Microfinance institutions (MFIs) that became small finance banks (SFBs) in the last one year and gained access to a more wealthy and diversified clientele will continue to be critically dependent on their low-value borrowers even in their new avatar, several industry executives say. Most SFBs also expect a sizeable portion of their non-MFI loan growth to come from upgrading existing MFI customers.
In September 2015, the Reserve Bank of India (RBI) gave in-principle approval to 10 applicants to set up SFBs, of which nine were MFIs. Currently, MFI loans form 90-98% of the loan book for SFBs, most of which expect up to a quarter of their MFI customers to be upgraded to non-MFI loan products immediately. Since the non-MFI loan book of these banks is still very small, the upgrading will bolster the growth of non-MFI portfolio in the coming years.
Varanasi-based Utkarsh SFB is expecting at least 25% of its MFI customers to be upgraded to advanced loan products like small ticket home loans and two-wheeler loans. "If we take care of our current customers, it will take care of our initial requirements of growth for the next 3-4 years. MFI business will not become secondary for us," Govind Singh, managing director and chief executive at Utkarsh SFB said, adding microfinance will continue to be the bank's mainstay in the coming years as micro lending is a viable and scalable business and will be a source f potential customers. Utkarsh has 1.3 million MFI customers and a loan book of Rs 2,300 crore.
Even as most SFBs plan to reduce the share of MFI portfolio in their total loan book below 50%, they do not intend to lower the growth of the MFI business. "We expect that about 20-25% of our MFI customers have the need and capability to avail of other advanced loan products from us. As we grow our MFI book, again a fraction of those customers will become eligible for non-MFI loans. It is a journey. You acquire them as MFI customers and graduate them to superior loan products over a 2-3 year period as they become better off," said Rajeev Yadav, managing director and chief executive officer, Fincare SFB.
Yadav added that getting a bank licence will allow the SFB to retain micro borrowers who would previously move to full-fledged banks for their other loan requirements as they became better off. "Our MFI strategy does not change. What changes is the fact that now, future customers of banks in the small-ticket category will be served by us," he said, adding that bringing down the MFI business as a percentage of the loan book is merely to diversify risks. Fincare has about 1 million customers to whom it has lent a total of Rs1,400 crore.
Apart from MFI loans, SFB are launching new loan products for their upgraded MFI customers. These include small home loans, loans against property, small shopkeeper loans, gold loans, two wheeler loans and a small overdraft facility.
Kerala-based ESAF SFB and Navi Mumbai-based Suryoday SFB also expect about 10-15% of their MFI customers to be upgraded immediately to advanced lending products. ESAF and Suryoday have 1.4 million and 800,000 customers respectively. R. Baskar Babu, MD and CEO at Suryoday, said its micro lending business will continue to grow 25-30%.
"We are not rigid on the idea that the MFI book has to be brought down sharply. Experience in the microlending segment where one has to lend to the customer without any visible assets will allow us to move up in segments that are underserved," Babu said.
As MFIs in their previous role, SFBs largely lent to joint liability groups. They, however, are now looking to tap the individuals of these JLGs to expand their business. A JLG is an informal group of 4-10 individuals jointly seeking a bank loan.
Apart from direct upgrading of MFI accounts, most SFBs expect their business growth - both loans and deposits - to come from the families and acquaintances of their MFI customer base. "Many of our new customers will come from our existing MFI catchment areas. As an MFI, we deal largely with women or with individuals or one person per household basis. Now, as a bank, we can cater to the needs of their family members as we can offer different loan solutions," said Singh of Utkarsh.
According to analysts, the micro lending sector, which had taken a beating due to demonetisation, is back on track. "Average monthly disbursements are scaling new peaks, implying portfolio (MFI) growth will improve. The collection rate on the loans disbursed in this calendar year is closer to the pre-demonetisation level," said Rajiv Mehta, banking analyst at IIFL Investment Managers.
According to a report dated 7 December by credit ratings company Icra Ltd, overall collection efficiency in the MFI sector continues to improve, increasing to 94% in September 2017 from a low of 87% in December 2016. "Several MFI players reported over 98% collection efficiencies for the loans disbursed after January 2017. Consequently, fresh slippage of loans has been arrested," the report said.
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