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MFI Question

with 16 comments

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.

My view:

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.

Written by amitdipsite

December 30, 2016 at 7:15 am

Posted in Uncategorized

16 Responses

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  1. Very interesting. This is an interesting study too:

    Basically there are 2 ingredients to lender bankruptcy – over leverage of borroowers and external shock.


    December 30, 2016 at 9:55 am

  2. Thank you Amit ji for Good explanation and correlation. But i feel sad and pain about loan sharks recovery methods. That pain is much bigger than the guilty feeling of holding ITC, VST.


    December 30, 2016 at 11:27 am

  3. Hi amit
    i am not invested in MFI, but i think a lot of people miss the point on the alternative to MFI. people view the whole MFI borrowing from their personal view point. If i am an educated professional and can borrow at 12% from banks, why will i borrow from an MFI @ 20% ?
    i think the small borrower, though not literate is rational. For him/ her the alternative is the local loan shark/ lender who will charge 36-48%. in such as case, an MFI is a much better option
    also in the same if cost was the only factor, restaurants would not exist. we would all cook and never eat out. MFI also provide a distribution function as you pointed out

    Rohit Chauhan

    December 30, 2016 at 2:23 pm

    • Exactly, depends on next best alternative i.e. loan shark. Even if banks enter villages, so long as an organisation has faster approval process with fewer paperwork, that alone would ensure business survival. Right now loan sharks are lending 10x+ of organised MFI sector.


      December 30, 2016 at 7:13 pm

      • I did a lot of study on this sector few months bank including failures in various parts of the world. Average borrowing in India is 20 K INR, in Argentina/Latin America its 200K INR. There you go 10X.

        One area that needs plugging is common document across credit bureaus to prevent multiple loans from multiple MFIs. People rig this by providing Adhaar at one place and PAN at another place and take 4 MFI loans vs 2 allowed.

        Biometrics are a better alternative, there is room for that in India in credit bureaus only immigration are big users of this technology at the moment.


        December 30, 2016 at 7:17 pm

        • I agree with you. The equivalent of this industry is pay cheque loan industry in the US which operates in the poorer urban neighbourhoods. It was always assumed that these are predatory lenders and were over charging or cheating their customers. There was a movement to push out these lenders and when that was done, the communities were worse off as they were replaced by the local gangsters.

          As you said, i think the MFI may actually be undercharging for the risk they incur. There is the over-lending risk due to multiple ids. there is the ever present political risk too. My gut feel is that the industry will go through a few boom bust cycles before it matures

          Rohit Chauhan

          December 30, 2016 at 10:03 pm

        • Pay day loans here are as high as 400% per annum. 500$ loan to be repaid in six weeks requires repayment of 700$ – 750$. So, 50% interest in 1.5 months. Or over 300% interest rate per annum. Best deals are for 80% interest rate. Relatively speaking 26% is pretty cheap.

          One can calculate here or 50 more websites in this tiny country of 4 million.

          Loan is approved in 20 minutes, so banks are unable to compete.


          December 30, 2016 at 11:56 pm

  4. Great post & discussion on MFIs.

    Modi in his speech on 31 Dec increased the allocation for MUDRA which is v positive for MFIs. Infact its nearly 60 K Crore of MUDRA and 1000s of crores banks money under PSL category which is being disbursed by MFIs. So why will RBI & Govt take risk with such big sum & interfere with working of MFIs acting under supervision of RBI?

    Maha CM Fadnavis response t crisis in MFI industry was v measured & mature.

    ratna Vishwanathan doing yeoman work for all MFIs under the umbrella of MFIN.

    Story of MFIs remain intact IMHO

    Vivek Gautam

    January 2, 2017 at 11:16 am

    • I have no idea why people think MFI is dead when Pay Day Loans are alive and kicking in USA and other developed countries at 300% – 800% interest rates. They are repaid in 2-6 weeks. 26% is very cheap. Many boom and depression cycles to come. May buy again in 2017


      January 2, 2017 at 11:22 am

  5. Hi Amit,

    Any comments on below article

    It’s a different demography compare to one mention by Ratna Vishvanathan of MFIN. But the demography mention in above article is digitally connected younger demography.


    January 6, 2017 at 1:17 am

  6. Indusind call yesterday have backed up your views Amitji


    January 11, 2017 at 6:13 am

  7. Most important point miss by media and masses is that in rest of the world [Like US, UK, China, Singapore] NBFCs or as they call shadow banking is not allowed to leverage more than they need to charge exorbitant amount of interest to make ROE > 15-20%.. with 5-6x leverage Indian NBFCs charge lot less.. [Atleast I studied gold finance in greater detail, so very much sure about sure its same for rest of the NBFC activities abroad]

    Anil Tulsiram

    January 22, 2017 at 3:33 am

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