Satin Creditcare, his benefactor, has perfected the ‘daily repayment, collected at doorstep’ model, targeted at petty traders, over the years. It is now celebrated as one of the stars of the new crop of urban MFIs. Even Yes Bank, which entered the urban micro-finance market in July 2007, has borrowed Satin’s robust ‘grading system’ for evaluating the credit worthiness of the urban poor.

Micro-credit has reached about 50 million households, predominantly rural. Current micro-credit by MFIs is around Rs 20,000 crore. There is a sure, slow shift towards urban India. "It’s still a huge unexplored market," says HP Singh, Chairman and Managing Director of Satin Creditcare, with clients across several north Indian cities. Over Rs 40 crore, with an average loan size of Rs 29,000, was disbursed last year. Bad debts are miniscule at 0.5%. By 2010, Satin’s disbursements are expected to cross Rs 300 crore.

The urban poor, with little or no access to formal financial services, have been largely ignored. While the poor in cities have increased from around 52 million to 67 million, their numbers have fallen in the rural areas—from around 257 million in 1991 to 193 million in 2001.

The average indebtedness of the urban poor is estimated at Rs 22,534, indicating a high appetite for credit. Currently, much of this is drawn from moneylenders. Demand for micro-credit in urban areas is estimated at Rs 22,000 crore, which could go up to a third of the total demand of about Rs 240,000 crore.

The traditionally rural MFIs—like Basix, Share Microfin and Spandana—have, therefore, started their march towards cities. "We stayed away from metros thinking it is a difficult market with fluid populations," concedes Vikram Akula, Chief Executive Officer of SKS Microfinance, which has catered to 950,000 borrowers, largely rural. But after working in semi-urban areas of Andhra Pradesh, SKS is now consolidating its presence in seven cities, including Hyderabad.

While the Ahmedabad-based Sewa Bank has carved a niche for itself over the decades, Indian cities are seeing a new breed of MFIs driven by professionals—Ujjivan Financial Services in Bangalore and Swadhaar FinAccess in Mumbai, for instance. Another breed making a foray are the non-banking finance companies (NBFCs) ‘downscaling’ to address mass markets.

The small clutch of urban MFIs is creating ripples with innovative products and services, standing apart from the rest. "Urban MFIs, steered by professionals, display better efficiencies due to the adoption of management systems and technology," says Sanjay Sinha, Managing Director, Micro-Credit Ratings International, a micro-finance rating agency.

This, perhaps, is the reason why urban MFIs are attracting risk capital from an array of investors. Urban MFIs are able to break even much quicker—within just over two years—than MFIs focused on rural areas, which could take a couple of years longer, depending on many variables. In the urban MFI model, transaction costs are lower, since it is relatively easier to reach concentrated populations. Loan sizes are also larger. For urban MFIs, growth and scaling up, therefore, can be less painful.

"We stayed away from the metros, thinking it to be a difficult market with fluid populations "- Vikram Akula CEO, SKS Microfinance

The innovations that have endeared investors and clients are many. Mumbai-based Fullerton India Credit Company follows a unique model of ‘neighbourhood financing’ with focus on mass market clients within a radius of 5 kms from its branches.

Indian Bank, with exclusive MFI branches, has fostered the urban self-help group (SHG) model—informal associations of up to 20 members who meet at regular intervals to save small amounts. ICICI Bank is gearing up to take micro-credit to Kolkata’s 65,000 sex workers through the SHG route.

Satin Creditcare was comfortable with lending to individuals all along, primarily to cater to their working capital needs. However, it has now been goaded into adopting the joint liability group lending model. "It was imperative to reach out to poorer sections with loan requirements below Rs 10,000," explains Singh.

Ujjivan, unlike Satin, was always focused on group lending, exploding the urban myth—absence of social cohesion and group integrity in cities. In less than two years, it has built up a client base of over 22,000 women.

The MFI lends to every need, be it working capital, consumption, education, health or housing. During emergencies, money is handed out across-the-counter. Interest rates are around 1.25% a month. "We have adopted the life-cycle approach to a family’s needs. A festival loan is also being tweaked at for the coming season," says Carol Furtado, Head of Operations at Ujjivan.

However, Ujjivan’s CEO Samit Ghosh is pondering the inevitability of individual lending, for he is certain that loan sizes beyond Rs 15,000 cannot sustain the social collateral. In fact, individual lending is increasingly seen as an appropriate avenue in the urban context.

Usually, one or two individuals in a group grow faster, requiring larger loans. Obviously, it causes anxiety among the remaining group members. "Given a choice between individual and group lending, the former is always preferred by a client," says Robin Ratcliffe, Vice President of Accion International, a global pioneer of micro-finance.

Urban micro-finance is finally coming into its own, triggering considerable investor interest. The Michael and Susan Dell Foundation of the US, with an endowment of $1 billion, and an accent on the double bottom line—embracing both financial and social returns—hopes to catalyse at least 20 MFIs in India to reach 4 million clients by 2015.

The Bellwether Microfinance Fund, the first of its kind in India, is expanding its fund size to $20 million. Already, the fund has built up a portfolio of 11 MFIs. It is keen on funding NGO-MFIs, which are in the process of transforming themselves into for-profit MFIs. Says R Venkatram Reddy, Investment Officer: "We are long-term investors and seek a return on equity (RoE) of 18 to 20%."

While credit is steaming urban microfinance, the big opportunity is in offering a spectrum of

"We have adopted a life-cycle approach to a family’s needs. A festival loan is also on the way" - Carol Furtado, Head of operations , Ujjivan

services—from savings, insurance, remittances to specialised products—once the regulatory ambiguity is addressed. The absence of savings in Indian micro-finance (barring few exceptions) is referred to as ‘walking on one leg.’ A system that allows collection of deposits could lend strength to the sector, addressing a crying need of the poor.

Bank Rakyat of Indonesia is often touted as an example. It serves 30 million savings clients and 3 million borrowers and has $3 billion in savings and $1.7 billion in loan portfolios, a fine self-sustaining model.

Market penetration of Indian MFIs is abysmally low. "Our regulations should allow for mainstream financial institutions to play a significant role in micro-finance," says Somak Ghosh, President, Corporate Finance and Development Banking of Yes Bank.