Back in 2009, my colleague Liliana Rojas-Suarez convened a meeting at CGD of a task force that would draft Policy Principles for Expanding Financial Access. Attendees included Jonathan Morduch of NYU; and Nachiket Mor of the IFMR Trust, who brought along Bindu Ananth. During a break, Bindu started to tell me about the IFMR Trust's radical new approach to bringing financial services to poor Indians, called Kshetriya Gramin Financial Services (KGFS), which means "Regional Rural Financial Services." I was just finding my way as a blogger, so when Jonathan said, "You should blog this," it was needed advice. I took it.
From the outside, KGFS seems like alchemy. No longer is a single, low-quality financial service like group microcredit mass-produced for the poor. Instead, poor people get customized financial services the middle class might envy. A client walks into a branch and meets with a KGFS employee who inventories her income and spending, assets and liability, worries and goals, punches them into a computer, and prints out a recommended portfolio of services that may include loans, insurance, savings, and even retirement savings. KGFS then provides all the recommended services, either on its own account, as with loans, or as an agent, as with insurance. The financial assessment, and presumably the service portfolio preferred, is updated every six months. Somehow, despite all this custom service and the forays into services most others have lost money on, KGFS turns a profit. When Nachiket Mor, who I think is the driving force behind IFMR, described it at a CGAP meeting last December, someone in the audience aptly commented that she would like access to something that good.
There is much that is refreshing about KGFS: taking client needs as the starting point; using of high tech to cut the cost of assessing and meeting those needs; partnering with insurance companies and other financial titans, with KGFS the retail agent; and delivering a set of services. The big question in my mind has been whether it can pay for itself and grow.
So far it seems to have. CGAP has just put out a report and a video interview with Bindu.
From the report, I learned that in the last few years the IFMR Trust has licensed the KGFS system to five independent for-profit entities, which have raised all their capital from private investors. Together they have reached 200,000 people. Even more impressive is that mature branches, ones approaching three years in age, reach nearly 70% of people in the vicinity, or "catchment area."
I commend both the report and the video to you as introductions to the KGFS model. They are clear, accessible, not too long. Having met and talked shop with Bindu, as well as her CGAP coauthors on the report, Greg Chen and Stephen Rasmussen, I have great respect for judgment and intelligence of all those involved.
That said, you should recognize that these materials do not represent an independent inquiry into KGFS, which is what I, as someone already familiar with the model, was most hoping to see. Both are clean presentations of the KGFS story as the KGFS people want to tell it. That's fine as long as it's seen for what it is.
At this point, I have a couple of critical questions not confronted by the new CGAP report. Writing for CGAP, Rich Rosenberg has warned that demand for microcredit may be lower than is often assumed when people talk about the billions who still lack access to it. If forced to pick a number, I bet he'd estimate the typical demand at closer to 10% of poor households than 70%. Yet according to the new report, 87% of the 70% of people reached by a mature KGFS branch within its catchment area take loans. That works out to 61% of the population, way higher than the statistics we've seen for national microcredit penetration anywhere else. Should we worry about this spread of indebtedness? A lot of the loans are group loans, presumably not unlike those in traditional microfinance.
In the same vein, which products generate the profits? I think it's fantastic that customizing multiple services to meet actual needs is hard-wired into KGFS. Yet if some products make money and others lose it, that generates incentives that are hard to ignore, and could easily push the practice, whatever the theory, toward credit. The "stylized branch income and expense statement" on page 14 of the report oddly displays net income from lending (so we see it's profitable) and gross income from everything else (so we can't tell what in the array of other services is profitable and what not).
I am also curious about who is investing in KGFS, and how many would consider themselves "social investors." Beth Rhyne has argued that a core cause of the Andhra Pradesh debacle is India's prohibition on non-profits owning parts of for-profits. So when Indian microcreditors went for-profit in order to raise capital and grow, mission-driven actors were structural excluded, unable to counterbalance the drive for profits. What does that imply for KGFS?
Not that I have reason to be deeply suspicious of KGFS. Indeed, I assume Greg and Stephen only lent their names to this report after serious, behind-the-scenes due diligence. But KGFS is so striking a departure from the past, so potentially important, that it deserves close, independent scrutiny, which would not be coauthored by one of the promoters. The model I have in mind is MicroSave's tracking (with DFID funding?) of the roll-out of Grameen II a decade ago. They hired Stuart Rutherford to study it from the client point of view, and I assume gathered other kinds of evidence through examination of financial records and interviews with staff from Muhummad Yunus on down. The result was a credible, penetrating, balanced analysis with important lessons for the rest of the microfinance world.
Update: I forgot to mention how great it is that the IFMR Trust has commissioned a randomized evaluation of KGFS, to be led by Rohini Pande and Erica Field. Especially exciting is that the experiment will run for three years instead of the usual 12--18 months, giving us a glimpse of longer-term impacts.