MFI Industry Trends

Key Success Factors

Landscape
Sizeable credit under-penetration at the bottom
of the pyramid, liberal PE/VC investments,
stringent regulations & diverse business models
have caused this sector to be attractive for
lenders
A sector catering to 32 mm customers with over
50% AUM CAGR over FY12-16, led by 22% &
21% CAGR rise in volume (no. of borrowers)
and value terms (loan per borrower)
SRO introduction (MFIN & Sa-Dhan), credit
information bureaus (CIB), cap on lending
spreads, provisioning requirement and capital
requirement have resulted in financial discipline
Average ticket size more than doubled to Rs
16,379 vs. ~Rs.7,550 in FY12. MFIs have 9,669
branches across 35 states/union territories

Massively underpenetrated vis a vis global

industry with a potential market opportunity
pegged at Rs 2.7-3tn from a current level of 1.1
tn, implying strong growth potential
Expanding network of players following the
need to de-risk state concentration to a
maximum of 15-16% of net worth, especially in
south India and to target highly under-penetrated
north and central regions which may lead to
consolidation
Cost-rationalization efforts in the form of
process automation, technological innovation,
increase in borrower / loan per employee and
ticket size the industry has achieved RoA of
3.1% in FY 16 and a global low opex of 8.4%
New product offerings which are largely to
leverage on existing customer base coupled with
better risk management

Challenges

MFI Growth Trends (%)

Geographical Regions
Low Income States, North Eastern States with low
banking penetration
Unfulfilled credit & savings needs of Rs 67.4 tn
Products & Segments
Micro/small enterprises and Low Income
households for credit and savings needs
Competitor Benchmarking
Loa
Mca Gros
n
NI
P/ RO
Companies
p
s
ROE Boo
M
B A
(Cr) NPA
k
(Cr)
Bharat
Financial
Inclusion
14 12,0
3.8 24.9 5,20
Limited
%
85 0.1% 8.2 %
%
1
Equitas
2.8 19.1 4,41
Holding
11% 6,057 1.3% 5.9 %
%
9
Ujjivan
Financial
3.7 18.3 5,06
Services 12% 5,488 0.2% 4.5 %
%
4
Satin
Creditcare 10
2.2 22.2 3,27
Network
% 2,143 0.2% 6.5 %
%
1

State Wise Concentration (%)

Small Finance Banks- Opportunities and Challenges for MFIs

Why Transform?
Full range of financial products
reduces risk

Sustainability
Reducing
Constraints

Margin Cap and Qualifying

Asset Criteria

Underserved
markets

Markets for client centric lowcost products

Opportunity

Market opportunity of Rs 2tn to support 20%

loan CAGR in 3-5 years
Bottom 60% in rural markets and bottom 40% in
urban markets form addressable target for SFBs
(to ~140mn households out of 265mn Indian
households)
Key growth driver is market shift from highinterest informal lending to SFB
Avenues of opportunity
Geographical Regions
Low Income States, North Eastern States with low
banking penetration
Unfulfilled credit & savings needs of Rs 67.4 tn
Products & Segments
Micro/small enterprises and Low Income
households for credit and savings needs
Avenues of opportunity
Diversification

Holistic product portfolio,

reduced risk, payment
participation and settlement

Leveraging Low Low operational costs for rapid

Cost Structures
achievement of profitability
Access to Low Differentiator vis--vis MFI
Cost Retail
with better margins and
Deposits
profitability
No Spread
Limitations

No current spread cap

regulations on loan portfolio

Ability to Cross
Sell

Ability to cross sell will be a

major revenue driver

Political Risk
Management

Holistic product offering and

banking framework reduces
risk of political interference

Deepening
Rather Than
Widening

Vertical penetration with

enhanced product portfolio

Challenges to Transformation
Business Model related
High Costs of Transformation
Infrastructure, organisational, product
portfolio, servicing and risk management
Expected breakeven: 3-5 yrs
Efforts and Cost of Deposit Mobilization
High cost of deposit mobilisation owing to
small deposit sizes and skew towards
savings account
Expected lead time to attain low-cost
sustainable deposit funding: 5-7 yrs
Cost Effective Measures
Limited infrastructure and capacity of target
clients
Limited Scope of Cost Effective Measures
Such as Internet and Phone Banking
Regulations Related
Control Dilution
Obtaining long term potential capital for
40% promoter stake norm
Capped Foreign Ownership
Constrained domestic equity poses
challenge to MFI due to cap on foreign
capital (74%)
Added Capital Pressure
Regulatory requirements of CAR (15%),
CRR (4%) and SLR (22%)
Branding Related
Savings to Fuel the Liabilities
Lender positioning hinders attracting deposits;
needs shift from push to pull
Organisation related
Issues in Human Resource Management
Limited capabilities of MFIs employees
in liabilities, insurance, credit assessment
Change Management
Establishing multiple channels and
acquiring banking expertise
Risk Related
Vulnerability to Failure Due to Limited Risk
Exposure and Inexperience in Dealing with
High Ticket Loans
Concentration of big-ticket credit to few sectors
makes portfolio risky & vulnerable

Suggested Business Model

Strategy

Product
Portfolio

Strategy of becoming an SFB in future with

required capabilities and reducing the
threat of SFBs currently

Operational
Model

Customers

Technology

Drivers
Organizational
Capabilities

Partnerships

IT Architecture

Enablers
Agent TAB and mPOS

IT architecture

Field agents would be given a TAB that would

IT architecture of Svatantra needs to be agile and
enable them to reduce paper work, redundancies
should be modular in order to accommodate the
and on spot digitization of customer's details.
growing business and have an efficient operational
TAB is connected to the UIDAI database on real
model that would help in reducing the transaction
costs while turning to SFB.
time basis would help in eKYC validation and
CRM, MIS, CBS should be updated on real time
saves a lot of time and money
basis and generate reports to assess the credit
It can be connected to the mobile POS that helps
worthiness and risk of the customer and
in reducing the cash transaction
performance of field agents and Svatantra itself.
The sales executive is monitored using the TAB
Partnering with cKYC would reduce the risk by
check in and check out facility apart from helping
removing duplication and validating customer
in spot disbursement
efficiently
Partnerships
P2P-Collaboration with P2P helps in getting more business without incurring any operational costs.
However, Svatantra needs to take certain steps to reduce the risk of P2P lending which is still getting
regulated such as :
Mandatory physical validation by P2P firm and use of credit score model
Need comprehensive protection plan based on ratings in case of default with legal support of recovery
Sharing of complete borrower information and diversification of risk through small loans to many
Rate of interest should be defined by risk not by competition
Payment banks: This collaboration would be mutually beneficial as there will be a banking need for the
customer in the future if one uses either of the product. The agent of payment banks can divert its customer
to Svatantra and vice versa which would increase the incentive of the agent and the business of each other
Credit analytics: This helps in assessing the risk of the customer using both financial and non financial data
by collaborating with firms such as Lenddo and at the same time, need to build in house capabilities
Customer and Products

Need to diversify into other new products in the group Lending Model:
Emergency loan that can be spot-disbursed
Education loan for the children of SHGs
Agricultural and farming loans for women
Svatantra can build capabilities in terms of employee skill in validation, risk assessment, cross-sell, up
sell, MIS, financial management by diversifying into
Micro insurances in collaboration with insurance companies
Loan insurance schemes
Micro Savings that can be collected weekly through Field agent
SMEs and Individual Lending Model to mitigate the risks of matured Groups, to reduce the transaction
costs and to tap the market of lower middle class. Svatantra should offer only selected product mix that

Regulatory Mandate and Risk Assessment

Capital Requirement

Minimum paid-up equity capital of Rs. 1 Billion

Minimum capital adequacy ratio of 15%

Activities

Deposit-taking and lending for small-sized customers

Mutual funds, Insurance and pension with RBI approval
25% branches in unbanked rural (population <10k)
Cannot be a Business Correspondent (BC) for another bank

Prudential Norms

Usual CRR and SLR apply (currently at 4% and 21.5%)

Priority sector lending (PSL) requirement of 75%
Adjusted credit of 40% under PSL subjected to similar sub-limit
Loans of size up to Rs 2.5mn to form at least 50% of loan book

Shareholding &
Listing Agreement

Minimum promoter shareholding of 40% for five years

Promoter holding:40% in 5 yrs, 30% in 10 yrs and 26% in 12 yrs
Total FDI limit at 74%, with FII sub-limit of 49%
Listing within three years after reaching a NW of Rs5bn

RBI inclined towards regulating large MFIs

Reasons for regulation:
Does not want large MFIs at the mercy of state
governments
Not in favour of excessive profit making by
MFIs
Legislation wants independent regulator other than RBI,
tentatively MUDRA Bank
Mudra not yet given regulatory powers over MFI, will
not necessarily be pro-MFI

Group lending does not mean lower

defaults
Suffers from high credit costs due to:
Peer Pressure driving Mass defaults:
Can work both ways, timely
payments and mass defaults
Higher chance during periods
when most borrowers cannot repay
in the group
Disincentives for good borrowers:
Good borrowers have no incentive
to service group loan for defaulters
in group

CRR
Application
PSL
Application

Long Term

Medium

Immediate

Group Lending Model Risks

Criticality

Future Regulatory Direction

Low

SLR
Application

OpEx for
branch
conversion,
tech &
marketing

Savings on
optimisation
of cash
balance

Fall in Cost
of wholesale
funding

Increase in
Leverage

Mobilisation
of Retail
Deposits

Medium
Impact

High

Global MFIs with historically low

Credit Costs
Bank Rakyat Indonesia (BRI):
Government support mitigates risk of mass
defaults
Government underwrites 70%-80% loan
losses
Soft collateral backing (land, livestock etc)
for unsecured loans
Individual Lending model mitigates mass
default risk
ASA Bangladesh (ASA):
Focus on good borrowers through
individual lending
Strong Collection focus with bigger
collection teams and low
borrowers/employee