Overview of MFOs in India - NABARD - Sep 2009
Overview of MFOs in India - NABARD - Sep 2009
Overview of MFOs in India - NABARD - Sep 2009
Ramakrishna Regulagedda
September 2009
Microcredit Innovations Department Rural Financial Institutions Programme
(MCID) L-20, Green Park Main
National Bank for Agriculture and New Delhi 110 016 / INDIA
Rural Development
Plot No C24, “G” Block
Bandra Kurla Complex
Post Box No. 8121, Bandra (East)
Mumbai 400051 / INDIA
2
Table of Contents
1. Background ___________________________________________________ 9
2. Objectives ____________________________________________________ 11
3. Methodology __________________________________________________ 13
4. Evolution of the MFO sector ____________________________________ 15
4.1. Estimation of number of MFOs ____________________________ 15
5. Overview and main characteristics of MFOs ____________________ 17
5.1. Geographic distribution of the MFOs ______________________ 17
5.2. Organisation of MFOs by legal types _______________________ 20
5.3. Range of financial services provided by MFOs ______________ 23
5.4. Delivery methodology of the MFOs _________________________ 25
5.5. Human resources in MFOs ________________________________ 26
5.6. Governance and management of MFOs ____________________ 27
5.7. Funding arrangements in MFOs ___________________________ 29
5.8. Book keeping in MFOs ____________________________________ 30
5.9. Savings and MFOs ________________________________________ 30
6. MFOs by size of loan portfolio outstanding______________________ 33
6.1. Review of financial strength of MFOs ______________________ 33
6.2. Capital in MFOs __________________________________________ 34
6.3. Capital adequacy _________________________________________ 35
6.4. Asset quality ______________________________________________ 36
6.5. Profitability of MFOs ______________________________________ 36
7. Conclusions __________________________________________________ 39
7.1. Recommendations ________________________________________ 40
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List of tables
Table 1: Distribution of MFOs by state ____________________________ 17
Table 2: Geographical spread of MFO operations __________________ 18
Table 3: Districts with large number of MFOs _____________________ 19
Table 4: Range of districts operated by MFOs ______________________ 19
Table 5: Distribution of MFOs by age______________________________ 20
Table 6: Overview of MFOs in India (March 2008) __________________ 21
Table 7: Overview of MFOs in India excluding the big MFOs (March
2008) ____________________________________________________________ 22
Table 8: Product mix of MFOs by state ____________________________ 23
Table 9: Product offerings of MFOs by legal type ___________________ 24
Table 10: Insurance services offered by MFOs _____________________ 25
Table 11: Delivery methodology of MFOs __________________________ 26
Table 12: Human resources in MFOs _____________________________ 26
Table 13: Management and governance in MFOs __________________ 28
Table 14: Experience of board members of MFOs __________________ 28
Table 15: MFOs by type of funding arrangements__________________ 29
Table 16: MFOs by type of funding arrangements related to size of
portfolio outstanding _____________________________________________ 29
Table 17: MFOs and book keeping practices _______________________ 30
Table 18: Savings of MFOs- Savings per MFO and Savings per capita
__________________________________________________________________ 31
Table 19: MFOs classified by loan portfolio outstanding____________ 33
Table 20: Leverage of MFOs by size of loan portfolio outstanding ___ 34
Table 21: Average capital in MFOs ________________________________ 35
Table 22: Average capital of MFOs by size _________________________ 35
Table 23: Capital adequacy and leverage of capital of MFOs ________ 36
Table 24: Profitability of MFOs ____________________________________ 37
4
Abbreviations
AP Andhra Pradesh
APMAS Andhra Pradesh Mahila Abhivruddhi Society
BC Business Correspondent
BF Business Facilitator
CEO Chief Executive Officer
D/E Debt to Equity ratio
GTZ Deutsche Gesellschaft für Technische Zusammenarbeit
MACS Mutually Aided Cooperative Societies Act
MI Micro Insurance
MIS Management Information System
MFO Micro Finance Organisation
NABARD National Bank for Agriculture and Rural Development
NBFC Non Banking Finance Company
NGO Non Government Organisation
NPA Non Performing Asset
O/s Outstanding
RFIP Rural Financial Institutions Programme
SHG Self Help Group
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Preface
Microfinance has grown rapidly over the past decade both in terms of
outreach and also in the terms of number of service providers. The
sector is diverse with the presence of different players of varying sizes
and forms. Usually many service providers called NGO-MFOs go
unnoticed because of their geographical locations and limited
outreach. Some of the larger MFOs are transforming into regulated
institutions and are, therefore, in a position to attract capital from
both the private investors and the formal banking system. At the same
time, at the other end of the spectrum is the smaller NGO – MFOs
about whose outreach and capacities not much is known and
therefore they are not in a position to attract capital. Thus, the
absence of concrete data-base in this regard comes in the way of the
orderly growth of NGO-MFOs which could lead to better financial
inclusion.
The data mined from the collected profiles of 786 MFOs from 13
States in the country including abridged balance sheets and profit and
loss statements of the MFOs have been analysed and presented in this
report. The data have been analysed on a macro level so as to give a
better understanding of the different modes of organizations operating
in the sector. While the analysis seems good, one should keep in mind
that a work of this mammoth nature is bound to have some data
inconsistencies because of inadequacy/inaccuracy of the information
in the data collection process and the report should be read with this
limitation in mind.
Chapter 5 deals with the general overview of the MFOs and analyses
the general organization characteristics on state-wide basis and
organizational type basis. This could be a sound basis for design of a
capacity development plan for the sector. Chapter 6 deals with the
financial aspects of the MFOs in a limited context focusing on the
capital structure, capital adequacy and the profitability of MFOs. This
document, on the whole, forms a sound basis for the understanding of
6
the sector and for gaining insight, identifying risks and opportunities
and in a way serves as a useful guide for policy exploration.
B B Mohanty
Chief General Manager,
MCID, NABARD,
Mumbai
Dated: 8th October 2009
7
8
1. Background
The latest information from a 2007 survey conducted by Planning
Commission estimates the number of persons living below poverty line
at 220.7 million. In spite of the vast network of retail banking outlets,
a major section of the rural population is excluded by the formal
banking system. In this context, microfinance organizations have
emerged throughout the country and are providing financial services
to people in limited local contexts. The estimates of the number of
such organizations are not clear and the number ranges from 800 to
1,500. Incidentally, the estimate of 800 is from the Task Force for
Supportive Policy and Regulatory Framework for microfinance set up
by NABARD in the year 1998. Various sources estimate the number of
MFOs between 800 and 1,500, even by today. Microfinance has grown
rapidly over the past decade both in terms of outreach and also in the
terms of number of service providers; so called the NGO-MFOs.
Usually many service providers go unnoticed because of their
geographical locations and limited outreach. Today financial services
by MFOs have a market share of close to 12%.
The sector is also diverse with some of the larger MFOs transforming
into regulated institutions and are therefore in a position to attract
capital from both the private investors and the formal banking system.
At the other end of the spectrum are the smaller NGO – MFOs about
whose outreach and capacities not much is known and therefore they
are not in a position to attract capital. This comes in the way of the
orderly growth of NGO-MFO which could lead to better financial
inclusion.
9
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2. Objectives
NABARD GTZ Rural Financial Institutions Programme (RFIP) therefore
undertook the task of creating an information base of the NGO-MFOs
in thirteen states of the country, focusing mainly on microfinance
intensive states. RFIP engaged the services of APMAS to collect and
compile a comprehensive information base through a survey of MFOs.
This information base will also enhance the understanding of the
sector in a better manner and could help the policy makers in
designing appropriate framework conditions for the growth of the
sector. To reiterate, this process would help in the following ways:
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3. Methodology
APMAS used a questionnaire for collection of information on the MFOs
across the thirteen identified states. The questionnaire consisted of
four parts: Part-1 comprised general information about the
organization such as name, address, year of establishment,
registration, kind of products offering to clients and the methodology
of service delivery. Part-2 mainly focused on the details of sources of
funding, human resources and capacities relating to microfinance
operations. Part-3 covered the outreach component, especially the
geographical spread, number of clients and the amount outstanding,
promotion of groups, clusters and their federations. Part-4 of the
questionnaire was about the financial performance of the MFO for the
last 3 years (up to March 2008). An explanatory note to fill the format
was also sent along with the format to make it simple for the MFO
filling the format. About 786 MFOs responded with profiles of varying
quality. These institutions included NGO-MFOs registered under the
Societies Registration Act, Indian Trust Act, Cooperative Societies Act
of the states, MFOs registered as for profit NBFCs, as Section 25
companies under the Indian Companies Act and as MACS under the
liberal cooperative society’s acts of the states. In other words MFOs of
whatever institutional type but which are delivering financial services,
having minimum of 500 saving members and/or with 1,000 borrowing
members were included. The information was collected from 13 states
namely: Andhra Pradesh, Bihar, Gujarat, Karnataka, Kerala,
Jharkhand, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Tamil
Nadu and Uttar Pradesh and West Bengal. APMAS identified 25
partner organisations in the selected states who could possibly
mobilize profiles from their respective states. This included networks
and resource NGOs. APMAS undertook an intensive exercise first to
locate the MFOs, send out the questionnaires and then collected
them back.
13
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4. Evolution of the MFO sector
Since the last two decades, NGOs have been offering financial services
to clients in a limited manner. The success of the SHG bank linkage
programme brought NGOs to the forefront and in a way recognized
their efforts, some of whom were engaged in financial intermediation.
Since in the non-formal sector, the microfinance efforts were led by
the NGOs, microfinance was taken up in a developmental mode rather
than as a commercial financial intermediation activity. The NGOs were
registered either as societies, trusts, cooperatives and not -for -profit
companies since it aligned well with their social mobilization work and
since financial intermediation was not anyway their core engagement
with the people. Also important is the fact that NGOs are formed with
a voluntary spirit and profit making is anyway not a motive for such
institutions. As the NGOs grow over a period of time, they realize the
limitations of their structure and look for alternate forms of
organizations in order to continue providing financial services on a
more sustainable basis to clients. Some of the erstwhile NGO-MFOs
have been successful in transforming themselves into organizational
forms more suited for financial intermediation which are normally the
companies. As a result, microfinance institutions (MFIs) in India can
now be found in the form of for profit non-bank finance companies
(NBFCs) as well as not for profit companies.
15
16
5. Overview and main characteristics of MFOs
17
Table 2: Geographical spread of MFO operations
State 1 State 2 to 5 6 to10 >10 Grand
States States States total
18
Table 3: Districts with large number of MFOs
Andhra Pradesh Tamil Nadu
District No. of MFOs District No. of MFOs
Chittoor 76 Thiruvannamalai 11
Nalgonda 55 Kanchipuram 10
Anantapur 78 Madurai 9
Cuddapah 49 Villupuram 8
Adilabad 76 Chennai 7
West Bengal Orissa
Kolkata 16 Sambalpur 5
24 Parganas 4 Bhubaneswar 3
Howrah 4 Kalahandi 3
Purba Medinipur 7 Cuttack 2
Jalpaiguri 1 Ganjam 2
Chittoor and Adilabad in Andhra Pradesh have the highest number (76)
of MFOs. Nalgonda, Nizamabad, Anantpur, Cuddapah have more than 40
MFOs. No other district in any state has so many MFOs operating.
Among other states, only Kolkata (West Bengal) Kanchipuram and
Thiruvannamalai (Tamil Nadu) have 10 or more MFOs. This augurs well
for the clients as they have a wider choice for financial services and the
competition between these MFOs could contribute towards improving the
quality of financial services.
19
As can be seen from the above 530 MFOs (68%) operate in only one
district. Close to a quarter of them operate in 2 to 5 districts. 93% MFOs
operate in less than 5 districts. Again MFOs from AP, Bihar and Tamil
Nadu have ventured into more districts compared to MFOs from other
states.
Table 5: Distribution of MFOs by age
State < 5 years 6-10 10-15 15-20 > 20
years years years years
Andhra Pradesh 304 125 29 11 2
Bihar 20 16 5 0 1
Gujarat 3 4 1 0 1
Jharkhand 1 0 0 0 0
Karnataka 10 7 1 0 0
Kerala 1 9 6 1 0
Madhya Pradesh 9 3 2 1 0
Maharashtra 8 4 1 1 0
Orissa 14 8 5 1 0
Rajasthan 11 2 3 1 1
Tamil Nadu 48 39 7 3 0
Uttar Pradesh 4 0 0 0 0
West Bengal 11 13 5 1 0
Total 444 230 65 20 5
(Percentage) (58%) (30%) (8%) (3%) (1%)
The majority of MFOs i.e. 444 (58%) are rather young and have been
established in the past five years. The remaining 42% of MFOs are
quite mature: 30% being between 6 and 10 years, 12% over 10 years
old and 5 MFOs which have been in the business for more than 20
years.
20
• The third category is ‘for Profit MFOs’ which would cover Non-
Banking Financial Companies (NBFCs) registered under the
Companies Act, 1956.
Each type is found in again two distinct legal forms, as shown in table
above. The microfinance sector has grown considerably in recent
years, and the total loans portfolio outstanding amount of Rs 41,417
millions as on March 2008.
21
Table 7: Overview of MFOs in India excluding the big MFOs (March
2008)
Type of MFO No Share (%) Loans O/s (Rs Share (%)
million)
Mutual Benefit MFOs
Cooperatives 2 0 23 0
MACS 440 56 2,285 6
Sub Total 442 56 2,308 6
Companies
NBFCs 19 2 19,069 46
Section 25 Co 6 1 530 1
Sub Total 25 3 19,599 47
NGO-MFOs
Societies 194 25 4,106 10
Trusts 102 13 1,597 4
Sub Total 296 38 5,703 14
As can be seen from the above tables, MACS are by far the most
preferred organizational form for MFOs. Number-wise, the
domination of MACS and NGO-MFOs in the sector is clear. Loan
portfolio wise, NBFCs and not for profit Section 25 Companies
dominate the microfinance sector.
22
5.3. Range of financial services provided by MFOs
The full range of financial services provided by MFOs includes:
Savings, Credit, Insurance and Remittances. 29 MFOs have reported
that they provide all these 4 services. The three critical services of
MFOs namely savings, credit and insurance are provided by 262 (38%)
MFOs; 112 MFOs (16%) only provide loans.
23
Table 9: Product offerings of MFOs by legal type
Type of MFO No Share Savings Loans MI Remittances
(%)
Low income clients feel a greater need for savings services primarily as
a means for safe keep of tiny sums in order to smoothen household
cash flow. They also need to save as an insurance against
emergencies, life cycle events and consumption needs in lean seasons.
Except for MACS no other organizational form of MFOs are allowed to
mobilize savings. Even MACS can only mobilize savings from their
members. None of the NBFCs surveyed provide savings services to
their clients. The MFOs who have reported that they provide savings
services are extending such services through their SHGs and the
savings collected do not seem to reflect in the books of the MFOs. In
other words the savings of such SHGs are not always parked with the
MFOs.
24
Table 10: Insurance services offered by MFOs
Type of MFO No Life Health Asset Pension
insurance insurance insurance
The clients at the bottom of the pyramid have income streams that are
low, uneven and variable. The ability to cope with risk is therefore
minimal and therefore they feel the need for insurance services
primarily for mitigating risks against assets, health and life. The above
table reflects that close to 70% of the MFOs offer the basic minimum
of life insurance services to their clients. A greater proportion of MACS
clients seem to have access to a range of insurance and pension
services.
25
Table 11: Delivery methodology of MFOs
Type of MFO No Share Individuals SHGs Grameen Clusters
(%) groups
As can be seen from the table above 75% of the staff working in the
MFOs are employed in microfinance. NBFCs and companies have the
largest proportion of staff working in microfinance while NGO-MFOs
i.e. Societies and Trusts have the smallest proportion of staff involved
26
in microfinance at 58%. This could indicate that for NGO-MFOs
microfinance is not the predominant area of involvement and that
microfinance is an add-on area of engagement. The average number of
microfinance staff per MFO is close to 50. This could be very high for
companies and NBFCs where the average staff per MFO is 663 and
the staff per MFO for the mutual benefit group of MFOs is only 9.
Data from the survey also reveals that 2/3rd of MFOs have total staff
in the range of 6 to 25. 9% MFOs have more than 100 staff. Andhra
Pradesh, Tamil Nadu have more MFOs in the staff range of 6 to 10
which means many small MFOs are operating in these states. West
Bengal, Karnataka and Kerala have a higher representation of MFOs
with more than 100 staff. In Orissa, AP, Karnataka and Tamil Nadu,
the majority of staff are involved in microfinance work. For MFOs in
Rajasthan, Gujarat, Kerala, Madhya Pradesh and Jharkhand,
microfinance is not the major work. 40% MFOs have staff in the range
of 6 to 10 and a quarter of MFOs have less than 5 staff. Overall in
64% MFOs staff strength is less than 10. About 6% of the MFOs
mainly comprising NBFCs and one trust and a few Societies have
more than 100 staff each and account for 81% of all the staff working
in microfinance sector.
27
Table 13: Management and governance in MFOs
Type of MFO No Share Trained % Experi- % MFOs Board
(%) CEO MFOs enced with members
with CEO experi-
trained enced
CEOs CEOs
28
80% institutions have reported that they have a trained CEO, close to
50% of institutions have reported that their CEO had related
experience for leading the MFO.
It is also clear from the above table that the smaller MFOs have a
greater penchant for attracting grants and the bigger MFOs seem to
attract more of commercial capital. MACS dominate the segment of
MFOs with less than Rs 5 million loan portfolio outstanding and
29
NBFCs and companies dominate the segment with higher loan
portfolio outstanding. As pointed out earlier, MACS have been the
major recipients of donor grant funding.
The table above shows that close to 100 MFOs do not practice double
entry book keeping. They still follow singly entry system of accounting.
Close to 500 MFOs which practice double entry system of accounting
follow the cash system of accounting and not the accrual system.
30
Table 18: Savings of MFOs- Savings per MFO and Savings per capita
Type of MFO No No of Savings Savings per Savings
savings outstanding MFO (Rs. per
clients (Rs million) million) client
(Rs)
The above table gives the details of savings by each of the MFO type. It
can be seen that the per capita savings is the highest in MACS while
the savings per MFO is close to Rs. 8 million. The savings mobilized
per MACS is close to Rs. 5 million. The savings mobilized through the
SHGs intermediated by the NGO-MFOs is higher at Rs 13 million.
31
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6. MFOs by size of loan portfolio outstanding
The table below shows those close to 500 MFOs are very small in size
as shown by their loan portfolio outstanding of less than Rs 5 million
per MFO. Also most of these small MFOs are NGO-MFOs and MACS.
But what may also be seen is that there are a few NGO-MFOs which
are also big in size i.e. loan portfolio outstanding in excess of Rs 100
million.
The MFO sector can be divided into three segments by MFO type and
size (measured in loans portfolio outstanding):
33
Table 20: Leverage of MFOs by size of loan portfolio outstanding
MFOs by size No Loans O/s Average loans D/E
(Rs million) per MFO (Rs
(%) million)
The large MFOs mostly the NBFCs on average have a capital basis of
Rs 211 million. Section 25 companies have an average capital of Rs 13
million. As a group the companies have an average capital of Rs 160
million.
34
Table 21: Average capital in MFOs
Type of MFO No Average capital Capital to loans
( Rs million) ratio
The above table brings out clearly the small capital base of the small
MFOs. The larger MFOs have a capital base of close to Rs 142 million.
35
Table 23: Capital adequacy and leverage of capital of MFOs
Type of MFO No Capital Capital to
adequacy loans Ratio
36
Table 24: Profitability of MFOs
Type of MFO No Share Operational Operating Total cost
(%) self cost ratio ratio
sufficiency
37
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7. Conclusions
The effort to collect data from 786 MFOs in the country to understand
their status is a massive exercise. There are some limitations in the
data provided by MFOs as it was obtained based on a questionnaire
survey. In the absence of a trained person administering the survey,
there could be ambiguities with reference to understanding questions
related to organizational information. The quality of the financial
information was also much to be desired especially from the NGO-
MFO type of institutions:
39
Financial strength of MFOs:
• Interest on loans is the major source of revenue for most MFOs;
7.1. Recommendations
• South India (especially Andhra Pradesh and Tamil Nadu) seem
to dominate MFO sector. There is a need to accelerate efforts in
other regions which have poor banking networks;
• Most MFOs are very small given their legal status which
impedes them to grow by attracting capital. They are restricted
to one district. NGO-MFOs are temporary vehicles for financial
intermediation. If financial services have to be delivered on a
professional and sustainable manner, transformation is the key.
There is a need to identify potential MFOs and help them grow
through transformation;
• The MACS ACT has helped to promote largest number of MFOs
in a state like Andhra Pradesh. It is an ideal legal framework for
community owned alternate financial institutions. There is a
scope for both for advocacy and building awareness;
• MFOs are eager to provide as many services as possible to their
clients. But they are not permitted to provide all services
40
(especially Savings) to the clients. Hence we see large number of
MFOs providing only loans. It is imperative that the low income
clients need the savings services as much as they need finance.
The microfinance bill may address some issues. It is also
important that savings services are provided by healthy and
strong institutions;
• Most MFOs have board members with little knowledge of micro
finance sector. NGO-MFOs have the greatest ‘key man’ risk and
therefore it is important to promote professionalization of the
management and work towards good governance and
transparency;
By way of conclusion it can be said that MFOs sector is a sunrise
sector with great growth potential. There are many NGO-MFOs whose
legal form incapacitates them to realize their full growth potential. The
potential of these NGO-MFOs can be unleashed by transformation to
an optimum legal form i.e. the NBFC. This should be accompanied by
appropriate capacity development of the MFO sector. It is not just
about more training and skills but due attention should be paid to the
development of adequate and optimum systems and practices in order
to realize the orderly growth of the sector.
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