Microfinance

Table of Contents
Sr no. Topic Page no.
1 Synopsis 2
2 Microfinance- An Introduction 4
3 Evolution 7
4 Evolution in India 13
5 Target of Microfinance 17
6 Business Models in Microfinance 19
7 Institutions Model in India 25
8 Business Models in India 27
9 Top Ten Institutions in India 35
10 Microfinance outlook in 2012- Region wise 45
11 Funding Needs 46
12 What in Investors look in MFI’s 50
13 Fund to MFI’s Worldwide 52
14 Securitisation 57
15 Major Deals in Microfinance India 59
16 Recommendations for Growth 63
17 Conclusion 66
18 Webliography 67
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Synopsis
Project Title: Microfinance – A New Avenue for Private Equity
Introduction
This project enlightens on how the microfinance business works in India and what
are all the funding needs and how the Private Equity have helped them overcome
this funding need. The further part of the projects also shows the deals in this
sector and most active players who have received how much funding.
Objectives
This project gives highlights about how these microfinance institutions are formed
and how they actively perform in the rural market though they are a small bank
with differences.
Scope of Study
The scope of the study was to find out the following things
1. When it all did started
2. What is microfinance
3. What business models they have
4. How do they manage their funding
5. Private equity investments in Microfinance
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6. What are suggestions
Identification of the problem
The microfinance sector have an acute shortage of funds due to the delayed
cycles of repayment of loan they have to take loan from banks and lend the same
to the customers or borrowers. They only serve to poor of the nations and not
very poor.
Limitations
The limitations to their funding is they do not have a perfect accounts of lending
and their repayment cycle is delayed many a times due to which the availability of
funds to them is a big problem and banks do lend them on a mortgage of assets
which then becomes a problem for them because they cannot realize wealth on
their assets.
Research objectives and procedures
The objective to do the research was to find out about this fast growing sector in
India and the investment in this sector is booming from the last 2 financial years
although the sector has seen a sharp fall in the last financial year but then it has
got a good perspective in future.
The data is being taken from various sites which are as follows:
Vccircle.com
Bellwether.com
Microfinanceindia.com
RBI.org
References from
Times of India
Business Standard
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What is Microfinance? - An Introduction
Microfinance is the provision of financial services to low-income clients or
solidarity lending groups including consumers and the self-employed, who
traditionally lack access to banking and related services.
More broadly, it is a movement whose object is "a world in which as many poor
and near-poor households as possible have permanent access to an appropriate
range of high quality financial services, including not just credit but also savings,
insurance, and fund transfers." Those who promote microfinance generally
believe that such access will help poor people out of poverty.
Microfinance is a broad category of services, which includes microcredit.
Microcredit is provision of credit services to poor clients. Although microcredit is
one of the aspects of microfinance, conflation of the two terms is endemic in
public discourse. Critics often attack microcredit while referring to it
indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range
of microfinance services, it is difficult to assess impact, and very few studies have
tried to assess its full impact.
Traditionally, banks have not provided financial services, such as loans, to clients
with little or no cash income. Banks incur substantial costs to manage a client
account, regardless of how small the sums of money involved. For example,
although the total gross revenue from delivering one hundred loans worth $1,000
each will not differ greatly from the revenue that results from delivering one loan
of $100,000, it takes nearly a hundred times as much work and cost to manage a
hundred loans as it does to manage one. The fixed cost of processing loans of any
size is considerable as assessment of potential borrowers, their repayment
prospects and security; administration of outstanding loans, collecting from
delinquent borrowers, etc., has to be done in all cases. There is a break-even
point in providing loans or deposits below which banks lose money on each
transaction they make. Poor people usually fall below that breakeven point. A
similar equation resists efforts to deliver other financial services to poor people.
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In addition, most poor people have few assets that can be secured by a bank as
collateral. As documented extensively by Hernando De Soto and others, even if
they happen to own land in the developing world, they may not have effective
title to it. This means that the bank will have little recourse against defaulting
borrowers.
Seen from a broader perspective, the development of a healthy national financial
system has long been viewed as a catalyst for the broader goal of national
economic development (see for example Alexander Gerschenkron, Paul
Rosenstein-Rodan, Joseph Schumpeter, and Anne Krueger). However, the efforts
of national planners and experts to develop financial services for most people
have often failed in developing countries, for reasons summarized well by Adams,
Graham & Von Pischke in their classic analysis 'Undermining Rural Development
with Cheap Credit'.
Because of these difficulties, when poor people borrow they often rely on
relatives or a local moneylender, whose interest rates can be very high. An
analysis of 28 studies of informal moneylending rates in 14 countries in Asia, Latin
America and Africa concluded that 76% of moneylender rates exceed 10% per
month, including 22% that exceeded 100% per month. Moneylenders usually
charge higher rates to poorer borrowers than to less poor ones. While
moneylenders are often demonized and accused of usury, their services are
convenient and fast, and they can be very flexible when borrowers run into
problems. Hopes of quickly putting them out of business have proven unrealistic,
even in places where microfinance institutions are active.
Over the past centuries practical visionaries, from the Franciscan monks who
founded the community-oriented pawnshops of the 15th century, to the founders
of the European credit union movement in the 19th century (such as Friedrich
Wilhelm Raiffeisen) and the founders of the microcredit movement in the 1970s
(such as Muhammad Yunus) have tested practices and built institutions designed
to bring the kinds of opportunities and risk-management tools that financial
services can provide to the doorsteps of poor people. While the success of the
Grameen Bank (which now serves over 7 million poor Bangladeshi women) has
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inspired the world, it has proved difficult to replicate this success. In nations with
lower population densities, meeting the operating costs of a retail branch by
serving nearby customers has proven considerably more challenging. Hans Dieter
Seibel, board member of the European Microfinance Platform, is in favor of the
group model. This particular model (used by many Microfinance institutions)
makes financial sense, he says, because it reduces transaction costs. Microfinance
programs also need to be based on local funds. Local Roots
Although much progress has been made, the problem has not been solved yet,
and the overwhelming majority of people who earn less than $1 a day, especially
in the rural areas, continue to have no practical access to formal sector finance.
Microfinance has been growing rapidly with $25 billion currently at work in
microfinance loans. It is estimated that the industry needs $250 billion to get
capital to all the poor people who need it. The industry has been growing rapidly,
and concerns have arisen that the rate of capital flowing into microfinance is a
potential risk unless managed well.
As seen in the State of Andhra Pradesh (India), these systems can easily fail, some
reasons being lack of use by potential customers, over-indebtedness, poor
operating procedures, neglect of duties and inadequate regulations.
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Evolution
The concept of microfinance is not new. Savings and credit groups that have
operated for centuries include the "susus" of Ghana, "chit funds" in India,
"tandas" in Mexico, "arisan" in Indonesia, "cheetu" in Sri Lanka, "tontines" in
West Africa, and "pasanaku" in Bolivia, as well as numerous savings clubs and
burial societies found all over the world.
Formal credit and savings institutions for the poor have also been around for
decades, providing customers who were traditionally neglected by commercial
banks a way to obtain financial services through cooperatives and development
finance institutions. One of the earlier and longer-lived micro credit organizations
providing small loans to rural poor with no collateral was the Irish Loan Fund
system, initiated in the early 1700s by the author and nationalist Jonathan Swift.
Swift's idea began slowly but by the 1840s had become a widespread institution
of about 300 funds all over Ireland. Their principal purpose was making small
loans with interest for short periods. At their peak they were making loans to 20%
of all Irish households annually.
In the 1800s, various types of larger and more formal savings and credit
institutions began to emerge in Europe, organized primarily among the rural and
urban poor. These institutions were known as People's Banks, Credit Unions, and
Savings and Credit Co-operatives.
The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen
and his supporters. Their altruistic action was motivated by concern to assist the
rural population to break out of their dependence on moneylenders and to
improve their welfare. From 1870, the unions expanded rapidly over a large
sector of the Rhine Province and other regions of the German States. The
cooperative movement quickly spread to other countries in Europe and North
America, and eventually, supported by the cooperative movement in developed
countries and donors, also to developing countries.
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In Indonesia, the Indonesian People's Credit Banks (BPR) or The Bank Perkreditan
Rakyat opened in 1895. The BPR became the largest microfinance system in
Indonesia with close to 9,000 units.
In the early 1900s, various adaptations of these models began to appear in parts
of rural Latin America. While the goal of such rural finance interventions was
usually defined in terms of modernizing the agricultural sector, they usually had
two specific objectives: increased commercialization of the rural sector, by
mobilizing "idle" savings and increasing investment through credit, and reducing
oppressive feudal relations that were enforced through indebtedness. In most
cases, these new banks for the poor were not owned by the poor themselves, as
they had been in Europe, but by government agencies or private banks. Over the
years, these institutions became inefficient and at times, abusive.
Between the 1950s and 1970s, governments and donors focused on providing
agricultural credit to small and marginal farmers, in hopes of raising productivity
and incomes. These efforts to expand access to agricultural credit emphasized
supply-led government interventions in the form of targeted credit through state-
owned development finance institutions, or farmers' cooperatives in some cases,
that received concessional loans and on-lent to customers at below-market
interest rates. These subsidized schemes were rarely successful. Rural
development banks suffered massive erosion of their capital base due to
subsidized lending rates and poor repayment discipline and the funds did not
always reach the poor, often ending up concentrated in the hands of better-off
farmers.
Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil,
and a few other countries extended tiny loans to groups of poor women to invest
in micro-businesses. This type of microenterprise credit was based on solidarity
group lending in which every member of a group guaranteed the repayment of all
members. These "microenterprise lending" programs had an almost exclusive
focus on credit for income generating activities (in some cases accompanied by
forced savings schemes) targeting very poor (often women) borrowers.
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• ACCION International, an early pioneer, was founded by a law student, Joseph
Blatchford, to address poverty in Latin America's cities. Begun as a student-run
volunteer effort in the shantytowns of Caracas with $90,000 raised from private
companies, ACCION today is one of the premier microfinance organizations in the
world, with a network of lending partners that spans Latin America, the United
States and Africa.
• SEWA Bank. In 1972 the Self Employed Women's Association (SEWA) was
registered as a trade union in Gujarat (India), with the main objective of
"strengthening its members' bargaining power to improve income, employment
and access to social security." In 1973, to address their lack of access to financial
services, the members of SEWA decided to found "a bank of their own". Four
thousand women contributed share
capital to establish the Mahila SEWA Co-
operative Bank. Since then it has been
providing banking services to poor,
illiterate, self-employed women and has
become a viable financial venture with
today around 30,000 active clients.
• Grameen Bank. In Bangladesh,
Professor Muhammad Yunus addressed
the banking problem faced by the poor
through a programme of action-research. With his graduate students in
Chittagong University in 1976, he designed an experimental credit programme to
serve them. It spread rapidly to hundreds of villages. Through a special
relationship with rural banks, he disbursed and recovered thousands of loans, but
the bankers refused to take over the project at the end of the pilot phase. They
feared it was too expensive and risky in spite of his success. Eventually, through
the support of donors, the Grameen Bank was founded in 1983 and now serves
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more than 4 million borrowers. The initial success of Grameen Bank also
stimulated the establishment of several other giant microfinance institutions like
BRAC, ASA, Proshika, etc.
Through the 1980s, the policy of targeted, subsidized rural credit came under a
slow but increasing attack as evidence mounted of the disappointing performance
of directed credit programs, especially poor loan recovery, high administrative
costs, agricultural development bank insolvency, and accrual of a
disproportionate share of the benefits of subsidized credit to larger farmers. The
basic tenets underlying the traditional directed credit approach were debunked
and supplanted by a new school of thought called the "financial systems
approach", which viewed credit not as a productive input necessary for
agricultural development but as just one type of financial service that should be
freely priced to guarantee its permanent supply and eliminate rationing. The
financial systems school held that the emphasis on interest rate ceilings and
credit subsidies retarded the development of financial intermediaries,
discouraged intermediation between savers and investors, and benefited larger
scale producers more than small scale, low-income producers.
Meanwhile, microcredit programs throughout the world improved upon the
original methodologies and defied conventional wisdom about financing the poor.
First, they showed that poor people, especially women, had excellent repayment
rates among the better programs, rates that were better than the formal financial
sectors of most developing countries. Second, the poor were willing and able to
pay interest rates that allowed microfinance institutions (MFIs) to cover their
costs.
1990s These two features - high repayment and cost-recovery interest rates -
permitted some MFIs to achieve long-term sustainability and reach large numbers
of clients.
Another flagship of the microfinance movement is the village banking unit system
of the Bank Rakyat Indonesia (BRI), the largest microfinance institution in
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developing countries. This state-owned bank serves about 22 million microsavers
with autonomously managed microbanks. The microbanks of BRI are the product
of a successful transformation by the state of a state-owned agricultural bank
during the mid-1980s.
The 1990s saw growing enthusiasm for promoting microfinance as a strategy for
poverty alleviation. The microfinance sector blossomed in many countries, leading
to multiple financial services firms serving the needs of microentrepreneurs and
poor households. These gains, however, tended to concentrate in urban and
densely populated rural areas.
It was not until the mid-1990s that the term "microcredit" began to be replaced
by a new term that included not only credit, but also savings and other financial
services. "Microfinance" emerged as the term of choice to refer to a range of
financial services to the poor, that included not only credit, but also savings and
other services such as insurance and money transfers.
ACCION helped found BancoSol in 1992, the first commercial bank in the world
dedicated solely to microfinance. Today, BancoSol offers its more than 70,000
clients an impressive range of financial services including savings accounts, credit
cards and housing loans - products that just five years ago were only accessible to
Bolivia's upper classes. BancoSol is no longer unique: more than 15 ACCION-
affiliated organizations are now regulated financial institutions.
Today, practitioners and donors are increasingly focusing on expanded financial
services to the poor in frontier markets and on the integration of microfinance in
financial systems development. The recent introduction by some donors of the
financial systems approach in microfinance - which emphasizes favorable policy
environment and institution-building - has improved the overall effectiveness of
microfinance interventions. But numerous challenges remain, especially in rural
and agricultural finance and other frontier markets. Today, the microfinance
industry and the greater development community share the view that permanent
poverty reduction requires addressing the multiple dimensions of poverty. For the
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international community, this means reaching specific Millennium Development
Goals (MDGs) in education, women's empowerment, and health, among others.
For microfinance, this means viewing microfinance as an essential element in any
country's financial system.
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Evolution of Microfinance in India
The genesis of microcredit, and therefore microfinance is credited to Dr.
Muhammad Yunus, who founded the Grameen Bank in 1983. In India, however,
financial services especially for the rural poor also had a parallel evolution,
starting from the earliest cooperative societies in 1890 to the burgeoning
microfinance sector of today, dominated by Self Help Groups (SHGs), which have
emerged as micro level financial intermediaries.
Prelude
The role prescribed for financial sector in India to achieve developmental goals
dates to pre independence days. The agriculture credit department was set up in
1935 by the Reserve Bank of India to promote rural credit. In its early days, the
government of India sought to promote rural credit by strengthening the
cooperative institutions. The need to replace costly informal credit with
institutional credit was strongly felt as the All India Rural Credit Survey report of
1954 found that informal sources accounted for 70% of rural credit usage,
followed by cooperatives (6.4%) and commercial banks (0.9%).
The “Lead Bank Scheme” was introduced in 1969, thereby starting a process of
district credit plans and coordination among the different financial
intermediaries. The same year also saw the nationalization of fourteen
commercial banks. As a result of these initiatives, the share of formal financial
sector in total rural credit usage rose to 30% in 1971. The Regional Rural Banks
(RRBs) were conceptualized in 1975 to augment the delivery of financial services
in rural areas. This resulted in the creation of a network of banks which is one of
the largest in the world even today. Not surprisingly, the All India Survey Debt and
Investment Survey of 1981 found that the share of formal financial sector in total
credit had risen to over sixty percent.
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Preparing the Ground
The government initiated the Integrated Rural Development Programme (IRDP) in
1980-81. The objective of IRDP was to direct subsidized loans to poor self-
employed people through the banking sector. The National Bank for Agriculture
and Rural Development (NABARD) was established in 1982. In the same year the
government established Development of Women and Children in Rural Areas
(DWARCA) scheme as a part of IRDP. It was around this time that the first Self
Help Groups (SHGs) started emerging in the country mostly as a result of NGO
activities. The NGO MYRADA was one of the pioneers of the concept of SHGs in
India. It was in 1984-85, when MYRADA started linking SHGs to banks. These SHGs
were large enough for the bank to have transactions. The SHGs in turn were also
very responsive and flexible to the needs of their members. While MYRADA did
not directly intervene in the credit market for the poor, it facilitated “banking
with micro institutions established and controlled by the poor”. The SHGs were a
step in that direction. Thus, seeds were sown for the modern microfinance sector
in India to emerge.
IRDP is estimated to have reached over 55 million poor families until 1999, when
it was transformed into Swarnajyanti Gram Swarozgar Yojna (SGSY). The IRDP, in
spite of its immense outreach, experienced very low repayment rates and created
40 million defaulters, which coupled with the subsidy component ruled out long
term sustainability of the programme.
The formal financial sector has been criticized to be supply driven during this
phase (Sriram and Fisher, 2002) . The formal financial sector was characterized
by:
• A large network of banks including cooperative banks and innovations such as
RRBs,
• Focused approach on credit,
• Lending targeted at the “priority sector” such as agriculture and weaker sections
of the population,
• Interest rates ceiling,
• Subsidies.
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Financial services, were thus, viewed as a social obligation. Given the high rates of
default, a formal loan waiver was announced by the government in the year 1989.
This had a negative impact on credit discipline, and reinforced the view that
lending to the poor was not a profitable business among the mainstream financial
institutions.
Economic Reforms and a new Generation of Financial Institutions
In the year 1991, India faced a balance of payment crisis. India’s foreign reserve
fell to a very low level and the country’s ability to meet foreign debt obligations
was seriously impaired. This, however, propelled the government into introducing
structural changes in the economy-commonly referred to as the Economic
Reforms of 1991. This gradually resulted in greater autonomy to the financial
sector. As a result, new generation private sector banks such as UTI Bank, ICICI
Bank, IDBI Bank (all established in 1994) and HDFC Bank (early 1995), emerged.
The Narsimhan Committee report of 1991 also recommended phasing out of
interest rate concessions. At the same time the Brahm Prakash Committee
recommended reducing state involvement in cooperative banks.
Microfinance is Borne SHG – Bank linkage programme was formally launched by
the NABARD in the year 1992, with it circulating guidelines to banks for financing
Self Help Groups (SHGs) under a Pilot Project that aimed at financing 500 SHGs
across the country through the banking system. While, the banks had financed
about 600 SHGs by March 1993, they continued to finance more and more SHGs
in the coming years. This encouraged the Reserve Bank of India (RBI) to include
financing to SHGs as a mainstream activity of banks under their priority sector
lending in 1996. The Government of India bestowed national priority to the
programme through its recognition of microfinance and it found a mention in the
Union Budget of 1999. The banking system comprising public and private sector
commercial banks, regional rural banks and cooperative banks has joined hands
with several organizations in the formal and non-formal sectors to use this
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delivery mechanism for providing financial services to a large number of poor.
Concurrently, in 1993, the Rashtriya Mahila Kosh (RMK) to accelerate the flow of
self employed women in the unorganized sector. It is worth mentioning that the
Sewa Cooperative Bank has been operating in Gujarat with similar objectives
since 1974. The bank has been viable right from its inception and is an ideal
example of community owned sustainable financial service delivery. Microfinance
received greater recognition when the Small Industries Development Bank of
India set up a Foundation for Microcredit with initial capital of Rs100 crores in
1998. The same year also saw the formation of Sa-dhan as an apex level
association of Community Development Finance Institutions. The passing of
Mutually Aided Cooperative Societies Act by Andhra Pradesh in 1995, followed by
some other states has also acted as a stimulant as many new microfinance
initiatives have come up under the MACS act. In addition to the success of the
Nabard-SHG bank linkage programme, alternative microfinance initiative
following Grameen and/or SHG methodology or at times individual lending model
has also been successful.
Some Recent Developments:
The year 2004 has seen some very important development in the microfinance
sector in India. The banking sector led by ICICI bank has shown interest in
microfinance as a viable commercial opportunity. The total disbursement of the
banking sector to microfinance is put at around Rs1000 crores for the year 2003-
04. ICICI Bank plans to build a microfinance portfolio in excess of Rs1000 crores. It
has taken a lead in establishing innovative partnerships with microfinance
institutions which will allow for risk sharing between the two. ICICI bank has also
securitized the microfinance portfolio of Share and Basix, and has potentially
opened the doors of capital markets for the microfinance sector. Microfinance
sector in India is set to enter a new growth phase in its evolutionary course.
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Target of Microfinance
The fundamental reason behind the Indian microfinance industry’s impressive
growth is that it is fulfilling a critical need of its target audience, the low-income
population, which has thus far remained unaddressed by the traditional financial
services sector. Currently, a total population of 1.1 billion is being served by
50,000 commercial banks, 12,000 co-operative bank offices, 15,000 regional rural
banks and 100,000 primary agriculture societies. This density of financial 12
services, however, belies the availability of financial services to low-income
households, which make up a significant chunk of the Indian population. Before
exploring why financial services have failed to reach this segment of the
population, it is necessary to first define their target. The Indian population can
be divided into four categories based on household income levels. The Rich who
make up 0.4% of the households have an annual household income greater than
$20,000.
The Middle Class comprises 11 million households, or 5.9% of the total
households, and has an annual household income between $4,000 and $20,000.
The Aspirers make up nearly Source: Lok Capital
22% of the households and have an annual household income between $1,800
and $4,000. Lastly, the Deprived segment, the prime target of the microfinance
industry, comprises 135 million or 72% of the households and has an annual
household income below $1,800.
Despite the density and robustness of the formal Indian financial system, it has
failed to reach the deprived segment, leaving approximately 135 million
households entirely unbanked. The size of India's unbanked population is one of
the highest in the world, second only to that of China. The microfinance sector
targets the poorer portion of the Aspirer segment and the mid to richer portion of
the Deprived segment. The industry has thus far been able to create a service
model and products that are suitable to these segments and these services and
products have proven successful in affecting improvements in the clients’
economic status. The reasons behind the formal financial sector’s failure to reach
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such a large segment of the Indian population are manifold and operate in a self-
reinforcing manner. The principal prohibiting factor is that banks face extremely
high fixed and variable costs in servicing low income households, resulting in high
delivery costs for relatively small transactions. Much of the low income
population is located in rural areas that are geographically remote and
inaccessible. For this population, the cost of visiting a traditional bank branch is
prohibitive due to the loss of wages that would be incurred in the time required.
Concurrently, from a bank’s perspective, the cost of operating a branch in a
remote location is financially unfeasible due to the low volume and high cost
dynamic. Moreover, low income households are not interested in the same
products that are usually utilized by the rest of the population because they have
different immediate needs, lower financial capacities and variable income
streams. The unsuitability of existing credit products for low income households is
exacerbated by a general unavailability of collateralizable assets. Additionally, the
low income population is often illiterate and lacks financial knowledge, making it
nearly impossible for it to even contemplate availing existing financial services,
which provide no ancillary support to mitigate these challenges.
In the absence of access to formal financial services, the low income segment has
traditionally relied on local moneylenders to fulfill their financial needs. While this
money is readily available, it is often exorbitantly priced at 60%-100% annual
yields and forces the borrower into a classic debt trap, entrenching her in poverty.
Credit from moneylenders has not traditionally acted as a tool for business
expansion or enhancement of quality of life, but rather as a lifeline for immediate
consumption or healthcare needs.
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Microfinance Business Model
MFI came into existence when the lack of access to credit for the poor is
attributable to practical difficulties arising from the discrepancy between the
mode of operation followed by financial institutions and the economic
characteristics and financing needs of low-income households.
MicroCredit which is an integral part of Microfinance, is the extension of very
small loans (microloans) to those in poverty designed to spur entrepreneurship.
These individuals lack collateral, steady employment and a verifiable credit
history and therefore cannot meet even the most minimal qualifications to gain
access to traditional credit.
Business Model for getting financially viable
Over the last ten years, however, successful experiences in providing finance to
small entrepreneur and producers demonstrate that poor people, when given
access to responsive and timely financial services at market rates, repay their
loans and use the proceeds to increase their income and assets. This is not
surprising since the only realistic alternative for them is to borrow from informal
market at an interest much higher than market rates. Community banks, NGOs
and grass root savings and credit groups around the world have shown that these
microenterprise loans can be profitable for borrowers and for the lenders, making
microfinance one of the most effective poverty reducing strategies.
To the extent that microfinance institutions become financially viable, self-
sustaining, and integral to the communities in which they operate, they have the
potential to attract more resources and expand services to clients. Despite the
success of microfinance institutions, only about 2% of world's roughly 500 million
small entrepreneurs are estimated to have access to financial services.
The Grameen Bank which is a synonym for Microfinance makes small loans to the
impoverished without requiring collateral. Established in 1976, the Grameen Bank
(GB) has over 1000 branches (a branch covers 25-30 villages, around 240 groups
and 1200 borrowers) in every province of Bangladesh, borrowing groups in 28,000
villages, 12 lakh borrowers with over 90% being women. It has an annual growth
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rate of 20% in terms of its borrowers. The most important feature is the recovery
rate of loans, which is as high as 98%. A still more interesting feature is the
ingenious manner of advancing credit without any "collateral security". The
Grameen Bank lending system is simple but effective. The system of this bank is
based on the idea that the poor have skills that are under-utilized. A group-based
credit approach is applied which utilizes the peer-pressure within the group to
ensure the borrowers follow through and use caution in conducting their financial
affairs with strict discipline, ensuring repayment eventually and allowing the
borrowers to develop good credit standing.
The Business Model on which most of the Microfinance works is solidarity
lending. Solidarity lending is a lending practice where small groups borrow
collectively and group members encourage one another to repay. It is an
important building block of microfinance. Solidarity lending lowers the costs to a
financial institution related to assessing, managing and collecting loans, and can
eliminate the need for collateral.
An early pioneer of solidarity lending, Dr. Muhammad Yunus of Grameen Bank in
Bangladesh describes the dynamics of lending through solidarity groups this way:
"... Group membership not only creates support and protection but also smooth’s
out the erratic behavior patterns of individual members, making each borrower
more reliable in the process. Subtle and at times not-so-subtle peer pressure
keeps each group member in line with the broader objectives of the credit
program.... Because the group approves the loan request of each member, the
group assumes moral responsibility for the loan. If any member of the group gets
into trouble, the group usually comes forward to help."
The above cited Model helps in minimizing the delinquency rate. The source of
income for most of the Microfinance Institutions (MFIs) are the high rate of
interest they charge to the borrowers, The real average portfolio yield cited by
the a sample of 704 microfinance institutions that voluntarily submitted reports
to the MicroBanking Bulletin in 2006 was 22.3% annually. Microfinance
institutions can broaden their resource base by mobilizing savings, accessing
capital markets, loan funds and effective institutional development support. A
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logical way to tap capital market is securitization through a corporation that
purchases loans made by microenterprise institutions with the funds raised
through the bonds issuance on the capital market. There is at least one pilot
attempt to securitize microfinance portfolio along these lines in Ecuador. As an
alternative, BancoSol of Bolivia issued a certificate of deposit which is traded in
Bolivian stock exchange. In 1994, it also issued certificates of deposit in the U.S.
(Churchill 1996). The Foundation for Cooperation and Development of Paraguay
issued bonds to raise capital for microenterprise lending (Grameen Trust 1995).
Successful MFIs like Grameen Bank even generate revenue by providing training
programs / research programs to journalists or upcoming MFIs.
Another kind of MFI in India is indigenously developed system known as Chit
funds; they are the closest thing to a bank in many parts of India. They mobilize
huge amounts of small savings and offer the same as some sort of microfinance.
Properly used chit funds are an effective tool to meet unplanned, unforeseen and
unexpected expenses, especially for the middle class and small businessmen. Chit
fund is a dual-purpose instrument for both borrowing and saving. It has no
financial intermediation. Each chit group is in a way a self-help group. Members
invest a fixed amount every month. This collection is available for borrowing.
Auctions are conducted every month. The members who bid for the highest
discount win. The dividend at every auction is distributed to the subscribers out of
the discount (the difference between the chit amount and the amount bid), after
deducting the group foreman's commission. Shriram Chits has more than 22 lakh
subscribers.
Proposed Model for MFIs
If we consider the fact that MFIs role is to lend loan to impoverished sector of the
society so that they raise their living standards and can provide a stable lifestyle
to their families, which can be possible only when a group of member can come
up with an business idea. But how successful the entity is going to be after its
formation and will result in timely repayment of the loan cannot be guaranteed. I
personally feel, instead of letting the inexperienced group to decide upon the
venture all the time, MFIs or NGO's should set up ventures which can be either be
an subsidiary of existing stable company or something which can traded outside
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the community, guaranteeing the flow of funds. This will bring an stable or regular
source of income for many households without the worries of loan. The reason
behind this though is the criticism behind the Microcredit institutions. Some
experts argues that most microcredit institutions are overly dependent on
external capital. A study of microcredit institutions in Bolivia in 2003, for example,
found that they were very slow to deliver quality microsavings services because of
easy access to cheaper forms of external capital.Global data tables from The
Microbanking Bulletin show that savings represent a small source of funds for
microcredit institutions in most developing nations.
Because field officers are in a position of power locally and are judged on
repayment rates as the primary metric of their success, they sometimes use
coercive and even violent tactics to collect installments on the microcredit loans.
Some loan recipients sink into a cycle of debt, using a microcredit loan from one
organization to meet interest obligations from another.
Recent move by indian govt to repay the loan taken by the farmers of certain
segment is the result of delinquency. To avoid such incidences again, its better to
invest in upbringing of this segment by bringing an regular source of income to
the households.
Charity or commerce?
The different structures of microfinance
The term microfinance is used to describe a vast range of business structures and
funding mechanisms. In particular, the roles of charity and commerce within the
world of microfinance vary hugely depending on the organisation and the country
of operation.
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Commercial microfinance
Commercial microfinance institutions structure a profitable business model
around the principles of microfinance. This does not prevent them from being
socially responsible, or “pro-poor” – Compartamos, a Mexican MFI and bank that
is part of the ACCION network, describes itself as a “social company”, for
example. Similarly, Kenya’s K-REP describes itself as a “commercial bank” with a
“social mission”.
Another area in which private investment is playing an increasing role in
microfinance is through the capitalisation of MFI loan books. In recent years,
investors have begun to create investment funds for the microfinance sector
offering a market rate of return. The first widely cited example of this was
Profund, a $23m Latin American fund created by a group of investors headed by
ACCION in 1995. Large, multinational banks are also now becoming increasingly
involved in this area – Citigroup and HSBC both have microfinance divisions
providing services such as loan guarantee funds, operational support and
commercial wholesale lending to MFIs.
Charitable, and not-for-profit microfinance
Modern microfinance has its roots in non-profit structures. Grameen Bank of
Bangladesh, founded by Nobel peace prize winner Mohammad Yunus, is a
community bank owned by its clients. Grameen now claims to be sustainable, in
that it covers its costs from interest earned on loans, and so does not require
donor funding. However, unlike commercial microfinance, profits are reinvested
into the business, or what it calls a “Rehabilitation fund”, which is set up to
provide support and relief in disaster situations.
Other not-for-profit microfinance institutions do receive external funding, either
to support expansion or to help cover costs. These include global organisations
such as
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FINCA, BRAC and Opportunity International (which has a UK support base), as well
as UK based charities such as the MicroLoan Foundation. Many, though not all,
not-for-profit microfinance institutions aim to cover costs, and hence achieve full
sustainability (ie non-reliance on donor funds). Sustainability is widely considered
desirable, since it ensures that initiatives will be meaningful, scalable and long-
lasting. In this model, donor funding is used to fund start-up costs or expansion as
opposed to propping up a long-term business plan. However, in many regions,
notably sub-Saharan Africa, sustainability is often incompatible with universal
access. For example, a rural client who needs a $50 loan and who requires basic
business training to set up their first business is far more costly to serve than an
urban, educated client taking a $500 loan to finance an existing business venture.
At the MicroLoan Foundation, (a UK based microfinance charity operating in sub
Saharan Africa) we are therefore committed to becoming sustainable in the long
term, both from the interest charged on loans and from ethical trading with our
clients. However, it is integral to our approach that sustainability does not come
at the expense of the availability of services to those most in need.
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Micro Finance Institutions in India
Those institutions which have microfinance as their main operation are known as
micro finance institutions. A number of organizations with varied size and legal
forms offer microfinance service. These institutions lend through the concept of
Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10
individual members who come together for the purpose of availing bank loans
either individually or through the group mechanism against a mutual guarantee.
The reason for existence of separate institutions i.e. MFIs for offering
microfinance are as follows:
High transaction cost – generally micro credits fall below the break-even point of
providing loans by banks
Absence of collaterals – the poor usually are not in a state to offer collaterals to
secure the credit
Loans are generally taken for very short duration periods
Higher frequency of repayment of installments and higher rate of Default
Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25
companies, Societies and Trusts, all such institutions operating in microfinance
sector constitute MFIs and together they account for about 42 percent of the
microfinance sector in terms of loan portfolio. The MFI channel is dominated by
NBFCs which cover more than 80 percent of the total loan portfolio through the
MFI channel.
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26 | P a g e
Sl.
No.
Type of MFI Number Legal Registration
Not-for Profit MFIs
1 NGOs 400-500 Society Registration Act,
1860
Indian Trust Act, 1882
2 Non-Profit companies 20 Section-25 of Indian
Companies Act, 1956
Mutual Benefit MFIs
3 Mutual benefit MFIs –
Mutually Aided
Cooperative Societies
(MACS)
200-250 Mutually Aided Co-operative
societies, Act enacted by
State Governments
For Profit MFIs
4 Non-Banking Financial
Companies (NBFCs)
45 Indian companies Act, 1956
Reserve Bank of India Act,
1934

Microfinance Business Models in India
Model#1 The Grameen system
Potential clients are asked by the MFI to organise themselves into ‘Groups’ of five
members which are in turn organised into ‘Centres’ of around five to seven such
Groups. The members make regular savings with the MFI, according to a fixed
compulsory schedule, and they also take regular loans. They each have individual
savings and loan accounts with the MFI, and the main function of the Groups and
Centres are to facilitate the financial intermediation process, through performing
tasks such as:
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• Holding regular and usually weekly meetings which are supervised by a MFI
worker who maintains the records, where savings and repayments are collected
and handed over to the MFI worker,
• Organizing contributions to one or a number of group savings funds, which can
be used by the group for a number of purposes, usually only with the agreement
of the MFI which maintains the group fund accounts,
• Guaranteeing loans to their individual members, by accepting joint and several
liability, by raising group emergency funds and by accepting that no members of a
Group will be able to take a new loan if any members are in arrears,
• Arising from the above, appraising fellow-members’ loan applications, and
ensuring that their fellow-members maintain their regular savings contributions
and loan repayments.
The SHG system
The members form a group of around twenty members. The group formation
process may be facilitated by an NGO or by the MFI or bank itself, or it may evolve
from a traditional rotating savings and credit group (ROSCA) or other locally
initiated grouping. The process of formal ‘linkage’ to an MFI or bank usually goes
through the following stages, which may be spread over many years or which may
take place within a few months.
• The SHG members decide to make regular savings contributions. These may be
kept by their elected head, in cash, or in kind, or they may be banked.
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• The members start to borrow individually from the SHG, for purposes, on terms
and at interest rates decided by the group themselves.
• The SHG opens a savings account, in the group’s name, with the bank or MFI,
for such funds as may not be needed by members, or in order to qualify for a loan
from the bank.
• The bank or MFI makes a loan to the SHG, in the name of the Group, which is
then used by the Group to supplement its own funds for on-lending to it
members.
The SHG need never go through all these stages; it may satisfy its members’ needs
quite effectively if it only goes to the second or even to the first stage, saving
money and possibly not even withdrawing it (Harper M 2000, pp. 39-42).
The SHG carries out all the same functions as those required by the Grameen
system, but they do this on their own behalf, since the SHG is effectively a micro-
bank, carrying out all the familiar intermediation tasks of savings mobilisation and
lending. The MFI or bank may assist the SHG in record keeping, and they may also
demand to know who are the members and impose certain conditions as to the
uses of the loan which they make to the SHG, but the SHG is an autonomous
financial institution in its own right.
The members have their accounts with the SHG, not with the MFI or bank, and
the MFI or bank does not have any direct dealings with the members.
Model#2
SHG-MCI System
A typical SHG consists of twelve to thirty members (Rutherford, 2000). The group
is not merely a savings and loan association, but serves as an “affinity” group that
provides a platform for a range of issues (such as watershed development,
awareness building, and family planning—see Fernandez, 1994, for a
comprehensive description of such SHGs). An SHG meets regularly (often weekly),
and in these meetings, R. Srinivasan is professor and coordinator of the Finance &
29 | P a g e

Control Area at the Indian Institute of Management, Bangalore. Members
contribute savings and take decisions on loans to members of the group. Group
leadership is by rotation. The SHG may initially lend out of its own pool of funds
and after gaining some experience with lending (and recovering loans), it may
borrow from an MCI for on-lending to members.
Briefly, the SHG-MCI system has financial linkages as follows. Each SHG in the
system raises funds from individual members and borrows from the MCI. Each
SHG lends to members and saves with the MCI. I will assume that there are no
regulatory restrictions4 on the SHG activities. The MCI raises funds from three
sources: capital, SHG savings, and borrowings from outside. The MCI lends to
SHGs, invests outside, and maintains a cash balance. The MCI may have
regulatory restrictions on assets, liabilities, and interest rates.
Financial Model
The spreadsheet financial model5 (created in Microsoft Excel) was developed to
analyze possible strategies using what-if analysis. The model generates two sets
of outputs: SHG-level and MCI-level projections. The model generates these
projections based on input values provided for a number of factors at SHG and
MCI level. A stylized description of the functioning of SHGs and the MCI is
provided, with the various input assumptions. To simplify computation, a month
has been taken as the standard interval. Thus members save monthly, repay in
monthly installments, and so on.
Financial Model Inputs: SHG
• An SHG is formed by an initial set of members and the group remains constant.
(Initial membership fees are ignored; they make little difference to the model
output.)
• Each member saves a specified amount with the SHG. The SHG pays interest on
this amount. The members’ saving should desirably be regular, but in practice it is
often irregular (not all members may save in a given month or there may be a
30 | P a g e

shortfall in the individual saving quantum). The model incorporates some
irregularity in savings (this is not any implied defense of irregularity).
• A loan cycle represents the repayment period of a loan to members made by
the SHG. The model accepts loan cycles ranging from 1 to 24 months. The SHG
accumulates savings over the first loan cycle and maintains this with the MCI (i.e.,
no lending is done in the first loan cycle).
• Thereafter, the SHG lends a fraction of the available funds to members over
several loan cycles (referred to as the self-cycle phase). The balance is saved with
the MCI. The loan to members is repayable in monthly instalments over the loan
cycle period. Interest is paid monthly over the loan cycle. A fraction of the loans
are delinquent with members taking three months more than the loan cycle to
repay. Of these, a fraction will default; defaulting members pay neither interest
nor principal.
• At the end of the self-cycle phase, the SHG raises funds from the MCI and lends
a fraction of the total available funds (member savings, surplus retained, and
borrowing from MCI) to members. The balance is saved with the MCI. The loan
from the MCI can be back-to-back (i.e., identical in tenor to the SHG loan to
members), or range for periods from 1 to 24 months.
• The SHG incurs an annual operating cost expressed as a fraction of the common
fund (member savings plus accumulated operating surplus).
• The SHG makes annual profits (losses) that add to (reduce) the accumulated
surplus.
Financial Model Inputs: MCI
• The MCI starts with a certain capital base. It can raise a multiplier of this capital
and accumulated surplus by borrowing from outside.
• The MCI adds SHGs over a period of five years. The number of SHGs stabilizes
thereafter.
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• The MCI has to maintain a minimum fraction of its borrowing and SHG savings
as cash and maintain another minimum fraction in approved investments. The
remaining funds are available for lending to the SHGs. A fraction of the loans to
SHGs are delinquent and a smaller fraction default.
• The MCI incurs an annual operating cost expressed as a fraction of its
borrowings plus SHG savings.
• The MCI makes annual profits (losses) that increase (reduce)the total
accumulated surplus.
The MCI capital is not an input item. The model generates annual capital
requirements (consistent with the inputs) as an output.
Financial Model: Output
The model produces the following output at SHG and MCI levels:
• Balance sheets for 10 years.
• Income statements for 10 years and an aggregate income statement for the 10-
year period.
• Financial analysis.
• Sensitivity analysis.
In addition, funds flow statements for 10 years and an aggregate funds flow
statement for the 10-year period are produced at the SHG level
Model#3
SHG-Bank Linkage Program in India Review of Models
In India, three types of SHG models have emerged:
1. Bank-SHG-Members: The bank itself acts as a self-help group promoting
institution (SHPI).
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2. Bank-Facilitating Agency-SHG-Members: Facilitating agencies like NGOs,
government agencies, or other community-based organizations form groups.
3. Bank-NGO-MFI-SHG-Members: NGOs act both as facilitators and microfinance
intermediaries. First they promote groups, nurture them, and train them, and
then they approach banks for bulk loans for lending to the SHGs.
The second model, where SHGs were formed and nurtured by the NGOs, was
more popular among the bankers. Banks opened saving accounts and then
provided credit directly to the SHGs, while NGOs acted as facilitators. This
approach has been widely accepted by the practitioners partly because of the
large scale participation of state government through development agencies like
the District Rural Development Agency (DRDA), District Women Development
Agency (DWDA), and some of the centrally sponsored social sector missions, and
also because of special initiatives of NABARD. Sixteen percent of the SHGs were
credit linked under the third model where NGOs acted as facilitators as well as
microfinance intermediaries. Under this model, NGOs formed SHG federations
and then facilitated them to assume the role of MFIs. This model is expected to
gain wider recognition with smaller banks venturing into large scale financing of
SHGs.
Under the first model SHG linkages were facilitated through NABARD’s policy of
converting regional rural banks (RRBs) into self-help promoting institutions
(SHPIs). The SHG-bank linkage program has been operating in India since 1992–93
but has gained momentum only since 1997–98.
Model#4
ICICI Partnership Model
In 2002, an internal analysis by ICICI Bank revealed that despite consistent
evidence of viable demand from clients, access to MFIs was constrained due to
the organizationbased financing model adopted until then. Owing to the limited
number of rural branches, the SHG--Bank Linkage model was not considered a
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scaleable route for ICICI Bank. The partnership model pioneered by ICICI Bank
attempted to address the following key gaps:
To separate the risk of the MFI from the risk inherent in the microfinance
portfolio.
To provide a mechanism for banks to incentivize partner MFIs continuously,
especially in a scenario where the borrower entered into a contract directly with
the bank and the role of the MFI was closer to that of an agent.
To deal with the inability of MFIs to provide risk capital in large amounts, which
limits the advances from banks, despite a greater ability of the latter to provide
implicit capital.
The model has been conceptualized and executed with the following key
characteristics:
Loan contracts directly between bank and borrower. This feature is similar to the
SHG--bank linkage model, and means that the loans are not reflected on the
balance sheet of the MFI. The MFI continues to service the loans until maturity,
however, so the bank relies on the MFI's field operations for collection and
supervision. The key difference, then, between this and the financial
intermediation model does not lie in the operating methodology (it is in fact
identical), but in the manner in which the financing structure has been designed.
Alignment of incentives with a firstloss guarantees structure. In order to preserve
MFI incentives for portfolio quality in the new scenario where its role is closer to
that of an agent, the structure requires the MFI to provide a guarantee (typically a
`firstloss default guarantee') through which it shares with the bank the risk of the
portfolio, up to a certain defined limit. A firstloss default guarantee (FLDG) makes
the provider of the guarantee liable to bear losses up to a certain specified limit,
say the first 10 or 20 per cent of loss on the portfolio. It is different from partial
guarantees, where the guarantor is liable for a fraction of losses, say 50 per cent
of all losses on the portfolio. In terms of incentive compatibility, an FLDG forces
the guarantor to prevent any losses at all, as it is affected adversely right from the
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start. The quantum and pricing of the FLDG will reflect the operating capability
and maturity of the MFI
Securitization -- paving the way for capital markets access Microfinance assets
originated under the partnership model facilitate participation of a wider
investor base. This is achieved through the process of securitization. This may
involve sale of portfolio by the originating bank to another bank in the initial
phases. When the microfinance pools become larger in size, issuance of securities
that are backed by microfinance assets become conceivable. Securitization is a
process through which homogeneous illiquid financial assets are pooled and
repackaged into marketable securities. Securitization involves isolation of specific
risks, evaluation of the same, allocating the risks to various participants in the
transaction (based on who is best equipped to mitigate the respective risks),
mitigating the risks through appropriate credit enhancement structures and
pricing the residual risk borne by the originator.
List of Top Microfinance Companies in India
SKS Microfinance Ltd (SKSMPL)
Name SKS Microfinance Ltd
Headquarter Secunderabad, Andhra Pradesh
Legal Status Pvt. Ltd. Company (NBFC)
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Lending Model JLG
Number of Branches 1,413
Loan Outstanding (` Mn)
(As on September 30, 2008)
18,227
Borrowers
2,590,950
Net Worth (` Mn)
2,395
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
23.40
OSS (%)(Apr 1-Sep 30, 2008) 126.49
Current Portfolio (%)
99.14
Debt to Net Worth (Times)
7.37
Spandana Sphoorty Financial Ltd (SSFL)
Name Spandana Sphoorty Financial Ltd
Headquarter Hyderabad, Andhra Pradesh
Legal Status Public Ltd. Company (NBFC)
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Lending Model JLG, Individual
Number of Branches 696
11,987
Borrowers
1,668,807
Net Worth (` Mn)
1,225
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
27.43
OSS (%)(Apr 1-Sep 30, 2008) 132.02
98.88
7.04
Share Microfin Limited (SML)
Name Share Microfin Limited
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Lending Model JLG, Individual
8,568
Borrowers
1,231,556
Net Worth (` Mn)
1,448
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
27.49
OSS (%)(Apr 1-Sep 30, 2008) 152.45
99.32
5.03
Asmitha Microfin Ltd (AML)
Name Asmitha Microfin Ltd
Lending Model JLG
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4,944
Borrowers
694,350
Net Worth (` Mn)
475
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
17.43
OSS (%)(Apr 1-Sep 30, 2008) 121.04
99.80
9.92
Shri Kshetra Dharmasthala Rural Development Project (SKDRDP)
Name
Shri Kshetra Dharmasthala Rural Development
Project
Headquarter Dharmasthala, Karnataka
Legal Status Trust
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Lending Model SHG
4,060
Borrowers
612,482
Net Worth (` Mn)
157
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
12.02
OSS (%)(Apr 1-Sep 30, 2008) 100.46
99.68
29.81
Bhartiya Samruddhi Finance Limited (BSFL)
Name Bhartiya Samruddhi Finance Limited
Legal Status Public Ltd. Company, (NBFC)
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Lending Model Diversified
3,882
Borrowers
457,668
Net Worth (` Mn)
317
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
17.89
OSS (%)(Apr 1-Sep 30, 2008) 108.97
99.00
11.59
Bandhan
Name Bandhan
Headquarter Kolkata, West Bengal
Legal Status Society
Lending Model JLG
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3,389
Borrowers
851,713
Net Worth (` Mn)
435
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
26.32
OSS (%)(Apr 1-Sep 30, 2008) 175.40
99.92
7.07
Cashpor Micro Credit (CMC)
Name Cashpor Micro Credit
Headquarter Varanasi, Uttar Pradesh
Legal Status Section 25 Company
Lending Model JLG
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1,431
Borrowers
303,935
Net Worth (` Mn)
93
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
28.78
OSS (%)(Apr 1-Sep 30, 2008) 109.71
98.00
14.72
Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)
Name Grama Vidiyal Micro Finance Pvt Ltd
Headquarter Tiruchirappalli, Tamil Nadu
Lending Model JLG
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1,316
Borrowers
288,311
Net Worth (` Mn)
231
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
32.46
OSS (%)(Apr 1-Sep 30, 2008) 141.53
99.54
4.95
Grameen Financial Services Pvt Ltd (GFSPL)
Name Grameen Financial Services Pvt Ltd
Headquarter Bangalore, Karnataka
Lending Model JLG
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1,287
Borrowers
153,453
Net Worth (` Mn)
127
Portfolio Yield (%)
(Apr 1-Sep 30, 2008)
18.77
OSS (%)(Apr 1-Sep 30, 2008) 106.41
99.98
10.51
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Funding needs of the Microfinance Institutions
FROM WHERE FUNDS COME?
There are mainly two sources for meeting the funding requirements of the MFI’s.
External sources:
Promoters’ contribution, equity capital including investment by private equity
fund agencies/ venture capitalists etc. The MFI’s get funds through External
commercial debts, grants from various national and international organizations,
corporate donors, High Networth Individual (HNI) donors, promotional funds from
SIDBI and NABARD etc. Apart from the above the retained earnings from
operations are also sources of funds.
Internal Sources:
Income from operations and investment income etc. Ultimately the efficiency of
an MFI is decided on the basis of its operational efficiency and its ability to
generate sufficient income on a self sustainable basis. In the case of some MFI’s
income may flow through fee collected from training etc.
Although there are only this few sources that provides money to Microfinance
Institutions (MFI’s) the picture on page 33 shows that India has the growth
potential of 20-30% in MFI sector which needs `3000 crore and article supporting
that was posted on February 2 2011:
Micro Finance Institutions in India Need Rs 3,000 Crore to Continue Business
Mumbai, Feb. 02: The Micro Finance Institutions (MFIs) require Rs 3,000 crore
funding to continue with their business operations. This requirement is for MFIs in
states other than Andhra Pradesh, as they are facing shortage of funds since
banks blocked funding to MFIs after crisis hit the sector in Andhra Pradesh (AP).
As for MFIs in AP which account 30% of the total business of MFIs in country,
would require restructuring of loans.
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Banks are avoiding extending loans to MFIs as Indian Banks Association (IBA) and
the lenders' forum is currently working on the modalities. Banks have stopped
disbursal of loans and now onwards will be more cautious in giving out loans.
Banks are also awaiting response of Reserve Bank of India (RBI) towards Malegam
Panel's recommendation for MFIs. According to IBA functionary if panel’s
recommendation of “removal of priority sector lending to loans given to MFIs
would not, in our opinion, be advisable” is accepted banks can resume lending to
MFIs.
Now due to this situation in the market and the global turmoil being there in the
international markets the major investors in the market are the Private Equity
investors who want to anchor their funds in some investment.
The MFI sector showed them a positive sign regarding this as it showed growth of
around 150% average annually in the Africa, South and East Asia and also some
growth signs in South America.
The Image of the MFI growth on page 33 shows the Asia region and Sub-Saharan
Africa shows the maximum growth in the upcoming years due to development of
this sectors lending as this regions are poorly developed regions which has a very
less access to banks so this institutions thrive in this regions which gives various
loans to poor’s without guarantees.
The microfinance shows a well growth but recently the nations are in a spree to
regulate this large unregulated sector which is the major thing which the
countries financial regulators have come to know.
The Microfinance industry in India is growing at a rate of 100% and its annual
CAGR rate is 44% which indicates a good growth among the sector.
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But the Question is the industry is growing also beneficial to the poor’s in it?
How do MFIs’ manage the funds needed to sustain growth?
This are a contradictory questions asked as growing also helps to cater larger
number of poor’s across many villages but then the companies sort to many ways
of increasing the profits as they cover a larger area in this segment and also
succeeding the way in helping the needing
As stated in the above article the microfinance industry faces the lack of funds as
they give funds to poor who have a poor capacity to repay and also the returns on
investment is very slow as this are customized loans, so measuring the returns on
different loans is also a difficult job.
The microfinance institutions have to take the loans from banks and due to less
penetration of banks in India the rural people cannot directly access it, the MFIs’
take loans from banks and thus lend to poor so it increases their cost of
borrowing.
MFIs’ should allow to gather public deposits so that it will decrease their
borrowing cost and thus the benefit of less cost will be passed on to the loan
takers’ in the form of less interest and so they can manage the funds easily and
lend the poor accordingly.
In India the MFIs’ are not allowed to raise deposits so this creates a pressure on
them to rely on their own savings and the loans from banks which proves to be
costly and ineffectively in the applicable to rural areas.
Many MFI models failed due to the reason funding which is the most important in
this segment of economy. This is where the Private Equity(PE) players, High
Networth Individuals(HNI) and Microventure play a major role they play a very
important role of funding them as they are the anchor investors who want to
invest the funds available over a long term and has a research team to research
on the investment and keep track of the investment.
As this investment provides them an annual return of more than 50% they are
ready to invest in this. The sector is lucrative but, it comes with a lot of risk as
49 | P a g e

these funds are allocated among those poor who borrow for certain purpose but
can any time default on the payments. Today in this dynamic macroeconomic
environment the MFIs’ have also became very cautious in giving the money they
give money but they securities it with the good borrowed from it or they keep a
guarantee on that loan which has an impact on poor class.
The PE players want an investment which has a long investment period with a
good exit opportunity which is usually an IPO or sell of Stake to other players.
HNIs’ do invest in this because they are individuals having available funds which
can be applied to some investment which is a profitable venture and has a
potential to grow which will bear future fruits to it.
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What Investors Look While Investing in MFI?
1. Business Model
2. Number of clients
3. Frequency of taking loans
4. Cash Cycle
5. Debt on Books
6. Return on Investment
7. Concentration region
8. Past records
9. Its Operational Modes
10.Its funding needs
11.Its cost management
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12.Borrowing capacity
13.Is it a NBFC
The last point i.e. the microfinance is NBFC or not because an NBFC can also
provide many other services such as insurance, loan on different items etc.
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Funding to MFI’s worldwide by PE’s, VC’s and HNI’s
Blue Orchard , a commercial microfinance investment intermediary based in
Switzerland, has, through its Private Equity fund, invested Rs 500 million (the
equivalent of over USD 10.2 million) in the equity of Asmitha Microfin Limited , a
Microfinance Institution (MFI) based in Hyderabad, India. This was announced in a
press release available on the Asmitha website. Microcapital covered the
relationship between these two organizations in October of 2008 when
BlueOrchard made an initial equity investment in Asmitha of USD 5.3 million
intended to “expand [the MFI's] capital base and bolster its borrowing capacity” .
According to Dr. Vidya Sravanthi, Chairperson and Managing Director of Asmitha,
the MFI hopes to use the newest investment to “[expand] its operations deeper
into the Indian rural markets and offering its services to many more of the under-
served poor in these regions” as well as move toward “growth targets” set by
Blue Orchard .
Asmitha was founded in 2002 in an effort to give “rural poor women access to
financial resources in the form of collateral free small loans” . In fact, the Mix
Market, the microfinance information clearinghouse, shows that 100 percent of
Asmitha’s loans are provided for women . Now, according to Dr. Sravanthi,
Asmitha has one of the top-five biggest loan portfolios of any MFI in India at USD
165 million (as of July 31, 2009), and “serves over 1.16 million clients” . It was also
ranked 29th in a Forbes list of the top 50 MFIs in 2007, a list that was highlighted
by MicroCapital in January 2008 . According to the Mix Market, as of March 31,
2009, Asmitha has a 5.33 percent return on assets, a 55.52 percent return on
equity, a capital/asset ratio of 10 percent, and a gross loan portfolio to total
assets ratio of 61.37 percent .
BlueOrchard’s Private Equity fund was launched at the end of 2007 in an effort to
“[forge] long-term partnerships with MFIs worldwide” . Though the parent
company is Swiss, the Private Equity fund is registered in Luxemburg, and is
managed through BlueOrchard Investments, a subsidiary of BlueOrchard set up to
“[invest] in the equity of microfinance institutions and microfinance network
funds (family of MFIs)” . According to BlueOrchard’s annual report, the fund has
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raised USD 131.1 million in total assets after just one year of existence, as of
December 31, 2008 . These assets have been defined as “committed capital,” or
funds to be invested in MFIs and/or network funds .
BlueOrchard also has various other assets under management. These funds were
highlighted by Microcapital in June of 2009 in an interview with Jean-Pierre
Klumpp, the Chief Executive Officer of BlueOrchard. The largest fund in terms of
assets under management is the Dexia Micro-Credit Fund . Founded in 1998 by
the Dexia Banque Internationale à Luxembourg , the fund is “the first commercial
investment fund designed to refinance microfinance institutions specialised in
financial services to small companies in emerging markets” . It is managed by
BlueOrchard’s other subsidiary, BlueOrchard Finance, who specialize in providing
loans to MFIs. According to Mr. Klumpp, the Dexia Micro-Credit Fund has USD 477
million assets under management as of May 2009, extends to almost 100 MFIs in
30 countries, and reaches over 400,000 clients .
BlueOrchard Finance, along with Edmond de Rothschild Asset Management, “an
investment banking subsidiary of LCF Rothschild Group,” also manages The Saint-
Honoré Microfinance Fund, which invests in “local and regional investment funds,
MFI network funds, cooperatives, etc,” and has assets under management of over
USD 14.3 million as of May 2009 .
Additionally, BlueOrchard is an advisor to the portfolio of BBVA Codespa
Microfinance Fund , a regional fund in Latin America with assets under
management of over USD 40 million as of May 2009 [11]. Microcapital [16]
covered the launch of this “microfinance hedge fund”.
There are also three collateralized debt obligations (CDOs), funds backed by
securities, that BlueOrchard Finance uses to finance MFIs. These CDOs are
BlueOrchard Microfinance Securities , which [offers] US private and institutional
investors [an] … opportunity to acquire notes collateralised by MFI debt
obligations,” BlueOrchard Loans for Development, which works with Morgan
Stanley to “[offer] 5-year funding at fixed rates to 21 fast growing MFIs in 13
countries,” and BlueOrchard Loans For Development , which was the first
“significant CDO” to have a joint launch with a major investment bank (Morgan
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Stanley) in order to fund microfinance. As of December 31, 2008, these CDOs
have a combined portfolio value of USD 277.4, according to Blue News [, a “social
performance report” by BlueOrchard.
Microcapital covered these varied funds in a June 2009 article about a USD 28
million disbursement made by BlueOrchard. Additionally, this article covered the
Microfinance Enhancement Facility (MEF) , a facility co-managed by BlueOrchard,
ResponsAbility Social Investments , who “combine traditional financial
investments with social returns, and Cyrano Management , “a corporation
specialized in financial institutions and investment funds that service small
businesses”. The facility was started by the International Finance Corporation
(IFC) , the investment and advice portion of the World Bank working in the private
sector, and KfW Entwicklungsbank , a development bank that has the goals of
“reducing poverty, making globalisation fair, conserving natural resources and
ensuring peace”. The MEF has undertaken the task of helping MFIs refinance
amidst the financial crisis, and had “new investments [totaling] $16.2 billion in
fiscal 2008,” according to a press release .
BlueOrchard, as a complete entity, is not listed on the MIX Market. However,
from BlueOrchard’s annual review, it is shown that the company’s “partner MFIs”
experienced an average asset growth of 45 percent in 2008 and that BlueOrchard
funds “reached more than 9 million micro-entrepreneurs, a majority of them
women . Additionally, Blue News shows that, as of January 2009, BlueOrchard has
“nearly USD 870 million [assets] under management” with returns on these
“investment products between 4 and 10 percent – depending on each
microfinance investment vehicles’ strategy”
Serial investor Kalpathi Suresh--the founder of SSI Ltd who sold 51% stake in the
IT training firm to PVP Global for $140 million in 2007—is no stranger to scripting
big-ticket exits.
This time, aided by a raging investor appetite for well-managed microfinance
assets, he netted over 12x returns in just about two years by selling his stake in
Chennai-based Equitas Micro Finance to Sequoia Capital.
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Last Saturday, the Equitas board ratified the sale of 10% stake held by Kalpathi
Investments, an investment arm of Kalpathi Suresh, to Sequoia in a secondary
transaction valued at Rs 44 crore. Suresh had invested Rs 3.5 crore in Equitas
during 2007-08, without any management rights or board seat. Sequoia appears
to have agreed to a deal without significantly altering the contours of the original
investment.
This will be Sequoia's third investment in India's microfinance industry in less than
three years. In March 2007, it invested $11.5 million in the country's largest
microfinance player, SKS Microfinance, opening up a new deal pipeline for the
private equity funds who have poured in over $220 million into the sector since
then. Sequoia also invested in Ujjivan, a Bangalore-based MFI in late 2008.
Mape Advisory Group arranged the sale for Kalpathi Investments. The RBI
approval for the transaction came in December last week after Sequoia struck an
initial agreement to purchase the stake in October 2009. Incidentally, Equitas has
also hit the market for a fresh fund raise, and the latest secondary transaction
could provide the valuation benchmark for the same.
"The deal was signed within three months of initiation and generated strong
investor interest despite being a secondary share sale. The very successful exit by
a minority investor continues to demonstrate investor interest in well-operated
MFIs," says Akshay Dixit, Vice President, Mape Advisory Group. Kalpathi will
retain a token number of shares, under 0.5% stake, in Equitas.
Equitas commenced operations in December 2007, and has since grown to 98
branches. The company has cumulatively disbursed Rs 600 crore until September
2009.
Equitas had over 575,000 borrowers and a portfolio outstanding (based on assets
under management) of Rs 430 crore in the half year-ended September of the
current fiscal. It reported PAT of Rs 10.4 crore on an income of Rs 51 crore during
the same six-month period. The company had reported a profit after tax of Rs 2.2
crore on a total income of Rs 34.9 crore for fiscal ended March 2009.
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MFIs continue to hit the market for fresh fund raising as they expand their asset
books tapping into a huge market potential. A number of micro finance firms are
turning to PEs for fresh equity to grow scale in the business. Several MFIs, initially
registered as non-profit firms, have turned into for-profit finance firms for
accessing wider funds, with private equity emerging as an attractive channel.
2010 could be significant for this space as SKS is expected to go in for an initial
public offering (IPO), testing the interest levels of the capital market and opening
up an exit route for PE investors.
Sandstone Capital, Silicon Valley Bank, Columbia Pacific, Kismet Capital, Sequoia
Capital, and Legatum have invested in Indian MFIs, though it should be noted that
the vast majority of these funds invested in a single MFI – SKS Microfinance. In
addition to SKS, Ujjivan and Share Microfin also received investments from the
funds mentioned above, and in 2007 Spandana received Rs 40 crore (USD$10
mill.) from the JM Financial India Fund. Moreover, other major private equity
funds such as Blackstone and Reliance Capital have actively researched and
considered investing in Indian MFIs.
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Securitisation
In microfinance, securitisation of microloans refers to a transaction in which the
repayments from a set of microloans from one or more MFIs are packaged into a
special purpose vehicle, from which tradable securities are issued.11 For the MFI,
there is little practical difference between securitizing a portion of its loan
portfolio and selling it off directly to a bank via a portfolio buyout. In both cases,
the MFI retains a first loss default guarantee and is obligated to continue to
collect repayments on the sold off loans. Similarly, with both securitisations and
portfolio buyouts, MFIs can only sell off as much of their portfolio as they have
financed through accumulated earnings and equity. The main difference is that
securitisations require a rating, while a portfolio buyout does not, and that the
ability to re-sell securitised microloans may attract more potential buyers.
Proponents of securitisation argue that it holds great potential for decreasing cost
of funds to MFIs by allowing for more complex structuring of the underlying
product; by providing easier secondary sales of the assets; and by reaching out to
new types of potential investors. With portfolio buyouts, there is only one buyer
and one seller in each transaction. With securitisation, it is possible (though it has
not happened to date), to pool together loans from different MFIs to diversify
risk. It is also possible to slice the securitised portfolio up into different tranches
with different levels of seniority to cater to the different risk appetites of
investors. Further, the standardised nature of the product means it is easier for
the original purchases of the security to resell the asset. Lastly, through
securitisation, MFIs may be able to tap new sources of investment funds. Certain
types of large investors, especially mutual funds, are barred from directly
investing or lending to MFIs but not from investing in the securitised microfinance
loan, assets.
To date, to the authors’ knowledge, there has been only one true securitisation of
microloans in the world. In March 2009, microfinance lender Equitas, in
collaboration with IFMR Capital, completed a securitisation of a portion of
Equitas’ microloan portfolio worth Rs. 157 million. A key element of the deal was
that the securities were divided into two tranches. A senior tranche comprised
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80% of the portfolio and was sold to institutional investors, while a junior tranche
consisting of the remaining 20% was sold to IFMR Capital. This arrangement
effectively means that IFMR Capital holds the second loss default guarantee for
the loans.
Several leading commercial MFIs have return on assets (RoA) in the range of 5 to
8 per cent, far above the banking system anywhere in the world. In contrast, State
Bank of India, country’s largest bank, had a RoA of 1.04 per cent in 2008-09 while
ICICI Bank had a RoA of 1.13 per cent in 2009-10.
Since 2005, the credit growth of MFI industry has been much higher than the
commercial banking system in India. Although bank loans remain the largest
funding source for commercial MFIs, several players have been able to raise funds
from other sources including private equity funds, hedge funds and angel
investors. Since 2007, private equity funds alone have invested close to Rs 20000
million in MFIs. In 2009, there were 11 PE deals worth $178 million involving
commercial MFIs. Some MFIs have also raised money through non-convertible
debentures and securitization. Of late, commercial MFIs have also emerged as an
asset class for institutional investors.
In their quest to grow fast and to serve the insatiable appetite of private equity
investors, MFIs pushed inappropriate loans to poor borrowers without looking at
the repayment ability of borrowers. The practice of multiple lending, ever-
greening of loans and loan recycling (which ultimately increases the debt liability
of poor borrower) became widespread. In some ways, lending practices by such
commercial MFIs were akin to sub-prime lending in the US. As the defaults
became imminent due to high interest rates, MFIs resorted to strong-arm tactics
that have led rural poor to commit suicides.
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Major deals in Microfinance India are as follows:
2008 Deals
1. Ujjivan Financial Services received a funding from the below investors of
US$18.47 million Bellwether Microfinance Fund, Michael and Susan Dell
Foundation, AW Holding Pvt. Ltd., Sequoia Capital India, Lok Capital Group,
India Financial Inclusion Fund , Unitus Equity Fund II in 2008.
2. Arohan Financial Services received US$ 1.5 Million Lok Capital Group,
Michael and Susan Dell Foundation in 2008.
3. SKS Microfinance received US$ 37 million Sequoia Capital India, Odyssey
Capital Llc, SVB India Capital Partners Fund, and Columbia Capital Llc in
2008.
4. A Little World received US$6.5 million from Legatum Capital, Bellwether
Microfinance Fund, and India Financial Inclusion Fund in 2008.
5. Equitas Micro Finance India received a US$11.44 million Bellwether
Microfinance Fund, India Financial Inclusion Fund, and MVA Ventures.
6. Grameen Financial Services received US$2.3 million from Aavishkaar India
Micro Venture Capital Fund, Aavishkaar Goodwell India Microfinance
Development Co. Ltd.
7. Jagannatha Financial Service received US$0.79 million from Lok Capital
Group.
8. Madura Micro Finance received US$4.52 million from Unitus Equity Fund
9. MAS Financial Services received US$10 million from India Advantage Fund
VII (Mezzanine Fund-I)
10.Moksha-Yug Access India received US$2 million from Unitus Equity Fund
11.Satin Creditcare Network received US$1.25 million from Lok Capital Group
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12.SKS Microfinance received US$75 million from Sandstone Capital, Kismet,
and SVB
2009 Deals
1. ESAF Microfinance and Investments received US$2.6 million from Dia Vikas
Capital
2. Bhartiya Samruddhi Investments and ConsultingServices received US$ 10
million from Lok Capital Group, Aavishkaar Goodwell India Microfinance
Development Co. Ltd., SIDBI Venture Capital Ltd.
3. Navachetna Microfin Services received US$0.38 million from HNIs
4. Suryoday Microfinance received US$1.5 million from Aavishkaar Goodwell
5. Grama Vidiyal Microfinance received US$4.25 million from MicroVest,
Unitus Equity, Vinod Khosla.
6. India Financial Inclusion Fund received US$20 million from CDC Group
2010 & 2011 Deals
1. Intellecap announced this week that it had successfully closed the largest
private equity deal in the Indian Microfinance space in 2011, by raising INR
135 crore from International Finance Corporation (IFC) for MFI Bandhan
Financial Services Pvt Ltd. The deal marks the single-largest exposure by
the World Bank arm to India’s microfinance sector. Significantly, the
Bandhan MFI deal follows on the heels of the INR 65 crore third-round
funding of Bangalore-based microfinance institution Janalakshmi Financial
Services.
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2. Swiss company ResponsAbility Social Investments AG (responsAbility)
recently reported to MicroCapital that it has made loans to Latin American
microfinance institutions (MFIs) Banco Solidario of Ecuador and Interactuar
of Colombia. Banco Solidario received a total of USD 2.25 million disbursed
through two microfinance investment vehicles (MIVs) managed by
ResponsAbility: USD 2 million through the ResponsAbility Global
Microfinance Fund (RGMF) and the remaining USD 500,000 through
responsAbility Mikrofinanz-Fonds (RGMF). Interactuar received the local-
currency equivalent of approximately USD 2 million, half of which was
disbursed through RGMF and the other half through RGMF.
3. Even though microfinance in India is in turmoil, the private capital is still
flowing into the sector. Svasti Microfinance Pvt Ltd, a Mumbai-based
microfinance company, has raised its second round of funding of Rs 4.5
crore from Switzerland-based BlueOrchard Private Equity Fund. The
investment has been made by a Mauritius based arm of BlueOrchard. The
funds will be used by Svasti to expand its branch operations and to develop
innovative loan products to service the entrepreneurial low income
population in Mumbai, a statement said.
Grameen Capital India acted as exclusive advisor to Svasti on this
transaction.
4. Bengaluru, 5th January 2011: Bangalore-headquartered Ujjivan Financial
Services, a leading microfinance institution with pan-India presence, has
raised INR 40 Crores of debt capital through issuance of listed, secured,
redeemable, non-convertible debentures (NCDs) to DWM (Cyprus) Limited ,
a member of the Developing World Markets (DWM) group of companies.
Unitus Capital is the exclusive financial advisor and sole arranger of the
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issue. The NCDs are listed on the Bombay Stock Exchange and have been
fully subscribed
5. Microfinance Focus, Aug 4, 2010: World Bank’s International Finance
Corporation (IFC) may invest in India’s Ananya Finance For Inclusive Growth
Pvt. Ltd. Ananya is expected to raise approx. INR 1.50 billion
(approximately $ 32.60 m) in equity to strengthen its capital adequacy and
on lend larger amount in the new entity. IFC’s proposed investment in
Ananya consists of an equity investment of upto INR 500 million ($ 10
million) up to 20% stake in the company.
Ananya Finance For Inclusive Growth Pvt. LTD. (Ananya or the Company) is
the newly set up Non Banking Finance Company (NBFC), to scale-up
microfinance in India by providing financial and non financial services
toMicrofinance Institutions (MFIs). Ananya (formerly FWWB), provides an
effective channel to reach out the large number of underserved and poor
microfinance clients as it works aross 17 states in India with more than 122
Partner Oganizations, who have an outreach of more than 14 million.
6. Microfinance Focus, June 02, 2010: Fusion Microfinance, a Delhi based
start-up NBFC-Microfinance today announced equity funding of Rs 4.5
crores (approx USD 952,276) from Incofin, a Belgian microfinance
investment company. Incofin which has recently raised a new fund of Euro
100 million called Rural Impulse Fund 2, has been very active in India with
three investments in last two years having social impact across the country
in more than eight states.
Fusion was founded and promoted by Devesh Sachdev, Ashish Tewari and
Ankur Singhal . The company started its Greenfield operations in January
2010 and further augmented it by a unique acquisition of the microfinance
division of Aajeevika (a not for profit body operating in Delhi). As on date,
Fusion has a base of 2,600 clients in 3 states across of 4 branches with a
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loan book of Rs 22.6 million. Fusion is a NBFC registered with Reserve Bank
of India and is operational in the less penetrated North Central part of India
(Uttar Pradesh, Uttranchal, Delhi and Madhya Pradesh). In the next five
years, the company plans to serve over 500,000 borrowers predominantly
living in the rural areas.
With this deals into the pipelines the MFI’s will benefit a lot due to a good funded
and structured loans which will help them reach new areas.
Recommendations for Growth
1. Proper Regulation: The regulation was not a major concern when the
microfinance was in its nascent stage and individual institutions were free to bring
in innovative operational models. However, as the sector completes almost two
decades of age with a high growth trajectory, an enabling regulatory environment
that protects interest of stakeholders as well as promotes growth, is needed.
2. Field Supervision: In addition to proper regulation of the microfinance sector,
field visits can be adopted as a medium for monitoring the conditions on ground
and initiating corrective action if needed. This will keep a check on the
performance of ground staff of various MFIs and their recovery practices. This will
also encourage MFIs to abide by proper code of conduct and work more
efficiently. However, the problem of feasibility and cost involved in physical
monitoring of this vast sector remains an issue in this regard.
3. Encourage rural penetration: It has been seen that in lieu of reducing the initial
cost, MFIs are opening their branches in places which already have a few MFIs
operating. Encouraging MFIs for opening new branches in areas of low
microfinance penetration by providing financial assistance will increase the
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outreach of the microfinance in the state and check multiple lending. This will also
increase rural penetration of microfinance in the state.
4. Complete range of Products: MFIs should provide complete range of products
including credit, savings, remittance, financial advice and also non-financial
services like training and support. As MFIs are acting as a substitute to banks in
areas where people don’t have access to banks, providing a complete range of
products will enable the poor to avail all services.
5. Transparency of Interest rates: As it has been observed that, MFIs are
employing different patterns of charging interest rates and a few are also
charging additional charges and interest free deposits (a part of the loan amount
is kept as deposit on which no interest is paid). All this make the pricing very
confusing and hence the borrower feels incompetent in terms of bargaining
power. So a common practice for charging interest should be followed by all MFIs
so that it makes the sector more competitive and the beneficiary gets the
freedom to compare different financial products before buying.
6. Technology to reduce Operating Cost: MFIs should use new technologies and
IT tools & applications to reduce their operating costs. Though most NBFCs are
adopting such cost cutting measures, which is clearly evident from the low cost
per unit money lent (9%-10%) of such institutions. NGOs and Section 25
companies are having a very high value of cost per unit money lent i.e. 15-35
percent and hence such institutions should be encouraged to adopt cost-cutting
measures to reduce their operating costs. Also initiatives like development of
common MIS and other software for all MFIs can be taken to make the operation
more transparent and efficient.
7. Alternative sources of Fund: In absence of adequate funds the growth and the
reach of MFIs become restricted and to overcome this problem MFIs should look
for other sources for funding their loan portfolio. Some of the ways through
which MFIs can raise their fund are:
By getting converted to for-profit company i.e. NBFC: Without investment by
outside investors, MFIs are limited to what they can borrow to a multiple of total
65 | P a g e

profits and equity investment. To increase their borrowings further, MFIs need to
raise their Equity through outside investors. The first and the most crucial step to
receive equity investment are getting converted to for-profit NBFC. Along with
the change in status the MFI should also develop strong board, a quality
management information system (MIS) and obtain a credit rating to attract
potential investors.
Portfolio Buyout: It is when banks or other institutions purchase the rights to
future payment stream from a set of outstanding loans granted by MFIs. In such
transactions MFIs are responsible for making up any loss in repayment up to a
certain percentage of the portfolio and this clause is known as “first loss default
guarantee”. The above clause ensures that the MFI retains the correct incentive
to collect these loans. To ensure security to the buying institution, MFIs are
allowed to sell off as much of the outstanding portfolio as is financed by
accumulated earnings or equity.
Securitization of Loans: This refers to a transaction in which the repayments from
a set of microloans from one or more MFIs are packaged into a special purpose
vehicle, from which tradable securities are issued. As the loans from multiple
MFIs can be pooled together the risk gets diversified. Though securitization of
loans and portfolio buyout are similar in many ways like first loss default
guarantee clause, limit to the amount of loans that can be sold off etc. The major
difference between the two is that securitizations require a rating from a credit
rating agency and that it can be re-sold, which makes securitized loans attract
more potential buyers. Also unlike portfolio buyout, there can be multiple buyers
and sellers for each transaction in case of securitization of loans as compared to
single buyer and single seller in portfolio buyout. Through securitization, MFIs can
tap new sources of investments because fund of certain types like mutual funds,
which are barred from directly investing in MFIs, can invest through securitized
loans.
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Conclusion
From the above research and the data available it is seen that the Private Equities
are very active in the microfinance sector which gives them the most returns and
also fulfills their long gestation investment needs. The investors look for a high
return prospect n also want an easy exit route from the investment so MFI serves
the both it gives return as high as 200% and also an exit in 3 to 4 years.
So overall the MFI serves all the needs of Private Equity so it has got a boom from
the private equity investors, Overall the markets seem to be booming from the
2005 till 2009 but in the starting of 2010 the private equity’s started exit route as
the sector in India showed a sign of downfall from the Andhra Pradesh suicides by
farmers. The markets seem very favorable to them in the early times of the
development but now the sector is looming with crisis as the funding needs of
the sector is increasing due to a change in their monthly installments cycle this
sector fairly needs a good amount of money which will boost India’s economy in
many ways. As major portion of India lives in Rural India the need to boost the
rural areas is must and their development is ultimately nation’s development.
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Webliography
Vccircle.com
Management paradise.com
Microfinanceindia.com
RBI.org
References
KPMG report
Business Standard
Times of India
ResponseAbility Social Investments AG Report
NABARD Report
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Microfinance

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