Bangalore: Bankers may still be debating the idea of consolidation in the banking sector, but India’s microfinance institutions, or MFIs, that cater tothe credit needs of the rural and urban poor, are all ready for it. Experts say with the top 25 players in the business accounting for nearly 75% of the total MFI business, it will become imperative for small entities, who cater to a customer base of less than 5,000, to join hands to scale up operations and strengthen execution.
The imperative for scale is evident in the statistics: the current requirement of credit for the poor is Rs2.4 trillion and the available credit is less than one-tenth of that: about Rs20,000 crore. Two in five Indians do not have a bank account and 81% of villages do not have a bank within a distance of 2km, according to the Union finance ministry. It is not surprising then that MFIs in the country such as SKS Microfinance Pvt. Ltd are clocking growth in excess of 200% every year.
Joining hands: SKS Microfinance’s Hyderabad office. The firm has tied up with ICICI Lombard General Insurance for health cover for the poor.
“Consolidation is certainly on its way. It is not effective for small MFIs, particularly when a few players are getting backed by investors,” says Chandra Sekhar Ghosh, chief executive, Bandhan, a Kolkata-based MFI. Bandhan disburses nearly Rs90 crore a month.
In the last two years or so, MFIs have been transforming from being women-centric non-governmental organizations to corporate-like operations that are backed by venture capital, or VC, firms. Last year, Lok Capital Llc., a Mauritius-based venture capital fund, raised $22 million (Rs94.6 crore) from institutional investors to fund MFI plays in India. “People are talking about consolidation and some momentum is building up in the segment. It will happen in two years,” says Venky Natarajan, investments director, Lok Advisory Services, a technical advice and due diligence unit for the group’s investments.
The fund has so far invested in four Indian MFIs, including Hyderabad-based Spandana Sphoorty Financial Ltd, Bangalore-based Janalakshmi, New Delhi’s Satin Creditcare Network Ltd and Arohan from Kolkata.
Some MFIs, which raised their first round of VC funds as early as March 2006, are moving into credit-related businesses. Hyderabad-based SKS Microfinance has rolled out a health insurance product for the poor, for which it has tied up with ICICI Lombard General Insurance.
Earlier this year, it had raised Rs147 crore in its third round of funding from investors, including Silicon Valley Bank and Columbia Pacific, apart from Sequoia Capital, Vinod Khosla and Odyssey Capital, who had funded the company earlier too.
SKS will soon announce its initiative to start offering other third party products also, says Mohit Bhatnagar, operating partner, Sequoia Capital India. “We are very bullish on the segment. We are a long-term investor and are confident that SKS will soon build its customer base from two million to 10-15 million,” he says.
SKS currently operates in 15 states through 1,000 branches.
The role of private equity backers is seen as critical in the business as MFIs face constraints due to insufficient capital but given that the leading ones in the microcredit business have already been taken by the bigger private equity firms, the road ahead for the smaller ones is clear.
“Small organizations would end up getting sold to bigger players,” says Bandhan’s Ghosh.