Mi­cro Shift

Why new gen­er­a­tion pri­vate banks are ac­quir­ing ex­ist­ing well-run mi­cro­fi­nance com­pa­nies.

Business Today - - CONTENTS - BY ANAND ADHIKARI @anan­dad­hikari

Why new-gen pri­vate banks are ex­pand­ing into mi­cro­fi­nance by ac­quir­ing mi­cro­fi­nance firms

In July last year, IDFC Bank ac­quired South In­dia-based Grama Vidiyal Mi­cro­fi­nance. Many ex­pressed sur­prise at the de­ci­sion as the big­ger chal­lenge for IDFC, pri­mar­ily a lender to com­pa­nies, is cre­at­ing a re­tail plat­form. More clar­ity emerged af­ter two months when Ko­tak Mahin­dra Bank got South-based BBS Mi­cro­fi­nance un­der its fold. Now, In­dus Ind Bank’s an­nounce­ment that it was ex­plor­ing a merger with Bharat Fi­nan­cial In­clu­sion, the erst­while SKS Mi­cro­fi­nance, a much big­ger en­tity than peers with rev­enues of over `1,500 crore, has con­firmed the trend.

Many more bank-mi­cro­fi­nance deals would hit the Street in near fu­ture. The rea­son is sim­ple. Mi­cro­fi­nance can serve many ob­jec­tives of banks. Th­ese in­clude help­ing them lend to the pri­or­ity sec­tor profitably. Also the mi­cro­fi­nance space it­self is un­der­go­ing changes be­cause of low-cost de­liv­ery through use of tech­nol­ogy. The en­tire model of Band­han Bank, the youngest fullfledged bank, for in­stance, is based on mi­cro lend­ing. Sim­i­larly, some li­cences for Small Fi­nance Banks, a new model for serv­ing the bot­tom of the pyra­mid, have also gone to mi­cro­fi­nance in­sti­tu­tions. That is why the bankers too are look­ing at the mi­cro loan op­por­tu­nity. Ac­cord­ing to data, the MFI sec­tor has seen a com­pound an­nual growth rate of over 30 per cent to `72,000 crore­plus in the last three years. There are ex­pec­ta­tions of much higher growth in fu­ture.

Some say the banks’ move is a nat­u­ral pro­gres­sion. For decades, bank­ing was about cor­po­rates. In the 90s, banks moved to re­tail bank­ing as per capita in­come of the coun­try started grow­ing at a fast pace. In fact, many re­tail banks are now reap­ing the fruits of that trans­for­ma­tion, as cor­po­rate bank­ing is al­most stag­nant. Such di­ver­si­fi­ca­tion al­ways pays. They say the emer­gence of new seg­ments such as con­sumer durables, af­ford­able hous­ing and mi­cro­fi­nance lend­ing is bring­ing in more op­por­tu­ni­ties. “Tra­di­tional re­tail bank­ing prod­ucts are highly com­modi­tised with mar­gins un­der pres­sure. The new seg­ments not only of­fer high growth but also higher mar­gins,” says a banker.

Banks are also de­vis­ing a strat­egy to cover the ur­ban poor. Axis Bank re­cently for­ayed into ur­ban mi­cro­fi­nance. This is one area where many pay­ments banks are also fo­cus­ing for trans­ac­tion-re­lated busi­ness. There is a huge ur­ban low in­come pop­u­la­tion where there is a scope for prod­ucts such as re­mit­tances, mi­cro loans, af­ford­able home loans and loans for con­sumer durables.

But many say the new seg­ments are not with­out risk. First, small fi­nance banks are bet­ter placed to ex­ploit the mi­cro loan op­por­tu­nity be­cause of their cost model and ex­per­tise. Sim­i­larly, the banks’ fo­cus has never been on the low value and high vol­ume busi­ness due to higher costs and prob­a­bil­ity of loans go­ing bad. The en­try into small tick size per­sonal loans is a good ex­am­ple (most ex­ited the space af­ter 2008). The mi­cro­fi­nance story is just be­gin­ning. A lot more ac­tion can be ex­pected in the com­ing years. ~

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