For the past three years, India's microfinance sector has been growing at 50-70 per cent annually in terms of loans outstanding. Some players are growing at over 100 per cent a year. For the 183 members of Sa-Dhan, the largest network of microfinance institutions or MFIs, loans outstanding have grown from Rs 3,456 crore in 2007 to Rs 11,734 crore in 2009. But this strong growth has also sparked worries. Has access to finance increased? Are enterprising borrowers getting into too much debt?
To take stock, Business Today and Accion International organised a roundtable on the theme: Microfinance 2.0: Opportunities and risks of aggressive growth. The experts invited were Robert A. Annibale, Global Director of Citi Microfinance and Community Development; Vineet Rai, CEO of social venture capital fund Aavishkaar; Achla Savyasaachi, Vice President of Sa-Dhan; Monica Brand, Principal Director of Frontier Investments at Accion; Royston Braganza, CEO of Grameen Capital India, and Sanjay Sinha, MD of Micro-Credit Ratings International Ltd (M-CRIL). The consensus: Expect a correction in the next three years, the current growth rates are not sustainable. Edited excerpts from the round table, which was moderated by E. Kumar Sharma:
BT: Around the year 2000, the microfinance sector disbursed just around Rs 100 crore a year. Today, we talk of Rs 1,000 crore a month. The sector has come a long way.... If we could begin with some insight into this growth story and the milestones and tipping points. Bob?
ROBERT A. ANNIBALE: The growth in this sector has exceeded our expectations. It has been faster in certain geographies and in certain states than in others but the infrastructure to support it has now got to keep up or catch up. There are, of course, big expectations such as the need for credit bureaus to have information on individual borrowers, continuous financial education and having such initiatives included in the programmes of the institutions, and even the regulatory context.
VINEET RAI: One tipping point was in 2004-05 when the partnership model by ICICI Bank showed that scale can be achieved in microfinance. (ICICI Bank would forge an alliance with an MFI, which would identify, train and promote the clients and ICICI Bank would finance the clients directly.) This made the sector interesting - at least for the debt providers at that time. The second tipping point was Vikram Akula (of SKS Microfinance) standing up and saying I can raise capital and actually scale up.... Basically what he showed was that you can scale up rapidly and become fairly large.
ACHLA SAVYASAACHI: The growth can be traced back to two important statements from the government. One was the 2005 budget speech of (then finance minister) P. Chidambaram and the second was the credit policy statement from the RBI (the Reserve Bank of India). For the first time ever, we heard that there was a gap in reaching out to people. We have always heard from the RBI about the number of bank branches opened and the increase in reach, but here was the first time that it said there was financial exclusion...for the first time, it said there are institutions called MFIs which have a role to play….After that, we were beseiged by investors across the globe who wanted to know whether the government had come out looking for an alternative model. Chidambaram's speech was crucial in talking about 'no caps on the interest rates' in the MFI sector.
MONICA BRAND: One of the reasons for the growth is the fact that it is a commercial model with no cap on interest rates and one with a social focus. Now, in the next phase of growth, the focus would have to be on scale and quality.
ROYSTON BRAGANZA: Though it has grown dramatically, I am still concerned about the growth not reaching areas where financial exclusion is higher and poverty density is higher. Growth has to be both in terms of geography and in terms of product mix.
SANJAY SINHA: ... I am reminded of the Mughal empire. I feel that the microfinance industry has been through the Akbar and Shah Jahan phase and we are well into the Aurangzeb phase - which means it is huge and it is formidable but it is also starting to crumble at the edges. What happens next... is a question we need to answer.
BT: Sanjay, you rate the social performance of MFIs. The growth was supposed to have led to creation of assets, helping people come out of misery. How have we fared?
SINHA: One of the biggest concerns has been the focus on growth rather than on building social values; on ensuring that the people get the products that they need and on building economies at the micro level.
BT: What would you say to that, Royston?
BRAGANZA: I want to focus my thoughts on transparency. While we have been able to reach people and contribute towards financial inclusion, we seem to lose the clients in the numbers. The interest rate number is pegged but what is the composition of that interest rate number? What are the service charges? The cohesiveness of the group or the effort in financial literacy, transparency in pricing - these need to be fixed.
BRAND: In the next phase, focus has to be on quality and on contributing to asset building, deploying technology to reduce cost of delivery and on allowing for more disposable incomes.
SAVYASAACHI: If, with growth, value is created at the bottom, then growth is not an issue. The edge that the microfinance sector always enjoyed has been its closeness to the clients and its understanding of their needs. The issue now is: How is it going to retain this important element? Do we need just a few players who are very large or do we need small but many players?
RAI: There are a few things you need to look at today. You need capital, which brings with it the issue of valuation and ownership and greed. We started with client acquisition as a model. Now the investor question is client stickiness, and differentiation has become the buzzword. Nobody wants to invest in another Grameen model and it is not because that model is wrong but it is that if you are going to be a single product MFI then the scope for value creation is almost insignificant. Client stickiness can be done in multiple ways. Basix does that by providing livelihood and services, Equitas does that by providing rice and oil. When push comes to shove, who will the client drop first? That becomes an important ingredient in our due diligence.
Second, if you visit the websites of the top 10 MFIs, everyone says we are removing poverty but during the discussions here, it seems to be all about valuation and capital. While there is nothing wrong with valuation and capital, it is just that post-2005 we have come to clearly articulate what we are. We have still not got away from the realities of how we started in 1995. We were supposed to be the do-gooders... even though we were charging interest rates of 40 per cent. Today, while we reach millions of people, we are perceived as fleecing the poor at rates of 28 per cent. The moment you start measuring in terms of billion-dollar valuations, you begin to look very bad. So I think we will lose the battle on the management of perception rather than the reality. It is not true that the interest rates have not fallen. They have.
BT: A new set of people has been entering the business. At one end, we have big corporate houses. At the other, there are players who, in some cases, are from families of traditional moneylenders. What is drawing them and what does their entry mean?
SAVYASAACHI: It can't be a closed door society. We are going to see new players. The challenge is how we are going to define the rules of the game now. There is a code of conduct but how many will be able to behave?
SINHA: The first word that comes to my mind is greed. There are the commercial houses (big companies) that have entered and there are the small new players. What all of them are seeing is that some of the large MFIs have made a lot of money and they don't see why they can't. The difficulty with this whole thing is that the images in my mind are of money being turned over in order to generate profit. It is not about social value being delivered at the bottom of the pyramid. We need to start thinking much more about that and I suspect that the value that is waiting to be realised is very substantial but the innovation needed to make it happen has not come so far.
BT: What kind of innovation?
SINHA: Experimenting with new products, combinations of livelihoods and microfinance, farm loans, commercially provided business development services. Basix is doing a little bit but not enough is happening.
RAI: That, or insurance products, working closely with somebody who is setting up Tier III hospital chains. All this takes time and the problem is we want instant gratification.
BRAGANZA: One could ask why donor money is not coming easily now. That is because they are seeing you use the money to fuel valuation somewhere down the line. So, how do we create socially-focussed MFIs or put in place a matrix that looks at milestones based on scale? Do we want the poor to benefit from economies of scale?
BT: So, how does the picture look five years from now?
VINEET RAI: Five years from now, the growth rate is going to be 20 per cent…If you grow faster than 20 per cent you are going to collapse sooner or later. There will be no VC raising money for microfinance then.... Once growth drops to 20 per cent, microfinance from an investors' perspective would be as valuable as any NBFC (nonbanking finance company), which is not really very valuable.
BRAGANZA: My belief is we need many MFIs that are smaller, self-sustaining and scalable models. Leading on from Sanjay, I don't know how many people are starting MFIs to address social issues. I do not know how many of the poor are going to get out of poverty.
BRAND: Five years from now, there will be some collaboration and new players will be able to deliver more value.
BRAGANZA: Either the market will push them back to make them realise why they were set up or people themselves will realise that it is not all about valuation. As the market matures, people will start looking for client stickiness and the ecosystem that needs to be built. So, either you are pushed or you will go there yourself. I see financial inclusion growing.
ANNIBALE: Savings will play a role and the government will see that the microfinance industry's greatest strength is in its distribution capability and layering on other formal financial services like insurance. We could expect to see more of micro remittances, micro insurance and micro pensions. Product design is an evolution and clients have different needs and we need to have that flexibility. Clients need more than just loans.
SINHA: I think the microfinance industry is still in an immature phase and needs growing up. But that growing up has its pains and the right lessons are only going to be learnt when serious problems arise. I see problems coming within the next two or three years.
BT: What kind of problems?
SINHA: I can see one or two spectacular failures - MFIs going bankrupt because of a serious liquidity problem, serious collection problems and so on.
BT: What conditions today suggest that this may happen?
SINHA: One can see certain institutions that don't have adequate governance and management structures in place. When that happens, then the remaining MFIs and their promoters will start to think much more seriously about their business models.
SAVYASAACHI: We are also making a mistake in human resources, which is the interface between the institutions and the people. We are not investing at all in the last man on the ground. Investments are mainly happening at the top. In the next few years, we may now see a change in the sector's character. What we have proved so far is that the poor are bankable but we still have not mastered the how.