Microfinance Private Equity

All Eyes on Asset Quality: Microfinance Global Valuation Survey 2010 – CGAP

CGAP has released it’s latest report All Eyes on Asset Quality: Microfinance Global Valuations Survey 2010

You can download the complete report at the link below

Link 1 – http://www.cgap.org/gm/document-1.9.42531/OP16.pdf

Alternate Link – CGAP – CGAP Microfinance Global Valuation Survey 2010

The past year held many challenges for microfinance: not since the Asian crisis of the late 1990s has the sector faced a more difficult economic environment. Yet despite these conditions, most microfinance institutions (MFIs) proved to be up to the challenge.

Beginning in January 2009, MFI portfolio delinquency levels began to deteriorate rapidly, with loans past due over 30 days (portfolio at risk [PAR30]) jumping from a median of 2.2 percent to 4.7 percent during the first five months of 2009, while profitability dropped from a median return on equity (ROE) of nearly 18 percent at year-end 2008 to 6 percent by May 2009. However, since June 2009 delinquency has moderated and profitability levels have come back to stabilize at 4 percent for PAR30 and 10 percent for ROE, respectively. Most MFIs continue to maintain solid reserve and capitalization levels, with equity ratios unchanged from the 18–20 percent range established over the past two years.

The effects of the downturn were also far from uniform. While Central America, Eastern Europe, and Central Asia were particularly hard hit, large areas in South America and South Asia have witnessed little or no impact. At the same time, a few countries (Nicaragua, Bosnia and Herzegovina, and Morocco) have experienced severe delinquency crises but for reasons not directly related to the global downturn.
Summarizing few points made in the report and some commentary


  • MFI valuations are on the rise across the globe however there is still no established relationship between ROE and P/BV, suggesting an immature market.
  • Key valuation drivers are identified as asset quality, net income growth (not discounting for equity dilution) & age.
  • Valuations in India remain the highest in the world at 5.9 BV (ROE of 14%) – despite 30% of the deals tracked for the study being from India. However whether these valuation are hyped-up or fairly valued is not discussed.
  • Indian valuations are driven by high market potential (in spite of high historical growth), low costs, good asset quality, mature systems & processes.
  • Some contradictions while expressing concerns over Indian valuations:
  1. Using average ratios to say that profitability etc is not high enough for a 5x valuation even when average MFIs are not the ones getting these kind of aggressive valuations
  2. Expect that geographic expansion will bring down profitability going forward although geographically dispersed have managed to stay profitable by charging higher rates
  3. Expecting asset quality to fall even when sector wide intervention in India like credit bureau are acknowledged


  • Profitability seems to have begun declining in early 2007 and made more rapid post September 2008. Globally, MFI profitability has dropped from a median of 18% in May’08 to 6% in May’09 however India is still at 14.2%
  • While most countries have sufficient equity cushion, abnormally high leverage in India make it more exposed to both systematic risks & shocks
  • Rapid decline in median profitability (ROA / ROE) mirrors increase in PAR for Sym 50 data (Sym 50 index has no representation from S Asia or Africa)

Asset Quality

  • While large MFI’s remain well capitalized to ensure capital security due to increasing PAR, the lesser ones hold no such promise
  • Globally asset quality has fallen – PAR 30 at 4.7% – admittedly their data for South Asia is limited on this, and asset quality in India, Bolivia, Egypt & Kosovo have not followed this trend
  • The group lending portfolio (compared to individual lending) of Compartamos did better than the rest of its portfolio showing almost no impact of the crisis
  • Delinquencies have been worst in Nicaragua, Morocco, Bosnia & Herzegovina not only due to financial crisis but also due to unhealthy competition, loss in credit discipline. Indian MFI’s are taking preventive action in terms of self regulation, setting up a credit bureau, etc (both and enterprise and sector level).
  • The worst seems to be over with PAR 30 falling back down however inefficient processes of weaker MFI’s were exposed leaving them with higher delinquent portfolios and unnecessary equity dilution in certain cases.

Future trends for Indian MFI’s

  • In Latin America – Peru, Ecuador, Mexico etc, banks have made strategic MFI acquisitions indicating future possibility for Indian MFI’s.
  • The introduction of comparison of LIFI with large average ticket size portfolios (for e.g. financing tractors and farm equipment) of MFIs like Spandana is more adequate given a more representative risk profile. Recent trends indicate top 5 MFIs in India becoming LIFI’s driving valuations higher for investors.
  • Microfinance in India has been decoupled from the global financial markets compared to likes of Mongolia, Peru & Nicaragua perhaps indicating the increasingly lack of correlation between microfinance industry with regular financial markets in a country as it matures in age and asset quality.
  • Overvaluation in Indian MFI’s is driven by excess capital from those expecting quick exits alluding to a possible bubble driven by driven credit liquidity.

via IDB

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