Small loans, big impact: Microfinance now big business at banks

From being passive lenders to microfinance institutions (MFIs) till about five years earlier, banks have turned out to be active players in the business of small loans.

As on end-December 2016, banks accounted for 37 per cent (Rs 36,683 crore) of microfinance portfolio of Rs 98,625 crore; five years earlier, a handful of MFIs accounted for more than half.

High margins and volumes are two reasons why banks are exploring the market in thrift credit.  

Most of them in MFI lending are private sector ones. A majority of this portfolio is with 11 banks — Axis, Bandhan, DCB, Equitas, HDFC, ICICI, IDFC, Kotak Mahindra, RBL and YES. 

This apart, several public sector banks have increased their MFI exposure, through business correspondents (BCs).

“We see a lot of synergies with the microfinance sector. More, it is quite well-regulated and growing at a fast rate, providing a lot of business opportunities,” said an official in charge of a bank’s microfinance operations.

Also, over the past 18 months, banks have also been aggressive in taking equity stakes in MFIs. Last year, Kotak Mahindra Bank acquired Bengaluru-based BSS Microfinance.

RBL acquired 10 per cent in Utkarsh Micro Finance, which recently graduated into a small finance bank (SFB).

In July last year, IDFC Bank acquired Trichy-based Grama Vidiyal Microfinance, its second deal in the MFI space. Earlier, IDFC had taken 10 per cent in east-based ASA International India Microfinance. 

In March last year, DCB Bank had acquired a 5.81 per cent stake in Odisha-based Annapurna Microfinance. Earlier, RBL had acquired 30 per cent in Swadhaar FinServe, a company acting as a BC. 

Non-banking financial companies (NBFCs) have also shown interest. In 2015, Manappuram Finance had acquired Asirvad Micro Finance, a Chennai-based NBFC-MFI.

With a number of MFIs graduating to SFBs, the number in the MFI space is likely to further increase. And, even after graduating into a bank, they are likely to keep much of their lending to microfinance. Bandhan Bank, earlier an MFI, has even after close to two years into operation as a bank still got over 80 per cent of its lending portfolio concentrated in microfinance.

“Over the past three years, banks have shown a high level of interest in microfinance, part of a diversification strategy. Also, at least for two to three years, the new SFBs are likely to focus on microfinance as they build their deposit base,” says Ratna Vishwanathan, chief executive officer, Microfinance Institutions Network.

Seven of the proposed SFBs, some of which have transformed to a bank, together account for 46 per cent of the MFI portfolio, amounting to Rs 26,228 crore.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel