Microfinance has brought about a remarkable change in the lives of millions of rural and urban poor. By lending few thousands of rupees to meet the credit demands of these people, micro finance companies have bridged a major gap and brought the poor and credit unworthy people to the mainstream. There are many NBFCs and MFIs that have come up over the past decade. The two most promising and prominent ones being Ujjivan and Bandhan. This book talks about the former.

         This book starts off with a rather long introduction to itself, spanning close to forty-five pages and gives a gist of each chapter. This chapter could have been a tad shorter as the subsequent chapters elaborate on the aspects that the author wanted to cover.

History of Micro-Finance

          Credit to the India poor dates back to the fourteenth century when Muhammad bin Tughlug introduced "taccavi", a form of loan to the villagers, to overcome famine. The British continued this loan. After Independence, the Indian government continued taccavi through the 20th Century.

          The genesis of micro-finance is attributed to Muhammad Younus. In the late 70s, Muhammad Yunus, who was at the University of Chicago, returned back to Bangladesh only to find his country reeling under poverty. He found out that the lack of credit was a major cause leading to poverty. He started the concept of micro-finance by lending small amounts to the women to weave baskets. This idea turned out to be a success and the government of Bangladesh institutionalized it and started Grameen Bank. Grameen Bank was the originator of the concept of joint group lending concept, wherein a set of people formed a group and avail loans. The 90s saw this concept flourish and gain attention and acceptance across the world.

          In India, post the nationalization of banks, public sector banks started to lend in a big way. They lent money in rural areas as well. However, they faced a lot of issues due to defaults in repayments. This led to the curtailment of loans to marginal people. Since banks were now reluctant to lend to these people, there was a need to have some intermediate organizations that acted on behalf of these people. These organizations also called Self Help Groups (SHGs) bridged the gap between the banks and the customer. They took credit from the banks and distributed the loans among the needy. The banks in-turn, talked only to these SHGs thereby shielding themselves from talking to millions of people. There were three major SHGs or NGOs that pioneered this concept. Ela R. Bhatt's organization named Self Employed Women's Association (SEWA), Aloysius P. Fernandez's Mysore Rehabilitation and Development Agency (MYRADA) and Professional Assistance for Development Action (PRADAN). They were supported by NABARD which provided the necessary linkage between the banks and these SHGs. In the late 90s Small Industries Development Bank of India (SIDBI) launched a term-loan program. Under this program few MFIs grew up and spread their network to create a pan India distribution network. Among the many NBFC-MFIs few who attained scale were SHARE, Spandana and SKS Microfinance (now called Bharat Microfinance). Even Bandhan Microfinance evolved from this scheme. At the dawn of the new Millennium few new NBFC-MFIs emerged. Among them was Ujjivan which concentrated mostly on the Urban-poor (all other MFIs were mostly concentrating on the rural-poor).

Birth of Ujjivan

          Samit Ghosh's father was a big influence on him. He was a doctor who believed in serving the poor. When Samit lost his father at the age of 10 he realized the importance of money. He got an MBA degree from Wharton and worked as a banker for close to 30 years in different roles in Citibank, Arab Bank, Standard Chartered Bank, Bank of Muscat, HDFC bank. He then wanted to work for the poor. This led him back to his study table. Samit read different books on Micro finance. He then visited the offices of Basix microfinance, which was one of the major microfinacne players in the early 2000s. He attended their customer meetings in Hyderabad. He also interacted with Farmers in Raichur, Karnataka. He attended a workshop organized by Grameen Bank which gave him further insights into microfinance and taught him the process of starting an MFI. He also interacted with Fernandez of MYRADA to understand the microfinance sector. During all these learnings he realized that people were active in microfinance, but they were not using technology. He decided to do two things: To serve the urban poor using microfinance and to use technology as an integral part of the lending process. Thus the idea of Ujjivan was laid.

          Now, in order to get the company going, there were four things that the company needed (a) Initial Capital (b) Office Space (C) A team (d) Target customers. The initial capital of close to 2.5 crores for Ujjivan came from Samit himself, his close friends and from Bellwether Microfinance Fund. The initial office space was a guest house in Bangalore. From there the office shifted to MphasiS building and then back to a flat in Indiranagar. The initial employees were hired from Ghosh's circle of friends from Banks, couple of people came in from Grameen Bank to aid in setting up the structure. In order to identify the customer base, Ujiivan did a study in collaboration with Delphi Research Services in the year 2005. The focus of the research was the urban poor. The study focused on women in the salary bracket of 3,000-7,000 comprising of housemaids, roadside vendors, workers in factories, helpers in schools, hospitals. The research showed that such women always lived a hand-to-mouth existence and they were always in constant need of capital. They used to go to local money lenders who charged anywhere between 2-10% interest per month. This gave them the blueprint of the customer base that they were looking for. With all these things in place, the company approached the RBI for NBFC license and they received the license in less than 50 days.

.         In 2006, Ujjivan started its operations and launched a pilot scheme in Bangalore. Some key learnings from the pilot were the following: In case of Grameen Bank a single income generating product was sufficient. But Ujjivan realized than Urban poor had additional needs for example school fees, capital for festival expenses, housing loans etc. Therefore, multiproduct loans were devised. Another learning was to have smaller groups  of five people in the group lending scheme. Grameen model advocated larger groups of women, however, it was impractical to form larger groups in urban areas. Another learning was the need to have quality control in their operations (ex: selecting proper borrowers, using technology for loan processing, disbursals, and for follow-ups). At the end of the trial period Ujjivan learnt the following: Its customer base was women in the age group of 18 to 55 years who had a monthly income of 4,000 to 6,000 rupees and had expenses in the range of 2,000 to 4,000 on items like food, housing, medical expenses. Nearly half of these women were salaried and worked as housemaids, teachers and sweepers etc. Another 40% were self-employed and were selling fruits & vegetables, worked as tailors and in petty shops etc. Ujjivan started to give loans to these women. The loan amount was in the range of 6,000 - 12,000 rupees at an interest rate of 24-26.9% for a tenure of 12-24 months. Ujjivan charged an upfront fee and enforced a life insurance policy on each borrower to hedge against death of the borrower. During the initial phase, Ujjivan managed to obtain foreign direct investments from Unitus and from Michael and Susan Dell Foundation (MSDF). During the same period the company moved to its office in Kormangala.

Growth of Ujjivan

          After the pilot phase that ended in April 2007, Ujjivan embarked on a very high growth path for the next four years and by 2010-11, had 351 branches with 992,000 customers and 4000 employees. Total disbursements had reached 2073 crores. In 2008 the company under the aegis of Samit's wife Elaine Marie Ghosh started a non-profit organization called Parinaam Foundation. The aim of the organization was to train people about healthcare, insurance and provide education so that they acquire necessary skills and become eligible to avail loans from MFIs like Ujjivan. 2008 was also the year when Ujjivan started giving Individual Business loans ranging from 10,000 to 50,000 rupees. The same year Ujjivan introduced education loans for the kids. The company also introduced the housing loans. The company mandated that all borrowers should be covered by life Insurance.  2008 also saw the company raise additional funds from investors like Sequoia Capital, Lok Capital, Elevar Unitus and Indian Financial Inclusion Fund.

Andhra Crisis - The precursor and the actual crisis

          Though Andhra crisis hit sometime in 2010, the signs were ominous from 2009 itself and Ujjivan got a taste of it in early 2009 in Karnataka. Ujjivan saw mass default in Kolar, Sidlaghatta, Ramanagara and Mysuru. Though Ujjivan had a presence in only the latter three. The initial sparks of crisis actually started as early as 2006 in Krishna district where the district collector closed down 50 branches of MFIs like Spandana, Asmitha and SHARE and instructions were given to borrowers not to repay the loans. This led to mini-crisis. Then RBI stepped in to calm the situation and things went back to normal. By 2009 the other major crisis hit Kolar. Postmortem of the crisis showed that there was an irrational exuberance from the MFIs as they lent indiscriminately to the same borrowers  without adequate screening of the customers and cross-checking their capability to repay the loans. Due to easy availability of loans people even started to sub-lend money to others. Due to repayment difficulties some members of the groups of the JLG started to default and since the onus of repayment was on the entire group, people started to see the tension building up among the members of the groups. Even religious groups and groups like the Anjumann committee stepped in and they banned Muslim women from talking to the collection agents. What caused further damage was the policy of MFIs that did not tolerate delinquencies. There were genuine issues among these low income people and even though these people wanted to repay their loans, they were unable to repay due to their financial condition. All these factors contributed to the smaller crisis, these smaller crisis were seen at regular intervals of time. Ujjivan had spread itself across India, so even though Ujjivan got impacted due to mass non-payment in Sidlaghatta, Ramanagara and Mysuru, the impact was minimal on its balance sheet.

          The Andhra crisis started in the early part of 2010. The news channels started airing the stories of people committing suicide as they were not able to repay their loans. Some women even complained that they were being forced to go into prostitution in order to repay the loans. The Andhra Pradesh Government issued an ordinance that came into effect on 15th October 2010 which restricted MFI operations. MFIs were barred from door-to-door collection of money and were restricted to public places for their weekly meetings. The meetings were later curtailed to just one meeting per month. The legislation also brought to fore the regulatory gap that existed for MFIs. Hence RBI came up with a committee to address this. By December 2010 the committee submitted its report and recommended that a new category under NBFCs called NBFC-MFI needs to be setup to monitor these companies. These NBFC-MFIs were allowed to charge interest rates up to 24% with a margin cap of 10% for MFIs having a portfolio of over 100 crores and a margin cap of 12% for portfolios less than 100 crores. The processing fee was capped at 1% of the loan and no security deposit was to be charged for the loans. Eligible borrowers were not supposed to have a household income of more than 50,000. The loan ceiling was set at Rs 25,000. Loans up to 15,000 were to be paid in 12 months and the loans beyond 15,000 were to be paid within 24 months. The loans did not need a collateral and no prepayment charges were to be levied. A borrower was barred from being part of more than one SHG/JLG and she can be given loans by not more than two MFIs. Based on the recommendations, RBI came out with the guidelines for MFIs. Though Ujjivan did not (and even today does not) have a presence in Andhra, it welcomed the RBI guidelines as it paved the way for a structured and formal approach to the MFI lending process.

          Post the crisis Ujjivan took many prudent measures like cutting the number of branches, reduced the lending rate, reduced new customer acquisition rate and merged nearby branches. All these steps led to a reduction in its operational expenses. Ujjivan did two important things which helped it tide over the situation. Firstly, it took a humane approach and increased the repayment window so that people under stress could repay back with some flexibility. In some cases the loans were rescheduled or additional loans were given to such customers to help them recover from the situation. Secondly, the company set up branch-wise action plan to handle the situation differently at branch level. Special collection teams were set up in the branches where delinquencies were higher. At a higher level, risk management committee were set up to monitor these stressed branches. All MFIs were facing liquidity issues. To overcome the liquidity issue Ujjivan issued NCDs and also securitized some of the loans and sold them to banks/Institutions that had to meet their priority sector lending (PSL) norms. Ujjivan also managed to raise equity capital to the tune of 128 crores from many PE investors. Ujjivan and other MFIs signed up with the credit bureaus to share its customer details. This helped in sharing of customer information among the MFIs which helped in identifying customers who were taking multiple loans. Credit bureaus also helped in identifying defaulting customers.

Back to the Growth Path

          Between 2012 to 2016 the company returned back to the high growth path that was visible during its initial growth phase between 2007 to 2010. During this second phase of rapid expansion, the loan book grew at a CAGR of about 66%. Number of customers grew from 1 million to about 3.3 million. Revenue grew at the rate of 60% between 2012 to 2016. The net margin grew at an impressive rate of 17% and by 2016 the profits came in at 177 crores. Cost-to-income dropped from close to 95% to about 50%. Loan book per employee increased from 20 lakhs to 60 lakhs. Customer retention ratio was around 86% and staff retention ratio was 82%. The gross NPAs were a paltry 0.15%.

          In 2015-16 Ujjivan introduced Micro and Small enterprise (MSE) loans. These loans were given to meet the business demands of the MSEs. These unsecured loans were divided into three categories (a) 20,000-30,000 (b) 51,000 to 1,00,000 and (c) 51,000 -  1,50,000. Ujjivan also introduced secured loans in the range of 2,00,000 - 10,00,000 that had an interest rate of 20%. In order to meet the housing loan requirement, Ujjivan introduced 3 products (a) Unsecured housing loans between 51,000 - 1,50,000 (b) Secured loans in the range of 2,00,000 - 5,00,000 and (c) Secured loans in the range of 2,00,000 - 10,00,000. In order to meet the requirement of rural customers, Ujjivan also opened branches in the rural areas. The major requirement of rural customers are loans for agriculture and farm animals. So the company introduced following loan schemes for the rural populace (a) Individual Agriculture loan between 31,000 - 80,000 (b) Individual livestock loan  between 41,000 - 1,00,000 (c) A combo loan for both agriculture and livestock. One thing to note is the fact that all these loans are Individual loans. Ujjivan which stated the MFI with group lending concept slowly started moving towards Individual loans. This brought about a significant change in its employee mix as the approach towards Individual loan portfolio was totally different from group loans. New staff was hired, the existing staff was retrained, the IT infrastructure was revamped. The field employees were given tablets which helped in speeding up the loan growth and approval process.

Technology: During the initial days most of the activities at Ujjivan were manual. Right from processing of loan applications to the handling of cash was all manual activities. As a first step Ujjivan introduced scanning of documents that led to faster processing of loan requests. They also introduced document management systems to speed up the backend systems. The company introduced a system called Artoo that works with handheld devices which was used for customer acquisition. Based on the history of existing customers, Artoo shortlists existing customers who are potential candidates for new loans. The field staff then goes to these customers to check if they need credit. If yes, then these become eligible for new loans. The company also came up with rule based engine. For each phase of the loan a set of rules is defined. When a customer requests for a loan, the application is subjected to these rules. If the loan application successfully clears all these rules then the loan gets approved. This is entirely an automated process. However, if any an application fails to clear these rules then an employee manually checks the application and subsequently the application is accepted or rejected. Ujjivan now uses the Finacle Software for its core banking solution and Sun Solaris super cluster from oracle for the cloud. Wipro and Ujjivan jointly manage the software and hardware for the company. Field staff use the tablet which is used for customer acquisition, servicing as well as for loan management.

Risks: Microfinance is filled with multiple risks. The first risk is incompetent/unethical employees. Most of the time lending and loan recovery happen via cash. If Ujjivan had dishonest employees then it would lead to loss of money. The only way to handle this is to have proper background verification of employees who join the organization. Customer selection is the second risk that Ujjivan has to face. Ujjivan prefers existing customers as there is higher confidence in such customers. No wonder the customer retention ratio is close to 85% for Ujjivan. For new customers, the field officer visits the customer's home to assess the potential customer and their family. Opening a branch in a new location is the third risk for Ujjivan. To choose a safe area/location the company has multiple teams (controls function, vigilance department, audit department) that assess the area and generate reports. These reports are collated and then business head provides his recommendation to the CEO. Based on the recommendation a new branch is then planned at the proposed location. Among many factors, the major items that are considered while opening a new branch are political situation in the area, socio-economic situation of people in that location, working environment, the major occupation of the people in that area etc.

Small Finance Bank: On 16th September 2015, Ujjivan got 'in-principle' approval to operate as a small finance bank. As an MFI, ujjivan was only a lending agency and was dependent on other sources for its credit. After transitioning into an SFB, Ujjivan could now take deposits as well. This is a watershed moment for Ujjivan. It is no longer dependent on the vagaries of lending agencies. Moreover, by being a bank, it gets legitimacy and is not subject to the whims and fancies of local leaders who could instigate people to default against loans by MFIs. However as an SFB, it has to adhere to the regular banking norms like CRR, SLR etc. Additionally an SFB had to adhere to three provisions that were specific to SFBs: (a) Seventy-five percent of their lending has to be for the priority sector. (b) Fifty percent of the loans have to have a ticket size of less than fifty lakhs and (c) Twenty five percent of the branches have to be in the unbanked areas. Ujjivan had started working on these provisions way before getting the SFB license. Different teams were formed to come up with the solution to be compliant with these SFB norms. Employees were trained so that they get familiarized with deposits.  As a bank Ujjivan could also get into selling mutual funds, insurance products. Hence all the three provisions were manageable, but there were two other provisions that needed attention, (d) Within 18 months of getting the SFB license the shareholding of foreign shareholders had to come down to 49%. In case of Ujjivan 91% shareholding was with foreign investors. (e) The SFB has to be listed on the Indian stock market. In order to satisfy both these provisions Ujjivan came out with an IPO.

IPO: The process of IPO was divided into two phases. In the pre-IPO phase the company did Roadshows to showcase the company. The company managed to garner 292 crores at an issue price of Rs. 205. The subsequent IPO closed in May 2016 and raised 882 crores which was subscribed 41 times. The anchor investors subscribed for 265 crores and included names like ICIC Prudential Mutual Fund, Tata Mutual Fund, Birla Sun Life Mutual Fund, Sundaram Mutual Fund etc. The company got listed on the stock exchanges on 10th of May 2016.

Demonetization:  On 8th of November 2017, government announced Demonetization of Rs. 500 and 1000 rupee notes. This hit the micro-finance industry in a big way. Ujjivan was not immune to the ramifications. The impact was seen in three phases. In the first phase its customers were caught in the cash crunch due to non-availability of the legal tender. In the second phase many of its customers faced loss of income due to either loss of job or being paid in older currency notes. In the third phase Ujjivan saw local politicians in many parts of the country asking the public not to repay the loans with a promise that the Government will waive off the loans. There were four major regions in which Ujjivan faced major issues Uttar Pradesh, Maharashtra, Madhya Pradesh and Karnataka. The Major cause of confusion in all these four places seemed to be the 60-90 day moratorium from RBI from repaying the loans. Though it was a moratorium, some elements in these states misguided the people that the loans are being waived off and they need not pay back the loans. This led to a sudden drop in attendance of these borrowers from the weekly meetings. Ujjivan then took help from MFIN, NABARD, SIDBI, RBI, Chief Secretary, Finance Secretary and other institutions to send out the correct message to the masses that this was a mere moratorium and the loans have not been waived off. By January there was some semblance and borrowers started to repay back their past dues in small trenches. On their part, MFIs/SFBs tried to inform the public that they need to pay the amount to maintain their credit scores and to meet their obligations. Author claims that Demonetization reinforced the belief in Ujjivan's methodology of selecting areas of operations. The pain of demonetization was seen more in places where Ujjivan was no very active.

The Future: Ujjivan started as an SFB on 6th of February 2017. Eight out of ten companies that received the SFB license were MFIs. This marks a new chapter in the life of Ujjivan. Ujjivan has embarked on a new journey as a bank to serve the unserved and underserved in a comprehensive way.

         Overall the book presents the positive side of Ujjivan. Author interviewed different people from Ujjivan and people outside of Ujjivan as well. The book dishes out a lot of numbers and financial Jargons. Hence, one needs to have some knowledge of finance to understand the book. At times the book becomes repetitive. I felt the first chapter was  not required. If you are a keen follower of Ujjivan then you can pick up the book. Else you can safely ignore this book.

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