STRUCTURAL SHIFT - NGOs struggle as they venture into microfinance
B Y S AMANTH S UBRAMANIAN samanth.s@livemint.com························· NEW DELHI
E ight years after microfinance began to boom in India, there is more money available in the field than ever before. But, as Indian non-profit organizations (NGOs) follow the money and set up their own in-house microfinance units, many find themselves flailing.
Some of this can be attributed to a lack of expertise, but there also appears to be something less tangible at play.
Some call it the “NGO mindset”. “As many as 70% or 80% of NGOs struggle when they start their microfinance activities,” notes Abhijit Ray, vicepresident at Unitus India, a consultancy to microfinance institutions. “A handful can smoothly set up within six months, but many take up to three years or more. I’ve seen NGOs with 10-year-old microfinance units that still have very limited growth.”
The stumbling block, says Ray, is the service-oriented mindset of NGOs. Having been founded on such a commitment and after cultivating it for years, an NGO venturing into microfinance must suddenly prepare to be ruthless about profit. But, that transition is almost never smooth.
“There is no such thing as an emotional banker,” says R.K. Mukherjee, vice-president of microfinance at Access Development Services. “When you deal with money, it has its own discipline, which NGOs must heed.”
One of Unitus’ 14 Indian partners, Trichy-based ASAGV, is a classic case in point. ASA was a trust that began in 1986, focusing on natural resource management and sustainable community living. In 1996, ASA moved into microfinance, starting ASA-Grama Vidiyal as an in-house unit.
The impetus was a perceived grass-roots need for microfinance-led activities, says Arjun Muralidharan, chief executive of Grama Vidiyal. But, he also says of the NGO sector at large: “The lack of donor money is the only reason for the shift to microfinance.”
The Indian NGO world has come to accept the fact that grant money has dried up. “Around 10 years ago, donors realized that grants were not working, and also that the Indian economy was growing rapidly,” says Murali Srinivas, chief operating officer of Mimo Finance, a Dehradun-based microfinance firm. “Microfinance had been shown to work at the lowest level. No other bottom-of-the-pyramid business has worked on this scale. So, the emphasis shifted from grants to microfinance.”
In 2007, venture capitalists invested $50 million (Rs200 crore at current rates) in microfinance activities, compared with virtually nothing the year before, according to Venture Intelligence, which tracks private equity and venture capital in India.
“The money will grow. But, the opportunities have to be venture-ready and professional, and the average Indian microfinance firm is not,” says Arun Natarajan, chief executive of Venture Intelligence. “The really big money will choose to wait until there is clarity on that front.”
For NGOs that seem to be scrabbling for funds, the temptation to dabble in microfinance is strong. Vanita Viswanath, chief executive of the New Delhi NGO Udyogini, works with rural women in microenterprise management training. “We even discussed becoming a microfinance institution, using those profits to subsidize our other activities,” says Viswanath. “But, we couldn’t do both.” There is a conflict of interest between the NGO’s traditional role as a provider of assistance and a microfinance unit’s role as a profit-seeker. Viswanath says: “You can’t wear both hats.” Earlier, an initial hurdle for NGOs was negotiating the complexity of the regulatory framework governing nonprofits and non-banking financial companies (NBFCs). To become an NBFC and thereby access foreign funds, a microfinance institution needs a capital base of Rs2 crore, a daunting figure for any NGO.
“That transformation from NGO to NBFC certainly requires the support of lawyers, auditors etc.,” says Muralidharan. “It requires learning new regulations and understanding how to work under a different set of rules.” Those problems have reduced somewhat as regulations have become clearer, although Muralidharan stresses that you need “the right set of advisers.”
ASA-GV’s foremost hurdle still holds true for many NGOs.“In the initial stages, the biggest challenge was identifying the correct model for functioning,” says Muralidharan.
NGOs typically struggle in that quest. On the sidelines of a microfinance conference in New Delhi, Unitus’ Ray says: “Here, I can show you 20 people with 20 different approaches to microfinance.” And every one of them needs handholding at the outset, he says.
When ASA-GV began to work with Unitus in 2005, Ray remembers, they were not as efficient as they are now. “Before then, they were still much more development-focused,” he says. “Their microfinance unit was taking its own sweet time in becoming sustainable.Only in the last two years have they shown a profit.”
ASA-GV’s funding comes, at present, from banks as well as private equity investors. As a class, these investors too are becoming rapidly more wary about disbursing microfinance funds. To cite one example, the Dutch Rabobank Foundation, an active microfinance player, has developed two levels of screening for potential partners. “We have begun to look for some key indicators,” says Albert Boogaard, the foundation’s programme manager for East Africa, India and Bangladesh. “It doesn’t matter so much to us if they can calculate their portfolio risk ratio or something like that. But they should understand that the quality of their portfolio matters, that they should be constantly monitoring that quality, and that it is important to get money back.” Venture capitalists typically seek a high rate of return. Mukherjee estimates it to be 35% per annum, while Natarajan pegs it at between three or four times the investment, within a five-year term. Vineeth Rai, chief executive of the Mumbai-based Aavishkaar Venture Management, also rattles off a string of key indicators that his firm looks for. “Do they have a for-profit vehicle? If they have, how has it built up its portfolio? How professional is it? Is there a management to manage it in a for-profit manner? Can promoters bring in their own equity? Can the management make the microfinance business scalable?”
Rai looks to Intellecash, one of a new clutch of speciality firms, to point him towards promising microfinance institutions. Intellecash seeks to provide microfinance units with better systems and processes, and to instil professional management. Unitus’ Ray cites Muralidharan’s entry into ASA-GV as just such an instance of the importance of management.
Muralidharan, who obtained a graduate degree at Berkeley, returned to India and worked for almost four years at GE Capital before switching fields.“I wanted to work at something that would help India in a more direct way,” he says.
Muralidharan’s industry experience, says Ray, was crucial in setting ASA-GV on the road to profitability. “ASA took 12 years to get its first 100,000 members, but the next 100,000 members were added in just 12 months,” says Muralidharan.“Similarly, for a branch to be viable, it used to take over 18-24 months, but now it takes less than a year.” He is firm about his advice to NGOs: “If there is an intention to start microfinance operations, the NGO has to be willing to change to what is needed for achieving the objectives.”
BURGEONING INVESTORS
Private equity investments in microfinance firms since Jan 2007.
27 Invested in Share Microfinance by Legatum Group and Aavishkaar India Micro Venture Capital Fund in January 2007
11.5 Invested in SKS Microfinance by Sequoia Capital, Khosla Ventures and others in March 2007
10 Invested in Spandana by JM Financial in July 2007
2.3 Invested in Grameen Koota by Aavishkar India Micro Venture Capital Fund in April 2008
(In $ million) Source: Venture Intelligence
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