Ujjivan : A tale of success in microfinance

Having been crowned as the world’s third largest economy (by PPP) with the GDP growth rate of 5%, it is not very encouraging to know that 41% of the Indian population is unbanked . This means that there are still ~500 million people in the country who do not have access to basic financial services. A major chunk of these people belong to rural areas (>70%) whereas the remaining (<30%) live in urban India.

Sensing a massive opportunity to bridge this gap of financial inclusion, many MFIs (MicroFinance Institutions) mushroomed after year 2000 but the 2010 Andhra Pradesh crisis engulfed most of these banking institutions. One of the most unique MFI in India which survived the crisis is Ujjivan Financial Services Pvt Ltd which serves exclusively to the urban and semi-urban poor.Ujjivan was started in 2005 by Samit Ghosh who has been a member of the international banking community for over 30 years and had successfully led the launch of retail banking for Standard Chartered in the Middle East and South Asia, and for HDFC Bank in India. Today, Ujjivan operates in 22 states, including 48 unbanked districts of India. It has disbursed over INR 6,150 crores of loans with an exceptional repayment rate of 99.87%.

Here’s an account of the eight years of one of the dominant players in microfinance in India and the story of how it remained profitable even in times of crisis.

Fundamentals of microfinance

Right from targeting the urban poor to the decision of not operating in Andhra Pradesh, Ujjivan has been driven by strong fundamentals since its inception. At the same time, it means that the vision of the organization was never disillusioned by the misconceptions and pertaining myths of microfinance sector. Commenting on the same, Samit Ghosh said:

1. With almost 60 crore working poor without access to basic financial facilities, the nature of the problem is so large that donations and grants cannot be a viable proposition. We have to understand that a significant part among these people is the ultra poor who do not have the ability to repay any kind of loans (when given). They need to be addressed separately.
2. It is a myth that poor people want free or subsidized services. They just want the access to financial services which is available to everyone at the same price because the only other option of going to a money lender is more expensive.
3. Because of the superior attitude, policy makers and bankers offer to provide solution to poor people whereas it has to come from them. We have failed from the time when we nationalized the Imperial Bank of India in 1955.

2010 crisis and Ujjivan

In 2010, the Government of Andhra Pradesh (GoAP) promulgated an ordinance attempting to regulate the microfinance industry in the state owing to multiple harassment cases by MFIs in the process of loan recovery. As a result, the loan repayment rate fell by 30-40% and further lending became difficult for MFIs because their lenders (leading banks of the country) refused to lend more owing to the fear of loans going bad. Ultimately, the loss had to be borne by MFIs and it took them several months to come out of it and reverse the negative sentiments among borrowers across the state.

Looking back at 2010, Samit believes that absence of any mechanism to track and control the over-lending was the primary reason for the crisis. Even though Ujjivan doesn’t work in AP, they did lose money in few other states but because of their geographically diversified operations, it was overall neutralized. Also, setting up of the credit bureau in 2009 to track how much borrowing a customer has, helped a lot in choosing the right person while disbursing the loan.

Raising funds and investor relations

Ujjivan has attracted investments from some of the big names in the venture capital industry, including Sequoia Capital, India Financial Inclusion Fund, International Finance Corporation and Lok Capital. At once Sequoia might seem as an exception among all impact investment focused funds, but Samit clarifies, “One has to be clear with investors about what you can give them back. We are not in quick bucks business and can promise only reasonable returns (to the tune of 15% RoI), which is very clear to our investors. Sequoia Capital has been one of the biggest supporters of Ujjivan and none of the investors have pushed us to do something we don’t want to do. Also, SKS microfinance had received investments from Sequoia Capital which makes Ujjivan their second investment in Indian microfinance industry.”

Ujjivan v/s other MFIs

Ujjivan has maintained transparency at all levels of operations and management which turns out to be their biggest strength. Emphasizing more on what differentiates Ujjivan from its competitors, Samit says:

1. We are very clear about our objective. We are a social enterprise providing financial inclusion operating in a viral manner.
2. Whatever we have ever tried to do, our utmost efforts have been towards being innovative and the best (including company culture). Mind you, not the largest player but the best one.
3. We are an extremely transparent organization, both internally and externally. We try to be as equitable as possible. Our employees receive bonus/ESOPs based on their performance and not mere ranks.
4. We keep our end staff happy and motivated as a priority because like any other service industry, in micro-lending too they are the ones interacting with the customers and their behaviour decides the delivery of good service.

Secret behind 99.87% loan repayment rate

According to Samit, any well run MFI across the globe will have a similar repayment rate. But to maintain it sometimes becomes a challenge, and the following practices help the process to run smoothly:

1. Customer selection:
2. At the end of the day, it is the willingness and ability of a customer which decide the repayment rate. With group lending, it becomes a collective responsibility of the whole group to select customers who will not drop off (due to the inability to repay the amount) as they want the access to loans time and again and their bad reputation (due to defaulting any time) will affect that.
3. It has been observed that if someone faults for three times in a row towards repayment, it becomes very tough for the borrower to give back the amount. In such cases, group lending serves as a shock absorber where one person pays for another in case any person faults for even a single time.
4. Low interest rates: Since Ujjivan offers credit at one of the cheapest rates across the industry, each borrower wants to earn a name in the good books of lenders.
5. Credit Bureau: Data of borrowers which is collected and maintained along with a check on over-lending serve as the basic hygiene to avoid bad loans.

Key milestones and challenges

Though Samit has made the eight-year journey of Ujjivan look smooth, the way he shielded the organization from 2010 crisis or raised initial capital, has been truly commendable. Sharing the major challenges they have overcome which have led to some of the biggest milestones for Ujjivan’s story, he recalls:

1. Raising the first Rs 2.7 crore was the single big challenge and even with my 30 years of banking experience, it took me a year to do so. Today, Ujjivan disburses loans worth Rs 3 crore every 12 hours.
2. Getting through 2010 crisis and retaining the customers established us as pioneers in microfinance industry. We could tie the difficult period and came over even stronger.
3. Getting quality people to work for Ujjivan who have similar values has not been an easy task.

The road ahead

With the microfinance crisis behind them, MFIs in India are clearly on a surge and this trend will continue for some time. But moving forward, there is a need to rethink micro-financing and diversify the current single offering into multiple financial services for the poor. Finding out a way to deliver insurances and catering to the remittance need of the people is what will bring about a paradigm shift in the way MFIs operate. Shifting from group-lending to individual lending, which is possible because of the available data of borrowers, can also change the course of the game.

Only time will tell if Ujjivan can retain the lead in future and continue to pioneer the upcoming trends of microfinance sector, but for now we will rest the case with whatever they have achieved so far with their fundamental beliefs and great understanding of the financial inclusion.