The need to scale up mi­crofinance to provide fi­nancial services to the poor became vividly and painfully clear to me wh­en I was working in the villages of Andhra Pradesh in the 1990s. I had returned to work in India after graduating from college in the US in 1990. I spent three yea­rs with a local NGO that served rural communities and was part of a government-funded agricultural lending programme in 30 villages. I met with borrowers each week after travelling down dirt roads into the hinterland on my motorbike.

During my time working in India’s villages, I saw firsthand that microfinance was a very important tool to help the poor. It put control squarely in their hands and was more powerful than one-time donations of cash, goods or food. I saw how microfinance enabled people to start and expand micro-enterprises and earn income for their families.

One day I came across a poor woman with a weathered face and purple sari from a nearby village that was not included in our programme. “Can you start this programme in my village?” she asked me. I told her with regret that we did not have the funding to expand beyond the 30 villages our programme served.

She answered, “Am I not poor too? Do I not deserve a chance to get my family out of poverty?” Those words changed my life. Her question made me realise that it was unfair and unjust that our microfinance programme could not serve all the poor people who needed financial services to help ascend from poverty. There had to be a way to scale microfinance beyond the constraints of how it was typically practised then. Many existing MFIs were doing a lot of good, but with about 800 million poor people in India alone, “good” wasn’t good enough.

After a lot of pondering, studying and planning, I hit on a simple but powerful idea: why not make the practice of microfinance operate more like a business that would generate income, sustain itself, and even make enough money to attract commercial capital? That way, funding to sustain and grow microfinance would continue to come in, even as more borrowers were being served.

From working as a loan officer myself, I knew there were three major problems with the way microfinance was practised. First, there was never enough funding for programmes, a problem embodied by the plea from the woman in the purple sari.

Second, operations were highly inefficient and haphazard. Borrowers had different repayment schedules, from periodic payments to one lump sum at the end of harvest. Meetings to collect payments and distribute loans were scheduled for evenings — an unsafe time for loan officers carrying cash on motorbikes. Repayments were in different amounts, involving handfuls of coins and crumpled bills.

Third, the cost of business was too high. Transaction costs of administering a huge number of tiny loans were expensive and the margins were too low. Microfinance institutions laboriously recorded transactions by hand in unwieldy ledgers — a process prone to errors and inefficiency.

There had to be a way of tackling these obstacles to scaling microfinance and eventually I found some answers. Turning microfinance into a commercial, self-sustaining venture seemed to be a powerful solution.

I did not originally intend to start my own microfinance institution. But in early 1997 when I approached microfinance sector leaders about the idea of commercial microfinance, no one was very interested. It became clear that I would have to start my own organisation. The idea for SKS was born.

Though I had a vision for commercial microfinance, I adopted the tried and tested group-lending model of the Nobel Peace Prize-winning Grameen Bank in Bangladesh. In late 1997 I travelled to Bangladesh for a two-week training session with Grameen and absorbed as much as I could.

Many elements of the Grameen model are the foundation of SKS today. SKS lends to sub-groups of five women who are part of a larger group of women in one village. The five guarantee each other’s loans, which are only for income-generation and not for consumer goods like gold or televisions.

The five borrowers must approve the loan size for each member. In fact, they usually do not approve the full amount, thus ensuring that members of their group can comfortably repay loans. Loan sizes start small and increase incrementally each year that loans are repaid on time. Because of a careful and disciplined process and periodic loan utilisation checks, on-time repayment rates at SKS have historically exceeded 98 per cent.

With help from a small loan our borrowers have launched all kinds of successful micro-enterprises, from opening a home-front kirana store to raising goats and selling milk. The poor are incredibly entrepreneurial and given the right tools, they can help themselves out of poverty.