By Namrata Acharya, Business Standard

Consolidation seems to be the way forward for the embattled Indian microfinance industry.

Recently, Intellecash Microfinance Network Company Limited, a subsidiary of the Intellecap Group of companies, bought a majority stake in a Kolkata-based MFI, called Arohan Financial Services. This was the first acquisition in the MFI space since 2010, when a sudden Legislation by the Andhra Pradesh government had led to a near catastrophe in the business of small lending in India. More than 70 per cent of the MFI industry was then concentrated in Andhra Pradesh.

As the MFI industry gradually moves on to normalcy, two big MFIs in, Share and Asmitha, are also firming up plans for merger. The MFIs are waiting for a clarity in regulations and the implementation of the Micro Finance Institutions (Development and Regulation) Bill, 2012, which was introduced in the Lok Sabha on May 22, 2012.

The combined portfolio of the two MFIs could be close to Rs 3000 crore, which would be a competition of the largest MFI in the country, West Bengal-based Bandhan, which has a portfolio close to Rs 3500 crore.

“In the present scenario, consolidation of MFIs will be helpful to attain economies of scale. For MFIs, who have large portfolio stuck in Andhra Pradesh, a collaboration will help recovery of loans. Once the Central MFI Bill is implemented, we will initiate the merger process with Asmita,” said Udai Kumar, founder, Share.

Nearly Rs 7000 crore, which is close to half of the size of the MFI industry before the crisis, has turned out as bad loans for the MFIs in the southern state. The MFIs are hopeful that the new law governing the MFI sector will help them recover the loans as it will supersede the The Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010. The state act does not allow MFIs to recover loans from Andhra Pradesh.

“The Andhra Pradesh government is not supportive to the MFI industry. If the Central regulation comes we will be able to recover much of our loans,” said Kumar.

“Consolidation is the way forward for the MFI industry. Over the next three years we could see several mergers in the MFI space,” said Alok Prasad, CEO, Microfinance Institutions Network (MFIN).

West Bengal based Bandhan is also open to acquisition to expand its reach in other states.

“Right now we are not looking for acquisition, but there if we want to expand in a state where we are not present, we might look at the option of acquisition,” said Chandrashekhar Ghosh, founder, Bandhan.

The consolidation of MFIs would also help smaller MFIs to expand in newer geographies.

” . Post consolidation we will have a strong equity base and portfolio spread across three states – Bihar, West Bengal and Assam. It is a perfect launch pad to achieve our aim of reaching a portfolio size of Rs 100 crore by Mar 2013 and working towards crossing Rs 1000 crore in the next five years.” said Shubhankar Sengupta, CEO of Arohan.