A snapshot of microenterprises in Hyderabad slums

1. A snapshot of microenterprises in Hyderabad slums Analysis of the baseline data from the Spandana impact evaluation study Abhijit V. Banerjee, Esther Duflo, Rachel Glennerster

2. Spandana • Spandana is an MFI operating mainly in AP. 200,000 clients and growing. • Offers group loans, individual loans with daily repayment, consumption loans. • Basic group loans start at Rs 7,000 and has a one year cycle. Early repayment is possible and additional Rs 2,000 is available after 6 months.

3. The goal of the impact evaluation • Determining the impact of microcredit on • Starting a business • Business expansion • Household welfare • Decision making in the household • Ambition and saving behavior • Etc… • Why is an impact evaluation useful? • Current scenario implicitly subsidizes micro-credit, but it may not last without evidence • Even if clients repay and continue to come, micro-credit may not be beneficial to them (they may not be rational when they make the decision to borrow) • Understanding the areas in which microcredit has an impact is important.

4. Evaluation Design • Evaluation is conducted in 100 “small slums” in H’bad. In these small slums, we randomly selected 50, where Spandana started working, and 50 where they did not. • Baseline study was conducted before lending started, with a little over 2,000 households (20 in each slums). • Baseline study was conducted in early 2005. • Households were randomly selected in each slums as long as they had at least one prime age woman (not selected for having a business or wanting to start one). • A post survey will be conducted after about 2 years, after lending has penetrated the slums, and the effects of the loans may have started to occur.

5. The average family • The average family is a family of 5, with monthly expenditure of Rs 5,000. • Poor, but not ultra poor: only 6% of these households live under a dollar a day per member, but 47% live under 2 dollars a day. • 67% of the household live in a house they own, and 29% in a house they rent. The median house has two room, kutcha for 2/3 of the time. • 98% of the 7 to 11 years old, and 84% of the 12 to 15 year old are in school.

6. Businesses are very prevalent • 31% of the households run at least one small business. • Out of these, 9% of households run more than one. • For comparison, in the OECD, only 12% of the households run a business.

7. But these businesses are very small • Little specialized skills: • 11% tailors • 8% fruits and vegetable sellers • 17% general store or Kirana store • 6.6% telephone boot • 4.31% auto owners • 6.3% milk business • Many people in same slum running the same business • Employees: • Only 2% of business have a partner • Only 10% have any employee, none has more than 3 • Including household members, 58% of business have only one person working in them, and 95% have less than 3

8. More on size • Assets • Only 20 out of 730 business have a separate room in which they operate. • 20% use no productive asset whatsoever. • Productive asset that are used: • Sewing machine (43) • Table (71) and Chair (83) • Balance (61) • Pushcart, motorized or not (86) • Almost none of these assets are rented. • Scale of business: • Sales: Rs 12,000 per month on average, Rs. 3600 median (in other words most businesses sell little)

9. 1 jar of snacks 3 jars of sweets 1 jar of candies 2 jars of chickpeas 1 jar of magimix 1 packet of bread (5 pieces) 1 packet of papadum 1 packet of toasts (20 pieces) 2 packets of biscuits 1 bag of sweets 36 incense sticks 20 bars of lux soap 180 pan parag packets 20 tea bags 40 individual packets of haldi powder 5 small bottles of talcum powder 3 packs of cigarettes 55 little packs of bidis 35 packets of bidis 3 packs of 500g of washing powder 15 small packs of Parle G biscuits 6 individual size packets of shampoo Inventory of a general store in a village in Gulbarga, Karnataka

10. However owners work long hours • Where the owners work full time, they report very long hours: in our data, the number of hours worked in the last week ranges between 40 hours per week and 119 hours per week. • The mean is 72, and the median is 77, which means more than ten hours a day, seven days a week. • Some businesses, like the shop we saw in Gulbarga, are part-time businesses, one of the many activities the owner undertakes. • Part-time owners averaged 24 hours per week.

11. Profitability • The average monthly profit, after deducting any rents they pay but not including the unpaid time spent by household members, is Rs 1,859, and the median is Rs 1,035. • Fifteen percent of the businesses have lost money in the last month, after subtracting rents. • When we value the hours spent by household members, even at the low rate of Rs 8 an hour (which would give someone close to the minimum wage for a eight hours day), the average profits turn mildly negative. • Is this because the scale is sub-optimally small? • Or is it because the household is starting a business to “buy a flexible job”. • But would the availability of much/cheaper bigger loans change that?

12. Credit availability • A large fraction of household have debt: • 69% of the households have at least one outstanding loan • 46% of the households have more than one outstanding loan • The average loan, when it was taken out, was for Rs 20,000 (median Rs 10,000) • The average interest rate is 3.85% per month. • Loans are taken from moneylenders (49%), family members (13%), friends or neighbors (28%). Rarely commercial banks, almost no MFI loan (before our evaluation/Spandana entry)

13. Perceived credit constraints and repayment capacity • Perceived repayment capacity: Rs 500 per month (median) and Rs 1,000 (mean) • More or less the repayment on a Rs 7,500 loan from Spandana… • Among those households who do not have a loan, 56% say they want one but could not obtain one. • However, people are largely unaware of: how much of the loan is still outstanding, how much longer they will need to pay the installment for, etc…

14. Reason for incurring debt • Relatively rarely taken for a business expense: • Households that have business are no more likely to be indebted. • Main purposes for taking out a loan: Health (17%), temporary difficulty (10%), Marriage (13%), Home construction (10%), regular consumption (10%). • Business acquisition only 7% and business expansion only 1.33%.

15. Savings, Insurance and shocks • 34% of the households have a savings account. • 26% have a life insurance policy. • But almost none have any health insurance cover. • Yet 40% of the household had to spend Rs500 or more on health in the last year. • For those who had to spend, the average expense was R7500 (median Rs 3,000) • 60% of the households who had a sick member had to borrow: so 24% of the household borrowed for health in the past year.

16. Why not save more? • While credit is almost surely a constraint for these women, the fact that they do not save more is puzzling • The capital stock of many of these businesses is not large: the shop in Gulbarga had at most Rs.1500. • For family like the family that owned it ($2-4 per day) to be double their capital stock, they would just need to spend no more on alcohol and tobacco as the households below $1 per day. • Why don’t they? • May be it would take much larger loans to start something really productive: something that would not be exactly the same as many others, for one. • Are the Spandana loans big enough?

17. Thank you!