HDFC to open eight more MFI branches

In an effort to grow from its four existing branches to twelve by the end of the year, Housing Development Finance Corporation (HDFC) plans to open eight more microfinance branches across the nation. The branches would be designed around the self-help group linkage model.

This effort is one in a larger trend by major financial institutions to enter into the MFI space. Micrcapital.org, the source for this article, explains as such:

HDFC’s recent market entry and rapid scaling-up of operations reflects a general recognition by prominent Indian banks that microfinance is a financially sustainable if not lucrative enterprise. Other recent market entrants include banking giants UTI and ICICI, holding total assets of USD 1.2 billion and RUP 3.9 trillion (USD 92.7 billion) respectively. Further details on this movement can be found in the MicroCapital story Commercial Banks in India Delve into Microfinance Investments.

We have also written numerous times on the evolution of microfinance and involvment of traditional players. You can read Prerna’s wonderful post on MFI and Private equity here.

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Voice Plans in the Village

Grameen Foundation has recently announced that they will be providing two entrepreneurs seen money to develop Village Phone programs. It will be run through its Village Phone Assistance Center.

Launched in 2007, the Village Phone Assistance Center guides MFIs and other organizations in developing Village Phone products that provide poor communities around the world with affordable and reliable phone access and cell phone business opportunities. One critical resource is the Village Phone Direct Manual, first published in 2007 in collaboration with the International Telecommunications Union. The English-language version has been downloaded more than 1400 times, and it is now available in four additional languages: Arabic, Chinese, French and Spanish.

The grants will be on the order of $10,000, and initial applications should be e-mailed here. The deadline for the first round is August 24, 2008. More details can be read here.

SKS looks to educate its members’ children

Partnering with Career Launcher, SKS Microfinance will be opening 10 school in Nalgonda, Khammam, Rangareddy and Medak districts of Andhra Pradesh that will be English medium institutions for primary school education.

The SKS-CL Academy, in the pilot phase, will provide primary education till third standard using the national open school syllabus with special emphasis on technology. While Career Launcher would manage and run the schools, SKS Microfinance would support the marketing of the schools and provide education loans.

Recognizing that there exists a need beyond only loans to assist individuals in breaking free from the shackles of poverty, SKS is now looking to provide the actual means for such people to acquire the knowledge to improve their own situations.

SKS members can opt for an education loan of INR 3,100 (USD 72) to provide quality education to their children. The school will run at a fraction of regular fees and the monthly fee for KG and Class I is INR 175 (USD 4).

The schools are also open to non-members as well. TC-I along with the community at large will be anxiously watching this program hoping for its success and its subsequent replication across the board.

[Source: Microcapital.org]

Op-Ed: The Potential Marriage of Private Equity and Microfinance – Dysfunctional or Blissful?

The composition of the microfinance sector is becoming increasingly hybridized, as microfinance institutions (MFIs) morph into profit-making entities, and global financial institutions such as Citigroup, Inc. or HSBC Holdings become (unintended) vectors of poverty alleviation (refer to “Global Financial Institutions and Microfinance: A Promising Marriage?” for further context). The equation isn’t anything new (in fact, I’ve waxed philosophical about it at length) – “self-interest” + “social good” = “sustainability”, but the actors involved are becoming increasingly fluid, and therefore, so is the landscape. In this post, I will analyze the emergence of another actor – private equity firms – and its implications for the Indian microfinance sector (also refer to and “Should SKS Microfinance go Public? for further background).

Currently, India’s microfinance sector reaches 36.8 million borrowers, of which approximately 25%, or 10 million customers, are associated with the 60 largest microfinance institutions (MFIs). Despite the rapid proliferation of these MFIs, however, the remaining 50% of the borrower market remains untapped, translating, therefore, into a reservoir of untapped profit. For this reason, the involvement of profit-oriented entities such as private equity firms is rapidly accelerating, with at least 4 PE investments totaling USD 43 million since 2007 alone.

For the purposes of providing some background on the nature of private equity firms, a brief summary from Microcapital.org follows:

Private equity firms typically seek extraordinary returns and are seen as aggressive, non-transparent, difficult to regulate and uninterested in the broader social aspects of businesses they invest in. PE firms typically invest in closely held companies in which they see possibilities of extraordinary returns that can be obtained through an exit strategy involving initial public offer (IPO) or takeover by large firms.

Naturally, the question that follows, then, is – for what specific reasons are PE firms interested in MFIs? The aforementioned article cites two reasons:

First, there is a perception that the microfinance sector is capable of providing extraordinary returns. Compartamos, a Mexican bank specialising in microfinance, made a successful IPO of 30 percent of its shares with a valuation at 12 times its book value, implying an internal rate of return of roughly 100 percent per year from the time it became a for-profit entity.

Second, studies indicate that returns from the sector are not sensitive to swings in global economic cycles. This makes such investments desirable for risk diversification.

This post continues after the break. Continue reading

TC-I FundWatch

Editor’s note: In order to more quickly provide our readers with pertinent information, ThinkChange India has created TC-I FundWatch, a regular post that summarizes important investments made by social and traditional venture capital firms that directly affect the lives of India’s poor. This way, on Tuesdays, our readers will be able to get a regular update on the financial activity in this fast moving space.

Social

  • Unitus, a nonprofit focused on accelerating access to microfinance that operates in India in addition to other countries, has received a USD 9 million grant from the Omidyar Network. This is the largest grant to date. [Source: Microcapital.org]
  • Bharat Integrated Social Welfare Agency (BISWA) has sold USD 5.9 million of its agricultural assets, otherwise known as agri assets to private banks — another example of the growing trend of MFIs securitizing their loans for capital infusions. Grameen Capital India (GCI) was responsible for securing the deal. [Source: Microcapital.org]

Traditional

  • Rabobank, a Dutch financial institution, will establish a $100 million private equity fund in India focused on small and medium size enterprises (SMEs) in the agriculture value chain. [Source: VC Circle]
  • Lighthouse Funds is launching their 2020 Opportunity Fund — a $100 million that will focus on investing in fast growing small and medium size enterprises (SMEs). [Source: VC Cirlce].

MFIs tend to lose focus as they ‘evolve’

A new report released by the Women’s World Banking (WWB) observes that as many microfinance institutions transform from non-profits to traditional financial intermediaries, they tend to shift away from their original focus on helping poor women and instead focus on making larger loans a la a traditional financial institution. The results were disheartening as the report found that:

… five years after “transformation” for 27 organizations and compared them to 25 that had not commercialized. On average, it found the proportion of women served by transformed institutions dropped from 88 percent to 60 percent. It also found that average loan sizes were two to three times greater than those of non-commercialized outfits.

Written by Christina Frank, the report also highlighted the possible benefits of such a transition.

Transformed institutions tend to extend their borrower reach and diversify their product offerings. The study reveals that the number of active borrowers increased by 30 percent a year on average for commercialized MFIs, compared to 25 percent for the non-profits. Also, since many countries do not allow non-profits to take deposits, savings accounts are more widely available with transformed MFIs. The number of savings accounts grew by an average of 45 percent annually for the commercialized institutions, while those in the non-commercialized group that were already able to offer such accounts only saw 28 percent average growth.

This phenomenon is something that needs to be closely monitored, but as can be seen by the report there are arguments for both sides. Theoretically as long as new MFIs come in to serve the now abandoned population, this evolutionary cycle may not be that disastrous, but one must then question the sustainability of the microfinance growth model generally then.

[Source: Microcapital.org]

Wrap it Up: Two Papers reviewed by Microcapital.org

Microcapital.org reviewed two recently released papers this week; here is a summary of those.

1. “Should Access to Credit Be a Right?” by Marek Hudon

This is a very interesting question as fields like microfinance have gained so much popularity and success. The paper takes both practical and normative approaches to this issue and frames the overall debate in a way that seems to argue that the framing of credit as a right would significantly contribute to alleviating poverty. The full paper can be found here.

2. Consultative Group to Assist the Poor, Focus Note: The Early Experience with Branchless Banking (On the Potential of Branchless Banking in the Microfinance Sector)

This paper takes information from 18 different countries that employ branchless banking to analyze its effect on both microfinance and poverty generally. The paper highlights the ability of mobile banking to overcome the hurdles that many MFIs face with regard to the lack of well-established banking infrastructures in these countries. The full paper can be found here.