ASA itself grew explosively during the nineties. Its credit disbursement grew ten folds between 1996 and 2001. Following the ASA model, Bandhan, a West Bengal MFI, might even exceed that rate of growth.
The ASA model, due to its decentralized administration, is quite capable of withstanding the internal strain and instability generated during a rapid growth period. By adopting ASA’s mode of operation, Sarala will have a low-cost recruitment and training method, accelerated rate of group formation, an elaborately written manual-driven operation, extremely efficient collection system, cascading layers of monitoring and an institutional structure well adapted for rapid growth.
E. Accelerated rate of group formation.
The operational loss during the prolonged group formation period in a Grameen type MFI eats into its capital and reduces the amount of money that can be placed in the hands of the poor. The common sense solution of this problem would be to accelerate the group formation rate. ASA did just that by abandoning the slower shared-responsibility group formation process in favor of individual financial responsibility. Typically, ASA branches complete their group formation within three to five months, thus covering their operational costs after five months.
F. Quick operational and financial self-sufficiency.
ASA is considered by some as one of the most efficient MFI in the world. As mentioned above, because of the low cost, decentralized, branch based operation inherent in ASA method, Sarala branches, hopefully, will become operationally and financially self-sufficient within six months.
G. MFIs require strong internal controls and monitoring:
Sarala’s business product is money and we will be dealing with large amounts of money by borrowing/repaying, lending and collecting repayments. It is imperative that we install strong internal control and monitoring system. Fortunately, the ASA model provides several layers (branch Manager, Regional Manager, Divisional Manager and Head quarter) of overlapping monitoring and supervisory system. We have decided that very early in Sarala’s existence, we will have an internal auditor reporting directly to the Board of director through the CEO. Right from the beginning, we will have a computerized accounting system and MIS system.
H. Many of the Sarala branches would be able to cover their operational costs from day one:
In a densely populated area, Sarala will encourage a branch to grow to 140% (six loan officers) of its desired size. Then, split it into two 70% (three loan officers each) capacity branches. At that 70% capacity size, with three loan officers, a branch can generally recover its operations costs from day one. Both branches will then be encouraged to grow to 140% size in opposite directions and split again with one of the six loan officers becoming a branch manager. With splits coming every six months, one branch may form four branches within a year, without any capital loss during the group formative stage.
I. How do we plan to raise large amounts of on-lending money for rapid outreach expansion?
Apart from seeking equity and grant money, we plan to access on-lending money in three ways: 1. taking loans, 2. selling loan portfolios and 3. entering into “partnership” with commercial banks. “Partnership” is a new development in Indian microfinance. In this model, the bank provides the on-lending money and shares the risk of repayment and charges the bank’s market rate of interest to the clients, while the microfinance institutions provides the intermediation of selecting the clients, loan disbursement and collection of the repayments and charges a 6.5-8.75% flat handling fee. It has been reported that the ICICI Bank has entered into such a partnership with thirty leading microfinance institutions in the country and is negotiating with 20 others. Several other commercial banks (UTI Bank, HDFC Bank, ABN Amro Bank, Oriental Bank of commerce) are said to be entering into this type of venture in India.
J. What do we do to maintain a very high repayment rate?
During the last thirty years, Grameen Bank, ASA, Proshika and BRAC in Bangladesh and the replication programs around the world have demonstrated that very poor rural women are credit worthy. An extraordinarily high repayment rate may be expected after lending money to them.
Many Grameen projects have been successfully replicated in India. Some of them are undergoing spectacular growth (SHARE, CFTS, SKS and ASA-Tamil Nadu). As mentioned earlier, we shall adopt the written manual driven methods introduced by ASA. Most Grameen replication programs in India show a very high repayment rate of 98% or above. Some are maintaining an almost unbelievable rate of 100% (SHARE, SKS, SNEHA in Andhra, ASA in Tamil Nadu, and VSS in West Bengal) repayment.
The targeting, motivating, training of our clients, loan disbursement and weekly collection will be according to established ASA methodology. Bandhan, a new MFI in West Bengal, has successfully used the ASA method and is maintaining a 100% repayment rate. With the help of the borrowed Branch Managers from ASA, we have very good reason to expect that we would be able to maintain a very high level of repayment.
K. Mobilization of security deposit.
We shall require no security deposit for the 1st loan but require that our borrowers save money for a 20% security deposit on their 2nd loan, 40% security deposit on their 3rd loan, 60% deposit on their 4th loan and so on. This can be done by putting down, every week, Rs. 20 in the security deposit fund for every Rs.1,000 loan to be taken out in the next cycle. This will make a significant amount of on-lending money available to Sarala and it will build up a significant interest-bearing, personal savings for the clients.
L. Encourage clients to generate income without much investment.
Our clients will be required to plant short-term and long-term income generating plants and trees. Example – cocoanut, ‘sajne’ (Moringa) and papaya in the perimeter fence, banana and bamboo groves, date palm, ‘neem’, ‘segun’ (teak) in available land. They will be encouraged, whenever possible, to keep half a dozen of birds that forage on the ground (chicken), in the water (duck) or fly to distant fields (pigeon meat for market). They will be encouraged to maintain a vegetable garden with crops for the local market.
M. Protect clients from punishing interest rates.
MFIs across India, charge flat interest plus upfront fees to the extent of 15% to 20%. This translates into approximately 28 – 38% annual percentage rate. Much has been written in defense of this high interest rate – small portfolio, delivery at the door, weekly collection system, cost recovery, self-sufficiency of the MFI etc. The cost recovery and MFI self-sufficiency are absolute necessities and it is easy to understand that an MFI will never be able to bring down its lending interest rate to the level of a commercial bank. But some successful MFIs are very profitable and show huge increase in their equity – we assume from their earnings. Perhaps, a significant fraction of the cost of starting a new branch comes from the earnings of the existing loan portfolio – the poor subsidizing the service to other poor.
In the beginning, with few branches to share the cost of running a Head Office, Sarala will start with a flat interest rate of 15% but will strive to reduce this rate in the future.
N. Inter MFI collaboration for increasing client outreach.
Sarala’s goal is to make credit available to most of the poor in our chosen geographic area of service – West Bengal, Orissa, Jharkhand and eastern Bihar. It does not matter to us whether that credit is going to be extended by Bandhan, ISME, VSS, Sarala or any of the group of MFIs supported by CARE. We are far from market saturation and West Bengal will require many, many MFIs to serve a significant fraction of its poor. Sarala will provide consulting, staff training even small equity support to start-ups and small MFIs.
