The crisis, its cost and fallout
It would be naive of me to suggest that we in the microfinance sector did not know that a problem was brewing; we were just hoping it would never come and some of us were wondering when it would.
It would be naive of me to suggest that we in the microfinance sector did not know that a problem was brewing; we were just hoping it would never come and some of us were wondering when it would. The wait is over. We have the answer that has shattered our holier-than-thou image and questioned the validity of the business model that we took as the gospel truth.
As an eternal optimist (essential for being in a social sector business), I believe we will come out stronger from the crisis. But all such upheavals have inescapable costs and consequences. The microfinance industry has assets worth close to `8,000 crore outstanding in Andhra Pradesh alone, directly and some as assigned portfolio of banks. The most critical segment of this portfolio is that outstanding with the big five MFIs - SKS, Share, Spandana, BASIX and Asmitha. My estimate is that the large MFIs hold around 80 per cent of the AP microfinance portfolio. This would be 40 per cent of their total outstanding across India, and almost twice their net worth.
The most critical question in this situation is: Do the MFIs have the ability to meet their short-term repayment obligation and not default to the banks?
As I write this column, collections on the ground have still not picked up, and are hovering at 25-30 per cent. The only way for the MFIs to avoid default is to cut down growth and maintain liquidity to meet their repayment obligations to the banks. There is a belief that MFIs have the capacity to tide over the current crisis with a capital adequacy of around 25 per cent, as their 52-week loans to clients are disbursed on the back of 18- to 24-month term loans and credit lines.
While this may be a good position in aggregate, I doubt if MFIs individually are in such comfort zones. That the Microfinance Institutions Network, or MFIN, has reached out to banks seeking a `1,000-crore emergency debt facility clearly suggests there is some risk lurking behind the comforting numbers. Many MFIs may have to raise significant equity to bolster their balance sheets. The most severe consequence would manifest itself if repayments rates in the field do not go up soon. This could sink some of the large MFIs and cast a pall of failure over the entire microfinance sector. The fear of this scenario, even among public sector banks, was clear when an early demand to restructure the MFIs' loans was buried quickly and quietly. Restructuring could lead to classification of many loans as non-performing assets, and require provisioning big enough to wipe out the net worth of even the largest MFI.
The bank emergency funds would come at a serious cost to, and impose heavy obligations on, MFI shareholders and promoters. Already, valuations are taking a beating, with the SKS stock trading at its lowest since listing and five per cent below its listing price for the first time. Raising new equity will be a painful reminder to promoters about the fickle nature of the investing world.
Looking ahead
Here are some suggested steps for the sector. They are difficult to take, but could help avoid similar crises in future. For one, growth has to be re-calibrated. The time for vertical growth is over. Providing clients with comprehensive and quality service is more important than just credit. Two, the business model has to be revisited. By now, it is no secret that the talk of 99 per cent repayment rates is a myth. MFIs must start looking at real defaults and factor these into business plans. Three, service delivery has to be revitalised. Poor staff training and lack of transparency not only alienate customers; they contribute to the poor public perception of the sector. These steps are not, as they say, rocket science. But you don't always need rocket science to get out of a crisis.
Rai is Chairman & Co-Founder, Intellecap, and a recent recipient of G-20's SME Financial Challenge Award. For Intellecap White Paper, go to http://bit.ly/vinrai.
Vineet Rai
The most critical question in this situation is: Do the MFIs have the ability to meet their short-term repayment obligation and not default to the banks?
As I write this column, collections on the ground have still not picked up, and are hovering at 25-30 per cent. The only way for the MFIs to avoid default is to cut down growth and maintain liquidity to meet their repayment obligations to the banks. There is a belief that MFIs have the capacity to tide over the current crisis with a capital adequacy of around 25 per cent, as their 52-week loans to clients are disbursed on the back of 18- to 24-month term loans and credit lines.
While this may be a good position in aggregate, I doubt if MFIs individually are in such comfort zones. That the Microfinance Institutions Network, or MFIN, has reached out to banks seeking a `1,000-crore emergency debt facility clearly suggests there is some risk lurking behind the comforting numbers. Many MFIs may have to raise significant equity to bolster their balance sheets. The most severe consequence would manifest itself if repayments rates in the field do not go up soon. This could sink some of the large MFIs and cast a pall of failure over the entire microfinance sector. The fear of this scenario, even among public sector banks, was clear when an early demand to restructure the MFIs' loans was buried quickly and quietly. Restructuring could lead to classification of many loans as non-performing assets, and require provisioning big enough to wipe out the net worth of even the largest MFI.
The bank emergency funds would come at a serious cost to, and impose heavy obligations on, MFI shareholders and promoters. Already, valuations are taking a beating, with the SKS stock trading at its lowest since listing and five per cent below its listing price for the first time. Raising new equity will be a painful reminder to promoters about the fickle nature of the investing world.
Looking ahead
Here are some suggested steps for the sector. They are difficult to take, but could help avoid similar crises in future. For one, growth has to be re-calibrated. The time for vertical growth is over. Providing clients with comprehensive and quality service is more important than just credit. Two, the business model has to be revisited. By now, it is no secret that the talk of 99 per cent repayment rates is a myth. MFIs must start looking at real defaults and factor these into business plans. Three, service delivery has to be revitalised. Poor staff training and lack of transparency not only alienate customers; they contribute to the poor public perception of the sector. These steps are not, as they say, rocket science. But you don't always need rocket science to get out of a crisis.
Rai is Chairman & Co-Founder, Intellecap, and a recent recipient of G-20's SME Financial Challenge Award. For Intellecap White Paper, go to http://bit.ly/vinrai.
