Succeeding in Business in India’s Slums

Succeeding in Business in India’s Slums

By Peter S. Green

When Bina Dethe started her first business in Mumbai’s Shivaji Nagar slum about 10 years ago, videogames were all the rage, so she operated stalls outfitted with computers where neighborhood kids could play. But when home computers became so cheap that even slum dwellers could afford them, she shifted to selling snacks to workers and school children.

Dethe had financed those businesses with loans from microfinance groups. But as her ambitions and business skills grew, she found those organizations could no longer help her. They didn’t allow her to increase the amount she could borrow, so she closed out those loans and went in search of more capital.

The obvious choice would have been a bank. But banks won’t lend to small business owners without credit ratings or collateral, even if they have shown they can repay loans to microfinance organizations. Without access to capital, low-income entrepreneurs like Dethe who got their start with small microfinance loans can’t expand their businesses.

But Dethe is exactly the type of client Svasti Microfinance is looking to help. Mumbai-based Svasti makes traditional microfinance loans, but it is also developing new products and services tailored to Mumbai’s poor but economically vibrant slums. Svasti is creating a credit-rating system adapted to local conditions and finding innovative ways to use possessions like informal slum dwellings and tiny slum businesses as collateral. Svasti is also helping low-income businesspeople obtain a range of financial services commonly available to the middle class—bank accounts, individual loans, mortgages and insurance.

For Svasti (the word means “prosperity” in Sanskrit), it’s simply a matter of finding new ways to measure reliability for these unbanked entrepreneurs. They may not have a track record in a cash economy or clear title to their homes or shops. They do, however, pay phone bills and school tuition, order supplies, collect cash from their customers, meet their payments on microloans and save money through informal chit funds and credit societies.

 

“There are really a lot of data points here,” says Arun Padmanabhan, Svasti’s co-founder and chief executive. “Without even looking necessarily at income levels, just at their behavior, one can make an evaluation. In addition, one can look at their recurring expenditure and periodic savings patterns to draw conclusions on credit capability.”

Dethe clutches a red cellphone as she sits in the Svasti office not far from Shivaji Nagar and describes her dreams. She isn’t making much money selling snacks, just 400 to 500 rupees (US$6-$7.50) a day on sales of about 1,200 rupees (about US$18). It also takes time to keep her stall stocked and secure. Instead, she dreams of starting a boutique selling ready-made clothing for women and children. But that will require capital to buy inventory.

“It’s tough in this market to get a loan because everyone wants a guarantee, as if you were someone who has a permanent job. And no one has a permanent job in Shivaji Nagar,” she says.

Svasti didn’t demand a guarantee for the loans they have given to Dethe in the past five years, most recently a 35,000-rupee loan (about US$500) for her snack stall that she used to buy goods for resale and to renovate her shop. While she looks for a space for her new venture, Dethe continues to sell chocolates, juice and homemade vegetable-filled dumplings called samosas from her stall, located on one of Mumbai’s busy sidewalks near Shivaji Nagar.

Most microfinance lenders make loans to small groups rather than to individuals, with peer pressure proving very effective in preventing defaults. Svasti also uses peer pressure. Each person in a group of five or so borrowers, usually women, generally receives the same size loan. They are jointly responsible for guiding each other’s investments and ensuring that each member meets his or her repayment installments.

 

The groups meet weekly, and the lender’s representative comes to collect the week’s payments. The meetings are fertile ground for information that is helping Svasti build its credit ratings. Narayanan Subramaniam, Svasti’s co-founder and finance and technology chief, developed software to gather and mine customer data, such as which customers attend the meetings, which customers come on time and which borrower asks another to cover her weekly payment.

“We leverage this kind of information to make effectively an individual credit report on customers that goes beyond conventional analytical methods, and we have a system of ranking and rating customers based on this,” Padmanabhan says. “It is this which helps us make a determination about who is capable of taking on higher loans.”

Such a credit rating is necessary to transition into loans for individuals—another innovation in Svasti’s multipronged approach to microfinance. For now, Svasti’s credit rating consists of a simple pass or fail, Padmanabhan says. But the company will soon roll out more complex credit scores that will include an analysis of each borrower’s household cash flow. Real credit ratings should enable Svasti to make both secured and unsecured loans to individuals at higher amounts, as commercial banks do.

“We want to make thousands of these type of loans across multiple lending models, with each of the models being profitable on its own, so that it is a sustainable activity,” Padmanabhan says.

The traditional microfinance group loan has worked well in rural areas, where group members have similar economic opportunities. But in this city of 23 million people, Mumbai’s small entrepreneurs operate very different businesses with very different overhead costs. In shops that line the streets or with their wares laid on a cloth on the sidewalk, vendors sell everything from newspapers and tea to underwear and cellphones. Services abound: tailors, taxis and rickshaws vie for space. Streetside factories provide welding services, and mechanics fix motorcycles. Some entrepreneurs serve the slums where half of the city’s residents live. Others, such as Mumbai’s famous lunch box carriers, called dabbawalas, ferry lunch to their customers in the gleaming office buildings of India’s financial capital.

 

“This is probably the most economically active region in the world,” Padmanabhan says. “You have this massive population who are into millions and millions of small businesses.” But the traditional microfinance model of group lending puts people who need larger loans at a significant disadvantage, particularly those who have demands for higher amounts of money to expand their businesses faster and who can service the loans promptly, he says.

But in order for Svasti to offer loans tailored to individual, not group, circumstances, it needs more than credit ratings as security against default. Without a group to guarantee each member’s payments, Svasti needs to find another form of collateral, but one adapted to a city where land ownership is in flux.

“One disadvantage is that they live in houses with no clear title,” Padmanabhan says. “But it’s not completely unclear.” Slum residents who have inhabited their homes since 2000 have the rights to the land their homes sit on, if not to the homes they built. That partial title and the high demand for homes mean Svasti can collect on its debts if a borrower defaults. “When it comes time to enforce the mortgage, the negotiation is very easy. They find a way to refinance, because they know I can find a buyer,” Padmanabhan says.

Svasti lends no more than one-half of the estimated value of the home for tenures ranging between three and five years, making repayment more likely. Svasti expects that very often when repayment problems are seen in these loans, the outstanding loan amount is less than one-fourth or one-fifth of the value of the home, making recovery of stressed cases easier.

Svasti’s aim is to provide loans against a group of assets they may actually possess and give them credit they can use for businesses. Svasti also wants to provide its customers with insurance, bill payment services, retirement accounts and more.

“Our goal is to be a comprehensive financial-service provider to the low-income population,”
Padmanabhan says.

Padmanabhan had been working as a corporate lawyer for ICICI, a major Indian bank, and in his spare time, as a volunteer, helping flood victims after the Indian Ocean tsunami in 2004, when, he says, he felt he needed to improve the balance in his life. Combining his banking experience with his interest in helping the disadvantaged, he puzzled how to solve one of the developing world’s biggest challenges: How do you create the next billion consumers?

The answer was obvious to Padmanabhan: “by helping families that are disadvantaged economically and socially to move ahead.”

Partnering with Subramaniam, an accountant and technology expert, he created Svasti in 2008 to bring Mumbai’s enterprising slum dwellers a full range of financial services.

Svasti has since grown to 15 branches across Mumbai and made 110,000 loans totaling more than 2 billion rupees (about US$30 million).

It’s been tremendously successful by some key measures, with lending-related defaults of only 400,000 rupees (about US$6,000). That’s a default rate of 0.02 percent, versus 0.88 percent (44 times worse) for business loans made by commercial banks in the U.S., according to Federal Reserve data.

Two years after its start as a nonprofit, Svasti became a for-profit company, which Padmanabhan says makes it easier to raise private capital. It’s still seeking grants, mainly for the kind of costly innovations like developing a credit-rating system that its operating profits could never subsidize. Capital comes from 22 investors, including the Michael & Susan Dell Foundation, a private equity fund called Bamboo Finance, several members of the Mumbai Angels investing group and the Poonawalla family, owners of the Serum Institute of India, a pharmaceutical company.

A $250,000 grant from MetLife Foundation is helping Svasti transform itself from a traditional microfinance company into a multidimensional, multiproduct company serving the urban poor by adding new offerings such as bill payments, developing the credit-rating system to assess the individual needs and capacities of low income households, introducing new secured and unsecured lending products, and creating new and innovative products and services for India’s microentrepreneurs.

“We don’t generally think of poor people in that fashion, but a majority of poor people are enterprising,” says Krishna Thacker, director of the financial empowerment program for MetLife Foundation in Asia. “It’s not that they’re not making money. It’s just that they don’t have any tools to manage their money well, which we have access to. If you don’t manage it well, it has an impact on health, education and pretty much everything. Financial inclusion is essentially about helping people manage their money well.”

Dethe is already taking more steps toward financial security. In addition to using Svasti to help her build her business, she has opened up an account with state-owned Bank of India’s consumer banking division. She banks her earnings there, pays to send her sons to school and saves to buy land for a new home far from her mother-in-law.

Dethe is negotiating with Svasti for a 100,000-rupee (about US$1,500) individual loan, collateralized by her informal title to her home or her shop, to finance the clothing store once she pays off her current loan. Svasti’s new credit rating has given Dethe hope that the success she’s shown in her past businesses, and her steady repayments on her existing loan, will convince Svasti loan officers that she can move up to the next rung.

“If I go to the moneylenders, the interest is so high I don’t make a profit,” Dethe says. “But if I can get the loan from Svasti, it’s the only way to expand.”