Consolidation seems to be the way forward for the embattled Indian microfinance industry.
Recently, Intellecash Microfinance Network Co Ltd, a subsidiary of the Intellecap Group, bought a majority stake in Arohan Financial Services, a Kolkata-based microfinance institution (MFI). This was the first acquisition in the MFI space since 2010, when a sudden legislation by the Andhra Pradesh government had led to a near catastrophe in the business. More than 70 per cent of the MFI industry was then concentrated in the southern state.
As the industry gradually moves on to normalcy, two big MFIs--Share and Asmitha--are also firming up plans for merger. They are waiting for clarity in regulations and the implementation of the Micro Finance Institutions (Development and Regulation) Bill, 2012, which was introduced in the Lok Sabha on May 22.
The combined portfolio of the two microlenders could be close to Rs 3,000 crore, which could be a competition to the country's largest MFI, West Bengal-based Bandhan, which has a portfolio of close to Rs 3,500 crore.
“In the present scenario, consolidation of MFIs will be helpful to attain economies of scale. For MFIs, which have large portfolio stuck in Andhra Pradesh, a collaboration will help recovery of loans. Once the Central MFI Bill is implemented, we will initiate the merger process with Asmita,” said Udai Kumar, founder of Share.
Nearly Rs 7,000 crore, which is close to half the size of the MFI industry before the crisis, has turned out as bad loans for the MFIs in the Andhra Pradesh. MFIs are hopeful that the new Central law governing the the sector will help them recover the loans as it will supersede the The Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010. The state Act does not allow MFIs to recover loans from Andhra Pradesh.
“The Andhra Pradesh government is not supportive to the MFI industry. If the Central regulation comes, we will be able to recover much of our loans,” said Kumar.
Added Alok Prasad, chief executive officer (CEO) of Microfinance Institutions Network: “Consolidation is the way forward for the MFI industry. Over the next three years, we could see several mergers in the MFI space.”
Bandhan is also open to acquisition to expand its reach in other states. "Right now, we are not looking for acquisition, but if we want to expand in a state where we are not present, we might look at the option of acquisition," said Chandrashekhar Ghosh, founder of Bandhan. Consolidation would also help smaller MFIs to expand in newer geographies.
“Post consolidation, we will have a strong equity base and portfolio spread across three states--Bihar, West Bengal and Assam. It’s a perfect launch pad to achieve our aim of reaching a portfolio size of Rs 100 crore by March 2013 and working towards crossing Rs 1,000 crore in the next five years.” said Shubhankar Sengupta, CEO of Arohan.
