Microfinance Institutions (MFIs) still haven’t completely shed their image of being predatory lenders, led by slick CEOs with Harvard degrees who pocketed millions through IPOs. Then unsavoury lending practices caused the poor to rack up huge debts, some leading to a spate of suicides. Ultimately, the entire industry, mostly located in Andhra Pradesh, collapsed under the weight of its own hubris. Now, Janalakshmi Social Services, an MFI from neighbouring Karnataka, is trying to rekindle the promise the sector once held.
Janalakshmi focuses on the urban poor — maids, vegetable sellers, security guards — a segment of the population in dire need of structured financial assistance, but so far ignored by the more conventional banking systems surrounding them. While the rest of the sector has been largely stagnating, with a large amount of its unrecoverable loans, Janalakshmi’s loan book has been skyrocketing — growing 200 per cent year on year, from Rs 60 crore in 2009 to about Rs 450 crore today. It has had no problems raising money—its funders have been Lok Capital, Treeline, Citicorp Venture Capital, among others—some of the first-round investors having partially exited with attractive returns of over 25 per cent.
What can account for Janalakshmi’s success while most others in the industry have floundered?
“We knew from the beginning that this was an execution game, not a market-share game,” says founder Ramesh Ramanathan, former head of derivatives of Citibank in Europe, who, along with wife, Swati, an urban planner, gave up a wildly lucrative career abroad and returned to India in 1999, hoping to make a difference. Influenced by Muhammad Yunus, founder of Grameen Bank, Ramanathan spent some time with Myrada, a pioneering organisation in social work and microfinance, founded by Aloysius P Fernandez. Ramanathan convinced Fernandez to help him incubate an urban component of sister organisation, Sanghamitra, a rural MFI. Soon, Janalakshmi was born.
One of Janalakshmi’s differentiators is what Ramanathan calls “industrial strength technology”. At the front end is a biometric scanner that a field agent uses, where a thumb impression verifies collections and disbursals, reports of which are fed into a Cloud-based enterprise system at the day’s close. At the back-end is a core banking system technology that is robust and tweaked for an MFI. A Customer Relationship Model (CRM) allows the organisation to track important data, such as loan cycles, and facilitate a better understanding of customers — while potentially locating new ones, such as, say, the husband of a loan recipient who owns an autorickshaw and may need money for expansion of his fleet.
“I don’t think anyone else is doing this in the world,” says Ramanathan, but that doesn’t mean it was easy. “We really struggled. It was a daily battle for survival. Everything that could go wrong, did,” adds Ramanathan, referring to the early phase between 2006 and 2009, when teething problems such as the batteries for biometric scanners dying would cause major disruptions in data feeds. Ironically, while Janalakshmi was struggling to get its technology together, the rest of the sector that followed the Andhra model of scaling up small loans to generate maximum returns was booming, and CEOs like Vikram Akula of SKS Microfinance were being lauded as the new messiahs of poverty elimination.
The MIS system at Janalakshmi allows it to do two important things: Generate a state-of-finances report at noon everyday which allows supervisors to check not just the up-to-date status on disbursements or collections, but to also detect potential meltdowns ahead of time.
This, for example, could be a lapse in attendance for a certain group’s borrowings in, say, the tenth month. This, Ramanathan says, is an early warning of a possible inability to pay down the line.
Today, the Bangalore-based MFI is in 44 cities across 11 states and has 66 branches with a customer base of around 500,000 and, according to Ramanathan, profitable. The company offers loans across categories —in housing, gold and micro loans. It has a micro pension scheme for the poor that it offers along with Unit Trust of India; as well as life insurance, in association with Bajaj Allianz. “Instead of getting into debt from a local money lender from which they can hardly come out, here, our structured products enable the urban poor to get relief from their drudgery and work towards a fruitful life,” says Ramanathan.
Another differentiator: the Janalakshmi team. "It was a very important move to rope in highly experienced bankers early on, based on which Janalakshmi is building. Nearly 20-30 experienced bankers are on board, helping Janalakshmi steer itself away from the crisis by relying heavily on technology and differentiating the product offerings," says Eric Savage, co-founder & president, Unitus Capital.
R Srinivasan, executive vice-chairman, Janalakshmi, was the former India co-head, JP Morgan; and V S Radhakrishnan, MD & CEO, was previously head of the SME business at ING Vysya. Both men, says Ramanathan, have been instrumental in growing the company over the past few years.
Alok Prasad, CEO, Microfinance Institutions Network (MFIN), the self-regulatory body for the Indian microfinance industry, says Janalakshmi has also built a very strong governance structure and sturdy systems and processes, which allow it to raise multiple rounds of private equity. "Investors like to be associated with such companies, especially after what we witnessed in Andhra Pradesh in this sector. Janalakshmi has been able to stay above the water admirably, based on these two strong pillars," Prasad says.
Perhaps the most powerful aspect of Janalakshmi’s model is the unique way the company is structured. The organisation is bifurcated into a not-for-profit holding company in which the main promoters, like Ramanathan, have their stakes; and an operational company, run as a professional, for-profit financial services firm, which is allowed to raise equity. “As a student of institutions, I learnt that the market was a double-edged sword,” says Ramanathan. When contemplating a structure for Janalakshmi, he wondered what would happen if he “took greed off the table”. “Would I be as motivated?” he asked himself. “Ten years later I’m still as fired up,” he says.
It’s not as if Janalakshmi will not have its challenges. The company is aggressively moving up and down the customer value chain to look for new business. For instance, on the one end is its enterprise financial services division, where the company services customers like, say, a slum clinic that needs a diagnostic machine costing Rs 8 lakh but which can jumpstart a cash-rich business. At the bottom end of that chain is a vegetable seller who needs a loan of Rs 10,000. In the middle are 26 million small-to-medium enterprises, 95 per cent of whom receive no credit and who are potential Janalakshmi clients. Servicing so many of them could become a logistics nightmare. Ramanathan thinks Janalakshmi is up for the challenge. “We’ve built a model that can scale easily and is robust,” he says.
This surely is something for the Andhra MFIs to think about.