Microfinance Reports

Bharat Microfinance Report 2011

Sa-Dhan, the premier network of MFI’s in India has released it’s latest report on Microfinance Institutions in India titled the Sa-Dhan Bharat Microfinance Report 2011. The report was released by Dr. K C Chakrabarty , Deputy Governor of RBI at the India Habitat Centre, New Delhi on the 23rd November 2011.

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Sa-Dhan has been publishing reports on financial performance of MFIs in India since 2004. These reports are one of the most referred documents by stakeholders of microfinance as well as academia nationally as well as internationally. Being the only reports that provides data and analysis about the microfinance sector in India, these are used by RBI, Ministry of Finance and other ministers while developing policies on financial inclusion.

To view the complete list of Publications by Sa-Dhan about Microfinance in India visit www.sa-dhan.net/Publications

For copies of Sa-Dhan Bharat Microfinance Report 2011, please contact :

SMRC, Sa-Dhan
12 & 13, 2nd Floor, MPTCD Building,
Special Institutional Area,
Shaheed Jeet Singh Marg,
New Delhi-110067
Email ID: smrc@sa-dhan.org

Bharat Microfinance Report 2011 : Side By Side

Microfinance: Under Scrutiny but Resilient

Executive Summary

The Context

Microfinance has been recognized as one of the potent tools to address the issue of poverty. The positive outcomes of experiments in SEWA Bank in Gujarat and initiatives of leading NGOs like MYRADA and PRADAN encouraged the Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (NABARD) to nurture Self Help Group (SHG) movement in India which started with the onset of SHG- Bank Linkage in the year 1992. Also, considering the fact that around 50 percent of working population does not access banking services, the RBI recognized Microfinance Institutions (MFIs) as extended arms of banks to reach out to unbanked populace.

As per the NABARD data (2009-2010), there are over seven million Self Help Groups operating in India. They facilitated small savings / borrowing among the poor women numbering over 5 million. Over 1000 MFIs, most of them operating in southern and eastern India, borrow funds from banks to on-lend to over 30 million clients across the country.

The microfinance sector is undergoing a phase of transition now. The MFIs have started paying more attention to the importance of keeping a balance between financial sustainability of their operations and client level improvements from their credit services. MFIs in Andhra Pradesh state, with maximum concentration of microfinance operation, have been subjected to a well intended but restrictive measures imposed by Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act 2010. Consequently, the banks, whose funds constitute 85 percent of MFIs resources, have become extra cautions and slowed down release of loans during the past one year. This development brought the sector to a screeching halt. The growth in client outreach and loan volume has retarded during 2010-11.

The RBI is the sole regulator of financial services in India. This being the case, the Andhra Pradesh Act, 2010 has inadvertently created a regulatory arbitrage, apart from crippling the functioning of MFIs. The RBI thoughtfully, constituted a Board-subcommittee under the Chairmanship of Y.H.Malegam to study the issues surrounding MFIs. The committee submitted its report suggesting a host of measures to put the MFIs functioning in order. The report provides a much-needed blue print for best practices and standards of operation.

In the meantime, the Government of India brought out a draft bill, Microfinance institutions (Development and Regulation) Bill 2011 with a move to regulate hitherto ‘unregulated’ MFI-sector.

These two measures of the RBI and the Government have instilled a sense of optimism among MFIs and banks whose loans worth Rs. 17000 crores is at stake in the sector.

The Target Audience for the Report

The report purports to provide a primary based analytical information to the government, policy makers, the central bank and the apex finance institutions, banks , MFIs, technical service providers  for better understanding of the issues for making appropriate interventions.

The Data behind the Report

The report has been compiled out of analysis of primary financial and non financial data filed by 172 MFIs from across India. The reporting MFIs represent over 95 percent of clientele or portfolio in the country. The profile of the reporting MFIs is given in Annexure 1 & 2. In addition secondary data from NABARD and RBI reports and published literature have been used to widen the perspectives of the coverage.

The report team scrupulously scrutinized the audited financial statements of 110 MFIs to make the financial data and its analysis reliable. All other financial and non-financial data have been used as they were reported by MFIs. The validity of content of report, thus, hinges on the accuracy of the data self-reported by the MFIs. However, suitable desk validation efforts taken by the report team, accompanied by cross checking with the reporting MFIs wherever incongruities were noticed, would make the report dependable.

The Report coverage

This report probes into the role of microfinance in financial inclusion, outreach to different social segments of population, remote geographies, credit dispensation with different products, and a theoretical model on the practical feasibility of financial inclusion through MFIs ( Chapter 1).

It also attempts to provide landscape of microfinance services in terms of client outreach and outstanding loan portfolio, loan disbursed, average loan, growth rate including the negative growth experienced during 2010-11 across geographies and types of MFIs (Chapter 2).

It as well seeks to analyze financial performance of MFIs in terms of cost structure, yield and sustainability in the light of Malegam Committee recommendations (Chapter 3).

The financial solvency (strength) of MFIs in terms of Balance Sheet composition, liquidity, quality of loan assets, debt structure, fund flow from banks after the microfinance crisis, MFI rating etc is also covered   (Chapter 4).

Finally, it explores changes in practices among MFIs, changing role of funding agencies, urgent steps to be taken by the government, the SIDBI and the NABARD, special role of Association and Technical service providers to overcome the present stalemate and build robust system for sustainable microfinance.

The Content Highlights

Chapter 1: Microfinance and Financial Inclusion

  • The Government of India and the Reserve Bank of  India with measures like microfinance bill, India Microfinance Equity Fund of Rs.100 crore, SHG Fund Rs.500 crore and  priority sector  credit facilities to MFIs etc., have recognized the role of microfinance MFIs in Financial Inclusion
  • The SHG movement has helped over 8 crore poor women to accumulate savings worth Rs.6200 crore and obtain small loans Rs.28000 crore as of March 2010.
  • The SHG movement has to receive further impetus in North and North- Eastern states.
  • MFIs have consistently raising volume of credit made available to the clients located in rural and remote geographies, belonging to different social segments.
  • The clientele of MFIs included more than 95 percent women, disabled people, religious minorities, SC /ST communities and Below Poverty Line households.
  • MFIs offered products ranging from microcredit, micro insurance, savings, and remittance. Most of the credit availed from MFI are apparently used for income generation purposes.

Chapter 2: Client Outreach, Portfolio Size and Growth Rate of Indian MFIs.

  • MFIs operate in 517 districts of India spread across 27 states
  • The total MFI -client outreach as of March 2011 was 3.17 crore while the total microcredit outstanding was Rs.20276 crore. In addition, MFIs ‘manage’ estimated loan portfolio of Rs.2500 crore which have been securitized to banks.
  • During 2010-11, the microfinance through MFI –channel has grown 18.75 percent in 2011 in terms of client outreach and 13.15 percent in terms of credit portfolio.
  • This year loan portfolio growth rate has down heavily to 13.15 percent compared to 56 per the previous year.
  • MFIs collectively disbursed Rs.33730 crore as loans to clients during 2010-11. The average loan per client stood at Rs. 5706 which is less than that of last year figure of Rs.9766.
  • In 2010-11, more than one-third of MFIs displayed negative growth in client and loan portfolio.

Chapter 3: Financial Performance of MFIs

  • The Reserve Bank of India had brought in a condition of Qualifying Asset by which the MFIs should create loans assets that would meet certain conditions like maximum loan amount of Rs.50000, at least 75 percent of loan to be given for income generation purpose etc. for availing loan under priority sector credit schemes from the banks.
  • The data provides evidence to reasonably conclude that Indian MFIs in general possess Qualifying asset.
  • The cost structure of MFIs showed that the operating cost of MFIs has been, in general, higher than what the Malegam Committee had estimated last year. MFIs, in all likelihood, would find it difficult to contain the Margin Cap (Yield over Borrowing cost) of 12 percent set by the RBI.
  • MFIs may be able to restrict their loan interest rate within the cap of 26 percent.
  • The MFIs, in general, are self sustainable meeting their expenses out of their income, leaving, of course, just a marginal surplus to meet their growth needs.
  • Chapter 4: Financial Solvency of MFIs
  • MFIs liquidity position has deteriorated apparently due to the drying up of bank funds to MFIs.
  • The liquidity position has further been compounded by increasing Non-Performing Asset (NPA). The NPA (Portfolio at Risk in MFIs parlance) has gone up to 4 percent as of March 2011, while the loan repayment rate comes down significantly. The non-performing assets among Andhra Pradesh –based MFIs is at the all time high of over 96 percent as of September 2011.
  • MFIs ere dependent heavily on the bank debt for their operation. Larger MFIs with more than Rs. 500 crore portfolios held 78 percent of total bank debt made available to the sector by banks. The share of small MFIs in the bank debt is very insignificant.
  • The larger MFIs appeared to have availed bank loan relatively at lower interest rate ( 12 percent) compared to their smaller counterparts ( 13 percent)
  • Due to reluctance of banks to release funds after the crisis, bank borrowing by MFIs has come down by > 75 percent during the period April- September 2011 compared to the corresponding period in the previous year.
  • Restructuring of sticky bank loans in the books of MFIs, caused by liquidity crunch and spike in NPA, is an urgent step required. At present the facility is available only for very larger MFIs.
  • The leverage of capital of MFIs (Debt-Equity Ratio) has come down to 4 times. Their capital adequacy ratio is above 15 percent, which is in line with the norm prescribed by the Reserve Bank of India.
  • Around 50 percent of reporting NBFC –MFIs could meet the minimum Net Owned Fund of Rs.15 crore suggested by the central bank.

Chapter 5: New Paradigm for Effective Microfinance Services.

  • The microfinance crisis could be viewed as serendipitous development helping to consolidate the sector. The sector can become robust to serve unorganized population better through joint efforts of MFIs, Funding agencies, the Government and the apex institutions and Sa-Dhan.
  • MFIs have to undergo reengineering process. They need to revisit their mission and governance structure.
  • The growth strategy is critical. Turbo –charged intensive growth in a given geography without adequate systems / trained manpower will compromise client protection. The rate of growth of the sector at any case cannot be more than 50 percent.
  • The per capita (staff / client) investment of large MFIs and MFIs with high growth on staff training or MIS was found to be relatively lower compared to their smaller counterparts.
  • MFIs need to choose investors who are patient and not profit- seeking.
  • The MFI-sector has a work force of 105000 of whom 14000 are women and 63500 are field staff. The employee turnover is high (over 32 percent). This trend needs to be reversed through employee training and right incentive system.
  •  MFIs products need to be more flexible in terms of repayment schedule and tenor matching the client household cash flows.
  • Client protection and transparency deserve top priority of MFIs. MFIs need to do away with Zero Tolerance policy to client loan default. They need to provide consultative solutions to delinquent clients’ problems; communicate interest rate to clients in a transparent manner.
  • Banks need to support small MFIs as they are starved of adequate liquidity. MFIs may find it difficult to show 99 percent recovery in all circumstances. They are required to accommodate for genuine difficulties of defaulting clients. Banks, on their part, will have to raise the threshold tolerance level of PAR may be to 2-5 percent, while assessing the recovery performance of their client-MFIs.
  • The Central Government may pass the microfinance bill early to avoid regulatory arbitrage prevailing at present.  It may, with help of RBI, persuade banks and SIDBI for resuming lending to the sector to prevent small MFIs from going out of operation. The Government may , in consultation with SIDBI and NABARD , that the Guarantee fund at the disposal of SIDBI and technology and financial inclusion fund be available with NABARD  be put to use for the benefit of small MFIs.
  • Andhra Pradesh Government may permit MFIs, under the provisions of the microfinance act, to collect the repayment and operate in a way to keep the momentum going. This would avoid the credit culture getting spoilt among the microcredit clients in the state.
  • Sa-Dhan, as Community Finance Association , has insights on the sector gained over the past 12 years to extend supervisory support to the central bank, facilitate social investment, capacity building of NGOs/MFIs etc. The stakeholders could tap this potential to build robust sector for financing the poor.
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