Microfinance

Group Alpha

Agenda

Introduction-Microfinance

Issues

PESTEL analysis

Financial analysis

Recommendations

Introduction – Microfinance

Loans outstanding : $2.5 billion

Microfinance Institutions

NGO-MFINBFC – MFI’s

Co-operative

SEWA bankSamiti

SanghamitraBandhan

SKSSpandana

30 million borrowers

Unbanked population: 450

million

Over Regulation and Under Regulation

Lack of Customer Orientation

Multiple Lending

Improper Usage of Loans

Access to Capital Lack of Proper Technology

Transparency in Pricing

Sensitivity to Interest rates

Lack of Product Customization

Lack of Corporate Governance

Issues facing the industry

DEFAULT

Plight of Borrowers

Sources of Funding

Lack of Technology

Software

Access

Investment

No MIS

Need to support environmentally sustainable projects

Farming Techniques

Profile of Borrowers

Concentration

MNREGS

SHG model

2004-2005 Krishna District

AP government intervention

Policy Paralysis

Reserve Bank of India Act

Banking Regulation Act

Companies Act

Co-operative Societies Act

AP Act

Microfinance Bill

RBI Regulations

Political

Economic

Social

Technological

Environmental

Legal

PESTEL analysis

Andhra Pradesh crisis

AP ACT 2010

Multiple Lending

High Suicide

s

High Interest Rates

Coercion

Over Regulation?

Competition?

2.5 million houses– 27 million transactions

Back to Moneylenders

Analysis of costs of MFI’s

78%

11%

6%5%

Components of APR

InterestFeesInsuranceSecurity

SKS Janalakshmi0%

20%

40%

60%

80%

100%

120%

32% 21%

30%35%

15% 33%

22% 7%

Comparison of costs SKS vs Janalakshmi

Provision and write-offs

Depreciation and ammort

Operating and other expenses

Personnel expenses

Financial expenses

Annualized percentage rate is the compounded annual costs of the loans

The hidden costs which is around 22% should be clearly communicated to the customers

The operating expenses reduces as the scale of operations increases

The interest rate cap of 26% will negatively affect the profits of small and medium sized MFI’s

MFI’s have higher percentage of overheads compared to larger firms. These higher costs eat into the margins of smaller MFI’s

Increase in scale of operations reduces the operating costs

Tier I Tier II Tier III15%17%19%21%23%25%27%29%31%33%35%37%39% Comparison of costs

Interest Fees Insurance Security

Tier I Tier II Tier III0%

3%

6%

9%

12%

15%

18%

21%

24%

OEROER(P)OER(A)

Scale Client Outreach

Tier I >250,000

Tier II 50,000-250,000

Tier III <50,000

Tier 2 MFI’s have higher costs because of their investments in expansion

APR reduces as the institution achieves scale

Differentiating Factors

Issuing Loans and Repayments

Product Offerings

Joint Liability Group

For Profit

Cre

dit

Bure

au

Fair Trade MFIC

usto

mer

Focu

sed

Appro

ach

Access to Capital

Tapping New

GeographyCorporate

Governance

Technology

Recommendations/Findings

Technology adoption: M-Banking

Identify core customer value proposition

Develop a strong technological framework

Develop and manage an agent network

Partner with one or more MNO’s

Costs: $7 million

Customer reach: 120,000

Strengths

• Lesser operating Cost• Ability to provide financial

services to the poor

Weakness

• Lack of ability to track credit history

• Lack of proper corporate governance

• Lack of technology and corporate governance

Opportunities

• Huge untapped market in India

• Extensive Product Portfolio• Collaboration with NGOs

Threats

• Excessive regulation by the RBI

• Political interferences

SWOT ANALYSIS(For Profit MFIs with more than 2,50,000 client

outreach)

TOWS MATRIX

OFFER DIVERSIFIED PRODUCT PORTFOLIO ALONG WITH MICROCREDIT WHICH DISTRIBUTES THE COSTS ACROSS DIFFERENT PRODUCTS

USE TECHNOLOGY TO BROADEN THE CLIENT BASE AND CUT DOWN THE COSTS

Self regulatory body like MFIN can support MFIs in case of issues like over regulation

Good corporate governance principles will give little room for political interference

STRENGTH WEAKNESS

OPP

ORT

UN

ITY

THRE

ATS

Economic Issues