Social Enterprise Showcase: Micrograam – lending for rural prosperity

With customized repayment models, complete transparency at all levels of borrowing and lending transaction, an attractive guarantee model and over 23 partner NGOs, Micrograam treats its borrowers as equal partners in its mission to eradicate poverty through financial access.


With customized repayment models, complete transparency at all levels of borrowing and lending transaction, an attractive guarantee model and over 23 partner NGOs, Micrograam treats its borrowers as equal partners in its mission to eradicate poverty through financial access.

Naagamma, a 55-year-old resident of Ranibennur was at wit’s end. She had 2 daughters and a nephew to support and she was their only hope. She came up with the idea of opening a flour mill after noticing that there weren’t many mills in the nearby locality. Turned away by the regular banking system, she borrowed a starter loan of Rs. 50,000 from Micrograam and started a flour mill, where she now manages to save around Rs.6,000 every month after deducting all the expenses. Last month, she gave a speech at Hotel Taj Vivanta, Bangalore to students of Columbia University where she talked about her journey to becoming a rural entrepreneur and what worked for her.

The success stories of borrowers like Nagamma, 37% of India’s population who slip through the cracks and have no financial access of any sort, is what makes Micrograam the successful peer-to-peer lending platform built by Dr. Rangan Varadan, former banking head, and Dr. Sarukkai, a serial entrepreneur.

Genesis

“At a family function in 2009, my co-founder Sekhar Sarukkai and I 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. And that is how MicroGraam started,” says Dr. Rangan Varadan, CEO and co-founder, MicroGraam.

Micrograam enables rural individuals to obtain small loans for education, in amounts ranging from Rs. 5,000 to Rs. 30,000. “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. We were inspired by the Kiva model and started looking 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 market returns.” MicroGraam looked also at benchmarking borrowing rates with that of an average borrower at a bank, roughly 14-15%. Their goals were clear – 16% diminishing returns to the borrower with a 6-8% return to the investor.

Central Idea and Solution:  building relationships with small producers

Micrograam 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 the target group. “We work with NGOs who would then enjoy a service fee of approximately 6-7%. In doing away with the heavy operation costs a typical Micro-finance Institution (MFI) has by utilizing these key alliances, we are able to offer this return to the NGO partners. We also had to consider that the 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 1.5% margin retained by the company.

Key success factors: a guarantee fund

We attribute our success and uniqueness to two things. One is our model in offering affordable interest rates to borrowers. A unique aspect of the Micrograam offering has been the investor-risk-mitigation achieved. “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 Net-worth Individuals (HNIs) and Foundations.” The model of sustained investment with guaranteed returns and a strong social mission also appeals to most philanthropic members and foundations – <> of them.

Key success factors: partner NGOs and organisations

“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,” states Rangan. Micrograam have also tied up with two big wealth advisory firms that will position their offering to HNI investors as another product option to their customers, opening another critical supply channel for funding and scale. “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.”

Reality Check

“When we started out, Sekhar and I had immense belief in the model, in it being suitable to both lender and borrower. 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.”

The other barrier has been a culture of online transaction for this cause. Micrograam was 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.”

Future Course

“In the upcoming future, we are planning on investing heavily in the northeastern states of Jharkhand, West Bengal, Assam, Tripura and Meghalaya. Previously, our micro-loans were primarily focused on education and livelihood activities. Going forward, we also want to provide access to affordable clean energy, health, and sanitation solutions,” ends Rangan.

Micrograam is a finalist at the Artha Venture Challenge, a nationwide competition by Ennovent andVillgro to identify, select and provide the best socially focused ventures access to mentoring, connections and funding.

Pictures courtesy Micrograam and Mahindra Rise.

Social Enterprise Showcase is a series of profiles on mission-driven profit-cum-impact enterprises that are working on social, environmental and cultural development challenges across India.


  ABOUT THE AUTHOR
IDEX Fellow and founder of collaborative blog Seize The Word. When she isn’t bouncing off the walls with new ideas and childlike enthusiasm, she is dreaming up story book plots and researching for her new venture. A social-entrepreneur-in-progress, her plate is never empty and her glass is always half full. A Bangalore girl with a soft spot for Mumbai. more

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  ABOUT THE AUTHOR
IDEX Fellow and founder of collaborative blog Seize The Word. When she isn’t bouncing off the walls with new ideas and childlike enthusiasm, she is dreaming up story book plots and researching for her new venture. A social-entrepreneur-in-progress, her plate is never empty and her glass is always half full. A Bangalore girl with a soft spot for Mumbai. more

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