Rajeev Ranjan's Blog

Development through enterprise

Abundance of Small Finance Banks! Courtesy..failure of existing institutions..


In the last few days or months we have witnessed a lot of the work on the small finances. RBI, in line with its intention shown 2 years ago, gave in principle approval to 10 institutions as Small Finance Banks (SFB), 8 of which are MFIs, one is a local area bank and one is commercial vehicle financer.
And this has come only few days after granting of payment bank license to 11 entities.
Payment banks can accept deposits and offer other financial schemes and products but not loans, on the other hand, Small banks can accept deposit, offer loan products apart from carrying out the activities that a commercial bank does.
The idea is to bring financial inclusion of a larger section of the society which were so far lacking these services or if available, in limitation. The possible beneficiaries are Small business units, Small and marginal farmers, Small and medium Enterprises and businesses of unorganized sector.

This indeed is a welcome step..

It is only few months back the government had started Micro Units Development Refinance Agency (MUDRA) Bank, objective was to provide small businesses loans ranging from few thousands up to Rs. 2 lakhs. The govt. had announced a startup fund of Rs. 10000 crores, administration of which was to be done by SIDBI. Apart from these there are existing commercial banks which targets almost the same section of customers to fulfill their PSL quota. Then there are institutions like RRBs and NABARD which are expected to help the same base.

So for a customer it is a scenario of dream come true…too many service providers to cater to the needs…that too possibly with very competitive offers..

BUT does this also mean that the institutions (mostly govt. owned) which were supposed to cater to the needs of their customers (direct or indirect) have failed to do so in the last few decades…mainly because of lack of due reaponsibility & accountability, lack of innovations and competitiveness.

Consider this, Small bank’s PSL target would be 75% of total portfolio while it is 40% for other commercial banks. 50% of the portfolio of small banks would have to generated by loan sizes of below Rs. 25 lakhs.
PSU banks and even pvt. commercial banks perceive PSLs targets as a forced liability to their portfolio while for Small banks, most of which are MFIs, see this as as their strength and also as their best opportunity to graduate to the themselves to the next level by reaching out to a new segment of customers with customer focussed products.

In view of large customer base to cater to, it is imperative that few more Small banks are given license to operate. At the same time its is expected from the government and the regulator (RBI) to come out with clear policies and guidelinés to avoid lack of communication between the agencies, institutions and players operating in the same field.

India – A Hinterland growth story

The real Indian market does not lie in the metroes or the villages. Though the Indian urban growth story until now has been driven largely by metros – this is now moving beyond metros to smaller towns. Several recent studies bolster the case for the rise of Middle India.
According to 2008 edition of the RK Swamy BBDO Guide to Market Planning, 51 districts in India have at least one town with a population of more than 500,000. Together they have twice the market potential of the four metros (Mumbai, Delhi, Kolkata and Chennai) combined. According to another study in the year 2008 conducted by the Future Group, an Indian retailer, and the National Council of Applied Economic Research (NCAER), the ratio of spending to earning is higher in Tier II towns such as Nagpur, Jaipur, Surat and Coimbatore that it is in the metros.
An earlier NCAER study, in 2004 had shown a higher percentage of the rich in Middle class India than in some metros. For instance, the North Indian state of Haryana had a small-town crorepati density of 280 (Crorepati density is defined as the number of families who annually earn more than Rs. 1 crore — about $250,000 — per 1 million people.) The relative number for Kolkata, Hyderabad and Chennai were 180, 191 and 291 respectively. Acecdotal evidences suggests that the growth of the small-town rich continues.
India’s middle class will reach 583 million from 50 million (in 2007) by 2025 if high economic growth holds and govt. undertake reforms – This is what a consultancy firm Mckinsey report said in 2007. It also said if India’s high economic growth were sustained, incomes would triple over the next two decades and India would become the 5th largest consumer market by 2025, from the 12th place now, surpassing Germany.
So watch out for the developments in the INDIAN HINTERLAND….

Microfinance: Potential of expanding horizons in microfranchising

Microfinance is not limited only to microcredit, rather it is a wide approach that can empower the poor bring themselves out of poverty. In its core, microfinance provides financial products & services to the poor (primarily women) to start or expand their small, self supporting businesses and also increase their options for saving. In India, a typical micro-loan ranges from Rs.5000 to Rs. 20,000 depending on the period of association of the member with the MFI.
There are few concerns that every player in the microfinance sector will have to look for – Growing penetration & growing competition will certainly leads to saturation of the market. So, MFIs in India would have to look for other avenues to harness the potential of the large customer base they have. This can only be done by promoting multiple microfranching opportunities options and even develop and offer loans specifically targetted for microfranchisers. As new and purely commercial player enter the microfinance field, the above approach would enable the MFIs to better leverage their local knowledge of communities they serve, increase the value in their service and also tapping into new possibilities of revenue generation.
Its not that only the large MFI can do this but even the smaller ones can set example by testing a few models and convert them into a viable entitiy. Drishtee and VisionSpring (formerly called Scojo foundation) have proved theri models right with their ‘Drishtee entrepreneur or kiosk owners’ and ‘Business in a bag’ concepts respectively.

Indian microfinance industry and the first ever IPO in India

Indian microfinance industry / market size:
Indian microfinance industry / market size may be as high as $50 billion and with the current penetration level. it is getting bigger with the kind of growth it is experiencing in the past few years. Some data shows that the current industry size is around $3 billion growing at a CAGR of 80% and ROE of 30% between 2003 and 2008 (Intellecap data reveals that the current market size is only $1.5 billion with current penetration of 10%, which may vary from states to states). In the last 3 years the average growth is 50% on an YoY basis (some microfinance institutions have grown @ 100%-200%, YoY).
Macro and micro environments affecting the growth of Microfinance and PE investments:
We can debate over the actual market size but one point is very clear that this industry in India has huge market potential with ‘huge untapped rural market’, ‘low delinquency’ (as indicated by hitorical data) and ‘high govt. emphasis on rural development’. These are the factors behind the increased interest shown by the PE funds in Indian microfinance in the recent past (in 2009 it was $178 million as compared to $50 million in 2008) backed by the fascinating investment factors such as very high ROE and CAGR, moreover with the scale coming in, the higher ROA. But, the investment from the PE funds doesn’t come without a commercial sense in the portfolio they would invest in and with a pressure to delivery better results is something which follwos the PE investments.
Why an IPO is needed for a fast growing MFI?
The funds available with these PE funds are very small in size and can meet only a smaller portion of the funds requirements of a very large and high growth MFI. Mr. Vijay Mahajan’s Progression of MFIs concept explains this well. Consider an example;
A typical high growth Indian MFI with present loan portfolio of Rs. 500 crores and growing @ 100% CAGR will have a gross loan portfolio of Rs. 2000 crores in around 3 years. Considering RBIs‘ enhanced CAR (Capital adequecy ratio) of 15%, effective April, 2011, an additional equity requirement of Rs. 300 crores would be required. This level of equity can be provided by PE investors. Now, a stage will come when an Indian MFI with a loan portfolio of Rs. 2000-3000 crore (with 2-3 million customers) and growing @ 100% CAGR will have an additional equity requirement of Rs. 300 crores – Rs. 450 crores. This level is too big for even the PE investors and the only options for an MFI is to go to the capital markets with an Initial public offfer (IPO).
Thus an IPO is inevitable for a MFI like SKS considering the kind of portfolio and growth it is commanding.
It is important that the first IPO in the sector builds a road to capital markets rather than closes it. If this IPO does not do well, PEs will not invest in future, as they will not have any exit option. That could mean MFIs would end up as bonsai—stunted—at Rs 200-500 crore size.

Mobile Retail stores in rural India

‘Retail’ is the new buzzword in India today. Organized retail in India has been the centre of attraction for many domestic venture capitalist and also for the FIIs for the past 3-4 years and every big Indian industrial house has made a foray into retail. Mumbai-based Future Group was among the first to make a successful foray into retail, with its chain of lifestyle (Pantaloons) and supermarket (Big Bazaar) shopping malls. There have been a spate of new chains coming up recently, most notably the Reliance Group’s Fresh and Jewellery outlets, the Tata Group’s Star India Bazaar and the Aditya Birla Group’s ‘More’ hypermarkets. Everyone seems to be in a tearing hurry to cash in on this retail boom before global majors like Metro cash & carry, Walmart, Tesco and Carrefour make their entries into India. There are several other smaller and niche chains too. However, as with all high growth industries in the past, the retail industry has ignored rural and semi-urban India so far. Or, so I thought until I found out about 3A Bazaar and United villages network.
3A Bazaar is India’s first mobile retail company which was launched in early 2007. The company is owned by the Paramount Trading Corp Pvt Ltd, an exporter of metal handicrafts and primarily operates in the Jyotiba Phule Nagar district of Uttar Pradesh in Northern India. The company is the brainchild of Mr. Asad Shamsi, who was inspired by a few similar retail chains in Europe. ‘3A’ represents the first letters of the names of the three Shamsi brothers, all of whose names begin with ‘A’. Before starting 3A Bazaar, Mr. Shamsi conducted extensive research in rural India and found out that India’s rural population does have disposable income, but not regularly. However, value for money, good quality and a product’s criticality were some of the factors that were to be considered. There are about 5 vans which carry goods worth 2-2.5 lakhs of rupees everyday from Mr. Shamsi’s storehouse to about 700 villages in JP Nagar district. However, most of the villages are visited weekly or fortnightly or monthly. This fits with the irregularity of incomes of villagers and the mobility eliminates the drawbacks of a static rural retail shop. The daily average sales are in the range of 8-10 thousand rupees and Mr. Shamsi is looking at increasing the size of his fleet. It will be very interesting to follow the progress of 3A Bazaar given the fact that retailing is a volume driven business which comes from scale. It would also be interesting to see if the ROI and ROA are attractive enough to attract venture capitalist.

More banks in Tier 3 to Tier 6 cities (Cities with population upto 49,999)

A Group constituted by Reserve Bank of India has recommended that domestic scheduled commercial banks (other than RRBs) may be given freedom to open branches in Tier 3 to Tier 6 centres (centres with population upto 49,999), without the prior permission of Reserve Bank of India, subject to reporting. The Group has also recommended that domestic scheduled commercial banks (other than RRBs) may be given general permission to open branches in rural, semi-urban and urban centres in the North Eastern States and Sikkim. The Group further recommended that banks would continue to approach Reserve Bank of India for prior permission for opening of branches in Tier 1 and Tier 2 centres (centres with population of 50,000 and above as per 2001 Census). The number of branches which would be authorised by RBI based on such applications may depend, inter alia, upon various aspects including a requirement that banks may plan their annual branch expansion in such a manner that at least one-third of total number of branches opened in a financial year are in underbanked districts and financially excluded districts of underbanked States as also upon a critical assessment of the steps taken by the bank towards achieving the goal of financial inclusion such as the rate of credit growth in rural branches, growth in number of deposit accounts in rural areas and growth in credit accounts for less than Rs.25,000/- etc., The Group has also recommended that the branch authorisation policy in respect of foreign banks may remain unchanged until review of the roadmap for foreign banks. The Group is also of the view that the way forward for ensuring banking penetration and financial inclusion would be to have an appropriate combination of the physical ‘brick and mortar’ branch model and the branchless models such as Offsite ATMs/Point of Sale terminals, Business Correspondent model, mobile banking etc., and it should be basically left to the banks themselves to decide as to which model would be suitable for delivery of banking.

HDFC to open eight more MFI branches

In an effort to grow from its four existing branches to twelve by the end of the year, Housing Development Finance Corporation (HDFC) plans to open eight more microfinance branches across the nation. The branches would be designed around the self-help group linkage model.

This effort is one in a larger trend by major financial institutions to enter into the MFI space. Micrcapital.org, the source for this article, explains as such:

HDFC’s recent market entry and rapid scaling-up of operations reflects a general recognition by prominent Indian banks that microfinance is a financially sustainable if not lucrative enterprise. Other recent market entrants include banking giants UTI and ICICI, holding total assets of USD 1.2 billion and RUP 3.9 trillion (USD 92.7 billion) respectively. Further details on this movement can be found in the MicroCapital story Commercial Banks in India Delve into Microfinance Investments.