Loans and Livelihoods
The flaws in the present microfinance model,which starts and ends with giving a loan,stand
exposed.The next model will weave microfinance around livelihoods,and its
gaining traction, reports Naren Karunakaran.
FIVE YEARS AFTER VIJAY MAHAJAN started Basix,his confident,purposeful stride
across the rural heartland of India briefly turned into a halting,ambivalent amble in
2001.While many of his swashbuckling compatriots in microfinance continued with their
avowed task of alleviating poverty through microcredit,Mahajan chose to pause,unleash a
blood-letting exercise and churn Basix from root to shoot.
The immediate provocation was an impact assessment of microcredit on the poor households
he served.The Basix intervention into the lives of the poor,it turned out,was sterile.Only 52%
of its microcredit customers reported an increase in income that too of a measly 10%.Another
23% reported no change in their status at all;and worse,25% of its borrowers,despite the
loans,actually slipped deeper into despondence and poverty.
The revelations were humbling,hurting,even humiliating,for the serial social entrepreneur.An
IIT,IIM and Princeton University alumnus,Mahajan cut his teeth in developmental work with
Bhoodan land awardees and later cofounded the hugely successful PRADAN (Professional
Assistance for Development Action).From my earlier experience,I knew microcredit is
necessary but not sufficient.Yet,we were stunned by the assessment, says Mahajan.It changed
us dramatically,it changed the way we engaged with the poor.
Those at the Basix helm immediately revisited the tenets that govern the poor.Within a
year,they
devised
the
livelihood
triad
it
now
swears
by:
financial
services;agriculture,livestock and enterprise development services (Ag/LEDS); and
institutional development services (IDS),though not necessarily in that order.It wasnt just
about giving loans.It was also about creating livelihood mechanisms,which would build
capacity among the poor to repay their loans easily,and leave them better off than before.
I believe in Schumpeterian creative destruction.Its time has come.The present MFI model has
to
go,
predicts
Mahajan,considered
the
high
priest
of
Indian
microfinance.Mahajan,ironically,also presides over the Microfinance Institutions Network
(MFIN),an industry coalition,and is currently engaged in dousing the fire in Indian
microfinance cajoling bankers,assuaging governments,building confidence and seeking a
shift in stratagems.
At a recent Mumbai conclave of MFI practitioners,loud voices in favour of a livelihood
model were heard.In the next decade,tier-II and tier-III MFIs will have to focus on livelihood
mechanisms and then weave microfinance around it, says Sundara Rao,country head of Oiko
Credit,a global microfinance fund with a strong focus on social performance and 446 million
in capital outstanding.Capacity building,therefore,gains precedence over credit.
THE STARTING POINT OF THE Basix model is risk-mitigation.The usual risk-mitigation
tools arent accessible to the poor, explains Mohammed Riaz,head of the north Indian
operations of Basix.Breadwinners of the family or cattle die.Crops fail.Nature
ravages.Sickness debilitates.One stray incident can wipe out the net worth of a family, says
Mahajan.
Basix,along with insurer Aviva,pioneered micro-insurance in India,in 2002.Riaz,an old Aviva
hand,joined Basix three months ago.Basix has also implemented the complex weather
indexbased crop insurance,in which claims are triggered by an adverse weather event and
settled over a geographic area.Today,over 3.5 million of Basix customers hold policies
covering life,health,crop and livestock,among others.
The livelihood triad,therefore,engenders a type of engagement that builds skills and
capacities of individual households.It also strengthens entire communities,rural or
urban,through
institution
and
local
infrastructure
building.
The triad rationale: microcredit by itself is of use only to the more enterprising of the poor
and to those who live in areas that have a certain threshold of economic activity.For the less
enterprising,they have to first learn to cope with risks,through savings,insurance and
acquisition of skills.
In backward areas,the poor require considerable handholding: input supply,training,technical
support,market linkages.Services like Ag/LEDS cannot be delivered to individuals,which
means the people Basix works with have to necessarily coalesce into informal or formal
groups,cooperatives,or producer companies.The formation and nurturing of such groups
require IDS.
Basix,therefore,through a bouquet of companies Bhartiya Samrudhi Finance,the Krishna
Bhima Samrudhi Local Area Bank,Indian Grameen Services,the Livelihood School,and the
Basix Academy for Building Lifelong Employability (B-ABLE ) has evolved an entire
livelihood ecosystem in its areas of operation.Though rooted in microfinance,it is a
completely different play from the neighbourhood MFI.
AS BASIX PLUNGED INTO THE painful,slow,yet robust livelihood matrix,its
contemporaries like Spandana Sphoorthy Financial,Share Microfin and SKS Microfinance
flogged the typical touch-and-go method of loan disbursal and raced past Basix.
In 12 years,SKS,with its acceleration model,offering highly standardised loan products of
around Rs 12,000, to be repaid in 50 equal weekly instalments,acquired 7 million
clients.Basix,by comparison,is at 1.5 million.Grameen Bank,set up by Muhammed
Yunus,took
three
decades
to
reach
out
to
7
million
Bangladeshis.
Vikram Akula,SKS founder,has always maintained: There is no need to tutor the poor,they
are smart enough to organise their lives. It is now beginning to become clear that the SKS
model of microfinance,with its heightened emphasis on rapid scale and high profitability,is
flailing.Worse,Indian microfinance has been shying away from outcome studies.Impact
measurement tools like the Progress out of Poverty Index (PPI) are largely ignored.
As MFIs scale up,grow and make profits,shareholders shouldnt be the only ones to benefit,
says Samit Ghosh of the Bangalore-based Ujjivan Financial Services.Ujjivan,in 2009-10,its
very first year of making profits,dropped interest rates on loans from 24.5% to 22%,one of
the
first
MFIs
to
do
so
along
with
the
Kolkata-based
Bandhan.
The profit-maximisation breed and a large section of MFIs,overtly or covertly,yearn to be one
have hit a roadblock,as can be seen by the turmoil within the sector.These MFIs are under a
cloud.And for good reason.
Take,for instance return on assets (RoA),which indicates how much profit a company
generates from each rupee in assets.The RoA of Spandana was a stupendous 8.99% in
2009;its 4.96% for SKS and a modest 3.12% for Basix.For a sector that sets great store on
serving
the
poor,the
pursuit
of
extraordinary
returns
is
inexplicable.
When dealing with the poor,boards of MFIs should decide what constitutes a reasonable
profit.Good governance demands a laxman rekha, says N Srinivasan,chairman of the USbased coalition Microfinance Transparency (MFT).Mahajan agrees.Such RoAs in
microfinance are embarrassing,its unjustifiable.Its four times the returns even a Citibank
would have made in its peak profit-making days, he exclaims.
ITS NOT ONLY PROFITS THAT CAUSE concern.Take,for instance,transparency in
interest rates charged.In the absence of a Truth-in-Lending Act,as prevalent in the EU and
US,the Indian microfinance client is not really aware of the effective interest rate he or she is
paying.The difference in what is stated and what is extracted can be huge indeed.
A few years ago,Chuck Waterfield of MFT studied the interest rates charged by Mexicos
Banco Compartamos,the first MFI in the world to go public.Compartamos advertises its loans
as a 4% interest per month product.Chuck examined the quaint manner in which
Compartamos computes its interest rate.He also incorporated all fees,commissions and taxes
it charged,and arrived at a figure of 129%! This is the interest rate a Compartamos client was
actually paying.
What is the Indian scenario There is no systematic data collation by the industry.Effective
interest rates (EIRs) or annual percentage rates (APRs) are unknown,although it is agreed
they may not be as usurious as Compartamos.Product pricing and overall transparency among
MFIs is an issue that needs to be addressed, concedes Sanjay Sinha,managing director,MicroCredit
Ratings
International
(M-CRIL
).
Srinivasan goes even further.Even the 99% repayment rate claimed by most MFIs is a
myth,an illusion, he insists.Its too good to be true. Portfolio audits of MFIs,conducted by a
few mainstream banks lending to them,indicate the data offered and the ground reality
differ.How deep the rot is,only those engaged in the exercise would know.
These and numerous other distortions linked to untrammelled MFI growth relaxing of
controls to gain numbers,frauds at centre-head levels,loss of focus,design flaws,lack of
transparency and consequent ad-hoc governmental intervention are beginning to rear their
heads.
Unnervingly,these were the typical signs betrayed by Latin American countries.The sheer
pace of growth has overwhelmed scores of Latin American MFIs and may have gone belly
up.Here too,systems are apparently not holding up to match growth, says Sinha.Over a 100
MFIs have failed in Latin America.We have to learn from the Latin American experience,
says Ujjivans Ghosh.
THE UPHEAVAL OF THE RECENT past has brought Indian microfinance,especially the
big players,under the sustainability scanner like never before.Its relevance in a political
economy as it is today and continued societal acceptance are suspect.Competing models like
the business correspondent model,which are increasingly finding favour with regulators,are
knocking on the doors.
Also the joint-liability fabric,central to MFI functioning,is withering.This is prompting MFIs
to focus on deepening relationships with existing clients,which means more of individual
loans and collaterals;are we heralding micro-banking All of this presage change,gradual or
cataclysmic.Change is inevitable.
The Basix livelihood model is finding traction across India.While many NGOMFIs are
comfortable with the livelihoods approach,many NBFC-MFIS are also beginning to weave in
livelihood components into operations,to varying degrees;Ujjivan,Equitas and Grameen
Koota,for instance.
A quick look at Rajasthan,a market Basix entered recently,reveals the typical build-up of the
livelihoods approach.Shravan Kumar,a marginal farmer with 4 bighas of land in Chandrana
village,near Dausa town,purchased a buffalo with a cattle loan of Rs 15,000 from Basix a
year ago.He also avails of its Ag/LED service,for which he pays Rs 450 a year.As part of
this,a livestock service provider (LSP) on the rolls of Basix vaccinates,deworms the animal
and
conducts
preventive
checks
once
a
fortnight.
Ramkaran Saini,the LSP for Chandrana village,says he instructs his customers 150 from the
village alone to follow nutrition and fodder plans.The incidence of disease has
dropped.Laxman Bairwa,Shravans neighbor,also an Ag/LEDS customer,says his animal yield
more output 3 litres of milk a day,from the earlier two litres.
Basix is not only providing credit,but is also expending considerable resources and time on
support services,securing livelihoods and building capacities.It is helping the Rajasthani
villager to tend to cattle in a more studied manner.This is just the beginning.The Basix plan is
to foster a legion of dairy farmers.Even as it does this painstakingly,working with individual
farmers,it is simultaneously talking to Hariyali Kisaan Bazaar (HKB) of the DCM Shriram
Group,which has recently set up a milk-chilling plant at Khertal in Alwar for supply to
Nestle.
The 15,000 litre plant barely collects 5,000 litres a day, says Riaz,who is grooming his
farmers for HKB,desperate to bridge the supply gap.This is not all.HKB plans to increase
capacity to 100,000 litres a day,the viable quantity for processing of milk.Basix is ready to
extend credit to HKB to scale up and also set up chilling plants elsewhere in Rajasthan.Its
IDS is already tweaking plans to help create federations of milk suppliers.Its a microcosm of
the Basix livelihood triad at work.
JAIPUR IS A FINE EXAMPLE OF AN urban livelihood intervention.In Rajasthan,most
households,even those at the lower rung,own a sewing machine.Its a socio-cultural
thing.But,only a fraction is involved in commercial stitching activities.The potential is huge
for Jaipur exports home furnishings and garments worth 5,000 crore a year.The temptation
would have been to immediately link households with the garment cluster.
We are not doing that,not yet, says Vishal Singh Amarawat,a garments exporter who is now
spending time with Basix.Instead,a graduation model is in place.Amarawat is hawking a
training package to enable women to maintain their own machines.The fee is 200 for 6 days
training,with a free toolkit thrown in.Anita Sein,wife of a barber,has already learnt the
ropes.Earlier,a mechanic charged me 100 a visit;300 if parts were changed, she says.
Once they are equipped with the requisite skills,they will be linked to the garments chain,and
also command a premium for quality of stitching services, explains Vishal.Over a 1,000
women from Jaipur and two other cities have signed up.Next,an 18-day course on product
making,costing 400,is being tweaked.In the final stage,women will be taught on button-hole
and embroidery machines.The target is to reach 10,000 customers by December.We can
easily reach a 100,000 tailoring customers across Rajasthan, says Riaz.
In Rajasthan,Basix is not only pushing its own initiatives,but is also involved with the
Rajasthan Mission on Livelihoods (RMoL) a unique community-NGO-public-private
partnership,funded by the Government and the UNDP.Its entirely managed by Basix.In
fact,over 25 Basix employees have been seconded to the RMoL,including its managing
director,Rakesh Malhotra.
Over the years,RMoL has impacted over 300,000 families in Rajasthan.Over 74,000
youngsters have been skilled in various vocations.As livelihood opportunities are
sparse,RMoL has devised a unique migration platform where the youth are handheld from
source to destination,to Mumbai,or elsewhere.A private entity cannot match the
infrastructure,influence and the immense outreach of the government, explains Malhotra.
Engaging with governments,despite its occasional perils,is something Mahajan strongly
advocates,an imperative for a livelihoods strategy to thrive.Akula,with a singular,narrow
approach can get away with saying: Our standard instinct is we dont want to work with the
government.We just want them not to interfere. Vijay Mahajan is turning popular perception
on its head.And it seems, his way, the livelihoods way,is the right way,for now.
This concludes the two-part series on rethinking Indian microfinance.The first part whats wrong with microfinance appeared yesterday.