Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Saturday, December 11, 2010

Growth of Equity Investments and Gross Loan Portfolio: Some Initial Data From The Indian Micro-Finance Market…

Ramesh S Arunachalam
Rural Finance Practitioner

In a post made a couple of days ago, I had, subject to various caveats, pegged the total equity investment in Indian micro-finance[i] (until July 2010) at around US $ 679.48 Million.

This investment went to around 28 MFIs and I have split into two groups for further analysis: a) The Equity Leaders - Group A consisting of 6 MFIs that each received equity of at least >=25 Million US $; and b) The Equity Followers - Group B comprising 22 MFIs that each received equity < = 25 million US $.

For my analysis, I use these two groups along with a third group, The Non-Equity MFIs - Group C. These MFIs are the ones which did not receive equity investment for various reasons. I will deal with Group B and Group C MFIs in sequential posts, to be made on alternate days... The 6 MFIs in Group A - The Equity Leaders (and investor favourites) - are the subject of today’s post...Read on...

·         The Favourite MFIs For Equity Investment: The 6 Equity Leader MFIs[ii] have received a major share of the equity investment, which roughly totals US $ 549.26 million and this represents about 80.83% of total estimated equity inflows into Indian micro-finance. This is a significant percentage by any standards…

·         Range of Equity Investment: Within this group, the highest equity investment was over US $ 250 million for 1 MFI and the lowest was about US $ 25 million for 1 MFI. The other 4 MFIs had equity investments in the range of US $ 25 million to US $ 125 million, with an average equity investment of around US $ 60 million. What is interesting to note is that of the US $ 549.26 million of equity received by these 6 MFIs, just US $ 32.51 million came in as equity before April 2007. The bulk of it, US $ 516.75 million, came in during after April 2007 (and until July 2010)...and I will blog in detail on this separately...as otherwise, the statistics would be far too many...

·         For long people have been talking of an association (not necessarily causal) relationship between equity investment and growth pattern of MFIs and I said, let us use the principle of reductionism to get to understand this better. I plan to do this in a series of posts…

·         For a start, I look at how these 6 Equity Leader MFIs grew across two main reference periods that I have been using now for understanding the Andhra Pradesh crisis: a) April 2005 to March 2007; and b) April 2007 to March 2009. And in this post I look at changes in gross loan portfolio first and in the next post, I plan to look at change in number of active borrowers.  As usual, I derive these figures from my favourite database of published figures – the Mix Market

Changes in Gross Loan Portfolio for Two Reference Periods:

·         The 6 Equity Leader MFIs grew at a CAGR (over a 4 year period) of 88.92%, adding US $ 2.68 billion as gross loan portfolio during the period April 2005 to March 2009
·         Of this, a whopping US $ 2.18 billion (or 81.21% of the total portfolio increase from April 2005 – March 2009) was added during the period of April 2007 – March 2009. That is significant by any standards and is the equivalent to the 6 MFIs adding portfolio worth US $ Million 90.81 (or Rs Million 4177) every month, during the 24 month period. Again, this is a staggering growth statistic, at least for me...

Some key numbers to remember:
·         6 MFIs added US $ 2.18 billion during 24 months (April 2007 to March 2009)
·         Equivalent to Per Month Addition of Portfolio of US $ 90.81 Million (or Rs 4177 Million[iii]) for all 6 MFIs
·         Equivalent to each MFI adding a portfolio of US 15.135 Million (or Rs 696.25 Million) every month, which is certainly a lot of money!

·         Contrast this with their growth during the period April 2005 to March 2007 when they added just over US $ 1/2 a billion (0.504 billion US $ to be exact) and this is about 18.79% of the total portfolio added during the period April 2005 – March 2009. Adding 1/2 billion US $ over 24 months is equivalent to these MFIs adding portfolio worth US $ 21 million (or Rs 966.15 Million) every month for 24 months. That is about 1/4th of the monthly portfolio addition done by the same MFIs during April 2007 – 2009

Some numbers to remember:
ð      5 MFIs added US $ 0.504 billion during 24 months (April 2005 to March 2007)
ð      Equivalent to Per Month Addition of Portfolio of US $ 21 Million (or Rs 966.15 Million) for all 5 MFIs
ð      Equivalent to each MFI adding a portfolio of US 4.20 Million (or Rs 193.23 Million) every month - which is about 1/4th of the per MFI portfolio added per month during April 2007 – March 2009

A summary of the data is given in Table 1 below

What’s is the story conveyed by the numbers?

ð      These Equity Leader MFIs received significant equity infusion during the period April 2007 – March 2009 and also thereafter
ð      Their gross loan portfolio grew at very significant rates – almost 4 times the previous period (April 2005 – March 2007) gross loan portfolio – during the period, April 2007 – March 2009

Key Questions for Learning:

It would be useful if the RBI Sub-Committee and other stakeholders try to understand the rationale behind these:

ð      What drove this very rapid growth during the period April 2007 – March 2009, especially as it came in the backdrop of the Krishna crisis (of 2005/6) and especially, given the fact that 5 of these MFIs are headquartered in Andhra Pradesh?
ð      Did equity investors drive this growth? Or did the MFI promoters, who were perhaps looking for more investments (in the wake of banks having developed cold feet after the Krishna crisis) and better valuations, do so?
ð      Without question, the per MFI per month increase in Gross Loan Portfolio across these two periods is very significant and it would be interesting to see whether and how the systems of these MFIs coped with this rapid growth?

Answering the above questions would also answer the a key question posed by David Roodman in the recent Washington event on Indian Micro-Finance– i.e., the relationship between MFI growth, equity investment and related aspects.

Have a good weekend and nice day and feedback/comments[iv] welcome!

[i] After a lot of struggle, I have been finally able to create a reasonably valid database (I say this because the data I have is published or quasi-published but is getting updated regularly) on equity investments in Indian micro-finance. However, as I am still in the process of (re) validating the same, I would therefore like to caution you to view the data and numbers accordingly… That said, it is also my belief that any further data updation (because of re-validation) will not significantly alter the trends – at best, some numbers for the respective years may increase or decrease …
[ii] Not the same as the BIG 6 AP Headquartered MFIs referred to in the earlier posts. For reasons of confidentiality, I have withheld names of MFIs, at the request of people supplying the data
[iii] Used a dollar reference rate of Rs 46 per Dollar, which seems a good ball park exchange rate figure.
[iv] Please note that anonymous COMMENTS will not be published. Thanks!

1 comment:

  1. If would be necessary to study how the 6 MFIs got so much of equity in two years time. How FDI is allowed in Micro Finance by the regulator i.e. RBI? Who are the investor in the MFIs? Why they invest their money in microfinance? Is it because of high return in MF?