Rukmini Adsule (left ) and Anita Mane, from the microfinance fold, sell Godrej & Boyce’s nano refrigerators and Hindustan Unilever’s water purifiers, among other products, in Osmanabad, Maharashtra. Adsule earns Rs 3,000 a month as commission.
Microfinance
Microfinance institutions are going beyond financial products to sell phones, fridges and more. Everyone gains: rural consumers, rural sellers, companies and MFIs.

In a dry and dusty fair in Osmanabad, a small town tucked away in the Marathwada region of Maharashtra, a thousand women have just spoken. Their verdict is loud and clear. CANDY RED.

Consumer durables firm Godrej & Boyce is parading several colours of its new breakthrough product, ChotuKool, a nano refrigerator. A few fluorescent colours come first. The women vote this out with a cacophonous show of hands. They know what they want. Candy Red.

They did more than choose the colour of the fridge. They helped Godrej conceive and design the product. Then, from September 2008, when the first prototype of ChotuKool was unveiled to them, they began working with executives from Godrej & Boyce to ‘co-create’ it

 
 
With financing, villagers are willing to pay almost 50% more for useful applications on a handset.
 
 
. The ChotuKool is like no other fridge. It does not have a compressor. It runs on a battery. Utensils and bottles need to be loaded into this 43-litre cool box from the top. It weighs only 7.8 kg and costs only Rs 3,200. And, of course, it is Candy Red in colour.

Over a hundred ChotuKools are being tried and tested in Osmanabad district. It is to the refrigerator segment what the Tata Nano is to the car market...only it’s a lot more innovative. ChotuKool, the product, is itself an innovation. The way it was co-created with village women, through several rounds of alterations based on their feedback, is another innovation. And the manner in which it will be distributed, sold and serviced is even more innovative.

New Channel

Shantipriya Gavali of Vashi village in Marathwada, the young woman you saw on the cover, is carrying the innovation on her head, literally and figuratively

 
 
We are in the process of creating a market. Credit is just incidental.
 
 
. She is part of a self-help group created and run by Swayam Shikshan Prayog, an NGO microfinance institution (MFI). Shantipriya is Godrej’s new retailer, one of 101 such retailers it now has in 77 villages. “With two growing kids, there is pressure on the household to increase income. In three months, I have already sold six ChotuKools,” she says with pride. She markets ChotuKool to her villagers, explains its features and benefits using a flip-chart, and knocks on several doors every day to hard-sell it.

Women like Shantipriya convinced Godrej to cut the price of ChotuKool from Rs 3,700 to Rs 3,200. She earns Rs 150 as commission for every ChotuKool sold. Sakhi Retail, a specialist company promoted by Swayam Shikshan Prayog, earns another Rs 100. Godrej has junked the traditional model of a proprietary channel with a sales force and a distributor-dealer chain. Instead, it has joined hands with MFIs to create a new distribution ecosystem.


Jyoti Sawant, a cluster supervisor of Swayam Shikshan Prayog, an NGO-microfinance institution, mentors micro-entrepreneurs who sell products

 
 
The next big step is alliances with urban MFIs to cover the urban poor.
 
 
. Jyoti, from Ruibar village in Maharashtra, is one of 35 supervisors in SSP.

MFIs now have access to 50 million clients. They reach these consumers through self-help groups—a small collective of 12 or so women members who meet regularly to pool savings, seek income-generating loans and make repayments. Companies like Godrej are now using MFIs and self-help groups as new retailers to pry open the bottom-of-the-pyramid market.

“Companies value the fact that we are a powerful social network,” says Prema Gopalan of the Swayam Shikshan Prayog. The MFI also sells Hindustan Unilever water purifiers and BP Energy India cooking stoves. It accounts for 60,000 of the 200,000 Oorja stoves sold across the country by BP Energy

 
 
We are evaluating whether microfinance institutions can become our logistics partners too.
 
 
. Incidentally, these stoves were co-created by BP Energy and villagers. SKS Microfinance, the largest of its ilk in India, is now selling mobile phones for Nokia and a large basket of merchandise for Metro, the cash and carry (wholesale) chain. Spandana Sphoorty Financial, an Andhra Pradesh-based MFI, wants to sell tractors, but manufacturers do not want to upset the existing distribution chain.

The sprawling reach and power of self-help groups are now being leveraged by companies to penetrate this market. “The bottom of the pyramid is not a huge monolithic market,” says G Sunderraman, Vice-President, Corporate Development, Godrej & Boyce. “We have to understand the nuances and the needs of customer segments within.” That is why he called the 1,000 women to the Osmanabad fair. And that is precisely why several consumer product companies are exploring this emerging retail channel that is promising to take them into the heart of India’s vast rural hinterland.

Wealth In The Channel

By teaming up with MFIs, consumer product companies are creating more than just an exciting new distribution channel

 
 
The microfinance institution’s loan officer now enjoys the status that a village postman once had.
 
 
. They are also creating a wealth-generating web of micro-entrepreneurs that could pull thousands of rural households out of poverty. “It will have a far-reaching impact on poverty, while generating profits up and down the value chain—from poor families to multinational corporations,” says Alex Counts, CEO of the Washington DC-based Grameen Foundation, in a widely hailed paper in the Stanford Social Innovation Review. He argues that MFIs can be transformed into “platforms” for delivery of a slew of products and services to the world’s poor. “There is a need for re-imagining microfinance.”

The Swayam Shikshan Prayog model helps illustrate the wealth-creation effect. It created an entirely new company, Sakhi Retail Co, in which over 850 women called sakhis, drawn from its self-help groups, are stakeholders

 
 
Nobody is tracking the danger signals; the unintended consequences of the new models.
 
 
. Each woman contributes Rs 10,000 for the equity stake and takes on the role of an entrepreneur in her village. A sakhi, typically, earns over Rs 2,000 per month as commission on sales of various products. That is a fair amount of money in rural India. Pooja Tekale, Shantipriya’s neighbour in Vashi village, is a star sakhi. She has sold over 700 Oorja stoves. By turning retailers, thousands of women like Pooja can aspire to earn more. Across the country, SKS Microfinance, Spandana Sphoorty Financial and Basix, India’s biggest MFIs, have started distributing several consumer products through their self-help groups or through loan officers.

A Merchant’s Merchants

A dedicated team of SKS Microfinance loan officers are in the middle of an interesting experiment in Hyderabad’s Ameerpet area. It is quite easy to identify them

 
 
This year, I am targeting 10 million customers (from 1.8 million last year).
 
 
. They usually hang around kirana stores and some carry a handheld GPRS device. The idea is simple: they are working to push wholesaler Metro’s huge basket of merchandise—soaps, shampoo, detergents, paste, pulses et al—to the kiranas. They take orders from the kiranas and transmit it via the GPRS device to Metro, which services these orders.

K Krishnamurthy, an SKS Microfinance client who runs a hole-in-the-wall kirana store in Ameerpet, is customer number 121,437 for Metro. “I used to spend almost half of my day visiting various mandis in Begum Bazaar, Malapet and Shamsabad. Now, Metro delivers my supplies right to my shop,” says Krishnamurthy. More time spent at the shop means more money for him. He also doubles as a repairman for gas stoves and sundry appliances. His daily sale is around Rs 3,000.

Krishnamurthy’s only grouse is that Metro doesn’t supply ‘local’ brands like Veermani biscuits or items like jaggery

 
 
I see a situation in the not-too-distant future when MFIs may mutate into divisions of large corporations.
 
 
. But Metro’s supplies are cheaper. Sugar is cheaper by Rs 2 a kg and a bag of salt, which costs Rs 400 in the mandi, is sold to him for Rs 337. He also avails of a loan from SKS for buying stocks. Krishnamurthy liquidates his stock in a 15-day cycle and repays the loan in one shot to the loan officer who visits him frequently.

If this pilot extends into rural Andhra Pradesh, SKS Microfinance and Metro are exploring the possibility of constructing warehouses to reach the deep interiors of the state.

This pilot, if commercialised, can be a windfall for everyone in the chain. “The numbers can be staggering,” says Suresh Gurumani, CEO and MD, SKS Microfinance, as he crunches numbers on a calculator. “We can easily reach a turnover of Rs 8,000 crore in the first year of full-scale operations.” Gurumani moved into microfinance recently, after a stint as Retail Director, Barclays Bank.


Manisha Sawant’s kitchen in Jagjee village in Maharashtra would fill up with smoke when she used firewood for cooking. BP Energy’s stove has changed all that. The stove costs Rs 1,050 and is marketed by Swayam.

The arithmetic is simple: 100,000 stores buying Rs 4,000 worth of goods from Metro every week for 50 weeks in a year, is Rs 2,000 crore. SKS already has 500,000 kirana store-owners as its microfinance customers. Getting them to buy Metro merchandise shouldn’t be too difficult. In Ameerpet, for every kirana who is an SKS client, there are a few more in the immediate vicinity that aren’t. Geographically, it is quite easy for the SKS-Metro combine to tap them too. The big challenge is getting the logistics right. Metro and SKS are putting their heads to it.

The other big opportunity is in the telecom sector. Nokia, the handset vendor, service provider Bharti Airtel and SKS, selected a cluster of villages in Andhra Pradesh’s Nalgonda district and Karnataka’s Hassan district. These clusters had zero mobile penetration. SKS sold Nokia’s 1650 model with an Airtel connection, and also offered finance—the phone was sold for 25 monthly instalments of Rs 85 each. “Within months, we saw mobile penetration jump to 30%,” says D Shivakumar, MD and Vice-President, Nokia India.

If most of Bharti Airtel’s first 100 million customers came from cities, most of the next 100 million will come from villages. Mobile penetration in rural India is just about 10% today. MFIs will have a key role in increasing that.

Immense Potential

The Metro and Nokia alliances are still only pilots. But seen in the backdrop of SKS Microfinance’s huge reach, the potential of this new distribution channel becomes quite evident. SKS Microfinance employs 13,000 people, largely loan officers, and reaches 60,000 villages. It already has 4.2 million customers and is adding 200,000 every month. If SKS grows at this rate, it is slated to beat Grameen Bank of Muhammad Yunus and turn into the largest MFI in the world by 2010. Then, SKS will cross 8 million clients. Each one of them is a potential customer for companies targeting to sell consumer products to the bottom of the pyramid.

A typical borrower of SKS sits on two loan products and three insurance products. Money is disbursed and repayments collected right at their doorsteps, with the loan officer as a critical interface. All that an MFI–corporate partnership has to do is load this distribution channel with consumer products.

“Tomorrow, if I distribute 10 products to 4 million of my clients, that’s entering Google territory, right?” asks Vikram Akula, Chairperson, SKS Microfinance. Akula, a relative newcomer to the three-decade-old sector, caused waves when his MFI attracted over $130 million of investments from private equity (PE) players and venture capitalists recently. Traditionalists don’t like the entry of commercial capital in microfinance. It is argued that PE money and the accent on profits can dilute the social cause. None of that bothers Akula. He wants to turn MFIs into retailers.

Awareness Is Key

When Eureka Forbes launched AquaSure, a storage-water purifier, for Rs 1,950, through its traditional distributor-dealer channel in rural markets, uptake was appallingly poor. It tied-up with Basix, a pioneering MFI in India, to sell the product. It also introduced a loan product with a year-long tenure. Sales immediately jumped 20%.

“It is not just money availability that will make the water-purifier market a big opportunity,” says Aslam A Karmali, CEO, Consumer Division, Eureka Forbes. “It is awareness-generation about the need to consume clean water.” Water purifiers are a push product, requiring considerable concept selling in bottom-of-the-pyramid markets.

In fact, several products that would otherwise seem very important in rural India—solar lanterns, for instance—are push products. The Monitor Group, a global strategic advisory and capital services firm, recently conducted a survey to find out what products MFI borrowers really want. And behold, the poor, just like urbanites, root for status symbols, entertainment and conveniences. The big demand was for gold coins, TVs and cupboards. Next come fertilisers, livestock and motorbikes. Rural consumers thought insurance, water filters and solar lanterns were the least important.

“Educating low-income customers about the value of socially beneficial products is a big challenge,” says Ashish Karamchandani, CEO of the Monitor Group in India. “We need MFIs for their sheer power in selling concepts, more than the financial aspect,” says Ramesh Chembath, GM , Marketing, at Godrej & Boyce. “Their understanding of group dynamics, bonding and proximity to the customer is unparalleled.”

Here is where the loan officer, an important cog in the microfinance wheel, steps in. An MFI loan officer meets with self-help groups at least once a week. He thus becomes a fount of knowledge about the client, her household, her income status and the circumstances in which she lives. He is often the link between the product company and the self-help group. He explains the product to the members of the self-help group, who then generate demand. He also aggregates the orders from the group members. All the company does is deliver the product and provide after-sales service.

Early experience has shown that microfinance companies can provide more than just distribution. They can be a rich source of customer intelligence. When Godrej first deployed the ChotuKool in Osmanabad, it got quick feedback (from its MFI partners) that it malfunctions under low tin roofs as temperatures soar.


Vikram Akula of SKS Microfinance is turning MFIs into distribution channels for companies. His company services purchase orders of small kirana store-owners and even gives them 15-day loans.

BP Energy’s Oorja stoves too went through the same process of iteration. For instance, the steel chamber that holds fuel pellets in the stove had to be replaced because it expanded on heating and caused problems. With ceramic chambers, the stoves worked well. “While co-creating, we have relied on the access to the consumer we have achieved. The consumer has always inspired our product,” says Roberto Bocca, former director of Emerging Consumer Markets, BP Alternative Energy. Nokia is also on a learning curve in Nalgonda. Consumers want a torch and FM radio on their handsets. Microfinance partners ensure that such feedback is passed quickly to the companies.

Co-creation and learning from the fields is not limited to consumer products. Even financial products have been crafted for poor consumers in consultation with MFIs.

Blazing A Trail

Incidentally, it was financial services companies that first started distributing their products through MFIs; consumer products came later. Money-transfer firm Western Union was among the earliest. Over $50 billion came into India in 2008 as remittances from workers employed abroad. Western Union has over 6.6 million consumers in India. “About 70% of our business is from villages,” says Kiran Shetty, Country Director, Western Union.

First, Western Union tapped the ubiquitous post office network to reach rural clients. Later, it still felt the need to approach Spandana Sphoorty Financial in Andhra Pradesh. Why? “We wanted to reach the last mile, in remote villages,” says Shetty. Of 6,100 Western Union locations in AP, 300 are Spandana locations. The MFI acts as a sub-agent to Western Union’s master agents.


T Narsimhulu purchased a tractor with a fl exible-repayment loan from MFI Spandana Sphoorty Financial. Besides carting goods across short distances, he rents it out to others in his village in Mahabubnagar in Andhra Pradesh, and earns about Rs 15,000 a month.

Insurance companies came next. Bajaj Allianz tied up with SKS Microfinance in April 2008 to sell its policies. SKS’s Gurumani brought new insight to the table—bottom-of-the-pyramid customers see insurance more as savings. That prompted Bajaj Allianz to integrate money-back features into its pure-risk policy. The new offering was almost like a five-year savings product. Within 10 months, SKS managed to sell 1.8 million Bajaj Allianz policies. “It’s the fastest ramp-up of any insurance product in the world,” says SKS’s Akula. Bajaj earned a premium income of Rs 200 crore. Bajaj Allianz is now launching a slew of products for the poor, including a child-protection plan. “This year, I am targeting 10 million customers,” says Yogesh Gupta, Senior Vice-President and Head of Business Procurement, Bajaj Allianz.

ICICI Lombard General Insurance started selling its policies through SKS and a few other MFIs. This helped it reach two million customers in 18 months. There were learnings too. Initially, it assumed that a cashless health insurance policy would be ideal for villagers, but feedback from SKS prompted it to build reimbursement into it. “People shunned the accredited clinics and preferred to visit doctors they were familiar or comfortable with,” says Pranav Prashad, Head, Rural and Agriculture Business Group, ICICI Lombard.

It’s A Business

MFIs see business benefits in turning retailers. “The commission (from selling products) adds directly to our bottom line. This is when you see profitability, and a return on equity of 30-40%,” says Akula. The non-loan income of SKS is negligible now. “It can go up to 25% in two years,” says Gurumani. When MFIs earn profits by distributing phones, fridges and insurance policies, among other things, it has a social impact too. More business will enable MFIs to lower interest rates on loans, thus benefiting millions of rural poor. “It’s too early to tell. We have to understand the costs and cross-subsidies involved better,” says Ganesh Rengaswamy, Vice-President and Country Director, Unitus Capital, an investor in SKS Microfinance.

Corporate partnerships also open up other revenue streams for MFIs. Hundreds arrive at the unit offices of Basix—it has 105 across the country—on a typical loan-disbursal day. Basix allows companies to make presentations to the captive crowd for a fee of around Rs 1,200. Events are organised and meetings of key influencers are also convened for a fee by Basix. “We are, in a way, creating a unique media platform for corporates,” says K Prabhakar, advisor to Basix. Mamta Bharadwaj, Vice-President and communication expert at SKS, wonders how much she could earn if they conducted sharply calibrated surveys and consumer-preference studies for corporations. “Earlier, we were so caught up with growth that we didn’t comprehend the potential of our networks as a revenue stream,” she says.

Swayam Shikshan Prayog’s association with companies has helped it improve operational efficiencies. “Earlier, we spent 75 paise for distributing a kg of fuel pellets (used in Oorja cooking stoves). Now, it’s down to 26 paise due to better route planning and demand aggregation,” says Prayog’s Gopalan. Offering multiple products by MFIs has also resulted in enhanced loyalty of clients. Importantly, it enables MFIs to grow with their clients as they climb the social ladder.

It’s Not All Hunky Dory

The alliance between product companies and MFIs is not always easy and pleasant. Padmaja Reddy G, MD of Spandana Sphoorty Financial, the second largest and the most cost-efficient MFI in India, is in negotiations with Pune-based John Deere Equipment, the Indian arm of the multinational tractor manufacturer, to source tractors directly from it.

Spandana wanted to be a distributor for tractors, but Indian manufacturers are not willing to disturb their existing distribution channels. She also distributes PureIT, Hindustan Unilever’s water purifier. Her occasional skirmishes with HUL indicate that a lot of partnership issues need ironing out. Considering the immense savings in consumer-acquisition costs, Reddy asked HUL to reduce PureIT’s retail price. HUL refused. “The company should transfer a portion of the benefits accrued to the consumer. The partnership should benefit the poor,” she says. HUL declined to be interviewed for this story.

HUL, which is marketing PureIT aggressively in the rural market, has had several unsavoury run-ins with MFIs. An MFI was appalled when an HUL executive asked for its entire client list with addresses, to boot. The partnership between PepsiCo and Basix on contract farming is on hold, for the time being. A crop failure attributed to the seeds supplied by the company did it in. “We lost over Rs 5 lakh in the process,” says K Vasumathi, Head, Agribusines, Basix. The MFI is probing the possibility of creating a ‘risk fund’ to deal with such situations. It is obvious that companies have to give up their obsession with targets and profits, and acquire a more sensitive approach while dealing with the poor. “Most corporations just lack the developmental perspective,” laments BL Parthasarathy, Group Vice-President, Basix.

However, companies like Godrej are making up for the deficiencies elsewhere. “We are not looking at the next 18 or 20 years, but beyond that,” says Godrej’s Sunderraman. The company is trying to grow by increasing the size of the rural wallet, not just by grabbing a share of it. The accent is clearly on generating livelihoods, as it is doing with Sakhi Retail Co; improving the purchasing power of the poor and then selling to them. “Credit is not a reason why consumption should occur,” he says.

So, what does the future hold for microfinance as a ‘platform’ for companies to sell their products and services? S Sivakumar, Chief Executive, Agri Business, ITC, himself an innovator in rural markets, sums it up best. “I see a situation in the not-too-distant future when MFIs may mutate into divisions or wings of large corporations.” Shantipriya Gavali will relish the prospect of becoming a Hindustan Unilever employee.


By Naren Karunakaran with inputs from Anurag Prasad and Rajiv Bhuva

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