The joint venture by three well-known names in India — Nandan Nilekani of Aadhar fame, Ratan Tata of Tata Trust and Vijay Kelkar, former finance secretary and chairman of the National Institute of Public Finance and Policy — to start a new microfinance firm leveraging the technical prowess to provide small ticket loans to the bottom of the society is seen with caution by established players.
The principle of zero delinquency in microfinance sector, which means good collections have already led to the 2009-10 crisis that had rocked several microfinance players, including Nilekani’s wife Rohini who had been with the start up Sanghamitra microfinance a decade ago. The Kolar crisis in 2009 had virtually wiped out few lakhs of rupees in the region owing to religious delinquency.
While the AP Microfinance Crisis ushered in new RBI guidelines, the industry has seen almost 84% growth in the last one year, making those who had burnt their hands earlier to re-enter the segement with technology on their back. The cost of lending to joint group liability model has come down significantly with the mobile devices and credit bureau checks being done instantly in the field or at customers’ doorsteps.
Apart from Nilekani, whose expertise for banking software and his stint at Aadhar may provide the much-needed edge to the new microfinance, Tata Trust too has made its presence felt in the sector in recent years. The Ratan Tata Trust Fund for Research Collaborations in Micro finance has been active in the last few years in collaboration with the Indian Institute of Management, Ahmedabad (IIMA) in understanding the fields of financial flows of the poor over long horizons, understanding financial flows of seasonal migrants, documentation of transformation experiences of Indian microfinance institutions and assessing the role of mainstream banks in microfinance.
Thirdly, Kelkar with his expertise will give the enterprise a new touch of professionalism to avoid the experimental failures which marred the microfinance industry in 2010, prompted by about 100 suicides in Andhra Pradesh and a couple of bids in neighbouring Karnataka.
The scenario ahead is quite promising with the new Avanti Microfinance of the trio transforming the field competition altogether. The RBI guidelines stipulate 12% of margin money for lending the poor by MFIs with less than Rs.100 crore in their funds while the larger MFIs are allowed only 10% as margin. This streamlined approach and not letting any customer borrow from more than 2 MFIs at a time may hopefully avoid delinquency problem, according to RBI.
But the ground situation may change now as the trio is planning to bring in philanthropic money into the sector, which may be less expensive and even after charging the margin, it may still be far lower than other MFIs operating in the geographical areas where Avanti would be entering. If Avanti is getting its funds at 6%, then the interest they charge would be maximum 18%, which is far lower than the lowest interest charged by any MFI, say SKS Microfinance.
The current interest rates offered by large MFIs in India varies from 19% to 26%, depending upon where their funds are sourced. Already government-owned MUDRA is making headway into the lending rates of MFIs with its cheaper funds to MFIs. Coupled with philanthropic funds reaching the industry via Avanti, the situation may provide a real competitive scenario for many players.
Though the situation is not vulnerable as the 2010 AP Microfinance Crisis, the rate at which the MFIs are doubling their operation in the last two years is sending few confused and warning signals. Livemint has warned of a deja vu in its recent report based on increasing number of MFI borrowers recently. Now that, Small Finance Banks are poised to play a different role with much cheaper loans in all those segments where they were active as MFIs earlier is another sorrow for the industry planners.
If philanthropy funds are pumped into the industry, it may further bring down interest rates in the industry but really pose a danger of disappearance for small players soon.[ tags avanti microfinance, nilekani microfinance, tata microfinance, rohini nilekani, snghamitra microfinance, philanthropy funds, 2010 microfinance crisis, nanadan nilekani, ratan tata, vijay kelkar, new microfinance venture, microfinance news, ]