Lakshmi Potluri

Lakshmi Potluri '10 is working this summer in Chennai, India for the Institute for Financial Management and Research (IFMR) Capital. IFMR Capital is an IFMR trust venture whose mission is to act as a bridge to mainstream capital markets for entities and asset classes of relevance to low-income households. Lakshmi is working on identifying relevant sectors based on primary and secondary research and structuring financial solutions for small and micro enterprises in rural India.

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Journal #1

This summer, I am spending 10 weeks at a firm called IFMR Capital in Chennai, India. The firm’s objective is to build a debt capital market for microfinance institutions. Currently the cost of debt for microfinance institutions ranges from 9-15%. By the time this translates to the end user, the cost of debt for them is about 24-48%. IFMR capital has successfully securitized one MFI portfolio and is in the process of securitizing a multi originator pool. They have also held investor conferences and raising awareness of this initiative both with institutions and with other firms involved in securitization.

My role, specifically, is focused in two areas: 1) due diligence of MFIs 2) shaping the small and micro enterprise lending strategy for the firm.

I spent a significant portion of my time here on strategizing an SME pilot where we can test the SME systems and processes (for example, evaluation and monitoring procedures). During the pilot phase working capital loans in the range of INR 50,000 to INR 25lakhs will be made for a period of up to one year to small and micro enterprises in a specific geography/sector.

The environment here is a very diverse environment, both in terms of diverse professional and ethnic backgrounds and I believe are some of the smartest people working here to fulfill a purpose. In terms of social life, it is a fun and young group of people who will quickly welcome you and make you feel at home and also fun to be with. In terms of responsibilities, there are plenty of opportunities for you to work on a variety of things and a lot of flexibility on how you wish to manage your time and work.

Journal #2

My first visit was to the Kshatriya Grameen Financial Services(KGFS) that is run by IFMR Capital’s sister firm. The purpose of this establishment is to provide financial services and products to areas where the nationalized banks and the foreign banks do not exist. We identified small and micro enterprises in this region and had the opportunity of seeing how coir ropes are made from scratch, how bricks and limestone is made from scratch, coconut oil and stainless steel vessels.

The organization is located in the district of Thanjavur, Tamil Nadu(India) where the primary language of communication is Tamil. Being born and raised in Chennai, I am very comfortable with the language and found that my language skills came pretty handy. Peter Bremberg, a colleague of mine and I travelled by train and arrived in Thanjavur. Once we got to the guest house and refreshed we set out to the corporate office in the city. We arrived after breakfast at around 9:30 a.m. and the office was buzzing with activity. We met Guru, the CEO, who gave us an overview of the firm’s response and its growth plans in the area. The KGFS had grown to 15 branches within a span of one year and planned to increase this to 100 branches by mid next year.

The organization is located in the district of Thanjavur, Tamil Nadu(India) where the primary language of communication is Tamil. Being born and raised in Chennai, I am very comfortable with the language and found that my language skills came pretty handy. Peter Bremberg, a colleague of mine and I travelled by train and arrived in Thanjavur. Once we got to the guest house and refreshed we set out to the corporate office in the city. We arrived after breakfast at around 9:30 a.m. and the office was buzzing with activity. We met Guru, the CEO, who gave us an overview of the firm’s response and its growth plans in the area. The KGFS had grown to 15 branches within a span of one year and planned to increase this to 100 branches by mid next year.

After a brief overview, we set off to the branches to have a first-hand view of the activities. We were accompanied by an office staff as well. We arrived at the first branch, Devananchery, which started about six months ago and has grown very quickly. The model employed at all the branches is similar to the popular grameen model in microfinance. Typically, self-selected groups of five people pledge guarantees for their peers liabilities. They undergo training regarding their payment schedules, processes followed, group liabilities, interest rates, etc. Once the KGFS representative completes the training process, the following day a test is administered. Upon satisfactory completion of the test, they become eligible for loans. This model has been the popular model across many microfinance institutions and has very low default rates (2-3%). A majority of all microfinance institutions lend only to women.

After witnessing a training round, we set off to meet with small and micro enterprises in the region. We spoke to the owners of brick making units, limestone manufacturers, rice mill owners and dairy processing units in the region. In between, we also stopped for lunch at a really small café that the wealth managers from the branch directed us to. Post lunch, we completed our due diligence visits to two other branches and then headed back to the city. It was a long, but extremely productive day.

There seemed to be a great need for small and micro loans, more from the term loan perspective and less from the working capital requirements. The subsequent day was laden with meetings with General Manager at the Department of Industries and Commerce, the lead bank manager at a nationalized bank and the general manager at another leading nationalized bank. These meetings gave us a perspective of the industries in the region, the potential, the risks and lessons learned.

We repeated our trips to other villages and saw other industries for the remaining time of this trip. My vice president who is based in Mumbai joined us for the second half of the trip.

Overall, the trip showed us the potential for small and micro enterprise lending, gave us a flavor of what were the market gaps and linkages that are essential and better direction about our strategy.

Journal #3

I am writing this in the last week of my internship at IFMR Capital. I have visited about 15 small enterprises ranging from a cashew nut processing unit in the remote village of Orissa, a perfume oil manufacturer to a high end engineering spark manufacturer in the city of Chennai and having seen entrepreneurs grow from a one person facility to 50 member facility with a few million dollars in turnover. This has been one of the most memorable summer’s I have experienced. Our team is presenting our final conclusions to the senior management team next week.

In my earlier journal entry, I talked about my experience studying small and micro enterprises in the district of Thanjavur. My last entry is about my experience with the Microfinance aspect of my summer experience. Another vision of IFMR capital is to create a debt market for microfinance institutions. They are in the process of securitizing microfinance loan portfolio. The firm securitized and successfully distributed a single originator loan pool and is in the process of securitizing multi originator loan pools. I had the opportunity of going on a due diligence trip to an institute called CRESA in Rajahmundhry which is in the state of Rajahmundhry in India. This institute is serving two districts in Andhra Pradesh and providing financial services to the poorest of the poor in these areas. The unique feature about this institution is that they also offer an option where the poor can save for the long term.

My colleague and I spent three days and assessed the quality of their loan portfolio and made a recommendation on our return to the corporate office. It was really satisfying to see that these small loan amounts had an impact on the quality of the lives of the borrowers. Eighty percent of those surveyed amongst the borrowers used the loans as working capital for their businesses ranging from fruit shops, ice cream shops, convenience stores, etc. It was nice to see that some of them were able to send their children to schools because of the improvement to their quality of life. Most households were able to afford, at least, the basic conveniences. Most of these households, however, live on a daily income of less than $2-$3.

I walked away realizing that overall microfinance institutions are effective in providing access to finance. I find, however, that the effective interest rates are anywhere between 24-29% which is very high. Although the cost of finance and operations itself is high, it appears that it has also become a lucrative business. Furthermore, this high return has attracted a lot of institutions which do not have very effective processes in place. Talking to some of the people on the field, it appears that larger microfinance institutions also have misaligned incentives where the field officers are pressured to issue loans. They are also rewards based on the number of members they sign up. This could potentially result in a sub prime scenario, particularly in this segment it is very easy.

IFMR capital through its initiatives aims to bring these effective interest rates down and also make access to capital much easier and the markets more liquid.

My research involved: