Regulate Microfinance institutions based on activity, not legal form: Mathew Titus of SA-Dhan

By Ramesh Kumar

Microfinance Focus, Feb 18, 2010/New Delhi : Mathew Titus, Executive Director of Sa-Dhan shares his vision and concerns about microfinance in an exclusive interview with Microfinance Focus Consulting Editor Ramesh Kumar. Here are excerpts:

Microfinance Focus: Microfinance in its current form is more than 30 years old. How has been its journey in India so far?

Mathew Titus: Growth continues to be good. Organizations in each region have built their portfolio consistently. Numbers are enticing: it moved from approximately Rs.7,000 crore to Rs.11,734 crore. As of March 31 last year for which data is available, MFIs and NABARD (SBLP) together have reached a client outreach of 862 lakh with a portfolio outstanding of Rs.35,134 crore. MFIs alone contributed to 226 lakh clients with a portfolio of Rs.11,734 crore. The reach has grown substantially. Today we reach 71 per cent of poorest districts in India as against 63 per cent a year ago. Another significant number to note is our client outreach grown by 60 per cent while the aggregate portfolio leapt by 97 per cent over the previous year. It was a very consolidated attempt to cover the poorest region in the country.

Microfinance Focus: There is a criticism that some of the MFIs charge very high interest rates. What is the scene on the interest rates now?

Mathew Titus: Well, interest rates are going up.  There was an important shift last year.  Our cost of operation tends to be high because of the nature of microfinance operations and the service delivery at the doorstep of the poor. The interest rates almost matched the operating cost.  It is not a good thing. Our on-lending cost has also gone up because we have to cover our own cost to do that.  This is the first time we saw the interest rate converge with operational cost, which is a cause for concern today definitely.

Microfinance Focus: When we talk of microfinance, we are looking at very low and affordable interest rates – not the commercial bank lending rates or the moneylenders’ usurious rates. How this has come about? Were you not watching this scenario closely?

Mathew Titus: There is a fundamental shift taking place. In the beginning, bankers were looking at collateral free: known risk, quality of groups etc. These elements determined the price at which bankers were lending to us. They were taking a lot of risk themselves those days. Now, they have begun to demand much more in terms of equity, reserves on the balance sheet, risk capital in various forms. Put it differently, they are looking for a lot more comfort. These days, many more banks are coming up. They are looking at microfinance in terms of commercial risk capital. To that extent, there is a shift in approach. In the bargain, I think we lost some of the early comparative advantage we had negotiating with bankers in the past.

Microfinance Focus: With the expansion of microfinance at a rapid pace, has the nature of microfinance business undergone a big change of late, especially in terms of mission drift?

Mathew Titus: With bankers’ demand for comfort level going up, the price tag has also shot up. They have gained immensely whereas we have to make provision for greater risk capital driving up our price. Our procurement price was comparatively lower those days because they did not demand risk capital  fee. We could have reached out to more clients had the level of our borrowing cost been on the lower side compared to what it is now.

Microfinance Focus: There were many instances of large-scale delinquency issues that are impeding the functioning of MFIs in India. Can you throw some light on these loan defaults?

Mathew Titus: It is not a big concern at all, though defaults are on the rise. Long term loan losses constitute just 1-2 per cent.  Our actual concern is more about the root cause of those defaults because we believe defaults happen not by design. Our understanding is this: long term losses are miniscule in relationship to the risk the poor faces. Most of these problems occur in rural areas for agricultural lending.  There is a drought and the earning capacity is wiped out. Or the price volatility for their produce and the agricultural market collapse impact them severely. For instance, borrowers in Karnataka in the recent past were hit badly due to the export market collapse in the silk segment.  India is one of the biggest silk producers in the world.  Though individual loans are relatively very small – less than Rs.10,000 – their repayment schedule again is short: less than a year.

Our experience is that no borrower runs away from his or her commitment to repay. Challenges on various counts force them.  How to ensure the money lent, is returned is a good question. MFIs cannot brush aside challenges. We still have to go out and build: social collateral & ensure families gain largely, develop healthy peer monitoring devices, and provide products that are client sensitive. That is the backbone which will make our investment in borrowers’ lives meaningful.

Default ratio is on the lower side because loan disbursement happens in the name of the group which in turn allocates loans at its level. Though we keep individual records, it is the group that calls the shots. It is in the best interest of the group to ensure that loans are repaid so that future loan requests are entertained more favourably based on their past repayment record.

Microfinance Focus: Can you tell us how you visualize the future of microfinance, say in the year 2010?

Mathew Titus: We have consistently seen the high interest rate regime in terms of borrowing from banks.  We anticipate the emergence of strategies that will reduce costs through syndication &  selling portfolios. More importantly, we anticipate the dropping of interest rates. The second vital issue will be greater level of engagement with the client base,not only in terms of peer mechanism, but the recognising the importance of social performance & disclosures. That is, when a loan is dispersed, MFIs will put out on the same page the rate of interest. Put differently, this third intervention will expand financial literacy and thus engage them with openness. Because in the long run, the quality of relationship will be the key for success.

Microfinance Focus: You spoke of financial literacy. How receptive are the borrowers to these concepts?

Mathew Titus: It is a misconception to believe that rural people have less awareness about finance. They know and understand the numbers very well. In fact, they work backwards.

Microfinance Focus: What else can one expect in the years to come on the MFI horizon?

Mathew Titus: We should also see the rise of some more work on micro-enterprises. We will be looking at opportunities that will contribute to increasing the yield of agriculture. Basically, strategies around using new methods, establishing linkages with marketing for different enterprises.  Once the financial literacy gains momentum, rural borrowers – our target audience – will understand the importance of linking up with others markets on the output side and also leverage input info to post capital gain. There is a plethora of schemes to benefit the rural poor both from the centre and states. Financial literacy will enable rural poor to utilise these inputs to expand enterprise opportunities. Let us not underestimate their business acumen. Let me emphasise again that they are smarter and brighter to identify economic opportunities.

Microfinance Focus: Of late, MFI segment is attracting NBFCs too. What’s your take on their entry?

Mathew Titus: My definition of business is a transaction that generates surplus. What you do with the surplus is the differentiator between NGOs and NBFCs. For-profit organizations give out surplus as dividend to their shareholders while others plough back or retain it for future use. The difference between NGOs and NBFCs is not fundamentally that large on the transaction nature. Servicing the poor clients  & providing information is where the differences arise.

The important element is focus of the servicing organization. What matters the most is how well you protect and look after your clientele. Your background – NGO or NBFCs – matters very little. They are good as well as bad elements on both sides of the spectrum. The real challenge is providing services. Labels don’t matter.

Innovative approaches are required to keep the target audience engaged. This needs a lot of persuasion which can come about only through long term relationship building. The upside is very huge because the nature of poverty is changing so fast which throws up fresh economic opportunities. The critical issue is how well and quickly you respond to those demands. If you can win them over with your approach and provide a useful product you not only have gained a partner forever but have cracked a difficult market.

Microfinance Focus: Any thoughts on the regulatory mechanism for MFIs?

Mathew Titus: We do have policy-making and regulation in place. The Indian scenario is not like any other developing economy where the instruments are weak. Secondly, we need to recognise that fundamentally the largest contribution to microfinancing and regulatory instruments are in place already. Banks began rural lending under a government initiative. Our policy makers are extremely competent and possess long term thinking. Let MFIs be regulated based on activity, not on their legal form. This will put an end to all this talk about NGOs and NBFCs differentiation & build a more robust market .

Microfinance Focus: What are the long term challenges?

Mathew Titus: The issue is complex. Managing rural poor requires specialisation. This is different from segment lending to middle class and lower middle class. This needs different kind of skill set which definitely is in short supply. This gap needs to be bridged.

Microfinance Focus: What kind of skill sets you are referring to?

Mathew Titus: We need to build very sound data base, track business  and the portfolio. Then one can understand the underlying nature of asset and service. This together with an understanding of local economic issues needs to converge. Almost two-thirds of India lives in rural areas and depends on agriculture. We need to look at the kind of money we need to pump in.  Are we allocating an equal % of our national budget to address the concerns of these people? Unless and until you have that kind of investment across the board, focusing on the rural India, regulating markets will be difficult. Creating a rural electricity corporation or rural financial institution alone will not suffice. We need the right kind of  manpower to sell and service those households .  This kind of a change has to happen at the macro level. I am sure the nation has vision to do that. Understand poverty at the grassroot level and then you will know the kind of money needed to change the country.

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