Executive Summary Review 2011 m Cril

8/13/2019 Executive Summary Review 2011 m Cril

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Copyright:MicroCreditRatingsInternationalLimited,November2011

Allrightsreserved

MicroCreditRatingsInternationalLimited

602Pacific

Square,

32nd

Milestone

NH8

Gurgaon122001INDIA

www.mcril.com


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MCRILMicrofinanceReview2011

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Thispagedeliberatelyblank


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TableofContents[MainReport]

Page

Executive

Summary AnatomyofthecrisisinIndianmicrofinance

1 Anatomyofacrisisthepreamble

1.1 Acomplexandextensivefinancialsystembutjust40%inclusion

1.2 MCRILs2011cohortofIndianMFIs...

1.3 ...seescontinuationofthetrendtotransformtoNBFCsanddiversifygeo

graphically

1.4 ...asreportingonsocialperformancestartstobeestablished

1.5 But,inthemeantime,theMFImantraofgrowthhascometoahalt

1.6 ...astherushtobecomeNBFCsandgrowcausedoverindebtednessprovok

inggovernmentintervention

2 Outreach&services:Didoverindebtednesscausethemicrofinancecrisis?

2.1 Microfinanceisnowasignificantpartofthefinancialsystemintermsofits

implicationsforfinancialinclusion(clientsserved)

2.2 MFIshavevariousdevelopmentobjectivesandoperationalstrategies

2.3 Andmicrofinanceportfoliosarealsosubstantialinrelationtomicrolending

bythebankingsystem

2.4 ...thoughtherehasbeennogrowthintherealvalueofaverageloanbalances

2.5 Ismultiplelendingandconsequentoverindebtednessthevillainofthe

piece?2.6 Anddepositservicesremainadistantdream...

2.7 ...whileruraloperationscontinuetobethenormbutdonotnecessarilyindi

cateaparticularpovertyorientation

2.8 ...butsocialratingdatafromalimitednumberofMFIsdoesindicatetheneed

forbettersystemsalignmenttoachievegreaterdepthofoutreach

2.9 ...thoughtheprincipleofresponsibilityintheprovisionofmicrofinanceser

vicesisgraduallytakinghold

AnnexTables1&2: StatewiseAnalysisofOverindebtedness

3

Highoperating

efficiency

is

compromised

by

the

crisis

3.1

3.1.1

3.1.2

3.1.3

Costefficiencyhasdeclinedduetothecrisis

Staffnumbersandproductivityarecomparablewiththeoverallfinancialsys

temthoughtheMFIshavesmalleraccountsthantheruralbanks

...buttherearerelativelyfewfemaleloanofficers

CostperborrowerhasrisensharplyasMFIsfirstpursuedgrowthatallcosts

andthenspentsubstantialamountsonpersuadingborrowerstorepay

3.2

3.2.1

Operatingefficiencyhasbeenadverselyaffected

...asportfoliomanagementissueshaveincreasedOER


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3.2.2

3.2.3

3.2.4

3.2.5

3.2.6

3.2.7

...andthesmallloansizemakesitdifficulttolowerexpenses

Isusingwomenloanofficersanappropriatemeansofloweringexpenses?

Thecompositionofoperatingexpensesindicatesincreasedlabourintensity

...soperhapsitwouldbebettertofocusonworkingconditionstoreducestaff

turnover

...andwatchtheyieldOERmarginwhichhasnowdeclined

EconomiesinoperationaredeterminedpartlybyloansizebutalsobyMFI

scale

3.3 Portfolioqualityisbetterthanexpected;maybetoogood...

4 AnindustrycrisiscausedbythecollapseoftheAPportfolio

4.1 TheindustryhasbeenplungedintocrisisasclientsinAPhavestoppedpay

ments

4.2 Clientsatisfactionhasanimportanteffectonportfolioquality

4.3 ProvisioningforloanlossesisinadequateforthoseMFIsaffectedbytheAP

defaultaGreekstylehaircutforinvestorsis,therefore,inevitable

5 Thedebtfocusofportfoliofinancinghasreduced

5.1 IndianMFIsarenowpayingthepricefortheirrelianceoncommercialfunds

5.2 Theuseoffundshasbeensqueezedbycashconstraints

5.2.1 ...withthedryingupofbankdebtinresponsetotheapparentpoliticalrisk

5.2.2 ...givingtheimpressionthatprudentialmanagementhasimproved

5.2.3 ...buttheimplicationsofsecuritisationforprudentialmanagementneedto

beexamined

6 Financialperformancehasbeenaffectedbythecrisis

6.1 YieldshavedroppedduetothedelinquencyinAP

6.2 ...andreturnstoMFIshavedeclinedsignificantlyduetowriteoffs

Postscript Inchingtowardsaconducivepolicyenvironment

Keyreferencesanddatasourcesusedforthisreview

Glossaryof

terms


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ExecutiveSummary

AnatomyofthecrisisinIndianmicrofinance

afinancial

and

social

analysis

MCRILs2011financialandsocialreviewpresentsthefirstdetaileddissectionofthecrisisthathit

theIndianmicrofinancesubsectorofthefinancialservicesindustryinOctober2010.

TheMCRILMicrofinanceReviewprovidesacomprehensiveanalysisofthegrowthandperformance

ofmicrofinanceinstitutionsinIndia. ThisseriesofreviewsstartedinYear2000. MCRILpioneered

theworldwidepracticeofundertakingcountrylevelanalysesofmicrofinanceperformanceandcon

tinuestoaddvaluetotheinformationavailableinthisenvironmentthroughitscriticalandanalytical

screeningandpresentationofthedata. Whilelastyearsreviewfocusedonthecontributionofmi

crofinancetofinancial inclusion,thisyearsreviewexaminesboththefactorsthatcontributedto

thecrisis

loan

size,

multiple

lending,

over

indebtedness,

client

retention

and

client

protection,

staffworkingconditionsandtheearlyeffectsofthecrisisontheperformanceofIndianMFIs. It

isbasedondatatakenmostlyfromannualreportsandannualfinancialstatementsbutalsoonso

cialperformanceandoutreachdatareportedtotheMIXforMarch2011,sixmonthsafterthestart

of the crisis. In addition, it incorporates comments on some more recent developments without

analyzingtheseextensivelysincedetailedinformationforthisperiodisnotyetavailable. Withthis

publication,MCRILhasmoved towards thepublicationofan integrated financialand social re

viewofIndianmicrofinance.

Thisreviewconcludesthatwhilemicrofinanceisnowestablishedasasignificantcomponentofthe

financialsystem in thecountryand itscontribution to financial inclusioncontinuesto rival, ifnot

exceed,thatoftheruralbankingsystemtheefficacyofthatcontributionisnowunderthreat. Both

internal

factors

(such

as

high

growth

and

overindebtedness

plus

a

lack

of

adequate

concern

for

product characteristics) and external factors like the policy actions of the government of Andhra

Pradesh are responsible for this.

Emerging from the crisis, the Govern

ment of India, through the proposed

microfinance law now seeks to accord

the sector with a level of importance

commensuratewith itscontributionto

millionsofcitizens. TheproposedMi

crofinance Act would provide the sec

torwiththefullattentionofthecentral

bank,

would

enable

MFIs

to

offer

at

least limited deposit services to low

incomefamilies(recognisingtheirneed

for savings facilities) and protect it

fromthewhimsoflocalgovernmentby

clarifyingthatmicrofinanceisgoverned

by national lawsand is, therefore,not

astatelevelconcern. MCRILbelieves

these measures in the proposed law

aregoodandarecombinedwithade

quatesafeguards tohelpstabilisethe

provisionof

microfinance

services

in

India.

Exhibit1CRILEX,MCRILsgrowthindex,March2003=100

100 181444

8761,219

2,370

4,589

7,474

8,022

Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Mar11

9,000

[estimatedSep

2010]

6,000

[estimated

Sep2011]


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viii|P a g e

Indianmicrofinancesrushtoberegulatedandaphenomenalgrowthspiralcutshortbya

politicalaction...

WiththephenomenalgrowthrecordedbymicrofinanceinIndiainrecentyears62%perannumin

termsof

numbers

of

unique

clients

and

88%

per

annum

in

terms

of

portfolio

over

the

five

years

20052010andaround32millionborroweraccountsbyendMarch2011,Indiahasthelargestmi

crofinanceindustryintheworld. Thehighgrowthrateofmicrofinanceoverthefiveyearperiodwas

fuelled by commercial bank funding which inherently gravitated towards forprofit institutional

structures.Thus,therewasan IndiawidetrendtowardsthetransformationofMFIs into forprofit

nonbank financecompanies (NBFCs)sothatover55%ofthe59MFIs in the MCRILanalysisall

MFIswithmorethan10,000borroweraccountsconsistofsuchinstitutions. Boththetransformed

andnew,startupMFIswereabletogrowrapidlythroughbetteraccesstofundingandbyusingthe

provenmethodologyofamonoproductofferingrolledoutover largenumbersofbranches, indi

verselocationsusingstandardprocesses.Thiswasoftenatthecostoflimitedstaffclientinteraction.

Thecurrent

crisis

in

microfinance

is

partly

the

result

of

this

over

simplification

of

the

MFI

client

rela

tionship. Whilelargenumbersmayhavebeenreached,thelackofcommitmentoneithersideledto

substantialmultiplelendingandcreatedanenvironmentofconcernabouttherightsofclientsthat

hadbeenoversoldmicrocredit. Someclientsbecameoverindebtedasaresultandthemediaatten

tiongeneratedbytheIPOofSKSMicrofinance(atthetime,byfarthelargestmicrofinanceNBFCin

India)onlyledtofurtherintrospectionaboutthestatusofmicrofinanceclients. Withthereportsof

suicides in ruralAndhraPradesh (somethingthat regrettablyhappensvirtuallyeveryyear) thrown

intothemix,microfinancetooktheblamethistimearound. Giventhepopulistnatureofstatelevel

governanceinIndia,conditionswereripeforinterventionandtheAPmicrofinanceordinanceof14

October2010wastheresult.

However,

with

what

is,

in

effect,

a

ban

on

the

offering

of

financial

services

by

microfinance

institu

tionsinAndhraPradesh,themantraofgrowthinIndianmicrofinancehascometoahalt. Thedrying

upofcommercialbankfundingtoMFIsalloverthecountryinresponsetothecrisishasbrought

abouttheshrinkageofthesectorbyonethirdfromthepeakinOctober2010;theCRILEX,MCRILs

Indexofmicrofinancegrowthshrankfrom9,000atendSeptember

2010toanestimated6,000oneyearlater(Exhibit1).

But,nevertheless,asignificantsectorofthefinancialsystem

ThenumberofclientaccountsservedatendMarch2011isnearly20%

higher than inthepreviousyear;stillasignificant increasebutasub

stantial

climb

down

from

the

43%

growth

in

client

accounts

that

occurredin200910. InformationfromMFIsindicatesthatthisisthere

sult of veryhighgrowth during theperiodApril to midOctober 2010

andagradualdeclineonaccountofthedryingupofcommercialbank

fundingafterthepromulgationoftheAPordinance.

Moreimportantly,with31.8millionborroweraccountsthesizeofthe

microfinancesectormorethanmatchessignificantpartsofthe Indian

financialsystemintermsofthenumberofcitizensaffected. Thisnum

berismorethanthreetimesthenumberofmicrocreditaccounts(less

than Rs25,000, $555) serviced by the Regional Rural Banks (RRBs, as

shown

by

the

information

inExhibit

2)

and

is

greater

even

than

the

totalnumberofsuchmicroaccounts heldbythecommercialbanks. If

Exhibit2

MFIcreditaccountscompared

withotherbanksaccnts


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ix|P a g e

allowedtobeseenaspartofthemainstreamfinancialsystem,themicrofinancesectorwouldhavea

45%shareofthetotalnumberofmicrocreditaccountsinthecountry. IncludingSHGsintothedis

cussion,thetotalofmicrocreditaccountsinIndiaheldintheformalandsemiformalfinancialsys

temamountstoaround134million. The reportcontainsadetailedanalysisofthestatusofthe

provision

of

micro

credit

by

MFIs

vis

a

vis

the

banking

sector

and

the

overall

availability

of

finan

cialservices.

Withimprovingpovertyfocus

The intended income profile of MFI clients targeted by

MFI managements is collated in Exhibit 3. After many

years of debate on the feasibility of poverty reduction

through microfinance, significant numbers of MFIs have

now realised the need to focus on low income clients

whoseincomesmayormaynotbebelowthenationalor

international

poverty

lines

but

who

are,

nevertheless,

financially excluded. However, even now systematic

povertytargeting isundertakenbyrelativelyfewandM

CRILs client analysis based on social rating data shows

that a significant number of MFI client profiles now

nearlymatchthenational povertyprofilebutarerarely

abletoreachlowertoachieveagreaterpovertyfocus.

...thoughtherehasbeennogrowthintherealvalueofaverageloanbalances

However,despitethesignificantgrowthofloansizeoutstandingfromMFIsinrecentyears,analysis

inthereportshowsthat inrealterms theMFIcontribution totheeconomic livesof low income

familieshas

actually

reduced

by

around

one

third

over

the

past

ten

years.

Ismultiplelending,andconsequentoverindebtedness,thevillainofthepiece?

ThedisruptioninIndianmicrofinancecausedbytheAPordinanceissubstantial. Theapparentrea

sonsfortheordinancewere

Excessive lending by MFIs in the state of Andhra Pradesh leading to overindebtedness whichcauseddistresstolowincomemicrofinanceborrowers

CoercivebehaviourbyMFIstaffincollectingfromtheseoverindebtedborrowerssufferingfromthestressofkeepingupwiththeirrepaymentobligations.

WhetherornottherehasbeenexcessivelendinginAP(andinotherstatesofIndia)andwhoisre

sponsiblefor itisassessed inthisreport. Thestatewisepictureisdisquieting. What isinteresting

hereisthatinAP,whilethenumberofMFIloansisjustover100%ofthenumberofeligiblefinan

ciallyexcluded families,SHG loansareactually310%of thatnumber. More importantly, to the

extentthatmicrofinanceloansarenotevenlydistributedthismeansthattherewillbeasignificant

numberoffinanciallyexcludedfamiliesinAPthathaveasmanyas78loansatonetimeandanum

beroftheseareSHGloans. ThisraisesthequestionwhetheritisSHGratherthanMFIlendingthatisresponsibleformultiplelendingandthecrisis.TheanalysisrevealsthatevenifdebtweredistributedequallyamongstalleligiblefamiliesinAPtherewouldbeoverindebtednesstotheextentof9%of

theaverageincomeforsuchfamiliesassumingthat40%isthemaximumreasonabledebtservicing

capacityattheaveragelevelofincomeforfinanciallyexcludedfamilies. Atlowerassumedlevelsof

debtservicingcapacity,thelevelofoverindebtednessishigher. Thereportincorporatesanewap

Exhibit3

StatedclientfocusofreportingMFIs

4

8

12 111

5

32

Verypoor

clients

Poorclients Lowincome

clients

Nospecific

focus

NBFCs+[24] NG Os+[8]


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proachtotheassessmentofaggregateoverindebtednessinaregion,setsoutthedegreeofover

indebtedness for all the major states and discusses where further problems could occur in future

unlessthetypicaldebtperborrowingclientislowered.

But

the

principle

of

responsibility

in

the

provision

of

microfinance

is

also

now

taking

hold

Theconcern forresponsiblemicrofinance isreflected intheCodesofConductdevelopedbyMFIN

and SaDhan, and internationally in the client protection principles being developed through the

SmartCampaign. MCRILhasuntilnowincludedevaluationofresponsibilitytoclientsaspartofSo

cialRating. During2011,alongwithotherspecialistratingagencies,wehavepilotedaResponsible

Finance Rating product. Issues emerging from these assessments are summarised in the report.

These issues include integrity,governance,competition,clientprotection,appropriatestaffbehav

iourandresolutionofcomplaints. MostleadingMFIsareinprocessoftakingactiontoimproveper

formanceinalltheseareas.

Costefficiency

has

declined

due

to

the

crisis

The cost incurred by MFIs in servicing loan accounts is very low in comparison with the global

benchmarkof$139oftheMIX.EvenwhencomparedwithotherAsianMFIs,thecostperborrower

(`716,$15.90)amountstojust26%oftheEastAsianme

dianof$61andisalsosubstantiallylowerthanthemedian

for low end MFIs internationally ($64). The trend in the

averagecostperborrowerforthedeliveryofmicroloans

in India shows a sharp 33% increase over the past year

(Exhibit4). This isattributabletothehighgrowthatall

costspursuedbyMFIs inthefirsthalfoftheyearasthe

largerones

chased

the

chimera

of

an

IPO,

while

the

latter

halfoftheyearwasspent infirefighting,tryingtoper

suade borrowers in AP to repay and those elsewhere to

maintaintheirpayments.

TheweightedaverageOperatingExpenseRatioforsampleMFIsissignificantlylowerthanthoseof

2007sample.ThetypicalIndianMFIasmeasuredbythesimpleaverageacrossMFIshadanOER

of15.6%,upfrom14.3%lastyear.Akeydeterminantoftheoperatingexpenseratioisthesmallloansize. Asdiscussedinthereport,

theOERshowsaverycleardownwardtrendastheloansizeincreases. Inanindustryhighlydepen

dentonstaffforcustomersatisfaction,thereisalsoanimportantpositivecorrelationbetweenthe

staffturnoverrateandOERandanegativeonebetween theproportionofwomen loanofficers

andOER; whether the latter means that women loan officers are more efficient or that they are

simplypaidlessisanopenquestion. Theaveragestaffturnoverrateof29%andlackofwrittenHR

policiesalsoraiseissuesaboutstaffworkingconditionsthatbearinvestigation.

...andthewideningtrendintheyieldOERmarginhasbeenreversed

Theweightedaverageyieldof27.6%(comparedto28.3%lastyear)hasdeclinedalittleinresponse

to the controversy about interest rates in the lead up to and immediately following the AP ordi

nance.Exhibit3.15inthereportshowsthetrendinportfolioyieldandOERoverthepast10years.

The

portfolio

yield

increased

significantly

in

recent

years

largely

because

of

changes

in

fees

charged

andsometimesonaccountofachangeintheloantermwhen,say,areductioninthetermfrom50

Exhibit4 Costperborrower

504

716

473

668620

298

378

200

300

400

500

600

700

2000 2003 2005 2007 2010 2011

Rs/borro

wer

AllMFIs

L10

2002prices


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xi|P a g e

weeksto45weekscanhaveasignificantimpactontheyieldthoughthechangeappearstobesmall.

Withthedeclineinyieldin201011theaverageyieldearnedbyMFIsinIndiacontinuestobelower

thantheAsianandglobalmediansof28.8%and31.1%respectively. Onaccountoftheinterestand

margincapsforthepurposeofprioritysectorclassification,MCRILexpectsthesqueezeonmargins

to

continue

during

the

current

financial

year

(2011

12).

This

matter

is

discussed

in

the

report.

...astheindustryhasbeenplungedintocrisisbytheAPactionahaircutforboththe

MFIscaughtinthecrisisandtheirlendersisnowinevitable

TheunspokenmessageoftheAPordinancetoclientswasthatMFIswouldnotbeallowedtooper

ateand,therefore,therewasnoneedtorepayMFIloans. AnalysisindicatesthattheMFIsinIndia

asagroupnowhaveamongsttheworstportfolioqualityratiosintheworld. Thesampleaverageof

PAR30at25.5%isexceededbytheL10group(at29.5%)ofwhom5ofthe6largesthavetheirmain

operations inAP. This is insharpcontrasttothereportedportfolioqualityratioof0.67%forend

March2010. Inpracticethispresentsableakerpicturethanisjustified. Thegraphsinthemainre

portshow

the

aggregated

PAR

values

for

non

AP

MFIs

and

compare

these

with

the

portfolio

quality

ofSHG loans.The long term trend inportfolioquality andcrosssectional comparisonswithother

typesoffinancialinstitutionsarepresentedinthereport.

Exceptionalcircumstancesaside,theclientretentionrateisgenerallyacceptedasbeingakeyindica

torofclientsatisfaction. Whilethecorrelationbetweenthetwobasedonthedataisnotverystrong

itindicatesasignificantrelationshipbetweentheclientretentionrateandportfolioquality. Itsug

geststhatasclientsatisfactionincreasestheportfolioqualityalsoimprovesasshowninExhibit4.5

ofthereport. Inthiscontext,theaverageclientretentionrateofIndianMFIsisrelativelylow.

The aggregate write off ratio across the sector for 201011 is high but, in any case, a temporary

measuresince

the

eventual

write

off

resulting

from

the

crisis

will

be

far

higher

ifthe

matter

cannot

beresolvedintheverynearfuture. InanycaseahaircutforboththeMFIscaughtinthecrisisand

fortheirlendersnowseemsinevitable. Itisonlytheclosenessofthecut(theproportionofinvest

mentlost)thatremainstobedetermined.

IndianMFIsarenowpayingthepricefortheirrelianceoncommercialbankfunds

Thedistributionofsourcesoffundsformicrofinance,presentedinExhibit5,showsthattheshareof

debt in MFI fi

nances climbed

sharply. The cur

rent

level

of

debt,amounting to

69.2% of total

funds raised by the

leading MFIs repre

sents a reduction

from the highest

levelofaround80%

reachedin2008.

Theextenttowhich

commercial

debtcontinues to domi

Exhibit5 Sourcesoffundsformicrofinanceoperations

34%

25%

8%

30%

7%

4%

75%

3%

0.2%

69.2%

3.7% 5.4%

0.1%

14.0%

7.5%

Institutionaldebt Clientssavings Otherliabilities Grants Paidinequity RetainedEarnings

2003 2005 2007 2010 2011


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xii|P a g e

natethefinancingofIndianmicrofinanceisapparent. Indeed,thedominationofcommercialbank

fundsinIndianmicrofinanceisunderplayedinthissinceitexcludesoffbalancesheetfinancingvia

portfoliosalesandsecuritisationofportfoliosundertakenbysomeofthe leadingMFIstothecom

mercial banks. A separate compilation of the portfolio managed by MFIs for others securitised

portfolios

that

are

not

on

MFI

balance

sheets

shows

that

the

amount

added

some

10.5%

of

the

portfoliototheMFIsmanagedportfolio. Theshareofnetworth/equityinMFIbalancesheetsand

thedistortionaryeffectofinadequateprovisioningisalsodiscussedinthereport.

Theuseoffundshasbeensqueezedbycashconstraintswiththedryingupofbankdebtin

responsetotheapparentpoliticalrisk

TheallocationoffundsbyIndianMFIshasconformedfairlywelltointernationalbestpracticenorms

inrecentyears.However,theexceptionalcircumstancesofthecurrentyearhaveresultedinexcep

tionalmeasures. Ofthetotalresourcesof`25,000crore($5.5billion)deployed inmicrofinanceby

thesampleMFIs,over80%wasdeployed in loanstoclientsattheendofMarch2011 (Exhibit6).Last

year

this

was

69%

which

was

below

the portfolio allocation level of the MIX

international median of 76.8% largely be

cause of the prevalent practice in India of

lenders making substantial disbursements

of loanstoMFIs inthe lastweekofMarch

(theendofthefinancialyear).

As indicatedearlier,theeffectofthecrisis

resulting from the AP ordinance spread

muchmorewidelythanthestateofAndhra

Pradesh.

This

effect

was

not

due

to

any

delinquency contagion reaching clients

outsidethestatebutratherduetothedry

ing up of bank funds to MFIs. Thus, the

manifestationofpoliticalriskthattheysawintheformoftheAPordinance,resultedinbanksreduc

ingtheirsanctionsinthelastquarterofthefinancialyeartoaminimallevel. ThisaffectedMFIsall

overthecountryandistheprimaryreasonforthelow(25%)growthinnetportfoliooftheleading

MFIsduringtheyear. Sincethereisalimittotheequityitispossibletoraiseandequitytakeslonger

tomobilise,whiledepositsarenotanoption,MFIswereforcedtolimittheirportfoliogrowth.

...andthereistheimpressionthatprudentialmanagementhasimproved

For ensuring prudential management, banks in India are expected by the RBI to maintain Capital

AdequacyRatios(CAR networthasaproportionofriskweightedassets)of9%andNBFCsof12%

(until March 2010 increasing to 15% by March 2011). While equity was a constraint in the early

yearsofIndianmicrofinance,theearlierequityconstrainteasedconsiderablyand,thoughinvestors

becameverycautiousafterOctober2010,theweightedaverageforIndianMFIsisnowinexcessof

25%wellaheadofthebankingsector.Theslowdownandreversalofportfoliogrowth inthe last

monthsofthe financialyearhasbeen largelyresponsible forthis increasefromthe18%weighted

CARofMarch2010.

Whilesecuritizationmayofferashorttermsolutiontothecapitalproblem, itdoesnotresolvethe

issuein

the

long

term.

For

commercial

banks,

as

discussed

above,

it

provides

the

benefit

of

inclusion

intheprioritysectorlendingrequirement(thoughthatisnowbeingreassessedbytheReserveBank

Exhibit6

UseoffundsbyIndianMFIs,2011

Net

portfolio,

80.6%

Fixed

assets,1.2%Cash,13.5%

ST

investments,

0.02% LT

investments,

1.0%Advances,

0.5%

Othercurrent

assets,3.2%


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xiii|P a g e

ofIndiainthecontextofthecrisis). AsurfeitoflendingfundsleadsMFIsto

inductclientswithoutduecareandrelationshipbuilding lendbeyondthecapabilitiesandmeansoftheirclients resorttocoercivepracticeswhentheclientsexpressaninabilitytopay.

TheemergenceofclientprotectionissuesandtherelatedpoliticalriskinAndhraPradeshandKarna

taka(and,byextension,elsewhere in India)can largelybeattributedtothisphenomenon. Inthis

context,thereductionintheproportionofthemanagedportfoliofrom53%oftheownedportfolio

inthe2005to10.5%nowisawelcomedevelopment. Itisworthremembering,however,thatuntil

March 2010 the absolute amounts had increased to such an extent that the proportions become

meaninglessfromtheperspectiveofanoverheatedeconomicsector. InMCRILsopinion,securiti

zation isadevicethatdilutestheprudentialeffectoftheCARrequirementandshouldbecarefully

monitoredbyregulators.

ReturnstoMFIshavedeclinedsignificantlyduetowriteoffsandthesqueezeonmargins

Thefinancialviabilityofratedmicrofinance institutions in India,apparent inthe2005Review,was

underthreatin2007. Whilethissituationwasdramaticallyreversedin200910,thecurrentcrisisin

Indianmicrofinancehascausedasubstantialmoderation. Thisisapparentinconsideringthereturns

MFIsearnnetofallcostsoperatingandfinancial. Thesignificantmoderationofthepastyearhas

been caused by the substantial write offs necessitated by the collapse of microfinance in Andhra

Pradesh. Thehighefficiency(lowOER)of IndianMFIsplayedakeyrole intheirprofitabilityasdid

thesignificantlyincreasedportfolioyieldsince2007. However,currentwriteoffshaveincreasedthe

totalexpenseratioquitesignificantlyandcausedtheweightedaveragereturnonassetsfor201011

tofallto3.0%. Asdiscussedearlier,thecrisisnotonlyhadtheeffectofbringingmicrofinanceinAP

toahalt,italsocausedasuddenrashofprudenceincommercialbanklendingtoMFIs(atthesame

time

as

a

hardening

in

inflationary

conditions

in

the

country)

resulting

in

an

increase

in

lending

rates.

TheimpactofthisonthecoststructureofIndianMFIsisanalysedanddiscussedinthemainreport.

...andtheimplicationsofthecrisisforthelongtermfutureoffinancialinclusionbyMFIs

arestilldifficulttopredict

GiventheactionsoftheGovernmentofAndhraPradeshandthecollapseofportfolioqualityinAPas

aresult,itisquitelikelythatthewriteoffandprovisioningexpensesofMFIswithoperationsinthe

statewillincreaseevenfurther.Atthesametime,MCRILexpectsanotherdeclineinportfolioyield

onaccountofthe limitssetbytheRBIon lendingratesforthepurposeofclassificationaspriority

sectorportfolios.

Theimplicationsofthisforthelongtermfutureoffinancialinclusionarestilldifficulttopredict. It

hasalreadyresultedinasubstantialdeclineincapitalbothdebtandequityavailableformicrofi

nanceand,as discussed in the report,hassloweddownandeven reversed the financial inclusion

effectofMFIoperations.WhatIndianMFIsneedisastableenvironmentinwhichtodelivermicrofi

nanceservicesdeposits,remittances,insuranceaswellasmicrocreditinaresponsiblemanner.

WhetherornotMFIscancontinuetocontributetofinancialinclusioninIndiaisnowdependenton

thepassageofthedraftMicrofinanceBillbytheIndianParliament. Untilsuchtime,however,most

lowincomefamiliesinAPhavebeenthrownbackintothenotsobenevolentarmsofmoneylenders.

Many low incomefamiliesoutsideAPhavealsosufferedcollateraldamageasthedryingupofon

lending funds from commercial banks has caused a reduction in MFI operations throughout the

country.

The

future

is

difficult

to

predict

but

the

report

provides

some

indication

of

the

constraints

andissueslikelytoinfluencethefinaloutcome.


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xv|P a g e

IntroductiontoMCRIL

Apioneer

and

world

leader

in

microfinance

ratings

MicroCredit Ratings International Limited is one of the pioneers of financial performance ratings

andtheworldwidepioneerofsocialratingforMFIs. Itistheworldsleadingspecialistmicrofinance

ratingagency. BySeptember2011,MCRILhadundertakenover1,100financialandsocialratingsof

over500microfinanceinstitutions(MFIs)in32countriesofAsia,EuropeandAfrica.

MCRILisbasedinGurgaonoutsideDelhi,capitalofIndia. Ithasanexcellentteamof15specialist

analysts with knowledge and experience of microfinance led by Dr Alok Misra, Director, Microfi

nanceServices. Andanother10analystsfortheratingoflowcostprivateschools

MCRILalsoprovidessectorwideadvisoryservicesandundertakesresearchandpolicystudiescom

patiblewithitsconcerntoavoidconflictsofinterest. Itsratingandadvisoryserviceshavebeenpro

vided inmanycountriesofAsia includingallcountriesofSouthAsiaand inCambodia,EastTimor,

Indonesia,Myanmar,PapuaNewGuineaandthePhilippinesaswellas inSamoa. IntheNIScoun

tries of the former Soviet Union, MCRIL has experience of Azerbaijan, Georgia, Kazakhstan, Kyr

gyzstan,RussiaandTajikistan. InAfrica,MCRILhasworkedinCongo,Ethiopia,Kenya,Malawi,Mo

rocco,Nigeria,Rwanda,SouthAfrica,Tanzania,Uganda.

Inkeepingwithitspioneeringtradition,

MCRILhasalsointroducedratingservicesfor

MicrofinanceInvestmentVehicles(MIV)(combinedfinancialandsocialrating)

LowCostPrivateSchools(forchildrenfromlowincomefamilies)

and

ValueChainInitiatives(toassesstheirimpactonpovertyand

theefficiencyandeffectivenessofsuchprogrammes)


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Documents

Executive Summary Review 2011 m Cril