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.