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 Number of branch Total

already MATRIX has been where MATRIX has not

implemented been implemented

Number of branch of 7 520 527

banks in microfinance
Annual cost of 50,000 50,000 26,350,000

maintenance support

(php)
Software 225,000 117,000,000

implementation cost

(php)
Total 143,350,000

1.4. Market Segmentation

These two are feasible variables for market segmentation as far as IT

requirements are concerned. Since microfinance software is implemented

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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 Details of the Estimated Market Size Approach towards IT

By Segments Systems
Size of Less than New comers, they are not yet Vendors will find it difficult to
Microfinance 1000 viable. sell to this market segment
Institution (no of borrowers Generally, MF operations are not as these banks may not be
borrowers) viable under 1000 borrowers. This able to afford a separate
segment is the newly started system for microfinance.
operations that will take around 12 They will tend to do with
to 18 months to become viable whatever features are
(depending upon the MF model). An available in their regular
estimated 20% of the estimated 200 banking software or they will
MF Rural /Cooperative Banks would work with excel
fall in this category. spreadsheets.
1001 to 3000 This segment is where the majority These segment of banks will
borrowers of MF players (in terms of numbers) begin to look seriously into a
lie. Out of estimated 200 Rural microfinance IT system,
/Cooperative Banks doing MF, an specially as reporting
estimated 50% would fall under this requirement of BSP, PCFC ,
category. MABS and other donors.
3000 to 5000 These are the serious MF players, These are generally multi-
borrowers who have established successful branch operations, some
MF operations. Estimated 15% of with dedicated microfinance
the 200 Rural/Cooperative Banks branches. Microfinance
would fall under this category. oriented software is critical
for these banks.

5000 to 10000 The critical considerations

borrowers The Big players, 10% of the 200
Rural/Cooperative Banks
here are branch operations
and report consolidation at
the HO level. Also a critically
important thing is tracking of
profitability of microfinance
operations.

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Segmentation Details of the Estimated Market Size Approach towards IT
By Segments Systems
More than Very large microfinance oriented They already have the best
10000 operations (5% of 200 locally available software
borrowers Rural/Cooperative Banks) 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 / 71 banks (as per MABS The system must have the
MABS website) with a total of around MABS
200 branches. reports.
Group These are the Rural Banks that are PCFC prescribed reports
(Grameen in PCFC conduits. In terms of are
Model) number of banks, they are around required. Also, since many
60% of the total number of PCFC banks
conduits or around 100. Thus, in practice group and individual
terms of branch the number would lending, they will expect the
be around 240 to 300. software to support both
models.
ASA and CARD Bank, Life Bank and few ASA methodology relies
others others belong to this category. mainly on manual systems.
Although small in number both They are unsure of adopting
CARD and LIFE Bank have a IT systems at the branch
combined branch strength of levels. However, reporting
around 50. requirements by BSP, PCFC
and other external agencies
and funding agencies will
prompt them to use
information technology.
Degree of Microfinance These banks have absolute focus IT requirement is
Microfinance focused rural on microfinance operations. microfinance focused
activities and banks Generally located in province, software. They need

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Segmentation Details of the Estimated Market Size Approach towards IT
By Segments Systems
current systems branches of these banks require software exclusively for
software solution which is focused microfinance. Affordability is
on microfinance. Example CRB, not a problem for them.
LIFE bank, CARD bank
Rural banks These banks have branches where IT requirement is
where both commercial banking activities microfinance focused
microfinance is and rural banking activities are software. They need
a part of accomplished. These banks have software exclusively for
business and good existing software solution for microfinance. Affordability is
have good commercial banking. Their need is not a problem for them.
software to get a good microfinance solution.
solutions Example;- G7 bank, Malacity Bank,
currently. Sunrise Bank, Bangko Kabayan etc.
Rural banks These banks have branches where These banks need a
where both commercial banking activities combined software solution
microfinance is and rural banking activities are for rural banking and
a part and accomplished. These banks have microfinance. Since their IT
have no no good software solution for rural maturity is low, they do not
modern banking and microfinance. At this need a microfinance
software point of time they need a combined focused software at this
solutions solution for microfinance and rural point of time. Rather they
currently. bank. Example; Rural bank of want a combined software
Paracale. which covers both rural
banking and microfinance.

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.

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Current State Future State
Generally rural banks and cooperatives Along with rural banks and cooperatives, large
are microfinance institutions. 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 Microfinance institutions will use software where
software based in client server transactions will be web enabled. Head office and
technology. branches will be integrated seamlessly through web
based transactions enabled by good networking.
Microfinance institutions are using simple Microfinance institutions will develop Datamining or
operating reports generated by system. 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 Data will be entered into system remotely through
for entering data into the system 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

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

28
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

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.

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 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.

MB India RB 2000 RMG XYZ Byte per

Byte
After The company is Implementatio Hardly any Backend Backend
Sales
competent. in this n and After support or Support from support from
Service
area. It has Sales service after sales India. Local Manila,
technical is attended by support India.
representatives two local IT currently
located at Davao companies. limited to 2
in the south and Generally their implementati
La Union in the service is not on persons
North of the seen as very one located
country apart from efficient by the at manila and
Manila. rural Banks. the other at
Batangas.
This is a
Company Originally FAO Rural Banker This product Incorporated privately

30
 MB India RB 2000 RMG XYZ Byte per
Byte
backgrou funded worldwide 2000 was in the India in held
nd
project. (RB2000) is developed by July 2004. company
designed ARMDEV, Operated in whose main
Its international specifically for the lead India since product is in
partners include rural banks in consultant in early 2000. rural
Food and the India to the ADB- This is a banking.
Agriculture strengthen IFAD-PCFC privately held Microfinance
Organization of their initiative. company. is an
the United Nations management additional
(FAO), information It was feature of
Microbanker system (MIS), distributed by the product.
International data collection PCFC to its
Foundation (MBI) and reporting conduits for
and Deutsche capabilities for effective MIS
Gessellschaft für traditional implementati
Technische banking on.
Zusammenarbeit activities as
(GTZ), Micro well as
Banker is a well microfinance
known name operations.
world-wide. The software
was
developed as
part of the
Microenterpris
e Access to
Banking
Services
(MABS)
Program.

Years in In the India, it has Since 2001 Since 2000 Since July Since 1990
the
been around a 2004 in the in the India.
Industry
decade and India.
enjoys a large
client base

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 MB India RB 2000 RMG XYZ Byte per
Byte
amongst rural
banks for regular
banking
applications.

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.

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.

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 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

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

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 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

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.

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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.

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.

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 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.

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.

36
 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

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 Threats

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 1. Big market open for IT 1. Unsuccessful
vendors in microfinance implementations have
sector. produced frustrations among
2. Central bank legislation microfinance rural banks.
forces MFIs to go for system. 2. Vendors having commercial
3. Commercial banks are banking software along with
starting microfinance activities. microfinance software are
4. NGOs are converting getting advantage in some
themselves into rural banks. segments.
3. Capacity builders have a
strong say in selection of
software.

Strength 1.Continuous enhancement of 1. Emphasis on quality and

1. Focused product for product and services to user training in implementation

microfinance. maintain the lead among methodology and strict

microfinance software vendors adherence to implementation

2. Attitude of management and in India. methodology.

culture. 2.Concentrated effort in 2. Continuous enhancement of

vertical industry segment in product so that no product

3. Location of development microfinance to provide end to from other small vendors can

center. end consulting where IT is a compete.

part. 3. Retention of skilled staff so

3. Inclusion of functionalities that quality of delivery can not

into the package, which are fall, at the same time hiring of

required by BSP. new person can be checked.

Weakness 1. Development of a marketing 1. Coming out with a separate

1. Could not focus differently channel to provinces where product of commercial banking

for different segments. microfinance rural banks are to minimize the risk of

very prominent. depending on a single product

2. No partnership with 2. Development of expertise in in microfinance.

facilitator of microfinance domain consultancy areas for 2. Giving emphasis on process

38
activities. microfinance institutions. and documentation to

3. Partnership with capacity minimize the risk of attrition of

3. Constraint of location building institutions. 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.

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

39
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

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

40
 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.

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

41
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

number of projects.

42