By Surabhi Mall, IFMR Rural Finance
This is the first blog post in the KGFS (Kshetriya Gramin Financial Services) Model Incubation series. The objective of the series is to methodically conceptualize an approach to build the branch network while incubating a new KGFS entity or expanding to contiguous districts. The posts focus on themes that range from district selection to identification of branch locations and optimization of the distribution network.
In this post we start with a brief discussion on the choice of a district and later discuss geography-specific questions that influence the economics of the model. Finally, the post stresses on GDP mapping as a heuristic solution to those questions.
Among the early steps of setting up a KGFS model is identifying a district. District selection is mostly a matter of organisational strategy and choice. The choice may be based on parameters such as district’s rural population, its population density, credit to GDP ratio, forest cover, road density, among others. Reviewing these attributes prior to finalising the district provides an elementary sense of the KGFS’s business potential, composition of the product basket in the branches as well as the degree of customisation that may be required to set up the model. Following this, reconnaissance (Recce) of the district provides insights to questions such as – Does the model need any fundamental changes or customisation in the given geography? What is the degree of competition it is likely to face? What is the current status of customers – i.e. their access to credit, income earning potential, and savings or repayment behaviour. This step serves as a final validation to the district selection strategy.
Recce gives field-level insights on the geography and competition in the district while secondary data helps understand the demography and infrastructure availability. Since geography, demography and the availability of credit in a place have significant influence on how the local economy develops, this should provide reasonable understanding of village-level economics and perhaps its influence on the branch’s business. It may even be leveraged to formulate the entity’s business plan, its competitive strategy and the network of branches. However, is this sufficient to understand the requirements and provide suitable comprehensive financial services? Is this information adequate for each branch to realise and achieve its potential volume of business at every life-stage? In fact, how does one quantify potential of a typical service branch in the chosen district? Finally, can the impact that the branch or the entity would have in the economic well-being of people in the long-run be measured? Estimating the branch service area’s Gross Domestic Product (GDP) provides powerful insights in unpacking such questions.
Figure 1: Three steps prior to setting up a new KGFS branch
Why the GDP?
To start with, what do we mean by estimating the GDP of a branch service area? GDP of an area is essentially the summation of different economic activities that thrive and contribute to the economy of that area.
Now, a KGFS stands to ensure the financial well-being of ‘every’ customer and enterprise in the area. This dictates that each customer’s needs be identified, acknowledged and serviced. In this context, the GDP exercise provides valuable insights on the composition of different sectors that thrive in the area. This can then be used to segment customers, identify their respective needs, customise the product basket at the branch and design an apt pricing as well as marketing strategy for them. A deep dive into the village economics through this exercise enables the branch to identify and prioritize customers from occupations with high degree of cash-flow mismatches, i.e. customers who are most likely to benefit from financial services. In effect, all this reinforces the KGFS’ geographic commitment by accounting for all possible households and economic drivers in the area.
The exercise gives insights on the share of existing financial players (from the interest income generated in the area), the median profile of a customer’s household and her debt servicing capacity. At the very outset, these can serve as a filter (post the Recce) to re-assert the choice of the district and the working estimates of the business plan. These estimates can then be built into the annual and monthly business targets for the branch. The activity can also be designed to give a rich sense of actual business that the branch is expected to do, i.e. its market share1. By capturing the share of other formal and informal financial institutions in the area, one can assess the volume of competition. This can then be netted off from the estimated demand for credit, thereby giving the potential market share of the branch.
From an operational point of view, data from GDP can be used to add greater granularities to the branch’s customer management database. It also enables scope for new business development2. For the product development team, it helps estimate occupation-based credit requirement and decisions regarding risk-exposure limits.
More generally, the GDP map helps visualise what kind of financial services are required to increase the size of the pie in the first place. It is a quantifiable measure that may be used as baseline for a ‘village profile’ in order to assess the financial viability and/or impact of a branch.
When – Ex-ante or ex-post?
While the above arguments advocate executing this prior to branch opening, this may not be a binding proposition. One can customize the scope of the exercise based on the objective sought at different life stages of a branch. For example, for an existing, low-performing branch where the enrolled database isn’t representative of the area’s population, the study’s objective can be to capture the economic drivers, re-estimate the branch’s potential and identify untapped business avenues. It may also aid to gauge the share of competition of other players’ vis-à-vis that of the KGFS branch.
However, the maximum utility of the exercise would lie in leveraging it as a diagnostic tool to acclimatize with the new geography of business. Such information, when captured at the very inception stage of branch set-up can greatly aid in understanding the branch’s gross potential and scale of operations, relevant needs of potential customer and perhaps even insights into strategies to thwart current or budding competition. If the GDP study in a branch is conducted at the proposed stage of branch, re-estimation and scoping for new business development through primary studies may then become redundant. Another added advantage of doing this prior is that this can be a part of the branch staff’s training track aimed at familiarizing them to the landscape of the area.
In the long run, a time-series GDP exercise process– prior to branch opening and ‘x years’ post branch opening is perhaps going to be the only real indicator of branch performance. Branch performance in this case will not mean the business at the branch but perhaps the change in (composition of) GDP of the service area and the impact of the KGFS branch on the lives of the people3.
KGFS Impact Long Run = f (actual business and type of customers served by the branch, increase in GDP share contributed by those served in the area that can be exclusively attributed to KGFS’ operations between KGFS0 & KGFS1).
[KGFS0 – is the GDP estimate from the study in time period 0 (prior to branch opening) & KGFS1 – Is the GDP estimate from the study in time period 1 (post x years of operation)]
The next blog in the series is on the Activity-based Costing of the GDP exercise. Through the lens of GDP studies done in the past, it will attempt to provide indicative answers to questions such as time and resource costs of the exercise.
- Market share of a branch estimates the actual served market/sales of a branch. This addresses concerns such as market cannibalization.
- Based on forward and backward linkage of value chains in the area, loan purpose and occupation type, unexplored segments, etc,.
- This estimation needs to account for fixed effects.
We recently hosted a series of knowledge management sessions (Spark Spring Edition 2015), as part of which Surabhi presented on this topic. In her session titled “Gross Domestic Product Mapping”, she spoke on how GDP Mapping can provide an intensive diagnosis of a defined location and how it can be used in a research process aimed at providing richer, robust and relevant information about markets, variables and potential.
View the presentation from her session below: