Mabuhay!

not exactly from the subcontinent, but we had fun nonetheless:

http://picasaweb.google.com/tbolende/Mabuhay#

Cricket Hits the Bigtime

Last Tuesday a group of us attended the first IPL match held in Hyderabad and an experience it was as always. We purchased the cheapeast tickets we could find and competed with the diehard fans for a spot that could see both the pitch (field) and the scoreboard (they totally have a guy behind the board who changes the score!) The Indian Premier league is the new top level professional cricket in India, and it has attracted much fanfare; one article goes so far as to claim it is having a transformative impact on how Indians view economics.

The IPL is not without controversy, as the lucrative television contracts and sponsorships have allowed the teams to offer salaries a fair bit above that of other leagues. The resulting small exodus amongst players from many national leagues.

We were astonished to see [very tall] nearly nude, white women in glitzy outfits. The expasts are aware of this custom at NBA basketball games, the Indian men must have thought they won the lottery: one ticket provides soft core and the best game on earth- at the same time! There were many heads darting between the ‘action’…

What is great is that the IPL is opening sport to a completely new cohort. We were surrounded by fans just learning the wave and complicated group cheers.

Seeing Cricket live did raise my appreciation somewhat, now if they can just get the vendors to start selling a decent beer…

Unfortunatly, not the nearly nude cheerleaders...

Farm Waivers

Two interesting events the past week in the Indian microfinance space. First off, in what can only be described as a clear vote buying maneuver (a general election is likely later this year) the finance minister, Palaniappan Chidambaram, announced that all loans to farmers with Rs. 50,000 (US$1,250) or more outstanding would be forgiven. The plan, which allocates 60,000 crore (US$15bn) is equivalent to 15% of the entire national budget.

Many of India’s farmers are clearly in trouble. Due to a combination of price volatility and over-indebtedness (more on the cause of this below) 150,000 farmers have committed suicide since 1997. While this recent proposal does address the latter, as the waiving of loans is universal- loans that are performing well (the vast majority) will also be forgiven.

This is all somewhat ironic given other government policy. The Indian government promotes increases in agricultural productivity by requiring 13.5% of commercial banks net credit activity to be in the form of “direct agricultural loans"; as this increases supply to the segment, farmers are able to access loans at below market rates. The thinking goes that increased access to credit will allow them to make capital purchases and thus increase their productivity. So after years of shoveling credit onto farmers the government now seems is now using loan forgiveness is the correct , what will be the next weeks policy?

The good news is that there is no direct impact on microfinance- the scheme only provides for waiving of bank loans (MFI’s aren’t banks.) Also, only loans above Rs. 50,000 will be forgiven, much larger then the average Rs.8000 of microfinance loans. The greater worry comes when microfinance clients look at their wealthier neighbors who are having much larger loans forgiven- what about me?

The foundation of micro lending has always been to educate the borrower on basic financial principals and instill strict credit discipline. With these twin pillars in place MFI’s have been able to offer unsecured loans that achieve phenomenal rates of repayment. If the culture of credit discipline is undermined by the hope of loans being forgiven- the entire basis of the industry is at risk.

The other interesting event was the introduction by Reliance group of a dedicated microfinance fund. Initially it will be a debt only fund- which is great, MFI’s can always use more access to debt finance. Reliance generally moves very aggressively into new markets and everyone is a bit tense to see if this initial foray is the start of something bigger- offering microcredit directly to consumers?

Obviously this is a great thing- the more competition the merrier- and better for our ultimate goals; it is hard however, after pouring yourself into an organization- to welcome a very robust competitor into the space. We'll just have to work that much harder.

Admittedly, they do make great commercials….

and back...

Whew, exciting month. Headed back to the states for two weeks to be with my family in Washington-along the way I got to do some flying and spend some time in the snow with someone who missed me. Then headed to New York for a week and an awesome Microfinance conference. Padmaja and I were grouped with a team of bankers from Morgan Stanley for a study competition on capital structuring. Spandana competed wih 8 other MFI’s, mostly from Latin America and South Asia. We didn’t win but had a ton of fun, and learned a few things that we can take back to Hyderabad and the front lines.

It snowed in Manhattan, which was very beautiful- but in less then 24 hours I was back in the incessant inferno that is South India.

Fiscal year over here closes at the end of March and so all the banks are trying to clean up their balance sheets- deals aplenty to be done. Have been bouncing between Delhi, Hyderabad and Bombay the last two weeks as Spandana gets serious about wading into the commercial capital markets.

Spent an absolutely amazing weekend in the town of Hampi, many many ruins from the 14^th century capital of the Vijayanagara empire interspersed between hills covered in gigantic boulders. Check out some pics.

Microfinance sure hasn't slowed down while I have been away, will get some updates up soon. For now, check this out.

And then it is all ok...

Found out Wednesday that my Grandad had been diagnosed with cancer. Being separated from family during these times is definitely something I considered before coming over here, but it doesn’t lesson the feeling of just wanting a hug from my dad. Between abbreviated phone calls with family at home it has been a rough few days.

My first recourse is to start pounding away on the excel models, maybe microfinance can buy me a bit of karma. Then Thursday I got to trek across town for a different type of coping. LifeSpring maternity hospitals run perhaps one of the most innovative and inspiring socail enterprises I have seen; top quality, no frills, extremely affordable health care ($35/ delivery, inclusive of all consultations and medicines) done at the only level feasible in India- massive scale.

LifeSpring succeeds in offering a valuable service to those at the bottom of the pyramid by being led by a passionate, energetic entrepreneur; a rockstar core management team and a blushingly proud hospital staff “we wouldn’t work anywhere else.”

Being at the hospital and seeing the new parents, seeing their optimism- they are going to raise their children in an India where literally anything is possible. Absolute emotional high.

And this is one of the reasons it is so exhilarating working at Spandana- getting to partner with organizations like LifeSpring. We are placed at the nexus- a huge customer base that we touch every week; to the extent we are able channel meaningful products like maternity health to them- we can go far beyond credit in the impact we make. It helps you remember what can get lost in the maze of conference calls, models and business planning. At the end of this chain, we may have just given that little boy or girl a better chance to succeed.

Start timing us, lets see how fast we can scale this.

Microfinance Gets Rolling in China

Recently there have been signs that microfinance in China is finally ready to make an impact.

Due to their giant populations and rapidly expanding economies, China and Indian are often compared and contrasted: totalitarianism v. democracy, a manufacturing led economy v. a service led one- and while microfinance has grown rapidly in India, it has been rather stillborn across the border. Much of this is due to previous official resistance to micro-entrepreneurs that I suspect is largely rooted in official ideology.

While the Chinese government is showing no signs of openness in many areas, the economy is clearly an exception- and this embrace of liberal economics may now be spreading to microfinance as well.

Last fall the Chinese banking regulator, the CBRC, lifted many of the obstacles for foreign banks to begin operations, additionally it has been actively supporting foreign banks who target the rural demographic, by structuring pilot programs. It seems Citi, HSBC and Standard Chartered have taken the charge and are now dipping their toes in. China’s rural farmers are hugely attractive to them, a absolutly massive market- if they can gain access to them through microfinance, a formalized mechanism for hooking the rural poor to financial systems, so much the better.

Additionally, it seems Vikram Akula’s SKS- the darling of Indian microfinance, is unfurling plans to enter the land of the panda as well. With a pile full of cash and one of the most professional management teams in microfinance they will surely make a dent.

Also, I ran across this: a children’s book about microfinance- pretty neat.

SKS Goes in for a Third Round

Spandana’s neighbor down the street and competitor/ fellow lender to the poor (will explore this interesting relationship further in a future post,) SKS, has announced the largest equity financing round yet in Indian Microfinance. The deal- amounting to 147 crores (~37.5 million USD) while significant, will likely only be a brief tied over until a further equity infusion is required.

A peculiarity of Indian Microfinance is at play here. The regulating body for MFI’s, the Reserve Bank of India (RBI, India’s Central Bank) does not allow MFI’s like SKS and Spandana to take savings deposits. These deposits generally form a significant portion of the funds banks use for lending. In the absence of these funds Indian MFI’s rely on external debt (most commonly loans from banks) for the funds to lend to borrowers. Sorry, that was kind of a mouthful.

The RBI, like all central banks, has strict caps on the amount of such debt a MFI can take relative to its capital base. If they want to take on additional debt (to expand operations) they must take additional equity. Given the incredibly ambitious expansion goals most Indian MFI’s have, these equity rounds will be having with increasing frequency. Doing some quick math SKS will probably require additional equity toward the end of 2008.

So what are MFI’s doing with all this money? There is no shortage of ideas, expansion into China is one- more on this tomorrow.

Microfinance: The View From Goa

So after a generally very hectic January for most in the industry we got a chance this week to step back from operational goals and re-access the big picture- where will Indian microfinance be in 5 years? I am in the resort town of Goa on the Indian ocean, known for its laid back locals and cheap cashew liquor- what better place to contemplate India's poor?

Thursday and Friday many of the industry leaders (they didn’t notice me in the back row) in this space gathered for a workshop and two major topics seemed on everyone's mind:

Is microfinance becoming too commercial?

As most people I talk with can attest- I am unabashedly in favor of the trend toward commercialization. While many dissent this viewpoint as a betrayal of microfinance’s roots, as I witness changes in the industry I am discovering that this debate is increasingly becoming academic: commercial microfinance is here to stay. I contend this to be primarily positive simply because increased money allows increased scale. But that is not to say there is no danger in this approach- it can be all too easy to lose sight of the ultimate goal of helping the poor. Which leads to the next question…

How can we better articulate the social benefit?

There is evidence trickling in that microfinance is having real impact, I recently came across this study. The trick is formulating this to stakeholders [read politicians] to create goodwill for the industry.

It is a very peculiar accident that microfinance is held in rather high esteem (maybe too high) in the west but viewed skeptically in many countries where it operates. Indian MFI’s have in the past been victims of political whims, but not since the early 2006 (ancient history in this space) Krishna incident have we seen any major disturbances, the trick is to keep the growth on the rails.

Overall a very productive series of discussions; beaches and balance sheets- I suppose we can't complain too much.

Ready or Not… The One Lakh Car Arrives

Today Tata announced the arrival of the world’s most inexpensive automobile, smartly named the Nano- for months people have been calling it by its sale price: the 1 lakh car. That works out to approximately $2,500, not bad for a brand new car that looks decent enough and can even keep dry five at a time.

In the next few years competitors such as Fiat, Suzuki, Bajaj and even Honda and Toyota will surely rush in; copying efficient manufacturing techniques in a segment of the market that will be hotly contested. In that, Tata is producing much more then a car- it is creating an entirely new market segment; instead of waiting for India’s economic engine to raise incomes to them- Tata has come to the people by offering a car at an unbeatable price point. Will it work? And what will be its impact?

It is widely expected that many who currently ride motorcycles (that cost 40-50% of what the Nano will) have aspirations of trading up to a car that was previously cost prohibitive. Surely, the improvement in safety is a huge benefit of upgrading to the Nano. Motorcycles currently jam India’s roadways and continuously weave through traffic, I have seen multiple motorcycle related accidents in my short time here. This could have a real impact on traffic fatalities.

Not my photo, but common enough on the streets of Hyderabad.

India’s roads are among the world most dangerous; according to this study traffic fatalities per 10,000 vehicles was more then10 times higher then the US (and due to the methodology the real risk might be significantly understated.)

But at the same time India’s roads have to be among the worlds most congested and practically, my biggest concern is my commute. It takes twenty minutes of weaving and bumping through stop and go traffic in one of these to travel the 1.2 miles to my office. With roads all over India already crawling along, what will the impact be of replacing many of the motorcycles with a car three times the size?

I cant help but lament that many south Indian cities are following the arms race model; building ever more freeways in competition with car sales rather then investing in mass transit. Though easier said then done, political squabbles need to be put aside and more projects like Delhi’s wonderful metro be undertaken.

All of these theoretic’s called for some on the ground research. So in the name of investigation your correspondent jumped aboard a ‘two- wheeler’ today on our way out to one of the field branches for some MIS testing. Transportation by two- wheeler is indeed much more efficient then that of their four-wheeled brethren, we shaved 40% off the time spent waiting in traffic by those who opted for the luxury of an SUV.

So this all may be a mute point- will the masses give up the efficiency and savings for the comparative comfort and safety of the Nano? Anecdotally, it seems so. In my informal poll, mostly at work where most incomes range between $500 and $1000 per month, there is real enthusiasm. My co-workers, who for the most part are the first generation to leave their rural towns and villages, view car ownership not only as efficient transportation but also a definitive signal of their success. Check back soon as I may be blogging from the backseat of an auto during my hour long commute…

What Next for Indian Microfinance?

2007 was a busy year for microfinance. We saw the first IPO- Compartamos in Mexico, a major equity deal led by a premiere Silicon Valley venture capital firm, Sequoia Capital and many smaller funding deals involving both equity and debt. MFI’s have used this capital to expand operations beyond traditional areas and to deploy a wide array of new products. MFI’s now cover 20 million clients in India.

Additionally, the ecosystem that will drive future growth continued to expand. Multiple entrants released IT solutions targeted at MFI’s in 2007 and they will continue to tailor these offerings based on specific needs.

Mainline commercial banks became much more sophisticated in their dealings with MFI’s. For most MFI’s in India, term loans from the banks are their only source of debt finance- the lifeblood of their operations. 2007 saw the first move beyond the term loan model into more sophisticated debt instruments; this is great news as it broadens MFI’s access to capital and reduces their financing costs. We will doubtless see additional and ever more exotic financing deals happen this year- a CLO? a bond issue? We can only hope.

There is significant opportunity for the first IPO in Indian Microfinance to happen this year, and with it increased acceptance into mainstream business -for both good and bad. Expect Indian MFI’s to touch 30 million clients by the end of this year and be present in far wider geographic areas, especially the northeastern states of West Bengal and Assam; these areas have been a little late in joining the fray but several MFI’s, especially Bandhan are poised to ensure the region catches up quickly. Andhra Pradesh, India’s hotbed for microfinance is now largely saturated and so many MFI’s are looking to expand to neighboring states and beyond, competition is heating up, 2008 will be a veritable land grab in microfinance. Going back to an earlier post- lets hope that in the midst of this growth MFI's are able to keep in sight their social goals.

It should be an exciting year, continue checking back as the Indian microfinance story unfolds.

In some personal news, I got my first haircut and straight razor shave in India today. I wound through the back alleys of a neighborhood bazaar to a 'Mens Beauty Parlor.' A crowd of onlookers gathered to watch the gora attempt to explain he didn't want a faux hawk, it was rather entertaining for all.

In an update to a story I mentioned last week; Pakistan looks set to delay the planned January 8^th election in the wake of the assassination of Benazir Bhutto. This is an extremely contentious move as both the major opposition parties are now pressing to have elections held as planned. Violent protests are very likely, lets hope a compromise can be reached.

And lastly, the Economist has an interesting perspective on Dharavi- Asia's largest slum, check it out.

Christmas Cheer in Hyderabad

A crew of us headed out Monday for midnight mass that, due to a very well subscribed communion- drug on long past Santa’s last stop on this side of the world.

Tuesday evening we all got together for Christmas dinner and drinks, though no substitute for family, we all had a very nice time. I even got to meet Santa!

In some tragic news, Thursday evening the ex-prime minister of Pakistan, Benazir Bhutto was assassinated by suicide bombers after a rally in Rawalpindi. Bhutto, who has been very critical of the current state of emergency declared by Musharraf, was to stand for parliament in next months general election. Whatever your feelings about her politics- this is surely bad news for Pakistani democracy.

Ford Leans Toward Tata

While I was in Mumbai Friday news came that Ford is heavily leaning toward Tata Group, India’s largest conglomerate, for the sale of Jaguar and Land Rover. While the economic distress of the two luxury brands is no secret, the status of the marques make the deal significant; the city was abuzz with further news of India’s economic imperialism.

Unfortunately, I had very little time for sight seeing while in Mumbai- but was able to break away for a bit today for some exploration in the old sections of Hyderabad. I hopped down to the Charminar, next door Mecca Masjid mosque and the frantic bazaars. I got some pictures but none are nearly so impressive as this. I videotaped a bit of my ride through the area:

Last night we headed out to the Indian School of Business, about 20 miles outside of town. They hosted a large celebration for Alumni weekend that included a performance by Indian Ocean, one of India’s most popular homegrown groups- lots of fun.

The Positive Side of Microlending

By its very nature microfinance, the use of capitalism to help alleviate poverty, will thread a fine path between profits and social benefit. Microfinance is simply a tool that will be wielded in many ways. As such it will (and should) come in for critical evaluations of its both positive and negative impacts.

The granting to Mohammed Yunus and the Grameen Bank of the 2006 Nobel Peace prize was a dubious honor for the industry; it was the high water mark for a veritable flood of positive PR the industry has received over the past five years. No doubt, the industry has benefited from the exposure, organizations like Kiva, Microplace and Prosper owe their continued support to the popular recognition in the US of the impact of Microfinance. No doubt these organizations are doing good work, this is the positive side of the PR.

But at the same time, the industry has managed to severely over bill itself, Microfinance Institutions (MFI’s) have been at the forefront of this effort. Primarily using anecdotal evidence rather then rigorous studies, they have managed to create the popular conception of a poverty ending tool. Poverty is far too complex a problem to be solved quickly or by a single approach, microfinance has created a promise that cannot be fulfilled.

In Mexico, the practices of Azteca and Compartamos are anti-social. Not necessarily in absolute terms of the interest rate charged but because of the use of deceptive advertising that allow them enormous returns on equity- essentially, profit. For 2006, Compartamos had a ROE of over 50% - your $100k investment at the beginning of 2006 would at the end of the year be valued at $150k!

However, Mexico is a bit of an isolated case- due to increased competition, the vast majority of MFI’s do not see this level of profitability. In general, the interest rate charged needs to be put in context- it is not appropriate to judge MFI’s operating in remote areas of the developing world by the standards of the US financial system. There are both supply and demand side differences that make the comparison irrelevant. First, the cost for MFI’s of raising the capital needed to disperse loans is much higher: between 10 and 15% in India. Additionally, by coming to where clients live and work, MFI’ make the financial transaction very easy for the clients- they are extremely user centric.

The first question any rural borrower asks is what the procedure is for receiving a loan, followed by where and how often they can repay. Many of these borrowers are inexperienced with financial institutions and afraid to walk into a formal bank and fill out the mountain of paperwork, they have heard stories of friends being refused on technical grounds- they don’t want to waste their time. Second, borrowers don’t want to travel the distances to the physical branch offices of a bank and be bound by an inflexible repayment schedule. Repaying loans one week at a time is an advantage for many poor business owners; they have no proper mechanism for saving this weeks profits until the end of the month, they prefer to repay the loans as they receive the cash. These services require credit officers to come to the borrowers and significantly reduces the credit officer to borrower ratio- the provision of these services drive up costs.

On the demand side, Vikram Akula the head of SKS states it well “Returns on investment for micro-enterprises are extremely high. Studies have estimated returns from micro-enterprises fall in the range of 50% to 100%.” When these small business’s are able to maintain such profitability they are relatively inelastic to changes in the rate of interest- what matters to them is service.

Spandana charges 26% (in American terms) interest on its loans. Is this usurious? In the US context yes, but due to the very different climate in which it operates and the services it provides, I don’t believe so.

Is microfinance doing good? In most parts of the world, that is a tentative yes. My hesitancy is primarily due to a lack of credible studies to show the benefit (though this is changing, a study by this group on Spandana is due out in May.) But both anecdotally and theoretically it seems progress is being made. Whenever you increase the supply, as MFI’s do for credit, it reduces the price. This can be seen in villages where MFI’s are active- local moneylenders are forced to charge much lower rates- this is surely good news. Microfinance is no panacea, but slowly, it is helping to improve the lots of many.

On the personal front, I managed to get registered with the foreigners’ office without being extorted for a baksheesh, found an apartment with a guy who works at Acumen Fund- in a section of the city called Banjara Hills, will be nice to get settled in. Am headed off in the morning for Mumbai (Bombay) for a quick two day visit; will hopefully post a few pictures when I get back.

Welcome to Hyderabad

They didn't mention Saturday is a work day. I got to Hyderabad last Sunday after five fast paced days in Delhi that were spent catching up with a few old friends, gathering as much knowledge as I could on the state of Indian Microfinance from my very patient Lok colleagues; and at a couple of social events getting a chance to meet many expats who are here to work in this exciting country.

As many of you know I interned with Grameen Bank two years ago and had a spectacular time. Since then I have not quite been able to put to rest my keen interest in microfinance and South Asia; so I turned in my notice at TransUnion, said goodbye to San Luis Obispo (and my incredible friends there) and boarded a plane for India.

For the next six months I will be working on the ground, through Lok Capital, with one of their investees, an Microfinance Institution (MFI) called Spandana. I am incredibly excited. They are a top- notch organization comprised of bright, talented people- entirely devoted to helping raise living standards through the extension of financial services. They are as a Lok colleague put it "always trying to build a better mousetrap." When asked, people top to bottom will explain their pride at the organizations ability to cheaply offer highly customized credit to disadvantaged people, and especially Spandana’s operating expense ratio (defined as: Operating Expense/ Average Total Assets.) They are proud for good reason, as operating expense ratio is a rough proxy for the rate of interest they need to charge poor people in order to stay in business.

As of March ’07, Spandana had an operating expense ratio of 5.52%; this is nearly unheard of in the industry. For comparison, a few other well know MFI’s (Share, Basix, SKS and Spandana all operate primarily in Andhra Pradesh, India. By a significant margin they are the four largest MFI’s in India):

Share: 9.61%
Basix: 14.71%
SKS: 10.88%
Grameen Bank(Bangladesh): 6.90%
Compartamos (Mexico): 29.60%

This can be accredited to the ruthless (though sweet) eye for efficiency of the founder, Padmaja Reddy. An entirely tireless women, she has nurtured Spandana from a small NGO to now the largest MFI in India, by working 80hr weeks and overseeing nearly every aspect of the business.

And so, in a nod to increased efficiency I have learned that for the next half year or so I can look forward to one day off per week. During the course of introductions one of the senior guys quipped [half] jokingly “Tyler, we purposely didn’t tell you about the work schedule until you got here.” Haha, though on a serious note, I think it will work out- the people here are motivated, engaging and generally a joy to work with.

They have some big plans for the next five years, we are going to see if we cant help to put some of the process’s in place so that can happen (introducing a two day weekend is first priority.)

Overall, the process of outsourcing my life has gone rather smoothly. After two very long flights, immigration passed smoothly (I just knew there was going to be some problem with my visa), a taxi was waiting to pick me up at the airport and I was whisked away to a guest house (basically a bed & breakfast) provided by one of the founders of Lok. Lok and Spandana have been a huge help arranging accommodation, getting cell service, and generally finding the things I need. I am currently staying at a guest house that is attached to Spandana’s office, can’t beat the commute.

The food is tremendous. Hyderabad specializes in a dish called Biryani, a bit spicier then the food in the north, I really enjoy it. And when the day comes that I just cannot possible put down one more rice based meal, there is a subway in a mall across the street, haha. I am slowly getting re-acquainted with eating with my [right] hand and generally trying my best to avoid the taboo's of etiquette that I missed out on growing up in the US.

So, thanks for making it this far. In this column I hope to comment on some of the events that are shaping the fast evolving microfinance space and also share a bit of my experiences in this dynamic, thrilling country. I hope to post 2-3 times per week, so check back every couple of days or so.

On the agenda for this week, get out into the field a bit with Spandana, continue the apartment search, register with the Foreigners office (my first real experience with the dreaded Indian bureaucracy) and hopefully explore some more of bustling Hyderabad. Please keep your emails coming, it is great to hear from you.

Tyler

Incidentally, I just came across this very critical look at microfinance published Friday in Business Week, take a look and I will post some of my thoughts soon.