Samit Ghosh, in his thirty-year career in the banking industry, saw the effect that financial products and services had on India’s middle class. His strong belief that access to credit could empower the poor prompted him to start Ujjivan, one of India’s first microfinance companies targeted at urban India. “All the focus, both from the government and other microfinance institutions (MFIs) was on the rural poor and almost everyone forgot about the 100 million poor in urban India,” says Ghosh who now serves as chief executive at Ujjivan. Ghosh’s entry into the microfinance world was well planned. Once he became interested in the sector, he made a career shift from consumer banking to go work at Basix and Sangamitra, two other microfinance institutions. He ran a pilot project in Bengaluru for 18 months to iron out the working model before he took the plunge. Since its inception in 2005, Ujjivan today is one of India’s fastest growing MFIs and they operate in 13 states through 230 branches serving over 6.2 lakh customers.
Though the fundamental model of microlending is the same, operating in urban areas has its own challenges. For starters, a large number of the urban poor were already employed. Their needs were different. They needed credit to fund their children’s education, to improve their homes or pay rentals. In some cases they needed working capital to start a side-business. “We clearly understood the needs of the urban consumer before we designed our loan products,” says Ghosh.
Changes were also needed on the customer management front. In rural India, within villages, social cohesion was much more. Most of the people knew each other and it was easy to form groups and ensure harmony between groups. In urban areas, people knew their immediate neighbours, but, not everyone in a locality. Ujjivan formed groups of five people who knew each other and then centers were formed by merging four or five of these groups. Says Ghosh, “Though we conducted meetings at the center level, the focus was on the groups. We do not follow the self help group model, instead we follow the grameen model to manage our centers.”
The debate of lending rates
Like most other MFIs, Ujjivan today lends at anywhere between 24 per cent to 26 per cent. To break it down, they borrow money at around 12 per cent, since their loan sizes are very small their cost of operations is 10 per cent, and after some credit write-offs, they provide their investors returns of 1 per cent to 2 per cent. When queried on why critics of the microfinance industry talk about extremely high interest rates, Ghosh says, “The complaint of high interest rates hardly ever comes from the customer. These interest rates are much lower than what money lenders offer and it is the operational challenges that prevent us from lending at lower rates.” The other aspect that needs understanding is that these loans are unsecured products, and these interest rates are in line with what other unsecured credit products like credit cards are offered at. Ghosh adds, “Most customers today borrow anywhere between Rs 40,000 to Rs 50,000 and microfinance companies are not able to lend so much. So the poor continue to borrow from moneylenders who are a lot more expensive. The focus on our side is to try and lend more even if it means only at current interest rates.”
Increasing the customer base
Scalability is the key to any MFI. It helps them keep overall operating margins in control while replicating the working model across several locations. Ujjivan added over 37,000 customers in March 2010 alone disbursing more than 90,000 loans to these new customers. “We constantly try to identify newer locations to scale up. Our current focus is Mumbai. It’s a huge market, and for now we’re completely focused on servicing this segment,” says Ghosh. Any time Ujjivan enters a new city they spend time in understanding the local culture. Their teams at the branch level are hired based on the nature and type of customers they would be interacting with. They also work towards understanding other challenges in the new region. “In Mumbai, cost structure is a huge challenge and we’re working towards some solutions to tackle this,” adds Ghosh.
Overall, Ujjivan’s growth over the years has been much better when compared to its peers in the industry. They have dispatched over Rs. 930 crore in loans with a repayment rate of 98.96 per cent. Ujjivan has over 2,800 employees across the 13 states and strives to improve its operating margins and expand into an under-served location. They are well on track to reducing poverty in urban India.