> Posted by Andrew Fixler, Associate, CFI
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“Cautious optimism” was the overriding sentiment towards the Indian financial inclusion investment space at the fall 2014 Financial Inclusion Equity Council (FIEC) meeting in Zurich. Four years after the Andhra Pradesh crisis, in financial year 2014 the regulated microfinance market in India saw its loan portfolio grow by 35 percent and client outreach increase by 4.7 million individuals, achieving a record 28 million clients. Although, as FIEC member Christian Etzensperger of responsAbility Investments AG noted, this is “catch-up growth” for India, where only 35 percent of the adult population has a bank account. On an institutional level, the remarkable growth of Bandhan Bank, India’s largest microfinance institution, illustrates the successful scaling up of MFIs. While Etzensperger noted the “dynamic revival of the microfinance sector…partly due to the inertia of the Indian banks”, he also alluded to the significant role played by the policies of the newly elected Prime Minister, Narendra Modi, as well as those of the recently appointed Raghuram Rajan, Governor of the Reserve Bank of India. Indian investor sentiment in general soared on the news of these leaders taking the helm, a trend that clearly resonates in the Indian financial inclusion equity community.
What have these leaders done to inspire confidence in the trajectory of microfinance?
Rajan has taken a markedly different attitude to the client-side risks of microfinance than did the local politicians that fomented the Andhra Pradesh crisis. Rather than sensationalize tragic cases of extreme overindebtedness, Rajan is respectfully conscious of the difficulties inherent in balancing social impact and profit-making: “My sense is that you cannot, in good conscience, make a fortune at the bottom of the pyramid. Make reasonable profits, but if you start making a fortune, it does start raising social anxiety about how the fortune is being made.”
Rajan’s agenda as governor is heavily focused on financial inclusion through financial sector development (in particular, microfinance growth), and he has vocalized the Reserve Bank’s responsibility to spur the development of a financial infrastructure that can serve the bottom of the pyramid. To begin, Rajan acknowledges a) the microfinance industry’s crucial function in the process of responsible financial inclusion, and b), the significant restraints that faced the industry as he entered his tenure, chief among which included difficulty raising funding, an unclear regulatory environment, and poorly developed management information systems.
As for substantive policy development, among other advancements, the RBI drafted guidelines that make it possible for MFIs to obtain bank licenses, a development that Etzensperger notes will “make it easier for MFIs to achieve strategic growth and institutional development [and] offer the whole range of financial services to the vast low-income segment of India’s population.” Members of FIEC are excited by this policy development, but question how it may translate into action.
Bandhan, the aforementioned MFI recently turned bank, is among the most prominent to take advantage of the new bank licensing policy. As a bank, Bandhan will pursue “strategic expansion”, overhauling its operational model, tapping the underserved MSME market, and continuing to serve the rural poor. A flood of resumes from young professionals of high-profile Indian universities is an indication of Bandhan’s growth prospects under its new hybrid model.
Prime Minister Modi likewise recognizes the state’s responsibility to spur financial inclusion. In August 2014 he presided over the launch of the Pradhan Mantri Jan Dhan Yojana (PMJDY). PMJDY will allow India’s underbanked to open free accounts which will be accompanied with debit cards, accident insurance coverage of Rs 100,000, and medical insurance coverage of Rs 30,000. After six months, good customers receive access to an overdraft facility of Rs 5,000. The financial inclusion plan is intended to lead to the creation of 75 million new accounts. Though the PMJDY is seeing participation from some of India’s largest banks, such as the State Bank of India and ICICI, it is generating considerable enthusiasm in the microfinance sector as well. The President of the Microfinance Institutions Network (MFIN), Samit Ghosh, noted that MFIN’s constituent MFIs can help realize the program by opening 25 million accounts.
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