This is a guest post by Alexandra Tsiolas, a college student at the University of Oslo, Norway. Alexandra met with Anoj Viswanathan, co-founder of Milaap, an innovative startup which is pioneering new types of microloans in India leveraging an online crowd-funding model. Milaap is a Unitus Seed Fund investee. More about Milaap >
Alexandra: How did the idea for Milaap arise?
Anoj: Traditionally microcredit has been about giving a woman a small loan so that she could buy a buffalo, set up a small shop, etc. On the ground I saw that it really wasn’t working for people to get out of poverty. My one-year experience in a microfinance organization in south India taught me that this is not supporting entrepreneurship; this is a “proprietorship” because the person is basically employing herself. Unless we create jobs and assets at the grassroots level, we can’t move to the next level. That was the first thing I learned from my experience working in this organization.
The second thing I learned was that interest rates were too high. I quickly realized that it is not the mistake of the microfinance organizations (MFIs) alone. These organizations have a very high operating cost – they have to actually go to the people and give the loan, and the MFIs are borrowing from mainstream banks. The interest that MFIs pay to borrow money is around 15 to 18 percent. So you start off with borrowing at 15-18 percent and then you lend, which has an operating expense at around 8-10 percent… of course the cost goes higher.
So we thought: What if we build a platform where we can dramatically reduce the cost of capital. At the same time it’s not like grant money, because I’ve seen a lot of grant money that’s not sustainable in the long term. We think crowd-funding is the way to do it. Through crowd-funding you raise small amounts of capital through people who aren’t looking for high return, and when collectively pooled, it is a great way of reducing the interest rate. So that’s how the whole idea of Milaap came in. To fund a new kind of microfinance with a new kind of capital, a mainstream capital AND we wanted to primarily support the entrepreneurs with bigger loans, as they are the ones creating jobs for their community, not just themselves.
Then, finally, in June 2010, we did a pilot-project. We raised $5,000 dollars at a small event in Singapore and then quickly deployed it as loans to ten women entrepreneurs who were creating jobs making and selling various products. It was a success. So, yeah, that’s the story of how Milaap got started.
Alexandra: What is the role of Milaap’s field partners?
Anoj: The whole concept of field partners came about when we decided to start Milaap. The primary motivation was that we saw a large number of MFIs (both for-profit and non-profit) that were doing great work on the ground, but they weren’t getting any enough visibility and therefore they were not able to raise capital to keep up with demand for microloans.
When we thought of starting Milaap we thought that these guys are great in identifying a borrower, appraising if they were credit-worthy or not, dispersing the loan to them, and collecting it back. But their challenge was to get visibility for their work, technical assistance as to how to design the loan product, new kinds of loan products, and difficulty raising capital. So we said we will focus on these value-adds – bringing in capital and providing the technical assistance – while our field partners will be responsible for making and collecting the the loans.
In other words, these are not individuals, they are registered organizations, MFIs and NGOs, and we put a very strong focus on identifying these types of dispersing agents. We have a very strict selection criteria for field partners. For example, we look for organizations who have been working for at least 5 years in the field, who have a strong microlending portfolio with at least 5 crores rupees ($1,000,000), etc. It is very important that we are not the only source of lending capital. As you see, we have a strong quantitative checklist. Qualitatively we go to the field, see the top-level management, the borrowers, middle-level management, and see their operations processes. It is a very thorough approach.
Field partners work with us because we are able to provide them lending capital at a lower cost than what they can negotiate with traditional banks. For example, when it comes to vocational training we have a lot of youth in India, 400 million youth, between the age 15-34 of which only 3% are employable. Unfortunately, not all of them can go to college, but we still wish to build a skilled workforce … which you can do through vocational training. These type of educational/training loans have long-term impact, because the borrower goes through a program, gets a job, and then can start paying the loan back out of their new higher level of income.
So Milaap designs loan programs and the implementation is done by the field partners.
Alexandra: In your different impact areas, you have different programs. Tell us more about the purpose of this.
Anoj: We have seven focus areas: education and training, water, sanitation, energy, small business, healthcare and sustainable farming. Within our seven areas of operation, we have several designs to suit different needs. For example, we have a vocational training program where the student enrolls with a job offer. If the person does this program successfully, s/he gets placed in a job when s/he is finished. That way, both the lender and the borrower feel more confident about lending money.
When it comes to the small business sector, our field partner gives someone the training and capacity support and helps sell the product once the product stream is finished. We provide the working capital – for instance, the investment in machinery, raw materials or inventory. These types of loans run anywhere from 50,000 to 4 lakhs rupees ($1,000 to $8,000). Usually, banks would only consider a loan size of at least 10-15 lakhs rupees ($20,000-$30,000.) And the microfinance organizations traditionally give up to 20,000-25,000 rupees ($400-$500) maximum. So what about small business owners who need loan amounts between 25,000 rupees ($500) and 10 lakhs rupees ($20,000)? It’s a huge number of people. Those who are running a small business and employing 5 people will need that type of capital. So we’re trying to provide these resources through our entrepreneur loans.
We are also looking into sustainable farming, but we haven’t found a suitable partner yet. We are actively looking for one though.
Health is more of an emergency aspect. Even though it’s said that you should not give things that people can’t pay back, what I’ve seen on the ground is that in case of an emergency, people don’t have the cash upfront to pay for medical costs. MFIs don’t give healthcare loans, so the people go to the loan shark and borrow, and then they are further in debt with extremely high interest rates. So we’ve designed a very low interest health loan to meet basic medical emergency needs. In a health emergency, our field partner immediately gives a loan to the person, and then puts the profile on our site. Then anyone can fund that loan.
Alexandra: How exactly does the process work? If I invest 5,000 rupees ($100) through Milaap, where does my money go?
Anoj: You can choose a specific project or person. This person has been identified by an field partner MFI and has a profile published on our website. When you go and make a loan using paypal or a credit card, the money comes to us. At the same time, there will be people around the world making loans to different entrepreneurs, and at the end of every month, we disperse money raised to the MFI. For example, if there were 30 borrowers of a particular MFI who got funded from various lenders, then we would disperse that amount directly to the MFI, and then it’s dispersed to the people who are taking the microloan.
Alexandra: You don’t simply give money in the hands of the borrower, you operate with vouchers. Why is this?
Anoj: The whole idea is to ensure end utilization of credit. Because our capital is a cheaper source of capital, we don’t want borrowers to pay off their more costly loans with Milaap loans. So we find mechanics in which the loan is utilized for the intended purpose. How do we do this? It differs from MFI to MFI. For example, in regards to vocational training, we don’t give the money to the student and ask him to go and pay the training program fees. The loan is given on behalf of the student to the training institute. Similarly with the payback, it happens when the student gets placed in the job. It’s deducted from the employer’s salary. So that way, the borrower doesn’t have to worry about paying or defaulting. This is basically a safe mechanism.
With entrepreneurship loans, the loan is given in the name of that particular entrepreneur or unit. The field partner is the one who provides training, training, buys raw material and when it’s finished, they sell the product to the market. All this is a big process. It is staged by us, on behalf of the entrepreneurs, through the MFI. And when they sell to the open market, whatever the MFI has to repay, is deducted.
So, this is roughly what we call vouchers. Again, what we are trying to do is put mechanisms to guarantee that the credit is used for the intended purpose.
Alexandra: How many lenders and borrowers do you have as of now?
Anoj: As of now we have raised about $250,000 in loans, from nearly 2,500 lenders around the world, and we have dispersed to nearly 1,000 borrowers, in five Indian states.
Alexandra: What did the investment from Unitus Seed Fund mean for Milaap’s operations?
Anoj: We don’t use the investment from Unitus to disperse loans. We saw that there was a huge value-add if we utilize that money to build our organization’s capacity. In order to be able to facilitate more loans, we need to work on the technology platform, the marketing, the field partnerships, and design — basically all the operational capacity areas. Of course, we’re hoping to scale. That’s the whole idea. We were 5 people before, and now we are 16. We’re moving in the right direction.
So, we don’t use any of that money to give loans. Raising loans from the platform is a sales product. The main reason why Unitus was a great fit for us was because they were some of the pioneers in accelerating microfinance. In 2000, when very few people knew about microfinance, they were the people who came in and accelerated the entire industry.
And this is exactly what we are trying to do now. We’re trying to move the model to the next generation of microfinance, a new kind of microfinance that can focus on essential provision, that can focus on entrepreneurship and that can focus on assets. So that’s why we believe Unitus can help in terms of their past experience and getting a good model of how to implicate.
Alexandra: Do you have an impact story to share with us?
Anoj: I have so many stories. One of the most prominent ones that comes to mind is about an entrepreneur who was working in a slum community outside Bangalore. She was into handicrafts, making office equipment and the like, and she was basically stuck, almost going bankrupt, because she did not have access to capital. She was primarily hiring destitute women and orphans, and she had a definite plan which required 3 lakhs rupees ($6,000) to invest in sales and marketing. The export markets were down at that time, so we weren’t sure how she would manage, but we took a gamble on her because she had a conviction that she wanted to work in the community. Today after nearly 1 year and 3 months, she has employed 60 people, 40 of them are contract workers, 20 are fulltime guys, and she’s doing manual production of 3 million rupees ($60,000) worth of sales, which is huge.
The reason we were able to help her is because we raised capital from socially conscious individuals. Even if she had not succeeded and not been able to repay, I’m sure 95 % of lenders would say that’s fine, she made the effort. So this is why I praise the patient low-cost as well as risk-tolerant capital.
There are many such stories. There was this person who happened to know that I was visiting the field in a neighboring village. He had taken a loan through one of our MFI partners, and now he had cycled 5 kilometers to meet me. He came to say thank you. He had a disabled daughter and every time she wanted to relieve herself he had to carry her to a field, and after she hit puberty he was worrying about what would happen. He was also from the excluded caste, so he never had an opportunity to even enter a bank before. But now, because of Milaap, he got a loan to build a toilet in his house. He’s working double overtime to pay the loan, but he’s thankful nonetheless.
Also a number of youth that have undergone vocational training have great stories. Like a guy who was first in his family to finish all levels at school, but it was of no use because he could not go to college. But through the vocational training program, he now works for a large BPO company and says that he’s probably the first in his family to work in an office.
There are many such stories on the ground.
Alexandra: You are changing lives!
Anoj: Hah, no, I’m just enabling lives to change!