Social Entrepreneurship in India

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Social Entrepreneurship in India

• Anna Agarwal
• annaag_at_mit.edu

2
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 (not measuring
  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 BusinessSocial Business

• Creating business models revolving around
  low-cost products and services to resolve social
  problems
• Social business is for more-than-profit
• combine revenue-generating business with a
  social-value-generating structure
• Can be two kinds
• Creating services for poor
• Owned by poor ( not a SB )

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• How can you do business and serve social goals?
• Why is profit-making not conflicting with social
  objectives?
• Profits -
• Promotes RD, 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 a HYBRID 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 Award 2006)
• Kiva (peer-to-peer micro-lending website) not
  founded in India
• Energy
• Solar Electrification - Harish Hande, SELCO
  (Social Entrepreneur of the Year Award 2007)
• Other examples
• Education (Same Language Subtitling, Janarth -
  education solutions for children 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 of SHGs

• Microfinance is providing financial services to
• the poor such as loans, savings, money transfer
• services 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 41)
  of the total funds in group account starts with
  lower multiples (11 to 21)

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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 of Capital Constrain on Outreach
• Until recently, MFIs were dependent on donor
  grants, but grants are limited in size and
  availability 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 by
• IIT 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.
• For microfinance, this enables updation of
  databases real-time and remote monitoring
  (reduces the cost-to-serve)

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Discussion

• What are the important questions
• Agenda for next meeting volunteers for leader?
• Logistics date, time, venue

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References (not appropriately referenced in the
slides!)

• Creating a World Without Poverty, Muhammad Yunus,
  Book, 2007
• MICROFINANCE IN INDIA  SECTORAL ISSUES AND
  CHALLENGES (By Thorat, 2005)
• The Indian Microfinance Experience
  Accomplishments and Challenges (Paper, GATECH,
  2004)