The Centre for Micro Finance A comprehensive approach of Microfinance Karachi November 1 st , 2006
Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Res...
Microfinance: who are the targeted clients? Poor and vulnerable households economically at the Bottom of the Pyramid How c...
Microfinance: what is it? … whereas objectives are Often perceived as… <ul><li>Suite of financial services </li></ul><ul><...
The challenge ahead: demand vs. supply gap to bridge Supply Demand <ul><li>60% of MF services in South </li></ul><ul><li>S...
Constraints overcome those challenges? <ul><li>Information Asymmetry </li></ul><ul><li>No collateral </li></ul><ul><li>No ...
Thus the need for institutions’ building Systems Finance <ul><li>Venture capital for start ups </li></ul><ul><li>Cheaper c...
Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Res...
CMF’s objectives and mission <ul><li>Established in 2005 </li></ul><ul><li>CMF’s objectives </li></ul><ul><ul><li>To addre...
CMF’s Objectives Research Influence  practice Advocacy Strategy building Training
MSU and RU re-enforcement loop Strategy (MSU) Research (RU) <ul><li>Impact of microfinance </li></ul><ul><li>Impact Evalua...
CMF collaborates with existing active players in the microfinance sector Manufacturing  Companies  Insurance Companies  Fu...
Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Res...
Understand  better <ul><li>Why are recovery rates so high? </li></ul><ul><li>What is the financial behavior of clients?  <...
These objectives translate into 4 Research areas to maximize microfinance impact Microfinance  plus Finance and Organizati...
Impact and experimentation <ul><li>“ Micro-credit has been changing people's lives and revitalizing communities” </li></ul...
Product design: credit Selection Monitoring Enforcement <ul><li>Individual/group liability </li></ul><ul><li>Self/MFI sele...
What do low income clients want? <ul><li>Insurance </li></ul><ul><li>Weather  </li></ul><ul><li>Life and Health </li></ul>...
Improve communication strategies <ul><li>How do households face shocks and risk? </li></ul><ul><li>What drives savings and...
Microfinance Plus: address contextual constraints ? Impact Health infrastructure entrepreneurship Access to Financial serv...
Organizational issues: cost and profitability Bank Transaction? Micro-loan 9% 25% Return? <ul><li>How to reduce transactio...
Organizational and financial issues <ul><li>What is the debt capacity of clients? Can they absorb higher loan sizes?  </li...
Policy issues <ul><li>What are regulatory obstacles to MFIs? </li></ul><ul><li>What are the consequences of competition an...
Microfinance plus Finance and Organizational issues Policy Impact and  product design <ul><li>Effect of staff incentives <...
Research: other initiatives <ul><li>Construction of a panel database in Tamil Nadu for on-going research </li></ul><ul><li...
Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Res...
MSU: Objectives   and areas of work <ul><li>Advice MFIs to  define and execute a growth strategy  by addressing their main...
MSU: Areas of work with MFIs Business strategy Organizational structure <ul><li>3y strategic plan definition </li></ul><ul...
Reduction of MFIs cost of funds: Supply-demand match assessment  Supply Demand Identify potential assets to securitize/buy...
4 options to explore and 4 types of players to interview to reduce MFIs costs of funds 1 Portfolio Securitization Bond iss...
HR training, recruiting, incentives Potential partners Organizational structure <ul><li>MFIs careers, Hunt – Third sector ...
Training / capacity building for MFIs: questions to be answered <ul><li>Identify & prioritize immediate and recurring trai...
MIS: partnership with FINO 3 <ul><li>To develop a common end to end delivery platform shared across Indian MFIs </li></ul>...
Market linkage creation: approach Corporates MFI <ul><li>Local presence in identified region? </li></ul><ul><li>Willingnes...
<ul><li>Dairy activity is a low revenue activity for farmers in spite of a growing milk demand and therefore remains a mar...
Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (2/2) Godrej Agrovet Spandana <ul><li>Pro...
Godrej Agrovet-Spandana: productivity improvement 4 Initial situation Dealer  Godrej Distributor Farmer Dealer Dairy After...
Godrej Agrovet-Spandana: productivity improvement After Spandana-Godrej partnerships Spandana buys cattle feed in bulk at ...
Market linkage example: Mint cropping (1/2)  <ul><li>Traditional crops are being produced in the Eastern Uttar Pradesh by ...
Market linkage example: Mint cropping (2/2) Mint Procurement Companies Requirement MFI’s Role <ul><li>Identify client on t...
<ul><li>Handicraft </li></ul><ul><li>Fisheries /  Seaweed </li></ul><ul><li>Trees plantation </li></ul><ul><li>Food proces...
Thank you <ul><li>For any question… </li></ul><ul><li>[email_address]  or  [email_address]   </li></ul>
Constraints to scaling access for the poor <ul><li>Information Asymmetry </li></ul><ul><li>No collateral </li></ul><ul><li...
How to release these constraints? <ul><li>To improve impact of microfinance on the poor </li></ul><ul><li>To increase acce...
CMF: Who are we?  <ul><li>Permanent staff : 23 Research associates and 8 MSU Associates from Kennedy School, Yale, IFMR, X...
CMF’s Objectives Research Influence  practice Advocacy Strategy building Training
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  • Against an estimate demand of Rs. 20,000 crore to Rs. 50,000 crore for credit, the supply from financial sources was less than Rs. 2500 crores Traditionally, it has been believed that the poor are not bankable. The main reasons relate to Lack of information on the income flows and expenditure patterns of households (which makes it difficult to assess whether the individual will be able to pay for the services. E.g. in the urban retail client some indicators used are salary slip, income tax return, ownership of assets, number of family members, etc.) The costs of reaching services is very large. E.g. SHARE one of the largest micro finance organisations in the county employs over 3000 people to service a portfolio of Rs. 2000 million. Banks typically handle much larger amounts per individual (ICICI Bank has a 5 person micro-finance team that handles Rs. 4000 million) The absence of facilitative environment such as absence of well functioning commodity markets, non existence of credit bureaus, etc. act as a hindrance. Indian regulations do not permit MFIs to collect savings. However, the FM’s in his budget speech has allowed Banking Correspondents.
  • Note: * =&gt; Maximum net revenue calculation is only taking cost of feed into account for 4 buffaloes. There might be extra costs due to vaccinations and labour costs associated with a new and more demanding feeding schedule.
  • Against an estimate demand of Rs. 20,000 crore to Rs. 50,000 crore for credit, the supply from financial sources was less than Rs. 2500 crores Traditionally, it has been believed that the poor are not bankable. The main reasons relate to Lack of information on the income flows and expenditure patterns of households (which makes it difficult to assess whether the individual will be able to pay for the services. E.g. in the urban retail client some indicators used are salary slip, income tax return, ownership of assets, number of family members, etc.) The costs of reaching services is very large. E.g. SHARE one of the largest micro finance organisations in the county employs over 3000 people to service a portfolio of Rs. 2000 million. Banks typically handle much larger amounts per individual (ICICI Bank has a 5 person micro-finance team that handles Rs. 4000 million) The absence of facilitative environment such as absence of well functioning commodity markets, non existence of credit bureaus, etc. act as a hindrance. Indian regulations do not permit MFIs to collect savings. However, the FM’s in his budget speech has allowed Banking Correspondents.
  • Against an estimate demand of Rs. 20,000 crore to Rs. 50,000 crore for credit, the supply from financial sources was less than Rs. 2500 crores Traditionally, it has been believed that the poor are not bankable. The main reasons relate to Lack of information on the income flows and expenditure patterns of households (which makes it difficult to assess whether the individual will be able to pay for the services. E.g. in the urban retail client some indicators used are salary slip, income tax return, ownership of assets, number of family members, etc.) The costs of reaching services is very large. E.g. SHARE one of the largest micro finance organisations in the county employs over 3000 people to service a portfolio of Rs. 2000 million. Banks typically handle much larger amounts per individual (ICICI Bank has a 5 person micro-finance team that handles Rs. 4000 million) The absence of facilitative environment such as absence of well functioning commodity markets, non existence of credit bureaus, etc. act as a hindrance. Indian regulations do not permit MFIs to collect savings. However, the FM’s in his budget speech has allowed Banking Correspondents.
  • Approach

    1. 1. The Centre for Micro Finance A comprehensive approach of Microfinance Karachi November 1 st , 2006
    2. 2. Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Research Unit </li></ul></ul><ul><ul><li>MFI Strategy Unit </li></ul></ul>
    3. 3. Microfinance: who are the targeted clients? Poor and vulnerable households economically at the Bottom of the Pyramid How can microfinance improve their lives? Low Income Middle Class HNI Ultra poor
    4. 4. Microfinance: what is it? … whereas objectives are Often perceived as… <ul><li>Suite of financial services </li></ul><ul><ul><li>Thrift / savings </li></ul></ul><ul><ul><li>Credit </li></ul></ul><ul><ul><li>Insurance and Investments </li></ul></ul><ul><ul><li>Transfer Payments and Remittances </li></ul></ul><ul><li>Group and individual lending </li></ul><ul><li>Sustainable activity </li></ul><ul><li>Micro-credit </li></ul><ul><li>Group lending </li></ul><ul><li>Social/charitable activity </li></ul>
    5. 5. The challenge ahead: demand vs. supply gap to bridge Supply Demand <ul><li>60% of MF services in South </li></ul><ul><li>Several un-served areas </li></ul><ul><li>< 2M Households reached </li></ul><ul><li>500M un-served poor </li></ul><ul><li>Fast growing population and overall economy </li></ul><ul><li>Range of risks to be covered </li></ul><ul><li>Missing market linkages / employment opportunities </li></ul><ul><li>Limited non-credit services </li></ul>Improve access Increase impact <ul><li>Largely urban </li></ul><ul><li>Mostly rural </li></ul><ul><li>$1.5 Bn* </li></ul><ul><li>$50Bn </li></ul>* Including loans against gold
    6. 6. Constraints overcome those challenges? <ul><li>Information Asymmetry </li></ul><ul><li>No collateral </li></ul><ul><li>No credit history </li></ul><ul><li>Difficult to evaluate enterprises’ potential success </li></ul><ul><li>High Costs of Intermediation </li></ul><ul><li>Low value transactions </li></ul><ul><li>Geographical isolation </li></ul><ul><li>High supervision costs (no financial literacy) </li></ul><ul><li>Informal activities: need flexible access </li></ul><ul><li>Illiteracy: traditional services inappropriate </li></ul><ul><li>High cash handling costs </li></ul>Difficult risk assessment High transaction costs How to release these constraints?
    7. 7. Thus the need for institutions’ building Systems Finance <ul><li>Venture capital for start ups </li></ul><ul><li>Cheaper cost of funds for on lending </li></ul>Capacities <ul><li>Product development </li></ul><ul><li>Technology platform </li></ul><ul><li>Clients’ authentication by unique ID </li></ul><ul><li>Staff Skills strengthening / Training </li></ul><ul><li>Recruiting of professionals </li></ul><ul><li>MFI Entrepreneurs development </li></ul>Research <ul><li>Assess and Increase impact on poverty alleviation </li></ul><ul><li>Experiment and improve products </li></ul>
    8. 8. Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Research Unit </li></ul></ul><ul><ul><li>MFI Strategy Unit </li></ul></ul>
    9. 9. CMF’s objectives and mission <ul><li>Established in 2005 </li></ul><ul><li>CMF’s objectives </li></ul><ul><ul><li>To address knowledge gaps in micro finance sector </li></ul></ul><ul><ul><li>Experiment on ground solutions </li></ul></ul><ul><li>CMF’s mission </li></ul><ul><ul><li>Systematically research links between access to financial services and participation of poor in larger economy </li></ul></ul><ul><ul><li>Participate in maximizing access to financial services </li></ul></ul>Research on micro finance and livelihood financing (RU) Strategy building for MFIs (MSU)
    10. 10. CMF’s Objectives Research Influence practice Advocacy Strategy building Training
    11. 11. MSU and RU re-enforcement loop Strategy (MSU) Research (RU) <ul><li>Impact of microfinance </li></ul><ul><li>Impact Evaluation Studies </li></ul><ul><li>E conomics of micro enterprise </li></ul><ul><li>Insights on HH &quot;financial behavior&quot; </li></ul><ul><li>Constraints on HH productivity </li></ul><ul><li>Experimentation on product design </li></ul><ul><li>Micro finance transaction costs </li></ul><ul><li>MFIs Strategy for growth </li></ul><ul><ul><li>Definition and implementation of innovative business models </li></ul></ul><ul><ul><ul><li>Market research, creation of linkages </li></ul></ul></ul><ul><ul><li>MFIS best practices sharing </li></ul></ul><ul><ul><li>Design/test of new financial products </li></ul></ul><ul><ul><li>Capacity building </li></ul></ul><ul><ul><ul><li>capital structure, HR, MIS, processes, customer segmentation, governance… </li></ul></ul></ul>
    12. 12. CMF collaborates with existing active players in the microfinance sector Manufacturing Companies Insurance Companies Funding Organizations MFIs/NGOs/Trust Banks/Financial Institutions Universities/ Research Institutions Regulators/ Policy Makers Government (Central and State) SMEs CDF CIRM CAFS CMF
    13. 13. Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Research Unit </li></ul></ul><ul><ul><li>MFI Strategy Unit </li></ul></ul>
    14. 14. Understand better <ul><li>Why are recovery rates so high? </li></ul><ul><li>What is the financial behavior of clients? </li></ul><ul><li>What is the impact of microfinance? </li></ul>Improve quality of services <ul><li>New and innovative products </li></ul><ul><li>Maximize the impact of credit through other services </li></ul><ul><li>Improve organizations </li></ul><ul><ul><li>Information management </li></ul></ul><ul><ul><li>Role of HR policy and staff incentives </li></ul></ul><ul><ul><li>More cost-effective processes </li></ul></ul>Goals of Research is to maximize microfinance impact through 3 axes <ul><li>Alternative channels </li></ul><ul><ul><li>SHGs </li></ul></ul><ul><ul><li>Revive RRBs </li></ul></ul><ul><ul><li>New channels (Kiosks, ATM, CF…) </li></ul></ul><ul><li>Policy </li></ul><ul><ul><li>Regulation </li></ul></ul><ul><ul><li>Competition and information sharing </li></ul></ul>Expand access
    15. 15. These objectives translate into 4 Research areas to maximize microfinance impact Microfinance plus Finance and Organizational issues Policy Impact and product design 1 2 4 3 Maximize impact On client
    16. 16. Impact and experimentation <ul><li>“ Micro-credit has been changing people's lives and revitalizing communities” </li></ul><ul><li>UN, 2005, Year of micro-credit </li></ul>1 Impact Experimentation “ The full promise of microfinance can only be realised by returning to the early commitments to experimentation, innovation and evaluation” Morduch 1999 Can we put numbers on this claim? Are there more cost-effective ways to achieve this goal?
    17. 17. Product design: credit Selection Monitoring Enforcement <ul><li>Individual/group liability </li></ul><ul><li>Self/MFI selection </li></ul><ul><li>Guarantors </li></ul><ul><li>Collaterals </li></ul><ul><li>Interest rate </li></ul><ul><li>Repayment schedule </li></ul><ul><li>Communication strategies </li></ul><ul><li>Loan size </li></ul><ul><li>Interest rate </li></ul>Design the most cost-effective products by varying credit product components <ul><li>Within group monitoring </li></ul><ul><li>Staff supervision </li></ul>1
    18. 18. What do low income clients want? <ul><li>Insurance </li></ul><ul><li>Weather </li></ul><ul><li>Life and Health </li></ul><ul><li>Livestock </li></ul><ul><li>Flexible loans </li></ul><ul><li>Small initial sizes </li></ul><ul><li>Larger subsequent loans </li></ul><ul><li>Longer terms </li></ul><ul><li>Housing loans </li></ul><ul><li>Build new homes </li></ul><ul><li>Improve existing homes </li></ul>Savings <ul><li>Group based </li></ul><ul><li>Individual loans </li></ul>Remittances products Product diversification and communication strategies 1 Which delivery channels/communication strategies are effective?
    19. 19. Improve communication strategies <ul><li>How do households face shocks and risk? </li></ul><ul><li>What drives savings and credit behavior? </li></ul><ul><li>Why do people default (and why don’t they)? </li></ul><ul><li>Why don’t households adopt the most profitable activities? </li></ul><ul><li>Why don’t people adopt useful financial services? </li></ul>Design the most effective communication strategies 1
    20. 20. Microfinance Plus: address contextual constraints ? Impact Health infrastructure entrepreneurship Access to Financial services <ul><li>Reduce risks of MFIs by combining microfinance with other </li></ul><ul><li>development interventions (health, financial training…) </li></ul><ul><li>Provide products / services through credit </li></ul>2 inputs
    21. 21. Organizational issues: cost and profitability Bank Transaction? Micro-loan 9% 25% Return? <ul><li>How to reduce transaction costs? </li></ul><ul><li>Show investors risk return performance of micro-loans </li></ul>3
    22. 22. Organizational and financial issues <ul><li>What is the debt capacity of clients? Can they absorb higher loan sizes? </li></ul><ul><li>How can MFIs analyze better their clients’ debt capacity and capacity to repay? </li></ul><ul><li>Role of MIS in info management </li></ul>Information management Organizational structure Processes <ul><li>What organizational improvements will help MFIs to sustain themselves and to grow faster? </li></ul><ul><li>What is effect of HR policies (ex, staff incentives) </li></ul><ul><li>How can MFIs make their business processes more efficient: activity-based costing </li></ul><ul><li>What are the flows and successes during the implementation of the intervention? </li></ul><ul><li>How to improve project implementation? </li></ul>Financing <ul><li>How to secure financing for MFIs? </li></ul><ul><ul><li>Start up capital </li></ul></ul><ul><ul><li>Long-term loans </li></ul></ul><ul><li>Can securitization help access cheaper financing for MFIs and how can it be done? </li></ul>3
    23. 23. Policy issues <ul><li>What are regulatory obstacles to MFIs? </li></ul><ul><li>What are the consequences of competition and how to manage it? </li></ul><ul><li>Why is there no information sharing? How can a credit bureau be set up? </li></ul><ul><li>How to make MFIs more transparent? </li></ul><ul><li>How to improve microfinance reputation? </li></ul>4
    24. 24. Microfinance plus Finance and Organizational issues Policy Impact and product design <ul><li>Effect of staff incentives </li></ul><ul><li>Transaction costs break-up in MFIs </li></ul><ul><li>Activity based costing </li></ul><ul><li>For MFIs </li></ul><ul><li>Effect of smokeless </li></ul><ul><li>Chulhas in Gram Vikas, </li></ul><ul><li>Orissa </li></ul><ul><li>Impact of treated </li></ul><ul><li>bed-nets provided through </li></ul><ul><li>Credit in Orissa </li></ul><ul><li>Delivering Nutrition </li></ul><ul><li>supplements through </li></ul><ul><li>Microfinance groups </li></ul>Maximize impact On client <ul><li>Impact of micro-credit </li></ul><ul><li>In Spandana, Hyderabad </li></ul><ul><li>Experiment on repayment </li></ul><ul><li>schedules in VWS, Kolkota </li></ul><ul><li>and KAS, Orissa </li></ul><ul><li>Impact of weather </li></ul><ul><li>Insurance and willingness </li></ul><ul><li>to pay </li></ul><ul><li>Credit information </li></ul><ul><li>Sharing in India </li></ul><ul><li>Regulatory impediments </li></ul><ul><li>For micro finance </li></ul>Research projects: examples
    25. 25. Research: other initiatives <ul><li>Construction of a panel database in Tamil Nadu for on-going research </li></ul><ul><li>With Yale Center for Economic growth (Mark Rosenzweig, Dean Karlan, Chris Udry, Paul Schultz, Rohini Pande) </li></ul><ul><li>10,000 households in Tamil Nadu, rural and urban, every 4 years </li></ul><ul><li>Study vulnerability, consumption patterns over time </li></ul><ul><li>Document migration patterns, access to financial services over time </li></ul><ul><li>Economics of micro finance, by Adel Varghese, Texas University </li></ul><ul><li>Evaluating social programs, by Poverty Action Lab </li></ul><ul><li>MBA course elective on microfinance, by Rock Rock Magleby-Lambert, Boston University </li></ul><ul><li>Total immersion program in Finance and development </li></ul>Panel database Seminar series <ul><li>Academics and practitioners </li></ul><ul><li>Foregone seminars </li></ul><ul><ul><li>Prof Ashok Jhunjhunwala, IIT Chennai </li></ul></ul><ul><ul><li>Prof Vaidyanathan, Madras Institute of Development studies </li></ul></ul><ul><ul><li>Prof Sendhil Mullainathan, Harvard </li></ul></ul><ul><ul><li>GN Bajpai, ex chairman of SEBI </li></ul></ul><ul><ul><li>Shekhar Shah, World Bank </li></ul></ul>Courses
    26. 26. Agenda <ul><li>Microfinance in India: an overview </li></ul><ul><li>The Centre for Micro Finance </li></ul><ul><ul><li>Research Unit </li></ul></ul><ul><ul><li>MFI Strategy Unit </li></ul></ul>
    27. 27. MSU: Objectives and areas of work <ul><li>Advice MFIs to define and execute a growth strategy by addressing their main challenges </li></ul><ul><ul><li>Horizontal growth (Same Products & Same Customers Profile) </li></ul></ul><ul><ul><li>Vertical growth (New Products &/or New Customers Profile) </li></ul></ul>Refine Business strategy and model Improve internal Organizational structure Support MFIs growth (vertical & horizontal) Recommend Implement Diagnose Scale up
    28. 28. MSU: Areas of work with MFIs Business strategy Organizational structure <ul><li>3y strategic plan definition </li></ul><ul><ul><li>Competitive position assessment (SWOT analysis) </li></ul></ul><ul><li>Marketing strategy </li></ul><ul><ul><li>Customer segments to target </li></ul></ul><ul><ul><li>Products to develop to serve these segments (IL, insurance…) </li></ul></ul><ul><ul><li>Portfolio management </li></ul></ul><ul><li>Market linkages creation </li></ul><ul><ul><li>Leverage of ICICI MFIs and corporations clients </li></ul></ul><ul><ul><li>Thematic consultations </li></ul></ul><ul><li>Capital structure (equity/debt) and access to financial markets (VC, securitization…) </li></ul><ul><li>HR recruiting, training, incentives </li></ul><ul><li>Organizational design </li></ul><ul><ul><li>MIS </li></ul></ul><ul><ul><li>Processes of operations </li></ul></ul><ul><ul><li>Governance </li></ul></ul>2 4 1 3
    29. 29. Reduction of MFIs cost of funds: Supply-demand match assessment Supply Demand Identify potential assets to securitize/buy out Evaluate investors risk/return appetite for MFIs’ paper Check demand / supply requirements match Facilitate / structure the deal 1
    30. 30. 4 options to explore and 4 types of players to interview to reduce MFIs costs of funds 1 Portfolio Securitization Bond issue Portfolio Buyout Direct medium/long term loan Foreign banks Domestic banks Funds Facilitator <ul><li>Minimum volume of investment? </li></ul><ul><li>Investment currency and hedging mechanism? </li></ul><ul><li>Tenure / maturity of investment? </li></ul><ul><li>Pooled vs single MFI portfolio investment? </li></ul><ul><li>Investor risk/return profile? </li></ul><ul><ul><li>Portfolio / MFI rating requirement? </li></ul></ul><ul><ul><li>Guaranty requirement (FLDG/SLDG)? </li></ul></ul><ul><li>Investment seasonality (PSL requirement)? </li></ul><ul><li>Investor reporting / monitoring requirements? </li></ul><ul><li>Willingness / capacity of the MFIs to receive funds and comply with investors requirements? </li></ul>Impact on MFIs CoF?
    31. 31. HR training, recruiting, incentives Potential partners Organizational structure <ul><li>MFIs careers, Hunt – Third sector </li></ul><ul><li>Awareness program </li></ul><ul><li>Recruitment: facilitate recruitment for the entire sector in the next 3-5 y => 20K FTEs to hire (TBD) </li></ul><ul><li>Financial training for top mngt </li></ul><ul><li>Training for middle mngt & field staff </li></ul><ul><li>Incentive schemes </li></ul><ul><li>IFMR centers (CAFS, insurance…) </li></ul><ul><li>ICICI trainings </li></ul><ul><li>HBS, Duke, IIM </li></ul><ul><li>Coordinate existing providers </li></ul><ul><ul><li>MicroSave, Care India, Basix school of livelihood, EDA </li></ul></ul><ul><li>Set up new facilities (if required) </li></ul><ul><li>Cocoon? </li></ul>2
    32. 32. Training / capacity building for MFIs: questions to be answered <ul><li>Identify & prioritize immediate and recurring training needs at top/middle management levels and field staff for top 10 MFIs </li></ul><ul><li>Market review (cost, location, duration…) of the existing facilities in India (Priority1) and internationally (Priority2) </li></ul><ul><li>Identify gaps for supply to match demand => use MicroSave (CMF partner) study as a starting point </li></ul><ul><li>Set up new entities to fill these gaps (if necessary) </li></ul><ul><li>Explore funding solutions for MFIs to be trained </li></ul><ul><li>=> Interactions with ~top 10 MFIs , mainly CEO and HR director </li></ul><ul><li>=> Interviews of main training institutions and financial universities in India and abroad (HBS) </li></ul>2
    33. 33. MIS: partnership with FINO 3 <ul><li>To develop a common end to end delivery platform shared across Indian MFIs </li></ul><ul><li>Created as sectoral resource to serve 700M customers </li></ul>Objective <ul><li>To access reliable data on MFIs operations performance </li></ul><ul><li>Easier portfolio rating through creation of historical data </li></ul>Benefits for MFIs Benefits for investors <ul><li>To reduce initial CAPEX required per MFI </li></ul><ul><li>To improve product depth and capability </li></ul><ul><li>To improve business management and reduce transaction costs </li></ul><ul><ul><li>data reliability and timeliness (product, clients) </li></ul></ul><ul><ul><li>To better service liabilities and investments </li></ul></ul><ul><ul><li>To allow single-window monitoring of customer relationships </li></ul></ul>Current status <ul><li>Currently sized for 12-50M customers </li></ul><ul><li>Proof of concepts completed, final contract negotiations (IBM/iflex) </li></ul><ul><li>Entire infrastructure, hosting, operations outsourced </li></ul><ul><li>First phase launch with 5 partners by May 2006 </li></ul>
    34. 34. Market linkage creation: approach Corporates MFI <ul><li>Local presence in identified region? </li></ul><ul><li>Willingness/Capacity of MFI to </li></ul><ul><ul><li>Provide customized financial products? </li></ul></ul><ul><ul><li>Identify entrepreneurs (if necessary)? </li></ul></ul><ul><ul><li>Provide/coordinate technical training at the field level? </li></ul></ul><ul><li>Volume generated (absorbed)? </li></ul><ul><li>Quality? </li></ul><ul><li>Cost of production? </li></ul><ul><li>Capacity to contract & payback loan? </li></ul><ul><li>Existing capabilities/training need? </li></ul><ul><li>Product to be sourced (retailed)? </li></ul><ul><ul><li>Region? Volume? Price? Quality? </li></ul></ul><ul><li>Required investments (capital or capabilities) for tie up? </li></ul><ul><ul><li>Expected return (in value)? </li></ul></ul><ul><ul><li>Timeframe of return? </li></ul></ul><ul><li>Risk undertaken by company (quality…)? </li></ul><ul><li>Previous pilot already undertaken? </li></ul>Customers Demand Supply ICICI Commercial teams ICICI Sectoral team Sectoral experts / NGOs Market dynamics 4
    35. 35. <ul><li>Dairy activity is a low revenue activity for farmers in spite of a growing milk demand and therefore remains a marginal source income </li></ul><ul><ul><li>Milk yields from buffaloes is low because these are not fed good quality feed </li></ul></ul><ul><ul><li>Farmers perceive dairying as a subsidiary activity because it only offers marginal income: they have no incentive to own more that 1 or 2 buffaloes </li></ul></ul><ul><ul><li>Farmers however willing to invest in dairy (cattle feed, high quality breeds, artificial insemination…) often lack the funds to do so </li></ul></ul><ul><li>Godrej Agrovet, a concentrate cattle feed producer, is not presence in the areas where Spandana (MFI with 700,000 clients) operates. </li></ul>Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (1/2) 4 Objective <ul><li>To increase farmers revenues from milk production through improved yield and quality of milk produced by cattle feed utilization </li></ul><ul><li>To reduce the risk on Spandana’s loans that go toward buffalo purchase </li></ul>Expected Impact <ul><li>Expected net revenue increase in Guntur </li></ul><ul><ul><li>300-600Rs/month/household with a single buffalo fed with cattle feed </li></ul></ul><ul><ul><li>up to 2400Rs/month, ie. by 34%*, once households scale up to 4 buffalo after demonstration effect on one buffalo </li></ul></ul><ul><li>Marketing the feed product to traditional / low income farmers and educating them to utilization of such product </li></ul><ul><li>Designing a credit product that caters to the clients’ needs </li></ul>Challenges *: average monthly household income of 60 families surveyed was 7000Rs Initial Situation
    36. 36. Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (2/2) Godrej Agrovet Spandana <ul><li>Provide credit at 0% int. rate for the purchase of feed </li></ul><ul><li>Delivers the product to weekly center meeting </li></ul><ul><li>Has assigned 1 project leader </li></ul><ul><li>Does not make any profit out of this initiative </li></ul><ul><li>Increase yields and fat % </li></ul><ul><li>Increase income by 10-20 Rs/day </li></ul><ul><li>Are offered doorstep delivery </li></ul><ul><li>Are able to purchase the feed on credit at 0% </li></ul><ul><li>Delivers concentrate feed in 50 kg bags to central locations from where Spandana receives the product </li></ul><ul><li>Region: Guntur </li></ul><ul><li>Price: 325Rs/50 Kg </li></ul><ul><li>Has assigned 2 officers to coordinate project </li></ul>Customers Demand Supply 4
    37. 37. Godrej Agrovet-Spandana: productivity improvement 4 Initial situation Dealer Godrej Distributor Farmer Dealer Dairy After Spandana-Godrej partnership To be piloted Spandana Farmer Godrej Spandana Chiller Entrp. Dairy Milk Cattle feed Cattle feed Piloted Loan Sales Sales Loan
    38. 38. Godrej Agrovet-Spandana: productivity improvement After Spandana-Godrej partnerships Spandana buys cattle feed in bulk at distributors price (premium for delivery costs) Spandana provides a 0% loan for farmers to buy cattle feed delivered at village level and farmer pays back according to seasonality The entrepreneur pays back his loan through direct sales to the dairy Spandana supports a chiller set up by providing a loan to a local entrepreneur Details 2 1 Spandana Farmer Godrej Spandana Chiller Entrp. Dairy Milk Cattle feed Cattle feed Piloted Loan Sales Sales Loan 1 2 3 3 4 4 To be piloted 4 <ul><ul><ul><li>Pilot on 300 women for 5 months </li></ul></ul></ul><ul><ul><ul><li>Milk production increases by 50% (from 2L to 3L) </li></ul></ul></ul><ul><ul><ul><li>Increased net revenue for the farmer:~2200 INR per month*(4 buffaloes) </li></ul></ul></ul><ul><ul><ul><li>Spandana provides buffalo loan for farmer to take up milk production </li></ul></ul></ul>Results
    39. 39. Market linkage example: Mint cropping (1/2) <ul><li>Traditional crops are being produced in the Eastern Uttar Pradesh by low-income clients of one of the top 10 MFIs. </li></ul><ul><li>Mentha cultivation is not done at the commercial level although it is feasible. </li></ul><ul><li>Mint production company is trying to secure it raw material sourcing to serve a growing demand </li></ul><ul><li>Business model needs to be downscaled initially (low profit for the Company) </li></ul><ul><li>Financing the Distillation Unit (Rs 22-25 K) </li></ul><ul><li>Solving logistics (extension support) and pilot project funding issues </li></ul>Current Situation Objective <ul><li>Encourage and provide opportunity to the low income clients (having cultivable land) to grow mentha (Commercial) </li></ul><ul><li>Link procuring company to the low income clients directly </li></ul><ul><li>Organize producers in a commercial venture </li></ul>Challenges Expected Impact <ul><li>Enhanced returns through the mint cropping (Rs 21K /Acre) as compared to Rice (Rs 10K/Acre) and Wheat (Rs 8.4 K/Acre). </li></ul>4
    40. 40. Market linkage example: Mint cropping (2/2) Mint Procurement Companies Requirement MFI’s Role <ul><li>Identify client on the basis of land availability in the selected districts. </li></ul><ul><li>Finance Distillation Unit (Cost Rs. 20K-22K) and raw materials. </li></ul><ul><li>Design package loan covering the credit and insurance needs. </li></ul><ul><li>Plant Mint yielding 55-60 Kg/Acre and can be harvested twice in 7-8 months. </li></ul><ul><li>Proper irrigation and timely crop management. </li></ul><ul><li>Shift from Wheat (Traditional)  Mint (Commercial). </li></ul><ul><li>Invest (financed from MFI) Rs 22K- 25K for the Distillation Unit (Collectively owned) and raw materials. </li></ul><ul><li>Product: Good quality Mentha arvensis. </li></ul><ul><li>Region: Eastern Uttar Pradesh </li></ul><ul><li>Price: At Prevailing market rates (Rs 450- Rs 750/ Litre Mentha oil). </li></ul><ul><li>Scale of Operation: Aggregated produce from 15 Acres Bigha land. </li></ul><ul><li>Tie-up with mint firms for procurement through their local offices. </li></ul><ul><li>Risk: Crop failure due to water logging (Weather/Crop Insurance) and the demand fluctuations. </li></ul>Customers’ Role Demand Supply 4
    41. 41. <ul><li>Handicraft </li></ul><ul><li>Fisheries / Seaweed </li></ul><ul><li>Trees plantation </li></ul><ul><li>Food processing </li></ul><ul><li>Vegetables / Mint cropping </li></ul>Market linkage creation: other projects 4
    42. 42. Thank you <ul><li>For any question… </li></ul><ul><li>[email_address] or [email_address] </li></ul>
    43. 43. Constraints to scaling access for the poor <ul><li>Information Asymmetry </li></ul><ul><li>No collateral </li></ul><ul><li>No credit history </li></ul><ul><li>Difficult to evaluate enterprises’ potential success </li></ul><ul><li>High Costs of Intermediation </li></ul><ul><li>Low value transactions </li></ul><ul><li>Geographical isolation </li></ul><ul><li>High supervision costs (no financial literacy) </li></ul><ul><li>Informal activities: need flexible access </li></ul><ul><li>Illiteracy: traditional services inappropriate </li></ul><ul><li>High cash handling costs </li></ul>Provision of microfinance is constrained by… Regulatory Issues Staff Incentives not aligned to maximise access to financial services for poor High transaction costs Poor Technology
    44. 44. How to release these constraints? <ul><li>To improve impact of microfinance on the poor </li></ul><ul><li>To increase access to the relevant suite of financial services </li></ul>
    45. 45. CMF: Who are we? <ul><li>Permanent staff : 23 Research associates and 8 MSU Associates from Kennedy School, Yale, IFMR, XIMB, IRMA… </li></ul><ul><li>Short-term Interns : Masters and Phd students from Kennedy School, Harvard, Yale, MIT, DSE etc. </li></ul><ul><li>Research Committee to give advice on submitted proposals : </li></ul><ul><ul><li>Jonathan Morduch (NYU), Abhijit Banerjee (MIT), Byomkesh (SKS), Mr. Thiagarajan (MCFI), Chandrasekar (IFMR), Bindu Ananth (CMFR founder) </li></ul></ul>
    46. 46. CMF’s Objectives Research Influence practice Advocacy Strategy building Training

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