Crowd-Sourcing Low Cost Capital Helps MFIs Make the Leap to Energy Lending

Founded in June 2010, Milaap is a Indian start-up based in Bangalore that crowd-sources low-cost capital for microfinance institutions through its online platform as well as social funds, high net worth individuals (HNIs) and corporate partnerships. Funds are not donations, but rather micro-loans between a growing global network of contributors and low-income Indian borrowers. Milaap sources capital exclusively for non-traditional, value-added product portfolios, supporting investments in water and sanitation, vocational training, and SME capital.

In 2011, Milaap added energy lending to its portfolio when it established a partnership with DCBS, a small MFI based in West Bengal (India), and Onergy, a leading solar integrator in the region. Milaap has also made plans to partner with Karnataka-based Grameen Koota, one of India’s largest MFIs, to co-fund its growing energy lending program.

Arc Finance recently caught up with Milaap co-founder Anoj Vishwanathan to discuss the company’s origins, its growing focus on energy, and the core value proposition that it offers its MFI partners in the challenging environment of the post “microfinance crisis.”

Arc Finance: Milaap supports a number of portfolio areas that could be considered “non-traditional,” and I understand that energy poverty was an important catalyst behind the company’s founding. Is that true?

Anoj Vishwanathan: Energy is still a relatively new part of our program, but it was actually a key inspiration that led to the creation of Milaap. The idea occurred to me while I was working in microfinance in Orissa, and encountered the energy poverty of clients and saw how potentially important microcredit could be for advancing energy access. Most Indian MFIs were reluctant to think about offering non-traditional financial products for many reasons – a narrow focus on enterprise credit, but also lack of capital, the higher transaction costs of small loans, and a fundamental lack of understanding about promising non-traditional financial products. Access to low-cost capital was one of the bigger barriers and it has become more significant in the wake of the 2010 microfinance crisis. Not having capital, period, is one of the things keeping MFIs from taking up non-traditional areas like energy. Milaap was started to address this need.

AF: How exactly does Milaap work?

AV: Milaap raises loan capital through its online platform, as well as through direct engagement with high net-worth individuals, social funds and corporate partners. Our online platform is the fastest growing channel, and we anticipate it to ultimately be our largest. There is a huge, untapped community of potential lenders both domestically and globally. We lend to partner MFIs at roughly half the interest rates of commercial banks. The MFIs then on-lend the capital to their clients for water and sanitation, education, vocational training, or energy investments. We follow a very thorough due-diligence process for selecting our partner MFIs. This includes assessing their overall operations, carrying out field visits to evaluate their current non-financial programs, and detailed financial and governance analysis. It’s quite a process. One of the essential criteria is whether or not management demonstrates a serious, well thought-out commitment to value-added portfolio development, such as energy lending. If an MFI fulfills these criteria, an agreement is signed and the loan applications are sent to Milaap.

The MFI collects the installments from its borrowers with interest (12 to 18%) and repays back to Milaap on a monthly basis. The interest charged to the end-user covers the operational costs of both Milaap and the field partner. As the borrower repays the loan, the money is put back into the lender’s Milaap account. The lender has the option to either re-lend or withdraw the installments received. We have found that a staggering 95% of our retail lenders re-lend their money to another borrower. This recycling of loans leads to multiplying rounds of lending to different borrowers over time.

AF: Delivering affordable capital is the primary value proposition that Milaap offers. Why is this so important for MFIs right now in India?

AV: For MFIs, one of the main concerns is lack of dedicated credit for non-traditional financial products. They know there is demand for them and that there are benefits attached to them, but mainstream private sector commercial banks are not willing to provide capital because of what they perceive to be high risk. Also, more recently, the Reserve Bank of India (RBI) put new regulations in place that cap the level of “consumption” lending that MFIs engage in – but they haven’t clarified whether energy is in the “consumption” category, making things pretty vague. The scenario worsened during the microfinance crisis. In this environment, Milaap’s funds are a great boon for MFIs interested in energy lending.

Traditionally, energy programs have been funded by a mix of grant funding and equity, but loan capital is more sustainable and conducive to growth for the MFI, and what we offer is 50% cheaper than what banks offer.

AF: What are some of the other value-adds that Milaap provides its partners?

AV: In addition to the capital itself, there is the flexibility that comes along with it. The relative savings that our partners gain from cheaper capital provides a buffer that can be used to fund training, capacity building and increase outreach to more remote areas where clients need energy products. In some cases, the gains can even be passed-on in the form of lower interest rates to clients. As you know, incorporating energy or other value-added services – especially those that involve new partnerships or physical products – entails operational changes. So we believe that this buffer is particularly important during the early stages of an MFI’s energy program or during periods of growth, and helps ease – and even underwrite – the transition. Also, the capital received from Milaap is not a term loan as with traditional banks. The MFI can repay Milaap as and when the borrower repays her installments. This again grants flexibility to the MFI, enabling it to create a unique loan product that is customized to the cash flows of clients and mitigating some of the risks associated with non-traditional products. In the case of energy, this is important as clients often want to structure repayment around savings gained. Finally, we’re constantly promoting through multiple channels in order to grow our network of lenders, and this of course brings increased visibility to our partners’ programs and to the practice of energy financing more broadly.

AF: At present, Milaap is the only MFI-based, capital-sourcing platform in India that can receive foreign retail loans. Why is this significant?

AV: Milaap is the first player to meet regulatory requirements to enable the use of global retail debt in India. In other words, anyone around the world can make a loan on or offline to Milaap. This opened up a new and important market – members of the non-resident Indian (NRI) population living and working abroad who are interested in giving back to the country. Today the average size of a loan from outside India is USD $85, or Rs 4,675, compared to USD $35, or Rs 1,800, within India. The ability to raise money from outside India has definitely increased our chances of ensuring a sustainable pipeline of capital for energy lending to the MFIs.

AF: In what ways has the Indian microfinance crisis added to Milaap’s relevance and potential impact?

AV: The MFI crisis deterred banks from funding riskier, non-traditional products. Today, banks are being cautious about even regular wholesale lending to MFIs. Given this situation, MFIs are forced to think about their value to their clients more than ever before and also how to distinguish themselves from the overcrowded marketplace. But at the same time, more MFIs are starting to look at options that are beyond their core product (primarily credit) and to diversify to other customized loan products such as energy, as well as water, sanitation, education, etc., depending on the needs of their clients. So Milaap helps them make this transition in a turbulent time when capital remains scarce.

AF: I know that energy lending is one of your newer funding areas. Can you give us an example of the kind of partners and programs you’re currently involved in?

AV: Milaap is partnering with a small MFI named DCBS, based in West Bengal’s 24 South Parganas District, to provide capital for its energy program. 24 South Parganas is one of the most backward districts of India. Milaap has so far funded around 200 solar lighting devices and 50 solar home systems through DCBS’s solar energy program. The lights and solar home systems are used for weaving, tailoring, agricultural activities, cooking and housecleaning. In many cases, the usage of solar powered lights has had a direct positive impact on the incomes of DCBS’s clients. Milaap lent to DCBS, in spite of its limited ability to scale, as we wanted to support access to energy in extremely remote areas that are not catered to by traditional mainstream MFIs.

Looking forward, and on the opposite end of the spectrum, Milaap has also signed an agreement with one of India’s larger MFIs based in South India. We are going to source loan capital for their growing energy division. They are in a very different point in their program development than our other partners, and we are excited to help them scale.