PAPER WRAP-UP: India Microfinance Review 2007

 This review of the Indian microfinance sector is based on an analysis of M-CRIL’s sample of 58 rated microfinance institutions and the MIX’s 37 reporting institutions in 2006.  The publication was released in 2007 by Microfinance Information Exchange (MIX) and Micro-Credit Ratings International Limited (M-CRIL) as a 74-page document and is currently available at: http://www.microfinancegateway.org/content/article/detail/45957/

This review reports that the majority of MFI’s are located in Southern India. Forty percent of rated, and 64 percent of those MFI’s reporting to MIX Market. Three-fourths of all clients served by MFIs are also located in the south. This is largely due to the stronger, more developed economies found in the southern states compared to less developed areas in the north and east.

Of the sampled MFIs, 54 percent followed the Grameen model. Self Help Groups made up 32 percent of the sample, while the oldest MFIs in India, cooperatives, and individual banking models only represented 14 percent of the sample. In Andhra Pradesh, several Mutually Aided Cooperative Societies (MACS) have been established but since they rarely need external support, they do not seek ratings or report to MIX.

Non-Bank Finance Companies (NBFCs) made up 25 percent of the sample MFIs, a result of a national trend towards for-profit institutions. NBFCs using the Grameen method are the largest in the country, serving over 50 percent of MFI clients with an average of 130 thousand clients per institution.

Overall outreach of MFIs in India is 15-20 million clients, however only 35 percent of the 60-70 million poor families are being served. The average rated institution grew by 80 percent and reached 64 thousand active borrowers. This is 40 percent higher than the average South Asian MFI.

Though average loan portfolios have greatly expanded, client savings declined from 11.5 percent in 2005 to just 8.1 percent of outstanding loan balances in 2006 due to laws that restrict NBFCs and not-for-profit companies from taking savings deposits.

The Indian MFI sector is among the fastest growing and most efficient in the world. The sample institutions had an average of 326 staff members with a ratio of 231 borrowers being served per staff member. This is two thirds more than other surveyed South Asian countries. Grameen and SHG MFIs reported average servicing costs at ten dollars US per borrower, as compared to USD 30 spent by the average Asian MFI.

Recent expansion of leading MFIs into less developed parts of the country has resulted in an overall loss with the average operating cost of the sample at 21 percent with a portfolio yield of 20 percent, incurring slight deficit.

 The average portfolio at risk (PAR) rate of the sample was 6 percent, up from 4.7 percent in 2005. Indian MFI portfolio quality is weaker compared to other countries because of a reluctance to write off bad loans due to concern over loan portfolio size and the potentially adverse effects on an institution’s reputation.

The lack of availability of funds and grants has caused commercial finance to rise from 34 percent in 2003 to over 75 percent in 2006, drastically increasing debt-equity ratios, and contributing to an overall trend towards commercialization.

Financial performance of the Indian MFI sector continues to decrease due to poor portfolio quality and low portfolio yields, with a weighted return on assets of zero, down from an already low rate of 2.1 percent in 2005. Average MFI returns are at -9.8 percent, much lower than other South Asian countries.

Despite the overall decline in financial performance, 38 percent of the sample MFIs are turning a profit, though only 15 percent earn more than 3 percent. Fifty percent of borrowers are being served by institutions that have operational self sufficiency above 90 percent. India’s MFI sector has the potential to be financially viable in the near future.

By Melissa Duscha

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