National Conference on Microfinance 2011

1. National Conference on Microfinance 2011 Financing microfinance: lowering barriers to investment (Growth) March 15-16, 2011

2. Year 2006 – Challenges for Growth of MFIs • Capital • Debt Funding • Dependence on a single product • High Opex – No breakthrough technology intervention • Lack of skilled manpower / ability to attract talent • Absence of regulatory environment for a balanced growth of the sector

3. 2007-2010: Trends in Indian Microfinance –Growth • Not for Profits & Mutual Benefits grew from 111 to 208, for profit MFIs grew from 18 to 56 • Total Outreach of Not for Profits & Mutual Benefits grew from 39.79 lakh to 51.26 lakh in 3 years, Outreach of for profit MFIs grew from 43.65 lakh to 221.71 lakh • Portfolio outstanding of Not for Profits & Mutual Benefits grew from Rs. 1,432.81 crs to Rs. 2495.47 cr., and that of for profit MFIs grew from Rs. 1,826.78 crs to Rs. 15,238.71 crs Portfolio & Outreach of MFIs Reporting to Sa-Dhan over the period 2007-2010 Data Source: Financial Performance of Indian MFIs – A Quick Review 2010, Sa-Dhan

4. 100.0% For - Profit 80.0% 33.6% 60.0% Not - for - Profit 40.0% 57.9% 20.0% Mutual 0.0% Benefit (<Rs1 Cr (Rs1 - <10 Cr (Rs10 - <50 Cr (Rs50 - <100 (Rs100 - <500 (>Rs500 Cr 8.6% portfolio) portfolio) portfolio) Cr portfolio) Cr portfolio) portfolio) Not - for - profit Mutual benefit For - profit (<2 Yrs) (>8 Yrs) 2.9% 32.9% (2 - <5 Yrs) (5 - <8 Yrs) 40.0% 24.3% 2010: Trends in Indian Microfinance – Composition Distribution of MFIs by Legal Form Variation in legal form of MFIs based on Portfolio Size • Not for Profits constitute nearly 60% of the MFIs, but most new entrants are NBFCs & not for profits converting to NBFCs. • Close to half of all MFIs have come into existence in the last 5 years. However, avg. portfolio of MFIs between 2-5 yrs. is Rs. 38.7 crs, while for those between 5-8 yrs. is Rs. 23.5 crs. • 9 out of top 10 MFIs (by size) are NBFCs. No for profit MFI in very small category. Distribution of MFIs by Age Data Source: Financial Performance of Indian MFIs – A Quick Review 2010, Sa-Dhan

5. 2010: Trends in Indian Microfinance – Performance Variation in Yield on Portfolio based on Portfolio Size Variation in OER with legal forms of MFIs • Staff productivity does not differ significantly due to legal form of an MFI. Median ABCO of not for profits, mutual benefits & for profit MFIs are 346, 389 & 392 respectively • 73% of not for profit & 91% of for profit MFIs are operationally self sufficient • 43% of not for profit MFIs have OSS between 100-120%, 22% are between 120-150% & 7% are above 150% Variation in Yield on Portfolio based on legal forms of MFIs Data Source: Financial Performance of Indian MFIs – A Quick Review 2010, Sa-Dhan

6. 2010: Trends in Indian Microfinance – Funding Level of Debt Dependency among MFIs based on Legal Form Level of Debt Dependency based on portfolio size of MFI (in Rs.) • Leverage as on March 31, 2010 (D/E Ratio) • Very Small – 8.5, Small – 6.9, Medium – 5.9, Mod. Large – 5.9 , Large – 5.3, Very Large - 5.8 • Not for Profit – 7.7, Mutual Benefit – 7.4, For profit – 3.1 • 77% of the total borrowing of Rs. 16466 cr. went to top 10 MFIs, 90% went to for profit MFIs • Upto July 2010, about Rs. 3000 cr of equity investment has happened in India • Expected to have similar distribution pattern as debt Data Source: Financial Performance of Indian MFIs – A Quick Review 2010, Sa-Dhan

7. 2010: Trends in Indian Microfinance – Social Impact • Poorest district coverage • Total number of poor districts covered by MFIs – 235 • Coverage by For Profit MFIs – 139 • Coverage by Not for Profit MFIs – 205 • Coverage of backward classes • 25.3% clients belong to SC/ST communities, proportionate to their ratio in total population, but lower than their proportion in BPL families • MFIs that have SC/ST clients higher than 25% or even 50% of their total clients fall in the category of ‘small’ & ‘medium’ MFIs • Coverage of minority communities • 16% of clients are from minority community, again proportionate to their ratio in total population, far below in the category of below BPL • Urban poor • By 2030, anywhere between 40-50% Indians will be living in cities, rate of growth of urban poverty is higher than rate of growth of rural poverty • 27% of clients live in urban areas, but MFIs don’t have a solution for migrant population Data Source: Financial Performance of Indian MFIs – A Quick Review 2010, Sa-Dhan

8. 2011: Current Situation • Severe liquidity crunch - not for profits, smaller MFIs worst hit • Ambiguity about regulation for the sector • Debate on social value Vs. profit motive • Strong concerns around client protection, over-indebtedness • Heightened risk perception amongst lenders & investors • Questions being raised about the efficacy of current business models in creating lasting value for the clients Q1. Has the progress been systemic or are these just examples of individual excellence Q2. What is the role for not for profits/community organisations? Can these be developed into niche yet efficient organisations serving poorest of poor across the country?

9. 2011: Challenges for Growth • Regulations which promote, develop & regulate the sector • Strength of the Business Model • Range of products • Geographical spread • Customer need analysis • Credit profiling of clients • Business Intelligence – over indebtedness survey, competition analysis, cross sell • Market penetration/Target segmentation • Corporate Governance & Professional Management • Demonstrated track record • Adequate mix of skilled & non skilled staff • Management controls & system of checks • Imbibing of corporate values

10. 2011: Challenges for Growth • Financial jurisprudence & Operational capabilities • High capital adequacy • Comfortable leverage • Active liquidity management • Adaptability to dynamic environment/ Innovation • Availability of real time information from the field • Technology solutions to reduce cost • Flexibility in business operations/ business continuity planning • Adherence to Code of Conduct/ Client Education • Client protection • Transparency • Ethical Behavior

11. How do we overcome these? – Some Suggestions • Capital • No domestic equity fund to support small NBFC MFIs, not enough social investors to support growth of not for profit MFOs • Can sub-ordinated debt be a solution – from where & how • Or is becoming a BC the best option for small MFOs/MFIs • Low cost debt • Limited sources of debt during initial stages of growth, inability to assess risks • Domestic guarantee fund to channelise greater credit flow, underwrite risk for new products, support expansion in backward areas • New products / lending methodologies • MFIs lack expertise and resources to develop new products, skills for credit assessment • Sa-dhan is developing a micro-enterprise loan product • Can banks partner with MFIs to develop products both credit & non-credit based on client needs absorb the costs of testing, pilots, staff training

12. How do we overcome these? – Some Suggestions • Transparency / Client Education • Lack of expertise for client education & cost of deployment of resources ? • Technology/MIS • The is no common platform or shared infrastructure, either for backend transaction processing or an efficient delivery channel to reduce the overall cost of operations for MFIs • Can microfinance be also classified as “ Infrastructure” similar to provision for Health & Education, especially for technology platforms, physical infrastructure in areas like North-East ? • Skilled Manpower • The current microfinance models run on lowest skilled human resources • Can we create a PPP model to recruit and train an ethical and a motivated workforce in large numbers to meet our growth requirements? • Are we willing to compensate professionals to bring newer ideas and innovations, to create greater economic & social value for our clients ?

13. National Conference on Microfinance 2011 Thank you