• StartUps

Siva Cotipalli decided one day that it was time to multiply wealth. This is not unusual for an MBA grad with rewarding career prospects, one might think. But for Cotipalli, it was—he intended to multiply wealth for the un-banked segment of Indians.

Dissatisfied with his job as a marketing manager at Oracle, Cotipalli quit so he could venture out on his own. With Rs. 30 lakh as angel-funded seed money and a yearning to build a financially sustainable business with a strong social impact, he launched dhanaX Information Services Pvt. Ltd. in 2007.

Not quite a microfinance institution, dhanaX is an online / offline, people-to-people microlending platform that connects lenders and borrowers whose operations are spread across Karnataka and Gujarat. Online, it communicates with interested individual lenders; offline, it works through agents and its own field staff to build a database of credit-worthy borrowers (women only) who belong to self-help groups (SHGs).

Having spent considerable time on social developmental projects while at IIM Khozikhode, Cotipalli had the numbers and statistics to prove that this was a market with a huge opportunity. According to the Reserve Bank of India, 41 percent of India’s population is un-banked. This 41 percent equates to approximately 410 million people that do not have access to banking services—more than the population of the United States!

The concept of people-to-people lending is commonplace in the U.S., and the model is completely online. However, to suit Indian conditions with regards to low internet penetration, Cotipalli has replicated only the basic model.

“The U.S. has a high credit bureau penetration, which makes the borrower selection process different [from ours],” explains Cotipalli. His target market is any household with a monthly income of Rs. 5,000 to Rs. 10,000, where the man is a primary earning member and the woman earns to supplement the income. According to Boston Consulting Group’s statistics, there are 91 million households in India whose annual income is between Rs. 60,000 and Rs. 1.5 lakh per annum. The credit need of this segment is $50 billion, of which only 15 percent is met through formal channels.

So how does dhanaX go about multiplying wealth? To begin with, its field staff visits low-income areas. Then, through SHGs, it gets in touch with women who need loans (ranging from Rs. 4,000 to Rs. 25,000 per person) to start small businesses or invest in existing ones. This could be a kirana store, a tailoring unit, a vegetable shop, etc. Due diligence checks follow; this is part of the selection criteria to determine certain parameters that are laid down by the firm. Repayment capacity, education (at least a 10th std. pass), and most importantly, familiarity with other members in the group are also considered, as the dhanaX model works on a group liability concept. This means if one woman defaults on her repayment, others in the group are required to pay up for her.

Once selected as a credit-worthy borrower, the SHG gets a profile on dhanaX’s website for lenders to peruse. Lenders, too, are required to register themselves on the company’s website to select an SHG to invest in. “Our biggest niche here is the social aspect, where an individual gets to help another individual through a new investment option,” says Cotipalli.

dhanaX charges a borrower an interest rate of 21 percent per annum, of which it takes 7 percent as commission; the remaining 14 percent goes to the lender as EMIs on a declining rate of interest. This is much more than the current ROI of banks’ fixed deposits. MFIs, on the other hand, are more expensive, charging a borrower anywhere between 24 percent and 28 percent on a declining rate of interest.

Thus, the dhanaX model has clear advantages for the borrower, being a slightly cheaper option than MFIs and much cheaper than borrowing from money lenders. Moreover, it is quicker than banks and targets an income bracket that most banks don’t.

However, selling the concept to lenders wasn’t as easy as finding borrowers. As with most startups, word-of-mouth advertising through Cotipalli’s personal network worked best, coupled with presentations at corporate firms. This generated enough buzz to kick-start operations. Today, the company has partnered with three financial brokers who, in turn, sell dhanaX to their clients as a new investment option. The brokers earn 1.5-2 percent of the loan amount as commission.

“We have been selling dhanaX as an investment option to our clients because of its high return on investment,” says Prashant Pillai, a broker at Wealth Maximizer. “In turn, we suggest they put back EMIs into the market as SIPSs,” he explains, referring to the benefits of partnering with dhanaX. The financial broking firm has invested about Rs. 15 lakh in the startup till date.

Having worked with 18 MFIs in Karnataka, Wealth Maximizer has been exposed to the hidden pitfalls deemed to exist there. “On the other hand, dhanaX is a well-managed company with well documented data,” says Pillai.
However, being only 1.5 years into operation, the concept has yet to catch on with investors. Hence, dhanaX currently has ten times more borrowers than lenders. Cotipalli now plans to add more verticals to remain sustainable.

“We are not completely sustainable financially right now,” he says. “We need to serve the same community through different channels,” he admits. With this in mind, the company is looking to target people with specific needs, i.e., invest in assets required by an individual rather than a group of people. So, for instance, a doctor in a rural area who requires equipment would get a loan through dhanaX to purchase it.

Looking ahead, dhanaX is in talks with a healthcare MNC and also venture capitalists to fund this leg of the business. “The repayment model will be the same—but investing in an asset will be more secure,” Cotipalli says confidently. His faith stems from his failures and learnings during dhanaX’s early days. It had tried to use this model with farmers in Andhra Pradesh, but it didn’t take off as people were very apprehensive to invest in land in the villages. “Property rights in villages are not clear—and in agriculture, the unknown risks are more,” he explains. Unfazed, Cotipalli learned from his failures and grew the company from strength to strength. “Now that I’ve been running a startup, I’ve become more realistic of my goals,” he admits.

“Cotipalli needs to spend more time building a brand, since this is a financial product,” says Pillai. “He should also try and get ratings from a good agency to add value.” The model is indeed scaleable, but he feels it needs more investors; credentials can only be built over time, and once built, will encourage investors to come in. Moreover, there’s another pressing task for Cotipalli: to get people as motivated as he is to work toward the greater goal of financial inclusion.

©Entrepreneur February 2010

Tags:
Cotipalli, lending, MFI, microfinance, self-help group, SHG, Siva Cotipalli, social