Lifting the Urban Poor Out of Poverty: Assessing the Role of Non‐banking Financial Institutions in India

• Author: Yasmin Sayed,Asad K. Ghalib
• DOI: http://doi.org/10.1002/jsc.2082
• Published date: 01 September 2016
• Date: 01 September 2016

RESEARCH ARTICLE

Strat. Change 25: 585–601 (2016)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2082

Copyright © 2016 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2082

Lifting the Urban Poor Out of Poverty: Assessing the

Role of Non‐banking Financial Institutions in India1

Yasmin Sayed

Independent Consultant

Asad K. Ghalib

Liverpool Hope, UK

Four Indian urban‐focused non‐banking nancial companies show interesting

evidence of success, particularly in terms of their outreach and nancial

sustainability.

e World Bank (2012) estimates that 1.4 billion people were living on less than

US$1.25 a day in developing countries in 2005. It is now widely accepted that

poverty is a multidimensional phenomenon. Hulme (2003) and others have dis-

cussed various characteristics and processes that form an integral part of poverty

analysis, with the focus on social exclusion and vulnerability. Classifying the urban

poor as ‘poor’ under the current determinants of poverty consisting of income,

expenditure, and calorie consumption is even more challenging. e money‐

metric measures have their merits, but fail to rightfully classify the urban poor for

several reasons (orbecke, 2005), including the fact that generalized price indices

can be misleading (Mitlin, 2004; Mitlin and Satterthwaite, 2012).

Amongst the various strategies developed internationally for poverty reduc-

tion, a very popular tool that has emerged is micronance (Hulme, 2000). e

All‐Party Parliamentary Group on Micronance (2011) refers to micronance as

a broad term that can include a large number of varied nancial products, includ-

ing microcredit, microsavings, and microinsurance. However, most micronance

institutions (MFIs) have increasingly focused on microcredit, which is often used

synonymously with micronance. Empirical studies on the impact of micronance

as an eective tool for poverty reduction suggest mixed results from various parts

of the world. While some nd it eective, others question the extent to which the

provision of capital alone can help the poor.

Like the discourse on poverty, the micronance industry in India also has a rural

bias (Basu and Srivastava, 2005; Copestake, 2010). Urban micronance is a com-

paratively recent phenomenon. According to the Michael and Susan Dell

1 JEL classication codes: G23, O18, P25, R51.

A comparative assessment of four

urban‐focused Indian non‐banking

nancial companies (Swadhaar,

Janalakshmi, Ujjivan, and Equitas)

provides evidence of their success

in becoming nancially

sustainable as well as expanding

their outreach.

Assessed over a period of six

years, these companies show

evidence of their success in

contributing toward outreach and

sustainability, however, it was

found that Swadhaar and

Janalakshmi needed to focus

further on impact.

Some common factors across all

four institutions that contributed

to their success in serving the

urban poor were found to be

commercialization (or nancial

systems approach), strategic

positioning, organizational

leadership, and reaching out to

offer services beyond credit.

586 Yasmin Sayed and Asad K. Ghalib

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

Foundation (2006), this late attention to urban micro-

nance in India can be attributed to the general belief held

by potential investors and entrepreneurs that the existing

models in rural areas, especially the group lending model,

cannot work in diverse and transient urban communities.

Until the infamous Andhra Pradesh crisis in 2010 (see

Priyadarshee and Ghalib, 2012 for details), the micro-

nance sector in India had witnessed rapid growth over the

previous few decades. State governments, non‐govern-

mental organizations (NGOs), and nancial institutions

are the main players in the sector. Within the nancial

institutions, there are banks (state banks, regional rural

banks, the Small Industries Development Bank of India,

the National Bank for Agriculture and Rural Develop-

ment, and cooperatives), non‐banking nancial compa-

nies (NBFCs), and MFIs. e latest addition is

‘NBFC‐MFIs,’ which are based on a hybrid institutional

model supposedly catering for the low‐income segment as

opposed to regular NBFCs.

After this brief introduction, the following section

explores poverty within an urban context, followed by a

discussion on the role that micronance plays in combat-

ting it. is is followed by a detailed discussion on the

role that four NBFCs have played in providing micro-

nance services in urban India. is also includes a detailed

comparative analysis that delves into the three elements

that comprise the triangle of micronance: outreach, sus-

tainability, and impact. Prior to drawing conclusions, the

penultimate section discusses the observations, trends,

and lessons learnt, which cover the strategic positioning

of the NBFCs along with their organizational leadership

and what measures they take to reach out to the popula-

tion in terms of providing services beyond credit.

Poverty in an urban context

e Global Monitoring Report (World Bank, 2013a)

highlights a number of urbanization matters. e number

of people living in urban settlements has risen from about

1.5 billion in 1990 to 3.6 billion in 2011. Ravallion

(2001) writes about the urbanization of poverty, suggest-

ing that the poor urbanize faster than the non‐poor, more

so in the case of India. e Census of India (2011) sug-

gests that about 31 percent of the population is urban.

However, the issue of classication gets tricky when it

comes to distinguishing the urban from the rural areas, as

countries use dierent classications for urban areas based

on varied determinants such as population, geographical

spread, or sheer proximity to resources. e World Bank

(2013b) reiterates this, and states that there is no consis-

tent and universally accepted standard for this purpose.

It is estimated that 76.4 million people in the urban

areas live below the poverty line in India (Government of

India, 2012). e rate of decline in rural poverty has been

higher than in the urban areas, with an 8.0 percentage

points decline in rural poverty from 41.8 percent in

2004–2005 to 33.8 percent in 2009–2010, while a 4.8

percentage points decline was witnessed in the urban areas

from 25.7 percent to 20.9 percent during the same period.

Comparing the Gini ratio, it also reports that inequality

in rural areas has declined between the years 1977–1978

to 2009–2010, which, however, seems to have risen

steadily in urban areas in the corresponding period.

e anti‐poverty programs in India have largely

focused on rural areas, with little attention given to the

urban poor. Baker and Schuler (2004) and Meng et al.

(2005) suggest that poverty analysis traditionally has

focused on rural areas. Sridharan et al. (2008), from their

extensive review of the literature, highlight the fact that

during the past 40 years, studies on urban poverty in India

have been relatively few and highlight the issues faced by

the urban poor. Loughhead et al. (2001), in a report pre-

pared for the Department for International Development

(DFID), suggest that urban poverty reduction in India

needs considerable eorts by national, state, and local

governments; international organizations, civil society,

and the private sector.

While there is substantial discourse on the conceptu-

alization, framework, measurement, approaches to

poverty, and poverty reduction, the predominant trend in