Bangalore: Microfinance institutions (MFIs), established primarily to lend small sums to the poor, are trying to make consumers out of them.
Looking to diversify: The SKS head office in Hyderabad. SKS is offering loans to buy even mobile phones.
Going beyond their traditional role, some MFIs are starting to offer schemes to the poor to buy mobile phones and other products by paying in instalments—a mode of credit that drives consumer spending in India.
The country’s largest MFI, SKS Microfinance Pvt. Ltd, is running pilots in Andhra Pradesh and Karnataka offering loans to the poor for buying mobile phones, solar-powered lights and water purifiers, said chief executive Suresh Gurumani. The company plans to launch these schemes nationwide in a few months.
SKS is also offering schemes to grocery shops to buy merchandise from wholesale retailer Metro Cash and Carry India Pvt. Ltd.
It’s not typically what MFIs do. But as the concept of microcredit evolves, some pioneering MFIs globally have begun pushing their mandate to loosely resemble that of financial institutions.
Graphics: Sandeep Bhatnagar / Mint
“On the face of it, anything that adds to your bottom line is a good idea, but the consequence of wrong choices could be terrible,” said Vineet Rai, chief executive, Aavishkaar India Micro Venture Capital Fund. “And this has little to do with (a) philanthropic origin because finally, the idea is to let people have more access to products.”
“The big point in the MFI business is that if they start lending to (fund the purchase of) non-income-generating products, it adds to the risk of their business,” said Viren H. Mehta, national director at audit firm Ernst and Young India. Several other experts too see such diversification bringing in more business for MFIs, but caution it could lead to over-indebtedness for the poor and more repayment defaults.
For MFIs looking to raise funds from venture capital and private equity investors, though, it makes sense to widen their loan portfolio. “These firms may have difficulty in scaling up unless they have unique offerings,” says Venky Natarajan, managing director, Lok Advisory Services Pvt. Ltd, that provides technical advice and due diligence services for Mauritius-based VC fund Lok Capital Llc.
One unique offering is Bangalore-based Grameen Koota’s proposed home improvement scheme for the poor. “We will offer home improvement loans for those who have houses of their own and have been our customers for three-four years,” said managing director Suresh K.K. Grameen Koota already distributes life and health insurance products.
Bangladesh’s now fabled Grameen Bank, founded by Nobel laureate Muhammad Yunus who pioneered the microcredit concept, has led the way to diversification, which is now catching up in India.
In 1995, the group established Grameen Telecom (GTC) as a not-for-profit to sell cellphones to the poor, especially in rural areas.
A year later, it started Grameen Shakti, a renewable energy firm that sells, finances and services solar power systems for families and businesses. The family’s other ventures include Grameen Phone, Grameen Cybernet, Grameen Knitwear and Grameen Fisheries.
In a paper in the Stanford Social Innovation Review, Alex Counts, chief executive, Grameen Foundation, says there is a need to re-imagine microfinance as a platform and not as a product—one that relies on high volumes, not high margins. “They may have a longer-term impact on poverty while generating profits up and down the value chain—from poor families to multinational corporations.”
For companies, such diversification means new distribution channels. “We have seen how India is growing in tier II and III cities. Look at the uptake of mobile phones in rural areas,” said Mohit Bhatnagar, managing director, Sequoia Capital India, a venture capital firm. “We’ve underestimated the power of rural India.”
And for the poor, experts say more borrowing would increase their loan burden in the short term, but improve their lives. “From a long-term view, it can serve as an enabler for the poor to move up the value chain,” said Robin Roy, associate director at audit firm PricewaterhouseCoopers.