The Centre for Micro Finance

A comprehensive approach of Microfinance

Karachi
November 1st , 2006

1
Agenda

• Microfinance in India: an overview

• The Centre for Micro Finance

– Research Unit

– MFI Strategy Unit

2
Microfinance: who are the targeted
clients?

HNI
Middle
Class
Poor and vulnerable households
economically at the Bottom of
the Pyramid
Low
LowIncome
Income

How can microfinance

Ultra poor
improve their lives?

3
Microfinance: what is it?

Often perceived as… …whereas objectives are

• Micro-credit • Suite of financial services

– Thrift / savings
– Credit
– Insurance and Investments
– Transfer Payments and
Remittances

• Group lending • Group and individual lending

• Social/charitable activity • Sustainable activity

4
 The challenge ahead: demand vs. supply
gap to bridge
Demand Supply

• $50Bn • $1.5 Bn*

• 500M un-served poor • < 2M Households reached

Improve
• Several un-served areas • 60% of MF services in South access

• Largely urban • Mostly rural

• Range of risks to be • Limited non-credit services

covered
• Fast growing population
and overall economy
Increase
impact
• Missing market linkages /
employment opportunities

* Including loans against gold 5

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?

6
Thus the need for institutions’ building
• Venture capital for start ups
Finance
• Cheaper cost of funds for on lending

• Product development
Systems • Technology platform
• Clients’ authentication by unique ID

• Staff Skills strengthening / Training

Capacities • Recruiting of professionals
• MFI Entrepreneurs development

• Assess and Increase impact on poverty alleviation

Research • Experiment and improve products

7
Agenda

• Microfinance in India: an overview

• The Centre for Micro Finance

– Research Unit

– MFI Strategy Unit

8
CMF’s objectives and mission

• Established in 2005

• CMF’s objectives
– To address knowledge gaps in micro finance sector
– Experiment on ground solutions

• CMF’s 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)
9
CMF’s Objectives

Training

Influence
Research Advocacy
practice

Strategy
building

10
MSU and RU re-enforcement loop

MFIs Strategy for growth

Strategy (MSU) • 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 Research (RU)
• Experimentation on product design
• Micro finance transaction costs

11
CMF collaborates with existing active
players in the microfinance sector

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

SMEs CDF

Manufacturing Insurance
CMF
Companies Companies

CAFS CIRM

Funding Government (Central Regulators/ Policy

Organizations and State) Makers

12
Agenda

• Microfinance in India: an overview

• The Centre for Micro Finance

– Research Unit

– MFI Strategy Unit

13
Goals of Research is to maximize
microfinance impact through 3 axes
• Why are recovery rates so high?
Understand
• What is the financial behavior of clients?
better
• What is the impact of microfinance?

• Improve organizations
– Information management
– Role of HR policy and staff incentives
– More cost-effective processes
• Alternative channels
Expand access – SHGs
– Revive RRBs
– New channels (Kiosks, ATM, CF…)
• Policy
– Regulation
– Competition and information sharing

• New and innovative products

Improve quality
of services • 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 Microfinance

product design plus

Maximize impact
4 On client 3

Policy Finance and

Organizational
issues

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1
Impact and experimentation
Impact
“Micro-credit has been
changing people's lives
and revitalizing
communities”
UN, 2005, Year of micro-credit
Can we put numbers on this claim?
Are there more cost-effective ways
to achieve this goal?
Experimentation
“The full promise of
microfinance can only be
realised by returning to
the early commitments to
experimentation,
innovation and evaluation”
Morduch 1999
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1

Product design: credit

Selection Monitoring Enforcement

• Individual/group • Within group • Repayment schedule

liability monitoring • Communication
• Self/MFI selection • Staff supervision strategies
• Guarantors • Loan size
• Collaterals • Interest rate
• Interest rate

Design the most cost-effective products by

varying credit product components

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1
Product diversification and
communication strategies
Insurance
•Weather
•Life and Health
•Livestock Flexible loans
Savings •Small initial sizes
•Larger subsequent
loans
What do •Longer terms
low income
clients
Housing loans want?
•Build new homes •Group based
•Improve existing •Individual loans
homes

Remittances
products

Which delivery channels/communication strategies are effective?

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1

Improve communication strategies

• How do households face shocks and risk?

• What drives savings and credit behavior?
• Why do people default (and why don’t they)?
• Why don’t households adopt the most profitable
activities?
• Why don’t people adopt useful financial services?

Design the most effective communication strategies

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2
Microfinance Plus: address contextual
constraints

in
fr
as ts
tr u
uc p
tu in
re

Access to Impact
Financial services ?
en
t re
h pr
a lt en
He eu
r sh
i p

•Reduce risks of MFIs by combining microfinance with other

development interventions (health, financial training…)
•Provide products / services through credit
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3

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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3
Organizational and financial issues
Information management
• What is the debt capacity of
clients? Can they absorb higher
loan sizes?
• How can MFIs analyze better their
clients’ debt capacity and capacity
to repay?
• Role of MIS in info management
Financing
• How to secure financing for
MFIs?
• Start up capital
• Long-term loans
• Can securitization help access
cheaper financing for MFIs and
how can it be done?
Organizational structure
• What organizational
improvements will help MFIs to
sustain themselves and to grow
faster?
• What is effect of HR policies (ex,
staff incentives)
Processes
• How can MFIs make their
business processes more
efficient: activity-based costing
• What are the flows and
successes during the
implementation of the
intervention?
• How to improve project
implementation?
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4

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 projects: examples
•Impact of micro-credit •Effect of smokeless
In Spandana, Hyderabad Chulhas in Gram Vikas,
Orissa
•Experiment on repayment
schedules in VWS, Kolkota •Impact of treated
and KAS, Orissa bed-nets provided through
Credit in Orissa
•Impact of weather
Insurance and willingness •Delivering Nutrition
Impact and
to pay Microfinance plus •supplements through
product design
Microfinance groups

Maximize impact
On client

Policy Finance and •Effect of staff

Organizational incentives
issues
•Credit information
Sharing in India •Transaction costs
break-up in MFIs
•Regulatory impediments
For micro finance •Activity based costing
For MFIs
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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)
Panel • 10,000 households in Tamil Nadu, rural and urban, every 4 years
database • Study vulnerability, consumption patterns over time
• Document migration patterns, access to financial services over time

• Academics and practitioners

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

• Economics of micro finance, by Adel Varghese, Texas University

• Evaluating social programs, by Poverty Action Lab
Courses • 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

26
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 Refine Business strategy and

Organizational structure model

Diagnose Recommend Implement Scale up

27
MSU: Areas of work with MFIs

Organizational structure Business strategy

1
• Capital structure (equity/debt) • 3y strategic plan definition
and access to financial markets – Competitive position assessment
(VC, securitization…) (SWOT analysis)

2
• HR recruiting, training, incentives • Marketing strategy
– Customer segments to target
– Products to develop to serve these
• Organizational design segments (IL, insurance…)
3
– MIS – Portfolio management
– Processes of operations 4
– Governance • Market linkages creation
– Leverage of ICICI MFIs and
corporations clients
– Thematic consultations

28
1
Reduction of MFIs cost of funds: Supply-
demand match assessment
Supply Demand

Evaluate investors
Identify potential assets to
risk/return appetite for
securitize/buy out
MFIs’ paper

Check demand / supply

requirements match

Facilitate / structure the

deal

29
1
4 options to explore and 4 types of players
to interview to reduce MFIs costs of funds
Direct
Portfolio Portfolio
Bond issue medium/long
Securitization Buyout
term loan

• Minimum volume of investment?

Foreign banks
• Investment currency and hedging mechanism?
• Tenure / maturity of investment?
Domestic • Pooled vs single MFI portfolio investment?
banks • Investor risk/return profile?
– Portfolio / MFI rating requirement?
– Guaranty requirement (FLDG/SLDG)?
Funds
• Investment seasonality (PSL requirement)?
• Investor reporting / monitoring requirements?
• Willingness / capacity of the MFIs to receive funds and
Facilitator
comply with investors requirements?

Impact on MFIs CoF?

30
2

HR training, recruiting, incentives

Organizational structure Potential partners

• Recruitment: facilitate • MFIs careers, Hunt – Third sector

recruitment for the entire sector • Awareness program
in the next 3-5 y => 20K FTEs to
hire (TBD)

• Financial training for top mngt • IFMR centers (CAFS, insurance…)

• ICICI trainings
• HBS, Duke, IIM

• Training for middle mngt & field • Coordinate existing providers

staff – MicroSave, Care India, Basix school
of livelihood, EDA
• Set up new facilities (if required)

• Incentive schemes • Cocoon?

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2
Training / capacity building for MFIs:
questions to be answered
• Identify & prioritize immediate and recurring training needs at top/middle
management levels and field staff for top 10 MFIs

• Market review (cost, location, duration…) of the existing facilities in India

(Priority1) and internationally (Priority2)

• Identify gaps for supply to match demand => use MicroSave (CMF
partner) study as a starting point

• Set up new entities to fill these gaps (if necessary)

• Explore funding solutions for MFIs to be trained

=> Interactions with ~top 10 MFIs , mainly CEO and HR director

=> Interviews of main training institutions and financial universities in India
and abroad (HBS)

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3

MIS: partnership with FINO

• To develop a common end to end delivery platform shared
Objective across Indian MFIs
• Created as sectoral resource to serve 700M customers

• To reduce initial CAPEX required per MFI

• To improve product depth and capability
Benefits for • To improve business management and reduce transaction costs
MFIs
– data reliability and timeliness (product, clients)
– To better service liabilities and investments
– To allow single-window monitoring of customer relationships

Benefits for • To access reliable data on MFIs operations performance

investors • Easier portfolio rating through creation of historical data

• Currently sized for 12-50M customers

Current • Proof of concepts completed, final contract negotiations (IBM/iflex)
status
• Entire infrastructure, hosting, operations outsourced
• First phase launch with 5 partners by May 2006
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4

Market linkage creation: approach

Corporates ICICI Commercial teams

• Product to be sourced (retailed)?

−Region? Volume? Price? Quality?
Demand

• 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 Customers
Supply

• Local presence in identified region? • Volume generated (absorbed)?

• Willingness/Capacity of MFI to
−Provide customized financial products?
−Identify entrepreneurs (if necessary)?
−Provide/coordinate technical training at
the field level?
• Quality?
• Cost of production?
• Capacity to contract & payback loan?
• Existing capabilities/training need?

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4
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:
Initial they have no incentive to own more that 1 or 2 buffaloes
Situation – Farmers however willing to invest in dairy (cattle feed, high quality breeds, artificial
insemination…) often lack the funds to do so
• Godrej Agrovet, a concentrate cattle feed producer, is not presence in the areas
where Spandana (MFI with 700,000 clients) operates.

• To increase farmers revenues from milk production through improved

Objective yield and quality of milk produced by cattle feed utilization
• To reduce the risk on Spandana’s loans that go toward buffalo purchase

• Marketing the feed product to traditional / low income farmers and

Challenges educating them to utilization of such product
• Designing a credit product that caters to the clients’ needs

• Expected net revenue increase in Guntur

Expected – 300-600Rs/month/household with a single buffalo fed with cattle feed
Impact – up to 2400Rs/month, ie. by 34%*, once households scale up to 4 buffalo after
demonstration effect on one buffalo
*: average monthly household income of 60 families surveyed was 7000Rs 35
4

Market linkage example: cattle feed distribution

through Godrej Agrovet-Spandana (2/2)
Godrej Agrovet
• Delivers concentrate feed in 50 kg bags to central
Demand

locations from where Spandana receives the

product
• Region: Guntur
• Price: 325Rs/50 Kg
• Has assigned 2 officers to coordinate project

Spandana Customers

• Provide credit at 0% int. rate • Increase yields and fat %

for the purchase of feed • Increase income by 10-20 Rs/day
Supply

• Delivers the product to weekly • Are offered doorstep delivery

center meeting • Are able to purchase the feed on
• Has assigned 1 project leader credit at 0%
• Does not make any profit out of
this initiative

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4

Godrej Agrovet-Spandana: productivity

improvement
Initial situation After Spandana-Godrej partnership

Godrej Godrej

Cattle feed
Piloted
Distributor Spandana
Cattle feed Loan

Dealer Farmer
Milk Sales
Loan
Farmer Spandana Chiller Entrp. To be
piloted
Sales

Dealer Dairy

Dairy

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4

Godrej Agrovet-Spandana: productivity

improvement
After Spandana-Godrej partnerships Details

Godrej
1 1
Spandana buys cattle feed in bulk at
Cattle feed distributors price (premium for
Piloted delivery costs)
Spandana
2 Spandana provides a 0% loan for
2 Cattle feed Loan
farmers to buy cattle feed delivered at
village level and farmer pays back
Farmer according to seasonality
3 Sales 3
Milk
Spandana supports a chiller set up by
Loan providing a loan to a local
Spandana Chiller Entrp. To be entrepreneur
piloted
4 Sales 4
The entrepreneur pays back his loan
Dairy through direct sales to the dairy

Results • Pilot on 300 women for 5 months

• Milk production increases by 50% (from 2L to 3L)
• Increased net revenue for the farmer:~2200 INR per month*(4 buffaloes)
• Spandana provides buffalo loan for farmer to take up milk production
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4

Market linkage example: Mint cropping

(1/2)
• Traditional crops are being produced in the Eastern Uttar Pradesh by low-income clients of
one of the top 10 MFIs.
• Mentha cultivation is not done at the commercial level although it is feasible.
Current • Mint production company is trying to secure it raw material sourcing to serve a growing
Situation demand

• Encourage and provide opportunity to the low income clients (having

cultivable land) to grow mentha (Commercial)
Objective
• Link procuring company to the low income clients directly
• Organize producers in a commercial venture

• Business model needs to be downscaled initially (low profit for the Company)
Challenges • Financing the Distillation Unit (Rs 22-25 K)
• Solving logistics (extension support) and pilot project funding issues

Expected • Enhanced returns through the mint cropping (Rs 21K /Acre) as compared
to Rice (Rs 10K/Acre) and Wheat (Rs 8.4 K/Acre).
Impact

39
 4

Market linkage example: Mint cropping (2/2)

Mint Procurement Companies Requirement

• Product: Good quality Mentha arvensis.

Demand

• Region: Eastern Uttar Pradesh

• Price: At Prevailing market rates (Rs 450- Rs 750/ Litre Mentha oil).
• Scale of Operation: Aggregated produce from 15 Acres Bigha land.
• Tie-up with mint firms for procurement through their local offices.
• Risk: Crop failure due to water logging (Weather/Crop Insurance)
and the demand fluctuations.

MFI’s Role Customers’ Role

• Identify client on the basis of land
availability in the selected districts.
• Finance Distillation Unit (Cost Rs.
Supply
• Plant Mint yielding 55-60 Kg/Acre and
can be harvested twice in 7-8 months.
• Proper irrigation and timely crop
management.

20K-22K) and raw materials.

• Design package loan covering the
credit and insurance needs.
• Shift from Wheat (Traditional)  Mint
(Commercial).
• Invest (financed from MFI) Rs 22K- 25K
for the Distillation Unit (Collectively
owned) and raw materials.
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4

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

42
Constraints to scaling access for the poor
Information Asymmetry High Costs of Intermediation
• No collateral • Low value transactions
• No credit history • Geographical isolation
• Difficult to evaluate • High supervision costs (no financial literacy)
enterprises’ potential • Informal activities: need flexible access
success • Illiteracy: traditional services inappropriate
• High cash handling costs

High transaction costs

Provision of
microfinance is Poor Technology
constrained by…
Regulatory Issues

Staff Incentives not aligned to maximise

access to financial services for poor
43
How to release these constraints?

• To improve impact of microfinance on the poor

• To increase access to the relevant suite of financial services

44
 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)

45
CMF’s Objectives

Training

Influence
Research Advocacy
practice

Strategy
building

46