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Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
Competition in microfinance
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Competition in microfinance


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  • Since microfinance still concentrated in the South these figures understate true level of competition
  • Overly aggressive loan tactics – if MFIs compete solely on interest rates, there may be a “race to the bottom” in terms of the tactics used by credit officers to Mission drift – mention that, for example, a strategy of subsidizing the ultra-poor with the better off may no longer be viable
  • Loan product structure not ideal  e.g. if you are a farmer and have two seasons of planting
  • The audience is probably very familiar  Can I say that the partnership model was designed to get around the capital adequacy requirements
  • Multiple borrowers may provide false / misleading info  unlikely as KYC docs required for all partnership model clients, in many cases docs were gathered well after initial sign-up; most managers thought that this was implausible Partnership model clients different from other clients  unlikely, based on interviews MFIs, process for designating clients as partnership model seems to be pretty much random (much more info on this in paper)
  • Estimate of overall incidence of multiple borrowing  means % of people who have loans from more than one MFI out of all MFI clients in the states (does not include loans from SHGs)
  • Mention that MFI staff and other borrowers were not present during interviews Other group members being aware of loan  many of the managers we interviewed claimed that field staff were completely aware of multiple borrowing
  • Transcript

    • 1. Competition in the Indian Microfinance Sector Doug Johnson Center for Microfinance Institute for Financial Management & Research
    • 2.
      • Results from a Quantitative Analysis of MFI Client Data
      • Further Research
      • Background
      • Mapping Microfinance
    • 3. 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
    • 4. 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
    • 5. …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.
    • 6. 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?
    • 7.
      • Results from a Quantitative Analysis of MFI Client Data
      • Further Research
      • Background
      • Mapping Microfinance
    • 8. A Quantitative Analysis of MFI Client Data by Karuna Krishnaswamy
      • Key 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
    • 9. 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
    • 10. 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 clients MFI 10.04% 359 926 77612 MFI7 22.04% 287 1195 38546 MFI6 NA 0 142 20869 MFI5 87.26% 604 0 41662 MFI4 30.31% 64 226 5146 MFI3 51.21% 166 2819 244396 MFI2 41.22% 197 1420 147152 MFI1 Summary Statistics
    • 11. 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
    • 12. 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
    • 13. 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
    • 14. 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
    • 15. 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
    • 16. 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
    • 17.
      • Results from a Quantitative Analysis of MFI Client Data
      • Further Research
      • Background
      • Mapping Microfinance
    • 18. 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. 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
      6631 Satin Care 73368 GV 14268 IASC 84349 SNFL 22814 KBSLAB 123359 CMC 23081 Kotalipara 132027 BASIX 40915 GK 132027 BISWA 44434 ESAF 149886 Bandhan 48352 Mahasemam 172970 SKS 53932 VWS 772775 Spandana Total # Active Borrowers 2006 MFI Total # Active Borrowers 2006 MFI
    • 19. Sample Map Detail: Andhra Pradesh Snapshot
    • 20. 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
    • 21.
      • Results from a Quantitative Analysis of MFI Client Data
      • Further Research
      • Background
      • Mapping Microfinance
    • 22. 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