Designing Products based on Customer Requirements: Unique Approaches of SEWA Bank and IFMR (KGFS model), India

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1 Smart Note Designing Products based on Customer Requirements: Unique Approaches of SEWA Bank and IFMR (KGFS model), India Rationale The need to develop flexible and responsible financial products constitutes perhaps the most compelling challenge facing the microfinance industry today in India, as well as globally. Currently, given the regulator y constraints in India and the mono type of product offering, the gap between products and client needs is obvious. But, what does it really take to remove these imperfections? Designing of product is influenced by multiple factors and can be quite complex. Institutions like BancoSol and Fundusz 1 Mikro mention that organizational mission and internal strength play a crucial role in the development of a product process. Rutherford and Cohen, 2001 emphasize the need of the institutions to invest in the understanding of client preferences with regard to their cash flows as well as their need for lump sums of cash for anticipated expenses. In India, delivering more client-responsive financial services to a broader segment of the population requires some changes. So what works for microfinance institutions that have succeeded in designing products are that they take into consideration client characteristics and focus on doing no harm to clients. 2 Objective Broadly, the current tool: Documents and presents two distinct, but successful approaches of SEWA Bank and IFMR in understanding client (member) requirements and designing products that meet their requirements. About Sewa Bank And IFMR (KGFS Model) SEWA Bank is an urban cooperative bank of poor, self-employed women workers which was established in India in 1973 in Ahmadabad in Western India at the initiative of 4,000 selfemployed women workers who contributed Rs 10 of share capital each. Many of the SEWA members, especially the vendors, were badly in need of cheap and easily available credit to earn a livelihood. It was the first organization built for its members by the SEWA trade union. It aims to provide integrated set of banking services to serve poor, self-employed women. The IFMR (KGFS Model) is a licensor-licensee model of retail financial product and service distribution with IFMR Rural Finance Private Limited acting as Licensor and IFMR Rural Channels and Services Private Limited acting as a Licensee. IFMR Rural Finance Private Limited (Licensor) is a private limited company that designed and now licenses the Kshetriya Gramin Financial Services (KGFS) model to a network of licensors including IFMR Rural Channels and Services Private Limited. What is licensed includes the use of the KGFS brand name, a set of SaaS technology systems that enable the full set of systems required to run a KGFS entity, and product development services. 1 Brand, Special thanks to the authors Dr. Hema Bansal and Tanwi Kumari (Smart Campaign, India) and Mr. Dave Wallack (IFMR Trust). We also thank IFC for funding the development of this tool. Smart Campaign offers a wide range of tools for improving client protection practices among MFIs, networks, and investors. Visit to download these tools at no cost. 01

2 IFMR Rural Channels and Services Private Limited (Licensee) is a private limited company, engaged in the business of distributing and facilitating financial products and services for financial institutions (NBFCs and Banks) through the KGFS model, and is a licensee of IFMR Rural Finance Private Limited with five active KGFS entities' in the Indian states of Tamil Nadu, Orissa, and Utarranchal. Organization Of The Study The current tool explores how the philosophy of an institution affects its product offering and what are the approaches adopted by SEWA Bank and IFMR (KGFS Model) in understanding their members' financial requirements. 3 SaaS: Is a software delivery model in which software and associated data are centrally hosted on the cloud. SaaS is typically accessed by users via a web browser and can be used for many business applications like accounting, customer relationship management (CRM), management information systems (MIS), human resource management (HRM) etc. 02

3 Sewa Bank Philosophy of Sewa Bank SEWA Bank's origin is deeply rooted in the philosophy of SEWA Union. SEWA follows the Gandhian philosophy of truth, non violence, respect for all religions, and dignity of labour that inspires the members of SEWA to do the same. SEWA is an organization and a confluence of three movements; the labour movement, cooperative movement and women's movement. SEWA Bank is an outcome of a women's cooperative movement. The cooperative movement started thirty years ago when their members said they needed a safe place to keep their savings and access affordable credit services. Above all, they wanted to free themselves from money lenders, middlemen and usurious merchants once and for all. Recalling these times, SEWA Bank Managing Director, Jayshshreeben Vyas says, Three decades ago, no bank would entertain requests for opening poor women's saving accounts and loans. But the members of SEWA took the courage and contributed a day's worth of earnings to set up their own bank. Today, SEWA Bank is owned and managed by its women members and has been able to help thousands of women in informal labour markets to come out of the vicious circle of poverty. 4 Please see Annexure 1: Products of Sewa Bank 03

4 Exposure and Dialogue Programmes (EDPs) Methodology (Tanabana) In serving its women members, SEWA Bank adopts a life cycle approach wherein women's financial requirements are mapped from birth to death and products are designed to meet their short term, medium term and long term needs. SEWA Bank's objective is to act as a life time friend of a woman and not as a short term provider of funds and hence it tries to design its services, products and mechanisms as per the needs of the women. All product offered by SEWA Bank are linked to member benefit and needs. Each product needs to meet one or two of the member-oriented objectives like reduction in drudgery, improvement of energy efficiency, improvement in living conditions, and enhancement of productivity and acquisition of assets. Understanding Financial Requirements of SEWA Members SEWA Bank conducts significant experiments to continuously learn more about their members. On a regular basis, it contracts external consultants to conduct Focus Group Discussions (FGDs), field surveys or impact studies are used to understand their member's requirements. The findings of surveys and studies are used in combination to the member's household data to develop new products or services. One of the ways in which SEWA Bank conducts experiments to observe their members lives and assess their needs is through conducting Exposure and Dialogue Programme (EDPs) of their member's lives. Majority of the SEWA Bank staff, are required to undergo EDPs which is called as Tanabana meaning interweaving. Exposure and Dialogue Programmes (EDP) is a means to sensitize members, bank staffs and other stakeholders towards the challenges faced by the members, their household needs and how bank could provide financial solution in a sustainable manner. EDP is conducted by SEWA Academy which was established in 1991 as a systematic effort to provide training, capacity building, communication and research for reinforcing principles and philosophy of SEWA movement. EDP uses the strategies of immersion, dialogue and reflection to expose senior level technocrats and bureaucrats in Bank to the stark realities of the member's life. Accompanied by trained SEWA Academy facilitator and SEWA Bank local staff, the senior officials spend a few nights in the home of a SEWA member. They follow member's daily routine at home and at work in order to understand poverty and household challenges from her perspective. After the exposure, participants reflect on their experiences and enter a process of dialogue aimed at analysing, understanding and recommending change of policies related to product design or delivery in order to make the Bank more focused on the pragmatic needs of members' in the informal economy. The EDPs enable bank staff to understand how bank interventions have helped in making a change to the lives of SEWA's members and also to understand the financial flows and requirements of their members. EDPs are typically conducted for Bank's front end staffs like hand holders and bank sathis, but there are several instances of participation even from head office staff. SEWA Bank conducted its first Exposure and Dialogue programme (EDP) in 1991 by the SEWA Academy along with Dr Karl Osner from north south Dialogue for BMZ/GTZ initiatives' of Germany. Thereafter, SEWA academy has adapted and used the EDP methodology for different groups including SEWA Bank wherein this intensive process of interweaving the three phases of Exposure, Reflection and Dialogue is called as 'Tanabana'. 04

5 Tanabana EDP has three phases: 1. Exposure 2. Reflection 3. Dialogue Exposure and Dialogue Programmes (EDP) is an initiative to meet the members (clients) directly, share their life for few days, observe their vulnerabilities, analyse and come up with strategies to provide best solution possible in terms of financial or non financial initiatives. Each EDP is focussed around specific set of questions and member hosts (SEWA Bank members) are selected by SEWA Academy after keeping in mind the list of participants and the objective SEWA Bank wants to achieve as a result of this program. The three phases of Exposure, Reflection and Dialogue takes place just one after another, not strictly as they are also constantly practised in each phase of the program wherein the participants are always in dialogue with their members/facilitators and there is always something that invites reflection. Source: SEWA Academy 1) Exposure: It is the first phase in which members and Bank staffs meet for the first time. It lasts for four days and accompanied by the SEWA Academy facilitators, the bank staff spends a few (three or four) nights actually staying in the home of a SEWA member. They live, eat and sleep together with the member family. They follow her daily routine at home and at work in order to understand poverty from her perspective, challenges faced and the mechanism used to manage financial health of her household. 2) Reflection: It is the second phase after the exposure and lasts for one to two days. Here, the participants reflect on their exposure experiences both individually and in group as common reflection. This phase is about the significance or implication of the experience and about deepening the understanding of the members' life. It answers questions like How is the micro level of product and process policy connected with basic conditions of the member and the macro level? and helps in analysing, understanding and recommending change in policies to make SEWA Bank more focused on the needs and reality of members in the informal economy. During the Reflection process, each EDP participant writes or records their experience in form of two short notes one personal and one technical. Personal Note: In the personal note, SEWA Bank staff maps the details of family and work life of its host members and also describes the personal achievement and challenges in her life. In the personal note the bank staffs also tries to map the woman's livelihood pattern over a period of time with her current occupation. Major life changing events as described by the member in her life are also documented and member's family details, their education, health and activities are also documented. Technical Note: Is more focussed and includes financial information of the household like income, expenses, household assets and liabilities. The draft outline of the technical note is highlighted in Page 6. 3) Dialogue: It is the third and the final phase of half day duration in which all participants, SEWA bank staffs and the "facilitators" from SEWA academy meet and exchange observations, findings and recommendations from Exposure and Reflection phase. 05

6 Format of EDP Technical Note Name : Address : Activity : Birth Year : Date of EDP : Core Team Members : Staff Members : Household : Consumption Unit 5 Working Person : 4 Family Members Age Regular Occupation Living Condition : Marriage and Family : Economic Condition : 1. Income of Household 2. Expenses of Household 3. Savings of Household 4. Other Schemes 5. Liabilities of Household Present Situation of Member: Livelihood Income Composition Family Members Occupation Regular Earnings per annum (Rs.) 06

7 Expense Composition Expenditure per annum % Distribution Food Other Daily Expenses Monthly (hospitality, sickness, transport) Education Marriage in Family Marriage in Community Birth Festivals Death Ceremony Medical Expenses of Family Religious Trip Borrowings over five year period Year Interest Rate Total Amount in the Account Borrowings over five year period Year Name of the Scheme Amount Saved Agency Physical Assets Asset Year of Purchase Value of the asset in Rs. Liabilities Date of Disbursement Purpose Source Loan Amount Outstanding Loan Interest Rate Date of Repayment of Loan Analysis Saving and Borrowing Habits, Comments on existing saving and liabilities and expenditure pattern. Future Plans and Financial Services : Future financial requirements of the members. 07

8 The feedback and recommendations from the EDP process is like a bottom up approach and is used by SEWA Bank to craft an effective strategy for influencing senior management who make policies to the realities of members' life. It helps the Bank to gather feedback about existing products and services and understand about the clients evolving needs so that it is able to effect positive change in existing products, services and processes. EDP helps SEWA Bank continuously think through, reflect and maintains its focus on its members and the market in order to build long term relationship with the members in a sustainable manner. Apart from business sense, EDP helps in building capacity of barefoot workers and acts as strong induction process for new hires to understand and appreciate the roots of SEWA's philosophy and ideology. 08

9 IFMR RURAL CHANNELS Philosophy IFMR Rural Channels is a private limited company which is engaged in the business of distributing and facilitating financial products and services for financial institutions through a unique business model Kshetriya Gramin Financial Services (KGFS). The KGFS model is different from others as it operates under the principles of focused geographic commitment, client wealth management approach and offering broad range of products. There is lot of emphasis on designing products specifically to meet the local geographic profile of clients and their income streams. - Shift from incentives on sales towards incentives on following a service delivery process well, - Shift from a transactional approach to building long term relationships with the customers, and - Shift from massive scale towards outreach of depth in communities and an economic region. What makes all this possible in a sustainable and scalable way is the centralized development of a strong technology backend, high quality training, and strong relationships with product and service suppliers that can all be leveraged by a vast network of independent financial institutions managing the complexity of last mile service delivery. The KGFS model was designed by IFMR Rural Finance as a next generation financial products and services delivery model for unbanked communities. The core approach of the model is: - Shift from traditional single product sales to a financial planning approach, - Shift from hiring and investing in professional hires to the training of local people to serve their own communities, Understanding Financial Requirements of IFMR Customers IFMR Rural Channels and Services Private Limited is a licensor of IFMR Rural Finance's KGFS model which operates five KGFS style financial institutions executing the standardized KGFS approach. Each of these five financial institutions focuses on the rural portions of approximately two average sized Indian administrative districts or 3 09

10 million people through a dense network of branches that each covers approximately 2000 households within a 3-5 km radius of a physical branch. The staffs delivering the financial services are titled as Wealth Managers because their aim is to systematically focus on increasing the financial wellbeing of clients rather than product sales. Each branch is staffed by 2-4 Wealth Managers who are hired locally and trained in the use of IFMR's technology, systems, and products. IFMR's Wealth Management approach to improve financial well being emphasizes the following: 1. Planning: Help the customer to see forward into the future to manage periods of surplus and deficit in their financial lives in the short term (12-18 months), the medium term (3-5 years), and the long term (through retirement and the end of lifespan). 2. Growth: Use a combination of loans, savings, and investments to increase the net worth of the household. 3. Protection: Use insurance products to protect the household against the loss of future cash flows. 4. Diversification: Help the household to think about an appropriate balance of growth in their net worth and diversification of risk in the unprotected assets they hold. For offering products KGFS pursues the following three steps process in its lending methodology: Three Step Process: IFMR has a simple three step process that enables the institution to collect and store customer information, assess a household's cash-flows and use IFMR Wealth Management Approach to recommend any product. All the three steps are followed for both new as well as existing customers. Step 1: Know Your Household through Financial Well Being Report As a first step, all the households within the catchment area are enrolled by Wealth Managers. Enrolment involves detailed collection and verification of household information ranging from occupation and income details of all members, household expenses, asset ownership and most importantly outstanding liabilities of each household member. Members are not required to avail products or services during enrolment. Wealth Managers input the data into a technology system which generates a customized diagnostic report about the client's current state of financial wellbeing and pathways to improve it. When subsequent contact is made with the customer as in the disbursal of a second loan, customer data is captured again to revise the customer data. 10

11 Step 2: Cash-flow Assessment to understand surplus of customer With the use of detailed household information and the customized Financial Well Being report, the Wealth Manager understands the household's annual surplus. With minor adjustments the household surplus is translated into a measure called the household's Debt Servicing Capability (DSC) and embodies the Planning component of the Wealth Management approach. This report is the basis for a dialogue between the client and the Wealth Manager called the Wealth Management process. This measure is used by the Wealth Manager to help the household understand their ability to service debt and help the client to plan, quantify and attach timelines to their goals. Step 3: Customized Discussion related to needs of customer Based on the results of the economic analysis of the household in the Financial Well being Report, the calculation of the Debt Servicing Capacity (DSC), and the goals of the household, the Wealth Manager identifies the risk and potential associated with each stream of income associated with a given household (as an example risks and potential that could affect crop production, risk of customer death or disability, etc.) and suggests an appropriate product that are suitable to the customer like credit, insurance coverage and policy where such a policy is available. In the event that such a policy is not available, the Wealth Manager makes sure the customer understands the risks that their household faces. Clients with adequate surpluses are also advised to enrol for pension services or other investment products. Wealth Managers role to offer a complete suite of products including a wide range of loan products, insurance products, investment products, remittance and payment services, and they expect to launch derivative products in the future. Of course, the choice of whether or not to avail any products is entirely the discretion and choice of the customer. This last step represents Growth, Protection and Diversification stage of IFMR Wealth Management approach. As mentioned previously, IFMR's Wealth Managers are tasked to serve the entire population in their region. They must address households in crisis and they also must serve households that are thriving. IFMR's product design objective is to develop a complete suite of products to serve each household's complete set of financial needs. By taking this approach IFMR focuses on both the financial wellbeing of the household, but also the financial wellbeing of the region economy on which each KGFS entity is focused. 11

12 New Product development and feedback loop product and process innovation. IFMR follows a continuous and systematic effort to deepen the understanding of clients and tries to integrate it into revising products and processes. Some of the feedback for improved product design and process comes from the Wealth Managers directly and some of this design results from insights from analysis of customer data. In addition, social media and offline meetings provide Wealth Managers with the forum to exchange ideas and innovations about products. There is an online system called the Design Identification System that Wealth Managers can use to escalate a design idea to the product development team. These ideas are all tracked to actualization or dismissal. Every two weeks the operations team at each KGFS entity's headquarters randomly selects 2-3 cases (Financial Wellbeing Reports) which are presented by the Wealth Manager to their Senior Managers and colleagues. This meeting ensures that the organization stays connected with the customer, helps management to spot bugs in processes and products, enables them to monitor the quality of Wealth Manager understanding of key concepts and their ability to leverage them into the customer interaction, and helps the system to uncover ideas for new products and improve the quality of the technology. Conclusion Both SEWA Bank and IFMR (KGFS Model) offer products to help their customers move out of poverty and also safety nets to prevent any shocks. While SEWA bank follows a more informal approach, IFMR has a very formal and methodical approach of understanding their customers short as well as long terms requirements. However, what is common amongst these approaches is that, in both these institutions the staffs (both frontline and Head Office) are closely involved in understanding the requirements of the customers. There is significant commitment of both the institutions in continuously assessing the evolving needs and wants of the customers and constantly improving internal processes and policies that keep customers at the centre of all business decisions. References: 1. IFMR, Household approach to lending (Illustrations from the blog) 2. Monique Cohen, USAID, Making Microfinance More Client Led, (Illustration of Household Life Cycle Financial Needs ) A central product design team develops product based on an understanding of the rural Indian economy, and risks associated with each specific economic activity. The product development team actively uses client level data analysis and to identify trends and patterns. This analysis leads to product and process innovation. the smart campaign Keeping clients first in microfinance 12

13 Annexure 1: Products of SEWA Bank Recurring Types of Savings Riddhi Siddhi Yojana Ghar Fund Yojana Mangal Prasang Yojana Chintan Nivaran Yojana Bhavi Suraksha Yojana-2 Or Savings linked old age pension scheme Swapna Siddhi Recurring Gold Yojana Loan products General Loan (unsecured) Business/Income Generation Loan (unsecured) Gold Loan (secured ) Housing Loan Infrastructure Loan Features Open a recurring a/c starting with Rs.50/- or its multiple Regularly deposit amount as and when it comes. A medium term recurring scheme for planning their children's' marriage, education, house repairs etc Is a 5 years savings scheme and savings per month increases every year Lump sum money is received after 5 years with interest. Regular monthly deposit Rs.250/-, 500/- or 750/- for period of 5 years or more Withdraw the amount after minimum of 5 years and use the amount to build your own small house If Bank finds member credible, s/he gets the same amount as loan under Bank's terms and conditions Regular monthly deposit of Rs.200/- for 5 years and get the interest as follows. Under this scheme there is lucky draw every year for regular account holders for 5 years. The lucky draw winner gets an attractive gift which will be helpful for marriage purpose. Those lucky winners, who do not want to avail the gift, will get the same amount of fixed deposits for five years. Regular monthly deposit of Rs.40, until a minimum period of 5 years Transfer from savings to 'Chinta Nivaran' according to bank rules In case of any calamity after one year of joining the scheme, the member gets a loan (need based) up to Rs.5000/- in lien of the savings kept with the bank. A long term secure saving scheme for an old age benefit Regular saving for a period of 10, 15 or 20 years Gets lump sum cash back at the end of savings term or they have option of getting monthly income as interest and the lump sum saved amount remains with the bank as a fixed deposit in the name of the member. Can be for medium to long term saving scheme for 3, 5, 7 or 10 years. Regularly deposit Rs.500/- or it's multiple and get the lump sum amount on the maturity date. Compound interest is credited in the deposit account. Member can give or pawn gold and on lend from Sewa Bank without taking any kind of debt from outside. Features Loan Term: 3-5 years Interest Rate: 14.5% - 17% Maximum Loan Amount: Rs.50,000 Only given for purpose of income generation Members should have saved in Sewa Bank for an year Up to 80% of value of jewellery/fixed deposits/savings account balance retained with Sewa Bank till loan is fully paid up For purpose of constructing house or extension of house For purpose of infrastructure related needs. 13

14 Annexure 2: Products of IFMR Rural Channels Type of Product JLG Loan Education Loan Enterprise Loan Livestock Loan Housing Loan Personal Accident Insurance Emergency Loan Term Life Insurance National Pension Scheme Gold Investment Gold Loan Description Maximum Loan size Rs in the first cycle, with an increment of Rs in subsequent cycles (upto a maximum of Rs ) Weekly repayment with term of 50 weeks. Unsecured individual loan for financing higher education, backed by third party with maximum loan size of Rs and monthly instalments over 12 months. Unsecured loan to individual retailers backed by third party guarantees. Maximum loan size is Rs. 50,000 with repayments made either on weekly, fortnightly, monthly basis. With tenure of 6-24 months. Unsecured loan to clients already engaged in dairying activity to expand their activities through purchase of cattle with maximum loan size of Rs Client required hypothecating new cattle. Fortnightly/monthly instalments with tenure of 24 months. Secured loan for financing construction of a new house with maximum loan size of Rs. 1000,000. Monthly instalments repayment with tenure of 36 months. Collateral is the original land title of the small land on which the house is being built. Repayments in monthly instalments over 36 months. Insurance to cover death or disability due to accident with one year tenure policy. The sum assured varies from Rs. 100,000 to 300,000 in multiples of Rs. 100,000 Unsecured loan to all clients who have successfully repaid first cycle of JLG. Maximum loan size is Rs with bullet payment within one month. Insurance to cover death of a person, indemnifies the loss of income. This pension product is regulated by India's pension regulator. Loan scheme to buy gold coins by making payments in instalments and receiving physical delivery of gold at the end of the tenure. Maximum loan size is Rs Secured loan to individuals with gold jewellery as security. Valued and kept securely by KGFS. Maximum loan size is Rs in bullet payment. 14