BackNBFC-MFIs are not what the future is: Vikram Akula
Akula talks about his three-year hiatus and his comeback to financial inclusion as Vaya Finserv chairperson
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Mumbai: “My kurtas that were shelved for three years will now be out," says Vikram Akula, the ousted founder chairman of SKS Microfinance Ltd, while sitting in a five-star hotel in Mumbai, wearing a crisp black business suit. Fresh out of a forced three-year long hiatus because of a non-compete agreement with SKS Microfinance, he is raring to go back to the field and pursue his passion for financial inclusion. Known for his kurta-clad look, Akula is making his comeback to financial inclusion as the chairperson for Vaya Finserv Pvt. Ltd, a business correspondent.
“For the last three years, I was not able to do what I am passionate about. I feel unshackled now," he says.
Under Akula, Vaya plans to apply for a small finance bank licence, guidelines for which were issued by Reserve Bank of India (RBI) on 27 November. Akula will also soon buy a 26% stake in the business correspondent, which has 23 branches spread across six districts in eastern Maharashtra and northern Karnataka. Edited excerpts from an interview:
Would you say that this is your second coming?
I don’t know if it is my second coming, but I have certainly come back into financial inclusion. I had this three-year non-compete with SKS Microfinance which expired at the end of November, so I was looking around to get back into financial inclusion. When I looked around, I saw that the start-up Vaya is doing fantastic work. First of all, I think it has a great team, many are former colleagues from SKS. It has a mission which is very much aligned with what I am interested in. The plan is to look for all the white spaces in the under-banked districts across the country and find out how we can fill those. We are not looking to compete in overheated areas, not looking to become big. Finally, I think the technology that Vaya is using is really the next generation for microfinance. All the field staff is using tablets, we are setting up a system such that you can quickly move into mobile banking which would allow the convenience for customers that they have been deprived of in India.
What does Vaya stand for?
Vaya means energy or strength in Sanskrit and is in the feminine gender. We wanted to pick something that the company does at the core. At present, Vaya is working with women self-help groups (SHGs), but if we end up becoming a small bank, the canvas becomes wider.
What are the key things that tell you that Vaya is the next vehicle for you?
As I mentioned, these three factors are key. Vaya has got a great team, a vision that fits in with my own mission and has technology that I think is the next-generation technology for financial inclusion. Fourthly, if I can add, from a structural perspective, I think the era of NBFC-MFIs (non-banking financial company-microfinance institutions) won’t be here for very long. I think the regulator is quite clear in saying that you either become a business correspondent for a bank so we can regulate you through regulation of the bank or apply for one of these differentiated bank licenses. RBI has recognized that NBFC-MFI, because of this dual jurisdiction where it is not known whether the state is in charge or if RBI is in charge, is an amorphous area. So what RBI, I think, has done is to say that look, here is where we can regulate you. In that sense, when Vaya was making its selection of what structure, it did not make sense to become an NBFC-MFI. It made sense at present to become a business correspondent, wait for the regulations for small and payments banks to come out, and then consider which would be best.
Why do you say that the game is over for the microfinance industry?
Microfinance, the way it was traditionally, is over. NBFC-MFIs that are doing only credit, which are lending from their own book, are not what the future is. The future is a wide range of financial services, for example, as a business correspondent, we can do small savings for our clients. A space where a financial inclusion group can do a range of financial services for the poor is the future, as opposed to exclusively credit model which has tended to characterize NBFC-MFIs.
Are you upbeat about this second leg of your career? Or are you cautious?
I am very optimistic. I think the thing that makes me most optimistic is that we have got a great set of regulators. I think the RBI leadership, both governor (Raghuram) Rajan and Nachiket Mor, and you can see it through the financial inclusion committee report put out earlier this year, are very progressive. That makes me incredibly hopeful for the prospects of true financial inclusion.
What went wrong in the past?
I don’t look back (laughs). I am looking forward. I certainly believe in history though. The lessons have been discussed, have been learned. I think the regulator has imbibed those lessons in the sets of regulations that have come up. So if the regulator is suggesting that financial inclusion is best done and best regulated through creating a small bank, then the message is clear that we do not want you to be freestanding where you are vulnerable to dual jurisdictions and where maybe you are not performing in the way that is compliant with the rules of good banking.
What can go wrong now?
I think one of the lessons from the past was regarding the pace of growth. The pace has to be measured, sustainable. There have to be systems in place that are commensurate with the kind of growth that one wants to have and I think that we learned as a sector. When you see across the board, whether NBFC-MFIs or business correspondents, everyone is taking a measured pace in terms of growth. Certainly Vaya is going to be doing that as well. The most immediate challenge is that we have to get an application in in the next 35 days. As for competition, competition is not an issue for us, especially since we are looking at under-banked districts. And equity capital is also not an issue for us. The key is for us to line up more bank partners. That’s the real challenge at the moment—to get more bank partners.
If we were to meet in the same room after three years, what will be the story that you will be telling us?
Microfinance for me is not about valuation and exits or anything of that nature. It is about how do we provide true financial inclusion to all of our country, particularly to the low-income people who have been left out. Three-five years from now, if Vaya can say that we have helped some lakhs of clients from across the country get access to financial services, that is the satisfaction we are going to get from this.
You will be picking up a 26% stake in the company. What would the valuations be like?
The discussions regarding the valuation are confidential, but yes, I am picking up a 26% stake in the company. I wanted to have a meaningful stake. I want to do this in a way that says that look, I am not just saying this rhetorically, but I am putting my skin in the game behind this entity. I believe in Vaya.
What made you consider a small bank licence over a payments bank licence?
I think it is the ability to provide the full range of financial services to low-income clients. As a business correspondent, effectively we can do that, but also we will be beholden to the pace and thinking of our banking partner. Obviously, we feel like we know the space and we know what kind of products our clients need and how they need them. As a small bank, we think we will have the freedom to do it in a way that works best for our customers. But more than anything, because a small bank is being directly regulated by RBI, we are very comfortable with that. We do not want to get into a situation where we are regulated by the state or the central government, and those groups may not understand this space as well as RBI.
RBI has been very choosy about giving out licences in the recent past. How confident are you of being chosen over others?
The criteria is rigorous and the bar is high. By no means are we overconfident. We certainly are hopeful. Yes, Vaya has a very small track record of a few months, but the people here, me included, bring in about 15 years of very deep experience within the sector. We think that if anyone has a good shot at becoming a small bank, we do. We know that there is a lot that is involved in making this happen. We know that we will have to bolster our leadership, bring in some seasoned bankers in addition to the current group.
What is the business model going to be like for a small bank?
Financial inclusion is a tough game to do because the cost of delivery is still high. This is true not only on the credit side, but on the liabilities side it is even more difficult. These are small deposits, and the cost of servicing those deposits make it virtually an unviable proposition. You have to look at funding separate from your deposits. As it is with credit, the answer is volumes to make this viable. It does not mean growth at any pace, it means measured growth, but financial inclusion has to be done at a wide scale to make it financially viable. We will need to be creative because purely liabilities from our customer base will not give us enough funding.
There are many trying to roll out their plans for financial inclusion. How are you going to be different from others?
There are two things. One is the kind of staff that we have, we ensure that there is a high level of focus on what is best for the customers. That is our orientation. This is what made SKS what it was in the earlier days. The 50 field staff that started Vaya were the first 50 field staff at SKS. Each one of them brings some 10-plus years of experience. This DNA that we have is going to be very different from, say, an ex-banker who comes in and starts. Secondly, right from the outset, we are very technology-oriented. Even before Vaya started, the core team went to Kenya, spent a week looking at the mobile banking system there because that is the future of financial inclusion, even in India.
What will be the shareholding pattern at Vaya?
I am about to pick up 26% stake in the company. Sixty-five percent is owned by the SKS Trusts, while remaining 9% will be owned by employees.
So the SKS legacy still remains intact?
I wouldn’t say SKS legacy related to the company, the SKS Trusts is an independent entity which happened to be the promoter entity of SKS Microfinance. The core staff happened to be part of SKS, but the question is which came first. The SKS Trusts came first. Sure, SKS Microfinance has our initial stamp, but I created the SKS Trusts before I founded SKS Microfinance.
Do you feel that you will need to bring in more investors soon?
We are not looking for equity. The current investors would be able to fund this entity for some period of time. It would be a long time before we look for new equity investors. We like the group that we have now. It is an aligned group and we are very clear on our mission. We talked about learning lessons from the past, if anything, we would be extraordinarily careful about who the new shareholders are. We need those who understand what we are trying to do and are aligned with our mission.
Are you presently in talks with banks to grow your business correspondent business?
It will take some to line up new business correspondent partners. We are in talks with three banks. One leading private sector bank has been finalized. We are hopeful that by the month end or by January, the other two banks will come on board.
Do you have a Plan B if the small finance bank licence does not come through?
We are quite comfortable to stay as a business correspondent. We will continue to do financial inclusion as a business correspondent. The small bank licence would be an added advantage. But if it is not coming, we would continue to do the same on behalf of other banks.
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