India: Microfinance institutions drift from traditional Grameen lending model

By Namrata Acharya, Business Standard

Faced with the challenge of bank funding and stringent regulatory norms, many microfinance institutions (MFIs) are drifting from the traditional Grameen model of lending. The idea is to reduce operational cost, while maintaining low default rates. Many MFIs, especially those in the southern states, are experimenting with a monthly repayment system, rather than weekly repayment, to reduce costs. For example, Hyderabad-based Trident Microfinance and Chennai-based Equitas Microfinance have started experimenting with the monthly repayment model.

The Grameen model, dating back to 1976, stipulates weekly repayments under group lending, whereby the members of a group constantly create peer pressure for timely repayment of loans. As a result, the rate of default in most MFIs is as low as one or two per cent.

However, with margins coming under pressure and operational costs remaining high, after the crisis in the MFI sector, micro lenders are finding it difficult to continue with the weekly repayment system. Most MFIs in Andhra Pradesh, where majority of the industry was concentrated before the 2010 crisis, have substantially cut workforce at field level to bare minimum.

Recently, Trident Microfinance shifted from weekly to monthly repayment model of lending on a pilot basis in Madhya Pradesh. “The disbursement and repayment from the monthly repayment model is same as from the weekly one. It has reduced the cost as MFIs are struggling to stay afloat,” said Puli Kishore Kumar, promoter and chief executive officer, Trident.

Equitas, which had been operating on a fortnightly repayment model for lending since 2007, started monthly repayment model a year before.

At present, nearly 40 per cent of its customers are under monthly repayment schedule, while 60 per cent are in the fortnightly repayment schedule.

“We have begun offering monthly repayment options to our clients, and there had been no issues with repayments,” said P N Vasudevan, founder of Equitas. The monthly system of repayment in MFIs could reduce the cost of operations, which constitute a major expense for small lenders, by 25 per cent, said Alok Prasad, chief executive officer of the Microfinance Institutions Network ( MFIN), the representative body of MFIs.

However, the inherent risks of deviating from the Grameen model are not ruled out.

“Some MFIs are looking at monthly repayment system, as the operational cost is much lower. However, there are inherent risks in the model as the cash flows may not meet repayments. Expectation that a borrower will pay a lump sum amount of money at the end of the month can be unrealistic,” said Prasad.

India: Micro-lenders want policy norms to be eased quickly

By G. Naga Sridhar, The Hindu Business Line

Microfinance institutions are hoping for an early relaxation of norms on Non-Banking Finance Companies-MFIs by the RBI.

“The discussions are currently on with the Reserve Bank of India of India to address operational challenges in implementation of NBFC-MFI norms,” a senior executive of Microfinance Institutions told Business Line on Thursday.

“The response of the RBI to many of our concerns is positive. At this stage it can only be stated that relaxation of norms is likely very soon,” he added.

Dr D. Subbarao, Governor, RBI, had on Wednesday hinted that capital adequacy and provisional norms could be relaxed in a phased manner.
Entry capital

The existing norms prescribe a minimum entry capital of Rs 5 crore to be labelled as NBFC-MFI, which is tough for small MFIs to meet. Also, the 12 per cent margin restriction adds to the entry barrier. The RBI is likely to review these norms, among others.

However, this move may help small MFIs; the expectations of big players in the industry are slightly different.

“The relaxation of entry capital norms will certainly help smaller MFIs. However, in view of the paradigm shift in the microfinance sector, it is no longer enough to meet entry barrier norms,” Mr S. Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, said.

The focus now is on quality of assets, efficiency of operations, compliance, transparency, governance and globally benchmarked customer protection practices, he added.
AP FOCUS

The likely revision of norms by the RBI could be more Andhra Pradesh-centric in view of the prevailing situation in the State, the biggest market for MFIs prior to October 2010.

“Most parts of the existing regulation are good for the industry, expect maybe the provisioning norms. Apart from tweaking this a bit, the RBI may relax norms with an AP-specific focus,” Mr P. N. Vasudevan, Managing Director, Chennai-based Equitas Microfinance, said.

nagsridhu@thehindu.co.in

India: Microfinance institutions struggle for funds as banks raise lending rates

By Biswarup Gooptu & Deepika Amirapu, Economic Times

BANGALORE/HYDERABAD: Microfinance companies, especially the small and mid-sized micro-lenders, are expected to struggle to access money for lending even if the regulatory environment clears up, industry participants and observers say.

The main impediment will be banks’ reluctance to fund microfinance companies even after a proposed microfinance law comes into effect. Catering mainly to those at the bottom of the pyramid, microfinance providers rely heavily on banks for money which they lend at interest rates ranging between 24% and 36%.

Banks have steadily raised their lending rates to microfinance firms from 9%-12% earlier to 15%-18% now, making loans to small borrowers costlier. The ones likely to be most affected by higher bank lending rates will be small and mid-sized microfinance companies with loan portfolios between Rs 50-crore and Rs 250-crore.

“We have to wait and watch what is happening to the small and mid-tier players. The Bill will also force some amount of consolidation because banks are not comfortable in lending to small players,” Padmaja Reddy, managing director of Hyderabad-based MFI Spandana Spoorthy.

Banks have adopted an increasingly cautious approach towards the microfinance sector, and have preferred to lend money only to the marquee names that already have large equity base, such as Ujjivan and Equitas.

The Micro Finance Institutions (Development and Regulation) Bill, 2012, proposes an interest rate cap of 26% for microfinance institutions, with a margin cap of 10% above the cost of funds for players with loan portfolios exceeding Rs 100-crore, and 12% for smaller ones.

The Bill gives the Reserve Bank of India-the regulator for the sector–sweeping powers to control lending rates and margins, apart from fixing prudential norms. A microfinance development council, one of two advisory bodies proposed to be set up under the Bill, will set the policy agenda.

“It will turn out to be a loss-making business. If greater liquidity does not flow in over the next 12-18 months, we could see a number of the smaller microfinance companies disappear,” observed Venky Natarajan, managing partner of Delhi-based impact investment firm Lok Capital.

Turning to the risk capital industry is also not a viable option, he said.

“Equity cannot replace debt, and should not as well, simply because the risk-return characteristics are very different,” he said. Lok Capital has invested around $25 million (Rs 140-crore) in microfinance providers such as Ujjivan Financial Services, Janalakshmi, Satin Creditcare and Basix.

The Indian microfinance sector has been in a crisis since late 2010, when Andhra Pradesh, the hub for microfinance in India, imposed tight regulations on microfinance firms citing usurious interest rates and the use of coercion to recover loans.

SKS Microfinance, one the country’s largest, and the only listed microfinance company, bore the brunt of the fallout.

The microfinance company has been forced to write off nearly Rs 1,500 crore in loans over the past six quarters, and its stock, which traded at Rs 1,021 in October 2010, is now hovering at around Rs 65, having lost more than 90% of its value since the Andhra Pradesh crisis

The sector has seen some recovery in 2012, but it has been a skewed one. Larger companies have continued to successfully raise funds, with Bangalore-based Ujjivan having raised a $35 million so far this year.

“Larger players can survive and perhaps return to profitability in three to six months, but, frankly, I don’t see how the other smaller ones can survive,” said Dilli Raj, chief financial officer of SKS Microfinance.

India: MFIs still shying away from hiring field staff

By G. Naga Sridhar & Anjana Chandramouly, The Hindu Business Line

Hyderabad/Bangalore, March 29: Microfinance institutions are still wary of expanding field staff even as the business environment is improving.

The microfinance sector, which is slowly limping back to normalcy post the AP crisis, is cautious on branch expansion. This is expected to slow their recruitment as well. “The sector is now heading towards stabilisation. Generally, the focus is not on recruitment,” Mr P. N. Vasudevan, Managing Director, Chennai-based Equitas Microfinance, told Business Line. Before October 2010, the microfinance industry was among the largest rural employment providers with about 1.50 lakh youth working for it, according to Microfinance Institutions Network (MFIN) data.

Of this, major MFIs had about one lakh field staff spread over 10,000 branches.

This was scaled down drastically later due to the crisis in Andhra Pradesh. “We don’t have exact data for 2011-12 yet. But field staff numbers shrank compared to the previous year,” said Mr Alok Prasad, Chief Executive Officer, MFIN.

But with improvement in ground realities and funding, MFIs are now looking for non-AP expansion without big increase in field staff.

For instance, MFIs like Bangalore-based Grameen Koota are now looking at growth but in existing locations only.

“We don’t plan to expand our geographies,” said Mr Suresh K. Krishna, Managing Director, Grameen Koota.

Hiring, too, would only be for refilling vacant positions, he added. Mr Samit Ghosh, Managing Director, Ujjivan Financial Services, said that his company would hire 270 field staff to fill up existing vacancies.

SKS Microfinance reduced its employee strength by 31 per cent to 17,845 as on December 2011 from 25,735 in the year-ago period.

According to company spokesperson, SKS has no major plans for hiring except in small numbers for non-AP operations.

nagsridhu@thehindu.co.in

anju@thehindu.co.in

Equitas Microfinance to shrink loan book to Rs 850 cr by March

By R Srividhya, Mydigitalfc.com -

After talking about growth, PE investments and lifting the poor from their penury, microfinance firms are now talking about de-growth. The Chennai-based Equitas Microfinance has consciously decided to shrink its loan portfolio to Rs 850 crore by the end of the financial year 2011, compared to its loan book size of Rs 950 crore in October 2010.

The company is now taking cautious steps to ensure that the recent developments in the microfinance sector does not affect its growth.

The recent controversies surrounding the lending practices and non-transparent interest rate structure of microfinance companies in Andhra Pradesh saw the recovery rates of microfinance institutions (MFIs) fall significantly.

“It is only 2 per cent of our loan portfolio. But the customer psyche of not wanting to repay is alarming. Today it has happened in Andhra Paradesh. Tomorrow it may happen elsewhere,” cautioned PN Vasudevan, managing director, Equitas Microfinance.

Banks that earlier feared a state or central legislation on the sector put a hold on lending to MFIs. But following the Malegam Committee recommendations, banks were now opening up again to MFI lending, according to Vasudevan.

“But we are reluctant to expand in a scenario where there is an uncertainty on the way the sector will move ahead. It is risky,” Vasudevan said.

The real issue behind the crisis, according to him, is multiple lending to borrowers. “The Malegam recommendations talk about not more than two MFIs lending to a borrower and a limit of Rs 25,000 for each MFI. But what about the two other financial channels like SHGs and local money lenders who lend to the same borrower who has taken an MFI loan?” he asked.

The industry needed to have a clear monitoring structure, like a credit bureau, to identify multiple lending to the borrowers from various sources. Also the local moneylenders, who were an important part of the local lending scenario, had been totally left out in the Malegam Committee, Vasudevan said.

How Responsible Are Microfinance Investors?

by Antonique Koning, CGAP –

During the recent virtual conference on responsible finance several participants called on investors to reflect more on their growth expectations and insisted on proper assessments of governance, growth capacity of microfinance institutions, and debt saturation levels in the market. I agree. In my view, lending responsibly implies sticking to some of the basic principles of risk analysis and finance without letting competition for the best investment opportunities or fastest disbursements come in the way.

An overabundance of capital can trigger irresponsible actions or undue risk-taking on the part of investee companies. The experiences of countries like Morocco highlighted in a recent CGAP Focus Note tell the story. Investors were overeager to place funds in MFIs, which in turn grew too aggressively and were no longer able to manage their lending operations (i.e., they were less careful in the way that they placed loans). Disbursement pressure among investors comes from a large overhang of unplaced money sitting at microfinance investment funds. Beth Rhyne commented at the virtual conference that “this creates great pressure for investors to put money into MFIs that may not need it (or as much of it) or simply cannot manage it sustainably.” This does not mean that there is no need for investments in microfinance anymore. Rather, that investment funds are able to tap into new microfinance markets and investors are willing to take more risk to do so, as Blue Orchard commented in a recent post on this blog .

But the responsibility of investors goes beyond realistic growth expectations and accurate analysis. One other dimension that got attention in CGAP’s virtual conference, and rightly so, is the return expectations from investors.

Gil Lacson, of Womens World Banking, asked what a “reasonable” financial return would be for an investor, or an “acceptable” level of profit for the microfinance institution, given that the customers of microfinance are the poor and disadvantaged. This brings us to the realm of business ethics in microfinance: how much money should an investor and the MFI make?; what is obscene (or too much) and what is appropriate?; and who should pass that moral judgment?

Should others follow the example of the founder of India’s Equitas Microfinance institution that abides by a policy that voluntarily limits its annual Return on Equity? And if so, is Equitas’ voluntary limit of 25% a reasonable one?

As an example of how investors are addressing this question, KfW looks for a “risk constellation”, by examining the correlation of high average return on equity, high interest rates, high level (also in absolute terms) of nonperforming loans/losses, and a low level of loan loss reserves. KfW’s checklist for its investment officers suggests that a constellation with a return on equity greater than 25%, a portfolio at risk (30 days) greater than 10%, interest rates greater than 40%, and insignificant levels of loss reserves (occurring together) gives a first hint of irresponsible lending practices.

We are only at the beginning of this debate. The responsibilities and expectations of microfinance investors and managers are coming under increased scrutiny. What metrics to use to measure responsible investment and, more important, how to determine what standards are acceptable, will be key questions to address in the coming months. Watch this space.