Making microfinance viable with IT

Kanakapura is a township of about 50,000 on the fringes of Bangalore. It's known more for the road that leads to it: Kanakapura Road, on which an Art of Living Center is located.

But it's also the hometown of Razya. For three years, the 28-year-old could not find work in the small town and her husband barely made ends meet with his job in the sericulture business.

That all changed when Grameen Koota, a microfinance institution, lent her enough money to start a scrap business. In its first year, the business earned the family a profit and Razya was able to send her kids to school and purchase some furniture.

Razya is one of many. Although most others are not as fortunate. It sounds unbelievable but Bangalore, arguably the world's IT capital, is the 13th poorest district in Karnataka. An estimated 38 percent of the district's 1.7 million people live below the poverty line.

Experts agree that development among this class of poor is hard. Mainly because the cost of servicing microfinance loans (under Rs 30,000 (US$700) doesn't make business sense and commercial banks don't trust the poor to repay their loans.

That's a view that's beginning to change. "Microfinance is needed for people who are left out of formal financing institutions. Their inability to pay is never a reason, they pay back better than others," says Suresh K. Krishna, MD, Grameen Koota. According to Grameen Koota's website, it's repayment rate is 99.99 percent.

The high administration costs associated with small loans, however, is a harder nut to crack. Some experts estimate that servicing a microfinance loan is about six times more, proportionately, than servicing an average bank loan.

These problems kept commercial banks from seeing the poor as a potential market until Grameen Koota showed them.

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When Grameen Koota started in 1999, its aim was to help poor women in rural areas and urban slums through micro credit. Their target audience were women who earned between Rs 40 to Rs 80 a day. If they could consistently deliver need-based financial services to these women -- in a cost-effective manner -- they could be a financially-sustainable microfinance institution to the poor.

The Grameen Foundation, which also works with the Grameen Bank in Bangladesh (which got the Nobel peace prize for its work in micro-credit), supplied Grameen Koota with Rs 44 lakh to start work in the Bangalore district.

Today, the institution's mission hasn't changed -- but its way of working has. When it started, it worked with a microfinance management application. Like all start-ups, it was satisfied with an application that met its basic needs: track its portfolio and accounting for microfinance.

But growth started catching up with the software. Maintenance issues cropped up, MIS reports took longer to create and expanding the institution's operations was becoming a problem.

"For example, [the system] could not maintain transaction data," says Krishna. It overwrote "each transaction on top of the last one, maintaining only balances." This meant that a loan officer in a remote village could not tell when the last repayment was made -- only how much more needed to be paid. Since transaction records were maintained off the system, "you had to do a lot of work to generate proper transaction data," Krishna says.