A few microfinance firms overcame the hurdles and thrived in 2011
The microfinance sector has just had its worst year ever. But a few models have bucked the trend and managed to thrive, recording growth and even building scale. Interestingly, some of these organisations are not-for-profit entities.
Doing things differently: Janalakshmi founder Ramesh Ramanathan
Ten years ago, Srikesh Kotyan had a modest turnover and could not afford to stock too many items in his stationery shop in Belthangady, near Mangalore. Today, the 54-year-old's life stands transformed. His turnover has multiplied manifold and he now stocks goods worth Rs 15 lakh. He and his wife Pushpavathi, 48, have also been able to give their daughters a firm footing. The elder daughter is an M.Sc. in Mathematics, while the younger one is pursuing her Masters in English.
Small loans from the microfinance initiative of a Karnataka-based temple trust have played an important role in this transformation. The Sri Kshetra Dharmasthala Rural Development Project (SKDRDP) trust lends to self-help groups (SHGs), which, in turn, distribute loans to their members. SKDRDP, which has been lending to SHGs since 1995, is led by D. Veerendra Heggade, the Dharmadhikari and temple administrator of Sri Kshetra Dharmasthala, a famous centre of worship.
Independent estimates today peg the temple's assets at over Rs 10,000 crore and annual revenues at Rs 100 crore. "There have been many government programmes in the last 65 years, but ours has been the most effective in Karnataka. And, we don't expect anyone to thank us because this is not philanthropy," says Heggade. SKDRDP is active in 11 districts of Karnataka and supports 1.7 million members through 165,000 SHGs. Its total outstanding loans as on December 31, 2011, totalled Rs 1,325 crore. "Our credit appraisal is very strong and payback period varies from two to 10 years," says L.H. Manjunath, Executive Director of the SKDRDP trust.
The trust and a few others have provided a silver lining to the dark cloud that hangs over the Indian microfinance sector today. Till 2010, some of the leading 'for-profit' institutions in this space were seeking scale at all costs and simply churning out loans. They did not focus on the essence of microfinance, which is to go beyond the banks and reach out to the poor, hand-holding them in their efforts to overcome poverty.
In October 2010, the Andhra Pradesh government, reacting to allegations of coercive loan recoveries by some microfinance institutions (MFIs), promulgated an ordinance - later turned into a law - imposing drastic curbs on them. The new law required MFIs to register themselves with multiple government bodies, declare their interest rates upfront, make borrower details public, stop seeking weekly repayments and deny additional credit to borrowers who already had loans pending. Its effects were felt even outside the state as banks everywhere restricted lending to MFIs. Not surprisingly, the sector recorded its worst-ever year in 2011.
However, a few have managed to thrive, recording growth and even building scale. Interestingly, some of these organisations are not-for-profit entities. In Varanasi, for instance, Cashpor, set up by microfinance veteran, David S. Gibbons, has been successfully serving the poor for more than a decade. Unlike SKDRDP, which lends to SHGs, it follows the Grameen model - named after Bangladesh's Grameen Bank where it originated - typically lending to a fivemember joint liability group.
Cashpor's operations are restricted to 20 districts in eastern Uttar Pradesh and Bihar. It has around 400,000 borrowers, all below the poverty line. Cashpor may not have achieved scale like the forprofit SKS Microfinance - which operates across 19 states and at one point was adding 100,000 new borrowers each week - but neither has it faced the kind of battering SKS and other leading MFIs did in the wake of the Andhra Pradesh crackdown.
Instead its portfolio has grown, with loan disbursals rising from Rs 471.86 crore in 2009/10 to Rs 515.70 crore in 2010/11. Its share of non-performing assets (NPAs) also came down from 0.28 per cent to 0.25 per cent during this period. Being a Section 25 company, targeting only those below the poverty line, its operating surplus is also exempt from tax under Section 12A of the Income Tax Act. This has helped Cashpor reduce its interest rate by 4.5 percentage points (in July 2010, well before the Andhra crisis) to 25.76 per cent.
Bangalore-headquartered Sanghamithra Rural Financial Services is another not-for-profit Section 25 company that is thriving. Despite a presence in Andhra Pradesh - where the new law led to a sharp dip in loan recoveries - it hardly has defaults and NPAs. "That is because we do not lend to individuals. We lend to self-help groups and, more importantly, before lending, we invested in capacity building," says Aloysius P. Fernandez, its chief architect.
Sanghamithra, too, has been able to maintain growth, albeit at a slower pace. "For the past seven to eight years we have been growing at over 30 to 40 per cent per annum but in the last two years it has been down to 20 per cent," says Fernandez.
His example disproves the view that only those with limited exposure in Andhra Pradesh are doing well. "Models that tend to be closer to the people have been able to withstand the crisis in the sector," says Jayshree Vyas, Managing Director, SEWA Bank.
While promoter greed and the craze for scale have given microfinance a bad name, Bangalore-headquartered Janalakshmi has managed to remain blemish-free. Founded by former Citibanker Ramesh Ramanathan and his wife, it has a unique MFI model. The couple set up two for-profit entities - a non-banking finance company, providing financial services to the urban poor and an affordable housing developer company - but transferred all their shares in these companies to a not-for-profit Section 25 company, Janalakshmi Social Services. Any returns the promoters earn from the forprofit entities are transferred to the not-for-profit body.
So far, it has sustained itself on a $1-million grant from the Michael and Susan Dell Foundation. This will keep them going for the next two to three years. Thereafter, promoter returns from the for-profit entities could help fund further activities.
So what lessons can mainstream microfinance players derive from these models? "Rather than hunting for a fortune at the bottom of the pyramid, not-for-profits look at serving the bottom of the pyramid," says M.S. Sriram, an adjunct professor at IIM Ahmedabad, who is also on the board of Sanghamithra.
This makes all the difference. "One of the things that has influenced events over the last year has been the perception that for-profit MFIs profit at the cost of the poor," adds S. Viswanatha Prasad, cofounder of Bellwether Microfinance Fund. "You cannot say that about the not-for-profit side. That is the single biggest differentiator."
Staying connected with the poor seems to have helped. That, perhaps, explains how these entities have bucked the trend and grown while others struggle all around them.
Small loans from the microfinance initiative of a Karnataka-based temple trust have played an important role in this transformation. The Sri Kshetra Dharmasthala Rural Development Project (SKDRDP) trust lends to self-help groups (SHGs), which, in turn, distribute loans to their members. SKDRDP, which has been lending to SHGs since 1995, is led by D. Veerendra Heggade, the Dharmadhikari and temple administrator of Sri Kshetra Dharmasthala, a famous centre of worship.
Independent estimates today peg the temple's assets at over Rs 10,000 crore and annual revenues at Rs 100 crore. "There have been many government programmes in the last 65 years, but ours has been the most effective in Karnataka. And, we don't expect anyone to thank us because this is not philanthropy," says Heggade. SKDRDP is active in 11 districts of Karnataka and supports 1.7 million members through 165,000 SHGs. Its total outstanding loans as on December 31, 2011, totalled Rs 1,325 crore. "Our credit appraisal is very strong and payback period varies from two to 10 years," says L.H. Manjunath, Executive Director of the SKDRDP trust.
The trust and a few others have provided a silver lining to the dark cloud that hangs over the Indian microfinance sector today. Till 2010, some of the leading 'for-profit' institutions in this space were seeking scale at all costs and simply churning out loans. They did not focus on the essence of microfinance, which is to go beyond the banks and reach out to the poor, hand-holding them in their efforts to overcome poverty.
D. Veerendra Heggade, Dharmadhikari, Sri Kshetra Dharmasthala
| Bangalore-based Janalakshmi's promoters operate an NBFC and an affordable housing developer focusing on the urban poor. Returns are transferred their not-for profit arm. |
Cashpor's operations are restricted to 20 districts in eastern Uttar Pradesh and Bihar. It has around 400,000 borrowers, all below the poverty line. Cashpor may not have achieved scale like the forprofit SKS Microfinance - which operates across 19 states and at one point was adding 100,000 new borrowers each week - but neither has it faced the kind of battering SKS and other leading MFIs did in the wake of the Andhra Pradesh crackdown.
Instead its portfolio has grown, with loan disbursals rising from Rs 471.86 crore in 2009/10 to Rs 515.70 crore in 2010/11. Its share of non-performing assets (NPAs) also came down from 0.28 per cent to 0.25 per cent during this period. Being a Section 25 company, targeting only those below the poverty line, its operating surplus is also exempt from tax under Section 12A of the Income Tax Act. This has helped Cashpor reduce its interest rate by 4.5 percentage points (in July 2010, well before the Andhra crisis) to 25.76 per cent.
Bangalore-headquartered Sanghamithra Rural Financial Services is another not-for-profit Section 25 company that is thriving. Despite a presence in Andhra Pradesh - where the new law led to a sharp dip in loan recoveries - it hardly has defaults and NPAs. "That is because we do not lend to individuals. We lend to self-help groups and, more importantly, before lending, we invested in capacity building," says Aloysius P. Fernandez, its chief architect.
Sanghamithra, too, has been able to maintain growth, albeit at a slower pace. "For the past seven to eight years we have been growing at over 30 to 40 per cent per annum but in the last two years it has been down to 20 per cent," says Fernandez.
His example disproves the view that only those with limited exposure in Andhra Pradesh are doing well. "Models that tend to be closer to the people have been able to withstand the crisis in the sector," says Jayshree Vyas, Managing Director, SEWA Bank.
While promoter greed and the craze for scale have given microfinance a bad name, Bangalore-headquartered Janalakshmi has managed to remain blemish-free. Founded by former Citibanker Ramesh Ramanathan and his wife, it has a unique MFI model. The couple set up two for-profit entities - a non-banking finance company, providing financial services to the urban poor and an affordable housing developer company - but transferred all their shares in these companies to a not-for-profit Section 25 company, Janalakshmi Social Services. Any returns the promoters earn from the forprofit entities are transferred to the not-for-profit body.
So far, it has sustained itself on a $1-million grant from the Michael and Susan Dell Foundation. This will keep them going for the next two to three years. Thereafter, promoter returns from the for-profit entities could help fund further activities.
So what lessons can mainstream microfinance players derive from these models? "Rather than hunting for a fortune at the bottom of the pyramid, not-for-profits look at serving the bottom of the pyramid," says M.S. Sriram, an adjunct professor at IIM Ahmedabad, who is also on the board of Sanghamithra.
This makes all the difference. "One of the things that has influenced events over the last year has been the perception that for-profit MFIs profit at the cost of the poor," adds S. Viswanatha Prasad, cofounder of Bellwether Microfinance Fund. "You cannot say that about the not-for-profit side. That is the single biggest differentiator."
Staying connected with the poor seems to have helped. That, perhaps, explains how these entities have bucked the trend and grown while others struggle all around them.
