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Farm loans to banks by microfinance firms see big spurt………Aveek Datta
For banks, it’s a short cut. For MFIs such sales improve liquidity, Equitas MD P.N. Vasudevan says Kolkata: Indian banks are increasingly buying loans from microfinance institutions (MFIs) to fulfil their regulatory requirement of advancing at least 40% of their total loans to the priority sector, which includes small farmers and small businesses.
Almost all MFIs sold more loans to banks in fiscal 2010 than they did in the previous year, industry officials said. The spurt in sales of loans to banks was remarkable for firms such as Share Microfin Ltd, Bandhan Financial Services Ltd and Equitas Micro Finance Co. (India) Pvt. Ltd.
Share Microfin sold loans worth Rs653 crore in fiscal 2010, up from Rs324 crore in the previous year; for Bandhan sales jumped 83% to Rs330 crore; and for Equitas, the growth was 50% at Rs150 crore.
It’s a winning proposition for both banks and MFIs, according to P.N. Vasudevan, managing director of Equitas. For banks, it’s a short cut to fulfilling priority sector lending stipulations; and for MFIs, which are always “in need of immediately deployable funds”, such sales improve liquidity and help expand loan books rapidly, Vasudevan said.
Loan assets of top Indian microfinance lenders, whose clientele comprises the unbanked poor in urban and rural areas, are growing rapidly—Bandhan, for instance, doubled its outstanding loan portfolio to around Rs1,450 crore in fiscal 2010, while Share’s loan book grew 81% over the previous year to Rs2,200 crore.
“The time and energy required to make small loans in the priority sector is huge,” said K.R. Kamath, chairman and managing director of state-owned Punjab National Bank.
Buying loans from microfinance lenders is an easy way of fulfilling priority sector lending obligations, he added.
Commercial banks mostly buy agricultural loans from MFIs, according to Chandra Shekhar Ghosh, managing director of Bandhan.
Under priority sector lending stipulations, Indian banks are required to lend at least 18% of their total loan book to the farm sector.
Banks that typically buy loans from MFIs are those that do not have a strong branch network in rural areas, said J.P. Dua, chairman and managing director of Allahabad Bank. “For such banks, it is very difficult to lend directly to the farm sector.”
Typically, MFIs continue to monitor the loans for a fee even after they have sold them to banks. This arrangement ensures that banks do not have to recover the loans on their own, which, for any banker, is a key concern.
“Buying loans from MFIs is certainly more cost-effective than lending directly to the priority sector,” said Somak Ghosh, Yes Bank Ltd’s group president for corporate finance and development banking. “What is more, there is almost no risk in buying these assets because there is almost no delinquency.”
In fiscal 2010, Yes Bank bought loans worth at least Rs300 crore from Share Microfin and SKS Microfinance Pvt. Ltd. It has been buying such loans for at least two years.
To streamline the process of buying loans from MFIs, Yes Bank has, in partnership with credit rating agencies Crisil Ltd and Icra Ltd, developed a mechanism to evaluate the quality of loans, according to Ghosh. Microfinance loans are normally unsecured, or are not backed by mortgages, so understanding credit quality is paramount.
For banks, the annualized return on these assets is around 11-12%. MFIs, which typically lend at 24-36% interest, keep the rest for managing and recovering the loans, according to industry officials.
Bandhan’s Ghosh said his firm, which lends at 24% interest on average, keeps around 13%, while the bank that buys loans makes 11%.
Though repayment of microfinance loans is at 99% and returns, too, are good, other investors such as mutual funds and life insurance companies aren’t yet buying loans from MFIs because “they aren’t sure about the behavioral pattern of such assets”, according to Sashi Krishnan, chief investment officer of Bajaj Allianz Life Insurance Co. Ltd, a private insurer.
“We have invested in debt instruments issued by microfinance lenders such as SKS, but aren’t buying loans sold by them because we haven’t yet understood how these assets behave over a considerable length of time,” he said.
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