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More loans from Sri Lanka and re-launching in India

2 Jun

We are excited to announce that Berendina with whom we have been working over the past few months has got a significantly larger loan approved from their lending bank. This would mean that we will have many more loans from Sri Lanka on our website.

On top of that we are excited to announce that we will be launching in India with an online lending model. Many of you may wonder why we are launching a lending model when we have pioneered the guarantee model and when there are other organizations that have already proven the lending model. The reasons are simple:

We have learned that the guarantee model shows dramatic results when there is a certain degree of stability in the local microfinance market. If the stability is not there, banks are unwilling to lend to local microfinance institutions even with a guarantee.

Thus in several countries international lending may be the only viable model before banks are willing to step in and lend to local microfinance institutions with or without a guarantee.

There is a lot of work to be done to ending poverty. There is an urgent need for several organizations to be involved in fighting poverty at local and international levels. No one can do it alone.

The lending model is a means for our generous lenders to support communities where we are unable to make the guarantee model operational.

Over the last few months, we have been working with two microfinance institutions, Prayas and Mahashakti foundation, who will be our first set of partners in India. We are at the final stages of the paperwork and once we get a loan registration number through the Reserve Bank of India, we hope to have loans online in the next few weeks.

Prayas works in Kutch, Gujarat and Mahashakti foundation works in Orissa. Mahashakti foundation is also a Kiva partner.

While all this has been going on, Richaa Pokhriyal who has joined us as Project Manager out of New Delhi, India has been working with the team at Josh software to make changes to our website to support both the lending and guarantee models.  Richaa is the first salaried team member for UnitedProsperity.

We would like to thank our supporters who have stood by us through our long and at times tortuous journey. We are here because of your generosity, patience and resilience. Thanks once again.

Microfinance in India – solving the Gordian Knot

19 May

The Reserve Bank of India, the regulator for microfinance broadly accepted the recommendations of the Malegam committee and proposed some guidelines recently. Banks in India have been traditionally mandated to lend a certain percentage of their total lending to priority sectors such as microfinance, small business, agriculture and so on. Previously all loans to microfinance institutions (MFIs) came under priority sector lending and that encouraged banks to lend to MFIs especially since the defaults were extremely low as compared to other priority sector areas.

The new guidelines are more specific on what constitutes priority sector lending under microfinance. The overall objective for the new guidelines seems to be to protect MFI clients (borrowers) while holding banks indirectly accountable for client protection through the priority sector guidelines. The guidelines try to achieve client protection by putting several restrictions (caps) on the way microlending can done and these include:

1) Interest rate caps on loans made by microfinance institutions (MFIs)

2) Margin cap for MFIs

3) Loan size caps based on rural/urban area

4) Loan size caps based on loan cycle

5) Minimum prescribed loan tenors (duration) based on loan size

6) Portfolio mix caps ( what percentage of a loan portfolio of a MFI should be income generating )

The guidelines are however silent on specific client protection practices the MFIs should have in place. In many ways the approach seems convoluted and noted industry commentators N Srinivasan and M S Sriram seem to indicate that the microfinance sector will continue to pay a heavy price for the lack of appropriate regulation. To my knowledge, bank lending is yet to resume in India even after these new guidelines have been released. Hopefully the reasons are just procedural and banks will start lending soon.

In my opinion the regulations need to be a lot simpler. The RBI should have intervened in just two broad areas without getting unduly involved in specifying how the loan product should be structured. They should:

a) Allow sustainability of MFIs but put restrictions on profiteering: The RBI could have specified reasonable dividend cap and a bonus share issue cap (i.e. no stock splits) for MFIs that want to avail of priority sector lending from banks. Additional related caps would be on compensation to key executives of the MFI. Thus MFIs can operate sustainably without resorting to profiteering and the right kind of investors would get involved with microfinance. See Ramesh Arunachalam’s blog for a more elaborate note on this subject.

b) Hold MFIs directly accountable for client protection: The RBI should have mandated specific and strong client protection guidelines and the responsibility should be directly on MFIs and not indirectly on banks that are far removed from the actual practices on the ground.

The RBI is expected to come up with more detailed guidelines. I hope that they will take the opportunity to solve the Gordian Knot of Indian microfinance. India has more poor people than the whole of Africa put together and this requires the government’s and the regulator’s utmost attention. A crisis should never be wasted.

Meanwhile we have also been introduced to the bank in Sri Lanka. Being the first loan to a microfinance institution in Sri Lanka, the bank is moving cautiously and we will have more updates soon.

Over the last few weeks we have also contacted several microfinance institutions in South and Central America. The response we have got has been a bit overwhelming and nearly a dozen MFIs out of the forty MFIs we contacted are interested in partnering with us. In hind sight we should have approached MFIs in South and Central America much earlier, but we did not take it up because we wanted to build some more organizational capacity before we expanded operations to multiple countries.

While we have one volunteer who knows Spanish and is helping us connect with MFIs in South and Central America, we need the help of a few more volunteers who know Spanish. If anyone is interested in volunteering, please write to me at bhalchander(at)unitedprosperity(dot)org. Thanks again for stopping by.

Update on signing a new partner

21 Apr

In the last post I mentioned that we are working on signing a new partner in South Asia. As a part of the sign up process, the new partner Microfinance institution (MFI) needs to fill an extensive evaluation questionnaire which we then assess. We also take third party reference checks, review their financials and also assess the commitment of the MFIs’ senior management to the mission of ending poverty. We also need to find a bank that is willing to make a loan based on the guarantee. Signing up the bank is one of the toughest aspects of our guarantee model.

We have been making good progress with an organization in Sri Lanka called Berendina Microfinance Institute (GTE) Ltd. One of the most interesting aspects about this organization is that apart from providing microloans they also provide business development services to their clients and they are able to do it sustainably through the usage of coupons.We took a third party reference check about the organization and the feedback we received is that Berendina is a very progressive microfinance institution.I am told that they are very professional, have a good long term vision and have good loan products. Their challenge is access to funding.

Berendina has recently approached a few banks to see if they can lend to Berendina based on a guarantee. Berendina has never borrowed from a bank previously so this loan would be the first of its kind. At present one bank is evaluating their proposal and a decision by the bank’s lending committee is likely in the next two to three weeks. From what I understand from Berendina, if the loan gets approved this could be the first loan to an MFI in Sri Lanka from a bank. We are cautiously optimistic that the approval would come through and I will be posting an update on this over the next few weeks.

Meanwhile in India, the Reserve Bank of India which is the Central Bank and the regulator for the large for-profit MFIs has yet to publish its revised regulations for microfinance. Thus the uncertainty amongst banks and MFIs in India continues. As a result there are virtually no loans being made to MFIs from banks. It is nearly seven months since the crisis emerged in Andhra Pradesh state in India and if clarity on regulations does not emerge quickly it will be an increasingly uphill task of reviving the confidence of banks in lending to MFIs especially the smaller and more socially oriented MFIs. While banks will not be much affected if they do not lend to MFIs as microfinance constitutes only a small percentage of the total loans they make, the biggest losers are going to be millions of low income families and especially those who are poorer and in the more remote regions.

I sincerely hope that the government and the regulators in India show the urgency and determination in laying out appropriate regulations for microfinance in India. This is the absolute need of the hour.

Looking forward to an early spring

18 Mar

It has been a long winter for microfinance in South Asia this year.

First, I would like to share an update on the microcredit crisis in India. The Malegam committee published its recommendations for microfinance in India but no new formal regulations have been published so far though it appears several clauses of the report are likely to be implemented. As I had previously written, repayments in Andhra Pradesh state are still very low. Meanwhile, loans to the tune of nearly USD 2.8 Billion (Rs. 13,000 Crores) to some of the largest MFIs in the state of Andhra Pradesh are likely to be restructured with the loan term being extended from the usual 2-3 years to a maximum of 10 years.

I was in India over the last one month and the impasse has not done much good. The confidence of bankers on lending to MFIs for microcredit has been eroded. India is one of the countries that successfully managed to encourage local banks to lend to MFIs. The uncertainty and impasse has in my opinion turned the clock back by nearly a decade.

Prof. Malcolm Harper writes that this situation seems to have produced several losers, but the biggest and the most silent losers are going to be the poor women and their families all over India who will see the flow of credit slowing down. Many aspirations will have to be postponed or remain unfulfilled.

As a saving grace, at we are glad that default epidemic is restricted to only one state in India. Our borrowers are in a different region and are continuing to pay back their loans, although many of them have been disturbed by the prospect of not getting the subsequent loan on time.

In neighboring Bangladesh, Nobel Prize winner Prof. Muhammad Yunus, an international icon has been subject to the most unceremonious treatment by his government. I sincerely hope that international pressure will encourage the Bangladesh government to treat with respect and dignity the man who has done so much to help women in Bangladesh and around the world come out of poverty with dignity.

Making sense of some of these events has indeed been overwhelming. We have been trying to get banks to start lending based on our guarantee. However, bank lending in India to MFIs is frozen. We also explored several other possibilities in India, but at this point due to the environmental uncertainty banks are in an ultra cautious mode.

We are also contacting MFIs in several other countries to explore if they need guarantees so that they can borrow from local banks. So far we have noticed that in most of the countries other than India, MFIs are dependent on loans from international donor organizations. We have had encouraging discussions with a couple of MFIs and we hope that some of these leads will fructify. We will continue to be posting updates on our blog and newsletter on the progress we are making.

We sincerely hope that all of us can once again cherish and celebrate the opportunity to make a difference to people’s lives. Thanks for your patience and we look forward to an early spring.

From Microcredit to Livelihoods – New Roles for UnitedProsperity

2 Feb

The Malegam committee that was constituted to look into the state of microcredit in India presented its report a few days back. The report has been greeted with cautious optimism by several experts including N Srinivasan and Ramesh Arunachalam (Note: One USD is equal to Indian Rs. 45. One lakh is 100,000 and one crore is 10 million). The regulator, the Reserve Bank of India (RBI) has now requested comments from the general public and the RBI will finalize its guidelines in March-April 2011.

Meanwhile, the repayments in the state of Andhra Pradesh are still severely affected. Following the Malegam committee report, banks have started restructuring the loans for microfinance organizations (MFIs) that have made a lot of loans in Andhra Pradesh (i.e. MFIs get more time to repay the bank). In the rest of the country repayments continue to be high in the order of 99%. Loans are also being paid back to our MFI partner, Ajiwika, as per usual levels and we do not foresee any problems. Bank lending to MFIs has slowed down considerably and it seems that banks will start lending in a serious manner only after April 2011 when they have greater clarity on the nature of regulations.

These events are profound with a couple of important take-home messages:

  1. Supporting MFIs with the right social DNA is very important: This crisis highlights the fact that a few MFIs lost the way and started profiteering from the poor rather than helping them. In India alone there are perhaps more than 100 MFIs that are very committed to supporting the poor and are not indulging in any profiteering. However many of them do not get the needed support. Thus we clearly recognize that we need to support these socially oriented organizations and we will continue to support such socially oriented organizations. Conversely we also need to consciously avoid organizations that could potentially one day start profiteering. In this regard, an MFI in Kenya had got a bank loan approval based on a 50% guarantee from UnitedProsperity. On further due diligence we found that the MFI’s effective interest rate was high and the pricing to its borrowers was non-transparent. We therefore decided to not support this MFI.
  2. Beyond microfinance, focus on livelihoods is essential: A typical MFI would provide credit and in some cases provide other financial services. The clients would in most cases be engaged in different businesses, and beyond assessing the capacity of the borrower to repay the loan, the MFI does not directly help the borrower with her business. Thus if a client of an MFI finds that she cannot get the raw material for her business on time or if the costs go up suddenly or if the market for the product is affected then the client could get severely affected. In some cases these clients may borrow from multiple MFIs or money lenders to tide over what would seem to be a short term crisis and then eventually get enmeshed in a debt trap. An organization that is involved in livelihoods will do much more such as getting together clients who perform a similar business together in a co-operative or a producer company. The organization may pool the raw material requirements of its clients and buy the raw material in bulk from wholesalers or manufacturers cutting out the middlemen. The organization may provide training to its clients in their business. The organization may also aggregate their produce and sell it to end customers cutting out the middlemen. Thus, well run livelihood initiatives reduce input costs, get better prices for their products, reduce risks, allow clients to slowly graduate to larger loans without getting enmeshed in a debt trap, generate higher income and help clients get better control of their businesses and lives.

In my next post I will be writing about a new livelihood initiative that we are working on. And thank you very much for your patience and understanding over the last few months when we have had no loans online.

Update on Ajiwika and the situation in Andhra Pradesh

3 Dec

A few days back I wrote about the situation in Andhra Pradesh. Since then, several Microfinance Institutions (MFIs) are now considering extending the repayment period for the microloans so that their borrowers get some relief and the MFIs can also recover some of their microloans.

Although the situation is restricted to only the state of Andhra Pradesh in India, most banks have stopped lending to MFIs all over India. The Reserve Bank of India, which is the overall regulator of most financial institutions in India is awaiting the recommendations from the Malegam committee before finalizing on the appropriate regulatory changes for microfinance in India. The recommendations from the Malegam committee are due towards the end of January 2011. I anticipate that banks will resume lending once they have better clarity on the future shape of regulation of microfinance in India.

All borrowers of Ajiwika are paying back so there does not seem to be any immediate reason to be concerned. Ajiwika also needs to repay its existing lenders and it is able to do that currently. In normal course of events Ajiwika would have adequate liquid funds to make repayments to banks on time. However at this point, since fresh funds are not coming from banks they have they have to prudently manage their work capital so that they can make payments to banks on time.

Our partner bank also stopped lending after the Andhra Pradesh situation. As a result we are returning the funds we had raised for guarantee and that were not used to make loans available to Ajiwika. Guarantors will also continue to receive repayments on prior loans that are being paid back.

We are continuing to explore possibilities of resuming support to Ajiwika and its borrowers, and also signing up new partners in India and Africa. I look forward to updating everyone with some positive developments soon.

What is the right way to help the poor?

4 Nov

Microfinance as it started in Bangladesh is a social business. i.e. The microfinance institution (MFI) is either a non-profit or is owned by its borrowers in case it is a for-profit institution (e.g. Grameen Bank). This ensured that most of these organizations in Bangladesh are single bottom-line, pro-poor organizations whose primary and only mission is helping the poor in a sustainable manner. While most MFIs are non-profits, there is an emerging trend of commercializing microfinance by establishing for-profit MFIs.

In India, a few MFIs have raised equity from socially minded investors and also commercially oriented venture capitalists and private equity firms.Some of these for-profit MFIs also had plans of going public and SKS Microfinance became the first MFI from India to go public in August 2010. This was not appreciated by Prof. Muhammad Yunus who said that this is not the right direction. For those interested in knowing more, the two debates at Clinton Global Initiative and at Asia Society offer a fascinating perspective.

The last few days have been pretty unprecedented for microfinance in the state of Andhra Pradesh in India.Here is a summary of what has happened and some of its potential implications:

In the state of Andhra Pradesh in India, which is the home of several for-profit MFIs, several borrowers were facing extreme stress from excessive debt due to excessive borrowing from multiple MFIs and also from local money-lenders. There were also some reported cases of suicides due to debt-stress.

Extreme debt-stress amongst borrowers forced the Andhra Pradesh state government to implement several measures to protect the interests of the borrowers. The Principal Secretary of rural development at Andhra Pradesh clearly stated certain aspects that are non-negotiable in the operations of MFIs:

“We are very clear that certain fundamentals are non-negotiable for example, there cannot be any coercive mechanism, second thing is that there cannot be any multiple lending and third thing is that there cannot be lending without due diligence. I think these are fundamentals, beyond that certainly we are prepared to discuss and then we are prepared to look at it with open mind as far as the modalities are concerned, we are with open mind and we can certainly look at any difficulties that are arising and then dissolve it.”

Since then, Vijay Mahajan, the CEO of Basix which is a large MFI in India, and one of the most respected microfinance leaders summarized the problem and stated that these events will serve as a course correction:

“So it was basically situation where the sector’s incentive structures had gone wrong and I think that corrective has happened. We will rebuild the sector along the right lines and I am sure we will contribute to financial inclusion in the country but all over the country not just Andhra Pradesh.”

Elisabeth Rhyne, Managing Director, Center for Financial Inclusion also writes on similar lines:

“The blame for this unfortunate situation falls most squarely on the MFIs that failed to restrain aggressive growth even as the market became increasingly saturated. Investors must also swallow a big spoonful of blame. Because they paid dearly for shares in the MFIs, they need fast growth to make their investments pay off.”

I believe that the path of course correction has just started and if correctly done with the help of regulators it will be of great benefit to the poor. But the next few months are likely to be turbulent in Andhra Pradesh. MFIs in Andhra Pradesh are not reporting their usual level of collections from borrowers and as a result the finances of the MFIs who are operating in Andhra Pradesh are likely to be strained.

Banks have also slowed down their lending to MFIs and several loans that were to be disbursed to MFIs located all over India have been put on hold over the last few weeks. Banks are slowly resuming lending, but their approach is likely to be cautious for several months to come.

Ajiwika, our microfinance partner works in the states of Jharkhand and Bihar. Unlike Andhra Pradesh, these two states have low levels of penetration of microfinance and Ajiwika is not having any difficulty collecting repayments from borrowers. However, we are waiting on our partner bank to disburse the loan to Ajiwika for profiles for which we have already raised the guarantee (See for profiles by Raised status on

Although this situation happened in Andhra Pradesh, it is going to affect poor families all over India over the next few months. With banks becoming more cautious in lending to microfinance, it is going to slow down the availability of microcredit in regions like Jharkhand, Bihar, Kutch and others that have low levels of microcredit.

At a broader level, this raises a bigger question. Is the external investor driven profit-maximizing approach appropriate for solving complex problems such as poverty? Can it create unintended consequences especially for those who have so little, as we saw in the case of Andhra Pradesh?

A desire to help fellow humans is the primary motivation for United Prosperity and our loan guarantors. Social Businesses, that carry a single bottom-line of only helping the poor in a sustainable manner, as enunciated by Prof. Yunus, are certainly the need of the hour.