'With a five-fold growth ahead, microfin offers an attractive investment option'
MFIs have provided dignity to the poor who were treated as outcasts so far, says Sajeev Viswanathan, CEO, Bhartiya Samruddhi Finance.
By Shailesh Menon, ET Bureau |
Nearly 21 crore households need financial inclusion. It is estimated that banks reach out to around five crore poor households through self-help group linkages; about 2.5 crore households are covered by mainstream microfinance institutions (MFIs). The commercially viable last-mile network of MFIs provide unprecedented, scalable access to the country’s largest client segment. “This segment also opens a world of opportunity for affluent investors to diversify their investment portfolios into a low-risk asset class yielding stable returns,” said Sajeev Viswanathan, CEO, Bhartiya Samruddhi Finance (a microfinance company promoted by BASIX). Excerpts:
How is microfinance evolving as an investment avenue?
The credit portfolio of the poor stands at a meagre 1% of the total credit outstanding of the country. A well-managed growth in the industry could register a five-fold growth in the next 3-5 years. At a socially-justifiable and economically-sustainable 4-5% return on assets , we are talking about one of the most attractive investment opportunities. Apart from good returns, investments in microfinance help investors diversify their portfolios. Another encouraging factor is that 99% of rural borrowers repay their loans on time. Non-performing assets (NPAs) or loan defaults could be the barest minimum in microfinance investments.
You mean to say there are no risks while investing in MFIs?
Broadly speaking, there could be only two types of risk while investing in MFIs. Event risk, for one, is when any occurrence or happening impacts the livelihood of the borrower. Natural calamities such as floods or droughts or political unrests could severely impact the sustenance of the borrower. Secondly, there is a liquidity risk with respect to investments in microfinance. MFIs should also try to inculcate the habit of savings among borrowers. Borrowers should be advised on investment or money-saving options like investing in insurance policies and pension funds or even hold their savings in a simple bank account.
This was where high ‘on-time repayment rate’ comes handy. With a diversified portfolio spread across different states and multiple income streams, several MFIs — Basix included — grew at about 100% annually over the past two years. Such vibrant growth made MFIs a favourite asset class among lenders.
RBI’s comprehensive policies to sustain financial inclusion also ensured that this remained a priority sector investment for banks thus guaranteeing unrestricted access to capital. However, without savings and deposits services to the poor, MFIs’ mission of financial inclusion remains only half fulfiled. It’ll be great if the government provides well-managed (NBFC) MFIs a status similar to that of housing finance companies, and also progressively allow deposit taking from its clients.
What is stopping MFIs from tapping the capital market?
With MFIs increasingly becoming a powerful and responsible investment avenue, it is only imminent that valuable MFIs will open out to larger public investments through listings in the capital markets.
How is microfinance evolving as an investment avenue?
The credit portfolio of the poor stands at a meagre 1% of the total credit outstanding of the country. A well-managed growth in the industry could register a five-fold growth in the next 3-5 years. At a socially-justifiable and economically-sustainable 4-5% return on assets , we are talking about one of the most attractive investment opportunities. Apart from good returns, investments in microfinance help investors diversify their portfolios. Another encouraging factor is that 99% of rural borrowers repay their loans on time. Non-performing assets (NPAs) or loan defaults could be the barest minimum in microfinance investments.
You mean to say there are no risks while investing in MFIs?
Broadly speaking, there could be only two types of risk while investing in MFIs. Event risk, for one, is when any occurrence or happening impacts the livelihood of the borrower. Natural calamities such as floods or droughts or political unrests could severely impact the sustenance of the borrower. Secondly, there is a liquidity risk with respect to investments in microfinance. MFIs should also try to inculcate the habit of savings among borrowers. Borrowers should be advised on investment or money-saving options like investing in insurance policies and pension funds or even hold their savings in a simple bank account.
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How did MFIs fare during recession? This was where high ‘on-time repayment rate’ comes handy. With a diversified portfolio spread across different states and multiple income streams, several MFIs — Basix included — grew at about 100% annually over the past two years. Such vibrant growth made MFIs a favourite asset class among lenders.
RBI’s comprehensive policies to sustain financial inclusion also ensured that this remained a priority sector investment for banks thus guaranteeing unrestricted access to capital. However, without savings and deposits services to the poor, MFIs’ mission of financial inclusion remains only half fulfiled. It’ll be great if the government provides well-managed (NBFC) MFIs a status similar to that of housing finance companies, and also progressively allow deposit taking from its clients.
What is stopping MFIs from tapping the capital market?
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The need of capital will increase, as the sector continues to grow. Moreover, the move to increase capital adequacy ratio (CAR) for NBFCs from 10% to 12% this year and eventually to 15% next year, will require a significant quantum of capital infusion into the sector. Till now, MFIs were receiving investments from donor funds, mutual funds, private equity and through sub-debt structures. With MFIs increasingly becoming a powerful and responsible investment avenue, it is only imminent that valuable MFIs will open out to larger public investments through listings in the capital markets.
How can microfinance be made more affordable to the poor?
MFI intervention, although very recent in India, has already made a significant impact on millions of households across the country. MFIs have provided institutional dignity to the poor who otherwise were treated as outcasts by moneylenders despite being charged exorbitant rates of interest. Well-managed MFIs can deliver credit products to their clients at a reasonable all in cost of about 26-30%.
Going ahead, technological advances will further reduce MFI operating costs. Institutions like Basix have last-mile connectivity products like common service centre kiosks, remote data centres, dedicated links and other IT resources. Investment in technology will go a long way in reducing the operating costs and in building scale.
MFI intervention, although very recent in India, has already made a significant impact on millions of households across the country. MFIs have provided institutional dignity to the poor who otherwise were treated as outcasts by moneylenders despite being charged exorbitant rates of interest. Well-managed MFIs can deliver credit products to their clients at a reasonable all in cost of about 26-30%.
Going ahead, technological advances will further reduce MFI operating costs. Institutions like Basix have last-mile connectivity products like common service centre kiosks, remote data centres, dedicated links and other IT resources. Investment in technology will go a long way in reducing the operating costs and in building scale.
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