Can micro finance institutions succeed in banking world?

Can RBI use the opportunity to issue new bank licences to make a big difference to the unbankable? None of the indian PSUs and private banks have cracked the bottom-up model but microfinance institutions (MFI) have. Is it time to take a leap of faith and issue atleast one or some licenses to those who have a record of successfully lending to the unbanked? Gopika Gopakumar of CNBC-TV18 reports on the possibility of MFIs entering the business of banking.

D Subbarao, governor, RBI said, "Financial inclusion is an important criteria for evaluating application for licenses." As the governor spills the beans on RBI's expectation from the new banking applicants, microfinance companies like Janalakshmi are banking on his word. Ramesh Ramnathan, the head of Janalaskhmi, says microfinance companies are the one-size-fits-all solution to banking the unbanked. Ramesh Ramnathan, promoter-director, Janalakshmi, "Mainstream India is well-banked, competitively banked and does not need a new set of players to come and compete over crumbs that are available. What is really needed for India is the rest of India to get covered through banking services. And what has been demonstrated over the last few years is that no matter how innovative our formal banks are,  they are unable to crack the model of credible commercially viable financial inclusion. I think that is the cornerstone of new banking regime." However, not all microfinance companies are sounding so confident. Big names like SKS, Bandhan and Basix are still debating whether to apply for a banking license. According to Vijay Mahajan, founder & chief executive officer of Basix, "Merely being an MFI doesn't qualify you for a bank. It doesn't matter how big or small you are, because an MFI, by definition, deals with only one market segment. And when you are a bank, you will have to deal with all segments of the economy. So, even if you are a 3000 crore MFI, you don't have any experience of dealing with me, leave alone corporate or larger clients. Therefore, being an MFI is no great qualification." Finance experts also point out that banks may not give the same return on capital that the MFIs have been giving. Then why go for a bank? PH Ravikumar, former magaing director and chief executive officer, NCDEX opines, "The valuation multiples which is the best return that equity holders get for NBFCs, is in is in no ways inferior to what banks have achieved. Whether you seen on an average or you see the best in NBFCs vis-a-vis the best in banks, the best NBFCs get similar returns as are generated by the best return banks. Therefore, it is not very clear that becoming a bank is the best way to generate return on capital." Microfinance companies are still recovering from the impact of the Andhra Pradesh crisis that hit the industry in 2010. Capital is king for these MFIs. They would , therefore, be cautious before getting into a capital guzzling business like banking.