In July last year, IDFC Bank acquired South India-based Grama Vidiyal Microfinance. Many expressed surprise at the decision as the bigger challenge for IDFC, primarily a lender to companies, is creating a retail platform. More clarity emerged after two months when Kotak Mahindra Bank got South-based BBS Microfinance under its fold. Now, IndusInd Bank's announcement that it was exploring a merger with Bharat Financial Inclusion, the erstwhile SKS Microfinance, a much bigger entity than peers with revenues of over Rs 1,500 crore, has confirmed the trend.
Many more bank-microfinance deals would hit the Street in near future. The reason is simple. Microfinance can serve many objectives of banks. These include helping them lend to the priority sector profitably. Also the microfinance space itself is undergoing changes because of low-cost delivery through use of technology. The entire model of Bandhan Bank, the youngest full-fledged bank, for instance, is based on micro lending. Similarly, some licences for Small Finance Banks, a new model for serving the bottom of the pyramid, have also gone to microfinance institutions. That is why the bankers too are looking at the micro loan opportunity. According to data, the MFI sector has seen a compound annual growth rate of over 30 per cent to Rs 72,000 crore-plus in the last three years. There are expectations of much higher growth in future.
Some say the banks' move is a natural progression. For decades, banking was about corporates. In the 90s, banks moved to retail banking as per capita income of the country started growing at a fast pace. In fact, many retail banks are now reaping the fruits of that transformation, as corporate banking is almost stagnant. Such diversification always pays. They say the emergence of new segments such as consumer durables, affordable housing and microfinance lending is bringing in more opportunities. "Traditional retail banking products are highly commoditised with margins under pressure. The new segments not only offer high growth but also higher margins," says a banker.
Banks are also devising a strategy to cover the urban poor. Axis Bank recently forayed into urban microfinance. This is one area where many payments banks are also focusing for transaction-related business. There is a huge urban low income population where there is a scope for products such as remittances, micro loans, affordable home loans and loans for consumer durables.
But many say the new segments are not without risk. First, small finance banks are better placed to exploit the micro loan opportunity because of their cost model and expertise. Similarly, the banks' focus has never been on the low value and high volume business due to higher costs and probability of loans going bad. The entry into small tick size personal loans is a good example (most exited the space after 2008). The microfinance story is just beginning. A lot more action can be expected in the coming years.