graylightning

Khosla and SKS: 500,000 Borrowers but No One at the Party?

I briefly met Vinod Khosla tonight after he made an appearance at a small press conference held by SKS announcing their 500,000th microfinance borrower. The Grameen-style MFI now has a portfolio of over $45 million in loans outstanding across half a dozen states in India and is one of the fastest growing MFIs here (160% y-o-y portfolio growth) with one of the highest repayment rates (98%).

Kholsa, Silicon Valley venture capitalist and co-founder of Sun Microsystems, led SKS's first equity round back in March of 2006 and currently has $500k invested in the company. His track record needs no explanation: Sun, AOL, Netscape, Excite, Juniper, Cisco, Corvis, AMD. And as the first near-billionaire I've ever met, he seemed like a pretty nice guy.

The point of the press conference was to garner a little free publicity, which SKS CEO Vikram Akula has been doing a lot of in the last year (see last May's WSJ and Time Articles). But, to Vikram's chagrin I'm sure, there was a very small turnout and much of the beautiful steaming Indian food they had laid out went cold. Not sure if they didn't get word around or if people in the sector here are just tired of hearing about SKS for the time being.

Nonetheless, SKS did make "unofficial" mention that they are announcing another equity deal soon which will include an additional Rs. 6.5 crore ($1.4 million) from Vinod and about Rs. 4.5 crore ($1.2 million) from Brinks Security, a specialist in cash transportation and handling. No word on what the total deal size will end up being, but I would expect the other existing shareholders (Unitus, Ravi Reddy) will bring in several million more, along with a few new players.

This just in - tomorrow morning the Hindustan Times and Wall Street Journal are launching their new, much rumored, joint-venture Indian business paper. Have a few friends working on it so I'll get a copy in a few hours and let you know how it looks.

VC, PE and All the News from Mumbai

Today I was in Mumbai (formerly Bombay) attending a Conference on Venture Capital & Private Equity in Indian Banking and Financial Services at the ITC Grand Maratha Sheraton.

Most of the speaker topics revolved around PE and VC investment in mainstream financial services in India, but Microfinance being such a hot topic as of late, there was also a session with panelists speaking on venture capital investment specifically in Microfinance.

There were some interesting notes from the speakers, including my boss, on how to identify and assess microfinance managerial talent. But the news of greatest relevance to the PE and VC investors in attendance today was this morning's story in the Economic Times that Indian consumer retail giants Reliance and Bharti are actively looking to invest in microfinance organizations and may be setting up proprietary microfinance operations of their own. Should this news actually turn out to be one or two big equity purchases from the major Indian retailers, I think it may serve as a major validation for the microfinance venture capital exit strategy that investors in this sector have been planning (and mostly hoping) for.

In other microfinance news today, Muhammad Yunus spoke with a small group in Delhi while I was away (more when I get back and hear what he talked about), and SKS announced that Vinod Khosla, founder of Sun Microsystems and investor in SKS, will be in Delhi Wednesday at a reception marking SKS’s reach of 500,000 microfinance borrowers.

I think we'll see some more big news soon on a couple of the names above. I'll keep you posted.

My Goodness, My Google

You know there’s something special going on in India when the world’s biggest search engine starts making its presence felt here in a big way, not just in Bangalore and Bombay, but at levels high and low across the country.   

During the final three days of last week, as I traveled around India for work (and play), I had conversations with three different Google employees, in three different states. The most recent encounter was with a San Franciscan working in Google’s Hyderabad office and waiting for the same flight as I at the airport. Before that, I met a Google business development exec at a small company in a rural state bordering Delhi. Prior to that, I chatted with a Google friend visiting from Mountain View on business and staying in Gurgaon, Haryana. All of these conversations were in person, except the last one, as my friend didn’t have time to reach Delhi before catching a flight. How did we communicate? Over Google Instant Messenger, of course.   

Having worked in the Bay Area it’s not just that I get all ‘googley’ over meeting employees of Silicon Valley’s brightest star – but it is something to see so many high-powered Bay Area types living and working in cities where the cows eat the trash. It’s a far cry from the Googleplex and the Golden Gate.   

There has to be a reason these Americans and returning Indians I keep bumping into are happy to toss all the trappings of Western life and strike out into the Wild, Wild East of India. The fact is, Google, and its employees here, get it. They understand the long-term value in India, and that it’s more than just low cost R&D and outsourced back-office support (though they have those functions in Bangalore and Hyderabad). The opening of sales and marketing offices in Delhi and Mumbai this past year signaled that Google understands the potential of the Indian domestic market to be not just a cost center, but also a real revenue driver.   

InternetWorldStats estimates there were roughly 40 million Internet users in India at year end. That number has been growing at a compounded rate of 35% per year since 2000. If this trend continues, there will over 100 million users in India by 2010, and I'm guessing the majority of them will quickly learn that Google is the most organized way of sifting through information in what can be a very disorganized country. And if the language differences across this country seemed a barrier to entry, the search engine and some accompanying applications have already been translated into four of the major local languages plus Bengali.   

While this past week’s three encounters helped me complete the whole Google thread for my blog, what really surprised me about the plane where I met the Google employee was the number of other American business organizations represented. Besides the Googler, there were several UBS analysts setting up outsourced information services for their investment bank, two MBA students from UVA’s Darden School, and a team of Accenture consultants training employees at their facility in Hyderabad – which one trainer mentioned, “At 3,000 employees, is roughly the size of our home office back in Chicago.”   

If they didn’t serve curry on the planes here, I’d have thought we were landing at O’Hare.

Happy Hyderabad

“Come to Happy Hyderabad” (as the city’s slogan goes) and you’ll find more than just chicken biryani and IT call centers. Besides the dozens of shops selling billions of jeweled bangles, and the beautiful lake that separates the city from its sister, Secundarabad, Hyderabad has a distinct religious intensity that separates it from the other major metros.

As one of the few Islamic hubs in India, and really the only in the South, the Muslim community here sticks out in ways that you would not find in Delhi. Soon after I got off the plane I saw hundreds of women on the streets wearing identical, fully black “burkas” (a rare sight in Delhi, even in the Muslim neighborhoods).

More interesting though, this is the first place where I have seen many Muslims and Hindus living, shopping, and interacting with each other in the same neighborhoods and markets. In other cities the two religions seem to be segregated from each other into distinctly different streets and markets. Unfortunately, despite this seemingly peaceful co-existence, you can sense that under the surface lies a deep and historical religious divide between these communities. This much seems evident from the bold, language-specific personal signs these shop keepers place above their doors in Lall Market, announcing their religion, along with their trade, by using either Arabic or Telegu (the first for Islam, the second, Hinduism). It seems that while religious diversity is something that these communities have been comfortable with for centuries, social integration and religious dialogue is something much less comfortable. I’m guessing that this need for personal identity to become so tightly wrapped up in what a person was born (caste, surname, religion) stems from people's tendency here to look at and value the family or community, over the individual.

There was one thing I noticed while wandering around the old city tonight that seemed to be a fairly big "thumbing-of-the-nose" from some Hindu priests to the Muslim community living around Charminar (pictured above). A make-shift Hindu temple had been shoddily erected at one of the four corners of the Charminar with bamboo scaffolding, a tent ceiling and small god and goddess statues.

What seemed most silly (and antagonistic) to this outsider, was the small group of Hindu worshippers that were lining up to make offerings at this temporary temple, blocking part of the street and making Hindu prayers 25 feet away from the largest Muslim shrine in Hyderabad, when other established Hindu temples sat within easy walking distance across the square.

Supply and Demand on Steroids

I wasn't able to post yesterday as I got home late and didn't have connectivity - here's the blog that was intended...

On Tuesday night I played soccer on a well-lit field at a private school in south Delhi with teams that seemed like delegations from the European Union. I was of course the only American ("Americans play soccer?!" one guy asked). "Clearly not well," I responded, and my actions spoke louder than my words.

The group included a policeman from Slovenia whose job it is to stop human trafficking to his country from Asia and several Spaniards playing against Britons with an intensity that looked like they were still carrying a grudge from Drake's rout of the Armada 300 years ago.

After the game my friend and I got dropped off at a desolate taxi stand by two Indian groundskeepers on their mopeds. We poked around the tent at the stand's edge, looking for a driver.

"Hum mujjea GK one jaana hei, shriman, kitne ka hein?" I ventured in Hindi, telling him we needed to go to Greater Kailash 1, and asking how much. The cabbie, half-asleep on a camping stretcher, gave us a lukewarm response. "Kya?," (what?), "uhh...500 rupees," muttering as he put his head back down.

"That's ridiculous," my friend grumbled, "it cost me 300 to get here, and I was coming the long way."

Low on cash, we stared at the highway wondering how we'd get home. The taxi stand cabbie knew we were in a tough spot and had little choice of transport. His cab was the only supply, we were his demand, and he could charge whatever he liked.

Luckily, it didn't take long before a taxi-van came into view. Knowing it would be our last alternative for a while, I rushed up, quickly relaying our destination and asking how much. As the driver started to respond, I saw the cabbie from the stand lose his lethargy and start charging over to us. The van driver told me his price (250 rupees) and I opened the door, but from behind, the stand cabbie started screaming. My friend and I had all of a sudden become critically important to this sleepy stand operator who had lost his monopoly on the corner's transportation market.

I had seen, and successfully negotiated, this situation before, so I started asking each guy, "how much?" hoping to spark a brief price-war. Instead of capitulating, the sleepy-eyed guy from the stand picked up a stone and smashed it against the back window of the van, spooking its driver and causing him to sputter away as fast as possible. I yelled for the van to stop, but to my shock the stand cabbie just kept hurling rocks at the vehicle as it sped off.

Once again in control of the market, the cabbie looked back at us and shrugged. This time offering a slight discount, he asked, "400 Rupees?" My friend and I said a few choice words and headed off down the road in search of a driver who wasn't on creatine.

"I think you've got your blog entry," my friend laughed afterward, responding to the question I had posed five minutes before.

"So what should I write about tonight? Nothing crazy has happened today..."

My Friend the Money Lender

In keeping with the third part of my mission for this blog,

"3. To share the stories of individual people I've met here who are otherwise unable to get their voices out and onto the Web"

I thought I'd share a story about a man I know in Delhi who has from time to time been my driver.

Dhanesh is a local money lender.

In India he is not poor, though in the U.S. he would probably be considered "blue collar." But Dhanesh has a work ethic and street smarts that would make him a winner in the scrappiest district of Detroit, Boston or the Bronx. Dhanesh knows the gas people. Dhanesh knows the mechanics. Dhanesh knows the prostitutes (or so he told me one day). And Dhanesh knows this microfinance venture capitalist. What Dhanesh doesn't know is that during the day I try to put people like him out of business.

From what I could gather during our conversation, his standard loan product is a 10,000 rupee loan (USD $220) for 100 days, with daily repayment of 120 rupees. That means over the course of 100 days a borrower would pay back a total of 12,000 rupees. A 20% interest rate right? Wrong, try 73%.

The rate being charged is for 100 days. Divide 365 days by 100 and you realize that a loan like this can be turned 3.65 times in a year. Which means 20% multiplied 3.65 times, thus 73%. In addition, this interest is being charged on a "flat" basis (rather than on a declining balance) so at day 99 the borrower is still paying interest on the entire loan amount, even though the vast majority of the principal has been repaid.

If all this math is too much for you to digest on your lunch break, just consider this, the typical MFI (microfinance institution) charges somewhere between 24% and 28% interest per year, meaning Dhanesh is charging more than 2 and a half times what an MFI might charge for the same loan.

When I learned several months into our "driving arrangement" what his primary profession was, I had to ask myself a moral question, "Can I continue to pay this guy?" "Is my cash being used to fund usurious loans to poor people in Delhi?"

In short, the answers were yes, and yes.

In the absence of a better (or cheaper) option, Dhanesh is providing people in his neighborhood with a line of credit that is available 24/7, 365 days a year, with turnaround times for loans of usually under an hour, not a week. He is the ultimate credit officer, with personal knowledge of the credit score and risk appetite of everyone on his turf. He may be charging rates that are ridiculously high to us, but no one else is lending to these people. They are still asking for loans, and, for the most part, paying them back.

What does this tell us about the financial services industry in India at the bottom of the pyramid? At least for me it helped un-demonize "the money lender" in my view of the industry. They are the competition but not the enemy. I don't fault Dhanesh for being a capitalist, but I do hope that by the time I leave India Dhanesh will have been forced to become a full time driver. Loans with implied 70% annual interest rates are indeed usurious, particularly if they are structured so as to make it difficult for the borrower to pay off the principal and reduce his interest payment. More important though, these rates are a sign that Dhanesh's neighborhood needs competition.

So do I keep calling Dhanesh or look for a new driver?
While I've used other taxis, if I want a cabbie who shows up on time, speaks English, knows the city well and can arrange for anything I need (I'm thinking gas connections and groceries here, not prostitutes...) I call Dhanesh. And who is to say the next driver I find won't be involved in some less savory business when he's not behind the wheel.

I will continue to mine Dhanesh for information the next time we talk - where else can I get a good handle on the going rate for a loan in a place where there is no other access to credit? While I'll probably never be able to convince Dhanesh that money-lending at 70% is unethical even if it's profitable, a little microfinance competition may convince Dhanesh that in an efficient market, it is indeed, unsustainable.

Cow Dung and Computers

I traveled to two "villages" in Uttar Pradesh today, both about 4 hours by car from Delhi. From their sizes (between 5,000 and 10,000 people) and seemingly decent levels of economic activity, they could more accurately be called small towns.

We were meeting with local entrepreneurs who had taken loans to set up and run computer terminals through an Indian company here that provides IT equipment and some limited network connectivity in rural areas.

Partially through use of the equipment, the company enabled these entrepreneurs to offer villagers a diverse range of services including English lessons, computer education courses, health and agricultural information, and E-Bay-like online personal ads for buying and selling goods, arranging marriages and checking horoscopes.

However, the most visually stunning thing I saw today, even stranger than seeing computers sitting next to livestock paddocks, were the seemingly endless rows of hand-crafted cow dung cakes, stacked beautifully in long wall and circular hut-like structures which were occasionally embellished with linear designs and patterns. The patties, roughly the size and shape of a round loaf of bread, are used for cooking and heating.

I wish I could take credit for the picture above but unfortunately I left my camera at home today by mistake. I had to find this photo of cow dung fuel cakes online, but I think it accurately reflects what I saw. Regardless, let this image get your mouth watering while you cook up dinner tonight...

New MF Bill: No Rate Caps, but what about NBFCs?

Some notes for the microfinance readers out there on what we heard at Sa-Dhan's annual policy conference this week, regarding the pending MF Bill.

First, the good news.
The comments from RBI and Amitabh Verma, Joint Secretary, Finance Ministry suggest that the government committees looking at this bill have "gotten the message" from microfinance practitioners regarding the interest rate debate. Policy makers are beginning to understand that the rates being charged by most MFIs (APRs generally between 15 - 30%) are not usurious, but rather, cost-recovering. Indeed, they are often much lower than the rates available to the un-banked through informal channels (i.e. local money-lenders). At the higher end of this rate spectrum, these amounts usually reflect the relatively high transaction costs associated with providing tiny loans to borrowers that are difficult to reach, and in fact, represent the fair value of the service being provided: custom-made loans at your door-step in sizes small and extra small. Thus, it seems the new bill will not mandate or cap interest rates for the societal microfinance institutions it covers.

Also on the good side, it sounds like the new bill will finally allow at least some microfinance institutions to begin accepting savings from borrowers. This will broaden the scope of financial services MFIs can offer to the un-banked, while reducing their cost of funds.

However, there is some disappointing news.
It seems that for-profit, Non-banking Finance Companies (NBFCs, which lend but cannot take savings), have been left out of this bill and kept under RBI (Reserve Bank of India) jurisdiction. This basically means that the new MF bill will not affect any of these commercially-oriented MFIs that equity investors typically look at. This is problematic in that a sizable amount of the microfinance lending being done in India (from CARE's estimates roughly a third), and much of the recent growth, is coming from this for-profit channel.

However, despite leaving NBFCs out of the fold this time, there is a silver lining here to consider...

While this bill does not specifically address the key issues raised by commercial MFIs (NBFCs) such as the current rules against deposit acceptance, or the rising tide of rate caps from state governments, the generally favorable terms offered to societal and NGO MFIs suggest that NBFCs, in the end, will likely share similar legal footing and continued interest rate freedom from the central government. The number one reason we heard for this reluctance to cap rates: A fear that caps would scare away the foreign funds now flowing into India to fuel microfinance. Given the small field of players here, I assume they're talking about the foundations (Gates, Dell, Ford) and the major equity investors (Acumen, Lok, Bellwether, Unitus) that have set up local operations and, in combination, are distributing tens of millions of dollars to MFIs to serve as the equity basis for debt leverage.

Cuts on the Face of the Diamond

                                          

There has been much news here recently surrounding the tension and violence in three provinces, Assam, Orissa, and West Bengal (the first a northeastern state, the other two coastal states along the Bay of Bengal). Assam's conflict is by far the bloodiest and longest-running, the result of a well-organized, ethnically-based militia fighting the national (and to a lesser degree, state) government, as well as attacking "mainland" Indians who have migrated to the region.

In Orissa and West Bengal the conflicts are primarily over the seizure of land by the communist-oriented state governments, and the land's sale and assignment to private corporations for purposes of industrial development in something that might resemble Chinese capitalism. The farmers whose lands were taken have to some extent been compensated and offered jobs, but what good is a TATA factory job to a independent, fifth-generation farmer who doesn't want to sell his land or change his lifestyle?

India has designated these land areas as "special economic zones" and claimed eminent domain for the economic good of developing the region, but the violent political backlash that has been seen in Orissa and WB suggests that either the compensation has not been acceptable to the landowners, or that the government and the companies involved here have mistaken forced industrialization for participatory economic development.

But today, juxtaposed to these "backlash" stories in my inbox, were two more announcements of U.S. venture capital investment in India from Mayfield and Norwest. Also of note was an article stating that VC and PE firms had invested roughly $7.5 B in India last year, triple the amount in 2005.

It seems that while on one side of the Indian diamond, farmers and nationalists are fighting factories and beating up bricklayers, on the other side in Bombay, ferengi dollars are flowing through the India Gate at record levels. I mention the two sets of stories in parallel as I think they typify the growing divide between the new India and the old one, and more pointedly, the rich country here, and the poor one.

Today in his comments at the Sa-Dhan conference in Delhi, Vijay Mahajan, IIT grad and CEO of the MFI BASIX, drew a diagonal line across India starting at the northern tip of Punjab, slicing down through the central state of Madhya Pradesh and heading across Orissa to the coast, suggesting that "if you could map the lines of economic inclusion in India, this is what they might look like." Going further, he stated that if investors, development professionals and the government did not focus on improving service delivery and overall quality of life in these Northern and Eastern states, India would not only miss its hoped for target of 8-10% annual GDP growth, but the country might also begin to see fault lines forming for another type of political partition, this time between the nation's haves and have-nots.

DelhiExpat.com

There's a Sa-Dhan conference on Wednesday and Thursday at the Ashok Hotel in Delhi which I'll comment on later this week (Sa-Dhan is the industry association representing MFIs in India).

I'll be curious to hear people's thoughts there on the Microfinance Bill pending before Parliament and the proposed changes to the Reserve Bank of India (RBI) guidelines for MFIs (microfinance institutions). Everyone in the MF community is trying to get a sense of whether the last year of heavy media exposure and government attention is going to result in greater legal legitimacy for, or greater restrictions on, MFIs operating in India.

In the meantime, I thought I'd link those who are reading this locally to my flatmate's ex-pat community website, www.delhiexpat.com, which he started up to kill time during his hour-long commute to Gurgaon. Also because after several months of living here, our group of friends was getting frustrated at what we perceived as a lack of easily available information on where to find Western goods and services, restaurants, entertainment and fellow ex-pats living here in Delhi. He's had some success with the site so far, a few thousand page views in its first couple days, and almost 400 registered users in under a month.

If you're in Delhi, or at least India, check it out.

More for those not living on the sub-continent tomorrow...