thought line june 2010 -the banking & financial services e-newsletter from wipro technologies

JUNE 2010JUNE 2010

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ethe Banking & Financial Services -newsletter from Wipro Technologies

Volume VIII Edition XXXI

the Banking & Financial Services -newsletter from Wipro Technologies e

Feedback & Suggestions aremost welcome. Please email to

[email protected]

Editorial Team

Vishal KanvatySmitha NaikNitin Kumar

Volume VIII Edition XXXI

Index

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2the Banking & Financial Services -newsletter from Wipro Technologiese

For Wipro internal circulation only

.......................................................................................................................3• Foreword

.............................................................................................4• Know Your Domain Terms

• Demystification

• Innovation/ BTG Corner

• Market/ Product Watch

Fun Corner...................................................................................................................17•

• Traditioal Japanese tattoo designs.............................................................................18

- Demystifying Microfinance..........................................................................................5

- Evaluating Key Metrics – A Simple Answer to MFI Risk Mitigation..............................7

- Financial inclusion and Microfinance...........................................................................9

- Micro financing the Micro Affinity Way.....................................................................11

- Enabling Micro Finance through Mobile Banking – A Success Story..........................13

- Financial Inclusion to an Incumbent..........................................................................15

Foreword 3the Banking & Financial Services -newsletter from Wipro Technologiese

Greetings!!

Today, 3 billion people in the world do not have access to basic financial services such as savings, loans, insurance, and remittances. Often, they do not have the possibility to save today in order to improve their future, or to borrow in order to finance their projects, and even less to ensure their families' future. In this context, and for nearly 30 years, a number of organizations have taken up the challenge to help those with no access to savings, credit or insurance services. These organizations, called microfinance institutions (MFIs), are most often savings & loan cooperatives, NGOs or programs implemented by international institutions. By the end of 2009 there were an estimated 10,000 such institutions worldwide helping more than 80 million people Microfinance differs from other development assistance because it empowers the poor rather than making them dependent upon charity. It enables beneficiaries to take responsibility for their lives by employing themselves, saving for their future, and investing according to their own priorities. The microfinance sector has grown rapidly in the past decade, but many factors still constrain its capacity to assist the poor.

In this edition of Thoughtline, we have Nitin Kumar who puts forward some important terms in the Microfinance Domain. Then, we have an article from Smitha Naik demystifying the concept of Microfinance. Next, Vinayak Vasudeva talks about some easy ways for MFI risk mitigation. This is followed by a write up by Nitin that talks about Financial Inclusion within the Microfinance Domain. Then we have an article by Ashwin Balakrishna that brings in the micro affinity perspective to Micro Finance.

In the subsequent article, Aravamudan Rajgopalan, unveils how mobile banking has been able to boost up Microfinance? In the Market Watch section, Puneet Talwar does a close analysis of the current status of Financial Inclusion. Finally, please do not forget to visit the Fun Corner.

We thank all the contributors of this edition and hope that you enjoy reading articles.

Kind regards

Thoughtline Editorial Team Vishal Kanvaty

Smitha NaikNitin Kumar

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The views and opinions expressed in the articles/other contributions by individuals are strictly those of the authors and should not be viewed as professional advice with respect to your business.

Parts of the Images used in this Thought Line is from Reproductions of Traditional Japanese Tatoo designs


Nitin KumarBusiness Analyst, Banking Domain Team

Microfinance:

Credit Union:

Microcredit:

Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Those who promote microfinance generally believe that such access will help poor people out of poverty.

A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members. Many credit unions exist to further co m m u n i t y d eve lo p m ent o r s u sta in a b le international development on a local level. Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size, ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members. Yet credit unions are typically smaller than banks.

Microcredit is the extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet

even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.

The Opportunity Finance Network defines the term as "a category of financing that helps people and communities just outside the margins of conventional, mainstream finance join the economic mainstream—and helps the economic mainstream enter emerging opportunity markets." It is closely related to microfinance, but tends to occur on a larger scale and be more explicitly concerned with social benefit.

Micro insurance is a term increasingly used to refer to insurance characterized by low premium and low caps or low coverage limits, sold as part of atypical risk-pooling and marketing arrangements, and designed to service low-income people and businesses not served by typical social or commercial insurance schemes.

The Consultative Group to Assist the Poor (CGAP) is a consortium of 33 public and private development agencies working together to expand access to financial services for the poor in developing countries. CGAP was created in 1995 by these aid agencies and industry leaders to help create permanent financial services for the poor on a large scale (often referred to as microfinance). CGAP serves four groups of clients: development agencies; financial institutions including microfinance

Opportunity Finance:

Micro insurance:

CGAP:

institutions; government policymakers and regulators; and other service providers, such as auditors and rating agencies. To each of these client g r o u p s , C G A P p r o v i d e s s p e c i a l i z e d services—advisory services, training, research and development, consensus building on standards, and information dissemination.

Know Your Domain Terms


Demystifying MicrofinanceSmitha Naik Consultant, Banking Domain Team

“If financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.”

- Muhammad Yunus, Grameen Bank.

What is Microfinance?

In 1974, an economics lecturer at the University of Chittagong, Bangladesh, lent $27 to a group of impoverished villagers. Thirty years later, the lecturer, Muhammad Yunus, won the Nobel peace prize and microfinance become the world's favorite development idea, the silver bullet that will cure world poverty and spread the wealth-creating force of capitalism across the globe. Microfinance has an enthralling simplicity and a record of success not just in promoting financial resilience but in achieving other social objectives – reaching the excluded, empowering women and developing the capacity of small groups of people to take control of their own lives.

The interest in microfinance has burgeoned during the last two decades: multilateral lending agencies, bilateral donor agencies, developing and developed country governments, and nongovernment organizations (NGOs) all support the development of microfinance. A variety of private banking institutions has also joined this group in recent years. As a result, microfinance services have grown rapidly during the last decade, although from an initial low level, and have come to the forefront of development discussions concerning poverty reduction.

Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. It is a proven tool for fighting poverty on a large scale and provides micro-loans to poor people to start or expand very small, self-sufficient businesses. Through their own ingenuity and drive, and the support of the lending microfinance institution (MFI), many are able start their journey out of poverty. The broad range of services includes deposits, loans, payment services, money transfers, and insurance. The providers of microfinance can be classified into 3 types of sources:

• Formal institutions, such as rural banks and cooperatives;• Semiformal institutions, such as non government organizations; and • Informal sources such as money lenders and shopkeepers.Microfinance programs are funded by loans, grants, guarantees and

investments from individuals, philanthropists, social investors, local banks, foundations, governments, and international institutions.

Recently, microfinance institutions have begun using poverty assessment tools to more accurately measure the number of their clients who are living on less than $1 a day. Serving the very poor and the destitute – those who lack shelter, income, or even sufficient food – is more challenging, and may require ongoing subsidy. As per Grameen Foundation, a non-profit organization headquartered in Washington, DC; there are 2.8 billion people, approximately 560 million families around the globe who are considered poor, living on less than US$2 per day purchasing power parity (PPP). Of those, 1.2 billion people live in abject poverty; the “poorest” surviving on less than US$1 per day PPP. Despite recognition of microfinance as a proven poverty reduction tool, fewer than 18% of the world's poorest households have access to financial services. This figure likely underestimates, perhaps significantly, demand for microfinance services as it assumes only one member per family would avail of such services. The gap between supply and demand varies dramatically by region. The below figure illustrates the regional breakdown of market access by the poor:

Market Overview:

Demystification

Source: www.grameenfoundation.org


The figures above promise a great potential for growth of microfinance to meet the demands of poor people.

Technology remains one of the main barriers inhibiting the expansion of microfinance globally. However, many microfinance institutions (MFIs) are reluctant to invest their limited resources in technology because they have not yet seen the tangible impact on their goal of serving more people in poverty. As quoted by Peter Bladin of Grameen Foundation, "We need to figure out how to scale microfinance more effectively, and that's where IT becomes a huge tool to create more efficiency," many of the thousands of microfinance institutions (MFIs) worldwide recognize that technology is essential, not only to reach new people, but also to make the business of microfinance more cost-effective and sustainable. Mobile phones, ATM machines, and a host of new innovations promise to help MFIs more efficiently provide services to people typically considered "unbankable."

Microfinance has gradually developed to be a worldwide movement, no longer being a subject matter of microfinance practitioners alone. The microfinance industry is rapidly transforming, with increasing numbers of geographic regions around the world being serviced, with new types of products and services being developed, and with new ideas and technologies to support it. As per a survey by CGAP, the financial success of the Mature and best known MFI's with strong financial and operational track record in particular, as measured by return on equity and return on assets, has attracted the interest of local commercial banks and global banks, as well as alternative financial institutions (AFIs) such as savings and credit cooperatives and postal banks in certain markets, some of whom have entered the microfinance market.

In the years to come, the industry may see a consolidation of the Mature and best known MFI's with the successful but smaller less known MFI's. Leading MFI's will mature both financially and operationally and in some cases may transform

Role of Technology:

Future of microfinance:

into banks and integrate into the financial sector Commercial banks and other AFI's will enter the microfinance market directly, by “down streaming”, and indirectly, through partnerships, bringing their own technology and productivity as well as offering a wider range of services such as insurance.

While financing is the primary constraint to growth for leading MFIs, they will face two other constraints -- unfavorable regulatory regimes and challenges related to rapid growth. Of the two, the regulatory environment, which plays a major role in the ability of MFIs to grow and access capital, is the more significant. As regulatory regimes vary by country, MFIs will need to customize their operating and financing strategies to their local context. In the meantime, MFIs and MFI partner organizations should work together to lobby government for more favorable regulatory regimes.

References:www.grameenfoundation.org

As quoted by Peter Bladin of Grameen Foundation, "We need to figure out how to scale microfinance more effectively, and that's where IT becomes a huge tool to create more efficiency,"

Demystification


Evaluating Key Metrics – A Simple Answer to MFI Risk MitigationVinayak Vasudeva Bhakta Sr. Business Analyst, Banking Domain Team

T

Financial risk in a MFI - the tri-headed monster

he recent financial turmoil and subsequent contraction in credit has resulted in a lot of scrutiny and introspection within the financial institutions in regards to financial risks involved and how it could be mitigated. While big

banks and financial institutions are looking at revamping their infrastructure to ensure stability in this market condition there is another type of financial institution which has to quickly and continuously evaluate its exposure and rapidly does the balancing act. Microfinance institutions have both capitalized on the downturn as well as bore the brunt of the fall.

The financial risk for an MFI can mainly be categorized in the following three major areas namely operational risk, strategic risks and financial risks.

Even though all the risks need to be mitigated efficiently, the two most important or higher priority risks are credit and market risks.

The risk to earnings or capital of an organization is directly related to the customer portfolio of the organization and is one of the most significant risks

Credit Risk:

Operational Risk

Financial Risk Strategic Risk

Microfinance

Institutions

Human IT

Fraud

Transaction

Legal

Governance

Event

Reputation

CreditTransaction Market

Portfolio

from a MFI perspective. This risk is one of the most prominent areas within a MFI. Credit risk is simply the scenario in which the clients do not/ cannot pay back the loan amount thus leading to a reduced lending potential of the MFI.

The measure of how market fluctuations could impact the functioning or liquidity of an MFI's is another thing to care off. MFI's mostly rely on a continuous inflow of deposits to fund lending. These could be public funds, acquired through banks, client's savings or through donors who trust the MFI. So in case of market irregularities, an MFI has to deal with a dual pointed sword wherein the cash flow stops from its depositors stops and its customers stop paying.

Risk if not mitigated could lead to a situation where a MFI may not be in a position to meet its own financial obligations to its depositors or lenders thereby becoming a defaulter itself. This results in loss of confidence of the depositors and direct financial loss for the MFI as it loses not only interest but also its principal amount.

Risk can never be completely eliminated since it is inherent to the financial activities that the institutions undertake. But MFI's have to do extra efforts to mitigate risk since they can neither afford to be too conservative on their lending thereby restricting their growth nor can they be over enthusiastic which will result in losses. Hence, an MFI needs to have an effective risk management system to have reasonable growth without letting the risk cross the thresholds of acceptable limits. The core of risk management is making educated decisions about how much risk to tolerate, how to mitigate those that cannot be tolerated, and how to manage the real risks that are part of the business. Also MFIs that evaluate their

Market Risk:

A prelude to Risk Management for MFIs

Risk if not mitigated could lead to a situation where a MFI may not be in a position to meet its own financial obligations to its depositors or lenders thereby becoming a defaulter itself. This results in loss of confidence of the depositors and direct financial loss for the MFI as it loses not only interest but also its principal amount.

Demystification


performance on both financial and social objectives, hence those decisions can be more challenging than for an institution driven solely by profit. Moreover MFIs being a smaller portfolio driven organization should plan out deeper strategies for effective risk management.

Effective risk mitigation mandates extensive evaluation of metrics and subsequently strategizing to reduce risk. MFI portfolios even though similar in composition to any other financial industry need to be evaluated differently to understand risk

The first approach is to enlist and understand specific indicators within an MFI landscape. Consciously evaluating the indicators and taking corrective measures, improves the quality and mitigates the risks involved. One should also look for geographic trends and concentrations by sector, product and branch etc. Some of the foremost gauges or measures for a MFI would be 1) Portfolio Quality 2) Productivity 3) Financial Viability 4) Profitability 5) Capital Adequacy. This is apart from the social index or measure which anyhow they need to measure to analyze the success of their campaigns or programs from the social or economical front.

This is the measure of the risk in the overall loan portfolio. Some of the key metrics which should be evaluated are

• Repayment Rate – Measure of repayment (Amt of Repayment / Amt Due).• Portfolio Quality Ratios like number of days past due, delinquency bucket,

portfolio size, portfolio type etc.• Portfolio at Risk rate which is outstanding balance on loans for delinquent

accounts/ total portfolio outstanding, • Loan Loss Ratios such as expected loan loss, cumulative loan loss provisions

(income statement item), net write-offs, and loan loss reserve / portfolio outstanding, actual loan loss / avg portfolio outstanding.

This is the measure of the MFI to maximize available resources from productivity and efficiency standpoint and thus minimizing operational risks. Some of the key metrics which could be evaluated are –

• Loans per LO (Loan Officer)• Avg portfolio outstanding per loan officer• Amount disbursed per period per LO• Operating cost ratio• Average compensation to portfolio outstanding ratio, • Costs per loan

Metrics/Analytics approach to risk mitigation.

Portfolio Quality: -

Productivity: -

Financial Viability:

Profitability: -

Capital Adequacy:

Conclusion and Wipro Advantage

References:-

- This is the ability to cover cost through earned revenue mainly operational costs, provisions for loss, cost of capital and financing costs. Some of the key metrics which could be evaluated are

• Operational self-sufficiency• Financial self-sufficiency• Subsidy dependence index

This is the net income which the MFI is earning. This is an important measure which the MFI needs to take care of and mainly assess the

• Returns on investments namely assets and equity.

- This is the measure of capital available with an MFI at any given point of time. The most important metrics under this category would be

• Capital to risk to weighted assets ratio. There are many more metrics which could be evaluated by the above covers

some important points

MFIs through planned risk mitigation research and analytics can thus reduce their exposure to unnecessary losses and drastically improve their bottom line. Rather than reactive metrics generation, MFIs would be able to predict the future trend and make necessary alterations and updates to their strategy for loss mitigation.

Wipro has extensive experience in implementation of solutions at several global financial customer locations and understands the nitty-gritty's of an MFI structure and industry. Its domain and technology consultants have exhaustive exposure to specialized services in the MFI and have devised proven methodologies to quickly integrate and implement solutions. MFIs should hence partner with Wipro primarily to leverage on its understanding of industry wide best practices and approaches that could potentially provide a better customized strategy or solution scalable to future business needs. Additionally, there could also be a scope of leveraging the existing infrastructure in the current environment that could be upgraded to support clients own strategies, thus eliminating the need to buy and install costly COTS products. Hence, a strategic partnership with Wipro would help clients reduce the time to market and increase ROI while making an informed decision to analyze the risk and mitigate it.

- www.microcapital.org- www.microfinanceforum.org

Demystification


Financial inclusion and MicrofinanceNitin Kumar Business Analyst, Banking Domain Team

Introduction: From the late 1980s, the emergence of the Grameen Bank in Bangladesh drew attention to the role of 'micro-credit' as a source of finance for micro-entrepreneurs. Lack of access to credit was seen as a binding constraint on the economic activities of the poor. Micro-loans delivered to groups of poor women seemed to offer a simple and direct remedy and the connection between providing credit and removing poverty was intuitively appealing. It was also politically attractive. Resources could be made available through the political process, while government sponsorship of mass credit bought vote banks.

Less well understood was the need for micro-credit to be financially sustainable. Also, emphasis on credit to the exclusion of other financial services obscured the need to develop organic systems of financial intermediation, commencing with grassroots savings mobilization.

Simplistic notions of micro-credit produced counter-reactions. For the past decade or more the idea of micro-credit as a panacea for poverty has lost ground to a more holistic notion of microfinance, seen as encompassing a range of financial services needed by the poor. It was ironic that by 2006, the year in which Muhammad Yunus and Grameen Bank were awarded the Nobel Peace Prize for their pioneering work in 'micro-credit', the term itself had been eclipsed and retained virtually no currency in professional circles. Nonetheless, Yunus's Nobel Prize has served to cement 'micro-credit' ever more firmly into the popular, journalistic and political vocabularies. This is unfortunate in that it impedes a full understanding of the financial service needs of the poor and how they might best be satisfied.

More recently, the term financial inclusion has gained ground among professionals. 'Financial inclusion' focuses attention on the need to bring previously excluded people under the umbrella of financial institutions. However, while 'microfinance' has driven 'micro-credit' out of the professional discourse, 'financial inclusion' has not replaced 'microfinance' as an operational concept. Financial inclusion is the most useful frame of reference for considering how poverty might be reduced through provision of financial services. And microfinance remains the most potent weapon available for reducing financial exclusion.

Financial exclusion in developing member economies reflects the fact that the 'informal' or 'un-enumerated' economy is of major importance as a source of livelihood for the poor, while for them the household is the primary unit of both

production and consumption. A number of considerations impede the access of households to financial services. These include geographic isolation, low population densities and gender, which lead to unequal access in economies where financial sector development is limited. Particular sectors, notably smallholder and peasant agriculture, with their associated post-harvest and offfarm economic activities, pose special challenges for financial service provision. A general problem in the developing member economies is the inability of many lower income households to meet lenders' requirements for formal physical collateral.

International development agencies and financial institutions have been active in developing new approaches to these problems. The UN Capital Development Fund (UNCDF) published an influential 'Blue Book' on financial inclusion in 2005. The World Bank has devoted considerable resources to a research program on 'access to finance', within which attention is paid to financial exclusion of the poorest and to determining how access to financial services can be measured by governments. Also, within the World Bank Group, the International Finance Corporation (IFC) supports private sector approaches to increasing access to financial services.

The financial service needs of the poor are simple, but their satisfaction can be life enhancing. A broad conception of microfinance embraces deposits, remittances, and payments, micro-insurance and pensions, aside from credit. The poor need access to convenient, liquid and safe deposit services which are protected against inflation by positive real rates of interest. With savings in reserve the poor are able to smooth their consumption expenditures in the face of uncertain income streams. Savings give households a shield against catastrophic events, whether affecting individuals or entire communities. Misfortunes such as illness or bereavement, or destruction due to natural disasters, might otherwise force the vulnerable to divest productive assets, tipping them over the divide between meager sufficiency and poverty.

Access to deposit services also assists the recipients of 'lumpy' income flows, such as remittances or periodic crop receipts, to manage these more efficiently and prudently. This applies to domestic remittances in countries where internal migration is significant, but also in those countries with significant numbers of absentees working overseas. In either case, access to efficient and reasonably-priced remittance services can provide considerable welfare benefits.

Households in remote locations can benefit from payments services that greatly reduce the transaction costs, in time and money, of meeting a range of financial

Financial inclusion, microfinance and poverty:

Demystification


obligations. Microfinance institutions (MFIs) are often able to reach into areas too remote for formal financial institutions and government agencies. However in partnership with such agencies they are able to arrange payments for utility fees, government charges and other obligations for such households. There is also scope for households to receive payments from agencies of government, such as pensions, lease rentals and crop receipts, where applicable.

Micro-insurance is another financial product with potentially profound welfare benefits for poor households. Micro-insurers are learning how to pool risks among clients to provide simple forms of cover against contingencies such as death and illness. MFIs may offer cover to clients as an element in loan contracts, or arrange various forms of protection for savings depositors upon payment of an additional fee. While still rudimentary, micro-insurance is a growing element in the broader micro-financial services industry. Another development is a variety of long-term savings schemes that offer quasi-pensions to clients. Poor households benefit from access to credit, which can increase the productivity of their labor in micro-enterprise activities. Access to credit from alternative sources can also free poor households from exploitative financial relationships with moneylenders.

Further welfare benefits may occur if micro-credit is not restricted to financing narrowly defined 'productive' activities. Recognizing the fungibility of money, which makes it difficult for lenders to know exactly how borrowers use the funds they receive, many microfinance service providers are prepared to lend for a wider range of welfare enhancing purposes. These may include family needs, including school fees, and the purchase of consumer durables. To say that micro-credit has been 'eclipsed' is not to say that the poor cannot benefit from credit, but only that credit should be provided in the context of a full portfolio of microfinance services. And of all potential micro-financial services, access to deposits is probably the most useful to most people, for most of their lives.

Early pioneers have made an enormous contribution to economic development by finding innovative ways to empower the poor. They proved that it is possible to offer financial services to the low-income market through sustainable models. Yet, even the most developed financial inclusion markets reach no more than 30 per cent of the addressable population. A successfully scaled market must provide all members of the economically active population access to credit, savings, insurance and payments products that are relevant and affordable for them. Around the world, innovation is at work.

Some of the initiatives taken up by financial institutions and banks to promote financial inclusion are as follows:

Current Scenario-Initiatives by players

• Rural/Semi urban branch programme.• Opening no frill accounts.• Covering families under Financial Inclusion.• Issuing General Credit Cards• Promoting formation of Self Help Groups & Farmer's Club.• Encouraging Financial Literacy and Credit Counseling centers.• Providing vehicles in potential regions to facilitate the branches to reach the

rural poor and the excluded families by using the vehicle.• Facilitate debt swapping scheme for farmers and urban poor from the non

institutional sources.

The move towards inclusive financing is a big challenge for the financial system. However, a lot needs to be done to achieve the benchmark levels in terms of Banks' outreach and deposit ratios. Banks would need to adopt an innovative, customer-friendly approach to increase their effective reach so that share of organized finance increases. Banks have a critical role to play in inclusive growth and thus reaching the BoP customers. The reach of microfinance intervention to the lowest segment i.e. people living below the poverty line, is still an open debate, the success achieved so far is unquestionable and needs to be replicated further. In this situation, the following initiatives might help the mainstream institutions to achieve the goal of financial inclusion in the coming years:

• Using appropriate/flexible microfinance products supported by existing infrastructure and information technology.

• Clear emphasis on the role of banking facilitators and business correspondents in financial intermediation process will help in reaching areas often neglected by the regular institutional structures.

• In addition to regular group loans, individual loans for SHG members based only on group guarantee (without any regular collateral) could make a huge difference in taking the service to the lowest segments of the society.

Thus, all in all, to sustain and accelerate the growth momentum, the governments have to ensure increased participation of the economically weak segments of population in the process of economic growth.

Road Ahead

References: - http://www.igovernment.inhttp://www.apec.org.au- https://www.irma.ac.in

Demystification


Micro financing the Micro Affinity WayAshwin Balakrishna Shibaruraya Consultant, Banking Domain Team

ntroduction: I

Unraveling the mystery of Micro Affinities

At the grass root level, microfinance simply put, is an enabler for the unbanked to access financing for their daily needs. Mohammed Yunus of Grameen bank pioneered the concept of Microfinance with a special focus on

Micro credit. In fact legend has it that his first microcredit was worth all of $ 27.00. However microfinance has now grown into a multimillion dollar industry and is dished out in several forms, shapes and sizes. This article peers into the world of micro affinities and attempts to highlight how micro affinities serve as a form of microfinance.

Ask a charitable institution what their biggest problem child is and 9 out 10 would say lack of adequate donors. In our ever prospering world, there is even less available for people to give back to the society. The challenge then lies in enabling the well to do to impart with some of their riches and channelize them to the needy by simplifying the donation process. The smart banker, in the bargain, can actually make money out of the proposition.

In a nutshell an affinity card is a credit card where a part of the customer's rewards are apportioned off to the charity or institution partnering the bank. The same concept when extended to smaller micro sized social cause institutions leads to the micro affinity model. The picture illustrates the model adopted by a credit card issuer.

In the credit card industry, the banks make part of their money out of interchange income and give back some of the money to the customer as rewards. Therefore, the more the cardholder spend, the greater the interchange income. The more the cardholders spend, the greater the rewards accumulated. These two events form the pillars of the microfinance model for micro affinities.

Large financial institutions recruit small sized charitable organizations (micro affinities) to sign up for a program that helps the small organizations create a set of marketable artifacts. The artifacts advertize a credit card program being offered by the financial institution. The affinities in turn market these artifacts to their supporters and urge them to apply for the credit card.

Different organizations are known to have different donation models and there are complex analytics that go into defining the donation model. However, the important aspect is that there is a % of earnings being donated by the financial institution while the other % comes from the cardholder's rewards kitty.

Who Benefits and How?On the surface, it appears that the bank is just acting as a conduit and is not

making any money out of it. However the truth is that all parties involved in the transaction are actually benefiting.

The bank benefits because it's earning higher interchange income on every purchase. It is also possible the bank may earn interest on delinquent accounts, should the cardholder default. The affinities benefit because they are receiving a

Affiliate Partner Affinity

Recruits

Re

cru

its

Recruits

Financial Institution

Affinity Beneficiaries

Mar

ket

s

Application

For

Credit

Cardholder Rewards Donated

01

02

03

04

Demystification


donation from the bank through the redeemed rewards. The supporter is the only party that has no monetary gains in this transaction.

However, they have a ready and direct way of contributing to a charity of their choice without having to dedicate time and money for other forms of donation.

In ConclusionThe traditional models of microfinance are executed as a negotiable contract

with the borrower having a liability to repay the entire principal plus minimal interest. With Micro affinities gaining steam these models are being redefined leaving the beneficiary of the microfinance with no liability to repay. Also this model is enabling the rich to give back to their society by simply piggybacking on their day to day purchases on their credit cards.

However caution must be exercised as this model is yet to prove itself and without enough cardholders to subscribe to this model, the banks will end up having a sunken investment along with all the bad press that comes with a failed program.

Demystification

Enabling Micro Finance through Mobile Banking – A Success StoryAravamudan Rajagopalan Sr. Business Analyst, Banking Domain Team


Innovation/ BTG Corner

T

Background: RBI Regulations

The Initiative: EKO –Mobile Banking

he widespread use of mobile phones in our country offers a platform for financial transactions that can facilitate financial inclusion of people who would otherwise be outside the purview of the financial system. A

combination of Government policies, technology and innovative business practices is rapidly changing the way in which people conduct financial transactions. In this article we explore how this combination of Government directive and the application of technology, innovation and above all the zest to provide services to the unbanked of the pyramid have resulted in a successful business model that could well be a trend setter in Micro finance using Mobile technology.

An RBI guideline directs that under Section 25, non-profit companies can only become a 'business correspondent' (similar to an outsourced bank branch). Another regulation from RBI allows grocery stores, petrol pumps, and similar retail outlets to be appointed as sub-agents of business correspondents. These retail outlets, after due diligence, can been appointed as sub-agents, to work on the behalf of the business correspondents.

A CGAP-funded project (Consultative Group to Assist the Poor) has been running in New Delhi, NCR and Bihar since March 2009 and it is aimed at the 'un-banked' section of the population. This program has been spearheaded by Eko and the largest Public Sector Bank in India. Eko Aspire Foundation (Eko) is a Section 25 company established on November 2007. In line with the above mentioned RBI guide line, the largest Public Sector Bank in India appointed Eko Aspire Foundation as its Business Correspondent in February 2009. The Bank in collaboration with Eko launched a Mini Savings Bank Account as a pilot in Uttam Nagar, New Delhi. The Mini Savings Bank Account holders can do a host of financial transactions including deposit and withdrawal from their accounts through their mobile phones at various Eko Customer Service Points or CSPs.

As of March 2010, the company has 50,000 customers ever since it started the service. Its customers are able to withdraw, deposit, and do money remittances safely, instantly, and conveniently. The technology has been used to minimize the

transaction cost, making it profitable for financial services companies and banks.

The customer needs to approach a CSP to set up their accounts. These CSPs are typically shops in the locality like pharmacies, grocery shops and other day to day vendors that the common man uses daily. This 'local presence' enables increased reach, access and comfort level to the end customer.

The customers are required to establish their identity to set up their accounts with a CSP.

All that is required to set up a customer account is documentation per the minimum KYC (Know Your Customer) guidelines as directed by RBI. Once the account is set up, the customer can start conducting transactions almost instantly.

Application and Innovation:The Business Process

Transactions work on the following syntax: *Short Code*Recipient's mobile number*Amount*Signature with Pin#

This service is enabled through mobile phones and customers can use them to trigger transactions. The back end servers are integrated with the core banking systems of the bank. This service works on all handsets and there is no requirement for downloading or installing an application. It works on both GSM and CDMA handsets. GPRS is not necessary. It is configured in a way that you dial a number and this works on all mobile handsets. The confirmation of the transaction takes place via SMS

Like Internet banking, users can do certain transactions or trigger a transaction using mobile phones. Rather than going on to the Internet, the transactions can be done on the mobile phone.

Eko Counters or CSPs can service customers using their mobile phones for cash transactions and do not require any additional investments in terms of Point-of-Sale (POS) devices. Since the mobile number of a person is globally unique, the account number of the customer is mapped to the mobile number. All transactions are conducted in real time. On Eko SimpliBank, transactions are always initiated by the debiting party.


Innovation/ BTG Corner

The Underlying technologySimpliBankSimpliBank is an abridged core banking system, which provides the entire banking solution in the cloud and works on a universal interface. SimpliBank is designed with the mobile phone as its primary transaction interface. It will even work on ultra-low cost, pre-paid mobiles such as the Nokia 1200. It doesn't require GPRS, WAP, EDGE, or any other technology to work. Rather, it can initiate transactions simply by dialing numbers. It has the capability of managing and hosting customer accounts for the Bank.

Eko SimpliBank captures all mobile transactions, processes them and then reconciles the same with the core banking systems. This middleware understands transactions done by customers at a retail point. The user interface supports two-factor authentication for transactions. The system is as secure as the ATM (if not more). The technology developed has three-level security - the mobile phone, a "signature booklet" (patent pending) and the PIN. It is essentially low-cost numerical encryption.

Any modern banking system relies on robust hardware and software that has fool-proof security and is highly responsive. This infrastructure may be outsourced and hosted at a service provider.

Eko India Financial Services chose Wipro to host its infrastructure, which is delivered as a service (IaaS). It utilizes Wipro's compute and storage capability to host its application.

Technology Used: Wipro's IaaS Cloud with RedHat OS, MySQL DB, and Jboss/Tomcat App framework

“We have partnered with VeriSign for securing transactions. We generate an 'Okekey' which is a new type of authentication designed by us. The 'Okekey' is a 10 digit number of which six digits are randomly selected and the remaining four digits are for the pin number. So, when a customer opens an account, he/she receives an Account Activation Kit containing an 'Okekey' booklet. Post the registration of the booklet, the customer can deposit and withdraw cash from the nearest Eko Counter and conduct many other transactions”

-- Abhinav Sinha, Co-founder, Eko Aspire Foundation.

SimpliBank ensures transparency and traceability through its reconciliation process. It is capable of generating comprehensive analytics in various formats which may be used for Anti- Money Laundering.

Promising Future The combination of technology, innovation and business drive has been

successful in minimizing the transaction cost and making it profitable for financial services instituions and banks. In comparison cost per transaction is about Rs 1- 3 with Eko- SimpliBank, as against Rs. 60/- for a branch transaction cost /- (per CGAP). This project has also won the PC Quest Best IT Implementation Award of the year 2010. With such a lucrative service offering and an immensely potential market this Mobile Micro Finance model all set to be the trend setter in providing successful Micro finance.

References:http://www.expresscomputeronline.com/http://eko.co.inhttp://pcquest.ciol.com/http://www.informationweek.in


Market/ Product Watch

Financial Inclusion to an IncumbentPuneet Talwar Principal Consultant, Client Relationship Group – BFSI, Wipro Infotech

P

Michael Porter's five forces model applied to financial inclusion

overty is not new, and has been created as an end-state of business exchange processes happening throughout the history. As one ponders on roots of uneven wealth distribution, one often concludes that the business

models often marginalize the have not (s) of the society while accumulating maximum benefits of the haves. Unless we reach a point in social evolution when the preferred business models favor both haves and have not s, it is impossible to eradicate poverty from the society.

With close to 41% of unbanked population, India is a big presents a big opportunity. To top it all, the competition present is not very severe and is primarily limited to small business players, ignorance of customers, historical and typically hostile relationships with loan sharks and warmth of parking cash under pillow. Given the business acumen in society, some of the questions worth a serious thought include:

• Why is there such a large untapped market? How did it come about?• What are the key enablers to operate in this market?• Who are the suppliers and consumers in such a market?• Is it really as easy and lucrative as it sounds? • Does everyone really gain from financial inclusion? • Why is everyone not already profiting from the large opportunity

presented?• Are there any replacement products for the financial inclusion?• What are the barriers for someone to enter into this market?• What is needed to make it a reality?

Thus it can be said that any large change in an economy as big as India is possible only with orchestrated efforts among the Government, PSUs and Private sector organization. For gaining success similar to the relatively recent infrastructure upgrades, metro projects, STP parks across country etc – it is necessary to utilize the strengths of all three parties.

Let us look at Financial Inclusion using a well accepted management model:

The consumers that are targeted for Financial Inclusion are either rural, or unbanked urban generally ignorant about intricacies of Banking or Insurance. The

Competition:

- Regional FI players

- Loan sharks

- Comfort with keeping cash

- Unaccounted (Black) money

- Unawareness about Banking

- Unrecorded population

Suppliers:

- Business Correspondent agents (Last mile

providers)

- Financial Institutions (Banks/Insurance

Cos)

- Business Correspondent NGOs

- Technology providers

Consumers:

- Rural / Unbanked urban

- Mostly unaware of Banking

- Low income group

- Low value transactions

- May not meet detailed KYC norms

Barriers to Entry:

- Insufficient last mile

reach

- Association with NGOs

- Technology barriers

o Front-end

o Back-end

- Business model

requiring a single

company to have it all

Replacement products:

- Rural Banks and

ATMs

- Mobile companies

provided m-Wallets

- Loan sharks

size of transactions that are conducted is small other than the withdrawal of NREGS payment. Relaxation in KYC norms has certainly allowed a larger population of India to be able to open no-frills accounts. However, well being lies not in merely opening an account but also managing it properly.

There is a dire need of educating these customers on use of financial instrument and banking for Financial Inclusion to be successful. While there seems to be a large focus on customer acquisition, the higher good for customer lies in education on financial discipline that can only be delivered by market players experienced in conducting programs of education at that scale. Additional focus of the market players dealing should be the increase of balances that these customers carry, which is once again profitable for the bank providing financial inclusion as well as the customer who saves more.


Market/ Product Watch

The number of Financial Inclusion players in the market is very limited as the organizations providing this service are primarily managing both the technology as well as consumers. Above all, the proposed business model and self-selection by Banks presently does not encourage specialization in customer education and coaching, customer service or even technology. Most PSU Banks as consequence of their Financial Inclusion program have allowed participants to assist only if the participants provide service for end-to-end Financial Inclusion. End-to-End here includes everything from being provider of flawless technology to business correspondents (NGO), and includes customer education. Looking at these requirements, one only wonders about seriousness of intent of PSU Banks. This comes out as half-hearted effort while minimizing the amount of work created to manage.

Financial Inclusion today is driven by Business Correspondents, which are required to be NGOs and may recruit a selected list of professionals as last-mile providers of the service (agents). The agents are enabled using technical devices like hand held machines, or even cell phones to act on behalf of their associated Banks. Once a transaction is made by a consumer at one of the agents, the transaction is eventually made into the system of the Bank that is providing Financial Inclusion. Presently the transaction amounts are small and it is not viable for most banks to expose their existing systems to expected large volumes of small transaction.

Given that today most transactions permeating through system are NREGS payments, Financial Inclusion can be primarily seen as a distribution agent for NREGS payments. This is a payment made by the Government in lieu of unemployment of the concerned customer, and merely provides means of livelihood while customer continues to look for employment. Hardly does distribution of these payments instill financial discipline in the customer for eradicating poverty.

Financial Institutions, PSUs or Private have traditionally not developed back-end infrastructure that allows for Financial Inclusion at the scale as forecasted. Presently the infrastructure also does not support the transaction levels and granularity as needed for Financial Inclusion. Given that the infrastructure required is across the board, driven by the central bank, critical to success and the need for infrastructure to be of highest quality – it makes a strong case for development of centrally managed back-end infrastructure for Financial Inclusion. This central infrastructure (Financial Inclusion gateway) can be further provided for use to banks on an operating cost model. A business model like such can assist in many ways including provision of interoperability between banks, real-time remittances

across banks, consistent innovation in channels across banks, reduced dependency on channel providers etc.

Presently the Financial Inclusion services as demanded by most PSUs are provided by a small number of small but diverse market players. Given the size of market and number of end-to-end players, the competition between these players is very limited. The competitions need to intensify in this space for assuring not only a good ROI on Financial Inclusion investment, but also to ensure constant innovation to deliver best service to end customers. The banks can facilitate this competition by lowering the barriers to entry that an entrepreneur like me faces for Financial Inclusion market.

There are primarily two kinds of pricing models offered by banks: Number of customers oriented, and Number/Amount of transactions oriented. Presently the pricing models that Banks provide to these service providers are evolving and the models seem oriented more towards number of customers given reporting requirements faced by the banks. Only the second pricing model, to a certain degree addresses the objective of Financial Inclusion.

In a nutshell, some of the necessary steps required for Financial Inclusion to serve its purpose will be:

• Encourage participation of specialized players to promote Financial Inclusion: Business Correspondents, front-end Technology Providers, Data Aggregators etc. Present implementation model requires each of these players to get into relatively alien areas for them will relatively lesser experience. By planned orchestration of business experts in each of these areas, banks can ensure and expedite prudent financial inclusion.

• Develop sustainable back-end infrastructure that does not only mean requirements for providing no-frills accounts, but also provides for the FI requirements of insurance, credit etc. The infrastructure should be scalable, time-tested and provide for all industrial scale usage with facilities like disaster recovery, backup etc. Government can conceive this to be done using a National gateway for Financial Inclusion very similar to the payment gateway being setup by NPCI.

Revenue model for participants in Financial Inclusion needs to change for promoting desired behavior: Increase in number of transactions, Savings amount etc. A model where some of the benefits of these additional savings are passed back to consumers will only encourage financial discipline.

Fun CornerFun Cornerthe Banking & Financial Services -newsletter from Wipro Technologiese

For Wipro internal circulation only

Rush your responses to: [email protected]

17

The winner of May Thoughtline edition is:

'Shalini Sachdev' Manager, Operations, WBPO Solutions.

Smitha Naik Consultant, Banking Domain Team

Use the text below to find out at least 20 words/ terms which are used in the financial world.

t o a a o c c d c d i v e s t i t u r e d n a a

i r e i o d o i l e e e a e r v o v l e v e e t

t f a t n i s a e n c r s v c n a l e e e l f w

r t f n r l t s e r i u z i k e t g a c y f o c

r i r n s n o t o o c t i t c w a i n i f c h t

r t c a n a f t g n i c n a n i f a e e f i n t

t s n o o e c t e i s u i v n l n t o l e k n t

s p i a i c a t a c w r e i v i t s t f r d e v

s j h i t t p c i i o t n r f t c k f c r e e m

e o r p a t i v n o t s a e p o o i v n i b k g

i i i r l a t i a a n l t d s e n i i h s t t c

t n e m e g a n a m l a t i p a c g n i k r o w

i t i a r t l t f n r t r e n e p i i f m a n u

l v t a r t t f t o t i v c a o r j o b a t u i

i e k a o f i f p t c p i c o i a o p n n i n c

c n d i t c o r p o r a t e g o v e r n a n c e

a t n l s g o s i i l c t o e i t f t e g g g t

f u n r e c p r n o i t a z i t i r u c e s v i

t r t d v i s n f s i c i c f f p i e o m i c s

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Traditional Japanese tattoo designsBy Channakeshava

Art of Japanese tattooing is backed up by centuries of culture and tradition. Since the Japanese have such high regard for nature and spirituality, they often associate different creatures and places with deep spiritual meanings.

This spirituality is what transforms their ink and design into works that embody or symbolize several

things. This is also why certain creatures, especially the more revered ones like the dragon, the tiger, and the Koi

fish often make their way into the heart of most Japanese designs. The Japanese hold a special meaning for these creatures which is why they are often used in tattoo designs. Most of these designs are very colorful and fluid, making them generally more appealing than other designs. Also, each design is usually made up of more than a single element woven together by intricate patterns of lines, transforming the tattoo into one elaborate painting on the skin.

In Japanese designs such as the ones featuring Japanese koi fishes, tattoo masters already use more than six colors to finish the whole picture. This number just continues to go up as the intricacy of the patterns increases.

These designs emit a sense of power, so much so that the body where the tattoo is placed on almost disappears instantly behind the picture. The mix of form, color and intricate patterns draws attention unlike any other type of tattoo design. This is also why these designs take much longer to complete than others. The details that come into assembling each design make these designs extremely powerful and alluring.

In contrast to other designs which clearly look and feel like ornamental accessories on the skin, Japanese tattoos are meant to stand out.

The more popular Japanese tattoo designs span the length of almost the entire body. Some of the best and most well known patterns can cover the whole back from the thighs all the way to the shoulders.