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Figure : The Bellwether triangle Lok Capital is a proponent of the service company model as an appropriate legal vehicle for start-up MFIs and Lok's investments Equity is designed for both start-ups and established MFIs (Tier I in the diagram) and is expected to account for 50 per cent of portfolio. 5 Convertible debt is destined either for Tier II NGO-MFIs with high potential for scaling up and transformation, or to well-managed existing NBFCs that want to do down-market. 6 Debt is extended where there is potential for equity later, and loans have been made to two existing NBFCs who want to go down market. As an Indian fund Bellwether is not constrained by regulations governing the minimum size of investments and loans that foreign institutions must make, and thus has the advantage of being in a position to make smaller investments and loans more flexibly. Like Bellwether, Lok Capital has well defined expectations regarding returns. It prefers to get in at an early stage and provide relatively long-term support to its investees, both through its investments (with an average expected duration of 6 to 8 years) and through TA. In works closely with Bellwether and other investors and is proposing to partner them in some investments in the pipeline. Secondly, Lok Capital is a proponent of the service company model as an appropriate legal vehicle for start-up MFIs and Lok's investments. The service company model was developed in Latin America 7 , and is essentially the same as the partnership or business correspondent models in the division of responsibilities between the MFI and the bank. Since a service company can be registered as a private limited company rather than an NBFC, it offers the advantage of (i) reducing the entry capital requirement, 8 (ii) avoiding the pre-emption of scarce managerial time and energy in dealing with the complexities and frequently long waiting period of registering as an NBFC, while leaving open the option to transform into an NBFC later, and (iii) not attracting the regulations on the minimum size of foreign investments in NBFCs, which would enable the investor to make investments of much smaller and more appropriate sizes in accordance with the requirements of the investee as it grows (see Box 7.1) (iv) eliminating an unnecessary layer of equity at the NBFC level. For investees that are already registered as NBFCs it envisages a "hybrid model", i.e. with the NBFC continuing to lend on its own books, as well as off the balance sheet in the role of a service company for one or more banks. Unitus states its primary goal as extending outreach as quickly as possible since it regards this as the best way to serve the social objective of financial inclusion. The Unitus Equity 126
Equity Investments by the Venture Capital Funds Fund invests equity in MFIs around the world. Unitus Inc. provides capacity building support and grant money. In its partners therefore it has shown a distinct preference for MFIs that offer the prospect of rapid growth. It is well-endowed with grant money for TA for CB. However it is flexible about the period in which its TA partners should transform into NBFCs as potential candidates for its equity investments. In September 2005 it announced an alliance with ACCION for Indian operations and the two organizations have set up offices in the same building in Bangalore (see also Chapter 6). However neither organization will limit its operations to joint-partnerships since they define their primary goals differently. Unitus has made two investments in India so far. 9 MSDF is not a VCF, but a Foundation, dedicated to improving the lives of children around the world. In India it sees an opportunity to do so by promoting urban microfinance, primarily in the slums of the six largest cities, in which an estimated seven million children live, and where little or no microfinance services exist so far. Microfinance is expected to help families develop the economic security to provide for and educate their children. MSDF hopes to achieve this vision by catalyzing the development of scalable and sustainable start-ups through direct investments, targeted capacity building, and attracting top quality new leaders to the sector who "combine world-class management skills with the vision for massive social impact". Moreover, as a Foundation, it is in a particularly good position to add value to the market by providing grants to non-profits, not just for CB but for working capital to bring them to the point where they can attract equity investments, either from MSDF itself, or the other players. Thus MSDF has made a grant of the equivalent of $600,000 to Swaadhar, an urban start-up in Mumbai to carry them to break-even in about 3 years. 10 It expects half of its partners to be non-profits each year. However it expects them to aim at attaining exactly the same standards of governance and data driven management as its for-profit partners. It places particular emphasis on integrating social performance measurement into MFIs from the beginning, and to stimulate the creation of new kinds of lending for education, health, infrastructure and market-based services for micro-entrepreneurs. Issues Catering to the equity requirements of small MFIs: a task for MFDEF While the equity requirements of the for-profits and of non-profits with the intention to transform are being catered to by the new VCFs, the segment that is still neglected is the notfor-profit segment of MFIs registered as NGOs who are not in a position to transform, or indeed who may not want to transform. As discussed earlier there is need and scope for diversity in Indian microfinance and small not-for-profit institutions have a strong role to play in decentralizing coverage to underserved regions. While their main need is for credit funding rather than equity, all segments of the sector are highly leveraged and many of them find it hard to raise the next loan. In the M-CRIL sample 31 per cent of the total equity requirement for growth came from small MFIs with a portfolio size of less than Rs 1 crore, and another 33 per cent from medium MFIs, mostly NGOs, with portfolios of between Rs 1 and 10 crore. Moreover the growth equity requirement from those MFIs in these two categories with negative or inadequate CARs was 39 per cent of the total. Thus there is a both scope and need for equity financing for these segments from MFDEF. 127 MSDF is not a VCF, but a Foundation, dedicated to improving the lives of children around the world. In India it sees an opportunity to do so by promoting urban microfinance, primarily in the slums of the six largest cities, in which an estimated seven million children live While the equity requirements of the for-profits and of nonprofits with the intention to transform are being catered to by the new VCFs, the segment that is still neglected is the not-for profit segment of MFIs registered as NGOs who are not in a position to transform, or indeed who may not want to transform
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Microfinance in India A State of th
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List of Tables Page No Table 2.1 Gr
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Preface and Acknowledgements This r
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Abbreviations ABC ADB BC BF CAR CAG
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CHAPTER 1 Overview and Summary of M
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Overview and Summary of Main Recomm
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1 1a 1b 2 2a 2b 2c 3 3a 3b 3c 4 4a
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The Light and Shades Study A major
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highest proportion of weak records
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their profitability after accountin
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allow the programme to grow organic
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1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
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Endnotes 1 It is very hard to compa
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as cash with the groups, the true r
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linkages", 11 percent 3rd, and 5 pe
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References APMAS (AP Mahila Abhivru
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CHAPTER 3 Progress Under the MFI Mo
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Progress Under the MFI Model is fun
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Table 3.4 Comparative performance i
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Progress Under the MFI Model on lit
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Progress Under the MFI Model 4 Howe
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Progress Under the MFI Model Refere
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MFIs, and the need for MFIs to plou
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size had actually come down during
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The point at which peer group press
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The lack of contact and communicati
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Box 4.1 Continued 4. MFIs will coll
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Endnotes 1 There will be many disag
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19 The base suicide rate in AP is 1
Page 78 and 79: References APMAS, 2005, "A Report o
Page 80 and 81: (such as cattle and houses), and co
Page 82 and 83: The advantage of the provider model
Page 84 and 85: Some lessons learnt from experience
Page 86 and 87: Box 5.2 VimoSEWA: Synergies between
Page 88 and 89: 86 Table 5.1 Main Feature of Health
Page 90 and 91: Endnotes 1 While the microinsurance
Page 92 and 93: 16 A little less than a fifth of th
Page 94 and 95: 29 The rationale for transfer progr
Page 96 and 97: Roth, James and Vijay Athreye, 2005
Page 98 and 99: Issues and priorities for action re
Page 100 and 101: Endnotes 1 See for instance CGAP (2
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Page 104 and 105: such as Chaitanya who soon became s
Page 106 and 107: money to support operational expens
Page 108 and 109: finance, and the microfinancial ski
Page 110 and 111: Box 6.1 Continued in experts and to
Page 112 and 113: Endnotes 1 In a sense it always was
Page 114 and 115: 16 Examples are Margdarshak in Luck
Page 116 and 117: 114
Page 118 and 119: Table 7:1 Commercial bank exposure
Page 120 and 121: The main constraints to the expansi
Page 122 and 123: further review, RBI has modified th
Page 124 and 125: 9 Thus ICICI has sold some of its b
Page 126 and 127: B. Equity Investments by the Ventur
Page 130 and 131: Despite the weaknesses the public s
Page 132 and 133: Box 7.1 Continued foreign sources o
Page 134 and 135: Endnotes 1 At this point they will
Page 136 and 137: References ACCION, 2003, "The Servi
Page 138 and 139: SIDBI Foundation for Micro Credit (
Page 140 and 141: categories, depending on the amount
Page 142 and 143: The distribution of total disbursem
Page 144 and 145: Endnotes 1 It should be noted that
Page 146 and 147: B. Donor Participation in Indian Mi
Page 148 and 149: this has dropped to 8% on the curre
Page 150 and 151: and poor populations. More directly
Page 152 and 153: and expansion of available retailer
Page 154 and 155: 11 SDC through various programs for
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Page 158 and 159: 1.1 Impact evaluation of Spandana's
Page 160 and 161: in the loan tenure of 24 months. Th
Page 162 and 163: There are two main motivations of a
Page 164 and 165: compensation structures used by Ind
Page 166 and 167: Endnotes 1 By Annie Duflo, Anvesha
Page 168 and 169: 29 The main components of direct tr
Page 170: 168
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