There are over 40 MFIs in the country who are in regular need for funds given the huge un-banked population in the country. A key ingredient for a successful micro finance lender is to be well capitalised and have ready access to low-cost funds.
Microfinance industry’s poster child Bharat Financial Inclusion --formerly SKS Microfinance--had some months ago decided not to continue as a standalone micro financier. Failure to win a small bank licence in 2015 and then suffering collateral damage during demonetisation prompted the management to look out for a strategic partner.
It has found an interested suitor in IndusInd Bank with whom a merger is being discussed. Should the deal happen, Bharat Finance will get access to a strong line of credit and IndusInd Bank will get a high margin business with a huge client base. The only hitch could be the merger ratio as each party would want the best deal for its shareholders.
More importantly, the deal sends out an unmistakable signal that the end game for micro-finance companies has begun.
There are over 40 microfinance companies in the country who are in regular need for funds given the huge un-banked population in the country. A key ingredient for a successful micro finance lender (for that matter any lender) is to be well capitalised and have ready access to low-cost funds.
There is a limit to which a bank can raise equity to capitalise itself, without being listed. Further, with Jan Dhan Yojana, the market for un-banked customers is fast-shrinking. Banks with low-cost funds can easily snatch away a micro financier’s customers. Furthermore, banks can offer a variety of other financial products which a microfinance company cannot, because of regulations.
There are very few circles left for microfinance companies to grow. Data shows that client acquisition growth in urban areas is in low single digits, and in only some pockets of rural areas does it exceed 20 percent.
Thankfully, for the microfinance companies, banks are also seeking partners to expand their business and boost profit margins. Banks have understood that the risky client is not the poor villager who borrows money for livestock. Rather, it is the corporate who borrows money for an over inflated project and conveniently forgets to pay or uses political pressure to delay the inevitable. The repayment record of all micro-finance companies testifies to the credit worthiness of the poor.
Micro-finance companies have two options before them to survive and thrive. One is to become a bank like Bandhan, and the second is to look out for a strategic partner, like Bharat Financial has. Unless they choose one of the two, they would be no better than the traditional moneylender who keeps on milking his limited customer base.For more research articles, visit our Moneycontrol Research Page.