The microfinance industry is limping back to normalcy with a renewed interest from the investors? community, says Mathew Titus, executive director of Sa-Dhan, a microfinance network, in an interview with BV Mahalakshmi. Edited excerpts:
How has the interest been from the investors? community? How many companies have received funding and how does the pipeline look?
There has been a renewed interest from investors. It was assessed that private equity firms had invested R750 crore in MFIs in 2012, compared with R250 crore invested in 2011. As per industry estimates, the PE infusion in the last three years has been R1,500 crore with last year already being the largest with R700 crore. Earlier this year, when Bangalore-based Janalakshmi Financial Services raised R325 crore through series-D primary equity, various PE investors showed interest in the deal. Morgan Stanley Private Equity Asia led the Janalakshmi transaction and Tata Capital Growth Fund and QRG Enterprises also participated in the round. Existing investors Citi Venture Capital (CVCI Private Equity), India Financial Inclusion Fund and Vallabh Bhanshali also participated. Some of the other PE investments in MFIs include Grameen Financial Services, which raised R53.2 crore of equity funding and Satin Creditcare, which raised R41 crore through equity.
What are the prevailing risks in the industry and how can these challenges be overcome?
The biggest risk that the MFI sector faces currently is with regard to regulatory uncertainties. Due to the lack of a comprehensive national law, flow of funds to the sector is severely constrained. Lenders are apprehensive of an Andhra Pradesh-like situation elsewhere and hence, very cautious in lending to MFIs. Fund constraints have invariably led to delay/denial of repeat loans to clients, severely increasing the risk of NPA. In microfinance, historically, the repayment rates have remained close to 100%, primarily because the client is sure of a loan repeat with an increased amount. Good governance, leadership and management quality remain to be areas of concern in the microfinance institutions. The Indian MF sector is facing a reputational risk post the Andhra Pradesh crisis, though risk elements associated with the operations of the MFIs have been mostly addressed with the recent RBI notifications on regulating MFI. Such controls were seen in terms of grievance measures and client protection, multiple lending and over-indebtedness, competition, interest rate, margin and returns on equity, etc.
Do you see consolidation happening in the sector?
Consolidation is already happening in the sector post the Andhra Pradesh crisis. However, it is strongly felt that there is room for more players in the financial inclusion sphere. Exclusion in India is huge. The RBI report on ?Trend and Progress of Banking in India 2010-11? shows that in India out of every 1,000 persons, 99 had a credit account and 600 had a deposit account as on March 2010. There are about 6.3 bank branches for every 100,000 people in India. The total credit demand in the country is R3,30,049 crore. A large chunk of the credit demand comes from rural households. Regarding supply side, six states ? UP, Maharashtra, Andhra Pradesh, West Bengal, Tamil Nadu, Karnataka ? jointly constitute 60% of the total credit demand in India, and only 6% of the credit demand has been met in these six states due to lack of market penetration. The demand-supply gap is huge and the market opportunities are high. Clearly, there is scope for multiple players to offer financial services like credit, deposit, insurance, pension, remittance, financial literacy and so on. Clearly, banks, BCs, technology players, NGO-MFIs, NBFC-MFIs and support institutions have their respective roles to play.
What is the roadmap for MFIs, both in Andhra Pradesh and the rest in other states?
Presently, there is a three-tier supervision of the MFI operations. Firstly the MFIs are self-regulating and self-restraining from unfair practices. Secondly, the association and the banks are carrying out a rigorous check on the code of conduct compliance and self-regulation. Finally, the RBI regulations are enforced either directly by the RBI or through the banks using the priority sector guideline. Monitoring of these activities would certainly lead to a path of setting up systems, processes, practices and operations that are responsive. Compliance to code of conduct would bring the client focus to the centre stage.
