Swadhaar facing margin squeeze as it enters ‘billion rupee’ loan club, scripting expansion

Mumbai-based urban microfinance institution Swadhaar FinServe is set to enter the Rs 100 crore (Rs 1 billion) loan-book club by the end of this fiscal, which would require it to cap the margins on loans. The microlender is striking a critical deal which would help cut operational costs and is also planning to expand its reach to four more states by the end of the current financial year, its chief executive told VCCircle.

Swadhaar ended FY12 with a loan book of around Rs 90 crore and is expected to grow 40 per cent in the current year, said M RajaRam Kamath, CEO of Swadhaar FinServe.

The loan portfolio of Rs 100 crore means the MFI has to restrict its margins at 10 per cent. The Reserve bank of India has capped the margins (the difference or the spread between the cost of funds and the interest rate an MFI can charge its borrowers) for larger microlenders from 12 per cent to 10 per cent. The lower margin is applicable for MFIs with loan book of more than Rs 100 crore.

Swadhaar, which started its operations in 2008 and broke even last year, is currently in the process of launching a partnership with Axis Bank and Airtel Money that would enable its borrowers to repay through mobile payments. The project is in the pilot state.

Airtel Money is a mobile wallet service, enabling users to load cash on their mobile devices to pay utility bills, recharge mobiles, shop and transact online. It is similar to a card payment option, but offer customers the convenience of instant money transfer from an Airtel Money wallet to another Airtel Money user and bank accounts.

The transaction charges for loan payments would be borne by Swadhaar.

“We are an early bird in terms adapting to newer technology and we are working towards reducing our cost of operation,” said Kamath. “Through the tie-up, we would be able to work on a lower operational cost,” he added.

The tie-up would also enable more efficient collection process and greater control over its cash management system, Kamath said.

Swadhaar’s cost of operation is around 14-16 per cent, which is above industry average. This is because its operations are only in urban areas.

The Malegam Committee, which studied the state of MFIs in India, worked out an average operating cost of 9 per cent for MFIs.

Operating costs are not uniform across all MFIs and largely depend on the size of operations, customer base, products offered, repayment intervals, technology adopted and most importantly, the average size of loans.

The project would potentially replace traditional repayment methods of travelling to the local branch to repay in cash or Swadhaar loan officers making door-to-door visits during collections week. In other words, this partnership would offer an alternative payment platform to borrowers.

The MFI is also planning to expand its reach to four more states by the end of the current financial year. The microlender is looking to open offices in Madhya Pradesh, Rajasthan, Uttar Pradesh and Delhi. At present, it is only present in the urban and semi-urban areas of Maharashtra and Gujarat.

Swadhaar, one of the few MFIs who only focus on the urban poor, counts among its investors social investment firm Accion besides Michael & Susan Dell Foundation (MSDF), Elevar-managed Unitus Equity Fund and MicroVest Capital.

(Edited by Sanghamitra Mandal)