HOW MICROFINANCE GOT ITS MOJO BACK
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