Reaching out to the urban 'unbanked'
December 2008
D Sundara Murthy runs one of hundreds of automobile parts reconditioning units in Chennai. But he has one piece of equipment not to be found anywhere else.
It is a hydraulic jack that displays the brand name 'CapStone'. There is no such hydraulic jack manufacturing company; in fact, Murthy assembled the machine himself from bought-out components.
The ‘CapStone’ lettering painted on the hydraulic jack is just his way of acknowledging his gratitude to the company that gave him a loan to invest in the machine.
D Sundara Murthy working on the 'Capstone' machine
Murthy’s gratitude is understandable. He has been in the business for around 20 years, and his Thirumurga Turning Works, in RA Puram, a busy commercial area, employs five people. But, until CapStone approached him, Murthy had never taken a business loan from a commercial organisation. His enterprise had grown entirely out of his own savings.
No bank had ever approached Murthy, and he had not sought them out either. "I simply did not believe I could take a loan."
CapStone Trust
CapStone Trust, an IFMR Trust investee company, aims to meet the finance requirements of thousands of people like Murthy: self-employed or salaried individuals living in urban areas who have rarely, if ever, taken a formal loan.
An idea of just how many such people there are can be gauged from the fact that, according to CapStone staff, in the RA Puram area itself there are around 7,000 ‘unbanked’ small enterprises.
CapStone was launched in India in September 2007 by Development Innovations Group (DIG), a private international firm specialising in development finance.
DIG works in developing and transition economies with financial institutions, government agencies, donor organisations, NGOs, and the private sector. Its founders and associates are recognised experts in the fields of micro finance, housing finance, banking for the poor, urban and community development, and post-emergency reconstruction.
Says Eric Adams, Director, CapStone Trust: "We look at a double bottom line. We promote financial inclusion in a formal, professional, permanent and commercially viable way. We focus exclusively on the urban market and use an individual lending methodology."
Operations began in Chennai, in February 2008, with funding of Rs 10 million from IFMR Trust. By the end of September 2008, CapStone had disbursed loans aggregating Rs 18 million to around 600 individuals. Around 90% of the customers are self-employed; 96% had never taken a formal loan before.
Grassroots approach
CapStone’s philosophy is based on traditional micro finance methods that have been successful in rural India. Adams explains: "We don’t rely on mass media for promotion. We use a grassroots approach, going out into the field and getting to know potential clients and our market closely."
This 'grassroots approach' is highly structured. CapStone’s first branch on Greams Road, close to its main office, caters to people living or working within a tight radius of 5 km. Future branches are also expected to have such a focused base.
Within this small geographical base there is a "market waiting to explode". There are scores of provision stores, vegetable vendors, two-wheeler mechanics, barber shops, tiny manufacturing units and other small businesses run by people who would like to have access to a trusted and fairly priced source of financing.
"As any business person knows, access to finance is a pillar for stability and sustained growth,” says Bryan Winston, Director, CapStone Trust. “CapStone’s business model is based on the estimation that each of its branches can optimally cater to around 6,000 such people."
But, he stresses, the company will resist the temptation to expand too quickly. "In a market like India, CapStone’s growth is inevitable. The key is to ensure that market-driven products, systems and people are in place to support growth and maintain portfolio quality."
CapStone employs a detailed assessment process to ensure that it provides only “good loans”, and that defaults on repayments, if any, are minimal. The core principle, Adams says, is that “there are no bad borrowers, only bad loans".
Loan process
D Damodaran, a CapStone loan officer who has around 20 years of experience in marketing, explains the various stages of ensuring a good loan. At the loan officer’s first meeting with a prospective client, only the company’s business objectives are explained, he says. "We make no mention of how big a loan we can offer, and on what terms."
Once the prospective client shows an interest, a meeting with the loan officer takes place at the former’s premises, where the officer attempts to make a basic assessment of the prospective client’s average monthly earnings and expenditure.
Based on that assessment, and the purpose for which the loan is sought, a tentative amount is fixed. So far, CapStone has advanced loans ranging from Rs 8,000 to Rs 40,000, with monthly repayments structured up to a maximum of 25% of the applicant’s monthly household income. The average loan size is Rs 28,000.
A loan application form is then filled up with the help of the loan officer. The form elicits a wealth of information that is cross-checked, formally and informally.
Damodaran explains: "We look at frequency of purchase of stock. We talk to suppliers. We meet other people in the same business to judge how well they are doing. We go to the applicant’s home and see the family situation. We talk to their neighbours, meet the landlord if the house is on rent…"
A crucial requirement every applicant has to meet relates to traditional MFI reliance on trust. The applicant has to provide a guarantor with the ability and willingness to repay, in case of default. The guarantor cannot be a family member living in the same house, or a business associate. It has to be someone who knows the applicant very well. In the case of D Sundara Murthy, the guarantor was a garage owner who has known him for years.
Once all the formalities are over and the application screened in a three-step process -- by a loan supervisor, randomly by the branch manager, and finally by a credit committee at the head office -- the loan is given quickly. K Vijayrangan, a loan supervisor at the Greams Road branch, says the record so far has been a customer getting the money within three days of completing the formalities.
Repeat business
The relationship then is not limited to keeping track of repayments, which have to be done in four to 12 months.
According to Damodaran, when he is on his daily rounds identifying new clients he makes it a point to chat up existing ones, as many clients themselves provide leads. And they have good reason to be supportive. After installing the hydraulic jack, Sundara Murthy says his business increased by 20%. He recommended four potential customers to Damodaran.
The biggest attraction for prospective clients is CapStone’s competitive rate of interest. Whereas moneylenders charge interest at the rate of 5% or more per month, CapStone has a flat interest rate of 1.8% per month. This is much lower than the rate charged by some non-financial banking companies (NFBCs) that provide similar, non-collateralised ‘small ticket loans’ in the urban market.
Adams says: "Our lower interest rate is the Number 1 reason our clients say they chose CapStone."
To date, more than 75% of CapStone’s clients who finished repaying their first loan have chosen to take a second loan. However, some are not inclined to immediately take a higher loan even if they do have an impeccable repayment record.
M Muralidharan, owner of a refrigerator and airconditioner reconditioning and repair service unit, had taken only one formal loan (which he repaid promptly), for a motorcycle, before he applied for a Rs 30,000 loan from CapStone.
Cautious borrower: M Muralidharan, owner of a refrigerator and airconditioner repair unit
The loan, for a period of eight months, was to buy used machines during the off-season to re-sell at a higher price after reconditioning. This way, he says, his net income increased by around Rs 15,000 over the eight-month period. But he is not tempted to go in for a second loan above Rs 50,000. "One has to go step by step," he says.
That’s the way CapStone too plans to progress. The next steps are turning into an NFBC, tapping the capital market for additional funds, offering home improvement loans and opening more branches in Chennai.
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