With a population of less than 5,000, Pandia is a small village in the coastal district of Ganjam in Odisha. Like most villages, chit funds are aplenty here, mostly run with political backing, as bank branches are 7-8 km away. It’s not like stories of these funds folding up overnight and vanishing with villagers’ hard-earned money has not reached Rameshsundar Sahu. But the sweetmaker, belonging to the gudia caste, still invests Rs.200 out of his daily income of Rs.500 into one. Sahu is not alone. Chit funds are the only source of finance for villagers looking to save up for big investments like marriage or building a house in this unbanked tier-6 village.
It is this setup that IFMR Holdings aims to change. So far, it has brought institutional credit to 17 million low-income customers such as Sahu by inserting itself into every step of the process, right from facilitating rated debt capital to running a ‘wealth management’ programme in remote villages.
Managment Lessons
Usually associated with ultra high net worth customers, wealth management in a village setting is unheard of. But that’s exactly what IFMR is doing through Kshetriya Gramin Financial Services (KGFS). Run by its subsidiary IFMR Rural Channels & Services (IRCS), the rural outreach programme is present in six districts across Odisha, Tamil Nadu and Uttarakhand, four of which are operationally profitable.
For instance, KGFS Berhampur (or Dhanei as the villagers call it after a local river) is responsible for 33 branches in remote villages across Ganjam. “We have lent around Rs.160 crore to close to 80,000 households in Ganjam,” says Subasish Chatterjee, senior regional manager. Moreover, Chatterjee is responsible for 136 locally recruited ‘wealth managers’. Usually class 12 passouts or graduates with good communication skills and basic knowledge of mathematics, they are given monthly loan targets of Rs.20 lakh in the case of older branches and Rs.5-10 lakh for new branches.
Then, there are financial literacy programmes for the villagers, sessions to teach them how to channel money productively and even tests to educate them about joint liability before a loan is granted. The loan process itself is rigorous, with a financial wellbeing report that takes into account both the household income and future goals. KGFS disburses two types of loans - group loans under a joint liability group (Rs.20,000-30,000 at an interest rate of 26%) and individual loans under micro-enterprise loan (Rs.50,000 at an interest rate of 22%). In the case of former, men are roped in as guarantors to discourage them from using their wives to avail a loan.
The other differentiator is that IRCS doesn’t do doorstep banking through business correspondents. Instead, it tries to regularise customer behaviour by making them deposit installments and collects loans through its branches. To ease the process and make the branches less intimidating, colours and local languages are used. For instance, the branch in Pandia is painted in KGFS colours of orange, green and white, and all the posters and instructional boards are in Odiya. Also, KYC procedures are made non-discriminatory. “Earlier banks insisted on attestation of documents by the sarpanch, which often ended up being caste-influenced. For us, just Aadhaar or voter ID card is enough, along with a visit to the house to make inquiries,” says Bindu Ananth, Chairman, IFMR Trust, the promoter of IFMR Holdings. However, while documentation is not an issue for unsecured loans, it continues to be a hurdle in giving out secured loans. “Mortgage loans are in a pilot phase right now. The problem is that houses are often held in the name of the father or the grandfather. Now tomorrow, if there’s default, I cannot go to a court of law and claim the house,” explains Chatterjee.
Mortgage loans aside, isn’t the proposition of lending to low-income households still risky? “There is a misconception that poor means risky. We have seen that low-income households with no documentation and access to formal institutional credit have a bigger incentive to pay their dues on time, since they have nowhere else to turn to, unlike you or me,” says Ananth. For instance, Chatterjee says, when cyclone Phailin ravaged Odisha, especially the Berhampur district, people asked IFMR for more time. “We gave them a window of two months and in spite of the cyclone, our collection rate was around 98%.” IRCS though has come up with a common registry with other MFIs to ensure they don’t lend to people, who already owe money to others.
In FY16, the company had a revenue of Rs.54 crore, a net loss of Rs.5 crore and a BBB- rating from CARE and ICRA. As of Q1FY16, it has disbursed loans worth Rs.1,500 crore since inception in 2011. Vijayalakshmi, who hails from Arasapattu village in the Thanjavur district of Tamil Nadu, is one of them. “Before, we got loans from the moneylender at 60% interest or we had to pledge our jewels to cultivate land,” she says. But with Pudhuaaru KGFS (responsible for Arasapattu), Vijayalakshmi adds, crop loans are easier to come by now.
Rough start
Just like Vijayalakshmi, it wasn’t easy going for IFMR starting out. When it went scouting for investors around 2008, the financial crisis had just struck. It was a bad time to enter the capital markets, no one wanted to hear the words securitization and low-income. Then, in 2010, after the Andhra Pradesh crisis struck, microfinance became a taboo. “We were rejected about 50 times before we got our first investment. People used to point me to the CSR department of their companies, but I said no. I want capital, not grants,” recalls Sucharita Mukherjee, CEO, IFMR Holdings.
Mukherjee’s perseverance, however, paid off when the investing arms of ICICI, Reliance and HDFC became the first to lend it capital. “They were convinced by our logic. We said look at the data and you will know the risk.” Since then, IFMR has grown to log a 9MFY16 consolidated revenue of Rs.216 crore, and PAT of Rs.15.5 crore.
Besides IRCS, IFMR has two other subsidiaries: IFMR Capital and IFMR Rural Finance (IRF). IFMR Capital is a bridge facilitator between debt capital markets and lending companies (originators) operating in the microfinance, small business, affordable housing, commercial vehicle finance and agri-finance sectors. On the other hand, IRF is the subsidiary which has developed the KGFS model and offers technology and financial product solutions.
Of the two, what helped IFMR build trust was to make its Capital subsidiary a subordinated investor. This means that in case of a default, IFMR will get back money only after senior investors. “With no track record, no history, no reputation, the initial years were very difficult. The question was: why would mutual funds invest in a MFI-backed paper, which is why our role as second-loss investor was very important,” explains Kshama Fernandes, CEO, IFMR Capital.
This is also where IFMR differs from others. As it gets money only after senior investors, it is incentivised to do due diligence and risk monitoring. “Otherwise, as a broker, why would I bother,” asks Fernandes. IFMR has so far done due diligence on 400 originators (institutions that do the on-the-ground lending) and has chosen to work with 95 of them. The investor count, meanwhile, stands at 85, and it enabled about Rs.22,000 crore of financing thus far. “All this with no default, neither have we lost any money nor has a single investor,” says Fernandes with a touch of pride.
The sectors they facilitate debt for include microfinance loans (<Rs.100,000), small business loans (Rs.1lakh–Rs.2 crore), affordable housing finance, commercial vehicle finance (for owner-drivers) and agri-finance, its latest sector. “The common factor between all these sectors is that they struggle with bank financing. A lot of banks do provide finance, but they are driven by priority sector requirements. Suddenly at the end of the quarter everybody wants to lend to them, but there is no smooth flow of capital to enable business to happen. Also, there is not much access to debt capital, but when it comes it’s like a flood,” adds Fernandes.
This is why originators like Kogta Financial India are happy with IFMR. “IFMR Capital is always keen on long-term value addition in the overall process and management of the associate organisation instead of merely providing short-term benefits,” says Arun Kogta, CEO, Kogta Financial. Meanwhile, underlying default rates for MFI originators such as Kogta are 0.2-1%, 0.5-2% for commercial vehicle finance, 0.5-2% for small business loans and around 0.2-0.3% for affordable housing loans.
Another reason is the product mix, which could include securitisation, pooled bond issuances, complex financial products, guarantees, or even plain vanilla loans. “IFMR Capital has played a pioneering role in getting debt funds available through various instruments for the MSME segment,” says Brahmanand Hegde, CEO and Ramakrishna Nisthala, COO of Vistaar Finance, one of the originators.
These products are then rated by agencies like Fitch, ICRA, CRISIL and sold to investors such as bank treasuries, mutual funds, insurance companies, private wealth investors, non-banking finance companies (NBFCs), and development financial institutions (DFIs). Investors receive a return of 9-14% depending on the rating issued.
IFMR Capital, on the other hand, earns interest income on the capital it puts in the transactions it facilitates, along with fee income on the same. In FY15, it had a revenue of Rs.152 crore, with PAT of Rs.38 crore. In Q1FY16, the operating income was Rs.102 crore and PAT at Rs.23 crore. Besides, it had A+ (long term) rating from CARE and ICRA.
Risk management
One of the reasons for IFMR Capital’s zero default status is the effectiveness of its risk management. Investors too attest to this. “IFMR’s significant value add to both originators and investors comes through a deep understanding of sectors and business models, extensive credit and field due diligence, and sound risk analytics and modeling techniques using underlying loan data,” mentions R Balaji, vice president-marketing and strategy, Mahindra Finance.
However, initially, one of the biggest hurdles in gauging risk was the lack of data. IFMR is in a better position now. “The 5-6 million underlying loans we have structured thus far – each loan paid in weekly, monthly, fortnightly, quarterly installments – gives us a good idea about the credit behaviour of customers. Based on this, we have built our backend along with a fairly large risk team,” says Fernandes.
The company looks at risk from three perspectives: risk analytics, risk monitoring and risk modelling. The main concern though is with the volatility (standard deviation) of risk rather than the absolute level of risk. “We can deal with absolute risk structurally, what worries us is the volatility – if the originator has a default of 1% in one year, 7% in the next and so on, it makes us anxious, whether or not the business is being run in a tight manner,” she adds.
Going ahead, IFMR Capital plans to dive deeper into core sectors. At a holding company level, IFMR will continue in its mission to deepen financial inclusion. “I think we have only scratched the surface as far as financial inclusion is concerned. There will be expansion in IFMR Rural Channels. As far as Capital is concerned, we need continuous capital. If I’m a broker I don’t need capital, but since we are also invested, we will need it,” says Fernandes.
Right now, the company meets capital requirements from its significant loan book and internal accruals. IFMR had raised $25 million (Rs.162 crore) in equity capital from Accion in 2015. “With IFMR, we’re not looking for quick returns. We want to prove that this space is capable of delivering commercially viable returns, using technology,” says Victoria White, senior vice president and regional head, Asia Accion Regional Office.
On this front, the good news is that MFIs have made a comeback. According to data from Microfinance Institutions Network, an association of MFIs, the value of loans disbursed has increased by 84% to Rs.16,580 crore in Q3FY16 from Rs.9,003 crore a year ago. But, according to Fernandes, this growth has been led by existing MFIs growing bigger and not by new entrants. “However, growth in the small business loan and affordable housing sectors has been led by new entrants. The entire sector has developed in the last 3-4 years, with more professional new-generation companies taking the lead.”
The MFI culture too has undergone a sea change after the Andhra Pradesh crisis. According to the IFMR Capital CEO, almost all companies that folded during the crisis had a governance issue, even though their demise was precipitated by external events. “Today, MFIs are run far more professionally, with a second-level senior management,” she adds.
An important thrust area for IFMR is thus to bring more transparency. “The only way you can run this business is if you are completely transparent. You can survive anything, a liquidity crisis or an operational crisis, but you can’t survive a governance crisis. If the management wants to cheat, you don’t stand a chance,” says Fernandes. Preventing that from happening is the top priority for IFMR in its mission to facilitate debt capital to high-quality originators as well as millions of poor people across the country. In her words, when you act as the bridge between underlying excluded sectors and investors, the foundation can’t be shaky. The fact that IFMR recognises this makes it a bankable option for the millions of villagers looking for a source of credit.
