Delhi, 15th March, 2011

Product Pricing: Balancing Financial Viability with Social Impact

Royston BraganzaCEO

Grameen Capital India

Cheering the sector

Something amiss?

Big boys doing great doesn’t mean “all is well”

There could well be a shock in store

Should the minnows be excluded from the field

Don’t underestimate them…. Nuture them

UDRS – to be more inclusive among MFIs

Rate caps – a ‘doosra’

Could we be getting it wrong with ‘caps’

Typical P&L Structure - Indian MFI & Global Peers : Comparative Chart

Source: M-CRIL Microfinance Review 2010: Microfinance Contributes to Financial Inclusion

Indian MFIs profit margins compared to the World: Very High

Period of introspection- 2007 to 2010: “Did we score equal points in delivering Accounting Returns as well as Social Returns?”

How Successful were Indian MFIs in Passing Benefits Achieved through Economies of Scale to End Customers ?

Trend in Portfolio Yield & Operating Expense Ratio (OER)

Source: M-CRIL Microfinance Review 2010: Microfinance Contributes to Financial Inclusion

Average OER of Indian MFIs in India has declined dramatically over the past few years Substantial widening in the margin available to the average MFI for covering financial expenses, loan loss provisions and surplusTwo factors contributing to above:

Economies of scale achieved by Indian MFIsHigher clients/loan officer ratio (average in excess of 400 per loan officer and for some MFIs as high as 700). This has led to weakening relationships between MFIs and their customers

Yield & 0ERs for MFIs Globally

Yields are higher compared to Indian MFIs, but so are the OERs

Did MFIs pass on the benefit of economies of scale to customers in terms of lower lending rates ?

If the above was successfully achieved, could the recent crisis be avoided?

Impact of Loan Size on the OERs of the Indian MFIs

Source: M-CRIL Microfinance Review 2010: Microfinance Contributes to Financial Inclusion

Do Established, Bigger Players Face the Challenge of Creating Equanimity Between Lending and Borrowing Rates?

Some correlation is there between the age of an MFI and loan size (newer MFIs tend to have smaller loan sizes)

Stronger correlation with the fast growing institutions that both incur higher costs when they are in their growth phase and have lower loan sizes on account of having large numbers of new clients

So Equanimity might NOT be there for two category of MFIs:

New MFIs

Fast Growing MFIs

<4,000 4,000 to <6,000 6,000 to <8,000 <10,000 >=10,000

Loan Size Per Borrower

OER

Source: Malegam Committee Report

Clause 7.8 Malegam Committee Report

10% over the cost of funds ----> for the larger MFIs (loan portfolio exceeding INR1000 million)

12% over the cost of funds -----> for the smaller MFIs (loan portfolio not exceeding INR1000 million)

Margin Cap

In addition to the overall margin cap, a cap of 24% on the individual loans imposed

… as demonstrated by mandates from clientsDebt & Structured Finance Transactions

Cumulatively placed INR 3,350 Mn of debt with domestic and foreign banks over the last 18 months

March 2009

INR 750 Mn

Portfolio Sale

Bandhan

November 2008

INR 250 Mn

Short Term Facility

SKS Microfinance

June 2010

INR 100 Mn

Debt Placement

EMFIL

May 2008

INR 150 Mn

Term Loan

Bandhan

March 2008

INR 250 Mn

Portfolio Sale

BISWA

July 2008

INR 1,800 Mn

Portfolio Sale

SKS Microfinance

… as demonstrated by mandates from clients (contd.)Equity Transactions

Completed transactions worth more than INR 2,500 Mn; Pipeline > INR 2,000 Mn

November 2008

INR 940 Mn

Equity Placement

Ujjivan

March 2010

INR 500 Mn

Equity Placement

SMILE

December 2009

INR 200 Mn

Equity Placement

Sonata Finance

October 2010

INR 100 Mn

Equity Placement

Disha Microfin

July 2010

INR 275 Mn

Equity Placement

Swadhaar Finserve

March 2010

INR 500 Mn

Equity Placement

Janalakshmi

August 2010

INR 55 Mn

Equity Placement

Svasti Microfinance

In Progress

INR 280 Mn

Equity Placement

MIMO Finance