Laxmi, 40, a single mother of two teenagers runs a roadside pottery shop in Palluruthy in Kerala, and that’s all she has to support her family. However, over a year ago after her husband’s death, Laxmi’s life was in a shambles until she took a loan of Rs 6,000 from SKS Microfinance to start this business.
She’s among millions of others in India who have benefited from the microfinance wave. Till a couple of years ago, it was just another non-profit mechanism for social change, dominated by NGOs and donor-driven organisations or limited to a few experiments in spurring consumption in rural markets.
Lately, however, investments in microfinance have been on the rise due to the involvement of the capital market and private sector investors. And we have the big daddies of banking such as Deutsche Bank, ICICI Bank and Citibank entering this segment as well.
Not surprisingly, microfinance is fast emerging as a hot opportunity for global players with an estimated $20 billion to be invested globally and around $3 billion in India, by 2010. The volume of total microfinance loans globally rose from $4 billion in 2001 to around $25 billion in 2006, according to a research recently conducted by Deutsche Bank.
“About 51% of the total borrowers belong to South Asia,” says Raimar Dieckmann of Deutsche Bank in the report.
Meanwhile a research conducted by Hyderabad-based Intellecap, a strategic services firm in the international development sector, states that the growth of Micro Finance Institutions (MFIs) in India would be even faster than anywhere in the world in the years to come.
India has seen many MFIs entering the market and those present are growing at a fast clip though none of them have yet reached the level of the better known MFIs in Bangladesh such as Grameen Bank and ASA. Nevertheless, Indian MFIs have penetrated rural areas and successfully helped poor women. One of them is Varanasi-based Cashpor Microcredit. This MFI delivers its services only to below poverty line (BPL) women in Uttar Pradesh and Bihar.
Headquartered in Malaysia, Cashpor aims to reduce poverty in the Asian region by providing technical assistance to scale up existing credit and saving programmes. “We are growing at 100% despite the fact that our clients are poor illiterate women in professions like farming and animal husbandry,” says Cashpor’s AGM Durgeshwar Mishra.
Manju Mery George, associate VP of Intellecap, says, “In 2002 the market share of MFIs in small credit was 28%. That has grown to 47% in 2007.” There are about 800 to 1,000 MFIs in India of which Intellecap had included about 60 in its research.
“The 60 MFIs that were identified are the main ones in India and constitute to about 90 to 95% of the total business in this segment,” says George. However, lately there are some trends, which also favour growth of MFIs in India. “The word micro is re-defined with the average size of loans increasing from $161 to $ 201. And in India MFIs are now moving from the south towards north and north east,” he adds.
MFIs however have been criticised for charging high interest rates of anything between 25% and 40%. But MFIs maintain that the rates are still low compared to the ones charged by private money lenders. “We were charging about 35% interest per annum, which has now been brought down to 27% for short-term loans. But due to risk involved and high operational expenses MFIs cannot operate otherwise,” says Mishra.
Seconds Vineet Rai, CEO, Aavishkar India Micro Venture Capital Fund, “Rates in India are the cheapest in the world. While Indian MFIs charge anywhere between 23% and 33%, other markets offer rates as high as 45% to 90%.” Experts also point out that even 90% may not be considered high in this area as money lenders often charge as high as 500% to 1000% interest rates in many rural areas.
But despite the high interest rates borrowers still prefer the MFIs to money lenders especially in rural areas where MFIs have been able to penetrate successfully. Basix, a Hyderabad based MFI established in 1996 has around 2 lakh active borrowers in about 13 states, with an average loan size of Rs 5000.
According to Basix chairman Vijay Mahajan, India is the largest emerging market for MFIs and it has been growing at a fast pace. Basix has partnered with insurance companies such as ICICI Prudential and Aviva Life Insurance to design insurance products for rural customers.
SKS Microfinance, launched in 1998, is considered as one of the fastest growing microfinance organisations in the world, having provided over Rs 425 crore with an outstanding of Rs 170 crore in loans to 320,000 women clients in poor regions of India.
Borrowers take loans for a range of income-generating activities, including livestock, agriculture, trade (such as vegetable vending), and production (from basket weaving to pottery). SKS also offers interest-free loans for emergencies as well as life insurance to borrowers.
According to MFIs the opportunities ahead are promising. “The industry is growing at the rate of 50% and so the future is very bright. If the growth continues, India can reach the $2 billion mark within two years,” says Vishal Mehta of Delhi-based Lok Capital Group, which provides equity capital and support to Indian MFIs.
“Now every MFI wants to go for equity but most of the promoters are still not willing to adapt to the professionalism after the equity comes in,” he adds. Intellecap’s research also points out that lately there has been value creation in MFIs due to diversification and partnerships. Like there has also been an emergence of asset financing and supply chain financing in credit. MFIs are also venturing into alternate financial and non-financial services.
“The main reason for this could be emergence of more professional promoters and growing ambitions of MFIs who now aim to become bigger financial institutions,” explains George.
Leading MFIs in India presently have an estimated 9.76 million clients, up from 0.76 million clients in 2003. This figure is estimated to touch the 50 million mark by 2012. While loan portfolio is pegged at about $769 million assets are pegged at $915 million dollars in 2007. For top 10 MFIs in India the return on equity is over 60% a year. So by 2012 around $6 billion would be required for capital in MFIs in India.
Experts say a funding gap has already started arising as MFIs are expanding their customer base but are still unable to meet more than a fraction of today’s potential borrowers. Deutsche Bank research estimates the funding gap to be roughly around $250 billion globally.
Says Mahesh Dayani, business banking, HDFC Bank, “Even banks have now started focusing on microcredit and we have customers who have borrowed a small sum as Rs 1 lakh for opening a garage. Despite this the gap is too large, and there are lot of opportunities to be explored in this area.”
Experts say presently there is a rare direct access to capital market by MFIs. The same is expected to grow in India apart from MFIs going for PE from foreign investors and going for mergers with other MFIs or financial institutions.