In this interview with Mr. Nagarajan M. founder of Velicham Finance & Bharathi Women Development Centre, we trace his 3 decades-long journey while exploring the potential and challenges of the microfinance sector.
IndiaP2P: Your organisations have been undertaking banking and credit extension activities amongst women for the last 3 decades, what led you to venture in this space?
Nagarajan M: Bharathi Women Development Centre (BWDC) had been working with thousands of women on various initiatives, which we started as a social impact organization.
In 2008, we started looking into a Tamil Nadu government programme that was encouraging the formation and capacity building of women’s self-help groups (SHGs) and linking them to applicable government schemes. We started to focus our activities on this programme and further organized thousands of women into formal SHGs with banking linkages i.e. opening bank accounts and providing credit/loans.
The thesis of this initiative was that rural women are exceedingly entrepreneurial and good managers
of their personal & family finances and would benefit themselves
and others through formal financial inclusion.
Extension of loans enables an individual to expand their businesses and incomes and with SHG linkages, the banks would extend such loans to enterprising, disciplined rural women. However, there were some inherent challenges, banks would visit SHG field operations to announce credit programmes when the bank had some internal target and not necessarily when women wanted credit. Furthermore, the loan ticket sizes offered were too small and the waiting time and process to get them cumbersome.
It was a mixed bag, on the one hand the banks had identified a very credit-worthy and 'in-need of credit' segment but not fulfilling their requirements completely. This led us to think about and eventually start our own microfinance operations in collaboration with banks. We started with a business correspondence (BC) partnership with HDFC Bank and offered loans to SHG clients with timely disbursement for a decade, adding more banks and NBFCs as partners along the way, however, sometimes credit products offered by banks would lag in terms of the requirements of clients.
Being closer to the clients and interacting with them during SHG meetings every month, we understand how the rural landscape, aspirations, and behaviour are evolving. We decided to design our own products which needed the loan assets to be in our books and this led to Velicham Finance NBFC in 2018 which now operates across 10 districts of Tamil Nadu and Pondicherry. We have built a base of steady clients over the years who have maintained credit discipline. In the next phase of our journey, we are seeking to digitize our operations and constantly upgrade our product suite keeping pace with client requirements.
IndiaP2P: What was the personal motivation behind this?
Nagarajan M: For me, I always believed that enabling equalizing economic opportunities for women is the most straightforward means to economic development. Fortunately, when I started there was adequate encouragement from peers and experts.
IndiaP2P: You mentioned that conventional banking products do not always work for this borrower segment, can you elaborate on that?
Nagarajan M: Banks cater to the widest range of client segments and often do not upgrade services and products at the same pace at which the market demands. By nature, users’ needs and aspirations are constantly evolving and so is their economic standing, the speed, scope and scale of products offered must match that.
For example: Previously small loans were given, as small as Rs. 10,000. Such amounts could not do much in terms of economic activity expansion and were thus utilized for consumption purposes only. Rural women and their livelihoods were not viewed as businesses that could benefit from credit. This has changed. In our working area, the level of financial literacy is substantial and has made rural women ambitious in terms of scaling their businesses in traditional sectors such as farming and in new digitally enabled businesses too. In the past 5 years or so, our focus has centered on ambitious individuals seeking to expand their business incomes.
IndiaP2P: In spite of product-need fit and other challenges, the microfinance sector has significantly superior repayment rates and low defaults compared with almost all other unsecured loans borrower segments. What would you attribute this to?
Nagarajan M: The reason is very simple, it’s because the lender-borrower relationship in the case of microfinance is direct, continuous, and essentially supportive.
Microfinance providers focus on building educative, additive relationships with clients. We provide financial literacy,
support in formalizing banking and other financial activities and evolve products to suit their needs.
Moreover, we meet them at least once a month.
In traditional lending practices, the relationship between lender and borrower is more of customer support or sales, and sometimes, especially in the case of digital lending the lender and borrower simply don’t interact beyond the transaction formalities.
Microfinance lenders prepare clients first and only once satisfied with their understanding and financial management are loans given out. We also put in the necessary effort to validate the borrower’s current financial standing by visiting their homes, places of work, documenting nominees, meeting co-borrowers, and more. These are not one-time visits, these are regular, consistent visits. Even when we are not lending to a client, our educational activities with them continue.
IndiaP2P: Microfinance with women across the world whether in Asia, Sub-Saharan Africa, or even Latin America has done exceedingly well and been transformative for the local economies. However, we are yet to see at-scale examples of microfinance with men succeeding. Why do you think that is?
Nagarajan M: In my experience and as we can see from the global success of microfinance for women, women are more disciplined. This discipline can be seen in the way they handle business, family, and personal finances. I would say that this is a common truth.
IndiaP2P: In India, an estimated 6 Crore women or roughly 25% of households access microfinance through banks, MFIs, or other sources. This is already a big number. How do you think this will change over the next decade?
Nagarajan M: I can only state my personal opinion on this question. I would say that in quite a few regions and customer segments, we see adequate levels of lender penetration however capital requirements continue to go up. In other borrower segments and regions of the country, microfinance is hugely under-penetrated leading to overall low financial inclusion levels in these areas.
The overall picture, even when I read reports is that the sector is doing well, in fact, there is credit over-exposure in some areas which is not a good thing but it indicates that this space is getting competitive and competition should hopefully benefit clients in the end.
IndiaP2P: There have been some major crises that have shocked this sector, starting from the AP crises to demonetization to COVID. What do you think practitioners have learned or should learn from these?
Nagarajan M:
The biggest learning is the lender-client relationship is critical. If you had a strong and
cordial relationship before any of these crises then you did okay.
If not, then there are bound to be problems. In our client base, we have seen these crises and some natural disasters such as floods which have left clients with damages to property and loss of months of income i.e. an inability to repay on time. Good lenders maintain this relationship even during crises and continue with physical meetings and other touchpoints; these activities require well-trained personnel and financial resources, any cost-cutting here can be detrimental to the portfolio. During COVID we could not meet clients the way we are used to so we switched to regular phone calls that were of a counseling and supportive nature. A cordial, supportive, strong client relationship is critical.
Another learning is to avoid over-indebtedness. Financial institutions rightly have confidence in this borrower segment and can sometimes go overboard in terms of extending credit beyond the borrower’s means which eventually leads to defaults.
IndiaP2P: There have constant upgrades to regulation in this sector and overall technology is changing how credit is delivered. What are some of your observations here?
Nagarajan M: Digital lending has made very fast strides in India and microfinance providers are actively digitizing their internal systems and operations including us. I do want to point out one area where we don’t see appropriately designed technology solutions that seek to maintain and nurture the client-lender relationship. Current solutions tend to bypass this. Current technology solutions deliver great convenience to the lender but tend to dilute the client relationship which is a real challenge for the sector and even lending across other borrower segments.
Some level of human touch is good for lending.
For example, let’s say there’s a borrower who has taken two loans – one via app and one through a lender with local presence or personnel touchpoints. If there is repayment stress and the borrower can repay only one loan, who do you think she is likely to repay?
My submission is that while we develop technology with a human touch, we should look at hybrid tech+touch operational models.
IndiaP2P: The microfinance sector is large but still somehow does not feature prominently in conversations around the credit landscape in the country. Do you think there are some things about the sector that external stakeholders don’t fully understand?
Nagarajan M: I would say there are some misconceptions, the risk and returns are well understood but the operational dynamics that make this work are often misunderstood.
Even regulators and rating agencies are yet to customize their criteria for smaller lenders in the sector, even though the sector is highly fragmented and is built by many small players that have taken upon themselves to service highly underserved areas. The yardstick is often applied even when the objectives of the enterprises differ.
Even bankers tend to sideline microfinance loans because of the small ticket sizes, the presumption being that these ticket sizes are too small for the processing effort. Even though lending to their sector is profitable for banks. Change in the banker’s mindset is happening I would say. I would also say that private sector banks are ahead of public sector banks in terms of their understanding of this segment.
You can read more about Velicham Finance at www.velichamfinance.com
April 3, 2023
