Microfinance Focus May 08, 2011: Kshetriya Gramin Financial Services (KGFS), according to its promoter KGFS Capital is a new class of entities in the Indian financial system with the aim of providing a complete suite of financial products and services to ensure the financial wellbeing of households and enterprises in remote rural locations across the country.

In an exclusive interview with Microfinance Focus, Anil SG, Director of KGFS shared his experiences and learning lessons gained. Here are the excerpts:

Microfinance Focus: Could you please describe the KGFS model for our readers?

Anil SG: Kshetriya Gramin Financial Services (KGFS) is a class of entities, conceptualized by IFMR Rural Finance, whose mandate is to maximise the financial wellbeing of every individual and every enterprise in remote rural India by providing complete financial services.

Each KGFS serves around 3.5 million rural populations (an average of 2 districts) through branches set up in remote rural areas. A branch serves 2,000 households on average within a radius of 4-5 km and is staffed by locally hired individuals with a minimum qualification of XII standard called Wealth Managers.

A fundamental premise of the KGFS model is that a complete set of solutions is required to enable a household to plan for the future, enhance income, diversify its portfolio, protect against shocks and achieve its financial goals. Hence, KGFS branches offer a wide range of financial services, in partnership with regulated financial institutions. Currently, the services offered include secured and unsecured loans, remittance, insurance (life, accident, livestock), pension, savings and investments. While some of the products have scaled, some are in the pilot phase.

KGFS branches have real time connectivity to enable online transaction processing and data capture and therefore ensure minimal redundancy. A one-of-its-kind Customer Management System (CMS) acts as an online centralized warehouse to provide a unified view of the customer. A Core Banking Solution is used to capture and update transactions.
It is our belief that India would need roughly 300 fully scaled up KGFS’ or KGFS-like entities serving remote rural locations. Replicability and scalability is a central consideration in the development of KGFS model.

Microfinance Focus: What are the learning lessons from the KGFS initiatives?

Anil SG: A Good product design is key to address the complex requirements of low-income and rural clients. Rather than resort to simplicity that does not meet customer needs, our product development efforts aim to transfer more and more risk and complexity from the household to the KGFS, which can then be managed. In times when product structures have been difficult for the customer to understand, for example a Mutual Fund product with variable returns, staff training and communication have played a key role in gaining acceptance. We have observed how a household changes the way it manages its finances when the right products are available. For example, through our livestock loan product, households are buying better quality cows where they initially relied on small-ticket JLG loans for the same. We have learnt how having a physical branch proximate to the customer transforms the trust and reliability equation with the customer. This lets us serve segments like small businesses that have been extremely challenging for remote lenders.

Microfinance Focus: Is this model scalable and sustainable?

Anil SG: Absolutely, it is. We think replication of multiple geographically focussed entities is the way forward, rather than national monoliths.

Offering a wide range of services to clients in a defined service area helps build economies of scope, reducing costs for each unit service delivered.  Aggressive use of technology helps reduce the variable costs, making transactions of even Re. 1 viable. The branches are breaking even faster than we had hoped ; at the operational level in the eighth month and full break-even, where they even recover capital costs, by the fourteenth in most of the cases.  We are currently operational in three different geographies. The first of these entities, Pudhuaaru KGFS, started operations in Thanjavur district of Tamil Nadu in June 2008. Two other KGFS entities, Sahastradhara KGFS of Uttarakhand and Dhanei KGFS in Orissa will be completing almost two years of operations now.

Microfinance Focus:  Do you think this model can prove a best model for the financial inclusion in India?

Anil SG: The present channels of delivery of banking services are reasonably high on reliability and continuity, but have not been able to offer convenience and flexibility to smaller value customers. Due to high transaction costs, it is difficult for traditional banks to ensure convenience and flexibility for these clients. There are also information problems in lending because most traditional mechanisms of risk management (eg. collateral, scoring) usually do not work for rural and low-income clients. Informal channels such as moneylenders and community-based insurance schemes, while typically scoring high on convenience fail the test of reliability and continuity. The KGFS model combines the local nature and branch-based service delivery of cooperative and regional rural banks at cost structures much lower than those of banks and MFIs – roughly, operating costs of 3–5 per cent in steady state at full scale. Models like KGFS that combine the risk management capability of large well-capitalised entities with the outreach capability of flexible and convenient local channel partners will be the way forward.

Microfinance Focus:  What can microfinance institutions learn from this model?

Anil SG: The KGFS model goes far beyond the scope of micro finance institutions (MFIs), which have made inroads in remote locations in many regions of India with a single product (the joint liability loan). The growth of micro finance in India has been unambiguously important for millions of poor households. MFIs enable low-income households to take a loan when there is not enough money to meet some critical needs. This allows households to manage cash mismatches in ways that are superior to taking usurious loans from moneylenders, selling assets like gold or buffaloes, or pulling kids out of school. However much more can and should be done. Just like their middle-income counterparts, low-income households need to have the ability to move their resources across time and space, in such a manner that their needs for finance are met smoothly over a lifetime. To be able to do this, low-income households require the full suite of financial services, including savings, credit, risk mitigation and insurance and remittances.

Microfinance Focus:  What next with the KGFS initiatives?

Anil SG: Our immediate goal at KGFS is to deploy the Wealth Management concept in all our branches which entails that we complete our suite of products, train our Wealth Managers in the branches and fine-tune our processes.

Also, currently we have 105 branches across the three operational KGFS entities. Our intention behind choosing three geographies that are very different demographically and culturally was to demonstrate the viability of this model of delivery in varied external environmental conditions.  Over the next 2-3 years, we expect to complete the branch roll out across these geographies, and start few more KGFS entities across various regions through a combination of owned and licensed entities.

Microfinance Focus: Please explain your notion of wealth management?

Anil SG: At the core of our approach is wealth management. Put briefly, this entails offering a customised set of financial services to each household depending on their needs. KGFS Wealth Managers (WMs) at branches are trained to offer financial propositions that match the customer’s current and future finance requirements. The process is initiated at the time of customer enrolment in village-level branches, when WMs record data which is stored in the KGFS Customer Management System (CMS).  After a household enrols with a KGFS branch, the wealth manager meets the household again and through a guided conversation, takes it through the four building blocks of financial wellbeing: Plan, Grow, Protect and Diversify.  “Plan” is a diagnostic process that helps the household to recollect and plan for all its current and planned expenditures against current and planned income. In other words, Plan helps the household to assess their current reality and their financial goals. “Grow” part of the conversation with the household tries to deal with the question - “Is the household making best use of all its available resources”. “Protect” is with the Safety Objective to ensure that sudden and unexpected extreme shocks don’t result in the household having to reduce basic essential expenditures and growth-related expenditures. And “Diversity” relates to what household should do with respect to the current assets and the surplus income to ensure optimal returns. To facilitate this discussion IFMR Rural Finance has designed a tool called Financial Well-being Report (FWR) that helps wealth managers suggest suitable financial products to our customers.  This set of tools is currently being piloted in the three KGFSs. We expect this to change the way in which financial services are delivered, with a focus on provider accountability for a household’s financial well-being. We are developing a financial well-being index that will be the basis of all performance management and rewards in the KGFS environment.