states of the world, given their acquired level of insurance – life, health, accident and livestock. This is generated specific to each household, taking into account current income states and future financial needs, requirements and obligations. This measure also takes into account volatility in a household’s cash flow and can be updated regularly to reflect any change in a household’s financial state.

Liquidity: The ability of households to manage cash flows and maintain a balance between current and future requirements, to maximize the utility derived from lifecycle consumption.

To successfully manage liquidity, a household must be able to smoothen consumption and income over a period of time (Morduch, 1995). Given below is a method to comprehensively capture liquidity of a household: Standard Deviation of Monthly Consumption (adjusted for seasonality)

Consumption includes “all expenditures on nondurables plus imputed service flows from consumer durables, income, savings (net worth), and borrowed funds. It refers to that part of disposable income (income after taxes paid and transfer payments received) that is not included in savings”. Given this definition of consumption, we can even account for expenditure on education and other vocational courses while estimating cash flow of a household.

We recognize that accessing and gathering such data on consumption using institutional resources may be difficult.  However, given the need and effort made to smoothen consumption, this information is essential and the indicator above will help in aligning all future services and products for the estimation of household cash flows.

Diversification: Diversification is defined as the ability of households to reduce the volatility of return on the asset portfolio by investing in a variety of assets, including financial and non-financial.

Diversification is imperative to maintain an ideal risk-return portfolio that increases the probability of a smooth cash flow in all states of the world.

We use a variation of the Sharpe Ratio to measure diversification. Our assumptions take into account issues of extra-local versus local investments, along with diversification over physical and financial assets. The correlation and covariance matrices designed for this purpose will reflect all such assumptions. To measure improvements in a household’s level of diversification, we can measure the movement towards an ideal Sharpe Ratio overtime.

Growth: Growth may be defined as the ability of households to access capital and identify avenues to help increase their cash flow.

Measuring growth of a household over time is important to capture the effect of financial services on their overall financial wealth and worth. We identify two indicators to capture growth – Net Assets Value (NAV) and  using LIWE  by maximizing the area between wealth in the best states across time.

The NAV measure is an indicator of how much the household’s wealth has changed since last year. We include investments in education and other vocational courses as contributing to an increase in the total value of human capital, thereby increasing the net value of assets.

Our second option for measuring growth is to use the LIWE framework again and capture movement of the upper bound of the envelope. This will capture the impact on cash flows of a household over time, taking into account all assets, earnings and liabilities. An increase in the area between the current upper bound and previous upper bound will positively affect the index, as it will reflect growth in a household’s wealth.

Moving Forward

Moving forward, we must address a number of complex issues. We have managed to tackle some of them effectively by providing solutions to contentious issues such as measurement and collection, as well as conceptual and alignment issues. Questions that remain are those related to aggregation and normalization that are currently being discussed and debated. Some of the key questions we addressed are:

1. Do these indicators capture each domain effectively, taking into consideration a household’s short and long-term needs, while keeping in mind current status?

2. How can we make sure that the data collected is accurate and includes all attributes defined in the index? For instance, a dynamic indicator, such as consumption, is not only difficult to define but even harder to measure comprehensively and accurately.

3. Given the list of indicators, what method of aggregation can be used to construct an index without losing information and compromising on accuracy? The existing indices, such as the HDI and the Grameen PPI, are options worth considering, but cannot be taken as the final choice. We could give each indicator a score – a higher score if they are close to optimality and a lower score if they are further away. However, given that we have four domains, aggregating four scores to a single score may result in loss of information. Given this over-simplification process, a choice of a 4-number index, one for each domain may be a more comprehensive indicator of financial well-being.

In conclusion, the Index should represent and measure our mission of providing complete access to financial services to each household and enterprise, while maximizing their financial well-being. Building such an index is a complex task and is being done keeping in mind precision, fairness and comprehensibility.

By Arun Kumar & Anand Sahasranaman

With the novel objective of making Tamil Nadu the first ‘hut free State’ in the country by 2016, the state government launched a rural housing scheme called “Kalaignar Veedu Vazhangum Thittam” (KVVT) for rural areas with the objective of replacing all thatched houses in villages with robust all-weather houses over a 6-year period. The KVVT scheme comprises a grant of Rs. 75000 per house, which includes both cash and material components. Both cash and material grants are made in 4 tranches.

Only one problem!

Each tranche is disbursed upon the completion of a ‘stage’ of construction (such as upon the completion of the basement, or walls, etc), and clients have found it difficult to raise the finance required for the completion of each stage upfront.

To plug this gap, IFMR Rural Finance has devised a Housing Finance loan product that is currently being piloted in Alakkudi and Karambayam villages of Thanjavur district. This product serves as both a bridge and additional financing option for people eligible under the KVVT scheme.

The loan amount is in the range of Rs. 12000 to Rs. 25000, with monthly repayments and having a tenor of 3 years. One of the salient features of the product is that the customer can pre-pay or pre-close their loan when they get their tranche from the government for the portion constructed.

Mr. Shanmugavelu Mottaiyapillai of Alakudi, the first housing finance loan customer of Pudhuaaru KGFS who had availed a loan of Rs. 25000.

Amongst the basic pre-requisites for the loan are: 1) The customer should be eligible for the KVVT grant 2) The customer should have a clear title deed/patta for the property.

To our surprise, however, the need for a clear title deed wasn’t as simple as we thought.

Three weeks into the pilot we found that a majority of the residents of the two villages didn’t have proper title deeds/patta for their property, thus making it difficult for them to avail the loan. Taking this into consideration we had to make changes to our product eligibility requirements to suit some of the different scenarios as below:

• Land title in the name of client and few other people (siblings generally)
• Client’s land title in the name of deceased parent
• Client’s land title in spouse’s name but spouse is not available (out of country, state)

In special cases, where the government allots property to individuals, but passes on a certificate of ownership but not the title deed, we encourage such cases to avail a customised JLG Housing Finance loan than the regular one. This product has monthly repayments and a tenor of 18 months.

So far, out of 55 individuals in Karambayam and 26 individuals in Alakkudi who are eligible under the KVVT scheme norms, 9 in total have availed of our product. Working in close coordination with the local gram panchayat, the team intends to expand the pilot to other villages and adopt the learnings to refine the product. Watch this space for more updates on the progress.

By Chandrachudan V and Rajesh E, IFMR Rural Finance

For a business operation, a great deal of what happens on the field is determined by how equipped its field managers are. In our case, our Wealth Managers (WMs) at KGFSs (Pudhuaaru, Sahastradhara, Dhanei) are the primary interface in our endeavour to ensure access to finance.  Complete, continuous and accessible training therefore is a crucial ingredient in sharpening their skills at all times.

While the current training process involves a 24-day induction training and regular schedules of refresher training, this trainer-led effort with a lot of manual intervention provides a lot of challenges especially as it involves a lot of paperwork. To top this, there is no centralised repository that the WM could be directed to in order to stay updated on happenings and changes relating to products offered, processes and our USP of Wealth Management.

To bridge this gap, we hit upon the idea of an online learning management system which would be a one-stop shop for all learning needs featuring – product modules, process modules, Wealth Management modules, e-test and e-certification, storage of all training related information of each employee which later on can be factored into Performance Management of the respective employee.

Importantly this centralized learning environment will ensure consistency among learners, thus promoting web–based training that encourages self and participative learning, thereby, reducing trainer’s intervention for all training programs.

From ideation to fruition, it involved a lot of research in finding a suitable platform that could be customised to suit our training needs. The search was on to finalise a platform that is robust, user-friendly, easily customisable, secured, is being widely used across top companies with proven records and also a platform which is compliant to training standards like SCORM.  After 6 months of research, we decided on “Moodle”- a popular and prominent, free and open-source e-learning software. Moodle’s ease of installation, features and the level of customisation that could be done to it made it a perfect fit for our needs.

Learning Management System Architecture

Customised into 3 local languages (Tamil – Pudhuaaru KGFS; Oriya – Dhanei KGFS; Hindi – Sahastradhara KGFS) and in English, the learning management system would be a comprehensive tool that in its first phase would provide:

•    E – Learning on all products/processes and concepts of Wealth Management
•    E – Certification for all products/processes
•    Scheduling of training programs and maintaining repository of training data
•    Quiz and score management
•    Training dashboard automation: online extraction of training data – employee/geography wise
•    Automated mailer notifications for users
•    Feedback automation with effective reporting
•    Video based training on key aspects for better understanding
•    Internal chat for clarifying queries instantly
•    Discussion forums for knowledge sharing

Customised homepages of KGFSs (Click on image to enlarge)

The system would make it mandatory for the WMs to pass through the different certification programs on the various products, processes and concepts of wealth management. Also the system would update the training manager/CEO of a particular geography with macro and micro level information as regards the training status and the needs of the local staff so that they can evolve their training efforts.

The system will be live soon with the above-mentioned features. Improvisations and enhancements are planned in Phase II that will also include animated learning on all products/processes and concepts of Wealth Management, which will supplement the current modules.