Tag Archives: India

Update on lending to India

17 Mar

We launched lending to India last year but our experience has been that it is a lot more challenging than what we originally anticipated. Due to various bureaucratic roadblocks we are unable to send the funds over to the microfinance partner in India and we will be returning the funds we have raised.

To give additional background, the loan to a microfinance partner has to go through an approval process by the bank and the bank subsequently needs to submit an application with the Reserve Bank of India (the regulator for all banks in India). Only when the Reserve Bank of India gives what is called a Loan Registration Number can we start lending. We went through this process earlier and it took a fair amount of time.

Subsequently we learned that if there are any changes to the actual loan amount or disbursement date from what was there in the original application, the bank through whom we send the funds is insisting that the application form needs to be resubmitted to the Reserve Bank of India. The paperwork goes through the bank’s branch and then their head-office. We have been working with the bank but we are not getting any clarity on the expected completion date.

 As a result we are unable to send the funds over to the microfinance partner in India. Hence we will be returning the funds we have raised from lenders for lending to entrepreneurs in India. We had put in a lot of effort to make changes to our website to support lending and this is very disappointing for us and we are sure it is even more disappointing for lenders.

Over the next few months we will explore how we can make lending work in India.  Meanwhile there are more many more loans coming up from Berendina in Sri Lanka, so please do relend your funds to support Berendina in Sri Lanka where we are able to make a positive difference to people’s lives.

Thanks for your continued support.

UnitedProsperity.org needs the help of all online microfinance lenders now!

15 Oct

Thanks to your support, we fully funded the previous loan to BMI that was approximately $80,000 in value. This gave us the confidence to sign up new partners in India and we also agreed to fund the subsequent loan of BMI of approximately $400,000 ($200,000 in guarantee) over the next one year.  

The last few months we have been working vigorously with our partners to have new loans on the website. As a result, we have a much bigger loan for BMI in Sri Lanka, we have signed up Prayas in India and we are in the process of signing up Mahashakti Foundation in India.  

In our journey we have met several milestones and also dealt with several formidable challenges along the way:

  • We launched in the middle of 2009 and pioneered the online guarantee model that doubles impact and builds local credit history for our partners.
  • The microfinance crisis in India paused our operations and we recovered by launching Sri Lanka in late 2012.
  • In August 2013, we launched the lending model in India because we could not work with the guarantee model due to the extreme caution shown by banks after the microfinance crisis in India.  We did not give up.
  • We have raised in-kind support for software development, marketing, website hosting and accounting.  

To grow above and beyond where we are today, we have three challenges:

  1. Run operations and raise funds offline for it:  Our operations are quite lean and our current monthly operating budget is less than $2000. We raise donations offline, and we find that donors are most often willing to donate provided we are able to show growth in families we have impacted.
  2. Expand partnership with banks and microfinance institutions: In our experience this is a relatively slow and bureaucratic process but with time we are confident of doing this.
  3. Fulfill loans online with the help of lenders: This is the most urgent need right now. If we are able to do this, we are confident that will be able to take care of the other two.

Overall we need to raise approximately $60,000 every month to support the entrepreneurs. To achieve this, we need many more new lenders lending on United Prosperity. Most of our new lenders have joined through our existing lenders who have encouraged their friends and family members to join.  So we need your help in encouraging other lenders to join.

There are several ways you can encourage other lenders to join such as giving a gift certificate, sharing on facebook / twitter, email your friends, share on forums. You will also find more ideas here: http://www.unitedprosperity.org/us/get_involved_individuals.

So please help us meet the unfulfilled need and encourage other lenders to join.  

Thanks once again for your support. 

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.

The first signs of spring?

1 Apr

Over the past few months we have been approaching MFI in several countries – Kenya, Nigeria, Sierra Leone, Sri Lanka, Pakistan, Indonesia, Philippines and Cambodia. While most of the MFIs in India get their loan funds from local banks, in these countries there seems to be very little funding from local banks.

Even in cases where banks fund MFIs, the loan is backed by an international guarantee and in many cases it is a 100% guarantee. In a few countries we found local development wholesale funds that lend to MFIs without a guarantee.

We have started the process of evaluating some of these organizations and we are glad to announce that we are making steady progress with one organization in Sri Lanka. This will be the first loan for the organization from a Bank. We hope to have more news to share soon.

In India, the regulator (Reserve Bank of India – RBI) is likely to implement some of the recommendations of the Malegam committee. These regulations will be applicable for the large Non Banking Finance Company (NBFC) MFIs that were already being regulated by the RBI.A microfinance bill to cover all categories of MFIs will also be drafted over the next few weeks and it will be eventually presented to the Indian Parliament around July 2011. The uncertainty and dramatic slow-down in bank funding is likely to continue till the regulations are fully crystallized.

All these tell us that governments and regulators in countries have a very important role to play in making sure that microcredit is suitably supported and properly regulated. In India, there needs to be appropriate and comprehensive regulations backed by timely action against any errant organizations so that microcredit is safely and consistently delivered to clients.

In many other countries regulators need to find ways for MFIs to mobilize a reasonable amount of funds from local banks and/or the savings of microfinance clients so that adequate funds are available for the larger future needs. Further mobilizing local funds will also reduce foreign aid dependence, make local economies self sufficient and also make MFIs and their clients insulated from currency devaluations and international financial shocks. Our guarantees will make a positive contribution here in the years to come.

Meanwhile, we continue to 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.