NBFC microfinance Equitas MD urges discussion on profit entity versus mission

• Tuesday, May 4, 2010, 12:41
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15 Comments on “NBFC microfinance Equitas MD urges discussion on profit entity versus mission”

• 
  Peter van Dijk wrote on 4 May, 2010, 22:47

  Mr. Vasudevan is spot-on with his comments on some people who argue that non-profits are in principle focusing on the poor and that for profits are per definition out to exploit the poor.

  I would like to go a bit further and invite everyone to ask poor people to which organisations they want to entrust the little money they depend on for safekeeping, transfers and on-lending. In my experience they give non-profits less points on the potential of being “safe and sound” and of undertaking Microfinance Banking as a sustainable business, capable of increasing the assets of the poor.

  And imagine for a second of what will happen when the poor will massively deposit their money in regulated (micro-)financial institutions who in turn on-lend with those deposits instead of with external non-profit funds…..

  Another example is that governments of countries with experienced cooperative banks undermine the development of cooperative financial institutions in emerging countries by funding “apex funds” or “wholesale funds” for such coops. They can easily and should know better. Mission drift, weak membership, weak controls of such organisations is often a direct result of such foreign “socio-political”, non-profit funds. An often used argument of such funds is that deposits (often incorrectly called savings) are short-term and don’t allow longer-term loans for risk of mis-match. These funds make it difficult if not impossible to reinforce a more stable trust relationship between members and their MFI that will lengthen deposits and allow the development of concrete fixed term savings products (which in turn allow further development of specific longer term loans such as for SMEs and such as for housing).

  I am not a supporter of conspiracy theories of Non-profits, but such organisations should not pretend to be professional financial institutions that can as such help poor so far unbanked people better in managing money. Making more money with money of the poor is a job for (microfinance) banking professionals who consider it their job to integrate so far unbanked people in a structural manner in a mutually profitable, wealth creating manner. Non-profits can have a key role in preparing such market-oriented development and by operating as part of the social safety net.

  And finally, for non-profits that want to really transform and become financial institutions regulated by central bank, allowed to mobilise and on-lend public deposits, then they need to acknowledge the importance of profits and profit-orientation and not dodge the term by using words such as sustainability, cost-recovering or financial autonomy. Profit making does not at all mean profit maximisation and it does not mean that all profits go to shareholders (instead of partly being reinvested in the organisation’s growth, product development or the local community), that is complete non-sense. In my cynical moods I sometimes feel that activists in such non-profits who fiercely lobby that their organisations should obtain MF/banking licenses (at drastically reduced conditions) and be allowed to mobilise public deposits prefer to lead organisations that have no clear ownership status so that they can never be held legally responsible for not being able to help the poor in a financially sustainable manner…….

  Cheers, Peter
• 
  Shabbir Hakim wrote on 5 May, 2010, 11:05

  Mr. Vasudevan is spot on in his remark about Not for profit v/s For Profit. Strong words, but 100% true. MFIs making profit should not be seen as a SIN.
• 
  Narendra wrote on 5 May, 2010, 14:38

  Mr. Vasudevan is spot on in his remark about Not for profit v/s For Profit. It would be more relevant to also comment on higher valuations demanded by the for-profit MFI’s and their promises to the commercial investors. May be, the current valuations and higher operational margins are dragging down to the discussion of Not for profit v/s For profit. There are cases where promoters building their wealth under Not for profit, equally there are case where For profit entities increasing their lending rates to fulfill the promisses.
• 
  Baladeb Sen wrote on 5 May, 2010, 14:38

  Mr Vasudevans comments and the open challenge,sounding a bit too harsh,to the microfinance philanthropists on their oft-repeated criticism of the for-profit brand of microfinance services for the poor ,are on the spot and opens up the old debate,much of which has lost its sheen over the last two decades.
  The debate is somewhat historical as much of today’s microfinance initiatives owe their origin to the pioneering efforts of the social thinkers and activists in the seventies who were convinced that extending financial services to the poor without any collateral support would for ever remain outsiede the purview of the Banking system and

  began experimenting with microfinace ad extension of loans of very small amounts to the poor for livelihood and tiny enterprises.These people were not the archtypal promoters of financial institutions and were inherently opp0sed to the very idea of profit and making money out of the poor.Till the early nineties, the world slowly awakened to the fact that the “poor can save and repay loans if given an opprtunity”and they are also capable of leveraging their savings for future capital formation through micro-loans andthe entire microfinance scanario was dominated by such social volunteers with a total commitment for the development of the poor and alleviation of poverty.Sadly enough,the next brand of not-for profit microfinance promoters drifted from this missionary commitment of their predecessors and under the garb of “not-for -profit” organisations,starte adopting all sorts of anti-poor policies and practices.I fully agree with Vasudevan when he says that this group of neo-micro-financiers camouflaged their anti-poor activities and continued their relentless campaign aginst the more efficient and transparent brand of for-profit MFIs,knowing that the debate is inconsequential and irrelevant .One thing that occurs in mind that this continuous tussle between the two warring groups must not be allowed to continue as it has already damaged the long term interests of the movement Basically,the debate is all about claims and counterclaims that will remain ever inconclusive.The best thing to counter this infractuous debate is to establish such claims on hard empirical evidence on the achievements of the two groups of MF organisations interms of a set of globally accepted parameters like outreach,promotion of livelihood and enterprises,building of capacity and skills for the poor,efficiency ratios,cost of operations,affordability and credit-plus activities etc.In any case,this debate of “holier -than-thou” must come to a end.
• 
  Prof.S.Subramanian wrote on 6 May, 2010, 11:46

  Vasudevan does not appear to be harsh at all. He has boldly and squarely brought out to thr fore the types of frauds being perpetrated by some not for profit institutions in the guise of ‘ do gooder’ image in the society.
  Having said that, not all MFIs in place today can be besmirched, depite the great roles they play in the sector with mission and complex problems..
  What Vasu points out emantes from the reflections noticed in our society at large as a whole flooded with ivies of all sorts. MFIs are a part of the system and they cannot escape contagion effect.
  2. Basically, I always have advocated inclusive growth and inclusive free market economy, wherein free lunches, even single tea cannot be served but only at peril..!!
  If Equitas is run on professional lines by its Management, precisely by the Ex-Cholamandalam expert as its MD with focus, how can it be faulted and on the grounds of not exhibiting ‘sympathy’ in finnancial terms. Actually, if a serious financial analyst of merits looks at Vasu’s statement, a Net Interest Margin (NIM) of 4% and lending interest rate ranging around 13.5 %, it’s Heaven in the present Indian clumsy volatile and imbalanced financial sector interest rate scenario involving ethical players to touts and crooks..!!
  If the sector feels the heat of high interest rates and blasphemy, let no one criticise professional leaders like Equitas management.
  For the rest, blame it on Rio, do you get me, Microfinance Focus..?
  With love and regards
  Prof.S.Subramanian
  Ex senior RBI Executive and Ex bank Director
  Advisor and Senior Management Consultant (BFSI))
  Gradatim IT Ventures India Ltd
  Director, African Center for Mobile Financial Inclusion
• 
  Baladeb Sen wrote on 6 May, 2010, 15:26

  Prof Subramaniam’s advocacy of full professionalism with no free lunch,not even a cup of tea(!) ,as ardently followed by Equitas and his attempt to wish away all the effortsof the “not-for profit” MFIs on grounds of inefficiency and opaqueness in policies and practices ,contain elements of abiased and one-sided approach.
  It is globally accepted that the sole objective of the microfinance campaign over the last four decades in India is to make a percptible impact on poverty,raising of income,improvement in health care and education and empowerment of women who are the most exploited segments of the Indian population,across regions,communities,cultures,castes and religions.For me,the ultimate determinants of an MFI’s success /failures will be the extent(where possible by objectively verifiable measures) to which their activities and operations have made a difference in the human development index of the communities bei9ng served in a given time frame.In India,the scenario today is that even after decades of performance of the huge range of players in the financial services market,from the entire commercial banking system .the RRBs,the coperative sector,the exponentially growing operations and coverage of the NABARD’s SHG-Bank Linkage Scheme,the growing number of” for-profit” as also” not-for-profit” MFIs,there remains an yawning demand-supply gap in the financial services market for the poor in both rural and urban areas.To-day’s so-called successful ,”For-Profit” NBFC-MFIs with most of their H.O/Corp.Offices situated in big cities and run by big ticket managers and Boards consisting high professionals/ex-bankers,hired by the shre-holder owners, are found to operate in a market comprising only the creamy layers of the rural/urban poor(it is a universal phenomenon that not all poor,ural or urban,are budding entrepreneurs ) and extend loans of much larger amounts to individuals for enterprise development and very selectively to SHGs(that too, not formed and nurtured by these MFIs)To be a little blunt,such MFIs cannot afford to invest shareholders’ money on such activities as awareness bulding of the poor,formation,incubation and development of the SHGs(recognised as the basic building blocks for a holistic development of the poor and meaningfully involving these neglected members of society as a part of “Inclusive Growth of the national economy.Secondly,it is true that in anumber of cases,the management and governance of the Not-for Profit” MFIs fail to properly appreciate the benefits of professionalism in improving efficiency,lowering cost of operations,reaping the benefits of ICT and passing on such benefits to the customer-beneficiaries.If Equitas has been doing this ,I must say it has already become a “Role Model” for other NBFC-MFIs.Even then I would be keen to know the following 1)No of loans so far extended,2)average size of loans,3)average income levels of the borrowers4) mix of loan purpose,like consumption,w/c or T/L,5)% of direct enterprise loans ,loans to SHGs for on-lending to group members,if SHGs ,how many formed and developed by EQUITAS and the cost of building such financial infrastructure 6)the funding pattern and the average cost of funds for operation8)whether,as mentioned by Mr Vasudevan,the loan sanction letter while mentioning the interest rate also indicates the details of its calculation(this will be full transparency) 9) Prof Subramaniam may be in a position to give me more information on such price transparency practised by the top ten NBFC-MFIs in INdia.

  It is widely known that the NGO-MFIs (not for profit variety) initially enjoyed an uninterrupted access to donor funds that rarely contained any disciplining clause on utilisation/end-use of donated funds and the donors were not very specific on the concrete results being achieved.I know of many such NGO-MFIs (incorporated as Trusts,Societies,Co-Operatives) and not the “Touts and Crooks” that have mushroomed in the Sector lately,that are doing all that is necessary for cost control and reduction As such there is now growing awareness among such institutions about the benefits of professionalism (this is possible even when the institution ‘s governance and management has the desired attitude and is not solely decided by the structure of the organisation.This realisation has come upon the larger NGO-MFIs rather fast in the last decade or so, as donor funds started dwindling and the “do-gooder” promoters(to borrow the expression from Prof Subramaniam) with some out-of-thebox thnking started adopting professionalism in mangement in a big way. In the ultimate analysis,it is neither professionalism nor efficiency in operations or profit for the shareholders that is important in microfinance.The final test of success lies in whether the microfinance services have benefitted the poor and the ultra-poor and such benefits are measurable in quantitative terms over a given time frame
• 
  P N Vasudevan wrote on 7 May, 2010, 10:46

  In reply to Mr Baladeb Sen i would like to mention foll:
  There are three things which MFIs can typically try to do for their clients:

  1. Financial Inclusion: this means giving access to basic financial requierments of these people in a convenient manner and at a cost which is fair and transparent. From an Indian NBFC-MFI context, since we can offer only credit, this for us, means extending credit to the extent that the people need, in a timely and convenient manner and at the lowest possible cost by leveraging best of ICT and through an operation which is totally fair to clients and completely transparent.

  2. Social Empowerment: Whether the MFI spends time forming the group and nurtures them, spends time with them on things like financial literacy, basic health related information etc. 3. Non-financial services: whether the MFI provides other services such as health, education, skill development, livelihood development, market linkages, food security etc etc.

  1. Financial inclusion: Equitas delivers credit (which is the only financial product allowed by regulation for us), in a well defined manner through processes which gives the members complete knowledge of what terms they are getting into. further we probably have the best IT and Process flow in the entire MFI sector enabling us to operate at an efficiency level which is almost double of any other MFI in the country. thus, we have from the beginning offered a rate which is the lowest amongst all MFIs in the country. we charge 26.5% reducing balance rate and we have no other charges, fees, security deposits, advance instalments or anything else. plus, we have always printed our above rate in our passbook given to cleints by way of reducing balance and NOT flat basis. thus, our customers know clearly what rate they pay. Equitas is a Latin word which means Equitable in English which means being fair and transparent and this is followed in all our interactions with all our stakeholders.

  2. Social empowerment: we form our own groups with which we work and we have a well defined 14 day programme to form the group, take them through financial literacy as well as our product descriptions and stress on social benefits to them by remaining within a well knit group which benefits extend to them much beyond their relationship with us .. something which they can fall back upon in case of any emergencies to any member within the group.

  3. Other services: as mentioned earlier, we spend huge time and money on other services. we provide free primary health through medical camps and so far 175000 people have benefited from these (forming 21% of our client base). we have introduced secondary health care service by tieing up with large number of hospitals of various specialities and we have a health help line. any client suffering from serious illness can call us and we direct them to our tie-up hospital where they either get free or highly subsidised operation, in-patient care etc. we also counsel and educate them on the government’s health insurance scheme and wherever they are eligible we direct them to the Government’s network hospital. On Education, we currnetly run 7 tuition centres where we are supporting around 500 children in learning their school curriculum better besides offering English speaking and basic computer exposure. this was done on a pilot last year and went through a few model changes and this year we are ramping it to 70 tuition centres. we have commenced also 2 full fledged schools this year and will start 7 more schools for next year for which property purchse is currently on. we are allowed, by our Board, to invest upto 15% of our networth in creating infrastructure for our school projects. in Skill Development we provide training on simple cottage industry skills and have done so for over 60,000 members so far, free of charge. On Food Security, there is a company which is started to provide access to groceries at rates which are a discount to local shops through power of aggregation. this company is a Sec 25 company which means it is a not-for-profit company. hence the maximum benefit of aggregation can be passed on to the clients. we experimented on this last year and now have 4 shops running with around 3000 clients buying from our shops. this year we would be looking to ramp it to around 70 shops.

  One philosophy we have in the company is that any product or service we provide to clients which is for consumption purpose would be done on a not-for-profit basis and hence all these non-financial services, being basically consumption in nature, are provided either free or at rates which is to make it financially self-sustainable since they are provided either through our CSR division or through Trust or Sec 25 companies. and to ensure highest transparency and assurance of quality, all these entities are also audited by Deloitte who are also the auditors for the main company.

  No of loans so far extended : over 1 million 2)average size of loans : around $200 USD 3)average income levels of the
  borrowers : family income of 50% are less than $110 USD per month, another 25% are between $110 to $150 per month and rest over this. each family has average of 4.5 members. 4) mix of loan purpose,like consumption,w/c or T/L,5): all are working capital only. % of direct enterprise loans ,loans to SHGs for on-lending to group members,if SHGs ,how many formed and developed by EQUITAS and the cost of building such financial infrastructure : we form our own groups and lending is direct to each individual member within the group. we dont follow the SHG model. 6)the funding pattern and the average cost of funds for operation: Cost of bank borrowings currently for us is 13% and cost of operation is 7.5%. 8)whether,as mentioned by Mr Vasudevan,the loan sanction letter while mentioning the interest rate also indicates the details of its calculation(this will be full transparency) : Yes we have created a benchmark in the entire world of MFI by being the first to do so. Chuck Waterfield of MFTransparency.org also has appreciated our transparency and has confirmed that we probably are the first MFI to do so in the world.

  As i had mentioed earlier, we have tried our best to offer our members credit at the best rate possible, in a fair and transparent manner, support their group bonding and have initiated a number of non-financial initiatives to touch atelast 25% of our total clients thro such services. we are of course, open for course corrections and adding more services if that would help clients benefit and if we are capable of providing same. the fact that our basic MFI operation is a for-profit model enables us to support each and every one of these non-financial services. we are of course, only 2 years old and i hope that over the next 4-6 years, we will be in a position to take care of primary health care of a few million clients free, secondary health care of atleast a million at highly subsidised rates, give quality education directly through our tuition centres and schools to atleast a couple of million children of our clients, extend food security to a few million cleints giving them access to food on a revolving credit basis in times of emergencies and extend benefit of aggregation through price reduction etc etc.

  i really dont know how much of these we will be able to deliver but i do hope that with Gods grace and lots of help from many people we can truly deliver on our dreams.

  as i had mentioend in my first noting, my open invitation to anyone who wants to visit us and spend a day with us and if they still beleive not-for-profit model is the only right model for helping poor, i will accept to stand corrected
• 
  Microfinance Focus wrote on 7 May, 2010, 13:28

  Dear Eminent Friends..Hearty Greets..
  I am thrilled and excited about what all are appearing here and in a daze they are true and not just dreamy. .While Baladeb Sen’s dessertations are more of classy, macro and and born of theoretical and practical wisdom like mine, highly professionalised Vasu’s comments are direct and as response to all points raised at managerial and operational levels of a strictly-RBI regulated and well-run super efficient NBFC entity.
  Sharing of such vital business information in public as also his straight forwrd and forthright invitation to any one-I presume worthy stake holders only-to visit and stay in his office and the field of operations for a day, speak volumes of integrity, commitment, dedication, disclosures, transparency and above all ‘guts’-what we essentially expect as ethical Corporate Governance issues.
  Disclaimer: I have nothing to do with Equitas in any manner whatsoever but a stake holder in the sector under focus.
  2. In my comments as Ex Senior Central Banker for 4 decades in active dispensation from 1967, the year of release of All India Rural Credit Review Committe (the comprehensive bible for rural cooperative credit in India), half of the time concerning studies and minitoring rural credit, lead bank scheme, RRB / Local Area banking promotional and developmental matters, cooperative sector matters, and having visited close to 20, 000 rural beneficiaries / their family members of banking system covering Tamil Nadu and West Bengal, I had poured out near truths of Rural credit / MFI sector scenarios..Baladeb Sen may not disagree that I was clearly balanced in my direct comments and did not condemn at all not for profit making entities, which are thousands by number in India. They are performing what we traditionally address as ‘Yagna’ for poor and needy who forms about 65 to 70 % of our population by any un-biased yard stick and form part of ‘excluded categories’ for several purposes beyond finance. Finance is only one input. MDGs clearly define and address their problems for lively hood issues.
  Trickle down theory is a myth and it has owefully failed with everry policy maker globally.
  Mainstream financial players exclude poor and needy from their ways of business. Despite the known and recorded ills of the sector, only MFIs and other related SHGs, NGOs, worthy donors, etc provide genuine succour in their limited ways. But, Social inclusion for sustainable livelyhood inclusion is the first and foremost responsibility of the State machinary. You will not witness famine deaths or farmers’ sucides. I do have some information about some un-ethically functioning enties, failed NBFCs and other players, who are very small in number.for our discussions, but are relevent. While work of all others, which are missionary, needs appreciation, washing of dirty linen in public beyond decency about ‘touts and crooks’, who are visible to those who keep their eyes open, will not help in measures and minimum regulations or self-regulations for transformation in to useful entities.. Regulation is cost addition but rehabilitation and orderly organisation through fiscal and other legal institutional structures, will go a long way in cleansing of the sector’s ills.
  Why not give a thought to sagicious advice of Dr.A.N.Ghosal in introducing PPP model for MFI sector as ultimate deilivery machineries in this country is deficient, defunct or corrupt.
  As God’s name is invoked by even a professional like Vasu, let me end up thus, ” Ebaar phir aao morey aaro Bhagwan…kalki avatar” in lighter vain..
  I promise to return here as the debate moves with enlarged scope.. ..

  With love and regards

  Prof.S.Subramanian
• 
  Baladeb Sen wrote on 7 May, 2010, 14:32

  Many thanks for most of the clarifications asked for.
  Many issues still remain.

  Ever since my retirement from the State Bank of India(since retirement I have located myself in Chennai(contact No 9962057938),I have been involved with this fast emerging segment i.e microfinance, with an almost unlimited growth potential .My involvement is mainly as a keen observer and student of the subject and the diverse exciting dimentions of growth of the Sector,as a senior consultant to such organisations as SIDBI,NABARD,CARE and a number of MFIs,budding ,semi-mature and mature .Presently,I have been retained as a financial consultant for developing a comprehensive risk management framework for MFIs by M/S Dun &Bradstreet,a global Risk Management and Risk Modeling companyat its Chennai Office.
  It would be a great opportunity if we can exchange some ideas and thoughts on the current trends in the industry and also on the future course in theory as also practices.Let me mention one thing clearly.In all my comments,what I tried to explain is that ,as in theory so in microfinance practices,we do not stand to gain much by merely debating the best way to help the poor.There is no last word on philosophy and methodology.Certainly,Mr Vasudevan,and his team at EQUITAS has done commendable job in a very short time and the MFIs can definitely learn a lot from their example.In my arguments,I have never claimed that not-for profit MFIs are the best if the poor man’s interests are to be served.Similarly,it would be naive to argue that efficient financial services are possible without adopting professionalism. Be that as it may,I would end with a request for a direct interaction with Mr Vasudevan so that both of us can fruitfully discuss certain mutually relevant and critical issues on microfinance and the working of EQUITAS Baladeb Sen,(Ex-SBI),Sr Consultant,Microfinance,Chennai
• 
  P N Vasudevan wrote on 10 May, 2010, 9:49

  hi Mr Baladeb Sen i tried contacting your number given above but no response. u can alternately call me up on my no. 99405 77800
• 
  Microfinance Focus wrote on 17 May, 2010, 11:25

  I read with great interest very informative and pragmatic discussion on profit vs non profit MFI model. it is true no business could be sustainable if it does not generate profit. But it is equally true that profit need not be profiteering and it should not be justified by narrating that part of it is spent on social welfare of borrowers. I for one may be on the wrong side firmly believe that poor look for facile liquidity accessibility and therefore do not hesitate to pay hish price for the same, in fact they have been doing so since time immemorial, but that does not mean such exploitation should also continue for time immemorial. MFIs therefore
  look for reasonable return and need not provide any free lunch. Their strategy should be to empower poor to earn his livelihood with dignity and do not look for doles and donations as these have acted as opium and made them fatalist and in the process nation has been deprived of demographic dividend. SKS’s IPO has openly brought out the extent of profiteering promoters of highly developed and professionally managed MFI can look for. Do we need any further proof?

  DR.S.N.GHOSAL
• 
  L.Veeraraghavan wrote on 13 August, 2010, 12:53

  Most of the NBFCs coming into prominence in recent times, say, during the last 4 years are following the JLG model rooted in Grameen method. The NGO MFIs who replicated this model 10 years ago were following a standard interest rate of 24 to 36% flat as they learnt that by doing a short training programme in Bangladesh. Even in the SHG bank linkage programme the groups were encouraged to have their own internal rate of interest and most them charged 36% reducing. The growth of the sector and pressure of competition has pushed down the interest rates in Micro finance. Institutions like Equitas are setting benchmarks which smaller NGO MFIs would do well to strive to achieve. The arguments of for profit and not for profit is of irrelevance as long as benchmarks are pushed up by efficient institutions like Equitas which will serve goals of inclusion.

  The arguments about lending for  consumption or production is also losing its heat as it is opportunity costs which drive people to make borrowing decisions. When poor depended only on moneylenders they were borrowing only for social commitments and not for health, education, sanitation and dwelling. Now the interest rates in micro finance are coming down people are borrowing for these  purposes and these should be regarded as investment in human resources development.

  So hats off to institutions like Equitas which sets up benchmarks 

  L.Veeraraghavan
  Micro finance Consultant
• 
  Narasimha Reddy.TL wrote on 5 September, 2010, 3:59

  wow good innovation think in MFI’s sector.member continues livelyhoods base is very good. Hi sir good luck. Regards, TLN.REDDY.
• 
  David D"Souza wrote on 10 September, 2010, 19:12

  No need for Mr. vasudevan to proclaim lofty challenges from the rooftops. Why doesn’t he challenge his organization to provide loans at 15% interest regardless? if equitas is so efficient and so confident whay wait till the chicken is hatched? Just DO IT!

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