Bongu Bharat's Weblog

When I was reading about the microfinance crisis in the beginning of this year, I came across microsaving being used by many Micro Finance Banks (MFBs) in Africa and other parts of the world. I thought perhaps going forward, that would be a great source of funding for MFIs in India. These funds are much cheaper, you get them at an interest of approximately 4-5% per annum and you can use them to grow your loan portfolio. I know RBI norms donot allow NBFCs to do the same and hence that is not an option, but the question that has been running in my head is that can these microsavings really help fund your loan portfolio?

Increasingly as I think about this, the picture doesn’t look rosy anymore. The first question that comes to my mind is why the higher middle class or the rich save? Because they can afford to do that, as they generally have a surplus that they can save for future use or because the banks have a basic minimum balance that they have to maintain throughout. With the help of minimum balance you are locking certain amount of funds as commercial banks and you have customers who earn more than what they require to survive month on month.

In this trip to Lagos, what I observed in the MFB that I was working with here is that consumers save small amounts ($2-4) every day throughout the month and they withdraw almost all amount at the end of every month.  That means the consumers are saving up for their expenses that they incur at the beginning of a month, they donot have a surplus. The cost of collecting these funds is very high, as these funds are collected from the field by deposit officers but are they actually helping fund a loan portfolio? The answer is no. A typical loan tenure is for 3-6 months and that means you need funds which at least stay within the bank for that period, perhaps having a micro savings product with the customer having access to the funds anytime he wants is not the way forward to fund a portfolio (i.e in a case where you don’t have external capital to fund your loan portfolio and you are completely dependent on the savings)

One solution could be having fixed term savings or fixed deposits (3-6 months tenure) with higher returns to the consumer. But can the consumers whom we are targeting really afford to park funds for such a long period? I am looking for more answers on this will spend time to see how successful microsavings initiatives function across the world, for now these are few thoughts  (perhaps will keep this post a dynamic one)

24 days in Nijja and I am finally back in India with a stable internet connection around now I have the privilege of updating my blog.

The first impressions after landing in the Murtala Muhammed International airport were rather forgettable. Cops taking bribes to help people skip long queues and immigration officers asking for bribes openly didn’t leave a good first impression. The old infrastructure in the International airport ensured that we had to wait for another 2 hours for our luggage. As we drove out of the airport and went into the city which looked like the New York as shown in the 1970 classics with old Mercs and Audis all over the place. The city had a yellow tint which made me feel as if there was a sepia tone attached to the city.

I visited Nigeria for a consulting assignment with a Microfinance Bank. Having read many articles about the sad state of microfinance in Nigeria over the past few months (as a build up to the trip) my expectations were set at bare minimum. The industry that was crippled by fraud both internal and external barely recovered and even our client had a portfolio with PAR (>30 days) of 60%. As a company they had a revival of sorts in the last 8 months and they were seeking consulting help to ensure their portfolio is risk free from the operations perspective at least. So the assignment was to look at all sorts of risks (people, process, product, internal and external frauds) and help them develop controls to minimize the risks. Having spent just a few months in consulting I already realized the importance of working at the client site, it gives you a reality check and you can develop solutions by keeping their limitations in mind. I cant share much about the project because of confidentiality issues but in short I helped the client develop robust processes for the group lending portfolio. Having read about Indian MFIs and seen the reasons for the downfall it was a good process to setup operational processes for a nascent group lending industry in Nigeria which has very few players in the group lending domain. One thing that is different in Micro finance banks (MFBs) when compared to MFIs is that they also mobilize savings, the biggest challenge that MFBs in Nigeria are currently facing is that they are unable to mobilize enough savings to fund their credit portfolio. A customer saves in a commercial bank and applies for loans in an MFB as they lost trust because of fraudulent activities over the past two years. The Central Bank of Nigeria (CBN) has done a commendable job in not letting the industry die, they cancelled a lot of MFB licenses and cleaned up the system majorly. Currently our client has a PAR(>30 days) of less than 5% and is looking at having a 50-70% portfolio under group loans (which currently has PAR of zero). It’s very satisfying to build processes that  would help them scale in a sustainable way, and this trip really helped me realize that operations is my strength and perhaps I need to pursue such roles in the future (for now I am happy with consulting)

Coming back to my experience of living in Lagos, as I posted on twitter and Facebook during the course of the trip, the city is as expensive as Manhattan. Everything was sold at a premium, and the biggest shock was when we saw a laundry bill of 33k Naira (I could have got new clothes for the same price in India). The standard of living is very bad, no electricity, water or affordable healthcare facilities. One of my colleagues had to spend 8k Naira for a consultation at a hospital and while we were waiting in the reception of the hospital we saw medical tourism to India brochures with hospitals like LV Prasad etc listed in them. Education we hear is not too good, post schooling people have to go abroad to get quality education. Perhaps all this is because of unstable governments for the past 51 years, the country had Military rule for major part of their 51 years of Independence. On Independence day our driver was asking “why they need to celebrate independence as nothing much has changed post Independence”. They missed out on Industrial revolution, even we did but we recovered post 1991, the pity state is that they export crude oil to neighboring countries and buy back refined oil at a premium. We hear most of the politicians have stakes in the foreign refineries. Ten to fifteen hour power cuts ensured that all electric appliances run on a diesel generator which is sold at a premium price of 150 Naira per liter, more than twice the price of petrol which was sold at 65 Naira. We hear the new government under Mr Goodluck Jonathan has been stable and hope it revives the fortunes of the country. Otherwise the people are very kind and religious, the happiness quotient was much higher when compared to average India even after having many challenges in survival (An average Nigerian drives 6 hours a day to and fro from office). People are extremely religious and the city gets very colorful over the weekend as people wear their Ankharas (a Nigerian traditional dress that looks like a Kurtha but mostly in bright colors like Pink, green etc) to go and pray in the Church.

This trip has really made me realize the amount of comfort we have in India as most of the basic amenities are not too expensive. Unlike India I didn’t really find a middle class in Nigeria. Very few products or companies are focused on the middle class. For now I would stop here, will keep adding stuff whenever I recollect something else.

I was reading the latest issue of Beyond Profit magazine today about ‘empowering through education’ and there were a lot of issues that were troubling me and thought it would be good to write a blog post to puts things in my perspective about why affordable quality education is a must and what would be the challenges ahead.

I would look at this from various perspectives:

1. What is the Market Size from the business perspective?
2. What is stopping the poor from sending their kids to school?
3. What are the challenges ahead in setting up affordable schools for the poor?

Market Size:
Currently the market according to me is largely untapped. Though education has become a lucrative business in urban India where people can afford the ‘high’ fees charged by schools/colleges. The scenario when it comes to the poor is completely different. The poor are left with very few options at times or sometimes left with no choice but to send their kids to Government schools (we all know well the quality of education offered at these public schools). Let me get straight to Market Size now:
Assumptions:
Population : 120 crores
% of population in the age of (4-15) (Primary school going age) : 15% (18 crores)
Urban – Rural Split : 40% Urban (7.2crores) – 60% Rural (10.8 crores)

Market Size : 7.2*600*12*0.2+ 10.8*300*12*0.9 = 10,368 crores + 34,992 crores = 45,360 crore
(Assuming Rs 600/month as urban fees, Rs 300/month as Rural Fees and 20% and 90% untapped markets in Urban and Rural India respectively)

From perspective of business though the Rural market size is huge it will have its own challenges as the population is vastly scattered. Even if we look at the Urban poor market it is a huge market to tap into.

I think there is another big market on vocational training for uneducated and unemployed youth. That is not the point of discussion here.

Why arent the poor sending their kids?
Lets look at this from the financial perspective
I am looking at family of 5 in rural place with 2 working adults who earn $2 per day. They have three kids 2 boys and 1 girl. (Though child labor is a crime they still have a chance to send their kids to work at $1.5 per day)

* This is the disposable income without taking other costs into consideration. When other costs are taken into account the disposable income would be much lower.

** Today if you ask any educated person from rural India he will definitely have a story of his sibling who had to compromise on his/her career for the betterment of the family. The family has no other option but to compromise on one childs education for a better standard of living for the entire family.

Challenges ahead:
“An year of delay means over 80 lakh people being deprived of quality education”
The above statistic really is staggering and with the country heading towards a knowledge economy we need to correct this as soon as possible. The road ahead is very tough and by the time we reach the required market we might lose out many years. But lets see what the major challenges are :

1. Finding quality teachers in Rural India to facilitate education
2. Changing the mindsets of people to send their kids to school
3. Public Private Partnerships to make education more affordable
4. Standardizing curriculum/ facilities / teaching methodologies in all schools
5. Shifting the focus from regional language training to English medium training

We need to work towards building low-cost innovative technology to make learning more interesting and also should aim at looking at teachers acting as facilitators in teaching the content provided with means of technology. With mobile phones spreading so rapidly into rural India a lot can be done over the internet. But the major challenge would be to train the teachers and make them comfortable in using technology.

In changing the mindsets of people I think the government should take strict action against child labour and infact give grants to the ultra poor to complete education. We need to move towards making ‘Education a Right for every kid’. This might sound like a great votes gathering scheme but to actually achieve this the governement would be needing private sector support.

Having said that looking at the dire need and the number of people missing out on affordable education every year I think setting up high quality Affordable schools is an immediate need.

PS: This are just a few challenges which I could foresee, but to target such a scattered market there would be many more challenges to achieve scale. Do feel free to add more challenges/perspectives in comments.