Social Entrepreneurship in India

MIT India Reading Group Meeting

Anna Agarwal

annaag@mit.edu

References** (not appropriately referenced in the slides)

Creating a World Without Poverty, Muhammad Yunus, Book, 2007 MICROFINANCE IN INDIA : SECTORAL ISSUES AND CHALLENGES (By

Thorat, 2005) The Indian Microfinance Experience – Accomplishments and Challenges

(Paper, GATECH, 2004)

**This presentation is a compilation of information from these sources, and not the presenter’s personal views on the topic.

What Solutions do we have Today* Government – alone is not the answer

Inefficiencies, slow, bureaucratic, prone to corruption….

Nonprofit Orgs. – inadequate dependent on donations (uncertain, demand far exceeds supply) “compassion fatigue” Raising money takes time and energy, which can be spent planning

growth/expansion

Multilateral Institutions (World Bank…) - ineffective Conservative, slow, under-funded, unreliable Success is measured by

a) GDP (might not be helping poor)

b) Volume of loans negotiated (not measuring impact) Exclusively work with the government

Corporate Social Responsibility - fundamentally flawed “as long as it can be done without sacrificing PROFITS”

*From: Creating a World Without Poverty, Muhammad Yunus, Book, 2007

New kind of BusinessSocial Business

Creating business models revolving around low-cost products and services to resolve social problems

Social business is for ‘more-than-profit’

combine revenue-generating business with a social-value-generating structure

Can be two kinds Creating services for poor Owned by poor (** not a SB )

How can you do business and serve social goals?

Why is profit-making not conflicting with social objectives?

Profits - Promotes R&D, innovation, new technologies Increases efficiency Enables penetration to new geographical areas and serve deeper layers of low-

income people Helps recover costs and pay back investors, thus encourages investments

PMBs (profit max. businesses) vs. SBs (social businesses)

How they are same yet different Employ workers, create goods & services for consumers Must recover full costs Profits are important YET objective is to create social benefit and not limited to personal gains

Can there be a HYBRID i.e. 60% PMB and 40% SB??

Social Business – Some Examples Banking and finance is the biggest

beneficiary of technology-enabled social

startups Muhammad Yunus, Grameen Bank

(Nobel Peace Prize 2006) ** not founded in India Vikram Akula, SKS Microfinance (Social Entrepreneur of the Year Award

2006) Kiva (peer-to-peer micro-lending website) ** not founded in India

Energy Solar Electrification - Harish Hande, SELCO (Social Entrepreneur of the Year

Award 2007)

Other examples Education (Same Language Subtitling, Janarth - education solutions for

children of migrant laborers) Many more…

What are their stories!

Need for Financial Services for Low-income People Why do poor need financial services?

A study in Andhra Pradesh revealed that for the poor, about 50% of all risky events were

characterized as “health-related” and another 28% were “nature-related”.

Responses to these risks - 1st preference of the rural poor is borrowing (money lenders have very high interest

rates, subject to exploitation), followed by mortgaging/selling assets (often under difficult conditions that limits the value

received for such assets).

Why don't they just go to a bank?

The poor rarely have access to the formal financial sector No money to open a savings account No collateral or credit record to secure a loan Illiterate – so can’t do paperwork

Microfinance - Role of SHGs Microfinance is providing financial services to

the poor such as loans, savings, money transfer

services and microinsurance.

In India, Self Help Groups (SHGs) form the basic

constituent unit of the microfinance SHG is a group of a few individuals – usually poor women (group of 5 to 20)

They pool their savings (as low as Rs. 10 or 20 cents monthly per member) into a fund from which they can

borrow as and when necessary

Such a group is linked with a bank – where they maintain a group account.

Over time the bank begins to lend to the group as a unit, without collateral, relying on self-monitoring and peer

pressure within the group for repayment of these loans.

The group is eligible for ‘bank-loan’ after atleast 6 months of ‘inter-loan’ repayments

Maximum loan amount is a multiple (usually 4:1) of the total funds in group account – starts with lower

multiples (1:1 to 2:1)

Microfinance - Key Challenges High ‘Cost-to-Serve’

Accounts are low in value but large in volume High transactions costs (as frequent transactions) Low levels of automation Intense supervision requirements to maintain high recovery rates (trade-off between

supervision cost min. and recovery max)

Very small scale – figure shows SHGs linked to banks are in handful of States

(mostly in South India – AP) [Chakrabarti, Georgia Tech, 2004]

What is the role of technology in lowering these costs?

What is AP doing different?

Microfinance - Key Challenges Deficiency of Capital – Constrain on Outreach

Until recently, MFIs were dependent on donor grants, but grants are limited in size and

availability and are becoming harder to access as the pool of global MFIs grows.

Many of the MFIs are registered as not-for-profit entities that make it an unattractive choice for

investors

Low profitability of MFIs because of reasons mentioned above is also a barrier to raise equity

capital

Regulatory/policy Issues If the NGO earns a substantial part of its income from lending activity, it violates the Income

Tax Act and could lose its charitable status. If an MFI opts to become an NBFC, it should be able to satisfy the entry-level capital

requirements of Rs. 20 million. (In India, there has been strong advocacy for bringing down the capital entry norms for NBFCs in the business of microfinance)

In the case of NBFCs, deposit mobilisation is not possible at least for the first 3 years, till a satisfactory credit rating is obtained.

Borrowing from foreign institutions is hard due to the credit rating requirements imposed by RBI.

Challenges present Opportunities SKS, specializing in microfinance

is one of the largest and fastest-growing microfinance organizations in the world (disbursements exceeding $500 million to about 2.2 million women)

Inter-linked three principles: 1. for-profit methodology 2. best business practices 3. latest technology

N-logue Communications, a company incubated by IIT Madras, has built an entrepreneur-led business model for deploying rural internet kiosks across the country. These networks are capable of providing multiple services such as agricultural information, education and health applications and communication.For microfinance, this enables updation of databases real-time and remote monitoring (reduces the ‘cost-to-serve’)

Discussion

What are the important questions Agenda for next meeting – volunteers for

leader? Logistics – date, time, venue