Vijay Mahajan: MFI Profits Should Be Moderate

Vijay Mahajan talks to Forbes India on what he thinks the upcoming SKS public offering will do to microfinance in India

Published: Aug 16, 2010
Vijay Mahajan: MFI Profits Should Be Moderate
Vijay Mahajan,Chairman of BASIX

Vijay Mahajan
Age: 55 years
Title: Chairman of BASIX
Education: BTech, IIT Delhi, MBA, IIM Ahmedabad and Masters in Public Policy from the Woodrow Wilson School of Princeton University
Career: Started at Philips, founded NGO Pradan, started BASIX in 1996

What impact do you think the SKS IPO will have on the microfinance sector?
The fact that the capital markets have embraced a microfinance organisation is great for us as an asset class. The specifics of SKS fund-raising have raised many questions. Some of those questions will continue to be asked and [some will be] put to rest. I think Vikram Akula will continue to be a significant presence on microfinance and the development space. He is a very public spirited person. Most of the benefits from the IPO will likely be ploughed back for development purposes.  They have raised a substantial amount of money and to absorb this money while doing things ethically will be important.

What is your relationship with Vikram Akula like?
I have known Vikram since he was a young idealist trying to set up an NGO. We still have a warm and nice relationship. Interestingly, we have differed over several things over the years but we still share a warm relationship. Earlier he thought I was too commercial and now I think he is too commercial. Then he went to work for McKinsey and I thought that during the period he changed. Now I feel he is too commercial and that MFIs [micro-finance institutions] could do with a more moderate profitability.

Did you foresee the sector being as attractive as it now is?
Not at this scale. I was aware of the unmet demand and had done a macroeconomic analysis. But I never thought supply would increase as much although even this is too little. When I started the idea of commercial capital in microfinance seemed outlandish.

How difficult does commercial money make the investment in long term impact versus short term returns?

These are challenges the 20th century left us with. We need unusual corporate structures. We need hybrid structures. Professor Yunus was talking about social business. His definition of social business is something that generates profit but the profits are not distributed in any way to the investors. I personally think that’s a very limiting paradigm. There’s a certain limited supply of that capital. I prefer a hybrid business. When you say that the goals we are trying to address are complex and cannot be addressed by a solely for-profit entity. And if we do it with a nonprofit entity we’ll only be able to do a small size. So we set up a for-profit and a nonprofit separately. That part of the task, which is that subset, which is commercially viable, is through the for-profit. And we’ve done it through investors’ money; we yield a normal rate of return. We pay professionals a normal salary — using the momentum and reach of this entity, on this we piggyback those things which cannot commercially be viable.

How should MFIs expand beyond credit?
Think of it as concentric circles. The current circle, although rather bloated, is the standard 50 week, weekly repayment Grameen style loan for everything, whether you’re a farmer [or not]. It is ridiculous to ask you for a repayment the week after lending money. This is [the] faulty model of microfinance. So the first concentric circle outside of this should be differentiated credit products. So different tenures, different cash flows, preferably different uses, and so on. An extreme example would be housing —where tenure is very long.

How do you make non financial products work?
We have to differentiate the sales force and the delivery port first of all. So for example in insurance, in BASIX, the enrollment is definitely done by the same guy who sells credit but everything else from policy servicing to claim processing to mass education is done by the insurance teams. When it comes to livelihood services like veterinary care, we have 1,000 paramedical vets who only do this. 

(This story appears in the 27 August, 2010 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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