State of IT initiatives in the Indian Microfinance Sector Study Report

Sa-Dhan

State of IT in the Indian Microfinance Sector

Table of Content

1. RATIONALE OF THE STUDY .........................................................................................2 2. OBJECTIVES OF THE STUDY.........................................................................................2 3. METHODOLOGY ..................................................................................................................2 4. LIMITATIONS .........................................................................................................................3 5. UNDERSTANDING IT........................................................................................................3
5.1. IT AS COST CENTER.....................................................................................................................4 5.2. ISSUES AND CHALLENGES FACED BY MFIS IN IT.........................................................................5

6. IT VENDORS ............................................................................................................................5 7. CURRENT IT DEPLOYMENT .........................................................................................6 8. RECOMMENDED IT SOLUTION, BASED ON MFI SIZE ...............................7 9. RECOMMENDED FUNCTIONALITY, BASED ON MFI SIZE.......................8 10. RECOMMENDED FUNCTIONALITY, WITH APPROXIMATE ASSOCIATED COSTS ..............................................................................................................9 11. POTENTIAL USAGE OF IT ............................................................................................9 12. CURRENT SCENARIO OF IT VENDORS IN INDIAN MF .........................10 13. PREFERRED TECHNOLOGIES..................................................................................11 14. CHALLENGES .....................................................................................................................12 15. ROLE OF SA-DHAN .........................................................................................................12
15.1 INDUSTRY STANDARDS ............................................................................................................12 15.2 RATING SERVICES ....................................................................................................................13 15.3 CONSULTANTS DATABASE .......................................................................................................13 15.4 CAPACITY BUILDING AND REPORTS .........................................................................................13 15.5 ENTRY LEVEL OPEN SOURCE IT APPLICATION .........................................................................14 15.6 INDUSTRY WIDE SOLUTION .......................................................................................................14

CONCLUSION ...........................................................................................................................15

State of IT in the Indian Microfinance Sector

State of IT initiatives in the Indian Microfinance Sector

1. Rationale of the Study
The Microfinance (MF) Industry in India is growing rapidly in scale, and along with it facing challenges in managing records, achieving shorter turn around times and on-demand financial reporting amongst many others. Between 2002-05, the industry grew by 189% every year in outreach and 191% in outstanding portfolio. Between 2002-05, the number of transactions grew from around 03 Crore to 20 Crores. Growing at a modest 40% rate, MFIs have to process up to 216 Crore transactions1 (including insurance payments) to manage 3.5 Crore clients by year 2009. The industry is therefore witnessing intense activity in deployment of appropriate MIS tools. Existing IT based applications for the MFI industry are diverse in nature and mostly deal with Portfolio Tracking. IT experts connected to this sector feel that there is a strong need for a more robust portfolio tracking systems and advise for a more holistic approach to manage all processes (including management processes) as MFIs (Microfinance Institutions) mature in size. However, the sector lacks the much-needed profound understanding of IT and its limitations. There are several instances where IT solutions have been implemented and discarded. The role of technology in the MF sector has raised issues of the digital divide, technology in the hands of the poor as opposed to being esoteric, indigenous versus exotic, expensive or economical, high end versus low end, generic or customized and finally specific or customized technology products. Some of these issues continue to be addressed by MFIs as ideological positions, while some are factors in opting for technology. Most of the top MFIs, agree to have managed this growth and volumes due to robust processes and information and IT systems. A current and emerging trend in technology applications is the movement from standalone Management Information System (MIS), to wider integrated systems. While a bunch of organizations are able to demonstrate this but not many MFIs could put their feet into IT shoes. Most of the MFI members (of Sa-Dhan) have expressed their helplessness in choosing the appropriate IT-MIS (IT based MIS) and seek help, primarily through facilitation from industry representatives like Sa-Dhan.

2. Objectives of the Study

The study aims to understand and portray how IT is being perceived by microfinance institutions, to look at usage, technology interventions & experiments, issues, problems and impediments in implementation, and to examine the areas for Sa-Dhan to play a role and to recommend an appropriate strategy. The study focused on the impact of IT-MIS initiatives in three areas; Scaling up strategies, bringing Cost of transactions/other and improvements in Quality of work.

3. Methodology
A sample comprising of Heads of member Microfinance Institutions, IT managers of member Microfinance Institutions, Field level users of Microfinance Institutions, Funding & Facilitating

State of IT in the Indian Microfinance Sector

agencies, Microfinance experts, Venture Capitalists, IT vendors and IT experts, were contacted personally and followed up by email questionnaires for their inputs. The sample selected has representation across India, practiced different models and differed in scale.

4. Limitations
The study involved personal interviews followed up with a questionnaire requesting the interviewees to fill and email the form. However, a majority of them have not yet emailed filled forms. Due to the limited scope of study, inputs provided by members were not validated and is represented as stated in the interviews. None of the members contacted have conducted pre and post implementation review of IT-MIS projects (including pilots) and therefore all inputs are subjective in nature.

5. Understanding IT
MFIs generally feel that IT-MIS is the panacea to their MIS woes. Few of the young MFIs claim to be experimenting with various lending models with frequent changes and feel that paper based MIS is good enough to cope up and feel that IT-MIS cannot be customized quickly also needing specialized training. Most of the progressive MFIs state that they are able to scale up aggressively only due to their efficient IT-MIS. The large MFIs seem to be satisfied with their paper plus IT-MIS hybrid systems. The very young startups are divided in thought about implementing IT-MIS from the beginning of operations, primarily out of confusion in choosing the right IT-MIS with their limited budgets. Most of mid to small MFIs are actively looking forward for IT-MIS solutions for portfolio tracking and accounting. Most of the progressive MFIs state that savings in time & costs need not be observed keenly as it certainly helps in very fast up scaling. Clearly, fast up scaling and quality of work (transparency and quick status reporting) is more a priority to saving costs, as represented in the graphic below.

State of IT in the Indian Microfinance Sector

While most large MFIs have in house applications (built and customized), mid to small MFIs are unable to attract IT workers for development or have the capacity to sustain large salary costs.

Although all the MFIs consider IT as a very important element in the growth strategy of organisation but very few of them have clarity on the potential and possible advantages of proper IT functions.

5.1. IT as Cost center IT initiatives are still being considered as cost center (cost based decision) rather than an investment decision. Most MFIs have not examined results regarding time & costs saved, but believe strongly that IT-MIS would bring down time and therefore costs in the long run. None of the MFIs had a budget head for IT in their annual budget as a percentage of profit or turnover. In such a scenario, the IT department role gets limited to maintenance and reporting rather than getting challenged and do not innovate or improve existing systems. For instance, Safal Solutions, uses a sub-Rs 10,000 (Intel-dot station) PC for development, while none of the MFIs have known its existence.
The importance of IT is evident and acknowledged by MFIs but most of them are clueless about the potential and the role, which IT can play. This is because of various reasons; firstly due to lack of technical expertise, information, focus is on operations and credit delivery, lack of business plan and business review.

State of IT in the Indian Microfinance Sector

5.2. Issues and Challenges faced by MFIs in IT Following are some of the issues as cited by the MFIs. Close to 8% cited lack of information about available software and 12% cited non-availability of a comprehensive solution. An industry catering to 9 million clients and still grappling with very rudimentary issues needs concerted facilitation.

6. IT Vendors
The IT Vendors in this space are limited. The most successful vendors are offshoots of MF industry (Safal, Famis, MC Financier) who feel that MFIs should build or conceive robust processes on paper before deciding on a IT-MIS. According to vendors, Vendors feel that due to absence of clarity in processes and requirements by a MFI, solutions have suffered and have not matured. MFIs have limited understanding of IT and its limitations and therefore begin with very high expectations and often request vendors to replicate their existing legacy paper based system in an IT environment. None of the MFIs have dedicated yearly IT budget and almost everyone is looking for reliable ITMIS with very limited budgets ranging between Rs 30,000 to 2,50,000. Exceptions are investments between 10 lakhs to 40 lakhs, both by very progressive and rapidly scaling mid size MFIs. The vendors feel that there is scope for next generation IT tools, which require piloting and liberal budgets.

State of IT in the Indian Microfinance Sector

Vendors claim that MFIs do not discuss or state objectives for deploying IT-MIS and very little discussion about savings due to workflow and improvements in quality of work. Increasingly, MFIs have started to implement IT-MIS for up scaling and to provide transparency in operations, rather for cost saving reasons. The funding agencies and venture capitalists (Care-Cashe, Unitus, Bellwether Fund) have been facilitating employment of IT based systems and have not been thrusting, justifying their role. However, they express the need for simple, robust and inexpensive IT-MIS solutions (mainly for transparency) and motivate small/startup MFIs to adopt IT-MIS from an early stage itself. MF experts feel that IT-MIS systems are needed for transparency, decision-making and leadership apart from providing the basic strong portfolio tracking backbone and opine that the industry needs more vendors.

7. Current IT deployment
Currently, IT-MIS is used primarily for recording transactions and related tasks. The focus is more on portfolio tracking and basic reporting for monitoring. The basic business processes have not been thought about explicitly and therefore a certain lag in IT-MIS to cope up with expectations of a MFI. Most mid sized MFIs are based out of small cities and are unable to attract IT workers for developing on their own. Cost reduction is not seen very important, as none of the members conducted pre and post evaluation of costs. However, all stakeholders feel that employing IT-MIS would have somehow reduced costs. Few MFIs is of the view that manpower costs would only increase in the future, while IT costs will only reduce further justifying investment in IT compared to people investments. Most MFIs have clearly felt that IT-MIS is needed for Up-scaling and felt that it played a very important part of their new branch strategy. Several MFIs (Ujjivan, BSS, SKS, Share, SMILE) have clearly mentioned that they would not begin operations in a new branch without getting the IT system up and running. MFIs are increasing relying on multiple partnerships for up scaling and have to provide critical information regarding portfolio and performance in a transparent manner within short turn around times, necessitating IT-MIS. At Basix, for an internal auditing exercise, which would consume 3-4

months on manual mode, has taken only 15 days using their IT-MIS, with very significant reduction in manpower costs and time. Few of them have expressed desire to have on-demand and online
reporting for better monitoring and control, which sometimes require advanced technology, bigger budgets and more importantly robust processes. There is an urgent need for MFIs to use process consultants on business reengineering projects. Most MFIs complain about poor customer service by IT vendors with basic SLAs (Service level Agreements) not in place. This debate also exaggerate because there is no prior System Requirement

State of IT in the Indian Microfinance Sector

Study conducted on the part of MFIs or together with vendor, so the deliverables can be more
specifics. Most small MFIs assume that IT-MIS requires employment of IT professions and therefore reluctant to invest on an appropriate MIS.

8. Recommended IT solution, based on MFI Size

Based on size, MFIs could be categorized into Start-ups, Small, Medium and Large. Based on the number of clients, the type of IT application differs based on need. The graphic below recommends the type of solution(s).

State of IT in the Indian Microfinance Sector

9. Recommended functionality, based on MFI Size

State of IT in the Indian Microfinance Sector

10. Recommended functionality, with approximate associated costs

11. Potential Usage of IT

Upon settling on an appropriate IT-MIS, businesses expand scope of IT applications for business case modeling, data mining, data warehousing, analysis tools for decision-making and other tools to manage administrative functions like Workflow, Payroll, HR including performance management, Quality tools to assess and improve quality of work and Customer service tools to provide access to customers for service. These are normally built upon existing core business systems or built as standalone applications or use outsourced application service providers (remotely hosted applications).

State of IT in the Indian Microfinance Sector

An ERP (Enterprise Resource Planning) type of application or a SOA (Services oriented Architecture) approach allows building these tools as modules while integrating seamlessly into the backbone within reasonably quick turn around times. Such an approach will be the industrys calling within the next 2-3 years. Several mid to large MFIs feel this coming and are in the process of conceptualizing such applications. An ERP essentially deals with all business process as well as management processes, while a non-ERP system can deal only with product or service related processes. While leap-frogging efforts work during the start-up phase, it requires major BPR (Business Process Reengineering) and change management initiatives along with considerable time and very professionally progressive teams.

12. Current scenario of IT Vendors in Indian MF

Several mid to large MFIs have in house IT application development centers (SKS, Share, ESAF, Spandana, Basix, Grameen Koota). Popular IT vendors are Safal, Famis, Sharada, JavaSoftech, and Jayam, and the recent entrants are Craft Silicon, Kredits from Technology Develepment Solutions, an US based company. Known future products are Mifos - Grameen Foundation USAs fully free open source web application and a solution from Search-Copsa, Bengalooru. IT vendors express their inability to provide high quality IT applications, due to very limited budgets and lack of robust processes in MFI operations. MFI often are not clear on objectives and change

10

State of IT in the Indian Microfinance Sector

specifications frequently, delaying the building process. Also, the MFI staff feels threatened and do not cooperate actively. Most of the vendors are small, as the industry is unable to attract larger IT companies due to poor budget allocations. The most awaited and discussed solution is FINO, a company formed by ICICI Bank, the offering is a web based application with a core banking solution (CBS) at the core developed by iFLex and Oracle, an advanced offering (application service provider model/remotely hosted application), which integrates banking and insurance to begin with and a promise to integrate future financial services. It may be noted that FINO is not only for MFIs and aims to service any kind of firms. The application allows the user to customize or configure new financial products on the fly, seamlessly within minutes and provides cross/multi-platform integration. For instance, it would allow insurance premiums to be collected and credited to insurers directly within second of connecting, enabling MFIs to collect insurance premiums even daily instead of yearly premiums. FINO also would allow for integration of new delivery models like the Business Correspondent model, and POS (Point of Service) systems using bio-metric technology and can deliver 18 kinds of different services including savings, credit, insurance, pension, stocks, mutual funds, etc IDRBT (Institute for Development & Research in Banking Technology) along is also piloting and building to build an industry wide application for microfinance. There is certainly a significant shift happening in this space!

13. Preferred Technologies

Most MFIs use a combination of paper and IT-MIS, with most small MFIs using paper based and excel based systems. Some of them use legacy languages like Fortran, dBase or MS Access. The new age applications use either Microsoft or open based Sun platforms (java). Most MIS systems are vintage, stand-alone applications, not integrated centrally or with other important functions like accounting. Most of them are not compatible with latest platforms and do not have documentation, therefore impossible to customize. Several pilots (SKS, Grameen Koota, Care-Cashe) ranging from Smart Cards to POS (Point of Service) equipment have been tried, tested and discarded.

11

State of IT in the Indian Microfinance Sector

14. Challenges
Robust Portfolio tracking systems, specific to the industry similar to a core banking solution with
emphasis on transparency seems to be lacking and needs to be addressed urgently. Most of the existing IT vendors are very small and limited in number, narrowing choices to the industry. In the current IT market, attracting and retaining talent is being impossible to these vendors, as the MFIs remain close-fisted on IT budgets. Due to absence of industry standards unlike in the BFSI, vendors have adopted independent standards, which are limiting scalability and flexibility of IT-MIS forcing MFIs to remain devoted to a vendor in spite of any service deficiencies. Adoption of industry specific standardized frameworks, architectures, and exchange formats, protocols and code sets allow MFIs flexibility to migrate to better IT-MIS easily in the future. Due to limited awareness about processes and IT, most MFIs are not participating actively SRS (System Requirement Study) and insist on replication of their existing legacy paper based systems, without harnessing the capabilities of IT in reducing process steps. Most MFIs piloting IT-MIS do not address change management issues and flounder due to nonacceptance by the operations staff resisting change, who are mostly non-graduates.

15. Possible Interventions

15.1 Industry Standards
Development of industry standard protocols, architectures, and frameworks, code sets and exchange formats are not only needed to standardize software, but for interactivity between business partners. (For instance, if premiums are to be paid online to insurers, since the MFIs software application is different from the insurer system, an exchange format has to be formulated and agreed for both systems to interact without any human intervention. If industry wide standards were not framed, there would be different exchange formats to be coded, with an insurer/MFI ending up to work with multiple formats with multiple partners, which is totally unacceptable. However, if industry wide standards were formulated, insurers/IT vendors would easily integrate and proactively build new applications on these standardized frameworks, fostering innovation).

12

State of IT in the Indian Microfinance Sector

Associations, for instance HL7, typically initiate industry standards; a group of North American insurers developed the XL12 exchange formats for health care providers to directly submit electronic health claims to an insurer. The WHO had earlier formed a group to standardize recording of health care data, resulting in the ICD and CPT codes amongst other formats. If health care electronic standards did not exist, India would not have had the opportunity to be a major health insurance claims outsourcing hub. If IT-MIS is built on standards, MFIs would have easier options to switch IT vendors with minimal customization. There could be instances in the future, where an existing IT provider may shut down, with its customers (MFIs) left helpless.

15.2 Rating Services

Due to lack of understanding and talent within MFIs to evaluate existing IT solutions, members seek some kind of rating or to evaluate existing installations by experts. Members suggest that Sa-Dhan can form industry partnerships with leading IT and BPO companies, who would be willing to evaluate and help MFIs in automation, by deploying their IT personnel. (Recently an actuary from ING-Holland worked with ASA-Trichy for two weeks to evaluate their micro insurance strategies from an actuarial perspective. This was facilitated by the ING and OikoCredit global relationship. Innovation in technology and workflow is being tested across pilots, which are often expensive and the results are not being shared with the industry. Members are very enthusiastic on new developments and hope to try, if Sa-Dhan initiates/participates in these pilots and are willing to share results with the entire industry.

15.3 Consultants Database

Most of the current woes are due to improper process mapping. Members feel the need for hiring consultants for process optimization & IT projects, indicating that Sa-Dhan may create a national database of consultants for members to access. However, this requires a qualification process to be put in place to qualify consultants, which the industry partnerships with IT and BPO companies can cater to.

15.4 Capacity Building and Reports

Most of the failed initiatives are due to not sensitizing MFI staff on the importance of IT and its potential benefits. Regular capacity building programs are needed to increase this awareness. Members opined that Sa-Dhan could extend their current facilitation to build all overall IT awareness. Due to low awareness and to sensitize, some of the members opine that regular consistent information on IT initiatives and their results, may be compiled after validating by Sa-Dhan (instead of just reproducing from other media reports without checking) in the form of reports or as a magazine.

13

State of IT in the Indian Microfinance Sector

15.5 Entry level Open source IT Application

There is a very strong demand by entry level MFIs to employ IT-MIS, but lack the needed resources. Sa-Dhan could incubate an open source solution and allow members to use freely, similar to the Linux model. This would motivate start-ups and small MFIs to start using simple IT-MIS, which could be transitioned easily to more mature systems in the future. It might cost approximately Rs. 50-75 lakhs and around a year to build a new open source application, ground up, with additional investments in sensitizing IT vendors to support installations for a fee.

15.6 Industry wide solution

The MFI industry needs a comprehensive solution (CBS with ERP/SOA framework), especially for the small-medium size MFIs. Every business segment encourages more than ONE service provider to discourage monopoly and foster competition. FINO and IDRBT seem to be well poised to capture this market. The costs involved in building such a solution could be around 100-250 Crore Rupees, over a 10 year period, requiring > 10 crore transactions per month to break even operationally. Since, both solutions are not limited to the MFI industry alone, it is strategically important that there is representation from the MFI industry, preferably on the governing board of either FINO or IDRBT. MFIs have expressed the need for a solution like FINO, but are hesitant to enter into a contract with FINO due to strategic reasons.

14

State of IT in the Indian Microfinance Sector

Conclusion
Due to the industry spurt in growth over the last 3-4 yrs, clocking almost 200% every year, MFIs see a clear need for robust IT-MIS systems. Interestingly, during this period most of the IT projects have failed creating any impact. Recently, we are witnessing new entrants and better IT systems. Clearly, the need for just a Portfolio Tracking IT system is history. Between the three objectives IT seems to be favored for helping to up-scale and improve quality in comparison to saving costs. However, awareness about IT is still low and needs facilitation at the industry level. The severe shortage of highly credible IT solution providers and process consultants should get better, as IT budgets are expanding and with the possible advent of free open source software. The timing of this report cannot be at a more appropriate time, but requires urgent attention. Members clearly expect help from Sa-Dhan to facilitate IT initiatives, and by sensitizing and bringing up issues to deal proactively. The industry needs very robust mature solutions in the long run, which typically takes a decade to form. Only a modest beginning has been made so far, therefore needing very aggressive strategies and concerted work between all stakeholders. Sa-Dhan, perhaps is best poised to pick the challenge on behalf of the industry.
Based on a growth rate of 40%, Sa-Dhan members would grow from 9 million (clients in 2006) to 3.5 Crore by 2010. Considering a ratio of 1:1 between the SHG and Grameen model clients, the average number of transactions per client is taken as 31 in a year. If Insurance payments are collected every month, member MFIs alone will have to process up to 216 Crore transactions in 2010.
1

15