CHASING NEW OPPORTUNITIES Cos Seek Backdoor Entry Into Banking Via MFIs
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.