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Business News/ Politics / News/  Banks, MFIs look at urban poor to expand

Banks, MFIs look at urban poor to expand

Banks, MFIs look at urban poor to expand


Banks and microfinance institutions (MFIs) that have so far been concentrating on the rural poor are finally waking up to the huge opportunity that small-time tea stall owners, tailors, cobblers, and others belonging to the so-called low-income occupational segment present.

Estimates by various institutions working in the microfinance space show that the number of urban poor will exceed that of the rural poor in the next 8-10 years.

“There are 60 microfinance institutions that cater to tier I and tier II cities but together they service only 7% of the demand for an estimated $52 billion (Rs2.05 trillion)," said Atreya Rayaprolu, vice-president of Intellecap, a consulting firm that focuses on the financial inclusion space.

According to a study carried out by Intellecap, the customer base of MFIs in India will grow from 7.8 million in 2007 to 48.7 million in 2012, while the portfolio of these MFIs will grow from the current $1.3 billion to $6.3 billion.

“But this will require MFIs to consider diversification of financing options as well as products," said Rayaprolu.

He said there is a huge opportunity for MFIs in terms of syndicated loans, portfolio sales and securitization—all ways of debt management that will free up their books and help them lend more. Thus far, MFIs borrow from banks for a maximum period of three years at an interest rate of 11-14% and lend this money.

Atreya was speaking at Horizon 2007, a microfinance conference organized by Financial Information Network and Operations Ltd (Fino), a firm that facilitates inclusive banking.

While urban microfinance presents great opportunity, banks and financial institutions have been keeping away from this segment because these borrowers, who are small-time entrepreneurs, cannot provide proper collateral. “Most often, these micro entrepreneurs have had spent an entire lifetime in acquiring a consumer durable such as a television—that is their only property," said Mathew Sangma, of Accion International, a non-profit micro-lending organization.

According to him, borrowings by the urban informal sector in India were $5.5 billion in 2007, and 40% of this was from friends and relatives, or moneylenders.

This segment of the society requires need-based financing and often demands flexible repayment options, he said.

Sangma added that banks have often given small-ticket personal loans to these customers instead of adopting a microfinance approach.

That has resulted in over-leverage of customers.

Sangma suggested that banks and MFIs use credit scores to assesss creditworthiness of such customers before giving them microloans.

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Published: 21 Dec 2007, 12:50 AM IST
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