CHAPTER 1 – THE INDUSTRY ANALYSIS 1.1. The Introduction To begin with, the microfinance industry in India was considered a tool to eradicate poverty. But in course of time, the industry has proved its commercial viability and today it attracts the attention of serious investors and money markets. Thus, the industry has gained maturity and has moved from marginal to mainstream. 1.2. Logic of the Industry Although microfinance is after all a financial service, its business model is unique and unlike most traditional financial services. For example, while in regular banking, the client goes to the bank to transact business, in microfinance the bank ‘goes’ to the client’s place to transact business. 1
Transcript
CHAPTER 1 – THE INDUSTRY ANALYSIS
1.1. The Introduction
To begin with, the microfinance industry in India was considered a tool to
eradicate poverty. But in course of time, the industry has proved its commercial
viability and today it attracts the attention of serious investors and money
markets. Thus, the industry has gained maturity and has moved from marginal to
mainstream.
1.2. Logic of the Industry
Although microfinance is after all a financial service, its business model is unique
and unlike most traditional financial services. For example, while in regular
banking, the client goes to the bank to transact business, in microfinance the
bank ‘goes’ to the client’s place to transact business.
Generally entreprenal poor (e-poor) people make use of microfinance loan to run
small enterprises and small business. This category of people is called e-poor.
The poorest of the poor people deserve different treatment. They cannot take the
advantage of microfinance loan.
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1.3. Estimation of Market Size
As per BSP there are 527 branches of rural banks where microfinance activities
are practiced. Out of these 527 branches, MATRIX has already been
implemented in 7 branches. The implementation cost per branch is 225,000
peso. The annual production support cost is 50,000 peso. Let us calculate the
potential market, which can be accessed by MATRIX.
From the calculation below, we can understand that the potential market for
MATRIX is 143,350,000 peso (one hundred forty three million three hundred and
fifty thousand peso) in India.
Table 1. 1. Estimation of market size
Number of branch where
already MATRIX has been
implemented
Number of branch
where MATRIX has not
been implemented
Total
Number of branch of
banks in microfinance
7 520 527
Annual cost of
maintenance support
(php)
50,000 50,000 26,350,000
Software
implementation cost
(php)
225,000 117,000,000
Total 143,350,000
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1.4. Market Segmentation
These two are feasible variables for market segmentation as far as IT
requirements are concerned. Since microfinance software is implemented
separately in every branch, number of branches of microfinance rural bank does
not come in picture.
Table 1.2. The segmentation of microfinance rural banks
Segmentation By
Details of the Segments
Estimated Market Size Approach towards IT Systems
Size of
Microfinance
Institution (no of
borrowers)
Less than
1000
borrowers
New comers, they are not yet
viable.
Generally, MF operations are not
viable under 1000 borrowers. This
segment is the newly started
operations that will take around 12
to 18 months to become viable
(depending upon the MF model). An
estimated 20% of the estimated 200
MF Rural /Cooperative Banks would
fall in this category.
Vendors will find it difficult to
sell to this market segment
as these banks may not be
able to afford a separate
system for microfinance.
They will tend to do with
whatever features are
available in their regular
banking software or they will
work with excel
spreadsheets.
1001 to 3000
borrowers
This segment is where the majority
of MF players (in terms of numbers)
lie. Out of estimated 200 Rural
/Cooperative Banks doing MF, an
estimated 50% would fall under this
category.
These segment of banks will
begin to look seriously into a
microfinance IT system,
specially as reporting
requirement of BSP, PCFC ,
MABS and other donors.
3000 to 5000
borrowers
These are the serious MF players,
who have established successful
MF operations. Estimated 15% of
the 200 Rural/Cooperative Banks
would fall under this category.
These are generally multi-
branch operations, some
with dedicated microfinance
branches. Microfinance
oriented software is critical
for these banks.
5000 to 10000
borrowers
The critical considerations
here are branch operations
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Segmentation By
Details of the Segments
Estimated Market Size Approach towards IT Systems
The Big players, 10% of the 200
Rural/Cooperative Banks
and report consolidation at
the HO level. Also a critically
important thing is tracking of
profitability of microfinance
operations.
More than
10000
borrowers
Very large microfinance oriented
operations (5% of 200
Rural/Cooperative Banks)
They already have the best
locally available software
solutions. However, as they
grow further, issues of
systems integration, HO
consolidation, fund
management and external
funding are major issues
that they will look for in the
system. If existing systems
do not give the features,
they will look at more
comprehensive systems,
MF Methodology Individual /
MABS
71 banks (as per MABS
website) with a total of around
200 branches.
The system must have the
MABS
reports.
Group
(Grameen
Model)
These are the Rural Banks that are
in PCFC conduits. In terms of
number of banks, they are around
60% of the total number of PCFC
conduits or around 100. Thus, in
terms of branch the number would
be around 240 to 300.
PCFC prescribed reports
are
required. Also, since many
banks
practice group and
individual
lending, they will expect the
software to support both
models.
ASA and
others
CARD Bank, Life Bank and few
others belong to this category.
Although small in number both
CARD and LIFE Bank have a
combined branch strength of
ASA methodology relies
mainly on manual systems.
They are unsure of adopting
IT systems at the branch
levels. However, reporting
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Segmentation By
Details of the Segments
Estimated Market Size Approach towards IT Systems
around 50. requirements by BSP,
PCFC and other external
agencies and funding
agencies will prompt them to
use information technology.
Degree of
Microfinance
activities and
current systems
Microfinance
focused rural
banks
These banks have absolute focus
on microfinance operations.
Generally located in province,
branches of these banks require
software solution which is focused
on microfinance. Example CRB,
LIFE bank, CARD bank
IT requirement is
microfinance focused
software. They need
software exclusively for
microfinance. Affordability is
not a problem for them.
Rural banks
where
microfinance is
a part of
business and
have good
software
solutions
currently.
These banks have branches where
both commercial banking activities
and rural banking activities are
accomplished. These banks have
good existing software solution for
commercial banking. Their need is
to get a good microfinance solution.
Example;- G7 bank, Malacity Bank,
Sunrise Bank, Bangko Kabayan etc.
IT requirement is
microfinance focused
software. They need
software exclusively for
microfinance. Affordability is
not a problem for them.
Rural banks
where
microfinance is
a part and
have no
modern
software
solutions
currently.
These banks have branches where
both commercial banking activities
and rural banking activities are
accomplished. These banks have
no good software solution for rural
banking and microfinance. At this
point of time they need a combined
solution for microfinance and rural
bank. Example; Rural bank of
Paracale.
These banks need a
combined software solution
for rural banking and
microfinance. Since their IT
maturity is low, they do not
need a microfinance
focused software at this
point of time. Rather they
want a combined software
which covers both rural
banking and microfinance.
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We have derived the IT requirement of different segments of microfinance rural
and cooperative banks. Based on these IT requirements, proper positioning
strategy in each segment will be developed.
1.5. New Trends
we can compare current state and future state of microfinance industry.
Current State Future State
Generally rural banks and cooperatives
are microfinance institutions.
Along with rural banks and cooperatives, large
banking and financial institutions will be in
microfinance business. Microfinance institutions will
be professionally managed and will be listed in stock
exchange.
Microfinance institutions are using simple
software based in client server
technology.
Microfinance institutions will use software where
transactions will be web enabled. Head office and
branches will be integrated seamlessly through web
based transactions enabled by good networking.
Microfinance institutions are using simple
operating reports generated by system.
Microfinance institutions will develop Datamining or
Datawarehouse around their transactional software.
This will help them in developing a good decision
support system where forecasting, investigation,
analysis activities can be done efficiently.
Manual data entry operations are done
for entering data into the system
Data will be entered into system remotely through
mobile device so that field staff can enter data online
without staying in office. In the rising world of M-
commerce this is the obvious and realistic future.
CHAPTER 2 – ANALYSIS OF COMPETITORS
2.1. Porter’s five forces Analysis
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All these companies have specialty software in banking but their software is also
suitable in microfinance. Let us do analysis of porter’s five forces to understand
which force is more powerful on information technology vendors in microfinance
industry.
Buyers are microfinance rural banks and cooperative banks and NGOs and
cooperatives in microfinance sector. There are only four major IT vendors in the
market. At the same time very few branches of MFI or bank are left for software
implementation. Majority branches of microfinance rural and cooperative banks
have already gone for software implementation. So IT vendors in microfinance
area get very few clients for implementation. Buyers have command in selecting
the vendor or setting terms and conditions, but this command is not absolute due
to less number of IT vendors in this sector.
Substitutes are weak in this segment. There is no substitute of an IT solution for
complex interest calculation and huge data entry operations. Cheaply developed
software by relatively inexperienced developers may be considered as substitute
to products of IT vendors in microfinance area. But they are neither prominent
nor efficient to replace package products IT vendors.
Rivalry is there in the segment but this is not intense as number of major players
is only five in this segment. So competition is not severe in this segment.
Entry criteria is not easy without a specialty software in microfinance. Developing
specialty software in microfinance is not an easy task. This needs skilled IT
professionals and functional experts in banking and microfinance. For any small
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player it is difficult to make an entry in this segment. That is why the segment is
relatively less crowded.
As a whole it can be said that in this small segment the competition is not
intense and there is enormous scope for development as the market size is big
(as per table 4.9. ). Any existing company in this segment can survive and
flourish with a sound strategy and proper leadership.
2.2. Main Competitors
The main competitors of XYZ, INDIA, INC are the followings.
i. MB India.
ii. Micro-Enterprise Access to Banking Services.
iii. PCFC.
iv. Byte per Byte
All these companies have specialty software in banking but their software is also
suitable in microfinance. MB India has a product called ‘Microbanker’ for rural
banking and microfinance sector. PCFC has product called ‘RMG’ and Micro-
Enterprise Access to Banking Services (MABS) has a product called ‘RB2000’ for
rural banking and microfinance.
2.3. Aspects of competition
Apart from product features there are other aspects based on which we can analyze
competitive advantage or disadvantage. These are after-sales-service, company
background and their years of experience in industry.
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MB India RB 2000 RMG XYZ Byte per Byte
After Sales Service
The company is
competent. in this
area. It has
technical
representatives
located at Davao
in the south and
La Union in the
North of the
country apart from
Manila.
Implementatio
n and After
Sales service
is attended by
two local IT
companies.
Generally
their service
is not seen as
very efficient
by the rural
Banks.
Hardly any
support or
after sales
Backend
Support from
India. Local
support
currently
limited to 2
implementati
on persons
one located
at manila
and the other
at Batangas.
Backend
support
from Manila,
India.
Company background
Originally FAO
funded worldwide
project.
Its international
partners include
Food and
Agriculture
Organization of
the United
Nations (FAO),
Microbanker
International
Foundation (MBI)
and Deutsche
Gessellschaft für
Technische
Zusammenarbeit
(GTZ), Micro
Banker is a well
known name
world-wide.
Rural Banker
2000
(RB2000) is
designed
specifically for
rural banks in
the India to
strengthen
their
management
information
system (MIS),
data
collection and
reporting
capabilities
for traditional
banking
activities as
well as
microfinance
operations.
The software
This product
was
developed
by ARMDEV,
the lead
consultant in
the ADB-
IFAD-PCFC
initiative.
It was
distributed
by PCFC to
its conduits
for effective
MIS
implementati
on.
Incorporated
in the India in
July 2004.
Operated in
India since
early 2000.
This is a
privately held
company.
This is a
privately
held
company
whose main
product is in
rural
banking.
Microfinanc
e is an
additional
feature of
the product.
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MB India RB 2000 RMG XYZ Byte per Byte
was
developed as
part of the
Microenterpris
e Access to
Banking
Services
(MABS)
Program.
Years in the Industry
In the India, it has
been around a
decade and
enjoys a large
client base
amongst rural
banks for regular
banking
applications.
Since 2001 Since 2000 Since July
2004 in the
India.
Since 1990
in the India.
Thus, having superior product or features and effective implementation
capabilities may not be the only deciding factors for success in this industry
which is dominated by well-entrenched institution-supported software solutions.
But recent responses from microfinance institutions are strongly favourable for
XYZ. Through superior product features and good implementation methodology,
MATRIX is becoming very popular software in the niche market of information
technology in microfinance sector.
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CHAPTER 3 –OPPORTUNITIES AND THREATS
3.1. Opportunities
The followings are the opportunities in this segment of business.
i.) There is a big market open for IT vendors in microfinance sector.
There are only five major players in the market. So there is a huge
scope for growth in this sector.
ii.) The central bank (BSP) has a legislation that all branches of
microfinance bank have to use some software system. This legal
compulsion will force microfinance banks to go to IT vendors for
implementation and annual support contract. This legislation is a big
opportunity for IT vendors in microfinance area.
iii.) As commercialization of microfinance industry has taken place, many
firms who are in commercial banking sector are joining microfinance
sector resulting in increasing the growth potential of IT market in
microfinance.
iv.) Many NGOs who are doing well in microfinance sector are planning to
convert themselves into a rural bank. This conversion will bring them
under supervision of BSP and these converted institutes have to
implement software for their operation as per BSP legislation.
v.) Entrance of professional funding agencies into the microfinance
business. These funding agencies are insisting microfinance
institutions to go for some softwares.
3.3. Threats
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i.) Many unsuccessful implementations have produced frustrations
among user community about usefulness of IT solution. All
implementations should be done by skilled professionals. Any
unsuccessful implementation is a threat to further selling of software.
ii.) Improper user training may lead to improper use of software which will
raise a question of utility of software in microfinance sector. Many IT
vendors overlook the issue of proper user training. This is a real threat
for the segment of industry.
iii.) Major IT players in microfinance sector have software for regular
banking also. Since majority of microfinance rural banks have regular
banking operations, competitors have an advantage to sell their
software to banks who have both regular banking operations and
microfinance operations.
iv.) Capacity builders and external consultants have a major role in decision
making at the time of selection of software.
CHAPTER 4 - INTERNAL ASSESMENT
4.1. Overview
Internal assessment is required to understand the current situation in the
organization. It is required to understand the strength and weakness of the
organization, which are required to formulate correct strategy for the
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organization. There are ten levels of internal assessment. These ten levels are
mentioned below.
First level of assessment: - The organization should be measured in terms of
inputs poured versus outputs produced.
Second level of assessment: - The organization should be measured in terms of
strategies, programs, activities and tasks.
Third level of assessment: - The third level of assessment examines where the
resources of the enterprise have been allocated properly.
Fourth level of assessment: - The fourth level of assessment examines the
planning and budgeting process and leading and directing process.
Fifth level of assessment: - The fifth level of assessment examines basic
management functions like marketing, finance, operations, HR.
Sixth level of assessment: - The sixth level of assessment judges teams and
individuals of the organization.
Seventh level assessment: - The seventh level of assessment judges physical
set up and working conditions.
Eighth level of assessment: - The eighth level of assessment examines
organization linkages, networks and partnership.
Ninth level of assessment: - The ninth levels of leadership judges leadership and
top management.
Tenth level of assessment: - The tenth level of assessment evaluates the vision,
mission and objectives of the company.
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4.2. Strength and Weakness
The evaluation of different functional areas of the organization like human
resources, marketing, finance, operations have both strengths and weaknesses.
Strengths: -
1. Focused Product: - The product MATRIX is purely focused to cater the
exclusive requirement of microfinance sector. In comparison to its
competitors, MATRIX is ahead in terms of functionality it supports. It has
been observed that microfinance rural banks who have already
implemented the product of competitors of XYZ, are showing interest in
implementing MATRIX now.
2. Attitude of Management and Culture: - The highly positive attitude of
top management towards growth of business and the rich experience of
key people in the organization is the biggest asset of the organization.
Openness of key people and cordial working atmosphere are really
conducive for growth.
3. Location of Development Center: - The development center is located in
Hyderabad, India. The company can enjoy the service of quality and cost
efficient IT developers of India who are renowned worldwide. The office of
XYZ in India is also manned by Indian software developers. All major
development, enhancements, customizations are done in development
center in India.
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Weaknesses: -
1. Could not position itself for different segments: - In India XYZ only
concentrates in selling software products in microfinance sector. But it
was not able to address the need of customers in all segments. Rural
banks whose number of borrowers are less than 1000 ( income less than
128,100 Php) can not afford MATRIX at 225,000 Php for implementation
per branch. XYZ could not address the requirement of this segment. Also
XYZ could not address the need of another segment. That is rural banks
where microfinance is a part and having no modern software solutions
currently. When this segment is trying to go for any software solution, they
are looking for a combined solution for regular banking and microfinance.
XYZ, India has software only for micofinance. Where some of the
competitors have specific product for this segment.
2. Constraint of location: - In India XYZ has only one office, which is in
Makati City, Manila. Though the geography head tries his best to follow up
all enquiries from provinces, sometimes it is difficult for him to manage the
tight schedule and hectic travel plan. Majority of microfinance activities are
in provinces. That is why sometime it is difficult for the president to run
the show. Few of the competitors have offices in provinces.
3. No partnership with any prominent institutions who are facilitator of
microfinance activities: - The XYZ, India could not make any strong
partnership with international organization that fund for development and
growth projects. XYZ, India could not make any partnership with capability
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building institutions in India as well. But almost all of the partners of XYZ
are connected to some internal organization that fund for development
and growth projects or some capability building institutions for
microfinance in India.
4.3. SWOT Analysis
In SWOT analysis strengths and weaknesses are juxtaposed against
opportunities and threats. It is judged how strength of the company can be used
to utilize opportunities and overcome threats. It is also judged how weakness of
the company can be minimized with opportunities and how weakness can be
overcome in the context of threat.
Table 8.2. SWOT Analysis
Opportunities
1. Big market open for IT
vendors in microfinance
sector.
2. Central bank legislation
forces MFIs to go for system.
3. Commercial banks are
starting microfinance activities.
4. NGOs are converting
themselves into rural banks.
Threats
1. Unsuccessful
implementations have
produced frustrations among
microfinance rural banks.
2. Vendors having commercial
banking software along with
microfinance software are
getting advantage in some
segments.
3. Capacity builders have a
strong say in selection of
software.
Strength
1. Focused product for
microfinance.
1.Continuous enhancement of
product and services to
maintain the lead among
microfinance software vendors
1. Emphasis on quality and
user training in implementation
methodology and strict
adherence to implementation
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2. Attitude of management and
culture.
3. Location of development
center.
in India.
2.Concentrated effort in
vertical industry segment in
microfinance to provide end to
end consulting where IT is a
part.
3. Inclusion of functionalities
into the package, which are
required by BSP.
methodology.
2. Continuous enhancement of
product so that no product
from other small vendors can
compete.
3. Retention of skilled staff so
that quality of delivery can not
fall, at the same time hiring of
new person can be checked.
Weakness
1. Could not focus differently
for different segments.
2. No partnership with
facilitator of microfinance
activities.
3. Constraint of location
1. Development of a marketing
channel to provinces where
microfinance rural banks are
very prominent.
2. Development of expertise in
domain consultancy areas for
microfinance institutions.
3. Partnership with capacity
building institutions.
1. Coming out with a separate
product of commercial banking
to minimize the risk of
depending on a single product
in microfinance.
2. Giving emphasis on process
and documentation to
minimize the risk of attrition of
employees.
CHAPTER 5 - STARTEGY FOR XYZ, INDIA
Based on SWOT analysis and requirement of start-up phase in business life
cycle, I recommend following strategies for XYZ, India, Inc keeping in mind the
vision, mission, objectives, key result areas and performance indicators.
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5.1. Marketing Strategy
For establishment of customer base and product developments following
strategies are recommended.
1. Recruitment of salespersons to maximize market penetration -
Development of a marketing channel in provinces is required where microfinance
rural banks are very prominent. Immediate recruitment of two marketing
professionals is required to penetrate the market. Recruitment of more than two
sales persons is not recommended at this stage because of high salary of
salespersons. Salary of each sales person is 20000 Php.
2. Tie up with an organization that has good software solution for regular
rural banking – In the market segmentation we have seen that there is a
segmentation variable named ‘Degree of Microfinance activities and current
systems’. Through this segmentation variable we get a segment that is rural bank
with regular banking and microfinance activities without any modern software
currently.
3. Reduction of price of product and service – At present the total cost of
implementation of XYZ, India is 250,000 php. If we revisit market segmentation,
we can see that there is a segment of rural bank whose outreach is less than
1000 borrowers. Their estimated annual income is upto 128,100 php. They can
not afford to spend 250,000 php for implementation.
4. Tie up with capability building organizations – Capability building
organizations are very important in microfinance institutions in India. They help
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microfinance rural banks in developing good governance, high profit and high
outreach. Suggesting information system solutions is part of their job sometimes.
5.2. Operational Strategy
1. To establish credibility with quick and successful delivery – A
successful delivery in proper time with proper customization is required. One of
the key success factors is implementation within 30 working days. This should be
achieved. More close interaction between customization team in India and
implementation team in India are very important.
5.3. Product Strategy
1. Continuous enhancement of product features to maintain the lead
position of the product in the market and inclusion of BSP related
functionalities into the product – MATRIX is the product of XYZ in
microfinance area. In the terms of functionality the product is ahead of
other products in niche market of information technology in microfinance.
Constant effort should be given to maintain this lead position in the
market. Also another important thing is BSP related functionalities. Since
BSP is the main driver to force rural banks to use information technology,
it is important that the product of XYZ should be compliant to all
functionalities required by BSP.
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2. Development of a new product to target the segment of rural bank
whose number of borrowers is less – A new product within the price
range of Php 120,000 is required to target the segment of rural banks
whose number of borrowers is 1000 or in between 1000 to 3000. These
segments of rural banks can not afford the 225,000 php for
implementation.
5.4. Financial Strategy
1. Control accounts receivable to maintain a positive cash flow – Accounts
receivable becomes an important issue in the business of XYZ, India. If accounts
receivable is more than 25% in the year 2006, the organization will again face
negative cash flow in 2006.
5.5. HR Strategy
1. Recruitment of technical manpower and marketing manpower as per
growth – As XYZ, India is getting projects from different rural banks, it
becomes important for the organization to recruit people in technical area and
marketing area. In marketing strategy provision of two sales persons have
been mentioned. In technical area people should be added as per increase of
