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Microfinance institutions (MFIs), which evolved as precursors of the rural thrift credit market in India, are now shifting to urban areas, with big slums in cities turning out to be cost-effective markets over small villages in far-flung locations. In a short span of nearly five years, the urban microfinance market has cornered one-third of the gross loan portfolio of MFIs. The industry expects the ratio to change to 50:50 over the next three years.
Barring the two old-generation MFIs-Bandhan and SKS-the next four top MFIs have nearly 70 per cent of their portfolio focused on urban areas.
Taking a cue from the success of the urban MFI sector, Bandhan, which is expected to transform into a bank soon, will replicate its rural microfinance market in urban areas too.
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"The growth in the urban portfolio is more than that in rural areas, as the density of population is high in urban areas," said Chandra Shekhar Ghosh, chairman and managing director, Bandhan.
Today, two of the biggest urban-focused MFIs --Janalakshmi and Ujjivan--are run by former investment bankers. While tweaking the traditional model of micro-lending, the new generation, urban-focused MFIs have incorporated several technological upgradations to replicate the retail banking model.
For instance, Ujjivan, the fourth largest MFI in the country, started by a seasoned banker, Samit Ghosh, has changed the traditional lending model by introducing concepts like monthly group meetings in place of weekly meetings. In addition, nearly half of its disbursals are now credited directly to the bank accounts of its borrowers.
"Rural customers are more demanding. They don't have time for weekly meetings. So we replaced the weekly meeting cycles with monthly meetings. On the flip side, there is little cohesion among the group members, and hence a lending group in cities comprises five members, against nearly 30 in villages," said Ghosh.
Janalakshmi, the third largest MFI in the country, promoted by former investment banker Ramesh Ramanathan, saw a 100 per cent growth in loan portfolio in the last financial year. Recently, it tied-up with DCB or Development Credit Bank to launch a co-branded prepaid card for disbursal of small loans to its urban clientele.
"A significant number of the new-generation MFIs are urban-focused. Their growth rates have tended to be higher than the older, rural-centric, MFIs. Given demographic trends and demand patterns, in portfolio terms, the mix of urban to rural could well get to a ratio of 50:50 over the next 3-4 years. Both urban and rural markets are important for MFIs," said Alok Prasad, CEO, MFIN.
At present, a bulk of MFIs' operations cost goes out in opening offices in rural areas. However, in urban slums, the cost of operations is much lower due to the elimination of need for offices. Also, the per head employee cost is trimmed as there is no need to travel long distances for reaching customers.
