Microfinance Institutions - India Ratings and Research

Transcription

Microfinance Institutions
Financial Services
Microfinance: Strong Comeback
Sector to Grow 24% Annually Over FY15-FY19
Special Report
Microfinance Alive and Kicking: The microfinance sector is growing and attracting banks and
private equity (PE) investors again, says India Ratings & Research (Ind-Ra). However, this time
the growth is much lower than the over 100% annual growth seen during FY06-FY10 and
benefits from a tighter supervisory regime. The sector‟s outreach increased over 23% yoy and
gross loan portfolio grew 42% yoy in FY14. Ind-Ra expects the sector to grow at a CAGR of
24% and require an equity infusion of INR27bn over FY15-FY19.
Regulations De-risking MFIs: The Reserve Bank of India (RBI) has now emerged as the
central regulator for non-banking financial companies-MFIs (NBFC-MFIs; covering 90% of the
MFI universe). In addition to placing limits and defining procedures for MFI operations, RBI
guidelines have led to the establishment/prominence of credit information bureaus (CIB) such
as Equifax Credit Information Services Private Limited (Equifax) and CRIF High Mark Credit
Information Services (Highmark) and self-regulatory organisations (SROs) - Microfinance
Institutions Network (MFIN) and Sa-Dhan. It is mandatory for NBFC-MFIs to be members of at
least one CIB and one SRO to ensure credit checks and process adherence, respectively.
Most states barring Andhra Pradesh seem to have accepted the role of RBI to regulate NBFCMFIs and have not invoked the Money Lenders Act to regulate MFI operations. The
Microfinance Bill 2012 is pending in Parliament of India; if passed, it may eliminate the
possibility of an AP-like event in future.
Emerged Stronger from the AP Crisis: Ind-Ra believes the growth of MFIs is sustainable in
view of interest rate and margin caps, defined recovery procedures, caps on borrower
indebtedness and credit check procedures. Limitations have been placed on the earlier
observed lacunae of MFI operations.
The Joint Lending Group (JLG) model has survived and is the main reason of the high recovery
rates of over 98% in non-AP states. Many MFIs are spreading operations in several states so
as to minimise the impact of an AP-like event.
Funding Improves with Restored Confidence: MFIs have demonstrated strong growth in the
face of stringent regulations and limitations on lending, indicating that their model is strong and
viable. Also, RBI has maintained the priority sector status for lending to MFIs for microfinance
operations. As a result, bank funding that had dried up in the aftermath of the AP crisis is again
available to MFIs. Bank borrowing and securitisation deals for NBFC-MFIs increased to
INR274bn in FY14 from around INR206bn in FY12 and FY13.
The sector is again attracting PE participation (FY14: USD160m; FY15 till date: USD152m).
Given the growth trajectory of the sector, we estimate that the sector will require INR27bn
(USD449m) of equity infusion over FY15-FY19.
Analysts
Jindal Haria
+91 22 4000 1750
jindal.haria@indiaratings.co.in
Cyrus Dadabhoy
+91 22 4000 1723
cyrus.dadabhoy@indiaratings.co.in
Evolution on the Cards: The government‟s focus on financial inclusion and introduction of
new delivery models such as business correspondents (BC) and small banks could intensify
competition for NBFC-MFIs and simultaneously present evolutionary opportunities to them. An
orderly evolution can have several positive impacts, including lower costs for borrowers and
greater systemic stability.
www.indiaratings.co.in
30 January 2015
Possibilities and Business Models for MFIs
Microfinance is a one-dimensional business, providing credit to borrowers with limited access
to formal banking channels. The Indian government has over the years initiated various
schemes, under which bank accounts have been opened for the unbanked. Competition with
various existing and new microfinance delivery models, government thrust for financial
inclusion through public sector banks and relative credit saturation in some districts could prod
NBFC-MFIs to evolve into multi-services providers to the poor and the unbanked.
Increased Competition: The Jan Dhan scheme launched by the new government could
provide millions with access to banks and banking services. The number of BCs increased by
over 10x between FY10-FY14. Though efficiency of the BC model can be debated, there is no
denying that it could be a tough competitor to MFIs. Furthermore, market reports suggest that
some districts are saturated by micro-credits (within the extant RBI guidelines), especially in
West Bengal, Tamil Nadu and Karnataka. Differentiated banking licences and norms on rural
branches for scheduled commercial banks (SCBs) could pose a threat to MFIs‟ operations in
form of competition or an opportunity for evolution.
With around 120 million accounts opened in a matter of months, the scale and speed of the Jan
Dhan scheme have not been witnessed earlier. However, we believe that competition between
banks and MFIs could intensify only after four to five years when these large scale inclusion
programmes and diversified banks are established and achieve traction. This also provides
MFIs with a window to consolidate and grow based on their simple process and documentation
and the ability to closely interact with customers, deliver speedy and timely credit at customer
door-step, and to evolve into entities providing a range of financial services.
Opportunity to Make Strategic Shifts: The sector could see a high level of changes and
dynamism given the government‟s focus on financial inclusion. The speed at which the BC
model is adopted, the efficiency of the model as well as of emerging differentiated banking
models can provide opportunities to MFIs. MFIs may require evolving their models to serve
their customers rather than handing them over to banks on a platter.

BCs: BCs tie up with banks and provide access to borrowers to the partner bank‟s services
and assist the borrowers with banking processes through client servicing points (CSPs).
The Indian banking system set up over 3,00,000 CSPs by FY14 (FY10: 34,200). However,
the efficacy of the model leaves much to be desired. NBFC-MFIs have now been permitted
by RBI to act as BCs to SCBs. This could be an opportunity especially for many smaller
MFIs to compete with larger MFIs and remain in business.

Differentiated banking licences: RBI plans to establish payment banks and small banks
in proximity to borrowers. For an NBFC-MFI, this license could mean access to low-cost
funds (savings) and greater legitimacy in lending operations. Mid and large-sized NBFCMFIs could opt for the conversion to a small bank and evolve into a holistic financial
services provider.
Indian MFIs Could Follow Global MFIs: Most regulated MFIs in the world‟s 15 countries with
the largest MFI operations have access to savings as low-cost funds (Appendix 14). Although
savings could be partially ring-fenced, these regulated MFIs can provide a suite of services to
borrowers. In some countries in South and Central America, MFIs have migrated from group
lending to individual lending models. Some countries also allow MFIs to fund MSMEs.
Applicable Criteria
Financial Institutions Rating Criteria
(September 2012)
Non-Bank Finance Companies Criteria
(September 2012)
January 2015
In a bid to further the objective of financial inclusion, RBI could be somewhat liberal in the
issuance of small bank licences to NBFC-MFIs. RBI could, on being reasonably confident of
the sector, also relax the norms of qualifying assets and permit higher borrower indebtedness
as well as expansion in the scope of financial services provided by MFIs, making them
important participants in financial inclusion.
2
1. Re-emerging from the Crisis Gradually
The microfinance sector grew 40% yoy in FY14 which is still a far cry from the scorching pace
of growth of MFIs in their heydays (FY06-FY10) - Appendix 1. The sector has re-emerged from
the debilitating effects of the AP crisis (Appendix 2) and is experiencing strong, structural and
sustainable growth. The sector is back in favour with commercial banks (supported by RBI‟s
continued recognition of priority sector to microfinance) and PE investors. PE investors pumped
in USD160m in FY14 and USD152m in FY15 till date.
RBI has acknowledged the role of MFIs in financial inclusion and brought out a set of
guidelines. It has emerged as a central regulator for NBFC-MFIs and imparted a sense of
stability and regulatory certainty to an extent to the sector.
1.1. RBI Intervention Leads to a Stable Regulatory Environment
RBI had appointed a committee under Y. Malegam (Malegam committee) to suggest the
operational paradigms for microfinance operations and suitable regulatory structures. The
incumbent regulatory structure was pertaining to NBFCs in general and did not address the
specific needs of regulating MFIs. RBI issued a set of guidelines in December 2011
(Appendix 3) based on the Malegam Committee report, which led to the recognition of a new
class of NBFCs: NBFC-MFIs.
These guidelines made it clear that RBI acknowledged the role of MFIs in financial inclusion
and that is expected to continue in future. The guidelines led to the establishment of Credit
Information Bureaus (CIBs) and Self-Regulatory Organisations (SROs).
CIBs provide, maintain and update borrower records of the loans availed, payment history, etc.
They enable MFIs to perform credit checks on borrowers before providing credit (Appendix 4).
SROs act as industry representative to various forums as well as a check on compliance of
NBFC-MFIs to the code of conduct based on RBI guidelines. Member MFIs report operational
data periodically to SROs. (Appendix 4)
RBI also allowed NBFC-MFIs to act as BCs (Appendix 5) since their reach is deeper than
banks especially in unbanked villages and their employees/agents have closer and frequent
contacts with locals; they can facilitate deeper penetration of banking products through tie-ups
with various banks.
1.2. Growth Revival in Loan Portfolio and Outreach
RBI‟s acknowledgement that MFIs perform a very important role in financial inclusion of the
poor provides legitimacy to the regulated operations of MFIs. However, in a controlled
environment and where market participants have not shown enthusiasm for the sector, MFIs
managed respectable growth from FY12-FY14. In fact, total loans outstanding grew over 40%
in FY14.
Figure 1
Gross Loans Outstanding of NBFC-MFIs
(INRbn)
279
300
250
200
163
183
179
FY11
FY12
197
150
89
100
50
14
36
0
FY07
FY08
FY09
FY10
FY13
FY14
Source: Sa-Dhan, MFIN, Ind-Ra
January 2015
3
Figure 2
NBFC-MFIs grew their loan portfolio
over 40% yoy in FY14.
Growth in Gross Loan Outstanding
NBFC-MFIs are only for-profit legal
form of MFIs and hence enjoy higher
growth. They account for over 90%
of MFI loan portfolios.
(%)
Most large MFIs converted into for
profit NBFC-MFIs between FY08 and
FY10.
Growth in MFI
180
160
140
120
100
80
60
40
20
0
-20
158
Growth in NBFCs-MFIs
150
97
83
72
56
37
18
FY08
FY09
FY10
12
FY11
7
-2
-3
FY12
42
10
FY13
FY14
The MFI universe consists of NBFCs, NGOs/societies, and Section 25 companies. RBI
acknowledged the importance of the role of MFIs in financial inclusion since it was a provider of
credit about 30 million poor households in FY11. MFIs are often present where banks are not
and provide doorstep facilities to borrowers. This reflects in the growing number of borrowers
from these MFIs.
Figure 4
Figure 3
Borrower Growth
Client Outreach
(%)
(m)
20
32
31
30
29
28
27
26
25
24
15
10
5
0
-5
-10
-15
FY11
FY12
FY13
FY14
31
31
28
27
27
FY10
FY11
FY12
FY13
FY14
Figure 5
In FY11-FY14, per capita outstanding
increased by about 40% on a nominal
basis but only by 14% on an inflation
adjusted basis.
Substantial growth in the MFI loan
portfolio is due to an increase in
penetration and not higher borrower
indebtedness.
Average Outstanding Loans Per Borrower
Avg loan size
(INR)
CPI adjusted (base 2011)
12,000
9,708
10,000
8,000
6,997
7,668
8,160
6,621
6,955
6,766
FY11
FY12
FY13
6,621
6,000
4,000
7,533
2,000
0
FY10
FY14
Source: MFIN, Sa-Dhan
1.3. Geographic Diversification Ensued
The sector is decreasing its dependence on the south, especially AP, and establishing a
greater proportion of new branches in Uttar Pradesh (UP), Maharashtra, Bihar and Madhya
Pradesh (MP). MFIs are spreading geographically because of the following two main reasons:
1.
January 2015
Minimise the possibility of an AP-like event: MFIs with a higher proportion of loans in AP
suffered and many were restructured.
4
2.
Possible saturation in some districts: Though there are no studies on the level of
penetration of MFIs in districts, discussions with MFIs, SROs and CIBs indicate that some
districts in West Bengal (WB), Tamil Nadu (TN) and Karnataka are witnessing micro-credit
saturation rejection rates at CIB of 25%-30% (all India average: 15%-20%).
Figure 6
Between 1QFY14 and 2QFY15, NBFCMFIs increased their branches by 33%
in MP, 30% in UP and 28% in
Maharashtra.
Rapid Growth in Branches in Underpenetrated States
Q2FY15
MP
513
Bihar
540
UP
FY13
683
673
751
578
MH
873
682
KA
859
944
936
AP
1,082
1,355
1,318
1,364
1,348
1,400
TN
WB
0
200
400
600
800
1,000
1,200
1,600
Source: Sa-Dhan, MFIN
Figure 7
Share of South India in MFI loan
portfolio decreased to 39% in FY14
from 61% in FY08.
Regional Distribution of MFI Loans Outstanding (%)
Region
South
East
North
West
Central
North East
2008
61
20
1
7
9
1
2009
58
20
3
6
11
1
2010
55
21
3
8
9
3
2011
48
20
3
12
13
3
2012
49
23
4
8
10
6
2013
46
22
4
10
11
7
2014
39
25
4
12
15
5
Performance of MFIs in the states with larger MFI operations has been illustrated in
Appendix 6.
1.4. PE and Debt Funding Returns
Banks have shown greater confidence in the sector and increased their funding to NBFCs
through debt and also securitisation primarily due to two reasons:

The sector has begun to perform well under relative regulatory certainty

On-lending to NBFC-MFIs is considered priority sector lending

Securitisation of MFI loans also has priority sector benefits
Figure 8
Bank Borrowings and Securitisation
Borrowings (INRbn outstanding)
250 207
200
Securitised portfolio
207
178
170
28
37
34
FY11
FY12
FY13
222
150
100
50
20
0
FY10
51
FY14
PE players are showing renewed interest in the sector, even when it is growing at a relatively
moderate pace (FY14: about 40%) as against over 100% growth in pre-AP crisis years. It is
important that PE players maintain their interest in the sector since it will require equity funding
to finance growth.
January 2015
5
Figure 9
Private Equity Investment
(USDm)
180
165
163
137
150
120
160
152
FY14
FY15
(till Nov)
93
83
90
149
60
30
4
16
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Source: VC Circle
1.5. Operational Performance Improved
RBI, in its guidelines for NBFC-MFIs, has placed caps on the margins of NBFC-MFIs at 10%
for MFIs with total assets above INR1.0bn and 12% for MFIs with total assets below INR1.0bn.
The interest rates have a cap of 2.75x the bank rate of SCBs as notified by RBI from time to
time.
In addition, MFIs have two main cost components: Finance costs (fees and interest on
borrowings) and operating costs (admin and overhead costs and employee costs).
Effectively, revenue upsides have been capped by RBI while MFIs have little control over
finance costs. MFIs can control only operating costs to increase return on assets (RoAs).
Operating costs for the sector declined to 8.4% of loan portfolio in FY14 of the loan portfolio
from 10.3% in FY13. This was the result of more borrowers/branches and borrowers/loan
officer, a drop in the number of employees and loan officers, and increased share of field staff
(Appendix 7).
The number of branches and MFI staff
decreased while the outreach or the
number of borrowers increased to 31
million in FY14 from 27 million in FY11.
Figure 10
Operating Costs, Branches and Staff
Branches (LHS)
(000)
140
10.3
9.3
8.8
100
111.8
80
40
Operating expense/loan portfolio (RHS)
(%)
12
120
60
Staff (LHS)
9.9
93.3
87.0
64.4
8.2
10
8
75.7
6
4
7.3
10.4
12.7
13.6
0
FY08
FY09
FY10
FY11
20
8.4
114.7
11.5
FY12
10.7 2
0
FY13
Source: Sa-Dhan, mixmarket.org
2. Ind-Ra’s View on the Sector
Ind-Ra is of the view that MFIs are set for sustained, stable medium-term growth till FY19
based on the sector performance in the aftermath of AP crisis and the emerging landscape of
microfinance, with the government‟s thrust on financial inclusion and diversified banking
licenses. We expect that the other models of microfinance delivery (BC, small banks, Self Help
Group or SHG) could achieve traction by FY19, by then the current RBI guidelines may have a
larger impact in limiting the growth of existing MFIs in their current form. MFIs could evolve
their operations over the next five years to provide a full range of financial services to the poor
and withstand competition on a strong footing.
January 2015
6
2.1. Stage Set for Growth over Medium Term
Ind-Ra expects MFIs to grow at a CAGR of about 25% for about four to five years by increasing
their outreach and disbursements per borrower. However, the growth expectations are
constrained by the evolution of differentiated banking, banking penetration through the BC
model and government initiatives such as Jan Dhan and the impact of these models.
2.1.1.Estimates of Market Size
An analysis of 15 countries with largest MFI operations reveals that average loan outstanding
per borrower is 18.7% of per capita GDP while it is 10.8% in India. Also, microfinance
penetration (borrowers) is above 30% in some countries while it is about 10% in India (SHGbank linkage and MFIs together).
Figure 11
Microfinance Market Potential
Wt. average outstanding per borrower as % of per capita GDP
(Top 15 countries with MFI operations)
Wt. average outstanding per borrower as % of per capita GDP for India
Average outstanding per borrower - India (2013) (A)
Potential growth in per capita outstanding (B) (%)
Potential per capita outstanding - India (C) = (A) + (A)*(B)
Households with no access to credit (D)
Size of market outstanding basis (USD) = (C)*(D) *70% a
Current microfinance outstanding (SHG and MFI)
18.7
10.8
USD163
72
USD280
180m
USD35bn
USD12bn
All analysis on outstanding basis; 1USD = INR60
a
Outstanding portfolio is about 70% of disbursements
Source: RBI, World Bank, Mix Markets, Ind-Ra
The microfinance universe can grow up to 3x its current size, indicating there is high latent
demand for micro-credit.
2.1.2.Caution in Newer Large Markets
MFIs are now taking up the challenge and growing in previously underserved states due to the
following reasons:
1.
Faster expansion since RBI has through its guidelines tried to limit competition in markets
currently served
2.
Since an MFI customer cannot borrow from more than two MFIs, some regions/districts
may have reached saturation. Discussions with market participants led us to believe that
some districts in WB, TN and Karnataka are facing 25%-30% rejection rates at CIBs.
The new growth states such as MP, UP have shown higher defaults in the SHG-Bank linkage
programme than the South Indian states (Appendix 8). We expect that the JLG structure will
offer MFIs some protection against credit behaviours in these states (Appendix 16); however,
MFIs need to keep a watchful eye on portfolio quality, especially in these states.
January 2015
7
Figure 12
NPAs
Under
SHG
Programme
(FY14)
NPAs
NPAs Under
Under SHG
SHG Programme
Programme (FY14)
(FY14)
Growth
in
MFI
Branches
(Q1FY14
to
Q2FY15)
Growth
Growth in
in MFI
MFI Branches
Branches (Q1FY14
(Q1FY14 to
to Q2FY15)
Q2FY15)
www.indzara.blogspot.com
www.indzara.blogspot.com
Jammu
Jammu
and
and
Kashmir
Kashmir
Jammu
Jammu
and
and
Kashmir
Kashmir
Himachal
Himachal
Pradesh
Pradesh
P unjab Chandigarh
P unjab Chandigarh
Uttarakhand
Uttarakhand
Haryana
Haryana
Del hi
Del hi
Uttar Pradesh
Uttar Pradesh
Rajasthan
Rajasthan
Gujarat
Gujarat
Madhya Pradesh
Madhya Pradesh
Daman
Daman
and Diu
and
Diu
Dadra
and
Arunachal
Arunachal
P radesh
P radesh
Sikkim
Sikkim
Assam
Nagaland
Assam
Meghalaya Nagaland
Meghalaya Manipur
Manipur
Bihar
Bihar
Jharkhand
Jharkhand West
Mizoram
West
Bengal
Bengal
Gujarat
Gujarat
Arabian
Arabian
Sea
Sea
Goa
Goa
Lakshadweep
Lakshadweep
Sikkim
Sikkim
Assam
Assam
Meghalaya
Meghalaya
Bihar
Bihar
Jharkhand
Jharkhand
Madhya Pradesh
Madhya Pradesh
Daman
Daman
and Diu
and
DadraDiu
and
Odisha
Odisha
Arunachal
Arunachal
Pradesh
Pradesh
Uttar Pradesh
Uttar Pradesh
Rajasthan
Rajasthan
Tripura
Tripura Mizoram
Nagar
Dadra Haveli
and
Nagar Haveli
Maharashtra
Maharashtra
Himachal
Himachal
Pradesh
Pradesh
Chandigarh
Chandigarh
Uttarakhand
Uttarakhand
Haryana
Haryana
Delhi
Delhi
Punjab
Punjab
Nagaland
Nagaland
Manipur
Manipur
Tripura
Tripura Mizoram
Mizoram
West
West
Bengal
Bengal
Odisha
Odisha
Nagar
Haveli
Dadra and
Nagar Haveli
Telangana
Telangana
Andhra
Andhra
Pradesh
Pradesh
P uducherry
Tamil NaduP uducherry
Tamil Nadu
Indian Ocean
Indian Ocean
Maharashtra
Maharashtra
Bay
Bay
of
of
Bengal
Bengal
Telangana
Telangana
Goa
Arabian Goa
Arabian
Sea
Sea
Andaman
Andaman
and
and
Nicobar
>25%
Nicobar
Islands
>25%
Islands
>25%
>10%,<20%
>10%,<20%
Colour Gradient
>10%,<20%
Colour Gradient
>0%,
Lowest<10%,
(Red) to Highest (Green)
>0%,
Lowest
(Red) to Highest (Green)
>0%,<10%,
<10%,
<0%
<0%
<0%
Lakshadweep
Lakshadweep
Andhra
Andhra
Pradesh
Pradesh
Puducherry
Puducherry
Tamil Nadu
Tamil Nadu
Bay
Bay
of
of
Bengal
Bengal
<5%
<5%
>5%,<10%
<10%
>5%,
Andaman
Andaman
and
and
Nicobar
>10%,<13%
<13%
>10%,
>13%,<15%
<15%
>13%,
>15%
>15%
Nicobar
Islands
Islands
Map not to scale
Map not to scale
Source: Ind-Ra
2.1.3.Growth and Penetration Expectations
The growth that MFIs are experiencing now is structured, planned and systematic without
unbridled competition for the same set of borrowers. The growth of MFI portfolio is affected by
loans outstanding per borrower and increased penetration or borrower outreach.
Ind-Ra understands from market participants that the outreach can increase at the rate of 12%
CAGR over the medium term as the number of branches is increasing in previously underserved regions. Further, the actual number of unique borrowers could be less since the SROs
add up the number of borrowers of individual MFIs; some borrowers could be counted twice.
The annual growth in outreach (number of borrowers as reported by SROs) in 1QFY15 was
about 23%.
Figure 13
Loan outstanding per borrower or
average ticket size is likely to increase
at the rate of FY14 nominal GDP
growth rate (11.5%). MFIs were
focused on increasing penetration in
FY14. MFIN quarterly data shows that
the outreach increased to 26.49 million
in 1QFY15 from 21.54 million in
1QFY14, implying growth of 23%.
Growth Expectation in Borrower Outreach and Average Ticket Size
FY14
FY15
FY16
FY17
FY18
FY19
50
38.6
40
42.4
45.8
34.4
29.9
25.4
30
20
10.0
11.1
12.3
13.5
14.8
16.3
10
0
Average ticket size (INR 000s)
Source: MFIN, Ind-Ra
Borrower outreach (m)
Ind-Ra expects the sector to grow at a CAGR of 24% over the medium term given the confines
of RBI guidelines, an assumption that an AP-like crisis does not occur and the Microfinance Bill
(Appendix 9) does not impose debilitating conditions on the sector.
January 2015
8
Figure 14
Portfolio Size Estimates and Growth in Medium Term
Portfolio size (LHS)
(INRbn)
Growth (RHS)
(%)
748
800
700
600
500
400
300
200
100
0
32
35
629
27
30
520
25
23
422
21
332
19
20
15
253
10
5
0
FY14
Source: Ind-Ra
FY15
FY16
FY17
FY18
FY19
The microfinance market can grow 3x its current size over FY15-FY19. The SHG programme is
not showing much growth since FY11 in terms of credit outreach. Hence, MFIs can obtain an
increased share of the microfinance lending business. We estimate that MFIs can increase
their portfolio from USD5.0bn in FY14 to USD12bn in FY19 while SHG lending could increase
to USD12bn from USD7bn. However, a credit demand-supply gap of USD11bn still will remain.
Figure 15
Latent Credit Demand-Supply
MFI
(USDbn)
40
35
30
25
20
15
10
5
0
SHG
Credit gap
11
11
7
13
5
FY14
Source: NABARD, MFIN, Sa-Dhan, Ind-Ra, RBI (nominal growth rate)
FY19
2.2. Profitability Expectations
Average RoAs and return on equity (RoE) improved from 2011-2012. However, they were also
limited by a cap on margins and minimum operating costs for delivery of microfinance products
during that time. Periodic physical interaction with borrowers and doorstep delivery is a
manpower-intensive method of providing services and will have high delivery costs.
NBFC-MFIs have operating costs in the range of 8%-13%. Any further increase in the
profitability will be driven by a reduction in operating costs or by increasing other income
through cross selling or acting as banking correspondents. Any margin pressure in case of
regulatory changes will adversely impact the return ratios.
January 2015
9
Figure 16
RoA Tree and Expected Returns
Gross loan
portfolio (GLP)
above INR1.0bn
10
11.5
2
GLP below
INR1.0bn
12
13.8
2
13.5
8-10
15.8
10-13
Pre provisioning profit (%)
Provisioning (%)
Pre-tax profit (%)
Tax (%)
RoA (%)
Leverage (x)
3.5-5.5
1
2.5-4.5
0.8-1.5
1.7-3
6
2.8-5.8
1
1.8-4.8
0.6-1.6
1.2-3.2
4-5
RoE (%)
10.2-18
4.8-12.8
RoA Tree and expected
returns
Spread (%)
Margin (%)
Fees and other income
(%)
Total income (%)
Operating costs (%)
Comments
RBI stipulation (based on asset size)
Minimum Tier 1: 15%
1% can be charged - RBI stipulation,
disbursement usually 30% higher
than GLP
Estimates based on experience of
MFIs
33%
Lower leverage for MFIs with GLP
below INR1.0bn because of lower
bankability
Source: Ind-Ra
2.3. INR27bn Equity Infusion Likely over Medium Term
Most MFIs have been maintaining tier 1 capital at 18%-25% as against the RBI stipulation of
minimum 7.5%. Given the bitter past experience, we believe that most MFIs will maintain
excess capital and will consider fund raising at the threshold levels of 20% of tier 1 capital.
Within the confines of RBI regulations, our calculations in the previous section suggest that the
largest 20-25 MFIs could maintain RoE in the range of 10%-18%. For our calculations of capital
requirement, we assumed average RoE at 15% and tier 1 capital at 20%. The capital
requirement could be higher if:
Under our assumptions of 28% loan
book CAGR over FY15-FY19, the
NBFC-MFI universe is likely to require
INR27bn (USD449m) of equity
investments. The requirements are
likely to change if some MFIs are
converted into small banks.
1.
MFIs with lower tier 1 capital could bring it to par with better capitalised MFIs
2.
MFIs could raise equity for non-microcredit portion of their business
3.
MFIs could require higher capital if they opt for conversion to small banks
Figure 17
Capital Requirement
Min incremental capital required
Profit
Equity funding required
(INRbn)
25
20
18
21
17
16
14
15
10
24
22
20
11
9
7
7
5
5
3
5
0
FY15
Source: Ind-Ra
FY16
FY17
FY18
FY19
2.4. Lower Probability of AP-like Crisis
The AP crisis (Appendix 2) happened because of unbridled competition among MFIs, absence
of sector-specific regulations, process dilution, high interest rates and aggressive recovery
techniques. AP brought out the AP Microfinance Act in December 2010 (Ordinance in October
2010) which put severe restrictions on MFIs‟ operations in the state. Some large MFIs that
were restructured had over 50% of their portfolios in AP.
Much has changed since then. RBI is now the central regulator for NBFC-MFIs (which cover
over 90% of MFI borrowers). It has issued guidelines for various operational facets of MFIs‟
January 2015
10
operations, which have reduced credit and operational risks (Appendix 3). The guidelines have
resulted in interest rate caps, limit on loan amounts, limit on the number of micro-loans that a
borrower can avail and specifications for micro-loan tenor. MFIs are required to adhere to
capital stipulations, follow benign recovery means and exhibit transparency in interest and
other charges. This has limited the growth in loan portfolios and returns of MFIs (compared to
pre-AP crisis period). However, the RBI guidelines have resulted in stable growth, a steady
micro-finance structure and a higher degree of compliance to the code of conduct.
It is also mandatory for MFIs to conduct credit checks on borrowers through credit bureaus
(Equifax and Highmark) before disbursement (Appendix 4). This prevents indiscriminate
lending by MFIs and enables evaluation of borrower loan history and client borrowing against
RBI stipulations.
RBI has appointed MFIN as the SRO for NBFC-MFIs (which covered about 90% of
microfinance loan portfolio in FY14) and intends to implement a strong code of conduct and
self-regulation through the SRO (Appendix 4). Sa-Dhan is another body which has non-profit
MFIs among its members in addition to NBFC-MFIs.
No state other than Andhra Pradesh has decided to invoke provisions of the Money Lenders‟
Act to regulate MFI operations. The central government is evaluating the Microfinance Bill
(Appendix 9) to regulate microfinance operations. It was presented to the Parliamentary
Standing Committee in February 2014, which recommended the Finance Ministry to carry out
further studies especially on regulations, low interest microfinance programmes present in
some states and consumer protection in the sector.
The Microfinance Bill if passed could eliminate the possibilities of an AP-like event.
Figure 18
Summary of Major Changes in MFI Sector
RBI has clearly defined process, rates and
code of conduct
RBI has emerged as the central regulator of
NBFC-MFI
•
•
•
This limits the scope of interference by
individual state governments, which could
have otherwise used the Money Lenders
Act to control MFIs.
It also provides huge legitimacy to the
sector and improves MFI‟s access to funds
from the commercial banking sector.
•
•
Margins have been capped at 10% for
large MFIs, thus limiting the scope for
charging excessive interest rates.
Insurance expense and processing fees
are the only charges that an MFI can levy.
Recovery practices have been clearly
defined.
Low
Risk
CIBs provide an efficient monitoring
mechanism
Geographic diversification has ensured
lower exposure to a state
•
•
•
High indebtedness in AP was an outcome
of absence of any customer-related credit
information.
CIBs generate an exception report when
more than two MFIs lend to a single
borrower, thus acting as a check on MFIs.
•
Top five AP-based MFIs had over 35% of
their portfolios in AP.
Many MFIs have begun to diversify into
multiple states, partly under the fear of APlike event and partly in search of growth
opportunities.
Source: Ind-Ra
Passage of MFI Bill Last Step towards Ensuring Regulatory Certainty
Since NBFC-MFIs are regulated by the central regulator, some MFI constituencies are of the
view that the state has no role in regulating NBFC-MFIs. However, for the central bank‟s
authority to regulate MFIs to become a law, the Microfinance Bill has to be passed by the
Indian parliament (Appendix 9).
January 2015
11
In our opinion, the major objections raised by the Parliamentary Standing Committee now
either have sufficient mitigants (considering global experience of the sector) or do not take into
account the difference between MFI and bank lending.
Figure 19
Why Has the Microfinance Bill Not Been Passed So Far?
Key objections to the
MFI bill
The bill proposed RBI as
regulator for MFIs
High interest rates of
26% charged (some
government programmes
charge 12%)
Silent on multiple
lending, coercive
recovery and overindebtedness
Global experience (top 17
Current mitigants
countries MFI operations)
RBI is the regulator for NBFC-MFIs (90% of MFI Mixed models of regulation
universe)
for various forms of MFIs
Our analysis reveals Indian MFIs charge interest rates up to 3x the bank
rate while global average is 4.5x the bank rates (Appendix 9)
RBI has defined limits and procedures in
regulations for NBFC-MFIs
Independent client
protection agency or
respective central banks
Source: Ind-Ra
2.5. Competitive Environment, Regulations Favouring Incumbents
The RBI regulations on borrower indebtedness have indirectly resulted in lowering the
competitive levels among MFIs. The key regulations to that effect are not more than two MFIs
can lend to the same borrower and a spread cap of 10% for large MFIs and 12% for small
MFIs.
The cumulative impact of these regulations is lower competition. A few scenarios could be:
1.
Suppose two MFIs are already dominant players in a particular village.
2.
A new entrant in this village will most likely have to tap new borrowers, who may not be
easily available as the existing two MFIs have tapped most of the potential customers.
3.
Thus, the costs for the new entrant will be significantly higher and the 10% spread cap will
make the MFI‟s business model unviable or less profitable.
Thus, incumbents have an inherent competitive advantage. However, this does not prevent a
large MFI or a corporate house acquiring an MFI.
2.5.1.Increasing Share of Larger MFIs
Figure 21
Category of NBFC-MFI
GLP >INR5.0bn
Large
INR1.0bn>GLP<INR5.0bn Mid-sized
GLP<INR1.0bn
Small
Midsized MFIs are increasing their share of borrower outreach. Large MFIs have seen a
marginal dip in their share while small MFIs have seen a significant decrease in their share.
Figure 20
Increasing Share of Large MFIs
GLP: Gross loan portfolio
Source: Ind-Ra
glp>5 (INRbn)
100%
80%
12.7%
glp 1-5 (INRbn)
glp < 1 (INRbn)
3.1%
3.0%
3.4%
2.6%
13.7%
12.9%
17.3%
14.2%
83.3%
83.7%
79.6%
83.2%
FY12
FY13
FY14
2QFY15
15.7%
60%
40%
71.6%
20%
0%
FY11
Source: MFIN
We expect mid- and large-sized MFIs, especially with strong holds in certain areas, to continue
to operate profitably for the medium term. Many small MFIs may have to merge with mid- or
large-sized MFIs or adopt the BC model to remain profitable. Small MFIs may also face
difficulty in obtaining bank funding, securitisations deals, or attract PE and hence this raises
January 2015
12
questions on their long-term viability unless they have specific niches or operate in a particular
state. This may expose them to state specific legislation risk.
2.5.2.High Entry Barriers
The root of AP crisis was unsustainable MFI debt outstanding per household. This was a
consequence of intense competition to acquire clients and thereby grow loan books. There
were instances of four to five MFIs operating in a single village.
In its guidelines, RBI has built in provisions to lower competitive intensity by increasing
operating costs for late entrants in the same local area. An individual cannot be a member of
more than two JLGs and credit checks to be carried out before disbursement. Due to the above
provision, incremental cost for a new entrant to find suitable members and foster credit
behaviour is high and therefore a deterrent.
There have been only two new entrants among NBFC-MFIs since 2011; Svatantra Microfin
Private Limited of Birla group started operations in March 2013 and Altura Financial Services
Ltd, registered in Delhi in FY14.
However, a large corporate house may be able to enter into the sector by acquiring an MFI
without any significant entry barriers.
2.5.3.Competitive Landscape May Change with New Structures
Over the past few years, the government is increasingly focusing on financial inclusion as a
means to reduce poverty and bring the unbanked into the mainstream. The thrust of the
programmes is through banks. During 2005-2010, banks opened over 100 million bank
accounts supposedly to be used for MGNREGA payments, pension etc. However, surveys
reveal that these were generally target-driven programmes for the ministry and banks and over
70% accounts were dormant.
The new government has launched the Jan Dhan scheme (Appendix 10) that proposes to open
bank accounts for the unbanked with many facilities such as insurance, overdraft along with
savings accounts. Furthermore, RBI has issued banking licence to Bandhan Financial Services
(Bandhan), possibly for its role in financial inclusion (Appendix 11).
Competition from Jan Dhan Driven Bank Credit
If an overdraft facility is extended to all Jan Dhan account holders (as on 31 October 2014), it
would imply a credit of INR340bn (as large as the SHG programme). There has been no
experience of Indian banks extending unsecured credit at individual level of this magnitude and
hence portfolio performance cannot be estimated.
Our view is that it would be difficult for RBI to accept individual lending through Jan Dhan
accounts without collateral. Press reports suggest that even banks are sceptical about
extending an overdraft facility to Jan Dhan account holders.
Furthermore, the following advantages of MFIs over banks still exist:

Collateral free credit

Speed and timely availability of credit

Door step delivery; no opportunity cost of multiple bank visits

Less complex documentation; banks still viewed as complex entities
There could be a marginal loss of market share for MFIs, although it may not be disruptive in
the mid-term. Full-fledged credit could be made available to Jan Dhan account holders at
individual level only after satisfactory account behaviour and timely repayment of the initial
overdraft facility of INR5,000.
January 2015
13
Scope of Growth May be Limited Beyond 2019
Ind-Ra expects that the measures of the government such as appointing BCs at high speed,
trying to increase efficiency and transaction throughput of the BC model and permitting
diversified banks may achieve sufficient traction only by FY19 for financial inclusion and pose
competition to MFIs. These models could limit their growth in the long term. This may cause
MFIs to look at alternate models of evolution and expand their product suites for their
customers instead of handing over the customers to banks for additional services.
Figure 22
MFIs May Need to Look for Alternate Models
Limitations on growth of
MFIs beyond FY19
Limitations placed by
current RBI guidelines
Marginal increase in loans
outstanding per borrower
Adding clients would be difficult –
easy additions made by FY19
Lower preference for more than 1
year loans (disb above INR15,000)
since RoA lower
Penetration may be limited by the
existence of other MFIs and new
models
Competition from
other low-cost models
that accept
savings/deposits
1. Diversified banks
2. Bank credit through
Business
Correspondents
3. Expansion in scope
of SHG programme
Closer borrower indebetedness limits
Source: Ind-Ra
MFIs Can Adopt the BC Model
A BC acts as a third party agent between a borrower or a client and a bank (Appendix 5).
Smaller and mid-sized MFIs could look at a combined model of MFI and/or small bank and a
banking correspondent model.
The BC model provides an opportunity to MFIs to leverage their operational reach and
closeness to clients to provide them greater access to the banking services of the partner bank.
The BC need not require substantial capital for its operations and can leverage its equity much
higher than in MFI operations.
The model has its set of challenges where the transaction throughput may not provide
sustenance. However, the BC model could become a viable option especially for smaller MFIs
considering the increasing number of transactions through this channel and increased focus of
the government, regulators and banks on financial inclusion through it.
MFIs Can Apply for Small Bank Licence
MFIs largely have a one-dimensional business i.e. microfinance lending. With RBI allowing
MFIs to act as BCs for a bank, new areas for fee income growth are emerging. The small bank
license or the differentiated bank license may provide opportunity to MFIs to convert into a
multi-dimensional financial entity (Appendix 12).
Payment banks can remit money and pay utility bills or any other payments on behalf of its
client. The client‟s savings/deposits may be deployed only towards investments in government
securities (Appendix 12).
Small banks can provide a large suite of services to a client including savings, cross selling
insurance, remittance and loan products (Appendix 12). Furthermore, small banks are likely to
have a lower cost of funds (due to the ability to provide savings and deposits products) that
could translate into lower interest rates for borrowers. However, reserve requirements (in line
with scheduled commercial banks) will also put downward pressure on returns. Our estimates
January 2015
14
Figure 24
Category of NBFC-MFI
GLP >INR5.0bn
INR1.0bn>GLP<INR5.0
bn
GLP<INR1.0bn
Large MFIs
Mid-sized
MFIs
Small MFIs
Source: Ind-Ra
show that small banks could have 2%-3% lower cost of funds and 3%-4% lower operating
costs than MFIs‟ which could be passed on to customers. Most top 15 MFIs (about 80% of the
NBFC-MFI loan book in 2QFY15; Appendix 13) in our opinion are systemically important and
are better placed to benefit from the small bank licence.
The MFIs can adopt models based on their size and geographical spread.
Figure 23
Evolution Model for MFIs
BC: Business correspondent
MFI: MFI operations
SB: Small Bank
Small
BC+MFI
BC+MFI/SB
SB
Large
Concentrated in
few states
Diversified
presence
Source: Ind-Ra
Smaller MFIs may not be able to withstand competition from larger MFIs, small banks and the
government sponsored SHG programmes and hence may look at adopting the BC + MFI
model in its dominant states.
Mid-sized MFIs operating in a few states could adopt the BC+ MFI or SB model, while large
MFIs can transform themselves into small banks. The performance of top 15 MFIs on various
operational parameters may be referred in Appendix 13.
Migration to Individual Lending from Group Lending
In countries where microfinance has a presence since long, a category of borrowers have
moved up the value chain. They may have been successful in their micro-enterprises and their
requirements may not be satisfied by borrowings from MFIs. They may have relative certainty
of cash flow and/or business that may provide with steady income.
Their social status may increase and they may not want to be a part of the group lending
structure. In South and Central America, many countries have as a result migrated to the
individual lending mechanism. Many MFI borrowers could migrate to individual borrowing from
MFIs or banks in India also, considering increased income, increased status of the borrower
and higher credit needs and the fact that government and banks are pushing financial
inclusion.
Within the current contours of RBI guidelines, MFI loans above INR50,000 cannot qualify as an
MFI loan. Furthermore, the credit requirements of a borrower may exceed the RBI mandated
INR50,000 limit. If RBI does not modify the above stipulations, these clients may migrate to
banks. Alternatively, MFIs could serve these customers through the BC model or as small
banks.
January 2015
15
3. Appendix 1: Glimpse of Success (2006-2010)
In the early 2000s, the JLG model was experimented upon in India by societies set up by
NGOs for the specific purpose of lending to the poor. As non-profit organisations, they could
only accept donations/charity as funding sources. Subsequently, they realised that lending to
the poor can also be profitable and many converted into NBFCs. The high growth-high return
NBFCs attracted investments and debt, which fuelled the growth cycle. This increased the
competition for borrowers, equity etc and resulted in diluted standards of credit.
3.1. Conversion from Non-Profit to For-Profit
Most NGOs/societies/trusts realised that the microfinance business can be operated profitably
and hence converted into NBFCs (regulated by RBI). These NBFCs now constitute about 85%90% of the total MFI lending and are the subject of the report.
The interest rates charged in this sector (25%-35%) were higher than formal financial
institutions/sources due to the following two reasons:
1.
Moneylenders, whom MFIs expected to replace, charged 50%-500% interest rate.
2.
Operational and recovery costs were higher because of the small ticket size of the loans,
and MFIs could not operate profitably if they charged interest rates of 12%-15% (which is
typical bank lending rate).
Despite higher operational costs, NBFC-MFIs more than made up for it by charging higher
interest rates and some enjoyed ROAs of 4%-5% while the same for banks was 2%-3%. These
banks were also subject to prudential norms and reserve requirements. Among other
conditions conducive to growth, a favourable outlook of the world on microfinance led to the
flow of debt and equity capital into the sector. The sector had no shortage of funds and grew
over 100% annually from FY06-FY10.
Figure 25
Return Ratios of MFIs
RoAs
(%)
30
25
RoEs
27.50
25.00
20
15
10
9.70
4.10
4.40
1.90
5
0
2008
2009
2010
Source: mixmarket.org
3.2. Improved Access to Debt and Equity Funding
Globally, the microfinance sector was attracting a lot of attention and media and others viewed
it as a poverty alleviation tool without any shortcomings. The sector attracted funds from PE
investors and debt from banks. The story was no different in India.
January 2015
16
3.2.1.PE and Other Equity Raising Plans
Figure 26
Sector Attracted PE Investments
(USDm)
180
165
163
FY09
FY10
150
120
83
90
60
30
4
16
0
FY06
FY07
FY08
Source: VC Circle
The high RoAs translated to RoE of 25%-35% and attracted PE investors. Though some of
these were long-term investors, others looked to maximise returns in three to four years and flip
their investments.
Equity was over 25% of the MFI
balance sheet in 2010 (2007: 16%)
(Source: Mix Markets).
According to media reports, the investments were made at high valuations and the return
expectations were also high. The investors had a significant say in the strategy and
management of the company and possibly applied intense pressure on the management to
grow the loan books.
SKS Microfinance Limited, one of the top three Indian microfinance firms, raised USD357m in
August 2010 from the primary market and the stock doubled within a couple of months. The
listing happened at 4.2x its extant book value. Sequoia Capital India made 12x on its
investment in four years when it made a partial exit through the initial public offering (IPO).
Media reports suggested Bandhan and Spandana Spoorthy Financial Limited had also readied
IPO plans to raise INR30bn from the primary markets.
3.2.2.Bank Funding and Priority Sector
RBI and other regulatory bodies viewed MFIs as a means of financial inclusion for the poor.
Hence, banks‟ lending to these institutions qualified as priority sector loans. According to RBI
regulations, the adjusted loan book of Indian banks must have 40% of loans advanced to the
priority sector and most Indian banks usually fall short of this target. MFIs fulfilled this
requirement in the following two ways for Indian banks.
1.
Borrowings by MFIs qualified as priority sector loans
2.
MFIs securitised part of the loans originated by them. Some banks, as a part of their
strategy, made investments in such securitised products to reduce their loan book size.
This also reduced the priority sector loans they needed to advance.
As a result, bank funding increased to USD3.8bn in 2010 from USD1.2bn in 2007 (source: Mix
Markets). The increased availability of funds enabled MFIs to grow exponentially with high
returns attracting further confidence and funds.
3.3. Strong Growth Ensued
Sa-Dhan estimates that the number of MFI players across all legal forms increased to 318 in
2010 from 40 in 2006. Each player wanted to showcase its capability and growth to attract
capital. They undertook massive expansion and to achieve faster and easier growth, focused
on growing their portfolio in high penetrated states of AP, TN and WB.
January 2015
17
3.3.1.Loan Book Doubled Almost Every Year
The over 100% growth in NBFC-MFI portfolios was due to overall growth in microfinance
portfolio and conversion of some non-profit MFIs to NBFCs. By FY10, a majority of large MFIs
that were societies were converted into NBFCs.
Figure 27
NBFC – MFI Portfolio Size and Growth
Portfolio (LHS)
(INRbn)
Growth in NBFCs-MFIs (RHS)
(%)
163
180
158
150
180
150
150
120
120
89
90
90
83
60
60
36
14
30
30
0
0
FY07
FY08
FY09
FY10
Source: Sa-Dhan, State of Sector reports-Access Development Services
3.3.2.Blistering Operational Expansion
Flush with funds and in a hurry to show returns, MFIs expanded. Staff doubled in less than two
years and operating leverage (borrowers per loan officer) increased. MFIs also increased the
number of branches by 2x in three years.
Figure 28
Number of MFI Staff and Loan Officers
MFI staff
(Staff)
Field staff
111,804
120,000
93,342
100,000
77,145
80,000
60,000
64,354
63,472
47,622
39,997
27,998
40,000
20,000
0
FY07
FY08
FY09
FY10
Source: Sa-Dhan, mixmarket.org, State of Sector reports-Access Development Services, Ind-Ra
Figure 29
Borrowers Per Loan Officer
(Borrowers per credit officer)
400
356
346
FY09
FY10
294
300
231
200
100
0
FY07
FY08
January 2015
18
Figure 30
Number of MFI Branches
(No of branches)
12,690
14,000
12,000
10,435
10,000
8,000
6,189
7,252
6,000
4,000
2,000
0
FY07
FY08
FY09
FY10
3.3.3.Piggybacking on SHG Model
MFIs realised that they could form JLGs and disburse faster if they included SHG members
(who had inculcated good credit behaviour) in the group formation. MFIs concentrated on the
regions where the SHG programme was implemented on a large scale and was reasonably
successful i.e. south India and especially Andhra Pradesh.
Figure 31
Process of JLG Creation and Loan Disbursement from NBFC-MFI’s Viewpoint
New loan officer
to acquire 300
clients in a year
Pressure to form
a JLG
• In FY08, each loan officer serviced 294 borrowers.
• A new loan officer is looking to set up operations in a cluster of villages is under a
lot of pressure to attract clients (who will not default) and also to disburse loans.
• He has to serve 294 borrowers in a year.
• The cluster may already have two-three existing MFIs with offices and
established JLGs. In case the officer looks for new members that may not be
members of existing JLGs and SHGs, he may find them either unworthy of credit
or not find such members at all.
• In addition, even if he is successful in arranging for creation of such a group, it
would take time for the members to inculcate behaviors suitable for credit and
involve significantly high operational costs.
Source: Ind-Ra
The incentives of a loan officer were based on portfolio growth/disbursements and recoveries.
As a result, the easiest and fastest way for him to acquire new borrowers was to invite existing
JLG and SHG members for the formation of a new JLG.
January 2015
19
Figure 32
Loan Portfolio: Regional Share
Region (%)
South
East
North
West
Central
North East
2008
61
20
1
7
9
1
2009
58
20
3
6
11
1
2010
55
21
3
8
9
3
Source: Sa-Dhan and State of Sector Reports-Access Development Services
Over 50% SHGs in FY10 were concentrated in south India. MFIs mirrored SHGs and hence
south India had a share of over 50% in MFI loan portfolios.
3.3.4.Increased Concentration in South India esp. AP
The overdependence on south India, especially AP, after Kolar and Krishna crises (described
later) increased the concentration risk for MFIs.
Figure 33
Regional Break-up of the MFIs’ Portfolio
Regions (INRbn)
South
East
North
West
Central
North east
Total
2008
36.5
11.6
0.9
4.4
5.6
0.6
59.6
2009
68.6
23.2
3.9
7.0
13.5
1.1
117.3
2010
103.3
39.8
5.4
14.2
17.4
6.3
186.4
Source: Sa-Dhan, Ind-Ra
The top four states constituted almost 70% of the total loan portfolios of MFIs. AP constituted
28% of the MFI loan portfolio in FY10.
Figure 34
Loan Portfolio: States with Largest Share
(%)
FY08
FY09
FY10
35
30
25
20
15
10
5
0
AP
Source: Sa-Dhan, Ind-Ra‟s estimates
WB
Karnataka
TN
Both these models concentrated majority of their efforts in growing their loan book in AP, which
resulted in the highest MFI debt per poor household in the state in 2010.
3.4. Lack of Regulatory Oversight Leads to Process Dilution
There was no regulatory body or supervisory structure for MFIs as they could be in various
legal forms such as NBFCs, NGOs, trusts/societies and Section 25 companies.
3.4.1.Favourable Regulatory Regime
No Supervisory Structure: Though NBFCs (over 85% of the MFI universe) were regulated by
RBI in terms of accepting deposits and prudential norms, there were no guidelines for their MFI
operations, credit appraisal etc. Global experience shows that in an unregulated environment,
January 2015
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MFIs grow at a breakneck pace, but the quality of their loan portfolios could suffer.
Many MFIs were members of SROs and required to adopt their code of conduct, however
again, there was no system of measuring the adherence.
Figure 35
Borrowers from
Multiple MFIs
Number of MFIs
%
borrowed from respondents
1
5
2
24
3
51
4
12
>4
8
No Specific Norms for JLG Formation: JLGs were conceptually expected to operate in a
manner similar to SHGs. Under the ideal Grameen model, JLG members could be eligible for
loans after two weeks to one month from the formation based on the assessment of the group‟s
credit behaviour by a loan officer. Two aspects may be noted here: inherent conflict of interest
of the loan officer while assessing the group and the fact that these are mere guidelines, not
mandatory waiting periods.
The population of a particular region may exhibit a particular set of credit characteristics and
the formation and maturing of a JLG may be tweaked. For instance, NABARD („IND
AAA‟/Stable), in its studies undertaken for implementing a SHG-bank linkage programme
suggested that an SHG requires six months for maturing before it becomes eligible for credit.
3.4.2.Process Dilution Increased Credit Risk of MFIs
Source: Microsave
Competition was fierce in the barely regulated MFI sector. The cost of providing credit to a
borrower in the microfinance business was inversely proportional to the competitive intensity.
For example, for two MFIs operating in a large village with population of 5,000 and about 500
potential borrowers (considering the typical profile of a JLG member), two loan officers can
easily cover all the borrowers. Now if a third MFI decides to set shop, its loan officer would be
under intense pressure to attract borrowers and the following sequence of events may follow:

The loan officer may form a JLG out of the existing SHG/JLG members

The JLG may not be given time to mature

The loan officer does not carry out credit appraisal properly, or may not even confirm with
other JLG members before inducting a new member or providing a loan to the borrower.

The loan officer may provide multiple loans of increasing sizes.
Once a JLG is formed after the competition-led process dilution, easy credit is available to
borrowers.
3.4.3.Multiple Loans of Increasing Size
As the number of MFIs operating in a region increase, the credit appraisal process is diluted
because of competitive intensity by under-regulated MFIs.
Multiple Loans
The borrower would potentially be a member of JLGs with all MFIs operating in the region and
could be a borrower with more than one MFI. He may borrow from other MFIs to service
existing MFI loans. The borrower is then caught in a debt trap where he borrows increasing
amounts to repay earlier obligations. A survey conducted by Microsave, an international
consulting organisation, on a sample of AP MFI borrowers revealed that 71% respondents had
borrowers from three or more MFIs.
Loan Size
It would be understandable if MFIs were growing most of their loan portfolios by increasing their
outreach. However, the bulk of the increase in the loan portfolios of MFIs was due to an
increase in average ticket size. The average loan outstanding per borrower increased at a
CAGR of 26% during FY08-FY10. The growth was much higher in some states.
January 2015
21
Figure 36
Average Loan Outstanding Per Borrower (INR)
Andhra Pradesh
West Bengal
Karnataka
Tamil Nadu
Uttar Pradesh
Maharashtra
Madhya Pradesh
Odisha
Total
FY08
5,177
3,345
5,468
3,307
6,330
3,195
4,433
3,282
4,223
FY09
7,008
4,924
6,471
4,901
9,150
2,555
5,759
5,482
5,192
FY10
8,270
6,023
6,895
5,189
7,925
6,447
5,930
7,500
6,870
CAGR (%)
26
35
12
25
12
42
16
50
26
Source: Sa-Dhan
AP was the only state with an average loan outstanding per borrower of over INR5,000 in FY08
and average CAGR 25% loan growth for two consecutive years.
Of the other states with an average loan outstanding per borrower of over INR5,000, Karnataka
and UP reported a CAGR of about 12% for the same period. This was marginally more than
India‟s GDP growth i.e. 9.32% in FY08 and 6.72% in FY09 and 8.59% in FY10 (Source: RBI).
3.4.4.Purpose of Loans
Though it is not entirely possible to monitor the end use of microfinance loans, ideally the loans
were to be provided for income generating purposes. According to Sa-Dhan, over 85% loans
were extended for income generating purposes in FY10.
Figure 37
Purpose of Loans (FY10)
Non-income generating
Income generating
87%
Other
13%
Housing
3%
Others (includes
health and education)
2%
Consumption
8%
Source: Sa-Dhan
However, the Microsave survey reveals that in AP over 40% of loans in 2009-2010 could have
been extended for non-income generating purposes including repayment of the existing loans.
3.4.5.Non-transparent Interest Rates, Fees and Hidden Costs
The fees and interest charged by MFIs came under a lot of criticism for their non-transparency.
1.
2.
3.
4.
January 2015
Flat interest rate: MFIs charged a flat interest rate instead of on a diminishing principal
basis. It effectively means that a 20%-25% flat interest rate could actually be around 35%40% interest rate on a diminishing principal basis.
Additional fees: Further five to six different kinds of fees were charged to borrowers,
amounting to an additional charge of about 3%.
Interest rates did not decrease in line with bank rates: In 2006-2009, interest rates
charged by banks were lowest in a decade, but that did not deter MFIs from charging high
interest rates. Borrowers often have immediate cash requirements and thus interest rate is
not such a concern.
Deposits/forced savings: A few press reports alleged that MFIs typically deducted 10%15% of the disbursements as security deposits without reducing the corresponding interest
amount for debt service.
22
4. Appendix 2: AP Crisis and its Aftermath (2010-2012)
AP was the most penetrated state for microfinance loans during FY95-FY10. Even under the
SHG-bank linkage model, AP had over 50% share in a number of credit SHGs. In 2010, MFIs‟
exposure to AP was 29% (INR52.1bn on 31 March 2010).
The process dilution (refer section 3.4.2) and the related factors led to easy growth in terms of
number of customers and loan portfolio. It also led to easy customer acquisition and availability
of credit to JLG members. This led to a drastic increase in per household debt.
A Microsave report based on a survey reveals that 71% of the respondents had loans
outstanding from three or more MFIs. According to the State of the Sector reports by Sage
Publications, each poor household in AP had average loans of INR71,761 in FY10. Ind-Ra‟s
own estimates suggest that the average poor household debt in AP in FY10 could be up to
INR87,000.
Figure 38
Pressure to Lend and Recover Leads to Unsavoury Practices
Increased fund availability increases pressure to grow and disburse
Management and employee incentives are based on growth in customers and loan portfolio
Members from SHG and other JLGs are poached for the quick formation of a JLG
Loans are extended to the members (even if they have substantial indebtedness to other MFIs)
Borrower may have loans from three to four MFIs and SHG and may be under pressure to make
repayments
As the income insufficient, MFIs use aggressive means for recovery
Source: Ind-Ra, Microsave
Various operational aspects of MFIs, their charges, recovery were highlighted possibly in an
exaggerated manner. Profit-seeking nature, comparison with money lenders etc, further dented
MFIs‟ image. Various studies and surveys suggested that these press reports were not without
a reason, although it would be difficult to separate facts from exaggeration.
January 2015
23
4.1. High Household Debt and Correlation with Suicides
Due to unrestrained expansive strategies of MFIs and easy availability of debt, microfinance
debt per poor households reached high levels.
Figure 39
Household Microfinance Debt in Large States
MF debt (2010)
MFI debt (INRbn)
SHG debt (INRbn)
Total households (m)
Poor households (%)
Average borrowing/poor
household (INR)
AP
52.10
117.39
21
9.20
87,728
TN
23.87
40.59
19
11.28
30,850
Karnataka
25.51
20.55
13
20.91
16,493
WB
21.08
13.27
20
19.98
8,436
UP Maharashtra
MP
9.51
9.67 5.93
16.36
12.03 4.45
33
24
15
29.43
17.35 31.65
2,628
5,122 2,173
Source: State of Sector reports – Access Development Services, Census 2011 and Planning Commission
(for poor households, 2011-2012)
A poor household in AP in FY10 held about INR87,728 as debt, out of which about INR27,000
was borrowed from MFIs. Considering the average outstanding of INR8,270 (Bharat
Microfinance Reports, FY10, FY11 – Sa-Dhan), each average poor household borrowed from
at least three MFIs at a time. Some press reports quoted surveys indicating some poor
households having outstanding debt of over INR60,000 from six to seven MFIs.
Given that servicing the level of household debt was beyond the means of some poor
households, MFIs employed harsh recovery practices which could have included public
humiliation, house visits, following the borrower, intimidation etc. Society for Elimination of
Rural Poverty reported over 70 suicides within nine months in FY10-FY11 because of the
inability of the poor to repay debt.
4.2. Unfavourable Institutional Perception
A combination of high returns made by investors, bad press in relation to high interest rates
and aggressive recovery means affected the perception of MFIs in the eyes of the public,
customers, politicians and the system.
1.
Profit seeking image of MFIs: The Grameen model was ideally expected to charge
interest rates enough only to enable it to sustain and carry on its business of financial
inclusion with nominal profits for stakeholders. In FY08-FY11, Indian MFIs were among the
fastest growing in the world, attracting higher PE investments on the strength of their high
RoAs and RoE of about 5% and above 30%, respectively. SKS Microfinance was ranked
second in the world on the most profit parameters by Mix Market.
2.
IPO plans: SKS Microfinance raised over USD350m from the primary market while
Bandhan, another large MFI, had made its IPO plans public. Early investors were making
manifold returns on their investments (Sequoia Capital made 12x on its SKS investment).
MFIs increasingly began to be viewed as entities making profit off the poor.
3.
Local press highlighted extreme recovery measures and attributed suicides to the recovery
means.
4.3. Political Interference
The grievances began to be highlighted to various departments, ministers in the government
and the press. Given the socio-political importance of the fact that the poor may have been
exploited, intense political interference followed partly due to resentment towards MFIs using
the SHG structure for profitable purposes and partly due to media reports on MFIs‟ recovery
means and suicides.
Reports and subsequent surveys suggest that local politicians and strongmen in some regions
may have prompted people not to repay MFIs claiming that the poor were being exploited. The
AP government, under intense pressure from its own ministers and the opposition, decided to
act tough. It promulgated what MFIs consider draconian, the Andhra Pradesh Microfinance
Ordinance, 2010.
January 2015
24
4.4. AP Act 2010
The AP government, based on reports received from district collectors on MFI operations,
passed the Andhra Pradesh Micro Finance Institutions (Regulation of money lending)
Ordinance 2010. The AP Ordinance (which subsequently became an Act) was aimed at
crippling the seemingly haphazard processes followed by MFIs when lending to the poor. MFIs
could not recover their loans, make fresh loans without government approvals, and had to
provide a list of employees involved in the recovery and lending parts of business. This,
coupled with active encouragement to borrowers from local politicians and strongmen to halt
repayments, resulted in a contagion effect in the state. The collection efficiencies dropped to
below 20% in January 2011 from 99% in September 2010.
4.4.1.Key Provisions of AP Act
Figure 40
Key Provisions of AP Act
Feature
Registration of
business
Before AP Act
MFIs were registered
either as NGOs or
NBFCs and free to
operate throughout the
country
After AP Act
Register with following details
with every district authority
where they operate:
 villages and town they
operate in, proposed
interest rate,
 due diligence and recovery
system
 persons authorised for
lending or recovery on
behalf of MFIs
Operations permitted only
after registration
Cancellation of n.a.
On receipt of complaints of
registration
SHG or JLG members even if
an inquiry is underway
Borrower
MFIs aggressively
 No member of a SHG can
sourcing
used the ready
be a member of other SHG
ecosystem developed
or MFI
by the SHG-bank
 MFI desiring to lend to an
linkage programme
SHG borrower has to apply
to the district authority
Lending rates
Typically between
Only interest to be charged
30%-50%, which
included multiple fees Interest cannot exceed
etc
principal over the loan tenor
Recovery
Recovery agents
MFIs not to employee external
practices
would make trips to
recovery agents. Recovery to
borrower's residence if be done only at a central
required
location and not to interfere
with the borrower‟s routine
Penalty: Criminal action
Submission of n.a.
data to district
authority
Undertaking by n.a.
the CEO
Implication
Key feature of MFI loans was
speed and timely availability to
borrowers. These provisions led
to the lending operations subject
to the local bureaucracy
Resumption of business (lending
and recovery) only after
registration
Cancellation possible even on
receipt of unjustified complaints
to the authorities
Permission required from
bureaucracy for lending to each
existing microfinance borrower
In case where the interest could /
has exceeded the principal, the
excess amount is to be returned
to the borrower
Total dependence of MFIs on
willingness and intent of the
borrower for recoveries.
Fear of punitive action by the
state
Additional bureaucracy
Monthly statements with
borrower names, interest rate
charged and loan amount
CEO becomes directly
Even for a small lapse, CEO
responsible for any lapses in may be jailed. Highly
operations at branch level
disproportionate penal terms
also
Source: AP Act 2010
The bill was immediately enforced and the recoveries collapsed. As a result, MFI operations in
the state came to a grinding halt.
4.4.2.Could the Crisis Have Been Foreseen?
The AP crisis was not unique to AP. Similar crises occurred in Krishna district of AP in FY06FY07 and Kolar district, Karnataka in FY09-FY10. In addition, MFIs in many countries such as
Bolivia, Nicaragua, Bosnia and Herzegovina, Morocco and Pakistan suffered similar crises in
January 2015
25
the late 1990s and 2000s.
Krishna Crisis
The Krishna crisis occurred in the Krishna district of AP in 2006 and was the precursor to the
AP crisis where district authorities closed down 50 branches of MFIs.
The crisis started with a section of people alleging that MFIs charged extremely high interest
rates and were undertaking aggressive recovery tactics. This was similar to the AP crisis but
the scale was small (restricted to one district). There were three main allegations:

Lack of clarity on fees and other charges, calculation of interest on flat basis, forced
savings/deposits increased borrowing costs for the poor

Unethical recovery means including confiscation of land documents etc.

Poaching SHG members for JLG operations; direct competition with the SHG-bank linkage
programme (AP had undertaken significant initiatives in the SHG-bank linkage programme
and extended several grants/interest)
The entire incident attracted lot of bad press for MFIs including many suicides being attributed
to them. Some MFIs alleged that local politicians instigated the unrest with respect to MFIs in
Krishna. MFIs made a strong appeal to the government not to act. Finally, the government
allowed MFIs to continue to operate based on MFIs‟ commitments of applying for SRO
memberships and adopting the code of conduct.
Figure 41
Some International Crises
MFI – nature
before the
crises
MFI reach
and growth
Signs of
stress/risks
Trigger
Analysis of
main cause
Measures
Bosnia and Herzegovina
Direct lending preferred;
Started as non-profit MFIs; later
converting to for-profit joint stock
companies (mostly foreign bank
controlled)
From 2003-2008: borrowers and loan
portfolio increased 11x
Nicaragua
Mostly development NGOs; rural based;
mostly for agriculture and cattle (33% of
portfolio);
MFIs still struggling and not out of the
woods;
almost no regulation till 2007
From 2003-2008: average loan increased
3x and loan portfolio increased 5.5x
(almost 16% of country‟s credit)
Morocco
dependence on bank borrowings for funding loan
book growth;
limited regulation by central bank;
mostly NGO MFIs;
Recovered after the crisis with moderate growth
In 2008, clients began resisting
repayments and contesting seizure of
collateral (land in particular) as illegitimate
dispossession in northern region; this
spread to other parts of the country
Global financial crisis in FY09 increased food
prices;
merger of one of the largest MFIs revealed high
credit costs and it stopped disbursements;
fear of insolvency could have triggered borrowers
to avoid repayments without penalty implications
Unrestrained, unsustainable growth with poor
underwriting practices
MFIs consolidated operations by shrinking loan
books;
MFIs tightened their credit and recovery
Processes;
Set up CIBs;
Banks supervised MFIs for processes;
Central bank regulated MFIs
From 2004-2008:
MFI loan portfolio grew 11x and borrowers
increased 4x;
Covered 44% population
From 2003-2008,
From 2003-2007,
From 2003-2007,

Leverage increased from 2.5x to 5x 
Average loan outstanding increased 
PAR 30 increased from 0.4% to 5%
from USD1,203 to USD2,411

Average loan outstanding increased

write offs increased from 0.4% to 1.9%
from USD780 to USD2,200;

PAR 30 increased from 2.5% to

Average loan outstanding per borrower
5.25%
increased from USD200 to USD528

Write-offs increased from 0.61% in
2003 to 5.66% in 2009

Leverage increased from 2.8x to over 
Leverage increased from 1.8x to 5x
5x
50% of microenterprises failed, loans
often used for consumption
2004 onwards, politicians challenged MFIs Larger loans with poor underwriting policies
as usurious proﬁt-seeking businesses
Saturation:
Women borrowers decreased from 74% to 59%
32% borrowed from three or more MFIs Over 30% loans for cattle rearing; price
in 2006
shocks and import restrictions in Mexico
Inadequate MIS and internal reporting
Executives were among highest paid
Started as non-repayment at individual
level; no external catalysts or proconsumer movement
Inflation and global economic crisis
In progress
Political environment and market
manipulation
MFI law passed in 2011; the law was
stringent compared with those in other
countries
Source: Press reports and studies
January 2015
26
4.5. AP Act Fallout
Figure 42
Collapse of Repayment Culture
Press
praising AP
MFI Act
Local
politicians
and
strongmen
exhorting
people not
to repay
If X
defaults,
others
know X is
not going to
pay if they
default
Members
realise that
if all default,
MFI
collapses
Implies no
access to
future credit
and no
penalty for
nonpayment
Mass
defaults
Source: Ind-Ra
The collapse set off a domino effect on borrowers and recovery rates collapsed to below 20%
in January 2011 in AP from above 99% in September 2010.
4.5.1.Asset Quality Declined
Figure 43
Non-performing Assets of MFIs
Writeoff
PAR 90
PAR 30
2011
2010
2009
2008
2007
2006
0
5
10
15
(As % of total loans)
20
25
Source: mixmarket.org
MFIs could not do business in the stifling environment. As an example, only 1,600 of the
73,000 applications made by SKS Microfinance were approved by the district office (source:
press reports). Business restrictions and an unsustainable drop in recoveries in AP (about 30%
of total MFI portfolio) made banks nervous.
January 2015
27
4.5.2.PE Investments and Debt Funding Dropped
The banks stopped lending and halted securitisation of MFIs‟ loan portfolios. PE investors
deserted them; the sector had become untouchable.
Figure 44
MFI Borrowings
(INRbn)
207
210
200
190
178
180
170
170
160
150
FY10
FY11
FY12
Source: Sa-dhan
MFIs were required to liquidate their non-AP books to ensure repayment to the banks due to
the supply side shocks on the funding side. MFIs with heavy exposure to AP had to apply for
restructuring since it was expected that most of their loan portfolio would turn into NPAs.
4.5.3.Entry of MFIs in CDR
Due to a fall in recovery rates and impending huge write-offs, MFIs also defaulted on their debt
service. Five of the top six MFIs were asked by their banks to apply to the corporate debt
restructuring cell (CDR). However, after the initial terms of CDR were discussed, SKS
Microfinance and Bhartiya Samruddhi Investments and Consulting Services Limited (BASIX)
decided to opt out of restructuring. Reports suggested that they backed out because of
personal guarantee stipulations on the promoters.
Figure 45
Status of Portfolio of MFIs that Entered CDR
MFI (INRbn)
Asmitha Microfin Limited
Future Financial Services
Limited (FFSL)
Share Microfin Limited
SpandanaSphoorty
Financial Limited
Trident Microfinance Pvt.
Limited
Total
Total
outstanding
Portfolio size Portfolio size
FY11 AP share CDR deal
in 1QFY14
in 1QFY15
Total debt
13.75
14.00
7.00
7.50
4.09
3.57
1.60
2.01
0.46
1.10
1.77
2.31
24.02
33.26
20.00
29.00
10.00
19.00
19.00
23.00
8.29
10.18
7.56
9.55
1.49
1.36
1.12
1.25
0.24
0.6
74.11
66.37
37.58
51.85
24.57
23.05
Source: Press reports, MFIN
The CDR was made available only to major MFIs operating out of AP. Five MFIs listed above
participated in the first round of CDR. RBI allowed for loans to be recast instead of being
labelled as nonperforming; banks need not assign higher provisions for these loans. Main
terms and conditions of CDR are as follows:
January 2015

Two-year moratorium period on principal repayment and seven years of tenor

Banks will change part of the debt into convertible preferential shares, allowing banks to
convert debt into equity if any of the five MFIs default.

Banks will have two to three nominees on each board and thus significant operational
control on MFIs.

Promoters have to provide personal guarantees to maintain their stake in the business if
banks convert debt to equity. Personal guarantee was accepted only by the promoter and
MD of FFSL, G. Dasaratha Reddy.
28
All loans of the above MFIs in relation to AP exposure were restructured in FY12. Subsequently
BASIX (BSFL) entered into CDR in September 2012 for restructuring INR6.52bn of debt
(portfolio of INR12.50bn on 31 March 2011. Banks exercised the conversion into equity option
and now own 92% of BSFL while SWAWS Credit Corporation restructured INR0.9bn of debt).
4.5.4.Current Status of CDR MFIs
Figure 46
Current Status of CDR MFIs
MFI
SHARE, Spandana, Asmitha
FFSL
Trident
Current status
RBI rejected the request from SHARE, Spandana, Trident, Asmitha
and BSFL (BASIX) for a second round of restructuring, following which
banks restructured their loans again without the benefits on
provisioning.
Half of the INR55bn loans were converted into optionally convertible
cumulative preference shares, which were supposed to be redeemed
at specific intervals. The MFIs could not meet the repayment deadline
of June 2013. This time no provisioning benefits were available to the
banks.
It was the only MFI to repay its CDR loans and exit the programme in
August 2013 (had lower exposure to AP).
It is winding up its operations and the lenders may have to write off
their loans to the MFI since the current book size of INR60m is
inadequate to service outstanding debt.
Source: Business Standard
4.5.5.Court Battles Do Not Help
MFIs operating in AP filed a petition challenging the AP Act which was dismissed by the
Honorable High Court in February 2013.
Figure 47
Status of Various Court Cases
Who filed and
which courts
Against
whom/challenged
and why
Result/output
SKS Microfinance in May
2011 in Supreme Court
The AP Act because of
extremely restrictive rules for
lending; District Registrar had
cancelled its licence in
Mahabubnagar for allegedly
not following rules
In
March
2013,
SKS
Microfinance received an
interim order from the apex
court to resume micro-lending
operations in AP without
requiring
government
approval for every loan and
interest/principal recovery.
MFIs operating in AP
(including SKS) in High
Court though MFIN in 2011
The
restrictive
and
„draconian‟
AP
Act
considering that RBI issued
regulatory
guidelines
for
NBFC-MFIs
Group of borrowers
from AP
Challenged in Supreme
Court an order by the
AP high court asking
the state government to
review a law that reined
in lending by MFIs
The court dismissed the Ongoing
petition in May 2013 but
asked the state government
to review the Act as the
central
government
was
contemplating Microfinance
Bill 2012.
Source: Live Mint
The High Court also requested the AP government to review the AP Act and its need given that
the Microfinance Bill is under consideration by the parliamentary Standing Committee.
January 2015
29
5. Appendix 3: RBI Guidelines
Figure 48
RBI Guidelines
Implication for NBFC-MFIs in
relation to earlier complaints
Terms
Borrower loans
Borrower profile
Maximum of two NBFC-MFIs can lend to the same
borrower
Income generating Loans towards income generation activities more
loan
than 70% of overall book
Loan terms
Loan size limits
Loan tenor
Interest rate caps
(linked to bank
rates)
Interest periods
and repayment
Penalty
85% of net assets to be assets complying with
following:
 Borrower household annual income levels: rural
below INR60,000; urban and semi-urban below
INR1,20,000;
 loan amount below INR35,000 in the first cycle
and up to IN50,000 subsequently
 total borrower indebtedness below INR50,000
 MFIs can lend under SHG/JLG/individual level
 Max loan amount = INR50,000
 Max overall indebtedness = INR50,000
 Not less than 24 months for loan amount above
INR15,000
 Minimum moratorium equal to interest period
 No interest rate cap
 Margin cap 12% for small MFIs and 10% for
other MFIs (based on asset size)
 Interest to be calculated on diminishing
outstanding basis
Weekly, fortnightly or monthly
 No penalty on delayed payments
 No prepayment penalty
Transparency on
 Only three forms of charges - interest,
other charges
processing fee 1% of disbursement and
insurance premium (including admin charges)
 No collection of security deposits
 Loan card to every borrower with details in
vernacular language
Recovery
Recoveries at residence only if a customer fails to
appear at the designated place more than twice
Funding and capital
Capital ratios
Min net owned funds: INR50m
(North east MFIs – INR20m) after 31 March 2014
Limit on loans a borrower can
avail from MFIs
Could prevent loans availed for
consumption or for repayment of
other loans
Limit on total indebtedness of
borrower
May ensure loan availability to
only the poor
Limits indiscriminate
lending/borrowing
Since loan ticket size is limited,
less repayment pressure on
borrowers
Transparency on interest rates
Borrower‟s choice
Provides borrower flexibility in
repayment
Transparency on other charges,
fees etc.
Benign recovery means
Minimum capital stipulations for
NBFC-MFIs
Min CAR (Tier 1 + Tier 2): 15% of risk weighted
assets
Tier II capital cannot exceed 100% of Tier I capital
Priority sector
Exceptions for AP portfolio of MFIs
Status to continue
RBI accepts importance of the
sector and wants banks to fund
MFIs
Governance
Code of conduct,
NBFC-MFIs to ensure that a code of conduct and Operational guidelines with
customer protection systems are in place for recruitment, training and regard to customer service,
code
supervision of field staff
internal operations, staff hiring
and training, etc
Provisioning
Loan provision to be maintained by NBFC-MFIs NPA recognition and provisioning
shall be the higher of
norms
a) 1% of the outstanding loan portfolio, or
b) 50% of the aggregate loan instalments which
are overdue above 90 days and below 180 days;
100% of the aggregate loan instalments which
are overdue for 180 days or more
CIB
Mandated that all NBFC-MFIs be members of at Credit checks on the borrower
least one credit information bureau
and his/her credit history
SRO
Mandated that all NBFC-MFIs be members of at Internal controls, periodic data
least one SRO
and portfolio quality reporting, etc
Source: RBI
January 2015
30
It may be seen that these guidelines addressed most of the complaints that the market had in
relation to the functioning and other aspects of MFIs. The newly christened NBFC-MFIs
welcomed it and are of the view that since they are regulated by RBI, they should not be
regulated under the Money Lenders Act or its derivatives by individual states. Regulation of
NBFCs and banks is a central subject while the Money Lenders Act is a state subject.
January 2015
31
6. Appendix 4: Supervisory structure and credit bureaus set up
RBI guidelines led to setting up of SROs and CIBs. RBI made it mandatory for each NBFC-MFI
to be a member of at least one SRO and one CIB.
6.1. Industry Bodies such as MFIN and Sa-Dhan Established
Sa-Dhan and MFIN were the two industry bodies that existed even before the AP crisis. They
attempted to address the data quality, credit and concentration risks and industry practices.
However, adherence to their guidelines was voluntary due to the limited means of supervising
MFIs. RBI appointed MFIN as the industry SRO in June 2014.
MFIN‟s code of conduct on RBI‟s fair practices code for NBFC-MFIs has been accepted by
RBI.
Figure 49
Brief Details of the Code of Conduct
Part I: Core values
 Maintain integrity, transparency towards clients
and protect them from unethical practices and
ensure privacy
 Take client feedback and set up appropriate
grievance redressal mechanisms
Part III: Client protection guidelines
 Complete disclosure and transparency in all
dealings and communication with the client
 Educate and endeavor to provide appropriate
financials services in compliance with RBI
guidelines
 Shall ensure employee behavior for lending and
recovery operations in line with RBI guidelines
Part II: Code of conduct
 Promote and strengthen the microfinance
movement
 Build progressive, sustainable and client-centric
systems, and provide a range of financial
services complying with the applicable
guidelines
 Promote cooperation and coordination among
themselves and other agencies to achieve
higher operating standards
Part IV: Institutional conduct guidelines
 Complete adherence to code of conduct
 Maintain all records and file them with
regulators and other industry agencies
 Adhere to employment and anti-poaching
measures as per SRO guidelines
 Agree to share complete data with CIBs
Source: MFIN
It is mandatory for MFIN members to adhere to these codes. As stated in its annual report,
MFIN has set up an enforcement committee which looks into complaints by any member
against any other member. MFIN has addressed 173 complaints in FY14. Currently, MFIN
does not proactively audit MFIs‟ operations. However, MFIN indicated that the process for the
same is under development.
Most NBFC-MFIs are members of MFIN and Sa-Dhan. In addition, Sa-Dhan members also
include co-operatives, Section 25 companies and NGOs/societies which together constitute
about 10% of the microfinance universe and are non-profit in nature.
These SROs periodically collect data on MFI loans, geographical distributions, portfolio
performances, etc. and publish it.
6.2. Credit Bureaus Established, Fully Functional
Before the AP crisis, MFIs had no way of knowing if a potential borrower was a member of
additional JLGs/SHGs and had to believe the member. A loan officer of the MFI was unable to
know the number of MFIs the member has borrowed from and his total indebtedness.
Additionally, a member could default on his/her borrowing from one MFI (could be wilful or
because of genuine reasons) and still avail loans from either SHG or another JLG if he/she was
a member. This does not foster encouraging credit behaviour since there is no penalty for nonrepayment of dues. Also, the segment of population served by microfinance companies has
many features that do not lend to easy record keeping (one of the reasons why mainstream
finance institutions have reservations to lend directly to the segment).
January 2015
32
High household microfinance debt was one of the contributors to the AP crisis. Surveys reveal
that over 70% of borrowers had borrowed from three or more MFIs just before the crisis. These
CIBs were expected to maintain databases of the borrowers of MFIs and records of their credit
history.
6.2.1.MFI Credit Bureaus
The CIBs have millions of accounts with loan histories and are periodically updated. All MFIN
members are members of both CIBs and provide periodic updations on the borrower accounts
to the CIBs.
Figure 50
Database Maintenance and Updation
Customer details
Customer report contains
Updation methodology
Know your customer (KYC) details include name, age, family members,
relationships, identification (most common documents are voter id and
ration card)
Old loans, current loans, repayment history, days past due, etc.
 Database updation: Weekly or fortnightly, (monthly for nonmembers). The systems of some MFIs provide live data. While others
follow batch process.
 Borrower credit reports: These are available on query. Typically, the
credit reports are requested twice by an MFI before disbursement.
Source: Various press reports, Equifax, Highmark
An MFIN, RBI appointed SRO requires its members (servicing over 90% of the MFI borrowers)
to be members of both, Equifax and Highmark.
January 2015

Better MIS and data quality: Earlier, some MFIs relied on their primitive data bases which
had duplication and did not cover loans from other MFIs. Over the years, MFIs started
building better MIS to standardise and improve their data reporting while Equifax improved
the search algorithms and improved database capabilities. External consultants from
International Finance Corporation and MFIN aided the data improvement process.

Improved strike rate: The credit bureau uses „strike rate‟ to measure the efficiency of its
data quality and search algorithms. The strike rate is the probability of finding a match
when the person actually exists in the records. During the initial years (2010-2011), the
strike rate was about 70% (as data quality was low) which improved to 95% in FY14.

Frequency of data updation: The MFI borrower database is updated at least on a
fortnightly basis. MFIs reach over 30 million borrowers and hence are important
contributors to the database. MFIs have also been updating the historic data on loans so
that the credit bureaus can have accurate loan histories.
33
7. Appendix 5: Business Correspondent Model
In 2005-2006, RBI, on the basis of the recommendations of the Khan Committee, permitted
banks to use intermediaries such as BCs. This increases the poor and the hard-to-reach
individuals‟ access to banking services using a network of third party agents.
The bank and BC are bound by a legal contract. The BC usually is a technological service
provider (TSP). It provides transaction devices, maintains database and provides hardware
and maintenance services. The BC employs customer service points (CSPs) who act as sub
agents of the banks. These could be NGOs, Section 25 companies, individuals, SHG
members, etc.
The environment of operations of BCs was as under:
Main objectives: Opening of no frills accounts. Over 100 million no-frill accounts were opened
during FY2005-FY2012, of which over 70% are still dormant (Source: press reports). The BCs
also facilitate savings, transfers, insurance selling and cash withdrawal by providing last mile
connectivity between the banks and their poor customers residing in remote villages.
Other activities
 No frills savings accounts

Deposits, FDs and withdrawals

Remittances

Balance enquiry, statements, receipts

Enrollment of customers

Disbursal as per bank‟s instructions and limits

Other banking products such as overdraft/retail loans, kisan credit card, general credit card
Operational Scope of the Business Correspondent and the Bank
 The BC will be an agent of the bank and the bank will pay commission to the BC for its
services

The BC will function within 30km from the bank branch

BC and its CSPs are allowed to offer credit, savings, remittances and other products from
more than one bank

All BC transactions are to be accounted by the bank on the same day

Bank permitted to reasonably charge the client as per its approved board policy

KYC adherence is the bank‟s responsibility
Models of Operations of CSP
The three main models of operations at CSP are kiosk, GPRS-based biometric model and
SMS-based mobile model. The initial investment in hardware is INR1,26,000 for the kiosk
model, INR40,000 for the GPRS-based biometric model and INR35,000 for SMS-based mobile
model.
Average Remuneration to CSPs
 No frills account (NFA): INR25 (25% for the bank, 40% to CSP and 35% to BC)

Maintenance of NFA: INR4 p.a. (25% for the bank, 40% to CSP and 35% to BC)

Deposit services: 0.25% with INR6 as the upper limit (25% for the bank, 40% to CSP and
35% to BC) Minimum: INR1/transaction

Withdrawal: 0.5% with an upper limit of INR12 (25% for the bank, 40% to CSP and 35% to
BC); Minimum: INR2
Issues with the current BC segment
The India Banking Agents survey conducted in FY14 revealed that of the total 2,358 agents
surveyed across India, 47% were untraceable/unreachable and 16% of the remaining had not
carried out a single transaction. This implies that about 55% of BCs are non-functional. A
January 2015
34
median agent conducts, on an average, nine transactions a day and earns INR2,700 per month
(Kenya, Tanzania and Uganda record over 30 transactions per day). This amount is lower than
the minimum wages prescribed by state governments.
As a result, the attrition is between 25% and 34% as the youth (mostly selected as BCs) may
not have the patience to wait for transaction through-puts to increase. Sa-Dhan carried out a
BC survey in 2012 and found that the breakeven for a CSP in a village of 500 households could
range from three to five years.
However, the government, regulator and the banks are focussing on the BC model as a means
of financial inclusion. The number of CSPs has increased by almost 10x over FY10-FY14.
Figure 51
Business Correspondents – Coverage
Banking outlets in villages
a) Branches
b) Villages covered by BCs
c) Other modes
d) Total
Urban locations through BCs
2010
33,378
34,174
142
67,674
447
2011
34,811
80,802
595
1,16,208
3,771
2012
37,471
1,41,136
3,146
1,81,753
5,891
2013
40,837
2,21,341
6,276
2,68,454
27,143
2014
46,126
3,37,678
3,83,804
60,730
Source: RBI
The government is of the view that the sheer numbers of BCs/CSPs appointed by the banking
system will assist financial inclusion even if more than 50% of CSPs are not operational. It may
be seen that the number of transactions and the amounts of transactions have also increased
manifold.
Figure 52
Transaction Throughput of the BC Channel
Year
No of transactions (m)
Amount of transactions (INRbn)
2010
26.52
6.92
2011
84.16
58
2012
155.87
97.09
2013
250.46
233.88
2014
328.6
524.4
Source: RBI
Jan Dhan is likely to increase the transactional throughput of the BC channel and provide more
people with increased access to banks. Countries such as Brazil, Kenya, Uganda, South Africa
have viable BC operations and this channel could emerge as a competitor to the MFIs or MFIs
could operate as BCs.
January 2015
35
8. Appendix 6: Geographical Diversification Ensues
The impact of AP crisis on the financials of some MFIs was debilitating since over 50% of the
portfolios of some MFIs were concentrated in AP; three of the top five Indian MFIs had to be
restructured. Many MFIs began to diversify geographically to minimise the impact of a similar
event in other states, if it could arise. The MFIs began to grow, mainly in TN, WB, Karnataka,
MP, UP, Maharashtra, Gujarat, Bihar and Assam.
The below table illustrates the growth in borrower loan outstanding (MFIs + SHGs) in the larger
states indicating two aspects:
1.
Part of the growth is from an increase in per capita borrowing
2.
Some of these large states are under-penetrated as compared to AP
Figure 53
Average Borrowing/Poor Household (INR)
Average
borrowing/poor
household (INR)
2010
2013
AP
87,728
105,869
TN
30,850
35,527
Karnataka
16,493
25,100
WB
8,436
13,364
UP
2,628
3,191
Maharashtra
5,122
6,067
MP
2,173
2,814
Source: State of Sector reports – Access Development Services, Census 2011 and Planning Commission
(for poor households, 2011-12)
Assam and Bihar are the leading states in terms of growth but their portfolio size is slightly
lesser than that of Madhya Pradesh. The concentration of microfinance loans is higher in south
Indian states and WB but it is increasing in other large states too.
Declining share of MFI Loan Portfolios of AP and Increasing Share of Other States
Figure 54
Figure 55
GLP Percentage Share (2008)
Others
18%
Others
20%
AP
32%
MP
2%
AP
28%
MP
3%
UP
6%
UP
5%
Maharashtra
6%
Karnataka
18%
WB
9% TN
9%
Figure 56
Maharashtra
5%
Karnataka
14%
WB
12%
TN
13%
Figure 57
Others
25%
AP
24%
Others
30%
TN
14%
WB
14%
MP
5%
WB
13%
Maharashtra
5%
UP
7%
TN
10%
Karnataka
11%
MP
5%
UP
7%
Maharashtra
9%
Source: Sa-dhan, MFIN, Ind-Ra
AP
12%
Karnataka
9%
Source: Sa-Dhan, MFIN, Ind-Ra‟s estimates
January 2015
36
The share of AP has been decreasing since FY08 while WB, TN, Maharashtra, MP and UP
have more or less maintained their share. The share of the remaining states has increased to
30% in FY14 from 19% in 2010, primarily led by Bihar and Gujarat. The fall in Karnataka‟s
share in 2011 from 2008 was due to the AP-like effect in three-to-four districts of the state.
However, post 2011, their impact has been contained.
Loans per District Indicate Increasing Share of Newer States
MFIs are expanding in south India but their dependence on TN and Karnataka is increasing in
terms of the number of borrowers and loans outstanding in each district. In addition to
Karnataka and TN, MFIs have experienced high growth in WB and moderate growth in
Maharashtra and MP.
Figure 58
Loans in INRm/District
2011
2012
2013
2014
2,500
2,000
1,500
1,000
500
0
AP
WB
Karnataka
TN
UP
Mahrashtra
MP
January 2015
37
9. Appendix 7: Operational Costs Key to Increasing RoAs
Below are the various cost and revenue components of the NBFC-MFIs and their drivers:
Figure 59
Revenue and Costs: Limited Control of MFIs
Revenue components
Yield/interest
Description
Interest on loan
Controlling variables and implications
The interest rate depends on:
- Interest rates charged by other MFIs in the
region
- RBI‟s yield cap 2.75x banks‟ base rates
Processing fees (restricted MFIs usually charge fees in full based on RBI
to 1% p.a.)
guidelines.
May consist of interest on
deposits, commission from
sale of insurance, etc.
Fees
Other income
Cost components
Financing costs
Fees and interest paid on MFIs have minimum control on these costs as
bank and non-bank debt banks independently charge interest rates, etc.
based on their own assessment of the risk.
Contains manpower,
Costs can decrease by increasing
overhead costs, etc.
loans/branches, borrowers/loan officer and the
average loan ticket size.
Credit costs
Costs depend on the credit behaviour of the
borrowers and could be exacerbated by political
reasons. MFIs have only limited control - through
interest periods and persistence of collections –
on these costs.
Operating costs
Loan provisions
Source: Ind-Ra
NBFC-MFIs can only expand their margins by decreasing their operating costs since MFIs
have maximum control over them and marginal control over other cost factors.
Trend of Operating Costs
MFIs have tried to control operating costs by increasing branch throughput, loan officer
efficiency and through a higher proportion of field staff.
9.1. Reduction in Branches
The number of branches reduced in FY14 from FY11 but loans outstanding per branch
increased to INR31m from INR16m indicating that the strategy has changed from spreading too
thin to consolidating and then spreading.
Figure 60
Figure 61
No of Branches (000)
Loans Outstanding/Branch
(INRm)
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
12,690
11,459
10,697
10,763
25
20.88
20
14.46
15.89
18.25
15
10
5
0
FY10
FY11
FY12
January 2015
28.37
30
13,562
FY13
FY14
FY10
FY11
FY12
FY13
FY14
38
9.2. Trimming Staff
Manpower costs can constitute up to 25% of an MFI‟s total costs. MFIs have decreased the
number of loan officers, increased borrowers/loan officer and thereby loans outstanding per
loan officer, indicating higher operating leverage. However, any further rise in the total number
of borrowers/loan officer can affect client service and thereby delivery of microfinance services.
Figure 62
Figure 63
Loan Officers per Branch
Loan Outstanding per Field Officer
(000)
(INRm)
7
7
6
6
7
6
6
5
5
5
6.1
6
5
5
4
4
3
3
2
2
1
1
0
3.6
1.8
4.2
2.8
2.4
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY09
FY10
FY11
FY12
FY13
FY14
Source: Sa-dhan, MFIN
Figure 64
Field Staff of MFIs
(000)
90
75
78
77
63
57
60
54
50
FY13
FY14
45
30
15
0
FY09
FY10
FY11
FY12
9.3. Higher Share of Field Officers in Staff
Figure 65
Field Staff as Percentage of Total Staff
The employees in MFIs could be of admin/manager
grades or field staff (loan officers and branch
manager). The field staff is at the business frontline.
A higher proportion of field staff without
compromising on the quality of compliances and
reporting translates into higher staff efficiency.
All MFIs
Glp>5 bn
Glp1-5 bn
Glp< 1 bn
2012
2013
2014
62
66
48
67
65
67
59
65
66
67
60
62
Source: MFIN
Based on the trends observed in the sector after the AP crisis, we opine that the sector is
poised for steady strong growth, but there will not be complete recovery. The relative saturation
in some districts, expansion in the previously underpenetrated states (which exhibit relatively
poor portfolio quality under the SHG programme – Appendix 8) and the emerging strategy of
Indian government, regulators and banks might impart dynamism to the sector.
January 2015
39
10. Appendix 8: SHG-Bank Linkage Programme
10.1.
Development of Microfinance Credit Delivery Models in India
Before the 1990s, the lack of access to formal credit systems drove the poor to borrow from
local moneylenders who would charge interest rates anywhere between 50% and 500%. These
moneylenders were often landowners, local strongmen or politicians and would not hesitate to
use unscrupulous means to recover their money, including bonded labour, taking possession of
the limited assets of the borrowers and other social evils. These practices were widely
prevalent across the country.
The earnings of the poor were cyclical and meagre. A bulk of their earnings would materialise
in the four-to-eight month crop season, part of which would go to clear the arrears of previous
borrowings. They would have availed credit for consumption-related purposes, health or
unforeseen personal and social events. The high interest rates charged by the informal sector
would catch the poor in a debt trap.
The pre-1990 models of poverty alleviation primarily included grants and subsidies by the
central and state governments through agencies such as NABARD. However, some NGOs
were trying to develop appropriate credit behaviours in small pockets in South India, especially
in AP, Kerala and TN.
NABARD recognised this and undertook various initiatives to bridge the supply-demand gap by
trying to evolve financial inclusion using credit. However, the end-users could not make out the
difference between state subsidies and the credit systems; they often ended up treating credit
as subsidy/grant. This indicated that the lack of financial literacy, financial discipline and regard
for credit institutions plagued large sections of the society. These are mandatory requirements
for the development of any economy where credit is an important source of capital and equity is
sparse.
The problem was compounded by low value credits and relatively high costs of appraisal,
monitoring and subsequently high credit costs which led banks to abandon most of these
programmes.
Figure 66
Microfinance Models in India
Microfinance Credit
Delivery Models in India
SHG-Bank linkage
JLG - MFI model
Individual lending
• Involvement of bank
• Formation of SHG
consisting mostly of
poor women
• Development of credit
behaviour
• Eligible to avail credit
from banks
• Group members shall
not be eligible for future
credit in case of a
default
• Bank bears the loss
• Involvement of MFIs
• Formation of JLG
consisting mostly of
poor women
• Eligible to avail credit
• Other members repay
on behalf of the
defaulter
• On continuing default,
group is ineligible for
credit
• MFI bears credit cost if
joint liability fails
• Involvement of any
lending institution and
individual borrower
• No group lending or
liability structure
• Individuals relatively
more credit worthy than
group-based models
• More suited for
populations with good
credit behaviours
Source: Ind-Ra
India is traditionally an underpenetrated state in terms of credit. Due to poverty and illiteracy,
the financially excluded population as a whole did not see appropriate credit behaviours.
January 2015
40
Therefore, the government and its implementing agencies found it challenging to set up
structures for financial inclusion.
10.2.
SHG-bank Linkage Programme
The SHG-bank linkage programme was started as an Action Research Project in 1989, an
offshoot of a NABARD initiative. It is currently the world‟s largest state-sponsored microfinance
programme at about USD7.0bn outstanding loans and with a reach of over 90 million
individuals.
Figure 67
Role of Participating Entities in SHG Handholding
NABARD‟s early experiences
with the setting up of SHGs led
to the pilot projects involving
banks, SHGs and NGOs. The
results were encouraging and
led to the evolution of a
streamlined set of RBI guidelines
for banks to foster SHGs.
NABARD provided promotion
and refinance support to banks
and reimbursement of costs to
develop and mature an SHG to
the corresponding NGOs.
Role of SHG-bank linkage participants
Bank:

Identifies areas for SHG formation

Appoints NGOs for forming and fostering an SHG

Monitors SHGs after formation through NGO

Provides SHG members with savings account

Provides SHG members credit after the SHG matures
NGO:

Forms SHG among villages with commanalities among members

Monitors intra-group credit and savings behaviour

Imparts basic financial literacy, book keeping and capacity building

Hand-holds the SHG though savings and credit processes
NABARD

Sets up nationwide programme guidelines and monitors
performance

Provides grants to NGOs for expenses in fostering SHGs

Provides grants and refinance support to banks for their
participation in the programme
Source: Ind-Ra
The overall strategy adopted by NABARD relies on two main planks:

expanding the range of formal and informal agencies that can work as SHG promoting
institutions (self-help promoting institutions; typically NGOs)

building up capacities of the increasing number of stakeholders
NABARD developed the SHG-bank linkage approach as the core strategy that could be
implemented by the banking system in India to increase their outreach to the poor.
Main objective of the SHG-bank linkage programme: The programme‟s prime objective was
not only to provide credit to the poor, but also to empower them by providing sustainable
financial services. The strategy involved forming SHGs of the poor, encouraging them to pool
their savings regularly and using the pooled thrift to provide small, interest-bearing loans to
members, and in the process learning the nuances of financial discipline.
10.2.1. Characteristics of a Typical SHG
January 2015

Consists of 10-20 members

One member per household

Either all male or all female groups

Regular meetings and compulsory attendance
41
10.2.2. Process of Maturing of an SHG
Figure 68
SHG Formation Process
• SHPIs select SHG members (one per household) based on some commonalities (caste,
area, gender, livelihood, etc.)
• The households have to satisfy three-to-four of the following conditions: only one earning
member, drinking water available far off, old illeterate family members, women not having
access to toilets, drug addicts or drunkards, kuchha house, scheduled caste or tribe, etc.
SHG formation
•
•
•
No introduction to credit at the time of initiation
Members help each other
Members decide on the time and place of meetings, penalty on non-attendance, agreement
on the amount of savings, giving small loans to each other, repayment habits
• The mentor involves SHG members in activities for inducing fraternal feelings and capacity
building
SHG members
set terms
• In an SHG, all members are known to each other
• Initial loans are given from the common savings;
• Other members are aware that they may be denied future credit if the defaulter does not
pay
Social pressure
• After exhibiting appropriate credit behaviours, the SHG may be considered mature
• Based on members' decision, the SHG is ready to avail credit from banks
• The mentor may continue his/her relationship with the SHG
SHG maturing
Source: NABARD handbook on SHG formation, NABARD reports on SHG-Bank linkages
10.2.3. Borrower Coverage and Savings and Loan Portfolio Size of SHGbank Linkage Programme
Borrower coverage and savings
The SHG-bank linkage is the largest state-sponsored microfinance programme. It has been in
existence since 1990s and covers all major Indian states. The mature SHGs are allowed to
operate a savings account where it is mandatory for each member to save some money on
behalf of the SHG in the savings account. These SHGs can also borrow from participant banks.
Savings are mandatory, credit is not.
Figure 69
Figure 70
Client Outreach
Loan Portfolio Outstanding Basis
(m)
120
97
100
97
103
(INRbn)
500
95
96
70
80
58
60
280
300
200
40
363
400
394
429
312
227
170
100
20
0
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: NABARD - Annual reports and State of Microfinance reports
January 2015
42
The client coverage has increased to 96 million in FY14 from 58 million in FY08 under savings
SHGs. Each SHG has, on an average, 13 members and has remained more or less constant.
Also, the total loan outstanding under SHG-bank linkage programme increased to INR429bn in
FY14 from INR170bn in FY08. This indicates high latent demand of credit from hitherto underserved segment of population.
Figure 71
Figure 72
SHGs
Total SHG Savings
Source: Ind-Ra
FY2014
FY2014
FY2013
FY2012
FY2011
FY2010
FY2009
FY2008
0
FY2013
3
FY2012
6
FY2011
120
100
80
60
40
20
0
FY2008
(INRbn)
9
FY2010
SHGs (credit)
FY2009
SHGs (savings)
(m)
Source: Ind-Ra
Ind-Ra understands that banks determine their loan disbursement needs internally and
informally maintain a savings/credit ratio for SHG-bank linkage programme. For the banking
system, the ratio has been maintained between 4 and 5. In FY14, about 57% of savings SHGs
(4.2 million out of 7.4 million) had availed credit from the banks.
Though the number of credit SHGs has remained constant, the total loan portfolio grew at a
CAGR of 8% to INR429bn in FY14 from INR363bn in FY12. It indicates that the growth in loan
portfolio is due to an increase in outstanding loans per SHG.
Figure 73
Loan Disbursed and Outstanding per SHG
Avg loan outstanding
(INR 000)
200
Avg loan disbursed
160
120
80
40
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: NABARD
The loan disbursement per SHG and the outstanding loans per SHG grew at a CAGR of about
11% over FY12-FY14.
The data shows that banks are finding it difficult to expand their reach or penetration since the
past two years. In fact, the number of savings SHGs has decreased FY12 onwards and the
SHG portfolio growth is sourced by increasing per SHG disbursement and thereby loans
outstanding.
SHGs under the National Rural Livelihood Mission (initiative started in FY13) can borrow unto
INR2.5m in stages (as the SHG and its micro/medium scale enterprises mature and increase in
size and scope). According to NABARD, chances are that incremental growth can stem mainly
from an increase in SHG limits under NRLM rather than expansion of reach.
January 2015
43
10.2.4. Socio-economic Impact
Similar to most microfinance programmes across the world, SHG-bank linkage programme
focuses on women, SC/ST and minority SHGs.
Figure 74
Women SHGs
(%)
86
84
82
80
78
76
74
72
84
81
80
81
79
79
76
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: NABARD
10.2.5. Regional Biases and Portfolio Performance
The SHG-bank linkage programme first took root in south India in AP and thereafter in
Karnataka, TN and Kerala. The main reason for this was that NABARD wanted to employ the
services of Mysore Resettlement and Development Agency (MYRADA), an NGO with large
presence in these states working in the field of financial inclusion of the poor. As the
programme matured, it penetrated deeper into these states and currently over 55% of credit
SHGs are in south India.
Figure 75
Credit SHGs as Percentage of Total SHGs
FY10
FY11
FY12
FY13
FY14
70
60
50
40
30
20
10
0
South
North
East
West
Central
North east
Source: NABARD
SHG programme is slowly expanding in central, north and east India while maintaining South
India‟s share of credit SHGs.
The regional bias, combined with other factors, throws up some interesting insights on the
credit behaviour of people of these regions.
Figure 76
NPA Percentage in the SHG Programme
Area (%)
All India
South
North
East
West
Central
North east
FY2009
2.90
1.40
6.60
3.40
5.60
8.90
8.50
FY2010
2.94
1.87
6.61
3.21
4.46
8.07
5.51
FY2011
6.92
3.79
7.05
4.31
7.26
10.74
8.42
FY2012
6.09
4.98
6.92
7.28
8.22
13.20
5.17
FY2013
7.08
5.11
11.19
10.30
8.63
17.28
8.56
FY2014
6.83
4.64
13.67
11.07
11.11
18.87
8.88
Source: NABARD
January 2015
44
It may be accepted that these kinds of programmes can have high NPAs and the socioeconomic benefits may outweigh the credit costs of such loans. However, the trend of
increasing NPAs in central and north India is disturbing. NABARD‟s data shows that some
north eastern states such as Manipur and Mizoram have NPAs over 50% of the total loans
outstanding under this programme, while Gujarat, Haryana, Punjab and Odisha have lower
NPAs in the range of 18%-25%.
On mining even deeper, we find that the private sector SCBs have lower NPAs than those of
public sector and co-operative banks.
Figure 77
Bank Category-wise Share of SHG NPAs
Banks (%)
Public sector SCBs
Private sector SCBs
Regional rural
Cooperative
FY2009
2.40
1.70
4.20
6.80
FY2010
2.60
5.44
3.56
3.88
FY2011
4.76
10.10
3.67
7.04
FY2012
6.48
5.30
4.95
6.84
FY2013
8.39
3.69
4.10
8.13
FY2014
7.02
4.22
6.26
8.67
Source: NABARD
The above performance data suggests that:
1.
2.
3.
4.
All banks except private sector banks have weak recovery standards under the
programme.
The banks may have own compulsions to meet SHG targets and hence intense pressure
to disburse.
These credit costs can, on a system-wide basis, become materially important if the
programme increases two-to-three times its current size.
Outreach in south India has not increased over the last two years indicating certain level of
saturation in formation of SHGs with new members. Future growth in the loan portfolio can
come from other regions which suffer high credit costs.
Public sector banks have actually decreased their efforts on client coverage and are growing
their SHG loan books by increasing per SHG disbursements. The share of commercial banks in
total credit SHGs fell 7% from FY10 to FY14 while their share in outstanding SHG loans
reduced only 4%.
Figure 78
Figure 79
Credit SHGs Covered by SCBs
O/s per SHG
Comm bank: Outstanding per credit SHG
(Lacs)
35
Co-ops and RRBs: Outstanding per credit SHG
32.3
30.5
30
26.1
26.4
25.0
25
20
15
10
5
0
FY10
Source: Ind-Ra
FY11
FY12
FY13
FY14
(INR 000)
140
120
100
80
62
49
60
40
20
0
FY10
118
101
99
72
54
FY11
60
FY12
70
FY13
80
FY14
Source: Ind-Ra
Surprisingly, the actual no of SHGs to which SCBs extended credit fell 23% over FY10-FY14.
The SCBs have also increased per SHG disbursements at a higher rate than co-operative
banks and RRBs.
High credit costs imply that lending to SHGs is not sustainable on a standalone basis. SCBs
are lending to SHGs because (i) it is a minuscule part of their loan books, (ii) these loans hold
priority sector status for the SCBs and (iii) the fact that NABARD and certain government
programmes/schemes reimburse SHG formation charges to self-help promotion institutions
(SHPIs; i.e. partly subsidise SHG formation costs for the banks). It may be difficult for the
programme to exist without government push and support.
January 2015
45
11. Appendix 9: Microfinance Bill 2012
The Microfinance Bill was introduced in the Parliament in 2012 and later referred to a Standing
Committee. A parliamentary panel rejected the bill in February 2014 and asked the government
to bring fresh legislation citing the need for additional groundwork, wider consultations and
deeper study of certain vital aspects. The Standing Committee was of the view that instead of
RBI, a new regulator could be proposed.
Other objections of the Standing Committee were:

Inadequate focus on regulatory and supervisory structure

Silent on issues such as
collection/recovery methods

The study of lower interest government schemes under SHG (Kudumbashree and
StreeNidhi) not conducted
client
protection,
over-indebtedness
and
coercive
Can Kudumbashree and StreeNidhi Programmes be Replicated?
Kerala's Kudumbashree scheme provides loans at 11%-13% and the AP government's
StreeNidhi programme is offering loans at 14% with an operating cost of just 1%. Despite that,
it says, "No study has been conducted to evaluate and replicate these existing successful
schemes in achieving financial inclusion.”
These schemes are piggybacking on
1.
The SHG structure
2.
Credit behaviour fostered on a mass scale for over 20 years where the states, especially
has continually focused on the micro borrowers
3.
Government grants for interest subvention etc
NABARD is of the view that states other than those in southern India have not looked at
microfinance as a powerful means of financial inclusion. Also, social aspects such as relative
independence to women in allocating for household expenditure, meeting male representatives
of MFIs/banks, starting a micro-enterprise, financial literacy is relatively less in these states.
Agency professionalism and credit behaviour are other important aspects where these states
score low. Consequently, credit costs are likely to be higher. Also, southern states have
undergone years of conditioning on credit behaviours and SHGs are functioning relatively
better even when compared with a mature SHG not belonging to south India. Hence, these
schemes are likely to be difficult to implement across India.
NABARD is of the view that the executive is increasingly focused on interest rates charged by
MFIs. The comparison with banks is difficult as the cost of delivery of credit is higher for MFIs.
The global experience shows that a slew of regulations in the microfinance sector of various
countries, the interest rates or the margin are regulated in some form (the extent of interest/
margin caps may vary for non-regulated structures).
However, door-step microfinance has high operating costs and therefore charges high interest
rates. MFIs in some countries charge interest rates ranging from 12.3%-56.5%. However, for
countries charging interest rates lower than 20%, the bank rates are also 3%-4% as against 8%
in India.
January 2015
46
Figure 80
Countries with Large Microfinance Operations
Country
Portfolio (USDbn) Interest yield Central bank rates Operating costs Margins
Indonesia
10.94
37.3
7.5
24.4
12.9
Peru
10.61
25.9
3.5
13.0
12.9
Colombia
6.76
21.5
4.5
13.4
8.1
Vietnam
5.89
22.3
8.0
12.6
9.7
India
4.51
20.9
8.0
8.4
12.6
Mexico
3.83
56.5
3.0
37.8
18.7
Bolivia
3.58
17.5
3.7
11.6
5.9
South Africa
3.42
33.3
5.8
12.1
21.2
Bangladesh
3.15
25.8
7.8
9.5
16.2
Ecuador
2.78
21.5
8.2
12.8
8.7
Azerbaijan
2.49
25.7
3.5
12.5
13.2
Cambodia
2.09
23.7
1.4
10.6
13.1
Chile
1.90
12.3
3.0
8.0
4.3
Kenya
1.85
22.1
8.5
13.1
8.9
Mongolia
1.77
20.5
11.5
6.7
13.9
Brazil
1.68
23.9
11.3
13.6
10.3
Paraguay
1.24
23.1
6.8
15.8
7.3
Weighted average
27.3
5.9
15.3
12.0
Source: mixmarket.org, Portfolio size as on 31 December 2012; Interest yield and operating costs: For year ended
December 2013; relies on self-reporting by the MFIs
Central bank rates: http://www.cbrates.com
All numbers in percentage unless stated otherwise
In 2013, the weighted average interest rates charged by MFIs were 27.3%, their operating
costs were 15.3% and central bank rates were 5.9%. (weighted against their share in the MFI
market).
January 2015
47
12. Appendix 10: Features of Jan Dhan
The new government has launched the Jan Dhan scheme that proposes to open bank
accounts for the unbanked with many facilities including savings account.
Some of the features are:
1.
Banks may offer Jan Dhan account holders INR5,000 overdraft facility if they are satisfied
with the borrower history and repayment capability; INR1,00,000 accident cover if the
account is linked with Aadhar card; INR30,000 life insurance if the accounts are opened
before 26 January 2015
2.
Each account holder shall be provided a RuPay debit card
3.
Account holders cannot transfer over INR100,000 in one year
Similar initiatives in the past have not resulted in meaningful financial inclusion, but the sheer
speed and numbers that this scheme has achieved may have a positive impact on financial
inclusion. Press reports suggest that states like Haryana, Goa, Kerala, and Union Territories
like Puducherry, Chandigarh have covered 100% households under the scheme.
Figure 81
Status of Jan-Dhan on 24 January 2015
No of accounts (m)
Bank
Public sector
Regional rural banks
Private banks
Total
Rural
51.5
17.9
3.2
72.6
Urban
43.6
3.2
1.9
48.7
Total
95.2
21.1
5.1
121.4
No of RuPay
debit card
(m)
88.3
14.5
4.3
107.1
Balance in
No of accounts
accounts with zero balance
(INRbn)
(m)
79.48
63.5
15.28
15.6
6.37
3.0
101.13
82.1
Source: Department of Financial Services, Ministry of Finance; The numbers may not match due to rounding off
The Finance Ministry is taking additional measures to prevent Jan Dhan accounts from meeting
the same fate as the No Frills Accounts:
January 2015
1.
Other accounts may be included under Jan Dhan and existing account holders need not
open Jan Dhan accounts separately to avail the above benefits
2.
Direct transfer of LPG subsidies
3.
National Rural Employment Guarantee Scheme payments to be directly made to these
bank accounts (Rajasthan and MP have already started)
4.
The overdraft facility is linked with the savings account and the behaviour of the account
5.
The plan also envisages channelling all government benefits (from centre/state/local body)
to the beneficiaries‟ accounts and pushing the direct benefits transfer (DBT) scheme of the
Union Government.
6.
Mobile transactions through telecom operators and their established centres as cash out
points are also planned to be used for financial inclusion under the scheme.
48
13. Appendix 11: Banking Licence Awarded to Bandhan
RBI granted a full-fledged scheduled commercial bank licence to Bandhan, the largest NBFCMFI in India, in April 2014 (only two applicants granted licence out of 25, three more expected).
Markets are viewing it as a cautious experiment in financial inclusion.
Ind-Ra expects Bandhan to play an important role in financial inclusion with its reach (over
2,000 branches) and proximity to the unbanked. Other MFIs are not expected to be awarded
banking licences in the current set of issuances.
MFIs may now also have to compete with banks (such as Bandhan) in their own operating
regions. Since Bandhan will now have access to low cost funds (savings), it can charge lower
interest rates, and offer savings products and other financial services that the MFIs cannot
provide. Further, the trust perception could be higher in favour of banks. Competition with
banks is bound to have a negative impact on the top-line and bottom-line of NBFC-MFIs.
January 2015
49
14. Appendix 12: Diversified Bank Licenses
Based on the recommendations of the Mor Committee on financial inclusion, RBI announced in
April 2014 that it will work on the policies of having various categories of „differentiated‟ bank
licenses which will allow a wider pool of entrants into banking. Differentiated banks serving
niche interests, local area banks, payment banks, etc. are contemplated to meet credit and
remittance needs of small businesses, unorganised sector, low income households, farmers
and migrant work force. The summary of guidelines (issued in November 2014) and
implications for MFIs is as below:
Figure 82
Key Provisions Applicable to Diversified Banks
Payment banks
Small banks
Entity
description and
function


Eligible
ownership



Scope of
activities







Capital
requirements
Deployment of
funds









Small savings accounts,
Payments/remittance services

Existing non-bank pre-paid payment 
instrument (PPI) issuers, NBFCs,
corporate BCs, mobile telephone
companies,
super-market
chains, 
corporates, cooperatives and public
sector entities

Banks may have a stake in these
entities
Acceptance of demand deposits (under
deposit cover)- Initially restricted to
holding
INR1,00,000
balance
in
accounts
Payments and remittance services
through various channels including
branches, BCs and mobile banking
Internet banking
Can function as a BC of another bank
Payment banks to be ring-fenced from
the other businesses of the promoter
group
Distribution of simple financial products
such as insurance and mutual funds
Utility bill payment
Net worth of INR1,000m at all times
Capital Adequacy Ratio (CAR): 15%
Leverage ratio: >=3%
No lending activity
CAR as per Basel I standards since the
banks are not expected to deal with
sophisticated products
To maintain cash reserve ratio (CRR)
with RBI
Cash for operational activities and
liquidity management
Investments, mainly in government
securities/treasury bills with maturity up
to one year (statutory liquidity ratio
equivalent)
Access to call and money market for
liquidity management









Provision of savings products to
under-banked population
Supply of credit to small business
units, small farmers, micro and
small
industries,
and
other
unorganised sector entities
Resident individuals/professionals
with 10 years of experience in
finance
Companies and societies, NBFCs,
MFIs, local area banks (LABs)
Business houses and NBFCs
promoted by them may not be
eligible
Credit and savings functions
Distribution of simple financial
products such as insurance and
mutual funds
Cannot set up NBFC subsidiaries
Expansion to be monitored; at least
25% of branches in unbanked rural
areas
Minimum paid up equity capital is
INR1,000m.
CAR: 15% of RWA
Subject to all prudential norms and
regulations of RBI as applicable to
commercial banks
High priority sector requirement
At least 50% of its loan portfolio to
constitute of loans up to INR2.5m
primarily to micro enterprises
Source: RBI
January 2015
50
Figure 83
Can NBFC-MFIs Opt for any of these Licences?
Bank category Advantages
Payment banks 
Provide MFIs‟ promoters
not a preferred
with greater operating
option for MFIs
leverage (common branches
and operating premises)

Expand the role of NBFCMFIs in fostering savings
habits of its JLG members
(currently under the role as a
banking correspondent, this
is not the top-most priority of
the BC)

Reach/penetration could be
as deep as MFIs‟
Small banks
 It can provide access to
could be the
lower cost of funds for MFI
natural
operations (if savings are
evolution for
not ring-fenced/partially ringlarge MFIs
fenced and can be used a
funding source by the small
banks).
 Conversion to bank can
invoke greater trust in
people
 Avenues for the borrower to
save
 The range of financial
services can expand to
include all forms of credit ,
deposit and other financial
services
 Reach/penetration could be
as deep as MFIs‟
Disadvantages







Remarks
Giving up on loaning Unable to lend and
hence not suitable for
business/another
the existing NBFC-MFIs
promoter arm may
carry out the banking as they may have to
stop their lending
business
operations. However,
CRR requirements
MFIs can have a
Restrictions on
payment bank as a
investments
group company and can
No access to low-cost act as a banking
funds mobilised
correspondent of the
through savings
payment bank.
Monitored expansion
Subject to reserve
requirements
Developing trust with
potential customers
will take time
(gestation for deposit
services)
Industry discussions
suggest that mid and
large MFIs are
favourably considering
applying for small bank
licences.
Source: Ind-Ra
January 2015
51
15. Appendix 13: Performance of Top 15 MFIs
In the MFI sector, the top 15 MFIs constitute about 80% of the sector in terms of the GLP. Of
them, only SKS Microfinance Limited is listed while Bandhan is expected to start banking
services in FY16.
The list below represents the top 15 MFIs ranked by their portfolio size (2QFY15)
Figure 84
Largest Indian NBFC-MFIs (excluding restructured MFIs)
Microfinance Institution
Bandhan Financial Services Pvt Ltd (Bandhan)
SKS Microfinance Ltd (SKS)
Janalakshmi Financial Services Pvt Ltd (Janalakshmi)
Ujjivan Financial Services Pvt Ltd (Ujjivan)
Equitas Microfinance India Pvt Ltd (Equitas)
Satin Creditcare Network Limited (Satin)
Muthoot Mahila Mitra (Muthoot)
Grameen Financial Services Pvt Ltd (GFSPL)
ESAF Microfinance (ESAF)
Grama Vidiyal Microfinance Ltd (GVML)
Utkarsh Microfinance Private Limited (Utkarsh)
Sonata Finance Private Limited (Sonata)
Suryoday Microfinance Private Limited (Suryoday)
Future Financial Services Ltd (FFSL)
Arohan Financial Services Pvt. Ltd (Arohan)
GLP (INRbn)
67
32
26
24
19
12
10
9
7
6
5
4
4
3
3
Source: MFIN
The list excludes the MFIs that are currently under restructuring (Spandana, Share, Asmitha,
BSFL)
Figure 85
Share of Top 15 MFIs
Share in MFI GLP
Share in branch network
Share in borrowers
90
75
60
45
30
15
Top 15
Arohan
FFSL
Suryoday
Sonata
Utkarsh
GVML
ESAF
GFSPL
Muthoot
Satin
Equitas
Ujjivan
Janalakshmi
SKS
Bandhan
0
Source: MFIN
Vintage and first mover advantages enable established MFIs to have a higher share in GLP
and borrowers with lower share in branches.
January 2015
52
Figure 86
Growth of Top 15 MFIs
YoY growth (GLP)
YoY growth (Branches)
Top 15
Arohan
FFSL
Suryoday
Sonata
Utkarsh
GVML
ESAF
GFSPL
Muthoot
Satin
Equitas
Ujjivan
Janalakshmi
SKS
Bandhan
140
120
100
80
60
40
20
0
-20
Source: MFIN
The large and mid-sized MFIs (except Bandhan and SKS) have experienced higher growth in
2QFY15 over 2QFY14.
January 2015
53
16. Appendix 14: Global Models of Development of the MFIs
We have taken a sample of 15 countries with the largest MFI sectors and analysed sector
trends:
Legal forms and regulators
1. There could exist multiple forms of MFIs (for-profit and non-profit). In most countries, forprofit MFIs are regulated by the respective central banks.
2.
Non-profit MFIs may be partially regulated or be regulated by other institutions (only in a
couple of instances, Central Bank regulates them)
3.
However, in most markets, efforts are on to strengthen regulation and supervision
mechanisms, more so for non-profit MFIs
4.
Credit bureaus existing for all markets
5.
Micro insurance and remittance offered by most formal financial institutions (regulated)
Savings and other products
1. Most regulated entities accept savings deposits as funding sources
2.
In some countries, even unregulated entities can accept savings deposits
3.
Most countries have common consumer protection agencies for financial services or all
services including microfinance (not under main regulators)
4.
MFIs are also permitted to lend to the SME, MME industry segments
Other features/trends
1. Brazil has a strong banking correspondent model working in parallel with the MFIs
2.
At a country level, MFIs have not changed their model from group lending to individual
lending or vice-versa. Individual borrower may have upgraded
Globally, regulators have viewed MFIs as important to achieve financial inclusion. Norms have
been changed to accommodate the increased maturity of the MFIs and provide them adequate
business scope. With the growing confidence in the sector, RBI may relax certain limiting MFI
norms or grant small bank licences liberally to strong MFIs and increase their role in financial
inclusion.
January 2015
54
17. Appendix 15: The JLG Model
In the 1970s, Muhammad Yunus experimented with lending USD40-equivalent each in local
currency to 42 families affected by a famine in Bangladesh to reconstruct their lives. He
believed the absence of collateral was not a reason to deny the poor and the disadvantaged
access to financial services, especially credit. Providing this access would immediately allow
them to put in practice their skills in the field of agriculture, animal husbandry, primitive garment
industry and other rural services.
His experience in lending to these below-poverty-line borrowers and various other experiments
culminated into the grameen model of microfinance and led to the establishment of the
Grameen Bank. The model, with local alterations, is operational in most parts of the developing
world and to a certain extent, among the poor in certain developed countries.
17.1.
Features of a „Grameen‟ or JLG Model
Figure 87
Clients or Borrowers
• Borrowers form a group of 5-20 members.
• Typically, they are from the same local area and
know each other.
• Group members are encouraged to meet
frequently and help each other solve problems.
• They may not have access to formal banking
channels
• They may have minimal assets to offer as
colleteral.
• Group members are the borrowers.
• They follow the concept of joint liability where the
group pays on behalf of the defaulter.
• Joint liability brings intense social pressure on the
defaulter.
• If the group also defaults on the joint liability,
members become ineligible for future access to
credit.
• Loans generally are used for income generating
purposes.
Microfinance Institutions (MFIs)
• The loan officer is the pivotal representative of the
MFI.
• The loan officer forms JLG.
• The loan officer fosters credit behaviour and
explains the concept to the members.
• MFIs offer door step service to JLGs. The loan
officer goes to each village under his coverage and
forms JLGs.
• MFIs loan money to group members on higher
interest than banks (high operatings costs and lack
of collateral).
• In addition to credit, MFIs may offer savings
deposits, microinsurance and other financial
services.
• The loan officer interacts with the JLG periodically
and performs credit, recovery and other functions
Source: Ind-Ra
The JLG model is the widest model implemented globally for financial inclusion. Asian, South
and Central American countries dominate the microfinance universe. Some of these large MFIs
became so important to the national economy that they were converted into banks (Grameen
Bank - Bangladesh, Tameer Microfinance Bank - Pakistan, BancoCompartamos, S.A - Mexico).
January 2015
55
17.2.
Global Market
The JLG model spread as a means of financial inclusion from Bangladesh to Central and South
America and then other parts of the world. The global microfinance market is over USD84bn
according to Mix Market.
Figure 88
Global MFI Outstanding Book Size
(USDbn)
90
84.6
77.7
66.4
75
55.9
60
38.2
45
44.6
25.7
30
15
0
2006
2007
2008
2009
2010
2011
2012
Source: mixmarket.org, ex-China ; Data as on December 2012; reporting as on December 2013 is inadequate in
our opinion
The global MFI sector grew at a CAGR of over 23% over 2006-2012 as the market is underpenetrated and the demand is high. Asia and South and Central America (S&CA) constitute
almost 40% of the MFI universe each in 2012. The data may exclude government-run
independent microfinance programmes such as India‟s SHG-bank linkage programme.
Figure 89
Figure 90
Regional Share (2006)
Regional Share (2012)
Africa
8%
Africa
11%
Europe
16%
South &
Central
America
41%
Asia
35%
Source: mixmarket.org, ex-China
17.3.
Europe
6%
South &
Central
America
41%
Asia
42%
Source: mixmarket.org, ex-China
How does an Ideal Grameen or JLG Model Work
Even when the MFI offers savings services in most regulated MFI markets, they cannot be
offset against outstanding dues. The process of JLG formation may be adopted by the MFIs to
suit local needs or dynamics.
This low credit cost model primarily works on two main factors:
January 2015
1.
High involvement: The MFI officer is in touch with the borrowers as frequently as once a
week. The financial services are offered at the doorstep. The follow-up for repayments is
as frequent as the group meetings.
2.
The joint liability structure: The entire group pays on behalf of the defaulting member to
ensure continued access to credit.
56
Figure 91
Formation and Operations of JLG Model
The facilitator/officer (could be an employee of the MFI or NGO assisting MFI increase
its outreach) would set up an office in a suitable location covering a cluster of villages
He would search for potential borrowers and explain to them the concept of joint
liability and how it acts as an enabler for access to credit
He would foster groups of 5-10 individuals as a JLG. The group meets periodically in
presence of the officer and the individuals discuss the problems faced by them,
potential solutions, business plans, economic needs, etc.
When the group exhibits certain saving behaviours and requisite group dynamics,
about two members become eligible for loans
If the two borrowers in the JLG exhibit no delinquency and repay the principal and the
interest for a year, all the group members become eligible for loans
In case a borrower fails to pay up, other members pay on his behalf
Figure 92
NPA Experience of MFIs in Various MFI Markets
The credit costs borne by the MFIs are
typically low except at the time of
microfinance crises in various parts of the
world as was the case in India in October
2010.
The portfolio quality of MFIs is measured
by PAR (portfolio at risk) and write-off
ratio. PAR 30 indicated the percentage of
loan portfolio for which dues are over 30
days.
Write-off includes the percentage of loan
portfolios that have been written off
according to local institutional regulations
or MFI‟s guidelines as applicable.
Country (%)
Indonesia
Peru
Colombia
Bolivia
Ecuador
India
Mongolia
Kenya
Chile
Brazil
Mexico
Paraguay
Cambodia
Bangladesh
Azerbaijan
PAR 30
PAR 90
Write-off
0.0
5.8
6.1
1.0
3.0
14.0
1.6
6.0
9.8
6.0
4.7
10.1
0.0
6.5
1.9
0.0
4.8
4.9
0.8
1.9
13.9
1.2
3.1
7.0
5.3
4.1
8.6
0.0
5.9
1.7
0.0
3.3
1.6
0.5
0.5
2.2
0.7
0.0
0.1
2.9
8.9
2.8
0.1
1.2
0.8
Source: mixmarket.org 2012
January 2015
57
The JLG model was characterised by joint liability and as a consequence low credit costs.
Global thinkers and policy makers heralded the model as a means of financial inclusion of
about two-thirds of the global population profitably. The MFIs enjoyed sky-high valuations and
were the darlings of the street.
January 2015
58
18. Appendix 16: Indian Experience: SHG vs. JLG Model
The Grameen model adopted in early 2000s by various NGOs/societies followed the one
followed in Bangladesh. It was realised that MFI lending could be profitable under the JLG
model and hence many NGOs converted themselves into NBFCs or for-profit organisations.
The for-profit NBFCs grew over FY06-FY11; the adopted JLG model has stood on its own
against the world‟s largest microfinance programme – Bank-SHG linkage - supported by
various government agencies in India. The key features of the JLG model and the Bank-SHG
linkage models are enumerated in the table below:
18.1.
Structural Differences (FY11 and Earlier)
Figure 93
Key Differences in the SHG and JLG Models
SHG-Bank linkage
Participating
Lending institutions:
institutions
Commercial banks, co-operative and
(features and form) regional rural banks
Regulatory and implementation: RBI,
NABARD, SIDBI, etc.
Group fostering: NGOs and other
SHPIs for up to six months
Group size
Liability structure
Set-up costs
Loan features and
tenor
Credit costs
Sustainability
Institutions:
Perception and
acceptability
JLG model
Lending institutions:
NBFCs, Section 25 companies, Societies
and trusts (other than NBFCs, all are
non-profit)
Regulatory and implementation: RBI
(with regard to prudential and deposit
related norms)
Group fostering: Two weeks to one
month
10-20 members
5-10 members
Banks open the account in the name of The liability is on the group. In case a
the SHG. The lending is to the group and member defaults, other members pay on
hence the liability is on the group as well. his behalf to maintain their access to
credit.
In case a group member and thereby the
group defaults, the group is no longer
If the group defaults, the members are
eligible for credit
not eligible for credit
High; the initial costs are borne by the
Medium; group fostering guidelines not
SHPIs, part of which is reimbursed by
as long and stringent as those for SHG
NABARD
Two-to-four years
Maximum one year
Interest rates between 3% and 12%
Interest rate up to 35%-40%
All India: 6.8% in FY14, 18%-25% in
0.5%-1% of the portfolio on account of
some large states
JLG structure
The programme sustains on government For-profit entities can continue running
sponsorship and support and NABARD their business till it is profitable
reimbursements and refinance facilities
available to banks
Government and banks are viewed with MFIs are trusted more if they have been
relatively higher level of trust.
around for some time or are famous
through the word of mouth.
However, banks are viewed as complex
entities with complex documentation and They are perceived as easier to deal with
multiple requirements (an applicant may than banks, with less documentation,
need to make three-to-four trips to the
quick credit, door-step service.
bank and forgo the income for that
period).
On default, MFIs are very strict with the
NGOs and other entities are trusted if
borrowers and hence score lower than
they have been around for some time.
banks on the trust factor.
Source: Ind-Ra
Though the size and scale of SHG-bank linkage in India was multiple times that of MFI
operations in FY08, MFIs flourished. This was because of MFIs‟ many features such as
penetration, profit incentives, door-step service, regular involvement with JLG members, etc.
This reflects in the relative growth observed in both the models of microfinance.
January 2015
59
18.1.1. Borrower Outreach
Figure 94
Borrower Outreach of SHG and JLG Models in India
FY08
(m)
FY09
FY10
FY11
FY12
FY13
FY14
120
100
80
60
40
20
0
SHG-Bank channel members
MFI channel (borrowers)
Source: NABARD annual reports, Sa-Dhan, MFIN and Ind-Ra‟s estimates
Under the SHG model, the borrowing is in the name of the SHG and the amount may be
distributed to four-to-10 members, depending on their need and the group approval. However,
all the members have access to credit. The MFIs report their data based on the number of
borrowers/loans. MFIs have increased their outreach by over 2x from FY08 till date. The fall in
the number of borrowers in FY12 and FY13 can be attributed to the AP crisis.
18.1.2. Portfolio Size: JLG Based Institutions Catching Up
Figure 95
Portfolio of SHG and JLG Models in India (Outstanding Basis)
SHG-Bank Channel
(INRbn)
MFI Channel
500
200
100
312
280
300
227
183
170
124
429
394
363
400
305
216
209
223
117
35
60
0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
MFIs‟ pace of increase in the loan portfolio size is higher than that of the SHG-Bank linkage
programme. MFIs‟ portfolio has increased by over 9x in eight years while that of SHGs has
increased by 3.5x.
The easy availability of MFI credit and other features as described earlier, the share of MFIs
increased to 42% in FY14 from 22% in FY07 in the Indian microfinance universe.
January 2015
60
18.1.3. Share of MFIs Increasing in Indian Microfinance Universe
Figure 96
Share of MFIs Increasing vs. SHG in Indian Microfinance Universe
SHG
JLG
100%
80%
60%
40%
20%
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
One of the reasons for the high returns in MFIs was controlled credit costs due to the JLG
model. This factor contributed to the growing perception that the poor are bankable and their
willingness and intent to repay cannot be questioned. However, the credit for the same can be
attributed to the joint liability of the borrowers and having continuous access to credit.
18.1.4. JLG-based Model has Lower NPAs
Figure 97
Pct of Portfolio Outstanding
(%)
8
7
6
5
4 2.90
3
2
0.38
1
0
2007
JLG NPA
SHG NPA
6.92
2.90
2.94
0.38
0.35
0.35
2008
2009
2010
Source: mixmarket.org (MFI; year ending December), NABARD (SHG; Financial Year)
January 2015
61
18.1.5. Share of for-profit NBFC-MFIs Increasing
The earliest MFIs were run by NGOs and societies since they were already in this field and
close to the borrowers. Experience showed that MFI lending could be a profitable business;
and the profits could be ploughed back into the business to further the goal of financial
inclusion. The share of NBFCs in the MFI space increased because of two main reasons:
1.
MFI business was spun off by NGOs/societies/trusts into NBFCs
2.
For-profit NBFCs can attract debt and equity funding for expansion
3.
Management incentives linked to portfolio expansion
Figure 98
Increasing Share of NBFCs in the Indian Microfinance Sector
NBFCs MFIs
Non-NBFC MFIs
100%
80%
60%
40%
20%
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Sa-Dhan, MFIN, Ind-Ra‟s estimates
January 2015
62
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Microfinance Institutions - India Ratings and Research

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