Ramakrishna Krishna is generating a systems-changing way of delivering credit services to the poor; by blending peer-to-peer lending with a strong back-end delivery system that controls interest rates. By carefully prequalifying citizen organizations (COs) and establishing robust back-end processes, he repurposes COs to act as branches and for the first time, and deliver loans at interest rates as low as 8.5 percent per annum.
Ram is generating a systems-changing way of delivering credit services to the poorest individuals by blending peer-to-peer lending with a strong back-end delivery system that controls interest rates. By carefully prequalifying citizen organizations (CO’s) and establishing robust back-end processes, he repurposes CO’s to act as branches and for the first time, deliver loans at interest rates as little as 8.5% p.a.
Ram questions the increasing focus on ‘access’ to micro-credit without equal, if not more, focus on ‘affordability’ of micro-credit. He believes that efforts to increase access to credit without first tackling affordability of credit, compromises the core purpose that underlies micro-finance: bringing people out of poverty. To bridge this gap, Ram is employing various strategies that bring both credit and investors closer to the poor.
Ram questions the increasing focus on “access” to microcredit without equal, if not more, focus on “affordability” of microcredit. He believes that efforts to increase access to credit without first tackling affordability compromises the core purpose that underlies microfinance: bringing people out of poverty. To bridge this gap, Ram employs various strategies that bring both credit and investors closer to the poor.
Seeing peer-to-peer lending as a means to an end, Ram introduced India’s first technology platform that crowd-sources capital. He uses the integrity of this process to attract larger capital and credible partners who are aligned to controlling interest rates and delivering quality services. Rather than partnering with existing bureaucratic multinational financial institutions, Ram repurposes existing COs in rural areas to deliver financial services. He has designed processes and incentives for COs to ensure that the benefits of low-cost capital are in fact translated to borrowers. These steps have created access to microcredit at a flat 8 percent p.a. for livelihood loans compared to the average 26 percent charged by MFIs in India. Committed to reach populations and areas not typically considered viable by MFIs, Ram intends to scale deep and not wide.
Ram is also introducing new standards of social audit and transparency to create a vibrant community of investors who are deeply engaged with the vision of his organization, Rang De. This community is slowly taking ownership of the idea. The online platform has not only deepened their awareness about inequity, but also fueled investors to self-organize into city chapters where they share experiences, spread awareness, and engage closely with borrowers.
MFIs in India have largely focused on reaching as many citizens as possible. While they have been successful in substantially penetrating urban and densely populated rural areas, few have made any inroads into lesser dense populated areas, as scattered populations increase their operating costs. The focus of MFIs to achieve scale and efficiency has not only compromised the attention paid to affordability of credit but has also excluded the poorest and most marginalized communities.
For instance, the average rate of interest charged by microfinance institutions in India is 26 percent p.a. The effective interest rates are even higher because of commissions and fees charged by MFIs. Other factors, such as the compulsory deposits for obtaining a loan, frequency of repayments, and the systems adopted to collect repayments, also raise the effective interest rates. With increasing numbers of borrowers stuck in debt traps, policymakers have begun to push for ceilings on interest rates to ensure that poor households have access to affordable credit. This necessitates MFIs to innovate and create new frameworks to bring down the costs of capital and operations. Reaching those most poor does not happen automatically, programs have to be designed to include them and facilitate mechanisms that will impact poverty.
Although front-end driven models like Kiva have created frameworks for peer-to-peer lending that significantly reduces the cost of capital, they have failed to ensure that such a benefit is translated to borrowers. Given that Kiva and similar platforms typically on-lend to existing MFIs, their ability to influence and monitor the terms on which it is lent to borrowers is minimal.
Further, transparency and mechanisms to measure social impact are lacking in the microcredit space in India. Tools to measure social impact and bring increased transparency are becoming critical to boost investor confidence.
Ram witnessed that one of the main reasons for the high rates of interest charged by MFIs is the high-cost of capital. To cap this, he built an online platform in 2008 that aggregates small investments (Rs. 100 minimum or US$1.17) from lenders all over India to channel them at affordable rates to its field partners.
Rather than partnering with MFIs, Rang De partners with COs that have strong roots in communities to act as its field partners. This is strategic as it allows Rang De to closely influence and steer who credit is provided to, the terms on which credit is provided, and the purposes for which credit is provided.
Rang De identifies its field partners in sparsely populated areas, such as Central India and North-East India; typically considered unviable by MFIs. It then undertakes strong due diligence processes to verify the credibility of the organization and its capacity to execute its role. Among other things, Rang De ensures that its field partners have strong IT/management systems and requisite staff to be able to identify borrowers, disburse loans, and collect repayments. Rang De has also set up a formal Partnership Committee, with independent advisors to guide it in the process of identifying partners. Once the partnership is formalized, the field partners are required to target the poorest individuals, considered high risk by MFIs, such as borrowers whose household annual income is below Rs. 100,000 (US$8,520) a year. They also ensure that the borrowers have no outstanding loans. The field partners maintain a clear line of communication with Rang De, providing information on the background and needs of borrowers and also on any defaults and delay on the credit.
The minimum loan size offered is typically Rs. 5,000 (US$62) for business loans. However, depending on the needs of the target population, exceptions are made to also offer loans as small as Rs. 1,000 (US$16). Rang De has also realigned incentives and payment structures to its field partners by removing processing and documentation fees for each loan and instead providing a flat 5 percent commission on loans recovered. This acts as a fee for services provided by the COs. Rang De has field partners in thirteen states across India and has lent to over 10,500 borrowers at an average rate of 8.5 percent p.a for business loans. Rang De has also recorded a growth rate of over 300 percent, its operational income increased from Rs. 8.34 lakhs in fiscal year 2010 to Rs. 36.80 lakhs in fiscal year 2011.
While livelihood opportunities pull individuals out of poverty in the short-term, Ram believes that education is an important factor to bringing people out of poverty in the longer term. To date, 10 percent of Rang De’s portfolio has been channeled toward educational loans at a flat 5 percent p.a. Going forward, Ram intends to increase his focus on providing educational loans for primary, secondary, and vocational training. He is now in advanced stages of negotiation to provide credit to a large enterprise involved in vocational training.
Ram intends to scale deep by first tapping into the demand that exists within the communities of their field partners. Based on a recent survey, Rang De has assessed that there is an existing demand for seven times more loans than what Rang De can currently supply. To bridge this gap, Ram plans to tap into larger pools of capital such as priority sector lending budgets from banks and other institutional funding. He sees this mechanism as a way to change the way banks lend.
While the crowdsourcing of capital from small lenders has brought down the cost of credit, it also bridges the gap between investors and borrowers, as lenders choose borrowers they want to lend to. The online experience also establishes a connection for lenders through the stories of real people and through continuously updated information on recent transactions such as new lenders joining, loans getting repaid, loan requests getting funded, and so forth. To increase their engagement and ownership over the idea, Rang De has formed chapters in all major cities in India. Investors meet, share their experience, formulate campaigns to spread the idea, and undertake field trips to visit borrowers. Rang De’s transparency and collaborative spirit allows investors to represent Rang De at conferences and public events and also provide concrete suggestions to increase impact on borrowers. To retain the continued interest of investors, Rang De also launches different initiatives within chapters, such as the Rang De Box Office—where documentary films are screened. Going forward, Ram intends to launch a fellowship program where investors can work closely with the borrowers or the field partners to improve their systems, or improve overall conditions in the village.
Rang De also organizes annual meets where field partners, investors, and other key supporters of Rang De meet to share their experiences and provide suggestions to strengthen the organization. Such forums allow older field partners to mentor new field partners and see themselves as a part of a larger community. Committed to maintaining high standards of transparency and accountability, investors are constantly provided information on Rang De and the borrowers. Recently Rang De was given a rating by a credit rating agency and has also initiated the process of conducting social audits.
In the coming years, Ram intends to build an online credit history that can aid the organization’s borrowers in securing the trust of investors for future endeavors. He sees a future where Rang De evolves to a peer-to-peer bank and is formally recognized within the banking system.
Ram’s father worked at a state-of-the-art railway research and development center in Lucknow that provided all amenities to the staff and their families. Although he grew up in a protected environment, Ram volunteered in various initiatives and was deeply influenced by the work of Swami Agnivesh and Mother Teresa, among others.
At 18 Ram moved to Vijayawada to pursue his bachelor’s degree in engineering. Soon, he discovered that his college was notorious for its political youth groups, some violent, and was deeply disturbed by the fractures he saw within student life.
In his second year of college, Ram sought to make an annual festival a fundraising event for the Missionaries of Charity. Although this was received with skepticism by university administration, Ram committed to raising funds upfront. He formed a team and raised twice their goal in eleven days. He changed the image and culture of the university by approaching companies that no one from the college had approached. It was while organizing the event that Ram, for the first time, saw positivity at the college: polarized student groups came together to offer their support to organize the event. For Ram, this reinforced the opportunity of initiating positive action and bringing out the goodness in people. The event was a huge success and left him with a deep sense of satisfaction and purpose. Ram continued to organize several such initiatives at the university and became certain that he wanted to continue his engagement in social spaces.
After completing his education, Ram continued to volunteer with different citizen organizations while working for technology companies. He also became an active member of the CSR committee. While volunteering for an event, Ram met his future wife, Smita. She had a strong background in working with communities and their relationship was founded on their shared interest and vision to engage in changemaking.
In 2004 Ram moved to the United Kingdom on an assignment with a client and later joined Vignette Europe as a Principal Consultant. While this role gave Ram and Smita the opportunity to travel extensively, they slowly became restless. They felt compelled to define their roles in catalyzing social change and began to explore ways in which they could intervene. They initially contemplated working on either media, labor, or children’s issues, and spent significant time learning as much as they could. A thorough and measured person, Ram is constantly exploring new ideas to identify a dominant idea into which others can be woven.
The idea of Rang De was sown in 2006—the same year Muhhammad Yunus was awarded the Nobel Peace Prize for his work with Grameen Bank. While Ram and Smita both saw the power of microcredit to get people out of poverty, they were concerned about how MFIs were going about it. Their research showed that as early as 2004, there were reports of borrowers, who were unable to absorb credit given, committing suicide. Drawing from Kiva’s model, they returned to India in 2008 to launch Rang De. Despite pressure from investors to divide the operations of Rang De into two—a for-profit and a not-for-profit, Ram and Smita structured Rang De as a non-profit organization. They did this because they believed that their investors should invest into the whole idea of Rang De and not only in parts.
In the last two years they have woven their interest in media into Rang De by starting the Rang De Box Office to engage investors. Ram continues to design creative ways of engaging with a wider group of investors while penetrating deeper into the poorest sections of society.