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THINK BIG WITH SMALL
Starting a microfinance business and don’t know where to begin? Ashish Agashe & Sachin Dave help you find out
WHEN the world is talking about slowdown and recession the microfinance sector is seeing continuous growth. It has touched the billion dollar mark and many young entrepreneurs are entering the business with an ambition to start a microfinance institution (MFI). It is estimated that there are over 1,000 MFIs operational in India currently, which have disbursed only 10% of the potential demand of over $50 billion. Due to a large section of Indians living below the poverty line, this demand for credit for the poor is expected to surge. A report by Hyderabad-based Intellecap states that Indian MFIs are expected to build a portfolio of $6.27 billion by 2012 by catering to over 48.7 million borrowers.
So is this a good time to start an MFI? “The situation may not be as simple as before but the field is certainly growing. Anyone entering the sector should arrange alternate source of funds now,” says Arjun Muralidharan, CEO, ASA-GV. This MFI has not limited itself to micro-credit and has thus disbursed well over Rs 700 crore, offering a combination of financial products aimed at the economic empowerment of poor women. ASA-GV is now in the process of developing a comprehensive social security scheme for its members, where they would be offered the benefit of life as well as accident insurance and old-age annuity similar to pension offered in the organised sector.
Intellecash, a sister concern of Intellecap, was started last year to help launch MFI businesses from scratch and also guide existing MFIs work better. “We work with a company for a period of three years starting from incorporation. During this we help the entrepreneur in selecting the geography to operate, conducting field studies, putting together a branch network, appointing staff, training them and scaling up operations,” says Ulhas Deshpande, CEO, Intellecash, which has helped launch five MFIs till date.
Deshpande, who worked as the chief financial officer of Mumbai-based BPO firm Adventity before taking on his current assignment, says a large number of professionals are getting drawn to the MFI business because of its social relevance. “The other advantage of starting an MFI is that it’s not prone to the slowdown as India’s rural and agrarian economies have not been much affected. The problem rests on the supply side as raising finances can become difficult in the current scenario,” he says. As per RBI norms the minimum capital to be raised for startups in case they are operating as a Section 25 company or a notfor-profit company, must not be lower than Rs 25 lakh (starting a NBFC requires Rs 2 crore).
Vishal Mehta, MD, Lok Capital says, “If a new entrant can manage the supply side there’s tremendous potential in microfinance. However, new players should not only focus on the usual Rs 8,000 loan, but think of something creative to cater to the market.” Lok Capital was started eight years ago with the support of a grant from the Rockefeller Foundation. It is now mainly into mobilising support for assisting microfinance in India and providing financial as well as non-financial support to micro lenders. “Till now the liquidity situation hasn’t hurt MFIs but the real test would be post-April. Those who want to enter the market now should be prepared for high liquidity costs but even then there should be 30-35% balance sheet growth,” Mehta adds. Deepak Alok, a partner at Delhi-based M2I Consultancy, which advises MFIs feels the most critical aspect in starting a MFI is raising finances and ensuring their rightful utilisation. The entrepreneur also needs to be ambitious, with a good business sense and should be able to put together a good team of people and drive them well, he adds: “It is a HR-driven business and one wrong step can have a ripple effect on your survival prospects.”
Putting his people skills honed over 13 years as a HR professional to good use, Moses Rao launched Nirmaan Bharati (NB) in Lucknow two years ago. “The reason why I quit as the south India head of HR at Citigroup and decided to start a MFI is that I found the task of building a professional organisation very challenging. The other purpose which I used to yearn for–creating a sustainable business and being service oriented–were also getting addressed here,” says Rao. He mentions knowing of at least ten other professionals like him who have ventured into the MFI business.
NB, a Section 25 company, has so far disbursed over Rs 90 crore among 78,000 poor people in north Indian cities. Speaking about the essential qualities of a MFI entrepreneur, Rao says, “They must understand that this is something that not only requires brains but where the heart is as important. You must be able to identify the customer in a better way and must think beyond the usual ‘loan disbursal for income generation’ model and be open to disbursing money for other needs like building toilets, good ventilation etc.” So far, MFIs have a very good presence in south India with states like Andhra Pradesh, Karnataka and Tamil Nadu covered by the biggest of Indian MFIs like SKS and Basix. Other states such as Orissa, Maharashtra, Madhya Pradesh and West Bengal are also witnessing heightened MFI activity lately and are poised to grow. However, some of India’s poorer regions like Bihar haven’t seen similar MFI growth yet. Helping bridge the gap is Ashvini Sinha, who started Women’s Empowerment and Micro Credit Services (WEMCS) last year after working at Cashpor for nine years. “I wanted to do something for the uplift of the masses in my hometown and started last year with a capital of Rs 4.25 lakhs,” he says. Operating out of an office in the Dawood Nagar block of south Bihar’s Aurangabad district, Sinha recently borrowed Rs 20 lakh and has so far disbursed Rs 12 lakh among 175 beneficiaries. He claims that he would raise and disburse Rs 8 crore by March 2010 and will also start accruing profits from the venture soon.
Sinha might sound like a braggart but experts say it’s possible. It was estimated that microfinance as a sector would reach the $2 billion mark by 2009 but it has achieved $4 billion already. In 2002 the share of MFIs in the total small credit market in India was only around 25%. But later with many young professionals entering the scene the same is now pegged at 50%. Large MFIs like ASAGV, SKS, Basix and Cashpor have been constantly upgrading their services and reach in the sector and not limiting themselves only to microcredit.
And helping MFIs in this aspect are dedicated private equity (PE) and venture capital (VC) funds that invest in such businesses. According to Intellecash there are at least 38 funds/individuals/NGOs supporting the MFI sector. But the biggest constraint is that a majority of the funds support only companies registered as NBFCs because they are run only for profit and hence guarantee better returns.
“It is not a rosy dream all through and the challenges are too many. There are many days when you will be utterly frustrated at things but there is a remedy: whenever you are in such a state, go to the field and listen to a poor woman’s story…it truly is inspirational to hear how you can change her life,” says Rao.
WHAT ARE MICROFINANCE INSTITUTIONS? Micro finance institutions provide credit to poor people for starting a business or for goods consumption. Many MFIs also offer services like accepting small savings (of Rs 10 or Rs 25) and insurance services. WHY MFI? On an average MFIs charge interest of 30% annually. This could be considered very high but many poor people have been borrowing from private money lenders who not only lack transparency but are known to charge well over 100% annually. ISN’T IT A SATURATED MARKET? There are around 1,000 MFIs in India but there’s still plenty of demand for micro finance as the number of poor people who need such services is huge.WHAT ABOUT BAD LOANS? Contrary to what many believe, bad loans or bad debts in micro credit are a rarity. Only 2% of the total loan disbursed turn bad. WHO CAN START AN MFI ? Starting an MFI is not as complicated as other businesses in the financial sector. MFIs are traditionally floated by credit societies and trusts for disbursing credit amongst those they serve. Individuals or groups of people can also incorporate a not-for-profit company under the Companies Act, 1956. The third category is for-profit companies that have to be registered as Non-Banking Finance Companies (NBFCs) with the RBI and require bigger paid-up capital.
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