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    A contagion like 2010 is unlikely in microfinance companies now: PN Vasudevan, Equitas

    Synopsis

    Our repeat ratios are actually the lowest in the industry, it is about 45% from the first cycle to the second cycle and further to 30% from second to third cycle.

    In a chat with ET Now, PN Vasudevan, MD, Equitas, says given the margin cap which is there as you improve your efficiency and your cost of operation comes down, there is definitely a scope to inch the ROE up to anywhere between 15-18-20%. Edited excerpts


    ET Now: Let us talk about the business in general and the concern which I am getting from some of the naysayers is that microfinance companies are growing too fast and it is too risky. The fact is that the NPAs for the industry are zero on a longer term basis. It is not going to stay like this, is it?

    PN Vasudevan:
    See microfinance has been a business which has been happening globally for nearly about 40 years. There is a lot of history and there is lot of past precedence behind microfinance. It is not a kind of new business activity and in India, microfinance has been going on for may be about 15 years now.

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    In terms of the potential and in terms of the growth rate, microfinance has been growing at a reasonably fast pace before 2010. Then in 2010, there was a crisis in Andhra Pradesh when Andhra Pradesh government came out with an ordinance which kind of more or less brought microfinance stay a halt in that particular state and after a lull of two years, RBI had stepped in and they had formed a committee like Malegam Committee and based on that, RBI came with a regulatory framework for microfinance for the first time in India where they try to address the fundamental concerns which are there in the microfinance industry; 1) whether the MFIs are charging a very high rate of interest, 2) whether they are giving too much money to the same borrower which is potentially leading to an over leveraged position and resultant problems from the client borrower perspective and 3) whether the recovery practices are consistent with fair practice course.

    These are the three concerns which were there in the industry at that point in time and RBI set out a proper framework to regulate the industry. They brought in a lending rate cap which ensured that they cannot charge more than a particular rate, they brought in a margin cap which defines a margin between your cost of funds and your lending rate.

    They also then said that not more than two MFIs can give a loan to a one single borrower and the total indebtedness of the borrower cannot exceed Rs 50,000, that is what they said in 2011. Now, of course that has been subsequently increased to Rs 100,000. Then they brought in a fair practice courses for all the NBFCs, MFIs which has to be board approved policy in terms of how you deal with customers in case they do not have the money to repay back.

    So they brought in a really tight framework regulating the main concern areas of the sector and because of that, over the last three-four years what we see is structurally there is a lot of improvement in the industry and we have a very strong credit bureau data base now. So with a touch of a button we know exactly how much each customer has borrowed from other MFIs.

    The lending rate cap has been in work now for a long enough time and if you see the total return on equity of the MFIs the return on equity is no one has touched anywhere around 15% to 20%. I think there are hardly one or two companies in the country with an ROE of more than 20%. Otherwise, everybody is in the range of 10 to 15%. This clearly shows that the companies have tried to become very efficient now and after that you only get a reasonable return.

    There is a lot of structural improvement in the system over the last three-four years but still concern remains whether an industry which is growing at may be 60% per year now, may itself become a cause for further worry as we go forward from a risk perspective.

    The second thing is whether such a growth rate is sustainable and if so for how long. So those two questions still remain in the sector.

    ET Now: Are you saying that within and around the current growth rate levels, there is a scope for the return on equity for most companies to inch up over the next two or three years?

    PN Vasudevan:
    Yes. Given the margin cap which is there as you improve your efficiency and your cost of operation comes down, there is definitely a scope to inch the ROE up to anywhere between 15-18-20%. I mean if you are really efficient and your productivity parameters like your loan outstanding per customer, your number of customers per staff, these are the basic productivity parameters so--so long as you are kind of working hard to maintain your productivity parameters I think even in the given current margin cap it is possible that efficient MFIs can get an ROE anywhere between 15-18%.


    ET Now: Can supernormal growth lead to high asset quality risk and in worst cases contagion risk as well?

    PN Vasudevan:
    Yes. See whenever there is a high growth in lending, always any lender-- you can talk to any lender they will always have a very high level of fear the moment their growth rates are very high because they are always worried whether your quality client acquisition process is diluted somewhere, whether your systems and processes are able to manage to keep pace with their growth rate and whether your field level collection processes will keep pace, whether your operating controls will keep pace with the growth rate, so always it is a concern, for any lender high growth is a matter of concern and it depends on each individual lender as to how he is addressing those concerns which will make either sustainable or not sustainable. But in microfinance beyond the fact that there is an individual lender level prudence which is required, there is also this contagion effect which you just mentioned, that is also an issue in microfinance which is kind of maybe an added issue for microfinance, not there maybe for most of the other forms of lending.

    The contagion issue is something where you have an issue in a market. MFIs have been very prudent but they may also come under some stress. So the contagion effect is there. The question is whether the contagion effect can be the kind of one we witnessed in 2010 or it will be different? The kind of factors which were at play in 2010 in the particular state of Andhra which led to that ordinance being promulgated by the government, those kind of factors are actually not present anywhere in the country today. I would not be able to get into details of what those factors are just now because it is a long story but the reality is that those factors do not exist anywhere in the country today. So, my personal belief is that such kind of an impact may not happen now the way it happened in 2010 but clearly in localised market areas if any player is going and overstepping and...

    ET Now: How many new customers are you adding?

    PN Vasudevan:
    We have very tight norms in terms of our customer retention policy. Even though the RBI says that only two MFIs can give a loan to a customer and that does not actually very specifically include bank loans, only MFI loans, we have internally taken a view that even bank loans we will count within the two MFI loans.

    So if a bank has given a loan to a customer and an MFI has given a loan and so totalling to two we actually do not give a loan to her even if she is my existing client. So our repeat ratios are actually the lowest in the industry, it is about 45% from the first cycle to the second cycle and further to 30% from second to third cycle. So because of that actually in our particular case our new customer acquisition is actually is very high. Every month, whatever the number of customers, approximately 60-65% of the customers we finance in every month are actually new customers. So in our case it is rather high compared to maybe the rest of the industry.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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