Let your pot of gold create social impact

Wouldn’t you like to invest in a fund that gives decent returns and also makes you feel good about making a social impact?

The social venture fund launched by IFMR Investment Adviser Services seeks to provide long-term funding to micro-finance institutions (MFIs), thus giving a leg-up to financial inclusion. It is the first AIF and the only asset manager in India to be rated by a credit rating agency, says its CEO, VG Suchindran.

Why did you choose lending to micro-finance institutions as the mandate for your fund?

Today there is a lot of lending by banks to the micro-finance segment due to the priority sector tag for the shorter term.

There are also equity investors — private equity investors and domestic financial institutions — providing funds through equity. Equity funding comes with its own demands and return expectations. Bank lending is seasonal because priority sector lending is skewed towards the last quarter.

This fund tries to plug the gap in the NBFC capital structure and provide a viable medium- to long-term funding alternative. This is a six-year close-ended fund. It will invest in subordinated debt as well as senior secured debt of micro-finance institutions.

How will your fund help improve financial inclusion?

According to the RBI, 60 per cent of the population does not have a bank account.

These people depend on money lenders. When a customer takes a loan from an MFI, he builds a credit history; now we also have credit bureaus that have close to 100 million records.

MFIs get this section of the population into the mainstream. If banks want to lend to them at a later date, they have a credit history to base their decision upon.

People doing small businesses or the unorganised sector, who do not have salary slips, PAN number, etc., now have proper records to back their income and cash flows.

Isn’t there a higher credit risk in lending to the unorganised sector? What are the means through which this risk is mitigated?

We have evaluated around 32 MFIs across the country for this fund and short-listed around 12.

Delinquencies are almost negligible and collections have been 98 per cent plus, going by our experience with this segment over the last five or six years, except during the Andhra Pradesh crisis. Credit risk is not too high because this is targeted at the lower income group for whom this is the main source of funds.

There are two models for micro-finance — the joint liability group of the Grameen Bank model of Muhammad Yunus and the self-help group model. We prefer the first model where the customers are the underwriters. Most of these loans are given to women due to two reasons.

One, in most cases they manage the family; their husbands may or may not be supportive. Two, they know their neighbours well — who is likely to default and who will repay on time.

We also ensure that either the lady or the family is self-employed or has a business that earns an income.

This money is given to support the business — either to increase the income or reduce the cost.

What is the ticket size of the underlying loans? What is the interest charged to the end-customer?

The loan size varies between ₹10,000 and ₹30,000. If you have a good repayment track record you go into subsequent cycles where the loan amount increases depending on your credit history.

The interest charged to end-users is regulated by the RBI which has put a lending rate cap. It is 2.75 times the average base rate of the top five banks. The base rate is 10.09 per cent. So, the maximum you can lend at is 27.75 per cent.

But the lending rate varies from institution to institution, depending on their cost of funds. If the cost of funds is 8 per cent, they lend at 18 per cent.

If the cost of funds is 15 per cent, they could lend at 25 per cent. They need a high margin of 10 per cent because they have branches spread across locations. They need staff to go to the customers’ house to sensitise them about the product.

Do your clients worry about credit risk or returns because the fund also has a charity angle?

The fund does have a social impact angle but we believe in sustainable models for financial inclusion. To have a pot of money and give it away is the simplest thing in the world; but to make it work on a sustainable basis is not possible through charity.

We also believe in models that are scalable.

This is about mainstreaming the informal sector — not only getting them funds from high networth individuals but also from institutions such as insurance companies.

If the returns are commercially attractive, the social impact becomes compelling.

What return can be expected from this fund?

We are targeting a 14 to 15 per cent return on this. There will be a quarterly payment and you get the principal after maturity.

We charge a 1 per cent management fee and we expect the running cost to be 25 to 50 basis points. The rate at which we lend will, therefore, vary between 14 and 17 per cent.

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