MFIs need to look for new alliances with banks, fintech companies

Professor M S Sriram1Inclusive Finance India Report 2016 provides in-depth, well-researched, and well-analyzed evidence on how the financial inclusion agenda has progressed at various levels.

The report covers a review of the performance of diverse institutional initiatives working in inclusive finance—banks, specialized banks, self-help groups, and microfinance institutions. It also covers the initiatives in technology that address last-mile delivery as well as provides an overview of new initiatives.

The report focuses on a larger landscape of financial inclusion while continuing to report progress on microfinance in mainstream financial inclusion activity. It tracks the growth of financial inclusion across institutional structures and delivery models, provides a better understanding of the complexities of the sector, and contributes and informs the policy development process on inclusive finance. It also informs banks and investors, both national and international; highlights key issues that require the attention of the financial sector and policymakers; highlights the positive impact of the sector; and identifies policy and practice gaps on an annual basis. The report involves participation by the RBI, Ministry of Finance, banks, apex financial institutions, technology service providers, business correspondents, and diverse delivery models.

This is the best reference book on the annual trends and progress of the financial inclusion and microfinance sector. It includes data-based analysis of all streams of financial inclusion with the most current information in terms of numbers and developments and is a must read for every practitioner in the financial inclusion value chain.

M.S. Sriram is a faculty at the Centre for Public Policy, Indian Institute of Management Bangalore (IIMB). He is also a Distinguished Fellow at the Institute for Development of Research in Banking Technology set up by the RBI. Previously he was the ICICI Bank Lalita Gupte Chair Professor of Microfinance and Chairperson of the finance and accounting area at IIM Ahmedabad. He has been a faculty at the Institute of Rural Management, Anand and Vice President (Finance and Information) at BASIX. He has also taught at IIM Udaipur, Solvay Brussels School of Business and Economics, Brussels, and the Azim Premji University, Bengaluru.

Inclusive Finance India Report 2016

An ACCESS Publication

Inclusive Finance India Report 2016

M S Sriram

Sriram

ISBN 978-93-860-6219-2` 995

9 789386 062192

Supported under FIFManaged by NABARD

While many are convinced about the long-term benefit of such a move – in terms of fighting black money, terror financing, fake currency as well as pushing the world’s fastest growing major economy into a cash less mode – the short-term pain is evident. It has been a logistic nightmare.

Indeed, the government could have taken the plunge after fill-ing in the banks’ currency chests with new Rs 2,000 and Rs 500 notes and recalibrating the ATMs to disburse the new notes but that would have alerted every one and the very purpose of the exercise would have been defeated.

The microfinance industry has been hit hard by this as the small loans are typically disbursed and repaid in cash. Since the borrow-

ers of such loans primarily deal with cash, in the current environ-ment, they are finding it difficult to pay back the money to the mi-crofinance institutions (MFIs) as their cash flow is being hurt.

Many MFIs, I believe, have stopped disbursing fresh loans the repayments of old loans are becoming irregular for many. Sensing this, the Reserve Bank of India (RBI) has given a 60-day re-laxation to the MFIs for recogniz-ing bad assets. Typically, when an instalment is not paid for 90 days, a loan becomes bad.

While there will be a mini set-back for many MFIs even as the relaxation will hurt the credit cul-ture, they can use this as an op-portunity – if not moving into a totally cash-less environment, at

least making the first few steps.

The MFIs have already been al-lowed to work as business corre-spondents of banks. All they need to do is disburse small loans not through cash but by transferring money to the borrowers’ bank ac-counts (many of them now have back accounts, thanks to the Jan-Dhan project) and let the bor-rowers withdraw money from banks using their debit cards. Similarly, the loan repayment system can also be carried out through banks.

On the positive side, the short-term pain will encourage the MFIs to forge newer alliances with banks and embrace tech-nology faster. This will also bring down their cost of operations.

Demonitization is the flavour of the season. The government

move to replace the existing high-value Rs1,000 and Rs 500 currency notes, which account for about 86% of the Rs 17.3 trillion currency in circulation – little over 10% of India’s GDP – caught everyone by surprise.

Juxtaposed with the demoneti-zation chaos, the 13th Inclusive Finance India Summit promises to be marked by fierce and feisty debates. The jury is however not out yet whether this bold move of the Government will advance or impede the progress of financial inclusion in India. Given that the Summit is taking place while the implications of demonetization are still being assessed and un-derstood, all the sixteen sessions across the two days are likely to discuss the issues.

With the ambit of the Summit being expanded two years ago to broader financial inclusion chal-lenges, the diversity of discussions and also diversity of speakers has significantly broadened the scope of discourse. 108 speakers across the two days will share their per-spectives of how financial inclu-sion is progressing in the country.

With the release of our two im-portant Reports viz the Inclusive Finance India Report and the Re-sponsible Finance India Report, presentation of the Inclusive Fi-nance India Awards and thirteen Associated Events, the Summit, like all other years, will be a global jamboree to build a vision towards a universal access to finance. As always, as much profundity will be witnessed in the corridors as in the structured sessions.

It is my privilege to welcome you all to the 13th Inclusive Finance India Summit.

Informal SHG-BLP Payments Banks

Urban Co-op Banks/ PACS MFIs Mudra SFBs/ RRBs Banks

(Individuals) (Individual members)

(Individu-als. Limit Rs. 100,000)

(Individual customers)

Individuals Limits Rs. Rs.160,000 (U)

Individuals and small firms) upto Rs. 1 mil-lion

(Individuals and small firms) Upto Rs. 2.5 million

(individuals, firms and institutions)

Savings (lim-ited) Savings Savings Savings Savings SavingsLoans for so-cial consump-tion

Loans from the group

Remittances (largely indi-vidual)

Working capi-tal loans

Loans - pro-duction

Loans - Pro-duction

Loans produc-tion

Loans

Emergency loans

Top up loans from outside

Third party products

Basic banking facilities

Loans con-sumption

Loans -Work-ing Capital

Loans for work-ing capital and consumption

Full banking services

The year 2015-16 has been a great year for mainstreaming

of the inclusion agenda. While the numbers on the inclusion indexes have moved up, the accounts in the Jan Dhan Yojana – which saw a steep growth last year have pla-teaued and moving up on a nor-mal growth path; the Aadhaar enrollments are also moving on a normal growth path, there have been exciting developments else-where. The SHG Bank linkage pro-gramme moved up significantly during the year – thanks to greater convergence between the work of NABARD and that of the Ministry of Rural Development. The MFI sector continued to grow at a very high pace and the process of trans-

The smaller MFIs are doing a combination of business on own books and becoming correspondents to larger banks. Their moderate growth is not attracting infusion of capital. The only growth opportunity looks like an moderate organic growth on the books and the other growth by third party agency work.

Some of the smaller MFIs are being taken over either by new generation banks or larger NBFCs. We saw many deals which have been documented in the report, but there are some which happened after the report went to print.

SFBs, Payments BanksMuch preparation is happening on the SFB front with all the players getting ready to launch banking operations. After the in-principle licences, the first to go was Capital LAB in April 2016. Equitas SFB launched its banking operations on September 05, 2016. Suryoday, ESAF and Ujjivan converted their in-principle licences to final licences. More roll outs will be seen this year. The action on the Payments Banks were much slower, with only Airtel Payments Bank launched it services and there was much news about Paytm and IndiaPost rolling out their operations. There has not been much news about the other players in the public domain.While there were concerns about overheating and whether we are headed for one more crisis, the withdrawal of legal tender status for currency which sucked out liquidity from the system has possibly come as a blessing in disguise, as the MFIs are taking a pause to deal with the external shock. The effects of this move on the microfinance sector may be significant and we need to see how this will play out. The year ahead is full of challenges.

formation of some MFIs into small finance banks started. While the inclu-sive finance sector moved towards mainstream, the mainstream started moving downstream - MUDRA is moving to fill up the missing middle and the payments banks are coming up to largely address the issues of small deposits and transactions. The table below shows the range of institutions and services that are provided with target segments of customers.

Three trends that need to be highlighted in the MFI sector this year:

There seems to be a difference between the boys and men of microfinance. The bigger ones, with aggressive growth got more capital, many deals were struck, they were in the securitization market and some of them were moving towards becoming banks. The larger ones also issued stocks and got listed.

Inclusive Finance India Report 2016

Hear from these Speakers at the Inaugural · Dr. Harsh Kumar

Bhanwala, Chairman, NABARD

· Shri. Rajnish Kumar, Managing Director, State Bank of India

· Prof. MS Sriram, Visiting Faculty, Centre for Public Policy, IIM, Bangalore

· Prof. Alok Misra, Professor, Public Policy & Governance, Management Development Institute (MDI)

Vipin SharmaCEO, ACCESS Development Services

1 mssriram@gmail.com Sriram is the author of the Inclusive Finance India Report 2016 and works with the Centre for Public Policy Indian Institute of Management Bangalore.

Tamal BandyopadhyayConsulting Editor, MINT

Glimpse into the Responsible Finance India Report, 2016Financial inclusion space in

India has become varied, and the right ecosystem has been developed to harness various channels specializing in their domain to achieve financial inclusion. It is argued that at a time when universal inclusion looks a distinct possibility, it is critical that responsible finance matrices are applied across all channels. While in case of microfinance institutions, the framework of responsible finance has been well ingrained through regulations and industry efforts, in case of other channels like SHG-Bank linkage programme, banks and SFBs, it needs to be developed. The initiatives are being taken to develop a client-centric responsible approach for Digital Financial Services (DFS) and alternate channels.

Insurance penetration in India remains low (IRDA estimates

of 2014). The government’s effort of increasing public funding for extending insurance is laudable, but needless to mention it puts enormous burden on the budget of the GOI, which is already allocated mainly to payment of subsidies. As the majority of Indians are engaged in the informal sector and do not pay taxes (some estimates claim that the tax payers are only 1% of the entire population), it is imperative to explore how people in the informal sector would participate in financing their insurance cover. This requires experimenting with smart options which foster participation and enhance a sentiment of win-win. The strategy of embracing ‘innovation’, of finding newer and cost effective ways towards development, echoes the thinking and guidance of the honorable Prime Minister of India himself. In this spirit, the Micro Insurance Academy (MIA) has demonstrated over the last 10 years that poor ru-ral communities are able and keen to actively participate in their own risk management solutions,and con-tribute funds toward a successful ‘go local’ approach to risk management. Community-based Mutual Aid Schemes (CBMAS) require technical support and initial handholding, but can achieve both scale and sustaina-bility by leveraging the social capital (time, information, money and local

Igniting Inclusive Growth in the Shift to DigitalBy Shamina Singh, President, Mastercard Center for Inclusive Growth

In terms of financial inclusion in India, significant progress has been made under the government’s Pradhan Mantri Jan Dhan Yojana (PMJDY) program which aims to open a bank account for every

Indian household. However, the newly-opened accounts have yet to translate into widespread usage. While practically all households in the middle 60 percent of India’s income spectrum have access to a bank account, less than 13 percent have succeeded in securing a

Responsible Finance India Report is the sixth annual report that provides an account of developments in responsible finance and social performance in microfinance and financial inclusion in India. The report captures the essence of policy, strategy, and practice elements of social/responsible performance of the sector catering to the poor and the excluded. The report analyzes the current state of policy and performance of different channels on the globally accepted standards of responsible finance. It assesses the existing practices and products and also documents the new initiatives to present a holistic analysis of the current state of the sector. The report also highlights the role of policy, including lenders and investors, in shaping the agenda of responsible inclusive finance and the need for their proactive role in institutionalizing responsible finance practices. Going beyond assessment of current performance of policy and practice, the report identifies emerging risks to client-centricity and customer protection and suggests action for policy as well as institutions to strengthen the state of responsible finance for the excluded and the poor in India. The focus of the report is on capturing sector-wide trends rather than on individual performances.

Alok Misra is currently a professor in the public policy and governance area at Management Development Institute, Gurgaon. He holds a doctorate in Development Studies from Victoria University, Melbourne, and a Masters in Development Management from the Asian Institute of Management, Manila. He has been trained at the Harvard Business School in “Strategic leadership for Microfinance” and has been a fellow, Fletcher Leadership Program for Financial Inclusion at Tufts University, Massachusetts.

Responsible Finance India R

eport 2016

ISBN 978-93-860-6220-8` 995

9 789386 062208

Responsible Finance India Report 2016

Client First: Tracking Social Performance Practices

An ACCESS Publication

Alok Misra

Misra

the early warning signs, as poverty lending will always be subject to greater scrutiny, and it must be realized that regulations cannot be a substitute for institutional intent. The RFI Report presents discussion around this, which is critical given the high growth that the sector has witnessed in last couple of years. The report also draws attention towards the SHG bank linkage, and flags the gaps in the program from the responsible finance angle. Advent of NRLM, rising non-performing assets (NPAs), mono product, under financing, SHPA assistance, lack of grievance redressal system and regional skew, are affecting the program performance. A recent nation-wide study by APMAS, is analysed in the RFI report to discuss client level outcomes. An interesting development related to digitization of SHG records is also part of the chapter.

The RBI has recently circulated draft guidelines on P2P lending, and in keeping with the policy recognition of P2P lenders, the report presents the current model of two prominent P2P lenders in microfinance, using the responsible finance lens. The focus of the report is on documenting the positive steps taken to reach the un-served and poorer sections of the society with financial services, as well as to flag issues that need to be addressed to ensure sustained growth.

The digital economy offers a slew of benefits to consumers,

businesses and government: better products and services, greater safety and security, less waste and fraud, and cost-savings across the board. The growth of digital payments also has the potential to transform economies and spur broad-based growth. In India, widespread adoption and use of digital finance could boost the nation’s GDP by 10 to 20 percent, according one estimate.1

However, we must be vigilant that the shift to digital is truly inclusive-empowering everyone’s participation in the economy, rather than exacerbating inequities. This requires building an extensive electronic commerce ecosystem, as well as a broader effort to ensure consumers and small businesses don’t get left behind in this transformation.

Extending insurance coverage to the last mile – A partnership and

education centered approach

institutions) to develop rule-based schemes that function with pools of funds collected locally and spent lo-cally under predetermined rules that the community governs. Moreover, catalyzing demand is contingent on engaging the community in design of its benefits-package (evaluation of the risks prevalent in the com-munity, and deciding which options for coverage, at which prices, the community should select. Selec-tion means a process of Consensus building around one package and one price. As members of the CB-MAS administer their scheme, there is considerable capacity develop-ment and insurance education that take place, in order to ensure that community representatives can lo-cally govern the scheme and give the community complete control over the pooled funds.The core principles of this model are: voluntary membership based on perceived benefits; contributory rather than subsidized schemes; risk pooling by the community; and self-governance, management and op-eration. Moving a step ahead and leverag-ing the Digital India ambition of the PM, MIA has created MIA online – courses on CBMAS which replace the traditional face to face training method and would be instrumental in extending insurance education and encouraging implementation of CBMAS across different geographies and locations.

bank loan. On acceptance, there is potential to leapfrog other countries’ progress with products like mPOS and QR Codes. Mastercard is advancing low cost, easy-to-deploy solutions with the recent launch of Masterpass QR, which enables rickshaw and taxicab drivers to accept cashless payments from users via their smartphone or feature phone.

Inclusive finance innovations are also helping bridge the MSME credit gap. Pioneering start-ups are leveraging digital and mobile trends to make financing available in ways that are cheaper, faster, and more convenient to India’s underserved small-businesses. A stronger and more vibrant small business sector is essential for building a thriving middle class that can support and sustain India’s economic takeoff.

David Dror Chairman and MD, MIA

Dr. Alok MisraProfessor, MDI, Gurgaon

The RFI Report of this year presents the various initiatives taken by MFIs to bolster their client centricity, and the narrative is based on the dimensions of USSPM framework like last year’s report. The report analyses the role of BCs and Banks and argues for an activity focused regulation in place of current, form based regulation. As MFIs play a key role in financial inclusion, and the Small Industries Development Bank of India (SIDBI) has played a leadership role in this space, the report presents

Source: MFIN, Micrometer

Emphasis on Client Protection is Indispensable to the Journey of Financial Inclusion

The financial inclusion landscape in India today feels like a ‘high

traffic zone’. A positive aspect of all the traffic is the increased recognition amongst a variety of institutions that financial inclusion to the last mile – are important. This year, the Global Microscope has ranked India third on financial inclusion. Much of this achievement can be attributed to the broadening of pathways, channels and technology platforms aimed at increasing financial inclusion. The financial architecture has undergone significant change with 10 MFIs being licenced as small banks, 11 as payment banks and 2 as universal banks. Further, 126,000 banking correspondent (agents) provide cash in and cash out facilities and with government’s commitment, under the Pradhan Mantri Jan-Dhan Yojana (PMJDY) 217 million new bank accounts have been opened. While bank accounts represent 65% of the adult population, nearly a quarter of those accounts remain dormant. Financial Inclusion Insight survey indicates 49 % of Indian adults are digitally included, but

usage of digital accounts remains unproven, especially among the poor.

While there is much to lament about, we as an industry appear to be at crossroads wherein, the predicament is between optimizing the opportunity for inclusion whilst ensuring focus on quality aspect of client protection. Quality is a critical element of financial inclusion.

The digital financial divide that we see today can potentially be traversed by establishing guidance on embracing client protection principles. To achieve this several forces need to function in tandem. There is a demand and recognition for setting standards in digital financial services because unless quality is ingrained in all financial services and delivery models, channels and technology achieving sustainable and real financial inclusion may not be possible. The Smart Campaign’s globally accepted industry client protection standards are a robust framework that can be adapted for agent networks like business correspondent models, small banks and universal banks to ensure quality. In its second phase the Smart Campaign, aims to work beyond the realm of traditional microfinance players to encompass agent networks, banking correspondents and Fintech companies through regulatory engagements and strategic partnerships with players in the eco-system.

By Hema BansalDirector, South Asia and South East Asia, Smart Campaign

an interview with the Chairman and Managing Director (CMD) of SIDBI Dr Kshatrapati Shivaji. The interview covers the current issues and the future, as well as the role of MUDRA. Industry Associations that subsequently became SROs played a key role in formulating code of conduct for the industry, monitoring compliance, mainstreaming best practices, grievance redressal, and supplementing the efforts of the RBI in ensuring orderly growth of the sector. One of the chapters of RFI Report, examines the concept of self-regulation and related international experiences, and then follows this up by presenting the role of MFIN in promoting responsible finance.

With the frenetic pace of activity in financial institutions, technology and programs, what do the clients feel; is the litmus test. Thus, the RFI report presents findings of two client-level studies, commissioned by ACCESS ASSIST for this report. One study focused on client-level indebtedness, and the other captures the client voices. The findings provide pointers for future work for both – the policy makers and the practitioners.

The industry data of MFIN, granular data from the credit bureau (Crif High Mark) and other news reports pointed to development of hot spots in terms of over-lending, agent activities and pipelining. Thus, there are signs of distress emerging. There is need for caution and prudence to not ignore

1 http://www.mckinsey.com/global-themes/employment-and-growth/how-digital-finance-could-boost-growth-in-emerging-economies

While India is moving slowly to-wards more digital financial

transactions, the recent demonetiza-tion policy is expected to lead to a tip-ping point to go cashless. There is great excitement about the potential of using mobile technology to facilitate going cash less, particularly in areas where a banking infrastructure does not exist. This is further driven by widespread use of mobile phones even by some of the poorest households. According to Statista, the number of mobile phone users in India is expected to rise to 730.7 million in 2017. Counterpoint Technology Market Research also found that India houses approximately 720 million mobile phone users, out of which 320 million are rural mobile phone users — roughly 38 per cent of the rural population, including chil-dren and senior citizens, which is an increase from 22 per cent penetration in 2010.

Some of the key challenges of using digi-tal financial services by the poor and poorest are:

1. Lack of access of mobile phones – Access to and use of mobile phones are a complicated issues within poor households. In South Asia, a poor household is likely to have one phone which is usually ‘owned’ by the head of the house-hold (usually a man) but available for ‘use’ by other members of the household. Such a shared owner-ship structure by the man leads to others in the family having no ac-cess to a mobile phone if he is not around.

2. Significant gender divide in mo-bile phone ownership – According to the GSMA’s Bridging the gen-der gap report, women in India are 36% less likely to own a mobile phone than men, which equates to 114 million Indian women. Women’s ownership – or lack of it - significantly impacts their ability to access and use mobile financial services.

3. Lack of comfort with the mobile phone – Lack of awareness and mobile phone ownership signifi-cantly impact people’s comfort in using the phones, particularly for any services beyond voice calls or SMS. A Grameen Foundation case study revealed that women who ‘own’ mobile phones are much more likely to be comfortable us-ing the mobile phone indepen-dently. While we have incorpo-rated training on the use of mobile phones in our programs, we have had better impact using alternative methods to facilitate women’s use of the mobile phone.

We have spent considerable time with women and men in underserved com-munities, and identified several prin-ciples that pave the way to financial inclusion for poor households through the following:

• Make simplicity and usability key

– Many poor people are not com-fortable using their mobile phone beyond a simple voice call because they fear pressing the wrong key and being charged extra. In other cases, most of the current mobile money solutions have incredibly complex user interfaces. We have worked closely with mobile finan-cial service providers to simplify the user interface. We recently con-ducted a usability study in India in which it took us 16 steps to check the mobile money account balance of the users.

• Leverage existing social structures – Most women are reluctant to use the mobile phones to make financial transactions without the supervision of their husbands. We now invite the complete household to take part in the mobile financial services training to encourage assisted and independent transactions.

• Take baby steps – For households with minimal financial service experience, moving to mobile transactions is a huge step. Simple financial services like remittances, savings, credit, receiving payments are some of the financial services attractive to the customers.

• Create other options for mobile financial services (without owning a mobile phone!) – When a mobile phone is not available, transactions can be made without one. In a microsavings project that we undertook with a leading microfinance institution, Cashpor MicroCredit, the model we designed permitted the women to deposit money into their mobile savings

Moving to Cashless – what does it mean for Microfinance clients? Chandni Ohri, Grameen Foundation

account without needing a mobile (they did need a mobile phone for authentication to withdraw funds, however). In a more recent project, the women can take their mobile money account number to an agent who can transact for them using the agent’s phone or POS device

Source: RBI

Source: UIDAI

The Financial Inclusion sector in India has been painstakingly

working over the last few decades to bring all financially excluded in to the economic system and provide them the benefits of sustainable financial products that help them build upon their savings, insure their assets and avail loan products for personal and financial growth. The Indian financial inclusion sector should rightfully be credited for understanding the needs of the financially excluded, and de-signing and deploying solutions that results in improved lifestyle, income generation, sustainable livelihood and upward social mobility.

d.light has been in the forefront of providing world class solar products at affordable prices to all the off-grid and irregular-grid customer. It is in-teresting to know that the clientele of Financial Inclusion institutions and the d.light’s solar category overlap to a huge extent, considering the high cor-relation between financial poverty and energy poverty. d.light has been col-laborating with several Financial In-clusion organisations in helping their clients save money and improve health

As the Indian financial system goes through a tectonic

shift given the recent policy announcements, there is a more subtle revolution taking place that has for the first time substantially increased the number of women being introduced to the formal financial system. The Intermedia India Financial Inclusion Insights (FII), an annual, nationally representative survey shows that the proportion of Indian women with individual accounts in formal financial institutions (primarily banks) reached 61% in 2015, a sharp increase from 48% in 2014, lagging men by only eight percentage points. A close look at these numbers reveals opportunities as well as challenges, while access may have improved primarily driven by the government’s Pradhan Mantri Jan Dhan Yojana (PMJDY), active usage and financial capabilities still remain a challenge especially for women.

The need to address financial liter-acy of women and girls as a way to improve their economic empower-ment, opportunities, and well-being has been acknowledged nationally and internationally. The SDGs com-prise an ambitious 17 goals and fi-nancial inclusion is a key enabler for many of them.

There is ample evidence of how financial inclusion projects of different types can, if properly designed and implemented, enhance women’s economic empowerment. To make sure women benefit as much as possible from the programme, it is important to understand why

Microfinance industry in India has grown phenomenally in re-

cent years both in terms of its spread and depth. The gross loan portfolio registered 35% growth rate, while the number of clients rose by 20% dur-ing 2013-2014. There has been a con-scious effort to lend responsibly while adopt best practices as advocated by institutions like MFIN and Sa-Dhan. Policy environment has also been fa-vorable allowing for experimenting with promising models envisioning financial inclusion. Such interven-tions like introduction of small finance banks (SFBs), payments banks and regular revisions in lending guidelines accounting for changing client profile and varying customer segments, have encouraged microfinance institutions (MFIs) to perform exceedingly well. Recovering from 2010 crisis was chal-lenging but policy has made it easier in recent years. In this new generation of microfinance where low income households will have access to different kinds of institutions (SFBs, Payments Banks, MFIs), models (Group lend-

New Generation of Microfinance: Expectations and Challenges

Parul AgarwalAssociate Director, IFMR Lead

ing, Individual Lending) and products (Credit, Deposit, Remittances), it is important to take stock of strengths and weaknesses of each of these vari-ations and work towards aligning the offerings to client expectations.

Basing on the recent studies at IFMR-LEAD, one key expectation of clients is: customization of loan products. People employed in agriculture, estab-lished micro-enterprises and seasonal migration, which make a significant percentage of low income households are currently ill-served. They are not underserved as they have access to credit but owing to standardized re-payment model, clients are not able to make healthy investment decisions, grow their enterprises or get employed in better opportunities and conse-quently progress out of poverty. This is evident from the recent reports of over-indebtedness from various parts of country where the trend was found to be more prevalent among low and unstable income groups, particularly households that relied on agricultural and wage-based occupations.

However, it is easier said than done. Eventhough product diversification is an immediate expectation from the sector, designing new products and delivering them are both challenging. It is a challenge to customize credit products because it is risky to lend money (sufficient enough to enable required investments) and offer flex-ibility to households that have seasonal incomes as their cashflows are highly

exposed to shocks. Credit bureau data and loan application forms are ill-equipped to give near accurate esti-mates of income and cashflows which results in poor assessment of a bor-rower’s ability to service an additional loan. Another challenge is to build capacity and understanding of clients and last mile agents who are accus-tomed to the standard model of group borrowing. It requires consistent effort and monitoring. Last mile agents need to be more like wealth managers inte-grating the elements of financial liter-acy and awareness in their sales pitch. Their incentive structures might need to be revisited in this regard.

Aforementioned challenges are equally applicable to SFBs and MFIs. Payments Banks will also face simi-lar issues but in a different manner. IFMR-LEAD is currently in the pro-cess of studying these challenges to arrive at suggestive measures for the microfinance industry. For a matured microfinance sector as that in India, to keep up with responsible lending while avoiding stagnation, it is essen-tial to adopt efficient and standardized screening instruments and to take a client-centric approach not just for better delivery mechanism but for bet-ter product offerings as well. Access to resulting appropriate financial instru-ments could help institutions service wider client segments including vul-nerable populations without requir-ing them to compromise the quality of their portfolio.

At Grameen Foundation, we work towards enabling access to a wide range of financial services to the poor and the poorest. As we have tried to leverage digital technology to deliver financial services, our aspirations have been tempered by the realities on the ground.

financial exclusion for women is different from financial exclusion for men. SIDBI’s PSIG programme supported by the Government of UK offers key insights into how a gendered approach to financial literacy education has a positive ripple effect on households health, sanitation, education and other key socio-economic indicators.

Early findings from endline evaluation of PSIG’s first pilot in UP and Bihar, reveals that the programme had a number of positive benefits for women, it raised their confidence in dealing with formal financial institutions, local government and police. It empowered women to negotiate a more equal relationship at home, positive change in attitude of male members who attended the trainings and a more equal sharing of household chores was reported. They also understood grievance redressal mechanisms available in case of economic manipulation. Perhaps the most dramatic result was many women constructing toilets post the financial literacy and women empowerment trainings.

There is perhaps a need for greater investment in integrated approaches to financial literacy to build on the successes and extend the gains to other important financial services like insurance, credit and indeed the next frontier of cashless and mobile financial services.

(requiring the woman to enter her PIN for authentication)

Going cash-lite/cashless is a great goal to work towards. However, getting there requires a strong understanding of the context and behavior of the poor and willingness and ability to craft innovative models/solutions.

Bridging the Gender Gap in Financial Inclusion

by migrating from costlier and pollut-ing alternatives like kerosene, educate their children and create productive hours by enabling them to work unin-terruptedly after sunset.

As a shining example of this, in a small, off-grid community in the hinterlands of Bihar, Lakshmi is very proud on be-ing able to complement her household income by earning money through tailoring. She had a sewing machine but couldn’t put it to productive use as the only free time she used to get af-ter household and outside chores was after sunset. However, with the d.light solar lantern she acquired through a microloan extended to her by a finan-cial inclusion institution, she could in-crease her productive hours and gen-erate additional income by working on her sewing machine even after sunset. This is one of the many stories where d.light and financial inclusion institu-tions have come together to bring a sparkle to the eyes of these customers.d.light is committed to work with the financial inclusion sector to provide energy solutions for faster and impact-ful alleviation of poverty and improve-ment in lifestyle which will also help in developing a long-term bonding for customers with our partner organisa-tions. d.light lauds the efforts of the Indian financial inclusion sector and commits to extend its full support and participation in working together.

Sonal JaitlyTheme Leader

Gender & Financial LiteracyPSIG, SIDBI

Providing world class solar products at affordable prices

Sateesh Kumar, MDGlobal Operations d.light Energy Pvt Ltd

Chandni OhriCEO, Grameen Foundation India

Design & Content by: Sayantani Mukherjee, ACCESS ASSIST, sayantani@accessassist.org | Printed by: Elegant Enterprises, 8860127811 | infoelegant@yahoo.co.in

Excerpts from interview

Mr Govind Singh on transforming operations

from MF to SFB and impact on clients

Doorstep services has been the element of success of micro finance operations. But it is not that the microfinance clients are totally unaware of banking operations. In fact, at Utkarsh we have the practice of undertaking all cash operations at our Branches only. Though some of the MFIs have the practice of all cash operations at centre meeting place only. At Utkarsh, all the clients visit our branch for disbursements. Subsequently for repayment purpose also, the clients visit our branch on rotation basis (1 client per centre). While depositing cash, they also submit filled-in cash deposit counterfoil challan. So this way, we have our clients do visit branch, go through simpler process of filling forms, and also duly provide suitable KYC documentation while applying for loan. This is how we have enabled

them to have a very basic exposure of banking operations. We have a practice of engaging with clients through a 3 days ‘Continuous Group Training’, wherein we train them on all credit related process and practices. This is done pre-sanction of loan. As part of a strategy, we shall be bringing in modules of banking in this training. Today the clients are very mature and more aware of the developments going on in the domain.

Mr Govind Singh on human resources

Currently we have close to 2600 employees pan India specialised in our existing asset products of JLG, MEL and Housing Loans. We propose to recruit another set of over 2000 employees in a span of over a year to take care of banking asset products and more of liability products. We have already started providing suitable training to all our existing employees for

banking operations through different modules, reason being all our existing employees shall transit to the banking operations. Various plans are in process to have a smooth transition for the

Mr Govind Singh, MD and CEO of Utkarsh Microfinance Pvt Ltd, Exclusive Interview for PSIG Programme

Mr Govind Singh on products

Utkarsh has been engaged in low ticket size business. But if we see the trend, we find that our JLG clients (with a ticket size from Rs. 6,000 to Rs. 40,000) have been gradually moving to be our MEL clients (with a ticket size of Rs. 50,000 to Rs. 3 lakh) and our MEL clients’ requirements have also gone beyond Rs. 3 lakh. And our employees have been successfully addressing the higher ticket size requirements of our clients. Our operations team reads the trend and drives the activities accordingly. So, still further enhanced ticket size should not be a concern, especially with right kind of training and exposures. We have a dedicated training set up at Utkarsh.

Mr Govind Singh on partnerships

I am happy to share that we are the baby of the batch of ‘in-principle’ SFB license winners.

For SFB operations, most of the activities shall happen through our branches and our service points. We shall not be going in for a franchise model but may explore suitable formats of BC model. We plan to run all banking operations through our on-roll employees only. We may have some alliances with large financial institutes for network and product partnership.

Mr Govind Singh on PSIG

We have been associated with PSIG and shall continue to be associated with them. We would continue to be driven by our mission of supporting underprivileged and underserved segments by providing financial and non-financial services through a socially responsible, sustainable and scalable institution. PSIG has also been actively supporting us all along. The partnership has been extremely valuable in reaching out the financially excluded segment of the society.

existing employees as well as attracting prospective employees. The format of branches and the model of serving clients are made in such a format so as to take care of cost of operations part. We do expect a decline in the current cost of operations over a period of time.

Microfinance JLG sector going strong towards Rs 1 trillion Industry

The Microfinance JLG lending has grown by 17% in last

6 months and 97% over last 6 quarters. This soon-to-be a trillion rupee industry supports more than 4 crore borrowers across 620 districts with loans now averaging Rs 24000.

The extraordinary growth demands constant review of risks associated with repayment, over indebtedness and concentration.

Portfolio at Risk (PAR) 31-180 days continues to be low, though it has been on the rise over last 6 quarters – it has risen from 0.25% (Mar-15) to 0.30% (Mar-16) to 0.37% (Sep-16). Sharp increase has been observed in UP and Maharashtra. PAR may see further rise in near-term if the earnings are affected for borrowers as an effect of recent cash crunch.

Only about 12% new borrowers have entered the system. 14% of existing borrowers service loans with 3 or more lenders. 34% of all overdue loans in top 10 states are with borrowers servicing loans with 3 or more lenders. With the leading NBFC-MFIs transforming themselves into Small Finance Banks over next few quarters, the number is expected to rise unless the regulatory guideline gets revised to include Banks and other NBFCs.

5 states of Tamil Nadu, West Bengal, Maharashtra, Karnataka and Uttar Pradesh still dominate with 57% share. 12% of portfolio is concentrated in areas around Bangalore-Mysore, Kolkata (Paraganas, Howrah, Hooghly), Pune, Nagpur-Amravati and Coimbatore. An external event such as borrowers being misguided on loan waivers post-demonetization in Nagpur and Amravati could negatively impact players, especially smaller ones, operating in the region.

The growth seems robust as there are no visible signs of risk as yet. Quicker adoption of technology will be instrumental to support growth, scale and efficiency. Recent demonetization will accelerate cash-less and digital

transformation in the sector. Revision in regulation to include lenders other than NBFC-MFIs and continued self-discipline by lenders is needed to keep the sector distant from potential risks.

Parijat GargCRIF, High Mark

Microfinance and Clean Energy Access in India

Nicola ArmacostManaging Director, Arc Finance

There are three main challenges to providing energy access to the

poor around the world: affordability, distribution and technologies. In India especially, microfinance offers a promising channel to address each of these challenges. Many of the more than 46 million microfinance clients in India are partially or entirely “off-grid”, without high-quality and safe energy sources. Among this client base there is a high demand for reliable energy products and, through their core business of providing credit and savings, many MFIs already have extensive existing distribution networks that reach these “energy poor” communities in India. By partnering with clean energy product partners (for example manufacturers of household-level solar systems), MFIs can help to radically scale energy access to the energy poor.

Arc Finance is working with several leading Indian MFIs and banks through its Renewable Energy Microfinance & Microenterprise Program (REMMP) and PACE-D TA Microfinance Support Program to pilot and scale energy lending in India and around the world, so that microfinance clients can have access to clean, affordable energy – especially solar lighting and efficient cookstoves. The goal is to increase incomes and improve health and education outcomes for millions of families.

Through Arc’s programs, over 2.5 million people have benefitted from access to clean energy and millions of dollars of further investment has been leveraged to fuel growth in the energy financing sector. The Arc team believes that India is the most exciting market for this growth, with enormous demand, great products,

and many financial institutions that have the will and capacity to expand energy access to millions more people.

Please join us at our side event in the Friendship Lounge at the Ashok Hotel on December 5th at 1:00 pm to hear more from MFI leaders on “The Promise of Energy Lending for MFIs in India”.

Some Vital Stats – Access to Finance