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A brave new world of microfinance

Firms replacing microfinance industry are raising large amounts from PE investors & issuing new loans

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As the old guard in the struggles to survive, a new breed of firms has taken its place, raising large amounts from private equity investors and issuing record amounts of new loans, while signalling a way forward for the industry

The first anniversary of the (Regulation of Moneylending) Act, 2010, coincided with an interesting development in the business of microlending in India. Around October 2011, West Bengal-based Bandhan Financial Services, overtook Andhra Pradesh-based as the biggest microfinance institution (MFI) in the country.

Just about a year back, Bandhan did not even show up in a list of the top three MFIs in the country. At the end of the financial year 2010, Bandhan was less than half of the SKS. A year later, on December 2011, Bandhan was almost double the size of SKS.



In a very short space of time, a whole new breed of MFIs has risen from the ashes of the industry, In effect, they are breaking the decade-old monopoly of a handful of Andhra Pradesh-based MFIs, registering soaring loan numbers and pointing to a new way of doing business in the industry.

New MFIs are the rainmakers (Major PE deals after October 2010)
* Since October 2010, MFIs received private equity funds worth Rs 423 crore
* Satin Creditcare Network Limited raised equity worth Rs 40 crore in December 2010 and February 2011
* In June 2011, Janalakshmi raised Rs 65 crore from London based Citi Venture Capital International
* In September 2011, (IFC)  invested Rs 135 crore through equity in Bandhan
* In February 2012, Ujjivan Financial Services, raised Rs 127 crore from its existing investors

The MFI sector had been bleeding since October 2010, when the Andhra Pradesh government had issued an ordinance that curbed fresh lending and recovery of loans in the state. The impact translated into bad loans worth as much as Rs 6000 crore—toxic assets which may wipe out the net worth of several big Andhra Pradesh-based MFIs.

Earlier, SKS, Spandana, and together constituted more than 60 per cent of business of microfinance. flourishing in Andhra Pradesh, taking advantage of oldest and most successful self-help group movement. But the Andhra Pradesh crisis has turned out to be a big opportunity for smaller MFIs as its larger brethren are still floundering.

Take for instance, the loan portfolio of Bangalore-based Janalakshmi Financial Services, which started in 2008, soared from Rs 180 crore in March 2011 to almost Rs 300 crore by December 2011. By the end of the fiscal, the MFI expects to reach a Rs 400 crore mark. In June 2011, when private equity investors were scouting exit avenues from Andhra Pradesh-based MFIs, Janalakshmi raised Rs 65 crore from London-based Citi Venture Capital International.

In September 2011, International Finance Corporation (IFC), the private investment arm of the World Bank, invested Rs 135 crore through equity in Bandhan.

In February this year, another Bangalore-based MFI, Ujjivan Financial Services, raised Rs 127 crore from its existing investors, a Dutch and a Mauritius PE Fund—Netherlands Development Finance Company and WCP Mauritius Holdings III .

Ujjivan’s portfolio almost doubled from Rs 370 crore in financial year 2008-10 to Rs 625 crore last financial year. In fact, last year the MFI recorded highest growth in profit in last year years.

Delhi-based Fusion MFI, which started operations in March 2011 with a Rs 5 crore loan portfolio, expects to reach Rs 35 crore mark by March 2012.

Another Delhi-based MFI, Satin Creditcare Network Limited raised equity worth Rs 40 crore from ShoreCap II Limited and Danish Microfinance Partners K/S in two tranches in December 2010 and February 2011.

These are not just stray examples. Since October 2010, the MFI sector received private equity funds worth Rs 423 crore, with a clear shift towards smaller MFIs, said Abhijit Ray, co-founder, Unitus Capital.

Rising stars
The dispersion of MFIs outside Andhra Pradesh was no surprise, given the huge demand for microloans, and lack of investment avenues by private equity investors, mostly, socially responsible investors. In addition, the gap left by big MFIs after the Andhra Pradesh crisis fuelled the growth of local micro lenders.

For example, SKS’s non-Andhra Pradesh portfolio came down from Rs 3500 crore in October 2010 to Rs 1300 crore in December 2011. Also, a clarity in regulations has ensured long-term sustainability of the new generation MFIs and use of technology has given them an edge over the traditional ones in operational efficiency.

“In times of crisis, a key differentiator is the quality of leadership and the governance structures. Many MFIs, including Ujjivan and Janalakshmi, have had strong promoter CEOs, resilient management teams and an undiluted mission focus. These factors have allowed them to stay ahead in the game,” says Alok Prasad, chief executive officer, Microfinance Institutions Network (MFIN).

“For any private equity investor, exposure in Andhra Pradesh is a strict no. The investors are now looking at fundamentals like strong corporate governance, operations, strong management, rather than just profitability,” said Abhijit Ray, co founder, Unitus Capital.

In fact, Bandhan is the perfect example of how the crisis catapulted the West-Bengal based institution to the top rung. Between March and December, 2011, Bandhan’s loan portfolio grew by 34 per cent. The West Bengal-based MFI has been choosy in diluting equity stake, except for IFC and Sidbi.

However, it isn’t as if Bandhan was never a beneficiary of an unregulated interest rate regime, when the crisis was yet to hit the sector. In a smart move, in May 2010, just four months before the AP crisis, Bandhan voluntarily slashed lending rates by nearly five percentage points to 19.1 per cent from 24 per cent on a reducing balance. Notably, in 2010-11, the same financial year when the crisis hit the sector, Bandhan posted net profit of Rs 117 crore , compared to Rs 74 crore a year before.

“Credit itself cannot sustain MFI business, unless blended with development work. We consciously stayed away from mainstream private equity investors,” Samit Ghosh, founder, Ujjivan said.

Even as MFIs rush to sell portfolios to banks to raise funds through sensitisation deals, Ujjivan has taken a conscious decision to expand its balance sheet.

“We got funds from equity investors, banks and raised money through non-convertible debentures, so we have sufficient cash and we do not want to reduce our balance sheet size by entering secularisation deals,“ said Ghosh.

Unlike the traditional MFIs, Janalaskhmi had remained focused on urban customers and used technology, like biometric cards, for operational efficiency.

“We consciously stayed away from Andhra Pradesh due to intense competition. Now the number of players have reduced and this is definitely an opportunity for us,” said VS Radhakrishnan, chief operating officer, Janalakshmi.

Plummeting fortunes
For Andhra Pradesh-based MFIs, the worst is far from over. The latest blow comes from the new regulations which said a non-banking finance company microfinance institution (NBFC-MFI) would have to make 100 per cent provisions on aggregate loan installments overdue for 180 days or more. The new norms are effective from April 1, 2012. As a result most Andhra Pradesh-based MFI, expect for SKS, run the risk of have a negative net worth if the guidelines are not revised.

For example, if Share writes-off its Andhra Pradesh portfolio of Rs 1000 crore, its entire net worth would be eroded. Close to 1000 staff already left the institution between March-December, said sources.

Udai Kumar, founder, Share could not be reached for comments. Spandana, too will have its net worth eroded if RBI does not extend the deadline for bad loan provisioning. The MFI has merged at least 30 offices in Andhra Pradesh to cut costs.

“The net worth of most Andhra Pradesh MFIs will deteriorate if RBI does not revise its guidelines,” said Padmaja Reddy, founder, Spandana.

SKS has already written-off Rs 900 crore loans, stuck in Andhra Pradesh. However, it still carries Rs 484 crore of loans from the southern state. However, compared to its peers in Andhra Pradesh, SKS is better-off as majority of its loan portfolio is outside Andhra Pradesh. “We have already dealt with the Andhra Pradesh issue. Of the Rs 1500 crore Andhra Pradesh portfolio, we have already written of Rs 900 crore. Even if we write off the remaining Rs 484 crore next financial year, our net worth will be at a comfortable level,” said Dilli Raj, chief finance officer, SKS.

The future
As the MFI industry undergoes the biggest churn in a decade, it is the test of resilience for the MFI industry. The strict regulatory guidelines, such as interest cap of 26 per cent and margin cap of 12 per cent, would probably sift out those who are here to stay from the opportunists. “The MFI industry is probably more resilient now, because it has grown working in a tough conditions. It will be the ability to grow with responsible lending practices that would define the future of the MFI industry,” said Mathew Titus, Executive Director Sa-Dhan.

The crisis has also raised questions about established methods of microlending like group lending, which critics point out restrain loan sizes and leads to social tension.

“The crisis has shown that the group lending method has its own limitations. One needs to explore options like direct lending for long-term sustainability of the sector,” said Titus.

For MFIs in Andhra Pradesh, the growth would depend on the mercy of banks and regulators. “The AP-based MFIs are, no doubt facing very challenging times. Some of them have got a lease of life through the CDR mechanism. Hopefully, the AP Government will see reason and allow the normalisation of microfinance activities in the state,” said Prasad.

Meanwhile, their newer brethren like Sa-Dhan and Janalakshmi continue to post dazzling numbers, woo new investors as well as customers and chart out a whole new encouraging picture for the future of microfinance in India.

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