By tending to the needs of the underserved, Equitas Holdings, aims to become a top-tier financial services company for the underbanked and wants to become a respected institution by being fair and transparent
After spending over 20 years in Cholamandalam Investment and Finance and year-and-a-half at Development Credit Bank what destiny had in store for P N Vasudevan was entrepreneurship. Some personal and professional events which led him out of his professional stint can in fact be considered a blessing, as he is currently running a Rs. 480 crore company, Equitas Holdings (Equitas), with interests in microfinance, vehicle financing and affordable housing among others. Looking back, the company has come a long way since its inception in 2007. It has grown to be a Rs. 483.52 crore company in revenue in FY14, up from Rs. 283.17 crore, in the corresponding previous year. It is adding more than 200 employees on a monthly basis and the employee count currently stands at 6,200 people up from 4,500 in FY14. However, numbers are just numbers, for this professional turned entrepreneur, as he is keen on highlighting the bigger picture. “My goal is to create an extremely reputed institution which is fair and transparent and has no owners,” states Vasudevan.
When the Malegam Committee came out with its 12-point recommendation to regulate the microfinance sector, all the points were an exact reflection of what we have been doing since 2007. All our lending practices, norms that we have been practicing from day one, became a full framework a few years later.
Equitas is currently a professional organisation supervised by a strong independent board. Vasudevan set up the company with initial capital from friends. “I was able to mobilise about Rs. 10 crore from them which was the highest start up capital for a microfinance company in India,” he says. While the initial investors have sold out, around 75.10 per cent of the company is currently held by foreign institutional investors and private equity funds and financial institution IFC holds around 14.10 per cent.
The company has a governance level 2 rating from CRISIL and also has been ranked amongst the best companies to work for by Great Places to Work Institute, a global research, consulting and training firm. This year Equitas also received an award for fairness in performance management system. This story traces Vasudevan’s journey as an entrepreneur, the various growth stages and his future plans.
Tracing back in time
“What I was looking for was employment in the microfinance sector and not to start my own company,” recalls Vasudevan. He approached Unitus, Bengaluru-based consultant and a global NGO specialising in the microfinance sector, to understand his options. However, they urged him to start his own microfinance organisation and helped him to conceptualise and set up his own company. They also connected him with right people in the industry for him to conduct a study before he set up the company. What he found was that from the clients’ perspective, they needed such a product very badly and were also thankful for microfinance institutions (MFIs) for providing such long-term loans at lower rates, lower than what they would have otherwise borrowed at. “This apart, the MFI staff gave them a lot of respect. They are not used to lenders giving them respect,” he says.
Vasudevan states that meeting with the MFIs was an eye opener. “They seemed to be chasing growth when the PE funds entered the market in 2005. There was drive amongst them to scale up operations which will give them better valuations,” observed he. The lending rate became 45 per cent to 50 per cent, which may still be lower than what the clients could have borrowed from other sources. “But, that still does not justify MFIs lending at that rate,” he opines.
He also understood that there were no controls or processes in place, which was risky as MFIs manage a lot of cash, leading to potential frauds. There was also no focus on technology to improve efficiency and reduce cost.
Improper communication was another drawback that Vasudevan observed. For instance, while the real lending rate to the customer was around 40 per cent to 45 per cent, it was projected to the customer as 13 per cent to 14 per cent on a flat rate basis. “Effectively, the customer thinks he/she is getting a low rate, but in reality it was much higher and hence, there was no transparency in communication,” says Vasudevan. All these factors made him decide that he wanted to create a fair, efficient and transparent company and that is how Equitas Microfinance came into being in 2007.
Arriving at the fair pricing policy
“We wanted the company’s name to define our core philosophy,” says Vasudevan. And, hence named it Equitas, which means equitable in Latin. “True to our philosophy we set a lot of benchmarks in the market,” says a proud Vasudevan. When the market-lending rate was 40 per cent and above, the company’s lending rate was 25.5 per cent on a reducing balance interest rate to the customer. The company projected a growth for the first five years at 40 per cent to 50 per cent, a steady growth after that and a likely operating cost it would incur. It took that cost into its pricing assumption and this resulted in a 25.50 per cent lending rate. “This means that we will incur losses in the company till we grow to that level of efficiency. Only then will we start making profits,” states Vasudevan.
Interestingly, four years after the company was incorporated, RBI came out with a regulation for MFIs and capped the lending rate for MFIs at 26 percent. “So what we started lending at became the regulatory benchmark. When the RBI fixed the lending rate cap, all other MFIs had to reduce their operating cost to stay sustainable. We did nothing at all. Our efficiency was built into the company from day one,” adds Vasudevan. The company also deployed technology from the very beginning and set the right processes and systems in place. It currently has about two million clients in the microfinance space and operates 350 branches across six states.
Deciding to be diverse
Post the Andhra Pradesh ordinance crisis in the microfinance sector the company decided to diversify into other operational areas to ensure stability in the long term. It entered commercial vehicle financing and affordable housing finance sectors by creating two more companies in 2011. In 2013, Equitas introduced another product called micro SME, which offers loans in the size of Rs. 50,000 to Rs. 5 lakh for the top-end microfinance customers. “In the micro finance sector, we are dealing with people who are forced entrepreneurs as they not able to get a livelihood anywhere else. Their ability to scale up is very limited and hence, they cannot absorb a larger loan size. But 10 per cent to 15 per cent of these customers are real entrepreneurs with an urge to grow but do not have access to formal financing,” explains Vasudevan.
Currently, MFI contributes almost 55 per cent of the company’s revenue mix while the remaining comes from the rest of the businesses.
Sizing things up
Staying with its philosophy, any product that the company introduces will always have to comply with a requirement that it should be a large market, large demand and a significant part of it should be unserviced. For instance, the microfinance sector is growing around 40 per cent to 45 per cent annually. The size of the industry will be Rs. 30,000 crore comprising about 30 million clients.
As far the vehicle finance sector goes, other than very few very strong players in the used commercial vehicle finance industry, the key competition for the company is from the un-organised and private financiers segment. The total market size of this segment is estimated at Rs.1,80,000 crore and the share of un-organised segment is around 70 per cent.
As for the housing finance business, the company’s challenge is not competition but about its own ability to develop that market in a sustainable manner. Despite the inherent challenges in each of the businesses it operates in, the fact remains, that there is an unserviced segment of around 60 to 70 per cent in this market. While the market potential is evident, Vasudevan has a clear goal of establishing Equitas as the best financial services company for the under-banked and believes that as long as there is focus on creating a respected institution by being fair and transparent, the numbers will follow suit.
EQUITAS’ SOCIAL INITIATIVES
Equitas trust was registered within two months from the time it started operations and had clear policies on how the activities will be funded. The company contributes 5 per cent of its profits to the trust on a quarterly basis to carry out its initiatives. Besides that, every branch is given a budget of Rs. 2,000 per month per branch to spend on medical services for the low-income sections. Also, 15 per cent of the group’s net worth is reserved for creating infrastructure to run schools. The company had put it all down on day one into its chapter, as it is dependent on outside investors. “We need to be clear as to what we stand for and once we give that clarity to the incoming investor he/she can choose to come on board or not,” says Vasudevan.
The company has a tie up with 850 hospitals across six states. It conducts medical camps every month, which benefits close to 70,000 people. Cumulatively, in the last six years that it has been operating, about 22 lakh people have benefitted from this camp. Almost 60,000 spectacles have been provided free of cost and in a year, more than about 15,000 to 20,000 cataract operations have been done free. Additionally, in every camp, about a month’s worth of medicines are provided free if the person has been diagnosed with any illness.
The company also facilitates a skill development training programme, spanning 15 hours, where it trains people on small scale cottage activities like making agarbathis, soaps, paper bags and more. The company has trained about 5,000 people per month and in total has trained about 3.5 lakh people so far. The company does job placements with potential employers. It runs around six schools across Tamil Nadu under the banner ‘Equitas Gurukul’ in Salem, Coimbatore, Dindikul, Trichy, Karur and Sivakasi.affordable housing Cholamandalam Investment and Finance Equitas Holdings Microfinance