A look at the markets
Global markets have continued to recover despite the ongoing challenges and uncertainty created by the pandemic. The recovery is being driven by strong fiscal and monetary stimulus efforts across most developed and emerging markets. Financial vulnerability remains elevated for weaker countries and is the key focus of our investment and risk management strategies. The vulnerability comes as a consequence of the pandemic to the real economy – it varies greatly across individual markets, depending on governmental ability to provide continued fiscal support. Recent economic news from Asia was upbeat with data showing a recovery was underway. The mood in Latin America was a bit more somber as the number of new COVID-19 cases continued to rise, and legacy economic concerns are exacerbated. There are clearly also positive signs, for example, the credit rating of Ecuador which S&P and Fitch have upgraded to B-, following a successful restructuring of sovereign debt and an agreement with the IMF to provide emergency liquidity.
The BlueOrchard approach
Our investment approach places a strong emphasis on high-quality institutions and those with long term potential for growth aligned with our strategy of maximizing impact. In addition, we have been limiting specific country risks exposure.
The BlueOrchard Microfinance Fund portfolio has shown continued resilience and despite challenges facing many of our partner institutions, has stabilized with no new requests for debt rescheduling received since June 2020. Performance has increased along with investment level in September. The fund continues to yield a strong social return, serving more than 1.2 million micro-entrepreneurs, of whom 79% of end clients are female. The fund has invested in 151 MFIs across 48 countries, with majority stakes in India, Georgia, Ecuador, Mexico and Costa Rica.
With regard to new fund disbursements, we have seen growing demand for lending in certain key markets, and we continue to build a pipeline for the fourth quarter and new year based on the strategy noted above. Though travel restrictions have placed constraints on our ability to meet personally with investees and conduct in-person diligence, our investment team continues to use all means available including “virtual” diligence and trusted relationships in the regions to source new transactions and track performance of existing investees.
Insights from the field – NeoGrowth
NeoGrowth, one of BlueOrchard Microfinance Fund’s portfolio companies in India, provides loans to underserved and underbanked micro, small, and medium entrepreneurs across the country.
In India, MSMEs employ over 120 million people, and it is a large contributor to the country’s GDP: 25% of service, and 6% of manufacturing sectors. However, despite this significant size, the sector operates in a mostly informal space; less than 10% of the total banking credits in India goes to the MSME sector.
Digital payments are on the rise in India with over five million point of sale terminal installed across the country. This is due to the demonetization of Indian currency back in 2016 that led to a significant increase in digital payments.
NeoGrowth has leveraged this opportunity to serve the MSMEs sector of consumer-facing retail business. Creditworthiness is assessed through records of credit, debit cards payments, and universal payment interfaced – a new payment system recently introduced in India.
NeoGrowth places high importance on financial inclusion and social impact since over 51% of its clients are first-time borrowers and 78% are first-generation entrepreneurs.
Throughout this pandemic, the organization has shown resilience and its investments in payment technology have yielded positive results. Indeed, we have seen a trend across our portfolio that investees with solid electronic repayment infrastructure are weathering the COVID-19 storm reasonably well. NeoGrowth has reactivated engagement and repayments with 96% of all customers after the initial lockdown. With many businesses under lockdown, NeoGrowth accommodated rescheduling requests, offered payment moratorium, and focusing on maintaining liquidity. During the early month of the pandemic, the company kept on engaging with its customers through various means of communication, where they focused on understanding and accommodating customer needs. The economic activity since resumed in India and the company has resumed lending focusing on the core clients, risk mitigation and risk management.
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