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Bindu Ananth
Bindu Ananth
I explore how finance can be a force for good

On Wednesday, we brought together leaders from our Kshetriya Gramin Financial Services (KGFS) companies to talk about best practices from across our operations in Uttarakhand, Orissa and Tamil Nadu. One story really stood out for me – the green stool innovation.

When we were setting up branches in villages which had never been served by formal institutions before, we were very eager to imprint our values in all aspects of our operations. So, our wealth managers hired from the local villages wear uniforms to signal that they are professionals. All visitor cars need to be parked 100 metres away from the branch entrance so that there is no sense of outsider-insider within the branch premises. We insisted that our landlords build bathrooms adjacent to every branch so that we would be able to hire women wealth managers. One of the early things we also did was to have locally made benches painted bright green as the furniture in the branch. The bench seemed to us, to be the metaphoric leveller in a village context often characterised by caste and class divides. Until, one of our employees realised the awkwardness of the bench design.

As part of our enrolment process, we have a long (somewhat tedious) interaction with the customer about her family members, income streams, household expenses, assets, liabilities, goals etc. As a consequence of the bench design, we had situations in which the neighbour would chime in with details on some asset that the customer had forgotten to disclose! We were guilty of the assumption that surely, if people in the village are willing to guarantee each other’s loans, there would be no problem with a communal environment for enrolment. One of our employees figured out that this assumption was completely wrong and that the customer really valued privacy in these discussions. He came up with the idea of the branch having, in addition to the green benches, also a couple of green stools where they could break away from the group and have a one-on-one discussion with the wealth manager in the branch. This change in design cost us nothing but has had a pretty big impact in signalling to the customer that we will protect her privacy.

This is a great reminder that the small details matter so much. As our mentor & former Starbucks executive Deidra Wager tells us, “retail is detail”.

A new paper by Anandi Mani et al in the August issue of Science has a stunning finding – that the cognitive impact of being poor may be equivalent to as much as 13 IQ points. The authors study shoppers in a New Jersey mall and sugarcane farmers in Tamil Nadu using an experimental design and are able to show that the poor perform consistently worse on standard non-verbal tests of intelligence when “stressed” than the rich. Very interestingly, in the case of the sugarcane farmers, the comparison is not between rich farmers and poor farmers but the same farmer pre-harvest and post-harvest. Before harvest, the farmer is a poorer version of himself (compared to after harvest) because of the liquidity crunch associated with the time before harvest. Think of it as the equivalent of the last few days of the month for the salaried class.

I think this study has very important implications for thinking about how good financial access will look like for the poor and what it will achieve. Too often, as practitioners, we emphasize the “big factors” such as branches, financial literacy, products, regulation and so on and when we think about the impact we have on our customers, we think about mega metrics like income and empowerment. This study tells us that if done well, perhaps the most important impact we will have is to allow customers to free up their “bandwidth” to focus well on the big decisions in their life – their childrens’ education or choosing where to sell their next crop.

Take for example, our well-meaning desire to sell pension products to the poor. The decision to buy pension is a tough one, it has implications on what you would need to give up today and for several years in the near future to have a comfortable life many years into the distant future. Too often, we think the way to get people to invest more in pensions is to endlessly “educate” them about the value of pensions. We rarely consider factors like what is a good time to talk to the customer about pension – is it before or after harvest? Is it at the branch when she is on her way to a demanding day at the farm or at the home during a quieter time? Is the application form for the pension several pages long and in English to boot? The paper reminds us that these could potentially be very big factors in her decision to buy pension.

The paper was also a reminder for me of the value of “consumption loans”. A fundamental function of finance is to help the user manage liquidity – moving money back and forth across time. In the banker and development finance community however, financing consumption by providing small-value loans for a short period of time for no specified purpose is viewed as a no-no, spoken of in hushed tones as immiserating the poor. Entire regulatory guidelines have been written in its honour. But it seems to me that this consumption finance can provide the “bandwidth” that the poor need at crucial moments of their life. Micro-lenders will tell you that their disbursement peak is in June – school fee season time. This does not coincide with a cash-flush time for agricultural families, so they often borrow small amounts (Rs. 500 – Rs. 5000) to tide over this time. This study would suggest that this small amount has an impact on the parent that goes far beyond meeting the immediate goal of having enough to keep the kid in school. It makes the parent “richer” than what the small loan suggests.

What else might we do to ease the cognitive penalty of being poor? I am certainly persuaded to be a lot more sensitive about this while designing products and processes for our customers.

PS: Two of the co-authors of this paper also have a book coming out this week that explores these ideas further, “Scarcity: Why Having Too Little Means So Much”.

A friend pointed me to an interesting new book recently, “Inside China’s Shadow Banking: the Next Subprime Crisis”. This is written by an investment banker turned shadow banker, Joe Zhang. His anxious nine year old asked him if he was going to become a “small loan shark” in this transition. The book is a fascinating account of businesses that operate at the periphery of the banking sector in China and the consequences of prolonged negative real rates of interest combined with a banking sector subject to stringent licensing (sound familiar?).

This book also got me thinking how the term “shadow banking” has acquired so much currency in recent years since the US credit crisis. This rather unflattering term is used to refer to an entire spectrum of financial firms including hedge funds on the one end in the US and unlicensed deposit-takers like Saradha Chit Fund in India and micro-credit firms in China on the other. Irrespective of exact identity, being a shadow bank clearly connotes weak to non-existent regulation and risks to customers. A throwback to Shylock, if you will.

Why do these exist and why do regulators tolerate them? As Zhang rightly points out and a few commentators observed post-Saradha, shutting down shadow banks can be done but amounts to shooting the messenger. The real culprit is financial repression. In the absence of high-quality, formal options to save, invest and borrow, people are forced to deal with the more “shadowy” segments of the financial system. In its extreme form, investments in financial assets of any form are rejected in favour of physical assets. In its Financial Stability Report, RBI acknowledges that “the shift from financial assets to real estate and gold has become stark. Inflation, low penetration of banking services, credibility of financial institutions in the wake of mis-selling of products and financial frauds, low post-tax returns on bank deposits, negative/low real interest rates etc could be some of the issues that need to be addressed to re-direct non-financial savings towards financial savings”.

Given all of the challenges of an evolving banking sector in India and China and in the tradition of second-best approaches, maybe there is a two-stage evolution to consider — from physical savings (real estate and gold) to dealing with reputable regulated shadow banks and then over time from reputable regulated shadow banks to reputable regulated banks.

Do reputable regulated shadow banks even exist? Viral Acharya and his co-authors at CAFRAL recently published an excellent paper that looked at the shadow banking system in India, specifically, the non-deposit taking finance companies. They find significant complementarity between the presence and activities of the banking sector and the non-deposit taking finance companies, rather than overlaps. They caution that micro- and macro-prudential considerations of such shadow banks or non-bank finance companies in emerging markets like India may not necessarily resemble those in the developed economies and needs to be understood better.

This may well be an interesting path for India to escape the tyranny of financial repression.

I read an excellent post by Ajay Shah recently that questioned the policy wisdom of emphasising house ownership over rental housing. His concerns stem from hampering the mobility of labour and worsening risk diversification in the portfolios of households. While these concerns are true for most households, they are much exacerbated in the case of low-income families.

Take a typical worker employed in the construction sector earning, say Rs. 4500 per month. He faces two significant risks to income: accident/health shock resulting in temporary or permanent disability and unemployment resulting in temporary or long-term loss of income. Given this inherent income volatility, the obligation of a fixed Equated Monthly Installment (EMI) over a long period of time to finance the house purchase seems unsuitable. While capital appreciation as a motive might make sense for households with more stable incomes and low exposure to real-estate otherwise, the volatility in this case becomes a real stumbling block. A rental contract provides the much-needed flexibility to reduce housing expenditure when shocks occur and also the ability to migrate when the nature of economic opportunities shift, as they are likely to over a period of time. My colleagues have an interesting paper that simulates household wealth under ownership housing and rental housing that makes this point clearer.

While there is no question that the steady growth of the housing finance market must continue, particularly for those households for whom real-estate exposures are low and those that have income streams that are uncorrelated to the performance of the local economy; for self-employed households; households for whom principal income source is a small business prone to economic cycles; and low income households of all types, there has to be an almost complete shift towards a rental market and away from ownership.

Despite all the economic merits, rental markets in India remain vastly under-developed. Development of rental markets will receive a fillip from a) clarifying the entire legal basis of rental markets, repossession and rent control b) facilitating access to developer finance for rental housing c) developing the Real Estate Investments Trust vehicle (REITS) and d) channeling more long-term funding from insurance companies and pension funds to these markets.

In addition to rental ownership-friendly policy, there is also room for interesting business models. Take for example, Aarusha Homes that provides dormitory services to entry level low-income working people at a very affordable cost. This considerably reduces the entry barrier for a young person seeking employment in the city for the first time. The need for flexibility surely results in a willingness to pay.  (Separate post to come on the merits of migration from villages to semi-urban and urban centres)

(I thank Anand Sahasranaman and Nachiket Mor for their insights on this issue)

 

For every loan of Rs, 10,000 made through a Public Sector Bank rural branch, it costs them about Rs. 4150. The same number for a Private Sector Bank rural branch is about Rs. 3210. Little wonder then that rural branch expansion meets with so much resistance.

In a new working paper, my colleagues Deepti George and Anand Sahasranaman develop a framework to compare costs of rural credit delivery across five dominant channels: PSB lending through its rural branch, PSB lending through a Self-Help Group (SHG), PSB lending through a Micro Finance Institution, Private Bank lending through its branch and Private Bank lending through a Micro Finance Institution. Importantly, they look at costs comprehensively including a) cost of debt b) cost of equity c) transaction costs and d) loan loss provisions.

The magnitude and spread of these numbers is quite stunning.  Channel-wise costs and losses (assuming lending at 12%) look as follows:

 

Channel True total cost Loss assuming lending @12%
PSB lending through branch 42% 30%
PSB lending through SHG 29% 17%
PSB lending through BBB rated MFI 17% 5%
Private bank lending through branch 32% 20%
Private bank lending through BBB rated MFI 17% 5%

 

Why does any of this matter? From a policy perspective, if the outcome of rural credit expansion is deemed important, shouldn’t these just be viewed as welfare increasing costs just like other subsidies?

What is important to note here is that the same Rs. 10,000 loan to the rural customer has very different costs of delivery across various channels. By prescribing that bank branches ought to be the dominant delivery channel, the financial sector gets saddled with steeply higher costs without any proportionate welfare gain. As the authors note, flexibility to the bank in choosing the lowest cost channel has the potential to achieve the outcome of rural credit delivery with far lower costs. After all, shouldn’t policy making be more about outcomes and less about instrumentality?

 

A few colleagues and I recently travelled through Varanasi and Mirzapur in Eastern Uttar Pradesh visiting Micro Finance Institutions (MFI) in that region and their clients. I am delighted to report that this region, one of the poorest in India, is a hotbed of innovations.

Cashpor is a leading MFI operating in the region founded by Professor David Gibbons, a thought leader in the area of financial services for the poor.  Operating costs in the MFI model vary between 6 – 12% and one culprit for these numbers in extensive manual data entry processes. Cashpor has deployed a remarkable mobile-based payment and reporting solution developed in partnership with Atom Technologies that replaces the paper-based data entry with real-time mobile entry and reconciliation.

We witnessed the working of this mobile based system in a centre meeting of the Pandeypur branch in Varanasi.  The field officer starts with recording the attendance of each member in the application. Many MFIs believe that attendance rates are an important indicator of group quality. After that, the officer proceeds to record the amounts collected from each client against what was due. The field officer can also record requests for new loan cycles and see future disbursements on the application.

The field officer’s handset is programmed at the back end to access data for only the centres under his responsibility. This is done to cut down on data transfer as both the handset and network connectivity cannot handle large data transfers. When the meeting is completed, the field officer uploads the data to a central database, which the head office can access immediately to understand overdue position, if any. The entire process was smooth and effortless.

When we asked Cashpor staff about the benefits of implementing this solution, they mentioned that eliminating the manual data entry processes saved an entire workday per week! They are preparing for a significant interest rate reduction riding on some of these large productivity gains.

Another highlight of the trip was watching Cashpor’s officer talk to a group of women about the New Pension Scheme Lite (NPS-Lite), a pension product for informal sector workers with a matching contribution by the Central Government.  He started by asking the group whether they knew women in the village who were finding it hard to support themselves in their old age. Disconcertingly, almost everyone nodded their head. He then spoke about the power of compounding – how small amounts set aside every week could create meaningful lumpsums for old age. We were thrilled that the officer had a perfect understanding of the features of the product and explained the implied illiquidity in a pension product. The women clients had several questions for him, all of which he patiently addressed. It was a powerful reminder of the value of last mile institutions like Cashpor for building meaningful financial inclusion.

 

Our next stop after Cashpor was at Utkarsh. Set up by a former colleague from ICICI Bank (Govind Singh) only a few years ago, Utkarsh has rapidly emerged as one of the most promising MFIs in India. Here, we saw several innovative client protection processes in place. Notable among them was a grievance redressal system where a client is provided a toll-free line to call Head Office and share any concern they might have. Utkarsh mentioned that they receive several calls every day ranging from enquiries about membership and getting loans to complaints about credit officers not being on time. Utkarsh has tied up with a service provider in Delhi that provides the entire toll-free service, including recording, classification and retrieval of call information. This is systematically analysed and discussed by the senior management of Utkarsh.

Between Cashpor and Utkarsh’s growth plans, Eastern Uttar Pradesh and Northern Bihar look set to have access to basic financial services in the next few years. Both organisations have battled significant odds including infrastructure and operating risks in moving cash. Their success is an inspiration for everyone in the field of financial services for the poor.

What does the asset allocation look like for people living in remote rural India (villages with less than 5000 population)? My colleague Sowmya Vedula and I looked at the data from some of our investee companies and this is what the picture looks like across 250,000 individuals in rural Tamil Nadu, Uttarakhand and Orissa.

gold1

gold2

 

gold3

While there has been much discussion about demand for gold in recent times, the data reveals that land holdings are a much bigger issue from a concentration perspective. So, why are rural households hoarding these assets instead of financial assets?

 

In the absence of financial assets like fixed deposits, stocks and pension plans at these locations, rural households are forced to look at physical assets that will give them old age security and inflation protection, among other objectives. Land as an asset has many dimensions. Several of our labourer customers tell us that it is difficult to find wage labour opportunities beyond the age of 45 or so and then owning a piece of land becomes an important strategy to earn in the later years because you can always “hire yourself”. Similarly, in light of the heavy dependence on the local economy, gold is often the only “national asset” available to hedge against local economic downturns.

 

There is no quick-fix to alter asset allocations of rural households away from gold and land, despite their obvious shortcomings. We have to complete the task of making access to high-quality financial services available and create trust in these instruments and the institutions that provide them.

A recent Economist article says that 70% of Kenyans now use mobile money in some form. The battle against cash is an important one in the larger war against financial exclusion in India as well. Ease of payments makes a number of things easier – including for India’s large seasonal migrant population to send money home and also for a number of institutions such as banks and schools to operate in remote parts of the country.

The payment infrastructure in India consists of 80,000 bank branches, 150,000 post offices, 100,000 Business Correspondents, 88,000 ATMs and 600,000 POS machines. Simplistically, this is one payment point for every 1200 or so citizens. Add the rural-urban divide and the various regional disparities and this picture progressively looks worse.

The important elements of a ubiquitous payments infrastructure are: a national network of cash-in/cash-out points, universal data connectivity, a national switch and payment platform that banks and non-banks can use for clearing, standardisation of user interfaces for the customer to facilitate adoption and an ecosystem of financial product providers and billers that utilise this payments platform to offer a wide range of services. Dan Radcliffe and Rodger Voorhies of the Bill and Melinda Gates Foundation have an excellent new paper that describes the path to digitisation.

What will it take to make payments universal in India with a ratio closer to one point for every 100 citizens and importantly, who will pay for creating this infrastructure?

There are two directions that we may take to finance this infrastructure. One is to use the public good argument that is made persuasively by the Nandan Nilekani Taskforce on Aadhar Enabled Unified Payments Infrastructure. The excellent Taskforce Report makes a recommendation that a last-mile transaction cost of 3.14% with a cap of Rs.20 per transaction be budgeted for based on outcomes such as active accounts. The public good argument is further substantiated by the McKinsey study that estimated an annual savings of Rs.100,000 crores from reduction in leakages and lower administrative costs from having an electronic payments network for the country. So, while the recipient of an old-age pension pays nothing to withdraw her money from her local bank agent, there is a budgetary transfer to banks for effecting this transaction.

The second argument is predicated on the existence of an underlying business model. Here the pre-requisite is that the payments business is distributed across a very large number of payment points (as many as 1 per 100 households). A village resident could walk in to a friendly neighbourhood kirana to top-up her mobile phone and also withdraw a remittance from her ICICI bank account sent to her from an HDFC bank account holder. This will ensure that there is both higher ease of access and less pressure on an individual payment point. For this to work, while akin to the credit card merchant, a single bank may still “acquire” the merchant, the functionality embedded in the POS or the proposed micro-ATM would ensure that one could potentially access multiple accounts in a secured and inter-operable manner. The additional payment infrastructure related investment for the merchant needs to be as low as possible for it to proliferate, ideally an application on an existing mobile phone similar to what has been done by Square and PayPal Here.

Who will own and deliver this network is an open question in India but ubiquity of electronic payments seems within striking distance.

 
 
Bindu Ananth
One of my favourite movie scenes is from “It’s a wonderful life”. The hero, George Bailey, is a reluctant banker. On his wedding night he has to deal with a bank run. In trying to stop the bank run, he tries to explain the concept of illiquidity to his depositors. "

"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can."

George's vision of banking is infectious: it is not about pieces of paper or ledgers. It is about helping people build houses and dreams. This vision drives me. Along with my awesome team at IFMR Trust (where I am the president), am obsessed with seeing that all of India has access to high quality financial services; be it a daily wage labourer seeking to protect her Rs. 100 wage from inflation or a municipality issuing its bonds to build sanitation for its residents. I believe that finance, when done well, can be a tremendous force for good.

I live and blog from Chennai (and planes) but most of my stories are from Thanjavur, Ganjam and Uttrakhand.
 
 
 
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June 28, 2014 17:05 pm by Aditya Khurana
The picture of the real estate development in India has changed entirely in a positive manner. The excellent education and job opportunities people are getting in India has motivated them to enter the real estate business in large numbers. The real estate business has become the best investment in I...
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Reading this article on world toilet day, thought the story was of some innovation on open defecation.
November 19, 2013 16:42 pm by Dr.S.N.Ghosal
It is true villagers need to have bank branches either in a village tea shop or village Banyan tree where they gather to socialise and or settking family or village disputes. Here they feel at home and open up comfortably.
October 19, 2013 14:15 pm by Dr. Chetali Samant
Being a Medical Professional, the title of this blog meant something else to me :)
September 19, 2013 11:22 am by Shiv
Hello, A biggest impediments to lending to BoP(Bottom of Pyramid) customers are - credit rating and collateral. We dont seem to have got around this "corporarised thinking". The relevance of timing of discussion and method to assess liquidity requirement is at best rudimentary within the Financial...