IN 2002, professors C.K. Prahalad and Stuart Hart, from the University of Michigan and North Carolina, in an article made a strong case for businesses to look at the world's most impoverished individuals as potential consumers. Later, in 2004, the duo expounded upon the insight in their best-selling book, The Fortune at the Bottom of the Pyramid. Interestingly, much before the professors' idea of a new paradigm in consumer segmentation, it was Professor Muhammad Yunus, who had recognised the power of the have-nots by establishing the Grameen Bank in Bangladesh in 1983, driven by the belief that credit is a fundamental human right.

Traditionally, credit in the hinterland was dominated by money lenders, followed by banks. But over the past decade, non-bank microfinance institutions (NBFC-MFIs) have carved a niche for themselves. Of the ₹3 lakh crore microfinance portfolio, banks account for 37.7% share, while NBFC-MFIs make up for 36.7%. In fact, for the first time, NBFC-MFIs have cornered a 38.68% market share of the incremental microfinance disbursement of ₹75,655 crore in Q2 FY23, pushing down banks to No. 2 position with 36% share.

Alok Misra, CEO & director at Microfinance Institutions Network, the self-regulator for non-bank MFIs, says: "Though the trend is couple of quarters old, it is, nonetheless, an encouraging sign. There is a lot to watch out for in the sector with homogenisation of regulations coming in."

Leading the onslaught is CreditAccess Grameen (CA Grameen), whose present was envisaged in 1999 by Vinatha M. Reddy, motivated by the book Give Us Credit by Alex Counts, president of Grameen Foundation, U.S.A. Reddy, who was then running an NGO T Muniswammapa Trust, was inspired by what she read and managed to avail a $35,000 grant from the Grameen Foundation to create a replica in India. Thus, Grameen Koota came into existence and, as the concept gained ground, in October 2007, the business got housed in a new entity Sanni Collection Pvt. Ltd. Since then, through a series of transactions and change of name, the previous owners made way for a clutch of new promoters, including the Dutch-based Asia-focused microfinance major, CreditAccess India B.V., which has infused ₹968 crore in CA Grameen since 2009. Though Reddy is no longer in the picture, her founding philosophy continues under the stewardship of Udaya Kumar Hebbar, who joined as the CEO in 2010, but assumed a larger role as the MD and CEO since 2016.

"When I joined the institution, the loan book was ₹250 crore and it was struggling to make profit. We managed to scale it up with social relevance, stayed commercially sustainable and here we are today, sitting on a loan book of ₹17,786 crore and profits of ₹533 crore (9MFY23)," says Hebbar.

The reason for CA Grameen's market leadership lies in its business efficiency and financial construct, helping it grow its customer base from 3.2 lakh to 39.4 lakh as on date. "We are one of the lowest-priced lenders to our customers. Our average yield is about 21% compared with 23-28% for most banks and NBFC-MFIs," says Hebbar. The NBFC has been building a strong base within its core geographies. Of the 9.81 lakh customers acquired in the past 12 months, 53% came from its core markets of Karnataka, Maharashtra and Tamil Nadu. Of this, first-time customers accounted for 24-25% in Tamil Nadu, 32-34% in Karnataka and 40-42% in Maharashtra.

With over 1,727 branches, the company has a concentrated presence. The policy is to open a branch in one cluster only if there are 7,000-8,000 customers in a particular location, ensuring that one branch is suitably able to service their demands. "CA Grameen has adopted contiguous expansion rather than quickly building a pan-India network. Hence, its top three states' contribution remains higher," says Renish Bhuva, analyst at ICICI Securities.

Being an NBFC also gives it more operational flexibility to go deeper into the hinterland as penetration levels are still low — 10% of total credit outstanding in India is in rural areas. For instance, CA Grameen's rural-urban borrower mix has only kept increasing over the years, from 65%/35% in FY14 to 85%/15% even as it acquired another player, Madura Micro Finance, in 2019. In fact, CA Grameen is the only lender to 43% of its borrower base, and the only second lender to 39% of its customers. The overlap with rivals is minimal at 8% for Bharat Financial, 6% for Spandana, and 3% for the MFI-turned Bandhan Bank, according to analysts.

While foot soldiers are the backbone for MFIs, CA Grameen's HR framework also ensures a win-win for both the firm and its employees. For starters, the company only hires freshers from geographies it operates in, and in some cases, from the very family of its borrowers. Besides, a five-day week policy ensures employees coming from the interiors get a chance to go back home to visit their families. "For 97% of our loan officers we are the first employer, and almost 60% of our 11,000-plus loan officers come from our own customer base. External hires are only for specific areas such as finance or tech or risk," says Hebbar. The ingenious HR practice ensures that in the event of a default at the borrower's end, there is a better understanding of the reasons behind the crisis and acts a strong counter-risk mechanism. For instance, the best loan officer goes on to become the audit manager or the risk manager. "This creates a strong and resilient ecosystem within the organisation," says Hebbar.

A nuanced understanding of the risk framework has let the NBFC ditch the one-size-fits-all repayment approach as well. "Our research had shown that a borrower had multiple reasons for availing of a loan — education, house repairs, sanitation needs, medical emergencies, or for buying a bicycle. With such diverse needs, we created a credit line for borrowers rather than specific need-based loans," says Hebbar.

The flexibility was also extended to repayments. "Collections in the industry are either weekly, fortnightly or monthly, but we offered all of the three to borrowers as they are the best judge of their cash flows," says Hebbar. Today, 59% of its customers pay weekly, 37% pay fortnightly and the remaining repays monthly/four-weekly."

With a strong risk framework and a ceiling of ₹125,000 per borrowing family (though average borrowing is ₹47,000), CA Grameen has ensured that its credit costs have been manageable, even in the worst of cycles. Paolo Brichetti, vice-chairman and non-ED, who represents CreditAccess India B.V. on the board, says, "Microfinance is an unsecured business involving a certain degree of risk that can be effectively managed through robust internal controls. Our weekly engagement with borrowers combined with a limit-driven approach helps us navigate any crisis situation." While traditionally bad loan levels were not an issue, the pandemic upset the applecart as over the past two years, net borrower base declined to 3.8 million from 4.1 million pre-Covid, as the management went slow on onboarding new customers. Higher write-offs over the past six quarters also resulted in decline in the borrower base. But, of late, collection efficiency is back to near-normal levels at 98%. "We don't have recovery agents chasing borrowers, at best, we tend to recover 15% of the written-off amount over a three-year period, and that too if the borrower wants a fresh loan or manages to improve his cash flow," points out Hebbar. An outcome of that approach, according to Brichetti, has translated into higher loyalty. "Our customer retention rate has been over 84% for the past six years," says Brichetti.

However, higher write offs have also meant that pricing of loans had to be revised with the average new disbursement interest rate of 21.5% in Q3FY23 against 20.3% at the start of the fiscal. "Our pricing is still competitive as our borrowing cost is still 1.5-2% lower to the next-closest MFI," says Hebbar. The management has guided a weighted average borrowing cost of 9.3-9.4% for the fiscal, despite a higher interest rate regime. As a result, the company's net interest margin stood at a healthy 11.9% for Q3 and 11.5% for the nine months ended December 2022. Hebbar points out that over the past 13-14 years, the NBFC has written off over ₹1,900 crore, of which around ₹1,500 crore, or 78%, was due to the pandemic. "At no point has our capital adequacy fallen below 20% even as we maintained robust return ratios. In a stable market condition, our RoE will still be in the 18-22% range," says Hebbar. That's good enough for the NBFC. "It signals that internal profit generation would largely suffice for executing a steady-state growth objective," says Brichetti.

According to analyst Bhuva, the company is well positioned to maintain its leadership as reflected in its incremental share in the MFI lending at >8% as of September 2022. What has now caught the attention of the Street is CA Grameen's goal to become the preferred financial partner for 10 million low-income households — that lack access to credit — by 2025.

With the new RBI norms reducing the qualifying assets limit to 75% of total assets from 85% of net assets, it is giving CA Grameen the room to diversify its portfolio. The NBFC is piloting innovative payments, saving and investment products through partnerships. It is already disbursing almost ₹5 crore per month as loans against property, even as it is experimenting with gold loans in 6-7 branches. "We should be able to grow at a CAGR of 20-25% over the next four-five years," says Hebbar.

Industry observers believe the NBFC has the strappings to do much better. "The market for MFIs is estimated to be ₹13-14 lakh crore, and we have reached only ₹3 lakh crore. CA Grameen is head and shoulders above competition, and will only grow bigger as it will have the ability to raise even more capital," says Misra.

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