“Onerous conditions are sought to be placed on MFIs functioning”
Microcredit is certainly a noble idea and a genuine innovation that has provided some positive impact to its clients, particularly to women’s empowerment. It also helps the poor during cyclical or unexpected crises, and thus reduces their vulnerability.
A Post Graduate with additional qualification in Management, Raju Kuriachan, Chairman, Hope Microcredit Finance (India) Pvt. Ltd (HMFL), is an upcoming entrepreneur with more than 12 years of experience in the microfinance sector. Having served in well-known MFIs in Kerala, he floated Hope Foundation in 2005 primarily to reach out to the poor segments of the society with microfinance activities and other social projects. In early 2010, the microfinance operations of the Foundation have been transferred to a more regulated entity by forming a NBFC – HMFL.
In a wide ranging interview with K.V. Ajayan, Chief Editor of Hope Horizon (Monthly Newsletter), Raju Kuriachan touched upon various aspects of the organization, its growth, future strategy, the industry and its outlook.
Excerpts from the interview;
Hope Horizon : Can you trace the origin and growth of Hope microfinance activities? How was your journey and where you stand today?
Raju Kuriachan : Hope Foundation, registered under the Indian Trust Act 1888, has started its successful journey in 2005. The Foundation has been engaged in the charitable as well as microfinance activities with wider outreach as our microfinance schemes have penetrated to more productive sectors systematically and effectively.
We have built our knowledge and expertise in the integrated community development initiatives since its inception. This drive along with a clear mission and a dedicated team has helped the organization to expand its development initiatives and embark on microfinance program.
Since the commencement of the microfinance activities, the Foundation has grown to a medium size Micro Finance Institution (MFI) having 42 branches spread across six states with a portfolio size of Rs 42 crores.
H H : What prompted you to transform the Micro Finance operations into the Non Banking Finance Company (NBFC) structure? How the new format will benefit the further growth of the orgnisation?
R K : I believe in empowering the weaker sections of the society by facilitating them in increasing their income level. With the floating of the NBFC, Hope Microcredit Finance, our microfinance activities will spread to more geographic centres in a cost effective manner, giving the company a distinctive competitive position in ever growing MF sector. Besides, I am sure, the company will be able to enjoy the advantage of economy of scale of operations and thereby cost reduction. Our strategic move would result in better business synergy and opens up other growth avenues for HMFL.
Our timely decision to transform into a NBFC will bring in equity, mobilise debt and provide services for a much larger number of clients to see that large-scale poverty reduction takes place. NBFC format will also bring greater efficiency, development plans and good management to the organisaion.
HMFL’s main priorities are to attract the financial and human capital necessary to build institutional capacity that will support further expansion and establish strong presence of 196 branches across six states in the next five years. Our plan is to achieve an outreach of 10 kakh SHG members by 2015 with an outstanding loan portfolio of INR 420 crores.
HH : What is your expansion strategy in rest of the country?
R K : HMFL follows an aggressive growth path and chalked out an ambitious expansion plan to streamline its operations and take advantage of its NBFC status. Our strategy is to achieve a stabilised growth. Accordingly, we have identified a couple of north Indian states, potential areas in Kerala and Tamil Nadu for further expansion. We plan to tap the market segment with a range of financial products with cost-effective interest rates.
We hope that the fusion of these characteristics with new systems and processes such as a more robust management information system (MIS), improved organisational structure, and allocation of distinct responsibilities across departments as well as better communication and integration between them, will help HMFL become known as a ‘preferred microfinance institution and employer’ by the industry. Despite an unclear regulatory environment and increasing competition, HMFL is confident of future expansion plan and willfully utilise its financial and human capital to continue providing need-based services to our clients and continue on a steady growth path.
H H : What is your long-term objective? How you plan to achieve it?
R K : Hope launched the microfinance operations based on the development finance paradigm that suggested that poor people lacked financial resources, financial literacy and the skills necessary to succeed. We believe that credit was a ‘productive input’ that encouraged investment in nascent businesses, produced greater income and helped generate employment.
Our paramount objective is to provide crucial financial services to the poor through microfinance at market rates and to ensure economic sustainability for the rural poor. We focus on poverty alleviation by developing women in low-income families.
In order to achieve our objectives, HMFL is in the process of developing new loan products which will serve more individuals in need of microcredit loans. Steps have been initiated to attract funds, especially from international MFIs, professionalize the organisation through training and standardized practices and protect consumers through transparent cost structures.
H H : What are the challenges being faced by the microfinance industry today? How HMFL plans to meet the challenges?
R K : The Indian microfinance industry has witnessed extraordinarily high annual growth of about 45% in the last few years, characterized by low defaults, low average operating cost ratios, high flow of funds from the commercial banking system and investment by private equity funds.
I think, the industry is facing challenges related to emerging regulation by the government, access to finance, governance and management, demand for low interest rates and managing competition. Good governance, client focus and networking with other development institutions are the new challenges that microfinance institutions must prepare to face.
The single biggest challenge for microfinance lies in the area of training and capacity development. On the supply side, there is a lack of service providers and comprehensive, integrated and relevant training modules. Present available funds are quite inadequate when compared to the needs of SHG members. Apart from this basic factor, there are many other factors aggravating the funds availability to the members.
H H : Critics have pointed out that even today financial inclusion remains as elusive as ever to the people at the absolute bottom of the pyramid (BOP). What is your view?
R K : The social benefit of microfinance and its contribution towards poverty alleviation is well established. Financial inclusion is the availability of banking services at an affordable cost to the disadvantaged and low income groups. Therefore, financial inclusion, financial literacy and inclusive growth are the themes of MFIs in India.
However, I believe in the notion that no self-sustaining business can survive purely on ideological grounds. Although serving the ultra-poor directly has not been economically viable, it definitely is part of the ongoing integration plan of most MFIs. No doubt, the contribution of MFIs do impact the ultra poor, albeit indirectly. The micro-entrepreneurs supported by the MFIs develop small businesses which need staff employment beyond a certain level of growth. These people end up recruiting the ultra poor who now indirectly benefit due to a stable source of income and slowly graduate to the credit worthiness level for consideration by the MFIs.
H H : Do you agree with the statement that “the core of India’s financial system, its banking sector, does not support rural entrepreneur-based innovation”?
R K : There is finance in the system and even credit specifically allotted to the rural poor and to entrepreneurs. However, it is true that there is a decrease of credit in rural areas and a decrease in credit towards small and micro enterprises.
Even where schemes are in place to specifically provide credit for the rural poor or entrepreneurs banks often prefer non-compliance. Alternatively, their funds flow towards what they perceive to be the least risky alternative such as investments in government funds or the largest enterprises allowed under priority sector lending rules. There are several funds set up by the government to deal with the financing gap but so far they have had little impact. Instead an alternative financing sector — microfinance — has emerged to cater to the needs of rural as well as poor.
H H : Do you think, the SKS IPO success will herald more such microfinance offers in India?
R K : Most MFIs depend heavily on bank loans or investments from mostly global private equity firms. The current available credit for the poor is about Rs 20,000 crore, less than one-tenth of the Rs 2.4 trillion that is required. The sector still has growth potential of 10-15 times over the next few years.
Rapid growth of MFIs and the limitations of other financial sectors to cater to the needs of the industry have necessitated MFIs to consider other options such as IPO. Moreover, larger MFIs have reached a size where private equity cannot provide enough capital to fulfill the RBI’s capital adequacy ratio norms.
When the industry is growing rapidly, the sort of equity we need to maintain 15 per cent capital adequacy ratio will not come from philanthropists or banks. So the MFIs have to move to new sources like PE, the capital market and debt instruments. It is an evolutionary process and the IPO trend in the MF industry is likely to continue after the Andhra crisis blows over.
HH: India’s fast-growing microfinance sector has recently attracted regulatory scrutiny following allegations of aggressive collection practices and borrower suicides, with the finance minister calling for a code of conduct on interest rates and recovery norms. Do you think the new developments will bring about an era of change to a sector that has seen surging growth?
R K : As microfinance gets bigger, obviously there is need to regulate it. But I believe that Andhra Pradesh Ordinance has several limitations and it does not look fair and practical. Without analyzing the crucial issues of the sector, the Ordinance proposes to put restrictions on the functioning of MFIs and borrowers.
Compliance of various provisions of the Ordinance may result in a steep increase in the cost of operations of MFIs, which may further add to the burden of borrowers.
The high rates have some economic justification, though the larger MFIs have the space to lower rates. But crimping credit lines and curbing the operating flexibility of MFIs based on a flawed socio-economic argument would likely hurt the industry, many of whom provide the real social backbone to the microfinance business.
HH : The rural poor in Andhra Pradesh, a State showcased as a model for SHG-bank linkage, are caught in the vortex of microfinance. What is your reaction?
R K : It is a fact that MFIs have brought banking to the doorstep of the borrower. But now, because of the activities of some MFIs, there is an attempt to strangle the entire sector. While the AP Ordinance has been promulgated for the public good, I doubt whether it will do more harm than good.
The ordinance would hurt millions of borrowers and push them back into the lap of private moneylenders. It also got the potential to rock the MFI industry in AP by delaying collection, which works out to Rs.200 crore every week. The most extreme consequence will be that MFIs will vacate the credit space that will gratefully be re-occupied by the local moneylenders with all their associated ills.
Microcredit in many forms and shapes has touched not even 5 per cent of the inclusive imperative and India cannot move forward leaving behind 500 million people. Microfinance as a transformative tool shall not be allowed to be aborted. Onerous conditions are sought to be placed on their functioning.