Transcript Document

Developing products for rural markets
Annie Duflo
Centre for Micro Finance at IFMR
February 14, 2007
1
Appropriate products for rural markets…
• Need to be delivered through appropriate
channels
• Need to answer the demand of rural clients
• Need to be appropriately priced
– To allow sustainability
– To be affordable
2
Outline
• Products for the rural market: The microfinance
innovation in India
• Microfinance in India: delivery models
• Product innovations for rural markets: status and
challenges
– Credit products
– Non credit financial products
– Non financial services
• Pricing and transaction costs
• The role of the Centre for Micro Finance
3
Constraints to scaling access for the poor
Information Asymmetry
•
•
•
•
Higher for the poor
No credit history
Difficulty to evaluate
enterprises potential
success
Inability of the poor to
offer collateral
Clients’ profile
•
•
•
•
•
Difficult geographical access
Poor require low value transactions
Informal activities: need flexible access
Illiteracy: difficult to deal with traditional
services
Lack of financial literacy: need close
supervision
High transaction costs
Provision of
financial services to
the poor is
constrained by…
Low level of Technology
Regulatory Issues
Staff Incentives within traditional organisations not
aligned to maximise access to financial services for poor
4
…Hence the need for local intermediaries
• Local organizations have:
– Local knowledge, therefore can help reduce
information asymmetries
– Have less expensive operations, can therefore
help reduce transaction costs.
• But local organizations don’t have capital
• Banks have capital, but done have this
local knowledge
• Both should join hands!
5
Microfinance in India: apparition
• Until the 90’s despite various efforts and achievements by
the government, the banking sector was unable to
internalise banking to the poor as a profitable activity
• Financial sector reforms: motivated policy planners to search
for strategies for delivering financial services to the poor in a
sustainable manner with high repayment rates.
• NABARD: empirical observation catalysed by NGOs that poor
gather in informal groups
 SHG-Bank Linkage Programme (92)
• Recent emergence of MFIs: professionally run institutions
specialized in delivering credit with low cost staff and local
knowledge
• Key innovation in both models was to make use of local
knowledge, which traditional banking system does not have.
6
The microfinance promise
New contracts
Innovations
New
Management
structures
New attitudes
7
Outline
• Products for the rural market: The microfinance
innovation in India
• Microfinance in India: delivery models
• Product innovations for rural markets: status and
challenges
– Credit products
– Non credit financial products
– Non financial services
• Pricing and transaction costs
• The role of the Centre for Micro Finance
9
Predominant model of microfinance in
India: SHG-Bank linkage model
Efficient use of capital Y
Incentive alignment
N
Branches assess
credibility of SHGs
and monitor
repayment process
6 months savings
Loan to group
SHG
Bank
Repayment
commission
No liability
NGO
Grants based
Group formation
and linkage
10
Recently emerging model: financial
Intermediation by MFIs
Efficient use of capital N
Incentive alignment
Y
MFI on lends
Loan
Bank
Loan
MFI
SHG, JLG
or ind.
Bank lends to MFIs
based on their capital
MFI’s capital sets
risk absorption
capacity hence
limits for TL
On-lending of same fund at Bank
interest rate+MFI trans. costs
 Double counting of capital by bank and MFI
 Organization-based lending: Higher pricing
than warranted by riskiness of portfolio
11
These models have limited growth
• With SHGs, relatively low rates of growth resulting
from
– NGO reliance on grant funds to meet costs
– Banks wary of large portfolios in the absence of risk
sharing structures
• With MFI intermediation, although underlying
portfolio exhibits very low loss rates, sub-optimal
lending structures have resulted in
– Lower flow of resources
 Capitalization of intermediary is the constraining factor
– Higher pricing than warranted by riskiness of portfolio
 Charge on capital reckoned twice
 Bank/FI take into account riskiness of the intermediary
12
These models could not resolve the
paradox of limited supply
• A burgeoning segment with very large demand for
finance
• Grass-root agencies capable of providing origination
and supervision support in a cost-effective manner
• Banking system capable of providing large quantum
of wholesale finance (owing to priority sector
targets)
• However, there are no ‘natural providers’ of risk
capital for microfinance and this has constrained the
growth of several MFIs
• As a result, supply is still a small fraction of the
demand for finance
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Needed a model which:
• Addresses inability of MFIs to provide risk
capital in large quantum, which limited
advances from banks
• Allowed rapid scale-up
• Separates risk of MFI from risk inherent in
the mf portfolio
• But still provides a mechanism to
continuously incentivise partners
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The Partnership Model
Efficient use of capital Y
Incentive alignment Y
Loan at 9%-11% to end customer
Repayment collection
Service fee
Bank
MFI
(servicer)
Risk Sharing FLDG
OD
Service fee
SHG, JLG or
Ind.
Origination,
monitoring, collection
Reduces capital needs
•Intermediary assumes fraction of the credit risk, leading to
reduction in capital required
•Bank prices on basis of underlying asset rather than rating of
intermediary ( ‘asset-based lending’)
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…leverages each entity’s advantage
which are complementary
MFI
Strength
Weakness
Bank
• Social Capital
• Local knowledge
• Low cost delivery
channel
• Financial volume /
expertise
• Product innovation
• Technology
• Access to financial
markets
• Financial product
expertise
• Technology
• Low outreach in remote
areas
• Poor local knowledge
• Inadequate cost of
delivery to serve the low
income population
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Limitation of the partnership model for
MFIs
Advantages
• Facilitate growth by reducing
MFIs’ challenge to provide
risk capital in large quantum
– Off-balance sheet
– FLDG as OD (quasi equity)
• Improves RoE by equity
freed up (leverage from 3-4
to 10-12)
• Separates institution and
underlying portfolio risks
• Continuously incentivise
partners on portfolio quality
Limitations
• Most banks still using TL,
hence reducing MFIs
diversification of lenders
• Level of FLDG dependent on
one single lender’s risk
evaluation (vs. public market)
– Level of FLDG based on
processes and PAR*
• No secondary markets for
lenders reduces their own
liquidity (microfinance not an
asset class)
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Difference between SHG-Bank linkage
and MFI model
SHG
• better savings habit
• stronger group cohesion
• lower interest rates
• MFIs have to cover all intermediation costs
Grameen
– Interest rates are higher
– However interest rates charged by SHGs to clients are
similar
•
•
•
•
tighter control and monitoring
clients can borrow immediately without savings
loans disbursed are higher and individual
loan tenure shorter, allowing to increase loan size faster
•Choosing a model depends on the clientele the organization wants to
cater to
• Grameen model is likely to be suitable to serve tiny enterprise
owners and SHG model might be used to serve the wage labourers and
farmers or group enterprises
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MFIs in India
• Currently, roughly 66% of the micro
finance supply is via the Self Help Group
(SHG)-bank linkage route
• However, MFIs grow faster now, in terms of
number of clients and credit flow
• The share of MFIs is rapidly growing
• There are about 800 MFIs in India
(NABARD)
• However the top 15 MFIs account for about
70% of the credit through MFIs
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Comparison between SHG-Bank Linkage &
MFI model
Share in microfinance
disbursement by model
50
45
1
0.8
35
30
0.6
25
20
0.4
15
10
0.2
5
0
0
1996
1999
2002
Year
2005
billion $
Rs billion
40
% share in Annual Disbursement
India annual Microfinance
Disbursement
90%
80%
70%
60%
50%
40%
30%
20%
MFIs
SHG
10%
0%
2001
2002
2003
2004
2005
Year
Sources : Rough estimate derived from a presentation at a Microfinance Stakeholder Consultation Meeting in Delhi in January organized by
the World Bank. Major sources are NABARD Annual Report & Data collected by ICICI Bank.
Assumption : MFI disburse 1.5 time of Yr-end O/s loans – Ratio from M-CRIL data
22
Outline
• Products for the rural market: The microfinance
innovation in India
• Microfinance in India: delivery models
• Product innovations for rural markets: supply and
challenges
– Credit products
– Non credit financial products
– Non financial services
• Pricing and transaction costs
• The role of the Centre for Micro Finance
23
MFIs Models and products (credit)
“Grameen”
product
Individual
lending
Emergency
loans
•
•
•
•
50 weeks tenure
Weekly meetings and repayment
Joint liability in groups of 5 to 10 members
Often given for productive purposes only, often with close
monitoring of loan usage
• Loan size range from Rs. 3000 to Rs. 15,000 – increases
with loan cycle
•
•
•
•
For new borrowers or “star” borrowers (most of the time)
With or without collateral or guarantors/guarantees
Generally, not beyond Rs. 1 lakh
Different repayment schedules (for ex, daily or monthly)
• Existing clients
• 1000 to 2000 Rs
• For emergency purposes such as health etc.
•“Grameen” product is the most widespread
•So far products have been very standardized (which has
advantages but also limits customization for clients)
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Repayment schedules: vary schedules
• Weekly schedules may be more or less appropriate
depending on nature of businesses
• CMF-VWS study: Most businesses can be
categorized in two types: piece based or
independent businesses.
– For the first type, weekly payments make more sense.
Market based clients seem to prefer monthly payments as
they sell on credit and can not always recover their
payments every week.
• Need longer term loans with moratorium
– Existing product implies clients already have a business
or an income source, is not suited for financing start-ups
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Repayment schedules: allow flexibility
• Fixed debt contracts have a rationale
– avoiding operational headaches, cash management
problems, risk of loan officer fraud and weakened
repayment discipline of borrowers
• But benefits of flexibility could be huge
– With fixed schedules, repayment capacity based on
incomes of worse weeks/months, limiting loan size
– The rigidity of contracts may be keeping some borrowers
from borrowing or clients with rigid contracts may take
actions which reduce the return on their investments.
• CMF Case study in ASA and Cashpor: some forms
of production (sari and carpet weaving)
experience significant variance throughout the
year
– low availability of labor in harvest and festival seasons,
humidity and moisture from the rainy season etc.
26
Loan size: often seems too small
• In some Hyderabad slums, before microfinance introduction,
businesses were very prevalent (31% of households) – often
low-skilled, very small
• It seems possible for most household to expand the
business, and yet they have not expanded, so there was a
clear role for an MFI
• Average monthly sales proceeds were Rs.13000 while
average profit was Rs.3040 per month.
• A Rs 7,000 loan is probably not sufficient to greatly expand
the business.
• Small loans have a rationale when there is no competition
(teach clients financial discipline etc.)
• However when there is competition, MFIs may want to give
larger loans directly..
• But too large loans would require evaluating the client, which
is too costly to do for everybody.
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Therefore.. need for individual lending
• Group lending is constraining the most
entrepreneurial clients
• After all, not everybody can be a successful
entrepreneur. For example, in the OECD
only 12% of households run a business
• Some clients need larger loans, and
customized to the business
• Already exists, but preliminary stages
• Makes more sense for MFIs to provide it for
existing clients
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Group Lending vs. Individual
• Individual lending model bears some additional
risks:
– Difficulty in evaluating individual credit risk in the
absence of sound credit-scoring mechanisms
– Higher risk of default if the borrowers are unwilling to
repay
• Group model, on the other hand, has the risks of
– Higher default due to problems in group dynamics
– Increase in drop-out rates due to differences in credit
absorption capacity of clients and changing client needs
– The individual model is suitable to serve the not-so-poor
population who can afford to provide some guarantee
• The group-lending is best suited to serve the
poorer segments but does is not optimal for
graduated customers
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Example of individual lending: SKS
• Loan given to borrowers which are in business for more then
1 year, and only old SKS clients
• Guarantee of a govt. employee/of a farmer with land of more
than Rs. 1.5 lakh market value/ of a businessman having a
business asset of Rs. 2-3 lakhs
• SKS should have min. of 8 months of operational experience
in that area
• Loan amt: Rs. 20,000-100,000
• Term period:1-2years
• Interest rate: 11% yearly flat
• Repayment schedule: Monthly
• Purpose: Income generation and asset development purpose
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Individual lending: WWB Methodology
Key activities in the lending process:
•
1.
2.
3.
4.
5.
Analysis of
Balance Sheet of the business
Income Statement of the business
Family cash flow
Investment Plan
Character Assessment
•
1.
2.
3.
Operating Model
Staff profile & training
Branch location & infrastructure
Efficient information system
31
Outline
• Products for the rural market: The microfinance
innovation in India
• Microfinance in India: delivery models
• Product innovations for rural markets: status and
challenges
– Credit products
– Non credit financial products
– Non financial services
• Pricing and transaction costs
• The role of the Centre for Micro Finance
32
The needs of poor people are varied..
Protection
against Health
shocks
Lifecycle needs
Protect against
sudden death
What low
income
clients
need?
Need to build or
improve homes
Protection against
loss of assets
Protection against
weather shocks
Send money to
their families
when migrate
33
MFIs Models and products (non credit)
Insurance
Savings
Remittances
Housing loans
•
•
•
•
Most often as agent of insurance company
Most common product is life insurance
Bundled with credit
Health insurance emerging
• MFIs not allowed to collect deposits
• Banking correspondent model (few MFIs
have adopted it yet)
• Rare product
• One MFI in Orissa: Adhikar
• One MFI in Udaipur: Ajewika Bureau
• Rare product
• Focus on individual loans
• A few MFIs provide housing loans: IASC,
ESAF
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Insurance products
• Protect against loss of assets, damage of property etc.
Example of Sewa Bank comprehensive insurance
• Protect against illness
– often, failure of business is due to illness that led to low
availability of labor
– Defaults or drop out often due to health shocks
• The delivery of insurance through MFIs is attractive:
– Can keep costs relatively low (channels, compulsory product)
– It protects the MFI as well
• Health insurance companies products start being sold by
MFIs, where MFI is the agent
• Experience so far suggests that insurance literacy is low and
proper awareness campaigns are necessary
35
Remittances
• Substantial seasonal migration with large inter-regional
financial flows. NSS surveys (’93) indicate 89% of
permanent migrants send remittances back home. Likely to
be higher among seasonal migrants.
• But high transfer costs associated with remittances limit
propensity, distance and duration of migration. Cheap and
reliable channels are rarely available in rural areas
• Program run by Adhikar, Orissa: 1600 members remitted
almost Rs. 6,00,00,000 in 2 years of launching program
• Apart from being a viable program, MFIs can leverage
existing client networks; provide cheap and safe transfer;
add on services.
• Legal Issues in MFIs collecting savings–BC is a possible
solution. Scope for MFI to act as money transfer agents also?
• Stiff competition from informal agents which are quicker and
often cheaper
36
Housing Finance
• Challenge worldwide to provide low cost shelter for urban
and rural poor – a basic need for poor households.
Constraints: for Big Banks/financiers – recovery is a problem
and for Small organizations – Lack of capital
• MFIs are a great solution as they can act as agents for larger
financiers and have expertise in dealing with small amounts
and their recovery
• So far, unsophisticated product – usually just a larger loan.
Otherwise, mostly NGOs who have implemented government
subsidized programs
• Few MFIs currently providing housing finance but there is a
lot of interest in the sector
• Challenges include: innovative product design for
upgradation and ownership; issues of legal title to land;
competitive interest rates etc.
37
Product development: what about the
poorest of the poor?
• So far, MFIs and SHGs do not reach the poorest
– In AP, the 2 income quintiles above the poorest HH are
more likely to receive microfinance through SHG-Bank
model, while the poorest and those in the top 2 quintiles
are less likely to be in SHGs (Priya Basu, WB)
• Poorest are not micro entrepreneurs yet – could
they become one?
• Poorest have no ability to repay – at least not with
standard product
• May need more flexible products
• Or need to be pushed up to a level where they can
repay
• BRAC Target the Ultra Poor (TUP) programme:
asset transfer, skill training, handholding, health
grant
• Bandhan in India
38
Outline
• Products for the rural market: The microfinance
innovation in India
• Microfinance in India: delivery models
• Product innovations for rural markets: status and
challenges
– Credit products
– Non credit financial products
– Non financial services
• Pricing and transaction costs
• The role of the Centre for Micro Finance
39
Non financial constraints: Skills and
Innovation
• Often, low skilled businesses and little innovation
– Study in ASA and Cashpor: Of all clients interviewed, only
5 out of 105 demonstrated some entrepreneurial spirit
(have begun businesses that are different than traditional
activities chosen by most other members).
• When little specialized skills involved in the
businesses, the more businesses start, the more
they will crowd each other out.
– CASHPOR clients weaving saris: returns per sari had
often decreased by as much as 60% in the past 5 years.
• Few businesses grow beyond the size of household
business.
40
Non financial constraints: Skills and
Innovation
• Why is this happening and what should be the role
of MFIs in this?
• Might be dangerous to advise people on what to
do
– but can create information sharing
• Some businesses fail due to poor management
skills  Need for financial training and basic
business skills
– Sewa Bank business and financial literacy training
– Can partner with other agencies to provide business
development training or mentoring services (BYST)
• Credit is only one side of the story: need to link to
a higher value chain, create links between the
borrowers and potential buyers
41
Outline
• Products for the rural market: The microfinance
innovation in India
• Microfinance in India: delivery models
• Product innovations for rural markets: status and
challenges
– Credit products
– Non credit financial products
– Non financial services
• Pricing and transaction costs
• The role of the Centre for Micro Finance
42
MFIs’ strategies to provide affordable products
while being sustainable
• Serve the poor, including the poorest of the poor
– Interest rates as percentage of loan higher for small loans
• Offer affordable products for the poor
– Need to find strategies to reduce transactions costs and
access cheap funds
• Be sustainable
– Cover costs
– Need good repayment rates, therefore requiring
expensive operations
• Serve as many poor as possible
– Need profits to expand access
43
How to calculate a sustainable interest
rate?
The annualized effective interest rate (R) charged on loans will
be a function of five elements, each expressed as a
percentage of average outstanding loan Portfolio
• Administrative expenses (AE)
– Administrative expenses of efficient, mature institutions tend to
range between 10%–25% of average loan portfolio (in india can
be lower).
• Loan losses (LL)
– Many good institutions run at about 1–2%.
• The cost of funds (CF), India 10%
• The desired capitalization rate (K)
• Investment income (II) income expected from the MFI’s
financial assets other than the loan portfolio (e.g., cash,
checking deposits, legal reserves)
• Example (India context): 10+2+10+2+2-2=24%
Source: CGAP
44
MFIs’ interest rates in the world
Indian MFIs are the most efficient in the world (M-Cril)
45
Why are transaction costs of MFIs high?
• Door step services
• Intense monitoring
• Repeated interaction
– If one customer interaction may costs only US $0.25 due
to the high number of interactions, this translates into 25
percent of operating costs relative to the average loan
portfolio
46
What are the drivers of costs?
• Group formation (17-23% of total direct
transaction cost) and collection (28-36% of total
transaction cost) are the main components of
transaction costs
• The main driver of direct transaction cost is the
level of compensation of the field worker
• This would vary according to geography: An MFI in
a difficult geography has to pay a higher
compensation level for its employees
• Location, degree of competition, maturity of
branches, seem to have an impact on transaction
costs.
47
Possible strategies to reduce MFI
transaction costs
• Increase field worker productivity
– saturate a place before entering another place
– Sell more products
• Experiment with staff Incentives Schemes
Staff costs
– Focus not only on volume but also on retention as costs
higher for first time members
• Simplify Systems and operations as much as
possible
– ASA, Bangladesh: simplified operations so that they
could be performed by less-educated staff
• Can supervision levels be relaxed/modified for
mature customer groups?
Operations
levels
• Increase branch activity: sell more products
• Less “layers” of operations: models without
branches (for ex, only area offices and mobile
branches)
48
Possible strategies to reduce MFI
transaction costs
Products and
pricing
• Repayment schedules: experiment with less
frequent schedules! If no more defaults, could
lead in less transaction costs
• Take into account the lifecycle cost also when
pricing the loans. Merely looking at first year
costs may result in overpricing of loans
– may drive away some good borrowers
Technology
• Maintenance & centralization of customer's
record (bio-metric identification, credit bureau)
to avoid many legal documents (eg. KYC) - So
that credit worthiness of clients can be access
quickly
• Role of technology: Innovative delivery channel
(rural kiosks, mobile telephony, smart cards
etc.) - This helps in serving large client base
with less resources but one time investment is
high
49
What can banks do?
Delivery
channels
• Provide funds to MFIs, either through term
loans or partnership model
• Lend to Self Help Groups
• Provide grants or long-term loans for
infrastructure development
Product
development
• Help MFIs with expertise in product
development
• Link MFIs with other companies that have
expertise in product development, for ex.
Insurance companies
Products pricing
and costs
• Help MFIs with back-end technology
• Through risk sharing with MFI, help reduce
costs of funds
50
Outline
• Products for the rural market: The microfinance
innovation in India
• Microfinance in India: delivery models
• Product innovations for rural markets: status and
challenges
– Credit products
– Non credit financial products
– Non financial services
• Pricing and transaction costs
• The role of the Centre for Micro Finance
51
CMF’s objectives and mission
• Established in Feb 2005 at IFMR
• CMF’s objectives
– To address knowledge and practice gaps in micro finance sector
– Experiment on ground solutions
• CMF’s mission: help the poor by
– Systematically researching the links between access to financial
services and participation of poor in larger economy
– Participate in maximizing access to financial services
Research on micro finance and livelihood financing (RU)
Strategy building for MFIs (MSU)
52
MSU and RU
Strategy (MSU)
MFIs Strategy for growth
•Definition and implementation of
innovative business models
–Market research, creation of linkages
•MFIS best practices sharing
•Design/test of new financial products
•Capacity building
–capital structure, HR, MIS, processes,
customer segmentation, governance…
Impact of microfinance
• Impact Evaluation Studies
• Economics of micro enterprise
• Insights on HH "financial behavior"
• Constraints on HH productivity
• Experimentation on product design
• Micro finance transaction costs
Research (RU)
53
4 Research areas to maximize micro
finance impact
1
2
Impact and
product design
Micro finance
plus
Maximize impact
On client
4
Policy
3
Finance and
Organizational
issues
54
The role of research
• Evaluate impact, and find out what works and
what does not
– Impact evaluation of Spandana’s micro credit programme
– Impact evaluation of health and weather insurance (SKS,
Sewa)
• Improve existing products
– In theory flexibility or less frequent repayment schedules
could have some benefits, but could also create some
complications.. What is better?
– Repayment schedule research with VWS
– Flexible repayment schedules with KAS foundation
• Diversify financial products
– Remittances product project with Adhikar
– Sectoral study on Housing finance
55
The role of research
• Find out what can maximize the impact of loans
– Impact evaluation of Sewa Bank’s business training: is it
cost effective: how can it be improved?
• How can organizations be more cost effective
while achieving their goals?
– Study on effect of staff incentives
• Understand what is going on
– Find out the risk that small business face that financial
services can help with
– Understand non financial constraints
– Why are businesses not expanding: what are labor
markets constraints?
56
The role of MFI Strategy Unit
• Help MFIs with their business and expansion
strategies
• Provide help to MFIs in the following areas:
– Human Resources
– Access to capital (securitization etc.)
– Individual lending
• Create market linkages for clients
– Provide them with lower costs and high quality inputs
(Godrej Agrovet-Spandana)
– Provide clients with production/selling opportunities
57
The role of MSU: encourage vertical growth
Vertical growth
=> deepen share of wallet of existing customers
=> capture new customer segments
•New products
•New customers profiles
Customer
segment
Channel
Product
Backward
integration
Core
activity
Forward
integration
Geography
Capability
adjacencies
Technology
adjacencies
Horizontal growth
=> replicate similar model in new geographies
•Same products
•Same customers profiles
58
IFMR Trust
• Credit is only one side of the story
• Example: Wavers may organize themselves in cooperatives
but they need to sell the saris, and for a good price
• Need to link to a higher value chain, create links between
the borrowers and potential buyers
• Sandhi provide market linkages to garments confectioners –
one of the entity of the
• Trust for Networked entities: to fill this missing market
– Will act like a holding company having a part of equity in each entity
formed– to promote outside investment
– Will mobilize fund from social investors in form of grant or soft loans for
the incubation period
– Will retain a part of profit for itself as revenue
– Will be based at IFMR - different centers under it will provide specialized
services to entities – link to MFIs etc.
59
Thank you
• For any question: [email protected]
60