Prayatna

Microcredit in India - something to keenly follow

I recently read the autobiography of Mohammed Yunus- Banker to the Poor - and was very impressed with what Yunus has achieved by providing microcredit to the rural poor in Bangladesh through Grameen Bank, which he set up back in 1976.

Microcredit has been around in India for a while as this graphic from The Economist shows.
Andhra Pradesh has been at the forefront of the growth of microcredit in India. Microcredit caught the attention of the well know venture capitalist Vinod Khosla in March 2006.

Vinod Khosla, along with other social venture capitalists, the Small Industries Development Bank of India (SIDBI) and SKS’ borrower community, made a Rs. 11 crores ($2.5 million) investment in SKS Microfinance today. The deal is the largest-ever investment in any microfinance institution in India. SKS, whose mission is to provide financial services to the poor, will use the investment to access commercial debt and scale outreach from its current base of 200,000 clients to 700,000 clients in 2006-07.

"I am impressed with the people and processes at SKS and am confident that this investment will enable them to serve even more poor families throughout the country," said Khosla.

Of the Rs. 11 crores ($2.5 million) investment, Khosla has contributed Rs. 2.1 crores ($470,000) while technology entrepreneurs Ravi Reddy and Sandeep Tungare, co-founders of Vistaar Technologies, have contributed a combined Rs. 2.1 crores ($470,000). The Unitus Equity Fund (UEF) also invested Rs 2.1 crores ($470,000). The UEF is managed by a subsidiary of Unitus, a Redmond, Washington-based global microfinance accelerator. In addition, SKS borrowers have increased their current investment from Rs 2 crores ($450,000) to Rs 6.5 crores ($1.5 million) and the SIDBI has expanded its current investment from Rs. 50 lakhs ($112,000) to Rs. 1 crore ($225,000).

Founded in 1998, SKS serves close to 200,000 clients in over 3,000 villages spread across five states: Andhra Pradesh, Maharashtra, Karnataka, Madhya Pradesh and Orissa. It has a portfolio of $18 million, with a PAR over 30 days of only 2 percent and has consistently achieved a 250 percent annual growth rate, one of the fastest of any microfinance institution in the world.

The Economist in its latest issue reports that the rapid expansion of microcredit in India has resulted in a turf war between the microcredit providers and the Government of Andhra Pradesh, which accuses some leading micro finance institutions (MFIs) of being "no better than old-style usurers."

The dispute centres on one poor rural district, Krishna. Some women were reported to have killed themselves because they could not repay the MFIs. In March a top government official in Krishna temporarily shut 50 branch offices of four MFIs, seized and destroyed their records and told their borrowers not to repay their loans. He accused the microfinance groups of charging exorbitant rates.

Udaia Kumar, who runs SHARE, one of the affected four, says that, in fact, its loans cost about 21.5% a year—not excessive, since its cost of funds is 11% a year, the administration of a portfolio of more than 800,000 small loans in Andhra Pradesh is expensive, and not all loans are repaid. It is also less than half the rate a moneylender would charge or what a poor borrower would end up paying for a bank loan. Even so, SHARE has since agreed to cut its rates by about four percentage points.

There had been abuses. Viswanatha Prasad of Bellwether, a fund that finances microcredit-providers, blames “indiscriminate expansion” (see chart). The MFIs were flush with money, partly because commercial banks saw them as a good vehicle for lending to rural areas. Some microcredit lenders were charging interest rates on the full amount of a loan, rather than the declining balance, and some borrowers were bullied and humiliated. Aggressive competition and a failure to share information meant some people were in hock to numerous lenders. That is what seems to have led to the suicides. Mr Kumar says SHARE's own average outstanding loan was only 4,000 rupees ($86).

The root of the dispute, he says, is competition between non-governmental MFIs and a subsidised microcredit scheme, financed by the state and central governments and the World Bank. According to the bank, some 30% of SHARE's clients overlap with government-supported “self-help groups”. Mathew Titus, of Sa-Dhan, an association of Indian microcredit institutions, sees the row as a “battle of ideas”—between the non-government sector and those ideologically opposed to its working with the poor.

The fear is that the state government will now try to regulate the lenders, perhaps by capping interest rates at levels that could put them out of business. Legally, this would be difficult. SHARE and the other big MFIs are regulated as “non-banking financial companies” by the central bank, the Reserve Bank.

Bellwether's Mr Prasad thinks the scandal could even have some positive consequences. The microcredit groups will have to stamp out abuses, adhere to a code of conduct and recognise that they cannot ignore the government. For its part, the government will have to realise that the MFIs are a force to be reckoned with, and that their mission is not necessarily to exploit the poor.

It is not as if too much credit is available. There should be room for both private lenders and subsidised schemes for the very poor. There may even be room for the despised moneylenders, whose local knowledge and extensive business mean they cannot be ignored either. According to one survey, 30% of MFI clients in Krishna took loans from moneylenders. Nationwide, moneylenders are estimated to account for about one-third of the debt owed by rural households. The Reserve Bank is reviewing the laws on moneylending. One option is for banks to lend to registered moneylenders, using them as intermediaries. Priya Basu of the World Bank, an expert on India's rural credit market, thinks the idea makes sense “if they can co-opt moneylenders into the formal system”. Microcredit good; moneylenders not so bad after all.

It is still very early times for microcredit in India and the action is just beginning. After reading Yunus' autobiography, I'm convinced that microcredit has the potential to stimulate a huge boom in microenterprises and spur the creation of wealth and rid the country of poverty, far more than the attempts to alleviate poverty by doling out subsidies, loan waivers and the like. The latter might also be required, but will not suffice to achieve our ultimate objective of doing away with poverty. It will be interesting to follow the developments in this area - Badri has launched a new blog on microcredit in India to keep tabs on it.

A mobile library in a bus opens up a new world for children in rural Punjab

Indian Express has a heart warming story on an NRI librarian who after years of pleading with the Government to establish public libraries in Punjab, to no avail, decided do it on his own. He has set up a mobile library in a bus to cater to children in rural Punjab.

It is a weekly bus, huge by even Punjab standards, with the luxury of squatting on the floor or just browsing through books. Like every week, courtesy the brain wave of an NRI librarian who realised that the state would never set up public libraries, a bus chugs into the village and parks itself besides a shady tree where children line up to enter their library.

Years of cajoling officers, pleading with them to establish public libraries in Punjab never helped. So one morning, with a few lakhs saved from retirement benefits, this retired librarian from the US decided to set up a mobile library. ‘‘Let the village child discover the joy of books,’’ Dr Jaswant Singh says. For most children in rural Punjab, books continue to be a luxury despite the affluence. In Punjab villages, where ostentatious living standards has meant that houses have DVD players, but no books, not many gave Singh a second chance.

The bus which has bookshelves instead of seats, goes from one village to another, stopping by for an hour for the children to borrow books. It arrives again at the same time next week, so that children can return the books and borrow new ones. The schools do not have a library and book collections are rare to find. Collections of Sikhs scriptures is what the printed word means for many. ‘‘And there are imported books as well,’’ says Jeewandeep, who is astonished at UK printed books which have dual language story books in English and Punjabi.

In the nine months that it has run in the three chosen villages of Jurahan, Ranguwal and Fullowal in Ludhiana, it has notched a membership of 300. Membership fee is just Rs 10 for which you get a withdrawal card. Singh spends close to four months a year in Punjab for the project. His friend Prof Amarjeet Singh runs the show in his absence. The bus cost him 22 lakh, while the annual running expense is another four lakh. His aim is grand. There has to be a mobile library in each of the 180 blocks in Punjab, Singh asserts. He is flying back to US this week, but promises to come back with more funds, courtesy his US based foundation. More buses, but more important, with more books

Ammani's blog

I chanced upon Ammani's blog. I must say her quick tales are the most captivating and brilliant innovation in writing that I've seen in a long time. I thoroughly enjoyed reading her quick tales, as well as the traces she reveals of her methods, in the tales of terribly, sleepy, water.

Head over there now! I'm sure you'll enjoy it.

Stimulating entrepreneurship amongst the disadvantaged and the youth

Business Line carried an article recently on the Bhartiya Yuva Shakti Trust (BYST). They are, to put it in their own words, "developing entrepreneurs by providing young disadvantaged people in India with loans against no collaterals and a business guru."

According to their website,

To empower young dynamic micro-entrepreneurs, who are disadvantaged and integrate them into the economic mainstream.

To be a role model, nationally and internationally, for mentoring and nurturing small start up businesses through the active involvement of the corporate sector

Long Term Objectives

1. To be in the forefront of entrepreneurship development for the underprivileged youth and create employment opportunities for others and thus contribute to national development.
   
2. Develop and nurture qualities of initiative, motivation and enterprise among young entrepreneurs of India.
   
3. Support self-employment in the manufacturing and service sectors that develop entrepreneurial skills and create employment opportunities, thereby converting job seekers into job creators.
   
4. Provide high quality human resource inputs to the development of small enterprises through mentors / volunteers who can provide timely advice and enterprise specific information.

Immediate objectives

1. To create awareness among young people and businesspersons regarding opportunities in entrepreneurship as a means to achieving sustainability for national development.
   
2. To finance & support young entrepreneurs for their development.

At BYST, we want to help the disadvantaged youth through a whole new philosophy of Guru-Shishya Parampara (Mentor-Mentee Tradition). We extend support through a combination of money and mentor, thereby giving total assistance to disadvantaged youths who wish to set up, or develop, their own business. This assistance includes finance, professional advice, training, education and guidance till the venture takes off.

It is "people helping people" - which is what BYST is all about.

This is just what we need to be doing on a much larger scale. There are some other efforts by organisations like Aavishkar who are attempting something very similar, but through the equity route, by investing very small sums (in the range of US$25,000 - something that VCs would scoff at) in start-up companies. According to their web site,

Aavishkaar seeks to nurture and initiate creative thought processes at the grassroots level, to convert them into thriving enterprises.

Aavishkaar seeks to provide resources and assistance to rural endeavours that establish themselves beyond the stage of concept and prototyping into a fledgling economic effort.

Aavishkaar intends to transform nascent rural ideas into coherent business entities by funnelling resources at the point and time where it can be most effective so that the change spreads at the roots of the rural Indian society and blooms upward.

The primary commitment of Aavishkaar is to effect a change, by promoting growth of grassroots and organic ideas and enterprise.

On a similar note, Junior Achievement (JA), an organisation based in USA, is doing something very interesting. They are targeting potential entrepreneurs at an even earlier stage - right from when they are in school. According to their web site, their vision is

To educate and inspire young people to value free enterprise, business, and economics to improve the quality of their lives. From this, we articulate our mission: To ensure that every child in America has a fundamental understanding of the free enterprise system.

Junior Achievement reaches approximately 5.2 million students worldwide. Through age-appropriate curricula, Junior Achievement programs begin at the elementary school level, teaching children how they can impact the world around them as individuals, workers and consumers. Junior Achievement programs continue through the middle and high school grades, preparing students for future economic and workforce issues they'll face.

We do all this with the help of our volunteers. Volunteers who so care about our youth they take time out of their day to make a difference.

We ought to be attempting something like this in India too. It is best to start as early as possible and instill an appreciation for entrepreneurship, hard work and business sense, to help spur entrepreneurial activity. The notable thing about JA is that it is largely a volunteer driven activity, but extremely well oiled and organised.

"Desi" tool for vehicle tracking

Anand Parthasarathy in an article in The Hindu describes Bharat on Wheels (BOW), a "desi" tool to help transport operators as well as you and me keep track of our goods as they are carried across the country by road.

BOW stands for Bharat on Wheels: the company targets the 3 million goods carriers that move on Indian roads at any given time. To track these vehicles, the company makes use of STD phone booths — and a specially designed BOW card which looks like a credit card.

Fleet owners can provide a card to each driver which he will carry to the nearest tracking point, basically a designated STD booth on trunk routes, at major trucking stops and petrol bunks.

The booth operator will transfer details of the truck coded on the card together with a simple numbered message to a local telephone number using a Voice Response System. At the receiving end, a franchisee of BOW, uploads all incoming messages by email to a central hub, where it is processed and placed on a website.

Fleet operators can thus keep track of where each of their vehicles has reached. In addition the system provides the driver with access to emergency help in case of sickness, breakdown or accident.

BOW Network's Managing Director P.S. Selvaraj explains that the service would prove cost effective for fleet operators since the initial cost of each card ( Rs 1100) and the monthly service charge ( Rs 100 for local permit and Rs 300 for national permit vehicles) would work out much less than the amount that each driver spends monthly on STD calls to the head office while en route — typically around Rs 2500..

For regions where the phone service is not digital, making Voice Response systems inoperative, BOW has created a `smart card' where the local franchisee can upload the information using a card reader.

Lay customers who send their personal goods by truck are also served by the BOW system. They can purchase `trip cards' valid for one trip alone costing Rs 75 ( for 5 days) or Rs 125 ( for 10 days) and provide it to the driver. They can then track their goods on the Internet site which will reflect every message the driver logs. And how to motivate the driver to oblige? Every time he logs in at an STD booth, the driver will receive a Rs 2 token. This also allows him to participate in a quarterly draw where the prize is Rs 50,000.

This is certainly much cheaper than solutions involving the installation of GPS receivers costing $100 to $250, on each truck. Truck drivers are also reluctant to let "big brother" in the head office track their movements 24 hours a day. A good example of an attempt at an innovative solution to address a very felt need, but the logistics of setting up a network of tracking points and franchisees makes this too complicated

With the availability of mobile phones with roaming, I wonder why none of the mobile companies have come up with any solution addressing this need yet. A simple prepaid SIM with roaming enabled should do the trick. Truck drivers can be called by the head office twice or thrice a day to figure out their location and progress and a database maintained at the head office. The drivers can also call in to report any delays or problems. The cost of this will be very minimal and this could also be marketed as a value add to truck drivers by giving a certain number of outgoing calls free for them to keep in touch with their family.

Who will be the first operator to rise to this challenge? Not that it requires an operator to do much. Any trucking company can set this up themselves with a little bit of help from someone to develop their back-end database and web-based front end.

What's the raison d'etre of a business?

To make as much money (profit) as possible for its shareholders, is invariably the answer that comes to most people's minds. Many companies even include this as part of their mission statement, just so no one ever forgets it .

But is that really right? As Peter Drucker has said, Profit is a cost of doing business not a reason for doing it. If a business doesn't make profits, it will have to close down as it will in effect be eroding capital and so be a drain on society.

Charles Handy in an interview in the Economic Times echoes this view. In response to the interviewer's question "You talk about companies having a unique purpose - surely the aim must be to make money?", Handy says

I don’t think it is. That’s really my point. You want to make money in order to do something, that is more important. If you are making cars you want to make –don’t you think—the best cars at that price because you believe that the country needs cars and they need cheap cars. For example, cars of a certain value that you do better then anyone else and you want to be proud of the type of cars you are producing and in order to do that you have to make money. And this is the part where the shareholders come in I think. They should be entitled to a return on their investment but the aim of the company should not be to make as much money as possible for them. They don’t deserve it because they are just betting on the company they need a fair return.

It’s rather like somebody giving me a mortgage on my house I pay them their due — a fee for the money they lend me but I am not going to work my guts out to make them more money — why should I do that for the people who have lent money to my company. The point of the company is to make the cars and they’ll be a profit from making the cars and from that profit I will give a reasonable amount of money to the people who provided the money in the first place.

Food for thought for all of us. Businesses ought to be started with the objective of addressing a need out there by providing a product or service at a reasonable price to customers and making a fair profit for the business in the process.

In the same interview Handy was also asked " You have advocated that shareholders need to be given far less management authority — why when it is their money that they are investing in companies?" and Handy responded saying,

I am talking about public shareholders of big corporations that do not go near the company. To call them owners seems to be absolutely ridiculous. I have shares in some companies — it is my money, but I am only at best betting on the organisation. If it goes up, I feel good and if it goes down I get rid of my shares and sell them — my bet has failed I don’t have any responsibility for the actions of that organisation I am really just betting on it.