Saswati Chakravarty & J Padmapriya, TNN Jun 2, 2005, 12.08AM IST
BANGALORE/HYDERABAD: The movement may well have started two decades ago as a small measure to help the poor. But Indian microfinance institutions (MFIs) have today outgrown their shoes. They are looking at new structures and fresh funds to scale up in a market where demand outpaces supply by miles. Leading MFIs will tell you that there is a full-blown business opportunity waiting to be tapped.
Don't be surprised if many of these organisations, working at grass-root levels, have drawn up blueprints that eagerly set profit targets, margins, return on investment and, hold your breath, attract venture capital, partnerships with leading banks and equity investments. Ramesh Ramanathan, vice-chairman of Sanghamitra (a MFI promoted by Myrada), says: "Today, microfinance is a market opportunity. It is no longer just about doing social good. We need to look at this as an industry."
Though there are no precise figures available, back of the envelope calculations put the microfinance industry's appetite for credit at around Rs 2,00,000 crore. Against this, a meagre Rs 5,000 crore, as recorded in bank outstandings, is flowing through this channel. Incidentally, contrary to bankers' experience, most MFIs see over 95% loan recoveries.
Given the market potential and the need to gain mass, leading MFIs have made the crucial transformation from charitable to profitable, and not without reason.
One, conversion into an NBFC or a local area bank (LAB) gives it credibility by bringing it under the RBI's purview. Two, being a corporate entity enables an MFI to access the capital markets for funds to scale up and not depend solely on bank lending and grants or donations. Three, it can offer a range of products, invest in technology and nurture a profit motive, thereby ensuring growth.
As Mr Ramanathan puts it: "There is no conflict between the objective of reaching the poor and the institutional structure you adopt."
Vijay Mahajan, MD of Basix India, a bellwether MFI, says that there are about 3,000 micro-finance bodies in India, of which seven have become NBFCs structured with investors, around 20 have registered as not-for-profit organisations while 980 are still societies and 2,000 are mutually-aided societies.
Though there are 3,000 players, barely a handful have a significant size of operations. Most of the major MFIs have opted to become profitable. They include Spandana, Share Microfin, Basix India and SKS, all located in Andhra Pradesh. Spandana, the Guntur-based micro-finance body, has disbursed Rs 550
crore so far, while Share has a cumulative disbursement of Rs 950 crore so far.
That is not all. Share Microfin is in the process of tying up a $2m equity investment from Vinod Khosla, who will get a 15-17% stake in the institution. Incidentally, Mr Khosla is shopping for more. Share Microfin is also seeing interest from ShoreBank, Sidbi and IFC. Basix India has equity investors like Hivos Tridos Funds, HDFC, ICICI Bank, IFC while ShoreBank. Spandana is also looking for equity investment.
Share Microfin MD Udaia Kumar told ET, "MFIs are no longer shunned by banks as they are more structured, governed and make profits. It is now important for such institutions to be able to not only cover costs but make margins and declare dividend for shareholders. I have been paying 10% dividend for two years."
Typically, MFIs operate on the self-help group model driven by bank funds. They act as a bridge between bankers and the grass-roots clients. Banks transfer funds to MFIs, who are responsible for disbursal and collection. The intermediation cost could be around 6% of the loan amount. The risk lies completely with the bank as the advances will be reflected in its portfolio.
Banks do not mind taking that risk as they would not be able to service such clients in their normal style of functioning. "We have clients who are illiterate, have no means to produce ration cards, identity proof and even fill an application form and photocopy it. Banks can offer savings and insurance products without the difficulty of servicing such clients," says a player.
However, as banks lend at a pre-determined rate of interest, there are often questions of economic viability. The major players, thus, feel the need for a paradigm shift in the market. Mr Ramanathan says, "We should allow commercial banks to directly move into micro-credit.
It would be better than having thousands of small MFIs. We need to remove the artificial interest cap on priority sector lending. Instead, we should peg it to a bank's profitability. Banks can also better withstand political heat and interference that keep usurious rates thriving."
As the clout and success of micro-finance entities increase, it has also sounded a death knell for traditional moneylenders and loan sharks. "Small loans with some handholding have created entrepreneurs from beggars. We offer loans at 10-15% interest with a very easy repayable period and small instalments. Small amounts are collected on a weekly basis and this ensures compliance," Spandana MD Padmaja Reddy says.
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