Tier 2 cities will be more attractive for retail loan products over the next couple of years, says CRISIL

Volumes may be still low compared to metropolitan cities, but higher yields, especially in home and two-wheeler loans, is making business more profitable in these places

The prospects for corporate lenders in the retail sector are brighter today in tier-2 cities like Lucknow, Ludhiana, Indore, Visakhapatnam and Madurai, which are witnessing a surge in demand especially for auto and housing loans.

These cities may not have the kind of numbers that the metropolitan cities have, but higher yields on growing numbers has made business as profitable as in the big cities for these lenders recently, according to report by CRISIL Research on "Retail loan products: Opportunities and risks beyond the metros and mini-metros."

"Stronger growth prospects, lesser competition, higher yields and profitability comparable to the larger cities make tier-2 cities an extremely attractive proposition for financiers," says Prasad Koparkar, head of industry and customised research at CRISIL.

The yield to financiers is slightly higher in tier-2 cities, especially in the case of housing loans and two-wheeler loans. It is important however, that credit quality is tightly monitored. The report also considered car loans, gold loans and loans against property.

Of course, there would be a difference in the growth prospects and asset quality; so picking the right markets will be critical to profitability. The report covers ten other tier-2 cities— Kanpur, Bhopal, Jaipur, Rajkot, Nagpur, Nashik, Mysore, Kozhikode, Coimbatore and Thiruvananthapuram.

"Contrary to popular perception, not all tier-2 markets fare poorly in respect of asset quality. In eight out of the 15 cities studied, the level of non-performing assets compares favourably with the all-India average for all five retail loan products," says Ajay Srinivasan, head of industry research at CRISIL.

Car loan disbursements in 10 of the 15 markets are expected to grow at about 20% CAGR (compounded annual growth rate) over the next couple of years. This is higher than the 13% CAGR estimated for larger cities. In seven of these tier-2 cities, loan against property (LAP) disbursements are expected to grow faster than the rest of the country. Gold loans are expected to grow more than 50% annually in five non-southern cities, according to the report.


RIL receives govt’s nod for stake sale in 21 of 23 blocks to BP

The deal will give RIL access to BP's expertise in deepwater drilling and accelerate development and production from its fields, particularly the under-performing KG-D6 block in the eastern offshore

New Delhi: Reliance Industries (RIL) today said it has received the government's approval for selling a 30% stake in 21 out of a proposed 23 oil and gas blocks to UK's BP Plc for $7.2 billion, reports PTI.

The Cabinet Committee on Economic Affairs (CCEA) had on 22nd July cleared the stake sale by RIL to BP in 21 blocks, including the showpiece eastern offshore KG-D6 gas producing area and discovery area NEC-25. However, it held back approval for two inconsequential blocks-one a deep sea area off the Orissa coast and the other an onland block in Assam-over technical issues.

"RIL has received the government of India's approval for its transformational deal with BP," the company said in a press statement. "RIL is grateful to the government of India for the approval, which will result in the largest foreign investment in the domestic hydrocarbon sector."

BP will have to furnish a bank guarantee and performance guarantee, as per the Production Sharing Contract.

The deal, which might increase in value to $20 billion on the basis of future performance payments and investment, will give Reliance access to BP's expertise in deepwater drilling and accelerate development and production from its fields, particularly the under-performing KG-D6 block in the eastern offshore.

For BP, which has been struggling to recover from the disastrous Gulf of Mexico oil spill disaster last year, the transaction is a chance to enter a market where energy demand is growing at 5%-8%.

"BP will take a 30% stake in 21 oil and gas Production Sharing Contracts (PSCs) that RIL operates in India, including the producing KG-D6 block. Following the approval, RIL and BP will work together to conclude the deal expeditiously," the statement added.

RIL holds potential gas resources of 9.5 trillion cubic feet (tcf) in the KG-D3 block. Hardy has 10% stake in the block and Reliance 90%.

It has also made oil discoveries in a Cambay onland block.

In the KG-D6 block, RIL has so far made 19 oil and gas discoveries, of which it has put two gas-Dhirubhai-1 and 3-and one oil find, MA, into production.

It had in 2008 submitted a development plan for nine satellite gas discoveries around Dhirubhai-1 and 3. In 2009, it withdrew this and submitted an optimised development plan for prioritising four satellite gas finds to oil regulator Directorate General of Hydrocarbons (DGH).

An integrated development plan for all the gas discoveries in the KG-D6 block is being conceptualised to maximise capital efficiency and accelerate monetisation.

Industry observers have said the BP deal is a clear breakthrough for Mukesh Ambani, in terms of getting access to BP's expertise as well as de-risking its exploration and production (E&P) portfolio.

RIL and BP will also form a 50:50 joint venture (JV) for the sourcing and marketing of gas in India. The JV will also work toward creation of infrastructure for receiving, transporting and marketing of natural gas in India, which could be in the form of an LNG terminal.

RIL has been awarded a total of 43 blocks till date from the pre-NELP and eight NELP rounds. 14 of these blocks have been relinquished. Out of the 29 blocks remaining, there have been discoveries in nine blocks.

RIL also has 30% interest in the producing pre-NELP blocks Panna, Mukta and Tapti. It also has 5 CBM (coal bed methane) blocks in India, including two with gas resources of 3.5 tcf.

RIL recently also formed three US shale gas joint ventures.

BP will not take interest in any of these E&P assets of Reliance.


What went wrong with Indian microfinance?

For starters, here are some questions for SIDBI’s board and senior management so that they can initiate the task of learning from their past experience

Yesterday (8th August), Moneylife had raised the need for SIDBI to learn from the microfinance crisis, and assuming that SIDBI's senior management and board would like to do so, the question is where do they begin? (SIDBI must rework its microfinance strategy ). Accordingly, I start by sharing relevant data with regard to SIDBI's growth in Indian microfinance (See chart). A close look at this data suggests that SIDBI had abandoned its slow growth trajectory somewhere in 2007 and had, in fact, turbocharged the growth of the Indian microfinance industry by 2008. The data given below is self-explanatory.

At this juncture, let me again clarify that SIDBI's work in the Indian microfinance industry is phenomenal and I have the greatest regard for its contribution to the microfinance industry and the development sector prior to 2007. I would also rate it as one of the most responsible institutions prior to 2007. However, its role, especially from April 2008 onwards, raises a lot of discomfort and I hope that the management and board of SIDBI do a dispassionate and objective analysis of the same (in terms of what happened and why) with regard to the SIDBI Microfinance Saga. The idea is neither to blame nor penalise any of the officers,  many of whom are very committed and have great talent and knowledge—however, the time is surely ripe for SIDBI, as an institution, to introspect with integrity and learn from its past experiences. This is something that I would like to reiterate again.

And accordingly, with all humility, I provide some starter questions (that are by no means exhaustive) for use by the SIDBI board and senior management, so that they can initiate the task of learning from past experiences:

  • Fast Growth Strategy: Why did SIDBI's microfinance portfolio grow at the frantic pace witnessed during the specified period? For example, from April 2008 to March 2010, SIDBI's loan outstanding grew almost 4.01 times—from April 2008 (Rs950.38 crore) to March 2010 (Rs3,808.20 crore). Who authorised this burgeoning growth and why? Was it the senior management or board (or who else) who brought about this strategic change in SIDBI's growth orientation and why did they do so? This needs to be explored especially, given SIDBI's very conservative approach prior to 2007.
  •  Management of Portfolio: How did SIDBI hope to manage its very fast growing portfolio? What mechanisms were in place at SIDBI and were they adequate? Was there a proper risk analysis of the above fast growth strategy and were the pros and cons evaluated?
  •  Due Diligence at SIDBI and Process Adopted for Sanctioning Larger Loans: What due diligence was employed at various levels to expand the SIDBI microfinance portfolio several fold? How were credit decisions made (at SIDBI) on an individual case-by-case basis for the larger loans sanctioned to MFIs? What were the lead times for such sanctions and what due diligence was followed and was it sufficient? Given that SIDBI was not used to sanctioning loans in excess of  Rs100 crore to individual MFIs (at least until 2004), what processes were  adopted in the subsequent years when loans worth or in excess of Rs300 crore were sanctioned to individual MFIs? Were they sufficient? Were there any conflicts of interest? On what basis were such higher loans sanctioned by SIDBI to the MFIs?
  • Monitoring by SIDBI: Did SIDBI monitor the end use of its loans? If so, did it not sense the early warning signals with regard to huge and rising indebtedness, rampant multiple lending, ghost clients and the like at the field level? Was it aware about the use of agents in the Indian microfinance market and the prevalent and fast growing decentralised microfinance model? Were the monitoring mechanisms adequate and what did the field level reports indicate with regard to the above practices? Were any lessons learnt from the crisis in Krishna (2006), Kolar (2009) and other places and were they applied in practice to the micro-credit program at SIDBI in reality? In the wake of its rapidly burgeoning portfolio, how did SIDBI assure itself of the deployment of its funds in real (physically identifiable) microfinance assets?
  • Corporate GovernanceEquity Investments, ESOPs and SIDBI Nominee Directors: Given that SIDBI has made equity investments in several MFIs, what was the role played by SIDBI's nominee directors on the board of MFIs? What mechanism was in place at SIDBI to monitor their work on the MFI boards? Did they not alert SIDBI to the various not-so-good practices prevalent on the ground like interest free loans made by the founder and then managing director to himself to buy (same company) shares at face value? Likewise, salary contracts of MFI senior management staff were apparently not discussed in the board but were supposedly sent to the Government of India for approval based on suitable preparation of minutes. Further, when the notice and minutes clearly stated approvals of ESOPs to two senior management staff, in reality they were issued ESPSii  and equity shares—this is despite the original approvals having been for ESOPs and the original filings with the Registrar of Companies stating that ESOPs had been approved for the concerned two staff. Also, it appears that share certificates were printed (indiscriminately) without board approvals and that is indeed serious again. The key questions here are: Were the nominee directors aware of these? If not, why not and if so, did they question any of these practices? Did they dissent at the board meetings? Did they inform their parent organisation of the various happenings? If not, were there any conflicts of interest? The SIDBI board must note that this could range from nominee directors being granted ESOPs to other possible diluters offered by the concerned MFIs and all of these aspects need to be looked into by the board of SIDBI.
  • Corporate Governance-Minutes and SIDBI Nominee Directors: Further, on many occasions, the committee minutes were neither drafted nor signed, apparently. In fact, just extracts are said to have been prepared and placed at the board meetings, without any signatures. In some cases, the minutes were not signed by the then chairpersons, some of whom are today no longer on the board. On other occasions, action was taken based on minutes that had apparently not been approved. Sometimes, even AGM/EGM minutes had not been prepared. As I understand the Companies Act (1956 and amendments), all minutes have to be properly drafted, signed, statutorily placed and approved and I heard that SIDBI's nominee directors were presentiii at a number of these meetings when the above not-so-good practices happened. I think that the SIDBI board and management must note that all of these are clear contraventions of the Companies Act, 1956, and all directors can be held responsible. To that extent, it affects SIDBI, its reputation and its nominees on the board of MFIs. The key questions here are: Did the nominee directors ever raise these issues at the meetings and if yes, what was the outcome? If no, why did they turn a blind eye to such practices? Did they report this to their parent institution? What attempts were made by them to ensure that these practices did not occur again? Going forward, what safeguards can be built as SIDBI has invested in many MFIs and is likely to do so heavily as part of its mandate in the World Bank responsible microfinance program? I am sure that SIDBI would not like to be caught on the wrong foot!
  •  Implications for Future Responsible Microfinance Projects: Given what has happened on the ground and especially in Andhra Pradesh and other states, what are the implications for the responsible microfinance project of SIDBI that is being conducted in cooperation with the World Bank? What are the implications for the Access to Finance (A2F component) in the DFID funded poorest states inclusive growth (PSIG) project? What is the guarantee that things will indeed be responsible on the ground, this time around? What safeguards are there in these projects and what safeguards would need to be built into them to ensure that enthusiastic senior management does not derail the natural course of the so-called responsible microfinance projects in India?

These and other questions become very relevant as institutions like SIDBI intermediate public funds and, having seen the havoc that microfinance field agents have caused on the ground in the last nine months, I cannot help but ask the above questions. I hope SIDBI's board and management take these in the right spiritiv and introspect with integrity. And that alone should be able to provide practical guidance to the perfectly timed SIDBI-World Bank "Responsible Micro-Finance Project" and the DFID sponsored poorest states inclusive growth (PSIG) project where SIDBI is the consortium leader. Only time will tell whether SIDBI's board and management feel the responsibility to do this in an urgent manner…

  iEmployees stock option plans
  iiEmployees stock purchase scheme
  iiiI am very sure that the concerned nominee directors can identify the context
  ivThe idea is neither to blame anyone nor find fault with any institution. The objective solely is to learn from past experiences and ensure that similar things do not happen on the ground again in the future.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments.)



Laura Al-Amery

5 years ago


Thank you for your nice article on.What went wrong with Indian microfinance? I like it. It will help me for my research.


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