By Divya Moorthy, CIFD
Childbirth ushers with it a ray of hope and joy for the family. Pregnancy, birth and motherhood, in an environment that respects women, can powerfully affirm women’s rights and social status without jeopardizing their health. The enabling environment for safe motherhood and childbirth depends on the care and attention provided to pregnant women and newborns. Despite various initiatives, the maternal mortality rate (MMR) and infant mortality rate (IMR) in India is alarmingly high at 450 deaths per one lakh live births and 55 deaths per 1000 live births respectively.
Access to finance to acquire improved health care, quality reproductive health services, emergency obstetric and neonatal care and nutrition for the mother and her child is pivotal to addressing the issues of high mortality rates in India.
Centre for Innovative Financial Design (CIFD), IFMR, has developed the ‘Pregnancy Financing’ product that allows poor pregnant women to meet expenses related to child delivery and ante and post-natal care. ‘Pregnancy Financing’ is centered on the premise of Behavioral Collateral; where a particular behavior is treated as collateral for providing financial service. The rationale behind this is:
- Some women belong to the marginalized section of the society and hence would be unable to form groups that can underwrite each individual’s commitment.
- The women are too poor to possess tangible assets that could serve as physical collateral.
Women are encouraged to enroll in this product as early as possible during their pregnancy. Women who take-up the product, save regularly over the course of their pregnancy, with the amount of saving left open for the borrower to decide.
Two weeks prior to delivery, the savings accumulated by the woman is given back to her along with the loan since the savings behavior and not the amount of savings, works as collateral. The underlying principle behind this idea is that if a poor woman can forgo some of her current consumption for savings, then she can also forgo certain part of her consumption in future periods for repaying the loan.
CIFD has entered into collaboration with The Guntur District Cooperative Bank Limited in Andhra Pradesh and The Banswara District Central Cooperative Bank in Rajasthan for offering the pregnancy financing product. As part of the understanding, CIFD will design and develop the product and the associated processes for rolling it out. CIFD will also design the branding and marketing campaign to launch the product. The Bank from its end shall offer the necessary infrastructure and customers, also, it would extend the local level support required for the implementation. The product will be launched during the 2ndweek of August 2010.
What’s your take on the product?
IFMR Capital completed its second securitisation transaction with Bengaluru based microfinance institution (MFI), Grameen Financial Services Private Limited (previously called Grameen Koota) on June 23rd. This is IFMR Capital’s sixth securitisation transaction as a structurer, arranger and primary investor. The 311.5 million rupee securitisation transaction involved over 27,000 microloan contracts of Grameen Koota being pooled and issued as debt securities by Alpha Pioneer IFMR Capital 2010, the special purpose vehicle or SPV created for this purpose. The securities were issued in two tranches with the P1+(so) rated senior tranche being subscribed by a large Indian mutual fund. With this deal, funding facilitated by the Chennai based inclusive-finance company for the microfinance sector has reached about INR 3 billion.
The market conditions were a trial for IFMR Capital’s securitisation product, handed with the task of bringing market investors in such a liquidity strained scenario and ensuring a cost reduction for the MFI. The company is satisfied that this transaction achieved both. Grameen Koota achieved a cost of funding much lower than what was possible through bank funding. IFMR Capital played the role of the structurer and arranger, apart from that of a primary investor by investing in the P4+(so) rated subordinated tranche.
IFMR Capital looks forward to meeting many more such challenges in future and to continue providing access to capital markets for high quality microfinance institutions.
Last month the Wealth-Management Cross-Functional team had visited 15 households in Thanjavur to pilot the Wealth Management process. A week ago we revisited some of these households with a draft of the Financial Wellbeing Report to see how we could engage in a constructive dialogue with the household on various aspects of their financial lives. One such family was that of Jaya (name changed), a customer enrolled at Andipatti branch of Pudhuaaru KGFS.
The Family – Jaya (40) and her husband Rajan (42) live in a thatched house in Karukkadipatti village. The couple has three children Neetha (16), Vinodini (18) and Pramod (20). While the daughters Neetha (1st Year BSc) and Vinodini (10th Std) are still studying, the eldest son Pramod has just started working in Qatar as a driver. The daughters stay at Jaya’s sister’s house in a nearby village.
Their Activities – Till about 5 years back, Rajan worked in a hotel in Singapore. When he returned, he decided to manage the tea shop business that his father used to run. Rajan manages to make about Rs.1,20,000 a year from the shop. Apart from this the family owns about 1.3 acres of agricultural land and manages a net income of about Rs.35,000 by growing paddy for two seasons and black gram for one. The two cows they have fetch them a net income of Rs.4,000 a year. The family spends about Rs.39,000 a year on routine household expenses. Picture: Rajan (right) interacting with the team.
Goals – Among the list of goals that the household wishes to fulfil, Neetha and Vinodini’s education over the next five years alone will cost the family Rs. 3.6 lakhs (1 lakh = 1,00,000). Other priorities include their marriage (Rs. 5 lakhs each) and expansion of the shop (Rs 20,000).
With this and other information about the household, we set about preparing a Financial Wellbeing Report for them. The report talks about four pathways (Plan-Grow-Protect-Diversify) towards financial wellbeing – all of which try to answer the central question for the customer “How can Wealth Management help improve my financial wellbeing?”
The Advice – The specific advice around protection includes Life Insurance for Jaya (Rs.50,000), Pramod (Rs.5,00,000), Vinodini (Rs.4,20,000) and Neetha (Rs.3,80,000); Accident Insurance for Jaya (Rs.2,00,000), Rajan (Rs.1,75,000), Pramod, Vinodini & Neetha (Rs.5,50,000 each). Insurance for the cow and shop is also suggested upto their current market values. Life Insurance decisions are linked to human capital (Present Value of Lifetime Income net of Own Expenses) of each member.
As regards the surplus generated by the household, the advice was to allocate it in the following proportion: Index Fund – 20%, Gold – 18% and MMMF – 62%. This advice is consistent with the desired features of high returns, diversification from local assets and diversification in assets uncorrelated with human capital. Jaya should also maintain a separate balance of about Rs. 10,000 in the MMMF account to take care of liquidity needs.
The shop being a high TIP (Total Income Potential) asset, the advice is to borrow for its renovation. For all other medium to long-term goals that are 3 to 8 years away, a combination of savings and borrowing is advised.
For a full explanation of Jaya’s Financial wellbeing report please click here.
We would urge all those reading this to share their comments and suggestions on the process and the recommendations in the comments section below. What are we missing?
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Shilpa Sathe of InnerWorlds and Amit Shah of Rural Finance contributed to this post.
Our new office at the IIT Madras Research Park has brought together like-minded people from the Trust and the Research Centers under one roof. The environment and the interiors of the sprawling office enhance and showcase the diverse cultures and vibrancy of different teams, also paving way for seamless knowledge sharing.
Our organic and dynamic office was featured in the Times of India recently in the “Creative Spaces” section. Click here to read what they have to say about our new home.
Today, the Center for Innovative Financial Design (CIFD) has launched the endline survey of its project on contract enforcement in water markets in rural Uttar Pradesh. It will shed additional light on the appropriate interventions to overcome obstacles in irrigation markets in rural India. For that purpose, CIFD has recruited and trained field teams to survey more than 900 households in 22 different villages of Sitapur District over the course of the next 5 weeks. The training comprised different theoretical as well as practical sessions such as using GPS devices, using the survey questionnaires, and data quality management. The questionnaires that have been extensively field tested in the last 10 days cover various aspects related to water trade in rural areas such as pricing, mode of payment, and social relationships between water buyer and seller.
CIFD’s Survey Supervisor Mr. Bipin Gena piloting the Endline Survey questionnaire
Some background info on the research project: often we tend to romanticize about life in rural India, particularly, the social aspects. A common perception is that villagers have lived together for generations and the social interactions they engage in are not marred by conflicts. Such a milieu would facilitate the initiation of informal contracts amongst villagers which unfortunately is not often the case given anecdotal evidence from our field research in the dusty Hindi heartland of rural Uttar Pradesh.
In our preliminary fieldwork on irrigation markets in villages that encompasses the buying and selling of water through engine rental for irrigation of fields, we found that farmers do not undertake additional irrigation that would result in a significant increment in their output.
Pictured above: Survey field team members familiarizing themselves with GPS meters during the survey training
This is due to the paucity of funds to pay for such irrigations before the monsoon when they are most needed. For our randomly created sample water buyer-water seller pairs, we define a water seller as a farmer who owns both an operational bore-well and an operational engine. The matched water buyer in the same village is a farmer without an engine who owns a plot capable of being irrigated with water bought from the seller. GPS devises help to locate all households in the sample.
From today, the survey rolls out
The pertinent question here is why water sellers are not allowing water buyers to pay for irrigation cost or at least a part of it after the harvest when they get lump-sum payments. In return they could charge an extra fee from water buyers for delayed payments. The existence of irrigation credit markets within water buyer-water seller pairs seems to be natural if we consider farmers to be economically motivated.
But this is not the way things are on the ground. One of the reasons could be the difficulty in contract enforcement in rural areas. The experiments we carried out last year aimed to introduce variation in enforcement institutions for farmers and look at effects on bargaining over water sales. By providing subsidies in some cases to the buyers and in other instances to the sellers, we intended to observe a difference in irrigation transactions between these two groups if at all there are enforcement constraints in water markets.
Stand by for our findings when we complete the endline survey by July 2010.
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Sanchit Kumar, Project Manager at CIFD, contributed this post.
Livestock rearing is central to the livelihoods and survival of small marginal farmers and landless agricultural laborers across the country. As livestock related activities help to maintain a daily inflow of income for these households, livestock economy is a source of self-insurance for farmers. It provides a diversified source of income and mitigates the uncertainties of seasonal income from their traditional sources like agriculture.
In line with the mission to serve this target group of remote rural customers in Thanjavur district, Pudhuaaru KGFS (PKGFS) launched its ‘Livestock Loan’ product to fund customers who are interested in pursuing dairying activity.
Some of the salient features of this product are:
- Single loan to buy two cattle and two staged disbursements aligned with the lactation cycle to ensure continuous income from dairying activity to the customer.
- Repayment management– Seamless repayment management enables customers to supply milk to a designated milk vendor and the milk vendor remits amount earned by the respective customer to PKGFS. The installment amount will be deducted and the excess amount would be invested in respective customer’s MMMF folio, which can be redeemed as per customer needs.
- Anywhere disbursement – Based on the customer’s convenience, loan can be disbursed either at the branch or in the field (cattle seller’s place) after the necessary due diligence.
First Livestock loan disbursement. From left: Rohit Mukkawar (IFMR Rural Finance product and process team), Manikandan (Wealth Manger), Ravi (Asst Regional Manager – PKGFS ) handing over the loan amount to customer Poongothai & her husband Rajenthiran
The first loan was disbursed at Veeramangudi branch on 25th May, 2010, after the mandatory health checkup and valuation by Dr. Gangadharan, DNE’s veterinarian on the field. The second loan was disbursed shortly afterwards to customer Malarkodi after completing the necessary ground procedures.
Rohit Mukkawar says “The product & process were designed after taking inputs from various sources. Interested & eligible customers are being identified by our wealth managers. ARMs along with the veterinarian will conduct the mandatory health check up & valuation process before disbursing the loan. We look forward for a smooth piloting phase and hope to see the product reach the scale-up stage at the earliest”.
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Bharathi Kannamma of IFMR Rural Finance contributed to this post.
Having started its operations in Thanjavur by offering dairy healthcare backed cattle insurance in partnership with Pudhuaaru KGFS (PKGFS), Dairy Network Enterprise (DNE) incubated by IFMR Ventures, has rolled out the product to cover all the Pudhuaaru KGFS branches, since February. As the delivery of cattle insurance and preventive healthcare got stabilized, DNE has slowly started to look into other aspects of dairying with the mantra of “Making dairying remunerative”.
DNE has worked towards identifying ways in which it can provide support to the dairy farmers in Pudhuaaru KGFS areas to help them in addressing the issues they face in dairy farming. Beginning with measures like cattle insurance and disease prevention through prophylactic vaccination, DNE also moved into consultation in feeding and breeding management. All advice is given only as per the issues perceived by the dairy farmers and hence the farmers adopted anything that DNE offered them with an open mind. DNE has also helped in establishing market linkage for milk sales by working with organized milk buyers to set up collection centres in the Pudhuaaru KGFS areas.
Though it is too early to expect large-scale impact, early reports from Pudhuaaru KGFS areas in Thanjavur on the dairy front is highly encouraging. Few customer stories:
1) Vedhanayaki Karananidhi, a KGFS customer from Paruthiappar Kovil near Thanjavur has dramatically reduced her feeding cost by heeding the advice given by DNE. Previously her cost of production of milk was around Rs.6.50 per litre. DNE guided her in getting seed plant for Azolla (a fern), a protein and micro-nutrients rich fodder and supported her to cultivate the same in her farm. She has now replaced almost 50% of her costly concentrate feed with Azolla. With this, her cost of production of milk now is around Rs.4.20 per litre and she is happier than ever before. She has become an evangelist and is promoting the adoption of such practices to her neighbors.
Many more such enthusiastic people are being identified and DNE hopes that after a 3 day training for them, there will be many more such evangelists on the field. Such women (called Village Animal Healthcare Workers [VAHW]) are also expected to act as local contact persons for the veterinarians and retailers for dairy inputs. Beginning June 2010, every month, DNE wishes to train a new batch of such potential evangelists-cum-VAHWs.
2) Aiyyakannu Chinathambi, an agricultural laborer from Cholapuram grapples with joblessness for 3 months in a year making it difficult for him to sustain his family of five. He has had a very bad experience in the past when dealing with local moneylenders. But he says that the situation has changed, with support from Pudhuaaru KGFS he bought a cow and with advice from DNE he now owns a cow that is earning him handsome returns. He has his cow insured, as it is his family’s prized asset.
3) Jayarajavalli Thiruganasambamthan used to sell milk at a local teashop at Rs.10/ litre. As she received such a low price for milk, she kept only one cow to meet her domestic needs. However, after organized milk buyers set up collection centres in her area, she now sells milk at Rs.13.5-Rs.14/litre. She has insured her cow and is now looking forward to buy another cow because milk business has now become a remunerative venture in her area.
Examples of success are many but the path ahead is still long. Financing for buying cattle, cattle insurance and delivery of prophylactic vaccinations, veterinary aid in feeding and disease management and market linkage for milk sales has already been initiated to varying extents. However while all this is happening, DNE is continuously trying to understand the needs of the dairy farmer to better their livelihoods so that the fruits of financial inclusion reach their doorstep.
Follow DNE on:
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Dr. Gangadharan, DNE Veterinarian contributed to this post.
IFMR Ventures invests in rural supply chain companies to bridge the key financial gaps that ail the sector. Apart from Dairy, it is also involved in sectors like Rural Tourism, Crafts, Agriculture, Water, Vocational Training, and Rural Energy. For more information about it click here.
IFMR Finance Foundation (IFF), which recently came out with a plan for commercial banks to deepen financial access using the Business Correspondent (BC) model , is now working on an action plan to roll out the model extensively across India. The action plan proposes to set up a large number of conveniently located village level touch points across the country to provide a full-range of services including savings, credit, insurance and payments that is viable for the BCs, the bank and the customers. The significance of the initiative can be gauged by the fact that of the 600,000 habitations in India, hardly 30,000 have a bank branch.
IFF is proposing two models – the minimum service model (savings, payments and insurance) and the full service model, which includes lending.
IFF, which is designing the models, including working out the business plan for the various models, is to be involved in identifying the BCs; selecting the training and technology partners; working out business plans for the various models that are being proposed; designing the channels, processes and products; and zeroing-in on appropriate geographies for implementation.
Key to the success of this massive BC programme that IFF is proposing for commercial banks is establishing healthy partnerships with institutions that have built strong track records in working with village based entities. CARE India, a Delhi-based humanitarian organization, is one such institution that connects with a multitude of village level NGOs and provides them with tools and facilities to effectively serve the rural population. The support provided by CARE, after a careful due-diligence, ranges from product design, training, and funding to advocating for policy changes in relevant areas of their work. Thus CARE’s partner NGOs could become potential BCs of the bank.
To explore the possibility of CARE’s partner NGOs becoming BCs, a workshop was conducted at IFMR’s Office at IIT Research Park on 18th May 2010. While the workshop was attended by 25 NGOs who work in as diverse fields as livelihoods, health and education, more than half of them were also into microfinance.
Suyash Rai of IFF set the stage of the workshop by providing an overview of the proposed BC model of financial deepening. The discussions that followed were extensive. While CARE’s Chennai head Devaprakash suggested that his organization could be involved in providing training tools and infrastructure, apart from actually being involved in training, the NGO partners flooded Suyash with questions ranging from implementation to impact. It was very obvious that the partners were keen to become BCs and wanted to clear doubts and concerns.
Suyash Rai presenting the BC model.
Interaction with NGOs after the presentation.
The questions and apprehensions flagged by the NGOs are significant inputs for IFF to formulate an effective, viable and successful BC model on the ground. Some of their concerns that included, “how will the BCs of one bank function alongside BCs of other banks in the same area?”; “will there be credit ceilings?”; and “how will the time spent by the BCs on rejected loan clients be accounted for?” provided insights into some of the operational issues that would be appropriately addressed for the proposed initiative to be taken to scale across the country. If you have ideas on improving the BC model, do share it with us in the comments below.
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Asha Krishnakumar, Farzana Najeed and Kirthi Rao contributed to this post.
The sight of the mighty Himalayas and the scenic surroundings of the hilly terrain can be a source of respite for sore eyes, but when taken in the context of connectivity (both telecommunications and internet) it presents a critical challenge.
Sahastradhara KGFS (SKGFS) located on the foothills of the Himalayas, faced issues of intermittent network connectivity that interfered with its day-to-day operations, resulting in transaction delays and increase in customer wait-time at its branches.
The hilly terrain not only caused instability in continuous network availability at the SKGFS branches, but also the eventual disruption took a lot of time to correct. The options available from the network providers were limited and costly.
Earlier VSATs (Very Small Aperture Terminal) were used to provide Internet connectivity to the SKGFS branches. However VSATs have their own challenges of latency (delay in transmission) and are prone to disruption due to erratic weather. To top it, the running costs of VSATs were high.
To address these issues, IFMR Rural Finance in partnership with AirJaldi – which used the technology that came out of the University of California, Berkeley – created an interconnected network between the SKGFS headquarters in Jolly Grant and its branches, with Internet being supplied through this network. The average distance between branches is 10 kms with the first branch being 75 kms away from the headoffice in Jolly Grant.
Relaying seamless connectivity
The Jolly Grant network uses a combination of wireless WiFi links, utilizing the publicly available and unlicensed 2.4 and 5.8 GHz frequencies and wired LAN cabling. Relays, the antennas used to transmit and receive communication, are all mounted on low masts and are equipped with battery power backup allowing the network to stay up during power cuts – a frequent occurrence. Two of the relays, which are located in areas where power is very erratic or not available at all, are solar powered.
The network is managed and monitored from a central Network Operation Center (NOC), which utilizes a range of Free/Open Source tools configured to suit the network topology. As a result of this solution, now all SKGFS branches have connectivity bandwidth of 256 Kbps and the Head Office is connected at a speed of 512 Kbps through the NOC. The local SKGFS team has also been trained to handle day-to-day issues of basic maintenance.
The Rural Finance technology team is confident of scaling up this technology to other branches of Dhanei KGFS and Pudhuaaru KGFS as and when required.
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Raman Taneja of IFMR Rural Finance Technology team contributed to this post.
What does it take to make a mutual fund invest in small MFIs? The one team that would be able to answer this question would be the IFMR Capital MOSEC team that has just concluded the second multi-originator microloan securitization. We talk to the IFMR Capital team to find out all about MOSEC, microloan securitization and what it means to the MFIs, and how the poor can benefit from it.
Consistent source of finance
Gaurav from the Origination team tells us “MFIs have difficulty in accessing the capital markets and traditionally bank lending has been seasonal. During the first quarter, many banks seldom lend to the priority sector, whereas in the third quarter, there is a spurt in lending. This lumpiness in availability of finance meant that MFIs had difficulty in planning their operations. We have just ensured MFIs can hope for a more consistent source of finance all through the year. MOSEC has given small MFIs access to reliable capital market finance even at the beginning of the year, and from a greater variety of investors.”
Gaurav has just got us interested and we ask him to explain more about MOSEC. “MOSEC is a Multi-Originator Securitization transaction where we combine portfolios of multiple small MFIs. We then design a unique structure and issue securities backed by the receivables from these portfolios” he explains. MOSEC I was executed in January for 4 MFIs and MOSEC II, recently concluded, had 3 MFIs. “We received the portfolios from the MFIs, analyzed them and put together a very unique structure through which an investor has invested in 76 percent of this portfolio. All this is done through a Special Purpose Vehicle called IFMR Capital MOSEC”. That definitely sounds quite complicated and difficult. Was it? “Yes and no”, says Gaurav, “It was not easy but it definitely was exciting for me.”
But the structuring must have been a lot of work? “It is”, says Hari Nathan, who worked on the structuring for both MOSEC I and II. “I learnt a lot during MOSEC I and that helped me for the second deal. It definitely was a steep learning curve for me – analyzing the portfolios and coming up with the right structure. I entered the financial inclusion space because I wanted to make a substantial contribution, but I come with a specific skill-set which I wanted to take advantage of. This deal made the best use of my technical skills and I am really happy to be a part of this team” he admits.
CRISIL rating adds credibility
“Our MFI partners are quite satisfied” smiles Bhagirath, also from Origination team. “This MOSEC has given them access to Rs. 339 million from the capital market and much more. Market transactions impart credibility to MFIs and the CRISIL rating adds value to their portfolio. Deals like this mean a lot to the small MFIs and I can say that with confidence because I have worked in both MFI and in credit rating. I know how difficult it is for a small MFI to get an MFI portfolio rated and raise funds. Initially they were a bit apprehensive about combining their portfolio with another MFI’s. We had to convince them a lot to make them understand that the risk would be limited to their portfolio, but the reduction in cost of funding they get makes it all worth it.”
This deal also means a lot to an aspiring finance professional like Dhiraj, who co-ordinated with the Chartered Accountants for the deal. He says “This Deal came just a month after our previous deal and thus, gave us insight about the operational constraints under which we are operating and considering the business plan of 10-12 such deals, it prepares us for automating the operational process so that it will be scalable and economical.”
Lower interest rates
We ask Kshama Fernandes, Head, Risk Management, if MOSEC II was a repeat of MOSEC I. “Yes and no”, she explains. “All three Mosec II MFIs were also a part of Mosec I. However, the Mosec II structure is very different in terms of weight of each MFI in the total pool as well as its geographic diversification. There has been a significant reduction in the amount of cash collateral that the MFIs had to put upfront. This translates into a lower cost of funds for the MFIs, which when passed down, results in the lowering of interest rates to the end borrower, the MFI’s clients. This is what we aim to achieve over the long run. ”
Didn’t we hear that MOSEC II was creating a history of sorts? “Yes” she replies. “This is the first time a mutual fund investor has subscribed directly to a primary microfinance multi originator issuance. The investor has purchased the entire amount of Series A1 PTC which is rated P1+. This is encouraging because it means that investors have started looking at microfinance-backed paper with underlying loans originated by small to medium sized MFIs, as a new asset class. Being uncorrelated to mainstream debt and equity markets, this could prove to be an interesting investment for mutual funds, not just from the return perspective, but also from the risk diversification perspective”.
Challenging task
Meenal Madhukar, Head, Investor Relations, shares her most challenging aspect of the deal. “Price discovery is a continuous challenge in every transaction. While the originators are eagerly looking for us to lower the cost of funding for them, the capital market investors demand a significant premium for investing not just in a new asset class, but in this case, in a brand new structure that happens to be a global first, a multi-originator securitization structure that has been tried just once before by IFMR Capital. Yet, for us at IFMR Capital, the battle is not just about bringing an alternate source of funds to the MFIs, it is also about ensuring that we get the best price for them. As a result, each transaction is a tightrope walk in trying to lower the premium demanded while at the same time convincing new investors of the inherent value of our transactions. Getting them to spend quality time in evaluating our small size transactions, and conforming to their last minute requirements add spice to the adventurous journey, which though not for the faint hearted, has been truly exciting and very rewarding as we have been able to create new benchmarks in almost every transaction, in terms of a lower pricing.”
Sucharita Mukherjee, CEO, IFMR Capital, attributed the successful completion of the deal to her team. She summed it up nicely when asked about her thoughts on the deal. “It is a total team effort and it is only right that the team answered all your questions”.
We just had one last question. “Are you guys going to celebrate now?” “Yes!” is the team’s reply. But we only know too well they will back soon to work on the next deal that is already lined up for execution.
How are the three MFIs reacting to this deal? What is the mood in their camp? Watch this space for more.
