Overview of Indian Microfinance: Key takeaways from the Bharat MF Report [part-1]

Microfinance Focus, April 20, 2010: SA-Dhan, a network body of majority of Indian Microfinance Institutions has released its sixth annual Side-by-Side Report of Microfinance in India for the year 2008-09. The report is preceded by a Quick Report that is a compilation of unaudited data by MFIs for the purpose of spotting trends in the sector. The theme of this year’s report is ‘Responsive Growth’, as it touches on issues that arise with the maturation of microfinance in India. The contents include an overview of trends, highlights, new concerns and projections for the future. It also looks at how Indian MFIs measure up financially and socially, proposes a new way of quantifying social performance, and finally, discusses some negative consequences that come with growth, namely unhealthy competition among MFIs.

The data that this report was based on was obtained from self-report by 190 MFIs that are members and non-members of Sa-Dhan. The data collection sheet was based on six financial parameters drawn up by Sa-Dhan. The function of this report is twofold. The first is to shed light on the importance and performance of financial services management in an industry whose clients are the financially disadvantaged of society. With this data, the way MFIs manage their services to their clients can be monitored and tracked to identify areas of potential pitfalls and performance. Sa-Dhan also hopes that the annual collection, analysis and report of such data will eventually be recognized as a crucial facilitator of setting the standards for the industry.

A key event of the financial year 2008-2009 (FY08/09) was the global economic crisis, which slowed India’s economic growth. This impacted microfinance in as much as the employment of the export sector shrunk, causing some microfinance clients to lose their job, and also pushing them to spend more on basic commodities, instead of investing in their microenterprises. This was reflected in an increased ratio of Non-Performing Assets (NPA) in banks and a higher Portfolio at Risk (PAR).

On a brighter note, microfinance portfolio growth and client outreach have been increasing at a consistent rate, despite the crisis, through the two main channels of SHG-Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs). The performance of the abovementioned channels are looked at in greater detail in the later chapters, and the verdict is promising, notwithstanding room for improvement. In the last year, microfinance was extended to a further 168 lakh clients, bringing the estimated tally of clients to 817 lakhs, or a still impressive 736 lakhs if the overlap between the two channels is taken into account. Outstanding credit also increased by about 50% to an estimated Rs. 34, 413 crore. These figures reveal that while client outreach increased by only 29%, credit outstanding grew by a disproportionate 50%.

Microfinance is delivered by two primary channels of the SBLP and MFIs. In the former, savings outstanding grew by 46.5% to Rs. 5545 crore, and it client outreach surpassed 850 lakh. Loan portfolio grew 33.4%. Its credit outstanding of Rs. 22,680 crore reached 591 lakh borrowers. In the latter, its outstanding loan portfolio almost doubled in the past year to Rs. 11,734 crore, benefiting an estimated 226 lakh clients.

While both channels managed to increase their per capita loan amount, the rate of growth was higher through MFIs. The average loan to each borrower through SBLP and MFIs are Rs. 3789 and Rs. 6519 respectively, which are significant figures considering the average annual per capita income of India is Rs. 24295, and the below poverty income is Rs. 15000. It is also noted that more MFI-borrowers took loans of more than Rs. 10,000, and less took loans below Rs. 5000. 93% of borrowers were women.

In the past year, MFIs increased its reach by 60 districts, taking its total to 465 districts, of which 261 are the poorest in India. Of these 60 districts, more than half were poorest districts.

Among MFIs, volume of transaction and profitability, as measured by Returns on Asset (ROA) and Returns on Equity (ROE), has increased. However the financial crisis has evidently affected it in many aspects, such as sustainability, which dropped from 125.9% to 117%, and operating cost, which increased from 8.5% to 14.3%. Portfolio quality and productivity were observed to have declined as well.

The performance of SHG were analyzed based on NABARD’s report on SBLP, ad reinforced by Sa-Dhan’s own data that was obtained through a survey purposed to assess SHG quality and review research findings. Generally, SHG has increased its client outreach. 4.2 million of its 6.1 million SHGs are now receiving loans, and the amount of savings with banks from SHGs increased 46.5% to Rs. 5545 crore alongside, corresponding with a 33.4% increase in total bank loans, which now stands at Rs. 22679 crore. Volume transaction in the Indian SBLP is dominated mainly by State Bank of India, and 3 other south-based banks – Andhra Bank, Indian Bank, and Indian Overseas Bank. Majority of the banks involved in these programme are commercial banks, trailed by Regional Rural Banks (RRBs) and cooperative banks. Commercial banks also leads RRBs and coops in repayment rate as measured by Non Performing Asset (NPA) ratio. Despite the positive outlook on SHGs, NPA and SHG management quality are emerging as areas of concern.

Despite the success of MFIs in serving the poor, the growth of the industry has given rise to a number of problems. The areas of unhealthy competition among MFIs especially in saturated regions, budding intermediaries that may jeopardize the work of MFIs, and protection of the client are deemed to require urgent attention, if the industry is to maintain its positive image.

Based on the growth rates of MFI and SBLP in 2008 and 2009, which stand at 41% and 60%, and 21% and 50% respectively, the industry is expected to expand its portfolio to over Rs. 200,000 crore by 2015. The total number of clients to be reached is an estimated 4400 lakh. Further, it is expected that MFI will surpass SBLP on measures of client outreach and portfolio.

The social performance of MFIs has become an important issue in recent years. The increasing profitability of the industry has made it very tempting for microfinance players to overlook the social mission and hence focus too much on the profit motive. A profit-driven microfinance industry will spell trouble in areas of multiple lending, over-indebtedness and geographic concentration (as they compete to milk the most lucrative regions). Thus, it is crucial in the coming years that the sector reinforces its mission to put the client’s needs first.

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Note: 1 Lakh = 0.1 mn

1 Crore = 10 mn

1 USD: INR 45 Approx

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