Banks develop a liking for microlending

Mumbai: India’s microlending industry, dominated by traditional microfinance institutions (MFIs), is witnessing a re-emergence of interest from commercial banks, which are targeting low-income borrowers.

In the past, banks had stayed away from offering microloans in rural areas because of the high operational costs involved but are now using so-called business correspondents to re-enter the segment. business correspondents are agents of banks operating in far-flung areas of the country, where only MFIs used to operate before.

Commercial banks are following the traditional operational model of MFIs in microlending—be it charging a high interest rate or a no-collateral policy while giving small loans. The tenure of these loans is between 1 year and 3 years and the banks lend anywhere between ₹ 15,000 and ₹ 25,000 to customers.

Commercial banks, however, have the advantage of offering the loans at an interest rate ranging between 20% and 24%, lower than the 26-27% charged by MFIs including the processing fee. Though banks charge an interest rate of 20-24%, the final return to them will be far less, about 12-13%, after paying a commission to the business correspondent, bankers said. In some cases, where the borrower is represented by a group, banks accept a group guarantee.

Most banks engaged in microlending have built their portfolios over the past 2-3 years, when traditional microlenders plunged into a crisis after the erstwhile Andhra Pradesh government promulgated a law severely restricting the activities of MFIs because of alleged use of coercion to recover loans.

Banks that are focusing on low-income borrowers include HDFC Bank Ltd, IndusInd Bank Ltd and IDBI Bank Ltd.

For instance, IndusInd Bank has expanded its microlending book to somewhere between ₹ 400 crore and ₹ 500 crore in the past three years from about ₹ 100 crore, said Srinivas Bonam, head of inclusive banking group at IndusInd Bank. “The idea is to take the direct lending of microloans in the rural segments and ensure that the end-client has access to financial services at an affordable rate, and in a sustainable manner, compared with the products offered by microfinanciers,” Bonam said.

IndusInd Bank uses its business correspondent network to reach out to borrowers and lends at about 24%. Such loans will have a tenor of one year for loans of less than ₹ 15,000 and two years for loans above that amount.

IDBI Bank has doubled its direct microlending book from what it was three years ago, said a senior official at the state-run bank, who is directly involved in the business. Its total loan book to the low-income segment, which include loans to MFIs, is around ₹ 1,000 crore, the official said, declining to be named.

“With business correspondents coming in, we are using this model to expand our portfolio,” the official said. He is not authorized to talk to reporters.

As on 31 March 2013, Indian banks had deployed about 195,380 business correspondents covering 221,341 villages, according to the Reserve Bank of India.

Analysts said larger banks such as HDFC Bank too have become active in the microloan segment. HDFC Bank has significantly grown its portfolio in recent years.

A questionnaire sent to the bank on Friday seeking its response on the progress achieved in the microloan business remained unanswered.

Micro loans help banks meet their so-called priority sector targets, analysts said. RBI norms mandate that banks have to lend 40% of their loans to the so-called priority sector that includes agriculture, micro-credit, exports and economically weaker sections.

Some analysts, however, cautioned that using business correspondents to garner loans may not be a good strategy.

“From an asset-quality perspective, using business correspondents to get loans is riskier than bank staff directly going and lending to borrowers, because there is a possibility that business correspondents may push products to earn commission without following the due diligence,” said Hatim Broachwala, an analyst at Karvy Stock Broking Ltd.

As on 24 January, Indian banks had micro credit outstanding worth ₹ 17,500 crore compared with ₹ 15,100 crore in the year-earlier period.