INDUSTRY OVERVIEW

Unless otherwise indicated, the information in this section has been derived from publicly available documents, including information published by the Government of India and the RBI, as well as industry reports prepared by Access Development Services, Intellecap and Sa-Dhan, and has not been prepared or independently verified by the Company, the Joint Global Coordinators and Book Runners or any of their respective affiliates or advisers connected with the Issue, and none of these parties makes any representation as to the accuracy of this information. Industry sources and publications are also prepared based on information and estimates as of specific dates. Unless specified otherwise, the information and estimates used by these reports may be for periods that do not relate to the current financial year. Consideration should be given to the rapidly changing business and regulatory environment of the microfinance industry, and such information and estimates may vary, might no longer reflect the current position, and may not be consistent with other information compiled within or outside India. Industry sources and publications generally state that the information contained therein has been obtained from sources generally believed to be reliable, but their accuracy, completeness and underlying assumptions are not guaranteed and their reliability cannot be assured, and, accordingly, investment decisions should not be based on such information. Certain statements contained in this section that are not statements of historical fact constitute forward-looking statements. Such forward-looking statements are subject to various risks, assumptions and uncertainties. Accordingly, there are or will be factors that could cause actual results or outcomes to differ materially from those contemplated by the relevant statement.

Overview The Malegam Committee Report defines microfinance as an economic development tool to assist the poor covering a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfer and counseling. Microfinance services are defined under the MFI Bill 2012 as micro credit facilities involving such amount, not exceeding in aggregate Rs. 0.5 million for each individual and for such special purposes, as may be specified by the RBI, such higher amount, not exceeding Rs. 1.0 million, as may be prescribed, collection of thrift, remittance of funds to individuals in India subject to prior approval of the RBI and such other terms and conditions as specified, providing pension or insurance services and any other services. The RBI master circular on micro-credit dated February 14, 2011, defines micro-credit as the provision of credit and other financial products of very small amounts to the low-income groups to enable them to raise their income levels and improve their living standards. The Malegam Committee Report states that the microfinance sector provides credit to that section of society that is unable to obtain credit at reasonable rates from traditional sources. It further stresses the fact that easy access to credit is more important for the poor than cheaper credit which might involve bureaucratic procedures and delay. The essential features of the provision of this credit as summarized in the Malegam Committee Report are: (a) the borrowers are low-income groups; (b) the loans are for small amounts; (c) the loans are without collateral; (d) the loans are generally taken for income-generating activities, although in some circumstances, loans are provided for consumption, housing and other purposes; (e) the tenure of the loans is short; and (f) the frequency of repayments is greater than for traditional commercial loans. The Malegam Committee Report also emphasizes the fact that given the imperfect market in which the sector operates and the small size of individual loans, high transaction costs are unavoidable and that these transaction costs can be reduced through economies of scale. However, it concludes that increases in scale cannot be achieved, both for individual operations and for the sector as a whole in the absence of cost recovery and profit incentive. Key Players in the Microfinance Sector The key players in the Indian microfinance sector have been classified in the Malegam Committee Report as falling into the following three main groups: (a) (b) SHGs bank linkage model, or the SBL program model, accounting for about 58.0% of outstanding microfinance loans, as of March 31, 2010; non-banking finance companies or microfinance institutions (MFIs), accounting for about 34.0% of outstanding microfinance loans, as of March 31, 2010; and 113

(c)

Others, including trusts and societies, accounting for the balance 8.0% of outstanding microfinance loans, as of March 31, 2010.

According to the Malegam Committee Report, the MFI model has gained significant momentum in India in recent years and continues to grow as a viable alternative to SBL program model and the other traditional means of credit. MFI growth, as stated by the Malegam Committee in its report, is supported by factors such as deeper reach and informal approach, simpler and less time-consuming procedures, and comfort of banks in dealing with MFIs to meet priority sector targets, particularly at the end of the year when banks invest in securitized instruments issued by MFIs. The Malegam Committee considers the credit provided to MFIs as an important link in the scheme of financial inclusion. The MFI Model MFIs can largely be classified into two types: for-profit organizations and not-for-profit organizations. Organizations under a host of different legal forms may be covered under the MFI model, including trusts, societies, cooperatives, non-profit NBFCs registered under Section 25 of the Companies Act (Section 25 Companies) and for-profit MFIs registered with the RBI as NBFCs. For-profit MFIs have obtained a majority of the market share both in terms of clients and in terms of total outstanding loan portfolio. (Source: SOS 2011 Report.) According to the Sa-Dhan 2011 Report, for-profit MFIs had approximately 87.0% of all clients and approximately 88.0% of outstanding loans as of March 2011. Classification of MFIs and Market Share According to the SOS 2011 Report, the top 10 MFIs have a significant influence over the entire sector and they garner nearly 76.0% of the market share in terms of number of clients and aggregate loan portfolio. The list of top 10 MFIs, as of March 31, 2011, based on client outreach is set forth below. Name of MFI Outreach (million) 6.2 4.2 3.2 2.8 1.5 1.4 1.3 1.3 0.9 0.8 23.8 Loans Outstanding (Rs. billion) 41.1 34.6 25.1 20.6 12.5 9.6 13.2 7.9 5.2 6.2 176.1 Own funds (Rs. billion) 17.8 NA 3.8 3.0 2.1 0.2 2.1 3.0 0.9 1.2 34.2 Borrowings (Rs. billion) 22.4 11.9 18.5 21.0 12.3 8.7 11.9 5.9 3.5 4.7 109.0

SKS Microfinance Spandana Bandhan Share Basix SKDRDP Asmita Equitas Grama Vidial Ujjivan Total (Source: SOS 2011 Report.)

The comparative performance of the top five MFIs as of March 31, 2011, based on client outreach numbers, is set forth below. Name Clients 2010 2011 (million) (million) 5.8 6.2 3.7 4.2 2.3 3.2 2.4 2.8 1.1 1.5 114 Growth (%) 8.0 14.0 42.0 20.0 37.0 Loans 2010 2011 (Rs. billion) (Rs. billion) 29.7 41.1 21.6 34.6 12.1 25.1 17.2 20.6 7.9 12.5 Growth (%) 38.0 60.0 107.0 20.0 58.0

SKS Microfinance Spandana Bandhan SHARE BASIX

(Source: SOS 2011 Report.) Bandhan had the highest growth rate in terms of clients and outstanding loans during Fiscal 2011, with growth in its clients and its outstanding loans by 42.0% and 107.0% during Fiscal 2011, respectively. Bandhans growth is largely attributable to the fact that it has been operating outside A.P. On the contrary, SKS Microfinance, Spandana, SHARE and BASIX have had a portion of their portfolio in A.P. (Source: SOS 2011 Report.) For the purposes of a disaggregated analysis of the comparative performance of MFIs, these can be divided into four classes on the basis of the size of their loan portfolios. Size of portfolio More than Rs.1,000 million Rs. 500 to 1,000 million Rs.100 to 500 million Less than Rs.100 million The dominance of larger MFIs is clear from the breakdown of market share below.
3.95% 4.83% 0.50%
4.58% 3.07% 0.35%

Class Mega Large Medium Small

90.73%

Mega Large Medium Small

Mega 92.00% Large Medium Small

Client outreach by size of MFIs

Share of loan values, size-wise (Source: SOS 2011 Report.)

The A.P.-MFI Act and the A.P. Microfinance Crisis Background to the A.P.-MFI Act A.P. is stated to have a unique position of leadership within Indian microfinance industry, evidenced by the presence of the four largest MFIs in India in the state. (Source: Sa-Dhan 2011 Report.) In March 2010, it accounted for more than 30.0% of all borrower accounts and outstanding loan portfolios in the case of MFIs. (Source: SOS 2011 Report.) The following table provides details regarding the microfinance industry in A.P.. 2008 53,857.0 19,445.0 10.5 3.6 14.1 2009 89,021.0 35,652.0 15.8 4.9 20.8 2010 117,395.0 52,107.0 17.3 6.2 23.6 2011 128,694.0 52,045.0 21.9 5.8 27.6

SHG loans (Rs. million) MFI loans (Rs. million) SHG members (million) MFI customers (million) Total MF clients (million) (Source: SOS 2011 Report.)

Even though the Government of A.P. made significant investments in subsidizing financial inclusion through SBL programs, MFIs continued to increase financing to their customers. An added feature of this high level of MFI lending in the state were the low default rates with portfolio at risk being less than 1.0% for most of the MFIs. In contrast the SBL programs reported much higher default rates. The repayment rates under the SBL programs were low. (Source: SOS 2011 Report and Indian Microfinance Crisis, 2010: Turf War or a Battle of Intentions published by Intellecap in October 2010.) 115