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!!

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Fund raising for operations is one of the biggest challenges we face and one of the questions I hear very often is why UnitedProsperity.org is a not-for-profit and why it isn’t a for-profit social enterprise. I explain that our model is unique, we are pioneering something new to the world, it involves crowd sourcing and support from thousands of microlenders and that a sustainable not-for-profit model or a social business model works the best for us. However, the feeling I get on several occasions is that a large number of social investors, philanthropists and even many foundations nowadays have already made up their mind on the type of organization they would like to support and believe that all social enterprises need to operate in a for-profit manner giving reasonable returns and in many cases lucrative returns to their investors.

For those who can pitch their organizations in 30 seconds indicating how their social enterprise can help mitigate a social problem and also give returns to their investors I think there are a large number of investors willing to lend an ear.

On the other hand, for those who have started non-profits however innovative, I think it is quite hard to raise operational funding. My most recent experience was in a discussion with a billionaire who thought United Prosperity was a great idea. But he simply walked away in the middle of a discussion when I told him that United Prosperity was a non-profit and I had no intention of turning it into a for-profit enterprise in the near future. And in our discussion I had also not solicited any funds.

To me these incidents serve as a cautionary tale of how far mainstream thinking and perception on social enterprises has gone from the actual ground realities. I think there are social enterprises which should be for-profit enterprises, several need to be non-profits and we need many more social businesses. In my opinion, for-profit social enterprises are not a silver bullet for all problems at the Bottom of the Pyramid and an ideological worldview that only for-profit social enterprises can scale and be sustainable can be pretty short-sighted.

My view that there is a huge role for non-profit social enterprises was further re-affirmed when I heard the presentation from Operation Asha at the IDCA Seventh International Conference-Chicago where I was also one of the speakers. Operation Asha is treating Tuberculosis (TB) in the slums of India. Despite the fact that TB is a treatable disease, it has assumed epidemic proportions in India, claiming the lives of 400,000 and newly infecting 2.2 million every year. India has the highest proportion of its population, 3.3 per capita, infected with TB and accounts for one-fifth of the world’s TB burden.

There were several things about their organization which impressed me a lot:

- They serve the poorest of the poor.

- They are very customer centric in their approach. They have outbound health workers who visit patients at the patient’s home and they also have several TB treatment centers close to the slums so that their patients don’t have to spend time and energy or miss a day’s work to visit these centers. While most government centers remain open from 10:00 AM to 1:00 PM, their centers are open from 7:00 AM to 9:00 PM so that their patients can visit the center at their convenience without missing a day’s wage.

- They practice stringent cost control and the cost of the treatment over 7 months was only $15. Interestingly, the patient needs to go to the treatment center about 70 times during the therapy over 7 months. The low cost speaks highly of the operational efficiency despite the extremely high level of transactions.

- The have leveraged the support of the community, corporate and the government very well. Operation Asha has access to free supply of medicines from the government. This takes care of 3/4th of the total cost. Further, with the space and services given by providers for a modest payment, every dollar is leveraged 35 times. Thus, with an investment of $15 only, Operation Asha is able to provide medicines and services worth $350 and treat a patient for the entire period of therapy, which lasts seven months, on average.

- Each of their centers becomes sustainable from operations in two years.

- They have achieved remarkable automation of their operations and were piloting bio-metrics with Microsoft.

I don’t know how hard it has been for them to raise funding, but anyone would agree that the work they are doing is remarkable and in many areas worthy of emulation in so many areas. We are fortunate to have organizations such as Grameen Bank, Brac, Amul and Aravind which have done remarkable work at the Bottom of the Pyramid and transformed lives. Had the ‘for-profit’ filter been applied very early in their lives, we may have never heard of these remarkable organizations.

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The panel discussion highlighted some differences between the various organizations: Kiva, Grameen, and Accion were all supporting lending in the United States while United Prosperity’s focus is on those living in absolute poverty in developing countries. In addition, United Prosperity exclusively provides guarantees while the other organizations tend to have a focus on micro-lending. Kiva and United Prosperity tend to rely more on volunteers while Grameen and Accion had larger full-time staffs. The discussion also touched on topics including the rapid growth of the industry, challenges to expanding microfinance, and the potential of cellular technology in expanding opportunities for the poor. 

I’d like to thank the United Prosperity’s New York Chapter and Columbia’s NetImpact group for organizing a terrific discussion!

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Hemant Wadhwani and Cindy Yang

Nevin Shetty and Ashok Parameswaran

Praveen Srikanth and Siddharth Dandekar

Katie Wold, Suzie Sagues, Nevin Shetty, and Anthony Winslow with dollar bills to show how a $10 guarantee turns into a loan of $20 or more!

Rita Bagai, Diti Sangoi, Kanika Marwaha, and Amar Patel

Kristi Polsdam, Aditi Shah, and Siddharth Dandekar making a guarantee!

Krista Mar, Matt Neimken, and Sara Smolley

I am happy to report that the first happy hour organized by United Prosperity’s (first) New York Chapter was a successs! Despite torrential downpours, over 30 people came out to learn about United Prosperity and spread our message.

Everyone had a terrific time.  Nevin Shetty and I said a few words to the group about why anyone who is passionate about sustainably eradicating absolute poverty should get involved with United Prosperity.

A special thanks to Columbia University’s Microfinance Working Group for co-sponsoring the event, to the Leela Lounge for hosting it, and to Lisa-Marie Gil and the other New York Chapter organizers for their outstanding job in organizing it.

We look forward to organizing many more events. Please join us one facebook as well : http://www.facebook.com/group.php?gid=100842699351

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Where:

Leela Lounge
1 West 3rd Street (between Broadway and Mercer)

When:

Wednesday July 29th, 6-9pm

$5 beer and wine all night
$10 suggested donation
Presented in conjunction with the Microfinance Working Group

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Twitter : http://www.twitter.com/unitedprosper

Facebook: http://www.facebook.com/unitedprosperity.org

Linkedin : http://www.linkedin.com/groups?gid=2025482

Ning : http://unitedprosperity.ning.com/

Please join us on your community of choice.

Have a great weekend.

ubc6tw9aj8

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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.

Bhalchander

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

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,

N.Srinivasan

Author – State of the Sector report - Microfinance India 2008

Shrin54[at]yahoo[dot]co[dot]in

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 It took us a year to sign the partnership agreement with HDFC Bank, but it is well worth it as HDFC lends to both large and small MFIs unlike most of the other banks that lend to only a few large MFIs.  Many of the MFIs United Prosperity will work with in India will be working in the less developed states of India and our partnership with HDFC will be crucial in making sure that microcredit reaches the people who need it the most.

We also signed our partnership agreement with Ajiwika, an MFI working in the state of Jharkhand.  Ajiwika is the first MFI in Jharkhand State in India. Ajiwika is operating in one of India’s poorest regions where over 80% of potential clients are un-served and where only a few MFIs operate. From my interactions with Ajiwika over the last one year I have been impressed by their commitment to social goals and their willingness to put the needs of the poor entrepreneurs first.

Looking back at the last 20 months in setting up United Prosperity, I am proud of our various achievements. Building a complex website in a very short time, putting together the legal documents for partnerships with banks and MFIs, analyzing the regulatory aspects in the US and website terms, setting up the partnership with HDFC bank, working with Ajiwika to upload and create entrepreneur profiles on our website, setting up the basic accounting processes – each of these tasks came with their own challenges.

I would like to thank each of our supporters – Cognizant, UC Berkeley Law School, O’Melveney & Myers, Hanson Bridgett, Tempus Law, NetSuite and Books2Taxes for their early and sustained support.

We are extremely fortunate to have a great team of nearly 50 people with experience, expertise and dedication to work with us and advise us. We would not have been at this point without their timely and invaluable contributions.  

I greatly appreciate the initiative of our first partners, HDFC Bank and Ajiwika, in adopting the unique guarantee model of United Prosperity.

I would like to thank our numerous well wishers who have used their personal and professional connections to help us in this endeavor and my wife Shubha, who has been a constant source of support and encouragement.

Thank you very much once again.

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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.

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Bhalchander:

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.

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