A Giant Stumbles: Why did investors abandon Blue Orchard?

Microfinance Focus, 10 December 2012; microDinero (Spanish), 12 December 2012

Over the past 18 months, one of the microfinance sector’s largest and most prominent funds, Blue Orchard’s Dexia Micro-Credit Fund (recently renamed Blue Orchard Microfinance Fund), saw a major outflow of investor capital, with some $268 million or nearly 50% of the fund’s peak value having been redeemed.  The scale of these outflows is unprecedented in the sector.  For years, investment capital largely flowed one way:  in.  The exit doors were there, but rarely used.  That is no longer the case.  The pioneer of the microfinance investment industry has now crossed another milestone in the industry’s development.

Like Dexia, many microfinance funds (commonly referred to as Microfinance Investment Vehicles or MIVs) are subject to unscheduled redemptions.  For those funds, their investors, as well as others in the sector, BlueOrchard’s experience holds important lessons, and it is those lessons that this article hopes to convey. more →

Repairing a Tarnished Image: a Plea for Transparency in Indian Microfinance

MicrofinanceFocus, 28 March 2012

Last month, the headlines of the world’s papers read déjà vu.  “Suicides in India linked to microfinance debt.”  “SKS Microfinance implicated in farmer suicides.”  The headlines may have differed, but the article was one and the same, penned by Erika Kinetz of the Associated Press.  SKS was appalled, calling the report “libelous” and “scurrilous.”

For what it’s worth, the damage has been minimal.  SKS stock slid 4.25% on the day of the article, but recovered within a few days of trading.  The slide shows little distinction from its already volatile trading pattern (Figure 1).  Of course bad news can also cause lenders and investors to take a second look, or simply slow things down.  One MFI manager told me of exactly this very reaction on the part of an Indian bank in the immediate days after the AP article.  But the story got relatively little press in India, and no follow-up of significance.  By now it’s reasonable to say that the microfinance sector in India can breathe a sigh of relief. Seeing bad news get swept back under the carpet can be quite satisfying, even if the stink remains. more →

Unstable Core: is the funding of the Indian microfinance sector structurally flawed?

MicrofinanceFocus, 27 December 2011

On October 14, 2010, the Andhra Pradesh government issued an Ordinance that effectively shut down the microfinance market in the state.  That shutdown continues to this day, with collections at negligible levels.  It’s clear that the AP microfinance market is dead and will not recover for years.

Important as AP has been to India microfinance, it is not everything.  Despite the year-long crisis, repayment rates in other states remain strong.  And though AP-oriented MFIs have been seriously or even terminally wounded, others have remained unscathed.

Despite this, in the intervening period funding for MFIs – largely dependent on a handful of Indian state and commercial banks – has persisted in a state of severe liquidity deficit.  more →

Bring Microfinance into Politics

MicrofinanceFocus, 7 July 2011

It seems wherever you turn these days, politics is getting into microfinance. In Andhra Pradesh, the state government exercised its prerogative to kill off an entire industry. Next door in Bangladesh, Prime Minister Hasina decided to hound Yunus out of Grameen Bank, no matter the cost. The No Pago (No Pay) movement in Nicaragua counted on the support of the country’s president. What’s the industry to do in the face of such onslaught?

Weathering the Storm identified state intervention as one of the core risks faced by MFIs. It drew its lessons from the case of PADME in Benin, which was effectively nationalized by the government in 2008. At the time, PADME was in the process of transforming from an NGO to a for-profit entity, and the Benin government had made clear from the start that it was not in favor of such a plan. Despite this, PADME’s management and prospective investors had decided to push ahead, thinking that they would be able to parry the government’s attempts to block the process.

They were wrong. more →

Microfinance in Crisis: the Case of the Hidden City

Co-authored with Karuna Krishnaswamy; MicrofinanceFocus, 25 January 2011

Hyderabad has gone missing.  And it seems nobody has noticed the absence.  While academics and the press were scouring the villages of Andhra Pradesh in search of over-indebted borrowers and debt-induced suicides, and while politicians in the villages and government halls were busy protecting their beloved SHGs (and the vote banks they provide), Hyderabad up and vanished, leaving apparently no trace of its prior existence.

Naturally, we are referring not to the physical city, but to its microfinance market, as well as those of other cities in Andhra Pradesh.  Make no mistake – microfinance lending in urban AP has been widespread, outpacing even that of the countryside.  And yet, there seems to be little recognition of its existence and how it has been affected by the current crisis.  more →

Microfinance Securitization: Ratings Confusion

Co-authored with Vinod Kothari; MicrofinanceFocus, 20 December 2010

Something strange is happening with microcredit securitizations in India.  Two pre-eminent ratings companies, CRISIL (a subsidiary of Standard & Poors) and FitchRatings have taken diametrically opposing views on the credit quality of microcredit-backed securities.

Last month Fitch released a report, stating that “these transactions are unlikely to receive the highest Long- or Short-term ratings.”  Meanwhile, CRISIL continues to  issue high ratings to a number of microcredit securitizations, most recently rating a Rs. 54 crore ($12 million) pool issued by Asmitha Microfin as P1+(so), the highest rating that can be assigned to short-term securitizations.  This rating continues to stand, despite the fact that Asmitha’s debt has been downgraded since then and continues to remain under a ratings watch for further possible downgrades. more →

Preparing for Failure: Strategies for Challenging Times

MicrofinanceFocus, 8 November 2010

The crisis in Andhra Pradesh has highlighted how exposed MFIs are to mass non-payments.  Industry insiders have suggested that even some of the largest MFIs simply might not survive if the crisis is not resolved soon.  And if that were to happen, is the industry prepared to deal with the process of unwinding one of these giants?

The top MFIs in India are large by any standard, with assets in the multiple $100s of millions, most of which are held in the form of outstanding microcredits.  Once an MFI is hobbled to the point that it cannot survive as a going concern, what happens to these assets?  Experience from other MFIs suggests that prospects for recouping them are not good. more →

SKS Microfinance journey to IPO: An inside story

Co-authored with Vikash Kumar; MicrofinanceFocus, 12 May 2010

SKS Microfinance, India’s biggest lender to the poor, is soon to become the nation’s first microfinance company to list on the Stock Exchange. In the past 10 years, it has evolved from an NGO to a public limited company and has set many benchmarks for the industry to follow. Microfinance Focus presents a comprehensive look at this journey, tracing it from the company’s roots in the late 90s through the final months leading up to the IPO.

more →

Avoiding a Microfinance Bubble in India: Is Self-Regulation the Answer?

Co-authored with Sanjay Sinha;  MicrofinanceFocus, 10 Jan 2010

We live in a time of object lessons.  The economic crisis continues to buffet many countries, including the US, where the unemployment rate has now breached 10% for only the second time in the last 70 years, taking only 18 months to get there – the largest and steepest increase since World War II.  Three years after the first rumblings in the US subprime mortgage market, many banks around the world are still ailing.

The microfinance industry has not been immune either – MFIs in countries as diverse as Nicaragua, Bosnia, and Morocco are under severe stress, while many others have seen their portfolio numbers deteriorate significantly.  For the first time in its 11-year history, the industry’s flagship private investment vehicle – Blue Orchard’s Dexia Micro-Credit Fund – reported a net monthly loss.

The sector in India has thus far successfully avoided this fate.  more →

Is There a Microfinance Bubble in South India?

MicrofinanceFocus, 17 Nov 2009

By most standards, microfinance is a young sector, and in many countries it can be said to still be in its infancy.   Yet its continuing spectacular growth, especially in India, should give one pause – every time promoters celebrate another multi-million-client threshold, I wonder – how many more such thresholds are left?  How do we know when we’ve arrived?

This is not a philosophical question – normally, markets send signals.  New customer demand drops.  Prices fall.  Margins decrease.  However, credit markets are funny animals – the hopeful, exuberant part of our human nature dictates that, when presented with the opportunity, we tend to overestimate our repayment capacities and borrow beyond our means.  And when we can borrow from one lender to repay another, we can stretch the cycle out even further.  The market signal gets delayed, while a bubble builds – when the signal does come, it is in the form of the bubble bursting.  more →