Challenges and Valuations

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 Challenges

• Quality of Human Resource – Participants in this market struggle to find an adequate supply of trained personnel. This
nascent industry needs substantial amount of quality work force to achieve large scale economies.
• Financial Literacy - Most of the financial excluded households are not aware about the benefits of such services. In order to
penetrate in such a market, participants have to make the consumers understand the utility of such products.
• Absence of Regulation – Some of the participants have exploited the poor consumers to make huge profits. Such practices
would wean the consumers and have an negative effect on the industry in the long run. There is a need to have proper
regulation that protect consumers and also enables fast growth of the industry.
• Managing Technology – One of the major challenges in reaching the consumers is the high cost of operation. Technology
plays an important role in making the entire process more cost effective.
• Channels of Distribution – It is a huge challenge to achieve scale in distribution and remain cost effective. Rather than relying
on the traditional channels of distribution, the participants should consider non-conventional distribution channels such as
banking correspondence and mobile banking.
• Capital for Scaling Up – Such firms face a huge challenge with respect to scaling up of operations on account of lack of funds
(capital). There is a need to structure these organizations as a good investment proposition in order to attract commercial
capital.
• Lack of Information – One of the major challenge for the participants is the lack of credit information regarding repayment
history, frequency of deposits, and size of market. This lack of information leads to the inability of the service providers to
customize product offerings. The participant can overcome this challenge by taking assistance from people of local
communities such as retail shops (kiranas).
• Faulty Regulations – As financial inclusion is politically sensitive, the faculty regulations could be framed due to vested interest
of politicians. In case of microfinance, pricing caps for interest rate/mark-up could be imposed to reduce exploitation. Such caps
could in turn affect the profitability of MFIs and slow the process of financial inclusion.

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 Statistics on Financial Inclusion

Financial Inclusion: Data on Lending and Deposits by MFIs and BCs for Major Regions (Global), 2010

Gross Loan Average Loan Total Number of

Portfolio Number of Active Balance per Total Deposits Assets Depositors
Regions ($ Million) Borrowers (‘000) Borrower ($) ($ Million) ($ Million) (‘000)

Africa 4,800 8,000 324.9 5,200 8,500 20,700

East Asia and the

2,430 13,700 326.4 1,500 6,700 4,900
Pacific

Eastern Europe and

7,400 2,800 1,854.1 4,700 10,600 2,800
Central Asia

Latin America and the

19,500 14,200 946.7 12,800 24,600 17,100
Caribbean

Middle East and North

1,300 2,700 451.4 134.3 1,800 97
Africa

South Asia 7,500 50,400 143.7 2,500 9,700 33,100

Note: All figures are rounded; the base year is 2010. Source: Industry Sources and Frost & Sullivan

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 Statistics on Financial Inclusion (continued)

Financial Inclusion: Data on Lending and Deposits by MFIs and BCs for Major Countries (Global), 2010

Gross Loan Average Loan Total Number of

Portfolio Number of Active Balance per Deposits Total Assets Depositors
Countries ($ Million) Borrowers (‘000) Borrower ($) ($ Million) ($ Million) (‘000)

India 4,400 26,600 144 204.9 5,100 2,000

Argentina 21.6 30 568.2 N.A 27.7 N.A

Bangladesh 2,300 20,600 115.6 1,800 3,500 27,800

Brazil 943.5 820 1,418.2 226.8 1,100 167

China 18,600 1,600 1,747.4 11 66.9 3

Indonesia 90.1 286 505.1 46.6 111.6 362

Kenya 1,100 1,500 362.3 1,200 1,900 6,500

Malaysia 185 206 896.6 48.5 269.2 NA

Pakistan 209.9 1,400 120 85.7 340.8 462

The Philippines 590.4 2,700 276 431.3 869.1 3,400

Russia 167.7 91 2,171.8 51.8 220.5 23

South Africa 730.4 805 1,009.7 452.6 1,200 1,300

Sri Lanka 269.6 911 200.8 261 282.1 1,800

Note: All figures are rounded; the base year is 2010. Source: Industry Sources and Frost & Sullivan

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 Investments and Valuations

• Microfinance is largest in terms of the investment from the private equity investors. In India, the valuations have come to
reasonable levels after ordinance passed in Andhra Pradesh. One of the policy reforms that could be brought in force is capping
interest rates and profit margins. The share prices of SKS Microfinance, the largest and the only listed MFI in India, have
slumped considerably from its 52 week highs. Before this ordinance, the MFIs were valued at 3 to 7 times their book value.
However, after the controversies and ordinance, the MFIs are valued at 2 to 2.5 times their book value. Given the difficulty in
getting funds from banks, the MFIs would have to adopt newer means of raising funds such as non-convertible debentures.
Over a 4 to 6 year horizon, the investor can expect a 100.0 to 150.0 percent return on their investment.
• State Bank of India acquired 20.0 percent stake in A Little World (ALW), a banking correspondent for Rs. 80 crores in October
2010. This deal valued ALW, which has tie-up with 25 financial institutions worth Rs. 400 crores. ALW has opened 60 lakh bank
accounts through 10,000 touch points since its formation in 2006. It has plans to increase its footprint to more than 12,000
villages with a network of 25,000 touch points in 2011-2013. This transaction could be used as a benchmark for valuation for
funding deals in future.
• Vortex Engineering, a firm founded in 2001, has developed cost-effective ATMs for semi-urban and rural areas. It has received
funding to the tune of $6 million from various investors. It clocked revenue of Rs. 22.82 crores with a negative PAT of
Rs.69.4 crores in 2010. It has only received an order to supply 600 ATMs to the State Bank of India.

Financial Inclusion: Ratio Analysis of Participants (India), 2006-2009

Institutions ROE (2009) PAT CAGR 06-09 P/BV (2009) The valuations for MFIs are higher than those
for the banks and NBFCs because of vast
MFIs 31.1% 171.0% 5–7
market potential, low CAPEX, and low
Banks 19.0% 56.0% 4.8 penetration of such services.

NBFC 18.2% 33.2% 3.9

Note: All figures are rounded; the base year is 2010.
Source: Industry Sources and Frost & Sullivan

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