The petty neighbourhood shopkeeper is your new banker, savior

IN ADARSH Nagar, a small slum district in north Delhi, Sandeep Kumar, a 30-year-old small-time shopkeeper, attends to a line of customers. But they — local ricshawaallahs, other small shopkeepers and housewives — are not looking to buy their daily groceries. They want to withdraw money from or deposit it into their bank accounts.

This may seem unusual, but it is a sign of how the business correspondent model launched by the Reserve Bank of India four years ago is gaining traction. Financial Information Network and Operations Ltd, or FINO, the business correspondent company operating in Kumar’s locality, has more than 25,000 customers, split between 15 agents, in the district. Kumar himself gets about 60 to 70 customers per day.

FINO’s plan is aimed at improving the reach of the services to the unbanked sections of the population. Lenders are allowed to hire intermediary companies that deploy agents in rural and underdeveloped areas to open accounts for people. FINO has been hired by 16 banks and has 15 million customers.

It is a win-win situation for all concerned. Banks are able to reach remote areas without incurring the heavy expenses that opening a branch entails. For the customers, it means a safe place to keep their money, an easier access to loans and a proof of identity by way of their bank cards.

Kasim, a customer at Kumar’s shop who gave only his first name, says he likes to keep his money safe in a bank, but cannot afford to spend half a day every time he needs to deposit his cash. That is not the case with the business correspondent, where he is able to put in and take out small amounts without thinking twice. He also saves on the Rs 10 bus fare to his regular bank.

Punit Bist, FINO’s district coordinator for the area, says that in unsafe neighbourhoods like this one, depositing their money gives people security. Additionally, since most of these people do not have guarantors and an official proof of residence, they cannot open accounts with banks the regular way. He claims that 80 percent of FINO customers are first-time account holders.

The system of withdrawing and depositing money at a FINO outlet is easy. Agents keep about Rs 5,000 with them at all times. Customers come to the agent, who is open for business 12 hours a day, to either deposit money or withdraw small amounts. But first, the person identifies himself or herself through a small ‘point of transfer’ machine by inserting a smart card and using the thumb impression, instead of a PIN. The money is then shown as withdrawn from or deposited into the customer’s account. The agent links the machine to FINO servers through the Internet at the end of the day. Where such connection is not available, the machine can link through wireless GPRS.

On Sundays and holidays, the agent even goes door-to-door to customers, so they can operate their accounts, and get more people to open accounts.

The business correspondent model is fast catching on, with several companies using different technologies.

EKO is one such company. It has tied up with the State Bank of India (SBI) and has over 70,000 customers and 500 service points in Delhi, Bihar and Jharkhand. EKO uses the mobile phone to offer similar service. When a customer makes a deposit with the agent, he or she enters a code and his account number on the agent’s cellphone, and the money is instantly shown as having been deposited in a customer’s account. Further, money can be transferred from an EKO customer’s account to any person with an SBI account, using the phone. This is useful for migrant workers who may work in different areas and may need to send money home.

THERE ARE between 1,500 and 2,000 transactions (deposits, withdrawals and transfers) per day, totalling between Rs 12 lakh and Rs 20 lakh, according to Abhishek Sinha, chief executive officer of EKO. He says cellphones have made financial transactions possible on the move, and his company is making a difference in rural areas.

In India, where only 40 percent of the population has bank accounts, the potential for such no-frills accounts may be large. Whether this potential will be realised will depend on how fast the business correspondent model spreads, but for people who now have a place to keep their savings, and an easy way to send money to their families, this has come as a blessing.

By VILASINI ROY

Boosting the Business Case for Agents

This is the second piece in the five-part series launching CGAP’s Agent Management Toolkit. The toolkit is based on more than a year of research that yielded data on more than 16,000 agents in Brazil, India, and Kenya. In-depth interviews were conducted with 466 agents, agent network managers and providers, including mobile network operators, banks, MFIs and technology companies.

Today’s guest blogger is Prakash Lal, from Financial Inclusion Network & Operations Ltd. (FINO), which we found to have sophisticated insights on managing agents. FINO agents and technology connect more than 27 million Indians with 23 banks, 10 MFIs, 5 insurance companies and 15 government entities, via more than 11,000 POS terminals covering one-third of India. We’ve asked FINO to shed some light on how they boost the business case for their agents (referred to in India as “Business Correspondents”).

FINO was founded on 13th July, 2006 with the single objective of building technologies to enable financial institutions (FIs) to serve the under-served and the unbanked sector and also to service the technology requirements of entities engaged in servicing the bottom of the pyramid customers. Every step we’ve taken on technology, we’ve taken an equally important step forward in developing a highly-distributed, reliable network of Business Correspondents (BCs), whom we fondly call “Bandhus”, connecting clients to our technology and onward to the financial institution of their choice.

BCs are a critical link in our service delivery channel, and we invest a great deal in ensuring that working as a BC is attractive. Most of our BCs have other sources of income as well, meaning FINO needs to provide enough income to ensure that BCs will devote an adequate share of their time to the FINO business. We calculate that extra income to be, on average, INR 2500-3000 (USD 55-65) per month. This amounts to around USD 2 per day, which may not sound significant, but for a rural Indian it is welcome incremental income. Further, many of our BCs are also motivated by the desire to help their community and the social standing which comes with being allied with a high-tech product.

In addition, there are four points which strengthen the business case for our BCs:

Multiple Products: FINO has a complete suite of products to meet the financial inclusion needs of financial institutions. A multiple product suite roll-out enhances a BC’s option of increasing the number of transactions, hence an increase in their commission, as per the varied customer requirements. Product innovation in FINO is derived from its deep insight into the requirements of the client segment gained from pioneering work done with MFIs, banks and research organizations.

Financial Literacy: A regular saving habit by the customer will ensure regular transactions and thus more commission for the BC. FINO is doing various financial literacy projects with World Bank, International Finance Corporation (IFC), Microfinance Opportunities (MFO), UNDP and NABARD. FINO puts up the capital for our BCs and our staff play a large role in helping agents manage liquidity. FINO Block Coordinators manage approximately a dozen BCs and typically visits them every one to two days to retrieve excess cash or deliver new cash. In other words, if we look at the 9 drivers of the agent business case in CGAP’s Agent Management Toolkit, FINO removes the first two: upfront capital, liquidity management. We internalize that into our own business, making it much easier and more attractive for our BCs. We also pay our agents a fixed salary, in addition to per transaction commissions. This creates some certainty for our BCs as far as their income is concerned. We believe these are the best ways to build a viable network of agents in rural areas.

Take the case of one of FINO’s BC in Uttar Pradesh state, Md. Saleem. He runs a general store and also works with FINO. He handles 24 transactions on a typical day. His largest cash transaction on any given day is US$107 (INR 5,000), which effectively determines his cash-on-hand required to handle the largest transaction. A FINO Block Coordinator usually visits daily to pick up and deliver cash, and can get there within a few hours in case extra liquidity is needed for a very large deposit or withdrawal. Saleem uses his place of work—the general store—to conduct most agent transactions, obviating the need (and expense) for a dedicated agent location. As part of FINO’s “doorstep banking” model, Saleem also travels to client homes in three surrounding villages, incurring a transport expense. He nets a daily profit of US$1.84, which is very close to our target for BCs.

By FINO'S Prakash Lal for CGAP blog

How to Tell Good MFIs from Bad MFIs

Most of us working in microfinance want microloan clients to be paying interest rates that are as low as possible. While we have the same vision, there is disagreement about how to determine whether an interest rate is an appropriate one.

Some people, including Mohammed Yunus, are worried about the growing commercialization of microfinance, including the entry of profit-motivated owners and managers.  They are concerned, reasonably enough, about possible “mission drift,” especially in the form of interest rates rising to (or staying at) excessive levels. In his book and in many presentations, Professor Yunus offers a straightforward formula for judging MFIs and their objectives:

• If you’re a real microlender who cares about the poor, then your interest margin (the difference between the rate you charge when lending to your clients and the rate you have to pay when you borrow from your funding sources) should be no more than 10%. That’s the “green zone” where true microlenders operate.
• If your interest margin is 10-15%, a big warning sign is flashing because you’re in the yellow zone.
• Anything above 15% is the red zone, where you’ve left true microcredit behind and joined the loan sharks.

Unfortunately, when you look at the evidence, this appealingly direct formula turns out to be pretty far off the mark.

To begin with the conceptual problem, the formula doesn’t allow enough room for legitimate differences in administrative costs among MFIs. For an MFI that makes especially small loans or serves a sparse rural clientele, administrative costs will inevitably be a higher percentage of loan portfolio, and the lion’s share of the interest rate spread goes to cover those costs. Application of the proposed formula could actually discourage outreach by such MFIs to poorer clients.

But concepts aside, how does the formula match up against actual MFI experience? It turns out that this formula would place most of the world’s MFIs in the red zone—the average interest rate spread for MIX MFIs in 2008 was over 20%.  But to be fair to Prof. Yunus, that shouldn’t end the discussion.  After all, maybe plenty of the MFIs in the MIX are charging their borrowers rates that are way too high.

Now let’s test the green-yellow-red formula against a group of Grameen-approved MFIs. Christoph Kneiding and I analyzed MIX data on Grameen along with several dozen MFIs that received support from the Grameen Foundation and reported to MIX. In 2007, for instance, 33 MFIs (representing about two-thirds of the Grameen Foundation recipients) reported to the MIX.  The only one in the green zone that year (interest spread below 10%) was Grameen Bank itself. Seven were in the yellow warning zone (10-15%). All the other 25 were up in the red zone (above 15%) and most of them way up in the red zone (between 30 and 55%). The three preceding years looked pretty much the same.

The proportion of Grameen affiliates in the red zone was about the same as the worldwide proportion:for instance, 75% of all MIX MFIs were in the red zone in 2008, according to a new study by Adrian Gonzalez of MIX. NGOs were more likely to be in the red zone than for-profit MFIs, suggesting that interest spreads may be driven more by the higher costs of smaller loans than by profit maximization objectives. (Average loan size in NGOs is about a third of what it is in for-profit MFIs.)

Has the Grameen Foundation has been fooled into working with a bunch of red-zone partner MFIs that are wolves in sheep’s clothing? Far from it. The Grameen partner MFIs that look so terrible on the green-yellow-red test actually appear quite strong—in fact, well above average—on indicators normally thought to be associated with commitment to the poor, such as average loan size.  Nor do they appear to be inefficient: they average considerably lower on cost per borrower than the other MFIs in their countries.

It’s disappointing that simple formulas can’t help much when it comes to appraising things like mission drift or fairness of interest rates. It takes a more complex analysis (see, for example, the CGAP papers on microcredit interest rates and Banco Compartamos).  I hope we see a lot more MFI-by-MFI analysis, in which the reasonableness of interest rates is judged by the reasonableness of the costs and profits that produce those interest rates. We all want to see MFIs charging clients rates that are as low as possible, so we need analytic tools that can do a credible job of separating the sheep from the goats in that regard.

by Richard Rosenberg

Source:-CGAP

Financial Literacy for Financial Inclusion

The majority of the working poor in India, especially those working in the informal sector like small and petty vendors, home-based workers, artisans, labourers, maid servants, desperately need financial services from formal financial institutions. The reason is that they are involved in economic activities in which they need working capital. They also need credit or term loans to buy business equipment like sewing machines or cutting machines or livestock or handlooms.

There is also a need for credit for improving their huts or houses, for adding water and drainage services in their living place, or for getting electric connections.

These are all their needs for running economic activities, mainly because they are self-employed or working on their own. Because of their nature of work (mostly manual labour), poor living and working conditions, and low income level, they are very vulnerable and susceptible to many types of risks, i.e., personal risks like sickness, accident death, or natural disasters like floods, cyclone and fire. They need to be protected under these risks. They also want to build little savings for their future needs. Women want to "save for rainy days". Vulnerability during their entire working life does not allow them to build or plan for their old age.

What we need is a two-step financial literacy programme — developing personal financial management skills and developing financial operation skills — to make financial inclusion successful

The poor need credit, insurance, savings and pension services. But because of lack of access to these financial services from formal sector, they have to depend on informal financial sources, i.e., private money lenders. Not only are these informal sources exploitative, they provide only credit services and do not provide other financial services like savings, insurance, pensions and remittances. As a result, the poor are caught in a debt trap; they borrow at very high interest rates for all types of life-cycle needs, whether it is a business need or a personal need like sickness or accident, or a social need like marriage. If our objective is to bring these economically active poor out of the vicious cycle of poverty and help them build their own capital assets and business, we need to ensure that they get access to integrated financial services, and that too from formal financial institutions at a reasonable price.

The current ‘financial inclusion’ policy has all the components that are required to ensure that poor get access to financial services. Most importantly, the policy does not talk about only credit service, but also about integrated financial services. It provides for "door-step" banking, which is needed by the poor. It talks about bank appointing business facilitators and banking correspondents. It seeks to allow the poor to open "no frills" accounts. Banks are given targets and they are strictly monitored. There is the necessary political will as well as positive response from the formal financial sector, especially banks.

Though targets are supposedly being achieved, it is yet to be seen that it is bringing a positive change in the life of the excluded population. Thus, while "no frills" accounts have been opened, few accounts are being meaningfully operated.

Probably the gap is at the demand side; may be the needy are not ready to avail of these services in a meaningful way; because this is the first generation of the population which we are trying to link with formal financial services. They are taking time to get used to such services. They are used to deal with informal financial service providers who provide 24-hour service at their doorstep with the simplest procedures. May be, they are reluctant because they are scared to follow procedures.

We need to ensure that the poor get access to integrated financial services, and that too from formal financial institutions at a reasonable price

For a few services like savings and insurance, there is a need which needs to be converted into demand. There is also a need to help them change their financial behaviour – they normally live on day-to-day basis and also think on a day-to-day basis. We need to build their awareness to help them think for long-term lifecycle needs. There is a need to help them to change their habit of making financial decisions like impulsive borrowing without thinking or understanding its terms and conditions, and their repaying capacity. There is need to teach them to differentiate between productive and consumptive use of money, specially borrowing.

What we need is a two-step "financial literacy" programme to make "financial inclusion" successful and meaningful. One is developing personal financial management skills and the other is developing financial operation skills for availing various financial services.

Personal financial management literacy includes the component of awareness building for financial planning and changing impulsive financial decisions, understanding importance of regular savings, borrowing only for productive purpose, minimising risks through availing insurance services and also understanding financial principles. These include the following:

· the principle of fungibility of money;

· principle of power of compounding;

· principle of productive versus unproductive use of money;

· principle of borrowed versus own capital; and,

· principle of insurance.

A proper understanding of the principle of power of compounding will make the provision of "no frills" accounts meaningful because poor will understand the importance of regular savings for the long term. Similarly, the principle of productive versus unproductive use of money will reduce the use of borrowed money for productive purpose and the principle of fungibility of money may help them to save and plan for different purposes or different life-cycle needs. Personal financial management literacy should be accompanied with financial operational literacy, like account opening procedure, explaining a nomination facility, types of saving accounts or how to avail credit from a bank.

The financial inclusion programme can become meaningful if parallel work is done on both the demand and supply side. Excluded population should be prepared to avail of financial services from formal financial institutions and financial literacy can play a very important role in bringing in the desired results. Of course, it will be too much for banks to play this role of preparing people for availing financial services or converting need into demand. Thus, a parallel financial literacy movement should be encouraged, may be through the media, even as we build a cadre of financial counsellors at the grassroots level to educate people by building financial awareness.

Jayshree Vyas is Managing Director,
Sewa Bank