Ray of hope: Sanghamitra's urban arm receives substantial funding from philanthropist Rohini Nilekani (centre)

MICRO-FINANCE BY THE NUMBERS

Rs 45,000 crore Estimated annual demand for micro-finance Rs 1,022 crore Disbursements through micro-finance in 2002-03 12 million Estimated number of households reached in FY 03 Rs 1,000 The average size of a micro-finance loan 24% The average interest rate on a micro-loan 60 days The average duration of a micro-loan 3% The average default rate 95% The average on-time repayment of micro-loan

You wouldn't have heard of Rohini Nilekani, but now that you've read that name we can tell you your guess is spot on: She is indeed the wife of Infosys head honcho Nandan Nilekani. But, fear not, this isn't another story on corporate wives. Rather it's got plenty to do with a little-known outfit Ms Nilekani has funded, called Sanghamitra, which is a micro-financial institution that's targeted at the urban poor. If you're still wondering what such an institution does, well it's actually pretty simple: It offers loans to the poor at decent rates. ''Micro-finance in India was largely concentrated in the rural sector although the urban poor are in very great need of credit and have been accessing it anyway at rather exorbitant rates of interest. It seemed a great opportunity for me to do my bit for the idea of poverty alleviation in our cities and towns," explains Nilekani.

Sanghamitra, and the various other such institutions (focusing more on the rural poor) are loosely based on the model of Bangladesh's Grameen Bank, which provides small amounts of credit to rural women in that country. The bank operates through women's self-help groups and has gone on to become one of the largest banking institutions in that country, now even spawning a mobile telephone service (called Grameen Phone).

Clearly, in a country where poverty is widespread, micro-finance is an imperative. Official statistics peg the percentage of Below Poverty Line (BPL) people in India at around 26 per cent. What's more, the number of people living barely above the officially-determined BPL line, who do not have access to the formal banking sector, is estimated at a whopping 350-400 million. These people have no choice but to go to moneylenders and fly-by-night operators, who quite literally charge an-arm-and-a leg for their loans, and this usually has a domino effect on what you pay at the end of the consumer cycle.

Regulatory Hassles

The demand for micro-finance in India is estimated at Rs 45,000 crore annually. However, actual disbursement via micro-finance last year was a paltry Rs 1,022 crore. If micro-financing hasn't quite taken off a large part of the blame lies with the regulatory framework. Take the case of BASIX India, one of India's pioneering micro-financial services institutions based in Hyderabad. Vijay Mahajan, an IIT-Delhi and IIM-Ahmedabad graduate and a banker by profession started this micro-financial services company in 1996. Recently, he struck a deal with ICICI Bank whereby the micro-financial portfolio of BASIX was securitised. But he has had to endure a very difficult journey, manoeuvring through a morass of laws of legal frameworks.

''The problem is not about these laws being deliberately there to prevent micro-financial institutions from operating, it is because nobody in the bureaucracy or at the political level has really ever considered this sector seriously,'' points out Mahajan. The other problem according to him is the highly conservative outlook of the Reserve Bank of India, which is why BASIX's major brand, Bharatiya Samruddhi Finance Ltd. (BSFL), is forced to run as a non-banking finance company (NBFC). Mahajan reckons India needs the equivalent of 20 Grameen Banks. That's because the Grameen Bank reaches three million households. In India there are some 60 million such households that could avail of micro-finance.

BSFL for its part hasn't let the regulatory hurdles curb its enthusiasm. Today it is present in 18 districts across the states of Andhra Pradesh, Karnataka, Orissa, Maharashtra, and Jharkhand. BSFL has cumulatively disbursed 90,000 loans aggregating over Rs 113.5 crore. And BASIX is also offering several other services, like micro-insurance. Two private insurance players have begun working with BASIX, Aviva for life insurance and Royal Sundaram for livestock insurance.

The National bank for Agricultural and Rural Development (NABARD) has been one of the few government institutions pushing micro-finance in India for the past few years. Prakash Bakshi, Chief General Manager (Micro-Credit Innovations Department), NABARD, believes NABARD's efforts are still a drop in the ocean vis-à-vis the huge demand for micro-credit. NABARD has a direct-linkage programme with self-help groups (SHG) through banks, and in the past fiscal year (March 2003) banks have disbursed loans aggregating over Rs 1,022 crore (versus Rs 1,027 crore disbursed in the previous ten years).

"We have to make a certain amount of money to keep the service going" Nachiket Mor, Executive Director, ICICI Bank

NABARD may have fewer problems on the sustainability front, for many of the NGOs running micro-finance schemes the perennial dilemma revolves around keeping one's head above water. Ramesh Ramanathan, Campaign Coordinator for Banagalore-based NGO Janagraha, which runs the Nilekani-funded Sanghamitra, explains that the idea is not to make money but to cover all costs. ''But even this goes against the very concept of many people's idea of helping the poor,'' he shrugs.

High Interest Rates?

The average micro-financial institution charges interest at a rate of around 24 per cent. This may appear obscenely high at first glance but then it's surely cheaper than what the unfriendly-neighbourhood moneylender's charges, which average over 200 per cent. Also you have to remember most micro-financing institutions have huge costs. For starters they have their own cost of funds, which is around 6-7 per cent, and a risk-to-serve rate of usually under 3-4 per cent. But the largest costs for these institutions are the fixed ones, which run at about 10 per cent, far higher than the formal banking sector. ''The costs are so high because micro-finance involves low sums of money, door-to-door running around, and lots of very motivated people. For micro-finance to really take off, there have to be people who make some money out of it,'' says Ramanathan.

Trying to do a bit of that is ICICI Bank, which hopes to disburse Rs 5,000 crore via micro-finance in five years. The micro-financial services support group is run as a commercial venture. ''We don't roll in the money but definitely making a loss is not the idea. We have to make a certain amount of money to keep the service going,'' explains Nachiket Mor, Executive Director, ICICI Bank. ICICI Bank itself does not operate any micro-financial services. What it does is partner with NGOs (the number of such associations currently stands at seven) and train them, as well as design other micro-financial services around them. And ICICI Bank hasn't just restricted itself to lending small sums of money (did you know that the average size of a micro-finance loan is just under Rs 1,000!). Mor points out that that ICICI Bank's services include, besides savings and life insurance, a unique rainfall insurance scheme through ICICI-Lombard. The pilot of this scheme, which basically insures farmers against low crop yields in case the rainfall is lower than predicted, is under way in the Mehboobnagar district of Andhra Pradesh (in a tie-up with BASIX).

ICICI Bank is jointly with IIT-Chennai developing a 'poor-man's' ATM machine, that's been customised for the less-privileged. The machine will be finger-print driven, and will disburse coins. More plans to expand the service to include savings, as well as fingerprint readers at grocery shops, which combined with a mobile phone will make for a debit card of sorts. Clearly, micro-finance isn't just about lending small sums, but calls for the kind of innovations that would make a Henry Ford or a Ted Turner proud.

Would you be willing to give it a shot?