Changing Contours of the Financial Sector Architecture: Small Tremors or Tectonic Shifts

“Cost of credit matters to the poor but access to credit matters the

most to the poor

Inclusive Finance India Summit 2017 Starts on a High Note

Dr D SubbaraoFormer Governor, RBI

The historic eclectic session on “The Last Quarter Century:

Evolution of Financial Inclusion in India” on Day 1 of Inclusive Finance India Summit 2017 set the tone for the day long events. Moderated by Dr. Subir Gokarn, ED, International Monetary Fund & Former Dy. Governor, RBI, the session witnessed the presence of 4 past Governors of RBI- C Rangarajan, Y V Reddy, Bimal Jalan, and D Subbarao on the same platform, perhaps for the very first

time. The panel discussions largely drew from the book “Talking Financial Inclusion in Liberalized India: Conversations with Governors of RBI” edited by Prof M S Sriram. The session began by understanding the present financial landscape of the country with respect to microfinance and related services and how the increase in competition and channels for the supply of micro finance in the country has diversified and expanded over the

last decade. Dr. Rangarajan, talking about his tenure as Governor of the RBI, threw light on the early days of the financial inclusion movement which began with bringing new players in the space by creating new banks, while using regulation to motivate priority sector lending by banks. Dr. Jalan emphasized the need to subsume the financial inclusion agenda within the overarching objective of economic stability, which must always be central. The panel agreed

The second plenary session of Inclusive Finance India Sum-

mit 2017 started off with Amitabh Kant, CEO, NITI Aayog sharing his enthusiastic perspectives on the role of digitization in advanc-ing financial inclusion. With the government pushing forward the agenda of digitization through various schemes, the applications in turn have been able to generate a vast trail of data on the consump-tion and payments habits of the consumers. Mr Kant foresees a real tectonic shift in the financial sector architecture as early as 2020, ow-ing to the growing reach of smart-phones which have become new age agents of financial inclusion in the current context. Echoing this view, Dr. Rajiv Lall, Founder Managing Director & CEO, IDFC Bank opined that financial inclu-sion may be defined as reaching out to the “phone-less”. Modrator of the session, Ms Lata Venkatesh, Executive Editor, CNBC TV18 however, quoted rather dismal fig-ures for proportion of population having a mobile phone at 43%, and that of network coverage at

77%. She also voiced her opinion over the role of DBT, which seems to create mostly one way transac-tions that may not tell us much about consumer behavior. Mr. HR Khan, Former Deputy Governor, RBI while being positive about the importance of digitization, drew attention to the huge and crucial gap in inclusion in the agricultural sector. Smartphones, in his opinion are a better reflection of FI in urban areas rather than in villag-es where widespread digital illiteracy still plagues even the banking staff.

Quoting the example of Kenya, with one dominant player in the FI landscape, in contrast to Tanzania and Ghana’s expe-rience with a more competitive envi-ronment similar to India’s, Mr Michael Wiegand, Director, Financial Services

for the Poor, Bill and Melinda Gates Foundation expressed a positive future for the FI objective in the country. While competitive environment in India will facilitate FI in the long run, it may deter fi-nancial literacy in the short term since there are numerous models and products floating which make it difficult for the consumers to

catch up with the diversity.

To conclude, the panel agreed that credit is only one element of cre-ating a viable scheme for India’s vulnerable, that will pull them out of the vicious circle of poverty. Emphasizing on this broader ob-jective, it was stated that there is a need for a multi-dimensional ap-proach that looks beyond credit.

unanimously on allowing diversity in financial models and products to bloom, since it is too early to streamline these models, while emphasizing the importance of this diversity to the customers. Dr. Subbarao’s speech highlighted poverty alleviation as the ultimate objective of financial inclusion and the fact that it is not the cost of credit, rather access which is crucial for the poor. A bank account comes with elements other than credit- savings, remittance, and insurance, to name some. Financial Inclusion shall indeed remain an unfulfilled agenda unless all these elements are delivered to the poor. Echoing Dr. Subbarao’s views, Dr. Jalan asserted that making financial inclusion a platform for increasing opportunities and livelihoods is the central challenge today. To conclude, Dr. Rangarajan restated the importance of understanding the fundamental distinction between credit and deposit aspect of inclusive banking services, with the former having a much greater onus to facilitate financial inclusion. The panel concluded on the notion that a holistic approach is required for deepening financial inclusion in the country.

“ To make Financial Inclusion an

economic Inclusion, there is a need of

skill and scale

H R KhanFormer Deputy Governor, RBI

“Digital Revolution will drive Financial Inclusion in India

Amitabh KantCEO, NITI Aayog

Hear from our Speakers:

· H R Dave , Deputy Managing Director, NABARD

· Rajiv Mehrishi, Comptroller and Auditor General, Govt. of India

· Vijay Kumar, Advisor to Govt. of AP, Agriculture & Cooperation

· G.R Chintala, CGM, Microcredit Innovations Department, NABARD

· Praveen Vecha, Senior Director, IDFC Bank

· Graham Wright, Group Managing Director, MicroSave

· Prakash Bakshi, Former Chairman, NABARD

· Govind Singh, MD & CEO, Utkarsh Small Finance Bank

· Alok Misra, Professor, Public Policy & Governance & Chairperson - School of Public Policy & Governance, MDI, Gurgaon

InFin Musings

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A Recipe for Financial Inclusion: Fintech and Innovative Customer Protection

The story of financial inclusion is star crossed by two failures:

one of information and the other, of imagination. The lack of information about households’ creditworthiness limits the range and ticket size of products that are offered to them. The lack of imagination often translates into unsuitable products distributed through expensive and inaccessible channels. When these business challenges overwhelm financial inclusion, they become pressing public policy concerns.

“Financial technology” or fintech can address both these limitations. Fintech is technologically enabled financial innovation that could result in new business models, applications, processes, products, or services. This often

has associated, material effect on financial markets and institutions and provision of financial services. (Schindler, John (2017)2. For instance, fintech can use personal data of consumers to create insights on their financial capabilities, even when consumers may not have reliable or adequate financial records. This allows for provision and customisation of products to suit people’s needs. It can also deliver these products through scalable, accessible channels. Fintech carries huge promise for financial inclusion. However it also raises a few unique policy concerns3.

The increased use of personal data and technological interfaces can create a range of consumer harms. Improper handling of

personal data can cause privacy harms like harassment, anxiety and stress4. Separately, extreme personalisation of products can cause exclusion of certain groups of consumers5. Financial decisions are also susceptible to more be digital interfaces. Processing of personal information can reveal peoples’ vulnerabilities, potentially allowing predatory providers to target such consumers and sell them unsuitable products7. This makes people more prone to making sub-optimal decisions that can have significant adverse welfare implications.

As fintech wakes up to some of these challenges, providers have an opportunity to use technology to address these consumer issues. Provider responses like embedding privacy as the default option in digital interfaces, ensuring security of consumers’ data as well as clearly communicating the potential benefits and risks of sharing their personal data can help reduce consumer harms. ‘Privacy on the Line’- a primary research conducted jointly by Dvara Research, the CGAP and Dalberg identifies consumer concerns and offers innovative design solutions to providers8. New business models when complemented by robust and innovative customer protection can lead to enduring and profitable financial inclusion.

Release of the Inclusive Finance India Report 2017

1 Beni Chugh is currently working on customer level issues and their regulatory solutions in provision of digital financial services in India. She is a Research Associate with the Future of Finance Initiative at Dvara Research (formerly the IFMR Finance Foundation.) The author thanks Malavika Raghavan and Deepti George for their valuable comments.

2 Schindler, John (2017). “FinTech and Financial Innovation: Drivers and Depth,” Finance and Economics Discussion Series 2017-081. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2017.081, last accessed on 7 December 2017.

3 “Harms to consumers in a modular financial system”, Dvara Research, November 2017, http://www.ifmr.co.in/blog/, last accessed on 7 December 2017.4 “The Boundaries of Privacy Harm”, M Ryan Calo, 2010, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641487, last accessed on 7 December 2017.5 Newman, Nathan (2014), “How Big Data Enables Economic Harm to Consumers, Especially to Low-Income and Other Vulnerable Sectors of the Population”, https://

www.ftc.gov/system/files/documents/public_comments/2014/08/00015-92370.pdf , last accessed on 7 December 2017..6 “Applying Behavioral Economics to Financial Conduct Authority”, Occasional Paper 1, Financial Conduct Authority, April 2013. 7 “Data Brokers: A Call for Transparency and Accountability”, Federal Trade Commission, May 2014.8 CGAP, Dvara Research and Dalberg, ‘Privacy on the Line’ (November 2017), http://foundation.ifmr.co.in/wp-content/uploads/2017/11/Privacy-On-The-Line.pdf,, last

accessed on 7 December 2017.

Beni Chugh1

Little more than seven years ago, in October 2010, the Andhra

Pradesh government notified an ordinance that almost killed SKS Microfinance Ltd (SKS), now known as Bharat Financial Inclu-sion Ltd (BFIL). On the same date (11 October) in 2017, the boards of BFIL and IndusInd Bank Ltd (IndusInd) approved the merger of the two entities, giving yet another lease of life to India’s largest micro lender, albeit in a different form.

None of BFIL’s 15,284 employees will lose their jobs, at least for the first three years after the merger is formalized, which is likely to hap-pen by July 2018.

IndusInd and BFIL had entered into an exclusivity agreement on 11 September to evaluate the merger scheme but even a week before IndusInd and another bank, RBL Bank Ltd, were neck and neck in the race. IndusInd moved ahead by bettering its offer.

This is a pointer to the future in the microfinance space in India. More mergers and acquisitions are on the cards. When politicians spoil the credit culture, clamour-ing for loan waivers, and shocks like demenetization make life diffi-cult, some of the MFIs would offer themselves to banks. A good fran-chise, combined with a reasonably high client base will always attract the banks as it is an easier and far more cost-effective way to enter into the hinterland than spreading own wings.

All small finance banks are dream-ing big. They want to become uni-versal banks. Similarly, most MFIs want to become small finance banks and the NGOs would like to become for-profit NBFCs. That’s the logical progression. While some of them will be able to realize their dreams, many won’t. Rising deterioration in quality of assets will crash many dreams. So, pre-pare for a churn in this space.

Prepare for a churn in the

MFI space Tamal BandopadhyayConsulting Editor, Mint

Microfinance –PAR-ting shot ofDemonetization

The Microfinance JLG lending sector has seen some stress

over last 12 months – portfolio at risk (PAR31-180) went up to 10.56% at the end of March 2017, way beyond the 0.5% mark that had never been breached since the 2010 crisis. As of Sep-2017, the net addition to portfolio due for more than 180 days (PAR 180+) is at

5.7%. This could mean write-off of about Rs. 6,000 crores in the com-ing quarters.

Slight good news is that the asset quality on newly disbursed loan has been good, similar to earlier times. The PAR 1-180 days has come down from 16% in Mar-17 to 7.5% in Sep-17. Collection contin-ues to be a challenge in a few states such as Uttar Pradesh, Madhya Pradesh and Gujarat.

Amongst top 20 districts of India by portfolio size, 10 are from West Bengal. The GLP in these 10 dis-

tricts constitute 77% of the state’s GLP. The average ticket size for loans disbursed in last 6 months is about Rs. 30,000 - higher than national average of Rs. 26,700. The PAR for 1-30 days has risen to 4.91%, higher than the na-tional number of 3.75% -- mainly because of lower collection rates (92%-93%) in the districts of South

24 Parganas and Kolkata.

The PARting shot also meant a more moderate sector growth of 16-17% in gross loan port-folio (GLP). The disburse-ments this fiscal have been lower than last year, especially by banks. Q2-FY18 disburse-ments were 15% lower than

Q2-FY17: more drop observed in Maharashtra, Uttar Pradesh and Gujarat and Uttaranchal. Some capital seems to have been de-ployed in the states of Bihar and Odisha, which saw higher disbur-sals over last 2 quarters.

The institutions have been utiliz-ing this window to reassess their processes, systems and product offerings. MFI-turned-SFBs have been focussing on their diversi-fication into non-microfinance segments. With all this, a pickup in growth can be expected within next 2-3 quarters.

Parijat GargVice President, CRIF High Mark

0%

5%

10%

15%

20%

Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

Portfolio at Risk

PAR1-30 PAR31-180 PAR180+

Launch of BuddhiMoney: An Iconic Business Literacy Counsellor for Up-scaling Microenterprises(Created by ACCESS with support from Mastercard Center for Inclusive Growth)

Bringing development back to Microfinance

P. SatishCEO, Sa-Dhan

For Those Whom Microfinance Does Not Reach: Ultra-Poor ProgrammesHow do ultra-poor programmes differ from microfinance pro-grammes? What are the basic pil-lars of these programmes? Target-ing those who are ultra-poor, these programmes provide inputs and support for 24 months, bringing the beneficiary to a level where she can join a microfinance pro-gramme.

The first key step of an ultra-poor programme is selecting the right beneficiaries, with criteria includ-ing indicators for hunger and desti-tution, such as meals per day, chil-dren in work, lack of productive assets, etc. Targeting is a highly detailed process, including partici-patory tools like social mapping, wealth ranking. Once involved in identification of the poorest, vil-lagers are less likely to resent the benefits given to this group. A support committee is also formed with prominent villagers, social workers, teachers and others, who will support the beneficiaries and their assets, and solve problems at the community level.

Other pillars of ultra-poor pro-

national poverty line, regular sav-ings, asset growth and a safe and secure home. The graduation rates have been near 100% in most rep-lications of the THP programme implemented by Bandhan.

Like all development programmes, ultra-poor programmes face chal-lenges. In targeting, a choice must be made whether to incur inclusion errors (include some beneficiaries who may not strictly qualify under ultra-poor category), or to incur exclusion errors (miss out includ-ing some who may be ultra-poor). Opting for making inclusion errors ensures greater long-term efficien-cy. Ultra-poor programmes usu-ally do not have the band-width to provide psycho-social support, much needed by those who have experienced destitution. Finally, ultra-poor programmes should not replace official safety net pro-grammes, but highlight their need and show the government how to design and implement effective and efficient programmes for the poorest of the poor.

Prof. Smita Premchander is Visit-ing Faculty, Microfinance Manage-ment Course, Indian Institute of Management, Ahmedabad. (smi-tap@iima.ac.in ), and on the board of Bandhan, Konnagar. Aindrila Mokkapati is Senior Research Asso-ciate at Sampark, Bangalore. www.sampark.org, aindrila.mokkapati@gmail.com

For the first two decades of de-velopment of microfinance

services, most evaluations were biased towards proving positive impact. It was only towards the end of 1990’s that field studies found devils in the detail, with as-sumptions about widespread pov-erty alleviation and empowerment impacts being questioned. It took another decade for large donors to accept that microfinance does not reach the poorest of the poor, who need a different approach to ensure outreach. It was in 2001 that the world’s first Specially Tar-geted Ultra-Poor programme was launched by BRAC, Bangladesh, named Challenging Frontiers of Poverty Reduction (CFPR). Ini-tially, it had funding from De-partment for International De-velopment - UK, with Canadians, Australians and several other big and small donors joining in later. When proved effective, ultra-poor programmes were replicated in several countries across the world.

gramme include stipends for food consumption, transfer or produc-tive assets so the beneficiaries can start earning incomes, support for marketing and other business link-ages, access to savings services, and one on one support through week-ly visits over 24 months. Over this period, beneficiaries usually de-velop the confidence to join Self-help or Joint-liability groups, and to take credit as needed. The pro-cess of moving out of extreme pov-erty to microfinance programmes or sustainable livelihoods is also termed ‘graduation’ and many ultra-poor programmes are now called Graduation programmes. The graduation approach is not perceived as a short-term escape from extreme poverty but instead seeks to equip participants with the tools, livelihoods, and self-confidence to sustain themselves when the program is over. Given their high rates of success, most ultra-poor programmes had rigid designs, to be able to prove im-pact. As the programmes have shown success at scale, e.g. the Targeted Hard-Core Poor (THP)

programme of Bandhan Konnagar, the focus has shifted to improving impact and efficiency of project implementation as well.

Some changes evidenced in the THP programme include delayed start to savings, after consumption of the beneficiaries have improved and stabilized. As the THP pro-gramme in India is aligned with the financial inclusion aims of the government, the assist the benefi-ciary to open a bank account and deposit the money in any nation-alised bank or post office as per their choice. The practice provides greater agency to women to save at their own pace, and manage own savings. Beneficiaries with farm assets are provided consumption support for a longer duration as farm assets take a longer time to start generating income as com-pared to non-farm assets. For asset selection, earnings from the asset are prioritized over asset value. The THP programme added con-fidence building workshops to its activities, to enable beneficiaries to understand the programme, par-ticipate actively in the enterprise selection, maintain and utilize the asset well for income generation. The number of enterprises options offered was also increased.

The THP programme has set 12 indicators of graduation, with the most important ones being family members having two square meals a day, income increase above the

Smita PremchanderAindrila Mokkapati

If financial inclusion is the buz-zword for governments and cen-

tral banks all over the world today, the credit for this should solely and in right earnest be taken by micro-finance practitioners. It is they, with their efforts at grassroots level for the past three decades, who have proved that the poor are bankable and they require full range of financial services from in-stitutions, be they mainstream or alternative. Unfortunately, in India the microfinance sector has to bear the cross of weathering the storms at regular intervals. Microfinance is easily hit by collateral dam-age in times of crisis. The sector has seen similar fallout in the last 13 months. A greater part of the damage is indeed due the factors in the surrounding environment. But it is facile to point to reasons solely outside the institutions. In many institutions the problems were fuelled by the fact that cli-ent connect was given a goby in pursuit of faster portfolio growth.

Couple of large institutions have pursued growth by all means and they seem to have abandoned their developmental mission and solely attuned towards expanding their business and increasing the returns from that business in purely financial parameters. In the process, they have not only damaged themselves but left a scorched earth for the rest of the sector, es-pecially the small and medium ones. Microfinance has a social and development as well as financial mission. Mission drift usually refers to moving up-market to increase breadth of outreach at the cost of depth of outreach. The present juncture has brought to the centre stage again for the n th time, the need for institutions to engage in socially responsible be-haviour, as also balancing the needs of profits from business with needs of society. Terminology such as ‘double bottom line’ and ‘social investing’ have become part of everyday usage, to signal the need for profit-oriented MFIs, to balance the achieve-ment of social mission along with their profit-ability. But in true sense this philosophy does not seem have been internalised by some of the sector participants, at least by a few of the bigger players.

Perhaps no other sector gives us the apt illustration of the French term déjà vu than the microfinance sector in India. ‘Bring development back to mi-crofinance’ was the slogan of sector’s well-wishers in 2006 and 2010 and it will again be so in 2017.

Design & Content by: Sayantani Mukherjee, ACCESS ASSIST, sayantani@accessassist.org | Printed by: Elegant Enterprises, 8860127811 | infoelegant@yahoo.co.in

The Inclusive Finance India Awards is an endeavour in recognizing and honouring individuals and institutions that have indefatigably worked towards promoting sector goals of Financial Inclusion. The Inclusive Finance India Awards 2017 was presented by Mr Amitabh Kant, CEO NITI Aayog; Mr H R Khan, Former Deputy Governer, RBI; Mr Gavin McGillivray, Country Head, DFID; Mr Ravi Menon, CEO HSBC Asset Management India;Mr Yaduvendra Mathur Additional Secretary, Knowledge & Innovation Hub, NITI Aayog; Mr Rajeev Mahajan, General Manager, NABAD; Mr Vipin Sharma, CEO, ACCESS Development Services & Ms Radhika Agashe, ED, ACCESS ASSIST.

Inclusive Finance India Secretariat on behalf of ACCESS Development Services and ACCESS-ASSIST would like to thank and acknowledge the kind support from all participants, speakers, sponsors and all those who helped in making the Inclusive Finance India Summit 2017 a success.

List of Winners• Microfinance Organization of the Year (Large)-Bharat Financial Inclusion Limited

• Microfinance Organization of the year (Small–Medium)-Sambandh Finserve Pvt Ltd

• Self Help Group Promoting Institution of the Year (Large)-Chaitanya

• Self Help Group Promoting Institution of the Year (Small-Medium)-Jhargram Aranya Sundari Mahila Mahasangha

• Contribution to Advancing Financial Inclusion in India by an Enabling Institution-Shri Mahila Sewa Sahkari Bank Ltd

• Lifetime Contribution to the Sector by an Individual- Dr. Y V Reddy, Former Governor, RBI

• Jury Special Award-Dr D V Heggade

Inclusive Finance India Awards 2017