United Prosperity Team Blog

Last month we visited Ajiwika, our first partner microfinance institution based out of Jharkhand, India. We were very keen to meet some of the entrepreneurs from Ajiwika. We were joined by Tanay Chakravarty, the CEO of Ajiwika and some of his staff.

Our first visit was to Chakri Pahar which is around 10 miles from Deoghar where Ajiwika’s main office is located. We were greeted by several entrepreneurs and their families including Barki Devi and group, and Bandana Devi and group. Many of the entrepreneurs belonged to the Santhal tribe and we received a traditional Santhal welcome where they offer a pot of water with flowers to their guests, which was a wonderful experience. Shortly thereafter we started talking to the entrepreneurs on how the microloans had helped them – Barki Devi bought a bullock with the loan, Bandana Devi increased the inventory in her shop, Juba Hembram and a few others bought a cow.

Most of the stories showed signs of incremental progress, but we were impressed how Shaila Devi and her husband Naresh Murmu had quickly grown their business of making ventilators for houses. Naresh Murmu had been working as a mason for sixteen years. He had the skills but he did not have the money to start his own business. On getting the microloan, he started his business and now he has also employed two other people.

We were also delighted to learn that all the children in the neighborhood were going to school. In some cases, some families who were now enjoying a higher income after taking the microloan were enrolling their children in private schools instead of the government run schools which offer free education. While most of the women could only sign their name but could not read and write, their determination to make sure that their children have a good education was truly noteworthy.

As we were about to leave, Barki Devi sang a Santhal song to mark the occasion. The song was about coming together to create a shared prosperity for everyone. The experience was truly overwhelming and I still cannot fathom how she could choose a song so apt and profound on that occasion.

We visited more entrepreneurs at Nilkothi. Nilkothi is in the neighboring state of Bihar, which has recently experienced very good economic growth. The entrepreneurs here including Shanti Devi, Savitri Devi and other members were mainly involved in agriculture. All the entrepreneurs were highly appreciative of the fact that the microloans are disbursed quickly at their door step. They were excited to see pictures of guarantors coming from all over the world to support them.

We also visited Ajiwika’s branch offices and their head office. The branch offices are very functional and consist of two rooms with a kitchen and an attached bath. One of the rooms serves as an office and has a computer, two desks, a few chairs, a cupboard and a white board for keeping a scorecard of the loans. The staff involved in running the branch sleeps in the office at night.

The impact of the guarantee on Ajiwika has been remarkable. Six months back most of the smaller microfinance institutions like Ajiwika were struggling to raise funds because of the financial crisis. While development lenders such as FWWB and SIDBI were making some loans to smaller microfinance institutions, most of the banks had become extremely conservative in their lending. Banks often tend to work in an informal syndicate. If one bank lends then other banks are more inclined to follow. The converse also holds true, if the more development oriented banks become conservative, then the rest of the banks follow suit.

UnitedProsperity.org’s guarantee enabled one bank to lend to Ajiwika. Now that a mainstream bank was lending to Ajiwika, over the next six months several other banks have approved loans to Ajiwika.

The guarantee has had a catalytic effect. Not only did we directly support the entrepreneurs on our website, but we also provided the spark for freeing up funds locked with other banks to support many more entrepreneurs who are not listed on our website.

Barki Devi’s song of coming together to create a shared prosperity is apt indeed!!

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Readers may recollect, the previous interview with Mr. N.Srinivasan on microfinance in India. In the interview he had also suggested policy measures for the new government..

I am delighted to share with you, Mr.  N Srinivasan’s ‘ Microfinance agenda for the new government: Open letter to the new Finance Minister of India’.

Mr. Srinivasan will be participating in the discussion on this blog so please feel free to comment, critique and add your suggestions. Also please tell your friends and people involved in Microfinance in India and other parts of the world.

Thank you very much.

Bhalchander

Microfinance agenda for the new government: Open letter to the new Finance Minister of India

Dear Honourable Finance Minister,

The Indian electorate has returned a stable government to power which should facilitate the smooth passage of important policies and legislation. As one of the most versatile and experienced ministers in India, you have in front of you an enormous opportunity to empower more than 75 million microfinance clients(1) who also voted during the elections. With suitable policies you can enable banks, Microfinance

N Srinivasan

Institutions (MFIs), Non Government Organizations, Self Help Groups and thousands of people who have dedicated their lives to the betterment of our people to meet the aspirations of livelihood development and viable financial services of the served and yet to be served microfinance clients.

The microfinance sector seeks the continued support from the new government. With the growth of microcredit and the increasing aspirations of the people it is now time to look deeply into certain aspects which have now acquired an even greater importance.

1) First on the microfinance agenda is the microfinance law. With great hope the microfinance sector approached the previous government which suitably responded with a microfinance bill after consulting the sector at different levels. But the bill lapsed with the dissolution of parliament after its term was over. Now a new microfinance bill has to be brought in to ensure vibrant growth and effective regulation of the sector. You have the opportunity of doing the exercise de novo as the earlier bill had scope for several refinments. The new law should focus on functional regulation of those in microfinance – not form of institution based regulation as was attempted earlier. Customer protection is a critical issue that should be addressed in the law.

2. A clearer articulation of the stance towards Microfinance Institutions (MFIs) mobilising savings would be timely. You would be aware that the banks are still not in a position to provide savings services despite a few million “no frills accounts” (2). Allowing MFIs to mobilise savings on their own account or as correspondents of banks would improve availability of savings services to the remote and poor populations. Some of the limitations in the existing guidelines on banking correspondents need a review to accelerate availability of savings services.

3. A deposit insurance facility could secure savings of people in MFIs (e.g. Vietnam has a facility for this). This would increase regulatory comfort in allowing MFIs to mobilise savings. The Deposit Insurance Corporation could extend its existing cover to MFIs as well.

4. The refinance facility(3) available to banks from the Reserve Bank of India (RBI) and other sources should also be available to MFIs. The MFIs’ needs are smaller, but are dire and funding them satisfies a critical segment of vulnerable population. The facility could be set up in the public sector and made merit based without discretionary allocations. This would go a long way in ensuring funds flow to the sector even during periods of recession and financial meltdown.

5. The Centre should have an urgent dialogue with the States on issues relating to legitimacy and relevance of MFIs. Currently State governments also run their own independent microfinance programs. State governments could multiply the impact of the resources they deploy towards microfinance if they partner with microfinance institutions. Hence they should be actively encouraged to support microfinance operations by partnering with MFIs and the current microfinance infrastructure. This measure will not only put an end to intrusive and at times abrasive interference of local state officials in microfinance which is not healthy for the sector. The current state run programs can be gradually transitioned to MFIs so that the poor clients are not impacted.

6. The governments (centre and states) have several schemes that offer capital and interest subsidies to borrowers from banks(4). Such selective application of subsidies through select banks distorts the market, influences borrowers in their choice of banks and increases transactions costs of the customers. If the government has to pass on subsidies or transfer other benefits to people, the MFIs should also be eligible to participate in such schemes. This would ensure that the government is not a party to setting an uneven playing field.

7. The financial inclusion drive should undergo a qualitative change. The focus on numbers should give way to real access to financial services and including clients. The present efforts by and large start and end with opening of an account to meet mandates set by the RBI and as a result most banks end up doing the bare minimum. Doing business with included clients should become a valid objective in the drive towards total financial inclusion. This needs to become the corporate philosophy of banks engaged in inclusion. Perhaps, you may want to consider giving financial incentives to banks to work with low income clients so that the goals of shareholders, officers and employees of banks are aligned to making low income clients a significant source of revenue.

8. Lastly, financial inclusion measures have ignored MFIs and Primary financial cooperatives. These are the institutions that have the network and human capacity in the hinterland to provide financial services. Measures to strengthen and incentivise these structures to play a major role in financial inclusion would help the excluded population more than the other efforts targeting commercial banks.

Most of these require policy responses. Given the right policy environment, I am confident that the microfinance sector will perform and surpass your expectations. The perceived complexity and high costs (of designing financial sector policies that improve livelihoods of poor) should not deter the government nor make it defer the policy response to a future date. A large sector with more than 75 million poor but eager clients awaits your response; please help the clients empower themselves towards a better future.

Yours inclusively,

N.Srinivasan

Author – State of the Sector report - Microfinance India 2008

Shrin54[at]yahoo[dot]co[dot]in

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Bhalchander: It is my great pleasure to have with us on email Mr. N Srinivasan, author of the ‘Microfinance in India: State of the Sector Report 2008’. The unabridged report is also available in several bookstores including amazon. Mr. N Srinivasan is a development economist and a career development banker. A postgraduate in economics from Madurai Kamaraj University, he also has a certificate in training and development from the University of Manchester. He served National Bank for Agriculture and Rural Development (NABARD) for about 25 years of which last six years were in the capacity of  Chief General Manager.

After leaving the bank, he is pursuing a career as a freelancer and has been a consultant to World Bank, IFAD, UNDP, UNOPS, GTZ, Frankfurt School, Sir Ratan Tata Trust, Access Development Services and Government of India.

 And thank you very much for taking time from your busy schedule to be with us. 

Bhalchander: The Microfinance in India: State of the Sector Report 2008 is a very comprehensive report. Could you tell us in brief about the methodology you used for the survey?

N Srinivasan: It is difficult to fit in the preparation of the report to a defined methodology given the size, complexity and multiplicity of stakeholders in the sector.  Interviews, surveys, dip stick studies, focus group discussions and literature reviews were all used. Mostly secondary information made available by NABARD, Sa dhan, Reserve Bank of India (RBI), Insurance Regulatory and Develoment Authority (IRDA) and others were used to analyse macro trends.  Study and research outputs of several individuals and organisations were also examined and used to validate the voices from the field.  Primary information and client/practitioner views were gathered during field visits – I was on the road for more than eight weeks.  About ten seminars and conferences gave insights in to certain aspects of the sector. UN Solutions Exchange ran two questions on their web platform which produced information from different sources.  Weaving all the information from different levels and sources in to a cogent report was the tricky part.

Bhalchander: The title slide of your presentation is very interesting. It says “In Search of a ‘mission beyond growth’”. Could you please elaborate on that?

N Srinivasan: The last two years saw vigorous growth.  But growth cannot be not an objective; it is a path to somewhere.  Where- is the question that the sector needed to ask.  With all the efforts and resources are we serving “our customers” well and effectively is the question.  Most growth has been planned in pursuit of institutional aspirations – not necessarily for improving quality and effectiveness of services to the clients.  Hence the need for “mission beyond growth”.

Bhalchander: You state that the intensifying competition is not entirely leading to positive results. Could you please elaborate on that?

N Srinivasan: Competition has pressurized MFIs in to cutting corners in client acquisition, servicing and monitoring processes.  Offering higher loan sizes just as a competitive response without an appropriate appraisal, financing of existing clients of other MFIs without considering their repayment capacity, poaching clients from others by making enticing offers thereby introducing clients to shopping and MFI hopping and a focus on increasing client and loan base without adequate risk management systems are some of the consequences of escalating competition.  Competition is good for the customer as it improves product quality and reduces costs in the short term.  But these improvements may be temporary, if unfair competition destroys some of the competing institutions.  The customer would tend to suffer in the long run.

Bhalchander: The presence of MFIs is concentrated in regions which are well endowed and where the entrepreneurs (clients) are relatively better off, while the less endowed regions and the poorer clients do not have access to microfinance. Do you think increasing competition will eventually make sure that all regions and all entrepreneurs are reached or would we need additional incentives or policy measures to make that happen?

N Srinivasan:  Competition  is limited – almost non-existent- in the less endowed regions.  Poorer people are last choice clients and do not gain easy access to finance.  Competition would fill in gaps in well endowed areas and among better off clients.  For the less endowed areas policy interventions and financial incentives are needed.  The financial inclusion campaign with the support of two funds can play a very significant role in extending frontiers of microfinance to remote and underserved areas.  But policy push should result in banking system and MFIs making inclusion a “ business prospect” rather than a CSR obligation.

Bhalchander: India is perhaps unique in having two major models of microcredit. One is the traditional Bank- Self Help Group (SHG) model and the Grameen replicator model followed by most MFIs. Based on your experience and recent observations which model is proving more effective in lifting people out of poverty?

N Srinivasan:  Studies show that SHG model where it has been in existence for a long time (five years or more) has an impact on poverty.  The NCAER study finds evidence that savings income, expenditure on education and health  have all  increased.  I would believe that MFIs would also have a similar effect where they have provided loans to same clients over a period of time.  But given the present small size of loans in both the models, it is difficult to envisage a rapid decline in poverty.  The loans are not sufficient to cover investment in livelihood assets that can produce a poverty mitigating income.  In fact the loan sizes need to be about ten times the present average to provide a base for poverty alleviating income for a family.  Credit, we are reminded is not a solution to poverty.  There are other enablers necessary such as access to markets, appropriate technology, skill sets, input availability and infrastructure.  Institutions that have managed to provide/ensure  these linkages in addition to finance have been more successful in addressing poverty.

Bhalchander: There has been huge and rapid growth of the larger for-profit MFIs. Many of them seem to have adopted a strategy of touch and move. i.e. They make microloans to a few people in a locality  and then move on to another locality, rather than truly get involved and penetrate a given locality. What is the impact of this strategy on the clients and the MFI?

N Srinivasan:  The “touch and move” models result in high transaction costs, low revenues per client, low ability to manage risks, render monitoring and supervision of operations difficult due to the expanded span of control and impose higher costs on the customer.  Small loans leave the customer open to poaching by other lenders. While widening is necessary for inclusion, deepening of services would lead to greater customer loyalty, higher revenues per client and lower transaction and risk costs.  Consolidation of business in each location before moving to new locations would better serve the interests of MFIs.

Bhalchander: Most of the funds go to a select few for-profit MFIs who are on a rapid expansion path. They get equity more easily from investors as they have the potential to go IPO. Since they have access to equity, they are also able to access bank loans on favorable terms and grow very rapidly. On the other hand, smaller MFIs that are more localized find it very hard to raise funds. Given that capital is limited, is there any reason why smaller, more localized MFIs should be supported rather than only support the larger ones as seems to be the trend today?

N Srinivasan: A good question.  First of all the notion that an MFI needs to be very large to be effective has to be dispelled.  The paradigm relevant in banks that have multi-location, multi-business  clients is not relevant to MFIs where clients are small and ticket sizes are also small.  Most pan-Indian MFIs would tend to increase their costs of management and control on account of extended spans and large complement of staff.  The standardization that takes place to make the business manageable would leave little scope for innovation and no flexibility to respond to client specific requirements.  In many ways such large organizations would be software driven and not by local human intellect. Microfinance is relationship banking to the core.  Hence I would venture to say that small MFIs should be supported to find the right size.  Equity, quasi-equity, long term loans and guarantees are tenable ways of financing such institutions. 

Equity as the dominant option requires large MFIs so that the investor gets a viable exit strategy; hence there is a mutuality of interests among those wanting to grow huge and those wanting to invest in equity with a ‘return’ consideration.

Finding the right size is the challenge – one of the issues is sustainability, another risk management across clients and activities in the loan portfolio, a third is the absolute cost of regulatory/supervisory compliance which is the same regardless of size.  But a critical consideration should be at what size the MFI could still be sensitive to the client’s needs.  The short answer is that we should prioritise small localized MFIs for all support.

Bhalchander:  What strategies should smaller MFIs which are either NGOs, societies, S.25 companies or cooperatives adopt given that they are likely to find it very difficult to transform into for-profit Non Banking Finance Companies(NBFCs) with the financial crisis and still continue to serve their clients? Is member owned co-operative which can also mobilize its own savings a feasible option?

N Srinivasan: Member owned forms are feasible, but slightly difficult option.  There are member owned and managed for profit companies, Mutually Aided Credit Societies, conventional cooperative societies that are successful. There are a dozen examples of member-owned MFIs that work successfully. These could be the models that other transformation candidates could emulate.  An important caveat is that such institutions take three to five years to stabilize; so the threshold of patience should be high to give such institutions the space to grow and psopper.

 If transformation is to ensure continuity and sustainability of access to finance, the NGOs could also think of becoming Banking correspondents of banks.  With more technology entering microfinance space, banks are willing to use NGOs to service microfinance clients.

Bhalchander: Some of the large MFIs in India have reached sizes which are not common in other parts of the world. Moreover they are purely microcredit institutions with no access to internal funds unlike Grameen Bank for example. And further they are for-profit entities with investors which also include Private Equity funds and Venture Capital apart from a few socially responsible investors. Such scale and structure is not found anywhere else in the world. What do you think are the emerging risks to banks which lend to them, their clients and to the organizations themselves because of this aspect which is so unique to India?

N Srinivasan:  We might find a few large MFIs  in other countries too. Some MFIs have targeted growth and size and have moved ahead.  They have the appropriate models for expansion of business.  But customer comfort may not always be a priority.  They offer uniform products regardless of clients’ livelihood investments and cash flows.  Sustainability of fast paced growth and retaining clients after three or four cycles of lending with the same loan product are concerns that would have to be addressed.  The high profits come out of an ability to price the loan – poor clients pay out  from their capital or a new loan.  Whether borrower would be sustainable at any level of interest rates? - the long term future of the MFIs depends on a study of interest rates on loans taken out of desperation and loans taken for livelihood activities.

Bhalchander: What can the microfinance sector in India learn from other countries?

N Srinivasan:  Capacity building  approaches, induction of relevant technology,  regulatory practices and building the profile of microfinance are some of the areas where we can learn from others.

Bhalchander: If you were to suggest 5 policy measures to the new government which have to be implemented in the next five years to improve the lives of the poor through microfinance, what would those be?

N Srinivasan:

1.  Targeting livelihoods and incomes among the poor so that financial services can offer relevant services that address poverty.
2. A new microfinance bill that would focus on sector regulation – not institutional/model regulation.
3. Enabling savings mobilization by the sector either on own account or as correspondents, with the backing of deposit insurance through Deposit Insurance Corporation.
4. Funding for investment in new customer acquisition for MFIs and banks to achieve financial inclusion objectives
5. A low cost bulk funding facility that would finance MFIs  for on-lending to defined microfinance clients so that interest rates to the borrower could be kept affordable and MFIs themselves would remain sustainable.

Bhalchander: Mr. Srinivasan, thank you very much for being with us. We wish you success in your efforts to educate all stakeholders in microfinance and in the process building a vibrant microfinance sector which offers a hand up to the poor.

Mr. Srinivasan will be taking additional questions from readers posted in the comments, so please feel free to pose your comments and questions.

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My visit to India last month gave me a great opportunity to talk to people and get a first hand assessment of the impact of the global financial crisis on microcredit programs. Yesterday I also happened to read a recent Fitch ratings report on microfinance and it gave me an opportunity to compare its findings with my own observations.

 Fitch ratings believes that there is growing evidence that the larger, more integrated players in this sector are experiencing increased pressures. Given the concentrated nature of the industry, with the 100 largest microfinance institutions (MFIs) estimated to account for 80% of sector assets and 70% of sector borrowers, Fitch’s view is that it will be difficult for the microfinance sector to be immune to the global financial crisis.

Talking to banks and some of the MFIs, I did not get an impression that the ability of the larger for-profit MFIs to raise debt (loans) in the short term from local commercial banks was severely affected. Perhaps this may be because banks in India are required to allocate a certain portion of their lending to priority sectors like microfinance. Since most commercials banks do not lend to smaller MFIs, I think the larger for-profit MFIs have multiple banks to shop around for their debt and thus are able to raise commercial debt to a reasonable extent despite the global financial crisis.

I also met with people at AccessDev, an MFI network in India. Through its AmFa initiative, Access supports 110 MFIs, most of which are smaller MFIs working in remote and under-served regions.  As per Access and some of the MFIs I spoke to, smaller MFIs are finding it increasingly difficult to get fresh loan approvals.  This problem is compounded because only a few banks and development institutions such as SIDBI, FWWB, HDFC Bank and Axis Bank lend to smaller MFIs. 

Thus my assessment of the impact of the financial crisis at least in the Indian context is that Microfinance as a whole is likely to see lower growth and smaller MFIs will get impacted more severely than the larger MFIs.

On a separate note while in India, I also attended a Panel discussion where Vijay Mahajan the founder of Basix, India was a panelist. One of the points he mentioned was that MFIs are increasingly finding it difficult to raise equity. Discussions with the team at IFMR trust also gave me the same impression. MFIs need to raise equity because most banks typically lend to MFIs only if their capital adequacy ratio exceeds a certain threshold. Greater equity leads to a greater capital adequacy ratio. (Check http://www.themanagementor.com/enlightenmentorareas/finance/FIFS/CapiAdeq.htm  for a more detailed discussion on capital adequacy).

Typical investors in equity include microfinance focused funds like Unitus, foundations like the Michael and Susan Dell foundation, private equity and venture capital firms. I think equity investors are increasingly finding it difficult to raise funds from their investors because of the global financial crisis. If MFIs are unable to raise equity then in due course they will find it increasingly difficult to raise debt from commercial banks and serve their clients.

Given these trying times, I think it is all the more reason that the community at large should increase the support for microfinance and help MFIs and poor entrepreneurs tide over this crisis.

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Continued from ‘The First Break-through’.

By February, we had gathered additional momentum. Chiradeep Vittal joined the team and soon after Amar Singh, Ramkumar, Ramya and Vinay started building the system at a fast pace. We would have quick two week development iterations followed by testing done by Suriya Prabha and Supraja.  

There was a ton of legal work to be done and we initially had a very hard time getting any law firms to help us. But after a little bit of struggle, things fell into place – Hanson Bridgett, UC Berkeley and O’Melveney and Myers started helping us with the legal work.

Meanwhile Natasha Ramarathnam joined us in India and we started talking to various Microfinance institutions (MFIs) who may need guarantees and also to the large banks who lend to these MFIs.

As we started talking to MFIs and MFI networks, we were soon struck by the enormity of demand and the amount of ground we had to cover. Rajkamal Mukherjee, a microfinance veteran and VP at Accessdev (a Microfinance network working with emerging MFIs in India), wrote to us:

“The AmFA partnership presently has 110 partners aggregating to outreach of 2.4 million clients and gross loan portfolio of over a USD 250 million. These institutions represent a major chunk of the 40-50% annual growth segment in the sector. Our assessment of the immediate demand for additional credit among the AmFA partners is of USD 600 million.”

This bottom up assessment of the demand was quite stunning. One would expect that banks would quickly step in and lend to microfinance institutions adequately at a market determined interest rate. But that clearly does not seem to happen, despite the fact that banks in most developing countries have enough capital to lend. One outcome of this has been that bank lending has been heavily skewed to the larger MFIs while smaller MFIs have struggled to raise adequate bank loans to meet demand.

Prof. Mohammad Yunus summarizes the problem beautifully ‘The biggest problem we face in trying to expand the reach of microcredit is not the lack of capacity. Instead, it is the lack of availability of money to help microcredit programs get through their initial years until they reach break-even level.’ He further adds ‘Local banks cannot lend to MFIs because MFIs cannot provide collateral. However, if an international or domestic organization steps forward to act as a guarantor, local banks are happy to provide the money’ (Nobel laureate Mohammad Yunus with Karl Weber, Public affairs books, Creating a world without poverty : Social business and the future of capitalism, page 70, 2007).

I would take Prof. Yunus’s argument one step further. To make bank loans available to microcredit programs through their initial years, we need to make guarantees easily available. And to make guarantees easily available we need a scalable way to raise funds from socially responsible investors. I believe that our internet-centric model has the potential to raise socially responsible funds in a scalable manner and make it available to MFIs when they need it the most. Implementing it calls for a lot of hard work from a lot of people. I will write more on that topic in another post.

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Let me introduce myself and share with you the story of the birth of United Prosperity. My name is Bhalchander Vishwanath, ‘Bala’ to folks who know me. I came to the US from India 8 years back almost to this day. I worked with MphasiS and subsequently Infosys, building large software systems for financial institutions.

On the side, I kept coming up with startup ideas and would spend several months researching them – an innovation and idea management system, a website for comparison shopping of elective medical procedures and many more. I would typically spend 3 to 4 months researching each idea and then evaluate whether I should seriously pursue it further.

In 2006, I was working as a consultant with PMI, a Mortgage Insurance Company.  Borrowers who have poor credit scores and cannot put the 20% down payment towards a home  cannot get a mortgage. However, if the borrower or the bank buys mortgage insurance from PMI, the bank will make a loan to the borrower and the borrower can enjoy home ownership. Over the years, Mortgage Insurance or Guarantee as it is called has significantly expanded home ownership in the US.

My idea was simple, if guarantees could help people buy homes, why cannot guarantees help poor people get small loans from banks? I had heard a little bit about microfinance and I felt these guarantees could also expand the reach of microfinance. I started reading literature on microfinance and would spend endless hours reading articles and papers I could find on the internet.

Sometime in 2006, it was also announced that Prof. Mohammad Yunus, the pioneer of microfinance, had won the Nobel prize and that increased excitement in the field. But I soon realized that I had hit upon a massive roadblock – An organization which plans to offer guarantees needs to have adequate capital. How do I raise the several million dollars to set up a guarantee fund? I was a little disappointed that I had hit this seemingly un-surmountable road block and decided to move on to finding the next idea.

The next few months I spent time conceptualizing a website which would measure one’s carbon footprint.  It would be integrated with a recommendation engine which will then suggest upgrades to household appliances, changes in lifestyle etc. By then http://green.yahoo.com was launched. It had similar features though a little more basic than what I had envisaged. There was also another well-funded project on similar lines being done by UC Berkeley. Given these, I was not sure if my idea could compete against these well funded ventures.

I came back to the earlier microfinance guarantee idea – it simply would not go away. I continued to read more on guarantees and microfinance and figure out how I could raise funds for the guarantee fund. Sometime in April of 2007, I came across Prosper.com and a few days later Zopa and Kiva. Peer to peer lending fascinated me. Instinctively I realized that this held a clue to solving my problem, but I did not know how. By then I also became familiar with the guarantees offered by Grameen foundation and Accion. I also learned that the smaller Microfinance institutions (MFIs) were not having adequate access to capital and no organization was offering guarantees to smaller MFIs. This was a problem waiting to be solved.

But after all this research by June 2007, I was beginning to get a bit impatient. I had no business idea. I responded by setting myself a deadline – I would come up with an idea by July 3, 2007. There was an IIT alumni conference in the valley the following week, and in one of the tracks, VCs would hear and fund idea pitches. I hoped to have an idea by then. The next few weeks I kept thinking on how the peer to peer model could come together with the guarantee model. And finally on July 2^nd or 3^rd, the whole thing came together: The general public will guarantee loans to entrepreneurs on a website. The guarantee will allow the MFI to borrow from local banks and make loans to the entrepreneurs.

The idea made sense to me, but another reality dawned on me. Just taking an idea to a VC will not secure funding. I decided to first get the idea validated. More on that tomorrow.

Thanks for reading.

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