MICROCAPITAL STORY: Indian Microfinance Institutions (MFIs) Increase Focus on Urban Areas

A recent article in the Business Standard reported an increase of urban microfinance in India. The piece pointed to facts from a study conducted by Sa-Dahn, an Indian NGO that serves as a trade association for MFIs. According to the study, recent experiences in urban microfinance show that success is possible despite higher start-up costs necessitating larger loans.

The Sa-dhan study contends that 3.5 million urban residents received microfinance services in India last year, one fourth of total MFI customers. Due to higher start-up costs, Sa-dhan also found that urban borrowers took out one third as many Rs 5000 (USD 116) loans as rural borrowers, but 1.5 times as many loans of Rs 10,000 (USD 233).

According to Mathew Titus of Sa-Dhan, “Only a big MFI can afford to scale-up operations in urban areas,” possibly explaining why all of the urban projects identified by the article were undertaken by for-profit institutions. For example, both SKS and Bhandan, an MFI with NGO and for-profit arms, operate or plan to operate in Delhi and Mumbai. According to its website, SKS currently has 6,727 active borrowers in Delhi. Bhandan plans to reach 33,000 active borrowers in each city.

Another large for-profit MFI, Equitas, operates exclusively in Urban areas and contends that “Urban India was never considered suitable for MFI operations, as urban poor were supposed to be a migrating lot. It was also assumed that there would be no bonding within groups to enable them to stand guarantee for one another. All these have proved to be myths.”

According to MIX Market, Bhandan, established as an NGO in 2002 and later licensed as a non-bank financial institution, had total assets of USD 102m (denominated in local currency), a debt to equity ratio of 1,116 percent, and a return on equity of 62.4 percent as of March 31, 2008. It also reported almost 900,000 total borrowers and a gross loan portfolio on USD 82.4m.

Founded in 1997, SKS Microfinance Private Ltd (SKS), reported totals assets of USD 78.8m (denominated in local currency), a debt to equity ratio of 379 percent and a return on equity of 4 percent to Mix Market as of March 31, 2007. At that time, it had a gross loan portfolio of USD 63.2m and 513,108 active borrowers.

Equitas Micro Finance India (Equitas), an urban MFI established in established in 2007, controled total assets of USD 4.8m, had a debt to equity ratio of 66 percent and total equity of USD 2.8m as of March 31, 2008. A return on equity was not available on MIX Market, the microfinance information clearinghouse. Equitas also had a gross loan portfolio of USD 4.1m and 16,166 active borrowers as of the same date.

Sa-Dhan, founded as the Association of Community Development Finance Institutions in 1999, is an association of 196 MFIs that works to improve standards, disseminate best practices and contact policy makers with the goal of improving microfinance services in India. Together, the organizations that make-up Sa-Dhan have a gross loan portfolio of Rs 15,000 crore (USD 3.5b) and a total of over 7 million borrowers. Sa-Dhan’s 2006-2007 annual report provides none of its own financial information. A list of member organizations and their financial data can be found on Mix Market.

By Greg Casey, Research Assistant

Additional Resources:

Business Standard: “MFIs turn to the cities”

MIX Market: SKS Microfinance Private Ltd

MIX Market: Equitas Micro Finance India

MIX Market: Bhandan (Society and NBFC)

MIX Market: Sa-Dhan

Sa-Dhan: Home

Sa-Dhan: Annual Report

Oanda.com: FX Coverter

SKS: Focus Areas