By Nick Gerry-Bullard  on Sun 5 Feb - 0 Comments
Categories: International Development, shared value business

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This January, I traveled to Mumbai, India with a group of Harvard Business School students to work with Mahindra Rural Housing Finance (MRHFL). MRHFL, a subsidiary business of Mahindra & Mahindra (a large Indian conglomerate) provides home loans to rural farmers, and we were helping evaluate the company’s model for business development and credit appraisal. The experience, part of HBS’s new FIELD curriculum, was an eye-opening introduction to the challenges of doing business in emerging markets and the social impact these efforts can have.

Rural Indian farmers can rarely afford to build new homes all at once, and the quality of construction is usually limited. Mahindra's loans allow farmers to finance larger renovations and improvements, in addition to building new homes from scratch. This is a major potential market: over 60% of India’s population works in farming, yet the small size of relevant loans and the difficulty of reaching customers in rural areas has largely kept other lenders from entering the space.

On the second day of our trip, we visited several villages and talked with Mahindra customers about how the application and appraisal process has worked for them. Generally, for those with sufficient income to demonstrate credit-worthiness, it has been a positive experience. We saw both old homes and new ones built with Mahindra financing; the new buildings were spacious and well-equipped, with basic plumbing and other amenities that the farmers' previous dwellings lacked. 

We also learned about the difficulty of growing the loan business, due to the dispersion of the customer base across the rural landscape, low technological access in the rural areas, and the difficulty of acquiring the documentation to verify land ownership. Mahindra’s customer managers must set off by motorbike everyday to collect documents from local government offices, collect payments directly from customers (due to generally low levels of banking) and verify the progress of construction.

 Mahindra is committed to keeping interest rates low and focusing on the low-income rural segment, so their challenge is to reduce costs through internal efficiencies. In addition, to reduce paperwork, the business team has developed joint-liability loans given to groups of farmers. When individuals are jointly liable for each others’ payments, social expectations compel good borrower behavior, reducing the need for credit documentation. 

All things considered, it appeared to us that the business is having a positive impact and I appreciated the challenges Mahindra faces trying to build it. Many of these issues spring from poor infrastructure in the form of roads, utilities, or Internet access. By the same token, though, it is precisely the difficulties involved in reaching the rural population that create a unique opportunity for Mahindra, which has a history of selling and financing agricultural equipment to these very farmers, yielding customer understanding that other companies lack. 

I was left wondering about this infrastructure question, and whether there is any reward for businesses that try to build it directly, in the relative absence of government provision. Apart from the difficulty of financing what is usually a public good, however, there may be a negative incentive to create structures that rival companies can benefit from in developing their markets. Government, it would appear, is better positioned to create and level the playing field. As a joint degree student with the Kennedy School, maybe it's unsurprising that the trip left me thinking about the relationship between business and government, and how each really does need the other.