20120313 infographic indian microfinance

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$ 5.3 BN December 2010 Microfinance legislation (the AP Act) passed by the Government of Andhra Pradesh July 2010 SKS IPO raises H1,600 Cr. (USD 320MM) October 2010 Andhra Pradesh MicroFinance Institutions (regulation of money lending) Ordinance, 2010 is issued 90 % May 2011 Legatum issued a white paper A Crisis at the Bottom of the Pyramid – which challenged the premise of the AP Act March 2012 The Microfinance Bill to be debated by Indian Parliament offers some new hope for the Indian microfinance industry 2010 The Bill’s proposed 26% interest rate cap takes no account of the fluctuation in bank lending rates which have recently risen from 12% to 14-16% The requirement for capital adequacy of 15% will severely stress MFIs with large exposure in AP. Is this a sustainable business model? Limiting loans to households with less than H60k income encourages misrepresentation since loan recipients may find themselves suddenly excluded 14-16% cost of funds 7-9% operating expenses 1-3% profit A mere I472 Cr. (USD 94MM) in equity capital has been invested in the Indian microfinance sector since the AP Act was passed, down from I2,600 Cr. (USD 520MM) in Mar-Oct 2010 alone. 2011 2012 the ap act crisis but... 82% DOWN equity capital investment L6395 cr 26% interest rate cap ZERO 2010 2011 In the year before the AP Act was passed, MFIs disbursed USD 1.5BN to more than ten million households in Andhra Pradesh 7,494 CR of loan portfolios in AP will likely be written off amounting to I4,919 Cr. (USD 984MM) to I6,395 Cr. (USD 1.3BN), or between 19 to 24% of the industry’s entire portfolio in FY 2011. Repayment rates in AP plummeted from almost 100% to 5% following the AP Act. 9.2 MM Since the AP Act, the disbursements have dropped to almost zero. women now form the largest bloc of blacklisted borrowers in the world thanks to the AP Act people in India have no access to formal financial services 1 3 in 42 % the size of the private microfinance sector in March 2011 was H26,255 Cr. of the Indian population exists on less than $1.25 (H62) per day © 2012 Legatum Limited. www.legatum.com clients in nearly every state of India. andhra pradesh 1974 The Self Employed Women’s Association formed an urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, to provide banking services to poor women employed in Gujarat. 1980s The microfinance sector went on to evolve around the concept of Self Help Groups (SHGs), informal bodies that would provide their clients with much-needed savings and credit services. 2005 The Krishna District crisis followed unfounded allegations against some MFIs and the shutting down of branches; repayments dried up and the sector took two years to recover. focus on: a brief history of the indian microfinance industry gross loan portfolio client base growth indian microfinance Looking Beyond the AP Act and its Devastating Impact on the Poor In December 2010 the Government of Andhra Pradesh passed a law (the “AP Act”) which effectively shut down private sector microfinance in the State. The AP Government stated that its goal was to protect the poor. Now, 15 months later, the impact of the AP Act is clear: rather than protecting the poor in AP, it has had the opposite effect and indeed harmed the poor by starving them of access to credit and basic financial services. facts & figures 30% 20 MM of all MFI loans across India are in the state of Andhra Pradesh (AP) 2008 to 2010 Private sector MFIs grow to meet the needs of the poor: Gross loan portfolios +80% p.a. Client base +64% p.a. 2008 to 2010 Comparative Growth p.a. Private MFIs vs. SHGs By March 31 2011, the loan portfolio and clients grew at a reduced rate of 19% over the previous year (driven by good growth until October 2010 and then stagnant after the crisis) to H26,255 cr (USD 5.3Bn) in portfolio and 31.7 million clients 1974 1980s 2005 2008 private mfis critical to financial inclusion micro-accounts held by corporate banks 10m regional rural banks 31.7MM private sector MFI clients estimated interest rates MFIs indian credit cards village moneylenders 26% 30% 150% By denying access to microfinance, the AP Act exposes India’s poor to the exorbitant interest rates of unregulated village moneylenders The top five private sector MFIs reach more than 80% 64% 28% 13.6% MFIs MFIs SHGs SHGs The microfinance sector is a critical part of India’s economy. When included in the mainstream financial system, the sector has a 45% share of all microcredit accounts nationally. Adding in SHGs, the total number of microcredit accounts is around 45 % 134MM

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An infographic from Legatum attempts to capture the seen and unseen impact of the AP legislation on microfinance.

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$5.3BNindian microfinance Looking Beyond the AP Act and its Devastating Impact on the Poor

December 2010Microfi nance legislation (the AP Act) passed by the Government of Andhra Pradesh

July 2010SKS IPO raises H1,600 Cr. (USD 320MM)October 2010Andhra Pradesh MicroFinance Institutions (regulation of money lending) Ordinance, 2010 is issued

90%

May 2011Legatum issued a white paper – A Crisis at the Bottom of the Pyramid – which challenged the premise of the AP Act

March 2012The Microfi nance Bill to be debated by Indian Parliament o� ers some new hope for the Indian microfi nance industry

2010

The Bill’s proposed 26% interest rate cap takes no account of the fl uctuation in bank lending rates which have recently risen from 12% to 14-16%

The requirement for capital adequacy of 15% will severely stress MFIs with large exposure in AP.

Is this a sustainable business model?

Limiting loans to households with less than H60k income encourages misrepresentation since loan recipients may fi nd themselves suddenly excluded

14-16% cost of funds7-9% operating expenses1-3% profit

A mere I472 Cr. (USD 94MM) in equity capital has been invested in the Indian microfi nance sector since the AP Act was passed, down from I2,600 Cr. (USD 520MM) in Mar-Oct 2010 alone.

2011 2012

the ap act crisis but...

82%DOWN

equity capital investment

L6395 cr

26% interestrate capZERO

2010

2011

In the year before the AP Act was passed, MFIs disbursed USD 1.5BN to more than ten million households in Andhra Pradesh

7,494CR

of loan portfolios in AP will likely be written o amounting to I4,919 Cr. (USD 984MM) to I6,395 Cr. (USD 1.3BN), or between 19 to 24% of the industry’s entire portfolio in FY 2011.

Repayment rates in AP plummeted from almost 100% to 5% following the AP Act.

9.2MM

Since the AP Act, the disbursements have dropped to almost zero.

women now form the largest bloc of blacklisted borrowers in the world thanks to the AP Act

people in India have no access to formal fi nancial services

1 3in42%the size of the private microfi nance sector in March 2011 was H26,255 Cr.

of the Indian population exists on less than $1.25 (H62) per day

© 2012 Legatum Limited. www.legatum.com

clients in nearly every state of India.

andhra pradesh

1974The Self Employed Women’s Association formed an urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, to provide banking services to poor women employed in Gujarat.

1980sThe microfi nance sector went on to evolve around the concept of Self Help Groups (SHGs), informal bodies that would provide their clients with much-needed savings and credit services.

2005The Krishna District crisis followed unfounded allegations against some MFIs and the shutting down of branches; repayments dried up and the sector took two years to recover.

focus on:

a brief history of the indian microfinance industry

gross loan portfolio

client base growth

indian microfinance Looking Beyond the AP Act and its Devastating Impact on the Poor

In December 2010 the Government of Andhra Pradesh passed a law (the “AP Act”) which e� ectively shut down private sector microfi nance in the State. The AP Government stated that its goal was to protect the poor. Now, 15 months later, the impact of the AP Act is clear: rather than protecting the poor in AP, it has had the opposite e� ect and indeed harmed the poor by starving them of access to credit and basic fi nancial services.

facts&figures

30%

20MM

of all MFI loans across India are in the state of Andhra Pradesh (AP)

2008 to 2010Private sector MFIs grow to meet the needs of the poor:Gross loan portfolios +80% p.a. Client base +64% p.a.

2008 to 2010Comparative Growth p.a.Private MFIs vs. SHGs

By March 31 2011, the loan portfolio and clients grew at a reduced rate of 19% over the previous year (driven by good growth until October 2010 and then stagnant after the crisis) to H26,255 cr (USD 5.3Bn) in portfolio and 31.7 million clients

1974 1980s 2005 2008

private mfis critical to financial inclusion

micro-accounts held by

corporate banks10m

regi

onal

ru

ral b

anks

31.7MMprivate sector

MFI clients

estimated interest rates

MFIsindian credit cards

village moneylenders

26% 30%

150%By denying access to microfi nance, the AP Act exposes India’s poor to the exorbitant interest rates of unregulated village moneylenders

The top fi ve private sector MFIs reach more than

80%

64%

28%

13.6%

MFIs

MFIs

SHGs

SHGs

The microfi nance sector is a critical part of India’s economy. When included in the mainstream fi nancial system, the sector has a 45% share of all microcredit accounts nationally. Adding in SHGs, the total number of microcredit accounts is around

45%

134MM