The estimated size of the organized microfinance industry in India is roughly INR 42,106 crore as of the end of June 2015, with about 3.1 crore last mile borrowers being directly impacted by RBI registered NBFC-MFIs. While over the last 15 years, the Joint Liability Group model has emerged as the predominant model of credit delivery to the targeted microfinance borrower, challenges remain:
- Rural penetration not as much as desired
- Only credit focus, other financial services including savings and insurance are yet to come to the fore
Inclusion of other formal sources of lending to the same customer segment – such as NGO-MFIs, Cooperative banks, Commercial Banks through the Self-Help Group (SHG) Model, and also the Business Correspondent (BC) model-nearly doubles the size of the MFI industry.
While a number of experts had predicted that the AP Ordinance would bring about the end of the microfinance market in India, the sector has actually emerged out of the crisis with a huge amount of credibility. There is growing optimism surrounding the sector given the radical realignment of India’s financial sector under the Reserve Bank of India (RBI). RBI has encouraged the expansion of players offering financial services and has therefore opened up the financial sector to new market players i.e. microfinance.
Regulation around microfinance is now much clearer than before the Andhra Crisis and there seems to be a decided thrust from the Central Government also in support of the sector. The awarding of a Universal Banking Licence to an MFI and Small Finance Banking Licences to 8 MFIs is further proof of the confidence that the regulatory and governing authority places in MFIs as optimal delivery models for dissemination of financial services.
The sector has seen a significant return of both debt and capital funding. Indian MFIs have taken significant steps towards strengthening their operations and reducing costs while maintaining portfolio quality. Investors’ concerns on over-leveraging by microfinance borrowers have been allayed by the setting up of credit bureaus.
MFI Sector on High Growth Trajectory
Over the last year, Indian MFIs have also emerged as effective financial intermediaries offering a viable alternative to the financially excluded.They have demonstrated commendable scale, sustainability and impact. Indian MFIs have taken significant steps toward strengthening their operations and reducing costs while maintaining portfolio quality with focus on expansion and diversification of geographical risk.Many MFIs have also diversified away from being “monoline” companies and have started partnering with third party services providers for offering both asset and liability products to their client base.The sector has witnessed many more equity deals this FY in addition to other landmark debt and capital market deals.
Market Overview of Microfinance Sector
Funding to MFIs has grown by 40% in Q1 of FY 15-16 compared to Q1 of FY 14-15. Major PSU banks have re-entered the fray and are enhancing exposure significantly. Equity deals have also gained momentum in the FY with most large and mid-sized players raising large sums of equity.
An additional impetus from the regulatory perspective has been provided by the formation of the MUDRA Ltd, currently a subsidiary of Small Industries Development Bank of India (SIDBI) and registered as an NBFC. In the interim, MUDRA is expected to act as a refinance agency to provide access to affordable money to MFIs such that the cost of funds to the microfinance borrower is consequently reduced. In addition refinance facilities available from National Bank for Agriculture and Rural Development (NABARD) and SIDBI are also helping MFIs access low cost funds.
Our Involvement with MFIs
IFMR Capital works very closely with high quality Originators in the sector – our partner base comprises of 32 MFIs as of October 2015, with a combined AUM of INR 210 billion. All of these Originators have developed standardised processes and systems, focusing on clean governance and transparency in origination practices and reported stable operations-evidenced through financial indicators and portfolio quality. Our underwriting guidelines cover three aspects namely governance, management &operations and financial indicators.
IFMR Capital works with these partners by offering a slew of capital markets products. The “invest and arrange” model adopted by IFMR Capital by virtue of which any MFI taken to the capital markets is first taken exposure to by IFMR Capital’s balance sheet has been instrumental in boosting investor confidence in the sector. In the last financial year IFMR Capital arranged close to INR 3,500 crore of funding to its partners. All of the partners that IFMR Capital works with have emerged strongly since the AP crisis, many of them having been nascent at the time with the support provided by IFMR Capital proving essential in their growth phase.
IFMR Capital today boasts of working with MFIs that have emerged as the largest and most innovative across technology and processes. It also continues to identify and work with small MFIs across the country to help them scale and achieve the same heights.
IFMR Capital closely monitors the risks involved with the microfinance sector, including high geographic concentration, political intervention, and operational risks related to cash management. Given below are some highlights of the sector derived using insights from IFMR Capital data across exposure to portfolio: