Banks size up micro-loans

Indian banks face a dilemma. They know that the next big opportunity is lending to rural customers, who make up the majority of the country's population. But they also realise that the cost of opening branches to serve the 300m rural Indians who lack access to formal credit is prohibitive.

That is why banks are increasingly turning to micro-finance lenders (MFLs) - which lend tiny sums to poor people - as a bridgehead into rural India.

Two other factors underpin this emerging partnership. First, there is increasing political support for improving access to credit for the rural poor. Second, banks are beginning to acknowledge that they lack not only the branch networks but also the expertise to judge the credit risk of people earning US$30 a month and requesting loans of US$60.

The large domestic commercial banks, such as ICICI, HDFC and UTI, that have taken a lead have learned that while the rural poor may earn low incomes, their credit quality is unusually high, with a record of repayment that shames most larger borrowers.

......Yet the biggest boon to micro-borrowers could be if state-owned banks such as State Bank of India reverse a tradition of under-utilising their vast rural expertise.

"The big banks coming is a lifeline for micro-lenders," says Vithal Rajan, who advises Ankuram Sangamam Poram, an MFL in Hyderabad.

The issue for the banks is choosing the right way in. ICICI, India's second largest bank, has formed partnerships with 30 MFLs and has grown its micro-finance portfolio from US$45m two years ago to US$100m.

......This year, ICICI securitised two blocks of micro-loans - for Share Microfin, worth Rs162m, and for Basix, valued at Rs42.1m. The MFLs sold the loans to ICICI, which repackaged them into bonds and sold the paper on to a private-sector investor.

For the micro-lenders, such deals allow them to raise funds while offloading some of their credit risk. ICICI, meanwhile, is expanding its micro-finance portfolio, helping to meet mandatory quotas on loans to the poor and gaining access to elusive rural customers.......

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