MFIs-payments banks partnership to benefit both: SKS Micro

Speaking about the growth of the micro finance institutions going forward PH Ravikumar, Non-Executive Chairman, SKS Microfinance touched upon a very interesting topic - that is partnership of payment banks and MFIs which would benefit both the institutions in the long run because MFIs as of date have the best network of borrowers.Ravikumar confirms that the company has been approached by several payments banks so far but  nothing has been finalised as yet. Talking about growth for the industry as a whole, Ravikaumar says, FY16 could see the industry growing by 35-50 percent but post that in FY17, there would be some slowdown because the MFIs that have got small bank license would be shift their focus on conversion to bank. The conversion to banks would take anywhere between 12-15 months, he adds.On the penetration front, he says the MFIs so far is only 11 percent versus average 18-19 percent, globally. The stock performance of SKS Microfinance was hit after RBI excluded it from the list of small bank licence. However Credit Suisse still has outperform on the stock with a target price of Rs 480 per share. The company too believes not getting a bank license is not the end of the road for them._PAGEBREAK_Below is the transcript of PH Ravikumar’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: What is your sense? Will a licence make a very big difference to microfinance companies and alternatively not getting it, will it be a big loss in terms of getting cheap money? A: Jury is out because obviously, since all of us applied for licence. Very clearly, we felt on the balance, it would make a difference, but you must understand that the scenario is different for the different categories of microfinance institutions if you take some of the more urban microfinance institutions and some of the more rural microfinance institutions. You are aware that 72 percent of Indian banking deposits com from top-200 cities in India which means 28 percent of banking system deposits come from other cities, other semi-urban and other rural areas. Roughly, rural deposits as a part of existing banking system in my opinion are less than three percent, maybe in fact, less than two percent. Relying on deposits as the key driver for rural microfinance institutions is going to take a long time. Even urban microfinance institutions, I would compare them with cooperative banks, urban cooperative banks. Urban cooperative banks have also migrated to technology. They have also moved to providing customised solutions to their customers. Therefore, I am keeping my fingers crossed as to deposits as a reason for becoming a bank is this whole reason. Having said that, I must also say that the Reserve Bank of India (RBI) policy postulations clearly push non-banking financial companies (NBFC) whether microfinance institution (MFI) or non-MFI as they grow in size to become banks. That is one reason the regulatory landscape is also a reason why most NBFCs and NBFC MFIs had applied for banking licence whether in the full scale bank licence exercise or this one. Sonia: What do you see as the growth for the microfinance industry from here on because for SKS Microfinance, particularly as well, the growth has been very steady? I mean loan disbursements have gone up by 100 percent. Even as early as the quarter gone by, the net interest income (NII) growth has been 50 percent. What do you reckon could be the growth trajectory for the industry as a whole for the next 6-12 months? A: This year, the growth trajectory should be in the region of 35-50 percent. My opinion, the sector as a whole should grow by 35-50 percent. In fact next year, the year 2016-2017 could see some slowdown because the entities which have received the licence would be focusing on the infrastructure and related issues relating to and converging to a bank. And I believe they will see a slowdown in their growth which will affect the overall growth of this sector. Latha: There was a fear on the part of some investors that – in fact I am referring to a Religare report – which says that microfinance institutions have over penetrated in some of the Southern states and they could be double-triple lending to the same set of households and hence a fear of saturation. Would you say there is that fear? A: There is no doubt that the penetration in South India is much higher than the Western, Northern and Eastern regions of India so far as microfinance institutions are concerned. Having said that, both RBI regulations and at least definitely the larger of all the microfinance institutions now share data with the credit bureaus and most of us do not lend to borrowers if already two MFIs are lending to a potential borrower. And that trigger has been adopted by almost all the major microfinance institutions. So, I am not therefore seeing a repeat of 2011 where multiple microfinance institutions push credit down the throat of a MFI borrower. I am not seeing that issue. Having said that, overall the microfinance penetration in India is about 11 percent vis-à-vis the average for the major 15 countries where MFI is strong is about 18-19 percent. So, we may have a regional imbalance so far as penetration is concerned, but we are far away from where the global peers are. Latha: So, this 30-40 percent growth is still possible, you think for the next couple of years? A: Growth in microfinance institutions, at least for the present is restricted by what the individual companies management, board and executive management want it to be. Typically, you take, population is 1.25 billion, 6 people per family makes it 200 million of which 26 percent is around the poverty line which makes it easily 50 million, which means 500 lakh borrowers. All of us put together are not even a third of it. or maybe closer to 30 percent. So, this is one segment in financial services where if we get our risk and our distribution right, growth is not a constraint. Sonia: Just to get some absolute numbers if you have any ballpark numbers with us, what could the loan disbursements for the industry as a whole, what is it now and how much could it grow to in about two to three years? A: Rs 35,000 crore was the outstanding roughly as on March 31, 2015 and of I say 40 percent is the annual growth, incremental disbursements are Rs 14,000 crore on a outstanding positions. But, if you take for example an entity like SKS itself, 75 percent of our loans are by way of one year loans which means every year for achieving a growth, we do not have to alone replace the existing book, but lend additionally. Taking incremental disbursement into account, I would say the incremental disbursements would be somewhere between Rs 25,000 and 35,000 crore. Latha: Now you also have a challenge from the payments banks segment. We just heard Mr Vineet Nayyar of Tech Mahindra tell us that they are one of the winners of the payment bank licence and they will be able to provide loans from Mahindra & Mahindra Financial Services Limited (MMFSL), although as a payment bank, they will only be allowed to take deposits, they will actually be able to sell loan products from their group company. I would assume likewise idea would be able to do it. They have a huge NBFC backend and so do you see your traditional space getting eaten? Definitely all of your customers will have a mobile phone and if there is a bank account and a loan being sold through that phone, is that competition? Will that in some way stymie both your margins as well as your growth? A: In fact, if I were Mr Vineet Nayyar, I would partner SKS Microfinance because Mahindra Finance, I know they are the ones who have been a pioneer in rural lending, but if you look at the distribution network of Mahindra Finance, it is actually sitting above that of rural branches of public sector banks. While Microfinance institutions, the branch network is below the network of rural branches of public sector banks. Therefore, the customers who are our customers, the microfinance industry segment customers are nowhere touched by NBFC lenders including Mahindra Finance. (Interrupted) Latha: No, they are not. I said they will be. I am sure they are not. A: Unless they have a strong banking correspondent (BC) network and who could be a better BC than microfinance institutions. Latha: Are you speaking to them? A: So, unless they partner microfinance institutions. Right now, they have the licence, they have to speak to us. Latha: Are you being approached by any of the payments bank guys? As you say, you have the best network of borrowers. A: Several of them. Several independent of the payment bank licence allotment, I would say that we were already doing pilots with the global investor Mr Vinod Khosla. He has an effort going on in Northern Karnataka. We have partnered him in running pilots in Northern Karnataka using the payment bank technology to create closed user group communities. The challenge for microfinance institutions which continues to be there today, but which hopefully the payment banks will solve is that our last mile is fully cash based. We need to take cash, receive cash and that adds to our operating expenses. We have substantially surmounted the challenges in the networking of very granular rural centres and that technology assimilation has helped us reducing our operating cost, but the elimination of cash will add easily one to one and a half percent in the margin and that a partnership with payment banks will definitely achieve that. Latha: So, when can we hear about you signing on the dotted line with any payment bank? A: No, we have not reached that stage. I would say too far away. Sonia: So just to understand in a tie up with a payment bank, what kind of revenue of a fee structure will a company like yours be able to enjoy? A: It has to be derived from the fee structure that the payment banks themselves have projected. If payment banks have projected ‘x’ for putting in place technology for let us say remittances and related payment businesses, it can be revenue to a service provider, can be only a fraction of it. Therefore, unless you achieve scale and it has to be a massive scale, at least in the next two three years, I am not seeing a substantial fee income growth even if there is a tie up between anyone of the microfinance institutions and one of the payment banks. Sonia: You had also said earlier that in FY17, the industry will see a slowdown because of all the infrastructure issues for a conversion to a bank. How long does it take approximately for an MFI to convert to a bank seamlessly and the conversion process, the infrastructure issues to be sorted? A: I am only looking at the experience of Bandhan, because Bandhan was the largest of the MFIs and they did slowdown because of the management bandwidth issues, sustaining a current growth momentum as well as conversion into a bank. Taking that into account, I think it takes anywhere between 12-15 months.