India microfinance and tightening credit markets

I was recently in India and had the chance to meet with a number of microfinance CEOs, bankers and insiders in the microfinance industry including Unitus, Unitus Capital and Unitus Equity Fund staff. One of my key inquiries was how was the global financial crisis affecting MFIs ability to access capital. Accessing capital from 3rd parties is a critical issue for Indian MFIs as they are prohibited by the Reserve Bank of India of accepting deposits as a source of capital. While an increasing number of the MFIs are generating some profits, the profits are insufficient to support their lending growth needs, so they need to go to outside sources for most of their capital needs.

A few highlight observations:

  • Large MFIs. The large MFIs are continuing to have access to sufficient capital for their growth needs. One large MFIs chose to slow down growth in late 2008 in order to test the new market conditions for credit, but is now operating once again growing its lending. SKS, based in Hyderabad, announced closing $75M in new equity capital late in 2008.
  • Securitization. (Wikipedia definition) Spadana announced $20M securitization in late 2008. In Feb 2009, SKS successfully securitized $40M of their loan portfolio with ICICI Bank. Then just last month SKS announced a $20M new securitization deal with YES Bank which received the highest rating from credit rating agency CRISIL. Securitization has gained a notorious reputation in conjunction with the USA mortgage crisis, but implemented prudently (with strong underlying assets) it is an important and valuable financial vehicle.
  • MFI Valuations. Valuations for all MFIs are down with smaller/earlier-stage MFIs being hit even harder. This is not a surprise as equity has become more expensive with the tightening financial markets, but it none the less is a shock to many MFIs who need more equity capital to keep growing. There are different responses to this. One MFI CEO I met with said that they were going to not raise equity capital right now and have made consequently made a decision to dramatically slow down their growth.
  • Donor Capital. Donor capital for non-profit MFIs is largely dried up. Because of the prominent success of a number of for-profit MFIs, non-profit MFIs are struggling to raise donor capital needed for growth. This is a significant problem as MFIs need to get to a certain scale before they can be financially sustainable. I met with one MFI CEO pioneering work in a very underserved area of India who had to stop most new loan disbursements because they don’t have a strong enough capital base in order to get additional on-lending capital from banks. Without getting more scale, they will not get to profitability and therefore are stuck in a very difficult position.
  • MFI On-Lending Capital. The good news is that the government mandates for banks to lend a certain percentage of their loans to support the poor (called the priority sector requirement) is still in place and microfinance is still getting a large allocation of this. The bad news is that the banks are becoming more risk adverse and many are looking to concentrate their lendings to fewer larger (less risky) MFIs. This means that some of the MFIs which are most innovative and tackling some of the harder areas of India are finding it harder to raise on-lending capital.

My net: Overall, microfinance in India is continuing to expand despite the global financial credit crisis. Much of the citizen sector which microfinance reaches are still not connected to the global financial markets and so are less affected by the macro issues. My hope is that MFIs will continue to have discipline in lending in order to keep repayment issues to a minimum in order to continue to provide these valuable financials services to the next village and the next slum.

5 thoughts on “India microfinance and tightening credit markets

  1. In recent time the sector has become highly attractive to Equity investors and MFIs are not letting down the opportunity to raise the capital from all the sources.There are specialized Microfinance funds like Bellwether, Goodwell Aaviskar, Unitus, Blue Orchard, Lok Capital, Micro ventures etc. Apart from these, private equity players like JP Morgan, Sandstone, JM financials, ICICI ventures, Bajaj Allianz,etc have also entered the field. There are also individual investors like Vinod Khosla (SKS, Share), Swaminathan Aiyer (Mimo) etc who have invested in Microfinance.There has been more than 1000 crore private equity investment in last 1 year


  2. Migrant remittances are also being looked upon as a source of capital for microfinance activities. However, adequate technical assistance would be required especially from international agencies like IFAD which have tested the model in other parts of the world and ensured better investments of the migrants’ money in their own home countries, that too for a good cause.


  3. Did you encounter any microfinance institutions in India whose clients are also qualify for loans from traditional banks? I am working with a microfinance in Udaipur and have found that women (below poverty line) are using microfinance loans as a supplement to traditional loans they have taken to expand their income generating activities. Would love more information about your impressions of microfinance in India, if you have them.


  4. Sahiba, very few MFI clients have access to any services from regular chartered banks. There are some gov't loan schemes … mostly in rural agriculture sector.Not sure what kind of "impressions" you are looking for…Overall, I think that India is one of the most innovative markets for microfinance … some of this is because of the scale which enables experimentation which just wouldn't work in some markets … some of this relates to how MFIs are attracting some of the brightest entrepreneurs who are setting new benchmarks.Let me know if you have specific questions.


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