Spandana microfinance

After the resounding success of SKS Microfinance, another Microfinance Institution has decided to go public. Hyderabad based Spandana Microfinance has outlined plans to raise about Rs 1,500 crore through an IPO. Proceeds will be used to expand its operations in India and abroad.

India's second largest microfinance firm after SKS, Spandana Microfinance is set to kick off overseas operations in Nepal and China, and aims to use the proceeds from the IPO to build 10 hospitals.

In an interview with CNBC-TV18, Padmaja Reddy, MD, Spandana Spoorthy Microfinance spoke on what the company proposes to do with the proceeds of the IPO.

Below is a verbatim transcript. Also watch the accompanying video.

Q: What do you plan to do with this Rs 1500 crore that you are proposing to raise?

A: We need Rs 1500 crore equity to meet our outreach. Right now we have 15 lakh borrowers in 12 states. We are looking at reaching out about 1.5 crore households in the next three years. This requires us to raise about Rs 40,000 crore loan fund and Rs 1500 crore equity.

We are evaluating various options of raising this money and we know IPO is one of the options. But we are ready to really make addition in terms of when we want to raise this money, how we want to raise the money.

As you know, bankers are convinced about the whole concept of the microfinance programme and they were our partners throughout our journey in reaching our mission of financial inclusion. As you said, the SKS IPO was extremely successful. It tells us that now the capital markets and not just the investors across the globe but even the retailers and even the domestic investors today like they have put their stamp of approving microfinance as a great business idea.

So we need to raise money and fund raise is a kind of work in progress for us. We need to raise money on a continual basis. Before this we started raising money from PE investors and now we are looking at capitalmarkets.

In terms of how we are going to use this money, going forward we would like to really offer customized loan product to our customers. This requires us to have robust technology in place. We would like to invest this money in terms of fine tuning our technology which we already have. We would like to further intensify our management depth, we would like to attract talent and we would also like to use this money to innovate more customer oriented products.

Q: Some of the investors have a question on the risk factors that microfinance institutions per se that they maybe coming under regulatory interventions for instance that since this is extremely sensitive from a socio-political angle. Is that a big risk to your mind?

A: What sort of regulatory risk? We often say that there could be a regulatory risk. If we try to understand what could be the regulatory risk that microfinance organizations have to face, the first thing that comes to my mind is the regulator and also the government and also the politicians, they have been talking about the interest rates and they feel that the microfinance organization are charging exorbitant interest rates.

If we try to really understand the interest rates that are being charged by microfinance organizations, unfortunately we are looking at percentages. And a small loan if you look at what microfinance borrower is paying to microfinance organization, it is nothing but 6 paisa on every Rs 1,000 per day. So even if the regulator wants to put a cap which I welcome fundamentally, which is very good for the industry.

Today like all the concerns, all sort of criticisms, they get completely addressed and it can sanitize the whole industry. So we

will be very happy to get much more regulated and work with an interest rate cap which can sanitize the industry and microfinance organizations become much more efficient and we continue to offer all financial services that we intend to offer to ourborrowers.

Q: I was pointing to a larger argument about the microfinance space and thats the argument of whether a promoter of a microfinance institution should be seeking profits, it may be alright for an investor in MFI or perhaps a banker to be profit motive or profit oriented, do you think personally its alright for a promoter or a founder of an MFI should be seeking profit in that sense?

A: If you see how microfinance organizations began offering financial services to poor people, we never thought like we will really move into a profit taking entity. We started as a non profit making entities while looking at acceptance of poor women and looking at the improvement that we are able to bring in, in terms of their socio economic status we were excited to expand our operations across the districts and across states.

We found that a non profit making entity is not an appropriate structure because in a non profit making structure we were not able to really raise money. So the volumes of operations was very small. There was a necessity for us to move into a better entity wherein we can attract commercial money so that we can increase the volumes of scale so that we become much more efficient and then we can further reduce the interest rates that we are charging to our borrowers. This is how the evolution really happened.

So when we wanted to move into a profit making entity we could only think of non banking finance company which required us to raise about Rs 20 million. So at that point in time when Spandana and several other microfinance organizations transformed into NBFCs there was none who could really invest in microfinance business.

The only option we had was people who really believed in this business and we never thought that there could be valuation and we will make profits and investors will come in and they will invest in microfinance organizations. We did not really think about it at that point in time.

Since we did nothave investors who wanted to really invest Rs 20 million in a microfinance company, there was no other alternative. We were operating as a society. Bankers had a concern. As a society we were not making profits, there was no regulation, there was no accountability, there was no ownership. But some of the bankers who got completely convinced with the idea when they wanted to expand their exposure towards microfinance organizations, they had capital adequacy as a concern and we were not able to increase our own net worth because the only way that we were funding our net worth was through surplus.

So there was pressure for us to move into a proper entity because liabilities were just increasing. There was no clarity in terms of ownership and we were not able to attract like professionals on our boards because they have unlimited liabilities. We were raising money and they don't have any stake in the company.

So as a result we were pressurized to move into a profit making entity and since we could not find any investor who wanted to invest Rs 20 million which is very much required for us to get RBI licence, the promoters and also the promoter friends, relatives who really got convinced about the whole idea in terms of supporting this small venture with an objective of reaching out millions and millions of poor people. We have 21 crore households in India and 30% of the people who have no bank accounts and who do not have access to banks.


Category: Payday loans

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