Microfinance risks have manifested themselves in different ways. In my opinion the major sector risks are different from what has been listed above. I will list down a few:
a) Political risk: Microfinance comes under the purview of state governments. Since most of the rural MFI loans are given to economically backward strata of the society and also since they form a major chunk of voting population any impact on them can lead to heavy clamping down by the state govt. The AP microfinance crisis clearly shows how badly state government regulations can impact the industry in a state.
b) Geographic risk: Any geographic calamity can have severe impact on an MFI. Example of this are available when the recent floods in Pakistan Punjab wiped out the MFI industry assets.
c) Multiple loans: This has been the biggest challenge operationally to the Microfinance industry. It has manifested itself time and again. The credit bureaus only cover MFIs (as per RBI regulation only two MFIs can lend to a person) but they do not cover loans from SHGs(Self help groups), HFCs(Housing Finance Companies), NBFCs and of course the local pawn broker. SHG loan books are almost the same size as MFIs. The recent RBI guideline of increasing the ticket size from Rs 30,000 to Rs. 60,000 greatly increases this risk significantly. Also MFIs lending from non operational revenue generating activities (consumer activities) are highly prone to this.
d) Religious: In certain communities interest on a loan is considered against the basic tenets. This risk manifested in the Mysore region where MFI loans were given to silk weavers.
e) Disease: Since a large amount of MFI loans are for animal husbandry purposes any disease outbreak could lead to wiping out of huge assets (think about mad cow disease, bird flu).
Along with these the standard risks of financial institutes are all present. In most of the cases these risks have combined together and resulted into huge losses to MFIs. The NPA of below .1% is a mirage since whenever any of these risks strike the NPAs have risen very sharply and have destroyed the entire MFI capital base.
Coming to the listed players which again I have gone into details:
Satin: Very high leverage. Preferential shares as part of tier 1 capital reduces interest coverage significantly. Not sure about management ethics. +ve ROAs are heading North every quarter. High exposure to animal husbandry.
Arman: Great management, conservative, focused on their work. Geographic and political risks.
SKS: Decent mgmt., lowest borrowing cost (lowest lending cost), wide geographic presence.
DIsclosure: Exited Satin recently. Looking to enter SKS.
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