Mumbai: Microfinance association Sa-Dhan has warned the industry against resuming the chase for heady growth of the past and to pick investors who look beyond immediate profit when they channel funds to microlenders.
Sa-Dhan said an annual growth of 50% is optimal for microfinance institutions (MFIs), which have been struggling to emerge from a crisis triggered by the passage of a law in Andhra Pradesh last year reining in the Rs20,000 crore industry in a state that has been the biggest market for loans to low-income, mostly self-employed borrowers.
“They need to revisit their mission and governance structure,” Sa-Dhan said in a report. “The growth strategy is critical. Turbo-charged intensive growth in a given geography without adequate systems, trained manpower will compromise client protection.”
Seeking change: Sa-Dhan executive director Mathew Titus.
The report also said: “MFIs need to choose investors who are patient and not profit-seeking.”
The report is a reflection of concerns that MFIs put too high a premium on asset growth in a bid to drive up valuations. Although it did not explicitly say so, the reference to investors seems to be an allusion to private equity firms that funded Indian MFIs and typically seek returns equivalent to multiple times their investment before cashing out.
Experts, including former Reserve Bank of India governor Y.V. Reddy, have in the past criticized the perceived profit hunger of microlenders and excessive growth as reasons for the crisis, saying MFIs should be treated at par with money lenders.
“There should be a true reflection of the situation (in the business of MFIs). They need to seek investors who will support the mission of microfinance and not just push for profits,” said Mathew Titus, executive director at Sa-Dhan.
Private investors are not too optimistic about the effectiveness of Sa-Dhan’s call for investors who don’t put a premium on profit.
“It will be really difficult. It is not really feasible to get investors who are not profit-seeking,” said Vishal Mehta, co-founder and partner at Lok Capital, which has invested around $20 million in around eight Indian MFIs. “Though investor interest may still remain in the sector post-crisis, the scale and quantum of investment will be less. As against 10 investors earlier, you may see one or two now.”
MFIs are in the business of giving tiny loans at interest rates ranging between 24% and 36% after sourcing 70-80% of their funds from commercial banks at 12-13%.
The law tightening MFI regulations in Andhra Pradesh, which accounts for up to one-fifth of the industry’s assets, followed complaints that coercive loan recovery practices adopted by some microlenders were responsible for a spate of suicides by borrowers.
The law barred weekly collections of loan instalments, prohibited MFIs from doing business at the customer’s doorstep and made government approval mandatory for the lenders to offer a second loan to the same borrower. MFI loan collection rates in the state fell to as low as 5-10% as local politicians encouraged borrowers not to repay their debt. As bad assets piled up, banks stopped funding MFIs.
In its prediction for the sector, Sa-Dhan said MFIs need to drop their zero-tolerance policy towards loan defaults and offer consultative solutions to delinquent clients’ problems.
After analysing 170 leading microlenders in the country, the industry association found that loan growth in the Indian MFI sector plunged to 13.5% in the last fiscal from 56% the previous year and around 97% in the year before. Prior to that, for three-four years, the MFI industry had seen average growth of close to 100%, especially in the southern states.
Sa-Dhan’s report comes close on the heels of a top management revamp at SKS Microfinance Ltd, India’s only listed MFI and until recently the largest, that led to the exit of its founder Vikram Akula from the company’s board.
SKS is also readying for a revamp of its business model to tide over the crisis that will see the firm diversifying its operations into mortgages, insurance and payment channels such as ATMs in addition to giving small loans.
SKS has seen its share value eroding by around 93.76% from its all-time high of Rs1,490.7 in September 2010 in the aftermath of the Andhra Pradesh crisis.
Dilli Raj, chief financial officer of SKS, said the crisis has proved that MFIs need to associate with only long-term investors who support the social objectives of the microfinance industry instead of those who look for quick returns in the short term.
“If investors come with a long-term perspective and allow the MFI to balance business growth and social objectives over a period of time, it can happen,” Raj said.
Growth should be commensurate with an institution’s capacity to manage its expansion with checks and balances.
“A 50% growth target set for the sector is a meaningful number,” Raj said.
Its shares dropped 4.96% to close at Rs93.00 on Wednesday on BSE.