0.1 3 8 840

341

0

100

200

300

400

<1Cr 1-10Cr 10-50Cr 50-100Cr 100-500Cr

>500Cr

NoofBorrowersinLakhs

5

260

842

1535

4902

41337

4

237

792

1088

5786

55947

<1Cr

1-10Cr

10-50Cr

50-100Cr

100-500Cr

>500Cr

0 10000 20000 30000 40000 50000 60000

GrossLoanPorAolio(RsinCrore)in2016GrossLoanPorAolio(RsinCrore)in2015

SmallMFIs:FutureSurvivalandSustainabilityChallengesKhushbooGuptaandRupikaSingh,IFMRLEAD

TheMicrofinancesector in Indiaplaysan importantrole inpromoting financial inclusion,particularly inremoteand rural areas. These population segments are served by both small and large MFIs, of which 8 have beengranted in-principle licenses to establish Small FinanceBanks (SFBs).As the landscapeof the sector changes itbecomes imperative to deliberate on the fast-changing dynamics for smaller MFIs. For the context of thediscussion, we define small MFIs as NGO-MFIs (Not for profit) whose outstanding portfolio is less than Rs.50Crore1.TheseMFIshave reporteda Leverage/Debt-Equity ratio less than2.6asagainst the industryMedianof3.2.StakeinBusiness2

As per data reported in the BharatMicrofinance Report 2016, the total numberof clients servedbyMFIs stoodatanall-timehighof399Lakhs (March2016).The industrysaw a year-on-year growth rate of 7.5% inclient outreach. Of this, only 11.1 Lakh(2.78%) clients came under the small MFIbracketin2016.Intheyear2014-15,thesamebracket was. serving around 13.1 Lakhborrowers.

In2015-2016,theGross loanportfolioofthesesmallMFIswasRs.1,033crore,which is1.6%ofthe industry. Intheprecedingyear,theportfoliowasRs.1,107crores(2.2%oftheindustry).ThechangeinnumbersislargelyduetograduationofsomeMFIstothelargeMFIcategory.

As personnel costs contribute to 24% of the totalexpenses incurred by MFIs, we can see that theefficiency and capacity of smallMFIs is relatively low.Onan averagebigMFIs haveone staff 3for every318borrowers.TheaverageforsmallMFIsis156only.TheABCO (active borrower per credit officer) average forsmallMFIs standsat308,against530 forbiggerMFIs.ThisreflectsthatlargeMFIsarebeingabletoleveragetheir economies of scale from technology as well asefficiency inoperations to servicea larger clientbase.However,lessnumberofactiveclientsperloanofficersindicates that smaller MFIs can dedicate more time toeachclient.

1ThesecouldincludefewstartupNBFC-MFIsaswellbutdefinedwiththelimitofoutstandingportfolio2BasedonthedatareportedbySa-DhaninBharatMicrofinanceReport,20163Calculatedontotalnumberofstaffandnotloanofficer

Figure1:BasedontheinformationinBharatMicrofinance2016Report

Figure2BasedontheinformationinBharatMicrofinance2016&2015Report

ChangingLandscape

Primarily,smallerMFIsareverylocalintheiroperationsandthushavesignificantunderstandingoftheneedsofthecustomerbase.Theyarecloselyinvolvedwiththeirclienteleandareawareoftheiraspirations.Theyarewellplaced to support themwith customizedproducts and services. These connections also allowborrowers tobeassisted,guidedandmentoredinchallengingeconomicssituations,includingoccurrencesofdisasters.ArecentIFMRLEADstudyon‘DisasterRiskReduction’practicesintheIndianmicrofinancesectorfoundthateventhoughtherearenosector levelprotocolsclearlydefiningMFIs rolesduringdisaster, someMFIshavedeveloped theirownad-hocprocessestosupporttheborrower insuchgravesituations.Fairserviceprovisiontoborrowers isamatter of concern in the industry, and with growing competition these small MFIs can prove to producesuccessfulmodelstocaterthediverseneedsofclients.

Challenges GapsAffordableFundingandcapital

ü Thereislotofcompetitionasthedonorshavevariedoptionstoofferfinancingü TheSmallMFIsneedtodevelopprofitableandsustainablebusinessmodels

Competition ü Retention of existing clients as the other financial institutions expand theiroperations

ü ProblemofoverIndebtednessasdifferentsourcesofcreditbecomeavailableinthemarket

Resources/Capacity

ü Lack of human resource capacity to innovate in business and support theoperations

ü ProductinnovationgapstomeetcompetitionsRiskManagement

ü Socialissueslikepolitical,unauthorizedagents/impostersü Internal controls, operational efficiency and capacity building of their field

staff

The sustainability of small MFIs is very important to support the inclusive nature of our financial ecosystem.Followingmeasurescanbetakentosupportthesame:Ø AssessmentandDocumentation: It is importanttounderstandtheneedsofthesesmallMFIsandhowtheir

existenceinthesectorsupportsthediverseneedsofthecustomersanditsimpact.Ø Funding andCapital support: Affordable funding support for theseMFIs has tobeprovisioned inorder to

ensurethattheycontinuetosustaininthemarketØ Product Innovation: As client needs and competition changes in the sector, it is important that there is

supportfromdifferentstakeholderstogivespaceforproductinnovationanddiversification.Ø ScopeofCollaboration:ThesmallMFIscanpartnerandcollaboratewithotherkeystakeholderslikebigMFIs,

Payment Banks, Small Finance Banks, Fintech to explore potential opportunities to improve business andservices.

Given this changing landscape, it is important to acknowledge the important role played by small MFIs in theecosystem,andsupporttheminremainingsustainable.

ü BankingLicenses:10entitieshavebeengrantedin-principlelicensesforSmallFinanceBanks,ofwhich8arelargeMFIs.Bandhanwasgrantedauniversalbanklicenseandhascommencedoperationsaswell.

ü PrioritySectorLendingCertificates: IntroducedinApril2016,thisschemeprovidesaplatformtoenabletradinginthecertificatesthrough itscorebankingsolution(CBS)portal(e-Kuber).Allscheduledcommercialbanks(includingRRBs), urban co-operative banks, small finance banks (when they become operational) and local area banks areeligibletoparticipateintrading.

ü ChannelforGovtProgrammes:ReserveBankgrantedNBFC-MFIsgeneralpermissiontoactaschannelizingagentsfordistributionofloansunderspecialschemesofcentral/stategovernmentagenciesexemptingsuchloansfromthequalifyingassetscriteria.

ü FinancialInclusionandDigitization:NabardsupportsadedicatedFinancialInclusionTechnologyFund(FITF)formeetingthecostoftechnologyadoptionforfinancialinclusion.

ü IncreasingcollaborationofFin-TechsandFinancialInstitutions:NumerousplatformsandproductslikePeertoPeerLending,RuPayCards