Responsible Lending: A New Industry Benchmark? (Royston Braganza)

By Microfinance Focus, on October 15th, 2010

From left: William Tucker, P.N. Vasudevan, Royston Braganza, John Conroy

Microfinance Focus, October 15, 2010 (Colombo) : Royston Braganza, CEO of Grameen Capital (India) began his discussion by underlining the need to regulate rural India. He said, “The loot and scoot practices of MFIs are still functioning. Most of the top MFIs and bulk of the MFI activities are located in Andhra Pradesh and there has been loan repayment crisis due to multiple borrowing in this area. Government is also set to monitor abuse of clients and high interest rates. Just yesterday in the news in India, following the reports of alleged suicides of a number of poor and rural people in the state because of coercive loan recovery processes of few MFIs in Andhra Pradesh, the government has banned unethical practices in microfinance, under the section of India’s penal code. It was considered to be like a homicide. I am suggesting to you how urgent some of the thoughts in this room are about responsible lending.

I urge you to remove the hats you came into the room with. You may be representing a MFI, NGO, investor or regulator, but I hope you will take off your hats and look at the sector passionately or dispassionately, whichever way that motivates you.

I liked the line in John’s presentation “Self regulation is the last resort of scoundrels”. We have to think about how a fresh MFI thinks when entering the market. Let’s say you have a new MFI. India has a huge market, 50 billion$ market and a huge opportunity for growth. He knows to start the MFI, he needs to build scale in this market and make it sustainable. This means in 2 years time, Series B, he has to raise 5 million. In 3 years time, Series C, raise 10 million, 4 years time Series D, raise 15vmillion. And 5 years time, go for an IPO. The new MFIs is constantly looking 3 years ahead and he knows that he needs to get the money, that he needs to go to the private equity investor and he knows that people in this conference room will give him the money because everyone is hyped up about investing in India. That will create a pool of equity for him.

The problem is the environment that we have created for MFIs. We all have a blame in it.

I think what we need to do is to tell an MFI to start a business and we (the big MFIs) will provide you with the funds. Then form a pool of 25 million by pulling together money from existing MFIs and tell the new MFI that if he meets social criteria, he can be free to dip into this pool. This means new MFIs don’t need to look beyond this point in time nor does he has to focus on how to get money for his loan portfolio to grow and forget other responsibilities of lending. With this capital pool, he can build sustainable capital and move to series B and series C.

We often stand back when we see a competitor become an over-commercialized MFI and criticize them for the financial objectives, but I wondered if I would be in the same position if I was running an MFI like that. We must aim to combine competition and regulation and not let others get murdered along the way as they grow. We build a train that is running too fast, and if we don’t check the direction of the train, we will de-rail.

William Tucker: Those are good ideas that you have proposed, creating a fund to help smaller MFIs in the market to have access to larger funds and be profitable. And based on social critierias, they would qualify for future additional funding .

Speaker’s Snapshot:

Royston Braganza is the CEO of Grameen Capital in India. Grameen Capital India Limited is a collaboration between Grameen Foundation USA, IFMR Trust and Citi, is a first of its kind social business promoting microfinance as an attractive asset class and enabling Microfinance Institutions (MFIs) develop wider access to the capital markets. Grameen Capital gathers various resources and channels them to MFIs.