Penny lent, penny earned

Hosahannathi means ‘new gold’ in Kannada. This village in Ranibennur district, Karnataka, seems to be living up to its name. Renuka, Lalitha and many other women from the village are very happy and satisfied with their lives, with good reason. Renuka started off her livestock rearing set-up with four goats and now tends to nearly 45 goats and sheep; and Lalitha used to earn ₹250 per day from her kirana store in the village but now rakes in twice that amount. The reason behind this prosperity? These women, like many others in this village, are among the 4,367 borrowers who have taken loans from MicroGraam in the last year.

On the way to Ranibennur, six hours from Bengaluru, MicroGraam founder Rangan Varadan talks about his nearly decade-long stint with Infosys handling its banking and capital markets. From there, he went on to become the CEO of an NGO run by Integra Micro Systems, managing the business correspondent activities of various public sector banks. While at work there, he realised that having a savings account made good financial sense but what rural populations needed was credit-led financial inclusion and an opportunity to save safely. “The way the government is pushing financial inclusion may work in the short term, but in the long term (five to 10 years), it won’t be enough. We needed to make credit both affordable and accessible,” he says. 

Inspired by Kiva, a crowdsourcing microcredit organisation in the US, Varadan tried to devise a model that pays market return (or at least close to market return) and still be able to provide affordable credit to the borrower. One of the key targets that Kiva had tried to achieve was to raise loans without interest to borrowers. All the credit risk lay with the lenders that way. “If you and I can get a personal loan from a private bank at 12%, why should a person who is ‘poor’ or ‘under-served’ pay higher rates of interest?” Against the nearly 24-26% charged by private moneylenders, Rangan, along with his cousin, Sekhar Sarukkai, laid the foundation for MicroGraam in 2010 by offering villagers loans at competitive rates of 14-16%. Their initial lenders were mostly friends and persons within the family network. 

“The first people I approached were those who worked at MNCs, had a good disposable income and could offer their wealth to the cause. But it was only a year and a half later that we saw people we didn’t know giving us money. Till then, 95% of our lenders were friends and family. Now, we are tapping into the HNI network to raise a good amount of funds,” adds Varadan. P Balasubramanian, an angel investor holding 14% stake in the company, believes that though MicroGraam needs a couple of more rounds of funding, the model is robust and scalable. “It leverages modern technology and provides an opportunity to grow based on solid performance that creates trust in the market place.” 

Making money work

So, how does the MicroGraam system work? The company crowdsources funds through its website and lends it to poor farmers who cannot afford high-interest rate loans. If someone requires, say, ₹1,000, the lender provides the money to MicroGraam, which passes it on to the respective on-ground organisation of the 22 present in six states. This organisation, usually an NGO, disburses the funds to the borrower. A prospective lender chooses the borrower of his or her choice, makes payments and then gets monthly or quarterly return on the loan, with an annual interest rate of 8%. The NGO, which is in charge of monitoring the loans and collections, earns about 7% and MicroGraam retains 2% as its own service fee. In all, the borrower’s cost of funds works out to
around 17%.

The crowdsourced finance model is obviously inspired by Kiva. The other aspect borrowed from that model is working with different field partners or local community organisations. “We picked organisations that already work with the local communities in various aspects, so that microcredit would just be an addition to their services. Thereby, they would be able to bring down the cost of providing the services. It is like retail channels being used to distribute the products. Villages need affordable services delivered to their doorstep, but then, the cost goes up unless you have scale. It is better to work with an organisation that is familiar with the area,” says Varadan.

The community organisation, along with MicroGraam, decides what livelihood activities can be invested in after due research. Vansasiri Rural Development Society (VRDS), the local organisation that it works with in Ranibennur, does community mapping with self-help groups (SHG) in the area and interacts with the communities. It offers training programmes and informs people about the various livelihood activities they could take up, giving them any additional technical support they might require. It builds a network of about 100 families before it starts funding their livelihood activities. The process is, however, not as mechanical as it sounds. During these interactions, the relationship that is built with the local community is close enough for it to be able to depend on Micrograam.

There is always a stigma attached to owing money to an outsider for fear of defaulting, Varadan explains, adding that people are much more comfortable borrowing from friends and relatives. “If we deal with them as friends, it will be easier to move away from the stigma. The community organisation must realise that they will benefit if the borrowers benefit. If we feel that they are starting to behave like just another MFI, we move out of the situation immediately,” he says. Micrograam has done that in two or three cases, primarily because of that reason. “There will be scope of failure but that is a risk you have to take.” 

Currently, Ranibennur district boasts of a crop of organic farmers, most of whom come from shepherding families. As Hosahannathi depends on the annual monsoon for its harvest, to sustain themselves through the year, the farmers have gone back to their roots and have taken up animal husbandry with the help of loans from MicroGraam. As seen in Renuka’s case, the village has seen much success with this model. 

Shamshuddin Baligar, executive director, VRDS, has been working in the development sector at the grassroots level for the past 10 years. “When there was a drought five years back, we saw that most people were dependent on their livestock. But what we found was that banks were not ready to provide these families with loans. That was when we decided that MicroGraam would provide credit support to the community at affordable rates,” he says. MicroGraam first provided VRDS with ₹26.5 lakh in FY13, with which 150 families were provided minimum support of ₹15,000-20,000. The borrowers are able to double this amount on the sale of livestock and get to keep most of the income once the loans are paid off. MicroGraam pumped in a second round of investment, this time of ₹58.5 lakh, into VRDS in FY14. Right now, it helps the facilitator support more than 500 families.  

Doing good

MicroGraam does not charge collateral from borrowers as its philosophy is to make its customers as independent of the vicious cycle of debt as possible. To be able to provide its lenders with some kind of security, it has formulated a ‘guarantee fund’ to mitigate that risk; this acts as a reserve that any other financial institution would keep. The NGO retains 10% of the total credit provided to its members as a guarantee by starting a fixed deposit linked to MicroGraam or raising funds from various activities. The interest accrues to the NGOs, but is left untouched until things go seriously off-track. Except in the first year, there have been no losses so far. There is an additional 10% that MicroGraam raises by tapping into funds set aside by HNIs and other foundations. 

Before disbursing funds to a new community, however, MicroGraam always conducts risk assessment surveys on a sample of 20-25 people. A few months after the loans are disbursed, the company conducts impact surveys to understand how they have been performing. 

“The challenge is working with the capability of the NGOs and their bandwidth. They work on a very thin budget and while the 6-7% they get from us covers their operational costs, surprises often spring up during the exercise,” says Varadan. There is scope for improvement and these surveys are helping Micrograam fill the gaps. We want to provide them with support for capacity building so that they can undertake these surveys on an ongoing basis themselves,” he adds.

Thanks to MicroGraam’s flexible repayment options, the NGOs don’t need to dip into their emergency funds often either. The company allows borrowers to skip monthly instalments in case of festivals or personal requirements such as weddings. It offers two plans: educational loans, where the student repays the money in monthly instalments only three months after securing a job, and farmer loans, which are repaid with a balloon repayment once the harvest is reaped at the end of the season.  

Growing, debt-free

After tasting success down south, the company now plans to move the business towards the north and northeast. “Karnataka has a lot of grameen or rural banks, but in many districts there are areas that have no irrigation, and these banks are very reluctant to lend to people living in such deprived blocks,” says Varadan. Currently, the company’s lending portfolio is concentrated in Tamil Nadu, Karnataka and Maharashtra (nearly 75%); the rest is made up by states such as Jharkhand, West Bengal and Assam. Now, the company is slowly looking for a 50-50 proportion between the north and south.

In terms of activity, providing credit to asset-building and livelihood activities forms 60-70% of MicroGraam’s volume. Besides offering funds for education and vocational training, the company also focuses on health and sanitation, with toilet-building activities in Bihar. It also contributes funding for water-related activities, such as building pipelines and helping with water supply. In future, the company plans to work towards provide renewable resources to the area. 

Though the initial couple of years did not see any lending, MicroGraam, which has nine full-time employees and enjoys a 99% repayment rate, clocked revenue of ₹1.5 lakh in FY13 on disbursals worth ₹1.41 crore and ₹7.5 lakh in FY14 on disbursals of ₹1.93 crore. In the current fiscal, it is looking at ₹10 lakh in revenue on disbursals of ₹3.15 crore. “Once we cross the ₹10-lakh threshold, we will start breaking even,” says Varadan, pointing out that the organisation’s annual expenses work out to ₹50 lakh. A chunk of the expenses goes towards marketing (mostly digital) and updating its technology. Breaking even will also require that the loan book touches ₹15 crore-20 crore. “We hope to achieve our target by December 2014,” says Varadan. With 1,160 local lenders and over 2,000 from Kiva backing MicroGraam, it appears that many more villages like Hosahannathi will soon learn to coexist — happily — with debt.