MFIs, banks need to revisit micro-loan pricing: CreditAccess Grameen MD

Udaya Kumar Hebbar comes across as a contrarian when he says that the industry has learnt to navigate lockdowns

The second wave of the Covid-19 pandemic has the potential to trip the financial sector all over again. For microfinance institutions (MFIs) that cater to the bottom of the pyramid, it is particularly challenging, given their dependence for funding on banks, even as they compete with them. UDAYA KUMAR HEBBAR, managing director of CreditAccess Grameen, comes across as a contrarian when he says that the industry has learnt to navigate lockdowns. He spoke to Raghu Mohan. Edited excerpts:
 
How is the second phase of the pandemic going to affect your collections?
 
In the first phase of the lockdown last March, you were not allowed to do anything for 40-45 days. This time around, the majority of the states have allowed microfinance institutions (MFIs) to operate as an essential service. In some states, like Chhattisgarh and Madhya Pradesh, it has been left to the local district administration to take a decision on this front. So, each district might take a different view, and this can affect collections. But disbursements have been hit hard, and new customer acquisition has also been affected. That said, the industry has learnt to navigate the lockdowns. What I mean is that customers who couldn’t take the lockdown in their stride are already defaulters. If I have 100 customers, and six of them have defaulted, it’s not that another six customers will default, going ahead.

 

 Is the data of MFI customers being adequately captured in the credit bureaus?
 
You have four credit bureaus now — CIBIL, Swiss High Mark, Equifax and Experian. We are mandated to share data with all of them. The cap on the loan given by an MFI is Rs 1.25 lakh; and the rule also states that not more than three MFIs can lend to one customer, subject to the same cap. That’s why today, in the entire spectrum of microfinance (be it via MFIs, non-banking financial companies, or banks), while you have close to 60 million customers, those who have taken more than Rs 1.25 lakh account for only 3.4 per cent of this base.

 
Just about every financial vendor is using digital to source business. How is this aspect playing out for MFIs?
 
There are two parts to digitisation. One is internal to our processes, which enables us to reduce costs and the turnaround time. The second part is the ability of the customer to make use of this route. A customer could be a lady in a village with two cows. It will take a long time to train her on digitisation. And it’s completely unsecured business. In the rural sector, you don’t have a proper digitised record of customers’ incomes. This is both a high-touch and a hi-tech business. Over a period of four to five years, at least 40-50 per cent of them may be able to go digital. That is why we continue to put in efforts to enhance digitisation, but in the meantime, this is not an important issue for us.

 
Why have you not applied for a small finance bank (SFB) licence?
 
We believe that for working in rural areas and with low-income households, you don’t need a banking licence. I am quite happy with the current regimen. Our view is to continue to work with the rural and the under-penetrated segment. Then, nearly 15 per cent of our liabilities are from international sources. And we have the intent to take it to 30-35 per cent in the next two to three years. This will take care of our funding needs instead of going to banks. As for MFIs when they become SFBs, their rural expedition stops. Their thought process anyway was to become a bank and diversify into multiple products.

 
What is your view on the rate at which banks and dedicated MFIs lend to the sector?
 
There are three aspects to this. One, you can’t lend at more than 26 per cent to anybody. And two, you can’t price a loan at more than 2.75 times the marginal cost of funds-based lending rate of the top five banks in the country; and this works out 21.45 per cent. And, third, you can’t price at more than 10 per cent over your cost of borrowings. For example, our cost of borrowing is about 9.4 per cent as of the last quarter. So, we are charging 19.45 per cent, which is the lowest in the industry. And on top of all this, the lowest of these calculations is to apply for pricing. Whereas for banks, there is only one rule — that pricing cannot be more than 26 per cent.

 
What is your problem with this, since customers will prefer MFIs over banks, given the lower pricing?
 
I concede that point, but in this segment, customers are still not price-sensitive, because it is still better than the money lender. It also leads to a higher level of customer indebtedness, as the cap of Rs 1.25 lakh per customer is not applicable to banks. We have to protect the customer also. I think the Reserve Bank of India may harmonise regulations on this front, soon.