Interview | CreditAccess to enter India life insurance business, hopes to get approvals in the next 6 months

Udaya Kumar Hebbar, Managing Director and chief executive officer of Credit Access Grameen

CreditAccess India N.V., promoter of microfinance company Credit Access Grameen, plans to enter the lucrative insurance business market in India and expects to complete the process of approvals in the next six months, said Udaya Kumar Hebbar, Managing Director and chief executive officer of Credit Access Grameen in an exclusive interview to Moneycontrol.

The life insurance business will be housed under a separate subsidiary of the promoter that will be called CreditAccess Life Insurance Limited. The company is aiming to complete the licence and approval process over the next six months, Hebbar said.

Hebbar also spoke about a range of issues including CA Grameen’s business strategy going ahead and growth outlook.

Edited excerpts:

What is the update on CreditAccess entering the life insurance business?

Our promoter CreditAccess India N.V., headquartered in Amsterdam, is in the process of commencing a life insurance business in India, focusing on low-income households. The life insurance business shall be housed under a separate subsidiary of our promoter and shall be called CreditAccess Life Insurance Limited. They are aiming to complete the licence and approval process over the next 6 months.

Will CA Grameen be investing in this?

CreditAccess Grameen shall not be making any investment in the promoter’s life insurance business. However, CreditAccess Life Insurance will become our captive insurance partner for most of the insurance products as part of our corporate agency along with other insurance partners to facilitate the distribution of life insurance to our customers along with end-to-end claim management. We shall ensure that our business with the life insurance arm is at arm’s length, ensuring suitable and cost-effective insurance solutions for our customers.

How does your promoter plan to meet the future capital requirements of the life insurance business?

Our promoter currently owns around 74 percent stake in the life insurance subsidiary and the remaining 26 percent has been contributed by domestic partners. Hence, the capital investment required by the life insurance business has been already entirely managed by our promoter and other domestic partners.

Is there interest from other investors?

Our promoter has already been witnessing strong interest from global investors who are keen to participate in India's microfinance and life insurance market potential. Recently, they received a 2 percent investment from an Italian bank, Intesa Sanpaolo, basis their disclosure on December 5, 2022.

How does the company plan to give liquidity to its shareholders?

CreditAccess Grameen is aiming for 20-25 percent portfolio growth over the medium term, which will require reinvesting of internal accruals in the business. We have a dividend policy in place and we shall evaluate the distribution of dividends to our shareholders, including our promoter, depending on our business growth and profitability over the coming years.

What will be the role of CA Grameen promoter in the MFI arm going forward?

Our promoter will continue to hold a majority stake in our company and continue to support as an anchor role for CreditAccess Grameen. More than 250 shareholders in the holding company have been supporting with more than adequate growth equity for the past 15 years to CreditAccess Grameen. Our promoter has the plan to create some liquidity for them by selling a certain portion of their holding in CreditAccess Grameen in the medium term.

Is the promoter planning to exit part of the holdings in the microfinance company?

Our promoter may look to sell up to 5-6 percent of their holdings per financial year through planned block transactions, aggregating to 10-12 percent over a couple of years. This will be done to ensure a higher free float and provide liquidity. However, such transactions shall be executed only on firm interest received from high-quality multiple long-term investors, and at a price level reflecting the business fundamentals and growth prospects, amid stable market conditions.

In a rising interest rate environment, how are you placed to protect your margins and profitability?

The net interest margins of players in the microfinance industry are expected to structurally improve going forward, basis the new RBI guidelines announced in March 2022, which agreed to the removal of the interest spread cap and allowed risk-based pricing. We were at the forefront to align with the new RBI guidelines in April 2022, post which our yield on new disbursals was adjusted with risk-based pricing, with an increase of around 120 basis points (bps).

How has your cost of borrowing changed?

While the repo rate increased by 190 bps during May to September period, our weighted average cost of borrowing increased by only 30 bps and the marginal cost of borrowing increased by only 50 bps with our strong and diversified liability management. Such minimum increases were passed on to customers from time to time while keeping our margins intact. We can efficiently manage our cost of borrowing due to our well-diversified liability profile with 40 percent fixed rate loans and 60 percent floating rate loans primarily linked to MCLR.

Do you intend to apply for a Small Finance Bank or bank licence or continue as MFI?

We are currently piloting certain products like secured business loans, affordable housing loans, two-wheeler loans and gold loans, which are required by our target customer segment to support their growth aspirations. We are not intending to apply for SFB/bank licence and would like to focus on building a solid, scalable and diversified asset base over the coming years, leveraging on our deep understanding of end markets in rural India. Parallelly, we are also working on strengthening our liability profile, which can allow us to achieve the desired scale and size over the coming years without being transitioned as a bank.

What is your growth outlook for the next five years?

We are aiming to grow our gross loan portfolio at 20-25 percent CAGR over the coming five years, driven by both customer and branch network growth at 10-12 percent CAGR each. The microfinance industry currently has around 6 crore active borrowers, whereas the addressable potential is around 17 crore, indicating only 35 percent penetration. The penetration in rural markets is further lower at 25-30 percent. We are also aware that rural India has a 47 percent share of GDP but only a 10 percent share in overall credit. Further, RBI’s new guidelines allow us to diversify into other lending segments up to 25 percent of total assets.

Are you happy with the way RBI regulations have evolved for micro-credit since the 2010 crisis period? Are there any gaps to be filled?

The central bank has applauded the contribution of the microfinance industry to foster financial inclusion over years through door-step credit in remote areas, which is visible in the new regulations. It has been the demand of the industry to bring parity given the industry has matured over years by manoeuvring various economic cycles with its resilient operating model and achieving a certain scale. Customer protection is the guiding principle under the new regulations, which state board-driven pricing policy, a maximum 50 percent fixed obligation to income ratio, a detailed display of the loan pricing and others, which are driving factors towards better transparency and governance. We should give some time for the sector to evolve in the current landscape.

What is your expectation from Budget this time particularly in the context of your industry?

Given the importance of the rural economy in the growth multiplier framework, the Union Budget 2023-24 is expected to focus on rural infrastructure and allocation to the MNREGA scheme. Any measures announced towards the betterment of rural healthcare, improvement in rural education, ensuring an adequate supply of input factors for agriculture and efficient price realisations for farmers, improving the efficiency of the rural-urban logistics network and increasing thrust on micro insurance would have a multiplier effect on the rural economy over coming years. These are the inclusivity drivers which touch the lives of the bottom of the economic pyramid served by the microfinance industry and are a big positive for us.

Do you share the view of some of your industry colleagues that big banks are still keeping small lenders in microcredit on the sidelines? 

Over the past two years, due to the disruption caused by the Covid pandemic, it was a bit difficult to raise funds for small NBFCs. However, things are slowly improving with interventions like the CGS scheme, PTCs, funding by NBFCs, SFBs etc. Given the vast potential available, the industry is moving towards collaborative business strategies using the co-lending model, where the banks are looking for opportunities and partnering with small and medium lenders to leverage their distribution network and supply credit to the underserved segment.

What are the next triggers for MFIs in their evolution in India? Will they remain relevant?

In the last 25 years of the microfinance industry, we saw it growing phenomenally to Rs 3 lakh crore serving 6 crore households. While there is a vast opportunity to reach over 10 crore low-income households, the new regulation has also created an opportunity to access family-level data. Therefore, the next phase of the growth journey with the rural household as the focus area signals data-enabled processes, product development, risk controls and digitisation of processes using artificial intelligence or big data. This is a huge opportunity to meet the growing rural aspiration. Therefore, we will see new products being introduced which will make the industry further resilient and remain relevant in the changing landscape.

Is the new crop of small lenders a threat to MFIs?

The microfinance model has a huge highway to grow given the penetration achieved to date. The new set of lenders doesn’t pose any threat to the microfinance players as we have all the capability to meaningfully serve the borrower base. i.e. post demonetisation over 99 percent of disbursements are directly in the bank account, an instant credit bureau check facility has been enabled, QR code is provided if they wish to make the repayment in a cashless manner. We are enabling the digital ecosystem by working in deep rural areas and understanding their needs. In fact, they are complementary to us in achieving broader outreach.