Microfinance institutions set to see further consolidation

4 years ago

The microfinance institutions (MFI) sector, subjected to a blizzard of critical regulatory changes over the past two years – both at the key market of Andhra Pradesh and by the Indian central bank – is set to see another round of consolidation, according to industry veterans.

Experts feel that smaller MFIs will be either lapped up by larger players or will become marginalised as the issue of scalability and fund crunch are impacting their operations. Quite a few MFIs have been backed by venture capital investors and the consolidation may come as a blessing for these firms.

“The smaller ones (MFIs) are short of funds and it would get difficult for them to operate, unless they merge with larger ones,” said a director of a Bihar-based MFI who didn’t wish to be named.

Inorganic consolidation is already under way with deals such as IntelleCash Microfinance Network acquiring majority stake in Kolkata-based microlender Arohan Financial Services, as well as the proposed tripartite merger among Spandana Spoorthy, Share Microfin and Asmitha Microfin.

A report by the industry body Microfinance Institutions Network (MFIN) says that on a pan-India basis, the number of branches reduced 13 per cent during FY12 from the previous fiscal and the bulk of it was attributed to Andhra Pradesh where the MFIs’ branch network shrank 20 per cent.

“The process of consolidation has to be taken as a process of evolution. We have to consider the regulatory environment as well,” said Alok Prasad, CEO of MFIN. “What we are likely to see is that over 200 MFI players, who are fragmented, will see a large compliance load and margin pressure. These things will impact the industry,” he added.

As of March 31, 2012, there were 9,743 MFI branches across 26 states and the 10 largest MFIs operated more than three-fourth of the total branch network. Out of the total number of branches across the country, the share of non-AP MFI branches rose to 47 per cent in FY12, from 36 per cent in FY10.

The deteriorating AP portfolios severely impacted the flow of funds to MFIs from banks and investors. Funding for the microfinance industry has largely been through three broad categories of institutions – private commercial banks, PSU banks and other financial institutions such as Small Industries Development Bank of India (SIDBI), NBFCs and development financial institutions (DFIs) beside other private funds. Of these, public sector banks have been the biggest lenders to the MFI sector.

However, as risk perceptions, vis-à-vis the microfinance industry, improved in the last six months of FY12, and bank funds and equity began to flow into the sector. But there was a consolidation in fund flow too, with small MFIs having portfolio size of less than Rs 100 crore finding it difficult to raise fresh equity or debt, as per the MFIN report.

SKS Microfinance continued to be the largest MFI in terms of client base (although a big chunk of it was inactive), followed by Bandhan, Spandana and Share Microfin. The top 10 MFIs covered 82 per cent of the total client base, even though each of them, except Bandhan, witnessed a decline in the number of clients in FY12. On an aggregate basis, the client base of the top 10 MFIs decreased by more than a fifth in the last financial year.

During 2011-12, the industry continued to struggle with the repercussions of the Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance/Law, 2010.

On a pan-India basis, all indicators such as clients, gross loan portfolio (GLP), disbursements, branches, employees, portfolio quality and financial performance ratios, deteriorated.

Another notable trend is that the microfinance industry, which was earlier concentrated in Andhra Pradesh and a few southern states, has now spread its base with a significant presence in Tamil Nadu, Karnataka, West Bengal, Orissa, Maharashtra, Madhya Pradesh, Gujarat, Uttar Pradesh and Bihar.

(Edited by Sanghamitra Mandal)

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1 Comment
Manoj Gautam . 5 years ago

The comments, though posted 15 days back have assumed special significance in the wake of suicides in Andhra. I do not know if the suicides are an attempt to politicize the micro finance sector or an attempt by people to tarnish the image of a particular MFI, however we would need to go beyond lending to poor. A model which lends money at 35% in rural India cannot work as I do not think any business can give an IRR above these interest rates. We would need to lend a helping hand to the people. MFIs, though are mired in controversy today, but let us not forget they have brought to fore rural vs urban India debate once again. I believe that the solution for all inclusive growth do not lie in urbanization of India as we are primarily an Agri society. People migrate to towns in search of Livelihood, what if that livelihood is provided at the village level itself. NABARD has developed many such models; RRBs have been attempting to replicate the success of commercial banks in Urban India but with limited success. I think MFIs need to work as development institutions rather than lending Institutions. Most of these MFIs lack the requisite bandwidth to execute the developmental lending. They are managed like typical NBFCs where the focus is on NIM and quarterly credit numbers. However, with their reach, they can work wonders as and when they decide to work with SHGs to provide livelihood to rural people.

Microfinance institutions set to see further consolidation

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