Tag Archives: India

Visiting our next partner in Kutch – Day 2

28 Oct

On the second day of my visit to Prayas, our next MFI partner in the state of Gujarat, I went to Gandhidham, which showed signs of most modern Indian cities with its large buildings, the latest cars on the road and so on.

I learnt that Gandhidham and other parts of the Kutch area also had a high level of HIV/AIDS. There were several reasons for this – a nearby sea port, transportation hub, a significant migrant population who work in the nearby export processing zones and industrial centers that did not have their families with them, and also acute poverty and lack of livelihood opportunities.

Prayas is also involved in the prevention of HIV/AIDS and works closely with the gay community and also female sex workers (FSWs) who are considered high risk groups. Prayas has 3 gay employees who reach out to the gay population many of whom are married and educate them about taking the necessary precautions. Many of them also have STD or AIDs as a result of which they incur high medical expenditures. Their families thus tend to be lot poorer. For their economic development, Prayas consciously forms groups in the areas where they live so that their spouses can take microloans and earn their livselihoods.

As I learned a little bit more, I also realized that were hardly any financing options for the poor available in Kutch. Other than Prayas no microfinance institutions operates there and most people have to approach a local money lender in case they need a loan. The money lender terms I found were the most usurious with interest rates in excess of 700%.

Thus, poor families facing financial shock or hardship for example during a health emergency, have very limited options. What I learned is that several women have had no choice but to become a FSW to get some money to treat a sick child or sick husband. Prayas is in contact with more than 800 FSWs. Apart from education, Prayas also works for their socio-economic development by helping them gain livelihood opportunities by giving them microloans.

I also visited some of the entrepreneurs and their families in Gandhidham. I found many of them living in worse conditions than what I had encountered in Jharkhand and Bihar when I visited Ajiwika. In case of some of the families, the rain water was entering their houses and some families were not even sending their children to school. This was a big shock to me.

Gujarat has been growing at very high GDP growth rates since 1991 (possibly greater than 10% per annum) and I did not expect to see this level of poverty. This perhaps tells us that while top down development strategies like big infrastructure projects, massive roads, big industry projects are useful and beneficial; their benefits may not necessarily reach the poorest families who continue to be trapped in the vicious cycle of extreme poverty. While bottom up development is not flashy; there are no big buildings, bridges, massive roads or monuments to show, I think it is a sure way to make a difference to the lives of the poorest families and help them come out of poverty with dignity.

Creating a shared prosperity

9 Feb

Last month we visited Ajiwika, our first partner microfinance institution based out of Jharkhand, India. We were very keen to meet some of the entrepreneurs from Ajiwika. We were joined by Tanay Chakravarty, the CEO of Ajiwika and some of his staff.

Our first visit was to Chakri Pahar which is around 10 miles from Deoghar where Ajiwika’s main office is located. We were greeted by several entrepreneurs and their families including Barki Devi and group, and Bandana Devi and group. Many of the entrepreneurs belonged to the Santhal tribe and we received a traditional Santhal welcome where they offer a pot of water with flowers to their guests, which was a wonderful experience. Shortly thereafter we started talking to the entrepreneurs on how the microloans had helped them – Barki Devi bought a bullock with the loan, Bandana Devi increased the inventory in her shop, Juba Hembram and a few others bought a cow.

Most of the stories showed signs of incremental progress, but we were impressed how Shaila Devi and her husband Naresh Murmu had quickly grown their business of making ventilators for houses. Naresh Murmu had been working as a mason for sixteen years. He had the skills but he did not have the money to start his own business. On getting the microloan, he started his business and now he has also employed two other people.

We were also delighted to learn that all the children in the neighborhood were going to school. In some cases, some families who were now enjoying a higher income after taking the microloan were enrolling their children in private schools instead of the government run schools which offer free education. While most of the women could only sign their name but could not read and write, their determination to make sure that their children have a good education was truly noteworthy.

As we were about to leave, Barki Devi sang a Santhal song to mark the occasion. The song was about coming together to create a shared prosperity for everyone. The experience was truly overwhelming and I still cannot fathom how she could choose a song so apt and profound on that occasion.

We visited more entrepreneurs at Nilkothi. Nilkothi is in the neighboring state of Bihar, which has recently experienced very good economic growth. The entrepreneurs here including Shanti Devi, Savitri Devi and other members were mainly involved in agriculture. All the entrepreneurs were highly appreciative of the fact that the microloans are disbursed quickly at their door step. They were excited to see pictures of guarantors coming from all over the world to support them.

We also visited Ajiwika’s branch offices and their head office. The branch offices are very functional and consist of two rooms with a kitchen and an attached bath. One of the rooms serves as an office and has a computer, two desks, a few chairs, a cupboard and a white board for keeping a scorecard of the loans. The staff involved in running the branch sleeps in the office at night.

The impact of the guarantee on Ajiwika has been remarkable. Six months back most of the smaller microfinance institutions like Ajiwika were struggling to raise funds because of the financial crisis. While development lenders such as FWWB and SIDBI were making some loans to smaller microfinance institutions, most of the banks had become extremely conservative in their lending. Banks often tend to work in an informal syndicate. If one bank lends then other banks are more inclined to follow. The converse also holds true, if the more development oriented banks become conservative, then the rest of the banks follow suit.

UnitedProsperity.org’s guarantee enabled one bank to lend to Ajiwika. Now that a mainstream bank was lending to Ajiwika, over the next six months several other banks have approved loans to Ajiwika.

The guarantee has had a catalytic effect. Not only did we directly support the entrepreneurs on our website, but we also provided the spark for freeing up funds locked with other banks to support many more entrepreneurs who are not listed on our website.

Barki Devi’s song of coming together to create a shared prosperity is apt indeed!!

Microfinance agenda for the new government: Open letter to the new Finance Minister of India – guest post by Mr. N Srinivasan

24 Jun

Readers may recollect, the previous interview with Mr. N.Srinivasan on microfinance in India. In the interview he had also suggested policy measures for the new government..

I am delighted to share with you, Mr.  N Srinivasan’s ‘ Microfinance agenda for the new government: Open letter to the new Finance Minister of India’.

Mr. Srinivasan will be participating in the discussion on this blog so please feel free to comment, critique and add your suggestions. Also please tell your friends and people involved in Microfinance in India and other parts of the world.

Thank you very much.


Microfinance agenda for the new government: Open letter to the new Finance Minister of India

Dear Honourable Finance Minister,

The Indian electorate has returned a stable government to power which should facilitate the smooth passage of important policies and legislation. As one of the most versatile and experienced ministers in India, you have in front of you an enormous opportunity to empower more than 75 million microfinance clients(1) who also voted during the elections. With suitable policies you can enable banks, Microfinance

N Srinivasan

N Srinivasan

Institutions (MFIs), Non Government Organizations, Self Help Groups and thousands of people who have dedicated their lives to the betterment of our people to meet the aspirations of livelihood development and viable financial services of the served and yet to be served microfinance clients.

The microfinance sector seeks the continued support from the new government. With the growth of microcredit and the increasing aspirations of the people it is now time to look deeply into certain aspects which have now acquired an even greater importance.

1) First on the microfinance agenda is the microfinance law. With great hope the microfinance sector approached the previous government which suitably responded with a microfinance bill after consulting the sector at different levels. But the bill lapsed with the dissolution of parliament after its term was over. Now a new microfinance bill has to be brought in to ensure vibrant growth and effective regulation of the sector. You have the opportunity of doing the exercise de novo as the earlier bill had scope for several refinments. The new law should focus on functional regulation of those in microfinance – not form of institution based regulation as was attempted earlier. Customer protection is a critical issue that should be addressed in the law.

2. A clearer articulation of the stance towards Microfinance Institutions (MFIs) mobilising savings would be timely. You would be aware that the banks are still not in a position to provide savings services despite a few million “no frills accounts” (2). Allowing MFIs to mobilise savings on their own account or as correspondents of banks would improve availability of savings services to the remote and poor populations. Some of the limitations in the existing guidelines on banking correspondents need a review to accelerate availability of savings services.

3. A deposit insurance facility could secure savings of people in MFIs (e.g. Vietnam has a facility for this). This would increase regulatory comfort in allowing MFIs to mobilise savings. The Deposit Insurance Corporation could extend its existing cover to MFIs as well.

4. The refinance facility(3) available to banks from the Reserve Bank of India (RBI) and other sources should also be available to MFIs. The MFIs’ needs are smaller, but are dire and funding them satisfies a critical segment of vulnerable population. The facility could be set up in the public sector and made merit based without discretionary allocations. This would go a long way in ensuring funds flow to the sector even during periods of recession and financial meltdown.

5. The Centre should have an urgent dialogue with the States on issues relating to legitimacy and relevance of MFIs. Currently State governments also run their own independent microfinance programs. State governments could multiply the impact of the resources they deploy towards microfinance if they partner with microfinance institutions. Hence they should be actively encouraged to support microfinance operations by partnering with MFIs and the current microfinance infrastructure. This measure will not only put an end to intrusive and at times abrasive interference of local state officials in microfinance which is not healthy for the sector. The current state run programs can be gradually transitioned to MFIs so that the poor clients are not impacted.

6. The governments (centre and states) have several schemes that offer capital and interest subsidies to borrowers from banks(4). Such selective application of subsidies through select banks distorts the market, influences borrowers in their choice of banks and increases transactions costs of the customers. If the government has to pass on subsidies or transfer other benefits to people, the MFIs should also be eligible to participate in such schemes. This would ensure that the government is not a party to setting an uneven playing field.

7. The financial inclusion drive should undergo a qualitative change. The focus on numbers should give way to real access to financial services and including clients. The present efforts by and large start and end with opening of an account to meet mandates set by the RBI and as a result most banks end up doing the bare minimum. Doing business with included clients should become a valid objective in the drive towards total financial inclusion. This needs to become the corporate philosophy of banks engaged in inclusion. Perhaps, you may want to consider giving financial incentives to banks to work with low income clients so that the goals of shareholders, officers and employees of banks are aligned to making low income clients a significant source of revenue.

8. Lastly, financial inclusion measures have ignored MFIs and Primary financial cooperatives. These are the institutions that have the network and human capacity in the hinterland to provide financial services. Measures to strengthen and incentivise these structures to play a major role in financial inclusion would help the excluded population more than the other efforts targeting commercial banks.

Most of these require policy responses. Given the right policy environment, I am confident that the microfinance sector will perform and surpass your expectations. The perceived complexity and high costs (of designing financial sector policies that improve livelihoods of poor) should not deter the government nor make it defer the policy response to a future date. A large sector with more than 75 million poor but eager clients awaits your response; please help the clients empower themselves towards a better future.

Yours inclusively,


Author – State of the Sector report – Microfinance India 2008


(1)Revised estimates for 2009 made on the basis of the data provided in the State of Sector Report on Indian Microfinance 2008, Access Development Services

(2)Simple savings accounts introduced that required no minimum balance and no service charges to facilitate poor open and operate bank accounts – introduced by Reserve Bank of India

(3)RBI offers a lender of the last resort facility; NABARD, SIDBI, National Housing Bank also offer refinance facilities to banks; some limited facilities are also available to MFIs

(4)Mostly public sector banks handle such schemes

Imagining India – Interview with Nandan Nilekani

4 May

Bhalchander: It is my great pleasure and honor to have with us today Nandan Nilekani, author of the recently published book Imagining India – Ideas for the new century, and Co-Chairman and Co-founder of Infosys Technologies. Nandan’s work and accomplishments have been recognized worldwide and he has received numerous honors and awards. In 2006, Nandan was conferred the Padma Bhushan, one of the highest civilian honors awarded by the Government of India. Most recently, Nandan was nominated to the list of 100 most influential people in the world by Time magazine.

Congratulations on your new book, Imagining India – Ideas for the new century. It is an extremely well researched, wonderfully articulated and truly thought provoking work. You have sparked a new discussion which all of us must actively engage in. And thank you very much for taking time from your busy schedule to be with us.

Nandan Nilekani:  Thank you. I’m glad to be here.


Bhalchander: We have several questions for you, many of them from twitters all over the world. The first question is from Raj Melville, Boston, USA.  How does one retrain & retain today’s rural India to help feed the increasing food demand?

Nandan Nilekani: I think rural India is in reality, well-placed to meet our growing food demand. But right now, our agricultural productivity is low because of a very weak support environment – ineffective water and electricity supply, a badly built subsidy system, and weak connectivity to our cities and markets.  We have for instance, ignored irrigation and groundwater replenishment – nearly two-thirds of our farmed land depend on solely rains for water. Our subsidy system – that subsidises water-intensive crops such as rice and wheat – encourages farmers in arid regions as well to grow these crops, since it lowers their risk. This means that our farms have not diversified, and we are not growing crops suited to regional climates. 

Particularly tragic is the amount of produce our farmers lose due to our weaknesses in transport. Fully one-third of our produce gets spoilt while being transported to markets, because we lack the cold chain infrastructure we need. These infra weaknesses – bad roads, unconnected villages – also isolate our farmers, limit their knowledge of best practices; and since they are so disconnected from our markets, they cannot find out quickly and easily what prices are, and what consumers are buying.  

So the reason our farm growth has averaged just 2% or lower is because of a disastrous combination of our above weaknesses. I would say that addressing these would solve a large part of our supply problems. 


Bhalchander: The next question is from Andreas Kopp, Munich. What should a young college graduate do to make his way to change the world?

Nandan Nilekani: The role of the youth is critical, and you tend to see that countries grow fastest when they have a larger proportion of their population that is young. I think graduates and students need to think beyond a first job in the corporate world. If you have a good idea and if you are a young entrepreneur for instance, you have a high chance for success – you have enthusiasm, and innovation on your side. And such entrepreneurs are critical for growth and development. In India, I’ve seen young entrepreneurs who are making quite an impact – Sriram Raghavan, who heads COMAT, and Jignesh Desai, who heads MCX, come to mind. And then there are the young people who take up and join various social causes: pushing governments towards more transparency and disclosure, tackling environmental issues, and driving reform. Even if you are not directly involved in politics and public policy, the third sector does allow committed people to make a difference. And of course, an effective way to ensure forward looking development is to have more young leaders in politics: governments need to be invigorated from within as well as without. 


Bhalchander: The next question is from Andreas Kopp, Munich, Germany and Trevor Rotzien, Seattle, USA. In his recent book, Creating a World without Poverty – Social Business and the Future of Capitalism, Nobel Laureate Prof. Muhammad Yunus talks of a new form of business – social business. In Prof. Yunus’s own words: “A social business is not a charity. It is a non-loss, non-dividend company with a social objective. It aims to maximize the positive impact on society while earning enough to cover its costs, and, if possible, generate a surplus to help the business grow. The owner never intends to take any profit for himself.” What are your thoughts on social business? Can a wave of social businesses as Prof. Yunus envisions help solve some of the pressing challenges India faces? 

Nandan Nilekani: From what I’ve seen, some NGOs that work in India do function as ‘social businesses’. That said, I think too many of us indiscriminately tar the idea of ‘profit’ being bad for the social sector. Its good for all kinds of organizations to create surplus for a rainy day.  Two organizations that made a huge difference to poverty in India were the Rockefeller and Ford Foundations – they financed the research efforts that led to the Green Revolution. Their money came from corporate profit. The Bill and Melinda Gates Foundation is now doing some incredible work in Africa. We can’t diminish such efforts because they were funded by corporate profit. 

And for better or for worse, more people are motivated by profit than by philanthropy. The question is whether such for-profit efforts are effective in the social sector, and from what I’ve seen, I would say yes – paired with sensible regulation, it helps bring excellence to the forefront in the social sector. In India, businesses targeted at the poor have managed to deliver them low-cost services more effectively than some NGOs. Arvind Eye Hospital specializes in  low-cost eye operations for the poor. For-profit micro-finance institutions are doing remarkably well in Tamil Nadu and Karnataka.   


Bhalchander: We have a question from Vijay Sankaran, Mumbai, India.  How is Indian IT helping bridge the digital divide? 

Nandan Nilekani: The real impact is right now with ICT rather than just IT – a combination of information and communication technologies. Mobile phone penetration for instance, has made a big difference to farmers, especially combined with voice services that inform them of crop prices, and weather information. And while internet penetration is still very low, community kiosks built by companies such as ITC and Comat have brought some semblance of connectivity to the villages and rural towns. 


Bhalchander: The Tata Nano has generated unprecedented enthusiasm. Building on the theme of innovation for the masses Vijay Sankaran, Mumbai, India and Atul S Kulkarni, Duluth, USA would like to know when will Infosys and the other large Indian IT companies make the common Indian their customer?  When will Indian IT build a Nano? 

Nandan Nilekani: In my opinion, Indian software for the common man will come through an instrument that is more like the mobile phone than the computer. This should hopefully take not more than another five years.  


Bhalchander: You mention in your book that people regardless of income levels should have access to health facilities, clean water, basic infrastructure, jobs, capital, social security and good schools for their children. But projects in almost each of these areas have long gestation periods and low financial returns to investors. How do you propose that we mobilize the risk-tolerant and patient capital in a reasonable time frame to initiate and implement these projects successfully? 

Nandan Nilekani: I have detailed the approach in my book – health and schools can be approached with a combination of voucher systems, and in highly rural areas, with government support for private initiatives in the early years. I don’t think these take long gestation periods. Neither does clean water and basic infrastructure – if there is popular pressure for it. Taking indirect subsidies out of the equation and replacing them with direct subsidies makes people focus more on markets, which in turn, forces pressure on governments to improve connectivity and access to basic services. Once the pressure is there, the response tends to be immediate. 


Bhalchander: In part II and part III of your book, you talk about areas where a lot of work needs to be – schools, our cities, infrastructure, creating a single market, environment and so on. There has been slow progress in most of these areas. With the impending elections, if you were to recommend a few easily understood points whose implementation the voters should demand from the government and politicians in a time bound manner, what would they be? 

Nandan Nilekani:  I would suggest, 1) Money in your hands – direct subsidies. In  the form of cash to an account held by each citizen, which would replace the creaky indirect system of ration shops and subsidized rice/fertilizer/kerosene. 2) School vouchers, which give poor students the option of attending either private or government schools. These two alone would bring more cash into the hands of citizens, and give them access to markets.  And it would as a result, create more pressure towards better infra that connects markets, and less red tape in education. 


Bhalchander: The World Bank estimates that 456 million Indians (42% of the total Indian population) now live under the global poverty line of $1.25 per day (PPP).  Most of them are perhaps impatient for progress. What would be your message to them? 

Nandan Nilekani: I would say, that we must use the democratic process to break barriers to access. We are in a vastly imperfect system, where votes are channeled to vote banks and interest groups, which in turn harden the status quo. Instead, if voters focus on the issues of access to education, direct subsidies, infrastructure, and breaking down barriers in labour markets, then we’d see progress come faster. 


Bhalchander: Your tone in the book is one of cautious hope, which largely echoes the general sentiment of the public. But while concluding the book, you state that the government and ministers do not talk the language of hope. How do you propose that the people at large get them to speak the language of hope? 

Nandan Nilekani: A big problem here is that the leaders in the government are of a different generation, and bound to age old interest groups. For a different language, we need younger leaders – this is beginning to happen – as well as reformers who simplify the language of reforms so that people can understand them: when reformers speak of direct subsidies, vouchers, universal health and pension plans, and a more decentralised approach to environment and energy, I think they will find that much of the poor is on their side. 


Bhalchander: The last question is from Ashok Parameswaran from New York, USA. How do you balance your time between work and philanthropy? And what are your future plans? 

Nandan Nilekani: My efforts in philanthropy don’t take much time because I have quite a few people that I trust running the day to day operations of it. I’ve been fortunate in that I have some very brilliant, dedicated people managing my non-profit interests. 


Bhalchander: Thank you very much for being with us. We wish you success in spreading your ideas and impacting policy for a renewed India.

Everything you wanted to know about microfinance in India but did not know whom to ask – Interview with Mr. N Srinivasan

27 Apr

Bhalchander: It is my great pleasure to have with us on email Mr. N Srinivasan, author of the ‘Microfinance in India: State of the Sector Report 2008’. The unabridged report is also available in several bookstores including amazon. Mr. N Srinivasan is a development economist and a career development banker. A postgraduate in economics from Madurai Kamaraj University, he also has a certificate in training and development from the University of Manchester. He served National Bank for Agriculture and Rural Development (NABARD) for about 25 years of which last six years were in the capacity of  Chief General Manager.

After leaving the bank, he is pursuing a career as a freelancer and has been a consultant to World Bank, IFAD, UNDP, UNOPS, GTZ, Frankfurt School, Sir Ratan Tata Trust, Access Development Services and Government of India.

 And thank you very much for taking time from your busy schedule to be with us. 


Bhalchander: The Microfinance in India: State of the Sector Report 2008 is a very comprehensive report. Could you tell us in brief about the methodology you used for the survey?


N Srinivasan: It is difficult to fit in the preparation of the report to a defined methodology given the size, complexity and multiplicity of stakeholders in the sector.  Interviews, surveys, dip stick studies, focus group discussions and literature reviews were all used. Mostly secondary information made available by NABARD, Sa dhan, Reserve Bank of India (RBI), Insurance Regulatory and Develoment Authority (IRDA) and others were used to analyse macro trends.  Study and research outputs of several individuals and organisations were also examined and used to validate the voices from the field.  Primary information and client/practitioner views were gathered during field visits – I was on the road for more than eight weeks.  About ten seminars and conferences gave insights in to certain aspects of the sector. UN Solutions Exchange ran two questions on their web platform which produced information from different sources.  Weaving all the information from different levels and sources in to a cogent report was the tricky part.


Bhalchander: The title slide of your presentation is very interesting. It says “In Search of a ‘mission beyond growth’”. Could you please elaborate on that?

N Srinivasan: The last two years saw vigorous growth.  But growth cannot be not an objective; it is a path to somewhere.  Where- is the question that the sector needed to ask.  With all the efforts and resources are we serving “our customers” well and effectively is the question.  Most growth has been planned in pursuit of institutional aspirations – not necessarily for improving quality and effectiveness of services to the clients.  Hence the need for “mission beyond growth”.


Bhalchander: You state that the intensifying competition is not entirely leading to positive results. Could you please elaborate on that?


N Srinivasan: Competition has pressurized MFIs in to cutting corners in client acquisition, servicing and monitoring processes.  Offering higher loan sizes just as a competitive response without an appropriate appraisal, financing of existing clients of other MFIs without considering their repayment capacity, poaching clients from others by making enticing offers thereby introducing clients to shopping and MFI hopping and a focus on increasing client and loan base without adequate risk management systems are some of the consequences of escalating competition.  Competition is good for the customer as it improves product quality and reduces costs in the short term.  But these improvements may be temporary, if unfair competition destroys some of the competing institutions.  The customer would tend to suffer in the long run.


Bhalchander: The presence of MFIs is concentrated in regions which are well endowed and where the entrepreneurs (clients) are relatively better off, while the less endowed regions and the poorer clients do not have access to microfinance. Do you think increasing competition will eventually make sure that all regions and all entrepreneurs are reached or would we need additional incentives or policy measures to make that happen?


N Srinivasan:  Competition  is limited – almost non-existent- in the less endowed regions.  Poorer people are last choice clients and do not gain easy access to finance.  Competition would fill in gaps in well endowed areas and among better off clients.  For the less endowed areas policy interventions and financial incentives are needed.  The financial inclusion campaign with the support of two funds can play a very significant role in extending frontiers of microfinance to remote and underserved areas.  But policy push should result in banking system and MFIs making inclusion a “ business prospect” rather than a CSR obligation.


Bhalchander: India is perhaps unique in having two major models of microcredit. One is the traditional Bank- Self Help Group (SHG) model and the Grameen replicator model followed by most MFIs. Based on your experience and recent observations which model is proving more effective in lifting people out of poverty?


N Srinivasan:  Studies show that SHG model where it has been in existence for a long time (five years or more) has an impact on poverty.  The NCAER study finds evidence that savings income, expenditure on education and health  have all  increased.  I would believe that MFIs would also have a similar effect where they have provided loans to same clients over a period of time.  But given the present small size of loans in both the models, it is difficult to envisage a rapid decline in poverty.  The loans are not sufficient to cover investment in livelihood assets that can produce a poverty mitigating income.  In fact the loan sizes need to be about ten times the present average to provide a base for poverty alleviating income for a family.  Credit, we are reminded is not a solution to poverty.  There are other enablers necessary such as access to markets, appropriate technology, skill sets, input availability and infrastructure.  Institutions that have managed to provide/ensure  these linkages in addition to finance have been more successful in addressing poverty.


Bhalchander: There has been huge and rapid growth of the larger for-profit MFIs. Many of them seem to have adopted a strategy of touch and move. i.e. They make microloans to a few people in a locality  and then move on to another locality, rather than truly get involved and penetrate a given locality. What is the impact of this strategy on the clients and the MFI?


N Srinivasan:  The “touch and move” models result in high transaction costs, low revenues per client, low ability to manage risks, render monitoring and supervision of operations difficult due to the expanded span of control and impose higher costs on the customer.  Small loans leave the customer open to poaching by other lenders. While widening is necessary for inclusion, deepening of services would lead to greater customer loyalty, higher revenues per client and lower transaction and risk costs.  Consolidation of business in each location before moving to new locations would better serve the interests of MFIs.


Bhalchander: Most of the funds go to a select few for-profit MFIs who are on a rapid expansion path. They get equity more easily from investors as they have the potential to go IPO. Since they have access to equity, they are also able to access bank loans on favorable terms and grow very rapidly. On the other hand, smaller MFIs that are more localized find it very hard to raise funds. Given that capital is limited, is there any reason why smaller, more localized MFIs should be supported rather than only support the larger ones as seems to be the trend today?


N Srinivasan: A good question.  First of all the notion that an MFI needs to be very large to be effective has to be dispelled.  The paradigm relevant in banks that have multi-location, multi-business  clients is not relevant to MFIs where clients are small and ticket sizes are also small.  Most pan-Indian MFIs would tend to increase their costs of management and control on account of extended spans and large complement of staff.  The standardization that takes place to make the business manageable would leave little scope for innovation and no flexibility to respond to client specific requirements.  In many ways such large organizations would be software driven and not by local human intellect. Microfinance is relationship banking to the core.  Hence I would venture to say that small MFIs should be supported to find the right size.  Equity, quasi-equity, long term loans and guarantees are tenable ways of financing such institutions. 

Equity as the dominant option requires large MFIs so that the investor gets a viable exit strategy; hence there is a mutuality of interests among those wanting to grow huge and those wanting to invest in equity with a ‘return’ consideration.

Finding the right size is the challenge – one of the issues is sustainability, another risk management across clients and activities in the loan portfolio, a third is the absolute cost of regulatory/supervisory compliance which is the same regardless of size.  But a critical consideration should be at what size the MFI could still be sensitive to the client’s needs.  The short answer is that we should prioritise small localized MFIs for all support.


Bhalchander:  What strategies should smaller MFIs which are either NGOs, societies, S.25 companies or cooperatives adopt given that they are likely to find it very difficult to transform into for-profit Non Banking Finance Companies(NBFCs) with the financial crisis and still continue to serve their clients? Is member owned co-operative which can also mobilize its own savings a feasible option?


N Srinivasan: Member owned forms are feasible, but slightly difficult option.  There are member owned and managed for profit companies, Mutually Aided Credit Societies, conventional cooperative societies that are successful. There are a dozen examples of member-owned MFIs that work successfully. These could be the models that other transformation candidates could emulate.  An important caveat is that such institutions take three to five years to stabilize; so the threshold of patience should be high to give such institutions the space to grow and psopper.

 If transformation is to ensure continuity and sustainability of access to finance, the NGOs could also think of becoming Banking correspondents of banks.  With more technology entering microfinance space, banks are willing to use NGOs to service microfinance clients.


Bhalchander: Some of the large MFIs in India have reached sizes which are not common in other parts of the world. Moreover they are purely microcredit institutions with no access to internal funds unlike Grameen Bank for example. And further they are for-profit entities with investors which also include Private Equity funds and Venture Capital apart from a few socially responsible investors. Such scale and structure is not found anywhere else in the world. What do you think are the emerging risks to banks which lend to them, their clients and to the organizations themselves because of this aspect which is so unique to India?


N Srinivasan:  We might find a few large MFIs  in other countries too. Some MFIs have targeted growth and size and have moved ahead.  They have the appropriate models for expansion of business.  But customer comfort may not always be a priority.  They offer uniform products regardless of clients’ livelihood investments and cash flows.  Sustainability of fast paced growth and retaining clients after three or four cycles of lending with the same loan product are concerns that would have to be addressed.  The high profits come out of an ability to price the loan – poor clients pay out  from their capital or a new loan.  Whether borrower would be sustainable at any level of interest rates? – the long term future of the MFIs depends on a study of interest rates on loans taken out of desperation and loans taken for livelihood activities.


Bhalchander: What can the microfinance sector in India learn from other countries?


N Srinivasan:  Capacity building  approaches, induction of relevant technology,  regulatory practices and building the profile of microfinance are some of the areas where we can learn from others.


Bhalchander: If you were to suggest 5 policy measures to the new government which have to be implemented in the next five years to improve the lives of the poor through microfinance, what would those be?


N Srinivasan:

  1.  Targeting livelihoods and incomes among the poor so that financial services can offer relevant services that address poverty.
  2. A new microfinance bill that would focus on sector regulation – not institutional/model regulation.
  3. Enabling savings mobilization by the sector either on own account or as correspondents, with the backing of deposit insurance through Deposit Insurance Corporation.
  4. Funding for investment in new customer acquisition for MFIs and banks to achieve financial inclusion objectives
  5. A low cost bulk funding facility that would finance MFIs  for on-lending to defined microfinance clients so that interest rates to the borrower could be kept affordable and MFIs themselves would remain sustainable.


Bhalchander: Mr. Srinivasan, thank you very much for being with us. We wish you success in your efforts to educate all stakeholders in microfinance and in the process building a vibrant microfinance sector which offers a hand up to the poor.


Mr. Srinivasan will be taking additional questions from readers posted in the comments, so please feel free to pose your comments and questions.

Poverty, collaboration and patience

11 Feb

Ever since I started working on United Prosperity, I have learned that progress in a startup happens in spurts. One is often faced with what seems like an insurmountable problem. You keep trying various things – nothing seems to work. Nobody seems interested in what you are doing or if they are slightly interested they have other priorities. And then one day suddenly someone decides to help and lo and behold, things start moving. The seemingly insurmountable problem now transforms into a doable task which then gets done with relative ease. This has been the consistent pattern with all the big milestones we have had like Cognizant helping us with the software development; UC Berkeley, Hanson Bridgett and OMM helping us with the legal work or HDFC Bank in India agreeing to partner with us.


I met Jonathan Lewis, CEO of Microcredit Enterprises a few days back at Davis and it was a great opportunity to bounce ideas and take advice on solving the seemingly insurmountable problems.  ‘It took us 3.5 years to get a bank to start working with us’, he said.  That gave me a perspective of the level of patience needed to overcome these startup obstacles. In our case, we approached a few banks in India and gave an overview of our guarantee in November 2007. However things picked up a little momentum only in May 2008 when we contacted HDFC Bank, India. Since then we have been closely working with them and are at the final stages of finalizing the legal agreement.


Another aspect which has struck me since I started working on United Prosperity has been that many of today’s complex problems like poverty or cures to tropical diseases tend to be outside or on the periphery of market forces and players. However, getting the necessary resources to solve complex problems like poverty requires the immense support and collaboration of mainstream market forces and institutions. They have the resources and expertise to solve different parts of the problem. E.g. we would not have come to where we are today without the support of Cognizant in building the software or the various legal teams who have helped us.


I got to discuss this with Jonathan Lewis. He was quick to highlight the importance of collaboration. ‘The current financial crisis is going to require an unprecedented level of collaboration’ he said. He is even putting together a forum called the Opportunity Collaboration where people working on poverty alleviation in various capacities can forge new alliances. Check it out.


Overall it has made me realize that combating poverty requires immense collaboration, which further requires patience. And for startups dealing with the seemingly insurmountable problems which come up from time to time, the value of collaboration and patience can never be underestimated.


And yes, we are all eagerly looking forward to sign the agreement with HDFC Bank in the next few weeks, so that we can launch soon.

Microfinance in India and the Global Financial Crisis

30 Jan


My visit to India last month gave me a great opportunity to talk to people and get a first hand assessment of the impact of the global financial crisis on microcredit programs. Yesterday I also happened to read a recent Fitch ratings report on microfinance and it gave me an opportunity to compare its findings with my own observations.


 Fitch ratings believes that there is growing evidence that the larger, more integrated players in this sector are experiencing increased pressures. Given the concentrated nature of the industry, with the 100 largest microfinance institutions (MFIs) estimated to account for 80% of sector assets and 70% of sector borrowers, Fitch’s view is that it will be difficult for the microfinance sector to be immune to the global financial crisis.


Talking to banks and some of the MFIs, I did not get an impression that the ability of the larger for-profit MFIs to raise debt (loans) in the short term from local commercial banks was severely affected. Perhaps this may be because banks in India are required to allocate a certain portion of their lending to priority sectors like microfinance. Since most commercials banks do not lend to smaller MFIs, I think the larger for-profit MFIs have multiple banks to shop around for their debt and thus are able to raise commercial debt to a reasonable extent despite the global financial crisis.


I also met with people at AccessDev, an MFI network in India. Through its AmFa initiative, Access supports 110 MFIs, most of which are smaller MFIs working in remote and under-served regions.  As per Access and some of the MFIs I spoke to, smaller MFIs are finding it increasingly difficult to get fresh loan approvals.  This problem is compounded because only a few banks and development institutions such as SIDBI, FWWB, HDFC Bank and Axis Bank lend to smaller MFIs. 


Thus my assessment of the impact of the financial crisis at least in the Indian context is that Microfinance as a whole is likely to see lower growth and smaller MFIs will get impacted more severely than the larger MFIs.


On a separate note while in India, I also attended a Panel discussion where Vijay Mahajan the founder of Basix, India was a panelist. One of the points he mentioned was that MFIs are increasingly finding it difficult to raise equity. Discussions with the team at IFMR trust also gave me the same impression. MFIs need to raise equity because most banks typically lend to MFIs only if their capital adequacy ratio exceeds a certain threshold. Greater equity leads to a greater capital adequacy ratio. (Check http://www.themanagementor.com/enlightenmentorareas/finance/FIFS/CapiAdeq.htm  for a more detailed discussion on capital adequacy).


Typical investors in equity include microfinance focused funds like Unitus, foundations like the Michael and Susan Dell foundation, private equity and venture capital firms. I think equity investors are increasingly finding it difficult to raise funds from their investors because of the global financial crisis. If MFIs are unable to raise equity then in due course they will find it increasingly difficult to raise debt from commercial banks and serve their clients.


Given these trying times, I think it is all the more reason that the community at large should increase the support for microfinance and help MFIs and poor entrepreneurs tide over this crisis.