The ‘not-for-profit’ concept is not such a good thing if it means that an enterprise does not intend to improve itself financially. Profits attract more investments and, thus, its utility to its users grows. That is the lesson from the gurus of microfinance in India.
Microfinance is undernourished today. The task before the sector is almost limitless - financial inclusion of 60 per cent of the country's population and creation a working capital at the bottom of the pyramid. The beneficiaries would be about 120 million households that are financially excluded.
The funds MFIs have today can take them to just 20-30 million households and they are looking for bigger things to give them a push up.
A lot of hope is set on MFIs like SKS launching themselves on the IPO scene. Bandhan and Basix are in queue, too. If they succeed, the funds that were going for the development of big businesses would flow downward for economic growth of the very poor, through microfinance.
MFIs last month shook themselves up to create a united front for the massive task of plugging into the capital market. The goal they have is financial inclusion of about 100 million households by 2050. The money required is $60 billion.
BASIX stitched together the network representing almost all the major NBFCs and bound them to a code of conduct. The MFI Network or MFIN, presided over by BASIX CEO Vijay Mahajan, has in its fold 38 MFIs, which have all agreed to following a common code of conduct that MFIN has drafted. Supported by Omidyar Network, members include SKS Microfinance, Bandhan, Asmitha, Arohan, Sahayata Microfinance, Ujjivan and Equitas Microfinance.
The code of conduct focuses on fair practices with borrowers. These include promoting transparency, fixing the overall lending limits at client level, data sharing, recruitment practices, whistle blowing and enforcement mechanisms.
The idea, says Sajeev Vishwanathan, MD and CEO of Bharatiya Samrudhi Finance Ltd, the NBFC microfinance arm of BASIX, is to help MFIs regulate and protect themselves, besides ridding themselves of the criticism about bad practices through increased transparency. The sector is already overregulated and NBFCs have poor access to funds. This has stunted their growth. Since banks charge 12-14 per cent interest, the NBFCs are forced to charge 24 per cent. Since NBFCs are forbidden from functioning as banks, their survival is heavily dependent on having a reasonable interest rate that meets their cost of funds and cost of delivery. The IPO path is seen as a possible breakthrough from the current cash-short existence of MFIs.
Vishwananthan links the growth of the MFI sector with growth of the rural economy. It is all about managing economy downwards, explains Vishwananthan. Today, whether there is a good monsoon or a bad one, the farmer does not benefit because he does not have the money to invest in business. MFIs create working capital for the village, he says.
BASIX has proved this through its unique approach to microfinance that money can work wonders for both the provider and the beneficiary. It has, for instance, enabled people in 20,000 villages to have deep freezers to store milk. About 1,000 veterinarians and agricultural scientists are available in these villages to advise on loan options. BASIX financial products are also tailor-made to help the village beneficiaries' specific needs. If BASIX can spread the idea of enriching rural lives through the network, the effort would be worth the while, with or without the IPO.