Bangalore: After diversifying into selling insurance, healthcare and home improvement products to the poor, microfinance firms (MFIs) are now looking to turn into micro-banks.
Six MFIs Mint spoke with said they want to approach the central bank for modified banking licences that would allow them to offer door-to-door savings and remittance services without having to open branches.
More options: A file photo of a loan officer with inhabitants of Rajiv Gandhi Pura village, near Mysore. MFIs are taking a cue from Bangladesh’s Grameen Bank, which allows customers to open savings accounts. Hemant Mishra / Mint
The Reserve Bank of India (RBI) is expected to put up draft regulations for new banking licences—throwing the sector open to non-banking financial companies (NBFCs) and corporate groups—by July.
“We cannot just go on offering loans only. People also need a safe, secure place for keeping their savings, however small they are,” said S. Ramachandran, chief financial officer of Bhartiya Samruddhi Finance Ltd (BSFL), a Hyderabad-based microcredit firm.
By some estimates, one in every two adult Indians does not have a bank account.
While the Budget for 2010-11 made a proposal for new banking licences to boost financial inclusion, RBI has set a stiff target for banks: All households in villages with at least 2,000 inhabitants should have bank accounts by March 2011.
Apart from BSFL, the other MFIs which are planning to seek such licences are Spandana Spoorthy Financial Ltd, Ujjivan Financial Services Pvt. Ltd and Equitas Micro Finance India Pvt. Ltd. People close to SKS Microfinance Ltd and Suryoday Micro Finance Pvt. Ltd also confirmed, on condition of anonymity, that they too plan to seek such licences. Spokespersons for the two companies were not available for comment.
There’s another reason for MFIs aspiring to become banks. Deposits from customers will reduce the dependence on banks for loans, which could effectively lower the cost of capital to 6-7% from 12-13% now. That, in turn, could allow MFIs to lower their lending rates from 26-28% to 18-20%.
The Indian MFIs are taking their cue from Bangladesh’s pioneering Grameen Bank, which allows customers—both borrowers and non-borrowers—to open savings accounts.
Around 40% of Grameen Bank’s asset book is from savings deposits, said Samit Ghosh, chief executive officer, Ujjivan Financial Services, an MFI in Bangalore. “It is wrong to believe that our customers do not need banking services. We can offer them these services as successfully as we do small loans.”
While MFIs say their competence in running low-cost businesses can be replicated and scaled up, they are aware of the possible issues that might arise. For instance, demand deposits “would bring with them the complexity of maintaining higher cash balances”, said Padmaja Reddy, founder and managing director, Spandana Spoorthy, based in Hyderabad.
P.N. Vasudevan, managing director, Equitas Micro Finance, said MFIs should accept only micro savings. “We would not take savings of Rs1 lakh; we would only take savings of less than Rs50,000,” he said. “The ‘micro’ focus needs to be retained in banking from MFIs.” Still, a banking licence from RBI may not come easy.
To be considered for the licence, an entity currently needs to have a national presence and a net worth of Rs300 crore. That bar could be set higher with RBI expected to increase the net worth requirement to Rs1,000 crore in a couple of months. No MFI in the country has a national presence or enough net worth to satisfy either criteria.
Experts also say RBI will want to ensure that only genuine MFIs are considered, besides making certain that they will be resilient enough to withstand shocks, said Ashvin Parekh, partner and industry leader, financial services, Ernst and Young India Pvt. Ltd.
“Local banks are collapsing worldwide as they are most exposed to systemic failure. With licences to entities like MFIs, do we want to create another bunch which hasn’t got deep pockets of capital and is dependent on one asset class, with no diversified portfolio, to overcome economic upheavals,” he said.
Also, servicing both borrowers and non-borrowers could lead to a conflict of interest over time, said Vineet Rai, chief executive, Aavishkaar India, which funds MFIs, besides other sectors.
“Deviation in focus may happen in a few cases. But frankly, it does not make any sense for an MFI to change focus if they get a banking licence.”