competition in microfinance

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Competition in the Indian Microfinance Sector

Doug JohnsonCenter for MicrofinanceInstitute for Financial Management & Research

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•Results from a Quantitative Analysis of MFI Client Data

•Further Research

•Background

•Mapping Microfinance

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Phenomenal Growth in Microfinance Is Leading to Increasing Levels of Competition

• 110% CAGR in total # of clients over past

five years for all MFIs reporting to MIX

Market

• In 2005, five Indian MFIs among top 20

fasting growing MFIs in the world

• In AP, SHG membership estimated at 90%*

• In Guntur District, AP multiple borrowing

estimated at 67%**

% women member of MFI or SHG by district as of March 2005

*Prabhu Ghate, “Consumer Protection in Indian Microfinance Lessons from Andhra Pradesh and the Microfinance Bill”, Economic and Political Weekly, March 31, 2007 ** APMAS, “Voice of people on lending practices of microfinance institutions in Krishna and Guntur District of Andhra Pradesh”, APMAS Report, Andhra Pradesh, 2006

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In most cases competition benefits end customers…

Inefficient MFIs and MFIs with poorly designed

products or poor customer service forced to adopt

products and strategies of competitors or face

bankruptcy. Net result is…

• Lower interest rates on loans

• Better customer service

• Better product design

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…but competition may have negative effects as well

In microfinance, competition may lead to…

• Overly aggressive loan collection tactics

• Clients taking on more debt than MFIs think is reasonable

• Reduced repayment rates as the threat of cutting off access to

future loans no longer serves as a disincentive

• Mission drift

• Reduced investment in client training

Many blamed the AP crisis on the effects of unbridled competition.

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Key Questions

How significant are the positive effects?

• Has competition caused interest rates to decline?

• Has competition resulted in better product design?

How significant are the potential negative effects?

• What is the true extent of multiple borrowing?

• Are borrowers taking on too much debt?

• How prevalent is client / staff poaching?

…and how do we minimize negatives while maximizing positives?

• Is a mandatory credit bureau needed?

• Should regulation prohibiting client and staff poaching be adopted?

• Are incentives needed to induce MFIs to expand into un-served areas rather than piling on?

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•Further Research

•Background


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A Quantitative Analysis of MFI Client Data by Karuna KrishnaswamyKey research questions:Why are people borrowing from more than one MFI at a time and what

is the extent of multiple borrowing?

Study Methodology:• Quantitative analysis of loan repayment data for large set of clients

for 7 MFIs• In-depth interviews with sector experts• Field interviews with multiple borrowers

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Potential Motivations for Multiple Borrowing

• Second loan used to repay first• Unable to obtain required loan size from single MFI• Smooth cash flows• Loan product structure not suitable• Backup option in case of default

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Data

• Loan records for all ICICI partnership model clients in AP (>5,00,000 records) for the time period November 2006 to January 2007

• Partnership model clients represent 10-87% of MFIs’ total client base• Data includes client name, husband’s / father’s name, village, district, and

arrears• Arrears retained in records for at least a year even if client drops out

Approx % of total client base

# of distinct urban colonies

# of distinct villages# of clientsMFI

10.04%35992677612MFI7

22.04%287119538546MFI6

NA014220869MFI5

87.26%604041662MFI4

30.31%642265146MFI3

51.21%1662819244396MFI2

41.22%1971420147152MFI1

Summary Statistics

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Brief Background on Partnership Model

• MFI acts as agent for the bank with loans kept on the books of the bank rather than the MFI

• MFI liable up to a fixed percentage of overall portfolio in case of default (“first loss default guarantee”)

• Because loans are off balance sheet for MFI, not subject to capital adequacy restrictions

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Name Matching

Client records compared across all MFIs to identify multiple borrowers

• Clients matched on name, initial, husband’s name, village

• Client name and husband’s name matched using phonetic Soundex & Double Metaphone algorithms

• Accuracy tested by random spot-checks– apparent high degree of accuracy for identified matches– significant rate of non-identification for legitimate

matches

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Limitations and Potential Biases

• All MFIs in sample are large and profitable and so clients may differ systematically from those of smaller MFIs

• Multiple borrowers may provide false / misleading information to avoid being spotted

• Partnership model clients may differ systematically from other clients

• No info on SHG membership

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Key results from quantitative analysis

• Overall percentage of MFI clients in state with loans from more than one MFI estimated at 10.28%

• Multiple borrowers repay as well or better than single borrowers

• No evidence to suggest that faster growing MFIs are attempting to lure clients from other MFIs by offering larger loans

• Repayment rates in more competitive areas as high as repayment rates less competitive area

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Results from interviews with multiple borrowers

In depth interviews were conducted with twenty one multiple borrowers from among those identified in the quantitative analysis. All multiple borrowers interviewed belonged to one branch of one MFI. Among these 21 borrowers…

• None reported repayment difficulty• None were poached• 85% of all loans were reported as being used for investment

purposes• 13 reported that other group members were aware of their other

loan; 9 reported that MFI staff was aware of other loan• Nearly all borrowers said they would prefer to borrow from a single

MFI if they could obtain necessary loan size from only one MFI but many also reported that interest rates were more important than loan size in deciding which loans to take

• Anecdotally, appeared very business savvy to interviews

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Results from interviews with sector experts

As part of the study, 20 sector experts, including several managers of large MFIs, were asked various questions regarding issues of competition and multiple borrowing.

• Most respondents said that MFIs are not adhering to the code of conduct when it comes to client poaching

• All MFI managers reported keeping tabs on the products and interest rates offered by their competitors

• Managers of some of smaller MFIs accused the new, faster growing MFIs of luring away clients with larger loan sizes

• A majority of respondents would like a credit bureau to be formed though many were unsure of the exact form it should take or who should lead the effort to develop it

• Most MFI managers claim that whether or not an MFI is already present in an area is not taken into consideration when decided whether to expand to the area

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•Further Research

•Background


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Map of Microfinance

The CMF, in collaboration with 17 major MFIs and with the support of the Swiss Development Corporation, has created a district-by-district map of MFI and SHG coverage for 2005 and 2006.

MFITotal # Active

Borrowers 2006 MFITotal # Active

Borrowers 2006

Spandana 772775 VWS 53932

SKS 172970 Mahasemam 48352

Bandhan 149886 ESAF 44434

BISWA 132027 GK 40915

BASIX 132027 Kotalipara 23081

CMC 123359 KBSLAB 22814

SNFL 84349 IASC 14268

GV 73368 Satin Care 6631

MFIs Which Provided Data for Latest Round (2006)

• Includes district wise data on total number of MFI clients, total # of members of bank-linked SHGs, approx % of female population covered by microfinance, and information on which districts each individual MFI has a presence in

• Total # of clients for MFIs which provided info represents 76% of total client base for all MFIs which reported to MIX in 2006

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Sample Map Detail: Andhra Pradesh Snapshot

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Planned Additions to Map of Microfinance for 2007

• Data on number of MFIs present in district in addition to total # clients

• Census / NSS data such as average income, # bank branches, average levels of debt to moneylenders, etc.

• More data showing evolution of coverage over time

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•Further Research

•Background


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Further CMF Research

•Investigating patterns of Expansion and Competition in Karnataka.– Using historical data on district expansion for MFIs operating in the state of

Karnataka to investigate what factors are correlated with choice of new branch location locations and the impact of increasing competition on loans sizes and interest rates.

•Analysis of factors correlated with microfinance coverage– Using data gathered for map of microfinance along with data from other sources

to determine what environmental factors are correlated with microfinance coverage.

•Taluk level map of microfinance for Maharashtra– (still assessing feasibility of project) In collaboration with Uplift and several major

MFIs with operations in MH, the CMF hopes to create a Taluk-by-Taluk map of microfinance coverage

competition in microfinance

Economy & Finance