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As of December 31, 2010, there were 1,395 MFIs globally with an estimated borrower base of 86 million with a total outstanding portfolio of over $44 billion as reported by the MFIs to the Microfinance Information Exchange or "MIX Market", excluding MFIs that do not report to MIX Market. If they did report, the total size of the global microfinance industry is estimated to be roughly 200 million borrowers. From 2003 to 2008, the global industry experienced a growth in borrowers at a CAGR of 12% and a portfolio outstanding CAGR of 34%.5 Inter-regionally, South Asia, East Asia and the Pacific region had the highest growth rates in terms borrowers, and Sub-Saharan Africa, Middle East and North Africa have experienced the slowest growth. Latin America continues to lead in terms of portfolio outstanding with $16 billion or 36% of the total global portfolio; however, South Asia has the lead in terms of borrowers with over 50% of the global borrower base.6 The disparity between these two trends is explained by the variance of average loan sizes in the two regions, which is a product of their economic well-being and the business models followed by their respective microfinance sectors.


The Indian microfinance sector presents a strong growth story. Its growth performance was impressively sustained through the liquidity crunch and continued at an increased rate in the second half of 2010. As of March 2010, the MFIs in India reported a client base of 22.6 million with an outstanding portfolio of more than $2 billion. Over the past five years, the sector has delivered a CAGR of 86% in the number of borrowers and 96% in portfolio outstanding. In the 12 months from March 2008 to March 2010, the microfinance industry experienced a 59% growth in its client base from 14 million to 22.6 million and 52% growth in its portfolio outstanding which increased from $1.52 billion to $2.3 billion.8 This reflects a 14% increase in the absolute growth in portfolio outstanding and 33% increase in the absolute growth in the number of borrowers from 2008 to 2009.

These numbers demonstrate the fundamental strength of the industry and the potential it still has to expand. Nonetheless, as presented by the table, the year-on-year growth rate has been declining, illustrating the increasing maturity of the sector. Though decreasing, the growth rate is still high and is reflective of the industry approaching a more sustainable rate of expansion rather than a reversal of the trend observed thus far. As the industry matures, it is also nearing an inflexion point and is considering more sophisticated growth strategies through diversifying product offerings, client targeting and creative financial and nonfinancial solutions, which will allow the sector to grow at a continuous pace while preserving its solid performance and abiding by its social mission. The equity financing flowing into the industry is reflective of the growth story it has experienced. Microfinance is gaining increasing ground as a viable investment sector. Since 2006, in India more than 25 equity transactions totaling more than $295 million in primary investments in the microfinance space have been completed. While the liquidity crunch did affect the availability of equity for microfinance players in the second and third quarters of fiscal year 2008-09, contrary to the trend in the financial services sector overall, Indian microfinance saw a surge in equity infusions in the first quarter of fiscal year 2009-10. In fact, the current fiscal year has also witnessed the entrance of mainstream private equity firms in the microfinance space, which had been previously occupied singularly by socially oriented investors such as Lok Capital. While the sector is still dominated by socially-focused investors, pure commercial investors are beginning to play a significant role by participating in a few, but large transactions. To fulfill the growth projections at play in the microfinance industry, it will continue to rely increasingly on equity versus debt. This need is compounded by the Reserve Bank of India's ("RBI") capital adequacy requirement for the sector which is currently 12% and is set to increase to 15% by April 2010. According to internal estimates, growth targets and capital adequacy requirements together create an annual equity need of approximately $200 million for the top ten MFIs until fiscal year 2013.

The growth of Indian MFIs has been enhanced by the availability of debt financing from both private and public sector banks, which have significantly increased their exposure to microfinance over the last five years. As of March 2009, banks and financing institutions had a total exposure to MFIs of $2.45 billion. This represents an almost 150% increase from the exposure in March 2008 of $984.8 million and a 200% increase from the exposure in March 2007 of $805.6 million.9 The priority sector lending ("PSL") requirements set by the RBI have encouraged banks to lend to MFIs as a way to satisfy their financial inclusion quotas for lending to agriculture and weaker and more deprived sections of society. During the 2008 liquidity crisis, some banks reduced on their exposure to microfinance, particularly to smaller MFIs. However, the Small Industries Development Bank of India ("SIDBI") played an important counter-cyclical role, and the new public sector banks such as Punjab National Bank and State Bank of India entered

as significant debt providers to Indian MFIs. As liquidity conditions eased by early 2009, the market witnessed the entrance of non-bank debt entities such as IFMR Trust. The large private Indian banks such as HDFC Bank and ICICI Bank that have historically lent to Indian MFIs, have begun to increase their exposure to the microfinance sector. ICICI Bank increased its exposure from fiscal year 2008 to fiscal year 2009 by 176% to $567 million, and HDFC increased its exposure over the year by 260% to $568 million.10 Other private sector banks such as Karnataka Bank, Kotak Mahindra Bank, Dhanalakshmi Bank and a couple others have also entered the debt financing market. Besides term loans, there has been a rise in non-traditional products such as non-convertible debentures, securitizations and portfolio buyouts available to MFIs through domestic as well as foreign debt funds. As of the end of fiscal year 2008-09, banks

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and new entrants had capital worth $100 billion available for lending to MFIs.11 As a result, today, larger MFIs have adequate and easy access to debt financing.

However, smaller and emerging MFIs are still struggling to find adequate funds as they have unproven business models and present a higher default risk to banks. Alternative debt providers are emerging in an attempt to fill this gap with subordinated-debt, guarantees and pooled securitizations.


SHG- Bank linkage model: launched by NABARD and under this model the SHGs are directly financed by the banks viz. Commercial banks, regional rural banks, and co-operative banks. SHGs or self help groups are the groups of 10-20 people preferably with the same economic background. These groups can be registered or unregistered. The loan is given to the group as a whole, which is then on-lend to the members within the group. The group members are also liable to save and deposit with bank within the group's name and the deposited money is later used for internal lending making them self sufficient. Once the SHG has accumulated savings for about 3-4 months, the members may be allowed to avail loans against their savings for emergency consumption and supplementary income generating needs.

Since the SHGs consist of people from different segments including the poorest of the poor thus it is basically targeted to reach the very poor which are bypassed by formal banking system. SHGs can be all-women, all-men or mixed groups. But it has been observed that all-women SHGs are much more successful because women are considered to be much better in finance management. Here peer pressure acts as an important weapon for collateral.

MFI-Bank linkage model: this model covers financing of MFI by the banks for on-lending to the SHGs and other small borrowers.

JLG Models

Banks can finance JLG by adopting any one of the following two models;

Model A - Financing Individuals in the Group: The group would be eligible for accessing separate individual loans from the financing bank. All members would jointly execute one inter-se document (making each one jointly and severally liable for repayment of all loans taken by all individuals in the group). The financing bank could assess the credit requirement, depending on the activities being undertaken and credit absorption capacity of the individual. However, there has to be mutual agreement and consensus among all members about the amount of individual debt liability that will be created.

Model B - Financing the Group: The JLG would consist preferably of 4 to 10 individuals and function as one borrowing unit. The group would be eligible for accessing one loan, which could be combined credit requirement of all its members. In case of crop loan, the credit assessment of the group could be based on crop/s to be grown and the available cultivable area by each member of the JLG. All members would jointly execute the document and own the debt liability jointly and severally.

Lending to the individual by the banks or MFI: in this the MFI or the banks give loan to the individuals who are then themselves responsible for the repayment of the loans. This is similar to the conventional methods used by banks to give away loans.

Individual Liability Model (Urban):

Satin's individual liability model is derived from the concept of providing generators to small business owners. These individual loans are provided to owners of small and medium-sized businesses who have demonstrated consistent cash flow. Instead of a specific collateral requirement each individual loan is guaranteed by another trader, shop owner, or service provider to ensure against default. Urban loans are more flexible than the rural operation loans because the duration can range from 6-18 months and loan repayment can be daily or weekly.

Mutual Liability Model (Urban):

Satin recently developed the mutual liability model to incorporate the joint liability philosophy into the urban setting. Low income urban clients will form groups of 2-3 people and take mutual liability for each other, thereby reducing default risk and eliminating the guarantor requirement. Loans terms can range from 32 to 52 weeks

Category: Payday loans

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