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Ujjivan’s success underlines dos and don’ts
Microfinance learns the hard way….Subir Roy At a time when the sector is faced with a crisis in the country, Ujjivan’s foresight and strategic moves have shown that there is light at the end of the tunnel of MFIs’ travails The months since October, when the microfinance crisis broke out on its home turf in Andhra Pradesh, have been traumatic for the sector. Several leading microfinance institutions (MFIs) that have their primary exposure in the state are in deep trouble, with recovery going down to as low as 10-15 per cent. But one of the few MFIs that are smiling is Ujjivan Financial Services.
The six-year-old institution is set to join the top-ten group of MFIs on the basis of the performance it has put up in the last financial year (2010-11). Its revenues went up by 86 per cent to Rs 156 crore and net profit touched Rs 11.4 crore, 19 per cent more than the previous year, when it broke even for the first time.
Another way of looking at the numbers is to note that the performance last year was actually subdued in comparison to the top line, having grown three times the previous year and over five times the year before. So the numbers are a pointer to both the organisation’s robustness and the sector’s strain – good and healthy growth, yes; but deceleration in relation to its own earlier performance.
Ujjivan, in fact, allows us to see the light at the end of the tunnel of MFIs’ travails. By looking at it closely, we can get an idea of what went wrong in microfinance and what is the way to sustainable growth.
The first point that Managing Director Samit Ghosh makes is that Ujjivan has absolutely no exposure in Andhra Pradesh because it had realised very early that when operating in a sector where competitive multiple lending is the bane, getting into a crowded field meant asking for trouble. The Bangalore-based organisation that had 40 per cent exposure in the South even a year ago now had a geographically well-distributed portfolio, with the South, East, North and West together pulling more or less equally.
Ujjivan was able to take corrective action because Ghosh was able to see what was coming. He told his shareholders in May 2010: “We expect turbulent times for MFIs in the near future: Pressure on interest rate margins; changes in primary sources of funding and bad press, as some of the poor business practices and governance of some MFIs come to light.”
When trouble hit MFIs in Andhra Pradesh, the ripples spread to other states and Ujjivan was also affected. In Tamil Nadu and West Bengal, for example, when competition among MFIs dried up in the face of the reverses, the overextended borrowers ran into trouble. Also, bad publicity disoriented the staff whose morale had to be restored.
In the end Ujjivan was able to absorb the consequences of bank finance drying up by turning to organisations like Sidbi and global funding sources. Most recently, Ujjivan raised Rs 17.3 crore through the structured securitisation of a batch of microloans, as did several other MFIs. Thus it is non-bank commercial funding that is coming to the rescue of microfinance.
While microfinance will survive the current crisis, Ghosh says, it has to learn the right lessons in order to remain successfully in business. The foremost is to shun “over lending and coercive collection practices” that led to customer suicides and brought on the harsh actions taken by the Andhra government. And within this the ‘joint liability system’, under which group members stand guarantee for each other, had to be ended because this, aided by commission agents, was the main source of unbearable pressure. This practice has been phased out in countries like Bangladesh that have a longer experience in microfinance.
The second major lesson is that if an MFI is to survive, it has to have the support of the community within which it operates. “MFIs lost their link with customers and their community so that there was no customer protest when MFIs ran into trouble in Andhra. The future will be bleak for them until they go back and rehabilitate their relationship with the customer and the community. They have to establish that they are there not just as money lenders but to help them improve their lives. This perspective was lost in chasing growth.”
Ujjivan has been building bridges with the communities within which it works by undertaking social development programmes at its branches, bringing customer, staff and community together. It began with staff help in disaster relief when floods hit North Karnataka. They contributed a day’s salary and Ujjivan matched it with a grant. Particularly successful has been the practice of allowing each branch to spend Rs 25,000 to meet the local needs that can be as simple as helping an anganwadi worker with a pressure cooker or mats for the children to sit on.
Sometimes a disaster can be manmade, as has been in Ranchi, the capital of Jharkhand, where “unauthorised” slums have been razed by the government, rendering people homeless. Ujjivan stepped in by offering grants, rescheduling existing loans and disbursing fresh loans. Ghosh explains that “it makes business sense to help customers in distress because they will simply run away if you try to chase repayment when borrowers are distressed.”
To tackle the fundamental issue of over-borrowing, Ujjivan has begun to use the audio visual medium by producing a film Sankalp in Hindi and Marathi. It has used real life stories to drive home the message. Jointly funded by a couple of other organisations, the production of the film cost Rs 18 lakh, but this is a small fraction of the Rs 2 crore it will cost to show the film to one million people in slums. “The impact of the film has been tremendous,” says Ghosh.
The Reserve Bank of India guidelines on how MFIs registered with it as non-banking finance companies should operate have begun to restore stability in the sector. But the margin and interest rate structure that have been laid down will make it mandatory for MFIs to cut costs to remain viable.
They can do this if they achieve a minimum critical size. For that, they have to grow fast, but not over-lend (multiple MFIs giving loans to the same borrower). “We do this by identifying white spots, which are relatively virgin territories with low MFI penetration,” adds Ghosh.
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