Vidya Viswanathan, New Delhi

Vishal Mehta is CEO and co-founder of Lok Capital, a social venture capital fund of $87 million that is keen to invest in bottom of the pyramid businesses – a concept promoted by the late Professor C.K. Prahalad. Although the idea that one can run a successful business and also resolve poorer people’s problems  has caught the imagination of investors, in reality there are just a few sustainable business options for funds to invest in. But, Mehta says his fund is in for the long haul.  His own ideas changed while he was doing a Masters in business administration in Michigan, Ann Harbour, in the US, where Professor Prahalad taught.  Mehta spoke to Civil Society about the problems of inclusive investing and what his fund is looking for.

How did Lok Capital happen? 

Aravind Srinivasan, the opthamologist who currently heads the Aravind Eye Hospital, was my senior in Michigan. We worked with Professor Prahalad to replicate the Aravind model of low-cost eye care in Kenya. Till then I was a middle-class engineering graduate who had taken a student loan and wanted to get into strategic consulting.  Once I paid off my loan I was willing to get into any area of development – health, environment or HIV/AIDs. I joined Population Services International (PSI) and was ready to move to Tanzania.  Then in 2002 I got a cold call from Rajiv Lall, who was at that time a very senior professional at Warburg Pincus. He wanted to start a social investment fund in India and was looking for someone who wanted to head back.  He said we would raise money. My education came about at CDC Capital in India where I was located for a few years. Donald Peck, the then head of CDC Capital, is also a co-founder of Lok Capital.

How did you raise funds?

We were first going to raise funds from individuals. But we soon discovered that for high net worth individuals of Indian origin, philanthropy through investment was too ahead of its time. They were happy giving us say a cheque of Rs 50,000.  Microfinance, where we would charge interest, was out of the question. International Finance Corporation (IFC) was our first investor.  Most of our other investors are multilateral institutions like FMO, KFW etc. We have two funds. The first is a $ 22 million fund. The second fund, which we raised in early 2008, is a $ 65 million fund. We tried getting pension funds and so on in that round but after the recession these funds disappeared.

Your initial mandate was to invest in microfinance. What happened?

That was the only investible sector available then. Microfinance is capital intensive.  Scaling up is necessary to grow.  A good way is to go public to raise money. But was it marketed correctly? Was it  really gold at the bottom of the pyramid? If we were in California that would have got us an award – for  solving the world’s problems and making lots of money in the bargain. That would never go down well in India.  We ignored our environment. The deputy governor of the Reserve Bank of India (RBI) said on record that MFIs are not ready for IPOs. We were a four per cent investor in Spandana, run by Padmaja  Reddy,  an excellent entrepreneur with great execution skills.  We could not control the situation with such a small holding and so we made a profitable exit by selling out. 

The industry said it would make eight per cent return on assets and continue to make it and scale forever. That is not sustainable.  Growth became the only mantra. There was over-lending and not responsible lending.  We had no other social goals or personal relationships with the customer. We ignored the fact that politicians work with people at the bottom of the pyramid.

Wasn’t the Andhra Pradesh  government encouraging microfinance institutions (MFIs)?

No, they were competing. The bureaucrats were against them. They had a state programme where the government, backed by the World Bank, lent to self-help groups (SHGs) at three per cent.  They said MFIs lending at 30 per cent was not sustainable. How is a loan at three per cent sustainable? That is pure subsidy. The bureaucrats were administering this large showpiece programme. When President George W Bush visited, this was the programme he was shown.

But the MFIs also misbehaved while collecting loans…

The story on the ground is quite different. Police officers would ask for bribes from officers of Spandana and SKS. I was on the board of Basix.  Once we got a call from an MLA that unless we gave him Rs 8,000, they would close down the branch.

Look at the situation. The MFIs were the ones offering a service. So the people should have stood by them. But they had not spent time building a relationship by providing other services. If they had, the people would have told the politicians off. This is also a complex issue. The people were used to loan waivers in the past. So when the politicians decided to gain mileage and asked them not to repay, they just did what they did earlier.

How has the government dealt with the issue?

The way the government dealt with it was quite undemocratic. They issued a 28 per cent cap on microfinance. It was coming down anyways because of competition. Now because of tight margins, funds don’t train thousands of credit officers. That was the core of the problem.

There was no innovation. They had one single product. We needed micro-insurance, housing and many others. Size is important in this industry. Banks have stopped lending. The small ones have collapsed. This was the country’s largest financial inclusion programme and we did not clean it in a logical manner.

Now we have a ridiculous situation where they lend to MFIs at 16 per cent and have a return on assets of four per cent whereas the MFIs have a return on assets of one per cent. The banks do nothing for this high return and have no cap on interest rates even though this is part of their rural lending. MFIs have high administration costs and low returns.

The good thing is, if anyone wants to be in microfinance now, he has to be mad enough to want to be in it badly. He has to have a social cause in mind. We have two investments in this sector – Satin and Ujjivan.  We believe they are committed. Satin survived because it is lucky not to have been in Andhra Pradesh.

Your second fund is going to be in other inclusive businesses…

In this fund we will invest in critical bottom of the pyramid services. People need assets, employment services, education and health care.  In employment services, we have invested in a rural BPO called Rural Shores.

Micro-housing is emerging as a very interesting sector. There are housing projects that cost between Rs 7 lakhs to Rs 15 lakhs in Mumbai, Ahmedabad, Bangalore and Pune. We are talking to a company that finances SMEs for between Rs 4 lakhs to Rs 5 lakhs. They lend to a company that runs power looms in Karnataka, a poha making unit and some small restaurants. We undertake field visits to see their clients. Currently, we found a restaurant employing children.  Hopefully we will be able to change that. This takes time. We will have to educate the finance company and put this in as part of social performance management in the term- sheet.

What about education?

The good news is that the poor are willing to pay for education. But the Right to Education (RTE) law has made affordable private schools very difficult to run. We have invested in Hippocampus because it does not come under the purview of primary or secondary schooling. It is a rural library chain that encourages reading and offers post-school services. The government should create a policy for private participation in inclusive businesses, but it does not seem to take this seriously.

I have come across a school which is willing to give more than 25 per cent quota for economically weaker sections and comply with all RTE requirements like a playground and Pay Commission salaries for teachers. The price point for the paying students will then be Rs 1,200. But that is steep. Many private schools were doing this at price points of Rs 200, Rs 300 etc. They subsidized students who could not pay.

What about health care?

The ethics in that industry is so low and bad systems are so entrenched. For example, there is a hospital that is trying to remove the referral system and they told me no doctor will stay with them. In diagnostics, if a customer pays Rs 8,000 for an MRI, Rs 3,000 goes to the doctor who asked for the MRI. What margins are we talking about? We are struggling to change mindsets.

On the other hand, there are exceptions. Lifespring in Hyderabad, a maternity chain is one of them.  They have been in operation for five years. Ethics are in the DNA of the doctors and nurses there. They are transparent and provide high quality at low cost.

How does transparency translate?

They have a chart that says a normal delivery costs Rs 4,000 and a C-section Rs 8,000. All services like  check-ups and medicines are listed.  The price point is very competitive. They also have a five- year track record where the C-section to normal delivery ratio is publicly available. For every delivery, there is a 20-page case sheet. 

We will have to watch new industries and create measures to impact social metrics. It takes time to understand and establish practices.