The rural credit rush

Ranu Kalita is a weaver living in the small riverside town of Changsari near Guwahati in Assam. A year ago, she and her husband were struggling to make ends meet. But then their fortunes turned when a microfinance company lent her ₹30,000 with which she started a small weaving business at her house. Today, the 38-year-old is a proud entrepreneur who earns around ₹200-300 a day. Her husband, too, helps in running the business and her family is now in a better financial position.

Prema, who used to be a food cart operator in Avadi near Chennai in Tamil Nadu, has a similar story. She took a loan of ₹35,000 from a microfinance company with which she set up a catering business on rented premises. Her daily income then shot up from around ₹600 to ₹1,500.

Kalita and Prema represent the dreams of thousands in small towns and villages across India who have turned around their lives because of small-ticket loans from microfinance organisations and fintech startups. The lenders are looking to cash in on demand for credit in rural India which is expected to rise along with a surge in consumption.

Data released by Microfinance Institutions Network, a national body for non-banking finance company-micro finance institutions (NBFC-MFIs), shows that NBFC-MFIs, which focus on lending in rural India, account for the largest chunk of the loan portfolio of the microfinance industry. They made up ₹54,018 crore of total loans of ₹1,46,741 crore in the second quarter of the fiscal year ending 2019, up 50% from the year-ago period. Banks have the second largest share at ₹48,200 crore and NBFCs are next at ₹17,588 crore.

Microfinance companies and fintech startups have an edge over large banks and NBFCs in lending to rural India, according to Prasanna Raghavendra, director, retailer success, Storeking. “The biggest problem that banks and NBFCs say is that a lot of these people who are looking to borrow are new to the credit system, plus they have no digital footprint and their repayment behaviour is unknown,” he says. NBFC-MFI loans do not require collateral. They do not exceed ₹60,000 in the first cycle and ₹1 lakh in subsequent cycles.

The loan Kalita took to start her business was from Satin Creditcare Network, an NBFC-MFI that focusses mostly on funding women entrepreneurs. The company says 82% of its portfolio comes from the rural market and there is enough scope for lenders to double their growth every year for the next few years. H.P. Singh, chairman and managing director of the company, says the rising interest among fintech startups and microfinance institutions to be part of the rural consumption story is no surprise. “Looking at what’s happening in the FMCG space, people feel that there is ample scope in this consumption story for growth,” says Singh. Fast-moving consumer goods companies grew at an impressive pace in the September quarter on the back of an uptick in rural demand. For instance, the net profit of Hindustan Unilever, which has a strong presence in rural markets with products like soap and toothpaste, grew 19.51% from the year-ago period. Most companies in the sector expect the trend to continue.

Singh is, however, looking to grow at a measured pace. “We want to see controlled growth; growing beyond a certain rate may not bode well in the long run. So we’re looking for a sustainable rate of growth, which to us is about 30% across the next four-five years,” he says. Satin Creditcare is active in more than 20 states and boasts assets under management (AUM) for microfinance to the tune of ₹5,700 crore. It has funded around 3.1 million women across the country. It has 1,066 branches with a strong presence in northeast and central India.

Inditrade Capital, too, is placing its bets on women entrepreneurs for its microfinance business. The firm, which is on track to do cumulative business of ₹500 crore in microfinance this fiscal year, believes funding women entrepreneurs is the key to boosting upward social mobility in small towns and rural areas. “We fund only women entrepreneurs as we believe empowering women in smaller towns and villages with a loan to start a small business can do wonders,” says Sudip Bandyopadhyay, group chairman, Inditrade group of companies. “From women starting sari businesses to tiffin services across Maharashtra and Tamil Nadu, we see so many women turn their lives around with just a little help in the form of funding.” Prema got the capital to set up her business from Inditrade Capital.

Rural retail, the mainstay of the economy, slowed down after demonetisation in November 2016. But it has picked up recently and lenders are back in business. Look at Storeking, a digital platform where retailers in small towns and villages can place orders for items like the latest FMCG products, smartphones, consumer durables, and two-wheelers based on demand from their customers. The company is now offering small loans to retailers on its platform to help them grow their business. From July 2017 when the initiative started until now, Storeking has disbursed ₹54 crore to around 1,900 retailers.

Storeking says transactions made using the company’s app provide a digital financial history of the borrower. The company also employs workers who physically visit retailers on the platform in case their activity on the app changes abruptly. “Banks, their processes, paperwork, etc. cannot operate in the same way in such a rural setting. So there is a huge opportunity for tech startups like us to enter this space and tap the demand,” Raghavendra says.

Storeking has tied up with NBFCs such as Capital Float and other financial institutions to extend loans and says interest from NBFCs to collaborate with them is growing rapidly with many of them approaching it directly for a possible tie-up. Raghavendra says that the average ticket size of these loans is about ₹60,000-₹1.5 lakh. The company is looking at disbursing ₹100 crore by the end of FY19 and ₹500 crore by FY20 end—a 400% rise.

Storeking is now aiming to lend to consumers. The company is looking at financing consumers buying consumer durables or two-wheelers and acting as a conduit between lenders and consumers through retailers. It is planning to launch a pilot of this initiative in Q4 of FY19 and roll it out fully later this year. “The holy grail for us would be to go beyond the retailer and reach the end consumer with these loans,” Raghavendra says.

Apart from rural retailers and consumers, lenders are also helping fund small businesses. Instamojo, only a payment gateway company until September last year, has a unique model to address the lack of working capital in micro, small and medium enterprises. It offers “sachet loans” to merchants using its payment gateway, under which a merchant can access the amount earned on a sale instantly instead of waiting a few days for the amount from digital payments to be credited to them. “So it is their own money which they are receiving in advance,” explains Sampad Swain, CEO and co-founder, Instamojo.

Swain says that the sachet loans business is growing 60% month-on-month. “There is a possibility to create a multi-billion dollar loan book in this space. And we want to lead that… This is a product where we can touch at least ₹1,000 crore by end of 2019,” Swain says. The company will be launching five new credit products in the next 12 months.

Microfinance companies hope the government’s focus on boosting rural entrepreneurship and agriculture will help rural lending. Storeking’s Raghavendra says setting up a framework to help banks and NBFCs tie up with platforms like theirs will be a welcome move. “Currently, there is no such guideline or framework. Also, if they can come up with an alternative credit rating mechanism for rural borrowers, it will help in financial inclusion,” Raghavendra says. Instamojo’s Swain, however, warns against over-regulation of the space.

The opportunity in rural India for credit growth has also caught the eye of some NBFCs. Ramesh Iyer, vice chairman and managing director, Mahindra Finance, says the company has piloted a project in which customers with excellent track records can avail smaller loans to finance consumer durable purchases or personal loans. Iyer says their business operates in around 360,000 villages and they want to cover 100,000 more villages in the next 12 months. “We will try and meet the health, education, and housing finance requirements of these customers,” he says.

Khushru Jijina, managing director, Piramal Capital and Housing Finance, too, is looking to ramp up expansion into tier 2 and tier 3 towns. “Ultimately, we will go more and more retail. According to us, housing finance and the emerging corporate lending business is our gateway to do more retail,” Jijina says. He adds the firm is working towards an initiative that will tap the credit demand in smaller towns in the longer term, but did not give details.

The interest shown by fintechs and microfinance companies in lending to rural India bodes well for the country’s financial inclusion mission. However, are existing players worried as competition heats up due to the pursuit of growth by newer and nimbler institutions? Interestingly, almost all companies that Fortune India spoke to say no. They believe that more players coming in will only help the industry grow as there is enough room for everyone to thrive. Instamojo’s Swain says the more the competition, the better: “Lack of access to credit and lack of working capital is the bane of our economy. We are hoping to see more players come in and create an ecosystem of credit in this space.

(This story was originally published in the January 2019 issue of the magazine)