RESEARCH: Rang De and online lending in India

By Arvind Ashta and Djamchid Assadi

Microfinance Focus, Feb. 7, 2010: The microfinance movement has been witnessing high growth rates along with high interest rates of about 28% per annum on average (CGAP, 2009). The small loan size in relation to transactional costs is the usual explanation offered for the high interest rates. One possibility of lowering these interest rates is through technology such as using MIS, internet and mobile telephones.

At the Burgundy School of Business in Dijon, France, we have been researching online lending mechanisms and how they are being applied to Microfinance for the last two years. We have seen that the rise of Kiva in the microfinance sphere and Zopa in the commercial online lending sphere has been followed by a host of others.

The typical commercial online lending model has a lender on one side of the online intermediary and the borrower on the other side. Although the borrower indicates his “story” on the intermediary’s webpage, there is no possibility for the lender to deal with the borrower directly. Interest rates are usually set through some kind of market place auction. The top half of the figure shows the supply chain for a commercial online lending model. Although we have mentioned Zopa, it is the same for Prosper or Lending Club.

As opposed to this, the supply chain of funds for a typical microfinance online lending model is longer. This is essentially because the poor borrower-entrepreneur does not have a computer and is illiterate. As a result, he does not know how to get money through internet. Also, he does not have a bank account for the online intermediary to place money in directly. Therefore, the online microfinance model goes through another intermediary, usually a Microfinance Institution. Again, although we have indicated Kiva in the bottom half of the figure, it is the same for Babyloan or for the Indian operators that we studied Rang De.

Commercial online lending models are, by definition, for-profit. However, in keeping with the general trends in Microfinance, where not-for-profits and for-profits compete to provide services, the online microfinance space has also got both for-profits and not-for-profits. Kiva and Rang De are not-for-profit. Babyloan and DhanaX are for-profit. Niether Kiva nor Babyloan provides interest to lenders. However, they are both operating in countires with near-zero inflation rates. Neither Kiva nor Babyloan can currently enter the Indian market due to Indian government regulations.

In this vacuum, Rang De was started in early 2008 by Smita and N.K. Ramakrishna in Chennai, Tamil Nadu in January 2008. Two years later, it has expanded to ten Indian States with 14 partner MFIs lending to 2108 borrowers (figures from website on Feb 4, 2009).

Our research indicates that the average pricing in India in the brick and mortar microfinance segment is about the world average of 28% per annum. Eight or the top ten Indian MFIs are for-profit, led by SKS microfinance, and they usually charge between 23% and 30% per annum, although they may have one or two products priced lower. The two not-for-profits charge lower interest rates, notably SKDRDP who charges 11%. The average microloan sizes in India are about $ 140 in 2007 and these fell to $100 in 2008.

As opposed to this, the microentrepreneur financed by Rang De pays about 16% APR for an average loan size of about $150, in keeping with its not-for-profit structure. At the same time, unlike Kiva who does not offer any interest to its lenders, RangDé offers a 3.5% APR financial return for the social investor. However, we are yet to see the effects of technology coming in to help Rang De break even.

The major challenge for Rang De is to scale up to move to profitability or at least break-even. This involves challenges on both sides of the supply chain. On the lending side, Indian middle classes are not into the social giving, which is characteristic of developed countries. On the borrowing side, large MFIs do not need financing by small operators. This means that operators like Rang De need to dialogue with and develop a number of small MFI partnerships.

To some extent, Rang De has been able to achieve visibility on its website. One way to look at website visibility is Alexa ranking. Rang De ranks 18,475 in India and 212,804 in the world (as on February 2, 2010). Kiva remains the most visible leader in the microfinance sector with a global rank of 5,548, way ahead of Grameen and other large brick and mortar initiatives.
We have set up a case competition, with a small prize offered by the Microfinance Chair of the Burgundy School of Business, for ideas on how to rapidly diffuse these innovations in Indian society. The complete case study and details of the competition rules are available on: http://www.escdijon.eu/index.php?page=case-study-contest.
(This research paper is by authors associated with the Burgundy School of Business or Groupe ESC Dijon-Bourgogne. The views expressed are by authors and do not necessarily reflect the views of Microfinance Focus — Editor)

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