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1. 1

2. Index of Slides
• Introduction
• Risk Analysis
• Regulations
• Trends in the industry
• Key players
• Funding and Opportunities for investments for institutions and HNIs
• News about potential opportunities
• Threats or risk involved & Risk Mitigates
• Approach to Investment Decision Making
• Your recommendations
• Conclusion
• Sources of Information
• Alternate investment options – Healthcare
• Alternate investment options – Education
• Alternate investment options – Real Estate 2

3. Introduction to Micro Finance
• Microfinance is defined as the large-scale provision of small loans and other
financial services to low-income people by conveniently located commercial
financial institutions.
• Approaches to lending
• Not-for Profit - the poverty lending approach, which is donor- and
government-funded, and the financial systems approach, which is
operated by self-sufficient financial intermediaries. The Self-Help Group
(SHG)-Bank Linkage Program (SBLP) which was launched Reserve Bank of
India, in 1992 marks the beginning of Organised Micro Finance in India.
• For Profit - the financial systems approach
• Business Model - The success of microfinance as a sustainable business
model largely depends on
• scale
• high repayment rates
• low transaction costs relative to traditional financial institutions
3

4. Risk Analysis
The MFIs run three important risks :
• Concentration risk – Concentration of loans to a particular
geography or types of business.
• Credit risk – Lending beyond the capacity of the borrowers to
repay, lack of proper due diligence, etc.
• Compliance risk – Non-compliance on the part of MFIs in
following the RBI guidelines.
• Governance risk – refers to lack of transparency in the
decision making process and accountability for action taken
(more relevant for the investors in MFIs)
4

5. State-wisedistributionofnumberofNBFC-MFIsinIndia
ason1-Jan-2017
3
6
8
4
13
11
3
1
2
11
3
7
0
2
4
6
8
10
12
14
Total 72
5

6. Regulations
• The regulatory regime of Microfinance Institutions commenced with
the notification of Directions by RBI, vide Notification no.
DNBS.PD.No.234 CGM (US) 2011 dated December 02, 2011
containing the regulatory framework for NBFC-MFIs .
• NBFC lending less than 10% of their total assets need not register
under these separate regulations. They can continue to be
registered under their existing category.
• Cap on Lending - Lower of the following:
• A - Cost of Funds + 10% (in case of Large MFIs) or 10% (in case of other MFIs). For
this purpose large MFI are those with loan portfolios exceeding n Rs... 100 crores.
• B – Average Base Rate of five largest Commercial Banks as notified by RBI on
quarterly basis, multiplied by 2.75 , currently 25.8775% (9.41*2.75) applicable for
the quarter beginning 1-Jan-2017.
• Capital Adequacy Ratio – 15% of the Aggregate Risk Weighted
Assets shall be maintained as Tier-I and Tier-II Capital.
• Code of Fair Practices to be followed. 6

7. Trends in the industry
•  As of 31st Dec 2016, MFIs provided microcredit to over 3.38 Cr clients, an increase of
42% over Q3 FY 15-16.
•  The aggregate gross loan portfolio (GLP) of MFIs stood at Rs.. 56,634 Cr (excluding
non performing portfolio i.e. PAR > 180 days in Andhra Pradesh and Telangana). This
represents a YoY growth of 53% over Q3 FY 15-16 and a decrease of 2% over the last
quarter.
•  Loan amount disbursed in Q3 FY 16-17 reduced by 16% compared to Q3 FY 15-16
reaching to Rs.. 12,424 Cr.
•  Total number of loans disbursed by MFIs dropped by 26% in Q3 FY 16-17 compared
with Q3 FY 15-16 and by 33% compared with Q2 FY 16-17.
•  Portfolio at Risk (PAR) 30 has increased considerably from half a percentage in the
previous quarters to 7.52% in Q3 FY 16-17. This is directly attributed to the impact of
demonetization.
•  Average loan amount disbursed per account is now Rs.. 20,981. The figure for Q3 FY
15-16 was Rs.. 18,425.
•  MFIs now cover 31 states/union territories.
•  In terms of regional distribution of portfolio (GLP), south accounts for 33% of the
total industry portfolio, north for 27%, west for 24%, and east for 16%. Top five top
states, viz. Karnataka, Tamil Nadu, Maharashtra, Uttar Pradesh and Madhya Pradesh
account for 54% of GLP
7

8. Key Players
As on 31st Dec 2016, microfinance industry has total loan portfolio of
Rs.. 98,625 Cr. Based on data captured for 31st March 2016, this roughly
represents over 90% of the total industry portfolio excluding SHGs. It
may be noted that
Seven MFI which are designated to be Small Finance Banks (SFBs)
account for 46% of NBFC-MFIs portfolio amounting to Rs.. 26,228 Cr.
These are -
1. Disha,
2. ESAF Microfinance
3. Janalakhsmi Financial Services
4. RGVN (North East) Microfinance
5. Suryoday Microfinance
6. Ujjivan
7. Utkarsh 8

9. Funding and Opportunities for
investments for institutions and HNI
• As of 31st December 2016, the Total equity of the industry
stand at Rs.. 15,100 Cr.
• At an aggregated industry level, 56% is domestic equity and
the rest is foreign equity.
• As per the FDI Policy 100% Foreign Equity is allowed into
“Micro Credit” under automatic route. Similarly, in SFBs
foreign equity is allowed up to 49% under automatic route and
49% to 74% under government approval route.
• There are ample opportunities for both domestic and foreign
investors to be make investments in MFI Sector.
• These opportunities could come both in the form of Debt and
Equity Investments. 9

10. NewsaboutMFIspotentiallylookingforinvestments
Some of the MFI that are looking to raise finance include
1. M Power Micro Finance (http://www.vccircle.com/news/micro-
finance/2016/11/03/exclusive-m-power-micro-finance-raise-capital-early-
investor-part )
2. Annapurna Micro Finance (http://www.vccircle.com/news/micro-
finance/2016/10/12/exclusive-annapurna-microfinance-plans-fresh-
fundraising-early)
3. Utkarsh Micro Finance (Exclusive: Utkarsh Micro Finance’s new funding to
value it at $150 mn)
4. Jana Lakshmi Financial Services (Janalakshmi Financial Services to raise $50
mn from IFC)
Note: Some of these deals may have already achieved financial closure. The
above list has been given only for illustrative purposes.
10

11. Threats or risks involved& RiskMitigates
Threats / Risks Risk Mitigates
Concentration Risk Diversification into various geographies and business segments
Credit Risk Devise and implement robust processes in the area of
1. Client Selection and Due Diligence.
2. Centralisation of Credit Application Processing.
3. Layered hierarch of sanctioning process.
4. Strict adherence to KYC norms
5. Evaluation of the ability of the borrower to repay the loan
through income generating activities.
Compliance Risk 1. Establishment of Compliance Cell that receive all the
communications relating to compliance matters.
2. Regular training programs to be conducted to all the employees
both at the time of induction and also on an on going basis.
3. Active monitoring of Asset Liability Management
4. Proactive action to be taken to maintain and exceed CAR norms.
Governance Risk Devise and implement progressive corporate governance policies in
accordance with the RBI / Company Law regulations. 11

12. ApproachtoInvestmentDecisionMaking
• The primary approach towards any investment decision making shall be driven
by analytical insights into the financial fundamentals of and future business
opportunities relevant a particular MFI.
• The investment opportunism could be both in Private Equity and Public
(Listed) Equity.
• Some of the fundamentals to be looked into would be as follows:
• Operational Efficiencies (Industry Average during FY 2015-16)
• Clients per Loan Officer (554)
• Clients per Branch (3,721)
• GLP per Loan Officer (Rs... 84 lakhs)
• GLP per Branch (Rs... 5.70 crores)
• Cost Per Loan i.e. cost of acquiring and servicing a client(Rs. 1,100)
• Financial Parameters to be evaluated
• OSS i.e. Operational Self Sufficiency (119%)
• Return on Assets (2.12%)
• Return on Equity (12.60%)
• Profit Margin (15.00%)
• Write Off Ration (0.25%)
12

13. ApproachtoInvestmentDecisionMaking ..Contd.
In addition to the financial parameters mentioned in the previous slide
there are quite a few non-financial parameters to be considered. These
include:
1. Integrity and the track record of the Promoters and the Senior
Management Team.
2. Geographical and segmental spread of the business.
3. Risk Profile of customer segments.
4. Robustness of the business practices, Systems, Procedures and the
related internal controls.
5. Transparency and Corporate Governance Practices.
6. Investment Exit avenues in case of Private Equity (IPO Listing, Buy back
etc.)
7. Linkages with Self Help Groups linkages which help the MFIs to
a. Get insights into their borrowers
b. Provided guidance on their income generating activities
c. Constant mentoring on their spending patterns
d. Guide and support on Health, Safety and Education matters
13

14. Recommendations – SFB Designates
• For the purpose of this study the following ten companies, which received in-
principle approval from RBI to set up a SFB can be shortlisted for the initial
consideration:
• 1. Au Financiers (India) Ltd., Jaipur
• 2. Capital Local Area Bank Ltd., Jalandhar
• 3. Disha Microfin Private Ltd., Ahmedabad
• 4. Equitas Holdings P Limited, Chennai
• 5. ESAF Microfinance and Investments Private Ltd., Chennai
• 6. Janalakshmi Financial Services Private Limited, Bengaluru
• 7. RGVN (North East) Microfinance Limited, Guwahati
• 8. Suryoday Micro Finance Private Ltd., Navi Mumbai
• 9. Ujjivan Financial Services Private Ltd., Bengaluru
• 10.Utkarsh Micro Finance Private Ltd., Varanasi
Since all the above listed Companies have got in-principle sanction, they would
looking forward to raise capital expand their Branch Network and thereby their
business. Companies like AU Financiers have already raised funds from IFC, Warburg
Pincus, Chrys Capital and Kedara Capital. Similarly, Disha is backed by India Value
Fund . 14

15. Recommendations – Large MFI (NBFCs)
Apart from the SFB designated entities listed in the previous slide the
following entitles which are large have the potential to expand their
business further and seek growth capital :
Sl. No. Name Sl. No. Name
1 Annapurna Micro Finance 8 Muthoot Microfin
2 Arohan Financial Services 9 RGVN (North East) Micro Finance
3 Asirvad Micro Finance 10 Sahre Microfin
4 BSS Micro Finance 11 Satin Microfin
5 Fusion Micro Finance 12 Sonata Microfin
6 GK Micro Finance 13
Spandana Spoorty Financial
Limited
7 Madura Microfin 14 SVCL Micro Finance
15

16. Recommendations ……….contd.
However it may be noted that the final investment decision shall
depend on the following:
• Financial & Operational Parameters, which shall be better than
that of industry average.
• Promoters integrity, experience, dedication and commitment to
the business.
• Robustness of their internal controls and business practices.
• Willingness and ability of the promoters to scale up on business
and corporate governance practices.
16

17. Conclusion
The MFI Sector though has been in existence for over four
decades now, it has come under formal regulatory regime of
RBI only in 2011. The best performing entities in the sector
have got a shot in the arm now with the gradual growth and
conversion into SBFs as listed in Slide no. 14.
Apart from those entities that have already got the In-
principle Sanctions from RBI to set up SFBs, there would
opportunities in the entities that are on the growth path to
move into the next orbit of SFBs, as mentioned in slide no.
15.
One has to check the capital appetite of each of both these
classes of entities and carefully plan an investment due
diligence based on the investment criteria mentioned
elsewhere in this study.
17

18. Sources of Information
• This entire study is based on the secondary research of the
following:
1. RBI Guidelines
2. Periodic data released by MFIN Micro Finance Institutions
Network, a Trade Body of MFIs)
3. Research Papers submitted to NSE
4. University Research Papers
5. Websites of various MFIs
6. News Paper Articles
7. Government of India Websites
8. Report on MFI Sector by the Sub-Committee of RBI Directors
headed by Mr Y H Malegam
18

19. Other Investment Opportunities in India
Healthcare
1. Healthcare –During the year 2014, the overall spend on
healthcare as a percentage to GDP was around 4.70% in
India v. 17.10% in the US, as per the World Bank statistics.
This points to a huge scope for increase in both public and
private spend on healthcare.
2. Currently the government spending on healthcare is less
than 1%. NITI Ayog is discouraging direct spending by the
Government on healthcare. This approach throws open
huge opportunity for private sector / FDI investment in
Healthcare, in the areas of Hospitals, Diagnostic Centres,
etc.
3. Medical Tourism is another segment within Healthcare that
offers immense potential. 19

20. Other Investment Opportunities in India
Education
• The education sector in India is poised to witness major growth in the
years to come as India will have world’s largest tertiary-age (school
going age) population and second largest graduate talent pipeline
globally by the end of 2020.
• In FY 2015-16, the education market was worth about US$ 100 billion
and is expected to reach US$ 116.4 billion in FY 2016-17. Currently,
higher education contributes 59.7 per cent of the market size, school
education 38.1 per cent, pre-school segment 1.6 per cent, and
technology and multi-media the remaining 0.6 per cent.
• Higher education system in India has undergone rapid expansion.
Currently, India’s higher education system is the largest in the world
enrolling over 70 million students while in less than two decades, India
has managed to create additional capacity for over 40 million students.
At present, higher education sector witnesses spending of over Rs
46,200 crore (US$ 6.93 billion), and it is expected to grow at an average
annual rate of over 18 per cent to reach Rs 232,500 crore (US$ 34.87
billion) in next 10 years.
20

21. Other InvestmentOpportunitiesin India
Real Estate
As per the Knight Frank FICCI study, pertaining to Q4 of 2016, due to
the effect of demonetisation, the current sentiment is at 41 percentile
(below 50 is pessimistic) and future sentiment is 59 percentile. What
it really means is that this the most opportune time to acquire real
estate assets.
However, one shall have a segmental approach to make investments in
the Indian Real Estate sector.
While the residential real estate is currently under stress. The office
market is buoyant. Some of the opportunities that can be considered
in select geographies (Mumbai and NCR to be avoided) are as follows:
1. Acquisition of pre-occupied and ready to occupy office spaces.
2. Development of industry specific infrastructure.
3. Affordable Housing 21

22. THANK YOU !!
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