• Opportunities

It was barely a year ago that engineering and management graduate R. Baskar Babu, V.L. Ramakrishnan (a chartered accountant and company secretary) and Ganesh Rao (an MEP from IIM-A) all quit their respective jobs, inspired by a common vision. They were to create an institution that would positively impact a sizeable percentage of India’s population.

 The three men—colleagues and friends at their previous places of work—always wanted to be entrepreneurs. Having complimentary skills and vast experience in retail lending, it was logical to start a financial services company together. In addition, they shared a common goal: to contribute to society in a sustainable manner, not through passive charity or philanthropic donations. To them, it was all about active social development at the ground level, so that the underprivileged could achieve and sustain a higher quality of life.

While discussing various possibilities, they hit upon the idea of microfinance. “We were inspired by a very successful microfinance institution that one of our ex-colleagues had started. But the decision was firmed up after a chance meeting with Vineet Rai of microfinance equity fund Aavishkaar Goodwell, who has been supporting us even before we had a business plan. Aavishkaar’s support was unwavering, even through the turbulence seen in the last year,” says Babu.

To finance the startup, several options were explored. Finally, the promoters decided to set up a non-banking finance company (NBFC). Legal requirements for an NBFC to be registered under the RBI Act entailed a minimum capital of Rs. 2 crore. The promoters raised this amount by pooling in their savings and selling their properties; they also connected with friends, who chipped in amounts ranging from Rs. 2.5 lakh to Rs. 20 lakh each.

For Suryoday, the initial obstacles were the lengthy regulatory approvals, limited direct experience in microfinance, execution impediments, and transitioning from employee to entrepreneur. But the company held its own and today uses microfinance as a tool to enhance income and build the assets of aspiring women micro entrepreneurs. There’s also a strong focus on vocational training to facilitate sustained financial stability.

Suryoday has a target of serving 30,000 customers with a cumulative disbursement of Rs. 30 crore by March 31, 2010. It will expand its reach by establishing at least 15 branches by 2010, and build a customer base of 1 million in five years. Suryoday—Sanskrit for ‘sunrise’—represents the dawn of a new beginning. “We believe this word encompasses our objective of giving an impetus to the economically disadvantaged women to make a fresh start by utilizing our loans for income-generating activities—and, in the process, enable sustainable socio-economic progress,” says Babu.

 Suryoday began its operations in Pune, seeing the city as a gateway to the western region. It currently has five branches, each distributing loans to customers who reside within a 10-kilometer radius of a branch. It has a core/carpet coverage area in the first 5-kilometer radius, and a selective/extended coverage area across the next 5-kilometer radius.

Suryoday intends to expand its operations in select markets and establish its footprint across India, especially in areas that are currently under-served by MFIs. It has two standard loan products: Sugandh (for a Rs. 10,000 loan) and Madhur (for a Rs. 7,000 loan). Both products have a repayment tenure of 46 weeks and an EWI of Rs. 250 and Rs. 175, respectively. “We also insure our customers for death and are exploring possibilities of increasing the coverage to their spouses,” says Babu.

Suryoday obtained an NBFC license from RBI on April 22, 2009. Within three weeks, customers were identified, groups formed and the first loan was disbursed on May 11. By May 31, the total loans disbursed stood at about Rs 1.25 crore—with 100 percent recoveries for a customer base of 12,000.

There is a general feeling that loan products are too inflexible, and that the savings and insurance services that the poor need aren’t widely available due to regulatory barriers. Suryoday, however, publishes the loan’s terms and conditions in a transparent manner, and even conducts Continuous Group Training (CGT) on it. It then obtain the customers’ acceptance of the terms and conditions. “We factor in household income, rather than individual income, to make our loan products acceptable to the customer,” says Babu. “While we have a limited product range at this point of time, we will deliver products based on customer feedback and work on delivering these in a cost-effective manner.”

As regards to insurance, all Suryoday customers are insured for Rs. 10,000 through a Group Term Life Policy, for which it has tied up with a leading insurance company. While microfinance is being seen as great tool for alleviating poverty and empowering the underprivileged, Babu admits that it isn’t the sole panacea to the problems inherent in this sector. “It needs to be supplemented by other measures that specifically address issues like education, employment and basic infrastructure,” he says. 

A stark reality is that most microfinance customers are already servicing high cost debt due to borrowing local moneylenders; this puts a strain on their meager income. By taking a loan from microfinance institutions, they are also able to retire the high-cost debt and, therefore, have a higher disposable income.

While the effectiveness of microfinance can be debated, it’s a reality that MFIs cater to the sector’s critical financial requirements through an effective, customer-friendly delivery mechanism. Babu feels, however, that regulations should allow MFIs to take deposits from existing borrowers and also act as banking correspondents. Banks should extend funding in a meaningful manner to well-governed, smaller and new MFIs. “We need to ensure proper regulation, so that customers do not get over-burdened by multiple loans,” says Babu. “This will discourage any imprudent, unsound practices of MFIs.”

Pullouts

Their goal was to be involved in active social development at the ground level, so that the underprivileged could achieve and sustain a higher quality of life.

The first loan was disbursed on May 11, 2009. By May 31, the total loans disbursed stood at about Rs 1.25 crore.

The problems faced by this sector need to be supplemented by other measures that specifically address issues like education, employment and basic infrastructure.

Tags:
Aavishkaar Goodwell, employment, Ganesh Rao, Maharashtra, microfinance, poverty alleviation, Pune, R. Baskar Babu, Suryoday, V.L. Ramakrishnan