Microfinance Focus, November 25, 2011: Sa-Dhan, a network of microfinance institutions in India, releases its Bharat Microfinance Report 2011 titled ‘Microfinance: Under Scrutiny But Resilient’. Dr. K. C Chakrabarty, Deputy Governor, of the Reserve Bank of India (RBI) formally released the report at an event organized by Sa-Dhan on November 23 at the Indian Habitat Centre in Delhi.
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. 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. 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.
In this report the financial solvency of MFIs in terms of Balance Sheet composition, liquidity, quality of loan assets, debt structure, fund flow from banks after the microfinance crisis, MFI ratings etc, is also covered. 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.
Sa-Dhan has been publishing Bharat Microfinance Report for the past seven years. 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. In addition secondary data from NABARD and RBI reports and published literature have been used to widen the perspective of the coverage.
Microfinance and Financial Inclusion
• The Government of India and the RBI with measures like the 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 Self-Help Group (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 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, Scheduled Castes and Scheduled Tribes and Below Poverty Line households.
• MFIs offered products ranging from microcredit, microinsurance, savings, and remittance. Most of the credit availed from MFI are apparently used for income generation purposes.
Client Outreach, Portfolio Size and Growth Rate of Indian MFIs
• MFIs operate in 517 districts in 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. 2500 crore which have been scrutinized 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 decreased to 13.15 percent compared to 56 percent in the previous year.
• MFIs collectively disbursed Rs. 33730 crore as loans to clients during 2010-11. Also, the average loan per client stood at Rs. 5706, which is less than that of Rs.9766 in the last year.
• In 2010-11, more than one third of the MFIs displayed negative growth in client and loan portfolio.
Financial Performance of MFIs
• The RBI 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.
Financial Solvency of MFIs
• MFIs liquidity position has deteriorated due to 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 here depend 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 insgnificant.
• 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 the reluctance of banks to release funds after the crisis, bank borrowing by MFIs has come down by more than 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 RBI
• Around 50 percent of reporting NBFC –MFIs could meet the minimum Net Owned Fund of Rs. 15 crore suggested by the central bank.
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 a 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 of staff training of 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.
• MFI’s 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 ned 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.