Outline

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Outline

• Drivers of MFI Performance
• Alternative Sources of Risk Capital

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1. Drivers of MFI Performance
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Single Branch Model
Assumptions

• Operations
• One Area Office 20 branches
• One branch Six field officers
• One field officer 700 customers (40 capacity in
  Year 1)
• Customer Average loan cycles amounts
• First Cycle Rs 12,000
• Second Cycle Rs 13,000
• Third Cycle Rs 14,000
• Fourth Cycle Rs 16,000
• Fifth Cycle Rs 18,000

• Financing
• Cost of senior debt 12.5 p.a.
• Cost of Tier 2 capital 15 p.a.
• Capital Adequacy Ratio 15 (10 Tier
  1 5 tier 2)
• Loan loss 0.5 of loan outstanding
• Pricing
• Interest rate charged 28.2 YTM
• Flat upfront fee 2

Full model available at www.ifmrtrust.co.in/mfire
sources/MFI_Cost_Analysis_Model.xls And
www.ifmrtrust.co.in/mfiresources/Deeper-Exploratio
n-MFI-Interest-Rates.pdf
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Single Branch Profitability
Drivers of Profitability

• Loan size per customer
• Field officer productivity
• Interest margin
• Portfolio quality
• Operational efficiency

Note Terminal value numbers are in Future value
terms(7th year value). Cost of Equity is taken
as 20 and nil growth rate. All numbers for MFI
with 20 branches Assumes a flat upfront fee of 2
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Strong Performance by Top 10 Indian MFIs
Source Intellecap. MFIs include Asmitha,
Bandhan, Basix, Cashpor, GramaVidiyal,
Microcredit Foundation of India, Share, SKDRDP,
SKS, Spandana. Note Profit margin, ROA and ROE
calculated using profit before tax.
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Availability of Local DebtPriority Sector Lending

• Growth has been fueled by debt from private and
  public sector banks
• Banks are required to lend 40 of portfolio to
  priority sectors
• Currently lending at interest rates in range of
  10-15
• Gap of 6 billion which banks are unable to meet

Source RBI Basic Statistical Return of
Commercial Banks, March 2007
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Potential New Source of Debt Mutual Funds

• MFI portfolio securitization is an attractive
  proposition for debt mutual funds seeking
  short-term paper (lt1 year)
• Average duration of a microfinance loan lt 0.5
  year
• Rating methodologies for MFI assets have been
  developed (e.g. IFMR Capitals securitization of
  Equitas portfolio)
• P1 (AAA) rated microloan-backed securities
• Geographically diversified multi-originator
  securitisation new product development
• Mutual Funds seek approximately 3.5-5 yield on
  AAA rated paper, therefore favorable for MFIs

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Key Risks

• Centralized management, no second line
• Operational risks, lack of systems high growth
• Client over indebtedness/multi-borrowing
• Undiversified funding sources
• Governance
• Political risks

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2. Alternative Sources of Risk Capital
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Market Segmentation
The top fifteen MFIs comprise over 75 of the
market concentrated in South
Number of MFIs operating in district, 2007
Source Centre for Micro Finance, IFMR
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Alternative Sources of Risk Capital
The Market Needs a Mezzanine Capital Company

• A new company that will invest risk capital into
  small to mid-sized microfinance institutions
  (Tier 3 MFIs)
• Provide long term hybrid debt to fund capacity
  expansion and supplement capital requirements
• Brings expertise in evaluating microfinance
  institutions
• Validation with underwriting standards of IFMR
  Capital
• Enables access to debt capital for Tier 3 MFIs
• Partnership with senior debt investors to
  leverage the new risk capital via bank loans
• Access to the multi-originator securitization
  market

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Alternative Sources of Risk Capital
An Attractive Investment Opportunity in High
Potential Tier 3 MFIs

• Attractive investment opportunities exist in high
  quality tier 3 capacity constrained MFIs
• Access to a diversified pool of mezzanine
  investments by geography and by servicer
• Tie up with well capitalised back up servicer for
  surveillance and implementation of improvements
  reduces servicer risk
• Mezzanine investment in the MFI will be senior to
  equity of the MFI
• Risk adjusted return is very high due to the
  adverse demand-supply situation
• MFI will be incentivized to perform on an ongoing
  basis as it retains skin in the game
• Effective controls for mid course correction

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Annexure
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Branch economics
assumes inflation to be zero
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IPOs GloballyPotential Route for Indian MFIs?
Valued at 13x book value and 24x
earnings Source Council of Microfinance Equity
Funds, 2008
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Significant Market Opportunity
Portfolio CAGR 265
At end of 2008 Indian MFIs had approximately 14
MM borrowers and 1.4 Bn in loans outstanding
Source Intellecap and Sa-Dhan
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Indias Favourable Market Conditions
Infrastructure

• Large market opportunity 100 MM unbanked
  households
• Competitive position Banks unable to serve this
  market
• Talent pool Experienced professionals
  affordable staff
• Array of MFI service providers Systems,
  training, consultants, and financial advisory
  services for MFIs
• Strong public equity markets Facilitate exits
• Rating agencies Mainstream (e.g. CRISIL) and MFI
  specific (e.g. M-CRIL)
• Industry associations Sa-Dhan
• Favourable regulation Priority sector lending

Source 2001 Census
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Strong Performance vs. Regional Peers
Source Intellecap and Micro Banking Bulletin
(MBB)