@ Saharanpuri and fellow boarders
I am providing you Key summary of 60 PAGE REPORT of the third edition of :-
"Intellecap Report 2010 on Indian Microfinance Sector":
CHAPTER 1)EXPLORING PRESSING ISSUES OF MICROFINANCE IN INDIA
1.1) Is microfinance growing too fast?
Indian MFIs have grown at a spectacular rate between
2004 and 2009: YOY the average increase in the number of clients has been 91% and that of portfolio outstanding 107%.In comparison the retail portfolios of commercial
banks in India grew by merely 4% in the last year. For certain stakeholders, this is a basis to argue
that the growth of Indian microfinance is too fast, and it is leading to an oversupply of capital. To understand if this is so, it is important to look at the primary driver of growth; the extent to which demand for credit remains unmet is the force behind the industry’s explosive growth. MFIs and the SHG-Bank Linkage Program2 (SBLP) together can be estimated to cater at most to 10% of the
demand for microcredit in the country and if you expand geographies to north india it is meagre 5%
1.2)Is Indian Microfinance a Bubble in the Making?
Recent media coverage has portrayed the Indian microfinance industry as a bubble threatening to burst. In reality, the industry continued to demonstrate high growth and a healthy portfolio quality. However, there have been isolated incidents of over-lending in some pockets of the country. examples include Kolar,6 Mysore and Tumkur districts of Karnataka and in Lucknow and Agra
districts of Uttar Pradesh. These incidents affected under 5% of the industry’s total portfolio outstanding.
1.3 How Well are Indian MFIs Governed?
in 2009 35 leading NBFC MFIs came together to form a Self Regulatory organization called the Microfinance Institutions Network(MFIN. MFIN also formulated a Code of Conduct which will require member MFIs to share qualitative credit information, be transparent in their charges and adopt practices to prevent over-lending to borrowers.10 The code binds member MFIs to not lend to a client who is already borrowing money from three institutions, or whose total outstanding debt exceeds INR 50,000 (USD 1,100). Finally, MFIN will also be opening dialogue with the RBI,other regulators such as the Insurance Regulation Development Authority (IRDA), the Ministry of Finance and the political class to advocate for NBFC MFIs, in order to allow them to accept client
savings, access external commercial borrowings, act as agents to micro insurance providers and become business correspondents11 (BCs) to banks.
1.4 Is the Commercialization of Microfinance Compromising its Social Impact?
Indian microfinance is accused of becoming too commercial, and of pursuing investor interest over that of other stakeholders, often compromising on its social impact. Yet, many believe that the goal of financial returns and social impact are in fact complementary, rather than divergent. The growth and commercialization of Indian microfinance has meant greater outreach to the poor and can
translate into better choice and service.
The advent of commercialisation has also driven
MFIs to reach out to poorer clients in new markets.
At the end of FY 2009, MFIs were present in 436
of the 621 districts in India, including 70% of the
poorest districts, up from 63% the previous
year.
1.5 Are Indian MFI Valuations too High?
Indian MFIs are receiving the highest valuations in the world. A recent report by the Consultative Group to Assist the Poor (CGAP) and JP Morgan16 shows that the median price to book value(P/BV) multiple in India is 5.9, thrice that of global multiples. Some have been quick to call this “irrational exuberance” on the part of investors. leading MFIs outperformed Banks and NBFCs on both counts. on
average, MFI Roe is 32.1%, a full 12 percentage points higher than that of Banks and NBFCs. MFI
profits grew over three times that of the sample banks’, and five times that of the sample NBFCs’
between 2006 and 2009. The closest comparable in this sample to MFIs in terms of business model is Mannapuram General Finance18, as their clientele is similar to that of MFIs and loan sizes are relatively low (INR 20,000), although their loans are backed with collateral. Despite the company’s Roe and PAT growth being lower than those of MFIs, its P/BV is at 8.4, higher than average for
leading MFIs.
ROE (2009) PAT CAGR ‘06-‘09 PAT Growth ‘08-‘09P/BV2009
SKS 18.30% 466% 382% 5.1
Mannapura 23.20% 97.20% 44.40% 8.4
If Mannapura with PAT CAGR of 97% command 8.4 P/BV SKS at even at 200% CAGR at 5 times is cheap.
A comparison between the Indian microfinance industry and global markets shows that Indian MFIs have the lowest yields, lowest operating costs, and the highest return on assets. This comparison explains why Indian MFIs are increasingly becoming an attractive option for global investors.Higher operating efficiency allows Indian MFIs to charge amongst the lowest interest rates in the
world, and still achieve high returns.
Table 9: Global benchmarking68
Ratio Africa MENA ECA LAC Asia India
Total Yield 38% 31% 32% 47% 31% 28%
Operating Expense Ratio 45% 27% 19% 45% 23% 10%
Return on Assets -3% 1% -0.5% 0.5% -1% 3.6%
2) DEMAND AND SUPPLY OF MFI SECTOR
2.1 Banks: Facing the Limits of Traditional Branch System:
Although 40% of all the bank branches of Public and Private Banks taken together are in rural areas, only 5.2% of villages are served by the branch system an indication of the limitations of the banking system in reaching out to the rural population.While priority sector lending norms encourage commercial banks to extend credit to MFIs and SBLPs, RBI regulations prevent commercial banks from lending at a rate higher than the Prime Lending Rate (PLR)24. This ceiling, coupled with the high transaction costs involved in serving rural customers, makes reaching out to the unbanked in remote rural areas a loss-making business
proposition.To overcome this limitation, RBI is currently in the process of revising regulation on the PLR, and a
change is expected to be introduced effective April 2010.25 Additionally, the RBI is also encouraging
using the BC model in reaching out to the unbanked. In this model banks use intermediaries (the
BCs) to reach out to the unbanked population in villages and help them open no-frills accounts.BCs are enabled to service the customer on behalf of the bank, using technology-based solutionsthat help overcome some of the barriers and transaction costs that make serving rural areas through traditional branch infrastructure unviable.
HOWEVER DESPITE OF THESE MEASURES However, as of 31
March 2009, of the 8,866,00028 accounts that were opened by the 26 public and private sector banks that are using BCs, only 11% are operational.29 While the opening of these bank accounts is driven with impetus at the policy level, the initiative currently entails no measures to encourage people to use the new facilities to deposit their savings, nor does it effectively enhance people’s capacity to accumulate savings from their disposable income.
2.2) Microfinance Institutions: NBFCs Emerge as Industry Leaders:
In terms of contribution to the aggregate portfolio of the MFI channel in 2009, NBFCs account for 80% of the total outstanding portfolio of INR 11,734 crore (USD 2.5 billion).32 The top three Indian MFIs, all of which are NBFCs, alone contributed to 48% of total MFI portfolio. The share of NBFCs grew from 65% of the total portfolio in 2007 to 71% of the total in 2008.
2.3) Demand & Penetration
The market potential for microfinance in India, expressed through the estimated size of the total demand for microcredit, is huge: INR 330,049 crore (USD 72 billion). MFIs currently meet only 3.6% of this demand. The poorest districts are still underserved, and even in the most highly penetrated regions, the financial services offered are mostly limited to credit.
2.4) Beyond Credit: the Market for Insurance, Savings, and Other Services
The following are new areas of micro finance:--
1)At least 94% of all low income households in India lack any form of insurance cover
2)65% of the population, equivalent to 650 million people
or 150 million households, do not have a bank account
3)Mutual fund investment is another opportunity for the low-income households to realize returns comparable to those from savings. A great number of funds have introduced investment plans that cater to this segment of the population For fund houses managing a large number of low ticket investors is operationally unfeasible due to
high operational expenses, and this creates scope for collaborating with MFIs.
CHAPTER 3) INVESTMENT SCENARIO IN MFIS
The global financial slowdown has made investors more aware of the risks of Indian microfinance,but has not dampened their interest in the sector. Both equity investors and lenders remained bullish, and in FY 2009 Indian microfinance received 75% more capital than in FY 2008. The INR11,734 crore (USD 0.2 bn) portfolio outstanding of the sector was fuelled largely by debt, whichwas the source of 89% of all capital to the sector, while equity funded the other 11%.
In FY 2009, 40% of all equity deals in the Banking and
Financial Services Sector were in microfinance
Larger MFIs Commanded Higher Valuations In the Indian market, portfolio size commands disproportionately high premiums, as size connotes stability, ability to leverage, and high return potential. The Leaders are thus the ‘pick of the lot’,and their valuations are further driven up by the market supply-demand dynamics as considerable investor interest is concentrated on these few MFIs.
Industry Attracted USD 2.33 Billion in Debt in FY 2009. The Indian domestic banking sector, a key
funder to Indian MFIs Private sectorbanks 54% PSU 17% and other DIIs 24%.
CHAPTER 4) THE ROAD AHEAD
A) NEWER MARKETS: The higher density of population in cities and peri-urban markets make these high growth regions and an increase in the weight of the urban portfolio on the total is likely.Poor under-served states such as Bihar, Uttar Pradesh and Rajasthan are also expected to witness a flurry of MFI activity in the next few years, given the vast opportunity. These markets are hugely underserved, and are fast being evaluated by MFIs.
B)Changing Business Model: Social is Commercial:
C) NEWER PRODUCTS AND MORE FEE INCOME FROM MNCs to USE MFIN DISTRUBUTION NETWORK.
FUTURE OUTLOOK ON MFI SIZE:
*INDUSTRY GROWTH PROJECTION FOR NUMBER OF BORROWERS:
From 28192 thousand in 2010 to 109581 thousand borrowers by 2014 i.e. CAGR of more than 100% YOY.
*SIZE OF LOAN DISBURSMENTS:
FROM 21,913 crores in 2010 to 1,43,265 crores in 2014 i.e. more than 200% CAGR Y.OY.
* Debt and equity supplied to the sector too will increase to fuel this growth. over the next few years,
equity investor interest is expected to sustain and grow, and both public and private sector banks are likely to maintain a steady exposure to microfinance. Intellecap estimates that for the next five years equity will entail 15% of capital needs, while debt will fund the other 85%. Given this, the debt required by the industry in 2014 is INR 33,170 (USD 7.21 bn) and the equity required in 2014 is
INR 4,282 (USD 0.93 bn).
**********END OF REPORT****************************
Now you can yourself realize the potential of MICRO FINANCE SECTOR IN THE NEXT 5 YEARS...
Zerodha (Trading & Demat Account)
RHP
