Investors happy as microfinance lenders discipline growth

Investors happy as microfinance lenders discipline growth

Mumbai / Bangalore: Microfinance institutions (MFIs)—firms that offer tiny loans to low-income groups—are moderating their pace of growth, but private equity (PE) and venture capital (VC) funds that have invested in them aren’t complaining.

MFIs are going slow on opening branches and acquiring loan customers. In an attempt to improve quality control, the industry has prepared a code of conduct, following which MFIs will try to avoid heavy concentration in some regions and stop chasing the same set of customers.

High growth means high returns for PE and VC funds. Yet investors are pleased the Rs11,750 crore microfinance industry is starting to rein in lending to address concerns that unbridled growth may cause bad assets to pile up.

“As investors, we love growth," said Sumir Chadha, managing director, Sequoia Capital India, which has invested in a few MFIs. “But in the lending business, you need to be very careful about your customer base."

MFIs such as Ujjivan Financial Services Pvt. Ltd, in which Sequoia Capital has invested, are acting on the concerns about asset quality.

“A lot of MFIs, including us, have put in strict discipline in terms of growth. We have become choosy," said chief executive Samit Ghosh. “If there are already three well-entrenched MFIs in a particular area, we don’t open a new branch there. Similarly, if a customer has borrowed from these three MFIs, one more MFI doesn’t lend to them."

According to an October report by rating agency Crisil Ltd, MFI disbursements have increased at a compound annual growth rate of 90% over the past four years. There are at least 3,000 MFIs, and 400 of them have active lending programmes, the report estimates.

“The larger you grow, the more cautious you need to be,"said Shiv Narain, head of finance at Spandana Spoorthy Financial Ltd, India’s second largest MFI, with an asset base of Rs1,870 crore at the end of the last fiscal. “In 2008-09, we grew at 200% but in 2009-10, we will grow at 100%."

The growth Narain is referring to is in terms of assets. In 2009, Spandana’s assets grew at 214% and client base at 104%.

Aavishkaar India Micro Venture Capital Fundhas invested in a string of MFIs including Grameen Financial Services Pvt. Ltd and Bhartiya Samruddhi Finance Ltd.

“One firm in our portfolio has registered lower growth in the first six months of fiscal 2010, but we are fine with it," said Vineet Rai, chief executive officer, Aavishkaar. “Lending to the poor in India is a long-term process."

MFIs say the initiatives to contain growth have been triggered by the firms’ plan to grow in a more responsible manner, which would include means of cutting down default and delinquency risks. Currently, the level of non-performing assets (NPAs) is around 1% but it is likely to rise if the industry continues to grow at a high pace.

In 2009, there were 27 private equity and venture capital deals worth $200 million in this sector, according to Venture Intelligence, a research service focused on PE and mergers and acquisitions, and the trend has been continuing in the current fiscal. At least one MFI plans to enter the capital market with an initial public offering.

According to the Crisil report, the asset quality of MFIs will deteriorate marginally over the short to medium term owing to an increase in larger ticket loan disbursements, multiple lending and migration of borrowers. “In the race for growth, the controls and practices may have been compromised and now they are being corrected," said Ramraj Pai, director, Crisil.

To be sure, all MFIs do not need to apply the brakes on growth. “It’s a region-specific phenomenon. In states like Andhra Pradesh, Tamil Nadu and Karnataka, penetration of MFIs is very high, but MFIs need to grow fast in new areas," said Sandeep Lohani, MFI operations adviser, Lok Advisory Services Pvt. Ltd, which has funded quite a few microfinance firms.

In Andhra Pradesh, for instance, there are 2.5 loans available per household of people living below the poverty line.

“If an MFI wants to open a branch in Andhra Pradesh, its board will come down and say, why Andhra Pradesh? It will question why do you want to expand or how you plan to expand. Two-three years ago, these questions would not have been asked," said Baskar Babu, chief executive, Suryoday Micro Finance Pvt. Ltd.