“Microfinance And Moneylender Can Complement:” SKS Microfinance
Microcredit is back to the fore again with the central government writing off Rs 60,000 crore that the farmers owe to the banks. There is a problem at hand for the policy makers. It still has not found a permanent solution to the mounting debt burden of the rural poor. Is a write-off every pre-election budget an answer to the issue? Definitely not. In an interview to VC Circle, S Dilliraj, CFO of India’s leading microfinance institution, says that “farmers need income for survival and not debt relief”. According to him, the long-term solution to this problem could be closer collaboration and synergy between banks and MFIs for rural lending. And also take the local moneylender along instead of banishing him from the system. Excerpts:
S Dilliraj, CFO, SKS Microfinance, India’s leading MFI, in an interview to VC Circle. “They need income for survival and not debt relief.”
This move certainly has its positive side as it will see a greater flow of capital into the sector but the long term solution to the problem could be closer collaboration and synergy between banks and MFIs for rural lending. VC Circle spoke to Dilliraj, CFO, SKS Microfinance to know more about the credit to the poor through microfinance institutions and what indeed is the solution to the entire problem. SKS Microfinance, the leading MFI in India is founded by Vikram Nakula who was recently recognized by Time magazine, as one of today’s 100 most influential people. Excerpts:
Where does MFI fit in India? Who is an ideal customer for MFI?
Microfinance operates in the sections of society just below those that have access to formal banking and above those who have no regular source of income. Any individual who falls under the upper poor and poor segment of the society with social collateral can be an ideal customer for MFI. India has more than 35 per cent of its population in the BPL (below the poverty line) segment and very often this section has no access to finance.
According to a study, the current requirement of credit for the poor is Rs 2,40,000 crore and the available credit is just about Rs 20,000 crore. In India, Microfinance has reached only a 15 per cent penetration or rural credit need. One has to remember that the loans should be used with the sole purpose of starting or scaling up existing income generating activities and not for consumption; else this will lead them into a debt trap.
Do you specifically target a distressed farmer or a farmer? What is the amount of loan you generally lend? How do you recover that? What is the interest rate that you charge? What happens in the case of a default?
At SKS Microfinance, just three per cent of our portfolio is exposed to agriculture. This is mainly because of the seasonal nature of agriculture and also because farming does not allow for weekly repayments. We provide collateral-free loans to only poor women in the rural, semi urban and urban areas to start or scale up their existing income generating activities. The loan amounts range from Rs 2000 to Rs 12,000 in the first cycle on with a repayment model of 50 weekly installments. After 25 weeks of repayment, a mid-term loan ranging from Rs 2,000 to Rs 4,000 is provided. We charge a diminishing rate of interest at a national average of 26 per cent. All our loans are provided on a joint liability model wherein the loan is provided to a particular woman, the entire group is responsible for the repayment in case of a default. The model takes care of the loan repayment which is testified with the current repayment rate of over 99 per cent.
What do you think is the problem with the rural credit system?
India is a vast country and availability of infrastructure to reach remote villages which are in need of credit is poor. For a poor woman in a village to access credit is an uphill task. She needs to travel to the nearest town or district headquarters to approach commercial banks and other financial institution. Also, the norms and policies create hassles for her which makes way for an agent to step in to help them out for a commission or bribes. The easier resort for them happens to be the local money lenders who charge high rates of interest leading them into a debt trap.
What are the implications following Rs 60,000 crore waiver for the farmers? Could’nt that have been put to good use and come up with a fund, instead?
We believe that farmers need income for survival and not debt relief. The positive side of the loan waiver for MFIs like SKS is that banks would now feel safer riding on the extremely robust collection and delivery systems of MFIs. This will see an increased flow of capital into the sector.
What is the solution to the entire problem?
The long-term solution to this problem could be closer collaboration and synergy between banks and MFIs for rural lending. We also hope to see the technology back-up needed for implementing the Banking Correspondent model which will with one stroke enable the rural population that has no access to formal banking to join the mainstream.
Can an MFI replace an organised moneylender at any point of time?
As said before, to meet the huge unmet demand, we need a lot of players to provide credit to the poor. An MFI and moneylender can compliment the activities to reduce the increasing gap. There is an attempt by the government to involve the money lender into mainstream banking. This can be a good option since the money lender is part and parcel of the social fabric and understands the needs of the borrower. If the money lenders can be regulated, then they can act as critical links in the rural banking system.
SKS is funded by VCs. Do you think VCs put a lot of pressure on you for returns?
There is an increasing awareness in the market for microfinance. Financial investors now have no hesitation to invest in our company. We recently closed our third round of equity of Rs 147 crore. The potential of microfinance in India is huge and we are scaling up at a rapid speed to reach out to maximum poor across the country. We are currently growing over 200 per cent annually. Our strong model and systems ensure that we enjoy repayment rates over 99 per cent. All these give good consideration for our VCs and we do not see any kind of pressure for returns so far. In fact, we have so far not given any dividends but are ploughing back the profits into the business.
