"ILFCO Microfinance plans to open 5-6 branches within this fiscal year"

ILFCO Microfinance floated 400,000 unit shares as part of its initial public offering on Chait 17, 2071, nearly three years after it came into operation.

ILFCO Microfinance Bittiya Sanstha Limited was established as a subsidiary of ILFCO (International Leasing and Finance Company Limited) in 2067 BS and started business from the year 2069. The company’s head office is located in Chuchchepati, Chabahil, Kathmandu, and has recently opened two branches—one at Sanga and the other at Melchour. The company is also doing its homework to set up five new branches within this fiscal year.     

In an interview with ShareSansar.com, Mr Sudip Dhungel, manager of ILFCO Microfinance, shared how the company plans to shape its business in the years ahead.   

Tell us about ILFCO Microfinance Bittiya Sanstha Limited?

ILFCO was established as subsidiary company of International Leasing and Finance Company (ILFC). ILFC, which is the institutional promoter of ILFCO, owns 51% stake in the company.

Individual promoters, mostly former and current employees of ILFC and ILFCO, hold 9% stake in the company. There are around a dozen individual promoters, including ILFCO’s ex-CEO Achuyut Raj Sapkota and ILFC’s current CEO Anil Dhungel, who own major stakes among the individual promoters.

We have decided to float the remaining 40% shares in our first public offering.

Until now we have mainly targeted customers inside the valley. There are many areas within the valley which haven’t seen much progress such as Jhor Mahankal, inner areas of Kapan, Jorpati, Sitapaila, among others.

We are trying to diversify our products and services focusing on the customers of those areas. Although we are national level micro financing, we have not made many customers. As a microfinance company we cannot just limit our services to Kathmandu. Customers with desirable profile for a microfinance company are not found in Kathmandu. We are expected to serve rural clients but at present we have been able to focus only on far-flung areas within the Kathmandu Valley.

But we are expanding our network gradually. Last year, we got approval from Nepal Rastra Bank to establish two branches—one in Sanga and another in Melchour.  

Did you have any specific plans when you decided to go public with the company’s shares?

We decided to sell the shares to public in view of the regulatory requirement. NRB guidelines state that after 3 years of coming into operation, a finance company must float its shares among public. We are not short of funds. As a company serving deprived sector, a D-class microfinance gets loans easily from banks. Rather than fund raising, it is more like compliance in our case.

We have done feasibility studies to open new branches in 4-5 places. We will soon file application with the NRB seeking permission to open the branches within this fiscal year. For that we need money. For now, we will curtail borrowing and plus if we open branches, about Rs 4 crore will be used in establishing 4-5 branches.

What are your priority areas?

We serve customers who fall under deprived sector and whose business is located in backward areas. We look for pocket areas and specific businesses such as animal husbandry in Sanga, agriculture in Melchor, and diversified group of clients in Kathmandu such as retail shops, flower sellers, among others.

Agriculture will be the major area of investment for us. We opened the two new branches in Sanga and Melchour with particular focus on animal husbandry and agriculture.

At present we plan to have branches only in the areas we can commute back and forth within 1 day. Remote and hilly areas do not hold potential for financial sector. Not much financial transactions happen in the hilly reason. As people of the hills are not known to take loans, BFIs focus more on Tarai region.

In remote and hilly areas people are more into agriculture than into trading or other forms of businesses. In Tarai, for example, a fruit seller can save Rs 1200-Rs 1500 per day. But in remote hilly areas, transactions take place on seasonal basis. Farmers take loans to buy seeds at the beginning of monsoon but even such transactions are not regular.

In remote areas people become members but don’t take loans that’s why we haven’t gone to remote areas of both Tarai and hills. After all we have to sustain ourselves through business and provide services till the long run.

But aren’t microfinance companies supposed to serve remote and inaccessible areas?

That is true but the difficulty in our case is that we don’t provide loans on the basis of collateral but to groups. So to sustain ourselves we have to see whether groups we provide loans with can generate income to pay back the debts. Just distributing loans won’t do. For example, there are people in Humla and Mugu who need credit, production is also good, but they can’t sell their products. After we have invested, it is natural for us to expect that customers would be able to generate income to pay back the loans.

Comparatively, we are newly established company. Still, we are working to help our clients grow their business by finding them suitable markets and buyers. We have found that providing loans is not enough because unless people can sell their products they will not be able to generate income. So we are thinking about helping our clients establish tie-ups with buyers and traders so that they can earn money.

Should it be done at the initiation of the regulatory or by the microfinance themselves?

The microfinance companies must take the initiative themselves. Regulatory body has already provided enough privileges for the microfinance sectors. While it is not difficult to get laons under the deprived sector category, even the interest rates for us are quite low. But in our case, it is even easier because we have good promoters backing us up.

We are able to sustain ourselves and earn certain profits we have to give it back to the society. Promoting the business of our clients will have to be seen as our social responsibility. However, if the regulatory body comes up with certain rules requiring microfinance companies to put aside certain percent of their net profit for the purpose, it should be taken as a welcome step.

Where will this company reach after 5 years?

Compared to other microfinance companies we have fewer branches. We are not in a rush to expand our branches. What we are focusing on right now is to develop our manpower. We are providing training and grooming the staff who are not from the microfinance background. We have opened only 2 branches in 3 years. But we cannot expand without opening new branches. So we have been exploring pocket areas where we will have the potential for business in the years ahead. We are planning to open 5-6 branches within this fiscal year. We might have 20 to 25 branches in 5 years with at least 10-15 of them providing reasonable returns. We will expand our business through these branches focusing mostly on social works. Also, we will tie up with NGOs and INGOs to provide trainings like making incense sticks, candles, farming, among others.

Do you think there are already too many microfinance companies? Should the regulatory body step in to ward off possible risks in the sector?

Microfinance companies are mushrooming but the problem is that they are concentrated only in few areas and focus only on few business segments. Another problem is that even big financial NGOs and INGOs are allowed to operate as microfinance companies. Either the NRB should prevent that or stop issuing licenses for new microfinance companies. There are already 35 to 40 microfinance companies, which is more than is required. All companies want to base themselves in cities as they are more accessible. Nobody wants to go to the rural areas. This trend has to be discouraged.

So you think regulatory intervention is required in this case?

Yes. There are too many microfinance companies and soon there will be a situation where some companies will not be able to afford even operating costs. ILFCO is our parent company and when we requested the company to let us open branches in the same building as theirs in Narayanghat, Butwal and Dang, they refused saying there were already too many microfinance companies in those areas. In case of finance companies, too many licenses were issued and later they were told to merge, similar scenario might occur in the microfinance sector.

What are other problems in the microfinance sector?

The main problem is of manpower. Manpower is limited in microfinance.  This is a new field and even people with 10 years of experience in banks will not able to know about microfinance. It will take time just to develop manpower for this sector. In many cases clever customers just manipulate the agents and staff of microfinance companies to get loans. Since we provide collateral-free loans, our staff has to be more careful. The sector will see mounting bad loans if it is not able to hire good manpower. That is also the reason why we are not hurrying to expand our branches.