By Priya Nadkarni and Jeevan Kumar
India’s drive towards becoming the world’s largest economy will continue to improve the lives of low-income population. Between 2005 and 2010, globalization has lifted half a billion people out of poverty across the world. As purchasing power improves, large demand-supply gaps are being exposed in fundamental areas such as healthcare, financial services, education, affordable housing, water and agriculture. Successful businesses in these segments need to move away from the traditional cookie cutter models because the challenges associated with operating in these markets are different. For instance, insurance – it is a necessary protection against income shocks for consumers, and yet insurance penetration in India is one of the lowest in the world. Regulators and Governments have taken the easy way out by enforcing the provision of these services on to private insurers. For many private insurers, this is just part of their social obligations and few really make money off products sold to the rural population. Hence, a large opportunity looms for building investing in businesses that work in this space.
Little wonder then, that more investors and entrepreneurs than ever are proactively investing their capital in solutions in precisely these areas. Since 2000, $1.15 bn2 has been invested in businesses that fulfill needs in financial services, healthcare, education, renewable energy, affordable housing and water and sanitation as impact investments. This segment offers a large virtually untapped market and businesses that can scale quickly in such a situation are attractive investment targets for investors
Providing the fuel to oil the economy – Financial services
Credit allows people to leverage their limited and stable income to make asset purchases such as a house, help tide over periods of irregular income or commit large expenditure such as organizing a wedding. Unfortunately, household debt in India is 10% of GDP, 8-9X lower than US, UK or Canada and 3x lower than China. The impact of this is especially felt among the poor who lack access to credit at a reasonable cost, mainly because they lack good collateral and a stable income.
The banking infrastructure in the country is overwhelmingly concentrated in urban areas- ~70 percent of India’s population is dispersed among more than 600,000 villages, but the entire country has ~33,500 bank branches. Even if a bank branch were present, accessing credit from there for the low income segment is a nightmare. Many people in the low-income segment borrow from moneylenders who charge at least 5% per annum – sometimes as high as 10% per day in case of traders.
To meet this need for funds, a whole set of organizations such as microfinance institutions (MFIs), gold finance companies and chit fund networks have sprung up who are trying to provide speedy credit through local points of access. Unfortunately, regulation prohibits MFIs from accepting deposits from people, and so this access cannot be extended to savings.
Long term savings and insurance
Savings avenues for the low income are limited and mainly include self-help group federations, co-operatives and chit funds. Access to retirement savings for the low income is another area that is little explored even as India has moved from a defined benefit system to a defined contribution system with the introduction of the National Pension System in 2004.
Invest India Micro pension Services (IIMPS), a Delhi-based company has developed a unique Micro PensionTM model that connects product providers, payment channels and training providers so that low income customers can access pension products. Founded in 2006, IIMPS is led by Gautam Bhardwaj and Ashish Aggarwal, both of them veterans on policy research and consulting, product design and implementation in the pension and savings space. IIMPS is currently providing pension products to >380,000 clients across 14 states in India.
Financial products exist but distribution through credible entities has been the dominant problem. Insurance penetration in India was 2.3% in 2000 and has moved to 5.1 % in 2010. The total premium collected under life and non-life micro insurance portfolios was ~Rs 1,543 crore – life insurance premium of Rs. 1,149 crore and non-life insurance premium of Rs. 393 crore. Compare this to the total premium written – Rs. 334,181 crore to understand the percentage of business that actually derives from providing access to micro insurance
IFMR Rural Channels and Services is engaged in distributing and facilitating financial products and services for NBFCs and banks through their unique business model – Kshetriya Gramin Financial Services (KGFS). Each KGFS offers a wide suite of products to remote rural households – credit, mutual funds, insurance, pension and remittance products. Each KGFS has locally hired wealth managers to guide households into making sound financial decisions. IFMR Rural Channels currently has five KGFS entities up and running across India and the company plans to roll out more such entities. Lok Capital and Proparco recently invested US$ 5 mn in IFMR Rural Channels.
India’s banking regulator, Reserve Bank of India had asked banks to introduce ‘no-frills’ accounts in 2005 to provide basic banking facilities. Banks have used the services of business correspondents (BCs) who have strong outreach in rural India to fulfill their quota of ‘no-frills’ bank accounts. MFIs have set up separate entities to do the BC business. Similarly, other entities like FINO PayTech and EKO/- have also emerged in response to the need for savings services in rural India. FINO PayTech has reached 53 million customers through more than 35,377 transaction points in 439 districts across 26 states in India. EKO/- provides a low cost infrastructure powered by innovation and technology to enable instant, secure and convenient financial transactions. Both are well-funded BCs, having received funding from the likes of Creation Investments, IFC, ICICI Bank, Corporation Bank, Union Bank, LIC, Intel Capital, Indian Bank and The Blackstone Group.
Enabling people to prosper and grow – Education
Education remains one of the sectors where potential for impact is huge. The Indian middle class is expected to expand significantly – from 300 million people today to 583 million people in 2025. By 2025, about three-quarters of India’s urban population will be part of the middle class, compared with slightly more than a tenth today. As Indians continue to climb the economic ladder, the composition of their spending will likely change significantly – growing by 11% over the next 20 years to 9% of the household income, creating a demand-supply gap.
Recognizing this, entrepreneurs have jumped into the sector to set up schools, provide content as well as design innovative technologies that can change the way people learn. Inopen Technologies is a Mumbai-based company that has developed Computer Masti, a program to teach computer science in schools. Currently being used by 300,000 students across India, the company is a classic case of academia collaborating with business. Computer Masti is a collaborative product of IIT Bombay and InOpen Technologies. Led by Rupesh Shah, a young Computer Science graduate from IIT Bombay, the company remains a market leader in quality computer science curriculum for schools and is working with both public and private schools today.
Karadi Path, an offshoot of publishing enterprise, Karadi Tales, looks to teach students English through a unique and creative pedagogy (audio books) for language learning in the classroom. Started by former Thermax employee CP Viswanath, the year old venture has tied up with more than 200 schools in rural Tamil Nadu, and close to 50 schools in urban India. It expects to have a pan-India presence by 2014-15. In April 2012, Aavishkaar invested Rs. 8 crore in the company.
Driven by the passion to provide a level playing field to kids in tier II and tier III towns of India, Arghya Banerjee and his wife set up The Levelfield School, run out of Siuri, a town about 200 km from Kolkata. The school’s founders have developed an entire pedagogy – practical activity-based learning and stimulating analytical applications for use in classrooms. The school finds and grooms fresh graduates to become teachers. Arghya is an IIT Kharagpur and IIM Ahmedabad graduate and has worked for ICICI Securities and equity research outsourcing firm, Irevna in various roles.
Solving a looming problem that hinders productivity and wipes off incomes – Healthcare
India is faced with several serious healthcare issues that threaten to reduce the quality of life. 43% of Indian children below 5 years of age are malnourished compared to 28% in sub-Saharan Africa. India is home to nearly 1/3rd of the world blind population when nearly 80% of all blindness is preventable. This is the result of several failures in the healthcare system (a) poor sanitation (b) inadequate and poorly trained healthcare staff (c) lack of access to healthcare facilities. There are less than 800,000 physicians in India – 6.5 physicians for every 10,000 people compared to a global average of 14.2 physicians for every 10,000 people, a situation that is further compounded due to paucity of healthcare facilities – 9 beds for every 10,000 people compared to a global average of 30.
Struck by this demand-supply gap, Forus Healthcare, a Bangalore-based company, founded by K Chandrashekhar (KC) and Dr. Shyam Vasudeva Rao, has designed 3nethra, a medical device that can detect five ailments that cause 80% of all blindness. 3nethra can be operated by a minimally trained technician and can be deployed in remote locations for a fraction of the cost of other devices, solving two major issues that impede access to healthcare facilities. Both KC and Dr. Rao have left their corporate careers at NXP Semiconductors and Philips to set up Forus. The company recently received US$ 5 mn in Series A funding from venture funds, Accel Partners and IDG India.
While Forus has developed innovative technology to provide quality healthcare to people in remote location, others like Vaatsalya Healthcare and Glocal Hospitals have focused on setting up hospital networks in tier II and tier III towns. Each of Vaatsalya’s 17 hospitals provides care across specialties in addition to general medicine, trauma, and other services such as pharmacy and diagnostics. Vaatsalya is led by two young doctors Dr. Ashwin Naik and Dr. Veerendra Hiremath, who conceptualized the idea when they were students at Karnataka Medical College. Vaatsalya has received a total of US$ 17.5 mn from Aquarius Investments, Aavishkar, Seedfund and Bamboo finance.
Similarly, Dr. Sabahat Azim, a doctor and IAS officer founded Glocal Hospitals in October 2010 in East India to create a healthcare delivery system that is universally available, acceptable and affordable. The hospital chain has set itself an ambitious target – to be present in every district of India in the next 6 years, transforming the state of healthcare in rural and semi-urban India. Glocal has received a total funding of US$3.36 mn from Sequoia Capital and Elevar Equity.
Building affordable homes for the mass market – Affordable housing
As rapid urbanization changes the landscape of our cities, India’s current model for low income housing is becoming grossly inadequate. The chawl is an apartment building with 4-5 stories, comprising 10-20 tiny 400 square feet rooms. The room serves as all-purpose quarters – living room, kitchen, bedroom and study. A typical family of five is joined by in-laws and visiting cousins. “It is a global paradox”, observes Naresh V. Narasimhan, an accomplished architect who consults for Infosys, TCS and the World Bank. “The smaller the unit, the more people live in it. The larger the house, the fewer people it contains.”5
The Ministry of Housing and Urban Poverty Alleviation (MHUPA) estimates that the urban housing shortage is ~25 mn. Recognizing this, the Indian Government has enacted the Bharat Nirman plan focused on create rural infrastructure including the creation of affordable homes for the low-income population. National Urban Housing and Habitat Policy (NUHHP) whose focus is ‘Affordable housing for all’ is seeking to promote partnerships among public, private, cooperative and institutional entities to create more affordable housing units. Part of Rajiv Awas Yojana and Jawaharlal Nehru National Urban Renewal Mission (JNNURM)’s aim is to create low-priced dwelling units in the urban areas. The government has also made efforts to improve capital flow by permitting external commercial borrowing for affordable and low-income housing under the FY 2013 union budget.
A low-income household can afford ~Rs. 7,000 to Rs. 12,000 for the repayment of loan; hence the price of the house that they can afford is between – Rs. 3 – 10 lakhs on a 20 year mortgage. Lack of availability of land and access to home finance, rising costs of construction and primitive regulations are significant barriers for viability of low-income housing. Private players are recognizing the extent of the demand in this sector. Monitor reports that there were 25 developers across India building or planning to build low-income housing across 7 states.
One of them is Value and Budget Housing Corporation (VBHC), promoted by experienced bankers and successful entrepreneurs, Jerry Rao and PS Jayakumar. VBHC plans to develop one million homes across 10 cities and kicked off its ambitious vision with Vaibhava, a construction project 30 km from central Bangalore. The apartments are available in a variety of configurations – a studio apartment is priced at Rs. 7.7 lakh and a 1 BHK, 2BHK, and 3BHK are priced at Rs. 22.4 lakh. The project boasts a high quality construction, and necessary amenities such as a primary healthcare center, a school, a shopping complex, and community center. With projects in Chennai, Mumbai, and NCR, VBHC has attracted Rs. 100 crore from the Carlyle Group in August 2011. Previous investors include HDFC and India Financial Inclusion Fund.
Janaadhar is another Bangalore-based affordable housing company co-founded by former banker, Ramesh Ramanathan, CMD of Sterling Developers, Ramani Shastri and Principal Architect of Venkataraman Associates, Naresh Narasimhan. Their first project Janaadhar Shubha is in Bangalore and has 1128 apartments – a 1 BHK is priced at under Rs. 5 lakh and a studio apartment priced at Rs. 7.7 lakh.
Saving the planet – Renewable Energy
Rising costs of fossil fuels and their depletion has increased the interest and investment in renewable energy sources. In many countries renewable energy has received substantial support from the government.
The world GDP hit $69.97 trillion in 2011 and it continues to grow at a brisk pace of 2.5%. An increasing share of the growth is going to be contributed by the developing countries. As development indicators increase in developing countries, their need for energy needs is likely to grow closer to the levels of developing countries – this trend is noticeable in the growth in China’s power per capita power consumption (see graph below). A paper by renowned venture capitalist, Vinod Khosla, 5 billion people covet the energy-rich lifestyles enjoyed currently by only 500mn people residing in the developed world. Traditional sources of energy will not be able to meet enormous demand. Hence, as Mr. Khosla says, only non-linear jumps in technologies will help.
Government policy can help spur both the innovation required and the usage. India has been proactive in enacting regulation to encourage renewable energy generation and usage. The Electricity Act of 2003 has had arguably the largest impact on renewable energy generation in India. The Act delicensed generation and a framework for feed-in tariffs and quotas for renewable energy. As a result, the clean technology sector has grown dramatically over the years. The National Tariff Policy of 2005 enacted with a vision of providing universal access to power, as well as increasing per capita power consumption to 1,000 kWh. The two policies establish a strong framework for both supply-side incentives with preferential feed-in tariffs and demand-side stimulus with purchase obligations. Although there is much to be desired in the implementation front, the policies clearly recognize and encourage the role of renewable energy and the stake holders involved.
The question for entrepreneurs and venture capitalists is: Can we innovate technologies that can change the landscape of energy?
Kiran Energy Solar Power (KESP) is led by Alan Rosling, an Englishman who led Jardine Matheson Group’s India venture and previously worked with the Tata group with a mandate to globalize it. KESP recently setup its 25MW solar plant in Gujarat Rajastan, and will be adding another 50MW by the end of 2012.With a plan to go up to around 250MW by 2014 – KESP will be the largest solar power companies in Asia Pacific. KESP received a total of $55mn of capital from New Silk Route, Bessemer and Argonaut. Rosling says the capacity may go to 25 GW by 2020 if the government’s goal to produce 3 per cent of power from solar is fulfilled. But, current capacity in India is 1 GW. Although the current solar power is subsidized by the government, Rosling is optimistic and believes that it will be a commercially viable and proposition without any subsidy.
Vana Vidyut (VV) is a bio-energy company that plans to establish the country’s first biomass plant supplying energy to the power grid. VV is in the process of setting up its first power plant near Madurai with a capacity of 1 MW; next year they will establish a 2 MW plant. VV has 300 acres of energy plantations and plans to bring in an additional 1000 acres to create man-made-hi-density-regenerative-forest. Aaviskaar funded VV in April 2012.
Improving rural incomes – Agriculture
Agriculture contributes 16.6% of the Indian GDP, more than half a billion people are employed in the agricultural and allied sectors. India is among the world’s five largest producers, growing over 80% of agricultural produce items. However, the crop yields in India are 30-60% of the yields in developed and developing countries – among the lowest in the world. Nearly a third of the produce is wasted due to poor supply chain and the unorganized nature of the retail industry in India.
India’s first comprehensive agricultural policy, National Agricultural Policy 2000, sets an annual target growth rate of 4% in agriculture over the next two decades. However, growth within the sector is being stymied by the ever present subsidies and declining investments in agriculture. Some steps have been encouraging and definitely in the right direction – the revision of APMC act to allow for contract farming, removing reservations for small scale firms on food processing industries, and allowing up to 100% foreign ownership in many agribusiness sectors.
However, the sector continues to be plagued by issues due to fragmented landholdings and high level of direct and indirect subsidy. The MGNREGA was started with the aim of improving purchasing power of the rural people but it has caused labor shortage. Farmers are increasingly finding it difficult to find farm labor due to demand for higher wages The poor post-harvest supply chain infrastructure further adds to farmers’ woes by reducing farm income and increasing prices for consumers
Opportunities exist for a multitude of creative solutions and companies.
With increasing labor prices and poor yields, small and marginal farmers are increasingly open to mechanization. This is a relatively nascent space in India and companies such as KisanKraft Machine Tools are trying to address a nation-wide demand for agricultural equipments (from sprayers to brush cutters to tillers). Kisan Kraft is led by Ravindra Agarwal, a BITS Pilani graduate with 17 years of extensive software development experience for various products at Microsoft in the US.
There has been a relatively recent thrust in this sector with companies such as Star Agri Warehousing offering warehousing space and credit linkages across different states. Cold storage is another piece within the post harvest value chain that is attracting investors with firms such as Moksha Youg-Access (MYA) getting funded by Vinod Khosla and Unitus Impact.
Food processing helps expand the market for agri-products and increases shelf life of products. Typical margins in the dairy are around 4%, but with additional processing and appropriate processing a wide array of high-margin products such as flavoured milk, butter, ghee, can be manufactured, benefiting both the consumer and the farmer.
Unitus Capital has investment banking relationships with IIMPS, Kisan Kraft, InOpen Technologies, The Levelfield Schools, and Kisan Kraft.
These authors’ personal views do not necessarily represent those of Unitus Capital.
About the Authors
Priya Nadkarni works with Unitus Capital, a boutique investment bank focused on raising capital for companies that impact the low-income population. At Unitus Capital, she has worked on diverse transactions in the micro insurance, micro pensions and the micro finance industry. Priya also has a keen interest in education and tracks the sector. Prior to Unitus Capital, Priya wrote for the Business Standard newspaper in Mumbai.
Priya is a graduate of the Indian School of Business, Hyderabad, and has a diploma in journalism from the Asian College of Journalism and a Bachelors degree in Economics and Statistics from St. Xavier’s College in Mumbai.
Jeevan Kumar is an investment professional working with Unitus Capital, a boutique investment bank focused on raising capital for companies that impact the low-income population. At Unitus Capital, he has advised several companies, across healthcare, financial services, and energy sectors, on raising capital. Jeevan was also part of the initial team at Unitus Seed Fund, contributing significantly towards its four maiden investments. Prior to Unitus Capital, Jeevan was part of SunGrid team, an experimental cloud based initiative at Sun Microsystems.
Jeevan earned his post-graduate diploma in business management from XLRI, Jamshedpur and computer engineering degree from NIT, Surathkal. Jeevan has a passion for entrepreneurship and enjoys working with innovative early stage companies.
 National Post: The end of poverty: What globalization did that aid could not
 Population Distribution, Urbanization, Internal Migration and Development: An International Perspective, UN Report, 2010
2 Venture Intelligence estimates
Image: Economist: McKinsey data
 Knowledge @ Wharton: Affordable Housing: An Idea Whose Time Has Come
Chawl Photo: Orginally posted by Abhinav Saxena on Flickr
 Jones Lang LeSalle: On Point: Affordable housing in India
 Monitor Inclusive Markets: Building houses, financing homes
 Vinod Khosla: Black Swans thesis of energy transformation
 Economic Times: KiranEnergySolar Power, ReNewPowerVentures & BharatLight&Power make headway in renewable energy sector
 Economic Times
 Food and Agricultural Organization of the United Nations
 Agriculture and Agri-food Canada: Indian Agricultural policy review