Vistaar financial services private limited

Abstract

It was a rainy afternoon when Brahmanand Hegde, chief executive officer (CEO), and Ramakrishna Nishtala, chief operating officer (COO), of Vistaar Finance were discussing the plan to hold a board retreat to brainstorm about the course of action Vistaar had to take.

Hegde was a career banker, and Nishtala had worked in the manufacturing sector. They had worked together in Fullerton, a large non-banking finance company backed by Temasek group of Singapore. At Fullerton, they created and led the microfinance business. Fullerton also offered financial services to micro, small and medium enterprises (MSMEs).

The microfinance institutions (MFIs) segment was getting cluttered, with multiple players operating on similar models. While there was much bullishness in the microfinance segment with one of the largest MFIs—SKS Microfinance—announcing the public offering in March 2010, there was also a sense that the microfinance market was overheating, particularly in the southern state of (then undivided) Andhra Pradesh with too many institutions chasing the same set of clients leading to overindebtedness driven by mindless growth.

At the same time, Hegde and Nishtala sensed an opportunity to work solely in the MSME sector because the market was large enough to warrant a dedicated organization. They quit Fullerton and set up Vistaar Finance, with operations in Karnataka and Tamil Nadu in April 2010, with an initial capital of `150 million. By October 2010, this decision made by Hegde and Nishtala was vindicated when there were a series of microfinance client suicides in (the then undivided) Andhra Pradesh. The state government clamped down on MFI through an ordinance followed by a very stringent law that heavily restricted the operations of MFI (Government of Andhra Pradesh, 2010).

Vistaar Finance offered a range of financial services to small businesses. For Vistaar, the business model (explained in detail in the following sections) was effective, and the growth had been impressive. The year 2016–2017 had been remarkable despite the general slowdown in the MSME space following the demonetization announcement made by the Prime Minister on 8 November 2016. The topline and bottomline had grown, indicating that the Vistaar model was robust (see Exhibit 3 for financial statements).

Around the same time, the Indian banking system was opening up. In April 2014, the Reserve Bank of India (RBI) issued two new bank licences representing two ends of the financial world. One to Bandhan, the largest MFI, and the other to IDFC, an infrastructure financing major. They were chosen from a list of 25 aspirants. Although the inclusion of Bandhan was seen as a wild card entry, there was hope that more licences could be issued to similar institutions. Thereafter, the application process for small finance banks (SFB) (RBI, 2014) opened in November 2014. RBI received 72 applications for SFBs. After scrutiny, RBI granted in-principle licences to 10 SFBs. By the end of 2017, most had started operations. They were expected to offer half of their portfolio in loan sizes less than ₹2.5 million and deploy 75 per cent of their book compulsorily into priority sector. In August 2016, the RBI issued guidelines opening applications for a banking licence on-tap (RBI, 2016). Based on these guidelines, Vistaar was eligible to apply for a bank licence in 2020.

It was in this context that Vistaar’s top management was brainstorming on the dilemma of the growth path for Vistaar.