CreditAccess Grameen, the largest microfinance lender in India, operates in a cash-based world. It runs an army of agents spread throughout the country’s villages, who handle cash loans to nearly 5 million borrowers.
The firm has a plan, though, for bringing digitalization to even the remotest village borrower, based on its use of a core banking system.
CA Grameen has been operating on top of a core system designed for banks, by vendor Temenos, since 2015. It was unusual for a non-bank to adopt a system built for banks. But CA Grameen relies on third-party lenders (both foreign and domestic) for its own funding, and it decided that a bank-designed core system would provide it with necessary credibility.
Initially it used Temenos for internal operations. Interactions with customers remained in-person and cash-based. That changed in 2020, when the Covid pandemic put a stop to face-to-face interactions, challenging the entire business model.
“Customers wanted to pay but we couldn’t collect,” said Ganesh Narayanan, CA Grameen’s CEO (pictured, right).
Double down
CAG made the decision to double down on tech. Earlier this year it upgraded its Temenos platform to handle far more transactions – and is now piloting a user-facing app to personalize the way CA Grameen and its agents serve their borrowers.
Disbursements are mostly electronic, sent to people’s bank accounts. “But 96 percent of collections is in cash,” Narayanan said. “Many village woman have no phone; some come from communities that are so conservative, they can’t even show their face. But this will become digital. Our customers will want it.”
The personalization is not just about product, but how to adapt the interface for India’s myriad languages and local cultures. The functionality will depend on the person’s capabilities. For example, a person must be literate to transact directly over the app, otherwise she will still have to deal with agents using cash.
Financier in the middle
CA Grameen is now 25 years old. It got its start in Bangalore with seed money from the original microlender, Grameen Bank in Bangladesh. (Grameen Bank’s founder, Mohammed Yunus, won a Nobel Peace Prize in 2006.) It doesn’t take deposits, so its lending business depends on capital from other lending institutions, whom it matches with individual borrowers throughout India.
Narayanan says about 20 percent of that capital comes from overseas institutions. Some of this is from multilaterals such as the World Bank’s International Finance Corporation, but commercial banks also lend via CA Grameen. CA Grameen’s borrowers are women and micro-sized businesses in agriculture, so it helps commercial banks meet various ESG-related targets.
But it also delivers steady returns on its portfolio of assets, which is now $3.2 billion. Its entire business is providing unsecured personal loans, but Narayanan says the gross non-performing loan ratio is under 1 percent (except during the Covid period, when the government imposed a moratorium on loan collection, on top of the difficulties with in-person activities).
Narayanan didn’t quantify the cost of funding, but it’s higher than a typical commercial bank’s because CAG has no deposit base to tap. However, he argues CAG’s operations are efficient. “We can offer loans that are cheaper than a bank’s [for microfinance loans],” he said.
To understand why, he says it’s best to think of CA Grameen as a factory. It employs 19,200 people across nearly 2,000 branches. Most of these people are agents – loan officers – who scour the nation’s villages and interface with borrowers.
The borrowers are all women who form local groups that borrow the money, with the women vouching for one another, effectively forming a community-based watchdog in lieu of any collateral. These groups borrow money to support a business, improve a home, provide for a family, or handle an emergency. The average loan size is equivalent to $650.
Diversifying the business
Narayanan says for most microlending agencies, loans are all the same, same size, same terms. CA Grameen’s been able to provide multiple products because of its Temenos system. But repayments are all still based on weekly schedules, with the agents camped out at the various branches. (For CA Grameen, a ‘branch’ is not like a bank branch, but like an agent dorm.)
Given the scale of agent movements throughout so many territories, CA Grameen has relied on its systems to schedule and track everything. It has disbursed $12.5 billion of loans over the past decade.
Now, as a result of the Covid turmoil and an upgrade of the Temenos system, CA Grameen is ready to rapidly expand the business. This isn’t just about adding more agents and customers. It’s also about having the flexibility to add new types of products, and to personalize the offering, says Sudesh Puthran, CA Grameen’s chief technology officer (pictured, left).
“Going digital makes things simpler on the front end, while the heavy lifting is done in the back end,” Puthran said. For example, CA Grameen can now track borrowers’ weekly earnings, so it can start to offer more complex products such as home loans and insurance. The firm will start to resemble a retail finance shop as some of its customers gain a good credit history and move up the economic ladder.
“We can do retail business because we have a core banking system,” said Narayanan, the CEO. He says CA Grameen is not seeking a banking license for now, although that could change if the customer base becomes wealthier. “Our customers have no money so they can’t give me a deposit.”
But villagers are eager to take advantage of retail-type products. The Temenos upgrade now lets CA Grameen handle 1.5 million transactions a day. It receives more than 50,000 loan applications every day, of which it may accept 10,000 or more. CA Grameen relies on Temenos to collect and analyze customer data, so it can help agents recommend new products.
Platform upgrade
Specifically, CA Grameen is switching its relationship from buying Temenos software for its own IT to using Temenos’s cloud-based software-as-a-service model. This removes the responsibility for maintaining the banking software from CA Grameen’s team. Narayanan says the firm was initially skeptical about moving to a cloud SaaS because it felt it was losing control: what would happen if there were an outage? But so far, the experience has been smooth.
Frankie Wai, business solutions director at Temenos, said CA Grameen was at the forefront of using technology to tailor its products and get to market quickly, “They’re using analytics and even artificial intelligence for service and risk management,” Wai said (pictured, center).
He says Temenos processes more transactions than all but the largest banks in India. The system submits loan data every day to India’s various credit bureaus, including details such as size and interest rate. The credit bureaus in turn provide information to ensure CA Grameen’s customers aren’t also borrowing from other financial companies.
Behind its own tech upgrade, CA Grameen is also relying on India’s public digital infrastructure, in particular its national identity database, Aadhar. CA Grameen agents also now carry point-of-sale terminals for disbursing cash that use Aadhar biometrics to ascertain who is who.
But Narayanan ascribes a lot of CA Grameen’s success to using a bank core system. “We were the first customer of Temenos in India, and it was a risk,” he said. “But they’ve been more like a partner than a vendor. Today I think more banks are looking to use them.”
