Banks are looking to acquire microfinanciers to get their lucrative high-yielding loan book and tap into the under-banked customer segment.
While Yes Bank and Federal Bank have expressed interest in acquiring microfinanciers, Kotak already has Bengaluru-based BSS Microfinance, and has announced plans to acquire Lucknow-based Sonata Finance for Rs 537 crore. The latter is awaiting approval from the Reserve Bank of India.
“The microfinance space is of interest to us because the segment offers an opportunity for the bank to get into the large segment of customers who are under-served today,” says Tapobrat Chaudhuri, president and business head – microfinance, Kotak Mahindra Bank.
Microfinance subsidiaries of these banks serve as business correspondents, who deliver various banking services to customers in rural and semi-urban areas.
“We were engaging third party business correspondents who are business correspondents of other banks also. But since we wanted to go a bit deeper, we feel that this acquisition method that we have taken is a good one,” Chaudhuri said.
Bharat Finance Inclusion merged with IndusInd Bank around six years ago. Both Yes Bank and Federal Bank have expressed interest in acquiring microfinanciers in a bid to grow their loan books.
According to RBI norms, a microfinance loan is a collateral-free one to a household having annual income of up to Rs 300,000. Target customers for these loans typically reside in rural India, and are either outside the formal banking system or are lightly supported by it. The segment is important for banks as it represents customers with unmet banking requirements, and has the maximum potential of rising through the economic pyramid, say experts.
While the interest rate on these loans was earlier determined by the RBI, it has now allowed microfinance lenders to fix the interest rate in such a manner that it is not usurious for borrowers. Typically, the interest rate on these loans can go up to 26% per annum, which is higher than many loan categories.
The market share of banks in the microfinance segment increased to 44% in 2020-21 (April-March) from 33% in 2018-19. However, it has since fallen to 36% in April-December, 2022, according to a report by CareEdge Ratings.
At the same time, the market share of microfinance-focussed non-bank lenders has risen to 38% in April-December, 2022, from 31% in 2020-21.
While banks enjoy access to funds at a lower cost, better reach in rural and semi-urban areas is a positive for non-bank lenders. Instead of mere geographic expansion, bankers acknowledge that it is more cost-effective to expand their microfinance portfolio by acquiring MFIs or partnering with them.
“The objective here is to reach to customers in a way that the related cost does not skew the product that you are offering. If to serve that objective, one has to use an inorganic way or opt for a partnership, one has to be open to it,” Chaudhuri said.
Bank of Baroda managing director and chief executive officer Sanjiv Chadha believes that while banks “certainly” cannot replicate the business model of MFIs, they can access previously untapped markets by collaborating with these lenders.
Going ahead, the microfinance segment is expected to remain lucrative for lenders due to a sustained demand and the easing of asset quality stress. Hence, banks are keen to regain lost ground, say experts.
“Banks are acquiring /partnering with NBFC-MFIs as these organisations have strong customer connect and are able to operate through low-cost delivery models more efficiently than banks,” said Arvind Sharma, head – priority sector lending, DBS Bank India. “Thus, banks get a direct access to a growing customer base, within a low-cost structure and are able to support this demographic with a much larger suite of products.”