The Inverting the Pyramid series was launched by Intellecap in 2007 as an attempt to capture the growth of the microfinance industry in India on an annual basis and track the efforts made, success achieved and challenges that remain. every year, it maps the microfinance landscape in India, identifies key highlights of the year, explores strides made in addressing the huge demand-supply gap that exists and analyzes the performance of MFIs. Further, it identifies key drivers for future growth and sustainability of this industry, its capital needs and its risks and priorities in the short to medium term.
The 2007 edition titled The Changing Face of Indian Microfinance captured Indian microfinance as a dynamic industry on the move. In 2008, Indian Microfinance: Scaling Against the Odds captured a resilient industry maintaining scale and asset quality amidst a turbulent financing landscape.
The 2009 report, Indian Microfinance: Coming of Age finds India at the centre of global attention, the most closely watched microfinance market in the world. While its large unbanked population is a significant contributor to this attention, its fast growth, high investor interest, planned IPos and continued strong operational and financial performance have also piqued the interest of investors, thought leaders, media and the public alike.
Chapter one explores five key questions on the minds of industry observers as heard in global microfinance conversations. Topics covered range from the frenzied pace of growth of Indian MFIs to whether they are losing their social orientation with increasing commercialisation to governance and valuations.
While the India tops the global list of recipients of commercial capital for microfinance, the number of people still financially excluded runs into millions. Chapter two puts this dichotomy in perspective by estimating the unmet demand for microfinance and related products and the extent of current supply in the Indian market. Further, this chapter examines emerging products and services being offered by MFIs and gauges the potential for their expansion.
Chapter three captures an Indian microfinance market whose structure and dynamics are vastly different from what they were two years ago. The industry emerged from the financial crisis more consolidated – the market that was made of numerous, small and medium sized, non-profit players gave way to one dominated by fewer large commercial players that are successfully attracting equity and debt capital, human resources and clients at a fast rate.
The traditional tier classification of MFIs based on their portfolio size fails to capture the emerging dynamics and activity in the market which led us to create an alternate classification that accounts for growth rates. Using this method, we identify three major classes of MFIs: the Leaders, the Moderates and the Young Turks. In chapter three, we examine the growth and performance of each of these segments in greater detail. Towards this, Intellecap uses financial and operational data of a sample of 29 MFIs in the country that constitute 80% of the market by portfolio outstanding.
Chapter four then explores where the growth capital for the industry is coming from, who it is going to, the outlook on exits for equity investors and the increasing sophistication in financial instruments used in the industry. We find that hedge funds, high net-worth individuals and blue chip private equity players have entered the market amongst others, and public sector banks have increased their exposure contributing a fourth of the debt capital needs of the sector.
In chapter five we examine the impact of the financial crisis of 2007-2008 on the clients of Indian MFIs. We find that home based urban workers were hardest hit, and disposable incomes fell overall, as did savings, coupled with increased difficulty in accessing credit.
Finally, in chapter six, we look at how the industry could evolve in the near future. The section covers how recent regulation on business correspondents could change the microfinance landscape and projects debt and equity capital needs of the market for the next five years.
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List of Abbreviations……………………………………………………………………………………. 4
1. Exploring Pressing Issues in Indian Microfinance 6
1.1 Is Indian Microfinance Growing Too Fast? 7
1.2 Is Indian Microfinance a Bubble in the Making? 8
1.3 How Well are Indian MFIs Governed? 10
1.4 Is the Commercialization of Microfinance Compromising its Social Impact? 11
1.5 Are Indian MFI Valuations too High? 12
1.6 What Happened Since Last Year: Update to the Trends Forecasted in 2008 13
2. Demand and Supply in the Microfinance Market 16
2.1 The Microfinance Industry: A Look at Who is Supplying the Funds 17
2.1.1 Cooperative Banks and Regional Rural Banks 18
2.1.2 Banks: Facing the Limits of the Traditional Branch System 18
2.1.3 SHG-Bank Linkage Program: Strong Base, Slow Growth 19
2.1.4 Microfinance Institutions: NBFCs emerge as Industry Leaders 20
2.1.5 Geographical Reach of SBPL & MFIs: More than 50% Clients are in South India 21
2.2 Demand & Penetration 22
2.2.1 Mapping the Demand for Microcredit in India 22
2.2.2 Market Penetration: Poorest States Remain Under-Served 23
2.2.3 Market Penetration by Number of Clients 24
2.2.4 Market Penetration by Credit Supply 25
Case Study: Uttar Pradesh 26
2.3 Beyond Credit: the Market for Insurance, Savings, and other Services 28
2.3.1 Special Purpose Loans: Moving Towards Consumer Finance 28
2.3.2 Insurance: Strong Growth Potential, Synergies with Credit 29
2.3.3 Savings: Unmet Need; Rise of Proxy Products (Investments) 29
2.3.4 Investments: Growing Interest from Mutual Funds 30
2.3.5 Remittances: A Value Added Service 30
3. Indian MFIs: Growth for Old and New Institutions Alike 32
3.1 Dramatic Industry evolution 33
3.2 Leaders and Young Turks Attract Investors 34
3.3 Decrease in Spread; MFIs Bear Rise in Financial Costs 35
3.4 Leaders Raise the Bar for operating efficiency 36
3.5 Improved Productivity Drives operating efficiency 36
3.6 Increasing Profitability 37
3.7 Deleveraging Balance Sheets 38
3.8 Portfolio Quality: Deterioration in Pockets, Healthy overall 38
3.9 NBFCs exhibit Higher Costs and Profitability, Lower Leverage 38
3.10 Indian MFIs: Lowest Costs, Highest Returns 39
4.The Sector through an Investment Lens 40
4.1 Boom in equity to Indian Microfinance 41
4.1.1 Sector Attracted USD 285 Million in equity 41
4.1.2 equity Flow Based on Performance, Growth Rates and Geography 42
4.1.3 entrance of New Investors 42
4.1.4 Larger MFIs Commanded Higher Valuations 44
4.1.5 Sector Witnessing its First Investor exits 44
4.2 Debt Supply: Increasing Sophistication 45
4.2.1 Industry Attracted USD 2.33 Billion in Debt in FY 2009 45
4.2.2 Increasing Participation from Public Sector Banks 45
4.2.3 Sophistication in Debt Instruments 46
5. The Global Economic Slowdown and Indian Microfinance Clients 48
5.1 The Financial Crisis and Microfinance 49
5.2 The Impact on Clients of MFIs 49
5.2.1 Mixed Impact on Income; Job Losses in Urban export-oriented enterprises 49
5.2.2 Increase in Food and Medicine Bills; Reduced Disposable Incomes 50
5.2.3 Difficult and Costlier Access to Microfinance Loans 50
6. The Road Ahead 52
6.1 Continued Growth, emerging Markets 53
6.2 Changing Business Model: Social is Commercial 53
6.3 Regulation: Potentially Game Changing 54
6.4 Technology: emerging Need for open Solutions and Industry Standards 55
6.5 outlook on Capital to the Sector 56
About the Authors 58
APPeNDIX 1: PooReST STATeS: PeNeTRATIoN AND oPeRATING eNVIRoNMeNT 59
APPeNDIX 2: MAIN LeGAL STRUCTUReS IN INDIA 60
APPeNDIX 3: SoURCeS oF DATA 62
APPeNDIX 4: LIST AND DeFINITIoN oF FoRMULAe USeD 63
APPeNDIX 5: CAPITAL PRoJeCTIoNS MeTHoDoLoGY 64