At a time when the name of microfinance is in the mud and its financial prospects severely dented mainly because of the aberrations it developed in Andhra Pradesh, two microfinance organisations based in Karnataka have won the latest national microfinance awards for 2011.
Microfinance India Awards were first instituted in 2009 by ACCESS, with support from HSBC India. Ujjivan Financial Services has won the “Microfinance India large organisation of the year” award for 2011 and Sanghamithra Rural Financial Services the award in the “small and medium” category. (The two sector leaders who have been honoured in the first two years are Vijay Mahajan and Ela Bhatt.) The two entities—Ujjivan and Sanghamithra—have distinctly different models and may not even much like the company the other keeps. Which is why taking them together and positing them against the Andhra experience tells us not only what lasts and what does not in microfinance, but also that one size does not fit all in what lasts.
As in any emerging sector, you can match a face to a leading institution. Samit Ghosh who founded Ujjivan and Aloysius P Fernandez who founded Sanghamithra, are still very much there at the helm of the two organisations. Ghosh founded Ujjivan in 2005 after a career in international banking. Fernandez founded Sanghamithra in 1996 but its origins go back to Mysore Resettlement and Development Agency (MYRADA), founded in 1968 to assist the government in resettling Tibetan refugees and closed in 1982 after the programme ended.
Ujjivan is registered as a non-banking financial company under the supervision of the Reserve Bank of India and follows the Grameen model. Sanghamithra is a not-for-profit organisation registered under section 25 of the Companies Act and follows the self-help group (SHG) model. Ujjivan was the first microfinance institution (MFI) to concentrate exclusively on the urban poor. Sanghamithra is focused on the rural poor. Ujjivan had a gross loan portfolio of Rs 625 crore and 8.5 lakh active borrowers in 2010-11. The corresponding figures for Sanghamithra are Rs 79 crore and 1.3 lakh. Ujjivan broke even in 2009-10.
Ujjivan adopted a pioneering operating model that adapted Bangladesh’s Grameen Bank’s processes and systems and combined them with the back-end efficiencies of a modern retail bank. It took a lead in following a decentralised management structure with a hub and spoke framework. Its product and process innovations have given it efficiency and transparency.
Sanghamithra works in the underserved areas as a bridge institution to link SHGs with banks. As many as 36 out of its 64 branches are in unbanked or under-banked areas. Sanghamithra has grown at a steady pace in the range of 11 to 18 per cent during last three years, which was considered low when the sector was growing exponentially. But in 2010-11 it grew at 14.86 per cent while most MFIs registered negative growth due to Andhra Pradesh crisis.
So what did MFIs in Karnataka or Bangalore do right which those in Andhra didn’t? According to Ghosh, Andhra MFIs did not learn the right lessons from the setback in Krishna district in 1985. On the other hand, the Karnataka MFIs, under the umbrella of AKMi (Association of Karnataka Microfinance Institutions) learnt from the setbacks in Ramanagaram and Kolar districts in 2009. Also, AKMi worked in collaboration with the state government, being able to participate in the state level bankers’ committee meetings. When the crisis broke, AKMi organised meetings for customer education and training in financial literacy, which were also attended by local officials.
In sharp contrast, the Andhra crisis erupted when the state government, in the wake of farmers’ suicides, came down heavily on the NBFC-MFIs, partly because there was no love lost between the two. The government saw NBFC-MFIs as predators who were taking away custom from SHGs backed by the government.
“In Karnataka the basic environment was superior, collaborative. This has helped us coexist,” says Ujjivan’s Ghosh. “In Andhra investors turbocharged growth without learning. Uncontrolled growth, over competition and over borrowing, leading to coercive recovery” proved to be the industry’s bane, according to Ghosh. “We agreed to avoid multiple lending, limiting the number of loans/agencies per borrower to three,” he adds. Conversely, NBFC-MFIs in Andhra pursued profit-led aggressive growth.
Ujjivan in particular, says Ghosh, has constantly sought customer feedback. One learning has been that the joint liability system, under which group members guarantee each other’s loans, becomes burdensome in higher loan cycles, that is when borrowers graduate over time to getting bigger loans. At this stage some group members become aggressive towards defaulters and this creates an explosive situation, worsened by the entry of money lenders. “When we saw this, we started piloting individual liability by introducing Grameen 2.”
Fernandez explains that there are two types of group lending. One is an MFI asking a few people to form a group, lending to individuals in the group guaranteeing each others’ loans, that is taking on joint liability. “Our model is different. We lend to self-selected groups who then lend to group members as they see fit – the size of the loan and purpose being determined entirely by the group.” Sanghamithra lays great store by the institution building approach based on promoting financial literacy. Imparting this training is a slow process. It takes money and time. “We get this training money from the government. It is like an educational programme. We train them to take decisions.”
Adds Fernandez, “We come in about six months after a group self-selects. What we look for and promote is whether a group meets regularly, saves regularly, lends out of its own resources, and has a system of sanctions for non-performance. This determines the quality of the group.” The NBFC-MFIs, particularly the top five or six, do not want to invest this kind of time or money. Their loans are standardised, not purpose driven. Their software is geared to handling standardised loans and aims to maximise volume and speed. Their profits are ultimately “extractive”.
He is quite graphic about the dynamics of their business model. “About halfway through a loan near balance sheet date, a borrower is given a topping up loan and growth, recovery and repayment look rosy. When anyone claims over 98 per cent recovery, I want to send our investigators.” Sanghamithra borrows from banks at 9 to 11 per cent and lends to self-help groups which eventually charge the borrower 14-24 per cent, the rate varying according to the purpose and duration of the loan. Its recovery rate is 97 per cent.
The borrowers’ groups formed at the NBFC-MFIs’ behest overlap, leading to multiple lending. Borrowers are initially not worried about interest rates, paying off one loan with another. When one individual ends up taking three or four loans and repayment obligations pile up, and the recovery agents of the NBFC-MFIs keep visiting borrowers, pressures build up and suicides occur. “There are no suicides over recovery by self-help groups. The auditors and rating agencies never pay field visits to find out these realities. The NBFC-MFI business model is based on high executive pay, high incentives, high growth.”
Critically, asserts Fernandez, the chastening effect of the Andhra crisis has not cured the sector of its ills. NBFC-MFIs have recently adopted a code of conduct. A code was also adopted after the Krishna incidents in 2005, but it was never followed. “The NBFC-MFI model is still flawed. You need to get to know the borrower and her diverse financial needs. The SHG can do this. In our apartment block two maids took microfinance loans to sell vegetable but used it to buy earrings. Why should we give up our maid’s jobs, they said.”
What are the key issues for the future? Ghosh sees it as the ability to operate in the new regulatory environment with a cap on interest rate and margin and a minimum capital requirement. “So people have to become more efficient by changing their operating model by learning. The microfinance bill is essential for financial inclusion. It must go forward. The no-frills bank accounts are not working. Banking correspondents don’t find it viable. Mobile banking holds the key.”