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Social Entrepreneurship in

India

Anna Agarwal

annaag@mit.edu

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What Solutions do we have Today Government alone is not the answer

Inefficiencies, slow, bureaucratic, prone to corruption.

Nonprofit Orgs. inadequate

dependent on donations (uncertain, demand far exceeds supply)

compassion fatigue

Raising money takes time and energy, which can be spent planning

growth/expansion

Multilateral Institutions (World Bank) - ineffective

Conservative, slow, under-funded, unreliable

Success is measured by

a) GDP (might not be helping poor)

b) Volume of loans negotiated (notmeasuring impact) Exclusively work with the government

Corporate Social Responsibility - fundamentally flawed

as long as it can be done without sacrificing PROFITS

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New kind of Business

Social Business

Creating business models revolving around low-cost products and services to resolve socialproblems

Social business is formore-than-profit

combine revenue-generating business with asocial-value-generating structure

Can be two kinds Creating services for poor

Owned by poor (** not a SB )

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How can youdo business and serve social goals?

Why is profit-making not conflicting with social objectives?

Profits - Promotes R&D, innovation, new technologies

Increases efficiency

Enables penetration to new geographical areas and serve deeper layers of low-income people

Helps recover costs and pay back investors, thus encourages investments

PMBs (profit max. businesses) vs. SBs (social businesses)

How they are same yet different

Employ workers, create goods & services for consumers

Must recover full costs

Profits are important

YET objective is to create social benefit and not limited to personal gains

Can there be aHYBRID i.e. 60% PMB and

40% SB??

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Social Business

Some Examples

Banking and finance is the biggest

beneficiary of technology-enabled social

startups

Muhammad Yunus, Grameen Bank

(Nobel Peace Prize 2006) ** not founded in India

Vikram Akula, SKS Microfinance (Social Entrepreneur of the Year Award2006)

Kiva (peer-to-peer micro-lending website) ** not founded in India

Energy

SolarElectrification - Harish Hande, SELCO (Social Entrepreneur of the YearAward 2007)

Other examples

Education (Same Language Subtitling, Janarth - education solutions forchildren of migrant laborers)

Many more

What are their stories!

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Need for Financial Services for Low-income

People

Why do poor need financial services?

A study in Andhra Pradesh revealed that for the poor, about 50% of all risky events were

characterized as health-related and another 28% were nature-related.

Responses to these risks -

1st preference of the rural poor is borrowing (money lenders have very high interest rates,

subject to exploitation), followed by mortgaging/selling assets (often under difficult conditions that limits the value

received for such assets).

Why don't they just go to a bank?

The poor rarely have access to the formal financial sector

No money to open a savings account

No collateral or credit record to secure a loan

Illiterate so cant do paperwork

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Microfinance - Role ofSHGs

Microfinance is providing financial services to

the poor such as loans, savings, money transferservices and microinsurance.

In India, Self Help Groups (SHGs) form the basic

constituent unit of the microfinance

SHG is a group of a few individuals usually poor women (group of 5 to 20)

They pool their savings (as low as Rs. 10 or 20 cents monthly per member) into a fund from

which they can borrow as and when necessary

Such a group is linked with a bank where they maintain a group account.

Over time the bank begins to lend to the group as a unit, without collateral, relying on self-

monitoring and peer pressure within the group for repayment of these loans.

The group is eligible for bank-loan after atleast 6 months of inter-loan repayments

Maximum loan amount is a multiple (usually 4:1) of the total funds in group account

starts with lower multiples (1:1 to 2:1)

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Microfinance - Key Challenges High Cost-to-Serve

Accounts are low in value but large in volume

High transactions costs (as frequent transactions)

Low levels of automation

Intense supervision requirements to maintain high recovery rates (trade-off between

supervision cost min. and recovery max)

Very small scale figure shows SHGs linked to banks are in handful of States

(mostly in South India AP) [Chakrabarti, Georgia Tech, 2004]

What is the role of technology in

lowering these costs?

What is AP doing different?

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Microfinance - Key Challenges

Deficiency ofCapital Constrain on Outreach

Until recently, MFIs were dependent on donor grants, but grants are limited in size andavailability and are becoming harder to access as the pool of global MFIs grows.

Many of the MFIs are registered as not-for-profit entities that make it an unattractive choice for

investors

Low profitability of MFIs because of reasons mentioned above is also a barrier to raise equity

capital

Regulatory/policy Issues

If the NGO earns a substantial part of its income from lending activity, it violates the Income

Tax Act and could lose its charitable status.

If an MFI opts to become an NBFC, it should be able to satisfy the entry-level capital

requirements of Rs. 20 million. (In India, there has been strong advocacy for bringing down

the capital entry norms for NBFCs in the business of microfinance) In the case of NBFCs, deposit mobilisation is not possible at least for the first 3 years, till a

satisfactory credit rating is obtained.

Borrowing from foreign institutions is hard due to the credit rating requirements imposed by

RBI.

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Challenges present Opportunities SKS, specializing in microfinance

is one of the largest and fastest-growing microfinance

organizations in the world (disbursements exceeding

$500 million to about 2.2 million women)

Inter-linked three principles:

1. for-profit methodology 2. best business

practices 3. latest technology

N-logue Communications, a company incubated byIIT Madras, has built an entrepreneur-led

business model for deploying rural internet kiosks

across the country.

These networks are capable of providing multiple services such as agricultural

information, education and health applications and communication.Formicrofinance, this enables updation of databases real-time and remotemonitoring(reduces the cost-to-serve)

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Discussion

What are the important questions

Agenda for next meeting volunteers forleader?

Logistics date, time, venue

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References (not appropriately referenced

in the slides!) Creating a WorldWithout Poverty, Muhammad Yunus, Book, 2007

MICROFINANCEIN INDIA : SECTORALISSUES AND CHALLENGES (ByThorat, 2005)

The Indian Microfinance Experience Accomplishments and Challenges

(Paper, GATEC

H, 2004)