Microfinance: An Overview

with special reference to India

Presented By:-
Rashi Jain (83)
Robin Bhartiya (85)
funding where needed
Shreyansh Sharma (100)
Vivek Singh (116)
19th October, 2010
Justina Francis

“Give a man a fish, he'll eat for a day.

Give a woman microcredit. She, her husband, her children and her extended family will eat for a lifetime ”
- Bono
CONTENTS
funding where needed

• Introduction
– Setting the Tone
– Microfinance – An Introduction
– Microfinance Institutions
• Microfinance – Indian perspective
– Why Banks are reluctant and flipside of it
– Demographic presence
– Trend so far
– Access to microfinance
– Present Scenario
• Models of Microfinance
• Case Discussion
• Strengths & Weaknesses
• Conclusion
 INTRODUCTION
funding where needed

To set the tone…

Typical government support to poor takes the form of subsidies

However many argue that more than subsidies poor need access to credit

Absence of formal employment makes it tough for the poor to get credit from
banks

This forces them to borrow from local moneylenders at exorbitant interest

rates

Microfinance is a response to fulfill this under-served demand for credit

And some perspectives, for a perspective!
funding where needed

“Credit is a human right. Every person has the right to credit to improve her/his livelihood.
Once this right is established, the entitlement to other rights becomes easier”
Mohammed Yunus, Founder Grameen Bank

“The only place where poverty should be is in museums”

Mohammed Yunus, Founder Grameen Bank
“The means by which poor people convert small sums of money into large lump sums”
Rutherford, 1999

" This is not charity. This is business: business with a social objective, which is to help
people get out of poverty."
Mohammed Yunus, Founder Grameen Bank

"Microfinance stands as one of the most promising and cost-effective tools in the fight
against global poverty." 
Jonathan Murduch, Chairman, UN Expert Group on Poverty Statistics
Microfinance – An Introduction
funding where needed

"Microfinance is the supply of loans, savings, and other basic financial services to
the poor”

Microfinance refers to small-scale financial services for the otherwise un-

bankables

It is a service for poor people that are unemployed, entrepreneurs or farmers who
are not bankable

Reasons why some people are not bankable –

 lack of collateral
 lack of steady employment
 lack of income and a verifiable credit history

Because of these reasons they can´t even meet the minimal qualifications for a
ordinary credit

As such, Microfinance is an innovation for the developing countries – like India

MFIs - Microfinance Institutions
funding where needed

A microfinance institution (MFI) is an organization that provides microfinance services

Microfinance Institutions provide a broad range of financial services –

 Deposits
 Loans
 Payment services
 Money transfers
 Insurance

Microfinance services are provided by three types of sources*:

 formal institutions, such as rural banks and cooperatives
 semiformal institutions, such as nongovernment organizations
 informal sources such as money lenders and shopkeepers

Institutional microfinance is defined to include microfinance services provided by both

formal and semiformal institutions

MFIs range from small non-profit organizations to large commercial banks

MFI Contd.
funding where needed

An increasing number of MFIs are seeking non-banking financial company

(NBFC) status from RBI to get wider access to capital, including bank finance

MFIs can have the potential to attract more resources given that –
 they become financially viable and self sustaining
 they are integral to the communities in which they operate
 they have the ability to expand services to clients

These institutions can broaden their resource base by

 mobilizing savings
 accessing capital markets
 garnering effective institutional development support

MFIs need to find ways to cut down on their administrative costs and also to
broaden their resource base
Microfinance according to Indian perspective
funding where needed

Why Banks are reluctant ?

Above $20000

$4000-$20000

$1800-$4000

Below $1800

 Uncertainty & default risk.

 Lack of Credit Information.
 The tyranny of collateral.
 Transaction Cost.
 Weak legal framework.
Flipside !

 Absence of flexible products and services

 Collateral
 Transactions costs 12/08/21
Demographic Spread of MFs
funding where needed

12/08/21
Trend So far
funding where needed

As of March 2009, microfinance institutions (“MFIs”) in India reached over 22

million borrowers and had a portfolio outstanding in excess of $2.3 billion.
Illustrates increasing maturity of the sector.
MFIs in other countries such as Brazil and Mexico have higher profit margins, but
they offer significantly larger loans with interest rates typically between 40-65%

12/08/21
Access to microfinance in India
funding where needed

On average, a rural bank branch in India serves almost three times the
number of people served by a non-rural branch.
Micro-loan sizes vary from an initial loan size between $100 and $150 to
subsequent loans of $300 to $500.
The term loans are structured with weekly or monthly repayment
schedules and a 6-month to 2 year term.

12/08/21
Present Scenario
funding where needed

Growing Suicide

Issue in Andhra

RBI Intervention

Capping up of lending rates (24%)

SKS public issue ( good or bad )

12/08/21
Models of Microfinance
funding where needed
Microfinance –Credit Lending Models
funding where needed

1: Associations
An association is formed by the poor in the target community to offer
microfinance services (micro savings, microcredit, micro-insurance, etc.) to
themselves.
It can form on the basis of gender, religion, or political and cultural
orientation of its members.
The association then gathers capital and intermediates between banks, MFIs
and its members.

Example: Self Help Groups, SHGs (India)

2: Bank Guarantees
A donor or government agency guarantees microloans made by a
microfinance/commercial bank to an individual or group of borrowers.
Compulsory deposits by borrowers in such banks are also included in this
model.

Examples: Latin America Bridge Fund

 funding where needed

3: Community Banking/ Grameen Bank/ Village Banking

Created by members of a target community who wish to improve their living
standards and to generate employment.
Guarantees are provided by social collateral (peer-pressure) as services are
distributed through 5-member groups where each member’s eligibility for
loans is based on his/her peer’s performance.

Examples: Grameen Bank (Bangladesh)

4: Cooperatives
Cooperatives are very much like ‘associations and Community Banks’ except
that their ownership structure does not include the poor.
A group of middle or upper class individuals may form a co-op to offer
microfinance services to the poor.

Examples: Co-operative Bank (England)

 funding where needed

5: Credit Unions
In a credit union, members of a target community gather their money and
make loans to one another at low interest rates.
Compared to community banks, credit unions are smaller and non-profit
oriented, charging interest rates that merely allow sustainability.

Example: Vancity Credit Union (Canada)

6: Non-Governmental Organizations (NGOs)

Their activities range from offering microfinance services (loans, insurance,
savings, etc.) to improving credit rating of poor, training, education and
research.
NGOs may also act as intermediaries between the poor and donor agencies
(UN, ADB, World Bank) and operate locally, as well as globally.

Examples: ACCION International (headquarters in USA), KIVA (Headquarters in

USA)
 funding where needed

7: For-profit Banks

The aim is social development as well as financial progress, beyond institutional

sustainability.

Examples: Khushali Bank (Pakistan)

8: ROSCAs Rotating Savings and Credit Associations (ROSCAs)

ROSCAs are small groups, typically composed of women.

Each member makes ‘regular cyclical contributions into a common fund’
Given entirely to one member at the start of each cycle (weekly, monthly,
quarterly).
The benefit of this model is the matching of a client’s cashflows with the loan,
the ability to structure the deal without interest rates, and the absence of over-
head costs.
MFIs - Born with a motive
funding where needed

The business base was small & hence operations were well organized (100%
repayment, 100% trust, smooth run towards the vision of eradication of
poverty)

Lesser number of players

Helping the poor with small loans at the easiest terms possible.
All is well?
funding where needed

The business base has expanded to the entire bottom part of the pyramid

Entry of new players

Financing business at the bottom level

SKS- an example
funding where needed

SKS Microfinance is India’s largest and one of the world’s fastest-growing

microfinance organizations. Its mission is to empower the poor by providing
them collateral-free loans for income generation. SKS Microfinance has 5.8
million clients (2010) in 1,627 branches in 19 states across India and total
assets worth $897.9 million (Sept.'09.) SKS charges an annual effective
interest rate ranging from 26.7% to 31.4% (Mix Market.)
All is not well
funding where needed

Malfunctioning in the entire microfinance

System.
Need for Speed: Cut-throat competition; Greediness;
Multiple Lending: Addicted to high growth; Push sales strategy (pay me later);
Purely mechanical;
Blind Fold: Low acceptance; Confused between wealth & objective;

Bad Company: Covering the rotten apple in the basket;

 funding where needed

Can all be well?

• Self regulation: If I want to be responsible, then no law will prevent me from

being good.

• Powerful Leadership: It is just a matter of getting together, putting our heads

together and making pledges about being transparent, non exploitative and
treating the poor client with dignity.
Strengths
funding where needed

Financial Inclusion-Bringing financial services to the poor people and

making it sustainable by the economies of scale effect.
Helps in the development of the economy by giving the people the
opportunity to establish a sustainable means of income. Eventual
increase in disposable income will lead to economic development and
growth.
Its closeness to its clients and its understanding of their needs.
Microfinance has become the buzzword of the decade raising the
notion that even philanthropy aimed at alleviating poverty c an be
profitable to institutional and individual investors.
Weaknesses.
funding where needed

High interest rates.(26% to 40%)

Lack of transparency in pricing.
Collection methods.-Field officers use coercive and even violent tactics to
collect installments on the microcredit loans
Women act as collection agents for their husbands and sons . Men spend the
money on themselves while women are saddled with credit risk. Some
borrowers have become dependent on loans for household expenditure rather
than using it to generate income.
One of the effects of the infusion of cash into local economies is the increase
in dowries with women forced at times to take microcredit loans as the only
way to pay dowries.
Studies have shown that microcredit are in fact, very often, loaned to people
with existing businesses, not to those who are seeking to establish new
businesses. Many of them used the loans to supplement family income. The
income that went up in business was true only for men and not for women.
This is striking because one of the major beneficiaries of microfinance is
supposed to be women.
Limitations to the growth of MFI
funding where needed

Lack of adequate quantities of risk capital.

Lack of long-term finance to pay for the creation of necessary infrastructure
and pre-operation expenses.
Lack of well trained staff in adequate numbers at all levels.
Inadequate technology.
Remedies
funding where needed

Banks force MFI clients to reduce interest rates.

Major public sector banks and NABARD ,the proposed regulator of
microfinance, are turning the heat on MFI’s lending practices.
SBI with a Rs 800 crore MFI portfolio has laid out a three pronged strategy:
 Ask MFI’s to disclose their lending rates.
 Ask MFI’s to get credit ratings from a professional rating agency.
 Strengthen its base among SHG’s whom it provides loans at 10%.Raise its customer base from
18lakhs to 21.5 lakh.
 Encourage the MFI’s to adopt fair loan practices, good recovery practices and charge
reasonable lending rates.
SBI’s MFI borrowers are mostly NGO’s and NBFC’s .While NGO’s charge 16
-22%,NBFC’s levy up to 26%.
Corporation Bank has asked its MFI’s to facilitate opening of accounts of its
borrowers in their bank to start direct banking relationships. They are
already providing overdrafts for these accounts.
Path breaking MFI’s
funding where needed

1. ASA(Activist for Social Alternatives).Tamil Nadu.The Gram Vidiyal

microfinance project now reaches 2.6 million women.
2. Kiva.org.
3. ACCION International.
4. M-PESA
Future of microfinance
funding where needed

Bringing about financial inclusion by increasing its product range,

improving quality in terms of pricing ,convenience ,product fit and client
protection and also extending its reach to include the remote population,
disabled and ethnic minorities.
Serves as a powerful weapon to fight against poverty and hunger.
The experiences of MTI’s suggests that it is possible to implement a social
business without sacrificing on profitability because it is founded on the
marketing principles of competition,pricing and sustainability.
Thank you!

funding where needed