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Published on: May 19, 2021, 2:02 p.m.
Arohan’s ascent is unstoppable
  • Nambiar: offering a wide range of loans

By Lancelot Joseph. Executive Editor, Business India

“Any deep crisis is an opportunity to make your life extraordinary in some way.”– Martha Beck, Author

 The financial inclusion story, post the notorious Andhra Pradesh crisis that rocked the micro-finance industry in 2010, stands out as a shining example of the extraordinary opportunity that American author Martha Beck speaks of.

The micro-finance industry was down in the dumps after several people committed suicide allegedly due to their inability to return loans and coercion by collection agents. The Malegam committee, set up by the RBI, suggested a slew of reforms and setting up a separate category of Non-Banking Finance Companies for the micro finance sector (NBFC-MFIs), stipulating a maximum interest of 24 per cent and a Rs25,000 cap on loans and, above all, the avoidance of multiple-lending, over-borrowing and ghost-borrowers.

Despite the AP setbacks, the micro-finance industry in India has recorded healthy growth in the past few years, as its GLP (gross loan portfolio) increased at a CAGR of 24 per cent to reach about Rs3.20 trillion in 2019-20 from Rs1.7 trillion-odd in 2016-17. CRISIL Research expects the industry to recover and grow at a strong rate over the next few years. In comparison, other segments like housing finance and auto finance had outstanding credits of Rs20.40 trillion and R8.20 trillion respectively, in 2019-20. A total of 170 entities are present in this space.

According to the CRISIL Report, the average MFI penetration in India is only 21 per cent. The relatively underpenetrated states, such as Uttar Pradesh, Uttarakhand and Himachal Pradesh, will drive future growth along with some of the moderately penetrated states, such as Rajasthan, Chhattisgarh, Haryana, Punjab and Jharkhand. MFIs have a significant role to play in furthering financial inclusion in India. As of March 2020, the largest share of microfinance was held by 84 NBFC-MFIs with a total gross loan portfolio of Rs737 billion. Some of the key NBFC-MFI players in the industry include Credit Access Grameen, Satin Creditcare Network, Spandana Sphoorty Financial, Asirvad Microfinance, Muthoot Microfin and Arohan Financial.

Dramatic change

Of these, Arohan Financial Services presents an impressive turnaround story. Started by Shubhankar Sengupta in 2006, Arohan went into a tailspin in the wake of the AP tsunami. Enter Aavishkar Group, which sits on an AUM of one billion dollars!

Arohan’s course changed dramatically. Today, it has emerged as the largest NBFC-MFI in Eastern India and the fifth largest NBFC-MFI in India based on GLP, says CRISIL. The country’s top 10 NBFC-MFIs contributed to more than 70 per cent of the NBFC-MFI portfolio in 2019-20. Among the top 10 NBFC-MFIs, Arohan had the third highest GLP CAGR between 2016-17 and 2019-20. Among the Eastern India-based NBFC-MFIs, it had the highest growth in customers between 2017-18 and 2019-20.

Arohan Financial Services plans to open its doors to the public and has received the regulator SEBI nod. Though the IPO details are yet to be finalised, the company may raise up to Rs1,500 crore via an IPO comprising a fresh issuance of shares, amounting to Rs850 crore. The company will have an Offer for Sale (OfS) of 27,055,893 equity shares by Maj Invest Financial Inclusion Fund II K/S, Michael & Susan Dell Foundation and Tano India Private Equity Fund II, collectively. Edelweiss Financial Services Ltd, ICICI Securities Ltd, Nomura Financial Advisory and Securities (India) Private Limited and SBI Capital Markets Limited are the managers to the issue.

“We see a huge opportunity as 11 of the 14 low-income states in India have micro-finance penetration of less than 30 per cent, and therefore, these states have a huge gap in credit demand and supply,” says Manoj Kumar Nambiar, MD, Arohan. “As of 2019-20, we also had the second lowest average disbursement size of Rs21,373 among the top 10 NBFC-MFIs and this positions us well in a market with significant room for future growth,” he adds.

Arohan has mastered a seasoned business model incorporating well-developed approval processes and controls and the implementation of risk management frameworks. “We have sound customer due diligence, credit appraisal, and loan origination, evaluation and sanction processes,” says Nambiar, while explaining that the teams also check for creditworthiness of the borrower’s spouse as well. This involves the checking of each customer’s indebtedness levels with reference to the customer’s current or previous microfinance loans or other retail loans, excluding education and medical emergency loans, to understand the existing loan obligations and overall ability to repay.

“Our field staff also assesses the customer’s cash flow, reputation and credibility by speaking to residents of the same area as the customer,” he affirms. Most importantly: “As part of the on-boarding process, our customers are required to undertake training to ensure that they understand their repayment responsibilities as well as the loan terms and conditions.”

“In 2018, we were awarded the MFIN Microfinance Award for implementing outstanding initiatives in the category of Risk and Resilience Framework,” says Arohan CFO Milind Nare. “We have implemented risk tools, techniques and data analytics to establish risk thresholds and benchmarks, which are then used for field-level reviews, business expansion plans, and our business strategy. Our risk management framework identifies, monitors and manages various types of risks inherent in our business operations, including risks associated with credit, liquidity, operations and other emerging risks,” adds Nare.

Arohan has designed its lending products to meet the customers’ needs, based on loan size and repayment abilities. “We offer a wide range of loans, from as small as a Rs10,000 entry level business loan to as large as a Rs25 crore term loan to small MFIs. In addition to our core loan products, in order to build customer relationships, we also cross-sell secondary loan products to our customers via a technology platform called Apna Bazaar, on which various products are made available to our field staff on mobile or tablet devices,” remarks Nambiar. 

Typically, the secondary loans are for the purchase of solar lamps, agricultural products, home and kitchen appliances, consumer durables and bicycles in association with various third-party vendors. To complete the financial inclusion cycle, Arohan also offers life and health insurance policy products that are issued and underwritten by certain Indian insurance companies with whom it has entered into tie-ups. It partnered with Bajaj Allianz Life Insurance Co in 2015, HDFC Life Insurance Co in 2019 and Kotak Mahindra Life Insurance Co in 2020 for them to underwrite group term life insurance policies. It also partnered with Future Generali India Insurance Co in 2015 to provide health insurance and hospital cash benefits to Arohan customers, and with Aditya Birla Health Insurance Co in 2020 to provide a Covid-19 related insurance policy, in addition to regular health insurance.

Digitisation of compliance

“As technology drives the financial services industry today, we have implemented various technology-based tools and platforms, including Gravity, an Android and web-based application for loan origination that helps to record operational transactions conducted in the field on a real time basis, in 2016; and Profile, a core banking system from FIS,” says Nambiar. “During the Covid-19 pandemic, Profile helped Arohan manage various government responses, including the payment moratorium, interest subvention and compound interest relief. We are the only MFI in India using Profile as a loan management solution.” Arohan’s digitisation of compliance and corporate governance was recognised at the Institute of Company Secretaries of India’s 20th National Awards for Excellence in Corporate Governance 2020, where it received the award for ‘the best governed company’ in the unlisted segment – emerging category.

“Moreover, with the help of our IT interventions and automation efforts, we have been able to reduce our operating expenses ratio from 6.78 per cent in 2017-18 to 5.14 per cent in 2019-20. We have also reduced our loan disbursal turnaround time from more than 15 days in 2014-15 (before we implemented Gravity) to less than a week in 2018-19.

According to a CRISIL report, collaborating with fin-tech companies will help raise operational efficiencies and reduce costs. A number of the leading NBFC-MFIs have collaborated with fin-tech companies. Arohan Financial entered into an alliance with Airtel and Paytm Payments Bank to facilitate on-boarding of customers onto its digital banking transaction platform. Such tie-ups have helped market participants sustain operations during the Covid-19 pandemic and have also led to the transition to cashless repayments and disbursements.

According to IRDAI, in 2018-19, micro insurance gross direct premiums accounted for only 1.5 per cent of the total gross direct premiums of life insurers in India; the same ratio was at only 1.46 per cent for general insurers in India. CRISIL Research believes this provides huge potential for the growth of micro insurance in India.

“Arohan has its asset liability mismatch strategies in place,” says Nambiar. “We primarily borrow on a longer-term basis than the average tenure of our assets. Our average asset tenure is 21 months while the average term of any borrowing agreement is 32 months, such that our cumulative asset liability position is positive. Further, we do not take any recourse against short term instruments such as commercial papers. This strategy is designed to strengthen our cash flow position, mitigate liquidity risk, and avoid negative asset liability mismatch in our books.”

India’s financial inclusion has improved significantly in the past three years, with the adult population with bank accounts rising from 53 per cent (as per Global Findex Database 2014) to 80 per cent (as per Global Findex Database 2017) with concentrated efforts from the government and the rise of various supporting institutions.

As of 31 March 2020, there were about 640,000 villages in India, inhabited by about 893 million people, comprising about 66 per cent of the country’s population. Rural areas in India contributed to 47 per cent of India’s GDP; however, the share in total credit outstanding as of 2019-20 was 9 per cent in rural areas, as compared to 91 per cent in urban areas. The report estimates that this presents MFIs with significant growth opportunities in rural areas.

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