AVANT GARDE

CASE STUDY CHALLENGE

SVATANTRA MICROFINANCE
Submitted by
ALPHA SEEKERS
Swarup Raj Jena
Hitaish Durugkar
Rutvik Malekar
Shashank Monappa

INDIAN INSTITUTE OF TECHNOLOGY

KOZHIKODE

Table of Contents
Executive Summary.......................................................3
INDUSTRY LANDSCAPE:..........................................4
Business Development Plan..........................................4
Risk Mitigation..............................................................5
URBAN MARKET:......................................................6
TECHNOLOGY DEVELOPMENT:.............................6
Marketing.......................................................................7
Financial........................................................................7

Executive Summary

The report consists of different aspects of the strategies we need to take to tackle the situation. The first part
being the Operational challenges, where each and every hurdle which exists is explained in great detail It sets a
tone for the analysis which follows on how t tackle these challenges in a clinical and effective manner.
That manner is explained by evolving a Business Development strategy which is SMART; Specific,
Measurable, Attainable, Realistic and Time bound. The business strategy gives the mission and vision of the
plan and how to go about beating the operational challenges. The plan focusses chiefly on Mission, markets and
clients. This plan takes on an operable role in the latter steps.
The chief hurdles for the Business development plan are identified with an intent to remain away from risk as
much as possible and be safe. Risk Mitigation deals with identifying the key risk areas and the low risk areas. It
also deals with how we go about creating a portfolio of diversified profiles so that the risk is sensibly mitigated
by sticking to these measures and ideas. Although not being risk averse, such steps are needed in an
environment where no collateral is being offered on the loans.
The next part deals with the possible financial challenges that might peek up during the implementation of the
business plan. How to raise funds, how to maintain cost of funds, how to handle these finances to give
sustainable returns are some of the key challenges that will crop up. The financial challenges can be overcome
by planning well ahead in time and also stressing upon the risk mitigation continuously.
The Human resource challenges expansion and retention are covered in the following part of the report. The
expansion is done not just physically but also in terms of human resources, employees and customers. It is
important to gain an entourage of loyal and hardworking employees along with loyal customers, while keeping
attrition levels on both fronts as low as humanly possible. This also brings the hallmark of trust into the mind of
the customers and builds a brand.
The final part deals with the various types of marketing challenges that are obvious and the other foreseeable
ones. Creating a trustworthy brand, marketing as a competitive financial institute, attracting customers, and
spreading the proper messages to the public, the government and the investors is necessary and an explanation
how to is given.

INDUSTRY LANDSCAPE:
Recent development in banking industry changed the brick and mortar branches to a system supplemented by
other technologies like Automated Tailor machine, Credit/debit Card, Online banking, mobile banking etc. But
these services basically serves the higher income segment of the society. Moving one step further microfinance
targets the rural segment that was untouched by the banking industry previously. In rural area micro credit is
preferred for non-revenue generating activities like marriages and education. But here comes the risk of return.
The aim of microfinance is also to give out loan to revenue generating purposes where risk will be less and it
will help in development of society. The aim is to increase the number of tickets in revenue generating
products.
Micro Finance industry is a niche product that targets the poor people and provides them low amount of lending
with a reasonable interest rate without taking any collateral. Here the challenges are to work in a risky segment
but return is also high. Basically the process is the MFI has to find out the potential customers and analyze the
capability and the most importantly willingness of those people to repay the loan. Then give out loan to credible
customers which will help them in developing small business and also necessities of life like education,
marriages etc. Finally we also have to make money out of the process which is much more important.
In Indian scenario there are 33.7 crore people are there in the age group of 20 to 45, out of which 2.75 crore are
working in organized sector. Wage rate in rural India was Rs.268.6 per month in the year 2014-15 which was
Rs242.5 in 2013-14. The amount is very low compared to GDP (Rs 1.877 Trillion) and GDP growth rate of
India which is around 5%. Our economy is expected to grow at 7.5 8.3% in 2015 -16.
These figures show that there is a great potential for a high number of people going for small business which is
the market of microfinance organization. So we have to tap the industry and make maximum out of the large
market of India.
As per the report Status of Microfinance in India by National Bank for Agricultural and Rural Development
(NABARD), the overall microfinance sector in terms of loan portfolio stood at Rs.53,801 crore including SHG
bank linkage model (Rs.39,375 crore) and MFI model (Rs.14,425 crore) as on March 2013.
Loan portfolio grew at 63% y-o-y in FY13 as compared to 9% fall in FY12. During FY13, total outstanding
loan portfolio of the MFIs increased to Rs.12289 crore in FY13 from Rs.8384 crore in FY12.
As a whole we can say that the microfinance industry has a great scope because of high volume of untapped
segment and also the growth of economy. The market that was purely untapped by the competitors are the urban
segment. Here we have to give out individual products with higher ticket size of 50000- 100000 because of the
credit worthiness which will increase the profitability.

Business Development Plan

The business development we have in our mind concentrates on 3 aspects viz, Mission, Markets and Clients.
Mission: The mission plan is to expand and grow rapidly while offering quality services as a microfinance
institute. We envision the firm being a partner in the growth of rural parts of the states it operates in, uplifting
the masses who need financial freedom more, thereby contributing to the economic progress of the country
significantly. We want to realize the dream of making India a superpower, starting from grassroots level.
Markets: Our primary focus is to expand to rural markets extensively in the states of Maharashtra and Madhya
Pradesh. This can be done by cutting a deal with a retail/FMCG giant like ITC which offer the services of their
supply chain to other firms. By leveraging the strength and the penetration levels of the supply chain, we can
gather data and statistics of each and every corners, especially economic hotspots of the states we are interested
in. Customers are also gained and cross-sold through the chain. These data and customers are solid and can be
banked upon for a long time. The customer life time value gained out of such scenarios is very high and overall
acquisition costs are pretty low compared to strategies where microfinance institutes need to begin from
scratch.
Clients: The clients are low-income persons that do not have access to formal financial institutions. We would
concentrate on those areas where PMJDY scheme has not been very effective, therefore leaving a large

customer base open for business. As we broaden the notion of the types of services microfinance encompasses,
the potential market of microfinance clients also expands. For instance, microcredit might have a far more
limited market scope than, say, a more diversified range of financial services which includes various types of
savings products, payment and remittance services, and various insurance products. Dividing our clients into
rural and urban, in rural they are usually small farmers and others who are engaged in small income-generating
activities such as food processing and petty trade. In urban and semi-urban areas, microfinance activities are
more diverse and include shopkeepers, service providers, artisans and street vendors who are not yet financially
included and would be not granted loans in the current economic system of credit ratings.
Synergy: Our idea is to create a synergy by combining the three key aspects and create an environment of
synergy, creating benefits for all stakeholders involved including but not limited to customers, society,
employees, investors, the management and obviously the firm itself.

Risk Mitigation
Effective loan assessment
For effective loan assessment, the microfinance institution must have an effective loan policy for ensuring
proper structure, analysis and monitoring of financial capacity, collateral, pricing and terms.

The analysis should address character, capacity, capital, net worth, collateral and borrower conditions. The
loan policy must include the purpose of the loan, required financial information, risk ratings and policy
expectations.

Identify and manage future risks as the best predictor of long-term success

Early warning system for potential problems

More efficient resource allocation

Better information on potential consequences, both positive and negative.

For credit risks, there must be mechanism to prevent client from taking multiple loans from the same MFI

Management information system to manage diversity of products

Prioritize the risk on the basis of severity and the likelihood of occurrence

Borrower screening techniques

For portfolio risk, policies on diversification, maximum loan size, types of risk, and structure lessen
portfolio risk

Periodic review of the entire portfolio by management to assess the nature of portfolios delinquency,
looking for geographical trends and concentrations by sector, product and branch.

MFI senior managers need to set up systems that compel and offer incentives to loan officers to prevent,
disclose, and respond to problem loans quickly, so as to limit potential credit-related losses

Banks should give loans to individuals who live within the bank area

Staff Fraud

Management training to increase managers capacity and strict supervision process

Enforces the following human resource policies:

o

fire staff involved in fraud immediately

maintain a profile of fraudulent staff and use it to refine recruitment

refrain from posting staff to home areas to reduce the opportunity and temptation to collude

make loan products available to staff

pay staff well relative to other available job opportunities in the area

rotate staff regularly within a branch

Transparency in credit operations through regular reporting

limited information processing and decision making

reasonable work loads

minimal complexity means less learning demands on staff

minimization of accounting and administrative procedures

on-going checks and balances for transactions (e.g. reconciling cash and program numbers

borrowers make frequent repayments of small amounts

Liquidity Risk:

Too much cash means less returns to cover costs of operations and too little cash means crisis of confidence
among investors.

Maintaining detailed estimates of cash flow on weekly basis

Limiting the number of withdrawals that customers can make to maintain liquidity

Anticipating potential cash requirements and seasonal variations in deposits or withdrawals

Ensuring that MFI has long term investments needed for growth and expansion
Operation Risks

Transaction risk high volume of small transactions resulting in more opportunities for error and fraud

Management Information system must manage loan tracking, loans disbursed, payments received, and
current status of outstanding balances.

Incorporating safety features in bank software, regular antivirus updates of the software

Maintaining consistency between loan management system and accounting system data

Regular client visits to verify loan balances

Internal audit to verify and test the accuracy of information and adherence to policies

Minimizing the repetition of data reduces the chance and frequency of human error

Checking validity of assumptions against reality on a periodic basis

URBAN MARKET:
In India 14% of urban population are in below poverty line. Around 25% of population in tier2 cities are
people migrated from rural area. So there is also a market in urban area what we have to leverage on. If we can
succeed in getting these clients onboard, we will get a larger benefit because of lower risk and effective
operations cost associated with this. We have to make some product that can attract urban people.
The target segment- 1) Small shop owners aiming for expansion
2) Someone trying to start her/his new business
3) Non revenue generating activities like marriage and higher studies.
But in rural area the 3rd one has less relevance because of the attitude of the urban people. Because they will
easily go for commercial banks for education loans and the demand for loans due to marriages is too less. So
our target should basically on the 1st and the 2nd type. The prevailing challenges are 1. Making products that
would attract them. 2. Changing their mind set. 3. Analyzing the mentality of urban people about their credit
worthiness.
As our average interest rate in 22% and our borrowing cost will be just above 11%, we can make a trade off by
offering products with interest rate of 18-20%. This attracts a lot of risk and decrease in profit margin but the
volume will increase and also the operation cost is low. The cumulative effect will have approximately equal
profit margin. The customers will be attracted because they would have got loan at an interest of 12-13% from
banks with a lot of processes and there is also no guaranty if they can get it or not. This will attract them to be
our customer.
As a NBFC MFI license holder we can also work as payment banks for these segment. Normally the rural
people living in urban areas have their family in rural areas. So the usual problem that they face is to send
money to their family members. We can help them with our own payment banking options leveraging our own
rural network. We can expand this payment banking option as a small scale mobile banking type. We will
develop technology for allowing mobile authentication which will work like a mobile banking. The cost for this
technology and experts will be around 1 lakh and will have less variable cost.

TECHNOLOGY DEVELOPMENT:
Cloud Computing:
The current method of analyzing the credibility of a potential customer is manual which is too much
effective but involves a lot of cost. The advantage of this method is a human can understand a human better
than anything else.
But thinking of long term aiming 2020 we can predict that the customer base will increase. According to the
prediction the customer base will be 350000 by 2017 and by 2020 it may reach 1000000 which is too high a
number to work on manually. So we have to take on cloud service which will help us in handling the data
effectively. We can also use data analytics to get the potential areas to target on. As internet of things (IOT),
the next big thing coming into play in the Indian market there will be huge many data available about every
person to know the behavior of person. These things taking into account as a long term plan we have to have
cloud services to mitigate future challenges.

Marketing

Banking correspondents to do the marketing of finance facilities of Swatantra in the radius of 10 km to 30 km

Spreading e-literacy to the rural people as well as urban semi-skilled poor people through computer knowledge

Awareness campaigns of banking products and services provided by Swatantra through mobile messages

Taking help of local NGOs in registering new users and providing the users basic training about banking operations like
requesting for loan, depositing and withdrawal of money

Use of Nukkad Natak and stage drama for generating awareness about importance of microfinance in the daily lives of people.

Decentralized storage of customer details specific to an area and interconnecting decentralized branches to a
centralized control office

Associating Aadhar number of customers with the bank account

24 hours service provision through mobile regarding balance details, summary of transactions done

Single window service for all types of transactions

Digital authentication of individuals and group members before opening accounts

Use of KYC to identify potential customers for delivering services specific to customers

Dissemination of banking information to customers like interest rates and outstanding amount through
internet and text messages

Financial
Since Svantantra has registered as an NBFC, it is denied access to venture capital, the initial capital for the
organisation comes from the contributed capital of founders and money raised through issue of equity capital.
This is also reflected in the annexure II. The debt to equity ratio is steadily projected to increase with additional
funding availed from NABARD or SIBDI for MFI purposes.
The MFIs cannot engage in venture capital as it isnt permitted by the government , and Svantantra MF cannot
accept deposits since it would require operations of two years and an investment grade rating from the credit
rating agencies. The sector is also denied access to venture capital.
Cost breakdown structure for the interest yield is given as:
Components of the Cost

(a) Average Financial Cost of Funds - assuming borrowing at 10-12% but around 70% of on- ending funds
comes from borrowings while the rest is from grants or internal generation of surplus or a small amount from
"compulsory savings" (or cash collateral )
(b) Operating Expenses

Annual
Percentage
aprox. (%)
6-9

10-14

(c) Loan Losses

1-2

(d) Desired Capitalization Rate - assuming a 30% growth rate and a capita adequacy ratio of 15% banks
will lend to MF s if they raise around
45% in the form of "own funds" - part internal resource generation (which is this amount) and part equity
finance from S DB NABARD and MF equity funds current y in existence and being established

3-4

Annual Effective Interest Rate

22-26

Rate,

Existing SHG and JLP schemes are unable to raise capital from banks and financial institutions due to structural
and sustainability issues. The account for 36% and 10% of the borrowings respectively.
We propose a system of
Microfinance Investment funds
serving as an attractive investment
vehicle for social investors. With
equity structure in place and
disclosure
norms
as
per
regulations, MFI funds are a
relatively safe exit route for
investors. The PBIT as per
Svantantra expenses are calculated
as per Annexure I. The CAGR for
PBIT over a 4 year period is
calculated to be about 71% making
an attractive scheme for investors.
Financial Prospects.
Total loan Size
Revenue Generated ( From
Interest )
Cost of Loans
Total Expenses
PBIT
Salary Per Person (HO)

7,98,37,584

31,80,94,400

1,50,99,84,000

4,18,00,00,000

7,35,00,00,000

1,67,65,893
0
1,44,18,668
23,47,225
70,836

6,67,99,824
79,52,360
3,80,75,900
2,07,71,564
2,25,449

33,21,96,480
13,13,68,608
12,09,19,519
7,99,08,353
5,72,208

91,96,00,000
41,38,20,000
19,86,33,600
30,71,46,400
9,29,818

1,61,70,00,000
95,55,00,000
25,22,52,000
40,92,48,000
9,45,945