Title: Empowering the Bottom of the Pyramid: Arohan Financial Services’ Vision for Sustainable Growth
Introduction
In an industry where the importance of serving the “bottom of the pyramid” is often stated but rarely acted upon, Arohan Financial Services stands out under the guidance of its Managing Director, Manoj Nambiar. As Arohan seeks to diversify its portfolio for enhanced scale and sustainability, Nambiar emphasizes the critical need to harmonize profitability with purpose, thus ensuring long-term investor engagement and the viability of the microfinance sector. Below are the insights from a recent discussion with Nambiar.
Key Priorities for Scaling Arohan’s Portfolio
What strategies is Arohan implementing to thrive in the current economic landscape?
To adapt to the evolving market, Arohan is expanding into secured lending products, including gold loans, loans against property, and home improvement loans. This strategic move aims to diversify the company’s offerings across various customer segments while improving the stability of the balance sheet. With the recent 60:40 regulation for microfinance asset qualification, new opportunities for growth have emerged.
Challenges in the Microfinance Sector
What hurdles does Arohan face in the current environment?
The microfinance sector grapples with several challenges, including difficulties in authenticating KYC (Know Your Customer) due to multiple identification documents, outdated credit bureau data that complicate real-time lending decisions, and external factors leading to uncertainty in repayments and delinquencies. Initiatives such as Karz Mukti Abhiyaan, along with state interventions, often lead to confusion, further complicating access to debt funding.
Managing Credit Costs and Ensuring Profitability
How is Arohan navigating its credit costs while maintaining profitability?
Credit costs are a pivotal element in Arohan’s pricing strategy. The introduction of a credit scoring model allows for risk-based pricing, enhancing the company’s financial performance. Despite a challenging previous year, Arohan recorded a profit of ₹105 crores, with a return on equity (ROE) of 6% and a return on assets (ROA) of 2.9%. Arohan aims to achieve sustained growth while optimizing profitability, as volatility can adversely affect investor confidence.
Core Strengths of Arohan Financial Services
What sets Arohan apart in the microfinance landscape?
Arohan prides itself on its practical understanding of the ground realities of microfinance. The company’s doorstep delivery model, solid risk assessment filters, and strong customer relationships contribute to its operational resilience. The firm has maintained profitability even during turbulent times, with peak ROE figures reaching 22% in FY18–19 and 18% in FY23–24.
Exciting Opportunities in the Microfinance Landscape
Where do the biggest growth opportunities lie for Arohan?
Despite progress, only 33% of the target population has access to formal regulated credit, representing a vast and largely untapped market. With government initiatives and RBI support for financial inclusion, along with the anticipated BULA (Ban on Unlawful Lending Activities) legislation, Arohan is optimistic about achieving better regulatory clarity and protection against informal lenders. The shift toward secured lending also presents promising growth avenues.
Growth Barriers and Structural Challenges
What obstacles are hindering growth for Arohan and the sector?
While the RBI has made strides in improving regulatory frameworks, infrastructural challenges such as authentic KYC verification, online credit data availability, and external disruptions still impede progress. The lack of credit guarantees and slow policy execution continue to be significant barriers, stalling potential growth and outreach.
Future Directions for the Microfinance Sector
What’s on the horizon for microfinance in India?
Consolidation within the microfinance sector is becoming inevitable, particularly as smaller players struggle to secure debt. With Arohan maintaining a strong capital adequacy ratio of 35%, the company views this period as an opportunity for growth. However, without adequate equity infusions, the microfinance sector may stagnate at a valuation of around ₹4 lakh crore.
IPO Plans and Market Sentiment
Is Arohan considering an initial public offering (IPO)?
While Arohan has contemplated going public, strategic timing is crucial. Current investor sentiment is volatile due to rising credit costs and political narratives affecting the microfinance sector. The organization will prioritize strengthening its ROE to between 10-15% and expanding operations before pursuing a listing.
Final Thoughts on the Sector’s Future
What’s crucial for nurturing the microfinance landscape?
Nambiar highlights that microfinance is a cornerstone of Viksit Bharat (Developed India), necessitating careful nurturing. A balance between profitability and purpose is essential; without attractive returns for investors, funding for growth may dwindle, risking the re-emergence of predatory lending practices that can jeopardize millions of lives.
Addressing the Unmet Demand for Credit
How significant is the gap in credit demand within the sector?
Currently, the microfinance sector has an outstanding credit of approximately ₹3.75 lakh crore, serving 78 million borrowers, but the potential market is at least three times greater. Arohan is merely scratching the surface, with significant opportunities remaining for expanding services.
Microfinance’s Impact on India’s Socio-Economic Fabric
What does the scale of the microfinance sector mean for the larger socio-economic landscape?
With microfinance touching over 80 million customers, it has the potential to impact over 320 million lives, assuming an average family size of four. If borrowers employ even a single additional worker, the sector could generate around 120 million jobs, illustrating that microfinance is not just about credit—it is a catalyst for employment and dignity.
Arohan’s Current Portfolio and Growth Prospects
What is Arohan’s current standing in the market?
Arohan manages ₹6,600 crore in assets under management (AUM), operating in 17 states with over 1,000 branches. The company anticipates growth of 25%, aiming to reach ₹7,500 crore this year, with an average outstanding loan per customer of ₹30,000.
Barriers to Accelerated Growth
What challenges hinder faster growth for Arohan?
Key challenges include issues surrounding authentic KYC and the availability of online credit bureau data. Additionally, misconceptions about interest rates remain prevalent, contributing to a negative narrative. Investor confidence has been shaken by recent sectoral delinquency, complicating growth efforts.
Financial Inclusion Through Investment Products
What’s Arohan’s role in promoting financial inclusion?
Mutual funds and insurance products have seen successful outreach, with Arohan also introducing initiatives like NPS Lite. The company provides group credit life insurance for all 22 lakh customers and offers products such as hospi cash, which aids in income protection during medical emergencies.
Future Considerations: Transitioning to Banking
Is Arohan contemplating becoming a small finance bank?
Currently, there are no plans to transition into a small finance bank, as this involves a different business model focused on liability management. However, a lack of differentiated regulatory rights may influence future decisions regarding Arohan’s structure.
Conclusion
Arohan Financial Services, through innovative strategies and a clear understanding of market needs, is committed to fostering a sustainable and inclusive microfinance landscape. The balance of purpose and profitability will be vital in enhancing investor confidence and ultimately empowering the bottom of the pyramid.
By implementing strategies that incorporate both growth and sustainability, Arohan is not just serving a market segment but is drafted as a key player in shaping a more inclusive and financially stable India.
