Karthik: Can you respond to “… my problem with the microfinance area is that first you are borrowing money from the regular bankers and selling it at a higher rate which of course doesn’t make sense as a business model to me. If you see the peer-to-peer landing platforms in America they have all been now under pressure. Secondly, what microfinance assumes is that every person that you lent money to is an entrepreneur that he can go out and give you a return on capital so there will be a very low amount of non-performing debts. My personal sense and I could be completely wrong that this is better left in the NGO sector and the social sector rather than the stock market the idea that every entrepreneur take money and return it back at a higher rate of interest doesn’t make imminent sense to me,” said Ramesh Damani.
Four parts to the statement:
a) Borrowing from bankers and lending at higher rates than bankers.
Banks move slow and others move fast. That is why personal loans from private finance companies, even in developed countries can charge 15%+ interest rates. And Banks that lend at 5% go bankrupt as well. Here is a lists of 100s-1000s of American banks that filed for bankruptcy, these are the private sector banks / cooperative banks.
Business model of TV lending, Furniture lending, Fridge lending, or income based (to entrepreneurs) lending is all viable and works in both developed and developing countries. The more aggressive the company gets about lending the higher the risk.
I was anticipating a problem with MFI 2-3 years down the line, but now boys will be separated out from the men, now MFIs will have another good run for 3-4 years starting 2017.
Coming back to question about borrowing from Banks and lending at higher rates, will not work when both organisation start targeting same customer segment. But 60% people have not even got a bank account in India? It may stop working for NBFCs in the year 2100 perhaps. Not time to worry right now. Besides RBI already has got a roadmap of SFB MFIs. So, given the above logic even Bajaj Finance, or Cholamandalam has no viable business model.
Talking about failures, even companies with 100 year old vintage in India get into problems in the financial sector from time to time, such is the nature of lending sector.
b) Peer-to-peer lending platforms in America under pressure.
Every leveraged organisation will run into pressure if it shows slackness in discipline and chases too aggresively.
c) What microfinance assumes is that every person that you lent money to is an entrepreneur
That is how they sell the story to investors. Some commercialization of NGO/social work may have occurred here.
d) My personal sense and I could be completely wrong that this is better left in the NGO sector and the social sector rather than the stock market
Everybody has a right to their opinion but we need to deal with facts on the ground as stock market investors. Even hospitals, medicines, schools should be a state matter in my opinion. No child should live in poverty, New Zealand and probably Denmark are the only countries that I know of whose Governments acts like your parents in the absence of / neglected by your biological parents. Good idea but far from implementation in India. All four are a state matter in New Zealand, medicine, school, hospital and social sector for upliftment / re-skilling of under privileged. Though some schools and hospitals are private but a small minority.