The Centre for Micro Finance

A comprehensive approach of Microfinance

Karachi November 1st, 2006

Agenda
Microfinance in India: an overview The Centre for Micro Finance
Research Unit MFI Strategy Unit

Microfinance: who are the targeted clients?

HNI Middle Class

Poor and vulnerable households economically at the Bottom of the Pyramid

Low Income
Ultra poor

How can microfinance improve their lives?

Microfinance: what is it?

Often perceived as Micro-credit whereas objectives are Suite of financial services
Thrift / savings Credit Insurance and Investments Transfer Payments and Remittances

Group lending
Social/charitable activity

Group and individual lending

Sustainable activity
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The challenge ahead: demand vs. supply gap to bridge

Demand
$50Bn 500M un-served poor Several un-served areas Largely urban

Supply
$1.5 Bn* < 2M Households reached 60% of MF services in South Mostly rural Improve access

Range of risks to be covered Fast growing population and overall economy

* Including loans against gold

Limited non-credit services

Missing market linkages / employment opportunities

Increase impact

Constraints overcome those challenges?

Information Asymmetry High Costs of Intermediation

No collateral No credit history Difficult to evaluate enterprises potential success

Low value transactions Geographical isolation High supervision costs (no financial literacy) Informal activities: need flexible access Illiteracy: traditional services inappropriate High cash handling costs

Difficult risk assessment High transaction costs

How to release these constraints?

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Thus the need for institutions building

Finance
Venture capital for start ups Cheaper cost of funds for on lending Product development Technology platform Clients authentication by unique ID Staff Skills strengthening / Training Recruiting of professionals MFI Entrepreneurs development Assess and Increase impact on poverty alleviation Experiment and improve products
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Systems

Capacities

Research

Agenda
Microfinance in India: an overview The Centre for Micro Finance
Research Unit MFI Strategy Unit

CMFs objectives and mission

Established in 2005 CMFs objectives
To address knowledge gaps in micro finance sector Experiment on ground solutions

CMFs mission
Systematically research links between access to financial services and participation of poor in larger economy Participate in maximizing access to financial services

Research on micro finance and livelihood financing (RU) Strategy building for MFIs (MSU)
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CMFs Objectives

Training

Research

Advocacy

Influence practice

Strategy building
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MSU and RU re-enforcement loop

Strategy (MSU)
MFIs Strategy for growth Definition and implementation of innovative business models
Market research, creation of linkages

MFIS best practices sharing Design/test of new financial products Capacity building
capital structure, HR, MIS, processes, customer segmentation, governance

Impact of microfinance Impact Evaluation Studies Economics of micro enterprise Insights on HH "financial behavior" Constraints on HH productivity Experimentation on product design Micro finance transaction costs

Research (RU)

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CMF collaborates with existing active players in the microfinance sector

Universities/ Research Institutions Banks/Financial Institutions MFIs/NGOs/Trust

SMEs Manufacturing Companies CAFS

CDF

CMF
CIRM

Insurance Companies

Funding Organizations

Government (Central and State)

Regulators/ Policy Makers

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Agenda
Microfinance in India: an overview The Centre for Micro Finance
Research Unit MFI Strategy Unit

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Goals of Research is to maximize microfinance impact through 3 axes

Understand better

Why are recovery rates so high? What is the financial behavior of clients? What is the impact of microfinance? Improve organizations
Information management Role of HR policy and staff incentives More cost-effective processes SHGs Revive RRBs New channels (Kiosks, ATM, CF) Regulation Competition and information sharing

Expand access

Alternative channels

Policy

Improve quality of services

New and innovative products Maximize the impact of credit through other services

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These objectives translate into 4 Research areas to maximize microfinance impact

1 2

Impact and product design

Microfinance plus

Maximize impact On client

Policy

Finance and Organizational issues

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Product design: credit

Selection
Individual/group liability Self/MFI selection Guarantors Collaterals Interest rate

Monitoring
Within group monitoring Staff supervision

Enforcement
Repayment schedule Communication strategies Loan size Interest rate

Design the most cost-effective products by varying credit product components

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Product diversification and communication strategies

Insurance Weather Life and Health Livestock

Savings
What do low income clients want?

Flexible loans Small initial sizes Larger subsequent loans Longer terms

Housing loans Build new homes Improve existing homes

Group based Individual loans

Remittances products

Which delivery channels/communication strategies are effective?

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Microfinance Plus: address contextual constraints

Access to Financial services

Impact

Reduce risks of MFIs by combining microfinance with other development interventions (health, financial training) Provide products / services through credit
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Organizational issues: cost and profitability

Bank

9%

Transaction?

25%

Micro-loan

Return?

How to reduce transaction costs? Show investors risk return performance of micro-loans

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Policy issues
What are regulatory obstacles to MFIs?
What are the consequences of competition and how to manage it? Why is there no information sharing? How can a credit bureau be set up? How to make MFIs more transparent? How to improve microfinance reputation?

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Research: other initiatives

Construction of a panel database in Tamil Nadu for on-going research With Yale Center for Economic growth (Mark Rosenzweig, Dean Karlan, Chris Udry, Paul Schultz, Rohini Pande) 10,000 households in Tamil Nadu, rural and urban, every 4 years Study vulnerability, consumption patterns over time Document migration patterns, access to financial services over time Academics and practitioners Foregone seminars

Panel database

Seminar series

Prof Ashok Jhunjhunwala, IIT Chennai Prof Vaidyanathan, Madras Institute of Development studies Prof Sendhil Mullainathan, Harvard GN Bajpai, ex chairman of SEBI Shekhar Shah, World Bank

Courses

Economics of micro finance, by Adel Varghese, Texas University Evaluating social programs, by Poverty Action Lab MBA course elective on microfinance, by Rock Rock Magleby-Lambert, Boston University Total immersion program in Finance and development
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Agenda
Microfinance in India: an overview The Centre for Micro Finance
Research Unit MFI Strategy Unit

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MSU: Objectives and areas of work

Advice MFIs to define and execute a growth strategy by addressing their main challenges
Horizontal growth (Same Products & Same Customers Profile) Vertical growth (New Products &/or New Customers Profile)
Support MFIs growth (vertical & horizontal)

Improve internal Organizational structure

Refine Business strategy and model

Diagnose

Recommen d

Impleme nt

Scale up

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MSU: Areas of work with MFIs

Organizational structure
1

Business strategy

Capital structure (equity/debt) and access to financial markets (VC, securitization)

HR recruiting, training, incentives Organizational design
MIS Processes of operations Governance

3y strategic plan definition

Competitive position assessment (SWOT analysis)

Marketing strategy
Customer segments to target Products to develop to serve these segments (IL, insurance) Portfolio management

Market linkages creation

Leverage of ICICI MFIs and corporations clients Thematic consultations

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Reduction of MFIs cost of funds: Supplydemand match assessment

Supply Demand
Evaluate investors risk/return appetite for MFIs paper

Identify potential assets to securitize/buy out

Check demand / supply requirements match

Facilitate / structure the deal

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4 options to explore and 4 types of players to interview to reduce MFIs costs of funds
Portfolio Securitization Foreign banks Domestic banks Bond issue Portfolio Buyout Direct medium/long term loan

Minimum volume of investment? Investment currency and hedging mechanism? Tenure / maturity of investment? Pooled vs single MFI portfolio investment? Investor risk/return profile?
Portfolio / MFI rating requirement? Guaranty requirement (FLDG/SLDG)?

Funds

Facilitator

Investment seasonality (PSL requirement)? Investor reporting / monitoring requirements? Willingness / capacity of the MFIs to receive funds and comply with investors requirements?

Impact on MFIs CoF?

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HR training, recruiting, incentives

Organizational structure Recruitment: facilitate recruitment for the entire sector in the next 3-5 y => 20K FTEs to hire (TBD) Financial training for top mngt Potential partners MFIs careers, Hunt Third sector Awareness program

IFMR centers (CAFS, insurance) ICICI trainings HBS, Duke, IIM Coordinate existing providers
MicroSave, Care India, Basix school of livelihood, EDA

Training for middle mngt & field staff

Incentive schemes

Set up new facilities (if required) Cocoon?

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MIS: partnership with FINO

Objective

To develop a common end to end delivery platform shared across Indian MFIs Created as sectoral resource to serve 700M customers To reduce initial CAPEX required per MFI To improve product depth and capability To improve business management and reduce transaction costs
data reliability and timeliness (product, clients) To better service liabilities and investments To allow single-window monitoring of customer relationships

Benefits for MFIs

Benefits for investors

To access reliable data on MFIs operations performance Easier portfolio rating through creation of historical data
Currently sized for 12-50M customers Proof of concepts completed, final contract negotiations (IBM/iflex) Entire infrastructure, hosting, operations outsourced First phase launch with 5 partners by May 2006
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Current status

Market linkage creation: approach

Corporates
Product to be sourced (retailed)?
Demand

ICICI Commercial teams

Region? Volume? Price? Quality?

Required investments (capital or capabilities) for tie up?

Expected return (in value)? Timeframe of return?

Risk undertaken by company (quality)? Previous pilot already undertaken?

ICICI Sectoral team

Market dynamics

Sectoral experts / NGOs

MFI
Supply

Customers
Volume generated (absorbed)? Quality? Cost of production? Capacity to contract & payback loan? Existing capabilities/training need?
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Local presence in identified region? Willingness/Capacity of MFI to

Provide customized financial products? Identify entrepreneurs (if necessary)? Provide/coordinate technical training at the field level?

Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (1/2)
Dairy activity is a low revenue activity for farmers in spite of a growing milk demand and therefore remains a marginal source income
Milk yields from buffaloes is low because these are not fed good quality feed Farmers perceive dairying as a subsidiary activity because it only offers marginal income: they have no incentive to own more that 1 or 2 buffaloes Farmers however willing to invest in dairy (cattle feed, high quality breeds, artificial insemination) often lack the funds to do so

Initial Situation

Godrej Agrovet, a concentrate cattle feed producer, is not presence in the areas where Spandana (MFI with 700,000 clients) operates.

Objective

To increase farmers revenues from milk production through improved yield and quality of milk produced by cattle feed utilization To reduce the risk on Spandanas loans that go toward buffalo purchase Marketing the feed product to traditional / low income farmers and educating them to utilization of such product Designing a credit product that caters to the clients needs Expected net revenue increase in Guntur
300-600Rs/month/household with a single buffalo fed with cattle feed up to 2400Rs/month, ie. by 34%*, once households scale up to 4 buffalo after demonstration effect on one buffalo
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Challenges

Expected Impact

*: average monthly household income of 60 families surveyed was 7000Rs

Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (2/2)
Godrej Agrovet Delivers concentrate feed in 50 kg bags to central locations from where Spandana receives the product Region: Guntur Price: 325Rs/50 Kg Has assigned 2 officers to coordinate project
Demand

Spandana
Provide credit at 0% int. rate for the purchase of feed Delivers the product to weekly center meeting Has assigned 1 project leader Does not make any profit out of this initiative

Customers
Increase yields and fat % Increase income by 10-20 Rs/day Are offered doorstep delivery Are able to purchase the feed on credit at 0%

Supply

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Godrej Agrovet-Spandana: productivity improvement

Initial situation Godrej After Spandana-Godrej partnership Godrej
Cattle feed Piloted Loan

Distributor Dealer
Loan

Spandana
Cattle feed

Farmer
Milk Sales To be piloted

Farmer Dealer Dairy

Spandana

Chiller Entrp.
Sales

Dairy

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Market linkage creation: other projects

Handicraft
Fisheries / Seaweed Trees plantation Food processing Vegetables / Mint cropping

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Thank you
For any question annie@ifmr.ac.in or sdjari@ifmr.ac.in

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Constraints to scaling access for the poor

Information Asymmetry No collateral No credit history Difficult to evaluate enterprises potential success High Costs of Intermediation Low value transactions Geographical isolation High supervision costs (no financial literacy) Informal activities: need flexible access Illiteracy: traditional services inappropriate High cash handling costs

High transaction costs Provision of microfinance is constrained by Poor Technology Regulatory Issues Staff Incentives not aligned to maximise access to financial services for poor
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How to release these constraints?

To improve impact of microfinance on the poor To increase access to the relevant suite of financial services

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CMF: Who are we?

Permanent staff: 23 Research associates and 8 MSU Associates from Kennedy School, Yale, IFMR, XIMB, IRMA Short-term Interns: Masters and Phd students from Kennedy School, Harvard, Yale, MIT, DSE etc. Research Committee to give advice on submitted proposals :
Jonathan Morduch (NYU), Abhijit Banerjee (MIT), Byomkesh (SKS), Mr. Thiagarajan (MCFI), Chandrasekar (IFMR), Bindu Ananth (CMFR founder)

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CMFs Objectives

Training

Research

Advocacy

Influence practice

Strategy building
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