“My material objectives I had already achieved while I was a banker. I didn’t have any material ambitions for this. My ambition was to build an institution which would serve the working poor in India,” says 64-year-old Samit Ghosh of the venture that he started to finance the urban poor.
After nearly three decades as a banker, in India and abroad, Ghosh decided to turn an entrepreneur and started Ujjivan Financial Services, a microfinance institution, in 2005.
He has been asked what was the toughest part of the journey. “It was raising that ₹2 crore of the initial capital which is required to get an NBFC (non-banking finance company) licence. That took me about one year.” Since then, Ujjivan has raised ₹350 crore from a clutch of investors that includes Unitus, Michael and Susan Dell Foundation, Lok Capital, Wolfensohn Fund Management and Sequoia Capital. Ghosh himself owns just a 2 per cent stake now in the enterprise.
After completing his MBA from Wharton, Ghosh started his banking career with Citibank, in 1975. He has worked in Standard Chartered Bank, HDFC Bank and Bank Muscat. Half his career as a banker was in India and the other half in the Gulf, he says. It was when Bank Muscat merged with Centurion Bank that he decided to start on his own.
In 2005, he decided to set up this microfinance institution primarily looking at the urban poor. For the rural poor, says Ghosh, there are a lot of Government programmes, microfinance institutions and non-governmental organisations. “But the urban poor, the fastest growing segment of our population who live in abject kind of surroundings, has nobody to look at them. I said why don’t I focus on the urban poor.” Ujjivan ran a pilot project for 18 months in Bangalore as it was using the Grameen Bank model. In 2007, it started expanding across India. Now, says Ghosh, Ujjivan has 350 branches in 23 States, serves 1.3 million customers and has the widest footprint of any microfinance institution. As on March 31, 2014, Ujjivan had disbursed over ₹6,800 crore. It has a repayment rate of 99.9 per cent.
Ghosh says Ujjivan, of which he is the Chief Executive Officer and Managing Director, was selective about where it wanted to operate. It steered clear of Andhra Pradesh, considered the microfinance capital of India. “We were very selective about where we wanted to do business. Wherever we saw excessive competition or if the political climate was not conducive, we didn’t go there,” he says. In 2007, when Ujjivan started expanding outside Bangalore, problems were surfacing in Krishna district of Andhra Pradesh. “The rest of the country was open space, where we could go to.”
What does Ujjivan do for the working poor? “Mainly it is loans, microfinance loans. Today, the loan ranges between ₹10,000 and ₹1-1.5 lakh,” says Ghosh. Its customers are domestic help and workers who live in slums and run businesses. “All our customers are women. They would be into trading, small manufacturing,” he adds.
Ghosh recalls a friend’s comparison of an urban slum to a casino. “If you go into a casino, what will you find? Different… someone playing cards, someone playing the slot machine… everyone is running around trying to make money, and like every business, not sure whether they will make it. If you walk into an urban slum, you will find people are running around trying to make money in various ways, which is like a casino,” says the former banker.
Low marginUjjivan charges an interest of 23.6 per cent a year. Isn’t that high for the kind of customers that the microfinance institution has? Ghosh replies that Ujjivan’s borrowing is around 13-14 per cent. The operating cost is quite high. Before the crisis hit the microfinance industry, the operating cost was as high as 17 per cent, which it has now brought down to 8.5 per cent. With the cost of borrowing and operating cost, the margin is just around 2 per cent.
Are the customers able to afford the interest rate that Ujjivan charges? “They make returns much more than that,” says Ghosh. “The other thing is, when we go and talk to a customer, they say you are giving us loan at a much lower rate than a moneylender. That makes our life better. A money lender would be charging 10 per cent a month.”
Ujjivan’s customers tell the institution that this is the cheapest source of funds for them, but they also realise that these loans only help them earn a livelihood and will not get them out of poverty. For that to happen, they need to put their children through school and college. So, Ujjivan, which was so far giving only education loan, has now started giving higher education loans, too. From focussing on the urban poor, Ujjivan now lends to the poor in urban, semi-urban and rural areas.
Public issue?According to Ghosh, the exit route for the investors is obviously a public listing, but Ghosh would like the perception about microfinance institutions to improve before he takes Ujjivan public. An IPO will also broad-base the ownership structure, which right now is 95 per cent foreign-owned, and also give it access to domestic capital.
Ultimately, Ghosh feels that Ujjivan will have to convert itself into a bank, as and when the RBI comes out with specialised banking licences.