MICROCAPITAL STORY: India Arman Financial Moves into Microfinance; Microfinance Portfolio Will Be Core Business

Arman Financial Services Ltd, a “Non-Banking Financial Corporation” under Indian law, is planning to enter into the microfinance market for female entrepreneurs, according to a news report from the Hindu Business Line. The company’s Vice-Chairman and Managing Director Mr. Jayendra Patel noted that the decision was made partly due to the low default rate in microlending. He further commented that, “the Reserve Bank of India says that there is a 99.5 percent recovery ratio in microfinancing and our experience says that low income groups of people [seeking assistance jointly] are more bankable.”

The news report also describes the proposed microfinancing scheme. The operational form is based on the Grameen Bank model conceptualized by Bangladeshi Nobel Laureate Muhammad Yunus. At the early stage, loan sizes would average between 5,000 Rupees and 10,000 Rupees, equivalent to between 101.8 USD and 203.6 USD, for each woman in a group of five. Borrowers take loans for a variety of income generating activities, and loans would be payable in a 50-week period at an interest rate of 15 percent per annum. Based on the demonstrated credibility of the group, bigger loan sizes would be extended later on.

Arman currently has concentrated operations in the municipal limits of the twin cities Ahmedabad and Gandhinagar in the state of Gujarat. In March 2008, the bank reported a total portfolio outstanding of 195.7 million Rupees, or 4 million USD; a debt to equity ratio of 1.73; return on assets of 4.1%; and return on equity of 11.2%. The organization also plans to expand its presence in smaller towns in North Gujarat, namely Mehsana and Sabarkantha, and is in the process of setting up a microfinance team for its operations as well as developing appropriate financial products (according to the company’s business plan). Mr. Patel also pointed out that while microfinancing is popular in parts of Southern India, in states such as Punjab, Gujarat, Rajasthan, and Maharashtra, it has just begun to pick up pace. Presently, at the national level microfinance institutions have approximately 11 million customers and a cumulative outstanding portfolio of 80 billion Rupees, or 1.6 billion USD, as of March 31, 2008. However, the supply of microfinance in India is still miniscule compared to demand. Consequently, the company intends to set up 40 branches in Gujarat, and to build receivables including interest of 2.5 billion Rupees from 190,000 customers by 2012, equivalent to 51 million USD.

Specifically, according to the company’s website, the proposed microfinance services may include:

1). Agricultural development, irrigation, watershed development, crop cultivation, plantations, horticulture, forestry, animal husbandry and allied activities, such as dairy, poultry, fisheries, aquaculture and floriculture.

2). Enterprise development which may include agro-processing, handicrafts, construction, trade and distribution, transport, and services of all kinds.

3). Market development including facilities for storage, trading, and transport for inputs and outputs.

4). Housing development which includes purchases, construction upgrades, extension and modification of buildings and infrastructure for residential, agricultural, commercial or industrial purposes, but exclusively targeted to poor men and women and the enhancement of livelihoods in India.

Arman Financial Services Limited was originally incorporated in November, 1992 under the name Arman Lease & Finance Ltd. In December, 1993, it converted itself into a Public Limited Company under Indian law and in August 1995 it held an initial public offering of 28 million Rupees, or 570,000 USD. The company is listed on the Mumbai Stock Exchange, and has a category ‘A’ certification (eligible to avail deposits from the public) from the Reserve Bank of India. The main business of the company consists of providing a wide spectrum of basic financial services, such as term loans, collateral free credit, other forms of credit, savings accounts, and insurance. Arman also has rich experience in India’s ever popular two and three wheeled vehicle market.

By Yanni Hao, Research Assistant

Additional Resources:

Arman Financial Services Ltd: “Home” “Core Business & Operations” “Microfinance Business Plan”

Hindu Business Line: “Home” “Arman Financial Ventures into Micro Financing”

Reserve Bank of India: “Home”

Mumbai Stock Exchange: “Home“