Interview with C.S. Ghose, Founder-CEO of Bandhan

The Business Standard today published an interview with Chandra Shekhar Ghose, founder and CEO of Bandhan, recently ranked by Forbes as the top MFI in the country and 2^nd in the world. Mr. Ghose talks about why Bandhan has been successful and elaborates on Bandan’s lending philosophy. A few highlights from the interview:

1. Mr. Ghose elaborates on Bandhan’s programme whereby the poorest of the poor are identified via participatory rural appraisals. Since these households are not at a stage where they can borrow from MFIs, Bandhan instead provides them with free assets and training for two years. At the end of this time period, they then have the financial wherewithal to borrow from an MFI. Incidentally, CMF has recently published a working paper which compares Bandhan’s identification methodology favourably with government identification methods.
2. While MFIs are at the forefront of the social enterprise movement, many have alleged that MFIs tend to pursue profits and ignore the social aspect of their business. Mr. Ghose emphasizes that, for him, microfinance is a “development programme in a sustainable way” and credits Bandhan’s success to a non-corporate, simple, cost-effective business methodology. He also credits low attrition rates in his organisation to the dedication of his staff, which is committed to improving the lives of its clients.

Vijay Kelkar on Financial Inclusion

Last Monday, Dr Vijay Kelkar, Chairman of the 13th Finance Commission and one of the architects behind India’s economic reforms, gave a speech on financial inclusion at the Administrative Staff College in Hyderabad. In the speech, Kelkar provided an extremely thoughtful overview of some of the critical challenges and opportunities in expanding financial inclusion in India and is well worth the read (full text here). The press focused on Kelkar’s proposal for using smartcards to deliver government services (which is not actually new -- the Planning Commission produced a report on the potential for smartcards to be used to deliver government services over a year ago and the census claims to have plans to rollout a national ID system using smartcards) but the speech covered the gamut of issues related to financial inclusion from how to incentive private players to what products the poor really need.

We at the Sector Wide and Policy team of CMF thought that Kelkar’s speech provided an ideal opportunity to summarize our own thinking on the issue of financial inclusion by way of response to Kelkar’s speech. Below are our comments:

1. Financial inclusion is almost universally thought of as broader access to formal financial services ranging from simple products like savings, credit to more complex ones like insurance, pensions etc. In India, there has typically been a greater focus on access to credit in comparison to other financial products. (Admittedly, this has been less true in recent times with the propagation of No Frills Accounts). An example of this is the new debt relief package for farmers recently announced by the government. This sort of measure primarily benefits the better off farmers who have access to bank loans in the first place and raises the expectation that loans are not meant to be repaid. Of course, this is also extremely expensive.
2. One point which Dr. Kelkar raises is that access to products which reduce vulnerability to economic shocks is critical. Given that access to finance is believed to have positive impact on poverty alleviation (Burgess & Pande, 2003; Honohan, 2004) and that some definitions of poverty look at levels of economic vulnerability (Matin & Hulme, 2003), improving access to risk-mitigating products has to be a key part of any policy that seeks to increase financial inclusion. Some examples of such products and what can be done from a policy perspective to improve access to them include:
1. Savings: There is evidence to show that low-income communities value savings almost as much is not more than debt, yet access to safe and secure savings products is low in India. Some ways to rectify this situation from a policy perspective are to promote branchless banking via Business Correspondents and to allow MFIs to collect savings.
1. Insurance: More infrastructures for data collection and sharing of historical data is required for developing index-based products – particularly, weather stations / gauges in underserved locations in the country.
1. Commodities: Develop a micro-commodities / micro derivatives platform within the NCDEX framework – to encourage smaller volumes trade – and consider newer channels (MFIs / Kiosks, etc.) as a platform for disseminating futures prices and for enabling trading.
3. Dr. Kelkar points to the recent initiative by the RBI to encourage banks to provide "no frills" accounts to the poor as an important step toward increased financial inclusion initiative. The "no frills" initiative is certainly an interesting one, but our own research has shown that it has had very little effect in terms of increasing financial inclusion.
4. While the point that financial inclusion can be a quasi public good is an interesting one, it is arguable that many financial products are in fact neither non-rival nor non-excludable (for example: a savings account). However, the broader point that governments must facilitate financial inclusion which happens best through market-based methods is well-taken. We would also argue that any steps taken to improve financial inclusion must be a in a form that is acceptable to the target audience. This point is important to make because there is evidence to show that the extensive banking network in India, which has developed as a result of government intervention, has not succeeded in reaching the poor. Similarly, simply market involvement is unlikely to work either given that the incentive to go to remote underserved areas would be lower.
5. Further, while we share Dr. Kelkar's enthusiasm for the role of the market in increasing financial inclusion, it is necessary to keep in mind that private markets in India are not caste or religion blind.
6. Dr. Kelkar points us towards some useful statistics: almost half of Indian farmer households do not have access to formal finance. In this context, the fact that access does not necessarily imply usage (Beck & De la Torre, 2006; CMF study on financial inclusion drive in Gulbarga) also buttresses Dr. Kelkar’s point that vast sections of the population are excluded from formal finance.
7. As Dr. Kelkar says the SHG-Bank Linkage programme has been an extremely effective way to improve financial inclusion in many parts of this country. It may be time to build some innovations in this model. This year’s State of Sector report, raises the issue of compulsory versus flexible savings. While SHGs require a fixed and compulsory amount of savings on a weekly basis, Dr. Ghate argues that there may be a case to be made for allowing flexible and voluntary savings, with evidence from Bangladesh to show that this does not affect savings discipline. Furthermore, there may be some communities which are so economically disadvantaged that they are unable to save on a weekly basis, but may be able to save on a fortnightly/monthly basis.
8. Finally, Dr. Kelkar suggests an original proposal for promoting financial inclusion by coupling it with the delivery of various government subsidies through a smart card. The establishment of a universal, national ID system based on smartcards holds enormous potential to increase the efficiency of delivery of both government services and financial inclusion. The Centre for Universal Financial Inclusion's recently released working paper which describes how a smartcard based system could be used to simultaneously deliver NREG wage payments while also providing flexible savings accounts to workers illustrates just one way in which this potential could be realized. Furthermore, the case for the government to intervene in this area is a strong one in that an ID system certainly qualifies as a public good -- i.e. the benefits from the establishment of an ID system would be spread across such a wide variety of players and the investment required to set up the system is so large that without government intervention action is unlikely to take place. Countries such as Malaysia and China have shown that it is indeed possible.

New York Times on the Indian Education System

Here. My favorite quote from the article:

Mr. Ghosh [an employee of Pratham] went on to point out that one of the aides had shown up more than an hour late, and then with a crying baby in her arms. Two teachers were altogether absent. Even Mr. Hassan, Mr. Ghosh added, had pulled up a half-hour late.

“You’re the head of this school,” Mr. Ghosh told him. “Only you can improve this school.”

Mr. Hassan fired back: “What are you talking about? For the last 25 years this school wasn’t running at all.”

At least we're seeing improvement.

Tim's QOD

Jay was the first to Quote Homer Simpson, and I might be the first to make the link between deconstructionism and development...both look at everyday things and try to identify the least common denominator, simplify life and art into a series of straight lines... So here is my contribution.

"Deconstruct everything. Take it apart, put it back together in such a way that nothing except the soul is the same. Only then will there be understanding."

I have no Idea who said this, or even if anyone has said this...but it comes out of my brief flirtation with being an architect (yes I studied architecture in a previous life). One of my teachers was known as a deconstructionist...based on the artwork of Piet Mondrian. So this is my tribute to Piet Mondrian...who looked at a tree and saw colored lines, who looked at color and saw only black, white, red, yellow and blue...

Second plagiarism of the day—Think differently. (this post and all other posts from me have been written on a Macintosh Power Book)

the People's Car redux

I would like to thank Doug for publishing the quote from the Gaurdian about the Tata Nano. I for one was skeptical about the car...and still I am slightly aghast as to the ramifications of the car. But they did a good job. Low emissions, it addresses a social problem...and if it had been unveiled in any major city in Europe or the US, it would have been hailed as revolutionary.

I think my justification for the reluctance to hail this as one of the major accomplishments of the last ten years is that the car was unveiled in India. I have nothing against the car or even India for that matter, but I don't think India is ready for the car from a practical stand-point. I still counter that the infrastructure and everything else is insufficient to meet the needs of the current car population.

But let me be the first to say that I was wrong...the car is a major feat of engineering and for that alone it should be hailed as revolutionary...now if we can just do something about the roads............................

Microcredit, Climate Change and CSR

This is taken directly from the World Bank's PSD Blog...

From a humanitarian perspective, donating to ineffective microcredit programs slows the growth and threatens the sustainability of the best programs. From a corporate public relations perspective, companies that make low-value or even harmful microcredit investments risk being attacked for unsubstantiated claims about the impact of their CSR activities. [And] now they may get bad press for "poverty washing".

Here is my contribution...

The quote is taken from the September issue of the Harvard Business Review...and I made the link between microcredit and climate change, especially when it comes to the CDM. Business still hasn't realized the opportunities that the CDM has in the area of CSR. And maybe this is because there are significant risks involved with making claims which are hard to substantiate. I don't know...I would be interested in what you think...

Randomized evaluations called for by the New York Times

The smokeless chulha project is one of the oldest projects at CMF (jointly implemented by MIT's J-PAL). We are trying to measure the impact of smokeless cooking stoves in one of the poorest states of India.

In India, majority of rural residents cook with biomass fuels, such as wood, agricultural residues, cow dung, or coals which emit tremendous amounts of hazardous smoke in kitchen. Women and childrean bear disproportionate exposure as women are responsible for cooking and the youngest child of the household often spend most of their time on his/her mother's back.

Infectious diseases such as pneumonia caused by indoor air pollution are major causes of deaths among children below 5 in India and other developing nations. And yet, it has not received as much attention by policy makers as some other diseases such as malaria or HIV/AIDS have. Furthermore, it is perhaps one of the most easily preventable diseases.

A New York Times article introduces some initiative taken towards slashing victims of indoor air pollution in developing countries. Kirk Smith, a UC Berkeley professor, states "one challenge had been the lack of randomized research trials that can show cause and effect, rather than just correlations."

Dr. Smith lead the very first randomized evaluation conducted in Guatemala. The smokeless chulha project at CMF/J-PAL is the second, and it has much larger sample size in the study. Let's keep our eyes open for the results we get from the study.

Quote of the Day

You might imagine that the news that someone has built one of the least polluting cars in the world at a record low price would be cause for celebration. Now millions of people can afford to swap their polluting behemoths for a sprightly, less damaging vehicle instead.

This would have no doubt been the reaction if the Tata Nano - which costs just 100,000 rupees (£1,260) and, according to its head designer, emits just 120 grams of carbon dioxide per kilometre - has [sic] been unveiled in, say, London this week. But the fact that the news emanated from India seems to have left many reeling with horror.

From The Guardian. \

Debt Relief for Farmers

The Union government is set to unveil a debt relief package for farmers, according to sources in the Agriculture Ministry.

The scheme envisages writing off the unpaid loans of the small and marginal farmers and a big relief for the big farmers over four years.

As reported in today's issue of The Hindu. The total write-off is expected to come to around 30,000 crore. Compare this figure with the projected annual cost of the NREGP after full scale-up of around 40,000 crore.

If this money was actually going to go to the "small and marginal farmers" I would be all for it. "Marginal farmers" don't get bank loans though. (The article reports that the debt relief will be restricted to farmers with two hectares or less of land but I'm skeptical that this will be adhered to.) Ironically, the current farmer debt crisis this plan is a response to is largely the result of the government's priority sector lending policy, which dictates that 13.5% of banks' net credit must be in the form of "direct agricultural loans" (i.e. -- loans made directly to farmers). So now, after mandating that banks shovel credit onto farmers they are bemoaning the excessive debt levels of these same farmers and calling for relief.

At least they're not without a sense of humour.

Is Tamil Children Reading?

Apparently not, according to Pratham’s most recent Annual State of Education Report released last week. Tamil Nadu seems to score just about the worst in terms of the reading ability of its school children as the colour-coded maps below show.




Is this for real? Are Tamil children really performing worse than their peers from Orissa and Bihar, states where the GDP per capita is about half of the levels it is here? Differences in attendance rates for children in different states are relatively minor so this can’t be explained by much higher attendance in Tamil Nadu. Granted, Tamil is a relatively difficult language to learn how to read and write but this can only be a small part of the answer to this.

Predicting the Price of Gold?

Interesting article in FT about Indian households pulling back from gold. A sign of things to come?

Indian households traditionally use gold as a haven from fluctuations in the market, to hedge against inflation, and other macro risks. As the article points out, gold is the second most preferred investment (after bank accounts). Nine percent of the global stock is held in India.

Aside from the investment aspects of the commodity, the consumption of gold in Indian society is significant. Weddings (regardless of household wealth) often mean the substantial purchase of large amounts of gold.

Are Indian households predicting the present-high of gold is soon coming to an end? Has anyone come across studies which examine the effect of gold prices on savings and investment?

The People's Car

The People's Car is finally here...the least expensive car to have ever been produced. And I have to say that it doesn't look bad. The car is little more than an enclosed rickshaw, 2 cylinder engine and powered by petrol. The social ramifications are immense...the elimination of the four-seater motorbike. But I only have one question to ask Ratan Tata, why not make it a 1,14,500 rupee car and install an engine which runs on LPG or at least offer it as an option? The cost spread over the five year term of the loan would hardly price the car out of the intended market and the environmental savings would be considerable. 

I believe that many of the environmental problems can not be addressed without placing the same emphasis on social issues, but how about inspiring change from the middle of the pyramid as the top is not listening?

Tag Lines and Theme Songs

I have to give a shout out for Jay...He is my new PR Officer and he came up with my new tag line and a theme song. So from now on the all posts will be signed with our new tag lines and end with our theme songs: 

Hi I'm Tim, ask me about carbon...Journey "Don't stop Believing"

Hi, I'm Jay, ask me about poverty...Britney Spears "I'm not so Innocent"

Hi, I'm Doug, ask me about confusion...AC/DC "Have a drink on me"

That's all...this is Tim, ask me about carbon...

What India’s Poor Expect from their Government

No it’s not education, not health services, nor even subsidized alcohol. What the poor want and expect, above all, from their government is improved access to credit. According to a survey conducted by Outlook magazine of residents of India’s poorest district, Bolangir, Orissa, when asked “What is the one thing you want the government to do to radically change your life?” a plurality of respondents (47%) said “higher and cheaper loans.” The second most popular response, at 32%, was “help in agriculture.” Improvement in infrastructure and health services was rated as the most critical government objective by only 3% of respondents.

Even as someone who routinely stresses the importance of access to credit this result still shocks and slightly freaks me out. Has politicians’ relentless drum-beating over the issue of credit to the agricultural sector created the impression that the government’s main function when it comes to the rural poor is to provide loans? If so, what effects has this had on the accountability of local governments for providing health, education, and other basic services?

Goa scraps SEZ plans

Goa rejects its SEZ plans citing "less availability of land, a strain on infrastructure and “no commensurate benefit to the state for its own people” as reasons for the decision.

Just adds to the growing anti-SEZ sentiment in India.