Microfinance looks attractive

OUT OF FOCUS

If all goes well, ICICI Bank will close it's accounts this fiscal with a microfinance book of close to Rs 400 crore. This will be up from last year's close at Rs 150 crore. A big leap for the bank. But a far bigger one for microfinance.

Considering annual disbursement last year to the microfinance sector by the banking sector as a whole totalled about Rs 1000 crore, ICICI Bank's increased lending to this sector gains significance.

While its size puts ICICI Bank at one end of the spectrum, foreign bank ABN Amro's efforts in this sector defines the other. The latter is likely to close this fiscal with a disbursement to this sector of close to Rs 6 crore.

HDFC Bank, UTI Bank and a few other private sector banks are in the middle. These are a group of banks which have done their numbers and are looking at microfinance as more than what it has always been, merely a priority sector target.

Because, the banks, as microfinance practitioners have been predicting, are finding that this asset class is bankable. But more importantly, an asset class they need to cultivate for the long-term.

Nachiket Mor, executive director, ICICI Bank , responsible for it's microfinance thrust points to ICICI Bank being a big part of the economy and hence considers it important to grow the economy bottom up. He also points to the current reality which is making both corporate lending and farm lending extremely competitive.

So a combination of investment into child health, elementary education and microfinance (in loans of Rs 5,000 to Rs 20,000) might create a franchise for ICICI Bank in a hitherto untapped constituency. And as yet ICICI Bank is only talking rural microfinance. Urban microfinance can only see the potential balloon.

Moumita Sen Sarma, head of microfinance, India, ABN Amro too says her bank sees microfinance as a means for an otherwise mainly urban bank (present in nine cities) to create a franchise in a population that will become the bankable mainstream over a period of time.

ABN Amro not only has a target in crores for its microfinance portfolio, but also in the number of households (1 million in five years).

Having a successful microfinance practice in Brazil, where ABN Amro is a local bank, the bank has chosen India as the next country to build its global microfinance book.

What is as important as the increase in interest in lending to the rural poor is the manner in which it is being done. So far, the main route for marginal loans of Rs 20,000 and less was by the banks lending to microfinance institutions which in turn would lend to self help groups (SHGs) set up by Non Governmental Organisations (NGOs).

There is now a realisation that this might be too slow a process, constrained by the capacity of the NGOs. For the entire country, the number of SHGs formed till date number around seven lakh. Give or take even a few lakh, these numbers are hardly sufficient to allow banks the aggressive microfinance portfolio that they are planning.

So banks are looking at a more direct route which could facilitate mass retailing. For this, the first preference is of course to route the money through rated microfinance companies. But there are not many of them.

And the Reserve Bank of India (RBI) does not allow any other companies besides those registered as Section 25 companies or non-banking finance companies (NBFCs) to engage in financial intermediation.

So banks who wish to stay on the right side of the RBI guidelines are ensuring that they have a framework which allows them outreach without sacrificing banking prudence.

So at one level, more microfinance companies are being brought into the net for intermediation. But the route which is really likely to change the face of rural microfinance lending is what banks are terming 'partnerships'.

Similar to the concept of direct sales agents through which banks have been dispensing consumer loans and car loans for over a decade now, these 'partnerships' will allow banks to lend in the rural areas without the money actually passing on to the books of these intermediaries.

They would really be agents to identify borrowers and therefore be extended arms of the banks. ICICI Bank is already talking of over one lakh such agents and ensuring loan quality checks through different levels of loan loss guarantees by these agents.

It is heartening to note that the microfinance sector which was for long stuck in the groove of the SHG linked refinance programme of NABARD, is now coming into its own. The big change that has happened is that for the banks there is today a shortage of bankable assets amidst fierce competition.

So banks are increasingly looking at lending in the rural sector. And what aggressive and innovative private banks will do today, nationalised banks will do tomorrow. So hopefully, not before long, the entire banking sector will begin to look at the rural poor, primarily women, as bankable asset generators.

Of course there will be false starts and non-performing assets. Even with banks lending to the middle class and upper middle class for houses and cars, the RBI finally had to issue a warning that banks were getting too aggressive on consumer lending. For the microfinance sector that day fortunately is still far away.

keyasarkar@yahoo.co.in

(The columnist has been a journalist and has worked in the financial sector)