Delhi, 15 th March, 2011 Product Pricing: Balancing Financial Viability with Social Impact Royston Braganza CEO Grameen Capital India

Cheering the sector

Something amiss?

Big boys doing great doesn’t mean “all is well”

There could well be a shock in store

Should the minnows be excluded from the field

Don’t underestimate them…. Nuture them

UDRS – to be more inclusive among MFIs

Rate caps – a ‘doosra’

Could we be getting it wrong with ‘caps’

Typical P&L Structure - Indian MFI & Global Peers : Comparative Chart Source: M-CRIL Microfinance Review 2010: Microfinance Contributes to Financial Inclusion Indian MFIs profit margins compared to the World: Very High Period of introspection to 2010: “Did we score equal points in delivering Accounting Returns as well as Social Returns?”

How Successful were Indian MFIs in Passing Benefits Achieved through Economies of Scale to End Customers ? Trend in Portfolio Yield & Operating Expense Ratio (OER) Source: M-CRIL Microfinance Review 2010: Microfinance Contributes to Financial Inclusion Average OER of Indian MFIs in India has declined dramatically over the past few years Substantial widening in the margin available to the average MFI for covering financial expenses, loan loss provisions and surplus Two factors contributing to above: Economies of scale achieved by Indian MFIs Higher clients/loan officer ratio (average in excess of 400 per loan officer and for some MFIs as high as 700). This has led to weakening relationships between MFIs and their customers Yield & 0ERs for MFIs Globally Yields are higher compared to Indian MFIs, but so are the OERs Did MFIs pass on the benefit of economies of scale to customers in terms of lower lending rates ? If the above was successfully achieved, could the recent crisis be avoided?

Impact of Loan Size on the OERs of the Indian MFIs Source: M-CRIL Microfinance Review 2010: Microfinance Contributes to Financial Inclusion Do Established, Bigger Players Face the Challenge of Creating Equanimity Between Lending and Borrowing Rates? Some correlation is there between the age of an MFI and loan size (newer MFIs tend to have smaller loan sizes) Stronger correlation with the fast growing institutions that both incur higher costs when they are in their growth phase and have lower loan sizes on account of having large numbers of new clients So Equanimity might NOT be there for two category of MFIs: New MFIs Fast Growing MFIs <4,0004,000 to <6,000 6,000 to <8,000 <10,000 >=10,000 Loan Size Per Borrower OER

Source: Malegam Committee Report Clause 7.8 Malegam Committee Report 10% over the cost of funds ----> for the larger MFIs (loan portfolio exceeding INR1000 million) 12% over the cost of funds -----> for the smaller MFIs (loan portfolio not exceeding INR1000 million) Margin Cap In addition to the overall margin cap, a cap of 24% on the individual loans imposed

… as demonstrated by mandates from clients Debt & Structured Finance Transactions Cumulatively placed INR 3,350 Mn of debt with domestic and foreign banks over the last 18 months March 2009 INR 750 Mn Portfolio Sale Bandhan November 2008 INR 250 Mn Short Term Facility SKS Microfinance June 2010 INR 100 Mn Debt Placement EMFIL May 2008 INR 150 Mn Term Loan Bandhan March 2008 INR 250 Mn Portfolio Sale BISWA July 2008 INR 1,800 Mn Portfolio Sale SKS Microfinance

… as demonstrated by mandates from clients (contd.) Equity Transactions Completed transactions worth more than INR 2,500 Mn; Pipeline > INR 2,000 Mn November 2008 INR 940 Mn Equity Placement Ujjivan March 2010 INR 500 Mn Equity Placement SMILE December 2009 INR 200 Mn Equity Placement Sonata Finance October 2010 INR 100 Mn Equity Placement Disha Microfin July 2010 INR 275 Mn Equity Placement Swadhaar Finserve March 2010 INR 500 Mn Equity Placement Janalakshmi August 2010 INR 55 Mn Equity Placement Svasti Microfinance In Progress INR 280 Mn Equity Placement MIMO Finance