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Individual microcredit loans better suited to smallholder farmers, GAWA Capital

Published: 12 April 2024

GAWA Capital is one of the impact investors backing Indian microfinance institution Sindhuja Microcredit, which has raised $14.5m to extend its services and develop new products, including individual loans to smallholder farmers.

The $14.5m loan to Sindhuja Microcredit will support self-employed women entrepreneurs in India | GAWA Capital

Last week, Sindhuja Microcredit, a digital and rural-focused microfinance institution providing financial services to self-employed women entrepreneurs in India, announced it had raised $14.5m (€13.4m) in a Series C funding round from Dutch social impact investor and worldwide cooperative Oikocredit and Spanish impact investor GAWA Capital.

The company, which was founded in 2018 and is headquartered in Noida, a city just southeast of New Delhi, provides microfinance to female microentrepreneurs and farmers in rural communities through its 235 branches across nine states in northern, eastern and western India, most of which are located in rural and remote areas.

Sindhuja currently has INR10bn (€111m) in assets under management and said it would use the latest injection of capital to expand its microfinance services and develop new product lines, including individual loans to the smallholder farming community.

The company’s head of finance, Rohit Tandon told Impact Investor that currently group loans comprised more than 99.9% of the company’s total loan portfolio. This is where loans are provided to groups of individuals who divvy up the money between themselves and are responsible to one another for making loan repayments, or risk the whole group being penalised.

Individual loans

Agustín Vitórica, co-founder and co-CEO of GAWA Capital, which has invested €8m through the Huruma Fund it manages, said the decision to extend the credit portfolio to individual loans would better serve the smallholder farming community.

Agustín Vitórica, co-founder and co-CEO of GAWA Capital

“Group lending is very popular among microfinance institutions in India. It is a great model but one which doesn’t work very well for farmers. Usually, these credits are based on monthly repayments that do not consider the cashflow realities of smallholder farmers whose productivity is seasonal,” he said.

“From the time a farmer starts to plant produce to the time they come to harvest or to sell it, it can take a period of six months or even a year.”

To help expand its credit offering to individual loans, Sindhuja will also benefit from the Huruma Fund’s technical assistance facility.

The Huruma Fund

The Huruma Fund invests in microfinance institutions providing customised financial products to smallholder farmers in underserved rural areas in Latin America, the Caribbean, Sub-Saharan Africa and Asia. The €120m fund, whose investors include the European Union, FONPRODE (the Development Promotion Fund) of the Spanish Agency for International Development Cooperation (AECID), COFIDES and private investors, has already made two investments in Sub-Saharan Africa, 13 in Latin America, and Sindhuja is its third investment in India. Vitórica said it had one more investment to make before it was fully invested.

“Through the Huruma Fund we want to transform the lending institutions we invest in, so that they start to work with smallholder farmers if they aren’t already and offer financing and instruments to expand the credit portfolios of those that are,” said Vitórica.

To assist with this, as well as receiving equity investments through the fund, investee companies also have access to a separate €8.5m technical assistance facility (TA), which has been funded by the European Commission, through the Directorate-General for International Partnerships.

Investments from the TA are earmarked for the purpose of providing consulting services and training in support of the Huruma Fund investees in order to enhance their impact.

“In the case of Sindhuja, the TA will invest several hundreds of thousands to develop its capacity and adapt the product to meet the needs of smallholder farmers,” explained Vitórica.

“This will require training of the credit lending personnel to help them gain a deeper understanding of agriculture and learn to evaluate the cashflow generation of individual farmers. It will also mean putting in place agriculture mitigation risk systems to ensure the company’s portfolio is well diversified from the point of view of geography, agricultural products as well as climate risks.”

Vitórica said the TA intervention in the project, which requires European Commission approval, would start in the next few months.

Financial inclusion

India has been pushing for greater financial inclusion with the introduction of the Pradhan Mantri Jan-Dhan Yojana scheme almost a decade ago, which aims to expand affordable access to financial services such as bank accounts.

“Under the regulation, banks across India are obliged to open bank accounts for anyone in India, expanding access to poorer and rural communities who have been historically underserved,” said Vitórica, who added that although the scheme had been successful in increasing access to bank accounts, many lay dormant.

“As well as offering loans to women in rural India, Sindhuja also helps to train them on how to actively use their bank accounts to help manage their outgoings and repayments,” he said.

Vitórica explained the decision to invest in Sindhuja was also driven by the company’s digital capabilities and integration of technology throughout their operations, both in terms of underwriting the loans they make and in collecting payments.

“This has made Sindhuja very efficient and has allowed them to charge a lower interest rate to clients. With collections and disbursements happening digitally, you have real time information of where the money is. This reduces the operating risk, which is one of, if not the highest risk in microfinance,” he said.

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