executive summary review 2011 m cril
TRANSCRIPT
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Copyright:MicroCreditRatingsInternationalLimited,November2011
Allrightsreserved
MicroCreditRatingsInternationalLimited
602Pacific
Square,
32nd
Milestone
NH8
Gurgaon122001INDIA
www.mcril.com
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Thispagedeliberatelyblank
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TableofContents[MainReport]
Page
Executive
Summary AnatomyofthecrisisinIndianmicrofinance
1 Anatomyofacrisisthepreamble
1.1 Acomplexandextensivefinancialsystembutjust40%inclusion
1.2 MCRILs2011cohortofIndianMFIs...
1.3 ...seescontinuationofthetrendtotransformtoNBFCsanddiversifygeo
graphically
1.4 ...asreportingonsocialperformancestartstobeestablished
1.5 But,inthemeantime,theMFImantraofgrowthhascometoahalt
1.6 ...astherushtobecomeNBFCsandgrowcausedoverindebtednessprovok
inggovernmentintervention
2 Outreach&services:Didoverindebtednesscausethemicrofinancecrisis?
2.1 Microfinanceisnowasignificantpartofthefinancialsystemintermsofits
implicationsforfinancialinclusion(clientsserved)
2.2 MFIshavevariousdevelopmentobjectivesandoperationalstrategies
2.3 Andmicrofinanceportfoliosarealsosubstantialinrelationtomicrolending
bythebankingsystem
2.4 ...thoughtherehasbeennogrowthintherealvalueofaverageloanbalances
2.5 Ismultiplelendingandconsequentoverindebtednessthevillainofthe
piece?2.6 Anddepositservicesremainadistantdream...
2.7 ...whileruraloperationscontinuetobethenormbutdonotnecessarilyindi
cateaparticularpovertyorientation
2.8 ...butsocialratingdatafromalimitednumberofMFIsdoesindicatetheneed
forbettersystemsalignmenttoachievegreaterdepthofoutreach
2.9 ...thoughtheprincipleofresponsibilityintheprovisionofmicrofinanceser
vicesisgraduallytakinghold
AnnexTables1&2: StatewiseAnalysisofOverindebtedness
3
Highoperating
efficiency
is
compromised
by
the
crisis
3.1
3.1.1
3.1.2
3.1.3
Costefficiencyhasdeclinedduetothecrisis
Staffnumbersandproductivityarecomparablewiththeoverallfinancialsys
temthoughtheMFIshavesmalleraccountsthantheruralbanks
...buttherearerelativelyfewfemaleloanofficers
CostperborrowerhasrisensharplyasMFIsfirstpursuedgrowthatallcosts
andthenspentsubstantialamountsonpersuadingborrowerstorepay
3.2
3.2.1
Operatingefficiencyhasbeenadverselyaffected
...asportfoliomanagementissueshaveincreasedOER
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3.2.2
3.2.3
3.2.4
3.2.5
3.2.6
3.2.7
...andthesmallloansizemakesitdifficulttolowerexpenses
Isusingwomenloanofficersanappropriatemeansofloweringexpenses?
Thecompositionofoperatingexpensesindicatesincreasedlabourintensity
...soperhapsitwouldbebettertofocusonworkingconditionstoreducestaff
turnover
...andwatchtheyieldOERmarginwhichhasnowdeclined
EconomiesinoperationaredeterminedpartlybyloansizebutalsobyMFI
scale
3.3 Portfolioqualityisbetterthanexpected;maybetoogood...
4 AnindustrycrisiscausedbythecollapseoftheAPportfolio
4.1 TheindustryhasbeenplungedintocrisisasclientsinAPhavestoppedpay
ments
4.2 Clientsatisfactionhasanimportanteffectonportfolioquality
4.3 ProvisioningforloanlossesisinadequateforthoseMFIsaffectedbytheAP
defaultaGreekstylehaircutforinvestorsis,therefore,inevitable
5 Thedebtfocusofportfoliofinancinghasreduced
5.1 IndianMFIsarenowpayingthepricefortheirrelianceoncommercialfunds
5.2 Theuseoffundshasbeensqueezedbycashconstraints
5.2.1 ...withthedryingupofbankdebtinresponsetotheapparentpoliticalrisk
5.2.2 ...givingtheimpressionthatprudentialmanagementhasimproved
5.2.3 ...buttheimplicationsofsecuritisationforprudentialmanagementneedto
beexamined
6 Financialperformancehasbeenaffectedbythecrisis
6.1 YieldshavedroppedduetothedelinquencyinAP
6.2 ...andreturnstoMFIshavedeclinedsignificantlyduetowriteoffs
Postscript Inchingtowardsaconducivepolicyenvironment
Keyreferencesanddatasourcesusedforthisreview
Glossaryof
terms
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ExecutiveSummary
AnatomyofthecrisisinIndianmicrofinance
afinancial
and
social
analysis
MCRILs2011financialandsocialreviewpresentsthefirstdetaileddissectionofthecrisisthathit
theIndianmicrofinancesubsectorofthefinancialservicesindustryinOctober2010.
TheMCRILMicrofinanceReviewprovidesacomprehensiveanalysisofthegrowthandperformance
ofmicrofinanceinstitutionsinIndia. ThisseriesofreviewsstartedinYear2000. MCRILpioneered
theworldwidepracticeofundertakingcountrylevelanalysesofmicrofinanceperformanceandcon
tinuestoaddvaluetotheinformationavailableinthisenvironmentthroughitscriticalandanalytical
screeningandpresentationofthedata. Whilelastyearsreviewfocusedonthecontributionofmi
crofinancetofinancial inclusion,thisyearsreviewexaminesboththefactorsthatcontributedto
thecrisis
loan
size,
multiple
lending,
over
indebtedness,
client
retention
and
client
protection,
staffworkingconditionsandtheearlyeffectsofthecrisisontheperformanceofIndianMFIs. It
isbasedondatatakenmostlyfromannualreportsandannualfinancialstatementsbutalsoonso
cialperformanceandoutreachdatareportedtotheMIXforMarch2011,sixmonthsafterthestart
of the crisis. In addition, it incorporates comments on some more recent developments without
analyzingtheseextensivelysincedetailedinformationforthisperiodisnotyetavailable. Withthis
publication,MCRILhasmoved towards thepublicationofan integrated financialand social re
viewofIndianmicrofinance.
Thisreviewconcludesthatwhilemicrofinanceisnowestablishedasasignificantcomponentofthe
financialsystem in thecountryand itscontribution to financial inclusioncontinuesto rival, ifnot
exceed,thatoftheruralbankingsystemtheefficacyofthatcontributionisnowunderthreat. Both
internal
factors
(such
as
high
growth
and
overindebtedness
plus
a
lack
of
adequate
concern
for
product characteristics) and external factors like the policy actions of the government of Andhra
Pradesh are responsible for this.
Emerging from the crisis, the Govern
ment of India, through the proposed
microfinance law now seeks to accord
the sector with a level of importance
commensuratewith itscontributionto
millionsofcitizens. TheproposedMi
crofinance Act would provide the sec
torwiththefullattentionofthecentral
bank,
would
enable
MFIs
to
offer
at
least limited deposit services to low
incomefamilies(recognisingtheirneed
for savings facilities) and protect it
fromthewhimsoflocalgovernmentby
clarifyingthatmicrofinanceisgoverned
by national lawsand is, therefore,not
astatelevelconcern. MCRILbelieves
these measures in the proposed law
aregoodandarecombinedwithade
quatesafeguards tohelpstabilisethe
provisionof
microfinance
services
in
India.
Exhibit1CRILEX,MCRILsgrowthindex,March2003=100
100 181444
8761,219
2,370
4,589
7,474
8,022
Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11
9,000
[estimatedSep
2010]
6,000
[estimated
Sep2011]
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Indianmicrofinancesrushtoberegulatedandaphenomenalgrowthspiralcutshortbya
politicalaction...
WiththephenomenalgrowthrecordedbymicrofinanceinIndiainrecentyears62%perannumin
termsof
numbers
of
unique
clients
and
88%
per
annum
in
terms
of
portfolio
over
the
five
years
20052010andaround32millionborroweraccountsbyendMarch2011,Indiahasthelargestmi
crofinanceindustryintheworld. Thehighgrowthrateofmicrofinanceoverthefiveyearperiodwas
fuelled by commercial bank funding which inherently gravitated towards forprofit institutional
structures.Thus,therewasan IndiawidetrendtowardsthetransformationofMFIs into forprofit
nonbank financecompanies (NBFCs)sothatover55%ofthe59MFIs in the MCRILanalysisall
MFIswithmorethan10,000borroweraccountsconsistofsuchinstitutions. Boththetransformed
andnew,startupMFIswereabletogrowrapidlythroughbetteraccesstofundingandbyusingthe
provenmethodologyofamonoproductofferingrolledoutover largenumbersofbranches, indi
verselocationsusingstandardprocesses.Thiswasoftenatthecostoflimitedstaffclientinteraction.
Thecurrent
crisis
in
microfinance
is
partly
the
result
of
this
over
simplification
of
the
MFI
client
rela
tionship. Whilelargenumbersmayhavebeenreached,thelackofcommitmentoneithersideledto
substantialmultiplelendingandcreatedanenvironmentofconcernabouttherightsofclientsthat
hadbeenoversoldmicrocredit. Someclientsbecameoverindebtedasaresultandthemediaatten
tiongeneratedbytheIPOofSKSMicrofinance(atthetime,byfarthelargestmicrofinanceNBFCin
India)onlyledtofurtherintrospectionaboutthestatusofmicrofinanceclients. Withthereportsof
suicides in ruralAndhraPradesh (somethingthat regrettablyhappensvirtuallyeveryyear) thrown
intothemix,microfinancetooktheblamethistimearound. Giventhepopulistnatureofstatelevel
governanceinIndia,conditionswereripeforinterventionandtheAPmicrofinanceordinanceof14
October2010wastheresult.
However,
with
what
is,
in
effect,
a
ban
on
the
offering
of
financial
services
by
microfinance
institu
tionsinAndhraPradesh,themantraofgrowthinIndianmicrofinancehascometoahalt. Thedrying
upofcommercialbankfundingtoMFIsalloverthecountryinresponsetothecrisishasbrought
abouttheshrinkageofthesectorbyonethirdfromthepeakinOctober2010;theCRILEX,MCRILs
Indexofmicrofinancegrowthshrankfrom9,000atendSeptember
2010toanestimated6,000oneyearlater(Exhibit1).
But,nevertheless,asignificantsectorofthefinancialsystem
ThenumberofclientaccountsservedatendMarch2011isnearly20%
higher than inthepreviousyear;stillasignificant increasebutasub
stantial
climb
down
from
the
43%
growth
in
client
accounts
that
occurredin200910. InformationfromMFIsindicatesthatthisisthere
sult of veryhighgrowth during theperiodApril to midOctober 2010
andagradualdeclineonaccountofthedryingupofcommercialbank
fundingafterthepromulgationoftheAPordinance.
Moreimportantly,with31.8millionborroweraccountsthesizeofthe
microfinancesectormorethanmatchessignificantpartsofthe Indian
financialsystemintermsofthenumberofcitizensaffected. Thisnum
berismorethanthreetimesthenumberofmicrocreditaccounts(less
than Rs25,000, $555) serviced by the Regional Rural Banks (RRBs, as
shown
by
the
information
inExhibit
2)
and
is
greater
even
than
the
totalnumberofsuchmicroaccounts heldbythecommercialbanks. If
Exhibit2
MFIcreditaccountscompared
withotherbanksaccnts
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allowedtobeseenaspartofthemainstreamfinancialsystem,themicrofinancesectorwouldhavea
45%shareofthetotalnumberofmicrocreditaccountsinthecountry. IncludingSHGsintothedis
cussion,thetotalofmicrocreditaccountsinIndiaheldintheformalandsemiformalfinancialsys
temamountstoaround134million. The reportcontainsadetailedanalysisofthestatusofthe
provision
of
micro
credit
by
MFIs
vis
a
vis
the
banking
sector
and
the
overall
availability
of
finan
cialservices.
Withimprovingpovertyfocus
The intended income profile of MFI clients targeted by
MFI managements is collated in Exhibit 3. After many
years of debate on the feasibility of poverty reduction
through microfinance, significant numbers of MFIs have
now realised the need to focus on low income clients
whoseincomesmayormaynotbebelowthenationalor
international
poverty
lines
but
who
are,
nevertheless,
financially excluded. However, even now systematic
povertytargeting isundertakenbyrelativelyfewandM
CRILs client analysis based on social rating data shows
that a significant number of MFI client profiles now
nearlymatchthenational povertyprofilebutarerarely
abletoreachlowertoachieveagreaterpovertyfocus.
...thoughtherehasbeennogrowthintherealvalueofaverageloanbalances
However,despitethesignificantgrowthofloansizeoutstandingfromMFIsinrecentyears,analysis
inthereportshowsthat inrealterms theMFIcontribution totheeconomic livesof low income
familieshas
actually
reduced
by
around
one
third
over
the
past
ten
years.
Ismultiplelending,andconsequentoverindebtedness,thevillainofthepiece?
ThedisruptioninIndianmicrofinancecausedbytheAPordinanceissubstantial. Theapparentrea
sonsfortheordinancewere
Excessive lending by MFIs in the state of Andhra Pradesh leading to overindebtedness whichcauseddistresstolowincomemicrofinanceborrowers
CoercivebehaviourbyMFIstaffincollectingfromtheseoverindebtedborrowerssufferingfromthestressofkeepingupwiththeirrepaymentobligations.
WhetherornottherehasbeenexcessivelendinginAP(andinotherstatesofIndia)andwhoisre
sponsiblefor itisassessed inthisreport. Thestatewisepictureisdisquieting. What isinteresting
hereisthatinAP,whilethenumberofMFIloansisjustover100%ofthenumberofeligiblefinan
ciallyexcluded families,SHG loansareactually310%of thatnumber. More importantly, to the
extentthatmicrofinanceloansarenotevenlydistributedthismeansthattherewillbeasignificant
numberoffinanciallyexcludedfamiliesinAPthathaveasmanyas78loansatonetimeandanum
beroftheseareSHGloans. ThisraisesthequestionwhetheritisSHGratherthanMFIlendingthatisresponsibleformultiplelendingandthecrisis.TheanalysisrevealsthatevenifdebtweredistributedequallyamongstalleligiblefamiliesinAPtherewouldbeoverindebtednesstotheextentof9%of
theaverageincomeforsuchfamiliesassumingthat40%isthemaximumreasonabledebtservicing
capacityattheaveragelevelofincomeforfinanciallyexcludedfamilies. Atlowerassumedlevelsof
debtservicingcapacity,thelevelofoverindebtednessishigher. Thereportincorporatesanewap
Exhibit3
StatedclientfocusofreportingMFIs
4
8
12 111
5
32
Verypoor
clients
Poorclients Lowincome
clients
Nospecific
focus
NBFCs+[24] NG Os+[8]
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proachtotheassessmentofaggregateoverindebtednessinaregion,setsoutthedegreeofover
indebtedness for all the major states and discusses where further problems could occur in future
unlessthetypicaldebtperborrowingclientislowered.
But
the
principle
of
responsibility
in
the
provision
of
microfinance
is
also
now
taking
hold
Theconcern forresponsiblemicrofinance isreflected intheCodesofConductdevelopedbyMFIN
and SaDhan, and internationally in the client protection principles being developed through the
SmartCampaign. MCRILhasuntilnowincludedevaluationofresponsibilitytoclientsaspartofSo
cialRating. During2011,alongwithotherspecialistratingagencies,wehavepilotedaResponsible
Finance Rating product. Issues emerging from these assessments are summarised in the report.
These issues include integrity,governance,competition,clientprotection,appropriatestaffbehav
iourandresolutionofcomplaints. MostleadingMFIsareinprocessoftakingactiontoimproveper
formanceinalltheseareas.
Costefficiency
has
declined
due
to
the
crisis
The cost incurred by MFIs in servicing loan accounts is very low in comparison with the global
benchmarkof$139oftheMIX.EvenwhencomparedwithotherAsianMFIs,thecostperborrower
(`716,$15.90)amountstojust26%oftheEastAsianme
dianof$61andisalsosubstantiallylowerthanthemedian
for low end MFIs internationally ($64). The trend in the
averagecostperborrowerforthedeliveryofmicroloans
in India shows a sharp 33% increase over the past year
(Exhibit4). This isattributabletothehighgrowthatall
costspursuedbyMFIs inthefirsthalfoftheyearasthe
largerones
chased
the
chimera
of
an
IPO,
while
the
latter
halfoftheyearwasspent infirefighting,tryingtoper
suade borrowers in AP to repay and those elsewhere to
maintaintheirpayments.
TheweightedaverageOperatingExpenseRatioforsampleMFIsissignificantlylowerthanthoseof
2007sample.ThetypicalIndianMFIasmeasuredbythesimpleaverageacrossMFIshadanOER
of15.6%,upfrom14.3%lastyear.Akeydeterminantoftheoperatingexpenseratioisthesmallloansize. Asdiscussedinthereport,
theOERshowsaverycleardownwardtrendastheloansizeincreases. Inanindustryhighlydepen
dentonstaffforcustomersatisfaction,thereisalsoanimportantpositivecorrelationbetweenthe
staffturnoverrateandOERandanegativeonebetween theproportionofwomen loanofficers
andOER; whether the latter means that women loan officers are more efficient or that they are
simplypaidlessisanopenquestion. Theaveragestaffturnoverrateof29%andlackofwrittenHR
policiesalsoraiseissuesaboutstaffworkingconditionsthatbearinvestigation.
...andthewideningtrendintheyieldOERmarginhasbeenreversed
Theweightedaverageyieldof27.6%(comparedto28.3%lastyear)hasdeclinedalittleinresponse
to the controversy about interest rates in the lead up to and immediately following the AP ordi
nance.Exhibit3.15inthereportshowsthetrendinportfolioyieldandOERoverthepast10years.
The
portfolio
yield
increased
significantly
in
recent
years
largely
because
of
changes
in
fees
charged
andsometimesonaccountofachangeintheloantermwhen,say,areductioninthetermfrom50
Exhibit4 Costperborrower
504
716
473
668620
298
378
200
300
400
500
600
700
2000 2003 2005 2007 2010 2011
Rs/borro
wer
AllMFIs
L10
2002prices
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weeksto45weekscanhaveasignificantimpactontheyieldthoughthechangeappearstobesmall.
Withthedeclineinyieldin201011theaverageyieldearnedbyMFIsinIndiacontinuestobelower
thantheAsianandglobalmediansof28.8%and31.1%respectively. Onaccountoftheinterestand
margincapsforthepurposeofprioritysectorclassification,MCRILexpectsthesqueezeonmargins
to
continue
during
the
current
financial
year
(2011
12).
This
matter
is
discussed
in
the
report.
...astheindustryhasbeenplungedintocrisisbytheAPactionahaircutforboththe
MFIscaughtinthecrisisandtheirlendersisnowinevitable
TheunspokenmessageoftheAPordinancetoclientswasthatMFIswouldnotbeallowedtooper
ateand,therefore,therewasnoneedtorepayMFIloans. AnalysisindicatesthattheMFIsinIndia
asagroupnowhaveamongsttheworstportfolioqualityratiosintheworld. Thesampleaverageof
PAR30at25.5%isexceededbytheL10group(at29.5%)ofwhom5ofthe6largesthavetheirmain
operations inAP. This is insharpcontrasttothereportedportfolioqualityratioof0.67%forend
March2010. Inpracticethispresentsableakerpicturethanisjustified. Thegraphsinthemainre
portshow
the
aggregated
PAR
values
for
non
AP
MFIs
and
compare
these
with
the
portfolio
quality
ofSHG loans.The long term trend inportfolioquality andcrosssectional comparisonswithother
typesoffinancialinstitutionsarepresentedinthereport.
Exceptionalcircumstancesaside,theclientretentionrateisgenerallyacceptedasbeingakeyindica
torofclientsatisfaction. Whilethecorrelationbetweenthetwobasedonthedataisnotverystrong
itindicatesasignificantrelationshipbetweentheclientretentionrateandportfolioquality. Itsug
geststhatasclientsatisfactionincreasestheportfolioqualityalsoimprovesasshowninExhibit4.5
ofthereport. Inthiscontext,theaverageclientretentionrateofIndianMFIsisrelativelylow.
The aggregate write off ratio across the sector for 201011 is high but, in any case, a temporary
measuresince
the
eventual
write
off
resulting
from
the
crisis
will
be
far
higher
ifthe
matter
cannot
beresolvedintheverynearfuture. InanycaseahaircutforboththeMFIscaughtinthecrisisand
fortheirlendersnowseemsinevitable. Itisonlytheclosenessofthecut(theproportionofinvest
mentlost)thatremainstobedetermined.
IndianMFIsarenowpayingthepricefortheirrelianceoncommercialbankfunds
Thedistributionofsourcesoffundsformicrofinance,presentedinExhibit5,showsthattheshareof
debt in MFI fi
nances climbed
sharply. The cur
rent
level
of
debt,amounting to
69.2% of total
funds raised by the
leading MFIs repre
sents a reduction
from the highest
levelofaround80%
reachedin2008.
Theextenttowhich
commercial
debtcontinues to domi
Exhibit5 Sourcesoffundsformicrofinanceoperations
34%
25%
8%
30%
7%
4%
75%
3%
0.2%
69.2%
3.7% 5.4%
0.1%
14.0%
7.5%
Institutionaldebt Clientssavings Otherliabilities Grants Paidinequity RetainedEarnings
2003 2005 2007 2010 2011
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natethefinancingofIndianmicrofinanceisapparent. Indeed,thedominationofcommercialbank
fundsinIndianmicrofinanceisunderplayedinthissinceitexcludesoffbalancesheetfinancingvia
portfoliosalesandsecuritisationofportfoliosundertakenbysomeofthe leadingMFIstothecom
mercial banks. A separate compilation of the portfolio managed by MFIs for others securitised
portfolios
that
are
not
on
MFI
balance
sheets
shows
that
the
amount
added
some
10.5%
of
the
portfoliototheMFIsmanagedportfolio. Theshareofnetworth/equityinMFIbalancesheetsand
thedistortionaryeffectofinadequateprovisioningisalsodiscussedinthereport.
Theuseoffundshasbeensqueezedbycashconstraintswiththedryingupofbankdebtin
responsetotheapparentpoliticalrisk
TheallocationoffundsbyIndianMFIshasconformedfairlywelltointernationalbestpracticenorms
inrecentyears.However,theexceptionalcircumstancesofthecurrentyearhaveresultedinexcep
tionalmeasures. Ofthetotalresourcesof`25,000crore($5.5billion)deployed inmicrofinanceby
thesampleMFIs,over80%wasdeployed in loanstoclientsattheendofMarch2011 (Exhibit6).Last
year
this
was
69%
which
was
below
the portfolio allocation level of the MIX
international median of 76.8% largely be
cause of the prevalent practice in India of
lenders making substantial disbursements
of loanstoMFIs inthe lastweekofMarch
(theendofthefinancialyear).
As indicatedearlier,theeffectofthecrisis
resulting from the AP ordinance spread
muchmorewidelythanthestateofAndhra
Pradesh.
This
effect
was
not
due
to
any
delinquency contagion reaching clients
outsidethestatebutratherduetothedry
ing up of bank funds to MFIs. Thus, the
manifestationofpoliticalriskthattheysawintheformoftheAPordinance,resultedinbanksreduc
ingtheirsanctionsinthelastquarterofthefinancialyeartoaminimallevel. ThisaffectedMFIsall
overthecountryandistheprimaryreasonforthelow(25%)growthinnetportfoliooftheleading
MFIsduringtheyear. Sincethereisalimittotheequityitispossibletoraiseandequitytakeslonger
tomobilise,whiledepositsarenotanoption,MFIswereforcedtolimittheirportfoliogrowth.
...andthereistheimpressionthatprudentialmanagementhasimproved
For ensuring prudential management, banks in India are expected by the RBI to maintain Capital
AdequacyRatios(CAR networthasaproportionofriskweightedassets)of9%andNBFCsof12%
(until March 2010 increasing to 15% by March 2011). While equity was a constraint in the early
yearsofIndianmicrofinance,theearlierequityconstrainteasedconsiderablyand,thoughinvestors
becameverycautiousafterOctober2010,theweightedaverageforIndianMFIsisnowinexcessof
25%wellaheadofthebankingsector.Theslowdownandreversalofportfoliogrowth inthe last
monthsofthe financialyearhasbeen largelyresponsible forthis increasefromthe18%weighted
CARofMarch2010.
Whilesecuritizationmayofferashorttermsolutiontothecapitalproblem, itdoesnotresolvethe
issuein
the
long
term.
For
commercial
banks,
as
discussed
above,
it
provides
the
benefit
of
inclusion
intheprioritysectorlendingrequirement(thoughthatisnowbeingreassessedbytheReserveBank
Exhibit6
UseoffundsbyIndianMFIs,2011
Net
portfolio,
80.6%
Fixed
assets,1.2%Cash,13.5%
ST
investments,
0.02% LT
investments,
1.0%Advances,
0.5%
Othercurrent
assets,3.2%
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ofIndiainthecontextofthecrisis). AsurfeitoflendingfundsleadsMFIsto
inductclientswithoutduecareandrelationshipbuilding lendbeyondthecapabilitiesandmeansoftheirclients resorttocoercivepracticeswhentheclientsexpressaninabilitytopay.
TheemergenceofclientprotectionissuesandtherelatedpoliticalriskinAndhraPradeshandKarna
taka(and,byextension,elsewhere in India)can largelybeattributedtothisphenomenon. Inthis
context,thereductionintheproportionofthemanagedportfoliofrom53%oftheownedportfolio
inthe2005to10.5%nowisawelcomedevelopment. Itisworthremembering,however,thatuntil
March 2010 the absolute amounts had increased to such an extent that the proportions become
meaninglessfromtheperspectiveofanoverheatedeconomicsector. InMCRILsopinion,securiti
zation isadevicethatdilutestheprudentialeffectoftheCARrequirementandshouldbecarefully
monitoredbyregulators.
ReturnstoMFIshavedeclinedsignificantlyduetowriteoffsandthesqueezeonmargins
Thefinancialviabilityofratedmicrofinance institutions in India,apparent inthe2005Review,was
underthreatin2007. Whilethissituationwasdramaticallyreversedin200910,thecurrentcrisisin
Indianmicrofinancehascausedasubstantialmoderation. Thisisapparentinconsideringthereturns
MFIsearnnetofallcostsoperatingandfinancial. Thesignificantmoderationofthepastyearhas
been caused by the substantial write offs necessitated by the collapse of microfinance in Andhra
Pradesh. Thehighefficiency(lowOER)of IndianMFIsplayedakeyrole intheirprofitabilityasdid
thesignificantlyincreasedportfolioyieldsince2007. However,currentwriteoffshaveincreasedthe
totalexpenseratioquitesignificantlyandcausedtheweightedaveragereturnonassetsfor201011
tofallto3.0%. Asdiscussedearlier,thecrisisnotonlyhadtheeffectofbringingmicrofinanceinAP
toahalt,italsocausedasuddenrashofprudenceincommercialbanklendingtoMFIs(atthesame
time
as
a
hardening
in
inflationary
conditions
in
the
country)
resulting
in
an
increase
in
lending
rates.
TheimpactofthisonthecoststructureofIndianMFIsisanalysedanddiscussedinthemainreport.
...andtheimplicationsofthecrisisforthelongtermfutureoffinancialinclusionbyMFIs
arestilldifficulttopredict
GiventheactionsoftheGovernmentofAndhraPradeshandthecollapseofportfolioqualityinAPas
aresult,itisquitelikelythatthewriteoffandprovisioningexpensesofMFIswithoperationsinthe
statewillincreaseevenfurther.Atthesametime,MCRILexpectsanotherdeclineinportfolioyield
onaccountofthe limitssetbytheRBIon lendingratesforthepurposeofclassificationaspriority
sectorportfolios.
Theimplicationsofthisforthelongtermfutureoffinancialinclusionarestilldifficulttopredict. It
hasalreadyresultedinasubstantialdeclineincapitalbothdebtandequityavailableformicrofi
nanceand,as discussed in the report,hassloweddownandeven reversed the financial inclusion
effectofMFIoperations.WhatIndianMFIsneedisastableenvironmentinwhichtodelivermicrofi
nanceservicesdeposits,remittances,insuranceaswellasmicrocreditinaresponsiblemanner.
WhetherornotMFIscancontinuetocontributetofinancialinclusioninIndiaisnowdependenton
thepassageofthedraftMicrofinanceBillbytheIndianParliament. Untilsuchtime,however,most
lowincomefamiliesinAPhavebeenthrownbackintothenotsobenevolentarmsofmoneylenders.
Many low incomefamiliesoutsideAPhavealsosufferedcollateraldamageasthedryingupofon
lending funds from commercial banks has caused a reduction in MFI operations throughout the
country.
The
future
is
difficult
to
predict
but
the
report
provides
some
indication
of
the
constraints
andissueslikelytoinfluencethefinaloutcome.
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MCRILMicrofinanceReview2011
xv|P a g e
IntroductiontoMCRIL
Apioneer
and
world
leader
in
microfinance
ratings
MicroCredit Ratings International Limited is one of the pioneers of financial performance ratings
andtheworldwidepioneerofsocialratingforMFIs. Itistheworldsleadingspecialistmicrofinance
ratingagency. BySeptember2011,MCRILhadundertakenover1,100financialandsocialratingsof
over500microfinanceinstitutions(MFIs)in32countriesofAsia,EuropeandAfrica.
MCRILisbasedinGurgaonoutsideDelhi,capitalofIndia. Ithasanexcellentteamof15specialist
analysts with knowledge and experience of microfinance led by Dr Alok Misra, Director, Microfi
nanceServices. Andanother10analystsfortheratingoflowcostprivateschools
MCRILalsoprovidessectorwideadvisoryservicesandundertakesresearchandpolicystudiescom
patiblewithitsconcerntoavoidconflictsofinterest. Itsratingandadvisoryserviceshavebeenpro
vided inmanycountriesofAsia includingallcountriesofSouthAsiaand inCambodia,EastTimor,
Indonesia,Myanmar,PapuaNewGuineaandthePhilippinesaswellas inSamoa. IntheNIScoun
tries of the former Soviet Union, MCRIL has experience of Azerbaijan, Georgia, Kazakhstan, Kyr
gyzstan,RussiaandTajikistan. InAfrica,MCRILhasworkedinCongo,Ethiopia,Kenya,Malawi,Mo
rocco,Nigeria,Rwanda,SouthAfrica,Tanzania,Uganda.
Inkeepingwithitspioneeringtradition,
MCRILhasalsointroducedratingservicesfor
MicrofinanceInvestmentVehicles(MIV)(combinedfinancialandsocialrating)
LowCostPrivateSchools(forchildrenfromlowincomefamilies)
and
ValueChainInitiatives(toassesstheirimpactonpovertyand
theefficiencyandeffectivenessofsuchprogrammes)
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