5th February, 2011

Volume 1: Issue 10

Fortnightly Microfinance Newsletter by Darashaw & Company Pvt. Ltd.

` Cover Story In this issue! Market Pulse Survey on the Malegam Committee Report Market Pulse Survey on Malegam Committee The much awaited Malegam Committee Report was released by RBI in the public domain on 19th Report...... …1 Jan, 2011. The committee was formed to study issues and concerns in the Microfinance Institutions Microfinance Banana (MFI) sector. The report has generated tremendous interest among all stakeholders and there are Skins 2011...... 3 numerous views / opinions coming from various corners. Market Pulse Team conducted a survey to Microfinance Pricing understand the sentiments of the various entities related to the Sector. The Survey was open for 7 Report by MF Transparency (USA) . 4 days and had 75 respondents. Following are the results of the survey:

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“An overwhelming 86% people feel that the recommendations have been heavily influenced by the recent developments in Andhra, without due consideration to the sector at large.”

“82% respondents believe that the committee has narrowed the role of MFIs in Financial Inclusion.”

“83% people believe that the recommendations are restrictive in nature and will restrain borrowers from adequate financial access.”

UPCOMING EVENT: Sa-Dhan National Microfinance Conference/ 15-16 Mar, 2011/ Hotel Ashok, New Delhi Market Pulse 2

“64% feel that the recommendations after implementation can lead to increased moral hazard on borrower’s part.”

“There's a huge disconcert with regards to interest rate cap and margin cap.”

“75% people feel that the recommendations have left loopholes in the classification of NBFC- MFI under the 90% qualifying asset rule.”

65.33% of the participants are either Promoters or Employees of Microfinance Companies

“76% feel that considerable modifications will be required to mitigate political risk.”

“76% people don't believe that the report adequately addresses issues concerning MFIs of Disclaimer: Please note that although the information in Market Pulse Survey has been composed different size operating in with reasonable care, Market Pulse does not represent or warrant its accuracy, and such diverse geographies.” information may be inaccurate, incomplete, outdated or condensed. It is not intended to provide the

basis for any evaluation or decision. The survey results are provided "as is" without warranty of any kind, either express or implied, including but not limited to, the implied warranties of merchantability, fitness for a particular purpose, or non-infringement."

http://shadabrizvi.blog.co.in/ 3 Market Pulse

Microfinance Banana Skins 2011 The Centre for the Study of Financial Innovation Survey of Microfinance Risk The survey describes the risks facing the microfinance industry as seen by an international sample of practitioners, investors, regulators and observers. As per the survey following are the top ten risks facing microfinance today. In order to understand the relative position of the risks in the earlier survey, each risk has its 2009 position in brackets next to it 8. Staffing (14) 1. Credit Risk (1) dangerous risks threatening consider it a significant risk.

microfinance operations world Lack of talent, competent The main factors that led to this over. The most common form of manpower, fraud, and risk being ranked first for two political interference is the credit risk due to successive years are A respondent correctly pointed interest rates caps which are on undertrained loan officers competition, multiple lending, out that “the presence of too the rise in the Indian sub- not understanding the weakness of internal controls many competitors encourages continent, Latin America, Africa borrowers and poor staff and political interference. some MFI staff to become lax and Central Europe, and pose a retention were the in implementing policies direct threat to MFI profitability. prominent concerns with 2. Reputation (17) rather than take it as a regard to staffing. challenge to improve products 6. Inappropriate regulation

The recent negative publicity and services”. (13) 9. Mission Drift (19) that the sector has had to cope with not just in Andhra Pradesh It was also felt that competition This risk has risen seven notches A shift from rural poor to in India but world over has led led to a reduction in margins as up due to the increasing feeling already well served urban to this risk rising to second it resulted in MFIs rushing into that regulation has been poor as well as a shift from position from seventeen last untapped areas with little unsuccessful in taking account of a social focus to a year preparation and hence higher the social role of microfinance, commercial focus is what operating costs. its ownership structure and encompasses the risk of Commercialisation of differing cost base. ‘mission drift’. microfinance, as well as 4. Corporate Governance (7) unethical practices by MFI Inappropriate nature or the As per a respondent, borrowers due to growing Apart from the quality of complete absence of regulation “rapid rise of consumer indebtedness were among the Boards of MFIs, the area of has resulted in reducing the finance, whether underlying factors for the sector concern for most respondents competitiveness of MFIs. This is disguised as housing losing its reputation. with respect to corporate because MFIs have effectively loans, education loans, or governance was the risk of been prevented from competing loans for whatever 3. Competition (9) conflicts of interest, lack of with other players that are ‘funder-fashionable’ independence and poor regulated by more developed purpose”, is pulling the Competition being the primary accountability. laws. sector from its purpose of reason for irresponsible lending poverty alleviation and and consequently over However for some 7. Management Quality (4) financial inclusion.” indebtedness of borrowers, is respondents, with greater being seen as one of the most interest being taken by Management quality in MFIs is 10. Unrealisable regulators and involvement of fraught with the ills of lack of expectations (18) professionals, the standards of professionalism and technical

corporate governance within expertise. “If news stories of over Although there was no the sector have been indebtedness, client clear pattern with respect improving. With credit and reputation risk harassment, excessive to the responses to this both growing, skills will be risk, the rise in ranking riches and other bad 5. Political Interference (10) needed in risk management, suggests growing dubiety behaviour continue to especially in relation to lending with regard to the make headlines, the The AP crisis has been cited as and public relations. effectiveness of industry will lose the one of the primary reasons for microfinance. moral high ground, and this risk being seen as a major However the year on year

with it donors, investors threat to the sector. The intense improvement in ranking could be The risk primarily lies in media coverage of political attributed to the contrarian view and talent”- US based the gap in perceptions of interference has made even of few respondents that this is Investor what microfinance can do those not directly affected to primarily an MFI specific risk. and what it actually does.

Old issues of Market Pulse: https://sites.google.com/site/darashawmarketpulse/ Market Pulse 4 Market Pulse

Microfinanceq Pricing Report by MF Transparency (USA) Amid the hue and cry following under: The APR (interest + fees + deposit) the Andhra crisis that has been for privately-owned for-Profit MFIs defined by many analysts and in India varies from 20.11% to commentators as a “mid-life 52.69% whereas the publically Editorial Board crisis”, MF Transparency, in traded for-Profit MFIs lend out in collaboration with Citi the range of 25.43% to 38.39%. The Shadab Rizvi average APR for the two groups Foundation, MFIN, Michael & stood at 32.22% and 29.99% Susan Dell Foundation and Shweta Phene respectively. Standard Chartered has come out Nitin Mohapatra with the India Pricing Data Further, a Transparency Index has As per the study more than 50% of Report. been devised to compare the Vinay Pokharna the MFIs do not disclose their cost nominal interest rate with the APR structure properly. It has been widely acknowledged for individual products by the MFIs. that the next stage in the growth A score of 100 represents a perfect of the industry will require a new score whereas if the score is less level of understanding and than 100, the APR is higher than the openness about the costs of nominal interest rate quoted by the lending in small units and company. If the product scores Disclaimer transparent communication of the above 100, it signifies that the

nominal rate is greater than APR. In This communication is for prices charged to cover those the current study, only 13 products private circulation only. It costs. scored above 90 with 2 scoring is based on the information The industry is almost equally divided above 100. generally available to This Transparency Pricing in terms of interest rate calculation public and considered

Initiative has summarized pricing between reducing rate and flat rate reliable. This report does This clearly shows the wide details from 82 microfinance structures. not constitute an invitation disparity in the nominal interest institutions which constitutes or offer to subscribe for or rates and the actual interest rate almost 77% of the total To reflect the various practices and purchase or sale of any charged and hence calls for security and neither this microfinance lending in the standards currently used in India, the responsible action to move towards document or anything MF Transparency dataset employed country with a thorough analysis, a more transparent system contained therein shall form several variations of the Annual signifying a step further towards promoting greater competition and the basis of any contract or Percentage Rate (APR) formula used commitment whatsoever responsible lending. consumer protection in the industry. across the globe. with Darashaw & Co. Pvt. Key findings of the survey are as Ltd.

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Loans against gold jewellery RBI invites Comments on RBI to decide on Malegam Darashaw & Co. (P) Ltd. not to be classified under Agri- Malegam Committee Report Recommendations by March or Loans (MCR) on MFIs April Corporate Office:

RBI, In a letter dated 2nd The Reserve Bank of India has Speaking at a conference after 1205-06, Regent Chambers, February, 2011, clarified that invited views/comments of all Reserve Bank's policy actions on 208, Nariman Point, Mumbai loans sanctioned to NBFCs for stakeholders and the public at 27th January, 2011, Mr. Duvvuri 400 021 on-lending to individuals or other large on the MCR on Subbarao, governor of RBI said Tel no: +91 22 6630 6612 entities against gold jewellery, are microfinance institutions (MFIs). that the bank will decide about not eligible for classification Comments/suggestions/views the Malegam recommendations Fax no: +91 22 2204 0031/40 under agriculture sector. may be forwarded to the Chief in March or April. www.darashaw.com Further, investments made by General Manager-in-Charge, He added that RBI would interact banks in securitised assets Rural Planning and Credit with banks, state governments, Registered Office: originated by NBFCs, where the Department, Reserve Bank of the government of India, and 3, Rajesh Mansion, underlying assets are loans India, Central Office Building, microfinance institutions (MFIs) against gold jewellery, and 10th floor, S.B.S. Road, apart from inviting feedback Dinsha Vaccha Road, purchase/assignment of gold loan Mumbai-400001 or emailed to from the public before taking a Mumbai 400 020 portfolio from NBFCs are also [email protected] latest by decision on the recommendations not eligible for classification February 13, 2011. under agriculture sector. Source: RBI Website Source: RBI Website Source: Reuters, Sify News

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