Hi Jan, there were two elaborate comments from your end and i had written two equally elaborate replies to them. my last reply was dated 3rd March 2011. today is 16th May 2011, nearly 2 1/2 months since my last reply. i had also asked you to share evidence of some serious allegations u were throwing at Equitas but so far nothing has come from your end on this either.

but i find that neither have you replied yet nor have you been able to come back and substantiate your allegations. in all fairness, having raised issues, you should either:

1. provide evidences necessary to substantiate the charges, or
2. seek further time from me for providing the same, or
3. apologise

look forward to your response
regards/vasu

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Hi Jan, nice to see u back again with a load of more questions. let me take them one by one:

1. Is Equitas part of the problem of over lending?

In a scenario of this kind, the common belief all of us tend to come to is that if a company is growing slowly they are not contributing to this problem and if a company grows faster, it has contributed to this problem. This is simplistic and generalising. The truth can even be exactly the opposite. The real answer lies in the actual practices of each company. as explained earlier, Equitas had an absolutely clear policy of not extending credit to people in urban areas if they already had loans from more than two MFIs and in rural areas if they had a loan from more than one MFI. We had put in place strong trainig and communicaiton to field staff not to exceed this and also random verifications by BM (25%) and risk team (another 10%) of cases to ensure its implementation. You could always come up with some exceptions where such rules were violated but i know out of my personal monitoring and overseeing the operations that we have followed this rule with probably less than 5% exception. This was one of the fundamental principles on which the company was built and hence I can say this with high confidence. Clients themselves never tell the truth when asked how many loans they already have. We make them fill up in the application form how many earlier loans they have and ask them to sign it but even then they dont fill up the truth which is most unfortunate. In the absence of a credit bureau it is difficult to find the truth in all cases. If only the clients had also cooperated by disclosing truly all their borrowings, it would have helped substantially.

2. Credit bureau

However we always realised we need authentic data base of the sector, to resolve multiple lending issue on a 100% certain basis and hence as mentioned in the previous posting, we had taken significant effort at both Tamilnadu level and at an all-India level and the result is that today we have a credit bureau up and running for the sector with data of about 8 of the top 10 MFIs and we hope in another 1 to 2 months we will have the balance about 35 MFIN members also on the bureau. This has for the first time given us authentic data of client's overall borrowings and together with either MFIN's code of conduct (not more than 3 MFIs and not more than Rs. 50000 loan per client) or RBI guidelines based on Malegam report would hopefully ensure that the risk of over lending to same client is resolved once for all. And if u check around, I am sure there would not be too many people who would grudge the seriousness and efforts put in by Equitas in this crucial initiative which is going to be a long term benefit to both borrowers and lenders. This is the culmination of nearly 2 years of focused effort

3. So is Equitas really denying involvement in being the cause of over lending inspite of being such a fast growth company?

As mentioned above, we had our policy very clearly in place that in Urban, if she has borrowed from more than 2 MFIs we don’t lend and in rural, if she has borrowed from more than 1 MFI we don’t lend. It is a fact that the members themselves never tell the truth and always hide the information on their total borrowings. Yet I am so convinced that we have put in place a very tight system of controls and monitoring mechanism that I am pretty confident we have not violated these norms in a majority of the cases. There would, I am sure, always be exceptions where we have violated these rules but I am sure it would hardly be even 5% of the total numbers. To my knowledge, many MFIs never had such a norm in place in their organization. Jan, if you are aware of MFIs in Tamilnadu who had such a norm in place over the last few years as part of their credit filters, I would be happy to have this list from you. Money lending is basically a banking business and requires license from RBI either in the form of a Bank or as an NBFC. It is easy to find out which are the banks or NBFCs which operate in an area since they are registered. Also they have to be of a certain size and above because of regulations on minimum capitalization etc. So, when I refer to MFIs above, we always took into account only NBFC-MFIs. You have mentioned about 7 MFIs operating in Trichy when we started there. If you are referring to NBFC MFIs, please do let me have the list since I feel this is wrong. However if you are also referring to non-RBI licensed lenders, then Jan, why talk of 7 lenders? In Trichy as in other places, there are literally hundreds of money lenders. We would not be able to count all of them and hence we stick to counting only NBFC-MFIs. Even the Malegam report recommendation talks of restricting lending to a member by upto 2 NBFC-MFIs but they are not talking of covering all type of non-RBI licensed lenders. If such lenders want to be counted, they should necessarily be licensed by the Regulators.

4. You need to back up your allegation or apologise:

You are alleging that Equitas caused over borrowing by clients on the general assumption that any company which grows must be doing this. This is like saying that all NGOs are frauds since we know that almost all of them are definitely fraudulent. While it is ok to talk of this in general, but if I specify an NGO by name and call him a fraud, I should do it only after I have enough evidence that they are doing fraudulent activities. Similarly if you want to specify Equitas as a company causing over borrowing problems to clients, then you need to have sufficient evidence before you can level such an allegation. Since you do allege this, I assume you have sufficient evidence for the same. We have nearly a million clients in Tamilnadu and to be called as a company causing over borrowing problems, we must have violated our lending norm to clients (mentioned above) in atleast 10% of the cases which is about one lac. If you have evidence for atleast this number of clients please do share it with me and I would admit to your charge. However if you don’t have any such evidence, then you surely have no right to throw charges like what you are doing and I would look to a graceful apology from you.

5. ‘Early years’ and how it makes sense:

You say that since Equitas is only a 3 year old company talking of early times does not make sense to you. You seem to be in a time warp. It took 150 years for the typewriter to change into a computer. But today it takes less than 150 days for the latest computer to go through dramatic change and become an unrecognizable machine. In Equitas, let me explain why it does make sense. Early times and late times are with reference to phases that a company goes through. If a particular phase lasts for say 5 years, that would be one block of time whereas if it lasts for 6 months and then a different phase starts off, then this phase has lasted just a few months. In Equitas we have already moved through 3 different phases viz: the beginning period where we built the branches and went through slow support from banks etc and then able to post some growth lasting nearly a year; next phase where the global credit crunch had its impact in India also and we went into a maintenance period where number of new clients serviced per month remained constant, lasting another about a year; next phase where there was a growth for a few months and then slow down in Tamilnadu and growth from the branches in West, lasting another about a year; and the current phase where we are seeing reduction in clients serviced and are awaiting stability to come in the sector in the form of regulatory certainty, robust credit bureau and authentic data base, regulations regarding multiple borrowing by same client etc. Once these things become settled down and clear, the next phase would begin where growth, holding on or shrinking the size would be decided based on the type of regulations that come in finally. So you see, even though we are only a 3 year old company we have had enough phases we have gone through and it makes sense to talk of early and later times

6. Social vs selfish investor:

Micro finance has for long held on to what I believe, is an untenable philosophy of eradicating poverty or lifting poor out of poverty. And this positioning probably helped many MFIs in their earlier years attract donations and grants too. However even as we started Equitas, we were very clear that as a company extending credit, we were in no position to claim to deliver poor out of poverty. We never took such moral high grounds. In fact through out our mission statement or other writings, we never use the word ‘poor’ or ‘delivering out of poverty’. Rather our purpose was very clear: if certain segment of the people were unable to access credit from the banks then we would reach credit to such people in a fair and transparent manner. This was our claim from the beginning and we have been consistently at this job of making available credit to such people in a manner which is very fair and totally transparent. I have already explained in the earlier reply the whole mission statement and what we have been doing over the last 3 years to fulfill every part of that mission statement. We have made a mission statement and we have consistently delivered on that. We were very fair to clients in pricing also. I had already explained our unique pricing philosophy where we never factored in actual cost of operation in determining our lending rate. Thus our first loan in Dec 2007 was at 25.5% reducing balance plus 0.5% membership fee at a time when the lowest lending rate in India by other MFIs was not less than 32%. Also we put a cap on RoE which protects pricing on a long term basis. These unique fair practices have been hailed by everyone associated with micro finance as global benchmarks. We are running a micro finance company, borrowing from banks on the one hand and lending to those whom the banks are unable to reach directly. While we can claim we are doing a service to them, since we also earn an interest income, you can’t take this claim of ‘service’ too far. But the big question is : are we doing this with a social consciousness? And this is where our fair practices come in and the whole team in Equitas down to our last staff are very happy working in a company which is extremely fair to its borrowers which I hope Jan, u also agree. If you have a difference on this pl do write back to me.

7. So am I a ‘social’ investor or a ‘selfish’ investor?

I am neither. I never started this company for the purpose of making money … nor started it for charity purpose. We put out a mission for the company and have consistently worked on and been delivering on it … period. I promoted this company and sticking to our initial mission … to this day! When you are quoting Woller I think you are a bit confused between what the business earns and what price the shares sell at. If a company earns let us say, a below market return (as woller puts it), of say 15% in a market where other companies earn at say 20% RoE, this does not mean that the shares of this company would be appreciating by 15% p.a also. If you take HDFC Bank in India, it has consistently given a RoE of around 20% over many years. However if you take the shares of this bank, in the last few years it has multiplied by many times and not by 20% p.a. And if you take the initial investment by the promoters at par, this share has multiplied by over 230 times over the last 10 years while the RoE is not 230%. The shares are valued on multiple factors of which RoE is one. Other things include quality of management team, quality of back end systems and controls in place, quality of branch team, ability to innovate on products, processes, IT capabilities, the prudence in its accounting practices, its transparency, quality of audits, ability to consistently deliver similar results, sustainability of the organisaton under crisis times etc etc. On the other hand, ICICI Bank shares are traditionally valued at a lower level by the market, even though they are almost twice as big as HDFC Bank because the market probably does not value them as high as HDFC on the above parameters. And please note that the RoE of ICICI Bank is also almost at similar levels as HDFC Bank!! If the share prices of Equitas has multiplied many times in the last 3 years it is because people have high faith on the company as a company which is built to last. It is not because we are a ‘selfish’ investor or a ‘non-social’ investor. I hope this is clear to you now.

8. Are investors in Equitas correct in claiming they are ‘social investors’?

For long micro finance has been called ‘social sector’ business. This might have been appropriate when it was purely a charity business. But even after NBFCs operate in micro finance it is still called ‘social sector’. I am not getting into semantics. You people can decide what sector this is. To me what is important is that do we have a clearly stated mission statement and are we living it in letter and spirit? If yes, we can be happy. And we believe in Equitas we definitely live our mission.

9. So are there really any social investors?

There are many people who are regarded as social investors such as Grameen Capital, Oiko, Manaveeya, Opportunity International, MSDF etc. But what are they really doing? They are funding companies either in the form of equity or debt at a stage which is the highest risky stage of the company. And always, if they invest in equity, it is at par and if they provide debt it is at a rate higher than commercial banks. If such companies do well, the investors make a good return; however if the companies don’t do well, they tend to lose value. So are they social investors? Or are they angel investors? What is the difference between angel investors and social investors? Both come in at an early and risky stage of a company, both invest generally at par and in a few investments, they get good returns and in a few, bad. To me it does look like they are all angel investors only. Anyway I don’t want to get into semantics as I said before and if you still believe these people are social investors and others not, pl do hold that view. I don’t see any relevance for the same. And don’t tell me social investors don’t push companies to get high RoEs while angel investors would do this. The investors never push the promoters on anything. If a company pursues high RoE and high profit route, it is because the promoter wants to do this and not the investors. If the promoter is clear from the beginning of what the company will deliver, the investors come with clear knowledge and there is no way they push for anything higher after that.

10. Leveraging at company level and customer household level:

At the company level we have always been highly prudent in leveraging and as a policy we never go below a CAR of below 20% (including off-book), far higher than statutory requirement. As far as leveraging at household level of customer is concerned, as elaborately mentioned in my previous reply also, we have always been worried about this and put in many efforts both within the company and at the sector level to address this risk. I have elaborated these many times over and if you still have doubts on this pl do write back again

11. Current crisis situation and managing investors while satisfying client needs:

You talk of the investors who have invested in Equitas on the belief of a strong growth in future which looks impossible to reach in the current situation. So you wonder how we are going to “satisfy the investors on one hand and to seek sustainable solutions for the clients in the current crisis on the other hand. Even an optimist may probably say that this is nearly impossible.” Jan, you always seem to think of everything as a 1 and a 0, a win and a loss. You seem to believe that either the investor wins or the clients win. Either we can satisfy the investors or we can seek sustainable solutions for the clients etc. But please note neither business nor life is a zero sum game. Sustainability comes not in one winning and the other losing. It comes by everyone moving up together. Let me explain how Equitas plans to ‘satisfy’ its investors while also being very good to clients:

a. In micro finance we will continue to either shrink in size or remain where we are till two things fall in place:

- New regulation expected from RBI which would bring regulatory clarity to the sector

- Addressing the risk of over borrowing by clients through a combination of credit bureau which has just got functional and regulation on number of loans that a borrower can take from MFIs

Once these happen we review the situation and take further course of action. Since Equitas is already run on extremely fair practices including our own internal lending rate cap, margin cap etc, we believe that as and when the regulation comes in place, we are likely to be one of the few MFIs who would be fully compliant with any stringent regulation. In fact Equitas is almost wholly compliant with the Malegam recommendations and there are hardly any changes we need to make to be in line with this. This is probably why most people have a liking and respect for Equitas

b. Diversification:

i. We had applied to NHB for a license for our subsidiary Equitas Housing Finance P Ltd in May 2010 and the same has been received recently. We expect to commence operations in the next few months. This would be focused on self-employed businessmen buying what is referred to as affordable homes. The banks are unable to reach this segment given the difficulty in credit assessment which we hope to fill in

ii. We are also commencing another subsidiary in which we would be undertaking used commercial vehicle financing, which is again addressing that segment of the population where banks are unable to reach

We have significant amount of managerial capabilities on these new lines of businesses which gives the confidence to the investors to approve these business plans. We expect to be able to create value for our investors through a balanced growth over a diversified product lines. And at the same time, we hope to continue to be providing high quality service and fair pricing to our micro finance clients. The micro finance clients would continue to be provided our various other social services too which we have commenced such as free medical check ups and treatments, vocational skill development training programmes, food security programmes, education support for their children etc etc.

So Jan, to conclude, I would suggest that you don’t keep proceeding on the path of ‘either investors gain or clients gain’. There is always a mid path to your line of thinking .. of being an extremely friendly and useful service provider to our clients in the most ethical manner possible and also provide value to our investors. This is difficult, needs total clarity and conviction of what we are doing and tremendous execution skill. And practically everyone who has visited us have expressed confidence on Equitas on this philosophy. You must stop throwing allegations in the air. If you are serious, please do visit us at any time of your choice and understand us better.

Dear Mr. Vasudevan,
Thank you for your contribution. I think you are right that an investor should be expected to walk out of the deal if the principles of the investor are not good even if the investment is likely to lead to a good and healthy financial return.
I know an investor who has invested INR 20,54 million in an mfi. Besides this initial investment, the investor is also entitled to subscribe upto 2.000.000 equity shares of the company at par (!) value of Rs 10 per share over a 3 year period. That would mean that, in case he would subscribe to the options the investor would have invested in 4.054.000 shares.

In the latest publicly available information of this mfi ( the annual report 2009/10) it is mentioned that two new investors paid a premium of Rs 136,20 per share. The said investor thus would virtually (!) have increased the value of his shares from Rs 40,54 million to Rs.592 million (equivalent to USD 12,8 million). The net profit would then be Rs. 552 million (equivalent to USD 12 million) in just a little more than 2 years! Not too bad for an investment that is supposed to contribute to poverty alleviation.

But what about the principles of this particular mfi? The mfi is well known because of it’s transparency and it’s systems, professionalism and efficiency. The mfi is applauded for the fact that it was able to grow from 0 to 1 million clients in just a little more than 2 years.
This means that every week approximately 10.000 clients per week were added or appr. 2.000 new clients on a daily basis. To be able to do so the mfi had to rigourisly hire new staff from scratch. All staff were new and not exposed to microfinance unless the staff were poached from other mfi’s. So is the case with clients. It is nearly impossible to organise new groups with inexperienced staff unless the staff and clients are already known to microfinance. It is much easier to work with clients who are already exposed to microfinance through the formation work of others (also referred to as ‘cannibalisation’). The help of ‘broker agents’ or ‘collection agents’ also makes the expansion a bit easier. Nowadays this is common practice in India. This was confirmed by Mr. Alok Prasad of MFIN at the Responsible Finance Forum, the Forum to celebrate the signing of the Principles for Investors in Inclusive Finance.
We have now learned the consequences of pouring out loans on poor people the hard way. It lead to over indebtedness, coercive practices etc. What does transparency in pricing mean for a client who already has the burden of 5 other loans? A client might be better off with one tailored made loan instead of accepting too many loans (including one loan with the highest level of transparent pricing!) which are beyond the repayment capacity of the client.

Unfortunately this particular mfi used the business model of poaching of clients and/or cannibalising SHGs clients which were formed by other mfi’s. Because of the existing practices at the field level the loan officers of this mfi now face the heat. Instances are reported that loan officers have been beaten up out of frustration of the clients and their community. Is this the true development that we wish to achieve?

So Mr. Vasudevan, may I ask you the question: if you were the investor in this mfi, would you find this highly profitable (virtual) return justified while the principles of the mfi are questionable as may have become clear from the above? Would you stay or would you walk out?

Dear Mr. Vasudevan,
Thank you for your contribution. I think you are right that if an investor should be expected to walk out of the deal if the principles of the investor are not good even if the investment is likely to lead to a good and healthy financial return.

I know an investor who has invested INR 20,54 million in an mfi. Besides this initial investment, the investor is also entitled to subscribe upto 2.000.000 equity shares of the company at par (!) value of Rs 10 per share over a 3 year period. That would mean that, in case he would subcribe to the options the investor would have invested in 4.054.000 shares.
In the latest publicly available information of this mfi available ( the annual report 2009/10) it is mentioned that two new investors paid a premium of Rs 136,20 per share. The said investor thus would virtually (!) have increased the value of his shares from Rs 40,54 million to Rs.592 million (equivalent to USD 12,8 million). The net profit would then be Rs. 552 million (equivalent to USD 12 million) in just a little more than 2 years! Not too bad.

But what about the principles of this particular mfi? The mfi is well known because of it’s transparency and it’s systems, professionalism and efficiency. The mfi is applauded for the fact that it was able to grow from 0 to 1 million clients in just a little more than 2 years.
This means that every week approximately 10.000 clients per week were added or appr. 2.000 new clients on a daily basis. To be able to do so the mfi had to rigourisly hire new staff from scratch. All staff were new and not exposed to microfinance unless the staff were poached from other mfi’s. So is the case with clients. It is nearly impossible to organise new groups with inexperienced staff unless the staff and clients are already known to microfinance. It is much easier to work with clients who are already exposed to microfinance through the formation work of others (also referred to as ‘cannibalisation’). The help of ‘broker agents’ or ‘collection agents’ also makes the expansion a bit easier. Nowadays this is common practice in India. This was confirmed by Mr. Alok Prasad of MFIN at the Responsible Finance Forum, the Forum to celebrate the signing of the Principles for Investors in Inclusive Finance.
We have now learned the consequences of pouring out loans on poor people the hard way. It lead to over indebtedness, coercive practices etc. What does transparency in pricing mean for a client who already has the burden of 5 other loans? A client might be better off with one tailored made loan instead of accepting too many loans (including one loan with the highest level of transparent pricing!) which are beyond the repayment capacity of the client.
Unfortunately this particular mfi used the business model of poaching of clients and/or cannibalising SHGs clients which were formed by other mfi’s. Because of the existing practices at the field level the loan officers of this mfi now face the heat. Instances are reported that loan officers have been beaten up out of frustration of the clients and their community. Is this the true development that we wish to achieve?

So Mr. Vasudevan, may I ask you the question: if you were the investor in this mfi, would you find this highly profitable (virtual) return justified while the principles of the mfi are questionable as may have become clear from the above? Would you stay or would you walk out?