Raja Vaidyanathan is an IIT and IIM alumnus with more than 30 years of experience in financial services, infrastructure, media, telecom and retail. In 2007, he set up Asirvad Microfinance in Chennai. It got its NBFC licence from RBI in December 2007, started forming groups the same month, and commenced lending operations in January 2008. In February 2015, Kerala-based Manappuram Finance took over the company with a stake of 85%. The growth has been rapid ever since—almost 200% between 2015 and 2016. It had Rs 1,001 crore under its microfinance portfolio as of March 2016; compared to Rs 322 crore, last year.
Manappuram was a good choice for Vaidyanathan to give a large part of his stake to. “Microfinance is a capital game. To professionalise the industry, you need funding,” he says. Manappuram is India’s first listed and highest credit-rated gold loan company, and widely recognised as a leading wealth creator in Indian stock markets. Since its inception in 1996, Manappuram has maintained consistently high growth. Today, it has around 3,300 branches across 26 states, with assets under management of about R10,000 crore, a workforce of close to 18,000 and a customer base of 15 lakh.
Technocrats like Vaidyanathan learnt many lessons after the crisis, which hit the fast growing microfinance industry in 2010. SKS Microfinance, which was a rock star among microfinance institutions (MFIs), had a very successful public issue in the middle of 2010. The dynamic growth of its loan assets required more funding. SKS’s listing and the spectacular growth of microfinance led to some disastrous consequences. There were a spate of suicides among microfinance borrowers who were caught in a debt trap. They were borrowers of some of India’s biggest MFIs such as SKS, Spandana, Share and others.
The industry was in a hurry to grow and there were no real checks and balances. RBI had not stepped into regulating this nascent industry. People were borrowing from several MFIs at the same time to pay off interest on one loan. It is said that coercive debt collection practices drove people to end their lives. This was most rampant in Andhra Pradesh. The state government came down heavily on the industry and nearly destroyed it.
The Andhra Pradesh government promulgated an ordinance to curb the activities of MFIs, which had to specify their area of operation, rate of interest and recovery practices. It also became mandatory for MFIs to seek the state government’s approval before issuing any fresh loans. “The 2010 crisis affected the entire industry. Many went down. We learnt a number of lessons and survived.” After the rise and fall, microfinance is rising again.
“Financial inclusion became the buzzword around 2005. MFIs appeared to be the perfect answer to achieve this. Then things went a bit haywire. RBI has stepped in and properly handled it; this is not really a risky business any more,” says Vaidyanathan. Based on recommendations of a high-powered committee headed by YH Malegam, RBI put in place regulations for the industry in December 2011. The margin between the cost of borrowing and the price at which loans were given was capped, interest rates were regulated and loan norms were defined. The central government, too, did its bit by introducing a Bill in Parliament. Two credit bureaus (Equifax Credit Information Services and CRIF High Mark Credit Information Services) were set up. The credit bureaus are now a repository of at least 100 million loan records.
In its earlier phase, MFIs received a lot of funding from foreign institutional investors (FIIs) and private equity (PE) players. “Foreigners really poured in money then,” shares Vaidyanathan. MFIs came under tremendous pressure to show strong growth. Now the Indian banking sector and large NBFCs such as Reliance Capital, Mahindra Finance, Ambuja Finance and Capital First are putting in money. “The delinquency rate is only around 0.5%. Every borrower is compulsorily vetted through the credit bureaus. Everybody uploads their status every week. RBI has fixed a credit limit of R1 lakh. We don’t exceed R60,000.” Registered MFIs have to show minimum net owned funds of Rs 5 crore.
RBI estimates that the overall demand for microfinance is around Rs 2 lakh crore, of which only 10% is being currently met by existing MFIs and banks through self-help group bank linkage programmes. In Tamil Nadu alone, the microfinance market is expected to be around 8-10 million borrowers, translating into a demand of Rs 8,000-10,000 crore.
“We have been following the Grameen Bank methodology, which ensures group guarantee for repayment of loans. These groups consist of members who are very close and who have a very good understanding between them. Due to this, repayment of loans is very high—almost 98-99%. The operating expense, however, is also high because of weekly meetings and services being made available to borrowers at their doorstep. It is a challenge for us to see how can we reduce the operation cost and increase productivity and efficiency.”
Vaidyanathan says that with Manappuram’s entry, funds have been assured. “Gold loans are not risky. These used to be paid out at 100% when gold prices were soaring. Now that the prices are fluctuating, they are given at 60% of the value. So, these loans are fully secured.” Manappuram has put in Rs 200 crore in its microfinance subsidiary. “Without money, you can’t survive in this industry. Five years ago, we operated only in Tamil Nadu. Today, we are in 10 states and our share of Tamil Nadu business is less than 50%. To make it in this industry, you have to be an all-India player.” Currently there are 56 licensed NBFCs in the country. Seven of them have got banking licences.
Vaidyanathan is confident that Manappuram Asirvad will be one of the top five players in India in the next two years.