Envisioning the Future of Microfinance: An Interview with Mrs. Vinatha Reddy
By Sudha Krishnan | Sudha is a CMF Research Associate working on a rural impact assessment of micro-credit at Grameen Koota, an MFI based in the state of Karnataka. Since 1996, Ms. Vinatha Reddy has been focused on micro-credit, studying the Grameen Bank model. After several years of studying the model, she submitted a pilot-phase project proposal to the Grameen Trust. The proposal was accepted for seed capital funding and led to the inception of Grameen Koota in 1999. Today, Mrs. Reddy, CEO of Grameen Koota, continues to work towards making Grameen Koota financially sustainable and ensuring a measurable impact on the poorest sections of society.

Q: Over the past few years, the increased number of new institutions and interest from a broad array of investors in the sector signals growth as well as greater competition. What is the microfinance scene in Karnataka today?
A: Within Karnataka, when Grameen Koota first started [1999], very few players were there. But slowly many other players have entered the state, which is a very good sign since more of those at the 'bottom of the pyramid' can be reached by institutions offering credit. But the situation is not as saturated as in Andhra Pradesh. There remains room for many players in Karnataka—many other MFIs, many other models. A lot of things can still happen in Karnataka.

Q: What is your reaction to the Andhra Pradesh crisis that occurred earlier this year?
A: Well, the Andhra crisis really made all of us sit up. Even now, the complete picture has not emerged describing what really happened and why. But from what has been published… there was too much of oversaturation and lots of dual memberships. It [the crisis] was definitely more supply-driven after the overlapping [by MFIs]. So there is a lot to be learned from the crisis, if we can get the total picture.

Q: What kind of information do you think hasn't surfaced clearly? Are there particular aspects you are keen to know about? The debate has centered largely around interest rates, for example.
A: I think even more than interest rates, the real issue there was the competition between the government MFI program and the private MFIs.

Q: In terms of regulation, do you see the responsibility falling on the state government or the RBI itself? What are the implications of the Andhra state's move for Karnataka?
A: I think it's a lesson for everyone—for MFIs also. We need to be enacting better governance and be more conscious of the work of the state governments so that we can work in coordination with them. The state governments also have to understand the MFI sector. And the regulator also has to play its role. Within Karnataka, for example, what happened to us in Davangere district—the lack of awareness among government officials that the MFI sector exists—that was the crucial thing that tipped against us ¹. They [state officials] didn't know that private MFIs existed and even that banks were lending to NGOs for on-lending to SHGs. The awareness must be created by the regulators also, among state officials, and not just by MFIs themselves. The whole sector needs to become more aware.

Q: You have been with Grameen Koota since its inception. During these years, a lot has changed in the microfinance scene. How has Grameen Koota evolved over the past seven years? Have its vision and values changed?
A: We revisited our vision last year. We started off very idealistically, thinking that Grameen Koota needs to be owned by members and run by members to be used by members. Over the last year and a half though, we decided that this idea of ownership by members wasn't as important as the need to bring the financial services that are there at the 'top of the pyramid' to the households at the 'bottom of the pyramid.'

Q: So Grameen Koota remains very client-driven, but no longer focused on the idea of members having ownership in the institution?
A: We feel that it is important that whatever is available in the mainstream, whether it is insurance products, pension products, or savings products, all those need to be drawn down to the poor. Still, our vision remains the same: we want to target women from poor households, in a sustainable and continuous manner.

Q: How have your clients' needs changed?
A: Well, definitely clients are more focused and seem more empowered now, compared to the time when they joined with us. Even after one or two loan cycles, you can see that clients are becoming bolder and asking for more products, ranging from insurance to savings to larger loans for housing and education. Unfortunately, we have not been able to fulfill all of their demands yet. Naturally, we can't—we have to go step-by-step and take advantage of technology to offer multiple products and services. Eventually, we would like offer all these products. Given our huge network and presence, we are there—every week, in every village—and we need to have more products and services that we can offer in the villages.

Q: What kind of value do you see in having your initial loan product, the Income Generating Loan, being used only for entrepreneurial or productive use?
A: For the first three years, we require that our clients use loans only for productive purposes, which can range from small businesses to animal husbandry, so that clients can increase their incomes by investing credit and also create assets for themselves and families.

For consumption purposes, we have an Emergency Loan product which is very popular since it can be used for food, health, education, and a whole variety of needs. I am sure that if we did not have this loan, our clients would still have to go to moneylenders.

This loan is not geared as a supplement to the Income Generating Loan. We have a separate, mid-term product, known as a Supplemental Loan, which was requested by our clients. The loan can be used to enhance a business started by the client that has been doing well, or to restart a business that may have failed initially. Our clients also have the option of not taking out the Income Generating Loan in the full initial amount of Rs. 7,000. For example, if a woman just wants a Rs. 2,000 loan, if that amount is most manageable for her, she can take out that amount only, and take out an emergency loan six months later.

Q: How do you envision your clients graduating to the mainstream financial sector or will Grameen Koota itself evolve and grow with its clients? What kind of training is Grameen Koota imparting to clients?
A: We see Grameen Koota evolving with our clients. For example, we will soon begin piloting individual loans for our star borrowers. Many of our clients are already running their own businesses with solid repayment records, and now they are in a position to absorb and repay larger loan amounts—these are our star borrowers.
We don't anticipate doing business training ourselves, but instead linking clients with other organizations that are more specialized.

Q: How has Grameen Koota handled the increase in competition and has there been any notable change in operations?
A: Like I mentioned earlier, we are not facing competition to a large extent. In some of our branches, we have other MFIs making a presence. One example I can remember is with BSS. In one of our branch areas, to distinguish between our members and their members, we actually gave our members identity plaques that they put up in front of their houses. Each said "Grameen Koota member" so up to a certain extent, this did work in distinguishing between clients. But we have not been able to replicate this across branches since it is expensive. But we continue to talk with our clients about not borrowing more than they can repay—from Grameen Koota and from all sources. This is even included in our Grameen Koota member pledge, which now includes a line that 'we will not borrow more than we can repay and burden our families.'

These conversations were part of a financial education program that we conducted. In the future, we want to do a full financial education training course so that clients can understand how to manage debt better and the importance of saving according to life-cycle needs, for example. I have seen SEWA's financial literacy module, and I feel that doing this for clients is very important, particularly in a competitive environment, so that they are financially educated.

Q: Grameen Koota currently conducts socio-economic development (SED) workshops on topics ranging from nutrition to business development. What could be the relative merits?
A: These workshops usually take place once every four months in some branches…. We also offer a SED specifically for the husbands of our clients, which is conducted on the one year anniversary of the branch opening. We cover a range of topics. Most recently, we had a doctor from a local government hospital give a workshop on Chikungunya and Dengue Fever. She also spoke about how women can get themselves insured under the government's health insurance scheme. In other workshops, we have invited government veterinary doctors that talk about how women can safeguard their livestock against disease. The SEDs are an important platform for discussions, and we also encourage NGOs to visit and do workshops. We had tied up with a local NGO in Kanakapura that works on a lot women's health issues. Kanakapura is one of the sub-districts with the highest rate of cervical cancer. These modules on health were well-received by our clients.

With our own workshops, we will definitely focus more on financial education, as well as other important topics, such as the Right to Information Act and how women need to become more active in the panchayats. The Right to Information Act that the government has come out with says that any citizen can write to an official to get information that they want and it is mandatory that they receive the requested information. For example, we often see that a road maybe be sanctioned in a village. Without this information being properly disseminated, a contractor can claim that the work was done and even get his cheques from the government, when the project may not have even started…. This Act allows citizens greater accountability by having access to this kind of information.

Q: What are Grameen Koota's motivations for offering insurance products, including cattle insurance?
A: Cattle insurance is something we do offer for our members, but it has not taken off just yet. We think more aggressive marketing efforts will need to be done. As of now, it is not mandatory for clients involved in animal husbandry since the upfront cost is a little bit high. By offering the option to make premium payments in installments, however, we think that more clients will take up this product.

Q: Grameen Koota has recently started operations in urban slums. Can you talk about the extent of urban operations now and how you see urban microfinance taking off?
A: Well, statistics show that urban poverty is growing at a faster rate than rural poverty. In the districts across Karnataka, we work in both urban and rural areas, often beginning operations in the slums within district headquarters and then covering surrounding villages.

I think that urban microfinance is definitely taking off with many new players, such as Janalakshmi, Ujjivan, and Sanghamithra who are all working in urban Karnataka. We remain focused on delivering services to the poor who really need these services, particularly as a safeguard, in both urban and rural areas. Still, Grameen Koota works primarily in villages.

One noticeable problem is that in urban areas, because of greater concentration, there is more negative publicity spread by moneylenders and mafia types against our organization. This also takes place in villages though.

Q: What are some of the gaps in microfinance research or some research questions you think should be addressed?
A: I think a lot of research remains to be done—and not only done, but disseminated. That is what is currently lacking. It is not enough that CMF does research; findings must become accessible to the public.

It is also important for researchers to have dialogues with policymakers. For example, with the telecom industry, the reason why telephones are so inexpensive and readily available is because of the deregulation that took place. The research on this sector took place in universities that were able to talk with governments and policy makers. The result is that a huge population segment has benefited from these research findings. In the same way, CMF research needs to find a way to establish a link with politicians and policy makers and reach a wide audience. A debate and discussions must ensue research.

Q: How do you think the microfinance sector will be affected by the decision to award the 2006 Nobel Peace Prize to Muhammad Yunus and the Grameen Bank?
A: Everyday we are seeing articles about microcredit and microfinance. For us especially, at Grameen Koota—because we are a Grameen replicator—we have been able to talk about this development with the district collector in Davangere, for example. The fact that our mentor and our benefactor has won the Nobel Prize has been very good for the sector, particularly following a bad year for us [the sector as a whole] with the Andhra crisis, Karnataka crisis, and so on. This positive visibility is good.

Q: What do you think the impact will be of this visibility? Do you see this as helping to alleviate some of these misunderstandings?
A: The awareness is also developing among government officials since most of them were previously only aware of the SHG-bank linkage program. Now people will know of a sector called the microfinance sector—and that it is legitimate—since the person most closely associated with this sector has won the Nobel Prize. It is a very positive development.

Q: Are there any other topics you would like to discuss?
A: I think it is very important for CMF research to also focus on savings. The most important message for clients is that they need to save for life-cycle needs. With our clients, we find them coming to us saying that since we are not able to accept savings—Grameen Koota is a registered trust—then where can they go? They still keep their savings under the pillow, which is very troublesome. I am not speaking only for Grameen Koota though—the sector, in general, must promote this message. We need rock-solid organizations that take advantage of the power of technology to securely accept clients' savings since so many remain without a safety net of any kind.