MICROCAPITAL STORY: Rickshaw Operators in India Opting to Borrow from Bandhan and other Microfinance Institutions

An article in the Hindustan Times reports that a growing number of microfinance institutions (MFIs) are lending to rickshaw operators and competing with local dealers, owners who rent their rickshaws to pullers. This growth is fueled by the fact that many dealers are obtaining very high returns on investment (up to 84 percent per annum), while MFIs are offering cheaper loans and promoting ownership.

The total cost of opening and operating a rickshaw business is approximately USD 340 the first year, which includes the cost of the rickshaw, basic maintenance and repairs, a passing license, a pulling license, and renting space to keep the rickshaw. Operating costs drop to about USD 213 in subsequent years.

The average rickshaw puller who rents from a dealer pays about USD 0.70 per day as rent to the dealer, or roughly USD 255 per year*. This means that, in the amount that pullers are paying to a dealer just in rent, they could afford to buy their own rickshaw (USD 127) in less than five months.

One rickshaw puller in West Delhi was quoted in the Times article: “I make about 120 rupees (USD 3.06) a day from which I pay off the rent.”

Dealers make anywhere from USD 15 to 107 (INR 600 to 4200) per year on a one-time investment of USD 127 (INR 5000). Thus, the rate of return can be anywhere from 12 to 84 percent per annum. Though dealers deny that they make so much profit, the average return is toward the higher end.

Organized MFIs are increasingly challenging these small dealers. Bandhan, for example, a Kolkata-based MFI, offers loans at an interest rate of 12.5 percent and has given out nearly 47,000 loans to help people purchase their own rickshaw. Under Bandhan’s plan, a USD 127 rickshaw would ultimately cost the borrower USD 143 (INR 5,625), and would likely be fully paid off in just one year.

Bandhan, founded in 2002, has 411 branches in India, 449,000 active borrowers, and a gross loan portfolio of USD 30 million. Every month, Bandhan receives about USD 11.7 million (INR 460 million or 46 crore) to serve 76,000 new clients. It has USD 31.7 million in total assets, a 9.1 percent return on assets, and a 131.2 percent return on equity. Though all of Bandhan’s borrowers are women (they are considered more creditworthy than men), women can borrow on behalf of men.

It seems that when given the choice between paying an institution like Bandhan USD 3 (INR 125) weekly to pay off a loan in 52 weeks versus paying a dealer USD 3 to 6 (INR 125 to 245) weekly only as rent, many rickshaw operators prefer to do business with MFIs.

*This figure was calculated by multiplying USD 0.70 by 365. However, rickshaws do not typically run every day or even throughout the year.

Additional Resources:

Hindustan Times: “Sensex too high? Try investing in a cycle rickshaw”

Microfinance Information eXchange: Bandhan (Bandhan (Society and NBFC)): http://www.mixmarket.org/en/demand/demand.show.profile.asp?token=&ett=1526

Bloomberg.com: Currency Calculator