The Newsletter of Grameen Foundation USA
Spring 2001 Online
April 21, 2001
Reducing Micro-Credit Costs Through Information Technology: The Case of SKS
Swayam Krishi Sangam (SKS) is a Grameen Bank replication program in the drought-prone Medak District of Andhra Pradesh, one of the poorest parts of India. It was founded in 1997 with a vision of providing micro-credit to India's poorest women. SKS also challenged itself to use technology to provide micro-loans more cost-effectively, thereby allowing each branch to serve more borrowers and to reach profitability faster. The technology it is developing now, with funding from GF-USA and others, is based on using Smart Cards and hand-held computers to automate the loan collection process. The article below describes the Smart Card technology.
An Indian woman dressed in a brilliantly colored sari approaches a small meeting area. She surveys the women clustered into groups of five and locates her group. Clutching a handful of money in one hand and a "Smart Card" that resembles a credit card in the other, she moves through the groups to her own borrowing group. Shortly after she is seated, the center manager arrives and the meeting begins. One by one the leaders of each borrowing group approach the center manager, loan repayments and Smart Cards in hand. Their loan repayments are counted, collected and entered into the center manager's small hand-held computer. The transaction is recorded on both the center manager's computer and on each borrower's Smart Card. The group leader completes her transactions and returns to her group with a paper receipt and updated cards.
This could be the way most center meetings held by Grameen replication programs are conducted in a few years thanks to the pioneering efforts of SKS, an Indian replicator of the Grameen Bank.
What is a Smart Card? It is a small piece of plastic on which both borrowers and lenders can track loan activity, replacing the current system based on passbooks, collection sheets and loan ledgers. It will allow micro-credit programs to reach additional clients with little or no increase in costs.
In the year 2000, SKS developed-with support from the Consultative Group to Assist the Poorest (CGAP)-the Smart Card concept in order to provide increasing numbers of India's poor with access to credit more efficiently.
Currently the field staff of SKS, and virtually all micro-credit programs worldwide, manually record the loan repayments as well as new loan disbursements in a borrower's passbook. Bank officers also manually record repayments on their collection sheets and again in another ledger at the branch office. The Smart Cards would serve as an electronic "passbook" and reduce the manual paperwork. At weekly center meetings, bank workers would use a palm-sized Hand-Held Terminal (HHT) that will download the loan collection and disbursement information from the branch office computer, so no manually generated collection sheet is required. During the weekly center meetings, the Smart Cards will be inserted sequentially into the HHT and transactions will be updated simultaneously on both the Smart Card and the HHT. (In the initial stages when borrowers may lack confidence in the Smart Card, the HHT will print a receipt so the borrower will have a record of the transaction.) Upon returning to the branch office, the staff member can upload the information from the HHT to the branch computer, at which time all accounts are updated immediately-saving the field staff the drudgery of re-entering center meeting data and giving management "real time" information about activities. Center leaders will also be given a read-only HHT to allow borrowers to check the status of their accounts in between meeting times.
The SKS technology has the potential to significantly reduce administrative costs by eliminating the manual paperwork of both borrowers and staff members. Additionally, it will reduce the length of center meetings. Borrowers will be able to spend more time with their businesses and less time at meetings. Staff members will be able to conduct more meetings in a day than was previously possible. SKS estimates that staff members who previously conducted two center meetings per day will be able to conduct three to four center meetings (depending on the population density of the village and the distance between the villages). Currently, field staff can only conduct center meetings in the morning as they spend their afternoons manually processing paperwork. This increased efficiency and reduced administrative expenses could allow micro-credit programs to reach operational sustainability in as little as two-thirds of the time it typically takes. These savings will help organizations become financially self-sufficient, which will enable them to attract capital from commercial sources. This private capital will enable them to scale up operations to reach larger numbers of impoverished families.
In addition to increasing the efficiency of micro-credit programs while reducing administrative costs, this new loan tracking system also reduces the possibility of error and fraud. This is especially important because a typical center manager manually records more than 200,000 transactions per year at the village-level. In Grameen Bank, for example, there are more than 1.2 billion transactions recorded at the village level each year, leaving a large scope for error and fraud. Smart Cards will reduce that scope because they create a single data entry point that simultaneously records the transaction in the HHT and the Smart Card. The scope for error and fraud is reduced, and the enhanced financial control fosters credibility and trust with their customers as well as commercial investors.
Another benefit of the Smart Cards is that they will make it more feasible for micro-credit programs to offer a wider range of flexible financial services to meet the diverse financial needs of the poor. Currently, most Grameen-style programs can only offer a handful of savings and loan products that are fairly rigid. Smart Cards would allow programs to meet the financial needs of the poor that extend beyond savings and loans. A micro-credit program could establish relationships with local hospitals and health care providers so that borrowers who face medical emergencies are able to receive the care that they need by paying with their Smart Card, for example. A program could also establish ATM machines in branch offices to allow borrowers to access cash for health and other emergencies anytime-day or night. Clients with excellent credit histories can have pre-approved lines of credit for use at local markets or take advantage of unexpected price drops in food and other basic necessities. The possibilities are endless.
SKS received CGAP's 2000 Pro-Poor Innovation Challenge Award with a $50,000 grant to explore these possibilities. The Smart Card will be tested in the field in April 2001. Once the system has gone through a sufficient trial period, SKS's management information system (MIS) division will develop a marketing strategy, assemble a sales/technical support team and market SKS Smart Cards as part of the SKS Grameen MIS package to other micro-credit organizations. Grameen Foundation USA's new Technology Center is providing an additional $50,000 in funding to support the development of the Smart Card as a technology that could improve the effectiveness of Grameen micro-credit programs in serving the poorest of the poor. This is the first project of the Grameen Technology Center, a division of GF-USA that will continue to explore and support technology that will benefit the poor and the micro-credit programs that serve them.
For more information about the Grameen Technology Center, please contact Alex Counts.
For more information on SKS, please contact Vikram Akula.