In this episode of Subtext, I sit down with Tamal Bandyopadhyay — veteran banking journalist and senior advisor at Jana Small Finance Bank — to unpack the microfinance credit crisis of 2023–24.
We discuss how RBI's 2022 interest rate deregulation gave lenders a freedom they arguably misused, why borrowers ended up with 14 loans simultaneously, how the JLG model is collapsing in the digital age, and what investors should actually look for before betting on an MFI stock.
If you want to understand credit cycles from first principles, this one's for you.
Video Mentioned -
Has the microfinance credit cycle turned? | Who said what? S2E37
0:00 Introduction
1:38 What is Microfinance? (RBI Definition & Categories)
6:16 Why Microfinance is Prone to Credit Cycles
16:12 The Role of Fintechs & Hidden Credit Exposure
21:15 JLG Model Breakdown & Digitization
25:42 Interest Rate Deregulation & the Recent Credit Crisis
34:42 What Investors Should Look For in MFI Lending
40:07 The Future of MFI: Business Correspondents & New Models
Kashish: [00:00:00] Hi guys. I'm your host Kashish Kapoor, and welcome to another episode of Subtext. In today's episode, I have with me a special guest, Tamil Bandyopadhyayji. He is one of the most [00:00:10] coveted Indian banking journalist, and he's covered banking for past two, three decades. When I first talked to him, he refrained from calling himself an expert.
[00:00:20] He called himself more of a observer of banking ecosystem. And he's not just an outside observer. He was earlier associated with Bandhan Bank as well,
Tamal: and now is currently a senior advisor at [00:00:30] Jana Small Finance Bank.
Kashish: In the end, he's an expert at everything banking. And today, I'm talking to him about microfinance industry.
Now, for those of you who don't know, we [00:00:40] also did a video on microfinance industry where I went through hundred and forty-four con calls across eighteen companies and eight quarters to see how the microfinance [00:00:50] industry went through a credit cycle. So if you wanna watch that video, go check that out. This conversation was recorded after that research, and I was very excited to discuss everything I learned with Tamilji.[00:01:00]
Not making you wait any further, here's my conversation with him. Thank you so much, Tamil, sir, for agreeing to do this. Uh, by the way, this is a personal fan moment for me. I started learning about banking, [00:01:10] reading about... reading from the Pandemonium book. Somebody suggested, and ever since then, just like you talked about in our call earlier, uh, I've also become an observer of banking.
Although you've [00:01:20] been doing it for decades, it's just been a couple of years for me, but I'm just enjoying this process of observing banking cycles. So thank you so much for introducing this to me first of all. [00:01:30]
Tamal: Thank you. Thank you.
Kashish: So, uh, so we want-- I want to talk about microfinance. Uh, there are a lot of questions I have, but I wanna s-first start with a very basic thing.
What does [00:01:40] microfinance mean? The reason I ask this is because RBI says that it's unsecured sort of loan given with a particular ticket size. But what confuses me is [00:01:50] almost everything can be categorized as microfinance. So a joint liability group loan given could be a microfinance loan. A loan given by a fintech app can also be categorized as a [00:02:00] microfinance loan.
A business loan given to Kirana shop, which is also unsecured, can also be microfinance loan. So is there a clear defined way of us to know what exactly is [00:02:10] microfinance loans? And when different businesses, let's say, a Kotak defining what their MFI books look like, and if a small finance bank like AU defining what their microfinance book looks like, are they comparable?[00:02:20]
So first, I just want to understand that.
Tamal: Yeah, I think it's very interesting question. In fact, uh, that was the case till, I would say, April two thousand twenty-two when Reserve [00:02:30] Bank of India came out with the new norms. Now, till that time, you know- It was not exactly defined what is [00:02:40] microfinance, which is why there were a lot of overlapping between microfinance entities and the banks.
They are doing the same thing and, you [00:02:50] know, and a lot of problems were created for that, over-leveraging and everything else because there's no turf as such, uh, one getting into another role. So [00:03:00] there are microfinance entities, right? Even now they are. But what is microfinance was not defined. So everyone was [00:03:10] jumping into it and creating problem, lot of problem.
In fact, Assam problem, I'm sure you talk about it later just, uh, during the COVID time and around or [00:03:20] before that happened. That was because of that, you know. Uh, one large lender, uh, took advantage of this, and what it was doing is what is actually [00:03:30] micro lending and all. That's a separate story. But Uh, 2020 thing, actually Reserve Bank of India started looking at microfinance, [00:03:40] not microfinance entities.
Microfinance as a subject, as an, as a segment. So if you're a bank, the rules are same for [00:03:50] you. If you are a non-bank, the rules are same for you. It could be an NBFC, N- MFI, NBFC and all, but microfinance norm same for [00:04:00] you. Now, what is this microfinance norm? RBI for the first time came up with this, which talks about what will be the household income, and, uh, that's one part of it.
[00:04:10] Second part of it, of course, um, you know, other pa- uh, one very critical part which is evolving is... Earlier what it was happened, a microfinance, if you are a [00:04:20] microfinance entity or you are into microfinance, uh, you can give up to 15% secured loan. Later it became [00:04:30] 25%, and now it's 40%. This is to save the microfinance entity.
Look, you guys got into trouble. Now I am allowing you to have more and [00:04:40] more secured loan to balance it out. So from 15 to 25 to 40, that has gone for the microfinance entities. But what microfinance is [00:04:50] very simple, that household income, if I'm not mistaken, is capped at three, three lakh. Beyond that you cannot give other.
The ability to pay back, I think, has to [00:05:00] be, uh, the 50% of the household income or something like that on that level. And earlier it was there, uh, largely to... it has to be productive loan. [00:05:10] But Reserve Bank of India 22, uh, 2022 said that, "No, it can be for education, it can be, uh, for a few, uh, um, other things as well, not only the [00:05:20] productive purposes only."
So now, whether you are a bank or non-bank, NBFC or MFI NBFC, if you are getting into that [00:05:30] segment where the household income is capped at there and you are giving loan at following these norms, this loan is treated as [00:05:40] microfinance. Of course, the challenge is how do you... even though despite the GST, et cetera, coming, coming in, how do you define, uh, [00:05:50] household income?
But actually three lakh, how do you go by this? So these are all very, uh, gray areas are there. And, um, one of the reasons or the [00:06:00] key reason, uh, for the problem is this. I mean, people don't care much about, yeah, there is three lakh, but, well, you know what I mean.
Kashish: So now [00:06:10] that we've defined, you know, microfinance as a category of lending, one thing that I've observed is that this is a category of lending which is very prone to a lot of [00:06:20] credit cycles, and these credit cycles are more industry-wide than just company specific.
We've obviously seen the Yes Bank thing happened, then in 2018 also [00:06:30] we had lending. All of that has happened, but the intensity with which crisis like the 2010 Andhra Pradesh crisis happened and then 2021 [00:06:40] Assam crisis happened, these happened across industry altogether, and they happen much more frequently as well.
Which begs the question, is [00:06:50] this a feature of microfinance itself that it's so prone to such cyclicality, or am I missing something here?
Tamal: There are actually multiple factors that can affect. [00:07:00] Remember, this is the class which is not the privileged class which have the access to bank loan, uh, which can afford for secure lending, et cetera, et [00:07:10] cetera, right?
So they are... Actually, the microfinance is replacing or substituting money lenders, right? And that's how they justify their [00:07:20] higher loan, that even though, uh, we are charging 24%, 26%, 28% odd, but still we are much less than money lender. But there is [00:07:30] a vulnerable section. Now, this vulnerability, uh- Leads to multiple things.
Uh, one is this, very often you will find that, uh, uh, say natural [00:07:40] calamities. This could be earthquake, this could be cyclone, it could be flood. That can affect them. It's a very regional specific thing. Assam, uh, you said, it's a different thing [00:07:50] altogether. It's actually in some segment on Assam in tea gardens, et cetera, uh, the, uh, the borrowers who are hugely [00:08:00] over-leveraged, uh, reportedly by one bank.
That particular bank actually thought that, oh, you know, this is my area. I am [00:08:10] creating this. I'm making awareness of people about microfinance, and I'm giving them money. Suddenly, why the other entities are also flocking in on, on... So that, that [00:08:20] particular entity started giving more loans than the borrowers can, can pay back.
Now what happens is, you know, if I'm a borrower and if I'm taking two or three loans or [00:08:30] four loans, which I should not, but still I can arbitrage, like taking money from one and giving money to another. But then suppose I was getting three [00:08:40] lakh... Sorry, uh, 30, uh, I was paying some... So getting, say, thirty thousand, thirty thousand, thirty thousand and ninety thousand from three persons.
I could have arbitraged and managed, you know, a [00:08:50] balancing act. But if one person gives me ninety thousand, I need to pay back, and then I'm not being able to pay back. So it was over-leveraging and it was probably an [00:09:00] adventure by one particular large lender, which is not a microfinance entity. Uh, that's the Pradum Assam crisis.
Similarly, uh, the, uh, many years back, [00:09:10] the Andhra Pradesh crisis also, uh, created by one particular entity which got merged to a, a large private bank later Uh, which was actually got [00:09:20] listed and got into trouble and all. I'm not trying... I'm not naming it. And so what happened is this, the, the collection thing, uh, getting, getting messy, and it led to suicides of [00:09:30] people, so on and so forth.
That's why the Andhra Pradesh government came in. This 2010. What happens is, one is the natural issues, natural calamity, et cetera, it can affect. Then the [00:09:40] political, um, political thing also, it can affect. Like s- many of the state lu- ru- norms, it says that it is... They're not [00:09:50] applicable to RBI ent- RBI-regulated entities.
Recently, yet another, uh, southern state gone for it. It categorically says these [00:10:00] norms are not regulate- not meant for RBI-regulated entities, which mean technically it is not, it is not applicable to RBI-regulated entities. But what happens in [00:10:10] reality, when you have that, then people, even though, uh, the, the, the borrowers which are, uh, given money by RBI-regulated entities, they get [00:10:20] influenced and they don't want to pay, like that.
Similarly, it often, uh, happened in a... It happened in the first decade when the central government, [00:10:30] uh, issue, um, you know, a lot of money. They, they... There's a loan waiver they... It announced in the budget. Yeah. It's central government. But if you see periodically, [00:10:40] multiple state governments ahead of the elections and they talk about this, uh, you know, waiving the loans and paying back the loans, et cetera, et cetera.
So that [00:10:50] creates a, a, a issue which is essentially, uh, that damages, that hurts the credit culture. So what happens is, even if I'm able to pay, [00:11:00] I'll say I'll not pay because the state government is there to help me out. But my fellow guys, uh, they're genuinely inconvenience for whatever reason. I [00:11:10] can pay.
But those who are able to pay also, they get influenced by that And, and some cases, uh, like the recent one which [00:11:20] we have seen in the past, which is now things are getting better. We-- I'm sure you're planning to discuss it later, I'm not getting to that. That reason is slightly different than others. But historically, [00:11:30] every few years you will see the problem.
And the genesis of the problem, the trigger for the problem, it can be political issues, it can [00:11:40] be collection... aggressive collections which created the political issue. It can be, um, ill before elections and loan waiver, it can be cultural [00:11:50] issues, uh, m- uh, meaning the culture of particular entities which allows people to over-leverage, uh, or it can be natural calamities as well.
[00:12:00] So there are multiple, multiple things which is, which is the banking system or the secured lending in NBFCs they are not subject to. So which is why I think the [00:12:10] investors in these such entities, they know for sure that, look, every four or five years, I'll not get any money for two years or three years.
So when I'm getting money, [00:12:20] let's make... They will put pressure on the particular entity that, look, well, it has to be... That's why the... You know, they will not compromise on their return. So, so [00:12:30] you make good returns for a few years, and then you, you don't make any money, you make loss for a few years, and then that's the balancing act you need to do.[00:12:40]
Kashish: I think I read somewhere where it was mentioned, if you want to understand credit cycles, MFI is the best industry because that's where you see live examples happen very frequently, [00:12:50] and, uh, you can actually see how the, uh, NPAs are moving. All of that happens in a very real time, in a very quick basis, so you can learn very fast.
And I eventually did see that happen [00:13:00] for the past couple of years. But adding on to what you mentioned, the regional aspect of it, right, sir? Is there a way for that to not impact an MFI business? [00:13:10] I understand that these are politically sensitive issues, and, uh, it's hard for us to distinguish between them.
But do we see a future where... I don't know, it's a very [00:13:20] hard question to answer, but do we see a future where such regional politics, such local things do not impact MFI industry, or is this the nature of MFI industry and investors just have to deal with [00:13:30] it?
Tamal: No, I think you can't avoid that. You can't avoid that because, um, again, if you look at the numbers, now the different states have different, uh, you know, the [00:13:40] MFI size, et cetera.
It's very different. You know, concentration is very different. As I speak, just I'll tell you that the five states, uh, um, that lead the microfinance thing and all, [00:13:50] I'm, I'm just reading out from something which is believable. I'm not talking about the source, but yeah. But they're all-- they have fallen the latest.
Now, for Bihar, [00:14:00] the number of borrowers has fallen from eleven point three four million to nine point one five million in the recent the, the crisis. Uttar Pradesh [00:14:10] from eight point nine nine close to nine million to eight point zero one two million. West Bengal from six point nine million to six point one five [00:14:20] million.
And Karnataka from six point two eight million to five point four six million. So all these five states in recent, whatever the, [00:14:30] the, the turmoil, what you're seeing that's... Only Tamil Nadu was relatively less, uh, impacted. Here, the number decreased from eight point one one [00:14:40] million to seven point nine two million.
So, uh, as you have said, there are no different states or different things. As you say that Tamil Nadu is different from the [00:14:50] other few places. So it depends on the leveraging. It depends on the lenders, you know. It all depends on the lenders, how the lenders behave. [00:15:00] And problem is this, uh, even though despite all the credit bureau, et cetera, et cetera, uh, in that segment, it's not...
Say five years back, [00:15:10] uh, um, it was, it was microfinance and money lenders. But now it is no more microfinance and money lender. Now there are [00:15:20] multiple lenders are there. All the fintechs, you know, uh, they're there and they're not necessarily, uh, their exposure is, uh, caught [00:15:30] by the credit bureaus at all. So as a microfinance entity, you might have seen that one particular person has given, uh, has taken three loans because you get to [00:15:40] know from the credit bureaus that he, he or she has two other exposure, and you are giving it because your SL says up to three loan, not more than that.
But th-that [00:15:50] person, uh, le- the lady, the woman or the man probably has two or three more loans from non-microfinance, non-NBFC, non-banks, but fintechs, [00:16:00] and they are equally expensive, forty percent, fifty percent. Uh, I know that that kind of things happens at all. So it's very, very, uh... I'm just saying the field, the turf, [00:16:10] you know, one way of looking at is this GST has come and things are now getting better.
You can measure people's income, so on and so forth. But on the [00:16:20] lending side, in the unsecured space and small loans, there i- there are issues which t- Which is very difficult, it's complicated. [00:16:30] Credit bureaus are there, and the microfinance entities, like everybody else, need to check the credit bureau and so on.
But the credit bureaus have not been able to catch everything because [00:16:40] of the fintechs, which is why Reserve Bank of India also concerned. They are talking about white labeling fintech, so on and so forth.
Kashish: If I understand correctly, sir, all these fintechs have been [00:16:50] giving loans not with any lending license they've gotten from RBI.
They've just been doing it out of their books, for lack of a better word, illegally. Is that the right way to put it?
Tamal: [00:17:00] Not exactly like that, but they're not caught. I, I give you one live example. I was in, in Kolkata in, in a bar. When, when I used to like... When [00:17:10] my college or university days, I used to go there.
Then I found that in particular bar, one particular table, there were five or six guys were there, and they're a little making more noise than others. [00:17:20] People are not very happy what they are doing, but they would not dare to tell them. They are there in their 20s, young kids. So I took the chance, "Let me see."
[00:17:30] And I tried to just, uh, chat with them and all. And trust me, I found out that they all had taken money loan [00:17:40] from fintech to finance their beer drinking. And, and, and two of them have, have come up very, very, pretty good background. One [00:17:50] lawyer's son and one some pretty, uh, responsible, you know, businessman's son.
Other three... Five or six of them. Some of them giving tuitions, et cetera, et cetera. And I am told [00:18:00] that they are, they are of course paying back and they are given 44% interest. 44% interest they are paying, [00:18:10] and the What is the hook for them? Why have they taken it? They've not defaulted. They said, "Look, one is this, no bank will give me money.
I'm getting money there," and all. [00:18:20] And second is they have been told that, "Look, this is the way I will get you into the credit cycle. Credit bureau will catch you, and later you'll be [00:18:30] credit-worthy," et cetera, et cetera. And that forty-four percent in due course for a, a few cycle after that it will come down to much less than six percent [00:18:40] or more.
And then I, I, I definitely mo- name the entity. Then I look around for that entity and found out that they have pretty good book and these are all... They have not raised [00:18:50] money from anybody, from their own capital they are using. And some segment is there, I know I was talking to one of the guys who are the auditor there.
They said, "No, they're doing good [00:19:00] business." And yes, in some cases there's forty-four percent or forty percent. And then for, for employer, employed person, they are charging much less. Salaried [00:19:10] person, they're charging much less. Eighteen percent, sixteen percent kind of thing, uh-
Kashish: And these are not, say, uh, RBI-registered entities?
Tamal: Uh, I would not think so. I would [00:19:20] think no. I think... I mean, on this I, I ju- I just, just don't have the answer actually, if you tell me. I, I don't think anyth- anything illegal they are doing. I don't think so.
Kashish: Well, and so [00:19:30] help me understand, sir, if credit bureaus are not able to capture, uh, this data.
Tamal: Not...
Credit bureaus are capturing. RBI, in fact, have you, have, have you seen that RD- [00:19:40] RBI recently, quite some time back, they said the, the, the, the rapidity, the velocity of, um, um, giving the data, they have increased, et cetera, et cetera. The time lag was [00:19:50] much less and all. But what I am just saying precisely, despite that, yes, the, it has become much faster, but not every data because certain [00:20:00] entities, uh, in that space, unsecured small lendings, and particularly the fintechs and the loan apps.
The fintechs and the loan apps, [00:20:10] they are n- every entity is not caught by it. Now, whether it is illegal or they're not re- they're not, um, uh, licensed by RBI, I, I'm [00:20:20] not qualified to say. But we understand that RBI is concerned and RBI is tightening the, the, the knob on the digital lending space. It's talking about a white labeling part.[00:20:30]
Like, you need to be, uh, you know, approved by RBI and all. I think that process is on. You will see it soon. Uh, but as, as we speak and, uh, [00:20:40] or, or it had been the case.
Kashish: Fair enough. So in that case, sir, if credit bureaus, again, they don't have full access to all of this credit data, how [00:20:50] does underwriting happen in MFI space?
Uh, I know that joint liability group, uh, method is another one where they take joint liability of the group. But from what little I read [00:21:00] over past couple of years, even that is breaking. That whole model is breaking. Even... I don't want to get wrong, but I guess I read it in Kotak's con call where they mentioned that they wanna go for [00:21:10] more data-based underwriting, even in microfinance unsecured, than going with the JLG model.
So first, why don't you help me understand a bit how JLG model works? And then [00:21:20] if JLG model is not working, we do not have enough credit data, how does-- how will underwriting happen in microfinance?
Tamal: That's the problem. But first of all, yes, you are absolutely right, the JLG model [00:21:30] is, it's not... No more the... Say till recently, I guess a few years back, JLG model was there.
Uh, JLG model was the overwhelming model even for [00:21:40] microfinance entity, apart from the banks and all. But now the JLG model will not work. The, the main reason is, you know, Reserve Bank of India, [00:21:50] again, I come back to two thousand twenty-two April, uh, the new norm. Apart from what is microfinance and no more microfinance entity, but identifying [00:22:00] microfinance, RBI also give them the license to fix the market rate interest rates.
Earlier it was there, depending [00:22:10] on your size, your cost of, average cost of borrowing plus ten percent for, I think, larger, uh, for thousand core plus microfinance, and below it was twelve [00:22:20] percent or something like that. And there are, of course, calculation how to do this and all. But Reserve Bank of India, uh, had the norm.
But two thousand twenty April, um, after [00:22:30] this, I mean the, well, during the COVID time, Reserve Bank of India, uh, freed the things. Now, what happens is that gives the entities freedom [00:22:40] to, to lend at whatever they think, depending on the cost of funds. And RBI thought it would be market-driven, it would go down.
It's another matter, [00:22:50] I would say Probably each and everybody has a reason. Why did they do it? Because during the COVID time, FY1 and FY2, uh, [00:23:00] their business was bad, and there's, uh, NPAs were going, and, um, our book was not growing, so they want to, uh, make over that whatever, the losses they did and all.
That's a separate [00:23:10] story. But that does a big hit on the JLG model. Because what happens is this, on the JLG model, when I have a group, say I'm, I have a group of [00:23:20] 16 or 20 or whatever it is, I am giving you loan at the same rate everybody. Now, when I am able to... When I have [00:23:30] the freedom to decide on the loan, now I will not say that all 16 will get the same, uh, at the same rate, no.
There'll be, uh, five [00:23:40] guys can get cheaper, another 10 guys can get higher, mu-much higher, one guy can get middle level and all. Now, how do you create a group where you are [00:23:50] lending money at different rates to different persons? Certainly it will not work. And of course, the other part was the JLG model, you know.
As we, uh, go to [00:24:00] more it is a digital space and all, the entire thing of the traditional way of doing it, that going there, holding group meetings every week or every [00:24:10] fortnight and fixing a leader who will, who will actually collect on others' behalf and all. Now that's history because, uh, because of [00:24:20] digitization, you know.
And, uh, there was... What was happening is this, this was, you know, the OpEx was-- the cost was too high, and digitization has actually [00:24:30] helping them to bring down the OpEx cost. But as a necessary corollary to that, all those connectivity, et cetera, are being affected. Uh, so what happened is this, it has to be, [00:24:40] uh, the, the right way of doing is this, it has to be, uh, either-- I mean, it's, it's a matter of what you're going to say, take and touch or touch and take, but [00:24:50] the combination has to be there.
But, uh, it's not happening anymore. Like for instance, disbursement now in most of the cases, 100% disbursement, and rightly so, [00:25:00] is through the bank channel. Meaning the money is now coming, you know, not, not as a... Earlier, 10 years back, what you used to see that they would come and pick up the money, the [00:25:10] cash.
It's not the case. Disbursement is, most of the cases, it's now electronic. And collection, depending on entity to entity, in some [00:25:20] cases electronic fully. Uh, again, I will not get the name. A few entities which are almost like 80, 90, 100% electronic, and in some cases still [00:25:30] there and all. So JLG model is not working-- will not work for long, uh, anymore, uh, because of those, uh, factors behind [00:25:40] it.
Kashish: Fair enough. I think, uh, you talked about, you know, the intrastate deregulation. I think that's a good point for us to delve a bit deeper into what happened in the past couple [00:25:50] of years, the recent cycle, which I've observed. That day, uh, I read one of your columns where you called the day they deregulated it as a red letter day.[00:26:00]
And I thought that eventually became a reason to what happened over next couple of years. What we saw, that earlier a lot of MFI problems were [00:26:10] usually used to be because of external reasons like COVID, right, or a natural calamity. But I think last couple of years, the reason we went through this, uh, the credit cycle was because of [00:26:20] overlending, which was very fundamental to how the industry players were behaving.
This is an observation I have made based on whatever little I've read. I'm sure you'd have [00:26:30] much more to add. How, how do you see it? Was it again more internal or more external? And was that day the trigger this happened?
Tamal: Uh, yes. I, I did say it was a red letter day for the industry, [00:26:40] uh, because Reserve Bank of India gave them freedom which they are asking for.
But, um, I think even Reserve Bank of India regrets that because the freedom is [00:26:50] I'm sure industry would hate me for this. It's been misused. Okay. And, uh, from multiple platform, RBI deputy governor, Mr. Swaminathan, did [00:27:00] flag up this issue that they're not judicious enough to, uh, to enjoy this, the, the way the freedom is being used.
So what happened is this, their logic was [00:27:10] 2001 and 2000... 2021, '22, they did bad loss because of the external circumstance. So aggressively, first they, they raised [00:27:20] the, uh, loan rates. I think every- everybody raised their loan rates, and then it started over-leveraging. You know, I mean, there are three loans, four loan...
I'm ... I think I [00:27:30] wrote in one of my pieces, one borrower I came across having 14 exposure, one fourth. So all this RBI norm that three lakh household [00:27:40] income go by the board-driven policy, see, et cetera, et cetera, nothing happened. Of course, the two SROs, they got into, uh, the scene and they, you [00:27:50] know, they put the guardrails that not more than three loans and not more than two lakh exposure, et cetera.
Kashish: Was that a good job done, sir, the SRO guardrails? [00:28:00]
Tamal: Tried, I guess. But, you know, there is a inherent, um... Again, it will ... lot people who don't like to say that. Because how would the SROs work? I mean, the bulk of their [00:28:10] revenue in the sense they'd need to run, it was given by the entities, right? If my entire architecture is built on the subscription by these [00:28:20] entities, so it actually...
I don't think I can enjoy the 100% freedom to curb on these entities on whose money I work. [00:28:30] Having said that, SROs were extremely careful. They, they, they have been doing their job. I think had there, had there been no SROs, then things would have been far [00:28:40] worse. But the fact is, as you rightly said, you, you said and you, you want to hear me saying this, yes.
Unlike in the past where the [00:28:50] politics played a role, where, uh, elections played a role, where, um, uh- Aggressiveness, one entity played a role. Natural calamities played a [00:29:00] role. But this is actually made by probably the entire industry, barring exceptions, few exceptions. So I'll just give you some number-- some number.
[00:29:10] Again, in FY seventeen-- financial seventeen, uh, the exposure was one point zero seven trillion in the micro role segment I'm talking about. By [00:29:20] FY twenty-four, it went up to four point three four trillion. And you remember, twenty-one, twenty-two, it did not happen anything. It actually came [00:29:30] down. So this twenty-three, twenty-four, it just zoomed.
And then, since then, I'm just seeing is this microfinance entity, [00:29:40] twenty-three... twenty-four, twenty-five, uh, portfolio stood at four point two six. By December two thousand twenty-five, this, this came down [00:29:50] to three point two one. Okay, I am, uh, quoting one of those, uh, credit bureau data and all. And I understand this, um, [00:30:00] subsequently, I think the-- as we speak, the last, uh, in February, m-microfinance industry to-total book size is three point two eight-- three [00:30:10] lakh twenty-eight thousand seven fifty-six crore, with, uh, witnessing two point four four eight percent growth from the previous month.
So in February, you was [00:30:20] talking about till December it was in a concentration mode. Now going down and down and down. Uh, right now, as we speak, the worst is behind, things are... And all these [00:30:30] reflections also in terms of the credit quality, and if you go-- I don't want to get into the technical aspects of, you know, thirty-day, sixty-day, ninety-day, et cetera, but [00:30:40] things are getting better.
And you see this, this number of period, as I said, as I said, that financial year two thousand twenty-five portfolio four point two six-- [00:30:50] four lakh twenty-six thousand six and nine-- six hundred and nineteen crore. December came down to three lakh twenty-one thousand fe-- five hundred and seventy crore. Uh, and then [00:31:00] subsequently, I said in Feb-February it has gone up little more.
But during this period, the active loan accounts dropped thirty-one percent. So [00:31:10] the, the volume of loan dropped twenty-five percent, and the loan-- number of loan accounts dropped thirty-one percent from one fifty-six [00:31:20] million to hundred and seven point four million. That's the thing. And the number of borrowers, this is I'm talking about loan accounts, and I'm talking about the [00:31:30] number of borrowers, including the defend- defaulters, fell from 87 million to 69
Kashish: million.
Tamal: So massive erosion in, [00:31:40] in the, in the overall loan volume, the number of accounts and number of borrowers. That's the price the industry paid. And as a [00:31:50] result of that, you are not asking me, but I'm giving you if it had not been in on, on your question, is this the, the main source of money, the [00:32:00] banking sector, that they have closed the tap So there is no more bank money for them.
For most of them. For most of them, I'm [00:32:10] talking about the, uh, not n- the, the big, uh, few entities you leave that out, but otherwise for most of them, the bank money is no more there. And, uh, [00:32:20] well, I see that at the, the smaller level there are, there are quite a few which have not been able to continue with their
Kashish: operations.
So sir, help me [00:32:30] understand the number going so high, like almost four X between 20- 20 to 23/24 and then also falling. All of this, I guess, was a function of supply elasticity, [00:32:40] right? Because I'm assuming the demand for such loans was always there. Uh, if not for the formal channels, uh, money lenders[00:32:50]
Tamal: You look at their balance sheets, you'll find that. Um, [00:33:00] I'm not s- I'm not getting into good, bad, ugly kind of stuff. I'm just saying the plain facts across, uh, across scale, big, [00:33:10] medium, and small. You look at them, how their balance sheet has shrunk. Because, you know, this is basically if you are not able to continue the cycle of [00:33:20] giving loans, then your balance sheet will shrink.
And how do you, how do you do that? If the, if they're the loan tap the banks have closed, and most banks [00:33:30] have closed their tap.
Kashish: So, uh, the number you mentioned about how the, uh, number of active accounts has gone down 31%, right? What does this mean? Does this mean that now those people are [00:33:40] no more borrowing?
Uh, do, do they mean that now they've shifted to informal channels? Uh, are they starving for money? What happened to those set of people?
Tamal: Depends on, you know, uh, you was, [00:33:50] you were talking about the underwriting, and now underwriting is very different from unsecured, for unsecured loan because the unsecured loan is a cash flow-based lending.
You know, cash [00:34:00] flow-based lending, unless it's not a balance sheet-based lending at all. Now, their cash flow has been impacted. Their cash flow, all these borrowers and all, their cash flow has been impacted. So when your [00:34:10] cash flow is intact- impacted, so essentially if those are in the smaller businesses and they are closing down their business, they have not been able to do anything, and multiple things are happening.
[00:34:20] Yes, money lenders are also stepping in and the loan, uh, apps, et cetera, happening and all. And m- most importantly, you see it was [00:34:30] over-leveraging, so people are taking more money than probably they require also because the... As you said, it was a supply side problem. It was [00:34:40] not a demand side
Kashish: problem. Fair enough.
Sir, one last question that I have for you before I let you go is, uh, I as an investor tried to play the microfinance credit cycle [00:34:50] over the past couple of years, and also got the opportunity to learn the cycle Uh, what I wanted to ask you is, let's not take any company names. Let's say it's [00:35:00] any, any lending entity, be it a smart finance bank, an MFI entity, or even a bank lending money to a microfinance segment.
What do I look at to understand, is [00:35:10] the bank doing or is the lending entity doing good at lending those money to the right set of people? I know for a fact NPAs is something to look at, but by that time it's too late. Those loans have [00:35:20] already been disbursed. They've already turned bad. I ideally want to stay away from those lending entities or at least make sure that I hedge my bets as an investor.
So if I'm an investor [00:35:30] understanding the business, what should I look for to avoid such things, or it's unavoidable?
Tamal: You yourself said it's underwriting. What's the underwriting capability? Now, if you look back to the [00:35:40] banking industry on a larger scale, uh, when Raghuram Rajan took over, he found that the banks were, um, you know, uh, they were hiding a lot of [00:35:50] things.
They were hiding a lot of things. They are, they are not in the best of health. Their NPAs was increasing and all, and there were multiple ways of, uh, camouflaging things and all. [00:36:00] And Raghuram Rajan also find that, you know, um, in the basic economics is that whenever people do business, there is one part is debt and one part is equity.
You bring your equity on [00:36:10] the table, then you look for the debt. And then debt equity has a ratio depending on the particular, uh, business. But he found that there, there were entities and all, both [00:36:20] the debt and the equity they are sourcing from banking system, right? So then he did what AQR, Asset Quality Review, and which essentially [00:36:30] said that, "Look, we don't trust your auditors.
My auditors will go and get into your kitchen and your drawing room and, and bedroom and find out that." And what I said, um, with, uh, of course, [00:36:40] lightly and all. So bankers were doing, um, actually, uh- You know, belly dancing or something like that. And Raghuram Rajan [00:36:50] forced them to do striptease. So essentially, they were stark naked.
So... And then they found that at least two banks, one in private sector and one in public sector, [00:37:00] found that 33%, uh, 30% plus NPA. And then the recovery path came, and as we speak, banking system, you see the health [00:37:10] less than 1%, uh, net NPA. And everybody's bullish on banks and all because they change their underwriting.
They are now more focused on their, their [00:37:20] risk management and underwriting is now far, far better than what it was, uh, till, say, 2017. And this is across all banks. Earlier, there [00:37:30] was herd mentality. A large bank is giving money, so small banks are also queuing up and giving the same money, even though their risk-taking ability is very different.
So what has now [00:37:40] changed between then and now? Their risk management and underwriting. So the same thing when it comes to unsecured loan. Its difference is this, it's not balance sheet based, it's [00:37:50] a cash-based thing. So you need to understand, uh, the risk management do. You need to do risk management well and underwriting well.
That's the thing. And [00:38:00] of, of course, uh, more importantly, you need to see that they are not over-leveraged. So the pr- the problem happened is, not historically, in the recent [00:38:10] past, you would find the same guys are getting many loans, even though they don't need. It was they're forced down their throat by the other side.
It's [00:38:20] a completely supply-side problem. It was sort of harakiri or whatever you call it, suicidal, because they thought that good time will last, and that's, that's how it [00:38:30] happened. So from the investor's point of view, you need to see, even in the banks, there are, um, again, not, not name, they're into... some of the banks are into unsecured loan, but [00:38:40] their m- their, their, uh, uh, NPAs are pretty low.
Not, not much there. Because the, the advantage of unsecured loan is this, your NIM is very high. Your spread is very high. [00:38:50] There's a cost to it. Yeah, credit cost to it. You can give some cost. I, I don't want to take some number and all. It cannot be less than 1%. Probably it'll [00:39:00] be little more, definitely. But as long as your NIM and your spread justifies that, you can make more money about that.
And other way is doing, there's no steering, [00:39:10] and you keep your spread down and keep your credit score, uh, close to zero. You know, so but in the unsecured space, you earn [00:39:20] more, definitely. But to, uh, to manage it, you need to understand the risk management under-- and underwriting, and you need to say no [00:39:30] to, uh, over-leveraging.
And I repeat, this is a completely supply side problem. You can't blame the borrowers. You give [00:39:40] the borrowers more money, push down their throat, which they are not able to pay back. You did not think that it would come, but that's what has happened. And [00:39:50] you regret this. Now you are... Because your balance sheet's shrinking, you are not getting money from the
Kashish: banks.
Uh, Tamil Sir, that's all the [00:40:00] questions I had. If there's anything, uh, you think I missed talking about the industry, the floor is yours. If not, maybe we can just wrap this up.
Tamal: Maybe, uh, maybe we can talk about what's the [00:40:10] new model they look for. Uh, I, I think this, this model, apart from underwriting and, you know, it's, it's a part of the same thing, uh, better [00:40:20] underwriting, better risk management and not over-leveraging at all.
But need to see that how to avoid that. One of the things I understand that many of the, uh, MFI [00:40:30] NBFCs are doing is this, they're turning into BC, that is banking correspondents. Meaning the books are... It's not they're not running their own books. On behalf of banks, [00:40:40] because they have access to borrowers, they're giving them money.
They have their collection efficiency if the lo-- if the right persons are giving, uh, being given loan. And they [00:40:50] can, uh, they can enjoy the commission. My understanding is this, uh, a few, uh, I'm not going to name, but a few, uh, smaller [00:41:00] MFIs are closing shops. They cannot survive. Um, many, many of the smaller, medium-sized MFIs are, are turning into [00:41:10] BCs, business correspondents.
Larger MFIs, yes, they can manage till now. But it's a high time, I think, they need to relook at their business model. [00:41:20] They need to reinvent themselves. It can't go on.
Kashish: I think, uh, I couldn't have asked for a better session on MFI from none other than you yourself, [00:41:30] who's observed the markets for past couple of decades, much longer than I was-- much before I was born.
So thank you so much, Tamil Sir, uh, for your time. You were very generous with your time and [00:41:40] very patient with my questions. Thank you so much.