CASE: E-372

DATE: 12/08/09

HAND IN HAND, INDIA

What Dr. Kalpana Sankar and her enthusiastic team have achieved in this time-span is probably
unique in the history of NGOs. I believe the astounding results in equal parts come from (1) the
enthusiasm and dedication from the Hand in Hand staff to help the poorest of the poor to a better
life, and (2) the application of modern management techniques with measurements,
decentralisation, and accountability down to the grassroots level. This, in turn, leads to high
quality and productivity and in the end that one donated dollar goes a long way.
Percy Barnevik, advisor to Hand in Hand and former CEO of Asea Brown Boveri, in
the companys 2006-2007 annual report.

Dr. Kalpana Sankar, CEO of Hand in Hand, was exhausted after an all-day meeting of the
organizations executive team at its headquarters in Kanchipuram, India. As she prepared for a
drive to Chennai (one of Indias four main cities), she dreaded the unrelenting traffic she would
face. However, the long trip would afford her time to think through the many strategic decisions
Hand in Hand (HiH) would need to make in the coming months.
She reflected on the remarkable growth that HiH had realized in three short years, having gone
from a small nonprofit focused on the elimination of child labor to a major force in driving
holistic community development. The organizations holistic approach included five interrelated initiatives that spanned education, Citizens Centers, health, the environment, and
microfinance. Based on the progress it had achieved in these areas, HiH had attracted the
patronage of Dr. Percy Barnevik, an internationally known business executive, who had already
given over $20 million in donations and provided valuable strategic guidance as an advisor to the
management team.
Sankars most challenging decisions were with respect to the microfinance group, which was
soon to be operated through a for-profit, non-banking financial company. Microfinance had
become Hand in Hands largest program, reaching over 300,000 women since 2003. 1 To
achieve its goal of developing over 1 million jobs by 2010, Sankar had hired Hemantha
Annie Adams, Sarah Garrett, and Whit Keuer prepared this case under the supervision of Professor Garth Saloner
and with the assistance of Lyn Denend as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. The Graduate School of Business acknowledges the generous
support of the Goldman Sachs 10,000 Women initiative in developing this case.
Copyright 2009 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order
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otherwise without the permission of the Stanford Graduate School of Business.

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Parmanthy, who had a background in commercial banking. Parmanthy would lead an initiative
to make HiH microfinance operationally sustainable within a year by charging higher interest
rates, increasing loan sizes, and billing clients for business training and mentoring services.
Sankar wondered if Hand in Hands clients could manage the larger loans and afford the higher
interest rates and fees for services that had traditionally been provided for free. These
unanswered questions underscored the inherent conflict between building a sustainable
organization that could scale its operation to reach even more people, and the ability to continue
providing the individualized, pro bono development services that had helped drive the
organizations growth.
Beyond the microfinance program, HiH faced other challenges. In all four of its other program
areas, the organization generated revenue from the provision of its services. Should HiH also
seek to run these programs on a for-profit basis to reduce its dependence on donations? Sankar
further wrestled with how to allocate scarce resources across these programs and how to compare
the relative impact of the organizations services in such diverse areas.
As she contemplated these issues, Sankars head began to spin. However, she realized that the
decisions she faced were not unique to Hand in Hand. NGOs across sectors were struggling with
the trade-offs between achieving sustainability and continuing to serve their organizations core
development missions.
ABOUT HAND IN HAND
The Early Years
HiH was a nongovernmental organization founded in 1988 with the goal of eradicating child
labor in the Tamil Nadu state of India. The organization initially pursued this goal through a
child labor education program that sought to take children out of bonded labor in factories and
connect them to public schools through transitory (or transitional) education. HiHs services
were implemented on a relatively small scale, with its work being performed by three full-time
and 25 part-time employees.
In 2004, the organization hired Dr. Kalpana Sankar as its chief executive officer (CEO). A
published author with a doctoral degree in natural sciences from Stanford University, Sankar
brought a wide range of experience to the organization, including development expertise from
the International Fund for Agricultural Development (IFAD).
After an evaluation of HiHs approach, Sankar pinpointed the need to expand HiHs services to
attack the root cause of child labor, which she identified as the familys necessity to generate
additional income. We realized we could not tackle the child labor problem in isolation, she
said. 2 We also had to help the family provide for its basic needs. We did this by expanding our
services to include the provision of microcredit. Thus, while not part of HiHs original mission,
a microfinance program was initiated as a vehicle to accomplish the ultimate goal of eradicating
child labor.

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Another event in 2004 further altered HiHs growth trajectory. One of its most prominent
donors, Dr. Percy Barnevik, a successful Swedish business executive, made several large
contributions and began to take an active interest in the management of HiH. Barnevik offered
his valuable experience in rapidly scaling organizations. From 1988 to 2001, he had led the
successful merger, integration, and restructuring of Asea AB and Brown Boveri et Cie and then
served as the CEO of the combined entity. During his tenure at Asea Brown Boveri (ABB), a
conglomerate with core businesses in power and automation technology, sales increased 30
times, net profit increased 60 times, and the stock value grew 87 times (or an average of 30
percent per year). 3 By applying similar management principles, Barnevik hoped to replicate in
the nonprofit sector with HiH the impressive growth he had helped achieve at ABB. Running
HiH was 95 percent [the same as it would be] to run a company, he said. I don't want Hand in
Hand to be the best NGO. I want it to be the best company. 4 Keys to success in both the
corporate and nonprofit sectors, Barnevik pointed out, were hiring the right people, developing
an organization structure and processes to facilitate the interaction of functions within the
organization, and watching metrics closely.
HiH Organizational Structure and Programs
HiH was registered in India as a public charitable trust. Its activities operated through the HiH
Trust, which administered the microfinance and child labor elimination initiatives, and the SEED
(Skills and Environment Education) Trust, which administered the Citizens Centers,
environmental, and education initiatives. Between these two trusts, HiH had 2,000 full-time staff
members, 2,400 part-time employees, and 17,500 volunteers. 5
HiHs vision was a world free of extreme poverty and child labor, 6 which it worked to achieve
through improved education, employment, income generation opportunities, and empowerment.
Because of the multifaceted nature of poverty, HiH sought to implement its five main program
areas simultaneously, via an Integrated Community Development Project.
Child Labor Elimination and Education
According to the 2001 Indian census, 29 percent of the countrys children, ages 6 to 14, did not
attend any educational institution (a total of 65 million children). 7 Moreover, the incidence of
child labor increased 9 percent in the 10 years between the 1991 census and 2001 censusfrom
11.59 million to 12.66 million.8 However, because the census figures did not include children
engaged in the agricultural and domestic sectors, many groups maintained that the number of
child workers was significantly higher. Sources varied widely, but some unofficial estimates
claimed that India had a child labor force in excess of 100 million.9
HiHs strategy for eradicating child labor was focused on providing services to prepare children
who had been out of school to enroll in government-run education programs. HiH worked
through a number of programs, including transit schools, residential schools, crches (day care
centers), and a child sponsorship program. HiH was careful not to create parallel structures to
the public school system, but rather to identify and fill gaps by funding extra teachers, forming
summer camps, and organizing parent-teacher associations. HiH also monitored school retention
rates with a minimum target for all children to complete tenth grade.

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By 2008, HiH had enrolled 13,710 children into various government and Hand in Hand schools.
In addition, 11,464 children attended HiHs two-hour after school coaching classes. HiH also
sponsored 226 children to attend school and paid 50 percent of the salary for 52 teachers. 10
Health
While India, as a country, had made notable advances in medicine and health, the benefits of this
progress frequently did not reach the people living in the poorest and most remote villages. In
these locations, a visit to the local medicine man was often a more common practice than
travelling to a modern health care center. To assist the poorest and most marginalized groups in
gaining access to improved healthcare, HiH organized medical camps in villages. At these
camps, women and children were examined, received vaccinations and, if necessary, were
transported to government hospitals. HiH also educated residents on health issues such as
HIV/AIDS, alcohol consumption, family planning, personal hygiene, and nutrition. By 2008,
HiH had treated 51,820 patients and referred 4,309 for additional care. 11
Environment
HiH viewed the status of the local natural environment as central to the community development
process. Poor people lacked the resources needed to reduce the negative effects of a damaged
environment, yet they were often directly dependent on the natural environment for their daily
survival.
HiH had several environmental initiatives, the largest of which was a solid waste management
project. This project included household trash collection, segregation, transportation, and
processing. Inorganic waste components were sorted and sold to industry, and biodegradable
waste was processed into organic manure in vermin-composts and sold to farmers. Through the
solid waste management project, marginalized groups were offered employment opportunities at
the same time that the local environment in poor villages was improved and soils were
rejuvenated.
HiH provided solid waste collection services to 51,713 households. It processed 310 tons of
biodegradable waste and 78 tons of non-biodegradable waste per month, 12 collecting service fees
for trash collection and earning income from the sale of fertilizer to farmers.
Citizens Centers
To improve access to information for poor and illiterate Indians and to educate them about their
rights as citizens, HiH opened multiple Citizens Centers across the state of Tamil Nadu. These
centers provided the community with basic information about how to vote, register for
government programs, and obtain a drivers license. A typical Citizens Center also had an
information technology kiosk with computers, Internet connectivity, and facilities for printing,
copying, scanning, and faxing, as well as a small library. By offering villagers access to
computers, computer courses, and the Internet, HiH sought to bridge the prevailing digital divide
between rural and urban India.
Several of the Citizens Centers were run by self-help group (SHG) members 13 (described in
more detail below) and funded through microcredit provided by HiH. While donor contributions
of equipment and funding could make the centers free, HiH used the microcredit system because

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it created more ownership of the establishments among community members. The centers,
which earned their revenues from the services provided to villagers, were visited by an average
of 30 to 50 people per day. HiH hoped to operate these centers on a sustainable/break-even basis
and further expand their ownership by SHG members. By 2008, HiH had a total of 790 Citizens
Centers in operation. 14
Microfinance and Self-Help Groups
Last but not least was HiHs microfinance program. The objective of the microfinance initiative
was both to alleviate rural poverty and empower women. HiHs activities in this area included
the formation of SHGs, the provision of microcredit, business training and mentoring for SHG
members, and the formation of new businesses. These activities are described in greater detail in
the sections that follow.
MICROFINANCE IN INDIA
Overview
Of Indias 1.1 billion residents, 79.9 percent lived on less than $2 per day and 34.4 percent (380
million people) lived on less than $1 per day. 15 Within these poor segments of the population,
roughly 73 percent of all rural households had no access to formal sources of credit. 16 Many
academics and financial industry analysts had studied the relationship between poverty and
access to credit and had found an important connection. The link was articulated most fervently
by Nobel Prize winner Muhammad Yunnus, founder of Grameen Bank and a pioneer in
microfinance. [Microfinance] is based on the premise that the poor have skills which remain
unutilized or under-utilized. It is definitely not the lack of skills which make poor people poor,
he said. 17 People generally remained poor, Yunnus asserted, because they lacked access to
capital.
Microfinance institutions (MFIs) had arisen to provide financial services, including credit,
savings, and insurance, to those people whom the formal banking system traditionally did not
serve. Microcredit, a subset of microfinance, referred to the extension of small loans to the poor
to help them establish or expand small businesses. MFIs also granted loans for purposes other
than income-generating activities, such as for education, housing repair or construction, and debt
consolidation.
MFIs typically targeted poor women as their clients. The worlds poorest households tended to
rely more heavily on income generated by women, and research had shown that female
microfinance clients were more inclined than men to repay their loans and invest their earnings
in their families health and education. 18 In HiHs early years, the Tamil Nadu government
persuaded HiH to make loans to a group of men. Barnevik described the result: Sure enough,
on the first occasion [repayment was due] the men came in and said: I have been sick, Terrible
dry spell in the weather, and so on, and would I defer the repayment? Excuses, excuses,
excuses. 19 This experience was relatively common across the MFI industry as a whole.
The concept of bringing banking to poor and rural communities was not new in India. Since the
1970s, different policies had been tried to encourage the expansion of rural branches, mandate
credit allocations for priority sectors (e.g., agriculture), provide subsidies to banks establishing

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credit programs to serve marginal communities, and maintain a ceiling on interest rates through
regulation. 20 Despite these efforts, the expansion of MFIs in India had lagged behind other
countries in the region. For instance, in 2006, Indian MFIs accounted for 31 percent of the total
microfinance loan portfolio for South Asia, while Bangladesh represented 57 percent with a
population of just 14 percent of Indias. 21,22 In 2007, the penetration rate of microfinance in
Bangladeshs poor population was 35 percent whereas in India it was only 3 percent. 23 There
were many reasons why MFIs had not scaled as quickly in India, including low levels of grants
to MFIs to establish operations, a policy environment that was still considered suboptimal, and
the presence of traditional banking infrastructure in rural communities. 24
Although microfinance in India got off to a slow start, it had begun to grow rapidly (outpacing
the rate of growth in Bangladeshs more mature microfinance market). In 2007-2008, the Indian
microfinance sector grew more than four times faster than the countrys national economy (as
measured by outreach growth and GDP, respectively). 25 This MFI growth was just 21 percent in
2006, but jumped to 72 percent in 2007. According to Intellecap, an Indian consulting firm, the
total MFI loan portfolio in India was expected to reach $6 billion by 2012. 26
Indian MFIs were among the most efficient in the world as evidenced by an average staff-toborrower ratio of approximately 1 to 275. 27 Another feature of Indias microfinance market was
its fragmented and relatively nontransparent nature. Roughly 800 MFIs were active in the
country. However, seven large institutions were increasingly dominating the market (although it
was not uncommon in other countries for just one or two MFIs to dominate the sector). As of
2006, this small group of MFIs held more than 80 percent of the countrys total microfinance
loan portfolio and served 67 percent of microfinance borrowers. 28 Because of differences in
language and regulation, the industry remained fragmented between the northern and the
southern parts of the country. The majority of MFIs were located in the south with particularly
high coverage in the states of Andhra Pradesh, Kerala, Karnataka, and Tamil Nadu.
The Important Role of the SHG in Microlending
In general, there were multiple barriers that prevented poor people from accessing formal
financial institutions. First, many of these individuals had low literacy rates and so had difficulty
completing the required loan application documents. Second, the loan amounts required by the
poor were typically small, which made them unprofitable to service for banks with traditional
infrastructures. Third, the poor have been perceived as not bankable because they lack collateral
and the cost of monitoring the performance of their loans could be excessive.
MFIs were structured to eliminate these three barriers. They typically provided assistance in
completing the required loan documents. In addition, many MFIs organized borrowers into
SHGs as a mechanism for servicing loans more efficiently and mitigating the cost of monitoring
and lack of collateral.
An SHG was a group ranging from 10 to 25 members. While the functioning of these groups
varied based on the practices of individual microfinance institutions, their purpose was to review
the status of members loan payments, collect loan and savings payments from members, and
help guarantee the loans in the group. Thus, instead of providing physical collateral, SHGs

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enabled women to provide social collateral. The concept of social collateral, pioneered by
Muhammad Yunnus and the Grameen Bank, was the idea that the peer pressure the women
placed on each other would ensure loan repayment. Since only some of the group members were
granted loans at any given time, the other members encouraged repayment because it directly
affected the subsequent availability of loans for themselves after the existing loans were repaid.
Another benefit of the SHG model was that it provided an efficient method for MFIs to monitor
the activities of the women in its program, collect the required loan paperwork, and distribute
monies since the organization could deal with multiple clients at the same time. A final
advantage was that the group provided a forum for the women to organize outside of the home to
promote the empowerment of group members.
SHGs followed several different operating models. On one end of the spectrum was a pure SHG
model, which was large in size and could involve up to 20 or 25 women. The SHG members
made regular savings contributions to the group, which were kept by the elected group leader.
The members borrowed individually from the SHG, for various purposes on terms and at interest
rates set by the group. Nine to 12 months after the groups formation, it was rated by a nonprofit
organization based on various factors, including the frequency of group meetings, quality of the
groups records, number of members in the group, amount of group savings as well as whether
internal loans were made, and frequency of repayment. If the group received an adequate rating,
it could, collectively, take a loan from an MFI or directly from a bank.
On the other end of the spectrum was the Grameen model, pioneered by the Grameen Bank in
Bangladesh. In the Grameen model, clients were organized into groups of five members. Each
member had an individual savings and loan account with the MFI or bank. The members
guaranteed loans to individual members by accepting joint liability, raising group emergency
funds, and agreeing to certain terms (for example, there might be an agreement that no members
of a group would be able to take a new loan if any other member was behind on her payments).
Models for Providing Credit
In India, MFIs provided microcredit to borrowers through one of two models: a partnership
model with a bank, or directly through their own funds. In the partnership model, pioneered by
the Indian National Bank for Agriculture and Rural Development (NABARD) and expanded by
ICICI Bank, MFIs connected groups of borrowers directly to a bank. Banks then make loans
directly to the SHG with period payments being collected by the MFI. A portion of the
repayment was kept by the MFI to compensate it for sourcing the SHGs, as well as overseeing
collections and group activities. The net amount was remitted to the commercial bank. The key
to this model was that the MFI acted as the first loss default guarantor such that it absorbed
default losses on loans up to a certain loss rate, which was predefined in the partnership
agreement between the bank and the MFI.
The second model was known as direct lending, in which the MFI made loans from its own
capital directly to the individual or group. The MFIs capital was either from deposits taken
from clients, shareholder capital, or most commonly on-lending funds it received from
commercial banks. If deposits were taken or if the MFI used on-lends funds it borrowed from

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banks, the MFI profit on the lending transaction was called net interest income (interest charged
on microloans less the interest paid to deposit holders or commercial banks).
TRENDS IN MICROFINANCE
Overview
Microfinance had grown significantly in recent years and had received international acclaim
(especially with Muhammad Yunnus receiving the Nobel Peace Prize in 2006). However, a
McKinsey study found that the $17 billion in worldwide loans outstanding in the microfinance
sector represented just 10 percent of the potential market. 29 The implication of this research was
that a significant percentage of the worlds poor still lacked adequate access to capital.
While many MFIs were working to expand their operations to increase the availability of credit
to the poor, achieving scale was difficult because of the low margins and lack of available capital
for capacity building. Low margins were the result of the narrow spread between interest income
and interest expense (known as net interest income), along with relatively high transaction costs.
MFIs had to operate at a scale large enough for the net interest income to cover their overhead
expenses. In addition, to increase their volumes, they had to be able to invest in infrastructure,
staff, technology, and other areas of development to build their capacity to serve more
customers. Yet, in order to attract the capital to make these investments, prospective investors
wanted the MFIs to have already become operationally sustainable. Because of this dilemma,
many MFIs operated as nonprofit organizations and relied on donor contributions to fund
operating deficits. However, if an organization was structured as a nonprofit, it was typically
unable to attract financing from the capital markets. As a result, many MFIs continued to
operate on a relatively small scale and remained unprofitable.
Another challenge to sustainability was that MFIs provided service to many individuals beyond
its actual clients. An MFI formed SHGs that included many potential borrowers, but only a
small percentage of those group members could take a loan from the organization at any given
timeroughly 5 of 20 members. The group provided the social collateral (peer pressure) to get
the loan recipients to make payments. However, if they failed to repay the loans, the other group
members became ineligible to receive new loans (i.e., become clients). This could result in a
higher than average expense ratio.
Finally, while microfinance institutions charged higher interest rates than retail banks charged on
other loans to small businesses, they also had significantly higher expenses for servicing clients.
The higher interest rate was due to the high operational costs of reaching people in remote areas,
the support services provided through the group structure, and the high operational costs of
providing loans on a much smaller scale than typical banks.
The Debate About Nonprofit Versus For-Profit Microfinance
In recent years, there had been a growing trend toward commercialization in the microfinance
sector, although it remained somewhat controversial. The commercialization movement, also
referred to as the financial system approach, focused MFIs on financial sustainability and
transitioning to a for-profit model as the pre-condition for achieving greater outreach. 30 The

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claimed advantages of commercialization were financial self-sufficiency, the expansion of

services to the poor, greater efficiency, improved transparency, and increased competitionall
of which would lead to better service quality.
To facilitate commercialization, many MFIs were converting their legal status from nonprofit,
nongovernmental organizations to non-banking financial companies (NBFCs). In India, a NBFC
had to register with the countrys Reserve Bank and operated similarly to a banking institution in
many respects, although it was prohibited from accepting demand deposits. 31 When an
organization registered as an NBFC, it was deemed to be a for-profit entity with an economic
development focus.
Commercialization had also been encouraged by the entrance of commercial companies into the
microfinance market. For example, one of Indias largest private financial institutions, ICICI
Bank, sought to expand its partnership model in rural India. Under this model, ICICI forged
alliances with existing MFIs, which would then be responsible for identifying, training, and
overseeing microfinance clients in rural villages. ICICI Bank, in turn, would finance the clients
directly on the recommendation of the MFI. 32
SKS Microfinance was one MFI that had achieved a fully commercialized microlending
program. SKS was launched in 1998 to address what founder Dr. Vikram Akula saw as a
fundamental flaw in the microfinance industrynamely, its inability to scale to large numbers of
poor people. SKS identified three main constraints to growth: capital, capacity, and costs. The
lack of capital stemmed from the dependence on a limited pool of donor funds; the lack of largescale operating capacity was the result of MFI management pursuing conventional growth
models; and the high costs of delivery resulted from a manually-intensive, high-touch
distribution model. SKS therefore developed a plan to scale microfinance based on three interlinked principles that would overcome those barriers. These three were: (1) applying a for-profit
methodology so that an MFI did not have to depend on limited donor funding; (2) using best
practices from the business world to speed growth; and (3) deploying technology to overcome
high delivery costs. 33
SKS transitioned from a nonprofit to a for-profit organization in 2006 and was operating
profitably with a return on assets of 3.3 percent and a return on equity of 23.9 percent. 34 SKS
was an NBFC. It had a total loan portfolio of $491 million as of March 2009 35 and a growth rate
of 300 percent for the previous two years. 36 Known as the Starbucks of Microfinance, 37 SKS
operated through 1,628 branches in 19 states across India 38 with an average loan size of $140.39
Since its inception, SKS had provided a total of $671 million in loans to 5.3 million women
clients. 40 In recognition of these accomplishments, Akula was named as one of the people who
shape our world by Time magazine and as the Schwab Foundations Social Entrepreneur of the
Year, both in 2006.
In March 2007, Sequoia Capital led an $11.5 million investment round designed to provide the
stimulus SKS needs to achieve its ambitious goal to provide financial services to over 5 million
poor families by 2010. 41 This is a huge untapped market. Nearly $55 billion is needed for the
development of the rural and urban poor. Of this, only $5 billion is given out by the
microfinance institutions, said Kanchan Pandhre, vice president of finance for SKS. 42 SKS also

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pursued other means of raising capital. We used to borrow capital from the banks at a rate of
9.5 to 10.25 percent. But now, as the regulator (Reserve Bank of India) has increased the
provisioning requirements for NBFCs, we now borrow capital at 11 percent, Pandhre said. We
are in talks with other banks for securitizing our existing loans. We will want to securitize loans
up to $200 million during the next financial year, 2007 to 2008. 43
While there seemed to be benefits associated with commercialization, the rate at which Indian
MFIs were transitioning to this model was slower than in Latin America and other Asian nations
such as Bangladesh and Indonesia. 44 Moreover, the movement had spawned something of a
backlash from the development sector among those advocating for the poverty lending approach.
HiH was among the chief critics of the commercialization approach, preferring poverty lending
targeted exclusively at reaching the poorest of the poor. HiH believed the interests of the poor
could be compromised if MFIs placed too much emphasis on profit motives or operational
sustainability metrics.
MICROFINANCE AT HIH
HiH worked in 17 suburban and rural districts in the Indian state of Tamil Nadu, and had an
emerging presence in three other Indian states: Pondicherry, Karnataka, and Madhya Pradesh
(see Exhibit 1). In each new area the organization entered, its efforts began with microfinance
and SHG programs and then expanded into education, health, Citizens Centers, and the
environment. HiH mainly targeted women who demonstrated a strong sense of financial
responsibility. HiH also targeted the poorest of the poor, including the Dalit Caste, Tribals,
Backward Caste (BC), and Most Backward Caste (MBC). At 12 percent interest (plus a 3
percent up-front processing fee), HiH offered the lowest rates available to the members of these
groups. Not only did HiH extend loans to these clients at an affordable rate, it also provided
supplementary business development services. Barnevik explained HiHs integrated approach:
Microcredit without massive effort to prepare the ground, coach, and train is nothing. Credit
without training and other support leads to consumption. This moves consumption forward but
doesnt increase the standard of living.
An article in the Stanford Social Innovation Review underscored Barneviks point:
Few MFIs have explicitly formulated their theory of changethat is, an
explanation of how their activities could lead to their desired outcomes. For
most MFIs, that ultimate goal is to alleviate poverty. Many MFIs do not
explicitly state this. Instead, they say that their goal is to give poor people access
to credit. Their theory of changeoften implicitis that building financial
institutions for poor clients will eventually help lift these clients out of poverty.
Yet few MFIs elaborate exactly how their beneficiaries will create those
successful businesses. This is an egregious oversight, as the vast majority of
microfinance clients have no prior business or banking experience and little
formal education. 45
Recognizing the limitation of providing only microcredit to its borrowers, HiH also offered its
SHGs training in how to operate as a group and instruction in basic literacy and finance
principles. Through the SHGs, HiH also promoted womens empowerment. Barnevik described

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the impact of these efforts. Whats fantastic to see is that we can lift these impoverished
women, who are 85 percent illiterate, the most backward castes, and they can rise. 46 He went
on to describe how he once met three women walking to an evening meeting of their self-help
group and inquired where their children were. They said their husbands were giving them
supper and putting them to bedthe first time that had happened in their village in 1,000
years! 47
Several women from HiHs SHGs had been elected mayors of their villages subsequent to their
involvement in an SHG. As women became empowered and employed, household poverty was
reduced and the health and education standards in the family as a whole increased. This
innovative approach had been remarkably successful in promoting empowerment and was, in
part, responsible for the high repayment rate99.6 percentof HiH loans. This success also
attracted the attention of organizations in Afghanistan and South Africa, where HiH consulted
with those countries governments in structuring similar programs.
Generally, the areas where HiH operated lacked population density. For example, in
Kanchipuram, where HiHs headquarters were located, there were 153,000 residents based on
the 2001 Indian census and approximately 42,000 women aged 20 to 60, the target market for
MFIs. HiH had approximately 15,000 women in SHGs in Kanchipuram. Management estimated
it had a 75 percent share of the estimated 20,000 women that were participating in MFI programs
and 35 percent market share of the total addressable market (TAM). Because of the relatively
small size of the TAM and HiHs high penetration, other MFI were not likely to enter, which
gave HiH a competitive advantage.
HiH developed a hybrid SHG-Grameen model, employing what it saw as the best features of
both approaches. For instance, in groups of 20-plus members, accountability was more difficult
to enforce so HiH limited its group sizes (12 to15). In addition, rather than limiting group
membership to only those who were receiving loans, HiH saw the inherent social benefit the
groups provided and, thus, designed groups to include other members. In a typical SHG, five
group members received loans from HiH or a bank, while two to three received loans from
internal savings. This also allowed women who were not as entrepreneurial to be informally
mentored or to join the businesses of other women who had already started a business.
HiH employed cluster coordinators to help service its loans. Their responsibilities were to assist
the SHGs on bookkeeping, mediate disputes, and gather required loan documents. A cluster
coordinator initially worked with 20 to 25 groups, but experienced coordinators could oversee as
many as 40 to 50 groups. A typical cluster coordinator earned Rs. 3,000 monthly (approximately
$65 U.S.).
Cluster coordinators reported to zonal managers. Zonal managers were responsible for ensuring
that groups were run effectively, collecting delinquent payments, helping to promote the
entrepreneurs businesses, and mentoring the women. Zonal managers earned Rs. 8,000-10,000
per month ($173 to $216 U.S.). Each district office also employed a district manager who
earned Rs. 20,000 per month ($432 U.S.) and an accountant who was paid Rs. 10,000 per month
($216 U.S.). Other office expenses historically amounted to 40 percent of personnel costs.

Hand in Hand E372

p. 12

HiH also incurred costs at the headquarter level, the largest of which was the cost of capital.
Because the Reserve Bank of India required registered commercial banks to lend a certain
percentage of their total loan portfolio to the priority sector, which includes MFIs, HiH was able
to obtain loans at 1 percent over the prevailing deposit rates, which at the time this case was
written were around 9 percent. HiHs overhead costs averaged Rs. 750,000 per month ($1,602
U.S.).
Managing Rapid Growth
HiHs microfinance initiative was started in early 2003. By the end of the 2007-2008 year, it had
organized 304,000 women into SHGs, with more than 60 percent receiving microcredit.48
Managing such rapid growth was not easy and required several significant changes.
First, HiH realized the need to transform its operations from a nonprofit organization with a
development focus to an organization running in a sustainable way. Even though HiH criticized
the financial system approach because of the risk of organizations trying to profit from the poor,
it recognized the value of creating a lasting, financially independent business model. The
transition would require external expertise so, in 2006, HiH hired Hemantha Parmanthy, an
executive with commercial banking experience, to oversee the microfinance program.
Importantly, HiHs sustainability goal extended beyond microfinance to its other four programs.
This approach reflected Barneviks management style. As CEO of ABB, a company with over
215,000 employees, he created 5,000 separate profit centers. The profit centers were small in
size, with most including fewer than 50 employees. This created the advantages of working for a
small businessincreased responsibility, authority, and recognitionwhile offering the security
of a large and diversified organization. Barnevik hoped to replicate this successful structure at
HiH. 49
Second, HiH established a non-banking financial company (NBFC), Hand in Hand
MicroFinance Ltd., to administer its microfinance services. There were several benefits of
operating through an NBFC. First, it was more easily able qualify for loans from banks, which it
could then on-lend to clients. Also, an NBFC could obtain these loans at lower interest rates than
nonprofit organizations. Finally, while an NBFC was prevented from taking donor funding, it
could accept equity investments, which significantly increased the pool of available capital.
A third strategy HiH employed to help increase the scale of its organization was to develop
partnerships with government institutions, the private sector, NGOs, and financial institutions.
For example, HiH established one partnership with a leading garment factory in Chennai called
Intimate Fashions. With an initial investment of INR 275,000, HiH set up an industrial powermachine tailoring center to provide jobs for young women in the garment industry. HiH
designed a one-month training program to suit the requirements of the industry. All candidates
were unemployed and came from rural areas. After completing the training, HiH secured
employment for the graduates at Intimate Fashions. As a result of HiHs grassroots presence
and its closeness to the target group, HiH was able to identify potential candidates and prepare
them to meet the demands of the industry. The women had a forum for representing their
grievances and concerns, and HiH functioned as an umbrella organization to protect their

Hand in Hand E372

p. 13

interests. At the same time, it helped the workers understand the concerns raised by the
company. The training unit proved to be an excellent model of an NGO-corporate partnership
and returned benefits well beyond the initial investment in machinery.
Lastly, while Hand in Hand had successfully assisted 161,000 women in setting up or
strengthening family-based micro-enterprises 50 (with roughly a $125 investment per enterprise),
it viewed the growth of medium-sized businesses as a key step to helping people leave poverty
permanently behind. The organization believed that it was through the bigger enterprises that the
women were enabled to secure lasting financial stability, either via employment or via
ownership. So far, HiH had developed 525 medium-sized enterprises (with approximately a
$1,250 initial investment per business). To improve these results, HiH began providing support
to assist family-based enterprises in collectively marketing their products on a larger scale. It
also set up incubation centers to test new product ideas, and provided training to SHG members
as discussed above.
CHALLENGES IN SCALING THE ORGANIZATION
Although HiH aspired to be the best run company in the world, it still had many other
challenges to address in managing its rapid growth. For example, HiH organized its operations
in a functional architecture, which grouped employees into one of the five programs with shared
HR, information systems, and accounting. This allowed HiH to develop specialization and move
down the learning curve in providing services in each of these areas. However, HiH had few
formal linkages between the five groups. Moreover, because of the organizations rapid growth,
most employees were relatively new to HiH and had not had time to develop effective informal
linkages. While the five programs were designed to operate in unison within the communities
where HiH was working, there was often insufficient internal coordination to optimize potential
synergies.
In addition, the HiH organization structure lacked formalized reporting relationships. At times,
this helped enable creativity, but it could also be a disadvantage. For example, on the upside,
Parmanthy was able to have frequent discussions with the cluster coordinators. These
individuals did not report to him but had valuable information that allowed him to tailor training
programs and refine HiHs loan products. On the downside, in the absence of a defined
structure, top management tended to micromanage certain high priority issues, which could
hinder the effectiveness of middle management and bottleneck the executives.
Another issue was that, because of Indias poor infrastructure in rural areas, HiH lacked an
integrated information system to connect its 12 district offices. As a result, the process of
gathering information from the field to determine capital requirements or branch performance
was a time consuming process which occurred approximately quarterly.
Further, HiH lacked a systematic strategic planning process. Because of the organizations
holistic approach to development, the management team was continually faced with resource
allocation decisions. A strategic planning routine would involve each of the five programs
developing a multi-year business plan, detailing target impact and resources required. These
plans could then be integrated and used to guide decisions, such as whether HiH should subsidize
business development services or increase the number of healthcare camps.

Hand in Hand E372

p. 14

A final challenge was the difficulty HiH experienced in leveraging the capabilities of the cluster
coordinators. As new SHGs were formed, the cluster coordinators played a critical role in
helping them to begin functioning. However, as the groups matured, they had a reduced need for
the services provided by the cluster coordinators. Yet, these individuals had strong relationships
with the SHG members and represented a competitive advantage that HiH had the opportunity to
leverage if it could redirect their energies toward other value-added activities.
THE ROAD AHEAD
On her drive to Chennai, Sankar contemplated HiHs rapid growth and the challenges ahead.
The future lay in expansionthe organization hoped to create 1.2 million jobs over the next
three years. Was converting Hand in Hands programs to sustainable businesses the right
approach? If so, how should Sankar and her team balance the trade-offs between building
sustainability and supporting the clients it was dedicated to serving?
DISCUSSION QUESTIONS
1.) What is the market failure HiH was founded to address? What problems do its clients
face and why have they not been solved by government and market forces?
2.) Evaluate HiHs approach. What did it do differently from other organizations (and how)?
3.) Evaluate HiHs portfolio of products and services. What would you change? Are the
various services offered by the organization complementary?
4.) Evaluate HiHs goal of making all five of its main programs sustainable by 2010. Given
the organizations development mission, is this an appropriate goal? Are some programs
more appropriate targets for sustainability than others?
5.) What are the advantages and disadvantages of the various sources of funding available to
Hand in Hand (e.g., equity investment, loan collateralization, charitable contributions)?
6.) Evaluate the trade-offs between the financial system and poverty lending models. Which
is a more appropriate approach for HiH, considering its competencies?
7.) Given the economics of HiHs microfinance initiative, is it feasible for HiH to strive to
operate this program on a break-even basis? Under what set of assumptions is this
possible?
8.) Evaluate the management techniques Percy Barnevik applied to HiH? Which of these are
appropriate for HiHs context? Which should be further modified or abandoned?
9.) Is microfinance enough?

Hand in Hand E372

p. 15

Exhibit 1
Map of India

Source: Courtesy of the University of Texas Libraries, the University of Texas at Austin.

Hand in Hand E372

p. 16

Exhibit 2
Overview of Hand in Hand
Hand in Hands aim is to eliminate poverty through an integrated community development
program.
Our work is founded on the concept of help to self-help, through participation at the grassroots
level. We believe there should be social, economic, and environmental sustainability in
everything we do, and our work is aligned with the UN Millennium Development Goals.
Vision
Hand in Hands vision is a world free of extreme poverty and child labor.
Mission
Our mission is to work through education, employment, income generation, and empowerment
for the eradication of child and bonded labor by mainstreaming deprived children into regular
schools.
We also work for the empowerment of women by creating micro-enterprises and by promoting
income-generating activities and jobs for growth.
Additionally, Hand in Hand focuses on strengthening grassroots involvement and democracy by
setting up Citizens Centers.
Finally, we promote health and hygiene among rural populations, and work to protect the local
environment through watershed projects and solid waste management interventions.
Principles

Pro-poor, bottom-up approach

Participatory learning
Gender mainstreaming in all activities
Transparency and accountability in all actions
Working in coordination with local institutions

Source: Courtesy of Hand in Hand (see http://www.hihseed.org/what-we-do/our-vision-and-mission/).

Hand in Hand E372

p. 17

Exhibit 3
Growth in Hand in Hand Clients

350,000

Individual Clients

300,000
250,000
200,000
150,000
100,000
50,000
2003

04

05

06

SHG Women

07

2008

Loans

Source: Data provided by Hand in Hand.

2,000

18,000

1,800

16,000

1,600

14,000

Employees

1,400

12,000

1,200

10,000

1,000

8,000

800

6,000

600
400

4,000

200

2,000

2003

04

Source: Data provided by Hand in Hand.

05

06

07

2008

Volunteers

Exhibit 4
Growth in Headcount

Hand in Hand E372

p. 18

Exhibit 5
Condensed Income Statement: For the Years Ending March 31, 2003-2008
K INR 000
2003
Grant revenue from foreign sources
Grant revenue from Indian sources
Donation
Interest on fixed deposit
Interest on microloans
Bank interest
Other income
Total Revenue

2004

2005

2006

2007

2008

18,800
329
254
312
1,753
21,448

49,399
1,018
366
806
1,686
1,130
4,195
58,599

4,369
16,191
940
21,499

3,917
46,184
1,970
52,071

6,528

Administration
Program
Depreciation
Total Expenses

Excess of revenue over expenses

(51)

Source: Data provided by Hand in Hand.

Exhibit 6
Balance Sheet: For the Years Ending March 31, 2003-2008
K INR 000
2003
ASSETS
Cash and bank balances
Microloans to SHG members
Advances
Total Current Assets
Investments
Fixed Assets
Gross value
Less depreciation
Net value
Total Assets
LIABILITIES AND CAPITAL
Current liabilities
Unsecured loan
Total Liabilities
Initial contribution
Capital grant: corpus
Capital grant: fixed assets
Grant: revenue
Revenues and surplus
Total Equity
Total Liabilities and Equity

Source: Data provided by Hand in Hand.

2004

2005

2006

2007

2008

25,626
5,821
1,082
32,530
30,812

94,602
36,943
7,472
139,017
227,140

8,794
(940)
7,854
71,196

28,012
(1,970)
26,042
392,199

1,264
2,293
3,557

2,773
44,800
47,573

7
210,000
36,310
90,815
7,483
344,616

392,189

7
30,000
8,017
28,649
966
67,639

71,196

Hand in Hand E372

p. 19

Endnotes
1

Annual Report 2007-2008, Hand in Hand and SEED,

http://www.hihseed.org/upload/other/PDF/Annual_reports/Hand_in_Hand-Annual_Report_2007-2008.pdf
(December 1, 2009).
2
All quotations are from interviews conducted by the authors, unless otherwise cited.
3
Percy Barnevik, Wikipedia.org, http://en.wikipedia.org/wiki/Percy_Barnevik (December 4, 2009).
4
David Brindle, No Nonsense, The Guardian, January 23, 2008,
http://www.guardian.co.uk/society/2008/jan/23/internationalaidanddevelopment.voluntarysector (December 1,
2009).
5
Annual Report 2007-2008, op. cit.
6
Our Vision and Mission, Hand in Hand, http://www.hihseed.org/what-we-do/our-vision-and-mission/ (December
1, 2009).
7
Review of Child Labor, Education and Poverty Agenda, India Country Report, 2006, Global March Against
Child Labor, http://www.globalmarch.org/images/india-report.pdf (December 1, 2009).
8
Ibid.
9
Worst Forms of Child Labor Data: India, Global March Against Child Labor,
http://www.globalmarch.org/worstformsreport/world/india.html (December 1, 2009).
10
Data provided by Hand in Hand.
11
Ibid.
12
Annual Report 2007-2008, op. cit.
13
A self-help group is a group of 10 to 25 members, usually established by a microfinance institution with the
purpose of reviewing the status of its members loan payments, collecting savings from members, and guaranteeing
loans.
14
Annual Report 2007-2008, op. cit.
15
Country Profiles: India, Business for Millennium Development, www.b4md.com.au/country.asp (December 1,
2009).
16
Speech by Her Excellency The President of India, Shrimati Pratibha Devisingh Patil, at the Inauguration of the
Platinum Jubilee Celebrations of Bank of Maharashtra, November 26, 2009,
http://presidentofindia.nic.in/sp261109.html (December 1, 2009).
17
What Is Microcredit? Grameen Bank, October 2009, http://www.grameeninfo.org/index.php?option=com_content&task=view&id=28&Itemid=108 (December 1, 2009).
18
Isobel Coleman, Defending Microfinance, Fletcher Forum of World Affairs, Winter 2005.
19
Brindle, op. cit.
20
Sukhwinder Singh Arora, The Future of Microfinance in India: The Microfinance India Conference and a Look
at an Expanding Market, United Nations Capital Development Fund, 2005,
http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_06/news_india.php (December 2, 2009).
21
Asia Microfinance Analysis and Benchmarking Report 2008, MIX and Intellecap, March 2009,
http://www.themix.org/sites/default/files/2008%20Asia%20Microfinance%20Analysis%20and%20Benchmarking%
20Report.pdf (December 3, 2009).
22
According to estimates by the U.S. Central Intelligence Agency World Factbook, Bangladesh had a population of
156 million in 2009, while India was home to 1.17 million. See https://www.cia.gov/library/publications/the-worldfactbook/ (December 1, 2009).
23
Ibid.
24
Sukhwinder Singh Arora, op. cit.
25
India: Microfinance and Financial Sector Diagnostic Study, The Microfinance Initiative for Asia, June 2008, p.
xi.
26
Ibid.
27
Ibid.
28
Ibid.
29
Matthew Swibel, Microfinance Fever, Forbes, December 13, 2007,
http://www.forbes.com/forbes/2008/0107/050.html (December 3, 2009).
30
Shaoni Shabnam and Sony Pellissery, Is the Social in Microfinance Washed Away with Globalization? Tata
Institute of Social Sciences, http://atlmri.googlepages.com/pptforconference.ppt#271,13 (December 3, 2009).
31
Frequently Asked Questions on NBFCs, Reserve Bank of India,
http://www.rbi.org.in/scripts/FAQView.aspx?Id=71 (December 3, 2009).

Hand in Hand E372

32

p. 20

History of ICICI, ICICI Bank, http://www.icicibank.com/pfsuser/aboutus/newsroom/history/history.htm

(December 3, 2009).
33
SKS Microfinance, http://www.sequoiacap.com/india/sks-microfinance (December 3, 2009).
34
SKS Microfinance, World Economic Forum, http://www.weforum.org/en/fp/VikramAkula/index.htm (December
3, 2009).
35
About SKS-Financials, SKS Microfinance, http://www.sksindia.com/financialhistory.htm (December 3, 2009).
36
Ibid.
37
Nayanima Basu, Microfinance Growing, but Needs More Commercial Funding, India eNews,
http://www.indiaenews.com/business/20061128/30350.htm (December 3, 2009).
38
About SKS-Focus Area and Demographic, http://www.sksindia.com/focusarea.htm (December 3, 2009).
39
Ibid.
40
About SKS-Background, SKS Microfinance, http://www.sksindia.com/background.htm (December 3, 2009).
41
Sequoia Invests in SKS Microfinance, SKS Microfinance, March 29, 2007.
http://www.sksindia.com/07mar29.htm (December 3, 2009).
42
Mahalakshmi Hariharan, Sequoia Capital Ventures into Microfinance, DNA, March 29, 2007,
http://www.dnaindia.com/money/report_sequoia-capital-ventures-into-microfinance_1087788 (December 3, 2009).
43
Ibid.
44
Shabnam and Pellissery, op. cit.
45
Srinkant Datar, Marc Epstein, and Kristi Yuthas, In Microfinance, Clients Must Come First, Stanford Social
Innovation Review, Winter 2008.
46
Brindle, op. cit.
47
Ibid.
48
Annual Report 2007-2008, op. cit.
49
Bob Nelson, Great Leaders Inspire Action, Bizjournals, 2000,
http://www.bizjournals.com/extraedge/consultants/return_on_people/2000/05/01/column77.html (December 3,
2009).
50
Annual Report 2007-2008, op. cit.