Svasti Microfinance currently lends to groups of five women in Mumbai slums, thus helping multiple households even while safeguarding its investments

There are over 1.5 million low-income households in Mumbai that could be potential customers for microfinance institutions (MFIs). Less than 10 per cent of these have been serviced by MFIs operating in the city. And Mumbai-based Svasti Microfinance (Svasti) is working towards addressing the needs of this city’s vast population. Svasti was started in October 2008 to make credit and other financial services easily accessible to low income households who are productive and engaged in income-generation activities. “When we surveyed the Mumbai market, we found that most of the slums here are actually quite stable and very safe,” says co-founder Arunkumar P.

Though Svasti had to scale down its growth plans due to the Andhra Pradesh crisis of 2010, it raised Rs. 4.5 crore by way of an equity investment by Blue Orchard Private Equity Fund in March 2011. This will be used to expand the number of branches from the current six in Mumbai to ten by August. Post that, it intends to play the watching game over the next two to three months before expanding further.

The vision

Arunkumar, a lawyer who was with ICICI Bank as part of the core strategic team until June 2007, co-founded Svasti with Narayanan B. – a chartered accountant and a certified information systems auditor. Their goal is to finance households that are involved in productive and income-generating activities to enable them improve their businesses. “We also see that low income households have a need for money for other important purposes, such as financing children’s education, home improvements, additional expenditure during festivals etc.,” he says.

Svasti provides access to its services currently through a women-centric joint liability group (JLG) lending model that requires women to organise themselves into groups of five each to apply for a loan. The terms of the loan include a group guarantee, whereby each woman takes responsibility for the payments of the other in her group. If the entire group were to perform well during its loan cycle, they become eligible to take a further loan from the MFI. The women, in the age group of 18 – 50, are extended loans from Rs. 10,000 to Rs. 15,000 for 50 – 60 weeks at an interest rate of 28.4 per cent. Weekly instalment works out to Rs. 230 – 300.

“We have developed a simple set of rules and procedures to be followed by our branch teams in assessing potential clients for loans.”

This model allows the MFI to provide finance to its customers by providing a system of group level incentives that would drive the behaviour of the women who are a part of these groups to select only reliable households into their group and to support each other to avoid defaulting in loan instalments.

“We ensure that in each of our joint liability groups, at least four out of five women are taking our loan for a productive purpose, i.e., to finance a business activity of the household. One woman in each group is allowed to take a loan for other purposes, such as children’s education, home improvements etc.,” explains Arunkumar.

“We have developed a simple set of rules and procedures to be followed by our branch teams in assessing potential clients for loans,” he says. Svasti’s aim is to finance households that are relatively stable. Therefore, the MFI will only work in communities that it has profiled and deemed as stable. “There are many ‘unstable’ slum communities in Mumbai that are not considered legal by the government and are prone to demolition. We do not finance households in these communities,” he explains. Additionally, in order to take a loan from Svasti, the family must either be homeowners or, if they are living in a rented house, they must have lived there for at least three years.

The company provides extensive training to its teams to ensure that they understand the rules and procedures. There is also an extensive concurrent audit done by an independent team that reviews and reports on the manner in which the branch staffs follow these rules and procedures.

Dispelling myths

“It is commonly believed that Mumbai slums are not stable and therefore a high risk proposition,” points out Arun. The high cost of living in the city, as well as the myth that JLG or self help group model will not work in the city have also been deterrents to MFIs venturing into Mumbai slums. Dismissing these, Arun adds, “The very high property prices in Mumbai are responsible for the government policy that grants people legal rights to property in slums through rehabilitation projects. The level of crime is also quite low in the slums due to great work done by the police over the years.” The women centric joint liability model has been successfully adopted by most MFIs in India, both rural and urban, he points out.

The potential

Typically, Svasti funds vendors of several products – fruits, vegetables, fish, meat, street food, ladies clips, combs, decorative items, shoes etc. Small shop owners – typically paan shops, small grocery shops, tailoring units, zari work, sari, apparel vendors are among the others who are funded. Catering is another major business segment – people who make food at home and pack lunch for office goers and also supply to small hotels at times.

Svasti is also working on an individual lending product that will be piloted during this financial year. This product will help the MFI tap into segments of the market that cannot be financed through the JLG model – such as men. “We hope to launch this at a full scale during the next financial year,” he adds.

The challenges

Following the Andhra Pradesh crisis, Svasti has not been able to access bank debt as planned despite having adequate equity capital and a quality loan portfolio. The Reserve Bank of India has recently formulated regulations for the sector whereby they have retained ‘priority sector’ status to bank loans given to MFIs. This is a positive development for the sector as well as for Svasti, opines Arunkumar. Additionally, the regulations also impose caps on lending rates and fees. Svasti has already made changes to its loan product terms and brought them in line with the requirements of the regulations. “We hope and believe that in light of these regulations, banks will restart lending to the sector soon and that Svasti will be benefited by accessing bank finance to fund its growth plans,” he says.

Training beyond funding

Svasti is aware that providing only a loan is not enough to its target group. Therefore, it provides extensive training in financial literacy and increasing their financial awareness before providing the loan as part of its community development initiatives.

The MFI also operates proprietary Microfinance Enterprise Resource Planning software (MERP), an Internet-based browser driven environment that is used by staff at all levels at Svasti. At the branch level, the MERP helps its relationship managers manage their work schedule and their client interactions. The result of every client interaction is recorded in the system, thereby reporting on all data collected at these meetings. The branch managers use the system to monitor the working of the relationship managers and to keep control over the branch portfolio. Additionally, the MERP also helps the centralised operations team remotely monitor the activities at the branches, and the accounting and finance team gather necessary financial and portfolio related data and plan budgeting across the branches.

“In the near future, we will be on the lookout for innovative methods to use technology. Some future projects include collections and meeting reporting through SMS from the field, use of GPS for mapping communities and more,” adds Arun. As and when breakthroughs emerge in any of the areas being tested by other MFIs (for instance, mobile payments) Svasti aims to use the same effectively.

Optimistic overview

Svasti believes that the future of the MFI industry lies in becoming a comprehensive financial service provider for the low-income population of India. Currently, MFIs provide only credit to this segment. The government, regulators, banks and the MFIs need to work together to ensure that MFIs can be effective vehicles to promote comprehensive financial inclusion in India that would include providing people with access to credit, savings, insurance and investments opportunities.  At present, there are some regulatory challenges in achieving this objective. Arun expects that in the next few years, these challenges would be overcome.

• Started in August 2008 as Svasti Foundation

• Transitioned to a non-banking financial company, Svasti Microfinance Pvt. Ltd. in October 2010

• Incubation support from the Michael & Susan Dell Foundation and Kotak Mahindra Investments Limited (a subsidiary of Kotak Mahindra Bank)

• Raised Rs. 5.45 crore in its first round of equity funding from several investors including a few members of the Mumbai Angels

• Provides loans of Rs.10,000 to Rs.15,000 to entrepreneurs in Mumbai slums

Svasti Microfinance

Co-Founders: Arunkumar P, Narayanan B

Year: October 2008

Industry: Urban microfinance

City: Mumbai