Wrapping Up

My microfinance stint in Mumbai has come to an end.  The experience was incredible on both a personal and a professional level.  After reflecting  on my time at the ground level, a few final thoughts…

• Microfinance (basically) works.  After seeing it in practice, I do believe in microfinance as a solution for poverty reduction.  The system and the process are effective and becoming increasingly efficient, and the low-income entrepreneurs definitely benefit from access to capital.  However, it generally takes two or three loans to really make a difference.  The initial loan is enough to get started, but the impact becomes significant after multiple loan cycles, which takes over a year.  Also, it is the “moderately poor” that are targeted.  While all borrowers fall into the low-income category (and all are deserving of  a loan and come to benefit from it), most of the small business owner borrowers are better off as compared to the “ultra poor.”
• The industry is in the midst of a transformation.  Private equity activity is on the rise and microfinance institutions are turning to commercial capital to fund growth and expansion.  To  achieve scale and increase outreach, forms of capital outside of traditional microfinance funding (grants, donations, government)  are critical.  As a result, the issue for microfinance institutions is becoming one of profit motive (with shareholders and investors to satisfy) vs. social commitment.
• There is a huge unmet need for microfinance.  The estimated total credit need is around $250 billion globally and $60 billion in India.  Only 10 – 15% of of market demand has been met which further emphasises the need for commercial capital to scale up rapidly.
• Costs, capital, and capacity are the three factors for microfinance institutions.  Costs must be meticulously managed given the thin margins — particularly in terms of processing costs for loans.  Capital is necessary to meet an expanding customer base and must also be must also be managed effectively and at the right price and interest rate.  Capacity in terms of scaling up and having the capability (staff, technology, resources, etc.) to access a growing base of clients.
• Technology platforms can provide opportunities for everyone to get involved.  I encourage everyone to participate and make a direct loan online (Kiva, Microplace) or a contribution to ACCION International.

Group Meeting

The Group of Group product repayment process occurs during a weekly meeting between the groups and the Loan Officer.  Prior to the meeting each of the five group members gives their repayment amount to the Group Leader (as designated when the loan is initially taken) who then presents the total group repayment amount to the Loan Officer during the meeting.  This is done for each of the individual groups that together form the “Group Center” (the group of groups).  Only women are eligible for the Group of Group product and we have experienced 100% repayment (i.e. of the  100+ groups of clients we have, none of them have EVER missed or been late on a payment).

 Group Repayment meeting in Talegaon, India.  Five groups are present, each sitting in a row with the Group Leader at the front.

 

The Loan Officer (seated center facing, in the red jacket) collects the repayments from each group and provides a signature and “receipt” that certifies the repayment.  In this meeting, the total amount collected was approximately 11,000 rupees ($220).

Micro-insurance

We are in the process of rolling out a life insurance product that will provide coverage in the event that a borrower with an outstanding loan passes away.  The product is structured so that a third party insurance provider covers the amount of loan outstanding and, based on that amount and other characteristics, also provides an additional ‘top up’ payment that goes to the borrower of the family to cover funeral costs and other expenses.  This structure benefits us (without it we basically write-off the loan if a borrower does pass away) as well as the borrower, by providing the ‘top up’ payment to the family.  The main questions left to consider are:

1) Is there demand for micro-insurance? Most borrowers are not likely to be familiar with the concept of insurance.

2) What fee should we charge the client? Keeping in mind our objective is only to cover our costs, not generate profit from it.

Target Market

The minimum eligibility criteria that must be fulfilled for an individual client and a Group of Group client (as described in the “Product Offerings” post below) that we target is as follows (note: this is just eligibility criteria, the ability and the willingness to make loan payments are then evaluated if this criteria is met)… 

Individual clients

• Owner and operator of individual business
• 18 to 55 years old
• Business is permanent and generates regular sales (i.e. not seasonal)
• At least one year of experience in the existing business
• At least one year in the same business location
• Four references – two personal and two business

An individual loan client in Dharavi slum who sells sandals (or "chappals" in Hindi)

Group of Group clients

• Females only
• 18 to 55 years old
• Must be married (or widowed or divorced)
• Husband must be involved in an income generating activity (with the exception of widows or divorcees)
• Loan purpose is to generate income
• Permanent address for at least two years (if the house is not owned) or six months (if the house is owned)
• Willingness to attend weekly group meetings
• Approval / endorsement by others to form a group

A Group client who sells coconuts in a town outside of Mumbai

Lending on Kiva

Kiva, the peer microfinance lending website, has been in the news recently for reaching a couple of considerable milestones and for creating a little bit of “controversy.”  Kiva celebrated its fourth anniversary and, since launching in October 2005, has provided loans to nearly 250,000 entrepreneurs in over 50 countries.  Kiva also hit the $100 million mark, with over 570,000 lenders having provided over $100 million in loans over the last four years.  The online platform seems to be gaining significant momentum in terms of number of lenders and volume of new loans as the amount of loans provided through Kiva has increased by $60 million since the same time last year (which is more than double the three prior years combined).

Kiva works by connecting generous people with microfinance lenders by promoting individual beneficiaries on the website.  This seemed to imply that the money provided was going directly into the pockets of the specific entrepreneur that had been selected to support.  The “controversy” that has emerged is that this is not how it really works.  A research fellow at the Center for Global Development blew the whistle about a month ago and others have since chimed in (links to a number of articles here).

Kiva does support the individuals pictured on the website, but by the time you or I want to make a loan to a certain individual, a microfinance institution has already done so.  Instead the money lent on Kiva is aggregated into a larger pool which is then used to backfill the loans that microfinance institution have already disbursed to different entrepreneurs.

Having provided a number of loans on Kiva, this revelation does not significantly impact my lending decision.  I believe the efforts and intentions of Kiva are sincere and the people there have done a fine job at fixing some of the misconceptions about the processes and releasing even more information to explain how it works since this all emerged.  I encourage everyone to participate and play an active role in microfinance and poverty alleviation by making a loan on Kiva.

Urban vs. Rural

Mumbai as an urban microfinance market is notoriously difficult.  The market is saturated with loan opportunities and borrowers are not as impressed with a lending institution or as concerned about the repercussions of defaulting.  The metropolis setting and quick pace of life has also generally resulted in borrowers who are less honest, more likely to re-locate, and not as concerned with the social factors that play a role in repayment (see the “Product Offerings” post below).

A huge distinction exists between lending in urban areas and lending in rural areas.  Urban areas, such as Mumbai, offer access to a concentrated group of borrowers located more closely to one another.  Given the urban slums setting with street markets and shop owners, the primary urban product is individual loans (see the “Product Offerings” post below for a description of different loan products) and the borrowers are primarily male.  The urban borrowers are relatively more sophisticated as many are aware of the formal banking system and most have likely been approached by a microfinance institution in the past.

Rural lending involves a customer base that is geographically more spread out and financially less sophisticated.  Group of Groups loans are the primary product and women are the primary borrowers given the village setting and social factors that are present.  Group of Groups loans are the most effective way to scale up and reach borrowers as the replicable expansion model allows for accelerated growth.  As a result, rural lending and Group of Groups type loans are the focus for most microfinance institutions in India.

To Profit or Not to Profit?

SKS Microfinance, India’s largest microfinance player, recently confirmed plans for an IPO (with Credit Suisse mandated as a bookrunner).  SKS is on pace to soon overtake Grameen Bank as the world’s largest microfinance institution (“MFI”) with over 8 million customers and would be the first Indian MFI to go public.  An IPO would be a high profile event within the industry and set a precedent for other MFIs.

Reactions to the SKS IPO plans have been mixed.  Given the social focus of microfinance, some view the business model as one that should be built on social capital and not seek to profit.  However, to scale up and reach more borrowers, MFIs need capital — much the same way that microenterprises need it to grow.  Private equity activity in the sector has been on the rise (hedge fund Sandstone Capital and private equity group Sequoia Capital have stakes in SKS) and an IPO would generate significant profit for the owners.  Investors in the high profile Banco Compartamos IPO in 2007 realized a rate of return of over 100% (!) on original investment — which is part of the reason it has been so controversial.

The key for the industry to grow while maintaining a social focus is to achieve a balance.  The best interests of the microenterprises and borrowers should still be the focus by providing fair interest rates, transparent fee structures, and suitable financial products.  However with only an estimated 10% of global demand being met, rapid growth and scaling up is necessary.  While Grameen Bank has reached over 7 million clients, an amazing feat, it has taken 35 years to do so.  To scale up and to access and help the low-income population, commercial capital is necessary to meet the huge funding requirements.  The key in doing so will be to achieve a balance and keep the interests of the borrowers at heart.

Happy Diwali

Today is the biggest Indian holiday of the year, Diwali (the festival of lights).  Check out President Obama’s Diwali message.  Happy Diwali to everyone!
 

Some of the team at the Diwali office celebration

A Day in the Life

I’ve received a number of questions asking what a typical day is like.  While each day is different, my weekdays are something like this…

7.30  Wake Up
Decide whether I should have an Indian breakfast, such as Idli, or go with Corn Flakes.

8.00  Catch a Taxi to Work
Never has the London Underground seemed more lame.  Traffic is insane.  Pure chaos.  Horns are blaring, traffic signals don’t matter, people blindly cross the street without looking.  Fender bender?… consider it a love tap.  The only reason for a car to stop moving is… if a sacred cow is roaming across the street.

8.45  Arrive to Office
The ACCION – YES SAMPANN head office is in Chembur which is on the outskirts of the city.  The management team consists of 10 people based in the head office along with middle office and back office support.  At the office, I catch up on emails and news first thing and then put together a plan for what needs to be done for the day.  Also, if I am going to visit clients in the field I go in the morning.

10.00  Activity Plan Management
As the company is in the process of transitioning into a new, standalone entity, I am responsible for managing the project both internally (by making sure all functions and departments are on schedule for transition and all legal / regulatory requirements are met) and externally (in being involved with acquiring necessary licenses and agreements).

11.30  Meetings
Meetings either with the entire team or individual team members, with vendors, with staff members from a branch office, or with a Loan Officer to listen to what is going on in the field.

13.00  Lunch
While many in the office bring food from home or have it delivered by a dabbawala (check out the link — it’s a pretty amazing service), I either order from a local restaurant  or, if I feel like having non-Indian, visit one of a number of cafes or even the nearby shopping mall that has a food court (complete with a McDonald’s and the “Maharaja Mac” aka the Indian Big Mac).

14.00  Financial Model Analysis
To develop a business plan as the business ramps up and the company prepares to become a standalone entity, I am building financial models that analyze branch profitability, liquidity management, asset liability management, and branch budgeting.

16.30  Strategy Update
Discuss progress with the team, identify issues that need to be addressed, follow up on action points.  This is a time to discuss and listen to new ideas such as potential products to offer, new aproaches to processes, and broader microfinance industry considerations.  Preparations for the daily Credit Committee also get underway.

19.00  Catch a Rickshaw
While I take a taxi to work in the morning, I take a rickshaw home at night as it is easier to maneuver in and out of the heavy traffic… plus they make for a much more entertaining ride.  To and from the office I pass through Dharavi slum, the setting for Slumdog Millionaire, and can see the extreme conditions and population density.

20.00  Gym
I hit a gym in Bandra close to where I live… partly to work out and partly (ok…mainly) to see the Bollywood stars that also work out there, including two of my favorites, Priyanka Chopra and Neha Dhupia.

21.30  Dinner
As with all meals here, the big question is: Indian or non-Indian?  For both options, there are many restaurants with a wide variety of cuisines and price ranges.  Occasionally I have the opportunity for an authentic home cooked Indian meal at the house of a friend, or, when I’m feeling brave, a less-authentic home cooked Indian meal prepared by myself.

Product Offerings

There are three basic types of loan products that we offer.  The first is the Self Employed Loan (“SEL”). This loan is made to individual business owners with the target population being the “economically active self-employed businessmen in the low-income market and slum areas, who have been outside the purview of the formal financial sector.”  Essentially, the SEL is a basic loan made to an individual with that individual being responsible for making principal and interest repayments.

The second product is the Joint Liability Group (“JLG”) Loan. JLG loans are made to a group of 5-6 members. A group is formed to work on a principle of mutual help and guarantee, with the group as a whole guaranteeing the loan of each group member.  JLG loans are made to individuals who are part of groups that have been formed.  Each group member is liable for their own loan repayment and the repayment of the other members of the group.  The groups comprise of people who individually would not be in a position to obtain a SEL because they would be deemed too high risk.  The group mechanism is effective because it transfers many of the administrative costs and credit risks to the clients themselves.  The group members become responsible for most facets of the lending process including client selection, business assessment, repayment collection, and delinquency management.

The third product is the Group of Groups (“GoG”) Loan.  This is the product made famous by Muhammad Yunus and his Grameen Bank and is the standard product offered by most prominent microfinance institutions in rural India.  The GoG product is offered to groups of 5-10 women only.  These groups are then grouped again to form a center, which consists of around 5 groups.  Similar to the JLG product, the GoG loan is an individual loan to a member of a group that is part of a center.  All of the members of the group and of the center are liable for the loan repayments of the other members.  As the groups consist of members who individually would not be eligible for a SEL, the group mechanism at both the group and center level allows for access to capital.  Group lending is effective because it includes the following:

• Peer monitoring:  the ability for borrowers to monitor the investment behavior of one another, making sure that each makes safe use of the capital
• Social ties:  the social cohesion means that the sanctions that a borrower would receive from the group for defaulting results in each member wanting to repay faithfully
• Group pressure:  the pressure between borrowers to repay means that the group can exclude non-paying members if they default, which would prevent them from continued access to capital