Billionaire Daughter Leads Birla Into Microloans

Ananyashree Birla, the teenage daughter of Indian billionaire Kumar Mangalam Birla, is lending to the poor. Her experience may help her father’s quest for a banking permit.

The 18 year-old Birla scion’s Svatantra Microfin Pvt. is offering credit to women in villages in Maharashtra state to buy sewing machines and start businesses to make papadums, she said in an interview. The company, which charges 20 percent interest on the loans, plans to expand into neighboring Gujarat soon, said Birla, who enters undergraduate college this year.

The venture will help the $40 billion Aditya Birla Group, which controls the world’s biggest supplier of aluminum to carmakers and runs India’s largest cement maker, acquire know-how of lending in rural India, according to Shinjini Kumar, director at PricewaterhouseCoopers. India’s central bank, which is poised to permit companies to set up banks for the first time in a decade, has ordered new lenders to open a quarter of their branches in villages, while providing 40 percent of their loans to farmers and small companies.

“It creates customer touch points,” said Kumar at PricewaterhouseCoopers, which is advising companies in ways to set up banks. “A conglomerate seeking a banking permit can leverage its microfinance venture in achieving the priority sector lending targets and setting up distribution channels.”

The Reserve Bank of India in February sought applications from companies keen to set up banks in the world’s second-most populous nation seeking to boost credit growth in rural areas. Firms will have to apply for the permits by July 1.

Bank Branches

New lenders will have to set up one-in-four of their branches in villages with less than 10,000 people in a nation where the World Bank estimates only 35 percent of the adult population has accounts with lenders and other financial institutions, compared with the global average of 50 percent.

Aditya Birla Nuvo Ltd., which runs the group’s financial unit, doesn’t have a microfinance business, said Ajay Srinivasan, chief executive of the division. The company provides services to 1 million people in rural India through its insurance unit, he said.

Srinivasan didn’t elaborate if the microlending business will help the group with its banking plans. Firms applying for the banking permits will have to undergo a fit and proper test to win licenses, which will be given to companies with “sound credentials and integrity,” according to the central bank.

Aditya Birla Nuvo, which also runs fertilizer plants and makes garments, closed 3.8 percent lower at 1,043.15 rupees in Mumbai today. The shares have advanced 34 percent in the past 12 months.

Double Employees

Svatantra, which means independent in Hindi, received a license for the microfinance business, made popular by Nobel laureate Muhammad Yunus, from the Reserve Bank in February. The company has been giving credit of as much as 10,000 rupees ($168) to men and women, Birla said.

“We’ll enter one more state by the end of this calendar year end, probably Gujarat,” she said in her office in Mumbai. West Bengal too is on the radar and “of course, we have our vision of going nationwide,” said Birla without giving a timeline.

Svatantra plans to more than double the number of employees to 40 by August from 16 and to 80 by June 2014, Birla said. The company, which has lent 4 million rupees to 400 customers so far, may break even by August 2014, she said.

The primary focus right now is on adding people and “controlling bad debts,” said Birla, whose father’s wealth is valued at $8.3 billion, according to Bloomberg Billionaires Index. She declined to disclose the group’s investment in her business.

Farmer Suicide

More than 70 people committed suicide in Andhra Pradesh state between March 1, 2010, and Nov. 30, 2010, to escape coercive tactics used by microlenders in the state, according to data provided by the government-run Society for Elimination of Rural Poverty.

That prompted India to draft a new law allowing the central bank to cap interest rates, profit margins and fees levied by microfinance companies and also stipulate rules for debt collection. The central bank also created a new category to monitor and issue permits for such financiers.

Svatantra charges the “lowest” interest rate in the country, Birla said. The company will hire a chief operating officer soon to allow the younger Birla complete her undergraduate studies. Microfinance companies charge between 24 percent to 26 percent, according to Alok Prasad, chief executive officer of industry body Micro Finance Institutions Network.

Microfinance Model

Microfinanciers work on a group lending model where members take unsecured loans to fund a business or other income generating activity and stand guarantee for one another in their group ensuring credit discipline and prompt repayments through peer pressure.

“New banks can resort to buying of securitized portfolios from microfinance companies,” said Nitin Kumar, an analyst at Quant Broking Ltd. in Mumbai. “There’s been a surge in the sales by micro finance companies in recent quarters.”

The Reserve Bank is likely to give approval for the banking licenses by March 2014, said Kumar. Firms will have 18 months to start their banking business once they get the central bank’s approval, according to the central bank.

That gives Kumar Mangalam Birla time to test procedures and ensure his company has systems in place, Quant Broking’s Kumar said.

Micro finance companies in India had more than 24 million borrowers as of March 31 with an average loan per person of less than 15,000 rupees, according to data compiled by Micro Finance Institutions Network.

Birla’s Acquisitions

The gross loan portfolio for the year ended March increased 23 percent to 212.45 billion rupees from 172.64 billion rupees bouncing back after it shrank by 14 percent from the year before. The industry employed more than 60,000 people across India as of March, said the industry body on its website.

Indian companies including Mahindra & Mahindra Financial Services Ltd., a unit of India’s biggest maker of SUVs, and billionaire brothers Malvinder and Shivinder Singh are also planning to seek banking permits.

Billionaire Birla, who took over as chairman in 1995 when he was 28, has spent more than $12 billion in acquisitions, according to data compiled by Bloomberg. He’s seeking to boost group revenue by 63 percent to $65 billion by 2015.

His companies had a combined turnover of $2 billion when he was chosen to head the group after the death of his father Aditya Vikram Birla.

“I can relate to other entrepreneurs who want to start or expand their businesses,” the younger Birla said. “I’m an entrepreneur myself.”

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