For microfinance institutions (MFIs), the year 2012 was a period of transition after facing strong regulatory headwinds in the past – both at the key market of Andhra Pradesh and from the Indian central bank. Microlenders are now going beyond mere loan product offerings to remittances, insurance distribution and payment services.
In 2012, the Reserve Bank of India created a distinct category of NBFC-MFI besides providing relief on provisioning norms and allowing external commercial borrowings (ECBs) up to $10 million.
While the past year was a rough one, there were quite a few MFIs who managed to buck the trend. VCCircle captures the top five trends in the sector.
Merge to survive
Experts feel that smaller MFIs will be either lapped up by larger players or will become marginalised as issues of scalability and fund crunch are impacting their operations. Inorganic consolidation is already under way with deals such as IntelleCash Microfinance Network acquiring a majority stake in Kolkata-based microlender Arohan Financial Services and 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, compared to 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. What we are likely to see is that over 200 MFI players, who are fragmented, will see a large compliance load and margin pressure,” said Alok Prasad, CEO of MFIN.
Bank funding remains a tough nut, but sentiment improves
The flow of funds to MFIs is still not out of the woods. Sa-Dhan, another industry body for MFIs, says that bank funds constitute about 85 per cent of the MFIs’ lending resources, but the banks have become extra cautious and slowed down the release of funds.
There was a consolidation in fund flow, with small MFIs having portfolio size of less than Rs 100 crore finding it difficult to raise fresh equity or debt.
However, the banks’ risk perceptions, vis-à-vis the microfinance industry, has improved. The managed portfolio, where loan assets originated by MFIs were sold to banks, increased in 2012, thus showing improving confidence of banks in MFIs.
In one innovative attempt in Rajahmundry of Andhra Pradesh, a few banks even took over the debts owed by self-help groups to MFIs by offering fresh loans to them to repay the microlenders.
De-risking strategy: business correspondents, remittances, et al
Diversifying product offerings is one of the ways MFIs are trying to de-risk their business model, which was skewed towards micro credit. Leveraging their deep networks in the hinterland, microfinance companies are now trying to distribute insurance products, offering remittances and other payment services.
The business correspondent model is also something which has caught the fancy of MFIs. The model helps extend the basket of products to borrowers and MFIs like SKDRDP, IDF, Asomi, Cashpor, Indur, Dhrishtee Prayas and others have been effectively acting as BCs to their respective banks.
The growth in client outreach reversed its trend in 2012 with the total client base of MFIs falling below the 30 million mark. And the few companies, which increased their client base and in the process, increased the loan portfolio above Rs 100 crore, faced a double whammy as they faced a regulatory margin squeeze from 12 per cent to 10 per cent.
Between 2011 and 2012, for every Rs 100 of MFI loan portfolio held, the interest revenue came down by Rs 4 while the loan loss provision expense went up by Re 1.
However, the contribution of fee income, as well as the interest income, is set to increase with cross-selling of other services to borrowers.
Deal-making: private investors return to back MFIs
Private equity and social sector investment firms who had faced setback in their investments in the MFI space in India due to regulatory flip-flops, had been cautious on betting afresh in the sector. Some like Accion Global, which has backed MFIs like Swadhaar FinServe and Saija Finance, are revisiting their India investment strategy and taking a hard look at any fresh MFI sector exposure.
However, others see an opportunity springing up. The year 2012 has already seen announcements for private investments and commitments for funding of over Rs 700 crore ($130 million). This is led by the IFC which committed fresh funds to Equitas and Ujjivan. Others who raised funds included Vistaar Financial Services, Saija Finance and Arohan Financial Services, among others.
Also, in the biggest fundraising activity, the erstwhile biggie SKS Microfinance raised Rs 264 crore through a qualified institutional placement, along with a preferential allotment to existing private equity investor WestBridge Capital.
(Edited by Sanghamitra Mandal)