BY:

FARAH .S.CHOUDHARY(10)
EHSAN UL HAQ(46)
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 INTRODUCTION
Micro finance is a term used for the practice of
providing financial services, such as micro
credit, micro savings or micro insurance, to poor
people.

It is a kind of movement by socialist peoples

that would guarantee access of poor peoples to
not only credit but also other financial services
as saving, insurance, fund transfer etc.

The very basic objective of microfinance is to

reduce or eliminate POVERTY. 2
 INTRODUCTION
As suggested by the name, micro finance,
most transactions involve small amounts of
money, frequently less than Rs.5,000.

Some governmental organizations define

micro finance as amounts below Rs.25,000.

Microfinance has been hailed as one of the

greatest innovations in attempts to alleviate
poverty in the third world in the recent
history.
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CHRONICLE OF MICROFINANCE

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CHRONICLE OF MICROFINANCE

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CHRONICLE OF MICROFINANCE

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CHRONICLE OF MICROFINANCE

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CHRONICLE OF MICROFINANCE

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STRUCTURE OF MICROFINANCE

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 FINANCIAL PRODUCTS
Insurance Plans

 Pension Plans

 Trade Microcredit

 Group Micro Credit

 Emergency Micro Credit

Micro Mortgage

Micro Leasing

Micro Saving

Term Deposit
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ASIAN MICROFINANCE MARKET
INDICATORS FIGURES TRENDS

No. Of Borrowers 5.0 m

Gross Loan Portfolio US$ 12,992 m

No. of Savers 59.1 m

Gross Savings US$ 6,660 m

Depth of outreach 17.9%

Efficiency 17.2%

Debt-Equity ratio 5.0

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ASIAN MICROFINANCE MARKET
So far, the Asian region has mainly financed its
operation by debt, as evident from its debt-equity
ratio of 4.9 as compared to global median ratio of 3.2
in 2008.

But , Asian MFIs are unique in that they were able

to raise funds from commercial sources & their
commercial funding liability ratio is 90.3% as
against the global benchmark of 76.4%.

The region received largest amount of funding-

US$3161 m in 2007 – 27% of total global investment.

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 SCENARIO OF MICROFINANCE
IN INDIA
India ranks at 134 in Human Development Index,
as per 2009 report.
25% of population today in country is still below
poverty line.
India’s budget 2009-10 has also given more
importance on rural development and inclusive
growth.
Finance minister has also focused on reducing the
BPL population by 50% by 2014, increasing job
opportunities for the poorer sections, improving
housing facilities and better rural infrastructure.

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 WHAT DO THEY HAVE IN COMMON?

Subprime Microfinance
PURPOSE

Offer credit to more Offer credit to borrowers in

borrowers under-served sectors
COST
Risk of higher defaults
Higher administration costs
COMPENSATION

Higher Interest Rates

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 HOW DO THEY DIFFER?

Subprime Microfinance
LOAN STRUCTURE

high value loans to high low value loans to no-credit

risk borrowers history borrowers
UNDERLYING ASSET/COLLATERAL

Real property Personal character

VALUE OF UNDERLYING ASSET

Real property vs. Personal

character
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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Target Market

Both subprime loans & microfinance serve the

underserved- those who otherwise wouldn’t have
assess to the products offered.

Both businesses have an inherent potential to

bring about social change, although the subprime
crisis was more the product of the chase for high
returns than a social cause.

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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Predatory Lending

In the hasty pursuit to acquire clients &

maximize profits, a number of undesired &
deceptive practices were carried out in US
housing market in the run to sub-prime crisis.
For Example, complex products were developed
& offensive policies were hidden from the
customers.
Due to diligence , including the practice of
examining client’s repayment capacity fell by the
wayside.
Subjective evidence suggest a similar trend in
microfinance 18
 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Abundance of Available Capital

The subprime market flourished as investors

flocked to the lucrative housing market seeking
fat returns.
Similarly, the flow of capital from global
investors into the Indian microfinance market has
skyrocketed in the recent years.
Indebtedness of clients due to over-supply is a
matter of concern for everyone in microfinance
industry.

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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Abundance of Available Capital
Recent Large Equity Deals
SKS US$ 75m Nov. 2008
Spandana US$ 6.0m Sept. 2009
Equitas US$ 12.5m Aug. 2008
Sahayata US$ 3.7m March 2009

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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Fast Market Growth & Competition

The Indian Microfinance market is growing at a

phenomenal pace.
The Bharat Microfinance Report shows that the
year 2008-09 saw a growth of 60% growth in
client outreach & a 97% rise in total loan
portfolio.
The growth of the top 10 MFIs has been
extraordinary, which is one of the driving factors
for increasing rate of default.

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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Fast Market Growth & Competition
Client (million) Growth Loan (INR bn) Growth
2008 2009 Rate (%) 2008 2009 Rate (%)
SKS 1.55 3.52 87 7.81 24.6 214
Spandana 1.19 2.43 104 5.95 18.7 214
Asmitha 0.70 0.88 20 3.35 7.1 111
Microfin

As per the table, the portfolio growth of large MFIs has been driven by
the larger loan size than an increase in number of clients.
Over-indebtedness is the real worry for the sector & how this will affect
the clients repayment. 22
 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Securitization & “Originate to Sell” Model

Securitization has opened up new & diverse

sources of funds for MFIs.
As of March 2009, it is reported that about 20%
of the total assets held by Indian microfinance
market has been securitized.
Moral hazard & weakening lending standards
are inherent risks in the “originate to sell” model,
which drove the subprime crisis.
There has been a number of large transactions
of this kind even in Indian microfinance, so we
can say that it is following the footsteps of those
responsible for Subprime crisis. 23
 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those in Favor, Say Yes
Securitization & “Originate to Sell” Model

Recent Securitization Deals

SKS US$ 38.5m Feb. 2009

Bandhan US$ 35.4m Apr. 2009

Share US$ 8.6m Apr. 2009

Euiqtas US$ 10.4m Nov. 2009

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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those Against, Say No
Product Nature
The comparison between microfinance & subprime loans is
fundamentally invalid. From loan design to operational structure,
the nature of two products is different
Microfinance Subprime Loans

It is a unsecured loan. It is a secured loan

Microloans, which have the adopted Highly affected by real estate bubbles
group liability system do not reply on the which led to crisis.
value of underlying collateral & hence
will not be affected by real estate
bubbles.
They are generally on short one-year They have longer tenures
term with a frequent repayment cycle.
It is transparent, due to frequent It is less transparent
repayment cycle thus defaults can’t be
hidden

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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those Against, Say No
The size of Underserved market & Growth Potential

Despite the industry’s impressive growth rate, the depth

of outreach is far from satisfactory & there is huge demand-
supply gap, which translates into huge growth potential &
capital to back the growth.

Current Market Size

Client Outreach Loan Outstanding

MFI 22.6 million Rs. 117.34 bn

SHG 54 million Rs. 241.96 bn

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 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those Against, Say No
The size of Underserved market & Growth Potential

The outreach is highly concentrated in 3 southern states-

Andhra Pardesh, Karnataka & Tamil nadu.
In Andhra Pardesh, more than 125% of all households are
served microloans.
4 Northern states- Bihar, M.P, U.P & Rajasthan- show low
penetration of microfinance.

Regional Supply Gap Demand & Supply Gap 27

 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those Against, Say No
Asset Quality

Indian MFIs boast high repayment rates & portfolio

quality.
Over the past 3 years the PAR percentage has declined
from 2.49% in 2006 to 2.14% in 2009.

Global Comparison 28
 IS INDIAN MICROFINANCE THE NEXT SUBPRIME?
Those Against, Say No
Straightforward Transaction & Securitization
Structure

The key element that initiated subprime crisis in US was

the degree of sophistication in structured products &
securitization structure, which led to lack of understanding
of potential risk among stakeholders.
However, the grave disconnects between lender &
borrowers do not seem to be present in Indian Microfinance
sector.
This is because, microfinance securitization deals are
fairly simple & are rarely sold to other categories of
investors.

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5 LESSONS FOR MICROFINANCE FROM SUBPRIME
CRISIS

1. The product
Typical microfinance products are still fairly
simple, and there is little evidence of widespread
delinquency or over indebtedness.
The entry of consumer lenders in markets such
as Mexico, India, and Eastern Europe is
extending credit far down the income pyramid
and introducing new and more aggressive
products and underwriting practices at a rapid
clip.
Resale of loans to investors is in its infancy and
faces many practical challenges.

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5 LESSONS FOR MICROFINANCE FROM SUBPRIME
CRISIS

1. The product

Microfinance providers would be well advised

to keep an eagle eye on clients’ debt levels and
portfolio performance as well as market share.
Not all innovation is good. There is value in
simplicity and ensuring that clients understand
their rights and obligations, as well as product
features.

Emphasis among traditional players on

product innovation, growth, market share

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5 LESSONS FOR MICROFINANCE FROM SUBPRIME
CRISIS

2. The Buyer Side

Pay attention to the new research from the
consumer/behavioral scientists

Use the insights to

 design products that work for clients as
well as providers – reasonable and
sustainable value proposition
 develop appropriate marketing messages
and communication strategies
 disclose pricing, terms and conditions
transparently

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5 LESSONS FOR MICROFINANCE FROM SUBPRIME
CRISIS

3. Credit Analysis , partners & players

Stay vigilant about portfolio quality while
innovating loan products and credit analysis
processes to “bank the unbanked’
Use of credit scores and other more efficient
underwriting techniques is important to
expanding access – but test them carefully to be
sure they work
Take care with outsourcing and partnerships –
especially to create incentives for high portfolio
quality and customer service
MF managers/boards (and investors) need to
pay more attention to managing a wider range
of risks
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5 LESSONS FOR MICROFINANCE FROM SUBPRIME
CRISIS

4. Climate for Investigation

We should expect more careful due diligence
and perhaps simpler instruments.

Microfinance expansion plans assuming access

to almost unlimited cross-border capital should
perhaps be tempered.

Greater attention to alternatives – like

domestic deposits and borrowing – is also in
order.

MF boards and managers might do well to

consider alternatives to securitization,
CDOs/CLOs, etc.
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5 LESSONS FOR MICROFINANCE FROM SUBPRIME
CRISIS

5. Regulation

We need to promote “light-touch” policy

and regulatory solutions that strike a careful
balance between promoting access and
protecting consumers.

Re-establishing long-term market

vibrancy is critical.

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 CHALLENGES FOR MICROFINANCE

Liquidity – Larger (MFIs) attracting bulk of

the funding

Higher Inflation – Eroding Purchasing Power

Exchange Rate Fluctuations – Currency

Mismatch

Transparency – What Interest Rates Do MFIs

Charge?

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 WHAT CAN WE DO TO DEAL WITH
CHALLENGES?(Self-Regulation)
 Establish & follow financial
discipline

 Stay close to customer

 Diversify Funding sources

 Identify /implement best practices

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 WHAT HAVE WE DONE?
(Self-Regulation)
4/08 – Pocantico Declaration

 25 Industry leaders adopted code of

conduct:
Avoid reckless lending
Transparent pricing/non-abusive
collection methods
Restructure non-payment loans

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 WHAT HAVE WE DONE?
(Self-Regulation)
9/08 – Campaign for client protection in
microfinance (Clinton Global Initiative)

In 3 Years engage 50% of world’s 500

largest MFIs

Develop & implement best practices and

engage investors

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 WHAT HAVE WE DONE?
(Self-Regulation)
Government Initiatives

 In November 2008, the RBI extended a

$1.5 billion credit line to SIDBI primarily for
emergency liquidity for SME.

Many microfinance institutes, self help

groups and govt of India’s initiatives like
NREGA, PMGSY, BHARAT NIRMAN, and
NSAP etc were involved in the process of
supplying money to people to alleviate
poverty and raise the standard of living.
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 WHAT HAVE WE DONE?
(Self-Regulation)
Informational Initiatives

MySME News: provide the poor with essential

business news.

Spoken web: an attempt to create a new world

wide web, accessible over the telephone network,
for the masses in these countries.

Airtel First Rural Service: The centers are

aimed at penetration into the remote villages,
offering rural customers enhanced network
coverage at affordable rates.
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 SOME CLOSING THOUGHTS
 Recent developments in the MF industry are exciting –
but we need to put growth, innovation, and capital
market access in perspective and manage their risks
appropriately
 Focus on clients – don’t we have a responsibility to take
reasonable steps to do no harm?
 Clients have responsibility too, to make informed
choices – role of financial education, transparent
plain-language disclosures, and further work on client
biases
 Short-sighted to resist well-designed “light-touch”
regulation

In the long run, all legitimate players benefit from

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responsible finance.
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