S-C-P analysis of microfinance industry in india

2,281 views
2,052 views

Published on

Published in: Business
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,281
On SlideShare
0
From Embeds
0
Number of Embeds
13
Actions
Shares
0
Downloads
0
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

S-C-P analysis of microfinance industry in india

  1. 1. Nottingham University Business School MBA Programmes BUSINESS ECONOMICS SCP Analysis of Microfinance Industry in India Prithviraj Paul Choudhury Student ID: 4122992 COPY [1] Word Count - 2075 1Copyright @ Prithviraj Paul Choudhury
  2. 2. Table of Contents 1. Introduction 2. S-C-P Analysis of Indian Microfinance a. Market Structure i. Market Concentration ii. Barriers to Entry b. Market Conduct c. Market Performance i. Profitability ii. Output 3. Discussion and Recommendation on Government Policy 4. Validity of S-C-P Paradigm and Conclusion 5. References 2Copyright @ Prithviraj Paul Choudhury
  3. 3. 1. IntroductionThe question most people might ask about Microfinance market is whether the industry issustainable and profitable? Well the answer seems it is characterized as a “monopoly with mono-products”. It can be contrasted with Ford’s perspective of the automotive market, which is stillproduct driven rather than market driven. MFI issues highly standardized loans with little variationwhich are easy to administer and fraud are easy to control (Brand 1998).The aim of this study is to analyze the Microfinance industry from the perspective of a policy maker.The essay starts with defining the Microfinance market which will then help in defining the industry.Based on the market boundaries, S-C-P framework will be used to do the industry analysis.Traditionally, the Structure-Conduct-Performance (S-C-P) paradigm hypothesized that in an industrythere are observable structural market characteristics (e.g., the number of firms, concentration,entry barrier, degree of product differentiation) that determine firm conduct (e.g. collusion policy,pricing strategy, R&D, advertising) that in turn determine performance (e.g., profitability, growth inoutput).For the study purpose, Market concentration and Entry barrier will be used to define the MarketStructure. This will help to understand the behavior of the Microfinance industry and then toevaluate the performance of the industry in terms of profitability and growth in output. Based onthe industry analysis, some recommendations will be formulated regarding govt. policies. Andfinally, in the conclusion the validity of the paradigm will be either supported or critiqued based onthe findings.2. S-C-P Analysis of Indian Microfinance Market STRUCTURE CONDUCT PERFORMANCE Figure 1: SCP Paradigm Causal Relationshipa. Market StructureThe first task is to define the market under investigation. Since the purpose of the study is toestablish the attractiveness of the industry, thus all the MFIs of India are included in the definition.Microfinance uses SHG model for various economic activities in areas such as Agriculture,Horticulture, Sericulture, Animal Husbandry, Cottage and Village Industries and other smallbusinesses/micro enterprises in urban areas. Microfinance institutions are not a specific legalinstitutional form. Among the Indian institutions offering microfinance services, there are Non-Government Organizations (NGOs), Private Foundations/Trusts, Cooperatives, Commercial Banks,Regional Rural Banks (RRBs), Local Area Banks (LABS) as well as specialized Non-Banking FinancialInstitutions (NBFCs) and Sec 25 Companies (Kumar, Sanu, Newport).The definition of market is incomplete without the mention of substitutes (Moschandreas, BusinessEconomics). The only known substitutes to Microfinance could be informal money lenders andbanks. Money lenders form a small portion, but private bankers and corporates like ICICI, HDFC,Reliance, etc. are coming in a big way to compete with the micro finance industry as the rural marketis having huge potential for micro finance. There is no doubt that competitions will be more in themicro finance industry and hence small MFIs have to make customer specific strategies. The Micro 3Copyright @ Prithviraj Paul Choudhury
  4. 4. Finance Institutions will henceforth have to bear in mind that they will not merely compete withthemselves but also with other significant actors in the whole industry.In a span of 5 years the market trend has drastically changed. The near monopoly status enjoyed byMFIs has changed. MFIs are now disciplined by a competitive market and their internal control.i. Market ConcentrationWorldwide, MFIs are evaluated based on their Outstanding Loan Portfolio and Number of ActiveBorrowers. In India, there are all together 148 MFIs with an overall gross loan portfolio of 4.6 billionUSD. Based on the market definition, a list of fifteen firms is prepared which include Gross LoanPortfolio of the firms, Number of Active Borrowers and Market concentration of loan portfolio.Table 1: Comparison of Top 15 MFI statistics Gross Loan No of Active Market MFI Portfolio borrowers Concentration SKS 960793988 5795028 21 SPANDANA 787304262 3662846 38 SHARE 490923201 2357456 49 BANDHAN 332462204 2301433 56 AML 315439786 1340288 63 BASIX 223229799 1114468 68 SKDRDP 136728666 1225570 71 EQUITAS 134597374 888600 74GRAMA VIDIYAL MICROFINANCE 134568751 772050 76 UJJIVAN 82447140 566929 78 SEIL 77876659 199731 80 GFSPL 73420428 352648 82 CASHPOR MC 59461459 417039 83 BISWA 58971572 305679 84 FFSL 54332892 257991 85 OTHERS 677441819 5042244 100 (Source: http://www.mixmarket.org/mfi/country/India) 4Copyright @ Prithviraj Paul Choudhury
  5. 5. Figure 2: Plot for Market ConcentrationThe concentration ratios are as follows: CR2 = 38 CR5 = 63 CR10 = 71 CR15 = 85It is observed that the Microfinance industry in India is monopolistic with many firms offering slightlydifferentiated products. It may also be argued that looking at the potential size of microfinanceindustry and the area wise concentration of these MFIs, some of the MFI’s do enjoy monopoly status(Brand 1998).ii. Barrier to EntryA barrier is defined as anything that allows the existing firms to raise their price above thecompetitive level without attracting new firms in the industry (book reference). In Microfinanceindustry, some of the forms of barrier are as follows (Brand 1998): • Staff: New products need specialized expertise and educated well-trained credit officer. • Delivery channel: Sufficient capacity is required within the delivery channel to market and distribute its products. • Systems: An efficient information management system to track loans, track demand and forecast profitability. An MFI must determine whether its systems can handle the disbursements and collections necessary for the fluctuating terms of such loan products. • Risk management: Diversification reduces portfolio risk but new products may increase liquidity issues. A MFI can introduce highly liquid savings product or a long term loan product but at the same time should also be able to meet short term cash needs. It needs to have robust management information and accounting systems, in addition to skilled, responsible staff for periodic portfolio monitoring. 5Copyright @ Prithviraj Paul Choudhury
  6. 6. • Training procedure: Maintaining a well trained staff is essential as the complex loan products or other financial products have to be made understood to the local customers.But in Microfinance industry, these barriers to entry may not be strong as everyone has access tosame technology. There is less capital investment and also there is no sunk cost. Even though MFIsare trying to establish healthy long term client relationship, but due to less product differentiation,consumers respond to price change instantaneously and so are less brand loyal.Low entry barrier and high profitability attracts new entrants, and in microfinance industry, thepotential entrants are from every nook and corner. Apart from Banks, local NGOs in association withInternational Funding Organizations are inclined towards microfinance activities for sustainability. Inthe case of NGOs there are neither clear-cut regulations nor entry/exit barriers for doing themicrofinance activities in India. Only exception is in case of NBFC registration under Sec 45 ofcompanies Act, the act itself has an entry barrier, as the capital requirement is a minimum of 200million. But Corporates and industrialists will enter micro finance industry to tap rural markets underthis registration (Kumar, Sanu and Newport).Under such conditions, the microfinance market is perfectly contestable. The incumbents can’t earnsuper normal profits. Due to low brand loyalty and a price elastic demand faced by the firms, newentrants can undercut existing prices to take away customer base.b. Market ConductAs MFIs become profitable and transform into regulated commercial entities, they have becomeaccountable not only to their shareholders (PE funds, investors) but to sophisticated boards ofdirectors, parent NGOs, and regulatory authorities that also monitor their activity. (Brand 1998)c. Market Performancei. ProfitabilityAn analysis of the profits reported by a few major non-banking finance companies engaged in microfinance has revealed that the average profits these firms accumulated through their earnings frominterest on loans had swelled from 907.12 million USD in 2007-08 to 5506.56 million USD in 2009-10.In other words, their profits had multiplied by 6 times over a period of two years.Table 2: Comparison of Profits MFI 2007-08 2009-10 SKS 1701 9589.2 SPANDANA 1274.5 7240.9 SHARE 1130.8 4752.7 BANDHAN 65.6 2221.1 UJJIVAN 363.7 3728.9 (Source: http://indiamicrofinance.com/ministry-finance-holds-detailed-discussion-profits-microfinance-nbfcs.html) 6Copyright @ Prithviraj Paul Choudhury
  7. 7. Figure 3: Plot for Profitii. OutputThe growth is not only in terms of profit but also in adding new borrowers to the existing ones. At anaverage these MFIs have increased the number of active borrowers by almost 3 times over theperiod of two years.Table 3: Comparison of No. of Active borrowers MFI 2007-08 2009-10 SKS 1629474 5795028 SPANDANA 1188861 3662846 SHARE 989641 2357456 BANDHAN 896714 2301433 UJJIVAN 58646 566929 (Source: http://www.mixmarket.org/mfi/country/India) Figure 4: Plot for Active no. of BorrowersThe existence of high profit and the increase in output suggest that the industry is currently highlyattractive and so is likely to face higher competition in future. 7Copyright @ Prithviraj Paul Choudhury
  8. 8. 3. Discussion and Recommendation on Govt. PolicyIn Indian Scenario, microfinance is seen to bring transformation in the economic conditions andlively hood restoration of the rural communities. Whereas the fact is obvious that there is gap inbest practices in credit delivery, lack of product diversification, customer overlapping andduplications, consumption and individual loan demand with lack of mitigation measures, less thruston enterprise loans, collection of savings/loans and malpractices by Self Help Groups (SHGs) andMicro Finance Institutions (MFIs) and highest interest rate prevailing in micro finance sector. Allthese are clear syndromes, which tell us that the situation is moving without any direction.One solution to this problem is lender restraint and due diligence over collection practices and MFIpricing transparency, ideally monitored by appropriate rating agencies (Sanjay Sinha 2010).The super normal profits will attract new players and due to favorable govt. policies and barriers toentry being low will intensify the competition. So, it can be expected that the market will self-regulate the industry. Though there are traces of regulation such as MFIs registered as non-bankfinance companies (NBFCs) have, until now, only been allowed to provide credit services to theirclients. Though many have also provided insurance services (as aggregators for insurancecompanies), deposit services have been specifically prohibited by the regulator, the RBI.However, recording high growth has been the MFIs’ way of impressing equity investors with theirprofit earning potential and obtaining good valuations for their shares which will help them toexpand. In an environment of frenzied growth, MFI lending quality has declined and internalcontrols have failed to keep pace; if some loan officers have engaged in inappropriate behavior withclients, it comes as no surprise.With more funds in hand, there will be intense competition between the players which might resultin pushing of loans to existing customer base leading to customer duplication and multiple loans.Thus, there is a possibility of Microfinance bubble (Rozas and Sinha 2010) in India which may hinderthe growth of the industry.Government has to play a role to curb this danger by imposing regulations on multiple borrowings,interest rate caps and should encourage MFIs to bring down their interest rates to bank rates. Thesewill force MFIs to adopt efficient ways to sustain growth and can also promote productdifferentiation.4. Validity of S-C-P Paradigm and ConclusionIn S-C-P Paradigm, the direction of causation runs from structure to conduct and from conduct toperformance. But the study has revealed that in the Microfinance industry, due to the highperformance of the firms, new players are attracted towards the industry. This has raised theindustry competiveness and so firms are forced to self-regulate, focus on producing customer centricloan products, reduce interest rates to remain competitive and thus defining the conduct of themarket. Also based on the performance results, government may be tempted to impose regulationswhich will again align the behavior of the firms. A change in conduct will then affect the structure ofthe industry as barrier of entry is becoming insignificant and so firms will forced into productdifferentiation. 8Copyright @ Prithviraj Paul Choudhury
  9. 9. The primary objective of MFI is to provide loans for income generation through various economicpractices. But in the light of high competition, the services offered have to be differentiatedparticularly if the market is facing intensive price competition. The offer can include innovativefeatures to distinguish it from its competitor to increase brand loyalty and hence customer base. Thesecondary services can include low cost housing technology, housing insurance, market supportservices to non-farming customers. For farming customers, technological inputs like soil testing,pesticides selection, high yield seeds, fertilizers, irrigation techniques and information on monsooncan be an attractive proposition (Kumar, Sanu and Newport).Thus, in this industry, high competitiveness seems to have been brought about by high profitabilityand increased output implying a reversal in the causation of S-C-P paradigm. STRUCTURE CONDUCT PERFORMANCE Figure 5: Revised S-C-P Paradigm 9Copyright @ Prithviraj Paul Choudhury
  10. 10. 5. ReferencesMatraves, Randi 2005, “Product Differentiation, Industry Concentration and Market ShareTurbulence”, Ceris-CnrBrand 1998 “New Product Development for Microfinance: Evaluation and Preparation”,Microenterprise Best PracticesKumar, Sanu and Newport, “Institutional Challenges in Microfinance Sector”, Indian Association forSavings and Credit.Moschandres 1994, “Industrial And Market Structure”, Business Economics 1994, Thomsan BusinessPress.Sanjay Sinha 2010, “Microfinance Regulation – A more subtle approach”, Available at:http://www.microfinancefocus.com/news/2010/11/03/microfinance-regulation-a-more-subtle-approach/ [Accessed on 12th Dec, 2010]Daniel Rozas and Sanjay Sinha 2010, “Avoiding Microfinace Bubble in India- Is Self regulation theanswer”, Available at: http://www.microfinancefocus.com/news/2010/01/10/avoiding-a-microfinance-bubble-in-india-is-self-regulation-the-answer/ [Accessed on 12th Dec, 2010] 10Copyright @ Prithviraj Paul Choudhury
  11. 11. 5. ReferencesMatraves, Randi 2005, “Product Differentiation, Industry Concentration and Market ShareTurbulence”, Ceris-CnrBrand 1998 “New Product Development for Microfinance: Evaluation and Preparation”,Microenterprise Best PracticesKumar, Sanu and Newport, “Institutional Challenges in Microfinance Sector”, Indian Association forSavings and Credit.Moschandres 1994, “Industrial And Market Structure”, Business Economics 1994, Thomsan BusinessPress.Sanjay Sinha 2010, “Microfinance Regulation – A more subtle approach”, Available at:http://www.microfinancefocus.com/news/2010/11/03/microfinance-regulation-a-more-subtle-approach/ [Accessed on 12th Dec, 2010]Daniel Rozas and Sanjay Sinha 2010, “Avoiding Microfinace Bubble in India- Is Self regulation theanswer”, Available at: http://www.microfinancefocus.com/news/2010/01/10/avoiding-a-microfinance-bubble-in-india-is-self-regulation-the-answer/ [Accessed on 12th Dec, 2010] 10Copyright @ Prithviraj Paul Choudhury
  12. 12. 5. ReferencesMatraves, Randi 2005, “Product Differentiation, Industry Concentration and Market ShareTurbulence”, Ceris-CnrBrand 1998 “New Product Development for Microfinance: Evaluation and Preparation”,Microenterprise Best PracticesKumar, Sanu and Newport, “Institutional Challenges in Microfinance Sector”, Indian Association forSavings and Credit.Moschandres 1994, “Industrial And Market Structure”, Business Economics 1994, Thomsan BusinessPress.Sanjay Sinha 2010, “Microfinance Regulation – A more subtle approach”, Available at:http://www.microfinancefocus.com/news/2010/11/03/microfinance-regulation-a-more-subtle-approach/ [Accessed on 12th Dec, 2010]Daniel Rozas and Sanjay Sinha 2010, “Avoiding Microfinace Bubble in India- Is Self regulation theanswer”, Available at: http://www.microfinancefocus.com/news/2010/01/10/avoiding-a-microfinance-bubble-in-india-is-self-regulation-the-answer/ [Accessed on 12th Dec, 2010] 10Copyright @ Prithviraj Paul Choudhury

×