Financing a silent entrepreneurial revolution

Bhalchander Vishwanath, Founder & Chief Executive Officer, Photo: Special Arrangement  

Sitting amidst the breezy trees of Nagewara Rao park, Bala paints a vivid picture of supporting a tribal entrepreneur in Jharkhand. “Farida who stitches school uniforms needs a loan of Rs 8,000 to buy an additional sewing machine. She approaches a local MFI (microfinance institution) that asks her to join a local borrowing group with four other women, each of whom needs Rs 8,000,” begins Bhalchander Vishwanath, Founder & Chief Executive Officer,

“The MFI uploads profiles of the entrepreneurs who need loans onto > The total amount needed is Rs 40,000, but the bank would be willing to make a loan of Rs 40,000 available, provided there is a guarantee of Rs 22,000.”

Here is where Bala’s site acts as a key link, by providing the space for willing individuals to contribute interest-free amounts as microloan guarantee to the small entrepreneurs using their PayPal account or credit card! Once the funds are raised, UnitedProsperity sends the funds to the lending bank, and the bank makes the loan to the MFI, he explains.

“Meanwhile the MFI finances Farida and other entrepreneurs. After the entire loan is repaid to the bank, United Prosperity’s guarantee to the bank gets freed up and returned to the individuals who can then choose to recycle the funds to support other entrepreneurs.”

We continue our conversation over the email.

Excerpts from the interview.

First, why a ‘guarantee’ model?

Banks usually do not lend to poor entrepreneurs because they do not have access to any collateral acceptable to the bank. Further, the transaction costs of servicing the small loans are very high. Some of these entrepreneurs are serviced by MFIs, which provide small loans to the poor. Today, MFIs serve over 100 million people worldwide. Current funding of MFIs is estimated at $17-$20 billion, but an estimated funding of $250-300 billion is required to meet the potential demand.While the largest MFIs tend to be relatively well-funded, emerging MFIs, many of which that work in remote areas or those reaching out to people in extreme poverty (people who earn $2 per day or less) struggle to get loans from banks as there are only a limited number of development-oriented banks that lend to such MFIs.

Our guarantee would enable these development-oriented banks to increase their lending to the emerging MFIs and also encourage mainstream banks to lend to these institutions and in turn support small entrepreneurs.

What has been the response of financial institutions to your idea?

A couple of financial institutions doing extensive work in microfinance have taken keen interest in our organisation. One of them is already working with us and we will be soon finalising our agreement with another financial institution. We have also contacted a few other institutions. Some of them have expressed interest in partnering with us.

You speak of leveraging the existing network of financial institutions for reaching out to the small entrepreneur. Can you elaborate on how and why?

Our microloan guarantee builds on existing institutions – banks and also the newly emerging class of MFIs. Each of these institutions has unique strengths; and using our guarantee model builds on their strengths.

Banks have enough funds; however, they would like other institutions to share a part of the risk while they make loans to microfinance institutions. Based on our partial guarantee, banks make a bigger loan to microfinance institutions. Since we partner with banks, we also gain from the market knowledge of banks and the proven and long established risk management procedures of banks. This is especially relevant for a young organisation such as ours.

Microfinance institutions have good local knowledge and have low cost operations to efficiently reach small but poor entrepreneurs in remote areas. They however do not have their own funds to lend to small entrepreneurs. We work with banks to make funds available to microfinance institutions.

What do you see as patterns among small entrepreneurs, as regards financing and loan servicing, earning and growing?

For many of these small entrepreneurs the preferred choice to access loans may be a bank, but they may not always have access to a bank. In some cases, a non-governmental organisation (NGO) may form a SHG or self-help group (a group of 15 to 20 persons to whom the bank lends as a group), and link them to a bank.

In case there is a microfinance institution operating in their locality, they can also take a loan from a microfinance institution. The interest rate on a loan from MFI tends to be higher but the process to get a loan from MFI is often a lot simpler.

If there are no formal sources of finance, small entrepreneurs have to rely on borrowing from family and friends. If that is not available, they may borrow from local moneylenders.

Over the last few years there has been a greatly increased availability to finance first through the bank-SHG linkage, and more recently through microfinance institutions. While most of the growth has largely been in South India, the rest of the India is also catching up. This has been a remarkable but quiet revolution changing the lives of millions of people in the country.

This revolution has also brought in systems and a great sense of pride amongst these small entrepreneurs. While a few years back they could never get a loan, now millions of poor women consider themselves ‘business-women’ and ‘entrepreneurs’. They take pride in repaying loans more than 97-98 per cent of the time and that too in a timely manner week after week.

These entrepreneurs are a highly motivated lot and they are very keen on growing their small businesses to improve the lives of their families. They are keen on giving a good education to their children and in many cases they prefer to pay out of their pocket to educate their children in a local private school for education in English, Computers and Maths. They want to equip their children with skills which are going to be very relevant in the 21st century business world.

Many of them have very ambitious plans for their businesses. While most of them do fairly simple businesses such as running small shops, raising cattle and so on, some of them run fairly sophisticated businesses such as a local cable service or a private school for children. Many of them also have very ambitious plans – one women who just started a hotel from her home wants to make it a 24/7 business. Given their ambitions, most of them want a bigger loan to grow their businesses.

A common complaint about microfinance is that it ends up in consumption rather than as productive expenditure. Your views.

While microloans are meant to finance productive expenditure, in many cases we need to have reasonable expectations on their usage. In some cases usage of these microloans for consumption may be good. For example if a small entrepreneur has got some finished goods ready for sale, but the entrepreneur does not have enough money to buy food, then the entrepreneur may be under pressure to sell the finished goods at a discount to buy food. In such a situation a microloan can help in buying food for the family while at the same time allow the entrepreneur to hold inventory which can be sold later at a better price.

However, if microloans are used largely for consumption or if there is ‘multiple borrowing’ – i.e. borrowing from one MFI to pay off a loan from another MFI – it could be counter-productive. Microfinance institutions need to monitor their borrowers and make sure that microloans are used for productive purposes and that they are not over-indebted.


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Printable version | Oct 1, 2020 11:16:47 AM |

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