Credit with heart!

In this series of posts titled ‘Part of The Solution’ read about imaginative yet realistic entrepreneurs, working towards a positive social difference in India. Read on for more!

STW spoke to Rangan Varadan, founder at Micrograam. Here is what he told us

“In 2009 at a family function, my confounder Sekhar Sarukkai and I (Rangan) were talking about various financial inclusion models that would make micro-entrepreneurship and rural livelihood development a possibility. We examined the then extremely successful microfinance model which clearly had to be made more accessible and affordable to rural and micro entrepreneurs, while still keeping the social business mission intact. We were also greatly inspired by the working of Kiva.”

STW: Tell us more about how the idea for Micrograam came to you?

RV: Essentially, Micrograam enables rural individuals to obtain small loans for education, farming or business from urban professionals. I had spent over a year as the CEO, in a company working on a government initiative, through which we set up village banking in close to 12000 villages. I realized that financial inclusion based on opening a savings bank account was not the optimum way, it really had to be a credit-based system. This lead me to think about how we could achieve this. In 2009 microfinance institutes were doing quite well.

But personally I was not comfortable with the microfinance model primarily because the cost was very high to the borrower, upwards of 26-28%. We did not know of any rural livelihood activity that could give us such a return and be sustainable. Additionally as the microfinance models were scaling up they were losing out the overall relationship with the borrower, which is key to this sector. We appreciated the model that Kiva used. In a sense we were arriving at a system that lent money to rural and micro-entrepreneurs, at a rate that would be affordable to the borrower and appreciated by the lender. We wanted social investors to gain a return that was close to the market return. We also wanted to benchmark borrowing rates with what you would typically get as an average borrower at a bank, roughly 14-15%. Our goals were clear, 16% diminishing returns to the borrower with a 6-8% return to the investor.

STW: Take us through your central ideas and solution?

RV: We also wanted to improve on what Kiva had done in terms of relationships with the borrower, by working with small local organizations and NGOs that had strong connections with our target group. We wanted to leverage their relationship with the people. We extended microcredit to people through these NGOs, who would then enjoy a service fee of approximately 6-7%. In doing away with the heavy operation costs a typical Microfinance Institution (MFI) has by utilizing these key alliances, we were able to offer this return to the NGO partner. We also had to consider that they NGOs were working on promoting various services and products (not just from us) and the cost for them would be distributed through this. Micrograam provides affordable microcredit to underserved populations with a humble 1.5% rmargin retained by the company.


STW: What has been your journey thus far? building blocks and success stories?

RV: We attribute our success and uniqueness to two things. One is our model in offering affordable interest rates to borrowers. Another unique aspect of the Micrograam offering has been the investor-risk-mitigation we achieve. We have done this by creating a guarantee fund. 10% of the total fund to the borrower is placed as collateral in a fixed deposit (FD) by the partner NGO. The FD is used by the NGO so they gain a return on this and will be used only if the borrower defaults. We call this the First Loss Default Guarantee. In addition we have another buffer of 10% brought in from various High Networth Individuals (HNIs) and Foundations. We believe that our model of sustained investment with guaranteed returns and a strong social mission would have 10 times more impact and appeal to most philanthropic members and foundations. They would see their donations flourish. We would raise 10 times more than the guarantee they would give, but the multiplier could keep changing. This was the Second Loss Guarantee Fund. In this model our operations and ability to offer affordable rates has been sustained.

Our partnerships with field NGOs have been another key strength and strategic tool. Another key partnership has been for raising of funds. Kiva is now a partner, it is a win-win relationship with them being able to branch into India in a big way with us, and us picking up on their fund raising ability. We anticipate raising a big dollar amount in the weeks to come. Our third and important USP is our ability to position our offering as another debt opportunity for an investor (of any type) with an assured return. We have tied up, a few months ago, with two huge wealth advisory firms that will position Micrograam’s offering to HNI investors as another product option to their customers. So this becomes another critical channel for us to sell this idea and scale our efforts. We are also running a pilot with a major Indian bank, that will work directly with some of our borrowers. Should this work as expected, banks will be able to leverage our model versus reinvent them to extend microcredit to entrepreneurs.

STW: Obviously you’ve had your share of highs and lows, give some key reality checks?

RV: Sekhar and I have immense belief in the model, in it being suitable to both lender and borrower. We believed that if we could prove returns we would have investors ranging from small to large amounts eager to invest. We were shocked to find people did not behave as expected. We had anticipated organic (through our marketing efforts and other channels) investments within weeks of the order of thousands, but did this did not happen even after a year. We were not sure what was causing this deviation from expected behaviour. Some ideas we had were that in India investors still viewed this as a ‘charity’ option. We still have not cracked a model that will help us overcome this perception. Our question today remains – how do we convert these people who have disposable income that they would like to use in charity, but get them to usefully invest in this? The other barrier has been a culture of online transaction for this cause. We were not a credible name for investors to feel comfortable in transacting online from day one. We do combat this one by building a strong team and trustworthy board, but this one will take time. Overall we have not gotten hung up on this one channel. Our mission and focus remains creating the impact we have set out to make, through other key partnerships.

STW: Can you tell us what your secret sauce has been?

RV: Our idea is to keep the cost to borrowers as low as possible. With Micrograam retaining as low as 1.5% – comparable to payment services such as Visa, we view ourselves as similar to them except we give microcredit. We are able to identify key partners and areas to leverage within partner strengths that will help us keep these costs low and allow us to stay afloat. We have to constantly play with the boundaries of our profit and not-for-profit missions. We also believe that having strong team members with an excellent blend of ideas keeps our mission fresh. The new wave of socially-conscious career seekers has brought us a mix of talent and interested people. I have had no difficulty in creating a sense of mission and motivation.

 Post a comment here to learn more about Micrograam.


About Shruti Bharath

Social entrepreneur and developmental writer, passionate about creating workable solutions in the areas of improving employability of youth and women through skill enhancement/training and generation of productive and sustainable employment opportunities.

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