Indian microfinance sector, the largest microfinance market in Asia, escaped the full impact of global meltdown due to low dependence on external funding and efficient microfinance institutions, a study said.
“Globally microfinance sector experienced shocks induced by the meltdown,” said N Srinivasan, author of ‘State of the Sector Report 2009’, an annual study on microfinance brought out by Access Development Services, a not-for-profit company.
However, “South Asia had a high level of domestic funding in microfinance which seems to have significantly helped the sector to absorb shocks arising from the global meltdown,” the author said in a statement.
While MFIs in several countries struggled to cover their operational costs such as in Pakistan, Bangladesh and Kenya, Indian MFIs with the lowest yield to gross portfolio manage to cover costs even on low average loan size, he said.
The microfinance industry witnessed rapid growth over the last few years and in the recent past, much of this growth was funded through savings deposits and increasing interest of the mainstream finance industry in microfinance.
“In a cross—regional comparison, investors rated Eastern Europe and Central Africa as well as Sub—Saharan Africa as high—risk markets, South Asia was rated as the least risky market for investments,” Mr. Srinivasan said.
“The inference is that Indian MFIs have efficient systems and are able to manage their businesses on thin margins,” Mr. Srinivasan said, adding India has emerged as Asia’s largest microfinance market due to size and high proportion of poor.
According to the study, Brazil and Mexico are countries where MFIs are profitable, but on high interest rates and high average loans.
Market opportunities in India are high, with several international and national funders willing to invest, the study said.
Indian MFIs have enjoyed a better valuation for their equity compared to their counterparts elsewhere in the world.
However, the challenge for the Indian MFIs would be to find funds for increasing the average loan size which could significantly improve return on assets and operational self sufficiency, it added.
The average loan size in the Indian microfinance sector is $ 146, which is lower than most countries. The average loan size in Indonesia is $ 915, Brazil $ 820, Mexico $ 468, Kenya $ 463, Pakistan $ 187 and Bangladesh $ 80.
However, the study highlighted that while sector-specific microfinance regulation exists in countries like Bangladesh, Pakistan, South Africa, Kenya and Uganda, India is yet to introduce a law.