In India, the penetration of banking in the rural sector remains limited. In such a scenario, the micro finance institutions (MFIs) play an important loan in strengthening the rural economy.
Village Financial Services Private Limited is one of the leaders in the MFI sector in West Bengal and is aggressively expanding in eastern India. BE’s Saptarshi Deb spoke to Dr. Kuldip Maity, Managing Director of Village Financial Services about the company’s growth trajectory and the growth potential of the sector.
Q. A large part of rural India remains out of the purview of formal banking. In this regard, how do you view the role of MFIs in enhancing financial inclusion and financial literacy?
A. Last year, on an average, the growth of the sector was around 60%. We expect this growth to be sustained in the next few years. The overwhelming presence of the informal sector can be seen as an encouraging factor for the MFI sector. We believe that the majority of financially illiterate and excluded remain in the rural sector, where the penetration of banking is low. The presence of MFIs in these rural, far-flung areas often bridges the gap. I believe that to reach these sections, the MFI is the best channel. Last year alone, we could successfully open bank accounts of around 1,50,000 customers. A large section of the rural population is apprehensive of the banking system. We have successfully oriented a large number of our customers into formal banking.
Q. Your organisation started as a grant-based, not-for-profit organisation aiming to work for underprivileged sections of society. It is now among the leading MFIs in eastern India. What propelled this transition?
A. Yes, we started off as an NGO, which was called Village Welfare Society in 1982. The organisation was involved in typical developmental activities pertaining to rural health and education, working mainly on government grants.
In 1994, the central government decided to initiate some micro-credit projects. They shortlisted 10 NGOs to initiate this project. Our NGO was among the shortlisted ones. That was the beginning. In 1998, Small Industries Development Bank of India (SIDBI) extended to us a loan of `25 lakhs. Eventually we understood our structural formation (we were still registered as a society) was not right for financial transactions and we were advised to form a Non-Banking Financial Company (NBFC). However, equity was an issue. Therefore, in 1998, we initiated a not for profit company and called it Village Micro Credit Services and merged the seven branches of our NGO with this company. Eventually in 2004, we launched our NBFC. However, we could start operations only in 2006. The transition from grant-based activities to a profit-making organisation was needed because we felt that grant-based activities were not a sustainable model. To enhance the lives of our target groups, we felt a need to provide improved livelihood options.
We now have presence in eight states and service around three lakh customers. Last year, we closed at ` 463 crore and recorded disbursements of around ` 1000 crore. We wish to expand aggressively in the coming years and have a vision of reaching 20 states by 2020. We believe that there are large opportunities for the MFI sector and we aim to explore the opportunities that lie in the sector. We would eventually aim at becoming a bank and a large presence is needed for that. Becoming a bank would give us a large number of benefits. The cost of borrowing will be reduced drastically. This will also translate to our customers.
Q. Does your company identify projects before releasing loans? Do you help in marketing and in procuring inputs?
A. The first criterion for our loans is that the loan receivers need to be familiar with the activities for which they are taking the loan. We do not want to disrupt their traditional linkages. It is these linkages that ensure year round business for the loan takers. We refrain from giving loans to people who come with no experience in a trade. We also evaluate if the loan taker can repay from other sources of income. We give importance to the collective knowledge of the Joint Liability Groups (JLGs).
Q. How has been your experience with employment generation and livelihood development?
A. A study commissioned by us a few years back showed that we touched around 4.5 lakh people in that year. We already have a customer base of three lakhs and we believe that this customer base has an extended sphere of influence. Apart from this, we directly employ 1200 people in our 200 branches. In West Bengal alone, we have around 140 branches. In Bihar, we have around 30 branches. We have targeted eastern India and are expanding in other eastern and north eastern states.
Q. The sector has steadily been expanding its urban base. What opportunities do you see for your company in this front?
A. Most of the MFIs have a rural base as they started as NGOs working in the rural sector. However, in the present, there is demand for MFIs both in the urban and rural sectors. In the case of opportunities, urban areas provide more of them. Operational costs in rural areas are high. But 80% of our presence is concentrated in the rural sector and we are comfortable in that sector. As of now, we have no plans of foraying aggressively into the urban sector.