Kolkata: Size does matter when it comes to microfinance. That and the pace of expansion mark the difference between success and failure, according to a study into the industry.
One out of three microfinance institutions (MFI) in India made losses in fiscal 2009, says a study of some 230 lenders conducted by ACCESS Development Services, a not-for-profit organization that offers consulting services to MFIs.
The study also shows that a higher proportion, 42%, of small microfinance lenders, or those that have a loan portfolio of up to Rs5 crore, posted losses.
“Small does not seem to be the right size for viability,” says the study, which was led by N. Srinivasan, an expert on MFIs.
In fiscal 2009, MFIs recovered 99% of their loans, according to the report, which is way above the recovery of commercial banks. While MFIs lend at rates going up to 30%, the smaller ones make losses because of high operating costs, according to industry experts.
Go slow: Bandhan’s Chandra Shekhar Ghosh suggests gradual scaling up of operations to prevent losses. Indranil Bhoumik / Mint
For large MFIs, the cost of distributing and recovering loans are typically 40-45% of the total. The rest is the cost of funds—MFIs typically borrow from banks and other institutions at around 12% interest. But for smaller players, operating expenses, or the proportion expended in distribution and recovery, could be as high as 60% of the total.
“If a new lender tries to expand fast and spends a lot of money on manpower, technology and market penetration, it could face losses,” says Chandra Shekhar Ghosh, managing director of Bandhan Financial Services Pvt. Ltd, one of the biggest and most profitable MFIs in India. “Operations should be scaled up gradually after building a certain amount of business.”
However, operations are sustainable only if a lender can raise its loan portfolio to at least Rs10 crore and that should take around two years from inception, according to Manoj K. Sharma, director of MicroSave, a consulting firm that advises MFIs. “Scale is very important in microfinance. A lot also depends on lending practices as well,” says Sharma.
The ACCESS report says “unbridled expansion tactics”, and competition in some cases result in lenders offering more loans than borrowers could service, and this, in turn, leads to delinquency. For illustration, Srinivasan cites largescale defaults in Kolar district of Karnataka, where non-performing assets (NPAs) are as high as Rs60 crore, almost half of the total NPAs of the industry.
Paring transaction costs is the biggest challenge facing microfinance lenders. “It isn’t easy making finance available to the last man in the queue,” says J.P. Dua, chairman of Allahabad Bank, which funds MFIs such as Bandhan. “It also costs quite a bit.”
MFIs in India had nearly doubled their outstanding loan portfolio to Rs11,734 crore in fiscal 2009, according to the ACCESS report. They added 8.5 million borrowers during the year and had 22.6 million borrowers as on 31 March.
The bigger players were better off—in fiscal 2009, 84% of the large MFIs, or those that have a loan book of more than Rs50 crore, were profitable, and of those that have a loan portfolio of up to 50 crore, 80% were profitable.
Meanwhile, on Wednesday, D. Subbarao, governor of the Reserve Bank of India (RBI), said MFIs were lending at very high rates, while acknowledging that they had made finance available to a large section of the society “left behind by the formal financial sector”.
Competition should eventually force MFIs to pare lending rates, Subbarao told Mint on Thursday.
The Union government could introduce a Bill to regulate microfinance lenders, finance secretary Ashok Chawla said. The legislation had been put on ice because one of the former allies of the Congress-led government wanted the Bill to put a ceiling on lending rates.
Chawla said the Bill “would be discussed by the standing committee” and it could “look at issues such as lending rates”.