Vijay Mahajan, Founder and Chairman of Basix, a financial services group that provides microfinance and other livelihood promotion services, was one of those expected to make a bid for a bank licence. But he chose not to.
He explains that a bank licence in the current environment would take the company away from its mission. Further, the microfinance industry has still not recovered from the Andhra Pradesh Government’s intervention a few years ago. His company was hit hard, with its balance-sheet shrinking drastically and a lot of people leaving.
'Criticising the AP Microfinance Bill, he says it has made it impossible for microfinance institutions (MFIs) to conduct operations and recover loans from the poor in the State.
Easy flow of working capital from banks is crucial to the revival of the microfinance industry.
Excerpts from an interview:
Are you seeing more funds from developmental organisations and Sidbi?
We are seeing some funding but the resources available to them are relatively limited. Sidbi runs the national microfinance equity fund. Its total corpus is Rs 200 crore. One growing MFI can absorb that much. They are helpful for small growing MFIs.
Are you seeing any green shoots on the policy front?
The RBI has been very constructive. It realised that what was done in Andhra Pradesh was not right. But how do you tell an elected government what is right or not right.
It has done what it could as a regulator, and introduced a lot more regulations on consumer protection. And the Department Of Financial Services was also proactive; it drafted the new Bill and is trying to pilot it.
Ultimately, our working capital is bank money; unless that comes, the rest is all chanting mantras and waiting for rain.
Outside Andhra Pradesh, do you see a scope for growth?
Last year the sector saw a healthy growth of 30-40 per cent. But if you compare it to 2010 level, we have still not reached there. In 2010, we were Rs 30,000 crore, and if we had continued to grow at that rate today we would have been Rs 1lakh crore. We are still at Rs 24,000 crore.
Right now, if you read the RBI regulations, it looks like there are 10-12 restrictive micro-regulations but, in a sense, the industry brought these upon itself. The RBI is a mature enough regulator to realise this is not a long-run regime. It will slowly remove these restrictions.
Why have you not applied for a banking licence?
Unfortunately in India, we have only one category of bank, which is the national banking licence. We are not interested in being a bank for everybody. We are into financial services as our objective is to serve the excluded. So it will take us away from our mission. As an MFI we primarily serve the poor; our local area bank has a balance sheet of Rs 200 crore and it has a quarter million customers.
But tomorrow, if there is a banking licence for, say, a microfinance bank, or what we had suggested in the Raghuram Rajan committee — a small finance bank, where the loan size is not more than Rs 10 lakh — then we will apply.
In your opinion, what factors are currently hurting the microfinance sector?
The AP law makes it virtually impossible to do anything there. We have overdues of Rs 7,000 crore, which has made a hole in several balance sheets. Outside of AP, things have improved a lot compared to three years ago but still the banking system doesn’t have the same level of enthusiasm or confidence it had because they are constantly worried about an unpredictable event like this. So, while there has been growth, we are still not at 2010 levels.
How has the last fiscal played out for Basix?
We have suffered very badly. I don’t think we are in that sense representative of the sector. We were a Rs 1,800 crore company and today we are a Rs 80 crore company, because we had a portfolio of Rs 550 crore in Andhra Pradesh and Rs 1,250 crore outside. After the AP one went bad, banks became nervous, so they said keep repaying us the rest. So we brought down the outside portfolio from Rs 1,250 crore to Rs 150 crore. We have also made a Rs 500 crore provisioning and another Rs 150 crore is due.
Basix alone had lost 9,000 staff out of the over 10,300 people employed in AP and elsewhere.
Apart from banking, is the microfinance industry looking at other avenues for funding?
In theory you could go to insurance companies and mutual funds but who would want to invest in an asset class where the lenders themselves don’t have confidence. To rebuild confidence you need new regulations. Some of the PE players have come back and that’s a good sign. It’s a function of how to rebuild confidence, new regulations and then you need equity, additional lending and stability.
What are your plans for this year?
A lot is dependent on whether the Microfinance Bill is enacted in Parliament or not. It’s a function of whether it will be introduced in time. If the Bill is approved it will be a confidence building measure for the sector.
Will you look at listing in this scenario?
It makes sense to go to the capital markets when your funding needs per year are at least Rs 500-1,000 crore of equity, which means you need Rs 3,000-4,000 crore of total funding. SKS was the first one which reached somewhere there. Bandhan, probably, may be the next one which may come that close. Then an IPO becomes inevitable because there is no other way you can raise money from the capital market. Every quarter, if you have to raise 200 crore of equity there is no way you can raise it from the biggest PE player.