By Smita Ram, Rang De Team
Goat rearing and Vegetable vending are perhaps two of the most often quoted examples on how the poor earn huge returns. It is always said that a poor vegetable vendor can earn upto 20% return on their investment everyday. Similar percentages are quoted for goat rearing. Isn’t it time we move beyond these percentages and look at other dynamics? For instance, how much saving is the vegetable vendor able to have at the end of the year? Are they able to afford to send their children to school? Are they able to afford health care in the nearest health centre (if it exists)?
Perhaps, we all know the answers to these questions. There has always been a reluctance to believe that interest rates have anything to do with indebtedness. Common sense tells us that higher interest rates and multiple loans will definitely lead to indebtedness. With lack of credit history for borrowers and with start up MFIs blindly following a few big players, the same borrower ends up getting multiple loans from different MFIs. Interest rates, multiple lending are all part of the same vicious circle.
Why does Rang De always harp on the interest rates? What are we trying to do differently? Here are some concrete measures that we take to ensure we have a good balance between social impact and sustainability:
1) Interest rate cap — Our field partners are not allowed to charge anything more than 5% towards their operational costs. This is audited and verified during evaluations and reviews. This ensures that borrowers are not charged high interest rates. Partnership is suspended or terminated if there is a breach.
2) Our field partners — It is also important to understand who our field partners are. Our field partners are not large MFIs but they are really small NGOs and NGO-MFIs who work in remote areas and have a dearth for capital. Hence the choice of the geography. We are consciously moving towards regions where microcredit is scarce. There is little opportunity for partners to make money very quickly. They will need to work with Rang De long enough and partners who do so realise the value of the partnership.
3) Our borrowers — Every field partner signs up to a Mandate that helps them screen borrowers. About 75% of our borrowers are first time borrowers — people who did not have access to microcredit before. The Rs.1000 loans (1 year loan tenure!) in Orissa is a classic example. The emphasis is on first time borrowers and no borrower can have two active Rang De loans at the same time. We also check if the borrower has more than one loan that they are repaying at any given point in time. We are strictly against ‘top up’ loans.
4) Enforcement: A partnership agreement and Mandate for field partner is signed by the partner. Their financials are now audited every year and this is apart from a minimum one evaluation visit to the partner. We are also beginning to rate the field partners based on their performance.
We are building on existing audit mechanisms and trying to strengthen the process. This is the road-map for Rang De:
1) Financial literacy of borrowers — ensuring that loans are not thrust upon borrowers but they make an informed choice.
2) Credit history and data sharing — to be able to track the credit rating of the borrower and ensure that the same borrower does not get multiple loans.
Eventually loans need to be serviced by banks. That is financial inclusion. The overall aim of micro-financing must be to show that the poor are bankable and are financially included. Just like you and me can walk into a bank and get access to a range financial products, the poor should be able to do just that.
It is time for innovation. It is time to do things differently. Rang De has a long way to go before we are able to lower the effective interest rate to a single digit!