Private equity major Blackstone Group, which invested over $1 billion in India over the last five years, has recently announced its smallest transaction (after $39.5 million in CMS Computers in 2009) in the country since opening its office here in 2005. On July 7, Blackstone announced Rs 150 crore ($33 million) investment in FINO Ltd, a company that provides technology solutions for banks and microfinance institutions, for a significant minority stake. The cash infusion will be used for funding overall growth of the company and meeting long-term capital requirements. The investment will make Blackstone the biggest individual shareholder in the company. VCCircle has caught up with Akhil Gupta for a quick chat about the investment, his views on the bottom-of-the-pyramid space and opportunities in rural India.
What prompted Blackstone to invest into the financial services sector? What other opportunities does the company see in this space?
Blackstone sees plenty of growth opportunities in the financial services sector and especially in the financial inclusion space in India. As the country plans to accelerate on a high growth curve, access to financial services by the masses is essential. Inclusive growth will help boost the country’s economy.
What had made Blackstone strike this deal with FINO?
FINO is the leading first-mover player who has demonstrated the ability to deliver and it is likely to sustain the current leadership position. It has partnered with leading banks (ICICI, Union Bank of India and Axis Bank) which consider the rural area to be a real opportunity. FINO has also established a positive track record with the required scale and national coverage to be the preferred service provider to any bank. The company has built a core competence of operational excellence with robust risk management while in the past, many of the players have failed in achieving this and emerging players are yet to demonstrate it at this scale. To add to all these, the professional management and high quality investors attracted us to FINO.
What are the opportunities to reach out to the rural population?
Attractive macro-level dual forces are at play – there is a significant unfulfilled demand and also a considerable pull for financial products in rural India. At the same time, the top-down push by various stakeholders (read government, the Reserve Bank of India) is likely to drive financial inclusion in rural areas. At one level, RBI and the government of India are driving financial inclusion as top priority for all banks, especially the public sector banks. On the other hand, they are driving towards transfer of government entitlements directly into bank accounts. Meanwhile, the next wave of growth in India is likely to be driven by rural India. The rural consumption market is likely to triple by 2020 to reach $600 billion from the current level of $190 billion. This is driven both by the increasing income levels and the shifting consumption patterns, hence providing a plethora of opportunities.
What about the competition? Is there threat from new entrants in the market?
Except for early movers, the industry presents high entry barriers, given the need for local scale to be profitable and a national coverage to hold a central relationship with banks. Therefore, the industry is likely to have an oligopoly structure. Additionally, banks will have a high switching cost once they have covered a region through a particular service provider. In the long run, a couple of early successful players will build the scale and the national reach to be the leading players (75 to 85 per cent market share between the two players) in the integrated business industry, which will automatically create entry barriers for others to come in.
Does UID pose a threat or is it an opportunity?
UID (Unique Identification) is an extremely essential element for implementing the KYC (Know Your Customer) norms for the banking and financial services community. In fact, UID is complementary to the exercise undertaken by FINO and will provide immense opportunities for FINO to help reach out to the customers and serve them better. Banks can access customer information and also act as a channel to ensure that government subsidies reach the customers. The business model with Net-enabled connectively will help in conducting the pilot projects for UID.