Microfinance in India and the Global Financial Crisis

30 Jan

 

My visit to India last month gave me a great opportunity to talk to people and get a first hand assessment of the impact of the global financial crisis on microcredit programs. Yesterday I also happened to read a recent Fitch ratings report on microfinance and it gave me an opportunity to compare its findings with my own observations.

 

 Fitch ratings believes that there is growing evidence that the larger, more integrated players in this sector are experiencing increased pressures. Given the concentrated nature of the industry, with the 100 largest microfinance institutions (MFIs) estimated to account for 80% of sector assets and 70% of sector borrowers, Fitch’s view is that it will be difficult for the microfinance sector to be immune to the global financial crisis.

 

Talking to banks and some of the MFIs, I did not get an impression that the ability of the larger for-profit MFIs to raise debt (loans) in the short term from local commercial banks was severely affected. Perhaps this may be because banks in India are required to allocate a certain portion of their lending to priority sectors like microfinance. Since most commercials banks do not lend to smaller MFIs, I think the larger for-profit MFIs have multiple banks to shop around for their debt and thus are able to raise commercial debt to a reasonable extent despite the global financial crisis.

 

I also met with people at AccessDev, an MFI network in India. Through its AmFa initiative, Access supports 110 MFIs, most of which are smaller MFIs working in remote and under-served regions.  As per Access and some of the MFIs I spoke to, smaller MFIs are finding it increasingly difficult to get fresh loan approvals.  This problem is compounded because only a few banks and development institutions such as SIDBI, FWWB, HDFC Bank and Axis Bank lend to smaller MFIs. 

 

Thus my assessment of the impact of the financial crisis at least in the Indian context is that Microfinance as a whole is likely to see lower growth and smaller MFIs will get impacted more severely than the larger MFIs.

 

On a separate note while in India, I also attended a Panel discussion where Vijay Mahajan the founder of Basix, India was a panelist. One of the points he mentioned was that MFIs are increasingly finding it difficult to raise equity. Discussions with the team at IFMR trust also gave me the same impression. MFIs need to raise equity because most banks typically lend to MFIs only if their capital adequacy ratio exceeds a certain threshold. Greater equity leads to a greater capital adequacy ratio. (Check http://www.themanagementor.com/enlightenmentorareas/finance/FIFS/CapiAdeq.htm  for a more detailed discussion on capital adequacy).

 

Typical investors in equity include microfinance focused funds like Unitus, foundations like the Michael and Susan Dell foundation, private equity and venture capital firms. I think equity investors are increasingly finding it difficult to raise funds from their investors because of the global financial crisis. If MFIs are unable to raise equity then in due course they will find it increasingly difficult to raise debt from commercial banks and serve their clients.

 

Given these trying times, I think it is all the more reason that the community at large should increase the support for microfinance and help MFIs and poor entrepreneurs tide over this crisis.

7 Responses to “Microfinance in India and the Global Financial Crisis”

  1. Jerry Ostradicky February 12, 2009 at 2:26 am #

    Hi Bhalchander
    What do you think is the best route for smaller MFIs to take at this point of the financial crisis? Do you think that they need to focus on a short term strategy, or do you think that they can hang in there for the time being and focus more on the long run? How can they best compete with the larger MFIs?

    Jerry

  2. bhalchander February 12, 2009 at 1:38 pm #

    Hi Jerry,
    Good point.. The way the bigger MFIs seem to be dealing with the crisis is by keeping costs low by making repeat loans ( next cycle loans) to existing clients and not putting too much effort in creating new groups and finding new clients. But smaller MFIs do not have that luxury. They typically have fewer clients and the percentage of loans they make to existing clients out of the overall loans they make is likely to be limited. The way I think they are trying to deal with this crisis is by slowing down hiring and by managing their funds very judiciously. But none of these will truly solve the problem. What will help smaller MFIs are new guarantee funds which increase bank lending, new banks lending to smaller MFIs, P2P lending models or regional wholesale funds which lend to smaller MFIs. Of course none of these are tasks which smaller MFIs could undertake. These are indeed very trying times for smaller MFIs.

  3. bhalchander February 24, 2009 at 2:13 pm #

    A quick update on the impact of the financial crisis.

    Women’s World Banking, billed as the world’s biggest network of micro-finance institutions, reports that several groups in the WWB network stopped extending new loans altogether in the final quarter of 2008.
    Check : http://bit.ly/QaFGP

    Cambodia has also released its figures and there is a drop of nearly 7% in lending in 2008 as compared to 2007.http://bit.ly/18o3Zq

    -Bhalchander

  4. Surbhi Goel March 5, 2009 at 4:00 pm #

    Hello Sir.

    I am Surbhi, pursuing my research from Delhi School of Economics, Delhi University, India. I have submitted by first research paper on Financial Inclusion: An emerging concept in India. I wish to work on the impact on global financial crisin on Microfinance in India for my next paper. I got through your post while searchin on net. It aptly presents the impact in simple and short words. I found it really helpful. Sir, could you please help me with other literature which delves into the fundamentals of mfi sustainability and crisis impact in much detail and esp. in context of India, if any. I shall be really grateful.

    Thanks and regards
    Surbhi

  5. bhalchander March 5, 2009 at 6:54 pm #

    Hi Surbhi,

    The crisis is pretty recent so I am not sure if you will find literature on the subject. One starting point for your research could be the State of the Sector Report for 2008 : http://www.amazon.com/Microfinance-India-State-Sector-Report/dp/8178299461

    http://www.microfinanceindia.org/download_reports/n_srinivasan.pdf

    Most likely you would have to meet practitioners in the field – banks, MFIs ( small and big ones), development bodies likes Access Dev, Sa-dhan, FWWB to glean more information.

    Bhalchander

  6. Surbhi Goel March 6, 2009 at 2:09 pm #

    Thanks for your help sir.

Trackbacks/Pingbacks

  1. Creating a shared prosperity | United Prosperity Team Blog - February 9, 2010

    […] of the smaller microfinance institutions like Ajiwika were struggling to raise funds because of the financial crisis. While development lenders such as FWWB and SIDBI were making some loans to smaller microfinance […]

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