Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Saturday, January 1, 2011

Should Banks Acquire Indian MFIs?

Ramesh S Arunachalam
Rural Finance Practitioner

The idea of banks acquiring MFIs, especially in the present Indian context has come up more than once and I spoke to several bankers[1] at fairly senior positions about the idea of banks acquiring MFIs and here is what some of them had to say...Raed on...

Banker A: A great idea and a very practical one. RBI must take the initiative on this and encourage banks to do so. This is the only way out of the present mess…as banks will then feel that they are in control of the situation…in terms of growth plans, avoiding multiple lending etc

Banker B: While a useful suggestion, there are practical problems including assessment of portfolio, merging of corporate cultures and the like. These would need to addressed properly and banks would certainly like to be sure that while there may be some risk in the micro-finance portfolio, the portfolio does not have “lemons” (Defined as NPAs) in significant measure. I have been hearing about Ghost Clients, use of third party agents and the like and that does worry me…as these are indications that the portfolio may not be as sound as portrayed to be. Add to this the current AP problems and its impact - you cannot rule out a portfolio under great stress and that needs to be carefully ascertained

Banker C: This may force non-profits to quickly transform to a for-profit and grow fast to become an attractive target. That is not good. In my opinion, this is not a sound idea and the banks have much to learn from the RRB experience on why this may not work in the long run.

Banker D: The issue of corporate cultures is again a critical one and acquiring banks must be wary that managing MFIs will not be the same as managing banks and that there would be important differences in systems and the way things happen on a day to day basis. If acquiring banks try to foist their corporate culture on the MFIs, then, the acquisition will surely fail. So, while acquisition of MFIs is a good idea in today’s crisis ridden environment, the management of the MFIs (post acquisition) will have to be done in an hands-off style by the banks. That needs to be clearly understood prior to an acquisition and also followed in reality, post acquisition

Banker E: The idea is a practical one because then the acquired NBFC MFIs would not have to worry about capital requirements – they will be able to gain access to lower cost bank funds as well and thereby offer better priced products to a larger number of customers. They would also be able to gain a lot in terms of governance and system improvements…

Banker F: It is outright dangerous for banks to acquire MFIs as there would be complete mismatch of systems, practices and employee cultures. Such an acquisition would be doomed to fail right from the start and should not be permitted by the RBI. Also, this seems to be an easy way to cover up for the current bad practices of MFIs and that would not be fair to the banks concerned

Banker G: Such an idea also lends credence to the long standing thought that there is only so much of scaling up that MFIs can achieve and they are somewhat intermediate structures that need to be absorbed into the mainstream financial sector. I am sure that with this happening, the governance and management of MFIs will improve and become more robust. The challenge of course would be to ensure that the flexibility and easy organization style of the MFIs is not lost…due to acquisition by a formal financial institution…

Banker H: While the idea is a good suggestion, I am not sure if the acquisition will really work as wherever such acquisitions have happened, the acquirers tend to force their systems and practices on the acquired institutions. This may not work and also, staff turnover could increase – in fact, it is already high in micro-finance and that may prevent the new entity from settling down. I am most worried about how the clients would view such an event and the new entity and from my little experience, I think that they may not be as free with a banking institution as with a local MFI

Banker I: This is a very useful idea and banks that have worked closely with specific MFIs should consider acquiring them. The rationale for this is that they would know the strengths and weakness of the concerned MFIs and hence, would be able to manage the entity better, post acquisition. The RBI must look at the large NBFCs MFIs that could be acquired and call for a meeting with them and get their concurrence before giving the go ahead. If this happens, it would be one of the best things for micro-finance as the industry will grow in a healthy manner because of the better governance and higher transparency in FFIs – which I am sure will rub off on the acquired NBFC MFIs

Banker J: This is a downright bad idea and I am not sure that banks should be investing their and public money in acquiring risky/delinquent portfolios and institutions with a record of bad governance. Sometimes, there could even be a reputation risk for the acquiring bank – especially, given that many MFIs have been caught red handed with non-transparent and illegal practices. This seems like an easy way to integrate rotten apples into the mainstream financial sector

As evident from above, while the reactions have been mixed to the idea of banks acquiring NBFC MFIs, if some of the challenges put forth are addressed suitably, then, I guess, it would be appropriate to conclude that there is widespread support to the idea (from within the small group I spoke to). Basically, I personally also feel that the idea of banks acquiring MFIs is a sound one and will help these MFIs to become more stable and mature financial intermediaries. At the same time, the MFIs have their charm precisely because of their grass-roots approach which affords them considerable flexibility and scope for innovation and that should not be curbed by the extremely formal financial systems. All in all, the idea is worth exploring and could in fact turn out to be the much sought after solution…for the current problems in Indian micro-finance…

[1] 39 people were contacted through telephone and conversations were held on a wide variety of aspects confronting the Indian micro-finance sector. All bankers insisted on their names being withheld and they also made it clear that they were speaking in their personal rather than official capacity.


  1. Interesting responses. Seems like a large portion of the concerns deal with the differences in culture, management style, and so on -- something that could be essentially bypassed by keeping acquired MFIs as subsidiaries, instead of merging them with the parent institution.

  2. I think this is the only ssolution for survival. I have sent a paper to Microfinancefocus on this. U may find it interesting. I have been avidly reading yr very well documented comments. I am a veteran retd. Banker. One of the pioneer professional in Social Banking

  3. Thank you Ramesh. Happy new year to you also, as well as many thanks for your continuing flow of useful material.

    These comments are valuable, for their diversity, and for what they do not say. They mainly focus on what such acquisitions would do to the MFIs, and to the banks, and they don't say much about what it would mean for the MFI clients. Surely the main benefit would be for clients, in that they could at last have the benefit of a 'real' bank account, where they could save, securely and accessibly, as well as borrow when necessary.

    And, if Indian bankers really want to reach 'down-market', not with schemes and subsidies but with real banking services (and maybe they don't !) this is an amazing opportunity.