Professional Documents
Culture Documents
Project On Micro Finance
Project On Micro Finance
Prepared by,
Unnati A. Mehta
Unitedworld School of Business
Mumbai
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who gave me the possibilities to
complete this report. I would like to thank Prof. Jayanta Sengupta, Dean,
Unitedworld School of Business, Prof. Sangeeta Pandit , Prof. Jaymala S., Prof.
Pinaki Ghosh ,Unitedworld School of Business and also college authorities for
providing me the opportunity to work on the report.
With a deep sense of gratitude and humble submission I would like to express my
heartiest gratefulness to my Faculty Guide Prof Sangeeta Pandit, Unitedworld
School of Business , whose help, stimulating suggestions and encouragement
helped me in all the times of research for and writing of this report.
Index
Executive Summary
Introduction to Microfinance
History
Geographical Spread
Book Review
Microfinance Products
Microfinance Clients
Microfinance Services
CRISIL List of Microfinance Institutions in India
Business Model
Legal forms of MFIs in India
Market Trends
Investment Climate
Microfinance Bubble
Success factors
Issues
Exits
Case study
Conclusion
References
Executive Summary
The microfinance sector in India has developed a successful and sustainable
business model which has been able to overcome challenges traditionally
faced by the financial services sector in servicing the low income
population by catering to its specific needs, capacities and leveraging
preexisting community support networks. As of March 2009, microfinance
institutions (MFIs) in India reached over 22 million borrowers and had a
portfolio outstanding in excess of $2.3 billion.
The microfinance business model in India typically generates a Return on
Equity (ROE) of between 20% and 30%, driven by financing from
commercial banks, strong operating efficiency and high portfolio quality.
Despite achieving rapid growth with a CAGR of 86% in loan portfolio
outstanding and 96% in borrowers over the last five years, the microfinance
sector still faces a large unmet demand which means that it still has great
potential for continued growth.
The microfinance sector is maturing and beginning to diversify its product
and service base to address other unmet financial and non-financial needs
of the low income population either directly or by acting as a conduit for
third-party providers savings, insurance, remittance and low cost
education and healthcare services being some of the key examples.
Given this growth and maturity dynamic, the Indian microfinance sector is
increasingly becoming a viable investment sector with commercial
investors joining social investors who have been nurturing the industry thus
far.
Equity valuations in the Indian microfinance sector are higher than the
financial sector due to the high growth expectations and substantial
availability of debt to fuel its rapid expansion. This availability of debt to
support expansion is expected to grow as more domestic banks take
exposure to the industry and alternative debt providers enter the market.
Over the short and medium term, MFI shares are expected to trade at
significant premia to book value as they realign their business models to
capitalize on unsatisfied demand, and cool down over the longer term as the
industry matures and begins to consolidate.
Currently, several exit opportunities exist including secondary and trade
sales which are increasing as more mainstream investors enter the market.
Another likely exit scenario is M&A, as larger MFIs seek to acquire players
with product or geographical niches and banks also seek to enter the sector
by forming alliances with existing MFIs. Larger MFIs may also consider
IPOs although that may be a less likely exit option for most MFIs in the
short to medium term.
(2)
(3)
Savings Products
For most of its history, the microfinance industry has focused on delivering
microloans to microentrepreneurs, and it is still in the process of seeking
greater scale at greater speed for delivering microcredit. The experience of
microfinance institutions (MFIs) across the globe that mobilize savings,
however, demonstrates that the demand for deposit products is many times
that of credit. Although low-income customers save in several forms, not
necessarily through formal means, there is a pervasive for safe
mechanisms.
Accordingly, savings mobilization is becoming a critical strategic goal for
MFIs, especially as microfinance markets become more competitive. MFIs
are looking to build their capacity to mobilize savings, either as a funding
strategy to support growth while reducing financial costs of funds, or, as a
marketing strategy to promote customer loyalty and retention.
One of the challenges that MFIs will face when mobilizing deposits is
controlling expenses, as operating costs of managing and delivering savings
services are relatively high. Micro savings customers are also more sensitive to
charges and fees than wealthier clients, given the smaller average balances and
income levels.
Another key challenge is for the MFI to diversify its target segment, as
mobilizing savings usually requires attracting a different clientele than the typical
micro entrepreneur. Savings mobilization also requires certain standards for
quality in customer service, which depends on key resources and capabilities,
such as technology, processes and qualified staff.
Insurance Products
Losses due to natural disasters, fire or death of a family member can be
devastating for anyone. For microentrepreneurs and other low-income
populations, even common illness can wipe out a lifetime of work, leaving them
without any resources to start over. Microinsurance products can help mitigate
the effects of losses on clients and their families so that they can retain and build
on the gains they have worked so hard to achieve and continue on the path out of
poverty.
Micro insurance is a nascent industry, which has made significant strides in the
last few years. Products are specially designed to meet the needs of poor clients:
premium payments are kept to a minimum, terms and conditions are clear and
simple, and exclusions and requirements such as medical examinations are
avoided to the greatest extent possible. Micro insurance includes but is not
limited to: Life, Health, Accidental Death and Disability, and Property products.
There are also country-specific challenges faced by MFIs related to the
country's regulatory environment and the availability of insurance companies
willing and able to underwrite client-appropriate programs that are competitively
priced
Remittances
These are transfer of funds from people in one place to people in
another, usually across borders to family and friends. Compared with other
sources of capital that can fluctuate depending on the political or economic
climate, remittances are a relatively steady source of funds.
India
Total MFIs
1,859
144
44.2 billion
2.1 billion
Number of borrowers
2008
82.9 million
16.4 million
23.7 billion
90.0 million
552.0
109.1
The Indian microfinance sector is expected to grow nearly ten times by 2011 to a
size of about Rs250 billion from the current market size of Rs27 billion, at a
compounded annual growth rate of 76%.
CAR FINANCING:
MFI also assist those people who cannot pay total amount at once. So, these MFI
gave them car on installments like UBL car financing scheme is too popular and
too many people taking advantage from this scheme.
HOME FINANCING:
Pakistan is a poor country. Purchasing power of Pakistan is very low. So many
people are living on rent. They cannot have too many amounts to purchase
homes. MFIs provide loans be considering their job stability and take security
for it.
PERSONNEL LOANS:
MFI also obtain personnel loans. Those people who have permanent employment
and stable jobs. This credit facility depends on the income of an individual.
TALEEMI LOANS:
MFI also provide financial aid to the students who cannot bare educational
expenses but want to study. MFI assist them in return of some security and it
would have to pay after completing the education.
Metric
25-35% p.a.
Interest on debt
ROA typically
3-5%
Debt/Equity Typically
5-8x
ROE
20-30%
Micro-loan sizes vary from an initial loan size between $100 and $150 to
subsequent loans of $300 to $500 with an annual interest rate between 25% and
35%.The term loans are structured with weekly or monthly repayment schedules
and a 6-month to 2 year term. Microfinance institutions typically charge a higher
rate of interest to their clients than traditional commercial banks as the
administrative costs of servicing smaller loans is far higher in percentage terms
than the cost of servicing larger loans.
Additionally, MFIs provide doorstep services to their customers, a strategy that
has a high cost associated with it, especially in rural areas where population
densities tend to be low. Because of this model, MFIs generally face an operating
expense ratio (OER) between 6% and 15%, depending on the scale and
efficiency level of the particular MFI as well its area of operations.
Additionally, today, MFIs face borrowing costs in the range of 12% to 16% per
annum, depending on the size and track-record of the individual MFI. This model
allows well-run MFIs to achieve a ROA of about 3% to 5% and a ROE of as
much as 20% to 30%. These high ROA and ROE numbers are contingent upon
low cost financing from commercial banks and the ability to maintain high
portfolio growth along with high portfolio quality.
The portfolio quality for MFIs is typically superior to commercial banks with
total Nonperforming Assets 180 days past due of 0.2% to 3% as opposed to 3%
to 10% for commercial banks.
Types of MFIs
1. Not for Profit
MFIs
a.) NGO - MFIs
b.) Non-profit
Companies
2. Mutual Benefit
MFIs
a.) Mutually Aided
Cooperative
Societies (MACS) and
similarly
set up institutions
3. For Profit MFIs
a.) Non-Banking
Financial
Companies (NBFCs)
Total
Estimated
Number
400 to 500
10
200 to 250
700 800
Market Trends
As the Indian microfinance sector matures, it is expected the year-on-year growth
rate to decline to still high, but more sustainable levels. Over the next four years,
it is projected the number of borrowers to grow at 34%, which is 60% less than
the historical 5-year CAGR of 86% and the portfolio outstanding to grow at 40%,
which is 58% less than the historical 5-year CAGR of 96%.
Even with these cautious assumptions, it is expected MFI borrowers to
increase from 22.6 million to 64 million and portfolio outstanding to increase
from $2 billion to $8 billion by 2012. With maturity, MFIs will have to begin
reassessing and re-engineering their growth strategies in a couple of years. They
will have to take into account market opportunities and risks and adjust their
geographical exposure, client base and product offering to remain competitive.
Hints of market conditions that MFIs will have to navigate in the coming years
are present even today, and MFIs are beginning to recognize these factors as they
continue to grow.
Some Encouraging Trends in the Microfinance Sector
Trend 1 Diversification of MFIs: microfinance providers are beginning to
broaden the range of services offered under the microfinance umbrella which
started with microcredit, but now includes micro-insurance, micro savings and
money transfer facilities as well.
Trend 2 Specialization of MFIs: microfinance providers are beginning to
focus on certain livelihoods such as crop insurance, or handicraft financing, etc.
As MFIs study each business model, they can produce services that are aligned
with the unique cash flow cycles or the varying demand patters of the clients
business.
Trend 3 Turnkey Solutions: some MFIs are beginning to provide nonfinancial services to support their clients businesses, such as assisting them with
their supply chain, or sharing marketing infrastructure to enhance these microbusinesses.
Trend 4 New channels: clients no longer have to visit physical offices of MFIs
in order to avail certain services. Franchise-based business models
and branchless banking are becoming effective ways of reaching potential clients
who often live in disparate rural areas.
Investment Climate
Today, microfinance is gaining prominence as a viable asset class globally,
particularly in India. MFIs in India have continued to attract large amounts of
capital despite the global economic recession. Currently, it is reported that over
100 microfinance investment vehicles (MIVs) exist globally, and India is a
focus for many of them due to its large market size, growth capacity, profitable
business models and potential development impact. Moreover, mainstream
investors are beginning to participate in this sector, picking up larger stakes than
the social investors that have been dominant so far. The entrance of mainstream
investors is indicative of an industry that is maturing, but is still expected to grow
at a high rate.
Even though the microfinance industry is reaching maturity, the large amounts of
untapped geographical territory and client base combined with the MFIs wide
network create potential for enormous sustainable growth in the future.
MFIs and other service providers are beginning to realize the significant value of
the network that has been created by MFIs and efforts are underway to utilize
them to deliver both, financial and nonfinancial products and services. These
factors will continue to impact the supply of equity for Indian microfinance and
hence the equity valuations. Furthermore, since this untapped demand is unlikely
to be satisfied in the short or medium term, while valuations will be tempered by
cautious investors, premia driven by fundamental growth expectations can be
expected to prevail through the short and medium term as MFIs re-engineer their
strategies to take advantage of the unsatisfied microloan demand.
Microfinance Bubble
Microfinance has grown at a sharp clip in recent years. Large amounts of capital
are flowing to the sector as major banks like Morgan Stanley, Citigroup, and
Barclays Bank, among others, prove that investing in microfinance is not a
charitable activity anymore. In addition to the involvement of banks and other
large companies, microfinance is flooded with funding from a new breed of
philanthro-capitalists such as Bill Gates, Warren Buffett, and e-Bay founder
Pierre Omidyar. Overall, the microfinance sector can expect to see a sixfold
increase in foreign funding over the next several years.. Despite the increasing
amount of investment in microfinance, most of these dollars are chasing the same
mature and commercially sustainable microfinance institutions that provide a
predictable return. An example of this is the wildly successful initial public
offering of Mexico's Banco Compartamos, which took place in April 2007. In ten
years Compartamos went from a financially self-sufficient NGO to a bank with
five successful bond offerings in the market, all rated investment grade by
Standard and Poor's and Fitch Ratings. The recent success of Compartamos and
Microvest demonstrates that commercial capital now provides an important
source of funding for microfinance. As the handful of investment banks and large
companies active in the sector establish the business potential of microfinance,
others will want their piece of the profit from this emerging asset class. Standard
& Poor's2 notes that the USD 15 billion-plus in microloans that are currently on
the books pales next to the potential of some USD 150 billion in lending. With a
large amount of capital chasing a limited amount of quality assets, microfinance
could be the next asset bubble.
On the supply side, it is also true that it has all the trappings of a business
enterprise, its output is tangible and it is easily understood by the
mainstream.
This also seems to sound nice to the government, which in the post
liberalization era is trying to explain the logic of every rupee spent. That is
the reason why microfinance has attracted main stream institutions like no
other developmental project.
Real life Examples:
Issues in Microfinance
Sustainability
The first challenge relates to sustainability. MFI model is comparatively costlier
in terms of delivery of financial services. An analysis of 36 leading MFIs shows
that 89% MFIs sample were subsidy dependent and only 9 were able to cover
more than 80% of their costs.
This is partly explained by the fact that while the cost of supervision of credit is
high, the loan volumes and loan size is low. It has also been commented that
MFIs pass on the higher cost of credit to their clients who are interest
insensitive for small loans but may not be so as loan sizes increase. It is,
therefore, necessary for MFIs to develop strategies for increasing the range and
volume of their financial services.
Lack of Capital
The second area of concern for MFIs, which are on the growth path, is that they
face a paucity of owned funds. This is a critical constraint in their being able to
scale up. Many of the MFIs are socially oriented institutions and do not have
adequate access to financial capital. As a result they have high debt equity ratios.
Presently, there is no reliable mechanism in the country for meeting the equity
requirements of MFIs.The book value multiple is currently the dominant
valuation methodology in microfinance investments.
In the case of startup MFIs, using a book value multiple does not do justice to
the underlying value of the business. Typically, startups are loss making and
hence the book value continually reduces over time until they hit breakeven
point. A book value multiplier to value startups would decrease the value as the
organization uses up capital to build its business, thus accentuating the negative
rather than the positive.
Microinsurance
First big issue in the microinsurance sector is developing products that really
respond to the needs of clients and in a way that is commercially viable.
Secondly, there is strong need to enhance delivery channels. These delivery
channels have been relatively weak so far. Microinsurance companies offer
minimal products and do not want to go forward and offer complex products that
may respond better.
Microinsurance needs a delivery channel that has easy access to the low-income
market, and preferably one that has been engaged in financial transactions so that
they have controls for managing cash and the ability to track different
individuals.
Thirdly, there is a need for market education. People either have no information
about microinsurance or they have a negative attitude towards it. We have to
counter that. We have to somehow get people - without having to sit down at a
table - to understand what insurance is, and why it benefits them. That will help
to demystify microinsurance so that when agents come, people are willing to
engage with them.
Adverse selection and moral hazard
The joint liability mechanism has been relied upon to overcome the twin issues
of adverse selection and moral hazard. The group lending models are contingent
on the availability of skilled resources for group promotion and entail a gestation
period of six months to one year.
However, there is not sufficient understanding of the drivers of default and credit
risk at the level of the individual. This has constrained the development of
individual models of micro finance.
The group model was an innovation to overcome the specific issue of the quality
of the portfolio, given the inability of the poor to offer collateral.
However, from the perspective of scaling up micro financial services, it is
important to proactively discover models that will
enable direct finance to individuals.
EXITS
For early stage investors the most likely source of exit remains secondary or
trade sales. In terms of potential M&A exit scenarios, the most likely scenario is
the entry of banks as acquirers in the medium term with the RBIs and the
governments emphasis on using banks to deliver more effective financial
inclusion they could leverage MFIs as the last-mile distribution platform for the
existing banking system.
Banks could potentially find it easier to complete acquisitions compared to large
MFIs as they are less promoter driven and have better institutional capacity to
integrate acquisitions. Acquisitions of regional MFIs by large national MFIs is
also possible given certain conditions the regional MFI would need to have
strong penetration in its local market, a similar basic operating model as the
acquiring MFI and a certain minimum portfolio size of approximately $50
million to $75 million.
The MFI sector could also see a merger of equals between two mid to large sized
MFIs as the industry matures and consolidates over the medium term.
Some large MFIs including two to three in portfolio could consider a potential
listing in one to two years, but IPOs will be a challenge for the sector
overall given limited market experience in listing socially-focused firms.
Criteria for a successful IPO will include size; the capacity to absorb large
amounts of capital and generate post-issue liquidity of the listed shares; operating
experience of the management team; track-record of value creation; and
institutional capacity to deal with the listing process, compliance requirements
and public scrutiny.
CASE STUDY
SKS Microfinance Ltd
SKS Microfinance (SKSMF) is the largest microfinance company in
India with loan portfolio of ~US$1bn, 2,000+ branches spread across 19
states and 6.8mn members. Its strengths include pan-India presence,
scalable operating model, diversified product revenues and access to
various sources of capital. Lending primarily to poor women, the
business model involves village centered group lending, thereby
ensuring a check on asset quality. The huge demand-supply credit gap
and inability of banks to penetrate into unbanked areas have driven the
growth of microfinance industry. While valuations appear expensive,
the scalable business model, market leadership position and high
earnings growth provide comfort.
Rural centric business model
The success of SKS has evolved around five key elements: a)
village selection, b) focus towards women, c) member training, d)
group lending and e) village level lending and collection. With
lending primarily to poor women, the company has expanded its
reach to 2,029 branches spread across 19 states and over 6.8mn
members. The pan-India presence has further helped mitigate the
risk towards local economic slowdowns and disruption. Through
systems and solutions in place, it has developed a scalable 3Cs
model Capital, capacity and cost reduction, which in turn has
helped reach rural masses in large.
Financial highlights
(Rs FY07 FY08 FY09 FY10
(I(Rs mn
FY07
FY08
FY09
FY10
Revenues
445
1625
5060
8736
yoy growth
(%)
265.1
211.5
72.6
Operating
profit
457
1700
5540
9589
PAT
22
166
797
1748
yoy growth
(%)
651.3
380.6
119.5
EPS (Rs)
0.8
3.7
14.0
27.1
47.8
116.0
146.6
RONW (%)
7.8
12.2
18.4
3.1
Issue details
Issue opens 28-Jul-10
Issue closes* 2-Aug-10
Price band (Rs)** 850-985
Face value (Rs) 10
Lot size 7
Total Issue size(mn) 16.79
- Offer for sale (mn) 9.34
Issue size (Rs m) 16,540
Issue type 100% Book building
IPO rating CARE IPO Grade 4
Industry - Finance
*Closure date for institutional investors is 31st July, 2010
**Rs50 discount has been offered to retail investors
Pre IPO
Promoters &
promoters group
55.8
Non Promoters
44.2
Public Share reservation (%)
QIB
Non institutional
Retail
Company managementmanagement
Dr. Vikram Akula Chairman
Mr. Suresh Gurumani Managing Director
Issue manager
Lead manager Kotak Investment Banking,
Citi,Credit Suisse
Registrar
Karvy
Listing
NSE, BSE
Objective of issues (Rs m)
Post IPO
37.1
39.6
23.3
(%)
60
10
30
Objective of issues
To augment capital base to
meet future capital requirements
To achieve the benefits of
listing on the Stock Exchanges
SKS Microfinance, microfinance firm, listed at Rs. 1,036 a share on the
Bombay Stock Exchange, reflecting a gain of five per cent over the
issue price.
In line with market expectations, SKS Microfinance opened at Rs.
1,036, up 5.17 per cent over its issue price of Rs. 985 per share. Within
minutes of trade, the scrip soared nearly 18 per cent to touch a high of
Rs. 1,159.90 per piece.
Analysis
SKS Microfinance has a high capital adequacy ratio (of 28.3 per
cent which may further improve to excess of 40 per cent postoffer) and strong risk-management systems which address two
concerns MFI are facing today access to capital and
maintenance of asset quality.
While the yields are high, so are operating costs. Operating costs
are higher than interest costs and are likely to remain so. However,
SKS cost-income ratio fell to 52per cent for 2009-10 from 62 per
cent.
Another concern is the seasonalityof the earnings, which are backended to the second half of the year. Given that the MFI loans are
to low income groups, during natural calamities, the loan
portfolios may result in NPAs due to the inability of the borrower
to pay.
CONCLUSION
The strength and sustainability of the Indian microfinance business
model lies in the fact that it is serving a large unmet need for financial
inclusion. It has thus far successfully tackled challenges that have faced
other financial service providers in meeting the demands of this sector
through creative product innovation with awareness of the segments
particular needs and capacities and use of the joint liability group
mechanism to manage risk.
The model has been successful in maintaining excellent portfolio
quality even with extremely rapid expansion over the last few years.
The large size of the currently unbanked population in India and
diversity of geography means that the microfinance sector has great
potential for continued high growth. Moreover, as the sector approaches
maturity, there will be increasing attention focused toward client and
geographical diversification and product innovation, financial and nonfinancial. Besides expanding their own services, MFIs are also being
viewed as potential channels for delivery of other products and services
to low income and rural populations. Since the scale of the Indian MFI
industry has exceeded 20 million clients, other consumer product and
service providers are beginning to attach greater value to the
microfinance distribution network.
Given this growth and maturity dynamic, the Indian microfinance sector
is increasingly seen as a viable investment target with commercial
investors joining the social investors who have been nurturing the
industry thus far. Equity valuations in the Indian microfinance sector are
higher than the financial sector in general and global MFIs in particular
due to the high growth expectations and substantial availability of debt
to fuel its rapid expansion.
References
www.microfinancegateway.org
www.grameenfoundation.org
www.sksindia.com
www.mixmarket.org
www.cgap.org
Banker to the poor- Muhammad Yunus