The Next Billion
Wednesday, July 16, 2008
Till a few years ago, N. Padmavathy and her six friends were daily-wage workers in an export unit in Chennai, with a monthly income of not more than Rs 2,000.
At times, when she had to pay her children’s school fees or take her children to the doctor, she had to borrow at hefty rates from the local money lender.
As a daily-wage worker, she could never predict her income, till she discovered the power of microcredit. A Rs 15,000 loan each, taken by Padmavathy and her six colleagues, has made entrepreneurs of these daily-wage workers. Today, they are the proud owners of a tailoring unit, which is an exclusive franchisee of a leading exporter.
Says P.N. Vasudevan, managing director of Equitas: “The loans we provide not only help the customers improve their business activity levels but also because of lower rates and easy repayment periods, customers can come out of the debt trap laid by money lenders.”
Thanks to urban micro-finance institutions (MFIs) like Equitas, Padmavathy and others of her ilk now have access to credit and a better way of life.
Seeing an aching need among this category, often referred to as the Next Billion, a new set of players are coming up in urban hubs to offer financial solutions-primarily credit and insurance-to this economically active group of consumers.
If daily wage workers in Chennai are buying out garment manufacturing units, in Mumbai puran poli makers are doubling their turnover with easy access to microcredit.
Micro-finance may have started as an idea by the not-for-profit sector to cater to those who were out of the ambit of any financial sector, it has, however, emerged as a market share opportunity that banks and non-banking financial companies are fast lapping up.
Conceptually it’s an irony-because what started out as an answer to the neglect by the financial sector is fast turning out an opportunity for it-and poses a dilemma- because regulation of this sector is through social pressure only.
Clearly, the Next Billion is now being viewed as the next opportunity and catering to this segment makes good business sense.
According to a Boston Consulting Group report, by 2010, three crore new households will come into the formal financial sector fold and this base of new consumers has the potential to contribute Rs 10,000 crore to the revenues of banks and Rs 20,000 crore to that of insurance firms.
Currently, only 6.9 crore households are within the formal financial sector. With barely 34 per cent of our population engaged in formal banking, India has the second highest number of financially excluded households in the world-13.5 crore.
Categorised by income, this segment sits just above the poorest of poor and just below customers who are targeted by most banks.
India has 9.1 crore households that fit the category of Next Billion. A typical segment in this category in a large metropolitan city earns between Rs 60,000 and Rs 1,80,000 annually.
From SKS Microfinance, the poster-boy of micro-finance industry in India, to ever-mushrooming new players, everyone is targeting the urban poor.
SKS has created a new vertical for urban areas and already has 2.5 lakh customers across cities in 18 states of India.
Says K.S. Rao, vice-president, SKS Microfinance: “As people migrate to urban areas, there is a need to cater to the needs of urban poor as large banks and Indian and foreign-owned non-banking financial companies are not equipped to cater to this population.”
SKS, which already has 100 branches across cities, intends to scale its urban operations to 6.11 lakh customers by 2009.
Believing in the power of the nano customer, MFIs are catering to credit needs of micro-entrepreneurs in urban and large metropolitan areas, so that they can expand their businesses, fund emergencies, children’s education and meet their housing needs.
Given that this segment is unable to provide either documentation or collateral, MFIs are following the joint liability training methodology to cushion their exposure.
So if anyone wishes to take a loan, they have to form a group of five or six members and undergo training. The group then has the joint responsibility for the outstanding loans of the members. =The collateral is social and the team assures repayment of the loan. The cost of membership is typically Rs 50 and the loan size in the first year ranges between Rs 4,000 and Rs 15,000.
According to Veena Mankar, CEO of Mumbai-based MFI Swadhaar: “Urban poverty is not seen in the same light as rural poverty. The urban poor make money but it’s their living conditions that are very difficult. Urban growth cannot happen till the poor get equal opportunity.”
While banks may still be trying to work out the models for credit rating of retail consumers, MFIs are successfully rating their consumers on the basis of repayment records.
In the first year, borrowers get not more than Rs 10,000, which they repay over 50 installments. Says Samit Ghosh, CEO of Bangalore-based Ujjivan: “Our rate of repayment is 99.3 per cent.”
If the repayment track record is good, the next year they become eligible for bigger loans. Interestingly, the urban MFIs are mainly targeting women entrepreneurs as they are said to be better managers and stable borrowers. MFIs, thus, mitigate their risks, apart from facilitating growth and empowerment of women entrepreneurs in urban areas.
At interest rates of 10-24 per cent, India’s micro-entrepreneurs dwelling in slums have found a new lease of life. Easwari, who supplies food to Chennai’s poor, managed to break free from the debt trap after she repaid the costly loans to the local money lender.
Since most urban poor are outside the formal financial sector, exorbitant interest rates charged by the informal sector, primarily money lenders, keep them in perennial debt.
Even at 18-24 per cent interest rates going to MFIs works out cheaper compared with the 40-50 per cent rates charged by money lenders.
Banks are now installing biometric ATMs in areas like Dharavi in Mumbai, to cater to this consumer base. After Citibank, Canara Bank has installed its first biometric ATM in Dharavi, which is its 10th such machine in India.
These ATMs read fingerprints and are expected to serve, amongst others, primarily the lower middle-income segment comprising the working class.
Given that banks and large financial services companies lack the channels to directly cater to the urban poor, non-banking financial companies (NBFCs) have come to play a critical role in facilitating financial inclusion of the Next Billion.
While no financial service can ever be complete without offering savings instruments, regulations currently do not allow MFIs to offer savings products. So they are hawking only liabilities to the urban poor.
Says S.S. Suresh, chief operating officer of GrameenKoota: “We are struggling to cater to the savings needs of these consumers. Recently, the Reserve Bank of India issued a circular, which allows non-governmental organisations (NGOs) to become business correspondents for banks, by which they can facilitate the opening of bank accounts of poor people.”
However, since most micro-finance organisations, like SKS, GrameenKoota and Swadhaar, have registered themselves as NBFCs in order to meet higher capital needs, none of them are eligible.
Therefore, if any of the existing MFIs have to become business correspondents of banks and offer savings accounts, they cannot do it under the MFI tag and have to float a new not-for-profit entity.
While players like Swadhaar have an NBFC for the loan business and an NGO to offer savings bank accounts, many others find sustaining two entities economically unviable.
Explains Ghosh: “Micro- finance can be offered at lower interest rates if the cost of funds can be brought down. Currently, MFIs like ours are dependent on funds from banks as they are mandated to lend 40 per cent to the priority sector.
However, if for some regulatory reason this source of funds dries up, we will be in trouble. In order to complete the business cycle, it’s important that we are able to mobilise deposits too which will also bring down interest rates for our loan products.”
Notwithstanding the pressure, the central bank is playing it safe and going slow in allowing urban MFIs from collecting deposits.
With the Micro Financial Sector (Development and Regulation) Bill, 2007 having been tabled in Parliament last year, the Rangarajan Committee on financial inclusion feels that MFIs registered under Section 25 of Companies Act, 1956 can be brought under the purview of this Bill while cooperative societies can be taken out.
Given the vulnerability of the section, regulations need to be put in place for their protection. However, there is little doubt that the Next Billion is an idea whose time has come because it’s no longer about obligation but an opportunity that is knocking on the doors of the financial sector.