The Economic Times - - Special Feature -

The aroma of f lam­ing gin­gelly oil wafted through the air as 16 women em­ploy­ees of Thris­sur­based Global Chips & Foods braced them­selves for an­other long day at work. A black wooden board, hung on a re­cently white-washed wall, listed out their day’s chores: 20 kilo­grams of tapi­oca chips and 20 kgs potato chips.

The women — wear­ing ma­roon uni­forms and white head-caps — were all rar­ing to go. Their “com­pany” had just se­cured or­ders from over a dozen su­per­mar­ket chains, apart from count­less re­tail out­lets across Ker­ala and a few buy­ers from the Gulf and even Thai­land. Global Chips, started with an ini­tial loan of ₹ 5,000 from ESAF Mi­cro­fi­nance nine years ago, logs a monthly pro­duc­tion of 65,000 pack­ets (of fries), sales turnover worth ₹ 3 lakh and profit of around ₹ 70,000.

“Mi­cro­fi­nance helped me build my com­pany. It pro­vided me with money when­ever I wanted it,” says 44-year-old Sindhu Sethu­mad­ha­van, the pro­pri­etor of Global Chips, who pays ₹ 1,410 ev­ery week on her out­stand­ing mi­cro­fi­nance loan of ₹ 1.5 lakh.

Sethu­mad­ha­van is part of a grow­ing tribe of small en­trepreneurs whose busi­nesses were seeded by mi­cro­fi­nance. This clan had shrunk in the wake of the Andhra Pradesh (AP) mi­cro­fi­nance cri­sis of 2009-10, trig­gered by a se­ries of bor­rower sui­cides, al­legedly on ac­count of un­scrupu­lous MFI (mi­cro­fi­nance in­sti­tu­tions) prac­tices of charg­ing high in­ter­est rates and ex­ces­sive lend­ing, lead­ing to in­creased in­debt­ed­ness among poor bor­row­ers, and turn­ing to co­er­cion to re­cover those loans.

The in­dus­try it­self took some hard knocks. As­se­tun­der­man­age­ment(out­stand­in­gloans or gross loan port­fo­lio) fell ₹ 3,000 crore to close at ₹ 20,500 crore in 2011-12. MFIs that had large-scale oper­a­tions in AP suf­fered the most. Non-re­pay­ment of loans by bor­row­ers (at the be­hest of politi­cians and other com­mu­nity lead­ers) re­sulted in AP port­fo­lios of most MFIs de­clin­ing by 35%.

“Post the AP cri­sis, there was a mas­sive over­haul­ing of prac­tices. MFI were brought un­der strict rules and reg­u­la­tions,” says Bindu Ananth, chair of IFMR Hold­ings, a lead­ing fi­nan­cial in­clu­sion plat­form.

Mi­cro­fi­nance, which was skulk­ing in the cor­ners of that un­prece­dented cri­sis, is now out and about. Of the 10 small fi­nance bank li­cences given by RBI in 2015, eight were bagged by MFIs. And a bunch of MFIs are now pre­par­ing to launch IPOs.

“The green­shoots you’re see­ing now is a fall­out of the AP cri­sis,” says Ananth.

One key rea­son for the resur­gence of mi­cro­fi­nance is the pres­ence of dili­gent bor­row­ers likeSethu­mad­ha­van,whosaysmi­cro­fi­nance loans should not be used for per­sonal pur­poses and were drawn by the strict mea­sures put in place. They helped the in­dus­try re­build faith and con­fi­dence among clients.

As it hap­pened, the im­me­di­ate af­ter­math of the cri­sis was painful.

“There was a lot of ex­ter­nal in­ter­ven­tion then. We could not even get in touch with bor­row­ers who were will­ing to re­pay,” rem­i­nisces S Dilli Raj, the CFO of SKS Mi­cro­fi­nance, which suf­fered the most dur­ing the AP cri­sis. SKS wit­nessed a near-70% slump in its loan book when it was forced to exit AP.

“We had to shrink our loan book to make up for our losses in AP. Out of the ₹ 1,496 crore we loaned out to bor row­ers in AP, we could only col­lect ₹ 130 crore. We had to write off loans worth about ₹ 1,300 crore over sev­era l quar­ters,” Dilli Raj adds. The AP govern­ment was the first to re­view and cen­sure. The AP State Govern­ment Or­di­nance im­posed strin­gent op­er­at­ing guide­lines — mainly tight­en­ing screws around lend­ing rates and col­lec­tion mech­a­nisms em­ployed by MFIs till then. Mean­while, the RBI was wait­ing for t he ‘Malegam Com­mit­tee Re­port on Mi­cro­fi­nance’ be­fore list­ing out its own set of guide­lines. The reg­u­la­tor turned in its first set of reg­u­la­tions in 2011 deem­ing for-profit MFIs as NBFC-MFIs (a new cat­e­gory of non­bank­ing fi­nance com­pa­nies). It also di­rected all MFIs to main­tain suf­fi­cient ‘net owned funds’ and struc­ture port­fo­lios with 85% of lend­ing to “qual­i­fy­ing as­sets.” In sub­se­quent amend­ments, the reg­u­la­tor put in place lend­ing lim­its per bor­rower, capped in­ter­est rates, em­ployed mea­sures to re­duce ex­ces­sive in­debt­ed­ness, ex­plic­itly stated ten­ure of loans and worked out loan re­pay­ment sched­ules. (See RBI Mea­sures…). Th­ese moves seemed like a bit­ter pill then, but were the ideal rem­edy for the in­dus­try’s ills. “Prior to the AP cri­sis, there were no rules gov­ern­ing mi­cro­fi­nance in­dus­try. There were no mod­els or ref­er­ence points in terms of lend­ing rates or how much we could lend,” says Equitas’ founder PN Va­sude­van, adding, “th­ese man­dates came only af­ter the cri­sis; it gave the in­dus­try a blue­print to op­er­ate.”

The In­dian mi­cro­fi­nance in­dus­try is dom­i­nated by NBFC-MFIs with an 88% mar­ket share. Th­ese in­sti­tu­tions have been grouped on the ba­sis of their ‘gross loan port­fo­lio’ (GLP). As per Mi­cro­fi­nance In­sti­tu­tions Net­work (MFIN) data, there are 18 small MFIs with GLP less than ₹ 100 crore, an­other 18 medium-sized MFIs with GLP be­tween ₹ 100 crore and ₹ 500 crore and 20 large MFIs with loan book above ₹ 500 crore. Large MFIs ac­count for nearly 90% of in­dus­try GLP.

Even though the num­ber of ac­tive MFIs has fallen from about 70 in the pre AP cri­sis era to just about 55 cur­rently, the in­dus­try loan book has leapfrogged 130% to ₹ 47,200 crore in 2014-15. Av­er­age loan ticket size (first dis­burse­ment) has also grown from ₹ 14,800 to about ₹ 18,000 cur­rently, ac­cord­ing to in­dus­try sources (see Back With a Bang).

Post the cri­sis, MFIs started spread­ing out their ac­tiv­ity to newer ter­ri­to­ries. In­stead of fo­cus­ing on cap­tive bor­row­ers (which was banned by RBI when it in­tro­duced the ‘twolen­der rule), the in­dus­try started ap­proach­ing newer set of bor­row­ers. This strat­egy widened their cus­tomer base. Bor­row­ers too, warmed up to MFIs they had no other source to get non-col­lat­er­alised debt.

“Loan port­fo­lio of top 40 MFIs would tip ₹ 70,000 crore by March 2017,” pre­dicts Kr­ish­nan Si­tara­man, se­nior di­rec­tor, Crisil Rat­ings. “There’s ro­bust­ness in the sys­tem now.”

MFIs, for their part, are keen to beef up their loan books as only that would in­crease their prof­itabil­ity. Prior to the AP cri­sis, MFIs used to lend at rates as high as 40%. This, how­ever, ended im­me­di­ately af­ter the cri­sis. Now, MFIs can charge a mar­gin of 10% and add up cost of funds (mar­gin of 10% + cost of funds) as in­ter­est on their loans. This for­mula pegs rates at 23–24%. “MFIs are try­ing to re­duce their costs and mark up prof­itabil­ity by in­creas­ing loan vol­umes. This is turn­ing out to be a good strat­egy as a few large funds have man­aged to bring down their rates to as low as 19–19.5%,” says Ananth.

The ris­ing prof­itabil­ity of large MFIs like SKS and Equitas is an in­di­ca­tion that the in­dus­try has started cap­tur­ing ‘economies of scale’, driv­ing up loan vol­umes. The large MFIs are al­ready see­ing a jump in their op­er­at­ing mar­gins.

Af­ter list­ing huge losses in 2012 and 2013, SKS turned around in 2014 (post write-off of bad loans) when it re­ported a PAT of ₹ 70 crore. Last year, it re­ported prof­its of ₹ 187 crore on rev­enues of ₹ 724 crore.

Equitas Hold­ings, now on the road to be­com­ing a pub­licly listed com­pany, de­clared an ad­justed PAT of ₹ 107 crore last fis­cal. The ₹ 2,170 crore Equitas pub­lic is­sue — which closed bids on April 7 — was over­sub­scribed 17 times. An­other MFI, Ujji­van Fi­nan­cial Ser­vices, is also pre­par­ing for a pub­lic is­sue to raise about ₹ 650 crore.

In­dus­try watch­ers ex­pect more listings in the months to come as MFIs that have re­ceived ‘in-prin­ci­ple li­cence’ to start small fi­nance banks (SFBs) are re­quired to re­duce for­eign share­hold­ing to 49%. Apart from Ujji­van and Equitas, Disha Mi­crofin, ESAFMi­cro­fi­nance,Janalak­sh­miFi­nan­cial Ser­vices, Sury­o­day Mi­cro­fi­nance, Utkarsh Mi­cro­fi­nance and RGVN North East Mi­cro­fi­nance have re­ceived the reg­u­la­tor’s nod to op­er­ate as SFBs.

“We’re see­ing a lot of MFIs rais­ing cap­i­tal. Even banks are not re­luc­tant lenders any­more. They’re buy­ing se­cu­ri­tised as­sets un­der their PSL (pri­or­ity sec­tor lend­ing) man- date now,” says Vishal Me­hta, co­founder of Lok Cap­i­tal. “Even op­por­tunis­tic in­vestors, who aban­doned MFIs dur­ing the AP cri­sis, are com­ing back now.”

The mi­cro­fi­nance in­dus­try it­self pulled up its socks post AP. Ac­cord­ing to Me­hta, the in­dus­try is reap­ing ben­e­fits of en­hanced col­lec­tion ef­fi­ciency, which is cur­rently up­wards of 95%. “A lot of tech­nol­ogy is now be­ing used to stream­line and make the col­lec­tion process more ef­fi­cient. Al­most all lead­ing MFIs use dig­i­tized data… Man­ual en­tries have gone out com­pletely at least at the ground level,” he says.

The in­dus­try is also mak­ing good use of credit bu­reaus to weed out delin­quent bor­row­ers and re­strict over-lend­ing to bor­row­ers. As per RBI rules, a bor­rower should not get loans from more than two MFIs. The in­dus­try keeps a tab on this rule (‘two-lender rule’) by re­fer­ring to credit bureau records.

“MFIs are us­ing our ser­vices for all loans dis­bursed at their end. We main­tain records of bor­row­ers who are a part of a clus­ter or self-help group as well,” says Har­shala Chan­dorkar, COO of CIBIL.

Deep in­dus­try-level fo­cus around “dis­ci­plined lend­ing” is yield­ing pos­i­tive re­sults as only 1% of loan in­stal­ments are ’30-dayspast-due’ cur­rently. Over 98% of loans are dis­bursed within the due date, say in­dus­try track­ers. “De­faults are spo­radic when you com­pare with NPAs in the bank­ing sys­tem,” says Paul Thomas, founder – MD of ESAF Mi­cro­fi­nance. “In­dus­try NPA has fallen from 0.8% to 0.3% cur­rently. MFIs are very care­ful while dis­burs­ing loans. Some of us even in­sist on Aad­har cards to com­plete the KYC process.”

MFIs now un­der­stand port­fo­lio con­cen­tra­tion risk much bet­ter than the pre-cri­sis days. Th­ese days MFIs pre­fer to spread out their loan books across dif­fer­ent states to re­duce ‘state risk’ (or port­fo­lio con­cen­tra­tion risk). MFIs are mov­ing away from time-tested south­ern states to newer ar­eas in North and North East­ern states.

“There’s an ef­fort to move to un­tapped mar­kets now like the North­East. By mov­ing newer re­gions, MFIs are di­ver­si­fy­ing their li­a­bil­i­ties,” says Ananth.

Go­ing ahead, MFIs with in-prin­ci­ple SFB li­cences would ben­e­fit from low-cost fund­ing in the form of de­posits, thus im­prov­ing prof­itabil­ity. An SFB li­cence would also al­low the eight MFIs to of­fer a range of credit prod­ucts to in­di­vid­ual bor­row­ers. But this is not likely to make NBFC-MFIs re­dun­dant.

“Pure MFIs have more link­ages with cus­tomers at the grass­root level. Banks do not have the band­width to match the de­vel­op­ment fo­cus of an MFI,” opines Thomas.

Echo­ing Thomas, Dilli Raj of SKS says: “We’ve not re­ceived SFB li­cence, but that will not af­fect us in a big way. We’ve easy ac­cess to cheap funds as a re­sult of good credit rat­ings. This mar­ket is big enough for NBFC-MFIs to sur­vive.” 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Source - MFIN, Crisil Re­search Source: MFIN Source - MFIN cat­e­gory of NBFCs for MFIs (NBFC-MFI)

net owned funds of 5 crore than 85% of net as­sets in qual­i­fy­ing mi­cro­fi­nance as­sets

of a bor­rower should not be more than 1 lakh

should not ex­ceed 60000 in the first dis­burse­ment cy­cle. In sub­se­quent cy­cles, MFIs can lend up to 1 lakh

be ex­tended with­out col­lat­er­als

loans should not be less than 24 months

be re­paid in weekly, fort­nightly or monthly in­stall­ments — at the choice of the bor­rower

be stan­dard form of loan agree­ment.

card should is­sued to all bor­row­ers. It should state rate of in­ter­est charged and other loan con­di­tions.

in the loan card should be in ver­nac­u­lar lan­guages

than two MFIs should lend to the same bor­rower

nor­mally made at cen­trally des­ig­nated places. House vis­its by field staff should be only in rare cir­cum­stances

— 2 broad for­mu­lae. lend­ing rate based on the for­mula that sets low­est in­ter­est rate

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