Role of Agriculture in India's Double Digit Economic Growth

A couple of weeks back, I spoke on the subject at a CII Conference. This is a high level summary of my talk.

On the face of it, Agriculture has a very limited role in India's economic growth... Since agriculture forms less than 15% of India's GDP, even a 4% growth in agriculture - this itself is nearly twice as much as the growth rate of the last ten years - will barely add a half percent to the overall GDP growth number!

However, growth in agriculture is vital for Indian economy from three angles:

• in providing food & nutrition security to a growing population. Today child malnutrition is prevalent in 7 percent of children under the age of 5 in China and 28 percent in sub-Saharan African compared to a whopping 43 percent in India.

• in India's inclusive growth agenda. 50% of India's workforce still relies on agriculture as the primary source of their livelihoods - in other words per capita GDP of a farmer is one fifth of that of the rest of Indians.

• in dealing with the challenge of climate change. Remember, agriculture is a major cause and a victim, as well as a potential solution to this problem.

Interestingly, if Western Indo-Gangetic Plains and Godavari contributed to India's first Green Revolution, Eastern Indo-Gangetic Plains and Brahmaputra can deliver the second Green Revolution. Eastern region, especially the Indo-Gangetic Plains are well endowed with basic natural resources viz. fertile land, abundant water and lots of sunshine. But, the route needs to be different, as the context is different...

Firstly, the per farmer land holding in Eastern region is just about a half of the national average and is not even a fourth of the Western Gangetic Plains. So, the ecosystem needs to factor this in, in terms of crops grown or technology inducted or the enabling institutional framework.

Secondly, the market for food in India in late 50s and early 60s was founded on a ship to mouth supply chain. The institutions created by the Government at that time, viz. Public Research System, Government Agri Extension System, Food Corporation of India, Public Distribution System, APMC Market Yards were relevant for that context. Today, with rising incomes and growing urbanisation, the consumer is seeking quality, variety, convenience, safety etc. Such market is better served by the Private Sector. The Government has to play the role of a Reformer and Regulator, rather than being a Player as before.

To co-opt private sector, reforms in agricultural marketing are key - Agricultural Produce Marketing Act, Essential Commodities Act and Forward Contracts Act.

To empower small farmers, producer company type institutions need to be built, which facilitate crop diversification as well as growth of livestock & fisheries.

To raise productivity, deal with climate change, and use natural resources like water more efficiently, development of new technologies is key.

Dairy Coops: What next?

Dairy cooperatives formed under the successful Amul Pattern, operate in a three-tier vertically integrated structure owned by the milk producers. The Dairy Cooperative Society at the village level collects the milk, the Union at the district level does processing, while the Federation at the state level is responsible for milk & milk products marketing. Aggregation of milk at right levels in these three tiers brought the vital economic scale to the micro milk producers of India, and linked them to the national and global markets effectively. This helped transfer a fairer share of the consumer price to the producer, rather than to the chain of intermediaries. The milk business is strengthened through research, knowledge transfer, feed production and marketing, disaggregated in the reverse direction.

Meanwhile, a 2002 amendment to the Indian Companies Act, defined a new institution called "Producer Company", and offered significant flexibility to the producers in managing their affairs vis-a-vis the constraints imposed by the Cooperative Societies Acts of various states.

In this backdrop, I spoke on "what the dairy coops could do next", at a workshop on 'the design and formation of milk producers' companies" organised by NDDB Dairy Services recently. This is what I said:

In the several decades since Amul has been formed, the world has changed. Today's marketplace throws several challenges and offers many new opportunities.

Rapidly evolving consumers seeking variety, quality, safety, convenience etc on one hand, and heightened competition with deep pockets and strong capabilities in consumer understanding, product development, marketing etc on the other hand, throw a challenge! Compared to the past, cooperatives need significantly larger financial - and far superior human - resource to compete and win in this new marketplace.

Let me also hasten to add that several new developments in information technology and better understanding of the dynamic of collaboration in the same period, offer a new opportunity to the milk producers to actualise the benefits of vertical integration without the associated costs. In other words, I am recommending a "virtual vertical integration" through appropriate collaborations.

The economic objective of milk producers can be achieved through a value chain that delivers them a higher net income (a combination of higher productivity, better quality, lower costs) at lower risk. Micro producers at one end and micro consumers at the other end are connected through different business models that aggregate and disaggregate milk at different points of the value chain. Different points also need different levels of labour intensive care, special technology and financial capital as per the business model specifics. Not all of these resources may be present in any one organisation. That's where collaboration comes in.

In the ever changing and hyper competitive marketplace, multiple organisations could come together to leverage their complementary resources & capabilities to create and capture value that is greater than what any one of them individually could.

Of course, every collaborating organisation may need to give up some control, or may not capture all the value they otherwise could, compared to a solo operation by themselves. If the collaborating organisations were to part at some stage, there would also be a risk of creating competition by virtue of shared trade secrets etc.

The trick is in retaining the lever of control in one's hand through key assets such as brands or technology, and make the partners fungible... Or, by recognising and respecting the mutuality of interest with the partners, one could structure a relationship that is built on reciprocal dependency, that all the partners have a vested interest in strengthening...

Any which way, every dairy cooperative must start with a clarity in terms of what they have and what they lack, so that collaboration with partners having complementary capabilities can be forged. For some, it may be expanding distribution into new markets, for others it may be attaining a larger scale to lower costs, and for some it may be new technology to create special products. In addition to these economic frames, given the unique context of cooperatives, it is important to look for organisations with shared vision and cultural fit too. Fortunately, such collaborations are now possible with the new institutional form of "producers' companies", unlike the limitations that the cooperatives face!

I illustrate two specific ways in which collaborations with private sector can add value to milk producers.

Instead of producers' companies trying to build marketing capabilities themselves, they could partner with organisations that possess such capabilities, and focus their efforts on reorganising milk production systems. Given that incremental value generated by improvement in productivity and quality is far greater than value captured through controlling marketing activity, this can multiply producer incomes manifold. In any case, demand for milk and milk products in India is rising rapidly, and the milk production needs to double in less than fifteen years

One such production reorganisation possibility is to move from 'Family Owned Micro Livestock Operations' to 'Collective Dairy Farming Units'. Every village can have a few such units depending on the potential. This can help in rearing animals in a controlled environment to implement best practices more easily. Producers can share work at the farm by "livestock units" or by "legs of operations". This will also facilitate collective decisions on land use, in turn protecting ecology and conserving bio-mass. Well managed dairy farming units can capture ecological credits through controlled release of methane gas. Apex institutions of the Producers Companies can co-opt knowledge & input providers, processors and marketers into the ecosystem and take on the role of a Network Orchestrator to achieve the "virtual vertical integration".

One of the workshop participants mentioned that such collective dairy farming units are already operating in Gujarat, as "Animal Hostels". In this early phase of evolution, it is important that many such experiments are carried out to craft models that suit different contexts. In recent times, other ecosystems in India such as road construction and telecom have grown through such innovative partnerships.

Another interesting collaboration possibility is in the Private Sector building the capacity of producer companies. When cooperatives are thinking in terms of transforming into companies, there is a need for them to create and sustain process driven institutions. Corporates run on SOPs (Standard Operating Procedures) with strong in-built internal controls. Self-correcting systems are part of their culture and ethos. Innovative use of IT systems strengthens these processes further. All these systems promote transparency and accountability, which are critical for the long term sustainability of the newly formed producer companies.

All in all, I think, the Indian dairy sector is ripe for another institutional change.

Agricultural & Environmental Concerns: Role of Education

Yesterday, I spoke at a seminar on the subject theme organised by Knowledge Xchange in Chennai. This is a summary of what I said...

You must've heard several speakers on the subject since morning, and now you must be wondering what a corporate has to do with this topic. Let me deal with that first.

Purpose of education = Know How. Know How has two components. Firstly, Know What. Training typically focuses on Know What, while education is expected to build the other component of the capacity i.e. Know Why.

Purpose of Know How = Do How.

And, purpose of Do How is to actually "do" things that "deliver" the intended outcomes.

What are those outcomes, in relation to the Seminar theme?

1. Raise incomes for the farmers (Per Capita GDP of Indian farmers is just about a third of the rest of Indians)
2. Achieve Food & Nutrition Security for our all our people (a third of all our children are malnourished)
3. Do this in an environmentally sensitive manner (so that we leave a habitable world behind for our children and their children)

The theme of my talk is "What can Corporates do, to enable these outcomes?"

Basically, I have three messages to share:

1. For the Know How to be effective, the medium (of education) must be tailored to the context.
2. For the Know How to be translated to Do How, the education must be an integral part of a "meta-process"
3. To execute the idea of a meta-process in the real world on a large scale, you must leverage the power of innovative business models

To substantiate these arguments, I will walk you through the nature of challenges in Indian agriculture and the corresponding solution themes. And then illustrate those through the creative solutions successfully deployed by ITC on the ground.

1. The context of Indian agriculture and the farmer is quite complex, with multiple dimensions and each dimension with multiple degrees of challenges. The "media strategy" of "education", if I may call that, must be tailored to this context. Let me outline four of those dimensions, relevant to our theme today.

a. Any context must first be seen from the perspective of "outcome for the consumer", in our case the "farmer". Each of our famer is so very different from the other. Starting with variations in farm size, to the heterogeneity in agro-climatic conditions, to the far more individualised resource availability and risk taking ability. In other words, one message is not relevant to all farmers. That means, many messages need to be personalised, some can be mass-customised, while a few can be generic.

b. The second dimension of the context, is the "nature of message" itself. That varies according to the action that the message should trigger to achieve the objective. In some cases, it could be simple awareness about a market or a weather condition; while in another case, it may need to alter an existing farm practice such as seed rate or row spacing; in yet another case, it could create a conflict between short term effort or cost with long term benefit (such as investment in micro irrigation for soil conservation). Again, obviously, one tool doesn't trigger action in all cases. In one case it could be SMS on mobile phone, in the other it is an on-farm demo, and may be an audio-visual in another case.

c. The third dimension is "time" that enables action. In agriculture, as you will all know, most activities are very time sensitive. Therefore, a piece of information or a knowledge component has to be delivered absolutely on time. Especially when some of the actions are linked to random events like rain fall or pest attack.

d. The last dimension is "cost". Notwithstanding different levels of message and types of tools, obviously the cost can't be out of whack with the benefit being delivered or the risk being managed.

In ITC eChoupal, multiple media are used in a 360⁰ approach tailored to the need. For example, improved practice or a new input through the eChoupal website, followed by an on-farm demonstration through Choupal Pradarshan Khet for better conviction; then the adoption is facilitated through SMS reminders & telecalling to clarify suitability for specific farm condition, and obtaining feedback on practice / product performance through tele-helpline.

2. The second message is about translating all this Know How to Do How. The farmer may know what to do, but many times timely & affordable access to other inputs is a problem. Be it, credit or seed or some crop protection chemical. In the mind of the farmer, all of these elements are part of one process. Call it the "meta-process", because it is in the mind of the farmer. Deciding which crop to grow, managing it through the crop season, and then realising cash from the crop. But, these needs are served by different industry verticals such as agri extension, banks, seed companies and so on... Unlike in evolved markets, the delivery of these inputs is not synchronised with knowledge. Therefore, the action doesn't happen often. Consider an evolved market like buying a car in Chennai. You can acquire the knowledge about a car suitable to your needs through several magazines, a loan through a bank, actual vehicle from a dealer, insurance from an agent, and the service arrangement through a dealer seamlessly. But, for many farmers in rural India, such seamless process is still a dream. Fragmented farm sizes, dispersed villages, heterogeneous conditions compounded by weak infrastructure make synchronised delivery a challenge.

ITC eChoupal factors these challenges while orchestrating an ecosystem that delivers the desired end-to-end solution to farmers. It is achieved through a new digital, physical and human infrastructure organised in a hub & spoke configuration. Today some four million farmers access services through the ITC eChoupal network, offered by 160 organisations cutting across Government, Private and Social Sectors.

3. To roll out an infrastructure like eChoupal on ground, it costs a lot of money. How ITC designed a business model so that the cost of such a system is not a burden on the farmer, but recovered through innovative revenue models, is the third message.

For example, by eliminating non value adding costs of a village to mandi to our warehouse chain through a village to our warehouse chain by discovering price in the village is one such model.

In another model, we embed traceability along the chain (having sourced directly from the farmers) into our products, we deliver greater value to consumers and capture some of that value for ourselves and the farmers.

Yet another model is charging a toll on these 160 organisations for bringing them cost-effective access to the rural markets.

Allow me to repeat my three messages, before I close:

1. For the Know How to be effective, the medium (of education) must be tailored to the context.
2. For the Know How to be translated to Do How, the education must be an integral part of a "meta-process"
3. To execute the idea of a meta-process in the real world on a large scale, you must leverage the power of innovative business models

Thank you.

Bringing about enterprise accountability and the concept of triple bottom line

Some of you may remember my tweets and Fb updates on the subject a couple of months ago, when I participated in a panel discussion at National Geographic's Green Conclave. I got busy soon after, and couldn't post a blog. Yesterday a friend asked for some material on triple bottom line, and I decided to write it now...

There are two arguments on what a good Corporate Citizenship is. One argument views business enterprises as pure economic citizens. The other, a position taken by ITC, sees them as Socio-economic Citizens.

Pure Economic Citizen argument says enterprise accountability starts with earning profits and ends with paying taxes; that the responsibility towards social and environmental aspects is best left to other organs of society viz Government and Civil Society Organisations. Further that the focus of Business Enterprises should be on satisfying the shareholder desire for a return on their financial investment to the exclusion of non-financial stakeholders.

Essentially, the argument is that the Corporates, as artificial entities, should have no social responsibility; people or real individuals must have social responsibilities. Generating profit by servicing consumers in a competitive environment is considered the most socially responsible act of an economic enterprise.

On the other hand, ITC views enterprises as socio-economic citizens and therefore as accountable to today's & tomorrow's society and environment from which it is drawing resources, besides to its financial shareholders. The expectation from socio-economic citizens is that the core business activities must be implemented with broader responsibility towards ALL the stakeholders. In other words, enterprises must demonstrate positive economic, social and environmental performance over long term. This is called Triple Bottom Line approach.

Of course, the trade-offs in the value created for multiple stakeholders make Triple Bottom Line approach a difficult path to follow. ITC has creatively enmeshed the interests of shareholders, the poor, and environment to build business models that overcome the trade-off challenge. ITC eChoupal initiative, Social Farm Forestry programme in Bhadrachalam area and Agarbatti business linked to women self help groups are some examples of Triple Bottom Line approach by ITC.

Other panelists argued that such enmeshing isn't easy and the trade-offs are inevitable, pushing companies to be profit focused or compromise on profits. I proposed that Government could do four things and create a market mechanism to deal with such a trade-off challenge.

1. ‎Make TBL reporting mandatory. Peer group and market pressure will then automatically broaden accountability of enterprises
2. Define TBL accountability metrics clearly along outcomes lines. For example, Water Positive and Carbon Positive Corporates...
3. Create tradeable instruments from such metrics. TBL then becomes a source of economic advantage
4. ‎Deepen the market for these social credits by mandating threshold TBL for bidding in Govt projects. Non TBL enterprises can buy credits to be able to bid

The Promise of UID - What to do, to get it right?

As part of the annual ISIS Conference on 18th Dec 2010 at ISB Hyderabad, there was a Panel Discussion on UID. Besides myself, Dr KC Chakrabarty of RBI, Mr Sanjay Swamy of UIDAI and Mr Abhishek Sinha of Eko Financial were the other Panelists. The Panel was moderated by Prof Arun Sundara Rajan.

Before the Panel Discussion, a specially recorded video (will be linked once the Conference Organisers upload the video) of Mr Nandan Nilekani, Chairman of UIDAI was played.

As you would see in the video, Nandan outlined SA, PA & DA of the SA-PA-DA-PPA template, I used my time on the Panel to do a PPA of three of those areas. This is what I said:

Acknowledged existence: Many Indians, especially the poor, cannot prove their identity with legally valid documents. Out of a billion Indians, only 60 million hold passports; there are just about 70 million IT PAN Card holders. It is not difficult for fraudulent third persons to misrepresent the poor in certain transactions. As a result, for example, many of the poor people cannot access social support programmes of the Central and State Governments. Substantial part of the social subsidies meant for the poor get diverted and misappropriated. The proposed UID number helps in accurately establishing the identity of a person and in authenticating any transaction. This will help in reducing misappropriation and lowering leakage from subsidy funds.

But, vested interests won't be happy with lower corruption in the subsidy system. Powerful among those interests won't let UID scale! Besides the technological challenges in scaling (mind you, the enrolment system must be fool-proof to eliminate any fake identities, must be robust enough to eliminate duplicates and must be easy & cost effective to verify & authenticate; all these for some 600 million people) that UIDAI is well geared to take on, the execution plan must cognise for the potential challenges arising out of the hurdles created by these vested interests.

I see these hurdles as marketing and social sciences challenges. Instead of clinically enrolling the citizens, the benefits of UID must be widely communicated to the citizens so that they get "enrolled" into seeing UID as a practical solution for their real problems. The people will then collectively find a way to deal with the hurdles created by the vested interests, as they did when ITC eChoupal faced similar resistance years ago. Similarly, it will help if the relevant agencies (eg District Administration) can co-opt the poor in design and execution of the social subsidy schemes. For example, the poor themselves know exactly how they get excluded from many schemes, and what process changes can help include them.

Business Opportunities: To start with, there is a mega business opportunity in the very process of enrolment of citizens into the UID system. Appropriate hardware is required at some 100,000 enrolment centres, along with necessary software to capture the finger prints, iris shots and demographic data. Someone aptly said that India can become the Bio-metric Capital of the world. There will also be similar opportunities in building transaction authentication hardware for different types of establishments using one or more of the UID features.

In the long term, the real value business application of UID is actually in improving effectiveness of financial transactions, consumer loyalty programmes, personalised crop management advisory, health cards for citizens etc. through shared transaction data of every UID across organisations. But, public access to such data raises serious concerns on privacy of individuals and competitive intelligence for businesses.

One way this conflict could be resolved is by limiting the seam-less sharing of such transaction data among a syndicate of organisations or certain type of businesses approved by the individuals for an appropriate value-exchange.

Innovation Ecosystem: Once the data sharing conflict is resolved, a powerful innovation ecosystem will be catalysed by the UID platform. Pretty much like a Development Apps Store! Some of the potential innovations would obviously be yet un-visualised. But, I can surely see ideas that make up for the missing institutions such as credit rating system and dispute resolution mechanisms. Many by many experience rating using the same identity can lead to interesting B2C and C2C applications.

The yet unvisualised innovations could also be mega threats to society. Dutch Census anecdote I recently heard is an example of such a threat. In an early 20th Century Census, Dutch collected the religious affiliation data of their citizens (for building places of worship in their neighbourhoods). A few years later, that data was very handy to Germans in exterminating some 75% of all the Jews listed.

On balance, I say, we must push forward with the UID.

But, raising public awareness of pros & cons of any new system with potential transformational impact, such as UID, is key, rather than selling it as a panacea to all problems...

Role of Corporate Sector in Inclusive Growth: Importance of Business Model Innovation

Earlier today, I spoke at the SMF-IIMA Conference on "Challenges to Inclusive Growth in the Emerging Economies".

My talk posed and answered four questions.

Q1: Who is "excluded" from the current growth process, that we now want to include?

Two sets of people are excluded, may be are even short changed, from the exciting growth story of the emerging economies in general, and India in particular, in recent times.

1. Some sections of our population, because they suffer from certain inherent disadvantages, are excluded from the new economic opportunities and growth (e.g. farmers, rural crafts persons, people with physical disabilities etc)
2. Some other people are excluded from the economic equations, because they don't have a say today! I am talking about our grand children and their grand children. The decisions taken by our generation have a bearing on the availability of natural resources (e.g. water) and the quality of ecology (green house gases) when they are around on this planet.

Q2: What can Corporate Sector do in this context?

Traditionally inclusive growth has been the domain of Government, Civil Society Organisations, Multilateral Institutions. Although there has been some progress over all these decades, none of us can feel satisfied with today's position of either of these excluded segments. For example, per capita GDP of an Indian farmer is just about 1/4th of that of rest of Indians. And, the concerns on climate change are at a level we have never seen before.

Programmes of these agencies miss out on one or the other aspects of three crucial areas.

1. Sustainability - where the programmes are subsidy based, their long term sustainability is suspect
2. Outcome effectiveness - for the target segment of people is weak, as the programme focus is typically on outlays
3. Scalability - is often the most challenging aspect of a successful programme

Call these SOS, if you will, by the first letters of the three areas. That's the message to the world.

On the other hand, by the very nature of enterprises, Corporates survive & thrive by doing these three things right...

1. Profit, the key metric of financial sustainability is the core objective of any commercial enterprise
2. Value Proposition to the target group of customers is the essence of market and competitive strategy, and guarantees outcome effectiveness.
3. Growth, the other metric by which Corporates swear, is what goes into determining market capitalisation of an enterprise

In other words, Corporates have the specific wherewithal to engage in inclusive growth agenda by applying these capabilities and deal with the SOS challenge.

Q3: Why is Business Model Innovation important?

Despite such a case for Corporate involvement in inclusive growth, there is widespread skepticism too!

Many in Government and Civil Society are skeptical about the intentions of Corporates. They simply see such engagement as a lip service, since they believe that 'profit' and 'inclusive growth' are at cross-purposes

Even the Financial Investors see a conflict between a company's profit objective and its social or environmental engagements.

On the other hand, if Corporates stay out, the SOS challenge unlikely to vanish. If the income divides expand and the ecological insensitivity continues we will have a serious problem. No business can succeed in a failed society, or in a world where natural resources are exhausted.

Then, there is also a huge business opportunity in selling products & services to the poor, and in selling eco-friendly products.

How do we reconcile these conflicting realities? The only answer is Business Model Innovation.

If we are able to innovate business models in a way that the profit objective of Corporates is enmeshed with the social or ecological benefits to the community at large, the new goal will be well aligned.

While many Corporates create shareholder value indifferent to society, and some even do at the cost of society, the conflict can be resolved if shareholder value is created "through" serving society. That's where business model innovation comes in!

By calling it business model innovation, I am distinguishing it from product or service innovation that can help inclusive growth. Renewable energy, micro finance, mobile phones, and road infrastructure are some examples of such product & service innovations.

Q4: Is there a special tool kit for business model innovation for inclusive growth?

Based on my experience in building the many phases of ITC eChoupal, and having observed several other inclusive growth initiatives of ITC from ring side, I see three important tools in a kit that will help innovate business models and deliver inclusive growth.

1. Co-creation together with the Communities: Both design and execution. This makes up for the missing infrastructure (eg individual credit rating, dispute resolution) through infusion of social capital. This also cuts costs. More importantly this co-opts lead consumers and helps accelerate product & service innovation. Two of the new institutions innovated under ITC eChoupal system viz. Sanchalak and Samyojak are vital components of a co-creation platform.
2. Leveraging Technology: Technology helps in remote delivery of services (eg eLearning, Telemedicine) and overcomes the physical access barriers as well as the knowledge concentration barrier. Technology can multiply productivity. Technology can also personalise solutions to individuals, so important given the heterogeneity of the target segment we are talking about. Technology helps in precision, leading to better resource usage and improve quality of the output.
3. New Revenue Models: Integrating the micro producers into value chains that connect them to the markets, is one way in which their share of a consumer price can be taken up. The principle of "Third Party Pays", as in Media business, is an important way in which the burden on the low-income producers or consumers can be reduced. This leads to rapid market expansion. Platforms that can carry products & services of several other organisations can create "increasing returns ecosystems" and deliver exponential growth, once the network effect sets in.

Wish you good luck, in co-creating a new world order :)

Microfinance

Earlier this week, when President of MFIN Vijay Mahajan tipped off that "some MFIs may have to shut shop as early as 1st Jan 2011, as Banks refuse to lend", of all things, Karna from Mahabharata came to my mind...

Bankers may only be proving the stereotypical notion that they are, after all, fair weather friends; or may be right in their judgment in not putting any more good money behind bad. But, much like the Karna's story, many factors beyond the new loans from Banks may have contributed to the death of such MFIs.

Here is my take on what some of those factors are:

1. While the interest rates of MFIs are lower than what a local money lender charges, the fact that the rates hardly came down in so many years of MFI existence implies that the sector hasn't innovated enough. Whoever survived without innovation for long?

2. Actually, at the heart of MFI value proposition are two other complementary services viz. (a) improving income generating capability of the borrowers - beyond their cost of borrowing - through several Business Development Services, including collectives for scales of economy and (b) social mobilisation for improving credit repayment culture and taking up activities that benefit the community as a whole, eg anti-liquor campaigns. Along the way, as MFIs proliferated many of them focused on transaction efficiency, and lost sight of these two pillars that defined the original business logic.

3. That politicians cutting across party lines are egging the borrowers not to repay their loans, likening the MFIs to Loan Sharks, suggests that the industry hasn't built any political capital either, in all these years! A wide range of motivations were attributed though, such as opportunistic political gains and selfish interest of some politicians who are money lenders themselves hence anti-MFI.

4. What's even more surprising is the lack of overt support (in this hour of crisis) from the very beneficiaries themselves - the borrowers - even after knowing fully well that the MFIs would close and they may have to resort to higher cost borrowings again. The absence of social capital in the operations of many MFIs (described in 2 above) meant that the borrowers didn't see the long term benefits of continued engagement with those MFIs, instead were happy extracting the short term transactional benefits (escape from repaying their loans). In contrast, when the middlemen struck work at mandis in 2004 to stop ITC eChoupal from making the agri markets transparent, thousands of farmers came on to the streets spontaneously to support eChoupal.

5. Appropriate regulations did not evolve along with the growth of the MF sector.

6. The MF market got distorted, with Government also acting as a lender through SHGs in many States. In fact, competition with Government (who is also a regulator) in a distorted market, is a big threat for the sustainability of many social enterprises. People at BoP are the common target, by definition.

7. Wrong choices of scaling models by many MFIs is another factor. Any organisation can choose from four scaling models - scaling up, scaling deep, scaling out or scaling through. Up requires standardisation of processes for efficient replication of a demonstrated unit. Prerequisite of deep is a capability to orchestrate an ecosystem to deliver multiple products & services to the same customer group. Out is replication of the same model in a different domain. And, through is a typical franchising approach with the attendant conditions. Some MFIs attempted crossing from one model to the other or even blending different models without building the requisite capabilities, obviously leading to trouble.

8. Large sums of money was pumped in through Private Equity, IPO etc. before the sector geared itself for scaling. These sources of money demanded rapid growth, which in turn meant diluted quality of execution (multiple loans to the same borrower, coercion in recovery etc). Coupled with 7 above, this is a recipe for disaster.

9. Not enough manpower was trained in conjunction with the growth of the sector, unlike what was done in other manpower intensive large scale businesses, such as Software, Green Revolution and Operation Flood. It is estimated that some 100,000 people are employed in MFIs. Again, whoever succeeded without quality manpower.

10. In many places, the group leaders (of borrower groups) started their own bridge loan businesses, thus "ever-greening" the loans, making the ground reality opaque to MFI staff.

11. Many people question the ethics of some MFI promoters for using the growth & profits from the highly leveraged soft loans (originally given for a social cause) for private gain. In businesses at BoP, it is important for the lead players not to lose the strength of morality to be able to push Government towards reform.

What Next?

Notwithstanding all the above factors, the business case for MFIs still exists. By virtue of the crisis wrought by the Ordinance in Andhra Pradesh, good MFIs are suffering as badly as the bad.

Instead of trying in vain to revive the sector after it is dead, all the stakeholders need to kick-off a consultation process to determine the right way forward in each of these and such other factors, with the future of the borrower in mind. Karna did die due to many curses, but mythology tells us that every curse can be lifted too!