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India: A hotspot for micro finance

April 28, 2006 13:14 IST
For the whole of last month all those connected with the micro finance industry have been very concerned about developments in Andhra Pradesh and how the state government and the RBI would respond to them.

While a lot of effort by MFIs working in that region and banks lending to them has got the situation somewhat under control, there is no doubt that a lot more will be heard on this debate.

To analysts looking at developments in this sector, happenings in AP are of concern. For, it will certainly cause a blip in the rapid progress that the MF industry is making.

Ironically, it was in the same month that SKS, an MFI headquartered in Hyderabad, received what is probably the largest-ever investment in any MFI in India.

Unitus Equity Fund, along with the borrowers of SKS, SIDBI and Vinod Khosla and other social venture capitalists, on March 28, made a Rs 11 crore (Rs 110 million) investment in SKS Microfinance.

The money would be used to access commercial debt and scale outreach from SKS's current 200,000 clients to 700,000 clients by 2006-07. In fact, both these incidents epitomise the current state of the MF industry today.

On the one hand, the industry is trying to grapple with problems of sudden growth, while, on the other, global social venture funds think that impact needs to be maximised and that institutions with the right professional leadership, governance, and systems need to be supported.

Unitus is a case in point. Started in early 2000 by a group of friends with a common mission of poverty alleviation, it is based in Redmond, Washington, with an office in Bangalore.

Unitus works in Latin America and Southern Africa, but with one-third of the world's population in India, focus has naturally turned to India. Sandeep Farias, who set up India operations for Unitus, sits in Bangalore and works with four MFI partners, besides SKS.

These are Trichy-based ASA-GV, Kolkata- based Bandhan, Bangalore-based BSS, and Grameen Koota.

In its engagement with these partners, the structure that Unitus is using is based on what it calls its "accelerator" model, which basically implies acceleration of outreach. Farias explains that the key gaps in the MF industry in India are capacity or skill and capital.

To address these gaps, Unitus uses three different capital instruments, namely grant, debt and finally equity. Working typically with MFIs, which are NGOs or have originally been NGOs, Unitus first uses grant funds to build the infrastructure in the MFI.

"Grant money is not to be on-lent," explains Farias. Once the MFI attains a certain level of skill of employees, internal structures, and MIS, Unitus is willing to help the MFI to increase their capacity to lend as well as obtain more leverage through appropriate debt resources.

Lastly, as in the case of SKS, Unitus will put in equity--its first equity investment. In SKS, Unitus has invested a little over Rs 2 crore (Rs billion). Through its interventions, Unitus wishes to increase the outreach of its partners mani-fold. The number of clients served by its Indian partners stood at a little over 400,000 as at the end of calendar 2005.

By fiscal 2009, which is the time that most the current partnerships are likely to end, Unitus expects that this number will go up to almost 30,00,000. In addition, Farias expects about a dozen new partnerships to be added over the next two years.

Even accepting the fact that there is many a gap between projections and reality, there is little doubt that Unitus's efforts are going to help its partners aim much higher than they had.

While Unitus is excited about possibilities in India and is willing to innovate to maximise impact, the fact is that it is a young organisation.

Probably, that's the reason why it has announced a tie-up with ACCION International in India. ACCION, a 35-year- old US-based non-profit organisation has the same mission as Unitus--that of poverty reduction through micro finance. But ACCION's strategy is to work with banks and finance companies (while Unitus works primarily with NGOs) and help them downstream to do micro loans for individuals.

Unlike in other markets, in India, banks and finance companies (thanks to their chit fund origins) have a fairly good grasp about individual lending, though ACCION would look to specifically provide inputs with respect to microfinance. The work of banks in microfinance has been primarily through the SHG-bank linkage programme and through wholesale lending to microfinance.

It will be interesting to see what value addition ACCION can make in its partnerships with commercial institutions and develop programmes for them to directly serve the micro enterprise client on an individual basis.

What is unmistakable, however, is that as far as micro finance is concerned, India is where the action is and funds are now there for the asking. For the sake of India's poor, hopefully all stakeholders will behave responsibly to seize the opportunity of global attention.

Keya Sarkar