Lowering Borrower stress: The SKDRDP model

Dr. L.H. Manjunath, Managing Director of SKDRDP interviewed by Dr. Arvind Ashta and Dr. Nadiya Marakkath on 25th August 2014 in Dharamsthala, Karnataka, India.

SKDRDP is a Hindu faith-based microfinance organization lending to people of all religions in Karnataka. The priest who founded the organization is Dr. Heggade and his temple is called the Shri Kshetra Dharamsthala. We met both Dr. Heggade, the founder and chairman, and Dr. Manjunathan, the Managing director. This first transcription is based on the interview with Dr. Manjunathan.

Q. We have been very fascinated by your spectacular model, where interest rates are lower than market. But your interest rates have gone up.

Dr. Manjunath: Now our interest rates are 18%. We borrow at 12%. Interest rates have gone up because banks financing rates have gone up. Secondly, the canvass on which we are working now has broadened into a more risky area. When we were working in the district of immediate influence of Dr. Heggadé and that of the Kshetra Dharamstahala (the temple), people would respect us. So we needed less money to manage this portfolio. The management costs were less. Now we are going to new areas. Thirdly, this expansion into new areas means that returns on investment will come after two years. So we have more expenses in new areas. The money has to come from established areas for cross-subsidization. We have kept the interest rate at 5 to 6% over the bank rates.

Q. Your personnel costs and administrative costs are lower than other Microfinance Institutions (MFIs). How do you control costs?

Dr. Manjunath: We pick up people from the grassroots. We have taken only one MBA. Other MFIs take many MBAs. So, our people cost us much less. Second, the risk perception is low. The aura of the temple and of Dr. Heggade temple means that people feel they are cheating if they don’t repay. They don’t want to deceive God. Third, we plan the loan well in advance to get better recovery. We take 12 weeks to process a loan in which time we teach the people on how to plan for their business, learn accounting, etc, as opposed to 48 hours by some MFIs. The microentrepreneurs have to write everything down. Now, this gives them a goal. So even the poor people who never had a goal, even marginal farmers, have now got goals and it becomes a habit for them. Fourth, we take these people to successful groups to see how it works. So, in fact we spend a lot of money, Rs. 1500, before they get the first loan. Of course, the money goes to the Self Help Group. The Group then distributes the money. Finally, in other MFIs, the credit officer goes to get the reimbursement. In our case, the agent or the group leader has to make the payment. So my cashier doesn’t have to go anywhere. This lowers the cost.

Q. Who forms the SHG?

Dr. Manjunath: Our field workers select women from the field who are between 25 and 35 years old and who have children going to school and therefore have spare time. They have some experience. We pay them Rs. 100 per group for managing the group. If they manage 35 groups, they can make Rs 3500 per month. As the loans go up and amounts go up, they can make more money. They can manage between 10 and 50 groups. They are our agents. This is not a salary expense but an incentive to agents, an administrative expense.

Q. Are these women the group leaders?

Dr. Manjunath: They are not the group leaders. They are service representatives.
Q. What are their qualifications?

Dr. Manjunath: Agents and employees have to finish matriculation (class 10). Even some of our managers and directors are only matriculates. But they have local knowledge and people-handling skills, to manage groups and meetings.
Q. Why do you have such a high leverage ratio? You have taken a lot of loans.

Dr. Manjunath: It continues to be high. Loans are given by commercial banks. But we are trying to change our model to move out of microfinance, to get a different relationship with the banks. Banks have a different set of norms for giving loans (like loan after six months, loans limited to two times savings). With the introduction of the Business Correspondence (BC) model, we need to adapt. But we have told the banks that our model works because we have overcome the difficulties of getting back loans. So why don’t you adopt our rules and abandon your norms? So, now we will service the portfolio of the banks. By 2015, we will have no portfolio of our own.

The Trust was giving us donations, but now we don’t need donations any more. Now we are self-sustaining and even able to do some charity from the funds of SKDRDP. These balance sheets are available on our website.

Q. Why should the only Hindu faith based microfinance organization, which is doing so well, abandon the field of microfinance?

Dr. Manjunath: We are a charitable trust and a spiritual group. At one time, Dr. Haggade got into microfinance wily nilly. In 2006 the BC model came. So banks wanted to bring in everybody. So all the banks and government of India decided that they would go by the BC model and they want to pay the BCs a fee. So, Dr. Heggade feels that there is no longer need to be in microfinance if we can be in empowerment of people. But, please note that banks will lend directly, but we will manage the groups and recover. The loans will be on the banks book. That is the only difference.
Q. What is your customer profile?

Dr. Manjunath: In rural areas, agricultural will be 60% to 65%. In some districts it may be lower. As you go outside our own immediate district, agricultural share is higher. This was surprising bacuase banks were already giving loans to agriculture.
Q. How do agricultural people repay you? They can’t pay every week. So how do you manage the cash flow?

Dr. Manjunath: This is our biggest innovation. Many people said it won’t work. The farmer grows sugarcane which is a cash crop which will be reaped after 12 to 18 months. He only has to plant it and switch on the pump once in a while. But lazy people only dream. If the crop fails, he commits suicide if the loan is from a moneylender. This is because of bad investments. What we do is we tell them to repay every week, Rs 200, irrespective of what happens in the end. So, he will be forced to do other activities, poulty, dairy or daily labour, and earn 250 to 300 rupees a day. So, he does a day’s labor to repay us for a week. This is the credit culture. So at the end of the 18 months, if the crop fails, he has already repaid. If the crop succeeds, all the profit is his. So, instead of suicide, he is laughing. So, everywhere we have gone, we have started this credit culture which has allowed the farmers to repay. Moreover, this multiple source of income has made him reduce risk.

My boss asks if they can drink every day and they have to admit that they can take out the money for such wasteful expenses. So, then surely, they can repay us too. So, it is the creation of mindset on use of money and repayment habit which is required.

Q. Will all NGO MFIs become BCs?

Dr. Manjunath: Most NGO MFIs have already become BCs. This may not be immediately visible, but its happening. Everyone wants a cut of this cake. But these other NGO MFIs don’t have negotiation skills and therefore can’t make money. We are insisting that we get 5% fee even for the BC model. So, banks give to SHGs at 11% but we recover 16% and keep 5%. For us, the financing problems are over, and we just do our administrative work.
Q. What are your challenges of fast growth rate?

Dr. Manjunath: We have expanded for a year, stabilized for a year and then expanded again (except for the last two years where we didn’t stabilize and kept expanding). Second, we have not gone out of our area and zone of Dr. Heggade’s influence which is Karnataka. People in other districts of Karnataka are waiting for us. Third, our low interest rates have saved us. Fourth, we have been very careful to cultivate political and bureaucratic leaders. This includes local village leaders who are solicited for their aid from the beginning. This humility allows us to succeed. This humility comes from Dr. Heggade.

Q. Your customers are Hindus?

Dr. Manjunath: We are totally secular, giving loans to Hindus, Muslims and Christians.
Q. In what way are you different? What are your innovations?

Dr. Manjunath: Our commitment to people’s needs is our biggest asset. We have introduced new products, including insurance. We have made models which have guided the government of India and Life Insurance Corporation. We also started old age pensions for the destitute and education scholarships to the very poor. So, we have never looked at the impact on the financial bottom line before doing social work. On some products we make very little money and yet we enter the market. Our housing loans are 12.5%. We get loans at 9% or 10%. Some of our crop loans are at 15% while we get loans at 12%.

Our software was created in-house. Now we can give the software to others. The SHGs can just send us an SMS which goes into the MIS system. This updates the cash records. The cashier then gives them their balances.

We were the first one in the country to use handheld devices.

Q. What is your background?

Dr. Manjunath: I am a Veterinarian. Then I joined a bank. Then I worked in RUDSET which allowed me to train entrepreneurs. Then I went back to mainstream banking. Then Dr. Heggade recruited me.

Q. How do you manage borrower stress: he won’t pay if there is no stress? The moneylender harasses and he will commit suicide.

Dr. Manjunath: The harassment should not come at a time when the amount is very huge. It is like falling into a small pit and falling into a well. If you fall into a well, you will be very scared. If it’s a small pit, you will not be scared. If it’s a weekly small amount, you can go and question him. The amount required is very small. If its monthly, its four times greater and huge. So, if its after 12 months, it is a mountain. So the more frequent the recovery, the easier it is. In fact, millions of people do this on a daily basis and borrow from moneylenders at 20% per day or 7200% per year. They can manage daily interest rates even if it is so high. But we are taking only 18% per year. If he has broken a leg, we can make adjustmentS. So, it is important for the field worker to intervene at the right time. In India there is no dearth of money, it is a question of mindset. So, if you make it like a bank and try to recover at the end of the crop period, obviously it imposes stress and non-recovery.
Dr. Arvind Ashta is a Professor of Finance and Control and holds the Banque Populaire Chair in Microfinance at the Burgundy School of Businesss in Dijon, France.

Dr. Nadiya Marakkath is Assistant Professor at the Centre for Social Entrepreneurship, School of management and Labour Studies, Tata Institute of Social Sciences, Mumbai and is coordinator for its incubation centre.

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