Recent trends in the microfinance sector

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Recent trends in the microfinance sector

• June 04, 2008
• TIP/FD

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Outline

• Growth of the sector
• Sector stakeholders
• Geographical coverage
• Poverty outreach
• Financing microfinance
• Growing urban microfinance
• Competition

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Coverage of microfinance (2007)
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Growth during 2006-07
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Outline

• Growth of the sector
• Sector stakeholders
• Geographical coverage
• Poverty outreach
• Financing microfinance
• Growing urban microfinance
• Competition

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The stakeholders map
Regulator RBI
Networks
Apex Institutions
Commercial Banks
MFI-NBFCs
NGO-MFIs
State Banks
Investors
SHPIs
Local governments
Consulting
Support agencies
Training and Capacity building, Research
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Capacity building

• Sector needs
• Governance
• Hiring middle management
• Human resources designing right incentive
  schemes
• MIS
• Access to capital
• Initiatives
• Various training programmes offered EDA, MCRIL,
  etc.
• Capacity building for start-ups MicroSave
• Consulting servicesM2I
• Start-up incubators IIM Bangalore, Intellecap
  Franchise package
• MBAs on microfinance
• Knowledge exchange forums UNDP Solutions
  Exchange
• However, need for more

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Growing interest in new products

• Housing, remittances, insurance
• A growing number of seminars on these topics
• Still limited products
• Financial literacy is also in fashion
• All these new services will also require capacity
  building, and more research

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Outline

• Growth of the sector
• Sector stakeholders
• Geographical coverage
• Poverty outreach
• Financing microfinance
• Growing urban microfinance
• Competition

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Geographical coverage

• http//ifmr.ac.in/cmf/map

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Geographical coverage

• Promotion of SHGs in the South allowed for people
  to become educated about microfinance
• But what about the Northeast where SHGs were also
  promoted heavily?
• On average, the South is wealthier than the North
• But what about Punjab?
• Banking infrastructure was less developed in the
  South than in some Northern states such as Punjab
• Yet there are many Northern states with little in
  the way of banking infrastructure
• Subsidized programs for credit have deteriorated
  the credit culture in the North
• Yet these programs were pushed in the South as
  well)

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Outline

• Growth of the sector
• Sector stakeholders
• Geographical coverage
• Poverty outreach
• Financing microfinance
• Growing urban microfinance
• Competition

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Poverty Outreach

• Think about the joint liability model we talked
  about yesterday
• Could that result in exclusion of certain people?
  
• SSR half of SHG members (EDA and APMAS 2006),
  and 30 of MFI members (M-CRIL), are estimated to
  be below poverty line
• About 22 of all poor households receive
  micro-credit services

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Poverty Focus Some facts from Bangladesh

• Bangladesh is home to microfinance with serious
  scale - over 11 million clients.
• A recent estimate using PWR exercises by Bracs
  RED suggests that about 15 of the microfinance
  clients are extreme poor
• Other estimates suggest that another 15 comes
  from just above the poverty line. The remaining
  70 are moderate poor.

Imran Matin, BRAC
www.flickr.com
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Working with the very poor trade-offs

• Trade-off providing loans to the extreme poor
  will be more expensive
• Probably difficult to do it in a sustainable
  manner
• So yes, there is very certainly a tradeoff
• The question is whether loans have an impact
  which is high enough that providing access to
  loans to this population should be subsidized
• But what is the impact of loans on the very poor?
  Is credit what they require?
• Maybe the very poor can not absorb credit, and
  require other interventions

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Working with the ultra poor Bandhan

• Asset transfer, regular handholding, small
  stipend for working capital, health stipend,
  small savings
• Targeting mechanism (Participatory Wealth Ranking
  combined with short surveys) effective at
  identifying the very poor)

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Outline

• Growth of the sector
• Sector stakeholders
• Geographical coverage
• Poverty outreach
• Financing microfinance
• Growing urban microfinance
• Competition

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The Partnership Model
Efficient use of capital Y Incentive alignment
Y
Loan at 9-11 to end customer
Repayment collection
MFI (servicer)
SHG, JLG or Ind.
Bank
Service fee
Service fee
FLDG
Risk Sharing
Origination, monitoring, collection
OD
Reduces capital needs

• Intermediary assumes fraction of the credit risk,
  leading to reduction in capital required
• Bank prices on basis of underlying asset rather
  than rating of intermediary ( asset-based
  lending)

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The funding crisis

• March 2006 ICICI represented 2/3 of total
  lending to the sector, with 60 coming from
  partnership model
• Due mostly to regulatory concerns about KYC (Know
  Your Customers) norm by RBI (Reserve Bank of
  India), lending declined in 2007, and is likely
  to stay low this year.
• Was partly substituted by term loans, but not in
  similar amounts
• Cashpor 47 of total portfolio came from the
  Bank created confusion among staff and clients
• Solution offered by the Bank collect client
  information through biometric cards

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Lending by banks and apex financing institutions
State of the Sector Report
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Private equity makes an entry

• 11.5 Mn investment in SKS by Sequoia Capital
• 25Mn investment in Share by Legatum
• 2Mn investment in Share by Avishkar, a social
  venture capital company
• Demand for equity has increased even more with
  the slowing down of the partnership model, and
  the resulting demand for term loans
• While it is unlikely that interest rates would
  rise to high (limited acceptability in India),
  such flow of equity could result in too fast
  growth, potentially causing problems
• But could also have positive outcomes in unmet
  demand

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Start-up MFIs financing challenges

• For small MFIs and start-ups however, it is still
  a struggle to find funds
• Startup capital would be used for infrastructure,
  operating expenses and to some extent onlending,
• The commercial loans would then come in through
  banking arrangements to finance further growth of
  loan book
• The startup capital effectively gives "free
  money" to the MFI until it can pay interest on
  the commercial loans that the MFI can take.
• Typically a bank will lend amounts up to 6-8
  times the capital of an MFI for on-lending
  purposes but they usually like to see some basic
  loan portfolio before they put their money out.

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Outline

• Growth of the sector
• Sector stakeholders
• Geographical coverage
• Poverty outreach
• Financing microfinance
• Growing urban microfinance
• Competition

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Urban microfinance is growing

• Remember our discussion on the joint liability
  model, and the assumptions on which it relies
• What might change in urban context?

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Why urban microfinance

• According to 2001 census, urban poor comprise of
  35 to 40 of total population
• Current urban market of 280 million is expected
  to grow by 600 million by AD 2030
• Urban market contributes to 62 of GDP
• Only 0.01 of them have banking relationships
• High population density reduces costs
• International precedent in Latin America

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A snapshot of potential clients

• The average family size is of 5 monthly
  expenditure of Rs 5,000.
• 67 of the household live in a house they own,
  and 29 in a house they rent
• 69 of the households have at least one
  outstanding loan
• Mostly Informal sources of credit
• The average loan, Rs 20,000 (median Rs 10,000)
• The average interest rate is 3.85 per month.
• Among households that dont have a loan, 56 want
  one but could not obtain one.
• Many of these loans were for health purposes
• 34 of the households have a savings account 26
  have a life insurance policy.
• But almost none have any health insurance cover.

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Where will micro-credit go?

• It is very common for families to own a business
  (31)
• But most businesses are small and low-skilled
• Taking into account household members working
  hours, have negative profits.
• Risk of crowding out if these businesses expand
  with micro credit?
• Only 8.3 said their loan was for business
  purposes (business acquisition only 7 and
  business expansion only 1.33)
• It is not clear that these businesses are capital
  constraint
• It could also be the case that these households
  start a business in order to have a flexible
  low-intensity job (if limited job opportunities
  around) but do not really want a larger business
• MFIs loans are much cheaper than informal loans
  more microfinance loans might go into business
  expansion/creation.

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Challenges in urban microfinance

• Moving away from Group lending?
• Problems of anonymity in urban areas
• Small groups as a solution
• Individual lending
• Responding to needs in urban areas (access to
  basic services like water, sanitation, housing)
• Overcoming space constraints
• Do away with meetings?
• Mode of transaction adjusting to the working
  lives of urban poor
• Monthly repayments

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Challenges(contd.)

• Financial literacy
• Training programs and credit-plus activities
• Coping with rural-urban migration and risk
• Composition of groups
• Recruiting and retaining field staff
• Borrower sophistication
• Opportunities in using technology

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Successful starts

• Organizations
• SEWA Bank
• Ujjivan
• Bandhan
• Spandana
• Janalakshmi
• Village Welfare Society
• Swadhar
• Locations
• Ahmedabad
• Hyderabad
• Bangalore
• Kolkata

Picture Care India
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Outline

• Growth of the sector
• Sector stakeholders
• Geographical coverage
• Poverty outreach
• Financing microfinance
• Growing urban microfinance
• Competition

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Competition
Competition in the Indian microfinance sector is
hotting up. Several studies have revealed that
multiple borrowing is now a common feature in
highly competitive areas.

• 2007 CMF report found that 7 of MFI borrowers
  in AP belong to more than one MFI (SHG membership
  not included in study)
• 2006 APMAS study in Krishna and Guntur districts
  of AP found that 59 of respondents borrowed from
  more than one source and 25 borrowed from 3 or
  more sources
• One recent study by researchers at IIMB of 20
  microfinance clients in the Bangalore area found
  that all women borrowed from more than one
  source. Most borrowed from several (3 or more)
  microfinance sources at a time and one women was
  even a member of 7 different MFIs/SHGs.
• There is already a credit bureau in place
  (CIBIL), but it currently does not include info
  on mF clients (they are interested in expanding
  though)

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Impact of competition in Karnataka

• The study explores the dynamics of MFI outreach
  and expansion strategies in areas where there is
  heavy competition from other MFIs.
• Whether in competitive areas, all MFIs just
  target the same clients, or do a larger number of
  clients get access to services that would not
  have earlier been possible.
• The study will also provide insights into whether
  multiple membership and multiple borrowings have
  any impact on empowerment of the women involved,
  in terms of a larger role at the community level.
  
• This particular study may not capture this
  phenomenon entirely - but will provide leads for
  further research for the same.

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Need Assessment for a Credit Bureau in West Bengal

• Is a credit bureau for the microfinance sector in
  India required at this time?
• What percentage of microfinance clients in West
  Bengal are borrowing from more than one MFI at
  the same time?
• How well are loan officers able to identify
  multiple borrowers without the use of a credit
  bureau?
• Do borrowers who borrow from more than one source
  at a time repay better or worse than other
  borrowers?
• And, if so, how should it be set up?
• Is collection of fingerprints necessary or can
  existing forms of ID be used and, if existing ID
  can be used, which form of ID is best?
• Can CIBIL be expanded to include microfinance
  clients or should an entirely new backend
  infrastructure be developed?
• Should both positive and negative client
  information be shared or just negative
  information?

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Need Assessment for a Credit Bureau in West Bengal
Fingerprints and loan payment history will be
collected for all microfinance clients in the
area. Fingerprint data will be used to match
clients across MFIs and identify which clients
are borrowing from multiple sources.
MFI 1
MFI 2
MFI 5
Client data for all clients of all MFIs operating
in a single area
MFI 4
MFI 3
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Possible positive outcomes of competition?

• Decrease in interest rates?
• Not clear this is happening much
• Reach out to new clients
• Access to more loans (not necessarily a bad
  thing)
• With competition rising, a possible outcome is
  the growth of new products and new product
  features loan sizes etc.
• Individual lending and technology will hear
  more about it today

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Thank you!