MICROFINANCE PRODUCTS

Institute of Rural Management Anand Cases in Microfinance

MD’S DILEMMA
(A CASE ON RURAL ELECTRICITY AND MICROFINANCE) 1

Part - 1

Posers to EMVS’ MD by SHG members from Malukan Village

Poser 1: “I am Sumathi, I have a five-year old son studying in a primary school.

We belong to Scheduled Caste. I have studied up to 10th standard. My parents
were unable to send me for further studies due to financial constraints. After two
years I completed 10th standard. I got married at the age of 18.”

“Government has allotted this house to us. We are living in this house for more
than five years. My husband is a wage labourer, who gets employment for ten
days in a month. Sometimes he gets fishing job and sometimes he does palm
mat weaving. Till last year, he was doing the work of climbing palmyrah trees to
cut palm leaves. One day he fell down from the tree and broke his legs. He
stopped the climbing activity. He earns Rs 500 to Rs 1,000 per month depending
on the work available as a wage earner.

“I do not know agricultural work but I know tailoring. As I have a child to look
after, I can’t afford to take up any full time work other than tailoring. But I want to
engage myself in some work to earn income to support my family. We live
frugally. We do not have many facilities including electricity connection. In the
evening after it is dark, I cannot do any work. I cannot move out of my house. In
this area snakebite is common. I have to do something about it. But I do not
know what to do?”

Poser 2 : “I am Poomayil. I have two sons and one daughter. They are
th th th
studying, in 7 , 9 and 10 standards. My husband and I do only agricultural

1
. Case prepared by Ms. A. Umarani with Mr. Dharmaraj, DHAN Foundation, Madurai, under
the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’,
sponsored by SIDBI Foundation for Micro Credit, Lucknow.

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labour work. We get employment only in the agriculture season. During the lean
season, we make and sell 7-8 palmyrah mats and earn Rs. 30-35. In a year we
get 160-180 days of employment.”

“We are living in a mud hut for over 17 years. There are 22 families like us living
here on one side of the tank bund. It is our own land. As we live in one corner of
the village, we do not have much interaction with the other villagers who live in
the centre of the village. Our hamlet gets very dark in the evenings as there is no
electricity for the past 45 years. We cannot move out of the house to interact
with others due to darkness. If we want to watch TV, we have to pay Re 0.50 to
the TV owner. We do not get any worthwhile support from the better off in the
village. After it is dark, my children cannot study for long hours. Neither I can do
any household chore nor take up any income earning activity. All the 22 houses
are located little away from an electric pole. Even then we have not got
electricity connection. I cannot imagine bearing the heavy cost of getting the
electricity connection.”

Part - 2

The Genesis of EMVS

Malukan is a village which has 164 households. It is 11 km away from the

Mapadnam block headquarters in the Danmar district. It has a hamlet of more
than 30 Valayar families located in the outer periphery close to the tank bund.
More affluent households live in the centre of the village with facilities such as
potable water, electricity, TV and transportation. As the Valayar families belong
to lower caste, they do not get any support from the villagers. They are engaged
in fishing and in making palm mats. Rarely they get employment in agriculture.
Some of them work as permanent labourers in coconut gardens.

The livelihood of the people in the Danmar district depends more on coastal and
marine resources. Fishing and palm mat weaving are the major sources of
income for the poor families. As agriculture is a seasonal activity, the income of

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poor families wildly fluctuates. Moneylenders support these families by providing

credit at 120 to 180 percent interest. Because of drought, many families have
migrated to other villages.

In this context, the HAND Foundation, a Non-Governmental Organisation (NGO),

came into operation in 1992 to provide the poor women with access to credit at
reasonable interest rate to support their livelihood. Self-Help groups (SHGs) with
15-20 women members came to be formed for the purpose. The HAND
Foundation encourages women to save and pool their income to lend to the
members. The SHGs can also borrow from the commercial banks. The purpose
of loan and the rate of interest are decided by the SHGs (see Exhibit 4).

To sustain the whole initiative, the members of the SHGs have promoted a
federation of SHGs in 1995 called the Earth Mahalir Vattara Sangam (EMVS)
with the HAND Foundation’s support. The aim of EMVS is to enable the poor
families to cross the poverty line and bring about desirable changes in their
standard of living. EMVS is a people’s organization managed by the leaders of
the affiliated SHGs. It is a registered body under the Societies Act of 1983. The
long term aim of EMVS is to gradually move out of savings and credit activity by
leaving it to the SHGs and to become a community development organisation.

Presently, EMVS is operating in 26 panchayats consisting of 105 villages. It has

promoted 176 self help groups, called sangams, with a total membership of
3,153 women. It has mobilised savings to the tune of Rs. 8.8 million from the
poor women members who have stakes in EMVS with ownership rights. Apart
from providing security and ownership, the savings also serve as a means to
attain self-respect for the poor. Besides regular savings, EMVS offers various
need-based savings products through which it has mobilized over Rs.0. 9
million.

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EMVS has now reached a stage where other financial institutions and banks
have come to recognize it as a prestigious people’s organization. Because of
this reputation, it could mobilize a loan of Rs 0.5 million from the Housing and
Development Finance Corporation (HDFC). Till March 1998, EMVS has
disbursed a total loan of Rs 73.92 million to 6160 borrowers. To meet the
various credit needs of its members, EMVS offers nearly ten types of loan
products. EMVS charges 15 to 18 percent rate of interest per annum on its
loans to the SHGs.

To carryout its various functions, EMVS has appointed six staff directly at the
federation level and 17 staff at the cluster level. There are 80 part-time workers
who help the SHGs in their management like accounts keeping. The salaries of
the staff at different levels are met by the organizations at respective levels (see
Exhibit 2). Through the income earned from its microfinance activity EMVS has
created a reserves and surplus fund of Rs. 0.65 million.

The Electricity Problem

Sumathi and Poomayil are the members of two SHGs affiliated to EMVS. Along
with them another 45 members expressed the need for electrification of their
houses. In Malukan village, the 22 Valyar families living near the tank bund
have put continuous efforts to get electricity connection but in vain. They are
located little far away from the main village and are without electricity. As the
school going children cannot study in the evening hours, their standard of
education has been affected. The women who come back from work in the late
evening find it difficult to cook and do other household chores. This has been
the case for the last 45 years.

During the lean season these families do mat weaving. In the evenings they
take all the leaf materials to one of the houses having electricity to continue with
mat weaving till 10 p.m. During the rainy season the situation is even worse.

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These 22 families have approached the government officials in the Danmar

district to get the electricity connection freely under some government scheme.
As these households rejected the demand for payment of bribe, the officials
took no interest. They approached the village president for help. None of the
four presidents in the village in the last 45 years have been able to solve their
problem.

When they approached the Electricity Board (EB), the officials of the EB replied
that the area in which the families are residing do not have even a single
electricity pole. Though near by there is a school with electricity connection but
it is located little over 110 feet away. As per the EB officials they have to satisfy
three norms for getting the electricity connection, viz, (i) an electric pole should
be within 110 feet, (ii) the wiring should not cross others’ land, and (iii) each
family should obtain from the Village Administrative Officer a title certificate for
the house owned. As they were unable to satisfy any of these norms, they could
not get any positive response from the EB. One of the engineers said that it
would involve a cost of more than Rs 10,000 to install a minimum of three poles.
They approached all the concerned persons which involved frequent travel and
submission of numerous applications. They had to spend nearly Rs 5,000 which
was shared by all the 22 families. But they failed to make any breakthrough.
These 22 families are members of four SHGs functioning in the village. The
financial status of the four SHGs as of March 1998 is given in Exhibit 3.

MD on a Wild Goose Chase

One day in their regular meeting the members of the Malukan SHGs raised the
issue of electricity and discussed it threadbare. They brought the issue to the
notice of the EMVS Managing Director (MD), Mr. Vel. Similar demands started
surfacing from other SHGs. The MD started taking more interest to address the
issue. He organized a meeting in June 1998. All the members who needed
electricity connection, the cluster level leaders and the board members of EMVS

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were called for the meeting. The issue was discussed at length. The members
asked the MD to explore the ways of getting the connection.

The MD sent one of the staff members to assess the need for electricity
connection in the entire block. It took nearly 15 days to carry out the survey. It
was found that nearly 1200 women members were living without electricity and
900 of them expressed immediate need for connection. The MD felt miserable
as he had failed to notice the gravity of the issue in the area.

On August 4, 1998 he wrote to the Director of the EB on behalf of EMVS

requesting to provide electricity connection to all the needy members in the
block. He had four rounds of discussion with the Board. The result was not too
positive. Some petty officials of the Board demanded Rs. 1000 as bribe per
family. To get the connection the following procedures are involved: Electric
poles should be erected wherever they are not there; ensure purchase of quality
electrical materials; identify a private contractor who is authorized by the EB to
carry out the works for all the houses, and ensure the completion of work.

The MD also approached a number of local contractors. The lowest reliable

estimate given for getting connection to one house with five points was Rs
2,900. The total cost varied from Rs. 4000-5000 which included material cost
and also the bribe. The members expressed difficulty in meeting the estimated
cost. They enquired with their MD whether it was possible to reduce the cost by
Rs 1,000. They were also particular about the use of quality material and
completion of the work within a short period of time. Also the SHGs did not have
sufficient money with them to sanction new loans to their members.

EMVS strictly adheres to the principle of not giving bribe to anybody. This took a
good deal of time and soul searching by EMVS. The MD remained worried and
tense all through this period. After long persuasion, the EB officials agreed to
relax the norms and provide connection to the members by taking a service

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charge of Rs. 100 per connection as a large number of households are involved.
The MD still has to find the solution to help the SHGs in overcoming their
problem of insufficient funds and ensure quality work at affordable cost to the
members.

Questions for Discussion

1. Should EMVS take up the responsibility of tackling the electricity problem

of its members?
2. Suggest ways to MD to find the best solution to help the SHGs in
overcoming their problem of insufficient funds and ensure quality work at
affordable cost to the members?
3. What specific role EMVS can play as a microfinance institution to help the
SHGs in tackling the problem?

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Exhibit 1: Simple Balance Sheet of EMVS as on March 1998

Assets Rs. Liabilities Rs.

Cash in hand 62,495.70 Excess rent 59,012.80
Cash in Bank 32,029.35 Loans outstanding 56,700.00
Total deposits 500,000.00 Bad debts 565,078.00
Deposits outside 607,329.75 Welfare fund 20,385.00
Rent advance 2,400.00 Health fund 3,079.00
Loan outstanding with 500,000.00
HDFC
Total 1,204,254.80 Total 1,204,254.80
(The EMVS Balance Sheet does not include groups’ savings and lendings)

Exhibit 2: Organisational Structure and Processes

Organisation Leaders/ No. of Processes

Representatives Staff
SHG Three leaders in each 80 - Weekly Meetings for
group (part savings, lending and
time) recovery
Cluster 15-20 SHGs from 4-5 17 - Monthly
Development nearby villages meeting of leaders
Association(CDA) promote CDA. Three - Monthly EC
leaders from each meeting
group form into CDA. - General body
A 5-7 member meeting held once
Executive Committee in six months of all
(EC) take care of the SHG members in
activities of CDA the cluster.
EMVS All SHGs are 6 - Monthly Board
members of EMVS. Meeting
One leader from each - Special
cluster is represented Meetings
on Board consisting - Annual General
of 13-15 members Body Meeting

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Exhibit 3: The Status of Four SHGs in Malukan

Kamatchi
Vinayagar Kailasamuni Annai
Particulars amman
Sangam Sangam Sangam
Sangam
Total Members 21 22 20 20
Members demanding
electricity connection 2 9 6 3
Total Savings by
members (Rs.) 35,787 43,288 31,346 22,057
Special Savings (Rs.) 2,748 27,717 4,200 1,579
Loan outstanding with
members (Rs.) NA 65,148 58,864 22,420

Exhibit 4: Purpose wise Loans issued by SHGs

Rate of
Purpose Share(%)
Interest
Consumption loan 43.3 24 – 36%
Redeeming outside debt 18.6 24 – 36%
Medical expenses 10 24 – 36%
Festival and social obligation 13 24 – 36%
Income generating activities 6.4 24 %
Housing 3 15 %
Education 3 36 %

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LOAN PRODUCT FOR DAUGHTER’S MARRIAGE 1

Part - 1

The Need for a New Loan

The daughter’s marriage is one of the biggest family expenses in our society.
People have to borrow money from their relatives, friends and many a times
from the moneylenders with rates of interest ranging from 3 to 10 per cent per
month. To obtain a loan from the moneylenders, the borrowers have to
mortgage their land, jewellery and other assets.

The Executive Chairman of the CASHPOR Financial and Technical Services

(CFTS) Limited is repeatedly told by the clients during his field visits and the
meetings with them about the felt-need for a loan to pay off the expenses of their
daughters’ marriage. The CFTS is a microfinance institution (MFI) registered as
a company, initially as a private company in October 1996 and later as a public
limited company in 1999. It is following the Grameen Bank of Bangladesh
approach. The Grameen Bank approach involves forming groups of five
members, providing collateral free loans, adhering to weekly repayments and
giving exclusive focus on poor women. The potential clients are encouraged to
form groups of five members. The groups are then organised into centres
consisting about six to eight such groups.

The CFTS operates in the backward district of Mirzapur in the eastern Uttar
Pradesh. Keeping in view the extent of poverty, large proportion of backward
castes and classes, and very low repayment rate in respect of formal bank loans,
the management of the CFTS felt that if the experiment could succeed in
Mirzapur district, it would succeed elsewhere also. The mission of the CFTS has

1
. Case prepared by Dr. KC Sharma, Banker’s Institute of Rural Development, Lucknow, under
the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’,
sponsored by SIDBI Foundation for Micro Credit, Lucknow.

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exclusive focus on poor women in rural areas and it aims to become a financially
sustainable institution while working for the poor. The mission of the CFTS is to
deliver financial services to its clients in an honest, timely and efficient manner. It
is operating since September 1997.

The management of the CFTS rests with the Board of Directors, which comprise
four members. Professor David Gibbons, a pioneer in replicating Grameen Bank
model in Malaysia, is its Executive Chairman. The CFTS plans to serve about
25,000 households by March 2003 when it will be able to become operationally
self-sufficient. By then it would have covered about 25 percent of the poor
households of Mirzapur district.

The CFTS provides two kinds of service – financial and technical. The financial
services include lending, savings and insurance services and the technical
services relate to Management Information System (MIS), monitoring and
evaluation, training, special research and income generating projects for the
poorest.

The most common loan product of the CFTS is the General Loan. It is repaid in
50 weekly instalments. The average size of the general loan comes to Rs.
5,433 and the range of loans taken so far varies from Rs. 500 to Rs. 20,000.
The amount of loan sanctioned can be from Rs. 500 to Rs. 8,000 in the first
cycle; the second cycle of loan is up to Rs. 15,000 and the third cycle of loan is
up to Rs. 25,000.

The rate of interest charged on loans is 20 percent flat and is based on the
Consultative Group to Assist the Poorest (CGAP) method of setting economic
rate of interest. The economic rate of interest is basically the rate of interest
which covers the cost of funds, administrative expenses, loan loss provision and
a margin for future growth. Nearly fifty per cent of the loan portfolio of the
CFTS is devoted to animal husbandry, mainly buffaloes, followed by trading

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which accounts for about twenty five per cent. The other activities for which loans
are taken include carpet making, transportation and agriculture. Much of the
agricultural loan is borrowed for leasing-in land by the clients. All the loans are
given for income generation activities except the emergency loan. All the loans
are of 50 weeks or less in duration. The loan outstanding of CFTS in March
2002 was Rs. 55 million.

The repayment procedure in the CFTS is dictated by a high sense of credit

discipline. The repayment is done in weekly instalment for 50 weeks and
irregular repayment is not permitted. The amount due but not paid in any week
by a client must be paid by the group and the centre members at the same
centre meeting. However, the CFTS faced a serious repayment problem in July
1999 and it assumed an alarming proportion by October 1999. However, by
taking judicious measures based on incentives to clients and the staff, the
repayment problem was contained. By June 2000, the situation came under
control. The overall recovery per cent of the CFTS loans during the period April
2000 to June 2002 has been more than 98 per cent.

The issue of marriage loan was bothering the management and the staff of the
CFTS as it was the felt-need of the clients. Therefore, the issue was further
discussed with the women members of the CFTS at the branch level. They
showed great interest in the proposed loan product. The CFTS decided to launch
a loan product for the marriage of daughters in October 1999. The product was
launched in two branches of the CFTS on a trial basis. Subsequently, all the
branches started offering it.

Questions for Discussion

1. How would you market this loan product in terms of the eligibility criteria,
loan size, repayment schedule and loan approval and disbursement?
2. Does this product raises any social issues?

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Part - 2

The Marriage Loan

The eligibility criteria, loan size, repayment schedule and loan approval and
disbursement details of the product are outlined below:

The eligibility criteria for the loan :

i) The centre should have a perfect repayment record at least for the last 12
months.
ii) There should be at least 6 groups in a centre with no split in any group.
iii) The clients should be all second cycle borrowers with perfect repayment.
iv) The clients should have proper loan utilization record and should not have
more than 4 absences from the weekly centre meetings in a year.
v) The client should not have more than one loan outstanding.
vi) The loan is only for the marriage of client’s own daughter.
vii) The client should have life insurance wherein the CFTS is a beneficiary by
way its loan being secured (optional only).

The Loan Amount Linked to Saving:

i) The client should have maintained a minimum weekly savings of Rs.10 for at
least 25 weeks. The single deposit paid should not be more than 10 percent
of the total savings amount.
ii) Based on her savings, the CFTS will provide four-times of her savings as
marriage loan but not exceeding Rs.4,000. In April 2001, it has been made
as 8 times of her savings but not exceeding Rs. 8,000.
iii) After the settlement of one marriage loan, the client will be eligible for the
second marriage loan.

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Repayment Schedule:

i) The marriage loan is for a maximum of 4 years. However, the client can
settle it earlier.
ii) The principal and the total interest due should be recovered by weekly
instalment with in 200 weeks. The interest amount will be spread over in
equal instalments along with equal instalment of principal.
iii) The interest will be charged at 20 percent flat per annum on a declining
annual balance basis.

Loan Approval and Disbursement:

The loan is for medium term and is meant for consumption purpose. The
approval and disbursement procedures to be followed are as under:

i) The loan proposal should be approved by the centre with a resolution signed
by the centre chief with the consent of all the centre members.
ii) The marriage loan should be finally approved by the Financial Services
Manager or General Manager of CFTS at headquarters. Since April 2001,
the Deputy Financial Services Manager is authorised to approve the loan.
The Deputy Financial Services Manager is also located in the head office but
visits the branches and centres regularly.
iii) The Branch Manager of CFTS should be present at the time of loan
disbursement in the centre meeting. This is not mandatory since April 2001.

The following Table shows the marriage loan off-take by the clients of CFTS:

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Table 1: Marriage Loan off-take in CFTS

(October 1999 to June 2002)
No. of Loan Amount Principal
Period Clients Disbursed Outstanding
(Rs.) (Rs.)
1 October, 1999 to 31 March, 2000 0 0 0
1 April 2000 to 31 March, 2001 1 4,000 2,700
1 April 2001 to 31 March 2002 21 1,06,000 56,950
1 April 2002 to 31 June 2002 82 4,89,000 4,76,305
Grand Total 104 5,99,000 5,35,955

Questions for Discussion

1. Evaluate the Marriage Loan Product of CFTS in comparison to your

marketing strategy arrived earlier ( Part 1 of the Case).
2. What could be the reasons of poor loan off-take initially?
3. There is a sudden increase in the loan off-take during April-June 2002.
What could be the reasons?
4. Do you foresee any recovery problems?

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MICROINSURANCE: IS IT A VIABLE SOLUTION?1

Part - 1

The Cashpor Financial and Technical Services (CFTS) was started in 1996 by
Prof. Gibbons (a pioneer in replicating the Grameen Bank Model in delivering
savings and credit to the poor) and Mr. A. Hasan in the Mirzapur district of the
eastern Uttar Pradesh (U.P.). The organisation was setup with the purpose of
providing microcredit to the poor women. Being a backward district, the main
occupations of the households are agriculture and wage labour. The
dependence on unpredictable rainfall is one of the main reasons for poverty and
agricultural backwardness. As a result, a large number of poor households face
difficulty in making both ends meet. More often they are driven to the doorsteps
of the moneylenders. The poor turn to the moneylenders as not many
formalities are involved in their system. The formal system of banking does not
reach the poor due to remoteness of the area and low literacy rate.

Given the need of the area, the CFTS soon started expanding its work. In
March 2000 it became a Public Limited Company working both in the urban and
the rural areas of the district. The aim of the CFTS is to reach 25,000 clients by
2003 and become operationally self-sufficient. The CFTS operates on the
Grameen Bank model using five member group for delivering unsecured loans
linked with weekly compulsory savings and loan repayments. As of May
2002, the CFTS has 10 branches with a loan outstanding of Rs.57.9 million
covering about 15,000 clients.

The CFTS initiated its work with two types of financial services- savings and
credit. While credit was directly delivered; savings, was started in collaboration
with the Mirzapur Mutual Benefit Savings Trust. The CFTS started realizing the
1
. Case prepared by Ms. Nidhi Ranjan, Friends of Women’s World Banking (FWWB),
Ahmedabad under the aegis of the Workshop on Developing Cases and Training Material in
Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.

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inadequate resources of its clients to mange their risk. Their inability to cope up
with the loss of assets like livestock or even loss of life of either the client or her
spouse was noted. The loss of life was found to be either because of
complications during pregnancy or due to some illness or malnutrition. Even
inadequate health service facilities were found contributing to the problem.

Under such circumstances, the CFTS faced a difficult situation due to the sudden
demise of one of its client. Parvati, a client of CFTS from Gyanpur who had
taken a loan of Rs.5000/- for setting up a small readymade garment shop expired
all of a sudden during the time of her delivery. She had repaid just four
instalments till that time. Her husband, Sunderlal, is a carpet weaver and works
for the big traders. He does not get regular work due to the increasing
competition in the market and due to the introduction of new labour displacing
technology. Much of the income of Sunderlal was being spent on the medical
expenses of his wife.

Parvati had set up a garment shop using the loan money. She had to face some
initial set back in the business. Being a small town, her place did not have a
regular market for the readymade garments. However, during the festival season
the business had started gaining momentum and she started getting enough
profits. Her work was going on fine till the early stage of pregnancy. As the days
passed by, complications developed. She had to make regular visits to the
district hospital for check up and each time she had to spend heavily on various
tests and medicines. She was not only spending all her earnings from the shop
but also had to even sell off the items in the shop to other merchants at a very
low price. She was unable to repay the remaining instalments of her loan. Her
husband had to skip his work frequently as she needed constant care and
attention which resulted in loss of work and income. They faced a huge
financial crisis. Parvati’s condition deteriorated further and she had to be
hospitalised. The doctors could not save her. By then their financial condition

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was so bad that even for her funeral, Sunderlal had to borrow money from his
friends and relatives.

Sunderlal was in no position to repay the loan Parvati had borrowed from CFTS.
Including interest Parvathi owed Rs. 5,520 to CFTS. The only option left for her
husband was to approach the local moneylender for a loan which would only
push him further into the vicious circle of debt.

Though CFTS has the provision for providing emergency loans but it is found
inadequate to address this kind of a situation. Emergency loans are short
duration loans specifically given for purposes such as marriage. The CFTS also
has the provision to write off loans in case of death of first time borrowers.
However, this was also not feasible for the organisation as it involved a risk to a
larger extent. In case of any calamity striking the region, the CFTS may have to
write-off loans for large number of borrowers. This may put the organisation in
a difficult situation.

Part - 2

The CFTS started exploring the possibility of providing insurance services to its
clients. However, it could not decide which type of insurance would serve the
purpose. Considering the interest of the organisation, a number of private and
public insurance companies approached CFTS and offered to launch their
services.

The CFTS decided to launch on a pilot basis two types of insurance services, life
insurance and livestock insurance to its members. Four insurance companies
introduced the products in different branches of CFTS. The first company to offer
its product was the HDFC Standard Life Insurance Company, which began life
insurance venture in August 2001. Initially it was started in three CFTS

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branches. The ICICI Prudential Life Insurance and the Life Insurance Corporation
of India (LIC) introduced their services in three more branches. The National
Insurance Company (NIC) also started the livestock insurance to the clients of
CFTS. The life and general insurance products offered by these companies
varied in their coverage, premium, sum assured, benefits offered and claim
settlement procedures. As a result each scheme had its own advantages and
disadvantages. The major features of these different schemes are given in
Exhibit 1.

The main reason why CFTS decided to work with different companies was to
experiment and pilot test the schemes before expanding further with the best
one. It has now been one year since the different schemes began and the
practical issues and problems of implementing these schemes are also clearly
visible.

The procedural requirements of all the companies are different.

ICICI: Working in two branches- City and Gyanpur, requires a minimum group
of 100 clients. The premium is collected in the months of March, April, and May
in the City Branch and March and April in Gyanpur branch.

HDFC: Working in three branches, Maharajganj, Rajatalab and Bihasara. The

policy is taken only twice a year, with a minimum group of 500 clients. The
premium is collected in the month of July and November.

LIC: Working only in one branch of Ahraura. The policy is taken in a minimum
group size of 25 clients. The premium is collected in the months of February,
March, and May.

In all 3000 clients have been covered under different life insurance schemes till
May 2002. HDFC scheme has attracted 1323 clients; LIC scheme has

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attracted 373 clients, and ICICI scheme has been subscribed by 1304 clients.
Only one claim is settled so far by HDFC in the branch of Rajatalab.

When the CFTS was asked as to what would be their next step, they were in a
dilemma. First of all, they have to decide whether to continue with the insurance
schemes or not. If they have to continue then the question is which of three
companies they should choose to continue? To answer these questions a cost-
benefit analysis was carried out based on the income and expenditure incurred
by CFTS. This was done for the insurance products offered by three
companies -- HDFC, ICICI and LIC. The two schemes of ICICI have been taken
together for the purpose of calculating income and expenditure. For the purpose,
the following information was collected from six branches of CFTS where
insurance is being offered.

The Expenditure/Costs include the following sub-heads:

 The salary of the staff and the Branch Manager

 The salary and perks of the Insurance Officer
 Administrative expenses such as courier, stationary, phone and bank
charges.
 Expenses on Claim Settlement
 Staff Trainings expenses

All the expenses are based on the actuals.

The Income/Benefits include the following sub-heads:

 Administrative and Service charges reimbursed from the company to

CFTS on getting the premium. LIC does not reimburse the administrative
charges.

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 Benefits obtained from insurance i.e. the loan money at risk secured.
During the study period only one claim was settled. Thus the amount of
money secured was the loan amount.

The final cost-benefit analysis based on the above calculation for each company
is given in the following table. The total expenditure is subtracted from the total
income. At the current level of coverage of clients and the costs incurred, CFTS
has incurred losses during the period July 2001 to May 2002 on all the
schemes. The HDFC scheme has the least loss and the maximum loss is
incurred in the case of the LIC scheme.

HDFC LIC ICICI

No. of Clients 1323 373 1304
Income (Rs.) 23,663 1,865 20,495
Expenditure (Rs.) 46,472 36,127 45,182
Loss (Rs.) -22,809 -34,262 -24,687

After seeing the above result, CFTS was worried as they were in loss in the
case of all the three companies. They tried to analyze the situation by calculating
the break-even point for all the three schemes to know when they would be in
a no loss or no profit situation.

The cost calculation for break-even analysis is done on the basis of following
assumptions and information:

Salary: The number of staff on an average is 7 per scheme. The time devoted
or contributed by a staff is 8.3 percent on insurance activity per month for an
average of 10 clients per day. The average salary of a staff is Rs.2,861 per
month. The accountant’s salary is same as that of a staff but the time contribution
on insurance is half that of a staff (4.15 percent). There is one Branch Manager
(BM) per scheme and the time contribution on insurance on an average is 6.25
percent. The average salary of a Branch Manager is Rs.4,255. There is one

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Insurance Officer (IO) for each scheme getting a monthly salary of Rs. 7,000
inclusive of all allowances. A cost of Rs.1, 000 is incurred per year on staff
training for each of the schemes.

Other costs: The administrative expense per client varies across companies.
For ICICI it is Rs. 2.3; HDFC Rs.1.6 and LIC Rs. 0.32. The per client expense
incurred on claim settlement for different companies also varies. For ICICI it
is Rs.250, for HDFC Rs. 250 and for LIC Rs. 20.

The income calculation is done on the basis of following information. The

administrative and service charges taken together per client and reimbursed by
different companies come to Rs. 15.7 for ICICI, Rs.15 for HDFC and Rs. 5
for LIC. The average size of loan claimed per client is Rs. 3,818.

The break even analysis can be carried out for different group sizes of
members to be insured like 1000 or 2000 or 4000 for different time durations
like 6 months or 1 year or 2 year. The average number of claims to be settled is
calculated based on the prevailing death rate in the area. The death rate in the
district is 10.3 per 1000 population as per the Census Department.

Based on the above information the break even point was calculated for each of
the Companies as given in Exhibit 2. From the calculation it can be seen that
insuring 1000 clients in a time period of 6 months with each company would
result in earning profit from HDFC.

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Questions for Discussion

1. What are the advantages and disadvantages one can identify from the
major features of insurance schemes being offered by different companies
through CFTS?

2. Should CFTS continue with all the three companies for some more time?

3. Should CFTS choose only one company for providing insurance service to
its clients ?

4. If so, which of the three companies is most beneficial to CFTS?

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Exhibit 1 : Main Features of the Insurance Schemes

HDFC Standard Life LIC of India ICICI Prudential ICICI Lombard

Insurance Life Insurance General Insurance
1. Age Group 18-50 Years 18-60 Years 20- 60 Years 20-60Years
2. Premium per client. Rs.95 p.a. Rs100 p.a. Varies from Rs.15 to Rs288/. Rs. 6 p.a.
p.a (In case of CFTS, average
premium comes around Rs30/.)

3. Minimum no. of 500 25 100 -

Clients
4. Premium collected July and November February, March and May March, April and May -

5 Coverage Natural and Natural Death, accidental death, PTD Natural death only Accidental death, PTD &
accidental death & PPD PPD due to accident

6 Benefit Rs.10,000 in case of natural Rs.20,000 in case of natural death. Rs10,000 in case of natural Rs.10, 000 in accidental
death. death. death,
Rs.50, 000 in Accidental death, Rs.10,000 in PTD &
Rs15000 in case of accidental Rs.5,000 in PPD
death. Rs.50,000 in PTD, Rs.25,000 in PPD

7. Formalities Required In Natural Death: In Natural Death: Only death certificate from 1. Death certificate
on Claim Death certificate from Gram Death Registration certificate Gram Pradhan. 2. Doctor's report
Pradhan. In Accidental Case: 3. Police report
In Accidental Death: 1. Copy of FIR
1. Copy of FIR 2. PM Report
2. PM Report 3. Police investigation Report
If client is having any problem 4. Police Final Report
to get the above two, 5 Doctor's report in case of
certificate from CFTS is disability.
accepted.
6. Commission to CFTS Rs10/ Per client No Commission 20% of the Premium No Commission

Note: PTD= Permanent Total Disability, PPD= Permanent Partial disability

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Exhibit 2 : Solution to the Exercise on Break-Even Analysis

Particulars ICICI HDFC LIC

GENERAL NFORMATION
1000 1000 1000
1.Number of clients
2. Duration 6 months 6 months 6 months
3. No. of Staff 7 7 7
4. No. of working months 6 1 6
5. No. of clients per month 166.67 1000 166.67
6. No. of clients per staff per month 23.71 142.86 23.71
7. Staff Time Contribution per month (%) 8.3 8.3 8.3
8. No of claims as per death rate 10.3 10.3 10.3

A. COST
1. Salary of Staff (2861x7) (.083x6) =9973 (2861x7)(.083x1)=1662 (2861x7)(.083x6)=9973
2. Salary of Accountant (2861)(.0415x6)=712 (2861)(.0415x1)=118 (2861) (.0415x6)=712
3. Salary of BM (4255)(.0625x6)=1595 (4255)(.0625x1)=261 (4255)(.0625x6)=1595
4. Salary of IO (7000x6)=42000 (7000x6)=42000 (7000x6)=42000
5. Administrative cost (2.3x1000)=2300 (1.6x1000)=1600 (0.32x1000)=320
6. Claim settlement (250x10.3)=2575 (250x10.3)=2575 (20*10.3)=206
7. Training 1000 1000 1000
Sub-Total (Rs) 60,155 49,216 55,806
B. INCOME
1. Administrative & Service costs (15.7x1000)=15700 (15x1000)=15000 (5x1000)=5000
Reimbursed
2. Loan Claim 3818x10.3)=39325 (3818x10.3)=39325 (3818x10.3)=39325
Sub-Total (Rs.) 55,025 54,325 44,325
Profit (B-A) (Rs.) -5,130 5109 -11,481

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