Microfinance institutions operating well below product pricing ceiling stipulated by RBI: Ratna Vishwanathan

Ratna Vishwanathan, chief executive officer of Microfinance Institutions Network (MFIN), is confident that the MFIs have put the Andhra crisis behind them and investors are keen to enter the sector. About 10 MFIs have got in-principle license to turn themselves into small finance banks after she took the reins of the self-regulatory body for the sector a year ago. Belonging to the 1987 batch of the Indian Audit and Accounts Service, Vishwanathan comes with a wide experience across a range of government departments, including defence and Prasar Bharati. Besides, she has also held critical positions in Oxfam. In a candid interview, she tells Manju AB that rural India is not yet free from the clutches of the money lenders, but the MFIs have certainly brought down the rural indebtedness.

Q. About eight of the micro finance companies are undergoing a makeover as small finance banks. What hurdles do you foresee for them? What are the advantages of migrating into a bank?

A. The initial challenge will be to get the business model right and putting together the right mix of liabilities. As I see it, today, getting the liability part of the business together is a key
challenge. Having said that, the converse is also true. Today, almost 90 to 95% of the loan book comprises of JLG (joint liability group) loans. The other challenge is to be able to get the right mix on the assets side as well in the process of transitioning to a bank. The most obvious advantage is the diversified and low-cost liability base which will help the small finance banks offer a comprehensive and competitive product range. As an MFI, one could offer a monoline credit product. The SFB, on the other hand, will have the wherewithal to cater to customers in a holistic manner and offer the entire suite of products that will further strengthen customer stickiness.

Q. The initial public offerings of Ujjivan and Equitas have done extremely well. Do you think there is investor confidence in the sector?

A. The small finance bank as envisaged today is a unique entity. It is not a tried and tested model and neither do examples exist elsewhere which would give an indication of where this entity is likely to go. However, both Ujjivan and Equitas are very well governed companies and have high standards of corporate governance. They are very robust and have a strong growth trajectory, and the success of their respective IPOs demonstrates investor confidence, which is largely based on their current functioning.

Q. The other six applicants have not come forward with an IPO. How do they plan to meet their capital requirements and bring down the foreign holding? Can we expect more IPOs from the sector?

A. I will not be able to comment on the IPO plans of the other MFIs. But some of them are raising capital through the private placement route.

Q. The MFI sector can lend up to 24% but as a small finance bank, the lending should be at much lower rates. How will MFIs make this difficult transition?

A. The pricing caps for MFIs are well defined and not necessarily at 24%. They are currently linked to their cost of borrowing / margin cap and an overall cap on rates. MFIN publishes a document called 'The Micrometer' every quarter, which is available on our website. It gives you the numbers on how the industry is functioning. One of the data points there is the product pricing by individual MFIs. If you look at those figures, you will find that several MFIs are operating well below the ceiling stipulated by the RBI. If they can do so while
operating from within the MFI model with their high cost of funds, SFBs with their diverse products will not only be able to maintain, but also gradually reduce end pricing to customers and that seems to be their intention.

Q. Has the MFI sector been able to snatch the money lenders' business in the rural areas?

A. The primary role that MFIs have played is to provide access to finance to vulnerable, low-income households with very limited access to funds as they have limited or no collateral to secure their borrowing with. MFIs have enabled underserved and unserved customers to access unsecured credit through a formal and well-regulated system within the oversight of the apex Bank. The 'feet on street' model of the MFIs provides the client with a direct interface with the MFI and creates a sense of comfort. Despite this, the moneylender still plays a certain role for several reasons. They provide loans with no questions asked and with minimal paperwork. These loans can be used for consumption purposes and do not necessarily link back to livelihoods. The irony lies in the fact that the customers do not feel pressurised at the vicious debt traps they fall into as the loans can pass on to their children. So while the quantum of borrowings may have come down from these channels, they still exist. MFIN has no specific data on this.

Q. A cursory look at the recovery figures of Ujjivan and Equitas shows that the recoveries are nearly 100%. In the banking sector, the record of recovery is disappointing. How do you
analyse it?

A. Comparisons will be apt if the retail loan book portfolio of the banks is compared with the portfolio of MFIs. There are several reasons for the almost 100% recovery rate. The ticket size is small and the terms of repayment are easy and convenient. The regulations in place that define recovery parameters ensure ease of repayment to the client. The easy installments in which recovery is effected and the door step service provided by the MFIs provide an outreach banks will find hard to provide. What needs to be emphasised in the MFI model is the strength of the relationships that the MFIs build up and maintain with their clients due to regular and structured interaction.

Q. Private equity players such as Temasek are showing interest in the MFI sector. Is the MFI crisis in Andhra Pradesh behind us?

A. The Andhra Pradesh crisis and subsequent learnings have helped rebuild and strengthen the microfinance sector. The sector is now under the direct regulation and supervision of the Reserve Bank of India (RBI). The credit bureau ecosystem is strong and the mandatory use of credit information reports (CIRs) from bureaus prior to the disbursement to the clients has gone a long way in bringing under check over indebtedness. Client focused regulations have put the industry on an orderly growth path. The robustness that the industry is displaying today in terms of process and governance is borne out by the fact that of the 10 entities that received 'in principle' approval to become SFBs, 8 are MFIN member MFIs. There are still issues that need ironing but this is true of any industry. Going forward, there needs to be a greater focus on suitable and customised products for various sub-segments and financial
literacy.

Q. What was the exposure of the MFI sector to Andhra Pradesh at the peak of the crisis? Where does it stand now?

A. The exposure in Andhra Pradesh at its peak was over Rs 7,000 crore. Today, the performing portfolio is Rs 81.56 crore (as on March 31, 2016)

Q. About four MFIs are undergoing corporate debt restructuring (CDR). Is it the fallout of the Andhra crisis?

A. Six MFIs underwent CDR. Of these, one MFI came out and is performing well, one has closed down and the other four are still under CDR.