Keya Sarkar: Micro finance is now bankable

OUT OF FOCUS

Given the amount of press that micro finance as an activity has got in recent times, coupled with a few pronouncements of the finance minister on the subject, a host of banks and finance companies are examining it as a business opportunity. But the way to go about it has eluded many of them, used as they are to the norms of lending for agriculture or corporate finance.

It is in this context that I thought a documentation of the experience of ABN AMRO might prove useful. Especially since ABN's size of operations in India, its branch strength, etc. are modest enough for a lot of banks to think that if ABN can do it, so can they. Provided they have a micro-finance head who is committed and genuinely believes in making a difference.

In fact, every interaction with Moumita Sen Sarma, the woman in charge of ABN's micro-finance book in India, has made me realise that there may actually be no dichotomy in pursuing a line of business which benefits the economically handicapped and a bank's foremost need to protect capital.

ABN AMRO made its foray into the micro-finance business only a year ago. It ended fiscal 2005 with a micro-finance portfolio of Rs 32 crore. But more important than the size of the portfolio is that, according to Sen Sarma, the business has ended the year with an operating profit, taking into account all direct costs and all allocated indirect costs.

She concedes that the profit may not cover the bank's internal return on risk capital. But then this is the first year and traditional calculations of return on risk capital may need a re- look, in the context of the businesses which are new to the bank.

So what comprised the Rs 32 crore micro-finance assets for ABN Amro? Sen Sarma's portfolio is distributed over 11 micro-finance organisations, making each loan, on average, Rs 3 crore.

In terms of geographical spread, the organisations are based in Tamil Nadu, Andhra Pradesh, Karnataka, Uttar Pradesh, and Orissa. A loan has also been sanctioned to an urban micro-finance organisation operating in Mumbai but disbursals are yet to start.

Plans drawn up for fiscal 2005-2006 include increasing operations in the north and the identified pipeline comprises one organisation in Orissa and West Bengal each. If things go according to plan, Rs 60 crore will be disbursed next year to 20 organisations, of which five will be from non-southern states.

Sen Sarma says her starting point to identify potential borrowers is conferences that are held in this sector. This is followed by intense interaction with the potential borrower to ensure that the organisation fits into the bank's selection criteria; and as importantly, to impress the micro-finance organisation that ABN is a good bank to do business with.

In a situation where there are about 30-odd "bankable" micro-finance organisations it is a question of too many banks chasing them. Although ABN in India does not have the financial muscle of the public sector banks or an ICICI Bank, what works in its favour is that micro-finance organisations do not wish to borrow from only one or two sources""thus a bank like ABN that wishes to take up not more than 20 to25 per cent of the total borrowings is often a preferred partner.

In identifying the organisations it wishes to deal with, the bank lays stress on working with micro-finance organisations which have the potential to be profitable, have the right type of leadership and value system, established MIS and internal controls and, most importantly, governance practices. Since most micro-finance organisations tend to be promoted and led by individuals, governance issues assume great significance in their operations.

A lot of information on how a micro-finance organisation operates can be gleaned from the press and from keeping one's ear close to the ground. But ABN has not remained content with that. It has established, along with Planet Finance (the French funding agency for micro-finance operations and innovations), the "Micro Finance Process Excellence Award".

Considering that there were 94 nominations this year from micro-finance organisations across India, it does seem like a smart move to get a hang of process orientation in this fledgling industry.

Besides creating brand awareness among nearly a hundred organisations, the establishment of the award helps the bank get a good insight into the ways of working of all the participating organisations.

Probably what sets ABN apart from the efforts of some of the other banks is its modesty of target, which allows it to be thorough in its approach. As Sen Sarma, like many others in her position, is aware, like all new businesses, the bank's foray into micro finance too is being watched and evaluated by the powers that be within the bank.

Thus there lies a huge responsibility on those who are in charge: to walk the tightrope between the necessary flourishes required to establish one's presence in an industry without falling into the trap of flamboyance, which would upset viability calculations and put off the bosses.