Macro-level disruptor in Micro Finance:

The preponderance of a sound credit framework in place for an economy is perhaps known to all and it manages to attain the tag of a household topic. The current Indian economic condition naturally paves way for more of discussions apropos to the concerned space. A healthy credit market ensures money in the hands of the public, which is the conduit to spending, investment and other forms of economic impetus. The nation’s economic parameters have left no stone unturned to express their resentment, with multiple indicators at an all-time low. The loan growth story has been dismal for the banks with a continued decline over the passage of time.

The declining loan growth story of Indian Banks
The declining loan growth story of Indian Banks

Concept introduction:

Microfinance is a concept that provides short-term credit breath to small and micro enterprises, nascent entrepreneurial setups and also to individuals who belong to the lower strata of the society, essentially the low-income earners, not having the capability to raise money from the market. The service framework may seem niche, but opportunities and numbers, are in abundance. Microfinance has picked up pace in recent years and rightly so at a time when the Indian credit market isn’t at the best of its mood.

Growth and Microfinance

The 42.9% industry growth in Q1 of FY’20, is suggestive of the fact that the concerned setups are not aiding the micro-entities in the economy but also rendering support to the credit market as a whole. At its initial days, microfinance had to deal with the elephant in the room- interest rates. The interest rates were high in India, which is a certain manner was not fulfilling the purpose until the Reserve Bank of India (RBI) had set an average base rate of 9.18% in 2019.

One can debate on the risk element of the parties involved in the transaction, as the borrowers have no obligation to pose any sort of collaterals against the microfinance loans availed along with the short span of these loans that can induce more loan defaults. The risk burden seems to have a proclivity towards the lenders’ side with the interest rates in control.

New lease of life?

In April 2019, Flipkart’s ex-CTO, Ravi Garikipati along with Raj Vattikuti gave birth to Davinta Financial Services, post identifying the vast openings in the sector. The venture has been seeded by the two individuals, with as much as INR 140 crores of personal money. The setup is unique as they intend to buck the trend and provide the finest of services to its clientele. I would provide some pointers to accentuate on the key differentiating elements:

Unique underwriting model:

The firm has in place a unique underwriting model, that in ‘near’ real-time creates customer profiles and is able to disburse loans the very same day. Also, it expands its horizon of services, on the back of provision of pay-day loans for blue-collar workers, which is essentially underwriting of these loans against their salaries. This acts as a cash advance for the workers, assisting them to address the problem of financial crunch.

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Numbers overview:

The average ticket size of loans for the firm range between INR 45,000-75,000, with the loan book at an odd INR 50 crores. The ticket-size range clearly delivers justice to the concept of ‘micro’ in the concerned concept. The firm has managed to tap into 500 villages so far, in the districts of Assam and Karnataka. The startup aims to push its loan book to around INR 350 crores, by the end of 2020. Davinta focuses on scaling operations across various regions and venturing into newer ecosystems. The rural contribution is expected to be around the range of 75%.

Fiscal discipline:

With heavy rural domination in business, the startup helps us identify the fiscal discipline that is present among the rural class of society. The founders claim that the firm runs on zero-per cent Non-Performing Assets (NPAs), given the current activities in the economy and the nature of the business. We all fall prey to urban sophistication, completely turning blind to the basic qualities that need to be imbibed to attain sophistication.

The Trickle-down effect of technology:

One needs to make peace with the fact that the future of financial services, rest in the arms of robust technology. With already the urban technological disruption in place, do we see trickling-down of its effect amongst the lower chunk of the society. They understand the inclusiveness of the framework and long its presence, due to the convenience factor.

Identification of true consumer need
Identification of true consumer need.

Author’s Take

In accordance with me, the recent Non-Banking Financial Companies (NBFC) crisis has given a lot of room for microfinance and its ancillaries to step up and extend the much-needed support. Also, I think all that microfinance has done is to manage a seamless substitution, in place of the NBFCs which was the biggest lending hand to the unorganized sector of the economy, occupying a considerable chunk. Further, the demographics and sector data of the microfinance institutions would paint the same picture. These late crises have weakened consumer sentiments and have raised the demand for a more vigilant corporate governance structure. For the firms, they need to ensure the sound quality of the loans disbursed in order to prevent any mishappenings like in the past. 

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Author’s Conclusion

Microfinance seems further lucrative, with the aggressive bullish stance by industrialists and the government on the Micro, Small and Medium Enterprises (MSMEs) expanse, with the Budget’2020 witnessing an allocation of INR 7572 crores, an all-time high. Further, the MSME sector sits on a larger pie of the microfinance institutions, with them attending to the fast working capital requirements of such companies. No doubt, that the headroom for microfinance is huge and can afford aggressive expansion, but the one thing they can’t is repeating mistakes.