Microfinance Focus, September 30, 2010: “Financial Performance of Indian MFIs-Quick Review 2010″ a report prepared by Sa-Dhan, a network body of Indian MFIs says that that the total loan outstanding for all 264 MFIs that reported to Sa-Dhan for the report is Rs.18, 343.9 crores (about US $ 4 billion) reaching out to 2.67 crore active borrowers. The report is yet to be made public.

The Quick Review, 2010 report, presents the performance of Indian microfinance institutions based on the audited data available till March 2010. Sa-Dhan has been publishing the Quick Report for the past five years and trend in reporting continued to be on the rise in terms of number of MFIs contributing data to the pool. This year 264 MFIs submitted the data including 115 non-members.

The report highlights an additional Rs.4,200 crores (US $ 0.91 billion) of outstanding portfolio is being managed by MFIs on behalf of banks and other financial institutions, taking the total outstanding portfolio managed by MFIs to about Rs.22,544 crores (nearly US $ 5 billion). The number of active borrowers has grown by 46% and outstanding loan portfolio has grown by 57.4% from last year to this year, it says.

Andhra Pradesh and the southern region continue to have the highest client outreach and loan portfolio among all states and regions. Share of outstanding loan portfolio and client outreach of the ten largest MFIs in the sector is significantly high. In terms of client outreach, it is also marked by a high degree of overlap of clients among the top ten MFIs.

Grameen model of service delivery is the most preferred methodology and a large majority of MFIs continue to work exclusively with women clients. Among the 10 largest MFIs in the sample, six of them have adopted the Grameen Bank model as their most dominant mode of service delivery.

Though the SHG model has been overtaken by the Grameen model as the dominant model among the MFIs, it still has significant presence which is evident from the fact that it has been adopted as most dominant mode of service delivery by nearly 40% of the MFIs in the sample. It was the most popular model in the yesteryears which is proven from the fact that nearly 52% of the MFIs older than 5 years (which constitute about 57% of the sample MFIs) have adopted the SHG model.

Urban focus of MFIs in India is on the increase, even though the coverage remains predominantly rural. The coverage of socially disadvantaged and religious minorities by MFIs has been growing over the years. The microfinance market in India is predominantly rural. However, in the recent years, it has been observed that Indian MFIs are also expanding their operations in the urban areas at a fast pace. Nearly one-third of the MFIs have significant urban orientation (with more than 50% urban clients). Nearly 20% of the MFIs in the sample have more than 75% of their total clients who lives in urban areas. As on 31 March 2010, about 27% of the total clients of the sample MFIs reside in urban areas. With increasing migration from rural to urban areas, many MFIs are now also increasing their focus on urban areas, the report says.

For profit MFIs hold nearly 90% of the total loan portfolio outstanding by MFIs and the 10 largest MFIs have the highest portfolio growth rate among all MFIs from last year to current year. For profit MFIs have also reported the highest growth rate among all legal forms of MFIs.

According to the report’s findings, median average loan size for the sample MFIs is Rs.9, 766. As per the self reported data of the MFIs, the median PAR (Portfolio at Risk) for the sample MFIs is 0.4%. MFIs with the highest average loan sizes (over Rs.15,000), have the highest median PAR among all MFIs based on their average loan size. Not for profit MFIs have the lowest PAR among all legal forms of MFIs.

The median of yield on portfolio for all MFIs in the sample is 26.6%. If the yield is taken as a proxy indicator for interest rates, it is observed that interest rates of MFIs are coming down with time. More than one third of the MFIs that reported had an yield of less than 20%.

The highest median yield comes from the ten largest MFIs (loan portfolio over Rs.500 crores) while median yield is lowest for MFIs with loan portfolio between Rs.50- Rs.100 crores. For profit MFIs have the highest median yield while the mutual benefit MFIs have the lowest median yield.

The median Operational Expense Ratio (OER) for all MFIs in the sample is 11.8% and or profit MFIs have the highest OER among all legal forms. As OER comes down with the increase in size of MFIs, hence the 10 largest MFIs have the lowest median OER. Further, OER is lowest for MFIs operating in the southern region while highest for MFIs operating in the western region. The report says that a major reason for high costs in the western region can be attributed to new staff and new clients. Hence the cost of expansion and client acquisition in new areas may reflect the true cost of operations of an MFI.

Further, the median RoA (Return on Asset) of all MFIs in the sample is 1.6% and the median RoE of all MFIs in the sample is 11.5%. The RoA for the top 10 MFIs is 4.3%.

Outstanding borrowings for MFIs as on 31st march, 2010 amounts to Rs.16, 466 crores (approximately US $ 3.58 billion) and 77% of the above borrowings are held by the 10 largest MFIs. 90% of the total borrowings are held by for profit MFIs.

The Quick Report also highlights that the public sector banks are the largest source of debt funds for MFIs, followed by the private sector banks. The debt funding from development finance and apex institutions as well as other bulk lenders remain low.

Moreover, the report highlights that of late the Indian microfinance sector has started spreading its wings outside the southern region in a big way and has reached many underserved regions. The State of Andhra Pradesh is reported to have the maximum outreach of microfinance borrowers with 62.5 lakhs clients.

Eastern region has been the single largest beneficiary of this shift. In the last five years, the growth in number of MFIs in eastern region has been very impressive. North and western region too have seen significant growth in number of MFIs. Though south still tops the list, the current trend has narrowed down the regional imbalance (in terms of presence of MFIs) to a great extent.

However, the underrepresentation of north-eastern region (except Assam) continues to be the area of concern. Out of the 264 MFIs reported, 45% are present in South India, 36.4% in the eastern region, 22% each in north and west regions and only 5.7% from north-east regions.

Very small and small MFIs together constitute more than 50% of the total MFIs in the sample. While the very large MFIs have only about 7% representation in the sample, they have got the substantially high share in the client outreach and loan portfolio collectively covered by all MFIs.

Nearly half of the MFIs working today have came into existence in the last five years. This reflects the high growth in number of MFIs in India. On the other hand, nearly one third of the MFIs are more than 8 years in age.

In the past few years, a trend has been observed India-wide where most of the not-for-profit MFIs are converting into regulated finance companies (NBFC). Even most of the new entrants in microfinance have chosen NBFC as most preferred legal form. Among the MFIs in the sample who have started microfinance operations in the last 5 years, nearly half of the MFIs have chosen to become NBFC. The MFIs with less than 5 years of microfinance operations constitute about 43% of the total sample of the MFIs.

Among the 10 largest MFIs in the sample (which contributes to more than half of the total client outreach and loan portfolio collectively covered by all MFIs), nine of them are NBFCs.

A further look into the relationship between legal form of MFIs and their portfolio size reveals that as the portfolio size of the organisation grows, the dominance of legal form of MFIs moves from ‘not-for-profit’ to for-‘profit MFIs’. As we could see in Exhibit 1.5, there are no ‘for-profit’ MFIs in the very small category, whereas, 90% of the MFIs in the very large category are ‘forprofit’ MFIs.

The very large MFIs have attained the highest growth rate during the year while the lowest growth has been observed in the very small MFIs. However, the small MFIs have the second highest growth rate. In terms of legal form, the for-profit MFIs have grown at a rate which is just less than double the rate at which the not for profit MFIs have grown.

The median portfolio growth rate among the sample is found to be 57.4% for the year 2009-10. While looking at the portfolio growth rate of MFI based on their size of portfolio, it is found that the 10 largest MFIs have surpassed all other category of MFIs. Their median growth rate for the year 2009-10 has been about 102%.

The report also goes on to say that Indian MFIs have a healthy allocation of assets conforming to global best practices. Liquid assets are marginally higher than the global norm while the allocation of fixed assets is low. In the overall sample, the median of proportion of the loan portfolio in the total assets is 81.8%, whereas, it is 12.1% for the liquid assets. However, the median of proportion of the other non-liquid assets in the total assets is just 6.1%, out of which, the major contribution is from the other assets (4.1%) and the fixed assets contributes to a meagre 2%.

As far as the pattern of portfolio financing is concerned, the report highlights that the total borrowings of 264 Indian MFIs,  as on 31 March 2010, is in the tune of Rs16,466 crores, out of which about Rs16,069 came from banks and other FIs and about Rs206 crores came from savings deposit (primarily by Thrift and Credit Co-operatives). Another major source of fund is portfolio securitisation, however, it is currently limited to only large and a few medium size MFIs. The total outstanding of loan portfolio assigned by banks and FIs to MFIs, as on 31 March 2010, is around Rs4,200 crores. Some of the large MFIs have also now started sourcing debt funds by floating ‘non-convertible debentures’ (NCDs).

Despite the inflow of substantial private equity to the microfinance sector, the dependence of MFIs on debt funds remains significant. The median of debt as a percentage of total liabilities and net worth for all sample MFIs is 80.3%.