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2015: The year that gave micro loans a new architecture

The most visible sign of this was that eight out of the 10 applicants to have been granted the in-principle nod by the RBI for small finance banks were microfinance institutions or MFIs.

twitter-logo E Kumar Sharma        Last Updated: December 24, 2015  | 17:43 IST

One of the major highlights for the Indian microfinance sector in 2015 was the signal from the Reserve Bank of India (RBI) on the roadmap ahead on micro or small loans to the financially excluded.

The most visible sign of this was that eight out of the 10 applicants to have been granted the in-principle nod by the RBI for small finance banks were microfinance institutions or MFIs.

Other than Au Financiers (India) Ltd., Jaipur and Capital Local Area Bank Ltd., Jalandhar, all the others are MFIs.

These are: Disha Microfin Private Ltd., Ahmedabad; Equitas Holdings P Limited, Chennai; ESAF Microfinance and Investments Private Ltd., Chennai (though it is Kerala where it is strong); Janalakshmi Financial Services Private Limited, Bangalore; RGVN (North East) Microfinance Limited, Guwahati; Suryoday Micro Finance Private Ltd., Navi Mumbai; Ujjivan Financial Services Private Ltd., Bangalore; and Utkarsh Micro Finance Private Ltd., Varanasi.

"It was certainly a major move for microfinance because it will alter the architecture of this space," says Sanjay Sinha, Managing Director of M-CRIL (Micro-Credit Ratings International Limited, an entity involved in ratings of microfinance institutions and in providing research and other services designed to promote the flow of investments into microfinance).

Elaborating, he says: "Up to now, the NBFC (non banking finance companies) MFIs could only operate with credit, and operations related to collecting deposits were restricted to large commercial banks. Now, there is an intermediate institutional form that has been created to enable greater outreach of small deposit services."

What this, by implication, means for microfinance is that some of them are now getting recognised as institutions that can also offer deposit services. It is yet to be seen if this will necessarily lead to shape up in the manner it is being envisioned by the government, RBI and the proponents of microfinance. That is because their viability is still to be proven, especially in the light of some of the conditions imposed by the RBI for small finance banks, including the need for larger Indian ownership, which has not been the case so far for many large MFIs.

It will also need to be seen how they are able to raise resources and it will be a challenge, initially at least. The moot question is: How many depositors would switch from a big public sector bank, or even a new depositor rush to a new small finance bank just because it has come up? It will arguably take a while. The whole evolution process could take three to four years, some of the experts in this space feel.

Like the small finance banks, the other major development was the new payment banks that were allowed and would do the same in the area of payments and remittances and, hopefully, expand the availability and use of those services by the people at the bottom of the pyramid.

The other highlight of the year was Bandhan transitioning from an MFI into a full-fledged bank. Experts feel it is still early to take a view on its impact on financial inclusion, and the way the portfolio and average loan sizes will pan out apart from other parameters.

The take-off of Mudra Bank, as an entity to provide refinance for MSME (micro small and medium enterprises) loans, was the other highlight of the year, though the jury is still out on whether this has meant creation of one more entity or the actual expansion of the total portfolio to this sector. How this pans out in 2016 will need to be watched as is the case with the way Bandhan takes off.

It is not surprising that on what to look forward to in 2016, S. Viswanatha Prasad says: "At least some small finance banks starting operations, Bandhan taking off and expansion of Mudra's activities." Prasad is Managing Director of Caspian Impact Investment Adviser, and has Equitas, Ujjivan and Janalakshmi - which were among those to get the RBI in-principle nod for small finance banks - as his portfolio companies.

Last but not the least, the impact of the Prime Minister's Jan Dhan Yojana would have to be watched.

In fact, speaking at the just concluded BT MindRush, the major conclave of thought leaders organised each year by Business Today, Jayant Sinha, Minister of State of Finance, Government of India, said: "The world's largest direct benefit cash transfer programme is already underway in India with 'Pahal'." Under which LPG subsidy is directly transferred to the banks of the customers to avoid any misuse. "Today, we have 12 crore people or 120 million people receiving their gas cylinder subsidy directly in their bank account. Also, 90 per cent of the people who are getting the NREGA payments are getting either through their post office savings accounts or through direct transfer to their bank account," the minister said.

But despite these, and back to small finance banks, it is still early to say the extent to which the financial inclusion problem has been solved. For consider the fact that much would depend on the share of large loans that the small finance banks begin to offer. If their share is substantial, then what this means for financial inclusion remains to be seen.

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