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Village Financial Services: Market-based impact lending for the underserved, unbanked

Considering the constraints of the banking sector in serving the poor, a funding platform setup in 1980s is helping rural entrepreneurs in building successful, sustainable business.

, ET Online|
Updated: Apr 23, 2019, 11.31 AM IST
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While outlining his organisation's roadmap ahead, Kuldip Maity adds that VFS is aiming to reach as many underbanked people as possible by expanding its footprints.
The famous scene from the epic Hindi movie Mother India (1957) accurately mirrored the times of the then newly-independent India. A village girl, Radha (played by Nargis), burdened with acute poverty, was left with no option but to pledge her family's fertile land to the ever- greedy village moneylender - all for a paltry loan of Rs 500.

Over 60 years since that movie was made, what has not changed is the fact that access to finance remains largely challenging for borrowers, making the entire notion of 'inclusive finance' a privilege largely limited to only a few. However, there are now firms and individuals slowly chipping away at the existing financial framework to make a difference. Efforts of individuals like Kuldip Maity who heads the Village Financial Services Ltd (VFS), a Kolkata-based microfinance institution, is proving to be transformative for many on the fringes of society.

Origins
With footprints across 11 states, VFI today boasts of a customer base of 4.71 lakhs. As of Q3 of FY 2018-19, VFS is said to have recorded a disbursal of over Rs 900 crores. So, what prompted its founders to venture into this niche domain?

Maity says a firm resolve to address the biggest Achilles heel in today's micro finance lending space, which is unavailability of adequate, timely and suitably priced credit facility, has been the key motivator that kept them going all along.

Driven by this spirit, giving away loans to deserving individuals on very generous terms has thus been VFS' sole objective ever since its inception some forty-odd years ago, tells Maity. "In 1982, aimed at mitigating gaps in rural health and education, VFS started off as an NGO, knowns then as Village Welfare Society. In 1994, Indian Government initiated micro-credit projects to empower the poor. We were among the 10 chosen NGOs to partner the programme in India. In 2004, to facilitate the changing nature of activities, we became a non-profit called, Village Micro Credit Services. This eventually led to the formation of the current entity in 2006- the first RBI registered NBFC-MFI in Eastern India," chronicles Maity.

Shining star
Today, numerous Indian states are dotted with VFS' success stories. Kalo Begum, a resident of Shankarhati village, in West Bengal is one such example, whose story contains numerous takeaways for budding entrepreneurs. Thanks to the timely funding made possible by VFS, Begum who, since her childhood, dreamt of doing something of her own, now successfully runs a tour & travel business.

Associated with VFS since 2009, she has so far taken several cycles of loans from the lender, with a proven track record of repayment. Elucidating the game-changing influence of VFS' helping hand, she tells that in a male-dominated tour & travel sector, she not only created her own identity in a rural belt of Munsirhat region (about 38km away from Kolkata), but has even helped her sons stand on their feet, help them buy three cars and extend their businesses.

According to Maity, his NBFC-MFI's unique differentiators lies in the fact that it puts maximum focus on handholding the customer towards the wider goal of financial inclusion thereby ensuring long term sustainability of the business. "We not merely offer loans. We help borrowers to shape and review business plans, understand the basics of financial accounting through our Customer Awareness Training (CAT) programme, encourage them to join the wider banking system and help them resort to digital transactions and take advantage of various government schemes for the poor."

Currently, VFS operates under Joint Liability Group (JLG) based lending model, through which borrowers can avail loans of up to Rs 30,000 and Rs 60,000 for a period of one or two years respectively. Besides, to meet the rising aspirations of its old MFI customers, the company has rolled out SME loans on a pilot basis in March 2018.

Indian-microfinance
(Image Source: Microfinance Institutions Network)

Undeterred by policy glitches

Terming Microcredit as one of the most effective ways of financial inclusion and alleviation of poverty, Maity believes that since India's population is on a growth path, the scope of MFI Industry appears brighter. "There is a vast untapped market. Moreover, some MFIs converted into banks or Small Finance Banks (SFBs) which created space for both existing and new NBFC-MFIs to expand services. Considering the constraints of the banking sector in serving the poor, we expect huge scope for the MFI sector to grow in the years to come," feels Maity.

Betting high on the MF segment's growth despite apprehension raised recently by the RBI on the spike in NPAs in Pradhan Mantri Mudra Yojana (govt's flagship scheme to support microenterprises), VFS' CEO mentions that Mudra loans granted through MFIs reported 100% repayment.

"For the record, VFS reports the lowest PAR (portfolio at risk) of 0.58% in the MFI industry. Notable, we limited defaults without restricting credit flow. On the contrary, we always took a lead role in enhancing borrowing limits for the poor etc," he states.

Stating that the role of MFIs is crucial in this attempt as they open viable options for access to finance to the rural enterprises, he is of the view that it is due to MFI's penetration in rural markets that rural-based enterprises normally stay clear of the liquidity crisis.

Talking on hiccups ahead, he highlights the cost of finance as a troubling eyesore. To him, the process of offering Microcredit is a, "Specialised and costly exercise, whose cost can only be reduced provided MFIs have access to low-cost funds." Therefore, he hopes that the government will consider setting up a dedicated fund for lending to MFIs in the days to come.

While outlining his organisation's roadmap ahead, he adds that VFS is aiming to reach as many underbanked people as possible by expanding its footprints." We have a vision of enhancing coverage to 20 states by 2020. We have plans to expand our branch network by 25%, from the existing 240 to 300 in FY20," he adds.

Last year, VFS raised Rs 40 crore in the last FY from Capital First and Param Capital. Bullish on the growth outlook and to enhance its lending ability, it's now looking at another round of fundraising of Rs 50-70 crore and is hopeful of completing it soon. "The fresh round of capital infusion will help us to lend more", he says, exuding confidence. He is, however, quick to say that, "To us, the spree of loan waivers being granted this poll season is a concern as it might impact the loan culture in rural India."
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