CHAS­ING NEW OP­POR­TU­NI­TIES Cos Seek Back­door En­try Into Bank­ing Via MFIs

The Economic Times - - Money & Banking -

Grameen Amer­ica, a not-for­profit mi­cro­fi­nance or­gan­i­sa­tion founded by No­bel Prize win­ner Muham­mad Yunus of Bangladesh for help­ing women liv­ing in poverty in the US, re­ceives 360-de­gree sup­port from a di­verse group of Amer­i­can cor­po­ra­tions such as Ap­ple Inc, Bank of Amer­ica, Google Inc, Mor­gan Stan­ley, and Wells Fargo Com­mu­nity Lend­ing & In­vest­ments. The for-profit mi­cro­fi­nance com­pa­nies in In­dia, by con­trast, have been lon­ers in their own back­yard. They have rarely got funds from banks; those a bit for­tu­nate got fund­ing from over­seas pri­vate equity funds only to find them­selves un­der mount­ing pres­sure from in­vestors to boost re­turns. Lo­cal in­vestors were hardly in­ter­ested in the busi­ness of mi­cro-lend­ing in the last decade.

But that is chang­ing. The sec­tor that makes credit ac­ces­si­ble to the poor with­out col­lat­eral has started be­com­ing more rel­e­vant to lo­cal cor­po­ra­tions and in­sti­tu­tional in­vestors, such as banks, with Re­serve Bank of In­dia award­ing eight out of 10 small fi­nance bank li­cences to mi­cro­fi­nance com­pa­nies, val­i­dat­ing their ca­pa­bil­ity to de­liver on the field. RBI has also al­lowed MFIs to work as busi­ness cor­re­spon­dents, cre­at­ing a large cross-sell­ing po­ten­tial and op­por­tu­ni­ties for in­vestors to lever­age their equity bet­ter.

Since Jan­uary, two pri­vate sec­tor banks — IDFC and DCB — pur­chased di­rect equity in MFIs and one more is be­lieved to be ex­plor­ing sim­i­lar pos­si­bil­i­ties. Ker­ala-based gold loan non­bank­ing fi­nan­cial com­pany Manap­pu­ram Fi­nance ac­quired 71% stake in Asir­vad Mi­cro­fi­nance last year.

Banks as well as cor­po­rates are com­ing in as equity in­vestors as they look to seize op­por­tu­ni­ties cre­ated by MFIs’ last-mile credit de­liv­ery skills, says SKS Mi­cro­fi­nance pres­i­dent Dilli Raj. “The dis­tri­bu­tion net­work strength that MFIs en­joy gives huge cross-sell­ing op­por­tu­ni­ties,” he says, sug­gest­ing MFIs as busi­ness cor­re­spon­dents could do de­mand ag­gre­ga­tion for prod­ucts such as consumer durables or even two-wheelers al­low­ing both lend- ers and pro­duc­ers to cash in.

Cor­po­rates shed their ap­a­thy to­wards MFIs af­ter 2011 when RBI started reg­u­lat­ing the sec­tor, pro­vid­ing sta­bil­ity to it. The likes of Ba­jaj Hold­ings, Tata Cap­i­tal Growth Fund and elec­tri­cal equip­ment maker Havells have come on board as in­vestors in sev­eral MFIs in the last five years.

Ananya Birla, daugh­ter of in­dus­tri­al­ist Kumar Man­galam and Neerja Birla, in­vested a tiny part of her fam­ily for­tune to build Svatantra Mi­crofin, which fa­cil­i­tated loans of ₹ 186 crore to 82,171 bor­row­ers within four years of its for­ma­tion. The Birla scion now dreams of con­vert­ing Svatantra into a small fi­nance bank. With mi­cro­fi­nance com­pa­nies show­ing the po­ten­tial to grow un­hin­dered at least for the next five years, more cor­po­rates and banks may look to part­ner them. The sec­tor grew at 50%-plus over the last two fis­cals tak­ing the cu­mu­la­tive loan book size to over ₹ 42,000 crore. The mi­cro-lenders are gen­er­at­ing cash sur­plus and there is a sense of eco­nomic sta­bil­ity.

MFIs have pen­e­trated just about one­fifth of the mar­ket, leav­ing vast op­por­tu­nity for ev­ery stake­holder, says Manoj Kumar Nam­biar, pres­i­dent of Mi­cro­fi­nance In­sti­tu­tions Net­work, or MFIN, a self-reg­u­la­tor that has de­vel­oped a set of code of con­duct for mem­bers to fol­low. “(They have) re­turn on equity (ROE) greater than 15%, yearly growth of over 50% and so­cial im­pact… evok­ing in­ter­est from the main­stream cor­po­rate sec­tor,” Nam­biar says.

The num­ber of ben­e­fi­cia­ries of loans from mi­cro­fi­nance in­sti­tu­tions stands at 2.88 crore. The av­er­age loan size for each ben­e­fi­ciary has also grown to ₹ 17,917 from ₹ 14,409 last year. MFIs’ out­stand­ing bor­row­ings stood at ₹ 36,439 crore at the end of De­cem­ber 2015, rep­re­sent­ing an 86% growth, ac­cord­ing to statis­tics re­leased by MFIN.

The story was vastly dif­fer­ent even half-a-decade back. L&T Fi­nance was the sole mem­ber of In­dia Inc to ex­plore op­por­tu­ni­ties in mi­cro-lend­ing since 2008. No other cor­po­rate was ready to take the risk in a sec­tor that was not reg­u­lated and was largely de­pen­dent on over­seas pri­vate equity funds for growth. An ad- min­is­tra­tive or­di­nance by the Andhra Pradesh govern­ment in 2010 to stop lo­cal MFIs from re­cov­er­ing money from bor­row­ers had led to a col­lapse of many com­pa­nies and crip­pled oth­ers.

A big shift took place in the year that fol­lowed. RBI en­tered the scene with its set of rules for MFIs reg­is­tered as non­bank­ing fi­nance com­pa­nies. Reg­u­la­tory clar­ity, code of con­duct and lend­ing on the ba­sis of bor­row­ers’ credit score were some of the fac­tors, be­sides eco­nomic rea­sons, that un­locked the lo­cal in­vest­ment flood­gate into the in­dus­try.

Mi­cro­fi­nance also qual­i­fies as pri­or­ity sec­tor lend­ing and, hence, banks are keen to back mi­cro-lenders. Not only have they turned more lib­eral in lend­ing to MFIs, those in the pri­vate sec­tor are even buy­ing di­rect stake in many in­sti­tu­tions. IDFC Bank ac­quired a 9.99% stake in ASA In­ter­na­tional In­dia Mi­cro­fi­nance for about ₹ 8.5 crore in Jan­uary, the first in­vest­ment by a lender. Two months later, DCB Bank took 5.81% equity in­ter­est in An­na­purna Mi­cro­fi­nance for ₹ 9.99 crore. “Mi­cro­fi­nance has be­come a good as­set class with low de­fault rate and, hence, a good source of di­ver­si­fi­ca­tion through bulk lend­ing,” says Ab­hi­jit Roy, man­ag­ing di­rec­tor at Uni­tus Cap­i­tal, which helps MFIs raise cap­i­tal.

The cap­i­tal that flowed into the sec­tor is help­ing it to be back on a ro­bust growth path. It’s a win-win for all stake­hold­ers. Bor­row­ers get pro­tected from mo­nop­o­lis­tic ex­ploita­tion by money lenders, banks and com­pa­nies get ac­cess to a big­ger mar­ket, which they could have never reached, and in­vestors get the cap­i­tal­is­tic share of profit from the poor.

Ujji­van raised $96 mil­lion in March last year from a group of over­seas in­vestors such as US’s CDC and Ba­jaj Hold­ings, one of In­dia’s top 20 busi­ness houses. Tata Cap­i­tal Growth Fund, In­dia’s lead­ing pri­vate equity fund, QRG En­ter­prises, a hold­ing com­pany for Havells, and Val­labh Bhansali in­vested in Janalakhsmi in 2013. “Many cor­po­rates are keen to have a bank­ing li­cence and they feel that with mi­cro­fi­nance ex­po­sure un­der their belt, get­ting a bank­ing li­cence could be eas­ier,” Roy said.

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