Dvara’s Journey Comes Full Circle As It Seeks A Small Bank Licence

When Dvara Trust started out, the idea was to approach rural finance differently.

The team of former ICICI bankers who came together to set up the venture had lived through the initial years of private rural finance. They had seen the potential. They had also seen the problems. And so, when they set up the Dvara Trust, in 2008, backed by Rs 150 crore in seed funding from ICICI Bank, the plan was to help move rural finance away from a bank-centric model.

“The problem with our financial system is that it is too bank-centric and the regulation is also very bank-oriented,” says Bindu Ananth, co-founder and chair of the Dvara Trust. The job, Ananth says, is “too big and complex” for a bank in Mumbai to tackle.

Dvara set out with a plan to establish a “bunch” of customer-facing, last-mile institutions. Almost like a network of hundreds of small non-lenders rolling up into a larger one.

The bank-led model of rural finance had also meant an excessive focus on credit as a product. Dvara went in wanting to fix that by offering products ranging from savings and investments to credit and insurance. “The idea was that can we experiment and deliver on the next version that does multiple products, not just credit,” says Ananth.

Twelve years later, some ideas have worked, others have not. Along the way, lessons were learnt. Some of these lessons, driven home by the pandemic year, have now prompted the group’s flagship non-bank lender Dvara KGFS, with over Rs 1,200 crore in managed assets, to apply for a small finance bank licence.

“What we learned over time is that the kind of customisation of products that we would ideally love, is nowhere near what we have been able to get...The second big missing link and unaddressed issue is the access to a bank account,” Ananth said, explaining the decision to seek a small finance bank licence. In addition, the access to longer-term liabilities and a lower cost of funds remains the time-tested draw of the banking model.

How It Started. How It’s Going.

While Dvara may have been drawn back towards banking, its operations remain more “densely rural” and decentralised than that of any bank and most micro-lenders.

"The KGFS model is not just about being rural, but being densely rural, and that is a key part of our strategy," says Samir Shah, executive vice-chair of the Dvara Trust.

The lender’s model is designed to reach remote parts of the country with village-level branches. “We enroll the whole village or a large part of the village through a branch, and then start collecting data to understand households at a very detailed level before we start the customer journey,” he says.

Once in these villages, the non-bank lender appoints “wealth managers”, who are appointed locally and trained to handle all administrative and customer service functions.

“The idea being that each KGFS institution has its own regional CEO and head office structure,” said Shah. “This creates our perception as a local bank.”

The multi-product approach towards financial inclusion also remains a core focus for Dvara.

Alongside micro-credit, which includes joint liability group loans to women borrowers, unsecured business loans, personal loans, jewel loans, consumer loans and crop loans are offered. The lender also doubles up as a distributor of wealth management services such as savings schemes, insurance, mutual funds, gold investment and pension plans, along with cash remittance and withdrawal services.

Almost all of Dvara’s borrowers have insurance products along with credit, says Ananth.

Technology and the in-house underwriting process plays a large part in offering customised products.

For instance, if a tea stall owner applies for a business loan at Dvara, the lender uses its existing data on tea shops to understand the unit economics of the business, such as cost of inputs and footfalls, along with income and household profile of customers, to form a credit template. Based on this credit template, each borrower is allocated a package of credit, insurance and investment products best suited to his or her needs.

“Presently, we have close to 50,000 customers on our wealth management bundle that was launched over a year ago,” says Shah.

The wealth management offering has earlier been tried by micro-finance firms but it didn’t work because commissions were not attractive enough to scale it up, says P Satish, executive director at Sa Dhan, an RBI-recognized association of over 200 micro-finance institutions.

“Also, wealth management at the rural-level requires special training of the field staff who are usually more aware of disbursements and collections. But, KGFS has done this in a much more systematic and comprehensive manner," he said.

However, there is a risk of mis-selling that comes along with bundled financial products, warned Satish. “Micro-finance institutions deal with a vulnerable segment of borrowers with low literacy levels, so it is very important that the product is explained clearly and in very simple terms beforehand, to ensure a voluntary buy-in rather than the product being mis-sold to the borrower.”

Beyond Dvara KGFS

Beyond the flagship non-bank lender, the Dvara trust has also incubated a set of startups to help solve specialised credit challenges.

• Dvara Money Pvt. distributes financial products to the low-income urban workforce, especially gig workers.
• Dvara E-Registry Pvt. provides alternative credit information to financial institutions for giving loans to small farmers.
• Dvara Smartgold Pvt. enables micro-savings in digital gold.
• Dvara E-Dairy Solutions Pvt. provides financial and cattle management solutions to dairy farmers.
• Dvara Solutions Pvt. designs technology solutions for financial institutions.

“As a combination of patient capital, operating experience and mission orientation, we want to solve problems that are systemically difficult, and someone like us is uniquely placed to solve them,” says Shah explaining the idea behind these start-ups.

Northern Arc Capital, an NBFC which was also promoted by the trust, is focused on bridging the gap between capital market investors and last mile lending institutions and businesses. “Over 12 years, Northern Arc has opened access to Rs 80,000 crore plus in debt. Some of it on-balance sheet, the rest of it arranged, or structured,” Shah said. Over time, the Dvara Trust has divested stake in Northern Arc and now holds about 10% in it.

The Tough Years

But rural finance has always been a volatile business and Dvara couldn’t escape that. Neither could it escape the ripples of the NBFC crisis, brought on by the collapse of IL&FS group in 2018.

Dvara KGFS’ net profit fell nearly 88% year-on-year to Rs 3.8 crore in fiscal 2020 even as total revenue rose nearly 29% to Rs. 209 crore. For the first nine months of FY21, Dvara KGFS reported a profit after tax of Rs 6.4 crore, according to an ICRA rating note dated March 26. Financials for the full fiscal year are not yet available.

If FY20 was a challenging year for NBFC funding, then FY21 brought asset quality troubles brought on by the pandemic.

As of December 2020, Dvara’s 90-days past due loans rose to 7.2% compared to 2.3% as of December 2019. ICRA, while reaffirming the company’s rating at BBB, cautioned on asset quality troubles.

ICRA also warned the concentration of Dvara’s portfolio in Tamil Nadu could pose a risk. Presently, Dvara operates in six states—Tamil Nadu, Odisha, Karnataka, Uttarakhand, Chhattisgarh and Jharkhand.

We’re likely to end about between 6-7%, and I think that is on par with well-performing MFIs, says Shah. Audited results for the fourth quarter of FY21 are not yet available.

Did the volatility of the last few years prompt the move towards a small finance bank?

“It has been a challenging time to be an NBFC, particularly in the rural sector, as any shock that happens anywhere in the system gets amplified in our liabilities,” Ananth said. “So, from a long-term, stable growth perspective the SFB model is a natural progression that would help us have the best of both worlds, while bringing down our cost of funds and giving us an access to deposits.”

Further, it would allow the lender to offer customised liabilities products to its borrowers. “The existing bank accounts of our customers are completely disconnected from their overall financial health,” she said. “Since we haven’t been able to crack a good partnership to deliver high-quality bank accounts, it feels like an important piece in the puzzle to solve.”

The transition, if it happens, will need a change to the Dvara governance structure. “The trust can’t be a promoter to a bank,” she said. “Therefore, we would need to change the holding structure complying with the RBI guidelines.”

At present, Dvara Trust, which is structured as a private trust, holds 32% in KGFS while Leapfrog Ventures owns 23% and Accion International, a global inclusion non-profit holds 21.7%.

The move towards becoming a bank may solve some problems but bring with it a new set of issues, says Satish. “Banks have higher capital adequacy and regulatory requirements than NBFCs, which would increase the overall administration cost. But, turning into a bank would also help them scale up their lending operations significantly.”