For Saroja, the tea stall in her village where she has been working since the age of 15 is her home. She has now had enough. Saroja wishes to change the way she lives and aspires for a home of her own. But this seems like a dream that she cannot realise as she has no money. “It is difficult to get loans from the banks and money lenders charge an exorbitant rate of interest,” says she.
This set Rangan Varadan thinking. “When we are able to get credit for 12 per cent to 14 per cent, why should people from the rural background be paying interest as high as 24 to 36 per cent,” says he. This inspired him to setup MicroGraam in 2010 with a main goal of being a lending platform that empowers rural micro-entrepreneurs with access to loans from socially minded investors.
Varadan, a Ph.D in finance and economics, has extensive experience in the financial services field. Before setting up MicroGraam, he was the head of Banking and Capital Markets domain competency group at Infosys Technologies. He subsequently headed an NGO run by Integra Micro Systems. During his stint in this organization, he understood the need for facilitating financial inclusion and an opportunity to save for the rural population, basically affordable and accessible credit. He also plans to take branchless banking services to villages in the most efficient manner through technology and field partnerships.
Inspired by the US based crowdsourcing microcredit organization, KIVA, and its operating model, he set up MicroGraam to provide affordable micro-loans to rural Indians who would otherwise have no access to financial services. “We modified this model to pay the lenders interest rates better than what you get from a savings bank account but less than fixed deposit rates,” says Varadan. A lender receives a maximum of 7.50 % interest rate on the amount lent with the minimum being 0% . As far as the borrower goes, their maximum rate of interest is 18%. However, almost 96% of the borrowers from the MicroGraam portfolio have paid only 14.50% in the last five years, with a few exceptions due to high cost of delivery.
Access to low-cost credit is the first step to ending systemic financial exclusion. This will result in holistic and accelerated development of rural and economically backward areas of the country through better livelihood opportunities.
Some of which is already evident from their five years of operation.
Let’s take the story of Haggappa who has a family of five to fend for. He lives in a small village called Aladagere, Haveri district, Karnataka and farming is the traditional occupation in his family. He owns 3 acres of land on which Haggappa cultivates maize and cotton, which earns him just Rs. 7000 a month. Through the support from a Self Help Group he decided to improve his earnings. He got a loan of Rs. 20,000 facilitated by MicroGraam. Haggappa bought a cow and the sale of milk has increased his earnings by Rs. 5000 a month. He is now planning to plant fodder seeds on his land and hopes to buy a few more cows.
There are many more such stories that MicroGraam’s Varadan has to share. He believes, “Constructive social changes can happen if we bring people out of the clutches of the money lenders and this can happen with affordable credit which is what MicroGraam is trying to do.”
The organisation currently focuses on women empowerment, dairy and livestock, agriculture, micro enterprises, education loans, employment training programs and sustainable farming programs. As of today, 9115 borrowers have been impacted and Rs. 13.14 crore of loans have been disbursed.
The circle of money
Simply put, the company crowdsources funds through its website and lends it to the underserved population at a reasonably low interest rate.
Let’s understand this through the story of Maya, a mother of three and a widow. She runs a small corner shop and wants to send her children to school and also own a home. If a lender wants to invest in Maya and her family’s future they can go to the MicroGraam website (which has a prescreened list of borrowers with their aspirations listed and the money needed to achieve them) and select her cause. One can choose any cause and lend as much as they want to, through safe payment options and at an interest rate of their choice.
Once the lender chooses the cause, MicroGraam sends the loan to the partner organisation, which in turn disburses the loan to the borrower. Once the borrower makes his or her profit, he or she repays the loan to the partner organisation, which repays MicroGraam. MicroGraam repays the investor who can either take their money out or offer a loan again.
The company today raises funds from India and outside India, through partnerships. “Raising funds from outside of India is a challenge. There are some discussions going on with RBI and SEBI to make it easier,” shares the social entrepreneur. To identify investors, it seeks help through the digital medium. “This apart, we also reach out to HNIs and position our proposition as an investment and not charity, which can fit into their portfolio, just like equity, debt and real estate,” states Varadan. The company is also awaiting a formal guideline on who will regulate it and is also trying to understand the category it falls under, NBFC or an MFI.
The organization was a part of Villgro’s innovation seed program in 2012. “The one year that we spent there taught us to create the right value proposition for our customers, differentiate ourselves in the market and build a business model for scale,” shares Varadan.
Partners in support
The organization works with local NGOs to identify and reach out to deserving borrowers. These NGOs work closely with communities to provide micro-loans, follow up for timely repayments and send updates on a regular basis to MicroGraam. Through this partnership model, the organization not only keeps its cost down but also ensures fair returns to its lenders. Before forging a partnership, it does its due diligence on parameters like experience in financial inclusion, holistic development services, sustainable methods and good governance practices. It has 32 partners so far.
By leveraging technology, they are able to keep their costs low, and pass on these savings to borrowers and social investors. The NGO partners receive upto 6.5% annual percentage rate (APR) as service charges while MicroGraam receives 2% upfront as service fees and 7.5% APR as transaction processing fee to cover foreign currency transfer and hedging cost. So, the total cost to a borrower is not less than 16% annual percentage rate for a maximum tenure of 18 months.
They are present in 7 states in India (Tamil Nadu, Karnataka, Andhra Pradesh, Jharkhand, Assam, West Bengal and Maharashtra) by partnering with 32 NGOs.
The borrower-lender equation
MicroGraam’s partners identify individuals in their local community who require loans for agricultural inputs, employment training programs, or micro-enterprise development. These borrowers are typically from low-income households (almost 80% are below the poverty line) who require funds for education or working capital for their small businesses. The borrowers’ loan and credit history, various income streams, willingness to repay and experience with the business etc is evaluated. Only then is the borrower approved for a loan through MicroGraam. After the loan is disbursed, the NGO partners work closely with the borrowers to assist them.
“As a lender, one can diversify their total investment towards multiple borrowers as it could help more in numbers,” opines Varadan. The amount one chooses to lend and the interest rate is one’s personal choice. “For each loan, we have listed the maximum interest rate the borrower is willing to pay you. You can specify any rate lower than the maximum allowed for the loan. You can also choose not to charge interest,” says he.
A good turnaround
MicroGraam’s borrowers have maintained a 100% repayment rate in the last two years. While it does not take any collateral from the borrower, it has developed a Principal Guarantee Fund, which acts like a fund reserve. The partner NGOs create a security deposit of an amount equivalent to 10% of their total loans provided to its members in this fund. This deposit accrues interest but is used only in case there are defaults.
“In case of non-payment by some borrowers, these funds will be used to repay investors whose loans are in default. However, since the security deposit does not equal the total amount of loans given by all investors, it cannot guarantee return of your loans in case of mass default of all borrowers,” states Varadan.
MicroGraam also rates all NGOs on a five-star scale to validate their credentials, past repayment rates and conducts other due diligence such as visits to the field. You can see these ratings on the partners page of their website.
The organisation clearly aims to ensure that all stakeholders are sustainable and are able to create the desired impact. “We can take this model to any country or state across the world. And by 2020, we aim to touch the lives of 60,000 rural population in the country by lending Rs. 150 crore in value totally,” says Varadan on a concluding note.