A new risk landscape for India commercial microfinance
by Xavier Reille : Monday, February 2, 2009
A couple of weeks ago, I attended a very interesting roundtable on the risks landscape and outlook of the microfinance sector in India for 2009. It was organized by CGAP and Intellecap and held in Mumbai. This was my first visit to India in 21 years, and it was a unique opportunity to discover the microfinance scene.
I was particularly interested in Intellecap’s December 2008 survey on the major risks facing the commercial microfinance sector in India. Overall, liquidity risks ranked first, over indebtedness due to multiple borrowing was second, and high cost of debts came in third. Investors and lenders emphasize internal risks (inadequacies of internal control, fast growth), and CEOs of MFIs emphasize external risks (refunding risk mainly)—a key risk to watch in the short term.
Why do CEOs of MFIs see over indebtedness as one of their main worries? India is definitely a large and young market, but MFI CEOs seem to be increasingly worried about the level of competition and indebtedness of their clients. Over indebtedness does not necessarily translate into credit risk because clients might need to borrow from several sources to get higher loans to fund their business. However, it is a source of concern in an environment without a credit information system, and it might be an early warning of upcoming credit risk. High-growth MFIs with substandard loan underwriting processes,and lax group formation and training policies may be particularly vulnerable, as we have seen in Morocco. This is definitely another topic to watch in 2009.
I didn’t have a chance to discuss the topic with commercial MFI CEOs but was surprised by the importance of group lending in India. While group lending is a good entry product, it has also shown several limitations in other markets. I would be like to learn more about MFI risk management techniques for group lending and product diversification plans.
Finally, I was not able to crack the equity valuation mystery. According to a soon-to-be-released survey conducted by CGAP and J.P. Morgan, the median price for private transactions is 1.9x book, but Indian MFIs are trading at 6x book value, 3 times more than the market median. What can justify such high valuation? While MFIs offer high growth potential, first-class management and systems, and attractive opportunities for IPOs on the local market, the earning prospects alone can’t justify such a level of valuation. Are MFI distribution platforms strategic acquisition targets for large equity investors?
April 11th, 2009 at 11:06 pm, ajit jhangiani ()
sooner or later lending to the poor without collateral and without credit check will backfire a bit
can we borrow from the for-profit banking sector and learn how to value risk in lending, and then have the software developers come up with a hand held device to input data to check credit so that decisions could be made by the lenders in the field?
also,some type of a credit card with photo ID could be issued to verify identity, and run a background credit check
3 Comments
April 7th, 2009 at 11:42 am, V.Rengarajan ()
1.In the Indian Microfinance sector , there is multi sector institutional participation with the mandatory target oriented approach resulting unethical comeptition, duplication of finance to the same borrowers by two MF players and over idebtedness in the poverty sector . Eventually it causes credit risk to the micro credit lenders. This happens ironically in the presence of alloaction of service area demarcation for each one of the MF players and presence of a coordination forum for supervision on this for a healthy credit intervention.
2.Over indebtedness is certainly a credit risk because greater portion of borrowels from different sources go to social purposes particulrly for health purposes followed by western consumption in poor households and not necessarily for the business as observed.MFI s lend second loan for closure of first loan without any realtions to business or income generation activiites
3. Risk management in group lending involeves measures like – peer pressure, group collective collateral for the loan, capacity building for credit management, close monitoring by filed staff , assessment of the groups efficiency in the internal group loan management, credit rating for group management as a whole, application of indigenous micro credit risk assessment tool etc
V.Rengarajan