Professional Documents
Culture Documents
Prepared by,
Unnati A. Mehta
Unitedworld School of Business
Mumbai
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who gave me the possibilities to
complete this report. I would like to thank Prof. Jayanta Sengupta, Dean,
Unitedworld School of Business, Prof. Sangeeta Pandit , Prof. Jaymala S., Prof.
Pinaki Ghosh ,Unitedworld School of Business and also college authorities for
providing me the opportunity to work on the report.
With a deep sense of gratitude and humble submission I would like to express
my heartiest gratefulness to my Faculty Guide Prof Sangeeta Pandit, Unitedworld
School of Business , whose help, stimulating suggestions and encouragement
helped me in all the times of research for and writing of this report.
Executive Summary
Introduction to Microfinance
• History
• Geographical Spread
• Book Review
Microfinance Products
Microfinance Clients
Microfinance Services
CRISIL List of Microfinance Institutions in India
Business Model
Market Trends
Investment Climate
Microfinance Bubble
Success factors
Issues
Exits
Case study
Conclusion
References
Executive Summary
Given this growth and maturity dynamic, the Indian microfinance sector is
increasingly becoming a viable investment sector with commercial
investors joining social investors who have been nurturing the industry thus
far.
Equity valuations in the Indian microfinance sector are higher than the
financial sector due to the high growth expectations and substantial
availability of debt to fuel its rapid expansion. This availability of debt to
support expansion is expected to grow as more domestic banks take
exposure to the industry and alternative debt providers enter the market.
Over the short and medium term, MFI shares are expected to trade at
significant premia to book value as they realign their business models to
capitalize on unsatisfied demand, and cool down over the longer term as the
industry matures and begins to consolidate.
The today use of the expression microfinancing has it roots in the 1970s when
organizations, such as Grameen Bank of Bangladesh with the microfinance
pioneer Mohammad Yunus, where starting and shaping the modern industry of
microfinancing. Another pioneer in this sector is Akhtar Hameed Khan. At that
time a new wave of microfinance initiatives introduced many new innovations
into the sector. Many pioneering enterprises began experimenting with loaning to
the underserved people. The main reason why microfinance is dated to the 1970s
is that the programs could show that people can be relied on to repay their loans
and that it´s possible to provide financial services to poor people through market
based enterprises without subsidy. Shore Bank was the first microfinance and
community development bank founded in 1974 in Chicago.
From modest origins, the microfinance sector has grown at a steady pace. Now in
a strong endorsement of microfinance, the National Bank for Agriculture and
Rural Development (NABARD) and Small Industries Development Bank of
India (SIDBI) have committed themselves to developing microfinance.
The microfinance sector has been "witnessing a tremendous growth" during the
last few years in India in terms of loan portfolio, geographical area and outreach.
With India’s GDP growing at the rate of 7.1 % the country’s socio-economic
pyramid is turning around the story with millions of poor people becoming
entrepreneurs.
Geographical spread of MicroFinance sector
in India
MFI’s have recorded about 8.5 million clients during the year
2008-09, a growth of 60% over the previous year.
The SHG loan outstanding has increased by Rs. 71.5 billion with
an addition of 6.9 million clients.
MFIs are beginning to realize, however, that the South is becoming overly
saturated and there is a commercial need to expand to newer geographies to
ensure continued growth and maintain the quality of their portfolio. It has
become imperative that MFIs diversify their operational base and limit
overexposure to heavily serviced areas and clients.
“Banker to the Poor” Book Review
Muhammad Yunus was born in Chittagong, Bangladesh as the third of
fourteen children. He studied at Dhaka University and then Vanderbilt
University for his PhD. He did not set out to become a moneylender of any sort,
nor did he anticipate starting an organization that would affect the lives of
millions. While serving as the department head of Economics at Chittagong
University, Yunus began to get involved in the village, Jobra, next to the
University.
It was there that the story of a young woman named Sufiya sparked the
idea that in the next few years would become Grameen Bank. She was a twenty-
one year old mother of three who labored all day to make bamboo stools by
hand. Sufiya borrowed the money for each stool, about five taka (twenty-two
cents), from middlemen on the condition she would sell the finished stools back
to them for five taka, fifty poysha (twenty-four cents). Therefore, her net profit
for the entire day’s labor would be only fifty poysha, or two cents for her family.
It was a miserably small sum, but as she explained to Yunus, she had no other
choice. The middlemen were better than the moneylenders who charged
exorbitant rates and only dragged borrowers deeper into the cycle of poverty.
Grameen Bank is run off a strict set of principles. Yunus decided to have the
loan period last one year, with weekly repayments, after a one week grace period,
made to Grameen Bank employees who visit the villagers. Groups are an
important component of Grameen’s Banking system. Grameen Bank uses groups
of five individuals, having them self-formed rather than assigned to promote
solidarity. By having a prospective borrower, such as a village woman, seek out
and convince her friends to join her already starts the process of independence,
responsibility and social control the group members have over each other with
the loans. Once a group is formed, loans are only extended to two borrowers. If
they repay on time for the first six weeks, then two more members may take out
loans; the chairperson is usually the last to take a loan. However, for a group to
be recognized by Grameen as eligible for a loan, each member must undergo a
week of training on the bank’s policies and pass an oral examination.
One interesting goal Yunus set for Grameen Bank was to have at least
half the borrowers be female. This was a struggle given the low social status of
women in Bangladesh, but today 97% of Grameen borrowers are women. He
cites that women have been shown through studies to use their loaned money to
more successfully improve the status of their families (especially their children)
than men. When a woman receives a micro-loan her priorities are first improving
the life of her children and second improving her household - for example
building a stronger roof or buying beds for the family.
Credit
Credit methodology lies at the heart of microfinance and its quality is one
of the most determinant factors for the efficiency, impact and profitability
of a microfinance institution (MFI). Credit methodology is comprised of a
host of activities involved in lending including sales, client selection and
screening, the application and approval process, repayment monitoring,
and delinquency and portfolio management. It is also linked to the
institutional structure and human resource policies such as hiring, training
and compensating staff. Getting the credit methodology and product mix
right is therefore one of the most demanding as well as rewarding
challenges MFIs face.
Savings Products
For most of its history, the microfinance industry has focused on delivering
microloans to microentrepreneurs, and it is still in the process of seeking
greater scale at greater speed for delivering microcredit. The experience of
microfinance institutions (MFIs) across the globe that mobilize savings,
however, demonstrates that the demand for deposit products is many times
that of credit. Although low-income customers save in several forms, not
necessarily through formal means, there is a pervasive for safe
mechanisms.
One of the challenges that MFIs will face when mobilizing deposits is
controlling expenses, as operating costs of managing and delivering savings
services are relatively high. Micro savings customers are also more sensitive to
charges and fees than wealthier clients, given the smaller average balances and
income levels.
Another key challenge is for the MFI to diversify its target segment, as
mobilizing savings usually requires attracting a different clientele than the typical
micro entrepreneur. Savings mobilization also requires certain standards for
quality in customer service, which depends on key resources and capabilities,
such as technology, processes and qualified staff.
Insurance Products
Losses due to natural disasters, fire or death of a family member can be
devastating for anyone. For microentrepreneurs and other low-income
populations, even common illness can wipe out a lifetime of work, leaving them
without any resources to start over. Microinsurance products can help mitigate
the effects of losses on clients and their families so that they can retain and build
on the gains they have worked so hard to achieve and continue on the path out of
poverty.
Micro insurance is a nascent industry, which has made significant strides in the
last few years. Products are specially designed to meet the needs of poor clients:
premium payments are kept to a minimum, terms and conditions are clear and
simple, and exclusions and requirements such as medical examinations are
avoided to the greatest extent possible. Micro insurance includes but is not
limited to: Life, Health, Accidental Death and Disability, and Property products.
There are also country-specific challenges faced by MFIs related to the
country's regulatory environment and the availability of insurance companies
willing and able to underwrite client-appropriate programs that are competitively
priced
Remittances
These are transfer of funds from people in one place to people in
another, usually across borders to family and friends. Compared with other
sources of capital that can fluctuate depending on the political or economic
climate, remittances are a relatively steady source of funds.
Clients of Micro Finance
The typical micro finance clients are low-income persons that do not have access
to formal financial institutions. They are typically self-employed, often
household-based entrepreneurs.
In rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban
areas, microfinance activities are more diverse and include shopkeepers, service
providers, artisans, street vendors, etc. Micro finance clients are poor and
vulnerable non-poor who have a relatively unstable source of income.
Global India
PROVIDING LOANS:
The important service is provided by MFI is given loan. These loans are provided
from some productive activities like; starting new business, expansion of
business; improving life etc.
CAR FINANCING:
MFI also assist those people who cannot pay total amount at once. So, these MFI
gave them car on installments like UBL car financing scheme is too popular and
too many people taking advantage from this scheme.
HOME FINANCING:
Pakistan is a poor country. Purchasing power of Pakistan is very low. So many
people are living on rent. They cannot have too many amounts to purchase
homes. MFI’s provide loans be considering their job stability and take security
for it.
PERSONNEL LOANS:
MFI also obtain personnel loans. Those people who have permanent employment
and stable jobs. This credit facility depends on the income of an individual.
TALEEMI LOANS:
MFI also provide financial aid to the students who cannot bare educational
expenses but want to study. MFI assist them in return of some security and it
would have to pay after completing the education.
Comparative Analysis of Micro-
finance Services offered
CRISIL List of Top 20 Microfinance
Institutions in India
A JLG consists of five to ten women who act as co-guarantors for the other
members of their group. This strategy provides an impetus for prudent self-
selection of reliable and fiscally responsible co-members. Moreover, the JLG has
an inbuilt mechanism that encourages repayment in at timely fashion as issuance
of future loans is contingent upon the prior repayment record of the group.
ROE 20-30%
Micro-loan sizes vary from an initial loan size between $100 and $150 to
subsequent loans of $300 to $500 with an annual interest rate between 25% and
35%.The term loans are structured with weekly or monthly repayment schedules
and a 6-month to 2 year term. Microfinance institutions typically charge a higher
rate of interest to their clients than traditional commercial banks as the
administrative costs of servicing smaller loans is far higher in percentage terms
than the cost of servicing larger loans.
Additionally, today, MFIs face borrowing costs in the range of 12% to 16% per
annum, depending on the size and track-record of the individual MFI. This model
allows well-run MFIs to achieve a ROA of about 3% to 5% and a ROE of as
much as 20% to 30%. These high ROA and ROE numbers are contingent upon
low cost financing from commercial banks and the ability to maintain high
portfolio growth along with high portfolio quality.
The portfolio quality for MFIs is typically superior to commercial banks with
total Nonperforming Assets 180 days past due of 0.2% to 3% as opposed to 3%
to 10% for commercial banks.
Metric Amount (in India)
Legal Forms of MFI’s in India
Hints of market conditions that MFIs will have to navigate in the coming years
are present even today, and MFIs are beginning to recognize these factors as they
continue to grow.
Even though the microfinance industry is reaching maturity, the large amounts of
untapped geographical territory and client base combined with the MFIs’ wide
network create potential for enormous sustainable growth in the future.
MFIs and other service providers are beginning to realize the significant value of
the network that has been created by MFIs and efforts are underway to utilize
them to deliver both, financial and nonfinancial products and services. These
factors will continue to impact the supply of equity for Indian microfinance and
hence the equity valuations. Furthermore, since this untapped demand is unlikely
to be satisfied in the short or medium term, while valuations will be tempered by
cautious investors, premia driven by fundamental growth expectations can be
expected to prevail through the short and medium term as MFIs re-engineer their
strategies to take advantage of the unsatisfied microloan demand.
Microfinance Bubble
Microfinance has grown at a sharp clip in recent years. Large amounts of capital
are flowing to the sector as major banks like Morgan Stanley, Citigroup, and
Barclays Bank, among others, prove that investing in microfinance is not a
charitable activity anymore. In addition to the involvement of banks and other
large companies, microfinance is flooded with funding from a new breed of
philanthro-capitalists such as Bill Gates, Warren Buffett, and e-Bay founder
Pierre Omidyar. Overall, the microfinance sector can expect to see a sixfold
increase in foreign funding over the next several years.. Despite the increasing
amount of investment in microfinance, most of these dollars are chasing the same
mature and commercially sustainable microfinance institutions that provide a
predictable return. An example of this is the wildly successful initial public
offering of Mexico's Banco Compartamos, which took place in April 2007. In ten
years Compartamos went from a financially self-sufficient NGO to a bank with
five successful bond offerings in the market, all rated investment grade by
Standard and Poor's and Fitch Ratings. The recent success of Compartamos and
Microvest demonstrates that commercial capital now provides an important
source of funding for microfinance. As the handful of investment banks and large
companies active in the sector establish the business potential of microfinance,
others will want their piece of the profit from this emerging asset class. Standard
& Poor's2 notes that the USD 15 billion-plus in microloans that are currently on
the books pales next to the potential of some USD 150 billion in lending. With a
large amount of capital chasing a limited amount of quality assets, microfinance
could be the next asset bubble.
Success Factors of Micro-Finance in India
Over the last ten years, 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
A. For NGOs
The field of development itself expands and shifts emphasis with the pull of
ideas, and NGOs perhaps more readily adopt new ideas, especially if the
resources required are small, entry and exit are easy, tasks are (perceived to
be) simple and people’s acceptance is high – all characteristics (real or
presumed) of microfinance. Canvassing by various actors, including the
National Bank for Agriculture and Rural Development (NABARD), Small
Industries Development Bank of India (SIDBI). Induced by the worldwide
focus on microfinance, donor NGOs too have been funding microfinance
projects.
This also seems to sound nice to the government, which in the post
liberalization era is trying to explain the logic of every rupee spent. That is
the reason why microfinance has attracted main stream institutions like no
other developmental project.
This is partly explained by the fact that while the cost of supervision of credit is
high, the loan volumes and loan size is low. It has also been commented that
MFIs pass on the higher cost of credit to their clients who are ‘interest
insensitive’ for small loans but may not be so as loan sizes increase. It is,
therefore, necessary for MFIs to develop strategies for increasing the range and
volume of their financial services.
Lack of Capital
The second area of concern for MFIs, which are on the growth path, is that they
face a paucity of owned funds. This is a critical constraint in their being able to
scale up. Many of the MFIs are socially oriented institutions and do not have
adequate access to financial capital. As a result they have high debt equity ratios.
Presently, there is no reliable mechanism in the country for meeting the equity
requirements of MFIs.The book value multiple is currently the dominant
valuation methodology in microfinance investments.
In the case of startup MFIs, using a book value multiple does not do justice to
the underlying value of the business. Typically, startups are loss making and
hence the book value continually reduces over time until they hit breakeven
point. A book value multiplier to value startups would decrease the value as the
organization uses up capital to build its business, thus accentuating the negative
rather than the positive.
Financial service delivery
Another challenge faced by MFIs is the inability to access supply chain.
This challenge can be overcome by exploring synergies between microfinance
institutions with expertise in credit delivery and community mobilization and
businesses operating with production supply chains such as agriculture.
The latter players who bring with them an understanding of similar client
segments, ability to create microenterprise opportunities and willingness to
nurture them, would be keen on directing microfinance to such opportunities.
This enables MFIs to increase their client base at no additional costs. Those
businesses that procure from rural India such as agriculture and dairy often
identify finance as a constraint to value creation. Such businesses may find
complementarities between an MFI’s skills in management of credit processes
and their own strengths in supply chain management.
HR Issues
Microinsurance
First big issue in the microinsurance sector is developing products that really
respond to the needs of clients and in a way that is commercially viable.
Secondly, there is strong need to enhance delivery channels. These delivery
channels have been relatively weak so far. Microinsurance companies offer
minimal products and do not want to go forward and offer complex products that
may respond better.
Microinsurance needs a delivery channel that has easy access to the low-income
market, and preferably one that has been engaged in financial transactions so that
they have controls for managing cash and the ability to track different
individuals.
Thirdly, there is a need for market education. People either have no information
about microinsurance or they have a negative attitude towards it. We have to
counter that. We have to somehow get people - without having to sit down at a
table - to understand what insurance is, and why it benefits them. That will help
to demystify microinsurance so that when agents come, people are willing to
engage with them.
The joint liability mechanism has been relied upon to overcome the twin issues
of adverse selection and moral hazard. The group lending models are contingent
on the availability of skilled resources for group promotion and entail a gestation
period of six months to one year.
However, there is not sufficient understanding of the drivers of default and credit
risk at the level of the individual. This has constrained the development of
individual models of micro finance.
The group model was an innovation to overcome the specific issue of the quality
of the portfolio, given the inability of the poor to offer collateral.
The MFI sector could also see a merger of equals between two mid to large
sized MFIs as the industry matures and consolidates over the medium term.
Some large MFIs including two to three in portfolio could consider a potential
listing in one to two years, but IPOs will be a challenge for the sector
overall given limited market experience in listing socially-focused firms.
Criteria for a successful IPO will include size; the capacity to absorb large
amounts of capital and generate post-issue liquidity of the listed shares; operating
experience of the management team; track-record of value creation; and
institutional capacity to deal with the listing process, compliance requirements
and public scrutiny.
In this regard, the experience of SKS Microfinance in executing its proposed
IPO in 2010 will be a useful learning experience for the microfinance sector to
determine the extent to which a social business model such as microfinance can
be accepted by mainstream and particularly retail investors, and the value these
investors are willing to ascribe to its potential.
That exits are still uncommon in microfinance means that for early stage
investors like entrepreneurs need to be made aware of their exit obligations, and
investors’ relationships with entrepreneurs will be key in realizing exits,
especially for minority shareholders.
The ability to work with different mainstream investors, MFI promoters, banks
and industry regulators as well as investors’ prior experience and track-record of
executing exits in the Indian market will be the key to completing successful
exits in Indian microfinance companies.
CASE STUDY
SKS Microfinance Ltd
SKS Microfinance (SKSMF) is the largest microfinance company in
India with loan portfolio of ~US$1bn, 2,000+ branches spread across 19
states and 6.8mn members. Its strengths include pan-India presence,
scalable operating model, diversified product revenues and access to
various sources of capital. Lending primarily to poor women, the
business model involves village centered group lending, thereby
ensuring a check on asset quality. The huge demand-supply credit gap
and inability of banks to penetrate into unbanked areas have driven the
growth of microfinance industry. While valuations appear expensive,
the scalable business model, market leadership position and high
earnings growth provide comfort.
Issue details
Issue opens 28-Jul-10
Issue closes* 2-Aug-10
Price band (Rs)** 850-985
Face value (Rs) 10
Lot size 7
Total Issue size(mn) 16.79
- Offer for sale (mn) 9.34
Issue size (Rs m) 16,540
Issue type 100% Book building
IPO rating CARE IPO Grade 4
Industry - Finance
*Closure date for institutional investors is 31st July, 2010
**Rs50 discount has been offered to retail investors
Shareholding pattern (%)
Shareholding pattern (%) Pre IPO Post IPO
Promoters &
promoters group 55.8 37.1
Non Promoters 44.2 39.6
Public - 23.3
Share reservation (%) (%)
QIB 60
Non institutional 10
Retail 30
Company managementmanagement
Dr. Vikram Akula Chairman
Mr. Suresh Gurumani Managing Director
Issue manager
Lead manager Kotak Investment Banking,
Citi,Credit Suisse
Registrar Karvy
Listing NSE, BSE
Objective of issues (Rs m)
Objective of issues
To augment capital base to
meet future capital requirements
To achieve the benefits of
listing on the Stock Exchanges
On the volume front over 44 lakh shares of the Hyderabad- based firm
changed hands on the bourses in early trade. "The brilliant listing of
SKS reflects investor confidence. No doubt it is a pleasant listing and
clearly shows sign of market recovery. The IPO had generated a huge
response and the company's debut on the bourses are in line with market
expectations," SMC Capitals Equity Head Jagannadham Thunuguntla
said.
The company which entered the capital market on July 28 raised Rs.
1,654 crore through its initial public offer. The public issue of 1.6 crore
shares was priced in the range of Rs. 850 to 985 a share.
SKS, founded by Vikram Akula, had fixed the issue price of its IPO at
Rs. 985 per share, the upper band of the price range. Retail investors got
SKS shares at a discount of Rs. 50 per piece at Rs. 935 per share.
Analysis
SKS Microfinance has a high capital adequacy ratio (of 28.3 per
cent which may further improve to excess of 40 per cent post-
offer) and strong risk-management systems which address two
concerns MFI are facing today — access to capital and
maintenance of asset quality.
While the yields are high, so are operating costs. Operating costs
are higher than interest costs and are likely to remain so. However,
SKS’ cost-income ratio fell to 52per cent for 2009-10 from 62 per
cent.
Given this growth and maturity dynamic, the Indian microfinance sector
is increasingly seen as a viable investment target with commercial
investors joining the social investors who have been nurturing the
industry thus far. Equity valuations in the Indian microfinance sector are
higher than the financial sector in general and global MFIs in particular
due to the high growth expectations and substantial availability of debt
to fuel its rapid expansion.
MFI shares are expected to trade at significant premium to book over
the short and medium term as MFIs realign their business models to
capitalize on unsatisfied demand, and cool down over the longer term as
the industry matures and begins to consolidate.
The industry is in its initial stage and its development could take many
forms, but we expect growth, innovation and financial performance to
continue on an encouraging path.
References
www.microfinancegateway.org
www.grameenfoundation.org
www.sksindia.com
www.mixmarket.org
www.cgap.org
Banker to the poor- Muhammad Yunus