I think it was Wayne Gretzky who said that what made him a great ice hockey player was that he skated to where the puck was going to be.
Entrepreneurs should go where the opportunities are and funding is easy to obtain. With this budget, focus on “aam aadmi” , Mohammed Yunus getting the Nobel Prize etc. the timing for microfinance seems to be good. Within microfinance if the herd is focused on rural microfinance maybe there is an opportunity in urban microfinance.
There is lot of money available for microfinance in general and some specifically for urban microfinance. The team probably should contain a banker who understands consumer lending and it will probably end up setting up an NBFC ( Non Banking Financial Company) which I think requires minimum 2 crores capital to get a license from RBI. Getting funded is never easy so the team has to be top notch. I spoke to Caitlin Baron ( caitlin@msdf.org) who heads microfinance in India for MSDF ( Michael & Susan Dell Foundation) . They are keen to invest in startup NBFC’s who target urban microfinance and she is willing to engage in discussions with good teams even before they have a business plan to help them shape a business plan.
If the team is in Delhi – NCR I would be happy to engage as well.
It would also be interesting to hear comments from readers on whether they think this is a good area to get into or not.
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Sanjay,
`Scale’ in Microfinance parlance is a two tiered structure.
Tier 1 – encourage formation of SHG / JLG cult, which moots banking habits, that exposes them to develop self confidence and dream of a better lifestyle thro cooperation.
Tier 2 – Vertical expansion of SHG / JLG and that of its members ( transitory veg vendor dreaming of owning a shop, direct sourcing from wholesale suppliers etc.) and Lateral expansion ( contagion amongst others who watch the peer prosperity and getting motivated ).
While your concerns of transaction costs are bang on, try working with your neibhourhood groups ( say rickshaw drivers / veg vendors ). You’ll soon realize that the challenge is not as much in margin concerns as it is in the MFI’s own scaling capability to address its customer needs.
A typical MFI borrower who benefited from it, has a sentimental attachments ( she things this MFI is lucky ! ) and will come back for more ( sticky ) as her desire to move up the lifestyle ladder is constant.
I can’t think of another pool of borrowers where default rates are as low as 2%.
Krish/Siva/Roshan,
Thanks for your comments. I am reading the paper Siva mentions. I am aware of Zopa and Prosper. The idea behind these modified may be worth exploring. Krish you know a lot about this and your checklist is useful. The paper Siva mentions has a case study on Ujjivan and five six others.
To me this problem is interesting from a transaction cost point of view. To make money on say a $200 loan even at say a 15% spread over cost of funds means that your all in costs ( including customer acquisition, processing,credit loss,collection etc.) cannot exceed $30 per loan per year. For a $1000 loan even a 3% spread gives you $30. Most people get fooled by percentages. On a $20 loan you need a 150% spread to get $30.
To lower cost per loan you need massive scale and for that maybe some of the old paradigms have to change. I think there is an opportunity for disruptive innovation here.
Thoughts ?
With more than 25% of poor living in urban India, this market looks very lucarative. However, from my research with organizations around Bangalore, I realized that most of the borrowers dont fall in the category of poor (less than $2/day). So the market size is even bigger. For those interested here is a good working paper
http://ifmr.ac.in/cmf/wp-content/uploads/2006/11/Reaching-the-Other-100-Million.pdf
Hi Sanjay,
I’m not sure if your heard of Zopa and Prosper but they do something on these lines which I feel is relevant to urban audiences. I find their business models interesting though they’ve gone through their own set of challenges.
Cheers,
Roshan
The idea is really good. The immediate upside is of lower transaction costs since it is easier in a city to find an efficient channel partner to do the last mile lending.
Further, the success of the urban Microfin model will depend on :
a) replication of group solidarity / social collateral model in the urban setting;
b) identifying homogeneous groups in cities based on a common social denominator (viz. place of origin/language/community/vocation) to form self-help groups (SHG) who shall recommend genuine cases after careful scrutiny and stand guarantors to one another.
c) establishment of a strong recovery mechanism to offset the weak social collateral, if that is hard to find.
d) educating and empowering SHGs on systematic evaluation of credit risks, prevention of agenda hijacking by influential politicians / bigwigs, benami transactions (which victimize the poor besides vitiating the turf).
e) matching credit criteria that fits with the agenda of the Bank / financier.
f) low cost disciplined group building, monitoring, distribution & recovery process to keep transaction costs low and affordable ;
g) conferring institutional status to Microfin Institutions (MFI) / SHG. At present they exist as loose groups. Longevity is of primary concern since the group can disband at will and can escape any recovery / guarantee enforcement proceeding in the event of default.
h) maintaining high levels of transparency thro institution of self regulatory mechanism till formal regulations are in place.
i) interest rate sensitivity – cost of funds to be lower than what borrowers are willing to pay.
j) the ability to bridge the gap between market size and realization by breeding sufficient SHGs that leverage the wholesale lending potential of banks / MF funds.
k) effectiveness of dispute resolution / consumer protection mechanism amongst the SHG.
I think UNITUS, a Redmond, Wa based non-profit / MSDF / Bellwether MF fund has a 24%, 13.8%, 12.6% stake respectively in Bangalore based UJJIVAN Financial Services Pvt. Ltd which is into urban MF in a big way. ( http://www.ujjivan.com )