Intellecap Inverting the Pyramid Edition 3

8/7/2019 Intellecap Inverting the Pyramid Edition 3

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Th authrs f this rprt wish t thank and acknwldg th cntributin f all th ppl wh

hav gnrusly ffrd thir idas, insights and tim in supprt t this ffrt.

First and frmst, w thank all th practitinrs, ntrprnurs, xprts and stakhldrs in Indian

micrfinanc wh thrugh thir passin and ddicatin hav shapd th sctr, and t whm w

ar dply indbtd fr sharing with us thir knwldg and xprinc.

A spcial thanks t Vint Rai, C-fundr and Chairman f Intllcap, and Manju Mary

Grg, Businss Cnsulting Grup Lad, fr prviding guidanc thrughut th prjct and

th ncuragmnt t think in nw ways. Thir visin has hlpd t shap ur wrk, and thir

ddicatin t th sctr has bn an inspiratin t us, driving us t maintain intgrity in ur

apprach and nsur utility in th analysis prsntd in this rprt.

Anurag Agrawal and Atrya Rayaprlu f Intllcap’s Invstmnt Banking Grup rciv

apprciatin fr making imprtant cntributins t th tam’s knwldg f markts and invstrs,

and fr kindly acting as a sunding bard fr varius analyss.

Publishing this rprt wuld nt hav bn pssibl withut th authrship supprt f th ntir

Intllcap tam, and spcially Satish Pai, Nisha Dutt, and Shalini Kadavru. Anand Brundiya

and Prachi Mathur als prvidd th tam with practical fdback, fr which w ar gratful. W

wuld als lik t thank Linsday Clintn and Arjun Kashyap fr thir ditrial supprt in th final

phas f wrk.

Finally, w thank Rashi Agrawal, Indira Mallla and Swapna Vuppala fr thir invaluabl supprt

in cllcting data.

ACKNoWLeDGeMeNTS



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CoNTeNTS

List f Abbrviatins................................................................................................. 4

excutiv Summary................................................................................................... 2

Intrductin............................................................................................................. 5

1. Exploring Pressing Issues in Indian Microfinance 6

1.1 Is Indian Micrfinanc Grwing T Fast? 7

1.2 Is Indian Micrfinanc a Bubbl in th Making? 8

1.3 Hw Wll ar Indian MFIs Gvrnd? 10

1.4 Is th Cmmrcializatin f Micrfinanc Cmprmising its Scial Impact? 11

1.5 Ar Indian MFI Valuatins t High? 12

1.6 What Happnd Sinc Last Yar: Updat t th Trnds Frcastd in 2008 13

2. Demand and Supply in the Microfinance Market 162.1 Th Micrfinanc Industry: A Lk at Wh is Supplying th Funds 17

2.1.1 Cprativ Banks and Rginal Rural Banks 18

2.1.2 Banks: Facing th Limits f th Traditinal Branch Systm 18

2.1.3 SHG-Bank Linkag Prgram: Strng Bas, Slw Grwth 19

2.1.4 Micrfinanc Institutins: NBFCs emrg as Industry Ladrs 20

2.1.5 Ggraphical Rach f SBPL & MFIs: Mr than 50% Clints ar in Suth India 21

2.2 Dmand & Pntratin 22

2.2.1 Mapping th Dmand fr Micrcrdit in India 22

2.2.2 Markt Pntratin: Prst Stats Rmain Undr-Srvd 23

2.2.3 Markt Pntratin by Numbr f Clints 24

2.2.4 Markt Pntratin by Crdit Supply 25

Cas Study: Uttar Pradsh 26

2.3 Bynd Crdit: th Markt fr Insuranc, Savings, and othr Srvics 28

2.3.1 Spcial Purps Lans: Mving Twards Cnsumr Financ 28

2.3.2 Insuranc: Strng Grwth Ptntial, Synrgis with Crdit 29

2.3.3 Savings: Unmt Nd; Ris f Prxy Prducts (Invstmnts) 29

2.3.4 Invstmnts: Grwing Intrst frm Mutual Funds 30

2.3.5 Rmittancs: A Valu Addd Srvic 30

3. Indian MFIs: Growth for Old and New Institutions Alike 32

3.1 Dramatic Industry evlutin 33

3.2 Ladrs and Yung Turks Attract Invstrs 34

3.3 Dcras in Sprad; MFIs Bar Ris in Financial Csts 35

3.4 Ladrs Rais th Bar fr oprating efficincy 36

3.5 Imprvd Prductivity Drivs oprating efficincy 36

3.6 Incrasing Prfitability 37

3.7 Dlvraging Balanc Shts 38

3.8 Prtfli Quality: Dtriratin in Pckts, Halthy ovrall 38

3.9 NBFCs exhibit Highr Csts and Prfitability, Lwr Lvrag 38

3.10 Indian MFIs: Lwst Csts, Highst Rturns 39

4.The Sector through an Investment Lens 40

4.1 Bm in equity t Indian Micrfinanc 41

4.1.1 Sctr Attractd USD 285 Millin in equity 41



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4.1.2 equity Flw Basd n Prfrmanc, Grwth Rats and Ggraphy 42

4.1.3 entranc f Nw Invstrs 42

4.1.4 Largr MFIs Cmmandd Highr Valuatins 44

4.1.5 Sctr Witnssing its First Invstr exits 44

4.2 Dbt Supply: Incrasing Sphisticatin 45

4.2.1 Industry Attractd USD 2.33 Billin in Dbt in FY 2009 45

4.2.2 Incrasing Participatin frm Public Sctr Banks 45

4.2.3 Sphisticatin in Dbt Instrumnts 46

5. The Global Economic Slowdown and Indian Microfinance Clients 48

5.1 Th Financial Crisis and Micrfinanc 49

5.2 Th Impact n Clints f MFIs 495.2.1 Mixd Impact n Incm; Jb Lsss in Urban exprt-orintd entrpriss 49

5.2.2 Incras in Fd and Mdicin Bills; Rducd Dispsabl Incms 50

5.2.3 Difficult and Cstlir Accss t Micrfinanc Lans 50

6. The Road Ahead 52

6.1 Cntinud Grwth, emrging Markts 53

6.2 Changing Businss Mdl: Scial is Cmmrcial 53

6.3 Rgulatin: Ptntially Gam Changing 54

6.4 Tchnlgy: emrging Nd fr opn Slutins and Industry Standards 55

6.5 outlk n Capital t th Sctr 56

About the Authors 58

APPeNDIX 1: PooReST STATeS: PeNeTRATIoN AND oPeRATING eNVIRoNMeNT 59

APPeNDIX 2: MAIN LeGAL STRUCTUReS IN INDIA 60

APPeNDIX 3: SoURCeS oF DATA 62

APPeNDIX 4: LIST AND DeFINITIoN oF FoRMULAe USeD 63

APPeNDIX 5: CAPITAL PRoJeCTIoNS MeTHoDoLoGY 64

CoNTeNTS



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BC Businss Crrspndnt

BLP Blw Pvrty Lin

BISWA Bharat Intgratd Scial Wlfar Agncy

BSFL Bharatiya Samruddhi Financial Limitd

BSS Bharatha Swamukti Samsth

BWDA Bullck-Cart Wrkrs Dvlpmnt Assciatin

CAR Capital Adquacy Rati

CAGR Cmpundd Annual Grwth Rat

CGAP Cnsultativ Grup t Assist th Pr

CP Cmmrcial PaprCRR Cash Rsrv Rati

DFI Dvlpmnt Financ Institutin

eCA eastrn eurp and Cntral Asia

eCB extrnal Cmmrcial Brrwing

eSAF evanglical Scial Actin Frum

FCRA Frign Cntributin Rgulatin Act

FDI Frign Dirct Invstmnt

FMo Th Nthrlands Dvlpmnt FinancCmpany

FWWB Frinds f Wmn's Wrld Banking

FY Financial Yar

GDP Grss Dmstic Prduct

GLP Grss Lan Prtfli

HNI High Nt-wrth Individuals

INR Indian Natinal Rup

IRDA Insuranc Rgulatin Dvlpmnt Authrity

IPo Initial Public offring

KYC Knw Yur Custmr

LAC Latin Amrica and th Caribban

MACS Mutually Aidd Cprativ Scity

MeNA Middl east and Nrth Africa

MFI Micrfinanc InstitutinMFIN Micrfinanc Institutins Ntwrk

MIS Managmnt f Infrmatin Systm

MIV Micrfinanc Invstmnt Vhicls

NABARD Natinal Bank fr Agricultur and RuralDvlpmnt

LIST oF ABBReVIATIoNS

NBFC Nn-Banking Financial Cmpany

NCD Nn-Cnvrtibl Dbnturs

NFP Nt-fr Prfit

NGo Nn-Gvrnmnt organizatin

NRIFS Natinal Rural Financial InclusinSystm

oeR oprating expns Rati

PACS Primary Agricultural CprativScitis

PAN Prmannt Accunt Numbr

PAR Prtfli at Risk

PAT Prfit Aftr Tax

P/BV Pric t Bk Valu

PCo Public Call offic

Pe Privat equity

PLR Prim Lnding Rat

PSL Pririty Sctr Lnding

PTC Pass Thrugh Crtificat

RBI Rsrv Bank f India

RMK Rashtriya Mahila Ksh

RoA Rturn n Assts

Roe Rturn n equity

RRB Rginal Rural Banks

SBLP Slf Hlp Grup-Bank LinkagPrgramm

SeBI Scuritis and exchang Bard f India

SHG Slf Hlp Grup

SLR Statutry Liquidity Rati

SSI Small Scal Industry

SIDBI Small Industris Dvlpmnt Bank fIndia

SIP Systmatic Invstmnt Plan

SKS Swayam Krishi Sangam

SPV Spcial Purps Vhicl

UID Uniqu Idntificatin

UP Uttar Pradsh

USD Unitd Stats Dllar

VC Vntur Capitalists

VFS Villag Financial Srvics



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INTRoDUCTIoN

Th Inverting the Pyramid sris was launchd by Intllcap in 2007 as an attmpt t captur th grwth f th micrfinanc

industry in India n an annual basis and track th ffrts mad, succss achivd and challngs that rmain. evry yar, it

maps th micrfinanc landscap in India, idntifis ky highlights f th yar, xplrs strids mad in addrssing th hug

dmand-supply gap that xists and analyzs th prfrmanc f MFIs. Furthr, it idntifis ky drivrs fr futur grwth and

sustainability f this industry, its capital nds and its risks and priritis in th shrt t mdium trm.

Th 2007 ditin titld The Changing Face of Indian Microfinance capturd Indian micrfinanc as a dynamic industry

n th mv. In 2008, Indian Microfinance: Scaling Against the Odds capturd a rsilint industry maintaining scal and

asst quality amidst a turbulnt financing landscap.

Th 2009 rprt, Indian Microfinance: Coming of Age finds India at th cntr f glbal attntin, th mst clsly

watchd micrfinanc markt in th wrld. Whil its larg unbankd ppulatin is a significant cntributr t this attntin,its fast grwth, high invstr intrst, plannd IPos and cntinud strng pratinal and financial prfrmanc hav als

piqud th intrst f invstrs, thught ladrs, mdia and th public alik.

Chaptr n xplrs fiv ky qustins n th minds f industry bsrvrs as hard in glbal micrfinanc cnvrsatins.

Tpics cvrd rang frm th frnzid pac f grwth f Indian MFIs t whthr thy ar lsing thir scial rintatin with

incrasing cmmrcialisatin t gvrnanc and valuatins.

Whil th India tps th glbal list f rcipints f cmmrcial capital fr micrfinanc, th numbr f ppl still financially

xcludd runs int millins. Chaptr tw puts this dichtmy in prspctiv by stimating th unmt dmand fr micrfinanc

and rlatd prducts and th xtnt f currnt supply in th Indian markt. Furthr, this chaptr xamins mrging prducts

and srvics bing ffrd by MFIs and gaugs th ptntial fr thir xpansin.

Chaptr thr capturs an Indian micrfinanc markt whs structur and dynamics ar vastly diffrnt frm what thy

wr tw yars ag. Th industry mrgd frm th financial crisis mr cnslidatd – th markt that was mad f

numrus, small and mdium sizd, nn-prfit playrs gav way t n dminatd by fwr larg cmmrcial playrs that

ar succssfully attracting quity and dbt capital, human rsurcs and clints at a fast rat.

Th traditinal tir classificatin f MFIs basd n thir prtfli siz fails t captur th mrging dynamics and activity in

th markt which ld us t crat an altrnat classificatin that accunts fr grwth rats. Using this mthd, w idntify

thr majr classs f MFIs: th Leaders, th Moderates and th Young Turks. In chaptr thr, w xamin th grwth and

prfrmanc f ach f ths sgmnts in gratr dtail. Twards this, Intllcap uss financial and pratinal data f a

sampl f 29 MFIs in th cuntry that cnstitut 80% f th markt by prtfli utstanding.

Chaptr fur thn xplrs whr th grwth capital fr th industry is cming frm, wh it is ging t, th utlk n xits

fr quity invstrs and th incrasing sphisticatin in financial instrumnts usd in th industry. W find that hdg funds,high nt-wrth individuals and blu chip privat quity playrs hav ntrd th markt amngst thrs, and public sctr

banks hav incrasd thir xpsur cntributing a furth f th dbt capital nds f th sctr.

In chaptr fiv w xamin th impact f th financial crisis f 2007-2008 n th clints f Indian MFIs. W find that hm-

basd urban wrkrs wr hardst hit, and dispsabl incms fll vrall, as did savings, cupld with incrasd difficulty

in accssing crdit.

Finally, in chaptr six, w lk at hw th industry culd vlv in th nar futur. Th sctin cvrs hw rcnt rgulatin

n businss crrspndnts culd chang th micrfinanc landscap and prjcts dbt and quity capital nds f th

markt fr th nxt fiv yars.



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1explring Prssing Issus in Indian Micrfinanc



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During th last yar th Indian micrfinanc industry has bn bth praisd fr its prfrmanc

and als qustind abut its grwth path and its cmmitmnt t th scial caus th sctr

rprsnts.

Th glbal invstr cmmunity has cmmndd th sctr fr its achivmnts and its prmis

f high grwth, xprssd by th quantum f capital – mst ntably, privat quity – flwing

t Indian MFIs and by th numbr dals mad during th yar. At th sam tim, n a glbal

scal, th mdia, minnt industry xprts and thr stakhldrs, hav qustind this rampant

cmmrcializatin, lking t undrstand what can b xpctd in th nar futur.

What ar th qustins that ar bing raisd? And what mr can b said abut ths issus?

This chaptr sts ut t xplr whthr th sctr is in fact grwing bynd its capacity, th

implicatins and th ffcts f its cnnctin with th cmmrcial financial markts, and t prsnt

sm th qustins that will find maningful answrs within this ntir rprt.

Is Indian micrfinanc grwing t fast?

Is Indian micrfinanc a bubbl in th making?

Hw wll ar Indian MFIs gvrnd?

Is th cmmrcializatin f micrfinanc cmprmising its scial impact?

Ar Indian MFI valuatins t high?

1.1 Is Indian Microfinance Growing Too Fast?

7,945

3,339

6,138

11,734

20,008

10,689

2007 2008

C li en ts ( in thous an ds ) G LP ( in I NR c rore )

2009

Indian MFIs hav grwn at a spctacular rat btwn

2004 and 2009: yar n yar th avrag incras

in th numbr f clints has bn 91% and that f th

siz f th prtfli utstanding 107%. evn in th

midst f a glbal cnmic slwdwn, th industry

witnssd incrdibl grwth frm 2008 t 2009,

grwing by 75.5% in clint bas and by 102.5% in

prtfli utstanding, an achivmnt largly drivn

by th prfrmanc f th tp MFIs. Th numbr fgiants in th industry is als n th ris; th Rsrv

Bank f India (RBI) rfrs t MFIs with a grss lan

prtfli (GLP) gratr than INR 100 crr (USD 22

millin) as “systmically imprtant”: th numbr f such MFIs has incrasd frm svn in 2007 t

17 in 2009.

In cmparisn with th grwth in th micrfinanc industry, th rtail prtflis f cmmrcial

banks in India grw by mrly 4% in th last yar.1 Fr crtain stakhldrs, this is a basis t argu

that th grwth f Indian micrfinanc is t fast, and it is lading t an vrsupply f capital in

th markt.

1. Surc:RBI Trnd and Prgrss f Banking in India, 2008-09

Figure 1: GLP and Clients 2007-2009

eXPLoRING PReSSING ISSUeS IN INDIAN MICRoFINANCe



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T undrstand if this is s, it is imprtant t lk at th primary drivr f grwth; th xtnt t which

dmand fr crdit rmains unmt is th frc bhind th industry’s xplsiv grwth. MFIs and

th SHG-Bank Linkag Prgram2 (SBLP) tgthr can b stimatd t catr at mst t 10% f th

dmand fr micrcrdit in th cuntry.3 Mrvr, this supply is nt unifrmly sprad: vr 60% f

all crdit is disbursd in thr stats in Suth India: Andhra Pradsh, Karnataka, and Tamil Nadu.

By cmparisn, in Uttar Pradsh, th stat with th largst ppulatin f ptntial micrfinanc

brrwrs,4 MFIs hav mt lss than 1.5% f th dmand. Thus, as grwth is drivn by th hug

markt ptntial and fulld by invstrs’ and bankrs’ cnfidnc in th sctr, n culd argu

that such high grwth rats ar nt caus fr cncrn, but in fact th natural prgrssin f a

sunris sctr.

T put this grwth in prspctiv, n can s that similar industris such as mainstram banking

hav dmnstratd high grwth rats in thir arly grwth stags. Fr instanc, in th arly 2000s,

during th banking bm in India, th rtail prtfli f ICICI bank, a lading Indian privat

bank, grw by abut 240% ach yar btwn 2002 and 2004. Dspit its incrdibl grwth, th

Indian micrfinanc industry with its balanc sht siz f INR 11,734 crr (USD 2.5 billin), is

still smallr than many individual cmpanis in th mainstram rtail r cnsumr financ spac,

many f whm dmnstrat cmparably high grwth rats5.

1.2 Is Indian Microfinance a Bubble in the Making?

During th Asian financial crisis f th lat 1990s, micrfinanc glbally prvd t b rsilint and

cuntr-cyclical. This tim arund, micrfinanc markts in cuntris such as Nicaragua, Mrcc,Bsnia and Hrzgvina ar facing a majr drp in asst quality and prfitability, a fallut f th

subprim crisis and th glbal cnmic slwdwn in markts alrady waknd by unhalthy

cmptitin, vrstrtchd MFI capacitis and lss f crdit disciplin.

Rcnt mdia cvrag has prtrayd th Indian micrfinanc industry as a bubbl thratning

t burst, which is what wuld happn if MFI clints wr gtting lans bynd thir rpaymnt

capacity. In rality, th industry cntinud t dmnstrat high grwth and a halthy prtfli

quality.

Hwvr, thr hav bn islatd incidnts f vr-lnding in sm pckts f th cuntry.

exampls includ Klar,6 Mysr and Tumkur districts f Karnataka and in Lucknw and Agra

districts f Uttar Pradsh (UP), whr uncntrlld lnding and clints brrwing frm multipl

surcs, cupld with high risk lcal sci-plitical dynamics, hav ld t mass dfaults. Ths

incidnts affctd undr 5% f th industry’s ttal prtfli utstanding. As th Chairman f Basix,

Vijay Mahajan, ntd, "Ths incidnts ar bst viwd as a vaccinatin, a littl sht t prvnt

furthr illnss", rathr than an indicatin f whr th ntir industry is hadd.

In additin, micrfinanc is incrasingly cmpard with subprim lnding and skptics spculat

that a similar crisis is in th making. This cmparisn is likly t b flawd givn th inhrnt

diffrncs btwn th tw industris. Subprim lans wr disbursd t ppl with pr crdit

histry and wr backd by vr-valud assts whil micrfinanc lnds t th pr with unknwn

crdit histris and rpaymnts ar guarantd by scial cllatral. Subprim lans wr givn

2. Th SHG Bank Linkag Prgram is a gvrnmnt-supprtd initiativ startd in th 1980s by th Natinal Bank fr Agricultur and RuralDvlpmnt (NABARD) t facilitat financial intrmdiatin in rural aras.

3. Dmand, supply and pntratin will b tratd xhaustivly in chaptr 2 f th rprt.4. In this study ptntial clint fr micrfinanc srvics ar dfind as hushlds with a yarly incm f lss than INR 150,000 (USD

3,260).5. Shriram Transprt Financ Cmpany (STFC), a Nn Banking Financ Cmpany (NBFC) that lnds primarily t truck drivrs and wnrs has

a balanc sht f INR 23,279 crr (USD 5.06 bn) and its cnsumr financ prtfli grw at an imprssiv CAGR f 68% btwn 2005and 2009 , a prtfli that is prhaps mr cmparabl t micrfinanc than mainstram banking.

6. S Bx 1: Incidnts f Mass Lan Dfault: a Lcalizd Bubbl.

MFIs and the SHG-Bank Linkage

Program (SBLP)together serveat most10% of

the demand for microcredit in the

country.




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ut at variabl intrst rats and lngr tnurs (ftn dcads), whil micrfinanc is a standard,

n yar lan prduct with wkly r frtnightly paymnts, which lavs littl pprtunity t hid

dfaults. Mrvr, as th pay f MFI fild staff is ftn linkd t prtfli quality, thy hav limitd

incntiv t push lans t unwrthy brrwrs. Subprim lnding agnts, n th thr hand, wr

ftn incntivizd t giv ut as many lans as pssibl, and wr immun t th impact f

dwnstram dfaults. Finally, th systmic risk psd by subprim lnding is nt cmparabl t

that psd by th micrfinanc industry tday. As bsrvd by th Dputy Gvrnr f th RBI

Usha Thrat,7 th micrfinanc industry is t small fr any prblm with asst quality t bcm

systmic. At INR 11,734 crr (USD 2.5 billin), sprad acrss svral banks, an impact n th

financial systm wuld b ngligibl.

In additin, th undrlying businsss backing micrfinanc lans rmain rsilint t th glbal

cnmic slwdwn. Acrss sctrs in mst parts f India, th lcal cnmy is ding bttr than

th macr cnmy, pssibly making micrfinanc clints a part f th slutin t th cnmic

slwdwn rathr than a cntributr t th prblm, unlik subprim brrwrs.

Box 1: Incidents of Mass Loan Default: a Localised Bubble

on 3rd Fbruary 2009 staff mmbrs f MFIs in Klar visitd th ara t cnduct cntr mtings

and, instad wr mt with hstility by th lcal yuth and wr thratnd against cllcting

paymnts frm thir brrwrs. Th Anjuman Cmmitt, a lcal rligius ntity, had issud a

dirctiv t th rgin’s Muslims thrugh th msqus t suspnd all rpaymnts n utstanding

lans. Ths wh disbyd wuld b dnid a burial srvic in th msqu and b stracizd frm

th rligin. ovr th fllwing wks and mnths, prtsts als sprad t Muslim cmmunitis inMysr city and Ramanagaram twn, as wll as a larg numbr f small twns in Tumkur District

and thr parts f Suthrn Karnataka. By th nd f July 2009, lan dfaults in th rgin wr

valud at INR 60 crr (USD 13 mn)8.

A clsr lk int th Klar incidnt unarths imprtant larnings fr th industry at larg. Klar

District has an agrarian cnmy and has suffrd drughts fr thr f th last fiv yars. Th

thr main industris in th rgin, handicrafts and silk, hav als suffrd as a cnsqunc f

th glbal cnmic slump. Th district hsts 43 MFIs that hav bn pushing hard int a markt

that was saturating fast. Hushld incms wr highly lvragd; th crdit-dpsit rati f th

lcal banks was 304%. Thus, sm clints bcam vr-indbtd, such as a brrwr cls t th

Anjuman Cmmitt, wh attmptd suicid aftr running up a dbt f INR 7 lakh (USD 15,200).

Sm bsrvrs ntd that MFIs wr rspnsibl fr vr-burdning clints by thir unscrupulusxpansin practics that disrgardd th ffct f th cnmic dwnturn n th livlihds and

capacity t rpay f thir brrwrs.

Thugh Klar rmains an islatd incidnt in which th “frc f rligin” 9 was usd t triggr

a dfault in lan rpaymnts, it is nt th first tim that brrwrs hav grupd tgthr t

rng n lans. Similar incidnts in Agra and Lucknw, whr th prtfli quality f svral MFIs

dtriratd bynd rcvry, hint at hw fatigu frm xcssiv dbt and th cllaps f cnmic

activity at th clint’s nd ftn play a hug rl in igniting rpaymnt criss.

7. ecnmic Tims, March 8, Gld rush vr fr micrfinanc.8. Micrfinanc Insights Vl. 16 - Lssns fr Micrfinanc frm an erstwhil Mining Twn.9. Bllamknda Ramsh, Battl f Klar – A watrshd vnt in Indian micrfinanc, Nvmbr 2009.

"These incidentsare best viewedas a vaccination, alittle shot to preventfurther illness"

- Vijay Mahajan,Basix Chairman




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1.3 How Well are Indian MFIs Governed?

Givn th scpticism arund th industry’s high grwth and institutinal capacitis t manag this

grwth in light f mrging risks, gvrnanc and rgulatin gains rlvanc.

In rcnt tims, gvrnanc and rgulatin hav takn a mr frward-lking viw, and MFIs

ar pr-activly addrssing ths bth within thir wn rganisatins, and at th industry lvl.

Th tightr financing climat rsulting frm th glbal financial crisis and a fw dmstic incidnts

f mass dfaults hav mad Indian MFIs and thir stakhldrs mr cgnizant f th risks f

th businss, and hav rinfrcd th nd t adpt sund risk managmnt practics. Th

rapid grwth f th industry has brught t th fr issus such as vr-indbtd clints, MFI staff

miscnduct and plitical intrfrnc, and th sctr as a whl is cnsidring th implicatinsf ths issus fr its lng-trm sustainability. Crprat gvrnanc fr individual rganizatins

rvlvs arund th fundamntal issu f ffctivly balancing scial and cmmrcial bjctivs.

With th Nn-Banking Financ Cmpany (NBFC) incrasingly bcming th lgal frm f chic

fr ld and nw playrs, a chic primarily drivn by th ncssity t rais capital cmmrcially in

th financial markts, th crprat gvrnanc practics f MFIs will hav t vlv t bcm

cmparabl t th gd practics f cmmrcial playrs. Sm lading NBFCs ar stting th

standard in th industry fr bing wll gvrnd and having high-prfil bards that cmpris f

indpndnt dirctrs and industry xprts. Th MFI bards appint a st f sub-cmmitts in

functinal aras t nsur rasnabl cntrl n th MFI’s pratins; ths includ Audit, Risk

Managmnt, Human Rsurcs Dvlpmnt, opratins, and Asst Liability Managmnt. Th

Cmmitts cnstitut a balancd mix f indpndnt and xcutiv dirctrs wh kp th Bard

infrmd f imprtant issus and aras f cncrn. Transparncy in disclsing n’s prating and

financial infrmatin is anthr ky ara whr sm MFIs ar practivly taking stps.

Th vlutin twards bttr gvrnanc practics in th industry is bing drivn nt just thrugh

th practics f individual MFIs, but als by a cllctiv mvmnt: in 2009 35 lading NBFC MFIs

cam tgthr t frm a Slf Rgulatry organizatin calld th Micrfinanc Institutins Ntwrk

(MFIN) t lbby fr plicy–rlatd mattrs and tackl mrging businss risks, mst ntably th

prblm f rgulating th cnduct f MFIs and th nd fr crdit infrmatin sharing btwn

MFIs. This grup frmd Alpha Micrfinanc Cnsultants Pvt. Ltd., a cmpany that invstd int th

first crdit burau fr th micrfinanc industry. MFIN als frmulatd a Cd f Cnduct which

will rquir mmbr MFIs t shar qualitativ crdit infrmatin, b transparnt in thir chargs

and adpt practics t prvnt vr-lnding t brrwrs.10 Th cd binds mmbr MFIs t nt

lnd t a clint wh is alrady brrwing mny frm thr institutins, r whs ttal utstanding

dbt xcds INR 50,000 (USD 1,100). Finally, MFIN will als b pning dialgu with th RBI,

thr rgulatrs such as th Insuranc Rgulatin Dvlpmnt Authrity (IRDA), th Ministry f

Financ and th plitical class t advcat fr NBFC MFIs, in rdr t allw thm t accpt clint

savings, accss xtrnal cmmrcial brrwings, act as agnts t micr insuranc prvidrs and

bcm businss crrspndnts11 (BCs) t banks.

10. http://blgs.cgdv.rg/pn_bk/2010/01/bubbl-cntrvrsy-simmrs.php.11. RBI prvisin that allws banks t us businss facilitatrs t prvid financial and banking srvics in undr-srvd aras. RBI circulars

issud in April and May 2009 incrasd th maximum distanc frm th bank f a businss crrspndnt (BC) frm 15kms t 30kmsand xpandd apprvd businss crrspndnts t includ Kirana , mdical and fair pric shp wnrs, PCo pratrs, ptrl pumps,rtird tachrs and functinaris f SHGs as BCs.

Leading NBFCsare setting the

standard for goodgovernance...

...in 2009 a groupof leading NBFC

MFIs formed aSelf Regulatory

Organization calledthe Microfinance

Institutions Network (MFIN)


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