Chennai: The next big players in the economy, especially at the bottom of the pyramid, could well be the microfinance organisations. Reason: They provide the last-mile financial connectivity for people, and are equipped with the granular data about the beneficiaries.
“We are looking at launching a few additional products such as educational loan (seasonal) and loan for the purchase of gold,” says Mr P.N. Vasudevan, promoter and Managing Director, Equitas Micro Finance Company India (P) Ltd, Chennai, talking recently to Business Line, during a lunch-hour interaction, about his plans on the anvil.
More importantly, using Equitas’ valuable database, Mr Vasudevan sees himself going beyond the financial realm by bargaining for cheaper products/services to benefit his borrowers. “We want to play a role in the lifecycle of the customer by being an aggregator of all our customers’ non-financial requirements and we will be looking to playing a value-adding function in the same,” he avers.
A physics and law graduate, Mr Vasudevan is also a qualified company secretary with more than 20 years of experience in the banking and financial services sector, having served in companies such as Cholamandalam Investment and Finance Co Ltd and Development Credit Bank. He was Chairman of the South India Hire Purchase Association for the year 2005-06.
Excerpts from the interview.
You have moved into microfinance after a long innings in commercial banking and financial services. Why?
I didn’t know much about microfinance till I did a thorough study about it for two months. Commercially it is a large opportunity with Rs 2 lakh crore annual credit demand, with less than 10 per cent being currently supplied. It is also a very relevant social business since it empowers women from the poorer segment by giving them access to finance at a reasonable cost. Seeing the impact our finance creates on the lives of these people has given me a satisfaction I had never experienced in my earlier careers. A combination of these is the reason for my being here in microfinance.
We talk a lot about financial inclusion. Is it happening? Should the work of MFIs such as yours also be counted for the reckoning of ‘inclusion’?
Financial inclusion is a national agenda and it is critical to achieve the same, so as to enable the ‘Bharat’ to benefit from the ‘India’ growth story. Reality is that more than 50 per cent of the population in cities, and an even higher percentage in rural India, are not part of the mainstream financial system. While banks are not structured suitably to reach this excluded segment, the MFIs (microfinance institutions) can provide the missing link.
Considering that there is a large demand for microfinance, where are the supply inefficiencies?
Traditionally the microfinance industry has been the domain of NGOs, which were unable to scale or reap efficiencies. The biggest inefficiency has been the cost of reaching the money to the customer which is where Equitas is specifically focussed.
You speak of marrying the technological and operational strengths of retail banking with microfinance. Can you elaborate on this?
The lending rates in MFI hover around 25 to 30 per cent due to high operating cost. While this is attractive compared to private moneylenders’ rates, there is still significant scope for reducing the operating cost and pass on the benefits to the customer. In Equitas, our aim is to leverage the technological and operational efficiencies of retail banking and bring the benefits of superior productivity and efficiency to the customers.
In what ways have you leveraged technology? How has it helped in cost control and other efficiencies?
We have put in place the best software available for MFIs and were the first MFI in the country to start business after the full IT system was in place. Internet-enabled software, combined with centralised processing, ensures that all backend operations are done at the HO, leading to higher efficiencies and also releasing the branch staff fully for customer-facing activities, thus enhancing their productivity.
What are the insights about microfinance that you have gathered so far in terms of borrower behaviour?
These customers have an amazing ability to manage diverse pulls of family with an uncertain monthly income. To them, education of children is a high priority; and they are willing to spend disproportionate amount of their income on the same. If they are given, not subsidies, but access to appropriate products and services, they would definitely be able to improve the overall quality of their life.
You have separate collection teams. How expensive is it to deliver one rupee of finance? And to collect one rupee? What are your strategies to reduce these costs?
Separating of sales and collections teams has helped us improve controls as well as enhance productivity. Typical cost of delivering a rupee is about one paisa; and, for collecting, it costs about 8 paise currently. Though we are already the most efficient in our operations, the challenge will be to continuously keep raising the bar on productivity and efficiency and scale up to absorb the cost better.
What are the challenges to MF? What legal changes, therefore, are the most looked forward to?
Challenges to MF are in terms of raising funds at a reasonable cost and keeping the operations cost down. As suggested by the Raghuram Rajan Committee on Financial Sector Reforms, we would look forward to a limited banking licence enabling the qualifying MFIs to accept savings from our own customers, which will be a great product offering to customers and also help us reduce the cost of borrowings.
Just as the IT sector is important from an export and employment perspective, the MFI industry is critical from an inclusive growth perspective. Hence it would be good if the Government looks at offering tax incentives to MFIs with suitable safeguards.
Can our social welfare/development projects deliver better results by tying up with MFIs?
It would definitely help to coordinate the efforts of different agencies working for the same customer segment. However, given the diverse nature of these agencies, it would be a challenge and needs concerted efforts.
How do you ensure fairness and transparency in your operations?
The name ‘equitas’ in Latin means ‘equitable’ in English, that is, fair and transparent. We are committed to ensuring that everything done in Equitas lives up to its name. For instance, we are the only second MFI in the country to print the reducing balance interest rate (real interest rate) in the passbook of the customer, equivalent to the annual percentage rate (APR) which is mandatory in the US. We are also the only institution in the country (including banks) to give the break-up of the insurance amount collected from customers, between the premium payable to the insurance company and the group administrative fee retained by us. The prerequisite for being transparent is being fair.
You have initiated CSR activities…
As part of our CSR (corporate social responsibility), we have formed a trust, the Equitas Development Initiatives Trust, to focus on education for the poor and community development. The trustees include Dr C.K. Gariyali, former bureaucrat, Mr R. Balasubramanian, former High Court Judge, and Mr M.B. Nirmal, founder of Exnora International. We are looking at playing a role in the ‘after school’ life of the students, by tying in the school education process to lead to better placements, both on further education and career options. In the area of community development, we are working closely with Exnora and taking their expertise to improve the living conditions in the communities where our customers reside. We have taken up pilot projects; based on the experience we will be scaling up the activities.