MF Sector Post AP MFI crisis

By Srihari Adurty

Comparison of Key financial Indicators & Implications

Financial Indicators OPEX Cost of Funds CRAR* Yield 2007 16% 9.1% 13% 25% 2011 9% 9.2% 18% 28% 2012 12% 11.1% 29% -

Rise in Operational cost post crisis yet lower than 2007 , indicates process improvement among MFIs The OER of Non-AP MFIs has risen from 15.6% to 17.3% between 2011-12 , increased capital cost and reduced margins makes it a challenging situation Increase in CRAR on account of shrunk portfolio size and the large ones debt being converted to equity Cost of funds increased due to cost of distress & decline in bank lines

* CRAR- Capital to Risk (Weighted) Assets Ratio

Comparison of Operational Indicators & Implications

Operational Indicators Portfolio/Staff Member Accounts/Staff Member Cost/ borrower Average Loan size 2007 274 $67 2011 $ 47,000 293 $16 $77 2012 $ 33,000 223 $21 $73

Portfolio/staff decreased on account of AP yet better than SE Asia standards Fall in number of clients serviced by 35% Emergence of other models like BC, Mobile banking , web based lending New products require impetus Lessening faith in group model due to increase individualism in the society

Operational analysis indicates tough situation but not a death bell

The Investment Fallouts

Investment Case Trident-Bellwether Fund Interesting Facts 100% assets in Telangana (AP) region All the assets lost in the AP crisis Company under CDR , investor stake diluted Promoted by non-Finance professionals Operations in nascent geography Seasoned MFI with good systems 1/3rd portfolio in AP Investor had majority stake Impact on Sector AP based MFIs investment effected Low diversification have negative investment grade Investor to look beyond promoter background MFIs should be ready for consolidation, takeover or merger Mainstream PEs may shy from investing Investment in Karnataka & Tamil Nadu also effected Kerela only remains as positive destination for investment in South India

MIMO-Bellwether

FFSL-IVF

The Investment Falloutscontd.

Investment Case Aarohan- Bellwether Background Bellewether majority stake holder Greenfield project by practitioner Impact on Sector MFIs need to embrace robust capitalisation , which was poor in Aarohan case Mainstream investor to shy from investing Banks to be more cautious on covenants Raising long term capital would be a challenge for large ones Valuation hits a new low Basix brand image goes down so does of Micro finance as a social enterprise

Spandana-JM

JM invests 40Cr and receives stake of over 30% Lok Capital exited already Spandana goes to CDR and banks become complete owners

BASIX-Multiple Investors

Initially had only social investors Matrix partners were first mainstream investors Expands to multiple-lending zones & partly disowns its traditional model CDR makes banks 90% owner of the company

Shift in Center of Gravity?

MFI Bandhan
Equitas SKS Spandana Share 2011 No of borrowers POS ( In Million) ( Rs. Million) 2012 No of borrowers POS ( In Million) ( Rs. Million)

3.25
1.3 6.24 4.18 2.84

25070
7940 41110 34580 20650

3.6
1.2 5.3 3.4 2.16

37302
7240 16690 27152 21103

Equity inflows fell from 9.4 billion* in 200910 to 3.86 billion in 201011 Total loans from financial institutions to MFIs during 2010-11 were `73.28 billion, about 68 per cent of the disbursements made in the previous year The outstanding bank loans to MFIs reached a level of 126.18 billion during 2010-11 which is about 13.3 billion less than the previous years level
* All figures in INR

Emergence of Medium Sized Players & Strengths

MFI Operational Details ( As on 2011) Key presence in Kerala POS*- 281 . Borrowers- 3.35 Key Strengths ESAF Has strong social sense Stable customer base Well capitalised & seasoned women ground staff Has strong social sense Stable customer base Cautious growth Seasoned promoter Cautious growth Nascent geography & client base Strong lending experience Well capitalised Field controls in difficult geography Robust control systems Well capitalised Product features relevant to client base Client loyalty due to social appeal

Grameen Koota

Key presence in Karnataka As on POS- 381. Borrowers-3.13 Key presence in UP As on POS-.101 Borrowers- 1.32 Key presence in NCR As on POS- 320. Borrowers-3 Key presence in Urban centers As on POS-700. Borrowers-8.2 Key presence in Tamil Nadu As on POS-520. Borrowers-8.2

Sonata

Satin

Ujjivan

Gram Vidiyal

*POS figures in INR Cr. Borrowers figures is in Lakhs All figures above as provided in Sa-adhan site

New approaches & Business Models

Aarohan which was effected due to liquidity crisis post AP downfall was amalgamated into Intellicash with active interest of Aviskaar MIMO finance has been take over by it PE investor and had tried for a sell off Financial Institutions like Vistaar & Janalakshmi are emerging as MSME funders Change in PSL guidelines on other assets have thrown new challenges to the banks, leaving Micro credit as the only viable source to access PSL assets (direct agri) Web based lending makes small entry

Synergies Emerging between Banks & MFIs on BC

9 8 7 Value gap which MFIs & banks have realised post crisis, which can be plugged through partnership on synergies

6
5 4 3 2 1 0

MFI
Bank

Client Access

Credit Skills

Operational Skills Recovery skills

Break Even looks tough

The business model in current circumstances looks challenging for new start ups This is completion of one Industry cycle in a business where there are new entry barriers are created New starts ups will find it difficult to manage without adequate capital levels Industry has matured to the next level where new players would have to do mergers or takeovers unlike pre-2010 where green field projects were still viable

MFIs trying to cross the hurdle

Eliminate-Raise-reduce-Create
( Blue Ocean Strategy) Framework for MFI Industry Survivors
Eliminate Community grouping to avoid political issues Raise Asset based portfolio Credit Underwriting standards Technological usage

Reduce

Create

Dependence on group loan Bank funding lines

Technology platform to partner with banks on financial products Platforms for low cost options like mobile banking Tech innovations Credit-plus services