[TC-I Changemaker]: CGAP's Gautam Ivatury on the linkage between technology and financial empowerment of the poor

The ThinkChange India staff is committed to providing our readers with interviews with people we believe are at the brink of something special but have for the most part been overlooked by the mainstream media. Readers will be able to see other conversations under our TC-I Changemakers tab.

This week, Vinay sat down (over the phone) with Gautam Ivatury of the The Consultative Group to Assist the

Poor (CGAP), a consortium of 33 private and public development agencies focused on working together to expand poor people’s access to financial services. Such services include but are not limited to microcredit and branchless banking. Within this organization, Gautam is the Manager of CGAP’s Technology Program (their blog on India can be read here), which focuses on researching, identifying and disseminating knowledge on how technology will help financial institutions deliver such services to the poor. The Technology Program is co-funded by the Bill and Melinda Gates Foundation.Vinay Ganti: First, I want to thank you for taking the time to speak with ThinkChange India and its readership. Why don’t we start out generally. Can you speak more on CGAP’s goals and how the aspect of technology plays a role?

Gautam Ivatury: CGAP is about building financial systems that work for poor people. However, there is more to it than that as we want this financial system to be integrated with the mainstream financial system at large. We do not want to create a state where the poor bank in some parallel world completely disconnected from the resources and financial options that other people enjoy. In essence we envision one inclusive financial system that provides tailored products to all types of people, including the poor.

This desire for inclusion partly stems from the need to develop financial institutions for the poor that are sound and stable, and one of the most effective ways to do that is to link them to the mainstream financial architecture. Poor clients need to have the same level of security regarding their savings and deposits as do individuals elsewhere in the traditional banking structure.

To address the stability while also providing a wide array of financial products, CGAP recognizes that there must be an approach that moves beyond just microfinance institutions (MFIs) and includes other players in the space to maximize choice for the consumer and to help us attain scale. When one looks past the traditional MFI, one observes postal banks, agricultural banks and other actors that are already helping the poor.

This is where the technology program becomes so critical as it is charged to identify those technologies that will best assist this wide range of potential providers to reach out to the poor regardless of their location or personal circumstances. Right now, the one obvious solution is the mobile phone and the rise of branchless banking that can be done via that medium.

VG: CGAP’s website highlights three key players — financial service providers, public and private funding organizations, and government policymakers and regulators — that are stakeholders in CGAP’s work. Can we discuss the conflicts that emerge among these actors?

GI: All of these actors are critical. Without governments implementing the proper regulatory framework for banking, it cannot be done. Likewise, the other stakeholders also play a vital role. In fact, there is a fourth actor, whom CGAP does not deal with directly, who are the actual customers themselves. In any market these can at times become opposing forces. Government wants safety plus access; businesses want to make money. This forces CGAP to take a practical approach with each stakeholder.

Each player has different incentives and needs, and therefore when our conversations with them require differing skill sets that reflect these distinctions. When you sit down with a banker you have to understand their perspective. She will ask what services am I supposed to give and how should I give them? Do I want to provide them at the branch and encourage the poor people to come inside or do I want to do it in a way where it can happen remotely? What sort of incentives must I provide my employees to provide these services, and what is the structure in which the employees interact with these new clients?

In contrast, when we deal with an MFI, there concerns are more technical with regard to the management and oversight of their loans or disbursements. Questions regarding improvements to portfolio tracking software, customer relationships and external fund raising all dominate the conversation.

VG: Drilling this down further and focusing on India, do you feel that these private sector actors are often hindered by risk averse politicians that are wary of change?

GI: Actually, India is a place of tremendous government action with regard to figuring out ways to provide financial access for the poor. Every finance minister’s budget speech deals with increasing credit in rural areas. Mrs. Usha Thorat, Deputy Governor of the Reserve Bank (RBI), spends a great deal of time focusing on financial inclusion, and the bank has invited officials from its counterpart in Brazil to facilitate knowledge transfer. The Rangarajan Commission recently issued a report on financial inclusion, and the RBI has organized its own trips overseas to understand different models of expanding financial access.

However, if you look at action the hot stories in the mobile banking space do not come out India. We believe there remain several regulatory roadblocks, and much more that private players can do. Banks need to be able to delegate some of the work to cell phone companies and existing village-level partners like merchants and agents. Only a few activities are now allowed to be outsourced but we are encouraged by the RBI’s gradual progress in relieving some of these restrictions. I am currently quite bullish about where India is going to be in five years or so.

VG: Of the work that CGAP has done in India in the past, are there any trends you see as important or of special note to our readers?

GI: To answer this question I will pull from my previous experience at SKS Microfinance in addition to my time here at CGAP. There seems to be three areas where India is positioned to become a possible showcase country.

1. Graduation Programs: Both SKS and Bandhan, among others, have been actively looking at how they can help those individuals today that do not have even the basic wherewithal to be typical microfinance clients. So we are working them to develop programs that provide those people with cash, food and assets that will bring them to the point where they can ‘graduate’ and receive a regular loan from the MFI.
2. Branchless banking: The regulatory hurdles that mobile banking initiatives face are not unique to India. As the government continues to embrace this new technology, we see India as being a great platform to build the knowledge around how to properly create, monitor and operate branchless banking.
3. Massification of MFIs: Finally, in many parts of the world that have more mature microfinance markets, you have seen a significant influx of investors that solely have a profit motive. India is a leader here, with many investors both foreign and domestic, providing capital purely for profit-maximizing. SHARE, SKS and other MFIs are examples.

VG: The idea of graduation programs is new to me and I think that it is a great idea. i will definitely have to research these initiatives for our readers in the future. With regard to massification of MFIs, another aspect of this is the apparent trend that these institutions shift their focus away from the poor as they expand. Is this perception accurate?

GI: When many mature MFIs first started out they were very focused on poor people, but in Latin America in particular many have expanded to accept deposits, for example, from wealthier clients. In doing this, many of them recognized that the more profitable customers are richer ones, and that poorer clients are actually a drain on the profitability. So, in some areas, there is definitely a tension regarding leaving your original clients behind. My view is that in India, MFIs have so many potential customers unserved and so much growth to achieve in the initial target group of the poor that this isn’t as much of an issue.

But I am always wary of when people claim that an MFIs sole obligation is to the very poor, because it ignores the growth and sustainability potential of serving less poor customers. The fact is if you want to serve as many poor people as possible, serving 800,000 people total with ‘only’ 200,000 of those being very

poor is still better than only serving the very poor and not reaching the same scale.

VG: Shifting gears, let’s focus now on the evolution of microfinance. I have written before about my skepticism of MFIs ability to truly create sustainable jobs and trigger widespread growth like SMEs are supposed to do. Do you believe the apparent limitations of MFIs are valid?

GI: This question can be answered in two ways. First, if you take the ‘everyone is an entrepreneur’ approach to microfinance then yes you can believe that MFIs are a total solution to job creation. However, my own view is that in a village even if everyone does take out loan, not every one will result in a successful business.

I think the more appropriate way to view this is to recognize that there exist a wide variety of financial products and delivery vehicles that are outside the scope of a traditional MFI. MFIs have received a lot of attention as effective vehicles for credit, but other organizational types exist. So we can’t just focus on MFIs. In India, there are something like 130,000,000 savings accounts in postal banks — to ignore the potential of an organization such as this would be foolish. So in that respect, yes, MFIs are not the only solution. The primary goal of CGAP is to identify all avenues that exist and to support a wide range of players effectively to provide financial services to the poor.

Another aspect of this issue is to provide those services required by such postal banks or MFIs that will better help them do their job and fulfill their missions. When I was at SKS, we grew from 7,000 to 25,000 cleints. During this time we chose to build and maintain our own technology systems. If IBM or another company had come to offer full services to manage various aspects of our day to day operations at the right price, then I think that would have been an attractive proposition. In essence we want to promote what could be described as “outsourcing technology from MFIs.”

Doing so will enable us to utilize economies of scale. Innovations like software as a service will be crucial to the development of this.

VG: Well I want to thank you for taking the time to speak with us today. We hope you and CGAP all the best in your endeavor, and TC-I will be closely following all of its great work.