IFMR: from Rural India to the Bombay Stock Exchange

A conversation with IFMR Capital’s CEO Kshama Fernandes

Accion and IFMR share a common vision: an abiding belief that everyone should have access to the financial services they need to protect their families, send their children to school and build better lives. One of the IFMR Holdings companies, IFMR Capital, works to channel funds from a wide range of investors to over 80 different financial inclusion intermediaries across multiple asset classes (microfinance, small business loans finance, affordable housing finance, vehicle finance and agri business) throughout India. In its eight-year lifetime, the Company has enabled over $3 billion worth of financing for these institutions which together serve over 20 million clients. Another Group company, IFMR Rural Channels, known by the brand KGFS, delivers complete and tailored financial services in untapped remote rural markets, empowering low-income households with financial access to savings accounts, pensions, insurance, and loans. After a recent investment from Accion and others into IFMR Holdings, IFMR Capital’s CEO Kshama Fernandes stopped by our office to speak with me about lessons learned from IFMR’s successes and challenges.

Can you give us some background on IFMR?

IFMR Trust was set up about eight years ago. The idea was to build financial institutions that would enable the entire process of efficient and reliable access to finance for all. The purpose of IFMR Trust was to ensure that every single individual and every single enterprise had access to financial services.

If we really want to reach the population of India, where hundreds of millions of people still continue to live in rural areas, we need high quality local institutions with a deep understanding of the requirements of their customers plus an understanding of the economic environment in which they live, and an ability to provide them with requisite financial products and services in a sustainable manner. The role of building the last mile deep linkages to rural households and borrowers was played by our many KGFSs – our retail outreach arms. We today have 6 KGFSs across 12 districts serving 620,000 underlying customers. We simultaneously looked at the quantum and nature of requirements of capital across India and found that a significant proportion of funding those days came from grants or donations. Banks, too, were active lenders, however funding from banks was rather lumpy and the much sought charitable contributions were simply not adequate to meet the vast requirement.

Building a sustainable financial ecosystem at the grassroots requires a steady and well-distributed supply of capital flowing into sectors and geographies across the country via high-quality originator financial institutions. Where could such steady and sizable supply of capital come from, we asked ourselves? The capital markets seemed the obvious choice. Large, mainstream financial institutions with deep pools of capital such as mutual funds, insurance companies, pensions funds, private wealth managers and the like could be sources of this capital if we could tap into them in a sustainable manner. The big question was – how? How could we then connect MFIs and other local originators to these mainstream financial institutions? That’s where IFMR Capital’s role of a bridge between these originators and mainstream commercial capital markets investors came in.

rural-india-ifmr-accion-client-at-a-market-financial-inclusionIFMR Holdings enables Indian entrepreneurs to pursue their goals.

In 2010 you were responsible for creating a new financial structure that allows smaller MFIs to get money from large, traditional investors by lowering the risk. This type of transaction, called multi-origination securitization, is now becoming more popular in India. Can you explain how it works and why you did it?

As they say – necessity is the mother of invention. It was the nature and requirements of our client originators that gave birth to the MOSECTM. We were working with a large number of small and mid-sized MFIs who needed capital round the year. None of these had ever accessed capital markets before because standalone they neither had the size nor the ability to tap these markets. We decided to take multiple such originators to the market in a single structure. We pooled together many loans from multiple MFIs, the average loan size being anywhere between $200 to $300, till obtained a transaction size that made sense. This achieved two purposes – one, we got the critical size of a deal that made sense to these large investors. And two, we got all the benefits of diversification across geographies, across underlying individuals and businesses, and across managements of these originators. The big challenge was on how to convince investors who had never invested in these sectors or in such structured finance transactions, to come in and participate. We realized early on that the only way to really build this market was to lead the way by being investors ourselves and demonstrating our skin-in-the-game. It made a big difference to say “We’re not purely an arranger; we’re not only a structurer. We’re all of that, and more. We are primarily an investor in all underlying originators we take to capital markets.” Putting the investor hat transformed the way we looked at these originators and sectors. It incentivized us and aligned us with investors we were trying to attract. We build a detailed underlying framework for identifying high quality originators, we designed structures that would allow us to attract investors with varying risk and ratings appetite and importantly, allow us to participate as principals. And we put in the monitoring and surveillance framework in place for all the investments we made.

IFMR Capital began by investing in the subordinated tranches of all transactions it structured and took to market. It changed the way the market looked at these underlying sectors and borrowers, at the investment opportunities therein and at us at IFMR. Suddenly large financial institutions were willing to speak to us and listen to our story of why traditionally excluded sectors could actually make for high-quality investments. It wasn’t easy at all. But nothing of great significance comes easily, does it?  We encountered a world of skeptics.  A lot of people said it wouldn’t work. We were told that the MOSECTM was a great one-off exotic structure. The numbers speak for themselves. We’ve structured, invested in and placed more than a 100 MOSECTM transactions directly enabling a large number of institutions and indirectly enabling millions of underlying borrowers to access capital on tap.

How does IFMR define success and impact, and what has been IFMR’s greatest success?

We measure our impact in terms of the number of lives impacted – directly through our retail KGFS network at IRCS and indirectly through our wholesale originator network at IFMR Capital.

Another way we measure impact is by measuring the amount of capital flow enabled by us. Creating an enabling financial market infrastructure is yet another way to create impact. The creation of a strong ratings framework and a ratings track record across originators and sectors has resulted in the ability to benchmark the sectors we work in using a framework well understood and accepted by capital market investors.  The listing of many of our transactions, including that of the MOSECTM on the Bombay Stock Exchange is another mark of impact on market development for our sectors. The listing of paper backed by microloans made to women across remote corners of the country was a demonstration of the fact that credit originated to these borrowers could adhere to the high standards of commercial viability, transparency and reporting that is a prerequisite for listing.

What are some of your lessons learned from your eight years with IFMR?

(1) When somebody tells you an idea is not going to work simply because others tried it and failed, don’t listen to them! (2) When it comes to building new products/markets/ideas, it helps to think big – to think through every aspect carefully and believe that this isn’t going to be a one-off deal but one that will grow into a full-fledged sustainable, scalable business. Working on one-off deals may give a sense of achievement, but it is the scale and the sustainability that will really create lasting impact. (3) Finally, lending to excluded sectors, geographies or communities is not necessarily risky. “Poor borrower” does not necessarily mean “Poor credit”.  Many individuals and businesses across the world are excluded from the formal financial sector not because they are risky, but because people like us haven’t yet found ways to provide them access to capital in a way that is most suited to their needs. The problem is with us, not with them.

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Kshama Fernandes is one of India’s outstanding young business leaders. As CEO of IFMR Capital, she is leading a company that is transforming the very fabric of finance in India. Before joining IFMR Trust, she was the Head of the Finance faculty at the Goa Institute of Management. She has also been a driving force in committees set up by the Government of India related to the development of capital markets and the advancement of financial inclusion.

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