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According to the 2009 Microfinance India State of the Sector (MISS) Report, the microfinance industry's client outreach has grown by 30% over the last year to 76.6 million and the total outstanding loan portfolio has grown by a staggering 56% to INR 359 Billion over the same period. The growing integration of the sector with the capital markets has led to an influx of funds from various channels and has accelerated the transition of the Indian Microfinance Institutions (MFIs) into mainstream companies. While such a period of heady growth especially amidst an overall slowdown in the economy is laudable, one must question whether the industry is fulfilling its core charter of integrating millions of underserved Indians into our financial system in a socially responsible way. Critics have pointed out that even today financial inclusion remains as elusive as ever to the people at the absolute bottom of the pyramid (BOP). There is also a real danger that some borrowers are falling behind by taking on excessive debt and then using debt rollover to meet their obligations. MFIs are also expanding the scope of their services by using their delivery platforms to bring more goods and services within the reach of rural India; but the same trend could also lead to financial profligacy amongst consumers. We delve into the intricacies of the microfinance debate and look ahead to see how Indian MFIs can manage the next phase of their growth in a way that benefits all stakeholders.

GAUTAM AGGARWAL: Microcredit - Need for reformulation

By definition, microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without (Gert van Maanen, Oikocredit 2004).

However, this definition doesn't seem to hold true in today's microfinance (MFI) space as we find the lower strata of the poor still struggling to get any financial traction with the MFIs. There are distinct income classes among the poor population which are classified differently by different people. To avoid ambiguities, this article segments this population into poor (income less than $1 per day) and non-poor (income more than $1 per day). As per the MISS 2008 Report, poverty audits carried out reveal that in five out of eight MFIs, the proportion of non-poor clients was more than the poor, with coverage of non-poor ranging from 42 to 88 per cent of the clientele. As a matter of fact, MFIs are substantiating the general notion that money attracts money by excluding the poor segment and focusing only on the non-poor one.

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Taking up an initiative to widen the scope of effective communication to the bottom of the pyramid of the Indian economy, the Mudra Institute of Communication Ahmedabad (MICA) has started conducting a research. The research called 'National Agricultural Innovation Project' (NAIP) is funded by the World Bank.

Professor Arbind Sinha and co-principal investigator Vishal Thomas are working on the research project. "The research aims to develop a set of alternative ICT initiatives in the field of agriculture. MICA's responsibility will be to develop communication models on communication needs assessment for effective dissemination of information on these ICT initiatives to the last man in the village,'' said Thomas.

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In 2009 the world was no longer flat; much of it was flat broke. Deflated by slumping sales and income, companies roundly did what innovation consultants say they never should—they cut spending on research and development. The U.S. drug industry, historically one of the most lavish spenders on research and development, announced the elimination of a record 69,000 jobs this year, up 60% from 2008. At many companies, quick hits and line extensions replaced more costly, though potentially more rewarding, investments in game-changing inventions.

Still, creativity lives on. Among fresh or fringe approaches that became mainstream tools in 2009: trickle-up innovation, design thinking, and open innovation. And while innovation may no longer be the golden goose it was in flusher times, the penny-pinching has forced companies to break some bad habits—such as wantonly pursuing every new idea—which could help them roll out new money-making products and services as the recession eases and an economic recovery takes hold.

A rethinking of the discipline is long overdue, argues Umair Haque, founder of Bubblegeneration.com, a business strategy Web site, and director of the Havas Media Lab. "Most innovation, well, isn't: It is 'unnovation,' or innovation that fails to create authentic, meaningful value," he wrote on a HarvardBusiness.org blog earlier this year. Among his examples of unnovation: the Hummer SUV and collateralized debt obligations, through which high-risk mortgages were blithely peddled.

Reversing the Trend

Trickle-up innovation may best represent what some are calling today's "good enough" marketplace. Multinationals used to develop their top-of-the-line products for the developed world. These goods then "trickled down" to emerging markets as even better replacements were introduced to affluent consumers. Now the process is being flipped. Companies increasingly are designing low-priced, no-frills products for those at the bottom of the pyramid and trickling them up to the developed world. General Electric (GE) and Procter & Gamble (PG) are in the trickle-up vanguard. Read this BusinessWeek story on the trend, Innovation Trickles in a New Direction.

Design thinking has been around for some years now, but it became a mantra among consultants in 2009. The notion boils down to this: Executives at all levels would be more innovative and therefore successful if they approached problems the way designers do. That means understanding a problem or need from the consumer's point of view and then coming up with the best good or service for the job. P&G, again, is often held up as a corporate role model here thanks, to such products as its dust cloth Swiffer, which opened up a whole new market for the consumer goods giant.

With a quartet of books on the idea published in 2009, including Change by Design by Tim Brown, chief executive of design consultancy IDEO, it's a safe bet that more companies will latch onto design thinking. (See these books and others in our slideshow of the pick of this year's best innovation and design reads.)

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The ILO's Microinsurance Innovation Facility issued a call for grant proposals to encourage insurance providers to experiment with new products and develop strategic partnerships that will bring affordable insurance products to working poor in developing countries.

To overcome the major challenges associated with health financing for low-income households, the Facility proposes a special emphasis on health microinsurance, but also welcomes applications for projects focusing on high-impact products and innovative distribution channels. Providers that have the potential to provide better insurance products to many low-income people but need their capacity to be to strengthened can also receive support including consulting services, training and exchange visits.

‘The big challenge that microinsurance is grappling with at the moment is health insurance. It is very difficult to provide on a sustainable basis, but it's the thing that the people want most. Families in developing countries often fall into poverty because of acute illness or a catastrophic event affecting their health and their capacity to generate an income. Studies highlight that many low-income people are willing and able to pay for a safety net that protects their family or business, but they generally cannot access affordable products that would meet their needs. On the supply side, insurance providers often lack the know how to reach this market and need to experiment to develop sustainable business models. The grants are there to support those risk takers, cover their start up costs and harness lessons learnt' says Craig Churchill, team leader of the ILO's Microinsurance Innovation Facility

‘[Microinsurance] is a profitable market and we would love to invite as many people as possible to try to make this market as competitive as possible. Honestly, there can't be enough competition. Competition is going to be what is important to forming a real market at the bottom of the pyramid.' Added Brandon Mathews, Head of Microinsurance, Zurich Financial Services

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“I am excited about Tata Swach because in my native village every house needs a water purifier as the water is contaminated,” says Dharmendra Jha, working in Patna.

Jha’s aspiration is tied to the fortunes of the salt-to-software Tata Group, whose Tata Chemicals has priced at a market-beating Rs.749 the purifier that could make a dramatic difference in interior Bihar.

“It is going to be a runaway success in rural Bihar as it won’t be consuming electricity which is a scarce commodity for us,” said Chotte Singh of Madhupur village in Samastipur district.

This down-to-earth product touching lives far away from the enchanted corporate environs of Bombay House, from where Ratan Tata’s industrial empire is run, is not the first such product addressing the lower end of the social pyramid.

Budget hotel Ginger, a cut-rate housing project that sells homes at less than Rs. 4 lakh and of course, the Tata Nano car that has caught the fancy of the world – all fall into the same vision that aims at seeking profits built around mass aspirations.

“We are trying to create a new category and are trying to convert non-users into users,” said R. Gopalakrishnan, executive director, Tata Sons.

Ginger was a brainchild of management guru C.K. Prahalad, who has been advocating for businesses “fortune at the bottom of the pyramid” on which he has also authored an acclaimed book.

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While C.K. Prahalad's seminal work, The Fortune at the Bottom of the Pyramid, advocated a strategy to look at the lower end of the market, companies till recently did not tap into the low-unit price market segment with aggression.

Asked why marketers did not look at a low unit price strategy earlier, Cadbury India's Managing Director, Mr Anand Kripalu, says that playing a low unit price game requires a change in manufacturing and mindset. It requires different kinds of machines, packaging, and the supply chain has to ensure distribution and availability.

There's is enormous opportunity in India in all segments of the market, he says, but it's only now that marketers are looking at the lower end. When aspirational brands have offers at the lower end of the market, which allow them to be accessible, the market explodes, he adds.

Small packs make sense for every segment of the market, says brand consultant Mr Harish Bijoor. About ten years ago small packs were meant for rural markets as well as for the unaffording set of consumers in urban markets as well as daily-wage earners.

But not any more.

Varied reasons

As Mr Bijoor explains, small packs help maintain the freshness of what is on offer. Instead of opening a large pack where the freshness of contents can deplete, opening smaller packs keeps things factory fresh. Secondly, small packs mean small outlay on single buys. “It helps penetrate markets one would otherwise not have penetrated due to the high price tag of larger packs. Thirdly, small packs offer ‘variety' options. Take biscuits. Instead of getting stuck with just one type of biscuit that costs Rs 25, small packs of Rs 5 will give me the ability to buy five different taste-profiles,” he elaborates.

Dabur's COO, Consumer Care, Mr V.S. Sitaram, says the definition of low unit packs now stretches in the price band up to Rs 10. Dabur itself is offering everything in low units packs: from its honey and Amla hair oil to toothpaste and toilet fresheners and even its blockbuster brand, Chyawanprash.

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The bottom of the pyramid in India is where the next big growth story lies. And Indian companies are waking up to this fact. The latest low-cost offering of high-end durables targeted at households in small-town and rural India is a water purifier from the house of Tatas, which revolutionised the domestic automobile market by rolling out the Nano. The new water purifier blends indigenous and advanced technologies and is priced at below a thousand rupees. Other players in the water purifier business like Eureka Forbes and Unilever have also come up with low-cost, non-electrical versions priced below a couple of thousand rupees. It makes good business sense: while the water purifier market is growing at 17 per cent per annum country-wide, it is growing at a whopping 60 per cent in rural India. And this high consumption pattern in rural India is not limited to water purifiers alone.

Contrary to popular perception, it is not just SEC A or B (jargon used by marketing professionals to mean the elite and more affluent sections of our society) but also the semi-urban and rural markets that are fuelling demand in India. Rural India accounts for almost two-thirds of India's domestic market and about 60 per cent of its income, according to the Rural Marketing Association of India. Which is why companies are tailoring their products to fit non-urban specifications. Innovation is the key to success as the products and services must take into account the differentiated needs and conditions of rural and semi-urban consumers, who are both brand and price-conscious.

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What if we could take Wall Street's endless energy and innovation and turn it on the hunger and deprivation in the world?

That's not a silly question. It's already being done.

In the halls of finance and at America's top business schools, there's a small but growing movement to do more than just find the next dollar. Unlike efforts of the past, these bankers and business people aren't heading off on missions to dig wells and hand out sacks of rice. They're doing what they do best: making money. The difference is just that their target market is dirt poor.

In Pakistan, they sell low-cost irrigation systems to farmers. In Kenya, they build pay toilets. In Tanzania, they make and sell malaria-resistant bed nets.

As Heidi Krauel explains, these are affordable products that improve lives and give dignity to a consumer who is making choices, and not taking handouts. This new breed of Wall Streeter has turned the maxim "greed is good" into "greed can do good."

Ms. Krauel, 34, spent five years at Deutsche Bank AG and Credit Suisse working as an investment banker specializing in mergers and acquisitions. She worked in the corporate venture-capital arm of Time Warner, lived through the America Online merger and then went to business school at Stanford. There, Ms. Krauel realized she wanted to marry her passion for business with something she until then had been unable to pursue: a desire to bring about social change.

"People who meet me now or met me then, really could not figure it out," Ms. Krauel says. "A lot of it was, 'what the heck are you doing? Why are you leaving venture capital? Why are you leaving this cushy San Francisco lifestyle with wine and yoga?'"

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Mention solar panels and you might think of people in richer countries installing them, so they can reduce their carbon footprint.

But there are good reasons for installing solar technology which are not to do with climate change.

For example, in those places where there are no lights in the dark, and no hot water, such as in many parts of the countryside in India, where the electricity grid does not reach.

Selco is a social enterprise which has provided solar-powered lighting and water heating for half a million people in the states of Karnataka and Gujarat since it began in 1995.

It provides lighting for businesses too and even rents solar lights to street hawkers.

Anand Narayan who started as one of Selco's customers, but now works for the company, talked to Business Daily's Lesley Curwen.

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Saraswati Das, 32, walks 20 km whenever she has to carry out a banking transaction. The walks have become more frequent of late because membership of the self-help group (SHG) she heads has been growing.

Das lives in Jalanga, a small village in Orissa's Bhadrak district. Government records show Jalanga in the list of areas with 100 per cent financial inclusion.

She leads Sri Gobind Anchalika Sangha, a conglomerate of 32 SHGs based at Jalanga, which has a population of 3,360 and a total land holding of 486 hectares. The village has over 400 no-frills accounts and 175 people who have taken bank loans.

Das, however, now hopes for better days as Jalanga had an unusual visitor on Thursday - Reserve Bank of India Governor D Subbarao. The visit was a part of the central bank's decision to reach out to villages in remote areas to spread the message of financial inclusion. Kolkata-based UCO Bank adopted the village on the same day.

RBI calls it a "financial outreach" programme, under which it will take stock of the financial condition of 200-odd villages in about eight months - a first-of-its-kind initiative from the central bank.

So far, the governor and his four deputies have visited eight villages (from Minicoy - the outermost island of Lakshadweep - to Khonoma, a picturesque village 20 km west of Kohima in Nagaland) and will visit 12 more.

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