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Vol. VII No. 6          June 2009                 The first monthly magazine on ICT4D


                                                                  Microfinance: Leveraging ICTs
                                                                  ICTs for Microfinance

                                                                  One billion opportunities
                                                                  Banking the Unbanked Globally
                                 Information for development
                                                                  Microfinancing Ghana
                               w w w. i 4 d o n l i n e . n e t
                                                                  Microfinance Sector in Ghana




                                       Microfinance :
                                       The Road to Self-sufficiency
ICTs and Microfinance
   ISSN 0972 - 804X




                                                                                         knowledge for change
Indiamicrofinance.com I I4D Magazine I June09 Microfinance India
Contents                        Vol. VII No. 6                                                   June 2009

                                                                                                                            Mail box
Features                                         Rendezvous
 5    Editorial                                                                                                                                         et
      Fueling the growth                         43       Global Conference on
                                                          Financing the Poor: Moving                                          info@i4d
                                                                                                                                            online.n

                                                          Beyond Inclusion, 29 December,
      ICTs for Microfinance
 6    Microfinance: Leveraging ICTs                        2009, New Delhi, India
      Sabyasachi Kashyap                                  Exploring the impact of microfinance
                                                          Dinoj Kumar Upadhyay

      Banking the Unbanked Globally
12    One billion opportunities
                                                                                                              The i4d magazine is an extremely useful
                                                                                                              resource for those of us who are practitioners
      Gautam Bandyopadhyay                       Interview                                                    in the field of ICT for D. It is well produced,
                                                                                                              and has informative and enlightening content

16    Microfinance in India
      Microfinance: A bigger picture              10 Rita Soni,
                                                    Senior Vice-President,
                                                                                                              which is very helpful for us to keep up with
                                                                                                              changes and developments in the field. Many
      Ritu Srivastava                                                                                         congratulations to the team!
                                                         YES BANK
                                                         Inclusion through                                                                Prashant Sharma
      Microfinance Sector in Ghana                        innovation                                                         Deputy Executive Secretary and
19    Microfinancing Ghana                                                                                                        Communications Manager
      Veronica Agodoa Kitti                                                                                        Mountain Forum Secretariat, ICIMOD,
                                                                                                                                                       Nepal

      Accounting System in Orissa                Columns                                                                            prashant@mtnforum.org

26    Panchayats
      e-Cashbook in Orissa panchayats
                                                                                                              I have been reading the two previous issues
                                                                                                              of your magazine and found them really very
      Shreemanta Kumar Samal,
      Sanjay Prakash Sahoo
                                                 45      What’s on
                                                                                                              informative. I would like to thank your team
                                                                                                              for such a valuable magazine on ICT4D.
                                                         In Fact
                                                 46      Microfacts about microfinance
                                                                                                                                 Mahendranath Busgopaul
                                                                                                               Internet Child Safety Foundation, Mauritius
29    Microfinance and Gender Equity
      Money for women by women                                                                                                         mahen@icsfonline.org
      Ritu Srivastava
                                                                                                              I take this opportunity to thank for the whole
                                                                                                              i4d team for the wonderful edition of the
      ZERO MASS Foundation
32    Development initiatives
                                                                                                              community multimedia Gender and ICTs.
      Loknath Panda
                                                                 Snapshots of                                                                   Hara Padhy
                                                                                                                                             UNESCO, Paris
      Best Microfinance Institutions                              microfinance
34    Forbes magazine’s top 50 MFIs                                solutions
                                                                                                                                          h.Padhy@unesco.org

                                                                                                              I have been very regularly getting i4d issues.
                                                                                                              Thanks for the efforts put by i4d team. I got
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40    Technology for microfinancing
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4                                                                                                                                                                                                                             i4d | June 2009
Editorial

                                                                           Fueling the growth

                                                                                                    Now that it has been widely accepted that microfinancing
                                                                                                    does not have to be an enterprise that runs on a not-for-
                                                                                                    profit basis, the challenge that faces us today is to make
Advisory Board
                                                                                                    microfinance more accessible, customised, and effective
Dr M P Narayanan, Chairman, i4d                                                                     while ensuring sustainable growth of the sector as a whole.
Chin Saik Yoon
Southbound Publications, Malaysia

Karl Harmsen
                                                                                                 It has been rightly said that sound microfinancing strategies have the
United Nations University                                                                        potential to alleviate global poverty. But to do so, we have to find ways
Kenneth Keniston                                                                                 to reach the millions of unbanked and under-banked households
Massachusetts Institute of Technology, USA
                                                                           who desperately need this support to get out of poverty and stay above the poverty line.
Nagy Hanna
e-Leadership Academy, University of Maryland, USA

Richard Fuchs
                                                                           Several questions need to be answered and a similar number of challenges have to be
IDRC, Singapore                                                            overcome to reach our goals. With the aid of modern ICT tools it is possible to reach the last
Walter Fust                                                                mile and also serve the population living in remote areas. But technology is just one of the
Global Humanitarian Forum, Switzerland
                                                                           components of this intervention with connectivity taking the lead among the related loops
Wijayananda Jayaweera
UNESCO, France                                                             that need to be closed, apart from the capacity building needs for the population to be served.
EDITORIAL BOARD
                                                                           Equally important is the creation of enabling policies that allow and, if required,
Akhtar Badshah, Frederick Noronha
                                                                           incentivize the setting up of Microfinance Institutions (MFIs). Also imperative is strong
EDITORIAL TEAM                                                             regulation and monitoring of these MFIs to curb the incidences of MFI operators
Editor-in-Chief Dr Ravi Gupta                                              running away with the savings of their victims. Since the target demography has
Assistant Editor Sandeep Budki
                                                                           probably never been exposed to banking services, they also require financial education.
Research Assistant Subir Dey
Sr. Graphic Designer Bishwajeet Kumar Singh
                                                                           None of these issues can be taken in isolation and have to go hand in hand to provide
Graphic Designers Om Prakash Thakur, Shyam Kishore
                                                                           succour from poverty to the disadvantaged citizens of the world.
Web Programmer Zia Salahuddin
i4d
G-4 Sector 39, NOIDA, UP, 201 301, India                                   In this issue, we have tried to bring to you varied perspectives of how different countries,
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Email info@i4donline.net Web www.i4donline.net                             organisations and government agencies are combating poverty through financial inclusion
Printed at R P Printers, Noida, India
                                                                           with an eye on gender equity. We hope you find this issue informative and thought
                                                                           provoking enabling us all to find new ways to meet the challenges that lie ahead.
i4d is a monthly publication. It is intended for those interested and
involved in the use of Information and Commnication Technologies
for development of underserved communities. It is hoped that it will
serve to foster a growing network by keeping the community up to
date on many activities in this wide and exciting field.

i4d does not necessarily subscribe to the views expressed in this
publication. All views expressed in this magazine are those of the
contributors. i4d is not responsible or accountable for any loss
incurred directly or indirectly as a result of the information provided.

                                                                                                                                                     Dr Ravi Gupta
                                                                                                                                               Ravi.Gupta@csdms.in

                      Centre for Science, Development and
                      Media Studies, 2008

Except where otherwise noted, this work is licensed
under a Creative Commons Attribution 2.5 License




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          June 2009 | www.i4donline.net                                                                                                                                 5
ICTS FOR MICROFINANCE



Microfinance:
Leveraging ICTs
    This article suggests               Over the last decade or so, the world
                                        seemed to have woken up to the reality
                                                                                        and fund transfers. In the last few years of its
                                                                                        existence, many organisations have jumped
    the ways through                    that to empower the rural marginalised
                                        communities and to alleviate the poverty
                                                                                        onto the microfinance bandwagon which
                                                                                        includes not-for profit NGOs, development
    which the existing                  scenario in the world, they need to be
                                        given opportunities to save, borrow and
                                                                                        professionals, corporates, commercial
                                                                                        banks, international donor agencies, etc.
    ICT tools and                       repay loans. Till a few years back, banking
                                        institutions, for the purpose of offering
                                                                                        The reasons for the enthusiasm varies from
                                                                                        the belief that microfinance offers a good
    technologies can                    banking services to the marginalised,
                                        experimented with subsidised credit
                                                                                        developmental alternative to the belief,
                                                                                        especially among the commercial banks,
    bring the poorer                    which affected the overall performance
                                        of the banks and contributed to the rise
                                                                                        who have opened microfinance branches
                                                                                        for their microfinance operations, that
    section of the                      in Non-Performing Assets (NPA). Thus
                                        subsidised credit as an option gradually
                                                                                        microfinance offers a good, sound banking
                                                                                        option. The government has also routed
    society in the ambit                lost its popularity among banks. Moreover
                                        more than the cost of credit, it was access
                                                                                        various developmental schemes through
                                                                                        microfinance. Microfinance leaders are
    of the microfinance                  to credit which was considered as the
                                        major barrier for the poor. With little or no
                                                                                        gaining prominence and it is said that
                                                                                        some of the leaders, particularly women,
    services                            means to afford the collaterals/mortgages,
                                        the poorer section of the society had to
                                                                                        have been taking a more active role in
                                                                                        other social spheres, including contesting
                                        resort to unscrupulous moneylenders for         elections for the panchayat and so on2.
                                        loans which pushed them further into the            The microfinance sector has grown
                                        vicious cycle of indebtedness. The reason       exponentially over the past few years and
                                        behind this was access or the lack of it and    the World Bank estimates that there are
                                        not interest rate.                              now over 7000 Microfinance Institutions
                                           Microfinance has come to be recognised        (MFIs), serving some 16 million poor
                                        as the most viable, efficient and result-        people in developing countries. The
                                        oriented mode of financially empowering          total cash turnover of MFIs worldwide
                                        the poor. For Robinson “Microfinance            is estimated at US$2.5 billion and the
                                        refers to small scale financial services        potential for new growth is outstanding.
                                        for both credits and deposits – that are        It is estimated that worldwide, there are
                                        provided to people who farm or fish or           13 million microcredit borrowers, with
                                        herd; operate small or microenterprises         USD 7 billion in outstanding loans, and
                                        where goods are produced, recycled,             generating repayment rates of 97 percent.
                                        repaired, or traded; provide services; work     It has been growing at a rate of 30 percent
                                        for wages or commissions; gain income           annual growth3.
                                        from renting out small amounts of lands;            However, several issues and impediments
                                        vehicles, draft animals, or machinery and       to the success of microfinance as an
                                        tools; and to other individuals and local       industry have cropped up, the primary of
                                        groups in developing countries, in both         them being: scalability and sustainiblity
                                        rural and urban areas”.1 Microfinance           of MFIs, and outreach and impact of the
                                        also entails the condition of sustainably       microfinance initiatives. Thousands of
    Sabyasachi Kashyap
                                        delivering the services and is not merely       MFIs around the globe are realising that the
    sabyasachi@telecentremagazine.net   confined to credit (microcredit) but            solution for the scaling up, and ensuring
                                        encompasses in its range savings, insurance,    maximum outreach and sustainability of
                                                                                                                          i4d | June 2009
6
palmtop computers is typically uploaded to the MIS at the end
                                                                      of the day, either directly in the branch office or via a remote
                                                                      communications link. Furthermore, the roll-out of wireless
                                                                      broadband infrastructure will enable these systems to be always
                                                                      online resulting in true real-time data collection and monitoring
                                                                      of the loan portfolio at branch and institutional levels.

                                                                      Correspondent banking
                                                                      One of the key challenges for MFIs is providing financial
                                                                      services to clients in remote areas including rural areas where the
                                                                      population density is low, the market is smaller and providing
                                                                      service entails high costs. Correspondent Banking – whereby a
                                                                      bank links itself with third party merchants located in remote
                                                                      areas – has emerged as a solution for this problem of outreach.
                                                                      Correspondents manage transactions on behalf of the partner
Photo Credit: CARE India                                              institution and are remunerated on a fee-for-service basis. Bank
                                                                      Correspondents are expected to be having long-term businesses,
MFIs lies in leveraging the benefits of technology, more specifically   and should be respected and trusted in their communities. The
information and communication technologies (ICTs). ICTs have          Bank Correspondents should also be ‘ICT-enabled’; generally
opened new window of opportunities for the MFIs to reach out to       equipped with equipments such as an Electronic Funds Transfer at
more people, controlling the risks making the business sustainable,   Point of Sale (EFTPOS) device, barcode readers and/or keypads, a
and bringing down the costs of operation. With new softwares          personal computer, etc. They are linked to the partner institution’s
specially designed to cater to the needs of the MFIs, mobile          servers using a telephone line, cable or satellite link. Post offices,
phones, efficient Management Information Systems, among                supermarkets, general stores, grocery stores, telecentres, etc, are
others, technology can and will in the near future bring about a      good examples of Banking Correspondents. In India, commercial
paradigm shift in the domain of microfinance.                          banking entities like State Bank of India, HDFC, have tied up
                                                                      with the respective Service Centre Agencies(SCAs) in the states
ICT usage for MFIs                                                    under the framework of National eGovernance Plan (NeGP) to
The current discourse on and practice of microfinance has             provide Banking Correspondent status to the Common Service
inevitably redirected itself through the ICT route for maximising     Centres (CSCs) equipped with ICT infrastructure and provide
outreach and ensuring sustainability. Adoption of ICTs also brings    microfinance services through them.
about business processes re-engineering because they povice
efficient, transparent and cost-effective mechanisms to run the        Credit cards, and ATMs
business of MFIs. MFIs have readily adopted ICTs for they have        In today’s world of banking, consumer credit cards are an
been looking for a change agent that will harness the benefits of      indispensable part of the bouquet of services offered by a financial
ICT tools for best possible management and reduce costs, time         institution. Some of the advantages of consumer credit cards
and efforts.                                                          are reduced costs associated with small transaction lending,
                                                                      unsecured credit, small transactions, and pre-defined credit
Management Information Systems (MIS)                                  limits. Other salient features of credit cards include on-demand
To monitor the quality, sustainability, and efficiency of the loan     borrowing, re-draw facility, and repayment flexibility within
portfolio, to measure its development impact, and properly            pre-defined guidelines. Since these services address the needs of
manage the administration tasks of an MFI, computerised               small borrowers also due to their potential to relieve them from
Management Information Systems comes in very handy. MIS are           their dependency on moneylenders for the same set of services
the most fundamental aspect of an MFI’s hi-tech infrastructure        that are not provided by MFIs. Due to this utility of credit
and it is difficult for an MFI to upscale significantly and maintain    cards the concept of Microcredit Cards have emerged and with
the accuracy and transparency of its loan portfolio without an        more opportunities. A credit card enabled MFI can implement
MIS that can grow with the institution. There is no denying the       microfinance tuned credit-scoring alogrithm which ensures
fact that an appropriate backoffice MIS is the backbone of ICT         that clients who have proved their credit worthiness over time
innovation for the delivery of microfinance services.                  through successful business transactions with MFIs can have their
   However, for MIS to really contribute to the efficiency of the      credit limit increased and be given access to additional sources
MFI, it has to be accurate, and up to date. MFIs find it difficult      of credit. Smart cards have an embedded computer chip that can
to maintain updated records as they have their offices in remote       store client and transaction data, as well as process information.
locations which rely on manual data-entry and paper based             Smart cards function as electronic passbooks, thereby reducing
transaction records. ICT innovations like mobile computing            reliance on printed receipts. However, the introduction of card
applications and palmtops at the hands of the loan officers who        based services would demand setting up of EFTPOS functionality
can directly record the transaction into the MIS can make this        and/or Automatic Teller Machines (ATMs). Because all relevant
system more efficient and up to date. The data entered into the        client data is stored on the card,
June 2009 | www.i4donline.net
                                                                                                                                         7
the options because of the ubiquity of its use and popularity even
                                                                      among the poorer section of the society. It is estimated there
                                                                      will be three billion mobile subscribers in the world by 2010.
                                                                      World GSM Association, further adds that mobile phone is the
                                                                      first and only communication technology to have more users
                                                                      in developing countries than in developed countries. Mobile
                                                                      phones have become mobile wallets by facilitating electronic
                                                                      payments in exchange for goods and services. m-Commerce has
                                                                      assumed tremendous significance under the circumstances and
                                                                      this development in m-commerce has positively affected the
                                                                      microfinance industry also with usages like facilitating savings
                                                                      deposits, loan repayments and other funds transfers. For the cost
                                                                      of sending an SMS message, the phone user/microfinance client
                                                                      uses an application stored on his mobile phone to initiate a transfer
                                                                      from his mobile phone account to his bank account.

                                                                      Microfinance softwares
                                                                      In tune with the emergence of service delivery technologies, various
                                                                      softwares have also been developed by technology innovators
                                                                      helping the microfinance industry to tackle challenges associated
                                                                      with efficiency, transparency, outreach and sustainability. The
                                                                      softwares and tools like, FINO (Financial Information Network
                                                                      and Operations), SafalFin, etc., vary in their nature and function.
                                                                      However, their utility to the smooth functioning of the operations
                                                                      are subject to speculation as some of the softwares come with high
                                                                      investments which a startup MFI may not be in a position to
                                                                      afford. However, low cost solutions like Computer Munshi System
                                                                      developed by an Indian NGO named Pradaan has promised to
                                                                      address this issue of affordability for MFIs. Built at low cost, this
    MFIs can utilise EFTPOS systems and ATMs that do not              software aims to improve book keeping of the Self Help Groups
need to be always online. This is a significant advantage in areas     (SHGs) as also to improve transparency, equity and longevity of
where telecommunication services are unreliable and/or expensive.     its groups. The model basically aims to improve the accounting
One more value addition to the services of MFIs are the use of        and book keeping of the SHGs.4
biometric technology (such as fingerprint scanners) which ensure
client identification as well as privacy and data security.            Conclusion
                                                                      In a nutshell, various experiments for integrating microfinance
Internet banking                                                      and ICT have been undertaken and even more numbers are
Internet Banking, in many ways, has revolutionised the banking        going to come in the future. The issue however, is to enable
scenario as it provides clients with real-time information about      the MFIs to meet their goals by helping them have maximum
their accounts, and the ability to transfer funds between their       outreach, be sustainable and be transparent in their business
accounts. It has become an integral part of the banking operations    and processes. ICT can only be an enabler, and not the driver,
and by giving clients the liberty of using their own convenient       and the real success of MFIs has to be measured vis-a-vis their
time to bank, and that too without having to visit the bank, it has   social performance and not by their ICT/technology readiness
become an empowering tool. MFIs, however, face the challenge          and preparedness.
of limited or more often than not no access to Internet services
of their clients. The rural telecentre network, being rolled out      References:
across the developing world, could come in handy here too, by         1.   Robinson, Marguerite S, ‘Microfinance: the Paradigm Shift from Credit Delivery
providing access to the clients.                                           to Sustainable Financial Intermediation’, in Mwangi S Kimenyi, Robert C
                                                                           Wieland and J D Von Pischke (eds), 1998, Strategic Issues in Microfinance,
Mobile banking                                                             Ashgate Publishing: Aldershot
Cellular phones, especially with GSM backbone, due to its             2.   Microfinance: An Introduction by R Srinivaan and M S Sriram in Round Table,
accessibility and affordability are becoming an indispensable              IIMB Management Review, June 2003, (Pg-52-53)
communication tool for the poor in the developing countries.          3.   Hari Srinivas, The Global Development Research Centre (GDRC),http://www.
As per the World GSM Association report, during the year                   gdrc.org/icm/data/d-snapshot.html accessed on 29-05-2009
2003-2006, more than 800 million mobile phones were sold in           4.   Report of the Steering Committee on Microfinance and Poverty Alleviation, The
developing countries. Mobile phones in today’s scenario have               Eleventh Five Year Plan, (2007-08 - 2011-12), Development Policy Division,
become the only option for communication from being one of                 Planning Commission, New Delhi, May - 2007, Pg-28

                                                                                                                                         i4d | June 2009
8
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      Ne w g
         nin
     Lear ys                                                                                      Internet
       Wa
                                                                                                 Governance




                             Another year of i4d is here.
                        A host of issues are to be talked about.
                                 Do you work on any of these areas ?
                            Do you have a project that should be covered ?
                              Are you an expert on any of the themes ?
                                 Are you interested to collaborate ?
                                       Write to us at: subir@csdms.in
INTERVIEW: RITA SONI, SENIOR VICE PRESIDENT AND COUNTRY HEAD - RESPONSIBLE BANKING, YES BANK,



Inclusion through
innovation                                                                                                                www.yesbank.in




                                                                                   In an interview with
                                                                                   Sabyasachi Kashyap
                                                                                   from CSDMS, Rita Soni
                                                                                   talks about YES BANK’s
                                                                                   foray into financial
                                                                                   inclusion by banking and
                                                                                   microfinancing through the
                                                                                   Internet, ATMs, debit cards
                                                                                   and mobile channels.
     Rita Soni
     Senior Vice President and Country
     Head-Responsible Banking, YES BANK


As per the latest census, almost one fourth of the population in     products and services to un-banked/under-banked, low-income
India lives Below Poverty Line. What role do you see banking         communities across urban and rural India.
institutions like YES BANK playing here?                                 As of March 2009, Wholesale Lending stood at USD 60
At YES BANK, we are working towards sustainable solutions to         million with 16 MFIs, covering an estimated 500,000 clients in
poverty through financial interventions by mainstream banking         over 1000+ villages. YES BANK offers a comprehensive package
activities. Utilising sustainable and mainstream approaches allows   of banking and advisory services, dovetailed with the expertise of
us to reach the scale which is necessary to reach the 800 million    relevant business units within the Bank to use structured capital
Indians living on less than US$2 per day. In our young bank,         market products to help MFIs leverage access to cost-effective
we have chosen to focus on ‘Responsible Banking’, promoting          funds from a broader pool of sophisticated investors. The Bank
financial inclusion and business solutions to social issues.          works as a holistic financial solutions provider working with
Where does financial inclusion fit into YES BANK’s scheme              different stakeholders, i.e., mainstream investors, rating agencies,
of “Responsible Banking”?                                            policymakers and technology vendors resulting in an aggregation
YES BANK is committed to creating equal financial opportunities       of services, cutting-edge innovation and thought leadership
and enabling financial inclusion, but it is our emphasis on           required to create a conducive environment for growth of the
innovation which is making the real impact. For instance, in         industry.
microfinance the vision is to go beyond offering plain vanilla            YES BANK also stands out for its focus on urban poverty
banking to providing the industry access to the mainstream capital   using individual lending methodology in a market that has largely
markets. This approach helps MFIs achieve scale at a lower cost      executed group lending to rural women. One of the ground
of funds, thereby resulting in affordable financial products for      breaking features of our model is the fact that in setting up the
the Base of the Pyramid (BOP). YES BANK has a two-pronged            first institutionally sponsored direct intervention model for
microfinance strategy to provide easy access to suitable financial     microfinance, the Bank has created a benchmark institution that
                                                                                                                            i4d | June 2009
10
becomes the reference point for what our wholesale practice strives     a vision to address issues of rural India through the previously
for in terms of helping transform partner MFIs into commercially        mentioned innovative financial interventions, complemented with
viable financial services providers for the BOP. Direct Lending is       expert advisory services and thought leadership. These practices in
accomplished through YES SAMPANN (Hindi for fulfillment),                microfinance, ARSB, advisory and thought leadership go beyond
currently in its pilot phase with a portfolio of 2000+ micro-           the banking sector regulator, Reserve Bank of India’s (RBI) directed
entrepreneurs. The business is projected to reach a client base of      credit policy mandated through its Priority Sector Lending (PSL)
a 1,000,000 with a portfolio size in excess of USD 100 million in       requirement, and adopts the spirit of addressing poverty to the
5 years offering products such as micro loans for working capital,      core. Below are specific examples where this combination approach
insurance and savings schemes.                                          has yielded results:
                                                                            In 2008, YES BANK worked with Jain Irrigation Systems Ltd.
Across the world, there is widespread recognition that                  (JISL) to reach nearly 50,000 small and marginal farmers across
information and communication technologies (ICTs) have                  India. As a testament to this ‘business solution to social issue’,
tremendous potential in facilitating the inclusion of the               the BANK conducted a comprehensive sustainability report for
underserved/un-banked population into the banking network.              JISL, outlining both the manner in which they operate as well as
Can you share your views about this?                                    specific social and environmental initiatives.
Bridging the technology gap between the urban and rural                     Another important rural client is Buldana Urban Credit
population through ICT is undeniably a step in the right direction,     Cooperative Society. The financing from YES BANK reaches
however YES BANK feels that unless discrepancies in the content,        approximately 8,000 rural households across western Maharashtra.
standards and delivery of basic, primary/secondary education and        The Cooperative has a unique approach of ‘social banking’ which
vocational training programmes are proactively addressed, the           has built the institution and met the needs of its members. In
effectiveness of ICT led initiatives will be greatly hindered. This     addition to these financial services, the Bank conducted a detailed
opinion and mode of thinking has spurred YES BANK to begin              study of the approach, uncovering a gamut of best practices that
forging working relationships with NGOs and social businesses           can be applied by urban and rural banks.
currently working in the education and ICT space to develop                 The Bank also plays the role of thought leader in several areas
effective educational content, especially in the realms of financial     including poverty issues. As an example, YES BANK and the
literacy, in order to enhance the national curriculum and skills        American India Foundation jointly wrote a report highlighting the
development programmes in rural and urban India.                        social and economic issues surrounding rural to urban migration
                                                                        in the country. A key feature of the report ‘Managing the Exodus’
What are YES BANK’s initiatives in providing banking                    is ways to provide rural populations employment opportunities
facilities to the underserved population in the rural areas?            and social services through the public private partnership model
In addition to the microfinance initiatives already mentioned,           in a bid to mitigate their migration to urban areas.
YES BANK also has a dedicated focus in the area of ‘Farmer                  In addition to financing Shriram Transport Finance Company
Financing’. The Agri-Business, Rural and Social Banking (ARSB)          Ltd. (STFCL), YES BANK facilitated an HIV/AIDS awareness
team develops innovative financial models, which leverage the            programme for their trucker clients. This programme brought the
outreach of various stakeholders in the Agri Value Chain to             Bank forward to form knowledge partnerships and synergies with
address ‘last mile’ issues. In the last year, the Bank has disbursed    the Clinton HIV/AIDS Initiative (CHAI) and the Red Cross.
approximately INR 700 crores in direct farmer financing,                The programme has reached out to 14 locations, 10 states and
impacting approximately 140,000 farmers. ARSB works closely             over 10,000 truckers who have been sensitized since this project
with Swiss Re and Agriculture Insurance Company of India (AIC)          began in October 2007.
to facilitate the development and distribution of need-based
insurance products for the agriculture sector, such as weather          Are the branches operating in the rural areas providing
insurance for grapes in the Nashik region.                              ‘anytime anywhere banking’ facilities? If yes, could you share
    As an example, YES BANK recently announced its partnership          your experiences with this?
with Zameen Organic, a farmer-owned producer company aimed              A standard feature in all our branches, urban and rural, we offer
at closer collaboration between farmers and companies to fortify        ‘Anytime Anywhere Banking’ through the Internet, ATM, Debit
inclusive and sustainable growth while building a transparent           Card and Mobile Channels. Customers can also transfer funds
supply chain. This alliance intends to create equal opportunities for   at their convenience, from home or office, to over 53,000 bank
producers and workers who have been economically marginalised           branches across the country using the NEFT and RTGS facility.
because of the conventional trading system. The business model          They are also given complimentary multi-city payable at par
empowers 6500 farmers to have effective and end-to-end control          cheque books for ease of payments. Under the aegis of the ‘One
on the ‘Fair Trade Organic Cotton’ supply chain which has resulted      Branch’ model, customers can access their account from any of
in improved economic condition of farmers from the Adilabad             the 117 state-of-the-art YES BANK branches, at no extra charge.
(Andhra Pradesh) and Vidharbha (Maharashtra) region.                    We were also one of the first few banks to offer complimentary
                                                                        access to over 32,000 ATMs in the country. Our technology edge
Could you elaborate a bit more about your experiences in                imparts ‘reach and easy’ access to our rural branches and our
the rural areas?                                                        ‘anytime anywhere’ facilities have received encouraging response
Within the Responsible Banking framework, YES BANK has                  in rural areas.
June 2009 | www.i4donline.net
                                                                                                                                        11
BANKING THE UNBANKED GLOBALLY



One billion
opportunities
Introduction                                    what banks can do to capitalise on this         •     Simplicity and speed in processing
Look and you’ll see an exciting landscape       opportunity.                                    •     Small product sizes when it comes
emerging in the banking arena. One where                                                              to loans and low-balance savings
there is a billion-strong market actively       How to bank the unbanked                              accounts
seeking financial services but remains          In China and India only about a third of        • Proximity and ease of access
largely unattended to. These globally           the population participates in the formal       • Ba s i c f i n a n c i a l e d u c a t i o n o r
distributed prospective customers represent     banking sector. In Africa the number is just          information since the unbanked
enormous earning potential for banks, but       25 percent. India has the second-highest              may not understand even elementary
constitute the unbanked.                        number of financially excluded households              concepts of banking
    The unbanked are those who do not           in the world – 135 million – after China’s          Most banks find it difficult to meet
utilise banking services and have limited       263 million. Africa as a whole has 230          these needs because of the high economic
banking needs. The unbanked are not             million unbanked households, and Central        cost of servicing these demands. However,
the poorest of the poor. However, they          and Eastern Europe and Latin America have       a little out-of-the box thinking in devising
certainly include those whom banks need         19 million and 42 million, respectively.        products that are simple and accessible can
to serve but cannot do so profitably in the          But irrespective of where in the            help ensure inclusive growth.
existing banking environment. Though            world they might be, this unbanked                  Some of these measures could include
these consumers need access to banking          section of society has similar needs for        tying up with an NGO or with a retailer and
for savings, loans and microfinance, they        financial services. Apart from the obvious       using village residents and empowerment
do not have bank accounts. The reasons          requirements of savings, loans, transactions,   groups as representatives. These can
for this are compelling.                        and investments, the unbanked have              lower customer acquisition costs and
• Lack of steady and substantial income         certain special needs, which are:               increase customer base, thus helping
      leading to a fear of insufficient funds    • Flexibility in savings and repayment          banks overcome the high cost challenge.
      for an account                                 schedules owing to a lack of steady        Such groups also help banks mitigate risks
• Limited access to banks, especially in             income                                     associated with dealing with the unbanked.
      remote areas                                                                              An estimated 2.6 million self-help groups
• Lack of formal employment that                                                                in India are linked to banks, giving
      precludes a financial history                                                              financial institutions access to 40 million
• Poor financial literacy
• Psychological factors such as mistrust
                                                  This paper aims to                            households.
                                                                                                    It is important that the products are
      of financial institutions                   educate the banking                            downsized without being downgraded to
    This unbanked billion is not outside the                                                    match the unbanked population’s smaller
banking sector by choice. An important          sector to reach out to                          requirements by offering low installments
reason for their predicament is that banks                                                      and flexible repayment options. Banks
do not offer them suitable products             the unbanked masses                             also require performance metrics and
tailored to their needs. In effect, they have                                                   regulatory conditions that are more suited
been excluded by the banks’ inability to           around the world                             to including the unbanked in the financial
understand their requirements and the                                                           mainstream.
unwillingness to adopt innovative models
                                                  by giving examples                                Some banks are using inter-industry
to serve them.
    However, this billion also constitutes
                                                from across the globe                           partnerships to increase financial inclusion.
                                                                                                For example, banks in Brazil have added
an enormous opportunity – if banks                about initiatives of                          100,000 point-of-sale locations to distribute
are willing to accept the challenge of                                                          products by tying up with retailers.
including them with an eye on the bigger          some enterprising                             Not only are these channels cheaper for
picture. This paper provides a regional                                                         banks but they are also more convenient
perspective to this issue and examines              banking entities                            for consumers.
                                                                                                                                    i4d | June 2009
12
Banks must realise – and they are seeing the light – that since        Mobile banking is another way of reaching out to such customers
the unbanked have remained unaddressed by traditional financial         and is also a huge opportunity for banks in India. According to
institutions, they will not hesitate to choose newer players for       a TRAI report, the total number of mobile subscribers by March
basic banking services such as payment and deposit transactions.       31, 2008 was 261.08 million as against last year’s 165.09 million
Collaborating with telecom players, adding a mobile channel, and       (an increase of 58.14 percent). This figure shows that in just
utilising cross-selling opportunities will go a long way in meeting    three years, the number of mobile subscribers has grown over 4.5
the needs of the unbanked.                                             times. India is adding more subscribers per month than any other
    In many emerging economies, mobile consumers are growing at        country. According to the GSM Association (Global Association
a much faster rate than bank customers. Mobile banking is taking       for GSM Providers), the next billion subscribers will come from
off because it is convenient, fast, simple, and secure. Moreover,      the BOP (Bottom of the Pyramid) market, of which India will
it is a cost-effective option for banks. Gartner has estimated that    have the largest share. The growth of mobile phone subscribers
there will be 33 million mobile payment users worldwide in 2008,       is outpacing the growth of banking customers as also PC and
with the Asia Pacific taking the lead. Gartner expects this number      Internet users in India.
to triple to 103.9 million users in 2011.                                  In 2006, banks were allowed to take the help of NGOs
    Other forms of branchless banking and e-payment gateways           and microfinance institutions as intermediaries in offering
such as payment cards and the Internet can also help banks increase    banking services through the use of correspondents. This was
their outreach. Banks need to experiment and include the next          perhaps a factor for many banks that opened six million no frills
billion consumers not merely for the socio-economic assistance         accounts with low or zero minimum balances between March
they will gain. The step will also have a strong business imperative   2006 and 2007.
for banks. Not only will a bank increase its customer base, but            ICICI Bank, HDFC Bank and Citibank have launched their
it will also ensure increasing numbers of future customers as          own microfinance programmes. HDFC Bank thus has tied
incomes increase.                                                      up with NGOs in Andhra Pradesh and Tamil Nadu to make
    Let us examine how banks are reaching the unbanked in various      financial services accessible to the rural poor. Citibank has linked
parts of the world, namely, India, China, Eastern Europe, parts        up with NGOs. Standard Chartered plans to lend $100 million
of Africa, and Latin America.                                          for micro-financing by 2008, up from current commitments of
                                                                       $40 million.
India                                                                      Banks are looking at technology to provide banking services at
The Indian banking market is zooming, with assets expected to          low cost – and this includes rural banking too. Citi has set up a
reach $1 trillion by 2010. An expanding economy, a growing             bio-metric ATM as a part of its ‘no frills’ Pragati account for the
middle class, and technological innovations are contributory           under-banked. The ATM recognises the customer through their
factors, according to a Celent report, ‘Overview of Indian             thumb impression and can interact in regional languages.
Banking Market’.
    The industry is focusing on the retail side of the market, with    China
a Compound Annual Growth Rate (CAGR) of 23 percent in                  Estimates about the numbers of unbanked Chinese vary. The
the past five years. However, despite this thrust on retail banking,    People’s Bank of China (PBC) estimates that only 36 percent
banks will have to come up with creative and simple solutions to       of Chinese rural households have access to financial services. As
make money in India. This is because India has a huge unbanked         one indicator of demand, the informal finance market has been
population and unless this is included, neither will banks prosper,    estimated at anywhere between CNY 1 trillion ($132 billion) to
nor the country.                                                       CNY 2 or 3 trillion.
    Banks have also realised the potential of this market and              But the bigger Chinese banks have for many years now
have come up with innovative means of reaching it. They are            been moving out of rural areas, goaded by commercialisation
going back to rural pockets for financial inclusion. State Bank         and competitive pressures. According to the State Council
of India is drawing up plans to reach out to 100,000 villages. In      Development Research Centre (DRC), the four big state banks
September 2007, ABN Amro Bank announced its microfinance                have reduced their presence in rural areas by over 43 percent in
division had provided basic financial support to some 500,000           ten years, closing 30,000 branches in the last five years alone.
underprivileged households.
    Building more branches in the countryside may not always              The Chinese government has launched several initiatives
be cost-effective. So banks need to explore other options by           to test out new forms of rural financial service providers.
developing a better understanding of what rural households need        Among them:
and offer new products and distribution networks to suit them.         • The People’s Bank of China in December 2005 launched
    Providing banking services through ‘Banking Correspondents’            a pilot initiative to establish Microcredit Companies using
represented by self-help groups, NGOs and other approved                   commercial licensing
organisations is one branchless banking mechanism. Touch-points        • The China Banking Regulatory Commission in December
may be set up by such organisations at places commonly visited by          2006 introduced their own pilot, creating new types of
the unbanked, such as the village markets or schools. This may be          licenses for rural financial institutions
supplemented by outreach teams equipped with hand-held devices            McKinsey believes that given the reliance on cash in rural
on which simple banking transactions can be performed.                 China and that additional ATMs do not appear to be the answer,
June 2009 | www.i4donline.net
                                                                                                                                      13
the existing mobile Short Message Service network could quickly        banking options. This also offers banks a channel for growth.
and cheaply provide an SMS-based payment system in rural                   Similarly, post offices, which constitute more than 50
areas. Since the most expensive parts of the infrastructure — the      percent of the physical infrastructure for access to the financial
network and phones — are in place, this solution would be              sector, could provide an innovative POS alternative to reach out
relatively low in cost, between $40 million and $60 million. By        to the unbanked.
forming a partnership, banks, network operators and merchants              According to the August 2003 Datamonitor report, banks in
could unlock spending.                                                 the region are looking to move beyond branch-centric distribution.
    The Chinese largely rely on cash payments, thus increasing the     This includes extending ATM networks and looking at online and
importance of the cash-based e-payment channel. Some leading           phone banking. The highest growth in IT spending was expected
third-party payment providers are adding cash-based and non-           to come from Romania and Bulgaria.
bank based payment options to their offerings. These include:
1. Cash remittance: Alipay is a third-party payment provider,          Africa
     allowing users to top up accounts with cash through China’s       According to the IMF, African countries are enjoying their
     postal service. This service was launched in March 2007 in        best period of sustained economic expansion since attaining
     selected China Post branches throughout China.                    independence. Real GDP growth is expected to rise from 5.7
2. Mobile toll stations: Smartpay, China’s leading mobile top-         percent in 2006 to 6.8 percent in 2008. Still, only 20 percent of
     up company, has formed a network of approximately 30,000          families in Africa have bank accounts.
     dealers. Smartpay dealers allow users with bank accounts to
     easily use Smartpay’s services, which in turn gives Smartpay
     access to a much wider range of potential users.
3. Targeting the unbanked with pre-paid cards: e-payment
     player IPS uses mobile and telephone prepaid cards in order
     to reach unbanked users. This service takes advantage of the
     popularity of prepaid top-up cards used for phone bills, online
     games, and virtual currencies in China. The cards are usually
     purchased with cash at newspaper kiosks, small shops, and
     internet cafes. IPS operates a service called Ipay.

Eastern Europe
In Poland, only 50 percent of the country’s population has a bank
account, according to ING Group. Banking penetration was 69
percent in Hungary at the end of 2003.
    Many East European (EE) residents avoid setting up bank            Katimba market, Central Kampala, Uganda. Credit sln.org.uk
accounts because they lack confidence in the banking system.
This mindset is gradually changing as governments encourage                Ethopia has less than one bank branch per 100,000 people – a
salary payments directly into bank accounts.                           developed nation like Spain has an average of 96 branches. Even
    Austria’s Erste Bank has the largest network in the region and     in South Africa, where the sector is more sophisticated, only 40
intends to target the unbanked in Hungary, the Czech Republic,         percent of adults have bank accounts. But there is a huge demand
Croatia, Serbia and Romania. Western banks in EE are focusing          for bank services. Finding this demand unfulfilled, millions of
on meeting the needs of the younger population. In Poland, only        Africans turn to informal services or invest in cattle.
49 percent of people over the age of 15 have a bank account,               But banks are increasingly adopting innovative methods. South
according to Polish research company Pentor.                           Africa has physically taken branches to the unbanked, either as
    Almost 40 percent of Poles who participated in a recent banking    prefabricated units, or in vans that make visits to under-served
survey attributed the low level of banking penetration to their lack   areas. In remote areas, machines have been installed in shops where
of savings. Only 5 percent of Polish people use Internet banking,      customers print out a slip and present it to the shopkeeper, who
against an average of 24 percent in Europe as a whole; 4 percent       provides the cash. Some rural branches and ATMs rely on solar
of Poles use telephone banking services compared with 7 percent        energy and satellite phone.
in Europe, according to Forrester Research.                                The ‘Big Four’ banks of South Africa (ABSA, First National
    To make it easier for Poles to access banking products, ING        Bank, Nedbank Group and Standard Bank) and the government
Bank Slaski, the Polish operation of ING Group, has simplified          developed the innovative Mzansi account in 2003 which is a
some products. The new offerings include a savings account which       low-cost transaction account. It enables banks to cover at least
offers one flat interest rate and a low-interest credit card.           70 percent of the unbanked market in a relatively short time.
    Plastic card technology is expected to present the banking         The government provided a small subsidy to cover the cost. It is
industry with an important means of tapping the unbanked               targeted at people who earn less than R2,000 (US$264) a month.
market. Moreover, according to Global Insight, electronic              It now has more than 4 million subscribers.
payments are expected to grow from $3.8 billion in 1999 to $25.8           Studies conducted by Genesis Analytics for the Finmark Trust
billion in 2009, thus indicating greater use of non-traditional        in 2004 have suggested that point-of-sale (POS) facilities can play
                                                                                                                                    i4d | June 2009
14
an increasingly important role in providing the unbanked access
to basic financial services in South Africa.
    West African financial services biggies Zenith Bank and
Ecobank and multinationals Citibank and the International
Finance Corporation have set up the Acción Microfinance Bank in
Nigeria. It aims to provide low income earners and entrepreneurs
with credit facilities and finance.
    Mobile banking seems to be the most promising option in
Africa. Few Africans may have bank accounts, but many have
mobile phones. Wizzit (a financial services provider), First
National Bank (FNB) and MTN Banking (a joint venture between
Standard Bank and a mobile-phone network), are targeting the
14 million unbanked South Africans.
    In Kenya and Botswana, 17 percent of the unbanked own               El Alto Market. Credit fellowsblog.kiva.org
a mobile phone, according to the FinMark Trust. In Kenya,
Vodafone and Safaricom, Kenya’s leading mobile operator,                about 5.1 million customers and 1800 branches. It has grown
launched an m-commerce payment service, M-PESA, aimed at the            steadily in recent years by concentrating on personal lending,
unbanked in March 2006. Within three months, it had 150,000             car financing, insurance, and investment funds. It helps that
customers, with 2,500 new users signing up each day.                    local interest rates are dropping and that Brazil’s government
    First Bank linked-up with Nigeria’s second biggest mobile           has introduced incentives to increase credit. For example,
operator, Globacom. The partners introduced the GloFirst card           payroll loans, whereby installments are debited from paychecks
in conjunction with the switching company Interswitch. GloFirst         are now permitted.
can be used to withdraw money, check card balance, print mini               In Brazil, banks are using nonbanking outlets, such as kiosks
statements, change the Personal Identification Number (PIN) and          and even supermarkets, to reach customers. However, the central
transfer money to another cash card or bank account.                    bank’s efforts in the way of promoting community representatives
                                                                        or agents and microfinance efforts are slowly bringing more of the
Latin America                                                           unbanked into the mainstream.
Chile reports the highest penetration and the lowest percentage             However, obstacles remain: agent-handled accounts are subject
of its population living below the poverty level. It is followed by     to transaction limitations, interest rate caps render microcredit
Brazil, where the majority of households have checking accounts         unprofitable and credit information is scanty.
because most payrolls in the formal economy are disbursed                   Electronic payments in Latin America are slowly taking off, but
electronically. Until recently, 40 million Brazilians had no access     are hampered by factors such as low income and lack of banking
to banking services. Nonetheless, access to consumer credit in          penetration. Banks are trying to keep the reform momentum
Brazil is mostly limited to the middle and upper class, and even        going. For example, Mexico has launched a three-year public-
foreign banks target primarily customers with an annual income          private initiative to expand the number of chip-enabled point of
of at least $20,000.                                                    sale terminals. The goal is to divert the use of cash taken from
    In Mexico, the formal banking sector has targeted only the          ATMs to POS debit-card transactions in its continuing battle to
top 15 percent of the population, while the other 85 percent is         suppress the informal economy.
considered too risky and unprofitable. Now, however, more foreign
banks in the sector have begun to pay closer attention to the retail    Conclusion
credit card business and other remittance-linked products. In           The numbers involved in meeting the needs of the unbanked
Colombia, where 55 percent of the population lives under poverty        may seem daunting, but in reality they represent a billion-strong
level, access to bank credit is low at 23 percent.                      opportunity for banks. By paying greater attention to their wants
    Therefore, Latin America’s huge unbanked population offers an       and developing sensitivity to their needs, banks will be able to
enormous opportunity for banks recognising their potential. To          develop customised products and include the unbanked in their
serve the banking needs of a relatively low-income economy with         scheme of things.
low penetration requires innovative and imaginative non-branch             Banks may do well to remember that they have a business
solutions. Microfinance and IT are enabling banks to serve the           imperative in converting the periphery into the mainstream.
excluded at relatively lower costs. Banks are also helping create                                                                Gautam Bandyopadhyay
financial literacy with the help of community leaders.                                                           Principal Consultant at Infosys Technologies
    Bancomer, one of Mexico’s nationalised banks, is reaching out
to the lower-income segment by offering simplified and more                 References:
accessible products, such as pre-paid credit cards or cards with fixed      Research by Boston Consulting Group
monthly payments. To cultivate a culture of savings in Mexico,             Research by Celent
                                                                           McKinsey Quarterly
Bancomer has made available a savings account-debit card combo
                                                                           The Economist
for a minimum deposit of about $70.                                        The Financial Express
    Santander Banespa, a Spanish-backed bank in Brazil, manages
June 2009 | www.i4donline.net
                                                                                                                                                       15
MICROFINANCE IN INDIA



Microfinance:
A bigger picture
The term, ‘Microfinance’ refers to the             services. Some major initiatives include               that the NFBC must have a minimum
provision of a broad range of financial             the bank linkage programme under                       US$ 46,511.6 Net Owned Funds (NOF)
services to low-income households                  the guidance and supervision of the                    that will make it eligible to accept public
and their microenterprises. Financial              National Bank for Agriculture and Rural                deposits. RBI introduced a new regulatory
services generally include microsavings,           Development (NABARD) in 1992, the                      framework for the NBFCs in 1998, focused
microcredit, money transfer vehicles               setting of the Rashtriya Mahila Kosh to                on NFBC accepting public deposits with
and microinsurance. Microfinance                   re-finance microfinance activities of NGOs               a view to safeguarding the interests of the
services are generally provided by formal          in 1993 and the establishment of Small                 depositors. RBI also established a Micro
institutions, such as rural banks and              Industries Development Bank of India                   Credit Special Cell in 1999-2000 to
cooperatives, semiformal institutions              (SIDBI) Foundation for Micro-Credit                    suggest measures for augmenting flow of
such as non-government organisations;              (SFMC) as a financier of Microfinance                    microcredit. In the same year, NABARD
and informal sources like money lenders            Institutions (MFIs). On the policy front,              established the Task Force on Supportive
and shopkeepers.                                   RBI has come out with directives on                    Policy and Regulatory Framework for Micro
                                                   various aspects of microfinance provision.              Credit. Based on the recommendations of
Need of microfinance in India                      Releasing the fact that Self-Help Groups               the Advisory Committee on Flow of Credit
Statistics from the World Bank estimates           (SHGs) and NGOs are a priority sector,                 to Agriculture and Related Activities from
that more than 87 percent of India’s poor          RBI engaged them in microfinance                       the Banking System, in its Annual Policy
can not access credit from formal sources          business by registering them as Non-                   Statement for the year 2004-05, RBI
and therefore have to depend on money              Banking Financial Companies (NBFCs).                   stated, in view of the need to protect the
lenders who charge them exorbitant                 As a result, commercial banks, regional                interests of depositors, MFIs would not be
interest rates ranging from 48% to 120%            rural banks (RRBs) and cooperative banks               permitted to accept public deposits unless
per annum or even higher. This shows               have also emerged as important channels                they complied with the extant regulatory
that the potential market of small money           of microfinance provision.                              framework of the Reserve Bank.
lenders, who can lend money according to               Through the RBI (Amendment) Act,                       T h e Mi c ro Fi n a n c i a l Se c t o r
the demand for financial services for this          1997, RBI made it obligatory for NBFCs to              (Development and Regulation) Bill,
section of the society. The provision of such      apply to RBI for certificate of registration.           2007, was introduced in March 2007
services, if implemented correctly, could          One of the conditions for application was              which applies only to three categories of
have a significant impact
on the poor. Releasing this Table 1: Growth of linked SHG’s in the regions
fact, under the Reserve
                                    Region            Beneficiaries
Bank of India Act, 1934,                                                         %                %
RBI undertook regulation                      March  March    March March increase between increase between  Share of Share of BPL
and supervision of all the                     2004  2005      2006   2007    2005-06          2006-07      population population
banks promoting and doing           North     52,396 86018    133097 182018      6%               6%          13%         7%
microfinance.                        North     12278  34238     62517 91754       3%               3%           4%         3%
                                     East
Regulatory                           East        158237      265628                               18%               18%
                                                                        394351 525881                                            22%          29%
framework of
microfinance in                      Central     127009      197365     267915 332729             12%               11%          25%          32%
India                                West         54815      96266      166254 270447             7%                 9%          15%          14%
In early 1990s, there have
                                     South       674356      939941    1214431 1522144            54%               52%          21%          15%
been many significant state
initiatives in the institutional     All India   1079091    1618456 2238565 2924973              100%              100%          100%        100%
and policy spheres to enable
the poor access financial          Source: Poverty Estimates for 2004-05, PIB, Government of India, New Delhi, March, 2007

                                                                                                                                          i4d | June 2009
16
not-for-profit MFIs: societies, trusts and cooperatives. These            Table 2: Region-wise growth in outreach in 2003-04 and 2004-05
are collectively referred to in the bill as Micro Finance                   MFIs by       No. of   Outreach - FY Annual Growth Annual Growth
Organisations (MFOs).                                                       regional      MFIs         2005      (%) in outreach (%) in outreach
                                                                          distribution                              FY 2005         FY 2004
Progress under the SHG Bank Linkage                                           East          18        332476             61.12             32.68
Programme (SBLP)
                                                                              West          2          6,738              31.4             42.15
India has seen an average annual growth rate of 82 percent in
providing microfinance services through SHGs in the period from               North          3          91317             11.34              19.5
March 1993 to March 2006, in relation to a 110 percent growth                South          45        1710323             67.5             51.73
rate in terms of credit amount. SHG Bank Linkage Programme
                                                                             Total          68        2140854            62.86             45.94
has proved to be the major supplementary credit delivery system
with wide acceptance by banks, NGOs and various government               Source: Poverty Estimates for 2004-05, PIB, Government of India, New Delhi,
departments. During the financial year 2005-2006, around                 March, 2007
620,109 SHGs were linked under the SHG Bank Linkage                         Table 2 shows that growth is concentrated in two regions, the
Programme, it incorporates more than nine million households             South and East, which already account for about 95 percent of
into the financial sector.                                                membership. The 31 percent growth was recorded in the West,
    According to the NABARD Annual Report 2007, the western              on an extremely small base, while only 11 percent growth was
region of India has experienced 63 percent of growth in its entire       registered in the North, among a larger base. With financial
region. Table 1 shows that the growth rate in eastern region was         support from government for SHG programmes the establishment
33 percent and in central region, the growth rate was 24 percent.        of a large number of MFIs following the SHG model has
The figures also show that the southern region is leading in              been registered.
the programme. During the financial year 2005-2006, Andhra                   From the perspective of the legal framework (Fig 1), the
Pradesh had further consolidated its role as the leading state in the    proposed new microfinance law does not cover nearly 80% of
size of SHG movement by holding 279 households participating in          these clients since 73% are served by NBFCs or MFIs on the
SHGs for every 1,000 households. During this period, the number          verge of transformation to NBFCs and another 6% by Section
of new loans in Andhra Pradesh, remained about the same but the          25 (not for profit) companies. Such institutions fall outside the
number of repeat loans increased by 31 percent/year. Himachal            ambit of the proposed law.
Pradesh, Kerala, Assam, Rajasthan, West Bengal and Maharashtra
formed an intermediate group with 94, 85, 82, 65, 61 and 56
households participating in SHGs for every 1,000 households,
respectively. In Uttaranchal and Jharkhand there were less than
thirty-two households participating in SHGs for every 1,000. In
Jammu and Kashmir, Haryana, Punjab and Arunachal Pradesh
there were less than ten households participating in SHGs for
every 1,000 of the total households.

MFI performance: Efficiency with growth
The MFI model in India is characterised by a diversity of
institutional and legal forms. The first and most well known
MFI, SEWA, was incorporated as an urban cooperative bank in
1974 and demonstrated that poor people were bankable. In the
1980s, a number of registered societies and trusts commenced
group-based savings and credit activities on the basis of grant
funds from donors. MFIs of all legal forms have their own funds
or are built up mainly from; (i) donor grants in the case of societies   Source: Poverty Estimates for 2004-05, PIB, Government of India, New Delhi,
and trusts, (ii) equity investments and promoters’ capital in the        March, 2007
case of companies, (iii) shareholdings in the case of cooperatives,
as well as (iv) retained earnings in the case of all three categories,   Progress under social performance
the main source of funds is debt, borrowed from the banks and            MFIs and those who work for MFIs like banks, investors, and
apex financial institutions.                                              donors are social enterprise. For any MFI, financial sustainability
    In the last decade, the MFI model has seen a series of critical      is important. An MFI that can cover its costs - has good financial
developments in the Indian MFI sector. According to the estimates        performance - can grow to serve more clients in more areas.
of 2006 Annual Report by Microfinance India, joint effort of              Social performance in microfinance is defined as “the translation
Care, Ford Foundation and Swiss Agency for Development and               of mission into practice in line with accepted social goals”: These
Cooperation (SDC), Large MFIs are more efficient in the disbursal         social goals relate to:
of funds with 81 percent of total assets held as loans, as against       • Reaching the poor or excluded clients
75 percent in the case of medium and small MFIs.                         • Improving the quality and appropriateness of financial
June 2009 | www.i4donline.net
                                                                                                                                                       17
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Indiamicrofinance.com I I4D Magazine I June09 Microfinance India

  • 1. Vol. VII No. 6 June 2009 The first monthly magazine on ICT4D Microfinance: Leveraging ICTs ICTs for Microfinance One billion opportunities Banking the Unbanked Globally Information for development Microfinancing Ghana w w w. i 4 d o n l i n e . n e t Microfinance Sector in Ghana Microfinance : The Road to Self-sufficiency ICTs and Microfinance ISSN 0972 - 804X knowledge for change
  • 3. Contents Vol. VII No. 6 June 2009 Mail box Features Rendezvous 5 Editorial et Fueling the growth 43 Global Conference on Financing the Poor: Moving info@i4d online.n Beyond Inclusion, 29 December, ICTs for Microfinance 6 Microfinance: Leveraging ICTs 2009, New Delhi, India Sabyasachi Kashyap Exploring the impact of microfinance Dinoj Kumar Upadhyay Banking the Unbanked Globally 12 One billion opportunities The i4d magazine is an extremely useful resource for those of us who are practitioners Gautam Bandyopadhyay Interview in the field of ICT for D. It is well produced, and has informative and enlightening content 16 Microfinance in India Microfinance: A bigger picture 10 Rita Soni, Senior Vice-President, which is very helpful for us to keep up with changes and developments in the field. Many Ritu Srivastava congratulations to the team! YES BANK Inclusion through Prashant Sharma Microfinance Sector in Ghana innovation Deputy Executive Secretary and 19 Microfinancing Ghana Communications Manager Veronica Agodoa Kitti Mountain Forum Secretariat, ICIMOD, Nepal Accounting System in Orissa Columns prashant@mtnforum.org 26 Panchayats e-Cashbook in Orissa panchayats I have been reading the two previous issues of your magazine and found them really very Shreemanta Kumar Samal, Sanjay Prakash Sahoo 45 What’s on informative. I would like to thank your team for such a valuable magazine on ICT4D. In Fact 46 Microfacts about microfinance Mahendranath Busgopaul Internet Child Safety Foundation, Mauritius 29 Microfinance and Gender Equity Money for women by women mahen@icsfonline.org Ritu Srivastava I take this opportunity to thank for the whole i4d team for the wonderful edition of the ZERO MASS Foundation 32 Development initiatives community multimedia Gender and ICTs. Loknath Panda Snapshots of Hara Padhy UNESCO, Paris Best Microfinance Institutions microfinance 34 Forbes magazine’s top 50 MFIs solutions h.Padhy@unesco.org I have been very regularly getting i4d issues. Thanks for the efforts put by i4d team. I got FAO-GTZ Microbanking System 40 Technology for microfinancing an invitation to write an article in the magazine International Federation for Information Processing (IFIP). They have made a mention i4donline.net 41 National Bank for Agriculture and Rural Development News that they are writing to me after reading my article on Network community services in Search ICT4D news by date in the sectors of governance, rural India in i4d. Thanks for introducing me (NABARD), India health, education, agriculture and so on. Banking for All to the network!!! E-mail Dr. N.S. Vasanthi Subscribe to daily, weekly, monthly newsletters online or Professor and Head, send request to info@i4donline.net Department of Biotechnology, 23 Microfinance News Bannari Amman of Institute of Technology, Print edition 38 India News The past issues of the magazine are available online Tamil Nadu, India, www.i4d.csdms.in/archive/archive.htm vasanthiuk@yahoo.com 39 World News New! Please continue to send us your Knowledge bank valuable feedback to help us of serve you better. books on ICT4d 25-27 August 2009, Hyderabad, India www.i4d.csdms.in/floss/introduction.asp info@i4donline.net www.eINDIA.net.in www.i4donline.net/feedback.asp
  • 4. Subscription Form EDITORIAL GUIDELINES SUBSCRIBE Information for development www.i4donline.net TODAY! i4d contains articles, case studies and essays on the theme of ‘ICT for development’ Duration Issues News stand Subscription Saving Subscription and related issues. Authors are requested (Year) Price Rs. Rs. US$ to follow the guidelines while sending 1 12 2400 2160 10% (Rs. 240) US$ 200 their articles to i4d. Please also consult the 2 24 4800 4080 15% (Rs. 720) US$ 320 editorial calendar to choose the theme of 3 36 7200 5040 30% (Rs. 2160) US$ 400 your interest. We also accept soft or hard copy submissions of your contributions. We encourage you to share your original research with our readers. The Editor’s decision to select, accept, modify or adjust your write-ups due w Nocribe to space constraints will be final. subs ne! Editorial guidelines are available at onli http://www.i4donline.net/Editorial/ Editorial_Guidelines.asp All correspondence should be I/We would like to subscribe for 1 2 3 years. addressed to: (circle as applicable) First name............................................................................................ Last name .......................................................................... The Editor-in-chief, i4d Designation/profession ........................................................................ Organisation ...................................................................... G-4, Sector-39, Noida, India Mailing address ................................................................................... City .................................................................................... Tel +91-120-2502180 to 85 State ................................................... Country ................................ Postal code ......................................................................... Fax +91-120-2500060 Tel (o) ................................................... Tel (r)................................................................. Fax .......................................................... Email info@i4donline.net Email ................................................... Website ............................................................................................................................. Payments for mailed subscriptions are only accepted via cheque or demand draft. Cash payments may be made in person. (tick one and fill as applicable) Please find enclosed my/our cheque/demand draft numbered dated ......................... for Rs......................................... in favour of CSDMS a/c payable at New Delhi. I am submitting this form in person and paying by cash CSDMS team Please use photocopies of this form as required. i4d news i4d, G-4 Sector 39, Noida 201 301, India Tel +91 120 250 2180 to 85 Fax +91 120 250 0060 Now Email info@i4donline.net available in daily, i4d Editorial Calendar 2009 Month Theme weekly, January Rural BPOs and monthly Feburary e-Agriculture email newsletters! March ICT in Climate Change April ePanchayat Subscribe at May ICTs in Elections June ICTs and Microfinance July Agriculture www.i4donline.net August Mobiles for Development 4 i4d | June 2009
  • 5. Editorial Fueling the growth Now that it has been widely accepted that microfinancing does not have to be an enterprise that runs on a not-for- profit basis, the challenge that faces us today is to make Advisory Board microfinance more accessible, customised, and effective Dr M P Narayanan, Chairman, i4d while ensuring sustainable growth of the sector as a whole. Chin Saik Yoon Southbound Publications, Malaysia Karl Harmsen It has been rightly said that sound microfinancing strategies have the United Nations University potential to alleviate global poverty. But to do so, we have to find ways Kenneth Keniston to reach the millions of unbanked and under-banked households Massachusetts Institute of Technology, USA who desperately need this support to get out of poverty and stay above the poverty line. Nagy Hanna e-Leadership Academy, University of Maryland, USA Richard Fuchs Several questions need to be answered and a similar number of challenges have to be IDRC, Singapore overcome to reach our goals. With the aid of modern ICT tools it is possible to reach the last Walter Fust mile and also serve the population living in remote areas. But technology is just one of the Global Humanitarian Forum, Switzerland components of this intervention with connectivity taking the lead among the related loops Wijayananda Jayaweera UNESCO, France that need to be closed, apart from the capacity building needs for the population to be served. EDITORIAL BOARD Equally important is the creation of enabling policies that allow and, if required, Akhtar Badshah, Frederick Noronha incentivize the setting up of Microfinance Institutions (MFIs). Also imperative is strong EDITORIAL TEAM regulation and monitoring of these MFIs to curb the incidences of MFI operators Editor-in-Chief Dr Ravi Gupta running away with the savings of their victims. Since the target demography has Assistant Editor Sandeep Budki probably never been exposed to banking services, they also require financial education. Research Assistant Subir Dey Sr. Graphic Designer Bishwajeet Kumar Singh None of these issues can be taken in isolation and have to go hand in hand to provide Graphic Designers Om Prakash Thakur, Shyam Kishore succour from poverty to the disadvantaged citizens of the world. Web Programmer Zia Salahuddin i4d G-4 Sector 39, NOIDA, UP, 201 301, India In this issue, we have tried to bring to you varied perspectives of how different countries, Phone +91 120 250 2181-85 Fax +91 120 250 0060 Email info@i4donline.net Web www.i4donline.net organisations and government agencies are combating poverty through financial inclusion Printed at R P Printers, Noida, India with an eye on gender equity. We hope you find this issue informative and thought provoking enabling us all to find new ways to meet the challenges that lie ahead. i4d is a monthly publication. It is intended for those interested and involved in the use of Information and Commnication Technologies for development of underserved communities. It is hoped that it will serve to foster a growing network by keeping the community up to date on many activities in this wide and exciting field. i4d does not necessarily subscribe to the views expressed in this publication. All views expressed in this magazine are those of the contributors. i4d is not responsible or accountable for any loss incurred directly or indirectly as a result of the information provided. Dr Ravi Gupta Ravi.Gupta@csdms.in Centre for Science, Development and Media Studies, 2008 Except where otherwise noted, this work is licensed under a Creative Commons Attribution 2.5 License i4d is supported by: June 2009 | www.i4donline.net 5
  • 6. ICTS FOR MICROFINANCE Microfinance: Leveraging ICTs This article suggests Over the last decade or so, the world seemed to have woken up to the reality and fund transfers. In the last few years of its existence, many organisations have jumped the ways through that to empower the rural marginalised communities and to alleviate the poverty onto the microfinance bandwagon which includes not-for profit NGOs, development which the existing scenario in the world, they need to be given opportunities to save, borrow and professionals, corporates, commercial banks, international donor agencies, etc. ICT tools and repay loans. Till a few years back, banking institutions, for the purpose of offering The reasons for the enthusiasm varies from the belief that microfinance offers a good technologies can banking services to the marginalised, experimented with subsidised credit developmental alternative to the belief, especially among the commercial banks, bring the poorer which affected the overall performance of the banks and contributed to the rise who have opened microfinance branches for their microfinance operations, that section of the in Non-Performing Assets (NPA). Thus subsidised credit as an option gradually microfinance offers a good, sound banking option. The government has also routed society in the ambit lost its popularity among banks. Moreover more than the cost of credit, it was access various developmental schemes through microfinance. Microfinance leaders are of the microfinance to credit which was considered as the major barrier for the poor. With little or no gaining prominence and it is said that some of the leaders, particularly women, services means to afford the collaterals/mortgages, the poorer section of the society had to have been taking a more active role in other social spheres, including contesting resort to unscrupulous moneylenders for elections for the panchayat and so on2. loans which pushed them further into the The microfinance sector has grown vicious cycle of indebtedness. The reason exponentially over the past few years and behind this was access or the lack of it and the World Bank estimates that there are not interest rate. now over 7000 Microfinance Institutions Microfinance has come to be recognised (MFIs), serving some 16 million poor as the most viable, efficient and result- people in developing countries. The oriented mode of financially empowering total cash turnover of MFIs worldwide the poor. For Robinson “Microfinance is estimated at US$2.5 billion and the refers to small scale financial services potential for new growth is outstanding. for both credits and deposits – that are It is estimated that worldwide, there are provided to people who farm or fish or 13 million microcredit borrowers, with herd; operate small or microenterprises USD 7 billion in outstanding loans, and where goods are produced, recycled, generating repayment rates of 97 percent. repaired, or traded; provide services; work It has been growing at a rate of 30 percent for wages or commissions; gain income annual growth3. from renting out small amounts of lands; However, several issues and impediments vehicles, draft animals, or machinery and to the success of microfinance as an tools; and to other individuals and local industry have cropped up, the primary of groups in developing countries, in both them being: scalability and sustainiblity rural and urban areas”.1 Microfinance of MFIs, and outreach and impact of the also entails the condition of sustainably microfinance initiatives. Thousands of Sabyasachi Kashyap delivering the services and is not merely MFIs around the globe are realising that the sabyasachi@telecentremagazine.net confined to credit (microcredit) but solution for the scaling up, and ensuring encompasses in its range savings, insurance, maximum outreach and sustainability of i4d | June 2009 6
  • 7. palmtop computers is typically uploaded to the MIS at the end of the day, either directly in the branch office or via a remote communications link. Furthermore, the roll-out of wireless broadband infrastructure will enable these systems to be always online resulting in true real-time data collection and monitoring of the loan portfolio at branch and institutional levels. Correspondent banking One of the key challenges for MFIs is providing financial services to clients in remote areas including rural areas where the population density is low, the market is smaller and providing service entails high costs. Correspondent Banking – whereby a bank links itself with third party merchants located in remote areas – has emerged as a solution for this problem of outreach. Correspondents manage transactions on behalf of the partner Photo Credit: CARE India institution and are remunerated on a fee-for-service basis. Bank Correspondents are expected to be having long-term businesses, MFIs lies in leveraging the benefits of technology, more specifically and should be respected and trusted in their communities. The information and communication technologies (ICTs). ICTs have Bank Correspondents should also be ‘ICT-enabled’; generally opened new window of opportunities for the MFIs to reach out to equipped with equipments such as an Electronic Funds Transfer at more people, controlling the risks making the business sustainable, Point of Sale (EFTPOS) device, barcode readers and/or keypads, a and bringing down the costs of operation. With new softwares personal computer, etc. They are linked to the partner institution’s specially designed to cater to the needs of the MFIs, mobile servers using a telephone line, cable or satellite link. Post offices, phones, efficient Management Information Systems, among supermarkets, general stores, grocery stores, telecentres, etc, are others, technology can and will in the near future bring about a good examples of Banking Correspondents. In India, commercial paradigm shift in the domain of microfinance. banking entities like State Bank of India, HDFC, have tied up with the respective Service Centre Agencies(SCAs) in the states ICT usage for MFIs under the framework of National eGovernance Plan (NeGP) to The current discourse on and practice of microfinance has provide Banking Correspondent status to the Common Service inevitably redirected itself through the ICT route for maximising Centres (CSCs) equipped with ICT infrastructure and provide outreach and ensuring sustainability. Adoption of ICTs also brings microfinance services through them. about business processes re-engineering because they povice efficient, transparent and cost-effective mechanisms to run the Credit cards, and ATMs business of MFIs. MFIs have readily adopted ICTs for they have In today’s world of banking, consumer credit cards are an been looking for a change agent that will harness the benefits of indispensable part of the bouquet of services offered by a financial ICT tools for best possible management and reduce costs, time institution. Some of the advantages of consumer credit cards and efforts. are reduced costs associated with small transaction lending, unsecured credit, small transactions, and pre-defined credit Management Information Systems (MIS) limits. Other salient features of credit cards include on-demand To monitor the quality, sustainability, and efficiency of the loan borrowing, re-draw facility, and repayment flexibility within portfolio, to measure its development impact, and properly pre-defined guidelines. Since these services address the needs of manage the administration tasks of an MFI, computerised small borrowers also due to their potential to relieve them from Management Information Systems comes in very handy. MIS are their dependency on moneylenders for the same set of services the most fundamental aspect of an MFI’s hi-tech infrastructure that are not provided by MFIs. Due to this utility of credit and it is difficult for an MFI to upscale significantly and maintain cards the concept of Microcredit Cards have emerged and with the accuracy and transparency of its loan portfolio without an more opportunities. A credit card enabled MFI can implement MIS that can grow with the institution. There is no denying the microfinance tuned credit-scoring alogrithm which ensures fact that an appropriate backoffice MIS is the backbone of ICT that clients who have proved their credit worthiness over time innovation for the delivery of microfinance services. through successful business transactions with MFIs can have their However, for MIS to really contribute to the efficiency of the credit limit increased and be given access to additional sources MFI, it has to be accurate, and up to date. MFIs find it difficult of credit. Smart cards have an embedded computer chip that can to maintain updated records as they have their offices in remote store client and transaction data, as well as process information. locations which rely on manual data-entry and paper based Smart cards function as electronic passbooks, thereby reducing transaction records. ICT innovations like mobile computing reliance on printed receipts. However, the introduction of card applications and palmtops at the hands of the loan officers who based services would demand setting up of EFTPOS functionality can directly record the transaction into the MIS can make this and/or Automatic Teller Machines (ATMs). Because all relevant system more efficient and up to date. The data entered into the client data is stored on the card, June 2009 | www.i4donline.net 7
  • 8. the options because of the ubiquity of its use and popularity even among the poorer section of the society. It is estimated there will be three billion mobile subscribers in the world by 2010. World GSM Association, further adds that mobile phone is the first and only communication technology to have more users in developing countries than in developed countries. Mobile phones have become mobile wallets by facilitating electronic payments in exchange for goods and services. m-Commerce has assumed tremendous significance under the circumstances and this development in m-commerce has positively affected the microfinance industry also with usages like facilitating savings deposits, loan repayments and other funds transfers. For the cost of sending an SMS message, the phone user/microfinance client uses an application stored on his mobile phone to initiate a transfer from his mobile phone account to his bank account. Microfinance softwares In tune with the emergence of service delivery technologies, various softwares have also been developed by technology innovators helping the microfinance industry to tackle challenges associated with efficiency, transparency, outreach and sustainability. The softwares and tools like, FINO (Financial Information Network and Operations), SafalFin, etc., vary in their nature and function. However, their utility to the smooth functioning of the operations are subject to speculation as some of the softwares come with high investments which a startup MFI may not be in a position to afford. However, low cost solutions like Computer Munshi System developed by an Indian NGO named Pradaan has promised to address this issue of affordability for MFIs. Built at low cost, this MFIs can utilise EFTPOS systems and ATMs that do not software aims to improve book keeping of the Self Help Groups need to be always online. This is a significant advantage in areas (SHGs) as also to improve transparency, equity and longevity of where telecommunication services are unreliable and/or expensive. its groups. The model basically aims to improve the accounting One more value addition to the services of MFIs are the use of and book keeping of the SHGs.4 biometric technology (such as fingerprint scanners) which ensure client identification as well as privacy and data security. Conclusion In a nutshell, various experiments for integrating microfinance Internet banking and ICT have been undertaken and even more numbers are Internet Banking, in many ways, has revolutionised the banking going to come in the future. The issue however, is to enable scenario as it provides clients with real-time information about the MFIs to meet their goals by helping them have maximum their accounts, and the ability to transfer funds between their outreach, be sustainable and be transparent in their business accounts. It has become an integral part of the banking operations and processes. ICT can only be an enabler, and not the driver, and by giving clients the liberty of using their own convenient and the real success of MFIs has to be measured vis-a-vis their time to bank, and that too without having to visit the bank, it has social performance and not by their ICT/technology readiness become an empowering tool. MFIs, however, face the challenge and preparedness. of limited or more often than not no access to Internet services of their clients. The rural telecentre network, being rolled out References: across the developing world, could come in handy here too, by 1. Robinson, Marguerite S, ‘Microfinance: the Paradigm Shift from Credit Delivery providing access to the clients. to Sustainable Financial Intermediation’, in Mwangi S Kimenyi, Robert C Wieland and J D Von Pischke (eds), 1998, Strategic Issues in Microfinance, Mobile banking Ashgate Publishing: Aldershot Cellular phones, especially with GSM backbone, due to its 2. Microfinance: An Introduction by R Srinivaan and M S Sriram in Round Table, accessibility and affordability are becoming an indispensable IIMB Management Review, June 2003, (Pg-52-53) communication tool for the poor in the developing countries. 3. Hari Srinivas, The Global Development Research Centre (GDRC),http://www. As per the World GSM Association report, during the year gdrc.org/icm/data/d-snapshot.html accessed on 29-05-2009 2003-2006, more than 800 million mobile phones were sold in 4. Report of the Steering Committee on Microfinance and Poverty Alleviation, The developing countries. Mobile phones in today’s scenario have Eleventh Five Year Plan, (2007-08 - 2011-12), Development Policy Division, become the only option for communication from being one of Planning Commission, New Delhi, May - 2007, Pg-28 i4d | June 2009 8
  • 9. te r Security Disas ent HIV/AIDS s gem and tool Mana ICTs Environmental 2.0 unity Web omm Cybercrim e using Concerns: C ent eWaste for owerm p Em ICTs for So ICT and Net cial MSMEs wor peace ks in Initiatives Inte rnet c Civi nal/ CTs sitio I The Fuel Crisis ppo ics and O it s tin g Giving Voices Community and Pol ICT udge ing and Assertive R ights: Climate Change er B eam Sexual and Radio end instr Reproductive R in Gd Ma ights an Safe Learning Drinking Water for and The O Grassroots Sanitation Move pen ICT ICTs and ment Statistics Innovations Food Security Ne w g nin Lear ys Internet Wa Governance Another year of i4d is here. A host of issues are to be talked about. Do you work on any of these areas ? Do you have a project that should be covered ? Are you an expert on any of the themes ? Are you interested to collaborate ? Write to us at: subir@csdms.in
  • 10. INTERVIEW: RITA SONI, SENIOR VICE PRESIDENT AND COUNTRY HEAD - RESPONSIBLE BANKING, YES BANK, Inclusion through innovation www.yesbank.in In an interview with Sabyasachi Kashyap from CSDMS, Rita Soni talks about YES BANK’s foray into financial inclusion by banking and microfinancing through the Internet, ATMs, debit cards and mobile channels. Rita Soni Senior Vice President and Country Head-Responsible Banking, YES BANK As per the latest census, almost one fourth of the population in products and services to un-banked/under-banked, low-income India lives Below Poverty Line. What role do you see banking communities across urban and rural India. institutions like YES BANK playing here? As of March 2009, Wholesale Lending stood at USD 60 At YES BANK, we are working towards sustainable solutions to million with 16 MFIs, covering an estimated 500,000 clients in poverty through financial interventions by mainstream banking over 1000+ villages. YES BANK offers a comprehensive package activities. Utilising sustainable and mainstream approaches allows of banking and advisory services, dovetailed with the expertise of us to reach the scale which is necessary to reach the 800 million relevant business units within the Bank to use structured capital Indians living on less than US$2 per day. In our young bank, market products to help MFIs leverage access to cost-effective we have chosen to focus on ‘Responsible Banking’, promoting funds from a broader pool of sophisticated investors. The Bank financial inclusion and business solutions to social issues. works as a holistic financial solutions provider working with Where does financial inclusion fit into YES BANK’s scheme different stakeholders, i.e., mainstream investors, rating agencies, of “Responsible Banking”? policymakers and technology vendors resulting in an aggregation YES BANK is committed to creating equal financial opportunities of services, cutting-edge innovation and thought leadership and enabling financial inclusion, but it is our emphasis on required to create a conducive environment for growth of the innovation which is making the real impact. For instance, in industry. microfinance the vision is to go beyond offering plain vanilla YES BANK also stands out for its focus on urban poverty banking to providing the industry access to the mainstream capital using individual lending methodology in a market that has largely markets. This approach helps MFIs achieve scale at a lower cost executed group lending to rural women. One of the ground of funds, thereby resulting in affordable financial products for breaking features of our model is the fact that in setting up the the Base of the Pyramid (BOP). YES BANK has a two-pronged first institutionally sponsored direct intervention model for microfinance strategy to provide easy access to suitable financial microfinance, the Bank has created a benchmark institution that i4d | June 2009 10
  • 11. becomes the reference point for what our wholesale practice strives a vision to address issues of rural India through the previously for in terms of helping transform partner MFIs into commercially mentioned innovative financial interventions, complemented with viable financial services providers for the BOP. Direct Lending is expert advisory services and thought leadership. These practices in accomplished through YES SAMPANN (Hindi for fulfillment), microfinance, ARSB, advisory and thought leadership go beyond currently in its pilot phase with a portfolio of 2000+ micro- the banking sector regulator, Reserve Bank of India’s (RBI) directed entrepreneurs. The business is projected to reach a client base of credit policy mandated through its Priority Sector Lending (PSL) a 1,000,000 with a portfolio size in excess of USD 100 million in requirement, and adopts the spirit of addressing poverty to the 5 years offering products such as micro loans for working capital, core. Below are specific examples where this combination approach insurance and savings schemes. has yielded results: In 2008, YES BANK worked with Jain Irrigation Systems Ltd. Across the world, there is widespread recognition that (JISL) to reach nearly 50,000 small and marginal farmers across information and communication technologies (ICTs) have India. As a testament to this ‘business solution to social issue’, tremendous potential in facilitating the inclusion of the the BANK conducted a comprehensive sustainability report for underserved/un-banked population into the banking network. JISL, outlining both the manner in which they operate as well as Can you share your views about this? specific social and environmental initiatives. Bridging the technology gap between the urban and rural Another important rural client is Buldana Urban Credit population through ICT is undeniably a step in the right direction, Cooperative Society. The financing from YES BANK reaches however YES BANK feels that unless discrepancies in the content, approximately 8,000 rural households across western Maharashtra. standards and delivery of basic, primary/secondary education and The Cooperative has a unique approach of ‘social banking’ which vocational training programmes are proactively addressed, the has built the institution and met the needs of its members. In effectiveness of ICT led initiatives will be greatly hindered. This addition to these financial services, the Bank conducted a detailed opinion and mode of thinking has spurred YES BANK to begin study of the approach, uncovering a gamut of best practices that forging working relationships with NGOs and social businesses can be applied by urban and rural banks. currently working in the education and ICT space to develop The Bank also plays the role of thought leader in several areas effective educational content, especially in the realms of financial including poverty issues. As an example, YES BANK and the literacy, in order to enhance the national curriculum and skills American India Foundation jointly wrote a report highlighting the development programmes in rural and urban India. social and economic issues surrounding rural to urban migration in the country. A key feature of the report ‘Managing the Exodus’ What are YES BANK’s initiatives in providing banking is ways to provide rural populations employment opportunities facilities to the underserved population in the rural areas? and social services through the public private partnership model In addition to the microfinance initiatives already mentioned, in a bid to mitigate their migration to urban areas. YES BANK also has a dedicated focus in the area of ‘Farmer In addition to financing Shriram Transport Finance Company Financing’. The Agri-Business, Rural and Social Banking (ARSB) Ltd. (STFCL), YES BANK facilitated an HIV/AIDS awareness team develops innovative financial models, which leverage the programme for their trucker clients. This programme brought the outreach of various stakeholders in the Agri Value Chain to Bank forward to form knowledge partnerships and synergies with address ‘last mile’ issues. In the last year, the Bank has disbursed the Clinton HIV/AIDS Initiative (CHAI) and the Red Cross. approximately INR 700 crores in direct farmer financing, The programme has reached out to 14 locations, 10 states and impacting approximately 140,000 farmers. ARSB works closely over 10,000 truckers who have been sensitized since this project with Swiss Re and Agriculture Insurance Company of India (AIC) began in October 2007. to facilitate the development and distribution of need-based insurance products for the agriculture sector, such as weather Are the branches operating in the rural areas providing insurance for grapes in the Nashik region. ‘anytime anywhere banking’ facilities? If yes, could you share As an example, YES BANK recently announced its partnership your experiences with this? with Zameen Organic, a farmer-owned producer company aimed A standard feature in all our branches, urban and rural, we offer at closer collaboration between farmers and companies to fortify ‘Anytime Anywhere Banking’ through the Internet, ATM, Debit inclusive and sustainable growth while building a transparent Card and Mobile Channels. Customers can also transfer funds supply chain. This alliance intends to create equal opportunities for at their convenience, from home or office, to over 53,000 bank producers and workers who have been economically marginalised branches across the country using the NEFT and RTGS facility. because of the conventional trading system. The business model They are also given complimentary multi-city payable at par empowers 6500 farmers to have effective and end-to-end control cheque books for ease of payments. Under the aegis of the ‘One on the ‘Fair Trade Organic Cotton’ supply chain which has resulted Branch’ model, customers can access their account from any of in improved economic condition of farmers from the Adilabad the 117 state-of-the-art YES BANK branches, at no extra charge. (Andhra Pradesh) and Vidharbha (Maharashtra) region. We were also one of the first few banks to offer complimentary access to over 32,000 ATMs in the country. Our technology edge Could you elaborate a bit more about your experiences in imparts ‘reach and easy’ access to our rural branches and our the rural areas? ‘anytime anywhere’ facilities have received encouraging response Within the Responsible Banking framework, YES BANK has in rural areas. June 2009 | www.i4donline.net 11
  • 12. BANKING THE UNBANKED GLOBALLY One billion opportunities Introduction what banks can do to capitalise on this • Simplicity and speed in processing Look and you’ll see an exciting landscape opportunity. • Small product sizes when it comes emerging in the banking arena. One where to loans and low-balance savings there is a billion-strong market actively How to bank the unbanked accounts seeking financial services but remains In China and India only about a third of • Proximity and ease of access largely unattended to. These globally the population participates in the formal • Ba s i c f i n a n c i a l e d u c a t i o n o r distributed prospective customers represent banking sector. In Africa the number is just information since the unbanked enormous earning potential for banks, but 25 percent. India has the second-highest may not understand even elementary constitute the unbanked. number of financially excluded households concepts of banking The unbanked are those who do not in the world – 135 million – after China’s Most banks find it difficult to meet utilise banking services and have limited 263 million. Africa as a whole has 230 these needs because of the high economic banking needs. The unbanked are not million unbanked households, and Central cost of servicing these demands. However, the poorest of the poor. However, they and Eastern Europe and Latin America have a little out-of-the box thinking in devising certainly include those whom banks need 19 million and 42 million, respectively. products that are simple and accessible can to serve but cannot do so profitably in the But irrespective of where in the help ensure inclusive growth. existing banking environment. Though world they might be, this unbanked Some of these measures could include these consumers need access to banking section of society has similar needs for tying up with an NGO or with a retailer and for savings, loans and microfinance, they financial services. Apart from the obvious using village residents and empowerment do not have bank accounts. The reasons requirements of savings, loans, transactions, groups as representatives. These can for this are compelling. and investments, the unbanked have lower customer acquisition costs and • Lack of steady and substantial income certain special needs, which are: increase customer base, thus helping leading to a fear of insufficient funds • Flexibility in savings and repayment banks overcome the high cost challenge. for an account schedules owing to a lack of steady Such groups also help banks mitigate risks • Limited access to banks, especially in income associated with dealing with the unbanked. remote areas An estimated 2.6 million self-help groups • Lack of formal employment that in India are linked to banks, giving precludes a financial history financial institutions access to 40 million • Poor financial literacy • Psychological factors such as mistrust This paper aims to households. It is important that the products are of financial institutions educate the banking downsized without being downgraded to This unbanked billion is not outside the match the unbanked population’s smaller banking sector by choice. An important sector to reach out to requirements by offering low installments reason for their predicament is that banks and flexible repayment options. Banks do not offer them suitable products the unbanked masses also require performance metrics and tailored to their needs. In effect, they have regulatory conditions that are more suited been excluded by the banks’ inability to around the world to including the unbanked in the financial understand their requirements and the mainstream. unwillingness to adopt innovative models by giving examples Some banks are using inter-industry to serve them. However, this billion also constitutes from across the globe partnerships to increase financial inclusion. For example, banks in Brazil have added an enormous opportunity – if banks about initiatives of 100,000 point-of-sale locations to distribute are willing to accept the challenge of products by tying up with retailers. including them with an eye on the bigger some enterprising Not only are these channels cheaper for picture. This paper provides a regional banks but they are also more convenient perspective to this issue and examines banking entities for consumers. i4d | June 2009 12
  • 13. Banks must realise – and they are seeing the light – that since Mobile banking is another way of reaching out to such customers the unbanked have remained unaddressed by traditional financial and is also a huge opportunity for banks in India. According to institutions, they will not hesitate to choose newer players for a TRAI report, the total number of mobile subscribers by March basic banking services such as payment and deposit transactions. 31, 2008 was 261.08 million as against last year’s 165.09 million Collaborating with telecom players, adding a mobile channel, and (an increase of 58.14 percent). This figure shows that in just utilising cross-selling opportunities will go a long way in meeting three years, the number of mobile subscribers has grown over 4.5 the needs of the unbanked. times. India is adding more subscribers per month than any other In many emerging economies, mobile consumers are growing at country. According to the GSM Association (Global Association a much faster rate than bank customers. Mobile banking is taking for GSM Providers), the next billion subscribers will come from off because it is convenient, fast, simple, and secure. Moreover, the BOP (Bottom of the Pyramid) market, of which India will it is a cost-effective option for banks. Gartner has estimated that have the largest share. The growth of mobile phone subscribers there will be 33 million mobile payment users worldwide in 2008, is outpacing the growth of banking customers as also PC and with the Asia Pacific taking the lead. Gartner expects this number Internet users in India. to triple to 103.9 million users in 2011. In 2006, banks were allowed to take the help of NGOs Other forms of branchless banking and e-payment gateways and microfinance institutions as intermediaries in offering such as payment cards and the Internet can also help banks increase banking services through the use of correspondents. This was their outreach. Banks need to experiment and include the next perhaps a factor for many banks that opened six million no frills billion consumers not merely for the socio-economic assistance accounts with low or zero minimum balances between March they will gain. The step will also have a strong business imperative 2006 and 2007. for banks. Not only will a bank increase its customer base, but ICICI Bank, HDFC Bank and Citibank have launched their it will also ensure increasing numbers of future customers as own microfinance programmes. HDFC Bank thus has tied incomes increase. up with NGOs in Andhra Pradesh and Tamil Nadu to make Let us examine how banks are reaching the unbanked in various financial services accessible to the rural poor. Citibank has linked parts of the world, namely, India, China, Eastern Europe, parts up with NGOs. Standard Chartered plans to lend $100 million of Africa, and Latin America. for micro-financing by 2008, up from current commitments of $40 million. India Banks are looking at technology to provide banking services at The Indian banking market is zooming, with assets expected to low cost – and this includes rural banking too. Citi has set up a reach $1 trillion by 2010. An expanding economy, a growing bio-metric ATM as a part of its ‘no frills’ Pragati account for the middle class, and technological innovations are contributory under-banked. The ATM recognises the customer through their factors, according to a Celent report, ‘Overview of Indian thumb impression and can interact in regional languages. Banking Market’. The industry is focusing on the retail side of the market, with China a Compound Annual Growth Rate (CAGR) of 23 percent in Estimates about the numbers of unbanked Chinese vary. The the past five years. However, despite this thrust on retail banking, People’s Bank of China (PBC) estimates that only 36 percent banks will have to come up with creative and simple solutions to of Chinese rural households have access to financial services. As make money in India. This is because India has a huge unbanked one indicator of demand, the informal finance market has been population and unless this is included, neither will banks prosper, estimated at anywhere between CNY 1 trillion ($132 billion) to nor the country. CNY 2 or 3 trillion. Banks have also realised the potential of this market and But the bigger Chinese banks have for many years now have come up with innovative means of reaching it. They are been moving out of rural areas, goaded by commercialisation going back to rural pockets for financial inclusion. State Bank and competitive pressures. According to the State Council of India is drawing up plans to reach out to 100,000 villages. In Development Research Centre (DRC), the four big state banks September 2007, ABN Amro Bank announced its microfinance have reduced their presence in rural areas by over 43 percent in division had provided basic financial support to some 500,000 ten years, closing 30,000 branches in the last five years alone. underprivileged households. Building more branches in the countryside may not always The Chinese government has launched several initiatives be cost-effective. So banks need to explore other options by to test out new forms of rural financial service providers. developing a better understanding of what rural households need Among them: and offer new products and distribution networks to suit them. • The People’s Bank of China in December 2005 launched Providing banking services through ‘Banking Correspondents’ a pilot initiative to establish Microcredit Companies using represented by self-help groups, NGOs and other approved commercial licensing organisations is one branchless banking mechanism. Touch-points • The China Banking Regulatory Commission in December may be set up by such organisations at places commonly visited by 2006 introduced their own pilot, creating new types of the unbanked, such as the village markets or schools. This may be licenses for rural financial institutions supplemented by outreach teams equipped with hand-held devices McKinsey believes that given the reliance on cash in rural on which simple banking transactions can be performed. China and that additional ATMs do not appear to be the answer, June 2009 | www.i4donline.net 13
  • 14. the existing mobile Short Message Service network could quickly banking options. This also offers banks a channel for growth. and cheaply provide an SMS-based payment system in rural Similarly, post offices, which constitute more than 50 areas. Since the most expensive parts of the infrastructure — the percent of the physical infrastructure for access to the financial network and phones — are in place, this solution would be sector, could provide an innovative POS alternative to reach out relatively low in cost, between $40 million and $60 million. By to the unbanked. forming a partnership, banks, network operators and merchants According to the August 2003 Datamonitor report, banks in could unlock spending. the region are looking to move beyond branch-centric distribution. The Chinese largely rely on cash payments, thus increasing the This includes extending ATM networks and looking at online and importance of the cash-based e-payment channel. Some leading phone banking. The highest growth in IT spending was expected third-party payment providers are adding cash-based and non- to come from Romania and Bulgaria. bank based payment options to their offerings. These include: 1. Cash remittance: Alipay is a third-party payment provider, Africa allowing users to top up accounts with cash through China’s According to the IMF, African countries are enjoying their postal service. This service was launched in March 2007 in best period of sustained economic expansion since attaining selected China Post branches throughout China. independence. Real GDP growth is expected to rise from 5.7 2. Mobile toll stations: Smartpay, China’s leading mobile top- percent in 2006 to 6.8 percent in 2008. Still, only 20 percent of up company, has formed a network of approximately 30,000 families in Africa have bank accounts. dealers. Smartpay dealers allow users with bank accounts to easily use Smartpay’s services, which in turn gives Smartpay access to a much wider range of potential users. 3. Targeting the unbanked with pre-paid cards: e-payment player IPS uses mobile and telephone prepaid cards in order to reach unbanked users. This service takes advantage of the popularity of prepaid top-up cards used for phone bills, online games, and virtual currencies in China. The cards are usually purchased with cash at newspaper kiosks, small shops, and internet cafes. IPS operates a service called Ipay. Eastern Europe In Poland, only 50 percent of the country’s population has a bank account, according to ING Group. Banking penetration was 69 percent in Hungary at the end of 2003. Many East European (EE) residents avoid setting up bank Katimba market, Central Kampala, Uganda. Credit sln.org.uk accounts because they lack confidence in the banking system. This mindset is gradually changing as governments encourage Ethopia has less than one bank branch per 100,000 people – a salary payments directly into bank accounts. developed nation like Spain has an average of 96 branches. Even Austria’s Erste Bank has the largest network in the region and in South Africa, where the sector is more sophisticated, only 40 intends to target the unbanked in Hungary, the Czech Republic, percent of adults have bank accounts. But there is a huge demand Croatia, Serbia and Romania. Western banks in EE are focusing for bank services. Finding this demand unfulfilled, millions of on meeting the needs of the younger population. In Poland, only Africans turn to informal services or invest in cattle. 49 percent of people over the age of 15 have a bank account, But banks are increasingly adopting innovative methods. South according to Polish research company Pentor. Africa has physically taken branches to the unbanked, either as Almost 40 percent of Poles who participated in a recent banking prefabricated units, or in vans that make visits to under-served survey attributed the low level of banking penetration to their lack areas. In remote areas, machines have been installed in shops where of savings. Only 5 percent of Polish people use Internet banking, customers print out a slip and present it to the shopkeeper, who against an average of 24 percent in Europe as a whole; 4 percent provides the cash. Some rural branches and ATMs rely on solar of Poles use telephone banking services compared with 7 percent energy and satellite phone. in Europe, according to Forrester Research. The ‘Big Four’ banks of South Africa (ABSA, First National To make it easier for Poles to access banking products, ING Bank, Nedbank Group and Standard Bank) and the government Bank Slaski, the Polish operation of ING Group, has simplified developed the innovative Mzansi account in 2003 which is a some products. The new offerings include a savings account which low-cost transaction account. It enables banks to cover at least offers one flat interest rate and a low-interest credit card. 70 percent of the unbanked market in a relatively short time. Plastic card technology is expected to present the banking The government provided a small subsidy to cover the cost. It is industry with an important means of tapping the unbanked targeted at people who earn less than R2,000 (US$264) a month. market. Moreover, according to Global Insight, electronic It now has more than 4 million subscribers. payments are expected to grow from $3.8 billion in 1999 to $25.8 Studies conducted by Genesis Analytics for the Finmark Trust billion in 2009, thus indicating greater use of non-traditional in 2004 have suggested that point-of-sale (POS) facilities can play i4d | June 2009 14
  • 15. an increasingly important role in providing the unbanked access to basic financial services in South Africa. West African financial services biggies Zenith Bank and Ecobank and multinationals Citibank and the International Finance Corporation have set up the Acción Microfinance Bank in Nigeria. It aims to provide low income earners and entrepreneurs with credit facilities and finance. Mobile banking seems to be the most promising option in Africa. Few Africans may have bank accounts, but many have mobile phones. Wizzit (a financial services provider), First National Bank (FNB) and MTN Banking (a joint venture between Standard Bank and a mobile-phone network), are targeting the 14 million unbanked South Africans. In Kenya and Botswana, 17 percent of the unbanked own El Alto Market. Credit fellowsblog.kiva.org a mobile phone, according to the FinMark Trust. In Kenya, Vodafone and Safaricom, Kenya’s leading mobile operator, about 5.1 million customers and 1800 branches. It has grown launched an m-commerce payment service, M-PESA, aimed at the steadily in recent years by concentrating on personal lending, unbanked in March 2006. Within three months, it had 150,000 car financing, insurance, and investment funds. It helps that customers, with 2,500 new users signing up each day. local interest rates are dropping and that Brazil’s government First Bank linked-up with Nigeria’s second biggest mobile has introduced incentives to increase credit. For example, operator, Globacom. The partners introduced the GloFirst card payroll loans, whereby installments are debited from paychecks in conjunction with the switching company Interswitch. GloFirst are now permitted. can be used to withdraw money, check card balance, print mini In Brazil, banks are using nonbanking outlets, such as kiosks statements, change the Personal Identification Number (PIN) and and even supermarkets, to reach customers. However, the central transfer money to another cash card or bank account. bank’s efforts in the way of promoting community representatives or agents and microfinance efforts are slowly bringing more of the Latin America unbanked into the mainstream. Chile reports the highest penetration and the lowest percentage However, obstacles remain: agent-handled accounts are subject of its population living below the poverty level. It is followed by to transaction limitations, interest rate caps render microcredit Brazil, where the majority of households have checking accounts unprofitable and credit information is scanty. because most payrolls in the formal economy are disbursed Electronic payments in Latin America are slowly taking off, but electronically. Until recently, 40 million Brazilians had no access are hampered by factors such as low income and lack of banking to banking services. Nonetheless, access to consumer credit in penetration. Banks are trying to keep the reform momentum Brazil is mostly limited to the middle and upper class, and even going. For example, Mexico has launched a three-year public- foreign banks target primarily customers with an annual income private initiative to expand the number of chip-enabled point of of at least $20,000. sale terminals. The goal is to divert the use of cash taken from In Mexico, the formal banking sector has targeted only the ATMs to POS debit-card transactions in its continuing battle to top 15 percent of the population, while the other 85 percent is suppress the informal economy. considered too risky and unprofitable. Now, however, more foreign banks in the sector have begun to pay closer attention to the retail Conclusion credit card business and other remittance-linked products. In The numbers involved in meeting the needs of the unbanked Colombia, where 55 percent of the population lives under poverty may seem daunting, but in reality they represent a billion-strong level, access to bank credit is low at 23 percent. opportunity for banks. By paying greater attention to their wants Therefore, Latin America’s huge unbanked population offers an and developing sensitivity to their needs, banks will be able to enormous opportunity for banks recognising their potential. To develop customised products and include the unbanked in their serve the banking needs of a relatively low-income economy with scheme of things. low penetration requires innovative and imaginative non-branch Banks may do well to remember that they have a business solutions. Microfinance and IT are enabling banks to serve the imperative in converting the periphery into the mainstream. excluded at relatively lower costs. Banks are also helping create Gautam Bandyopadhyay financial literacy with the help of community leaders. Principal Consultant at Infosys Technologies Bancomer, one of Mexico’s nationalised banks, is reaching out to the lower-income segment by offering simplified and more References: accessible products, such as pre-paid credit cards or cards with fixed Research by Boston Consulting Group monthly payments. To cultivate a culture of savings in Mexico, Research by Celent McKinsey Quarterly Bancomer has made available a savings account-debit card combo The Economist for a minimum deposit of about $70. The Financial Express Santander Banespa, a Spanish-backed bank in Brazil, manages June 2009 | www.i4donline.net 15
  • 16. MICROFINANCE IN INDIA Microfinance: A bigger picture The term, ‘Microfinance’ refers to the services. Some major initiatives include that the NFBC must have a minimum provision of a broad range of financial the bank linkage programme under US$ 46,511.6 Net Owned Funds (NOF) services to low-income households the guidance and supervision of the that will make it eligible to accept public and their microenterprises. Financial National Bank for Agriculture and Rural deposits. RBI introduced a new regulatory services generally include microsavings, Development (NABARD) in 1992, the framework for the NBFCs in 1998, focused microcredit, money transfer vehicles setting of the Rashtriya Mahila Kosh to on NFBC accepting public deposits with and microinsurance. Microfinance re-finance microfinance activities of NGOs a view to safeguarding the interests of the services are generally provided by formal in 1993 and the establishment of Small depositors. RBI also established a Micro institutions, such as rural banks and Industries Development Bank of India Credit Special Cell in 1999-2000 to cooperatives, semiformal institutions (SIDBI) Foundation for Micro-Credit suggest measures for augmenting flow of such as non-government organisations; (SFMC) as a financier of Microfinance microcredit. In the same year, NABARD and informal sources like money lenders Institutions (MFIs). On the policy front, established the Task Force on Supportive and shopkeepers. RBI has come out with directives on Policy and Regulatory Framework for Micro various aspects of microfinance provision. Credit. Based on the recommendations of Need of microfinance in India Releasing the fact that Self-Help Groups the Advisory Committee on Flow of Credit Statistics from the World Bank estimates (SHGs) and NGOs are a priority sector, to Agriculture and Related Activities from that more than 87 percent of India’s poor RBI engaged them in microfinance the Banking System, in its Annual Policy can not access credit from formal sources business by registering them as Non- Statement for the year 2004-05, RBI and therefore have to depend on money Banking Financial Companies (NBFCs). stated, in view of the need to protect the lenders who charge them exorbitant As a result, commercial banks, regional interests of depositors, MFIs would not be interest rates ranging from 48% to 120% rural banks (RRBs) and cooperative banks permitted to accept public deposits unless per annum or even higher. This shows have also emerged as important channels they complied with the extant regulatory that the potential market of small money of microfinance provision. framework of the Reserve Bank. lenders, who can lend money according to Through the RBI (Amendment) Act, T h e Mi c ro Fi n a n c i a l Se c t o r the demand for financial services for this 1997, RBI made it obligatory for NBFCs to (Development and Regulation) Bill, section of the society. The provision of such apply to RBI for certificate of registration. 2007, was introduced in March 2007 services, if implemented correctly, could One of the conditions for application was which applies only to three categories of have a significant impact on the poor. Releasing this Table 1: Growth of linked SHG’s in the regions fact, under the Reserve Region Beneficiaries Bank of India Act, 1934, % % RBI undertook regulation March March March March increase between increase between Share of Share of BPL and supervision of all the 2004 2005 2006 2007 2005-06 2006-07 population population banks promoting and doing North 52,396 86018 133097 182018 6% 6% 13% 7% microfinance. North 12278 34238 62517 91754 3% 3% 4% 3% East Regulatory East 158237 265628 18% 18% 394351 525881 22% 29% framework of microfinance in Central 127009 197365 267915 332729 12% 11% 25% 32% India West 54815 96266 166254 270447 7% 9% 15% 14% In early 1990s, there have South 674356 939941 1214431 1522144 54% 52% 21% 15% been many significant state initiatives in the institutional All India 1079091 1618456 2238565 2924973 100% 100% 100% 100% and policy spheres to enable the poor access financial Source: Poverty Estimates for 2004-05, PIB, Government of India, New Delhi, March, 2007 i4d | June 2009 16
  • 17. not-for-profit MFIs: societies, trusts and cooperatives. These Table 2: Region-wise growth in outreach in 2003-04 and 2004-05 are collectively referred to in the bill as Micro Finance MFIs by No. of Outreach - FY Annual Growth Annual Growth Organisations (MFOs). regional MFIs 2005 (%) in outreach (%) in outreach distribution FY 2005 FY 2004 Progress under the SHG Bank Linkage East 18 332476 61.12 32.68 Programme (SBLP) West 2 6,738 31.4 42.15 India has seen an average annual growth rate of 82 percent in providing microfinance services through SHGs in the period from North 3 91317 11.34 19.5 March 1993 to March 2006, in relation to a 110 percent growth South 45 1710323 67.5 51.73 rate in terms of credit amount. SHG Bank Linkage Programme Total 68 2140854 62.86 45.94 has proved to be the major supplementary credit delivery system with wide acceptance by banks, NGOs and various government Source: Poverty Estimates for 2004-05, PIB, Government of India, New Delhi, departments. During the financial year 2005-2006, around March, 2007 620,109 SHGs were linked under the SHG Bank Linkage Table 2 shows that growth is concentrated in two regions, the Programme, it incorporates more than nine million households South and East, which already account for about 95 percent of into the financial sector. membership. The 31 percent growth was recorded in the West, According to the NABARD Annual Report 2007, the western on an extremely small base, while only 11 percent growth was region of India has experienced 63 percent of growth in its entire registered in the North, among a larger base. With financial region. Table 1 shows that the growth rate in eastern region was support from government for SHG programmes the establishment 33 percent and in central region, the growth rate was 24 percent. of a large number of MFIs following the SHG model has The figures also show that the southern region is leading in been registered. the programme. During the financial year 2005-2006, Andhra From the perspective of the legal framework (Fig 1), the Pradesh had further consolidated its role as the leading state in the proposed new microfinance law does not cover nearly 80% of size of SHG movement by holding 279 households participating in these clients since 73% are served by NBFCs or MFIs on the SHGs for every 1,000 households. During this period, the number verge of transformation to NBFCs and another 6% by Section of new loans in Andhra Pradesh, remained about the same but the 25 (not for profit) companies. Such institutions fall outside the number of repeat loans increased by 31 percent/year. Himachal ambit of the proposed law. Pradesh, Kerala, Assam, Rajasthan, West Bengal and Maharashtra formed an intermediate group with 94, 85, 82, 65, 61 and 56 households participating in SHGs for every 1,000 households, respectively. In Uttaranchal and Jharkhand there were less than thirty-two households participating in SHGs for every 1,000. In Jammu and Kashmir, Haryana, Punjab and Arunachal Pradesh there were less than ten households participating in SHGs for every 1,000 of the total households. MFI performance: Efficiency with growth The MFI model in India is characterised by a diversity of institutional and legal forms. The first and most well known MFI, SEWA, was incorporated as an urban cooperative bank in 1974 and demonstrated that poor people were bankable. In the 1980s, a number of registered societies and trusts commenced group-based savings and credit activities on the basis of grant funds from donors. MFIs of all legal forms have their own funds or are built up mainly from; (i) donor grants in the case of societies Source: Poverty Estimates for 2004-05, PIB, Government of India, New Delhi, and trusts, (ii) equity investments and promoters’ capital in the March, 2007 case of companies, (iii) shareholdings in the case of cooperatives, as well as (iv) retained earnings in the case of all three categories, Progress under social performance the main source of funds is debt, borrowed from the banks and MFIs and those who work for MFIs like banks, investors, and apex financial institutions. donors are social enterprise. For any MFI, financial sustainability In the last decade, the MFI model has seen a series of critical is important. An MFI that can cover its costs - has good financial developments in the Indian MFI sector. According to the estimates performance - can grow to serve more clients in more areas. of 2006 Annual Report by Microfinance India, joint effort of Social performance in microfinance is defined as “the translation Care, Ford Foundation and Swiss Agency for Development and of mission into practice in line with accepted social goals”: These Cooperation (SDC), Large MFIs are more efficient in the disbursal social goals relate to: of funds with 81 percent of total assets held as loans, as against • Reaching the poor or excluded clients 75 percent in the case of medium and small MFIs. • Improving the quality and appropriateness of financial June 2009 | www.i4donline.net 17