Tag Archives: Accessdev

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.

Helping Microcredit Programs Succeed

13 Nov

 

 

Continued from ‘The First Break-through’.

 

 

By February, we had gathered additional momentum. Chiradeep Vittal joined the team and soon after Amar Singh, Ramkumar, Ramya and Vinay started building the system at a fast pace. We would have quick two week development iterations followed by testing done by Suriya Prabha and Supraja.  

 

There was a ton of legal work to be done and we initially had a very hard time getting any law firms to help us. But after a little bit of struggle, things fell into place – Hanson Bridgett, UC Berkeley and O’Melveney and Myers started helping us with the legal work.

 

Meanwhile Natasha Ramarathnam joined us in India and we started talking to various Microfinance institutions (MFIs) who may need guarantees and also to the large banks who lend to these MFIs.

 

As we started talking to MFIs and MFI networks, we were soon struck by the enormity of demand and the amount of ground we had to cover. Rajkamal Mukherjee, a microfinance veteran and VP at Accessdev (a Microfinance network working with emerging MFIs in India), wrote to us:

The AmFA partnership presently has 110 partners aggregating to outreach of 2.4 million clients and gross loan portfolio of over a USD 250 million. These institutions represent a major chunk of the 40-50% annual growth segment in the sector. Our assessment of the immediate demand for additional credit among the AmFA partners is of USD 600 million.”

 

This bottom up assessment of the demand was quite stunning. One would expect that banks would quickly step in and lend to microfinance institutions adequately at a market determined interest rate. But that clearly does not seem to happen, despite the fact that banks in most developing countries have enough capital to lend. One outcome of this has been that bank lending has been heavily skewed to the larger MFIs while smaller MFIs have struggled to raise adequate bank loans to meet demand.

 

Prof. Mohammad Yunus summarizes the problem beautifully ‘The biggest problem we face in trying to expand the reach of microcredit is not the lack of capacity. Instead, it is the lack of availability of money to help microcredit programs get through their initial years until they reach break-even level.’ He further adds ‘Local banks cannot lend to MFIs because MFIs cannot provide collateral. However, if an international or domestic organization steps forward to act as a guarantor, local banks are happy to provide the money’ (Nobel laureate Mohammad Yunus with Karl Weber, Public affairs books, Creating a world without poverty : Social business and the future of capitalism, page 70, 2007).

 

I would take Prof. Yunus’s argument one step further. To make bank loans available to microcredit programs through their initial years, we need to make guarantees easily available. And to make guarantees easily available we need a scalable way to raise funds from socially responsible investors. I believe that our internet-centric model has the potential to raise socially responsible funds in a scalable manner and make it available to MFIs when they need it the most. Implementing it calls for a lot of hard work from a lot of people. I will write more on that topic in another post.