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A clutch of microfinanciers is venturing into secured asset classes such as mortgages and gold loans to diversify their portfolio and balance the risk of unsecured microlending with loans that require collateral.

The strategy change took shape after a Reserve Bank of India (RBI) circular in March allowed microfinance institutions (MFIs) to lend 25% of their total assets in non-microfinance loans. Before that, they were allowed to lend 15% to non-MFI customers.

A loan has to be towards a borrower with an annual household income of up to 3 lakh to qualify as microfinance.

The loans should also be devoid of collateral, and customers must not be penalized for paying ahead of the original tenure.

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For instance, CreditAccess Grameen, a Bengaluru-based microlender, is entering the secured lending segment, including mortgages, gold and two-wheeler loans. While mortgage ticket sizes will be in the range of 6-8 lakh, gold loans will be about 45,000-50,000, and ticket sizes of two-wheeler loans will be in the range of 70,000-75,000.

“First, we want to get into this from a pure diversification angle because beyond a certain size, we did not want to have just one class of asset, and that, too, completely unsecured," said Ganesh Narayanan, deputy chief executive and chief business officer, CreditAccess Grameen.

That apart, it is also a natural progression for customers, Narayanan said. The lender, Narayanan said, loses around 15% of its customers annually, and 5-6% of them tend to move to other institutions because the microfinancier cannot meet their growing demand. In five years, it expects to build a non-microfinance book of 5,000-6,000 crore, most of which will be secured loans.

“I am sourcing a fresh customer and then giving it to somebody else. That is not something we want to do," he said.

Others are in the fray as well. Fusion Microfinance, which made its public trading debut recently, wants to drive a secured business but only target small businesses, news agency Press Trust of India reported on 30 October. As of 30 June, its total assets under management were at 7,389 crore, and it had 2.9 million active borrowers. Devesh Sachdev, founder and chief executive of the microlender, was cited by PTI as saying that Fusion has been lending to small businesses for some time now and currently has 200 crore of such assets. The lender wants to scale this loan book and hive it off as a non-banking financial company.

Experts said there used to be a huge concentration of non-collateralized assets on the book of MFIs, and increasing secured loans would help them diversify. In addition, loan ticket sizes under the secured categories would be more than what microfinance allows and in products that MFIs cannot venture into otherwise.

While the Reserve Bank circular has been beneficial to an extent, industry experts said that there are some areas that microlenders have approached the regulator about.

Although the ceiling on the non-microfinance loan book has been increased to 25% from 15% earlier, there is a catch.

“Earlier, MFIs had to take into account net assets—total assets adjusted for cash—while calculating the amount of loan qualifying as microfinance, but this has now been changed to total assets. That is one of the grievances of the microfinance industry that we have taken up with the Reserve Bank," said Jiji Mammen, executive director and chief executive of microfinance institutions’ industry body Sa-Dhan.

According to Mammen, the new definition does not allow microlenders to fully reap the benefits of the increased limit for non-MFI loans. Every MFI, he said, tends to hold some cash, especially at the end of the financial year.

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ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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