MicroSave conducted a study in August 2011 to collate clients’ experiences, opinions and needs, to inform policy makers and perhaps help devise solutions most suited to the requirements of the poor. To further enhance understanding of the effect of the microfinance crisis on poor clients two years after it started, MicroSave conducted another study in July 2012 in two states – Andhra Pradesh and West Bengal. While the MFIs in AP have struggled to make a turn around, MFIs in West Bengal, such as Bandhan, still grew during this period – albeit at a reduced rate. This Policy Brief draws a comparison between how access to credit for the MFI clients changed in these two states post AP crisis, and its impact on the MFI clients. It then offers policy and operational recommendations for MFIs, regulators and those that finance MFIs.
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Design Considerations for Credit Scorecard for MSME Financing
Globally, Micro, Small and Medium enterprises (MSMEs) have been playing a crucial role in promoting economic development. MSMEs contribute to the local economy by creation of employment opportunities for millions and in the process inject much-needed capital and liquidity in the local economy. However, one of the major challenges faced by MSMEs is the lack of access to finance. As per a recent McKinsey1 study, 15-40% of SMEs cite finance as the most important obstacle to growth. On the other hand, financial institutions are wary of financing MSMEs and cite a variety of reasons including lack of reliable financial information, poor financial record keeping and absence of credit history. High transaction costs in servicing MSMEs as well as a perceived high-risk profile further add to the distrust. Through this paper, we suggest a fresh approach to MSME finance by introducing a simple but effective credit scorecard. We base our approach on practical examples from MicroSave’s work in expanding access to finance for MSMEs and hope that this approach will help financial institutions to look at MSMEs as a strategic segment.
Harnessing the potential of Aadhaar via digitisation
The real potential for achieving the desired results with Unique Identity Authority of India – UIDAI Aadhaar depends on the effective execution of digitisation of the welfare programmes, extending banking services to the weak and the unbanked sections and linking the above two with Aadhaar. The government proposal on DBTs includes all of these components.
Apart from reducing the leakages from the system, these ensure that the entitlements reach only those targeted.
Digitisation is one of the prerequisites for the implementation of Aadhaar enabled systems. Aadhaar’s de-duplication function helps to eliminate duplicate and ghost beneficiaries.
The impact of digitisation and the role of Aadhaar in the delivery of public services can be observed in the case of East Godavari. Aadhaar details of the beneficiaries complemented the already digitised PDS database of Andhra Pradesh (AP). The AP government, realising the potential of IT systems in the implementation of welfare programmes, digitised its PDS database in 2005.
Digitisation helped the government to address the structural bottlenecks within PDS and reduce corruption. It allowed the government to track rations that were supplied to the fair price shops.
It also tackled the supply side problems hindering the PDS system. However, problems related to identification persisted in PDS with many of the rations being taken by corrupt dealers or their family members or other ghost beneficiaries. The Unique Identification (UID) number of the UIDAI was able to address these issues to list and identify beneficiaries.
BC model of banking was effectively leveraged in Aurangabad for the delivery of pension payments to the poor. The district administration involved the business correspondent (BC) staff at every step, and combined their efforts with the banking partner to provide banking services to the poor. The final delivery process required beneficiaries to use their Aadhaar card for authentication after which the BC agent makes these payments through a network of point of sale (PoS) devices, that is interoperable and Aadhaar enabled. This process not only increased the speed of payments to the poor, but also contributed towards savings to the exchequer by removing large numbers of ghost beneficiaries.
Employing the BC model and scaling it up for implementation across various geographies and programmes is challenging due to the several policy and operational drawbacks. The BC model, when launched in 2006, was promised to be the vital tool for financial inclusion of the poor, and to remedy the inadequate reach of the banking infrastructure in rural areas. However, the vast majority of BC network managers reported massive losses. The BC agents too were unable to earn a decent livelihood and a large percentage of them have closed or gone dormant.
UIDAI is working towards creating an enabling environment with the Aadhaar platform to address these challenges. The three fundamental pillars of its approach include, an online system built on the assumption that reasonable quality wireless data connectivity would be available to most rural areas in India over the next few years.
Secondly, Cloud-based storage and computing will rapidly become universal and cheaper, and hence storing and accessing biometric or account information from, or processing transactions in, cloud-based environments using online access will increasingly become a reality.
And lastly, following Moore’s law, the cost of front-end device such as micro-ATMs, handheld devices, mobile phones and computers would continue to come down, while their computing power and performance would continue to improve.
UIDAI has rolled out (and is developing) applications that would enable easier, faster and cheaper enrolment of beneficiaries by banks or other institutions involved with the delivery of government benefits transfer. One such application is electronic KYC (e-KYC), which re-uses the KYC information previously captured during enrolment for Aadhaar, and makes it available electronically to banks or enrolling institutions to speed-up KYC, increasing efficiency, reducing errors and lowering costs.
UIDAI’s online Aadhaar authentication system can be accessed by banks and other service providers to verify an individual’s details anytime from anywhere. This can be a replacement for smart cards, leading to substantive cost saving for the banking system, in addition to the enhanced security the system offers.
The pilot studies provided important lessons about the various operational challenges that need to be addressed for the Aadhaar enabled programmes to be implemented seamlessly.
Some of these challenges include, beneficiary details under several programmes continue to be decentralised and in paper format as they are yet to be digitised.
The government staff entrusted needs support and monitoring with the task of automation and use of technology.
Also, banks and BCs do not receive adequate compensation from government departments for opening beneficiary accounts or for processing payments.
Customers are not aware of how they can use their Aadhaar number to open a bank account and access financial services.
Cash distribution by agents frequently fails for want of Aadhaar authentication due to poor connectivity, coupled with the need to distribute the entire amount credited to beneficiary accounts within a short period. Agents often opt for alternate approaches such as manual authentication or offline payment to overcome such operational challenges, defeating the very purpose of Aadhaar linkage.
The pilot programmes demonstrated the great potential of Aadhaar enabled systems, but for this to be scaled both across the country and for many benefit transfer programmes, many barriers remain to be addressed.
(A print of this article was also published with One World South Asia).
Solving Indonesia’s sanitation woes
The problem is toilets for the world’s fourth most populous nation. Of the estimated 251 million Indonesians, only 11 percent fall below the poverty line, but in rural areas, a startling 61 percent still practice open defecation. Close to a third of city dwellers do not use or have access to toilets either. A miniscule 2 percent connect to functioning sewerage network.
Indonesia is one of the developing world’s success stories and Southeast Asia’s largest economy. Growth has been a healthy 6 percent or better in recent years; GDP in terms of purchasing power falls right behind Spain and Canada. And yet the government’s allocation for sanitation, previously two U.S. cents per person, is now five cents per person. Both are clearly well below the UN Millennium Development Goal of $6.30 a head for improved sanitation.
The figures above are further complicated by the fact that poorly constructed toilets do exist for many, but waste either goes untreated into open drains or seeps into the groundwater—a country of 17.508 islands obviously has fairly shallow water tables–thereby polluting it.
Designing and building reliable sewer networks for almost 57,000 kilometres of archipelago coastline is also a lot more complicated—and expensive—than it would be for comparable economies. Septic tanks and soak pits are the imperfect, interim solution.
The far more daunting expense, however, is the $250-300 that 40+ percent of the overall population currently without improved sanitation would have to pay to install a household toilet with a safe waste disposal system. No surprise, the bottom fifth quintile (~22 percent) with an approximate net income of less than $2,200 a year have other priorities they deem more pressing.
The government’s solution — two large information-awareness programmes to promote sanitation and hygiene — and similar efforts among international development agencies for Community Led Total Sanitation (CLTS) help underscore the need, but do not actually help finance or build the desired end result.
Some readers might well ask here why the significant cash outlays necessary to design and disseminate these extensive information efforts aren’t simply used to give people the toilets they need. The short answer is that in many poor countries, outside defecation has been the norm for so long that new toilets are viewed only as useful storage or deployed for other purposes completely unrelated to better hygiene.
We also know that, rich or poor, we value what we budget for and purchase ourselves. Free hand outs come with little sense of ownership or pride.
The one option that MicroSave has seen work in India and Kenya is microfinance loans. The $250+ required for toilet and system installation are feasible loans, with easy repayment schedules, for interested applicants. Many are also already MFI loan customers, allowing for speedier authentication, credit assessment, and clearance.
Social and behavioral change is never quite so simple as offering attractive financing for what is still a puzzling innovation for many in the developing world. For a long time, no noticeable change occurs, and then there is what Malcom Gladwell has defined as the tipping pointwhere, suddenly, everyone is doing what no one was doing before.
This transition may happen for sanitation in Indonesia more readily than elsewhere. Household disposable income continues to rise, even in very poor sectors, and close to half goes to domestic consumption, according to a Bank Indonesia summary. Muslims, more than 86 percent of the Indonesian population, emphasise personal hygiene and purification as an integral part of their religion. An even higher majority of the country are literate and own or have access to a mobile phone.
Infrastructure and geography remain problematic, but the social odds are heavily favour of a solution, if not now, then soon.
“Mobile phones and money: Less technology at a much lower cost “
Almost everyone agrees financial inclusion is a worthwhile and important goal. We’re not going to improve health, education, sanitation, and business prospects for the very poor, in India and elsewhere until money moves around more efficiently and safely.
But building and maintaining a workable system for better savings, money transfers, and payments, particularly in rural areas, hinges in large part on the bank agents, or business correspondents (BCs) as they are known in India. And most agents are not happy with the current model.
In fact, they’re not wrong; it’s not a great business proposition for them at present, especially those far removed from large cities. (For a more detailed analysis of the many reasons, please see MicroSave‘s agent network research in South Asia, East Africa, and elsewhere.)
Their primary gripe is of course costs—outlays they have to make up front to participate and the on-going expenses they incur. According to India’s Ministry of Finance in 2012-13, the 152,000 BC outlets made 183.8 million transactions for a total value of Rs.165.33 billion/US$2.67 billion. However, in the worst-case scenarios, their overall capital, and operating costs came to Rs.92 billion/$1.5 billion. (US dollar comparisons are obviously different from the numbers you were seeing last year as the Indian Rupee has lost close to one-fifth of its value against the dollar and other Western currencies in recent months.)
Normal-case scenarios do not look a lot more favorable. Widespread agent angst is suddenly more understandable.
One seemingly unimportant aspect in all this is the technology banks and network managers impose on agents for cash-in/cash-out, opening accounts, and other operations. In India, the most prevalent choice—point of sale (POS) devices that work in concert with India’s Universal ID (UID) cards—is also the most expensive to own and operate (Rs.20,000/$324 for the initial “security deposit” to the bank and ~Rs.2,400/$40 a month to maintain).
UID or Aadhaar is a biometric authentication system designed for all of India’s citizens, but its relevance to migrant and poor populations currently without valid papers or identification is particularly important for government benefits and other financial inclusion initiatives.
Kiosk computers which enable direct links to host banks for client transactions aren’t cheap either. Kiosk agents first have to buy the laptop or desktop (Rs. 15,000-25,000/$234-390) and monthly costs run Rs.1,500-3,000/$25-50.00.
In both cases, electricity and power backup to run the devices, internet access, and even printer paper and cartridges are all expensive. And outside large cities, electricity and online/server access are notoriously unreliable.
Enter the mobile phone. Simple, unadorned feature phones are adequate to most transaction tasks, most notably remittances whereby most agents make most of their money. Monthly phone costs are Rs.50-100/$1-2.00—yes, a surprising number of missing zeroes compared to the figures above—and most agents already own one. Phone replacements every 2-3 years and repairs are expenses most would have to pay anyway.
For authenticating clients, a UID-certified, Bluetooth/USB add-on that couples with a mobile phone or PC, and includes a biometric scanner, printer, and card-swipe slot, will run Rs.15,000/$234. And though this does not include electricity, server-connection, ID fraud, and related authentication expenses which agents will have to assume, costs are still less than the stand-alone POS devices noted above.
Smartphones are coming, even in very poor countries, even to the small Indian Kirana shop business correspondent. Internet access (average monthly mobile data access subscriptions in India run between ~Rs.100-450/$2-7) may increase these initial and longer-term costs. Although not necessarily. A basic smartphone in many parts of India can be bought for as low as Rs.5,000/US$78, and both agents and their customers may purchase one for personal reasons unrelated to remittances, direct benefits transfers, and other financial services.
Whatever type of phone they have in hand, the majority of agents are likely to see a mobile handset as the most affordable business-transaction option moving forward. Eko, the only business correspondent network so far in India to use mobiles exclusively, and Airtel Money, a leading Indian mobile operator with an advanced payments platform, are particularly interesting examples to follow.
For a more comprehensive analysis of these three technologies, the costs involved, and specific, relevant examples, please see MicroSave’s recent Transaction Economies report.
We’ll conclude where we began. The broad social and economic changes financial inclusion seeks to advance won’t happen without careful attention to the details. Until now, much of our attention has been centered on end-users, the financially excluded and underserved. With good reason. Their trust and participation are critical to the success of any inclusion efforts.
The next step toward widespread adoption, however, is more focus on agents, the technology they use, and the costs they incur providing financial services to the very poor. And, as is often the case with technology, simple and cheap trump all.
Maybe not for the banks and technology service providers, but neither constitutes the all-important “volume” and “sustainability” necessary to make financial inclusion work. First, we ensure inclusion policies are meeting the needs of agents and their customers and meeting them well. Then we’ll worry about everyone else.
The Aadhaar story in East Godavari
At a time when the country is working to enrol 600 million Indians for Aadhaar by 2014, the East Godavari district in Andhra Pradesh has achieved remarkable results. With over 99.50% Aadhaar enrolments as of 25th December 2012, the district administration has set a remarkable precedent for others to follow. They are now able to leverage Aadhaar to deliver rations (under the public distribution system or PDS) through the fair price shops leased out by the Government.
PDS process in India
Every year, the Indian Government spends nearly Rs.750 billion to provide food security to people below the poverty line, and yet 21% per cent of India’s population remains undernourished. International Food Policy Research Institute notes that, despite an increase in food production by almost 50%, there is a little change in the proportion of undernourished in India.
There are numerous lacunae in the systems that block the transfer of rations to the poor. Food grains and other essentials are distributed at subsidized prices through the established network of fair price shops (FPS) spread across the country. Families below the poverty line who are eligible visit the FPS with their ration card. The distribution network constituting 5.05 lac (505,879) fair price shops is not without defects. There are several structural shortcomings with the system. These include:
- malpractices by the fair price shop owners making the food inaccessible to beneficiaries (many FPS are open only for a few days in a month and beneficiaries who do not visit the FPS on these days are denied their right. FPS also use multiple excuses to both charge higher rates and deliver a reduced quantity of food grains);
- creation of a large number of ghost and bogus cards to sell the goods in the open market;
- the growing instances of beneficiaries receiving inferior quality food grains;
- the number of instances where benefits are being availed in the names of rightfully entitled families without their knowledge;
- irregular and diverse mechanisms adopted to identify households eligible for ration; and
- the lack of transparency and accountability at all levels making monitoring the system extremely difficult.
Government authorities have made several attempts to address these problems, yet with limited success.
The responsibility for regulating PDS, one of the oldest as well as the longest running, subsidy schemes in the country, rests with both central and state governments. While the central government is responsible for procurement, storage, transportation and bulk allocation of food grains, the state governments are responsible for the allocation and identification of families below the poverty line, issue of ration cards and supervision and monitoring the functioning of fair price shops.
Aadhaar Story in East Godavari
The district administration saw that Aadhaar can be used for the targeted delivery of food and civil supplies to the poor. To this end, the project was rolled out in four phases that covered:
- enrolment – in which KYR+ data (including ration card details, bank account information and mobile number was captured);
- seeding – which involved updating the ration card database of beneficiaries with the Aadhaar number and other details;
- roll out of Aadhaar enabled PDS; and
- Aadhaar enabled Ration Card Management System (AeRCMS).
The latter is yet to be implemented and will involve issuing a new ration card based on the Aadhaar number after authentication and de-duplication.
To execute the project in a timely and effective manner, the district administration designed several key processes. To enroll the people for Aadhaar, a detailed village level implementation plan was prepared. Special personnel from the civil supplies department were deployed to carry out the project with well-defined roles and responsibilities. Training sessions were conducted to educate them about the core process related to the project. The Joint Collector of the district, who is the Additional Director of the Food and Civil Supplies Department of Andhra Pradesh, also conducted a few training programmes and monitored the progress and implementation of the project. A private firm was contracted to provide the Electronic Point of Sale (EPOS) machines through which the ration was distributed to the beneficiaries, upon authentication. A special technical team was put in place to address the technical snags that arose during the use of EPOS machines. Feedback mechanisms were set up to accelerate the project and most of the issues were resolved immediately after identification.
Impact of Aadhaar
The district administration has created a well-regarded demonstration model for implementing AePDS, with teams from various other districts visiting East Godavari to study this system. According to the report published by the district administration, the government is already saving up to Rs.44,274 ($800) per month in each of the 47 FPS in which the pilot was launched due to the elimination of the ghost and duplicate beneficiaries.
Aadhaar effectively addressed the problems of identification and distribution that have been hindering the PDS since its inception. It ensured the establishment of an effective system under which no deserving beneficiary is deprived of his/her ration. Alerting beneficiaries about the arrival of ration at the FPS, and about the timing of disbursement for each month, via an SMS to their mobiles has enhanced the transparency and accountability with which PDS operates. Setting up of EPOS machines for validation and authentication of beneficiaries has ensured that rations reach the targeted persons.
Learned and the way forward.
The project was piloted in 47 fair price shops where it has been operational since September 2012. This has now been expanded to 100 of the total 2,561 shops in the districts. The administration faced numerous challenges during the pilot. The administration overcame challenges that included issues related to:
- training and capacity building of district functionaries involved in the project;
- low awareness levels of the AePDS among villagers; and
- network and connectivity issues for EPOS machines.
Effective mitigation strategies were adopted to counter these issues, allowing project achieve its objectives. The district administration is now focused on expanding the project to bring all the 2,561 fair price shops in the district under AePDS. Steps are being taken to manage this expansion and impending challenges like the supply of EPOS machines for all the fair price shops, and the provision of Aadhaar authentication for exceptional cases like old and disabled are already under review.
(A print of this article was published with IBN LIVE).