ASSOCHAM Microfinance Conference: "Strangulate or Regulate?"

This past Thursday the CEO of SRFS was kind enough to take me along with him to a conference on the recent national regulations of the Indian microfinance industry hosted by the Associated Chambers of Commerce and Industry. The event featured numerous officials from the banking industry, the government, government banks, and CEOs of various microfinance firms. The first few hours were largely introductions and welcome, with many members of government and the banking community coming out to support the MFIs. As the CEO of Ujjivan noted, it was encouraging for them to have this support since "there are not too many friends of microfinance today." The second section was the technical session on whether the new legislation was "strangluation or regulation." This section featured a round panel of IMFR representatives, CEOs of Ujjivan and Grameen Koota, and a representative of the Oriental Bank. For the most part, they supported the current legislation, which includes interest rate caps, profit margin caps, limits on household incomes of client families, and minimum requirements for amount of the loan portfolio directed to income generation activities. On the other hand, many voiced concerns that the legislation was to some extent unenforcable, due to its reliance on the lending banks as an enforcement mechanism, and its restrictions on household income, which is data not often available to the MFI. They are also concerned that interest rate caps will push the MFIs out of the higher cost (largely rural) areas, so that they can continue to make profit even at lower interest rates. The conference concluded with the MFIs sending recommendations to the government of Karnataka via ASSOCHAM.

This next week will be spent entirely in the field, concluding our interviews of SRFS clients. We will spend two days in Hosur, two days in Kodamballi, and one day in Channapatna. The week after that is our final week in India, and we will spend it conducting interviews of the management of other MFIs with whom we connected at the conference. This will provide us with some "counter-factuals" to the SRFS business model. Finally, we plan to conduct exit interviews with some SRFS officials, and will fly out early the next week. 

Last Two Weeks: Mysore and HD Kote

Apologies for not posting lately - we just got back a few days ago from a trip to Mysore and HD Kote, of which had internet access for us, and then unfortunately returned to Bangalore to find that the internet at my service apartment was down. But now we're back online and back to work at the Bangalore offices. The past two weeks have been great both for the research and for us as Indian tourists. Mysore is certainly very welcoming to tourists, and we got to do all sorts of things like wash elephants, visit temples, and see the Mysore Palace all lit up at night. Of course, even though Mysore is a tourist destination within India, this doesn't necessarily mean that people there are accustomed to foreigners. By the end, we felt like tourist attractions ourselves - I'm decently sure that 1/5 the population of Mysore has pictures with/of us.

The Mysore SRFS staff was incredibly helpful (as was the couple who lived in the apartment above the office and offered us tea when we accidentally walked into their house instead of Sanghamitra's offices). We were able to visit 6 groups on Monday and Tuesday. Because these were urban groups, there were not too many significant differences between them and the groups in Bangalore in terms of occupation and access to markets, etc. Some were all-Muslim groups, some lived in slums, but beyond that the structure was quite similar. To some extent, they did seem to be showing us their "star pupil" groups - we tried to meet with one default group, but unfortunately we could not get in touch with any of the members. The second day of interviews, the new representative of NABARD joined us on our interview. NABARD is the National Bank for Agriculture and Rural Development, which was one of SRFS's main donors at the beginning. Having the official along was extremely helpful, in that he could speak the local language and thus could extract more in his interviews and back-and-forths with the women. However, as a government official, we were also mildly concerned that this affected the answers the women gave. For example, one of the Muslim groups reported that since they started the SHG, they are now more free to leave the house and engage in economic transactions without the permission of their husbands. But when asked if they had any problems at home, none of them were willing to say anything, which seemed at least suspicious given their previous statements. All in all, however, Mysore provided some interesting insights into the project as well as a nice change of pace.

HD Kote, however, was even more remarkable. Kote is a very small town (if it even qualifies as a town), so our interviews here were our first look at SRFS's rural operations. People in Kote are of course even less accustomed to having foreigners stop by. At one point a restaurant actually opened hours early exclusively to get us breakfast. We were able to do 6 groups in one day in Kote, thanks to the portfolio manager and loan officer who took us around on their motorcycles all day and translated for us. There was a wide array of groups, from default groups who failed to repay because two members ran away with the money, to an all flower-growers group, to an all male group (which, for those of you who are not familiar with microfinance, is incredibly rare - around 97% of microfinance borrowers are female). At one point we were doing two interviews at one time, which needless to say was incredibly difficult, particularly because one of them was the all-male group. HD Kote was the first time we had the opportunity to discuss microinsurance with the groups as well. Because most of these groups were sponsored by MYRADA (SRFS's parent NGO) most of them had bought into a health insurance policy which costs 200 rupees per year ($4) per member. Many of them reported that it had significantly decreased their medical costs, and even one group that was in default was still paying into health insurance. Another interesting finding from the default groups was that while many of them were in default because of overindebtedness (taking multiple loans from various MFIs) the other MFIs were getting repaid before SRFS. This is mainly because other MFIs operate on the Joint Liability Group (JLG) model, meaning that no member in the group can receive another loan if even one member fails to repay. Thus, there is significantly more pressure to repay in JLGs than there is in SHGs.

Given this finding, Yavor and I have decided to spend some of our remaining time in Bangalore doing interviews at other MFIs to better understand their lending models in contrast to Sanghamithra's. We will also be continuing to interview SHGs in Channapattana, Ramangar, and Hosur, all of which are within 50 km of Bangalore. This week we also gathered the rest of Sanghamithra's financials, including their balance sheets for every year from 2002 onwards, which effectively covers all of their years of operation, as well as their Annual Reports. Before we go, we also intend to do some interviews with staff at MYRADA and SRFS to get a more complete picture of their day-to-day operations. With only 24 days remaining in our time here, that should be more than enough to keep us busy right until the end. 

First Interviews

Today was the first day of actual field work for Yavor and I – and shockingly it went quite well. The few days of last minute preparations were somewhat hectic, with lots of last minute changes, so we were not entirely sure what to expect today. But largely thanks to SRFS officials, the day went perfectly. We met with three groups in Attibele, a district in Bangalore West. Attibele is certainly not what we would call urban, but it is close enough to Bangalore (35km) to be affected by economic activity there.

The first interview was with a group of around 15 women (many of whom left midway since they work in the government factory nearby and it was a workday). This group was 6 years old and had taken three loans from SRFS. The women primarily used the loans for education for their children, housing repairs, and investment in their silk sari business. To some degree it was discouraging that so many of the loans were not used for livelihood activities; on the other hand, it can hardly be argued that improvements in education and housing do not directly relate to improvements in overall standard of living. After the group interview, we interviewed two of the women individually. There were some problems with cross communication – unfortunately it is very difficult to draw one woman aside individually, so the individual interviews were held in a group setting. One used her loans primarily for house repairs, the other showed us the looms she bought to weave the silk for the saris with the loan.

The second group, or individual as it were, was particularly fascinating. We had specifically asked SRFS to see groups that were considered “non-performing assets” – groups in default. This interview made me incredibly glad that we did. The group disbanded a year ago, so we were only able to interview one woman. This group had given 50% of their loan funds to one woman, which she used to purchase a vehicle to transport produce to the market. The vehicle unfortunately got in an accident, at which point that woman found herself unable to repay, and because she held so much of the group’s liability, the group subsequently fell into default. She is currently trying to make enough profits via other ventures to repay the loan to SRFS, but is having little success. The main dynamic that we found interesting from this interview was that the group decided to give such a large proportion of the loan to one woman. We were later informed by the Operations Manager that this dynamic of dominant membership can be found in about three quarters of defaulting groups.

 

The final group for the day was a relatively successful and very well organized group. They were almost all literate, which is quite surprising for a Self Help Group, and the main focus of their loans seemed to be education. In fact, one woman used the loan to pay for her son to attend medical school. The leader of the group was the wife of their equivalent of the mayor of the town, and the group as a whole seemed to be quite driven and collected. They described quite detailed processes of how they deal with late or defaulting members, etc – which we had not found in either of the two previous groups.

Tomorrow will be another day of interviewing, followed by a day off and then the trip to Mysore! 

Preparing For The Next Steps

Looking back on this first week, it really has been a steep learning curve, both in terms of the research and India in general. Meeting up with Adi this weekend, it became painfully obvious that we probably amused lots of waiters, salespeople, and people at our firm this week with our complete lack of understanding. But we're settling into a routine pretty quickly. Every morning now there is a little girl who meets Yavor and I outside our apartment buildings to share our breakfast (I think most of Bangalore has figured out we're complete suckers at this point....especially the salespeople). And we've figured out which streets to walk down on the way to work that smell least like cow dung. And we've figured out how to differentiate between the Hindu and Muslim restaurants, and what and how to order at each.


More importantly, we're starting to figure the research out. In fact, with the help of the firm and their patience through many different revisions, we have a largely concrete schedule for the next two weeks. We start our interviews of both SHG  (self help group) leaders and clients this Wednesday. We had hoped to start tomorrow, but SRFS is in the middle of a loan collection period, meaning that the loan officers aren't free to act as interpreters until the period is over. The extra time will probably be useful - we can firm up details and practice the interviews so we aren't going in cold. On Wednesday, we will start interviews in the Bangalore West region, starting with Attibele and Anekal. After that we will spend about a week in the Mysore region, doing interviews in Mysore, Udaygiri, and HD Kote, before meeting Adi and his sister to go ride and wash elephants at the elephant park outside Mysore. If all goes according to plan, we will be interviewing 3 groups with about 5 interviews in each group a day, which might be overambitious, but we can always adjust as we go. The loan officers will be interpreting as well as transporting us place to place on the back of their motorcycles. So as long as plans don't change, which they seem to do quite a bit at this point, we are ready to fully delve into the research.


But for now, I'm quite enjoying Adi's dismay at the Bangalore Royal Challengers beating the Chennai Super Kings (even though watching Dhoni lose is always sad) and making pizza with chicken tikka and paneer as well as lassi - not a bad end to the weekend in Bangalore. 

The First Week: "Solpa Adjust Maadi"

Everything in India takes a few extra steps. After a few days at my service apartment, I finally was informed that I had no hot water because there was a boiler that also needed to be turned on. While I'm used to generally just finding a hotel within my price range, here finding a place to stay involved several days of phone calls (thank God for my friend and his dad who took care of that for me) and negotiations to agree on the rate for a two month stay. And that was all before we decided that air conditioning really was necessary for an Alaskan to live in Bangalore. Which brings us to the first lesson of India: "Solpa adjust maadi." In Kannada, the language predominately spoken in Karnataka, this roughly translates to "Please adjust a little, sir."

To some degree, this phrase highlights the difference between the Indian mentality and our Western expectations. My research partner, Yavor Danailov, and Bangalore native friend and guide, Adithya Manohar, got into a long debate (not surprising since we are all members of the debate team) over whether it was better to have a society structure by rules and regulations, or a society that was willing to "adjust a little." There is a Sanskrit saying that goes "Na shreyo niyamam vina" or "No progress without rules and regulations.”  To someone from a Western culture, this seems self evident. Rules and regulations promote a system of equality, justice, and order. But there is also some chaotic beauty in a society that can recognize that life does not always fit into these boundaries and requires adjustment.

One of the first things to adjust once we got here (after a weekend of drinking coconuts, eating shark, watching the monsoon rains, and inadvertently fondling cockroaches) was our project. Sanghamithra, it turns out, is quite unique as microfinance institutions (MFIs) go. As we knew going in, it is a non-profit organization. But it is also entirely financially self-sufficient and despite not having profit motivation has actually made surpluses consistently for several years. Even more interestingly, SRFS does not lend to individuals. It exclusively lends to Self Help Groups, a group of 15-20 individuals who have been saving and lending internally for around 6 months to a year. The SHG can approach SRFS for a loan, and if it receives it, it is free to distribute the loan money as it sees fit among its members. This creates an entirely new dynamic in the project, as we were initially planning to study the impact of the MFI’s financial structure on the individual clients. This to some degree creates a middle man. On the other hand, it also opens a world of opportunities. After two days of reading background materials on SRFS, looking and its financials, and reading impact studies carried out by other researchers, Yavor and I adjusted the project to fit the new structure. We will be visiting SHGs (hopefully one per day, even though the projects are rural which makes travel a problem). In addition to the client interviews we came prepared to do, we will be interviewing the leaders of the SHG with a different set of questions regarding the nature of the SHG itself. In this way, we will have three levels of study: the impact of firm decisions (particularly regarding financial matters) on the SHG, the relationship of the SHG both with SRFS and its members, and the ultimate impact on the members’ livelihood.

Hopefully today we will have a more concrete plan as to what SHGs we will visit and how we are going to get there, but for now this is a beautiful morning in Bangalore and it’s time to get to work. 

स्वागत!

Greetings!

This is a blog of my experiences, observations, and perceptions during a two month stay in Bangalore, India. I will be interning at Sanghamitra Rural Financial Services (SRFS), a non-profit microfinance institute aiming to raise clients out of poverty by offering microloans and other financial services. I will also be conducting independent research on the profit structures of microfinance firms and its effect on the social and income impacts it has on its clients. To this end, I will be using SRFS's financial data, which they have been kind enough to share with me, as well as the data from other firms gathered off of the MIX Market database. In addition, we will be interviewing clients from the firm to gather their insights into the impact of microfinance, their standard of living, and their perceptions of microfinance.

This blog will include stories, pictures, insights from the interviews, as well as updates on the progress of the research. I would love any and all feedback, suggestions for the research, and stories of your own!

Becky Smith