The tumultuous journey of Bharat Financial Inclusion
Mumbai: The about 12-year-old journey of Bharat Financial Inclusion Ltd, formerly known as SKS Microfinance, has been tumultuous.
It suffered its biggest blow after the then undivided Andhra Pradesh promulgated a state law to severely restrict microfinance activity because of a spate of suicides by borrowers in late 2010, allegedly driven by coercive loan recovery practices. Subsequently, management differences saw the exit of its founder Vikram Akula and the central bank denied the microlender’s claim to run a small finance bank (SFB).
Bharat Financial overcame the stress and has since improved its profitability. But it now faces a potential takeover by the private sector lender IndusInd Bank, which some experts say is the only way for the survival of the microlender. The changing regulatory space has shrunk the microfinance industry to only three large companies, including Bharat Financial. Bharat Financial started its journey as a non-profit in 1998. Founded as Swayam Krishi Sangam by Vikram Akula, it later morphed into a non-banking financial company (NBFC) in 2005.
The microlender along with its peers saw unprecedented growth because of the reluctance of banks to serve the financial needs of poor customers who were not part of the formal banking system.
Five years later, it became the only microfinance lender to be listed on stock exchanges. In August 2010, Akula steered the initial public offering, which was subscribed almost 14 times. The success of SKS led to talks that other companies in the sector may also tap capital markets.
The party was, however, short-lived, not only for the company but also for the microfinance industry.
The suicides in Andhra Pradesh led to the state government putting severe restrictions on microlenders in a state that then accounted for a fourth of the industry’s business.
Andhra Pradesh enacted a law greatly limiting the ability of microfinance companies to lend and recover their loans in the state. Operations of most MFIs came to a near halt. SKS was one of the worst hit due to the crisis.
In September 2010, just before the microfinance crisis unfolded, SKS’s exposure to Andhra Pradesh was at over 27% of its total loan book, its highest in any state. In October that year, 30 poor women borrowers in Andhra Pradesh committed suicide within a period of 45 days. Among these 30 women, 17 were then reported to be borrowers of SKS Microfinance.
In the years that followed, SKS Microfinance provided fully for the outstanding exposure in Andhra Pradesh, wrote off exposure of Rs1,360 crore in the state, and stopped fresh disbursals there.
“It (AP crisis) had a long-lasting adverse impact but BFIL (Bharat Financial) was an exception. We met all our commitments to lenders including to banks on time and never went into CDR (corporate debt restructuring) structure,” said non-executive chairman P.H. Ravikumar.
Today, a chunk of SKS’s assets are in Odisha, Bihar, West Bengal, Karnataka and Maharashtra.
While most believe that the industry has managed to survive the Andhra crisis, the recent loan waivers announced by the state governments of Maharashtra, Uttar Pradesh (UP) and Karnataka could trigger another round of defaults in repayments. “The market at large, particularly investment community, feels that for MFIs, Andhra Pradesh like event or UP or Maharashtra election like scenario which adversely affect their operations is going to be a periodic recurring feature. This increases the credit costs,” Ravikumar said.
A year later in November 2011, Akula exited the company, allegedly owing to differences with the board.
This happened amid a changing regulatory framework.
As a fallout of the Andhra crisis, in December 2011, the Reserve Bank of India (RBI) put in place regulations based on the recommendation of a high-powered committee headed by Y.H. Malegam, a member of the central bank’s board. The norms capped the margin between the cost of borrowing and the price at which loans were given, and interest rates and loans were regulated.
Despite this, the company maintained its growth momentum. Assets under management, consisting of non-Andhra exposure, grew at a compounded annual growth rate of 46% between fiscal 2013 and 2017. As of June-end, its non-Andhra Pradesh portfolio grew 14% year-on-year to over Rs9,630 crore.
Following the Andhra crisis, the company reported losses due to loan write-offs and a shrinking credit book. From the December 2011 quarter, when losses peaked to around Rs428 crore, the lender swung back to profit a year later. However, demonetization also impacted the collection of loans, which forced the lender to make higher provisions, resulting in losses.
With improving collection, its net loss narrowed to Rs37 crore in the June quarter from Rs235 crore a quarter ago.
Even as things look normal, Bharat Financial faced another hurdle with the central bank killing its banking aspiration. In September 2015, RBI handed out in-principle SFB licences to 10 applicants, eight of which were microfinance lenders. SKS Microfinance was left out.
According to Vikram Akula, the central bank’s decision puzzled him because the lender seemed to meet all the criteria for an SFB. “Perhaps it was the RBIs discomfort with the current management team,” he said on Monday.
Dilli Raj, the then president of the company, was under the scanner of the Enforcement Directorate in a complaint filed by IDBI Bank against First Leasing Company of India, where he worked previously.
The conversion of MFIs into SFBs and RBI regulations are also being seen as reasons for the fall of the MFI industry.
Regulations on loan spread and lending has been unfavourable for the micro lending industry. For instance, MFIs are not allowed to lend to a borrower who already has two loans but is not applicable to banks. SFBs have access to low-cost deposits, which gives them advantage of lower cost of funds. MFIs are not allowed to access deposits.
According to Bharat Financial’s Ravikumar, the banks and SFBs today already have 70% share in the overall microfinance lending in the country and trends indicate that in another two or three years that share of MFIs would be less than 20-25% from 30% currently.
Monday’s announcement by IndusInd Bank about the merger talks with Bharat Financial follows months of speculation. Several banks as well as non-banking financial companies were rumoured to be either picking-up a strategic stake or taking over the company.
According to analysts, most of the talks were based on the fact that a bank partnership would give the microlender a leverage to expand its horizon into other loan products such as gold credit, two-wheeler loan.
Akula, former head of Bharat Financial, said that it appears to him that the RBI has decided to focus on expanding financial inclusion through focusing on banks rather than through standalone MFIs.
“In light of the history of political backlash against standalone MFIs, I think this is a prudent tactical move. I just would like to see the RBI accelerate this process so that all standalone MFI-NBFCs move under the umbrella of a bank, either by becoming SFBs or merging with a bank,” he said.
When asked if merger is natural choice for Bharat Financial given the challenging environment, Ravikumar did not offer any comments.
If the Bharat Financial-IndusInd Bank merger deal goes through, Grameen Koota Financial Services Pvt. Ltd, and Satin Creditcare Network, which are the other two large microlenders, will be the ones left in the space.
Jindal Haria, associate director, financial institutions, India Ratings and Research said, There are over 40 NBFC-MFIs in the country. It is a given that there will be further consolidation in the sector. “Given that private banks are looking for a way to reach the microfinance and missing middle customers and hence would gain from the distribution networks that MFIs have set up. It also could be an easy source of PSL. For MFIs, We are already seeing that the customer acquisition in urban areas is in single digits for most of them and in very few rural pockets it is over 20%.” He further added, “They may have to evolve their loan products and may not be able to maintain high growth in group loan products without increasing borrower leverage. Hence there is clear synergy between banks and MFIs.”