Can Vikram Akula do a Yunus...

Microfinance... Can India create another Grameen !!!


Recently I finished reading one of the best books which can or has emphasized the much talked about financial inclusion. More in so, with a narrowed focus towards the Emerging countries like India and Brazil."The Bottom of the Pyramid" by the late CK Prahalad. His idea of looking into things (business) is a visionary one.

The next target segment of the markets will be the one where technology would not come for a price but still would be an indispensable part of the growing system, just like the Internet boomed trading and the style of doing business with ebusiness,take any service- none are untouched or unaffected by the internet.

In the same way lending would evolve where ‘tiny amounts of money to people with tinier assets’ (as The Economist magazine put it in an article published in 2006) will seem to be an obvious way of doing business with what is potentially the largest driver for markets- consumption.

Of late my tryst with the state has grown and thus have been hearing the suicide cases of the borrowers in Andhra Pradesh, which has bought this much talked and expected about business under the microscopic scanner of intellectuals in India.

Media reports about high interest rates charged on loans made to people who appear to be ill-equipped to pay such large sums — and thus the suicides, allegedly — have raised eyebrows, even as other stories have reflected on the crores of rupees in stock options that company executives of microfinance companies appear to have benefited from. The seemingly high interest rates charged by microfinance institutions (MFIs) stem from transaction costs, which is why banks have not been very successful in microfinance. Even in the era of priority- sector lending, the banking system had tended to lose a lot of money on loan defaults — apart from the subsidised interest rates prevalent then. In other words, the banks’ failure lay in their inability to see microfinance as a sustainable business, and more as a social obligation.

The fire had not yet subsided from the issue, SKS Microfinance's CEO,Suresh Gurumani was sacked without citing any specific reason. His 5-year contract was to expire on 2014 March. Interestingly, Ashish Lakhanpal, an Independent Director, is also relieved from his duties. The first company in its category to go public and raise 16.5 billion ruppees from the market, a lot more than the money are at stake with the company.

The industry runs on three types of costs which matter: the cost of funds, the cost of associated risk (of defaults) and administrative costs, all of which are integrated into deriving the final interest rate charged to borrowers. Microfinance depends heavily on personal contact, limiting loan officers’ reach to a small number of borrowers, unlike banks that rely on technology for credit scoring (almost all microfinance lending is cash based, and collections take up significant personnel time).The most critical factor in simpler terms is the administrative costs, which incidentally are not proportional to the loan size. The transaction costs of making a single loan of Rs 1 crore by a bank are significantly lower than the costs of making 500 loans of Rs 20,000 each (a typical microfinance loan). Loans by banks are repaid quarterly; microfinance loans are collected with greater periodicity, perhaps or actually every week.

Dealing with barely literate borrowers with no collateral and credit bureau records, requires time-consuming personal interaction, all of which drive up costs high enough that can only be covered by high interest rates. It is a simple principle of business that if you cannot cover costs, you will not stay in business. If there is one area that microfinance institutions need to focus their energies on, it is building technology platforms that will reduce their high administrative costs. A lot of light on the other side of the tunnel comes from the interest being seen in exploring, researching aspects of Mobile Banking and Electronic transfer.

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