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The consistently robust repayment performance of the underlying clientele is the most impressive aspect of Indian MFIs.
We believe the Indian microfinance sector presents an attractive investment opportunity. This view is apparently shared by investors such as Legatum, Sandstone, Sequoia, Silicon Valley Bank, Valiant, and others who have made recent investments. This industry catering to poor borrowers, which until five years ago was primarily sustained by aid money, has proven to be highly profitable.
The same borrowers, who are largely unaffected by the global economy, have now withstood the test of time, their creditworthiness demonstrated by the continuous strong repayments. The phenomenal growth of the Indian microfinance sector coupled with empirical evidence that it is relatively uncorrelated to the global economic situation, have driven significant investor interest.
Recession Proof Growth
This translates to an average loan outstanding of Rs. 6,500 and the numbers in aggregate reflect the fortune at the bottom of the pyramid. Most of the better performing MFIs have had triple digit portfolio growth rates.
This is just the tip of the iceberg though – MFIs have reached only 3.5% of the poor in India, signifying that there is an immense untapped terrain, yet to be explored. Growth has largely been skewed towards Southern India and microfinance is in its infancy in the North and the West. We describe below what has driven this strong, recession proof growth, as well as some of the sector’s challenges.
The foremost initiative is the guideline on priority sector lending for all banks, which has incentivized debt funding to MFIs, even during the current crisis. Additionally, the dedicated and sustained efforts of state owned developmental financial institutions like SIDBI, NABARD and RMK have been indispensable to fostering Indian microfinance.
Going forward, the proposed creation of a national unique identification number will make feasible tracking of individual credit histories, exposures and developmental indicators. The Government will hopefully be even more helpful in the future by enacting legislation that allows the larger MFIs, which are NBFCs and have robust systems and processes, to mobilize savings deposits.
Specific legislation on microfinance is pending approval from the Parliament and is expected to provide a proactive and focused regulatory framework, standardized reporting and increased transparency.
Increasing Funding Options
Of late, there have been instances of select larger MFIs issuing listed debt instruments like commercial paper and non-convertible debentures – a recent media report stated that MFIs were looking to raise Rs. 1,000 crore this financial year through the issue of such instruments.
Such securities: (1) augment the investor universe by overcoming regulatory constraints and liquidity concerns, (2) reduce cost of funding as a direct consequence of this increased universe and (3) enhance the probability of funders taking exposure for longer tenures, which will help fund micro-housing and other products having longer terms. Securitizations are on the increase, banks are enhancing exposure to MFIs and the emergence of guarantee funds is facilitating debt funding to the smaller players.
An MFI is an incredibly powerful channel to reach rural masses and, as such, is a cardinal distribution channel to market products. SKS, India’s largest MFI, has teamed up with handset providers to supply its borrower base with low-cost mobile phones. Bajaj Allianz recently infused a strategic investment of Rs 50 crore into SKS as it agreed to provide the outreach needed to mass-distribute micro-insurance policies.
Through education, healthcare, energy-efficient devices and other products, there is an enormous potential to tap into the newly aggrandized disposable incomes of rural India, as well as create income sources for the poor. These opportunities will significantly contribute to increasing the fee-based incomes of MFIs, which will be independent of their loan portfolios.
MFIs are increasingly becoming tech-savvy and automation of hitherto manual processes has enabled deep cuts in cost structures. Teledensity in India has been growing at breakneck speed, touching 37% (430 million subscribers) as on March 31, 2009. Mobile banking is expected to be the next revolution in Indian financial inclusion, especially considering the incredible success that countries like Kenya have had.
Outlook
Exit mechanisms for investors have also become much more lucid – some secondary sales have taken place and reports of upcoming IPOs have been seen in the press. There is a market for all classes of equity investors in microfinance: infusions have varied from a couple of crore Rupees to more than Rs. 350 crore.
The median P/E at which private equity infusions into MFIs have taken place in the last year has been close to 10, despite growth rates of projected earnings often being above 100%.
This was a testament to the double bottom line approach that emphasizes both profitability and social impact. Newsprint is replete with articles on this silent socioeconomic revolution. Investors are also increasingly realizing why this asset class is so attractive.
Micro Finance is the real path of the growth of indian present economy.