Micro-finance, the provision of small savings and loans to the poor, has emerged in the last two decades as an effective strategy for poverty alleviation. Building on the pioneering work of institutions like the Grameen Bank of Bangladesh, micro-finance institutions worldwide have shown that poor people are creditworthy. These institutions have reached out to approximately 12.5 m. poor clients. While the achievement is significant, more than 500 m. poor people still fall behind due to: Lack of access to borrowings from commercial banks - as they do not have anything to offer as collateral security. The funds from various schemes, welfare or otherwise, do not reach to the needy because of limitations/ drawbacks inherent in the system - corruption, fraud, misallocation etc.

To meet this enormous demand, micro-finance institutions must do three things:

	First, MFIs must become financially sustainable to secure funds beyond the limited pool available from donors - drawing instead on more abundant commercial sources.
	Second, they must develop and adhere to sound financial practices to gain credibility from both commercial investors and clients.
	Third, they must develop flexible financial services that meet the needs of poor clients. SKS Smart card will help MFIs meet these challenges.

Project Description: Swayam Krishi Sangam - A ray of hope
Swayam Krishi Sangam (SKS) is a Grameen Bank replication MFI that serves very poor women in highly drought-prone Deccan region in India, where inhabitants dot a sparsely populated rural landscape. As of February 2001, SKS served 1,790 customers, for whom agricultural work, including horticulture and livestock rearing, is the main economic activity. SKS operates four branches in 102 villages. Since its inception in 1998, the total disbursement had been $116,000 and the repayment rate has been 100 percent on income generating loans (a fifty week term and twenty percent flat interest), seasonal loans (a twenty-five week term with twenty percent flat interest), and emergency loans (interest-free, with a four to twenty week term).

From the onset, SKS intended to base lending operations on a highly specialized Grameen ("village") banking model adapted to customer needs. Before offering services they organized participatory rural appraisals with villagers to conduct market analysis. The analysis showed villagers wanted flexible products with small repayments that would be commensurate with their low incomes of under a dollar a day. Also, since they spent their entire day working in the fields, they could only spend a minimal amount of time to obtain those products. The challenge then was to deliver very small loans and accept very small deposits, in a sustainable manner, to villagers who lived quite a distance from one another.

SKS implemented common efficiency-building methods such as streamlining products and introducing a computerized MIS, to make their operations most cost-effective. But, as with many other MFIs, eventually these methods hit the "efficiency wall". Since SKS delivers very small loans to poorest of the poor, and since loan officers face high travel costs to reach remote villagers, SKS needed to operate at higher levels of efficiency than other MFIs in order to reach sustainability.

Management explored other options for increasing efficiency, and found that the biggest gains could be realized by streamlining the 7 a.m. to 9:30 a.m. field meetings between loan officers and customers. Customers can only meet during these morning hours as they spend rest of the day working in the fields. Since loan officers only have about two and a half hours to meet with groups residing at great distances from the branch office, the officers could only visit two centers each morning, 80 customers per day. Loan officers spend greatest portion of their meeting time simply recording transactions in collection sheets and customer passbooks. In response, management devised the Smart card method to increase loan officer productivity - increasing number of group meetings loan officers could hold each morning, thereby increasing customer load and improving the bottom line.

How It Works

Smart cards offer a way for loan officers to dramatically reduce the time they spend with each client, reducing the center meeting from 60 to 30 minutes. It would further allow loan officers to see one or two extra centers on a given day (depending on the population of the village). With a small hand-held computer allocated to each loan officer, and a Smart card in the possession of each customer, loan officers reduce meeting times and increase productivity significantly.

Before Smart cards

Customers gather one morning each week for their center meeting. Each meeting lasts about an hour, with approximately one minute dedicated to each of the maximum of forty customers, comprising of up to eight solidarity groups of five women. A loan officer spends up to an hour traveling to the meeting place in time for his first meeting of the day, which begins at 7:00 a.m. and ends at 8:00 a.m. He meets with each customer and updates payments manually, once in her passbook and once in her own records. After the first meeting, the loan officer must travel to the next village, which can take up to a half hour, to arrive at the next meeting by 8:30. With the remaining 60 minutes before customers must go to work, the officer can conduct only one additional meeting.

After Smart cards

With the new technology, the loan officer downloads borrower information from the main computer terminal into his hand-held PC each morning before his first group meeting. At this meeting, each group member gives the loan officer her Smart card in place of a passbook, which the loan officer inserts into a special reader on his handheld computer . Using a custom-designed interface, the computer displays information from Smart card. Both, handheld device and Smart card then record the transaction, whether with a single button-press if the customer makes her payment in full for all loans (as is typical in Grameen methodology), or with an entry representing that she is a few rupees short. Loan officer then repeats the process for deposits and loan disbursals. He then returns the Smart card to the customer and continues with next. Transactions that usually take a minute each can be done in half the time. After he has finished meeting with all his groups, he returns to the branch office and with press of a button uploads all information into the main system. A read-only computer is left in the village for customers to check their balances.

Comparative Results

Table 1 compares the time required to service groups with the manual system versus the Smart card system.

Table 1: Systems Comparison Chart

Activity	Manual System	Smart card System
Pledge and Attendance	2 minutes	2 minutes
Cash Collection and Counting	8 minutes	8 minutes
Recording Collection Sheet	10 minutes	0 minutes
Recording Member Accounts	30 minutes	10 minutes
Loan Proposals/Discussion	10 minutes	10 minutes
Total	60 minutes	30 minutes

With the increased efficiency provided by this solution, loan officer, depending on population size of the village, can now service three to four centers per morning, 120 to 160 customers. Before Smart cards, loan officers could only service two centers per morning or 80 customers. The use of Smart card solution enhances loan officer's capacity by 200%. To allow the Smart card product to operate efficiently, SKS had to limit its savings and loan products to five with two loan repayment period options, instead of three. Such a restriction on operational flexibility is a common experience for micro finance institutions that introduce/adopt new technologies. SKS had to customize its MIS system (which took nearly 4 months) to ensure its functioning with maximum accuracy and to accommodate Smart card technology.

The Technology

The environment of the Deccan region, where SKS operates, ranges from hot and dusty in dry season to monsoons in rainy season, management chose the sturdiest hand-held technology available. Instead of PDAs (though small and sensitive to adverse conditions), SKS chose the slightly larger and better protected hand-held computers (costing $670), which have a bigger terminal and a more protective shell. Though sensitive to dust and humidity, they are slightly sturdier than the PDAs. As majority of transaction/loan information is held either in Smart card (which costs about $3.30 each) or in main computer terminal, memory capacity of hand-held computers need not have to be as large as that of a typical PDA. Reduction of staff time at each village and increased travel time leads to decrease in operational expenses (see Table 2), despite the prohibitive capital expenditure.

Although some practitioners worry how customers will react to new technology and whether they will trust and embrace it, the founder of SKS notes that for customers SKS serves, an original passbook is just as foreign to them as is new Smart card. Ability to accept and work with new products and technologies is a requisite for any villager who wants access to financial services from SKS. However, during the first year when customers have inhibitions and lack confidence in Smart card, SKS hand-held computers will be equipped with a printer to issue receipts. This will be phased out eventually, lowering hardware and stationery costs.

Added Efficiency

Operating costs of SKS increased with investment in hardware, software, and training. SKS forecasts an increase of 50 to 100 percent in loan officer productivity and 200 percent in load capacity, and a savings of at least 18% in operating costs. Further, SKS forecasts savings accrued at $5,000 per year per branch, which translates into $250,000 per year for an institution with 50 branches, or $5 million per year for an institution with 1000 branches.

Table 2 details cost savings that Smart cards provide over a four-year period for one of its own branches.
Table 2: Smart card Projected Cost Savings Over Four Year

ITEM	SKS MANUAL SYSTEM	SKS SMART CARD SYSTEM
Printed Material	Passbooks: $3,556	Receipts: $889
	Collection Sheets: $587	Monthly Statements: $427
Smart cards @ $3.33 Î 800 groups	--	$2,667
7 Hand-held computers @ $667 each	--	$4,669
7 Hand-held printers@ $111 each	--	$777
Staff @ $4,867 each	10 staff = $58,670	6.5 staff = $38,135
Travel @ $1,333 per staff	10 staff = $13,330	6.5 staff = $8,664
TOTAL	$76,143	$56,229
TOTAL SAVINGS		$19,906

Increased efficiency is very significant as it allows MFIs become sustainable quickly and scale up their operations faster, and facilitate increased access to financial services. The increasing revenue streams and higher productivity that each loan officer contributes allow MFIs to service more poor customers who need access to credit but were shut out in the past due to high delivery costs and limited availability. This positive feedback cycle allows for unprecedented growth.

Enhanced Financial Control

By automating nearly 200,000 transactions, processed manually earlier by loan officers, Smart card reduces fraud and error. When using Smart cards and hand held computers any errors in recording a transaction are shown in real-time so that the correction can be made immediately. Potential for manual errors is further eliminated as recording a full on-time payment requires the push of only one button on a hand-held device and another keystroke uploads data onto main computer terminal. Accounts can be reviewed daily as they are directly transferred to the main computer/database literally hours after group meetings, thereby eliminating fraud and error. Smart cards will enhance information to be updated on real-time basis and consequently allow management and stakeholders to monitor operations and respond to problems at the earliest. Strong financial controls foster trust from customers as well as from investors.

Scalable Financial Services

Smart cards can manage numerous and diverse products. SKS foresees upcoming opportunities for the product. For instance, customers who need emergency loans, for hospitalization etc., have access to cash advances 24 hours at a branch ATM rather than wait for weekly meetings. A customer who consistently makes timely repayments may be rewarded special privileges with a "gold" card. Additional services may include credit linkages with local merchants, pre-approved lines of credit, and ATMs in market towns. Groups with excellent repayment histories may be able to skip group meetings altogether and carry out all their business with an ATM. SKS expects that it will discover even more uses for the Smart card in the future.

Vision of SKS

SKS envisions creating a self-sustaining MIS Division that will not only provide Smart card solutions to its branches but also to other Grameen replicators. In this regard SKS intends to provide customized turnkey solutions to clients (other MFIs), including training personnel, maintenance, updating software for additional financial services etc. In this way, SKS can not only justify huge investment of more than $150,000 in developing Smart card solution but also collective achieve economies of scale with other MFIs, large enough to significantly lower hardware costs.

At present

SKS is currently financing development and pilot phases of the project through a CGAP Pro-Poor Innovation Award of $50,000 and long term loans from the Grameen Foundation: ($50,000) and Digital Partners ($25,000.)

To realize the vision of creating a self-sustaining MIS division, and scale up its own operations to 25,000 clients in 100 districts, it is estimated that SKS would need $1 million to be invested over the next three years.

For more Information Contact:
Vikram Byanna Akula
CEO, Swayam Krishi Sangam
Email: vikram@sksindia.com
Website: www.sksindia.com

Thunderbird, AGSIM students based upon information supplied by Digital Partners and/or the ventures themselves wrote all cases. We have tried in all instances to highlight the most important points from the information provided. Please note that this document is being circulated without formal editing which will be done after the conference. We would like to acknowledge the following Thunderbird students for their work in preparing the cases: Dennis Hall, Srikanth Madala, Hammad Rizwan, Steen Simonsen, Ryan Timms, David Feige, and Stephen Frail.