89805 Access to Finance Forum Reports by CGAP and Its Partners No. 4, May 2012 The Pursuit of Complete Financial Inclusion The KGFS Model in India Bindu Ananth, Gregory Chen, and Stephen Rasmussen © 2012 Consultative Group to Assist the Poor/The World Bank All rights reserved. Consultative Group to Assist the Poor 1818 H Street, N.W. Washington, DC 20433 USA Internet: www.cgap.org Email: cgap@worldbank.org Telephone: +1 202 473 9594 The authors of this paper are Bindu Ananth, IFMR Trust; Gregory Chen, CGAP; and Stephen Rasmussen, CGAP. Amit Shah and Deepti George from the IFMR Trust were critical contributors compiling KGFS data. Alexia Latortue and Meritxell Martinez of CGAP peer reviewed at several steps along the way. Tilman Ehrbeck, Jasmina Glisovic, Kate McKee and Richard Rosenberg reviewed on behalf of CGAP’s Publications Committee. A lakudi is a remote farming village near the 200,000 clients. The oldest KGFS has been in op- southernmost tip of India in Tamil Nadu eration since June 2008, and the most recent com- State. It would take 30 minutes or more by menced operations in February 2012. At the end of foot to reach the nearest dilapidated bank branch, 2011 KGFS institutions had 110 branches and man- though most Alakudi residents have never bothered to aged a loan portfolio of $10 million. Some branches make the trip. Within a short bicycle ride or walk of these institutions have become profitable, though along dirt lanes, all 2,000 households in Alakudi can none of the five KGFS institutions has broken even reach a Kshetriya Gramin Financial Services (KGFS) yet on a consolidated basis. Early client response to branch. Each branch is painted in KGFS green and or- these institutions shows a significant proportion of ange with an open front, rows of wooden benches, a households, over 50 percent, enroll within the first teller window, two online computers, and three uni- 18 months of a KGFS branch opening nearby. formed staff. But the villagers’ first contact with KFGS The model’s customized wealth management ap- probably would not have happened at the branch. proach starts with identifying household needs and When the KGFS branch opened in Alakudi in goals to provide services centered on client needs and September 2008, staff visited every household to without biases to sell one product or another. Clients conduct a village and household mapping exercise have begun to use multiple financial services cen- to demarcate the service area for the branch. They tered on client needs from KGFS institutions, espe- also invited villagers to come to the branch to en- cially insurance and pensions. More than 60 percent roll. As part of enrollment, staff completed a com- of enrolled clients across all KGFS institutions use prehensive know your customer (KYC) check, in- insurance services; 22 percent use only insurance. At cluding a household visit, and compiled a household the same time, credit remains important, with slightly financial well-being report based on data provided more than 55 percent accessing a loan product. The by each household. This report established a house- ultimate aim is meaningful improvement in the finan- hold profile, specified financial goals, and formed cial well-being of households, an outcome KGFS is the basis for KGFS staff to recommend a tailored evaluating with external research help. portfolio of two to three financial products to meet This publication explores lessons from the KGFS each client’s goals. KGFS staff visit each client’s model. The intent is not to endorse the model, but home every six months to update the report and rather to use early experience to share ideas and ob- give financial advice. Since KGFS arrived in Alaku- servations. The first three sections explore the three di, 76 percent of all households have enrolled; of core principles of the KGFS design, explaining how these, 89 percent have already begun to use some of each is implemented and how together they deliver the 15 financial products available at the branch. results. The fourth section summarizes the client re- The approach used in Alakudi illustrates how sponse so far, reviews how far the financial viability the KGFS model is being applied in various parts of of the model has progressed, and explores the ap- India. Three core operating principles differentiate plicability of the three core KGFS principles to con- the KGFS model: (1) complete coverage of the pop- texts beyond India. ulation in a focused geographic area, (2) custom- Throughout this publication data from December ized client wealth management services, and (3) a 2011 are used unless otherwise noted. In some cases, broad range of products. data from the oldest 14 branches (each having been The KGFS approach is still fairly new, though it in operation more than two-and-a-half years) are has moved beyond being a small experiment. Five used to illustrate how the model has evolved in its separate KGFS institutions are working in very dif- more mature settings. That said, the patterns seen at ferent regions of the country and serve a total of the end of 2011 can show only a work in progress. 1 Box 1 Background on Kshetriya Gramin Financial Servicesa The KGFS model is promoted by IFMR Trust (http://www.ifmr. products, including savings accounts, while permitting appro- co.in/) whose mission is to “ensure that every individual and priate risk-sharing with partner financial institutions. KGFS man- every enterprise has complete access to financial services.”b agement believes that the ideal eventual structure is for each IFMR Trust provided the initial capital of $10 million to launch KGFS to be registered as an NBFC. The legal structures will, the first three KGFS institutions, targeting a return on its eq- however, have to evolve given the changing regulatory land- uity of 20 percent annually. Each KGFS institution leverages scape for NBFCs and use of bank agents in India. additional financing from capital markets as well as loans from Although all KGFS institutions have a common parent com- domestic commercial banks. No grant funds have gone into pany that provides equity capital to each KGFS, each KGFS any KGFS. As new investors show interest, additional KGFS institution is designed to be an autonomous, self-contained institutions will be opened in different parts of India. regional operation with its own management team hired lo- In addition to the initial capital for the original KGFS cally. KGFS management believes that this separation, in con- institutions, IFMR Trust invested $4 million in IFMR Rural trast to a single national institution, enables region-specific in- Finance. This company owns and licenses the KGFS brand, novations as well as superior internal control to emerge. incubates new KGFS institutions, develops new products, KGFS institutions were set up in very distinct regions of and ensures a consistent approach across all KGFS opera- the country with a view to understanding the design implica- tions. This licensor–licensee model aims to preserve the tions of the model in diverse regional contexts. One KGFS core approach of KGFS while tapping into wider pools of serves Thanjavur and Thiruvarur districts of Tamil Nadu, which capital to accelerate replication. IFMR Rural Finance re- are fertile agrarian economies. Another operator in Orissa ceives a license fee linked to KGFS revenues. serves Ganjam and Khurda districts, which are economies One KGFS institution in Tamil Nadu is a nonbank finance characterized by subsistence agriculture supplemented by company (NBFC) licensed and supervised by India’s central domestic migration. The KGFS in Uttarakhand serves five hilly bank; it is not permitted to take deposits. NBFCs can make districts that are sparsely populated, where the underlying loans and can serve as agents for pension funds, insurance economies are dominated by trade and services. The three companies, and securities brokerages. However, NBFCs are core elements described in this paper are standard across all barred by regulation from serving as agents of commercial KGFS institutions; however, serving diverse geographics has banks for savings account operations. enabled KGFS to learn, adapt, and apply the learnings to new The four other KGFS institutions are using different legal KGFS institutions. structures that facilitate client access to a full range of financial a The literal translation is Regional Rural Financial Services. b IFMR Trust was provided seed funding by ICICI Bank in 2008 to incubate new business models in financial inclusion. 2 Three Operating Principles of the KGFS Model Three fundamental operating principles distinguish the KGFS approach: 1. Focused geographic commitment and complete population coverage. Each KGFS institution and branch is responsible for a specific catchment area and is expected to serve the entire population in that area, enrolling as many clients as possible. 2. Client wealth management approach. KGFS staff recommend a customized set of services for each client based on in-depth household assessments. 3. Access to a broad range of products. KGFS works primarily as an agent of banks, insurance companies, mutual funds, and pension funds to offer each cli- ent smooth access to a broad range of services. Implementing each principle involves complex delivery challenges and significantly shapes client interactions. 3 1 Pa r t Focused geographic commitment and complete population coverage E ach KGFS institution is designed to be a re- levels helps customization. For example, staff only gional institution serving a specific territory use local dialects1 to communicate with each other with distinct geographic, economic, and lin- and with clients. All signage and documents are in guistic characteristics. As a rule of thumb, a single the local language, and branches adjust timings for KGFS institution serves a rural population of 2 local convenience. The model is also based on the million to 3 million through a network of 200–300 idea that local ties will help the institution react branches. The branch is the fundamental business more quickly to local events, such as a bad harvest unit. Each branch serves a population of roughly or low rainfall, for instance, by relaxing repayment 10,000 individuals or 2,000 households. Branches dates or extending emergency loans. have two or three staff, called “wealth managers,” In addition, the model reflects the belief that geo- who perform all administration and customer ser- graphical focus ensures a sustained effort to engage vice functions. Regional managers oversee 35–40 clients intensively. A branch is required to focus on branches and 90–120 wealth managers. Each KGFS maximum possible enrollment within its territory; a institution has its own chief executive officer and branch constantly tries to deepen relationships with head office structure. All KGFS staff are local resi- its clients. It does not have the option to enroll cli- dents who have deep knowledge of their respective ents who reside outside its service area. regions. For the first month after a branch is established, New branch locations emphasize outreach to enrollment of individuals is the only activity. The underserved villages, using the following criteria first part of enrollment occurs at the branch. It es- to define the service area: tablishes biometric identification (fingerprints) and completes KYC requirements. The enrollment pro- • No village in the service area should have more cess also links clients to the household where they than 4,000 inhabitants. reside. The second part is gathering household in- • There should be no branches of any private sec- formation, which may be collected at home or at the tor financial institution in the service area. branch, depending on what is convenient for the cli- • There should be no more than one branch of any ent.2 The wealth manager gathers baseline informa- tion on the client’s household income, expenditure, public sector financial institution in the service assets, and liabilities. The adults in the household area. identify up to five household financial goals, such as • The KGFS branch should be at least seven kilo- covering marriage expenses, having income for old meters from the nearest town center. age, paying school fees, or purchasing property. This • The service area should not extend beyond a five information is used to generate a financial well-be- kilometer radius of the branch office. ing report, which is then used to develop recom- mendations of financial products for each client. A village survey records geo-coordinates of ev- ery household. This narrow and clearly defined geographical focus ties each branch to the resi-  ndia has over 22 languages and over 840 dialects. 1. I 2. In cases where there are multiple clients from the same house- dents in its catchment area. The KGFS model in- hold, each client is tagged to that household. Only a single set corporates the belief that geographical focus at all of information is collected and used for each household. 4 Box 2 A Public Health Approach to Financial Inclusion Public health goes beyond medically treating individuals to Another public health analogy is KGFS’s focus on preventive taking wider responsibility for the overall health of a popula- measures for high-risk households that require structured tion. Instead of measuring success by the number of sick pa- follow-up, for example, recommending insurance coverage to a tients treated, public health workers seek to achieve out- household that relies heavily on the earnings of one individual. comes for the total population, for example, lower infant Of course, the public health analogy is not perfect; public health mortality or increased immunization coverage. The KGFS interventions, such as provision of clean water, have benefits model adopts a similar mindset. Each branch is responsible that accrue to the entire community whereas financial services for the financial well-being of the entire population in its are nearly always private goods. catchment area. 5 2 Pa r t Client wealth management approach T he second principle of the KGFS model is to The primary practical question is whether provide tailored financial advice to every KGFS staff are skilled enough to deliver financial enrolled client. This is called a “wealth man- advice. KGFS wealth managers are from the local agement” approach, adopting a term common in area and typically have 12 years of schooling. Few private banking for affluent clients. The goal of have university degrees, and their position at this approach is to ensure that every client uses a KGFS is often their first professional job. To ad- tailored combination of financial services that best dress skill deficiencies, the KGFS model empha- promotes the financial well-being of the client’s sizes systematic staff training. A curriculum based household. The model is based on the belief that on a conceptual understanding of household fi- clients will make better choices among complex nance is the main building block of staff orienta- financial services when they have the benefit of tion and ongoing capacity development. New advice from trained professionals. Well-delivered wealth managers must complete a 21-day training advice should produce better outcomes for clients. course and pass a certification test. KGFS manage- Examples of wealth management advice include ment learned early on that individuals with expe- the following: rience in retail financial services bring a very strong product orientation, and it was almost im- • Highly indebted households are advised to re- possible for them to make the transition to a frain from further borrowing and to refinance wealth management approach. As a result, almost with cheaper debt. all KGFS hires have no prior experience in finan- • Households where the current income is too low cial services distribution. to meet their goals are encouraged to think about The model also uses automation to address de- ways to bridge the gap and offered advice on how ficient staff skills. Wealth managers base their ad- to finance business expansion, where relevant. vice on the household data collected at the time of enrollment. These data are summarized in a finan- • Households with physical assets concentrated in cial well-being report that uses a set of predefined the village, such as livestock or land, are advised wealth management algorithms. (Go to www.ifmr. to diversify through financial investments. co.in/fwr for an example of a financial well-being This approach reflects the belief that solving fi- report.) Automated reports help wealth managers nancial challenges of households, including opti- match household goals with an optimal set of ser- mal asset allocation and retirement financing, is vices to meet those goals, typically two to three complex and requires considerable expertise as products per household. Wealth managers discuss well as innovation. This, in turn, entails that KGFS the report with family members before any ser- institutions take responsibility for the appropri- vices are provided, and the reports and advice are ateness of advice about financial services while updated every six months. not solely relying on official product disclosures Maintaining the quality of the wealth manage- and customer judgment. The KGFS model sets out ment approach is an ongoing operational chal- to develop a system that provides advice that is lenge. Standardized drop-down menus and vari- built on the recruitment and training of wealth ous cross-checks that triangulate data to remove managers, automated generation of advice, regu- inconsistencies are used to help ensure the good lar monitoring and auditing, and appropriate staff quality of data entered at the time of enrollment. incentives. Even the advice provided to clients has been stan- 6 dardized through pre-set parameters. For exam- commission products, as well as creating consum- ple, recommended insurance amounts are linked er protection concerns. to an automated estimate of lifetime net earnings. The KGFS model aims for a fundamental shift Even though the wealth management process is from a supply-driven, one-size-fits-all focus to a aided by training and automated recommendations, customized sales process centered on client needs. it still relies on the skills of wealth managers to con- Performance appraisals for wealth managers em- vey advice accurately. To reinforce staff skills, phasize completing the household analysis and branch wealth managers begin each day discussing delivering advice correctly. The KGFS institution one household case chosen at random. When re- evaluates staff on process goals, such as enroll- gional managers visit branches, they first discuss ment rates, the accuracy of financial well-being household financial well-being reports rather than report data, and staff understanding of households sales targets or repayment rates. The aim is to make and products. The long-term vision is to link staff client financial well-being central to daily routines. financial incentives to improvements in household This is also reflected in how wealth managers spend financial well-being. their time. KGFS estimates that wealth managers With more experience and data, KGFS institu- spend about half of their working time enrolling tions will be able to establish an index that mea- and advising clients, and there is a constant search sures changes in wealth, the volatility of cash for ways to free up more staff time for more client flows, and the ability of households to meet identi- advice and follow-up. fied goals.3 One challenge is establishing an index Audits of a sample of household financial well- that staff can clearly understand and relate to their being reports are conducted to verify the accuracy own performance. Causality is another challenge of enrollment data. There are plans for a system to when changes in financial well-being might be check the quality of wealth management advice linked to many factors beyond KGFS services. and how the client is implementing that advice. The KGFS model also seeks to align staff incen- Other indices, such as the Progress out of Poverty Index (PPI), 3.  tives to the goals of the wealth management measure client outcomes. KGFS aims to build a different kind approach. Many financial institutions link staff of index because it works with clients above and below the poverty line, and a poverty line measure would not capture all incentives to product sales, such as loan amounts changes KGFS seeks. The goal is to develop an index that cap- disbursed, insurance policies sold, or savings bal- tures a wide range of financial well-being goals at the house- ances generated. This can lead to pushing high- hold and aggregate regional level. figure 1 Quality Control of the Wealth Management Process 1 Household 2 Advice 3 Client Data Given Uptake Fits Accurate? Correct? Advice? 7 3 Pa r t Access to a broad range of products C entral to the KGFS vision of complete finan- lend directly to clients through a series of credit cial inclusion is the conviction that house- products (group loans, loans against gold, and holds need a diverse range of financial ser- small business loans are the three most popular). vices. An important feature of providing a range of KGFS institutions sometimes sell their loan port- services is that products are not bundled; each must folios to other financial institutions, a common make sense on its own. For example, credit and life practice in India. Even in such cases, however, insurance are always offered separately, and using they take a sizeable share of any credit risk to one does not require having the other. While each avoid moral hazard and ensure there is a strong KGFS can offer nearly all available products, it is incentive to maintain portfolio quality. Interest understood that appropriate advice as well as client earned from credit is the main revenue source for use patterns will vary by region. KGFS institutions. Products are grouped into four broad catego- To provide services other than credit, KGFS in- ries that correspond to client needs and objectives stitutions collaborate with other financial institu- (short descriptions of each product are available in tions. Pension, insurance, securities, and banking all the Annex): have different regulators in India, and it is difficult, if not impossible, for one organization to be licensed 1. Plan. Tools that help people manage short-term to offer a broad range of products. Also, licenses are liquidity needs. These include savings, money most often granted to only a few large financial in- market investments, short-term loans (secured stitutions. So KGFS institutions are designed to op- and unsecured), and payments services. erate primarily as agents of larger financial institu- 2. Grow. Products that allow households to in- tions. For example, a KGFS institution acquires new crease income or reduce expenses. This category insurance clients, collects premiums, and settles includes working capital and term loans for busi- claims on behalf of large insurance firms that issue nesses, higher education loans for students, and the policies. This approach combines well-tested refinancing debt. products of large financial institutions with the deep reach of KGFS into rural markets. An impor- 3. Protect. Products that mitigate risk and include tant motivation for large financial institutions to many types of insurance (e.g., life, accident, partner with a KGFS institution is that government health, shop, and livestock). policies often require them to extend services to low-income and under-banked clients, in some in- 4. Diversify. This category includes investment in- stances even setting outreach targets. struments that help achieve inflation protection Economic shocks entail covariant risks that en- and offer better risk-adjusted returns. These danger regional financial institutions with a dis- help households diversify their assets away from proportionate exposure in one geography. The land or livestock toward assets that are better KGFS model holds that such risks are best man- protected if the local economy hits a slump. aged on the balance sheets of large financial insti- Products in this category include pensions and tutions with deep and well-diversified holdings. potentially equity-index funds. This is especially important for insurance and To finance their lending, KGFS institutions pensions, where the assets of low-income clients operate like other nondeposit-taking financial in- may be better protected in large, carefully regu- stitutions: they borrow funds wholesale and on- lated financial institutions. 8 figure 2 Broad Range of Products Support Household Goals Plan Money Market Mutual Fund Remittance Jewel Loan Joint Liability Group Loan Emergency Loan Grow Protect Enterprise Working Capital Loan Personal Accident Insurance Enterprise Term Loan Client Financial Well-being Term Life Insurance Education Loan Shopkeeper’s Policy Livestock Loan Livestock Insurance Housing Loan Diversify Pension Gold Investment Note: The first KGFS in Tamil Nadu is an NBFC that is barred by regulation from offering any deposit service on behalf of a bank partner, though it can offer the Money Market Mutual Fund product, which is a close substitute for a basic liquid savings account. Other KGFS institutions do not fall under an NBFC legal structure and will be able to offer a deposit service as an agent for a bank. At the time of this writing these products were under development. While the back-end of a KGFS institution in- client’s use and wealth management needs rather cludes multiple partnerships with financial insti- than tracking product data. tutions, various operational features make client Online and real-time core banking system. An interface relatively seamless. These features in- essential enabler of integration with large finan- clude the following: cial institutions is an online, real-time computer- ized information system of the same standard used • One-stop enrollment by large banks.4 This integration capability keeps • Client-focused information formats variable costs low, builds the confidence of partner financial institutions, and strengthens client trust • Online and real-time core banking system through a system that works in real time. Howev- • Integrated product development with partners er, it is a challenge to sustain systems in some envi- • Risk sharing ronments, particularly mountainous northern In- dia where KGFS institutions have had to invest in One-stop enrollment. The KGFS master KYC relaying technology that connects branches across enrollment process does not have to be repeated valleys and around mountains. They also have had for different products. This process meets the re- to address unreliable electricity supply by putting quirements of banking, insurance, pension, and in place back-up arrangements and business con- securities regulators. tinuation processes. Nevertheless, technological Client-focused information formats. A cus- integration is essential to the model, so KGFS has tomer management system keeps data on all cli- invested in this from the beginning. ents, detailing the complete portfolio of services they are using. The system is structured around a KGFS currently uses a core banking system offered jointly by 4.  Fidelity and Wipro. 9 Integrated product development with part- and that full final settlement will occur within a ners. Painstaking product development is central to week. This requires a carefully crafted service-level the partnership model. This work is led by IFMR agreement with the insurance company. Rural Finance, the KGFS licensor, which ensures Risk sharing. Even where it acts as an agent of that each KGFS uses standardized products devel- other financial institutions, KGFS institutions al- oped jointly with large financial institutions. Each ways commit capital against credit risk as well as product needs detailed planning and process test- operational risks arising from how services are de- ing. For example, even though insurance is provid- livered. This financial commitment demonstrates ed on behalf of an insurance company, KGFS com- to the partner financial institution that KGFS in- mits to the client that valid insurance claims will be centives are aligned and that service quality is a partly paid out on the same day the claim is filed critical feature of seamless delivery to clients. 10 4 Pa r t Client Response So Far Enrollment is the gateway to accessing any service miliarity with the KGFS brand as well as a broaden- from KGFS. Although the client does not have to ing of the product offerings since the first KGFS in- pay a fee, it takes about 30 minutes to enroll, and a stitution started its operations. wealth manager has to physically verify the place Despite persistent enrollment efforts, some cli- of residence. Enrollment grows most quickly right ents have not enrolled even after 30 months. Spa- after branch opening, but continues to rise more tial analysis shows that distance-to-branch is a than 30 months later. factor. Although no household is located more Branches in existence for more than 30 months than five kilometers from the branch, those near- have average enrollment rates of nearly 70 percent, est to the branch tend to enroll sooner than those with some even higher. These are penetration lev- in the periphery. Households headed by seasonal els few financial institutions achieve in any geogra- migrants also tend to have lower enrollment rates, phy, let alone remote rural India. KGFS staff talk possibly due to not feeling as much need for a local about a “learning effect” whereby more recently service. And households with large landholdings established branches that have learned from earlier stay out more often, possibly based on their per- experiences are seeing even faster enrollment rates. ception that KGFS is a brand for less affluent Faster enrollment may also be linked to growing fa- households. figure 3 Enrollment Rates as Branches Mature 80 70 % of households enrolled 60 50 40 30 20 10 0 6 12 18 24 30 36 Months since branch opening Note: Measures percentages of households enrolled over total households in catchment. The sample cohort is the 14 oldest branches measured at time intervals after branch opening. 11 Figure 4 illustrates enrollment by household in- come level for KGFS in Tamil Nadu. This distribu- figure 5 tion shows households enroll across a spectrum of income levels, with the largest share distributed Product Uptake Patterns in among households with between $500 (INR 25,000) the Tamil Nadu KGFS to $2,000 (INR 100,000) annual income.5 Figure 5 illustrates the substantial demand for Only Credit noncredit services. In the early stages of the expan- Products sion of KGFS institutions, there was heavy demand 3% for personal accident insurance, driven by the need Only to protect the income of household bread-winners. Products A similar need for protection drives a more recent other than surge in term life insurance requests. Over 60 per- Credit cent of enrolled households in the Tamil Nadu Both Credit and 13% KGFS are insurance clients. And almost 20,000 cli- Other Products 84% ents signed up for the National Pension Scheme– Lite product in the first 18 months after it was launched. KGFS attributes the uptake of insurance and pension products to the wealth management ap-  ased on exchange rate of INR 50 per U.S. dollar. 5. B figure 4 Annual Incomes for Enrolled Households, Tamil Nadu KGFS* 20,000 18,000 16,000 Number of households 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 0–25 25–50 50–75 75–100 100–125 125–150 150–175 175–200 200–225 225–250 250–275 275–300 Household annual income (Indian Rupees 000s) Estimated US$2 per day living standard Median household income of KGFS enrolled households Estimate of $2 per day based on $1.25 2005 PPP Index for India, multiplied by 2/1.25, inflated by 7 percent over six years and adjusted to average * household size of 4.5. 12 proach. Branch staff are trained to understand the The income of a branch depends on a high-qual- specific needs of each household and routinely ity credit portfolio of at least $240,000 composed of practice explaining insurance and pension prod- a broad mix of joint-liability group loans, loans se- ucts. Since products are not bundled or linked to cured by jewelry, and working capital loans for each other, uptake reflects an independent choice small businesses. According to the KGFS model, de- for each product and a more realistic picture of un- mand for loans will grow beyond this level since derlying need. As new products become available, branch service areas are estimated to have econom- especially new deposit services that will be offered ic outputs of $4 million to $5 million. Assuming by the two new KGFS institutions, there will be op- one-third of households borrow from KGFS, a portunities to observe new client behaviors. $240,000 loan portfolio means an average loan bal- ance of $360 per household, equivalent to one-fifth of the median income of enrolled households. Financial Performance So Far There would remain significant unmet demand for loans, and over time KGFS expects to have a more At this stage of their development, KGFS institu- diverse set of larger size credit products, such as tions rely on net interest income on loans for 85–90 asset-backed loans for commercial vehicles and percent of total revenues, with fees for other ser- farm equipment and infrastructure loans for things vices, such as insurance and pension distribution like commodity warehouses. These will also gener- accounting for the remaining 10–15 percent. Fee ate considerably more income and should improve revenue related to the distribution of noncredit overall financial performance. products is expected to increase as a portion of total The multi-product approach means that prices revenue as new services like domestic payments charged to clients per product can be reduced as gain momentum. But even then the overall contri- economies of scope kick in. Once enrolled, the mar- bution of fees for noncredit products is expected to ginal cost to KGFS of clients using additional ser- remain under 20 percent. Since fees are determined vices is very low, especially since all services are by KGFS partners under rules that are often set by provided at the branch and do not require addition- regulators, opportunities to raise further revenues al household visits. from fees are limited. Beyond recovering branch costs, the profitability Table 1 presents a stylized branch income and of each KGFS as a whole depends on recovering expense statement that illustrates drivers of branch fixed costs incurred by regional hubs and headquar- profitability and break-even levels of operations for ters. KGFS estimates that 30–40 branches operating a single branch. This stylized income and expense at full capacity will be needed to cover these addi- statement is typical of the 14 oldest KGFS branches. tional costs and lift a KGFS to overall profitability. Table 1 KGFS Branch Break-Even Illustration ($US) Expenses Amount* Income Amount* Wealth manager salary (3) $6,000 Interest income (8% margin over cost of $19,200 funds on a $240,000 loan portfolio) Internet connectivity and technology $1,920 Fee income from noncredit products $1,920 Rent, electricity, and other branch overhead $7,200 Branch depreciation $960 Loan loss (1% on a loan portfolio of $240,000) $2,400 Total Income (b) $21,120 Total Expenses (a) $18,480 Net Income (a) – (b) $2,640 *Amounts in Indian Rupees, US$1 = INR 50 13 The depth of penetration (inclusion of most tain whether a focused geographic commitment households and more than one client in many would work as well in highly dispersed popula- households) in a single local area enables KGFS tions—any expansion of a branch’s area implies branches to reach scale in a relatively small geogra- more travel time for both clients and staff. The phy. It is projected that the Tamil Nadu KGFS insti- KGFS approach has also not been tested in more ur- tution will achieve full profitability during 2012, ban geographies where distances are smaller, more based on depth of penetration and the increasing service choices exist, and financial service needs maturation of its 66 branches. This matches KGFS’s are different. initial expectations, which took a four to five year The wealth management principle is predicated view on what is required to achieve deep financial on solid information and good advice that enables inclusion. clients to properly use a full range of financial ser- vices. Considerable resources are invested to re- cruit and train staff who can map client needs to Can the KGFS Approach Be available products. KGFS front line staff usually have only 12 years of schooling, though even this Applied More Widely? level of education among human resources might Initial experience shows that clients are increas- not be available in some environments. The de- ingly responding to the KGFS approach, operation- mands of the wealth management approach have al challenges can be overcome, and financial viabil- required persistence and patience that might not ity is within reach. Client acceptance is reflected in suit the appetites of all investors or be appropriate the high enrollment and take-up rates across mul- for all policy environments. Another open question tiple products, especially in the significant demand is whether wealth management should go to scale for insurance and pensions. Operational challenges without more formal protections against exploit- presented by using the intensive wealth manage- ative sales practices and better client recourse pro- ment approach and the partnership model have cedures being embedded within a country’s con- largely been overcome. sumer protection regulations. It is also worth The next step was taken with the launch of the considering whether a balance of staff training and fourth and fifth KGFS institutions in early 2012, client training might be more feasible and lead to which was partly funded through equity contribu- better outcomes than the current KGFS approach tions from strategic investors. Wholesale funding of primarily focusing on staff capability to provide from domestic financial institutions is being devel- good financial advice. oped to finance expansion. The process of adapting The third principle of integration into the wider to new geographies will remain an ongoing chal- financial system certainly has potential within In- lenge as KGFS institutions open across India. Be- dia where regulations and the financial institutions yond India, however, how transferable are the permit the model. Other countries, however, may three core operating principles in other parts of not have large, sophisticated financial institutions the world? or policy pressures to encourage financial inclusion The commitment to work with the entire popula- that enable a KGFS-like agent model to gain trac- tion of a small geographic area should be possible in tion. Also, regulations permitting organizations to other environments. The coverage area of one institu- act as agents on behalf of larger financial institu- tion may need to be expanded or contracted, depend- tions are not always suitable and often impose sig- ing on the population density of the area covered and nificant constraints on agent institutions. In some how varied the area is economically and linguistically. countries, there may be more of a need for a “do-it- Branch service areas and regional coverage will have alone” style organization, such as the microfinance to be adjusted to ensure viability while not losing the banks that work well in some environments. emphasis on deep local knowledge. Of course, the acid test for the KGFS model is While KGFS has shown some good progress in whether it improves household financial well-be- the remote mountainous areas of India, it is not cer- ing, especially relative to other models and ap- 14 proaches. Globally there have been a series of mi- • Aggregate village-level impacts on variables, crofinance impact evaluations recently, most of such as social networks, wage rates, and migra- which aim to measure the short-run (12–18 months) tion behavior. household impact of access to a single financial ser- • Impact over a three-year duration, twice as long vice, typically short-term credit (Bauchet et al. as most randomized impact studies. An even lon- 2011). With a view to understanding what outcomes ger duration to fully understand transmission can be attributed to the KGFS approach, IFMR pathways would be ideal, but randomization is Trust has commissioned an impact evaluation of difficult to sustain over longer time frames. the KGFS institution in Tamil Nadu. This random- ized evaluation6 will examine the following: The baseline work for this impact study is already underway with results expected in 2014–2015. • Household impacts from access to a broad range But even with what can be observed today, the of financial services, not just credit. KGFS model demonstrates how a business model • Impact on client outcomes from a wealth man- can be reconfigured to pursue complete financial agement approach that tries to better match ser- inclusion: committing to reach as many households vice needs with use. as possible in a service area, putting client needs at the center, and offering a wide range of needed ser- vices. The KGFS experience introduces new finan- The principal investigators for this evaluation are Rohini 6.  Pande (Harvard University) and Erica Field (Duke Univer- cial inclusion ideas that deserve further consider- sity). ation in India and around the world. 15 Annex Product Features Cost to client* PLAN Money Market Mutual Fund (MMMF) Investment in an MMMF, for short-term liquidity management. Nil Underlying investments are mostly treasury bills of short maturity. No minimum investment amount. Redemptions can be encashed, with one-day notification, but a short-term credit facility allows for immediate access to liquidity as well. Maximum transaction size is INR 50,000. International Remittances In-bound remittances through Western Union Money Transfer can be encashed Nil, sender bears at KGFS branches. expense Clients (beneficiaries of the remittance) submit a unique Money Transfer Control Number (MTCN) at the branch along with other details, to receive cash. Maximum cash that can be received per transaction per day is INR 50,000. Client is entitled to 12 transactions per year. Jewel Loan Secured loan to individuals with gold jewelry as security. Valued and kept securely 23% APR by KGFS. Maximum loan size is INR 50,000. Bullet repayment within one year. Joint Liability Group (JLG) Loan Individual loan backed by group guarantee from a homogenous group of five clients. 21.5% APR Maximum loan size of INR 15,000 in the first cycle, with an increment of Rs. 5,000 in subsequent cycles (up to a maximum of INR 25,000). Repayment is to be done in weekly installments over 50 weeks. Emergency Loan Unsecured individual loan to all clients who have successfully repaid first cycle 24.50% APR of JLG. Maximum loan size is INR 2,000. Bullet repayment within one month. GROW Enterprise Loan Unsecured loan to individual retailers backed by a third-party guarantee. APR ranges from 24.1% to 24.6% Maximum loan size is INR 50,000. Repayment can be done weekly/fortnightly/monthly, over a tenure ranging from 6 to 24 months. Education Loan Unsecured individual loan for financing higher education, backed by 24% APR a third-party guarantee. Maximum loan size is INR 25,000. Repayment in monthly installments over 12 months. Loan is given to family member/guardian of the student. *All annual percentage rates (APRs) as of December 2011. 17 Annex, continued Product Features Cost to client* Livestock Loan Unsecured loan to clients already engaged in dairying activity to expand their 24% APR activities through purchase of cattle. Maximum loan size is INR 25,000. Clients need to hypothecate existing as well as new cattle to KGFS. Clients need to get existing as well as new cattle insured under Livestock Insurance. Repayment in fortnightly/monthly installments over a maximum tenure of 24 months. Housing Loan Secured loan for financing construction of a new house. 21% APR Maximum loan size is INR 100,000 disbursed in four tranches, each not exceeding INR 25,000, and set based on client income. Collateral is the original land title of the same land on which the house is being built. Repayment is in monthly installments, over a maximum tenure of 36 months. PROTECT Personal Accident Insurance Insurance to cover death or disability due to accident. Premium is INR 55 per INR 100,000 of cover All KGFS clients 18–59 years are eligible. Tenure of the policy is one year, renewable every year. The sum assured varies from INR 100,000 to Rs 300,000 in multiples of Rs 100,000. Term Life Insurance Insurance to cover death of person; indemnifies the loss of income. Premiums vary from INR 162 to INR 1,458 per INR 100,000 depending on age of person All KGFS clients 18–59 years are eligible. Tenure of the policy is one year, renewable every year. The sum assured varies from INR 25,000 to INR 2,50,000 in multiples of INR 25,000. Shopkeeper’s Policy Insurance to protect loss of income of KGFS retailer loan clients due to destruction Premiums range from of shop. INR 215 to INR 430 The cover is for the business locations against fire and allied perils and burglary. The sum assured varies from INR 12,500 to INR 25,000, depending on value of the building contents (which range from INR 50,000 to INR 100,000). Payouts are based on loss estimates subject to maximum limit of the sum assured. Tenure of the policy is one year, renewable every year. Livestock Insurance Insurance to cover death of cattle owned by KGFS clients (only for dairy purposes), 3.88% of sum up to 85% of market value of cattle or client declared value, whichever is lower. insured + Service Tax Cover ranges from INR 8,000 to INR 40,000. Age limits for the cattle is specified, and this needs to be confirmed by a veterinary doctor. Tenure of the policy is one year. *All annual percentage rates (APRs) as of December 2011. 18 Product Features Cost to client* DIVERSIFY National Pension Scheme-Lite This pension product regulated by India’s pension regulator can be offered at Registration fee of (NPS-Lite) KGFS branches (because KGFS is an authorized subaggregator for NPS-Lite). INR 35 Annual maintenance charge of INR 70 KGFS clients register to obtain their permanent retirement account number (PRAN) and open their account at KGFS to build a corpus for their retirement years. Up to 12 transactions per year are free. Contributions by clients get invested by chosen pension fund managers. Once client passes 60 years of age, he/she can withdraw up to 60% of the corpus as a lump sum and purchase an annuity with the remaining 40% (which the client would receive as monthly pension until age 70). Clients working in the informal sector can also avail the central government’s Swavalamban scheme (in which government will contribute INR 1,000 to every subscriber’s annual contribution between INR 1000 and INR 12,000 for the next four financial years starting 2010–2011). Gold Investment Loan scheme to buy gold coins by making payments in installments and 23% APR receiving physical delivery of gold at the end of tenure. Gold price is fixed as of the date of availing the product. Gold coins are available in weights ranging from 4 grams to 10 grams. Maximum loan size is INR 50,000. Payments can be made in weekly/monthly installments for up to one year. *All annual percentage rates (APRs) as of December 2011. 19 Reference Bauchet, Jonthan, Cristobal Marshall, Laura Starita, Jeanette Thomas, and Anna Yalouris. 2011. “Latest Findings from Randomized Evaluations of Microfinance.” Forum 2. Washington, D.C.: CGAP, Abdul Latif Jameel Poverty Action Lab, Financial Access Initiative, and Innovations for Poverty Action, December. 20 21