Fusion Microfinance: Giving wings to clients’ dreams
Anirudh Sarda, Oikocredit's Head of Equity Investments for Asia
On 15 November 2022, Fusion Microfinance Ltd, a longtime Oikocredit partner, completed an initial public offering (IPO) listing in India.
It was the next step in a major success story and a constructive partnership between Oikocredit and Fusion, a journey that began in 2010.
Fusion now operates in 18 Indian states, focusing on rural and semi-urban areas where 92% of its clients are based. Nearly all its clients are women. Fusion is presently the second-largest microfinance institution (MFI) in India in terms of gross loan portfolio. Since 2015, Fusion has grown its client base from 200,000 to 2.9 million.
While there are more than 95 microfinance companies in India, most have a small regional focus. The MFI sector is expected to grow at 18-20% annually between from 2022-2025, according to research and ratings company Crisil. The sector is regulated by the Reserve Bank of India (RBI) which has set strong guidelines and a clear monitoring framework. Self-regulatory organisations such as the Microfinance Institutions Network and Sa-Dhan also support the growth of the industry.
As of June 2022, India’s total microfinance credit portfolio stands at INR 2.93 trillion, according to the RBI.
Banks account for 38%, followed by non-banking financial companies (NBFCs) and microfinance institutions at 35%. SFBs, other NBFCs and other entities have a combined share of 27 per cent.
Separately, India’s rural areas account for about47% of India’s GDP. However, these areas only make up 9% of total credit and 11% of total deposits (as of March 2022, according to Fusion data. The massive divergence in the rural areas’ share of India’s GDP and banking credit and deposit services compared with urban areas indicates the extremely low penetration of the banking sector in rural areas. Oikocredit’s MFI equity partners (Annapurna, RGVN, and until last year, Fusion) focus on the rural areas of India.
Oikocredit sold its shares in Fusion in last year’s IPO. Fusion now has additional capital available to achieve its goals, while the exit enables Oikocredit to use the funds to support other partners.
For a closer look at Fusion, its end clients and at the larger microfinance situation in India, we spoke with Anirudh Sarda, Equity Manager for Asia at Oikocredit. Anirudh joined Oikocredit in 2017 and is based in Hyderabad, India. He is responsible for managing the Asian equity investment portfolio as well as leading the regional equity team in making new investments and adding value to our partners for achieving sustainable impact and successful exits.
Why did Oikocredit choose to partner with Fusion in the first place?
Anirudh: The cooperation with Fusion is a beautiful example of the good collaboration between Oikocredit’s equity and credit departments.
Oikocredit’s partnership with Fusion dates to 2010 when Maanaveeya, our Indian subsidiary, provided a loan to Fusion after evaluating a number of different investment opportunities in the Indian microfinance sector. Our credit colleagues then introduced Oikocredit’s equity team to Fusion in 2014.
We backed Fusion for its social impact alignment with Oikocredit, the quality of its management team, and its governance practices. Its branch-led business model and focus on underserved geographies gave us high confidence in its growth prospects.
From there, we built an open and transparent relationship with the partner organisation.
Fusion’s slogan is “Giving wings to her dreams…” Why would you say this slogan fits the company?
Anirudh: Fusion was founded with the core idea of creating opportunities at the bottom of the pyramid, by providing financial services to unserved and underserved women in India’s rural and semi-urban areas.
Its social vision and business orientation aims to provide underprivileged women with economic opportunities to transform the quality of their lives. Those women have an annual household income of up to INR 300,000 (€ 3500).
Fusion provides micro loans using a joint liability group-lending model, wherein a small number of women form a group (typically comprising five to seven members) and guarantee one another’s loans. These women entrepreneurs often run small businesses in the agriculture, manufacturing and services sectors.
But Fusion’s responsibilities are not merely restricted to financial support. The company also provides support around financial literacy, so its clients learn to manage their finances better.
In addition it has established a skills development programmeto create livelihood opportunities for women through providing training in areas such as tailoring, dry snacks, paper bags and wheat farming. Through the programme, Fusion also taught women how to make masks during the Covid-19 pandemic, enabling them to earn an income during the lockdown in India.
Can you share a typical client story with us?
Anirudh: A good example is Salida Begum, 26, from Tezpur city in the state of Assam, in India’s northeast. Salida is the caretaker of her elder sister, who has suffered from schizophrenia for more than 15 years.
During the pandemic it was very challenging for her and her family to meet their basic needs as their financial situation worsened. Salida describes Fusion Microfinance as a ‘ray of hope’.
After training from Fusion, Salida and her rehabilitation tailoring unit received a large order for face masks that gave her and her colleagues an earning opportunity.
Salida handled the order – the biggest the unit had ever received – for the entire group, earning the confidence to take similar mask-making orders and build a reputation for the unit
What role and importance do women entrepreneurs have in India?
Anirudh: The trend of focusing on women entrepreneurs in India dates to 1974, with the set-up of the Self-Employed Women’s Association (Sewa) in Gujarat.
Sewa helped highlight how providing women with access to capital increases their decision-making stature in the household and in the community as a whole.
As decision-makers, women can help direct disposable income to the more basic needs of the home such as nutrition, education, health, savings and asset creation.
Women also positively influence loan repayment in their household because they are generally more risk-averse, cooperate better in groups and demonstrate better discipline in meeting loan repayment schedules.
What business areas do women from low-income groups typically venture into in India?
Anirudh: Women have been integral to driving economic growth in India. This is particularly so with respect to agriculture (dairy production, animal husbandry, poultry farming and crop cultivation), manufacturing (production of bags, furniture, mats and handicrafts, as well as bread and other baked goods), and services (sale of groceries, clothes, provision of tailoring and stitching services, and small food establishments).
What does Fusion’s IPO mean for its end-clients? Can Fusion’s social mission be assured?
Anirudh: The company, in line with the purpose mentioned in its statutes, aims to focus on and serve low-income groups.
Since its inception, Fusion has focused on its social goals in terms of serving rural regions, women clients, and marginal communities. It has continued to do so even after raising large amounts of equity capital from other investors.
With the IPO, Fusion has a higher equity capital base available. The company has increased its net worth and achieved a credit rating upgrade. It now has additional capital to supportfurther growth.
Fusion’s improved credit rating can also help lower the cost of debt capital, a benefit that can be passed on to end-clients by way of lower interest rates on microfinance loans.
New products such as small business loans also become possible with the availability of more equity capital, and Fusion can reach more clients.
As a bigger institution, Fusion will be in a position to better ensure the continuity of microfinance loans to its end-clients.
What role did Oikocredit’s Equity departmentplay in the partnership with Fusion?
Equity has been closely involved with Fusion over a seven-year period – from 2015, when Oikocredit made its first equity investment, to 2022, when Oikocredit sold all its shares. Over the years, Equity provided inputs to the company on business strategy and growth.
Oikocredit enjoyed the right to nominate a member to Fusion’s board of directors. Our nominee served on Fusion’s board for five years, bringing experience of risk management and taking an active role on the audit and remuneration committees.
Equity was also instrumental in governance matters, especially promoting independence at the board level. Oikocredit was seen as the voice of impartiality and a leader in aligning interests between shareholders and management several times.
During the difficult crises in India, such as at the time of demonetisation, Oikocredit backed Fusion with follow-on investments in 2016 and 2018 to strengthen its balance sheet and support its growth efforts.
Equity’s keen involvement in subsequent capital raising processes played an important role in attracting new capital during Fusion’s growth stages from reputed investors such as Gawa, Creation and Warburg Pincus. The infusions helped Fusion achieved a high growth and scale, setting the stage for its IPO.
Equity maintained excellent relations with the Founder and other shareholders, which was fundamental in prioritising Oikocredit’s exit during the IPO.
However, Equity also depended on other departments within Oikocredit. Legal’s active support and inputs helped us in terms of the timelines, for example, with Oikocredit among the first shareholders to complete the IPO process.
What happens next to the relationship between Oikocredit and Fusion?
Anirudh: Oikocredit sold all its shares in Fusion in the IPO. We are no longer a shareholder in Fusion.
With the profit realised from the sale, Oikocredit will be able to redeploy those funds to other partners and positively impact our target beneficiaries.
In that respect, although the partnership with Fusion has come to an end, its IPO is also a huge success for Oikocredit.
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