We need a bank as a partner, with or without stake: MR Rao Managing Director, Bharat Financial Inclu

PUNE, India - June 22, 2017 - PRLog -- Many microfinance companies may be in distress due to demonetization-led non repayment of loans upsetting the credit culture in rural India, but the big banks are not giving up on the segment yet. Madapati Ramachandra Rao, Managing Director of Bharat Financial Inclusion said that a fourth entity has joined the race along with IndusInd BankBSE 0.52 %, IDFC Bank and RBL Bank for a possible takeover of the company. After a decade of witnessing ups and downs – the hugely profitable public offer, the Andhra Pradesh-led microfinance crisis, the high growths, demonetization -- Rao is now guiding India's second largest microfinance company into a critical phase where it may possibly loose its identity of a lender to the poor and merely become a business correspondent for the acquiring bank. At this interesting juncture, Rao discussed with ET's Atmadip Ray the details of multiple possibilities that are being worked out and the challenges ahead for the fragile microfinance sector. Here is the edited excerpt

Since 2006, you have seen a fledgling SKS MicrofinanceBSE 0.73 %, which is now Bharat Financial Inclusion, grow leaps and bounds despite countering several challenges in the form of Andhra Pradesh-led microfinance crisis and more recently demonetization. What are the key strategies and learnings that helped you in such critical times?

Microfinance started attracting limelight after Prof Yunus got the Nobel Prize in 2006. Vikram (Vikram Akula, founder of SKS) got nominated in Times Magazines top 100 people list during that time only. Private equity had started coming in in 2006, Sidbi (Small Industries Development Bank of India) invested too. Just around the time I joined, the company was in the process of raising equity.

Between 2006 and 2010, it was all about scalability. Universally all the microfinance practitioners started with great intent. They continued with the narrative saying "we are here for a social cause". But the underline fact was, as a non-banking finance company, all started seeking private equity and making profit. Fundamentally, the narrative of this being a social business was eliminated with our IPO at high value. People realized that there is so much money that can be made. Vikram's philosophy was to make profit but without trying to be extremely profitable. He focused more on efficiency, computerization. But when the crisis started, we were beaten black and blue. But where we stood out was: first, our geographical diversification with healthy 70% portfolio outside AP and second, that we raised capital through IPO so we had enough cash. We were also quite vocal from the AP crisis days that nobody should go and lend individual loans without proper system in place, we are against going for high-ticket loans and monthly repayment schedule. These are where the trouble begins.

You were a banker earlier. What has brought you in this sector?
I had previously worked in companies such as DCL, Esanda (a part of ANZ), Standard Chartered Bank, and had two entrepreneurial stint in between. I joined ING VysyaBSE -0.32 % in June 2004 (Bangalore was the headquarters of the erstwhile ING Vysya Bank). My family was here. In a visit to Hyderabad to meet my family, I called Sitaram Rao, my professional mentor. That time he was in SKS Microfinance and had invited me to visit SKS, which had 40-odd branches and some 40000 customers. I thought there could be a lot of cross sell opportunities. So, I tried to convince him to become a channel partner for insurance. He told me to do a field visit and check out whether customers can afford insurance. I did and I was swayed by the business model and it's potential. Eventually, I started chasing him for a job in SKS. They were an NGO at that point in time. In 2005, it got converted into a non-banking finance company and I finally joined in 2006 after two years of chasing Vikram (Vikram Akula, founder of SKS) and Sitaram Rao. The sector was not too crowded then.

How were those days in 2010, when everybody in the microfinance industry was taken by surprise by Andhra Pradesh government's decision to ban MFIs?
Signs of things becoming different started in 2008-2009 when we saw changes in customer behaviour. They started demanding more, thanks to the attention microfinance industry got after Nobel Peace Prize and stuff like that. People saw that this was a 99% repayment business and started getting into the business. In the span of one year, the whole landscape changed. Instead of four or seven, you suddenly had some 20 people coming in.

Normally, in a heavy competitive business, pricing comes down. In this space, given the fact that there was no system and credit bureau, people could grow 60-70% without competing on price.

Andhra Pradesh at that point had the maximum portfolio as four MFIs had headquarters here. Even money lenders started calling themselves microfinance companies. It was becoming a joke. All came to a boiling point because Andhra Pradesh had the strongest SHG (self-help group) portfolio. The Society for Elimination of Rural Poverty (SERP) was a great institution but the problem was they suddenly saw their portfolio getting shrinking and repayment getting affected. Politically, when YSR (YS Rajasekhara Reddy) was chief minister, there was lots of controversy but YSR allowed MFI to operate. But after his passing away and when Mr. Rosaiah became the chief minister, the act was passed. That was immediately after our IPO.

First day we did not even understand what was this all about. In the second day, we thought we will fight it out in the court. But over a period of 15 days, we realized the government was very adamant and determined and was going after us like nobody's business.Continue to read (https://mnacritique.mergersindia.com/news/we-need-a-bank-...)...