“The guy who sells a hot dog on the street is as much an entrepreneur as anyone else. Getting his $50 loan to start could be as difficult as finding $50 million for someone else. All people are entrepreneurs.” – Mohammed Yunus
Rangan Varadan’s innovative online micro-lending marketplace has helped rural borrowers transform their livelihoods by connecting with lenders from across the world in an open, transparent manner.
With a majority of the 1.2 billion people in India lacking any kind of access to the formal banking system, financial inclusion has been at the centre of policy making decisions in the last two decades. At the core of the financial inclusion movement has been the explosive growth of the Microfinance (MFI) sector that reaches over 100 million today with institutions covering every corner of the country, offering ‘tiny loans’ to economically disenfranchised populations.
An area that has gone unsupported by the financial inclusion machinery in the country, including MFIs, is the missing middle – micro-enterprise loans. Rural micro-entrepreneurs, typically in agriculture, dairy or sectors like craft, are often cash-starved and unable to avail of microloans as products are not customized to their needs, carry exorbitant interest rates and have rigid repayment schedules which do not take into account the vagaries of business or the seasonality of their cash flows.
The Challenge: Rural micro-entrepreneurs and access to finance
Despite the huge employment generation opportunity through small entrepreneurship in rural India, only 4.7% of small entrepreneurs have any access to institutional credit; the rest of them rely on the informal sector for finance. Mainstream commercial banks refrain from expanding their portfolio of rural products to micro-enterprises as the debt repayment installments are often lesser than the cost of pursuing the money.
Co-founder of Micrograam, Rangan Varadan, witnessed first-hand the challenges faced by rural entrepreneurs on a visit to Anantapur district in the South Indian State of Andhra Pradesh, hailed as the microfinance hub of India. He encountered a group of women farmers who wished to supplement their agricultural income by establishing a small dairy farm. Despite the viability of the venture and its proximity to the district headquarters, no financial institution was willing to come forward to support this group. Varadan dug into his own savings as a means of giving the farmers’ venture a fillip. On a visit three months later, he realized that besides an increase in monthly income, the earnings had led to an improvement in their children’s growth and health from better nutrition as well as a more respected status for the women farmers in society. It provided enough inspiration for Varadan to start a micro-lending platform that could nurture micro-entrepreneurship in small towns and villages across India and do this by solving the fundamental hurdles posed by traditional financial inclusion options.
“Access to low-cost credit with its multifold impact is the key to ensuring financial inclusion and improving the lives of millions of people” – Rangan Varadan
Social Product Innovation: Micrograam – A transparent, affordable online financial marketplace for rural India
Micrograam is a crowdsourcing micro-credit platform that leverages technology to empower entrepreneurs in India’s rural hinterland with access to loans. Borrowers are rural entrepreneurs who are typically looking for short term small loans to start or grow their enterprise. An investor could be anyone – individuals, corporations, funders or organizations – who would like to make a ‘social investment.’ Called ‘e-microlending’, the business model makes a significant departure from traditional microfinance where funds are generic, pooled together and lent only to women self-help groups, and are based on the MFI’s criteria.
Micrograam’s operations began in the more progressive and entrepreneurial Southern Indian States of Karnataka and Tamil Nadu which also have better access, but have since expanded to cover other states in Central, Eastern and North-Eastern India, comprising some of the country’s remotest regions, underserved, and unbanked populations. All three regions together account for 64% of all financially excluded farmer households in the country with overall indebtedness to formal sources of finance only 19.66%.
Statewise number of borrowers (Total: 6769)
Sector-wise distribution of loans (Total: 6769)
A peer lending model that offers loans at 16.5% or lower Micrograam’s peer-to-peer model is India’s first and only auction and negotiation based marketplace for micro-credit, which with its bidding system, eliminates the need for intermediaries to fix interest rates. Instead, lenders and borrowers are accommodated on equal footing for online bargaining.
On the online portal www.micrograam.com, potential lenders have the flexibility to choose rural borrowers based on various criteria including their gender, sector, region, loan amount, and the reputation rank of the associated partner NGO that facilitates these loans for their community members. Micrograam conducts an audit and ranking of partner NGOs every six months and makes these scores available to potential investors. The reputation ranks reflect NGO strengths and borrowers’ credit worthiness and allow investors to make informed investments. Investors can choose a rate of return between zero and eight percent – all lending is done at 16.5% interest rate or lower and are repaid in full by the borrower within 12-18 months, much lower than MFIs that lend at 24-36%. (NGOs receive between 5% and 7% to cover their operational costs, and Micrograam takes a 1.5% service fee.)
What Micrograam lends for:
Livelihood enhancement activities: 80%
Educational Loans: 12%
MSME sector: 8%
Average loan size: INR 23,000
Growing areas: Organic farming, Renewable energy, Craft and Artisan groups.
Since its inception, Micrograam has disbursed loans worth INR 10.12 crores across 6769 borrowers in six States.
Nagamma in North Karnataka was a 40-year-old sole earning member of the family who worked hard to support her 2 daughters and a nephew. She borrowed a starter loan of INR 50,000 from Micrograam and started the only flour mill in her village. She now manages to save around INR 6,000 every month.
“To us, the borrower as a customer is the same as the lender as a customer. Each one has the right to a fair rate” – Rangan Varadan
Customized credit for rural borrowers
MicroGraam’s borrowers are rural, underprivileged, wage workers who earn a daily income of about INR 100. Micrograam offers flexible and customized lending solutions with transparent interest rate negotiation policy for different borrower types.
Rates of interest for borrowers vary from 0% to the maximum level they are willing to pay with lenders selecting any interest they would like to get which is below the maximum payable rate of the borrower. The strategy of offering complete customization and flexibility has paid off – over the last two years, Micrograam has maintained a 100% repayment rate, making it a safe business.
Ensuring risk coverage for lenders
In order to mitigate the risk to investors and to provide them with some kind of security, Micrograam has created the Principal Guarantee Fund that covers 20% of all of Micrograam’s loans and is used to repay investors in case of default by borrowers. Known as the First Loss Guarantee Fund, 10% of the total credit provided to borrowers is retained by the NGO by starting a fixed deposit linked to Micrograam or by raising funds from various activities. The interest accrues to the NGOs, but is left untouched unless a borrower defaults.
There is an additional 10% percent that Micrograam raises by tapping into funds set aside by HNIs and other Foundations.
MicroVentures: Equity funding where debt falls short
Equity based models provide solutions to a number of problems that loan-based programs have such as loan defaults due to decline in the business, stress of high rates of interest on clients and problems of cash flows faced by micro-entrepreneurs due to strictly structured loan repayment schedules. The role of a micro-venture capital provider is not limited to providing equity financing but can also extend to giving professional advice and mentoring to the micro-entrepreneur.
Where Micrograam has achieved groundbreaking innovation is in providing an equity investment model for rural micro-entrepreneurs, the first of its kind in the country. The micro venture capitalist provides the full upfront cost to help start the business. The two parties agree upon how to share the profits (50-50, 60-40, etc.) and the period for which the micro venture capitalist will be involved. Micrograam acts as the facilitator in the transaction and, through the partner NGO, helps entrepreneurs with their business model. Micrograam has, till date, disbursed 1127 loans worth INR 2.98 crores for micro enterprises.
The first MicroVenture was a dairy farm in Kolar district of Karnataka, set up and jointly managed by the members of a SHG. Micrograam facilitated equity capital of INR 3,00,000 from six micro-venture capitalists in July 2010. The micro-venture capitalists hold 40% stake in the enterprise while 60% is held by the SHG. In two years, the micro-venture capitalists have been able to exit fully with an ROI of 11% p.a. Since then, it has grown to 30% of its loan portfolio. MicroVentures has enabled Micrograam to go above simple livelihood enhancement to the deeper engagement of creating enterprises and ecosystems: by allowing pressing social problems to be addressed using business solutions that, by being beneficial to lender and borrower, are sustainable.
Key Enablers for Scale
At the heart of Micrograam’s rural operations is its unique and scalable nodal NGO model enabling Micrograam to reach millions of remote borrowers by leveraging the strength and network of community based organizations that know and understand them well. On the other hand, Micrograam has also built a robust funnel through a diverse base of social lenders – right from socially conscious individuals across the globe to corporations, HNIs and equity funds.
Building the last mile: Rural community based organizations
Micrograam forges partnerships with small and medium sized local grassroots level community based organizations and NGOs who reach out to extremely rural and financially excluded populations. Micrograam partners share the organization’s outlook of a strong, holistic development strategy with a focus on capacity building in areas like livelihood, financial inclusion, micro credit, education, health and sanitation.
The partners helps Micrograam reach the last mile effectively by leveraging the strong community trustworthiness that they have built, offer the loan product as well as manage and audit repayment. Partners go beyond being local fund managers – they also maintain regular contact with borrowers through follow-up meetings to ensure appropriate loan usage and strengthen new micro-ventures to facilitate their profitability.
The relationship Micrograam shares with NGOs is a symbiotic one – NGOs are trained to execute Micrograam’s model on the ground. This in turn helps NGOs scale, expand their networks and their breadth of operations to reach a higher borrower base and offer loans, which also helps boost their reputation in the community. Working with NGO partners enables Micrograam to lower its expenses, which it is able to pass on to borrowers in the form of lower interest rates.
Lending operations begin only six months after an SHG is formed, giving members adequate time to develop bonds with each other while allowing the NGO time to study members’ financial needs, saving behavior and repayment capacity. “Once the loan is disbursed, we offer members every possible support to improve their ventures, including visits to expose them to innovations in the field, capacity building in SHG management, and entrepreneurial training through the Rural Self Employment Training Institutes ”, explains Channappa Naik, Loan Officer at Manuvikasa, one of Micrograam’s partners.
“At the heart of Micrograam’s rural operations is its unique and scalable nodal-NGO model enabling Micrograam to reach millions of borrowers by leveraging the network and trust of organizations that know them well.” says Varadan.
Newer models of funding: Wealth Advisory Firms
As Micrograam scales and broadens its reach, access to newer channels of funding become essential as does the need to make socially conscious impact investing a mainstream activity. Micrograam has tied up with two big wealth advisory firms that serve as channels of distribution by positioning micro-loans as a separate asset class to HNIs. So when investors go to their wealth advisors and express interest in social investments, they can choose to invest a portion of their portfolio in Micrograam, which provides a principal guarantee and a reasonable return.
“This year alone, we are looking to raise about 5 crores from the HNI channel and hope to expand our portfolio and scale”, says Varadan. “We are also working with a major Indian bank on a product that will allow it to leverage our model and work with our borrowers to extend micro loans to them rather than redesigning one itself.”
Going global with e-microlending: The Kiva partnership
With Kiva’s global crowd funding platform, people all over the world can now invest in low-income borrowers in India through Micrograam’s NGO network. “We want to tap into capital from abroad. Also, as Indian markets mature, we would also like to get funds for borrowers from outside,” says Varadan. Kiva stands to gain through Micrograam which allows it access to a large micro-credit market it would not have been otherwise able to, owing to India’s strict regulations around foreign financing. With a model similar to its own, partnering with Micrograam allows Kiva to expand its borrower base at low interest rates in India through its field partners.
Both entities have raised $250,000 from a pilot that started in March 2014. Micrograam now expects over 15,000 borrowers in India to be crowd-funded by Kiva lenders over the course of this year, a fifteen-fold increase in Kiva’s reach in India from last year. Kiva has agreed to raise up to $2 million (INR 12 crore) as the first tranche over the next two years under this partnership.
The Way Forward
Jayalakshmi Shet is a mother of four. Once her husband suffered a loss in his areca nut business, Jayalakshmi, with a monthly income of INR 1500, found herself the sole earning family member, burdened with the responsibility of running the household and supporting her children’s education. Jayalakshmi accessed a Micrograam loan of INR 45000 which she used to establish a store selling vegetables. Her monthly earnings have now gone up to INR 4000. Her family’s health and nutrition have improved significantly as has her children’s schooling. Stories of increase in incomes, starting of new enterprises, support of micro-entrepreneurial activity and timely lending abound in Micrograam. “With a loan size of Rs. 25000-Rs.30000 and all other support, if we are able to raise a household’s income by at least 50%-70% of its current base income, then we consider ourselves successful,” says Varadan.
The bigger impact of Micrograam’s work has been an improvement in life quality among rural populations. Women’s lives have become less hazardous as they have moved from using woodfire stoves to gas stoves and smokeless chulhas. Many of them have initiated toilet construction in their homes and no longer have to travel long distances to relieve themselves due to new sanitation loans that Micrograam has started offering. Awareness of their basic rights too has gone up. In order to achieve long term, substantive and inclusive development in rural India, the meaning of ‘credit’ must extend beyond traditional loans and savings, says Varadan. In the next three years, Micrograam plans to reach out to a population of about half a lakh borrowers. Despite Micrograam’s focus on making social investing a viable option to investors, it continues to grapple with being viewed as a ‘charity’ option. The organization has had some success leveraging technology and using social media and online marketing campaigns to strengthen its network and hopes to continue to reach out to more socially conscious individuals.
Rural empowerment necessitates last-mile delivery of financial services through innovative strategies and business models that are able to depart from standardized credit-scoring models built on pure economies of scale, and instead offer customized, flexible and relevant financial options for the poor.
In the organization’s future are plans to expand the portfolio beyond education and livelihood to include micro-loans for affordable renewable energy, organic farming, health and sanitation. There is also an effort to expand the geographical scope into largely neglected states of North East India, Chattisgarh and Orissa.
A research paper on ‘Lessons from the Andhra Pradesh microfinance experience’ emphasizes that rural empowerment necessitates last-mile delivery of financial services through innovative strategies and business models that are able to depart from standardized credit-scoring models built on pure economies of scale, and instead offer customized, flexible and relevant financial options for the poor.
Micrograam has done that and more by building an open, fair and flexible financial platform for rural populations which goes from traditional micro-credit models to equity based profit-sharing ventures. A more significant achievement has been an active building of a strong foundation for an ecosystem that can ably support these entrepreneurs to scale – from last mile community organizations that are building capacity to scale, to winning trust among the social investor community – right from individual socially conscious people to institutional investors and HNIs – to invest in India’s emerging rural entrepreneurs.
How Micrograam Enables Affordable, Equitable Credit for The Rural Poor
This case study is part of a booklet on social innovation. To read more such case studies, download the booklet here.