Project Report on “A critical analysis of Micro finance in India”
SUBMITTED BY: ARVIND KUMAR PANDEY Master of Business Administration (Finance) Skyline Business School Gurgaon 09811916653
Table of Contents Chapter 1-Introduction…………………………………………………………….....................3 1.1 Microfinance Definition………………………………………………………………………3 1.2 Strategic Policy Initiatives…………………………………………………………………….4 1.3 Activities in Microfinance…………………………………………………………………….4 1.4 Legal Regulations……………………………………………………………………………..5 Chapter 2-Micro-Finance in India...............................................................................................6 2.1 Distribution of Indebted Rural Households: Agency wise……………………………………6 2.2 Relative share of Borrowing of Cultivator Households……………………………………….8 2.3 Distribution based on Asset size of Rural Households………………………………………..9 2.4 Banking Expansion…………………………………………………………………………..10 2.5 Microfinance Social Aspects……………………………………............................................11 Chapter 3- Self Help Groups…………………………………………………………………..12 3.1 How self-help groups work………………………………………………………………….12 3.2 Sources of capital and links between SHGs and Banks……………………………………...13 3.3 How SHGs save……………………………………………………………………………...13 3.4 SHGs-Bank Linkage Model………………………………………………………………….14 3.5 Life insurances for self-help group members………………………………………………..16 Chapter 4-Microfinance Models……………………………………………………………….17 Chapter 5- Role, Functions and Working Mechanism of Financial Institutions…………...20 5.1 ICICI Bank…………………………………………………………………………………...20 5.2 Bandhan……………………………………………………………………………………...24 5.3 Grameen Bank……………………………………………………………………………….26 5.4 SKS Microfinance……………………………………………………………………………27 Chapter 6- Marketing of Microfinance Products…………………………………………….29
Chapter 7- Success Factors of Microfinance in India………………………………………...31 Chapter 8- Issues related to Microfinance in India…………………………………………..35 References……………………………………………………………………………………….39
Chapter 1: Introduction
Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have endeavored to provide access to financial services to the poor in creative ways. Governments also have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. 1.1 Microfinance Definition According to International Labor Organization (ILO), “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients”. In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”. "The poor stay poor, not because they are lazy but because they have no access to capital." The dictionary meaning of ‘finance’ is management of money. The management of money denotes acquiring & using money. Micro Finance is buzzing word, used when financing for
micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class of society, women, and poor, downtrodden by natural reasons or men made; caste, creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality, equity and mutual self-help. At the heart of these principles are the concept of human development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their children. Traditionally micro finance was focused on providing a very standardized credit product. The poor, just like anyone else, (in fact need like thirst) need a diverse range of financial instruments to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening of the concept of micro finance--- our current challenge is to find efficient and reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but extending credit to those who require most for their and family’s survival. It cannot be measured in term of quantity, but due weightage to quality measurement. How credit availed is used to survive and grow with limited means.
Who are the clients of micro finance? The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, micro finance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a relatively unstable source of income. Access to conventional formal financial institutions, for many reasons, is inversely related to income: the poorer you are, the less likely that you have access. On the other hand, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal arrangements may not suitably meet certain financial service needs or may
micro credit might have a far more limited market scope than say a more diversified range of financial services. Central government in India has established a strong & extensive link between NABARD (National Bank for Agriculture & Rural Development). State Cooperative Bank. state. payment and remittance services. which includes various types of savings products. district and village level.exclude you anyway.
. SHG & NGOs and support mechanism.
Due to the sheer size of the population living in poverty. It depends on local conditions and political climate. About 87 percent of the poorest households do not have access to credit. Over the last five years. official estimates range from 26 to 50 percent of the more than one billion population. the supply is less than $2. but rather. the microfinance industry has achieved significant growth in part due to the participation of commercial banks. For example. and various insurance products. Primary Agriculture & Marketing Societies at national. India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world’s poverty by 2015. Individuals in this excluded and under-served market segment are the clients of micro finance. would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. The demand for microcredit has been estimated at up to $30 billion. For instance.2 billion combined by all involved in the sector. District Cooperative Banks. As we broaden the notion of the types of services micro finance encompasses. The Need in India
India is said to be the home of one third of the world’s poor. many very poor farmers may not really wish to borrow. the poverty situation in India continues to be challenging. the potential market of micro finance clients also expands. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Despite this growth. activeness of cooperatives.
It is better to provide grants to families who are destitute. “The job of government is to enable financial services.” “Donor funds should complement private capital. which chokes off the supply of credit. microfinance must pay for itself. Microfinance institutions should measure and disclose their performance – both financially and socially. Financial needs and Financial services In developing economies and particularly in the rural areas. many activities that would be classified in the developed world as financial are not monetized: that is. not to provide them.” Donors should focus on capacity building.” Subsidies from donors and government are scarce and uncertain. not compete with it. Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system.” “The key bottleneck is the shortage of strong institutions and managers. in a war zone or after a natural disaster. build up assets and/or cushion themselves against external shocks. 2004: • •
Poor people need not just loans but also savings. and so to reach large numbers of poor people.
• • • • • • •
Microfinance means building permanent local institutions. money is not used to
. This situation can occur for example. or so poor they are unlikely to be able to generate the cash flow required to repay a loan.Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10. insurance and money transfer services. Microfinance must be useful to poor households: helping them raise income. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs.
Microfinance can also be distinguished from charity. “Microfinance can pay for itself.
As Marguerite Robinson describes in The Microfinance Revolution. childbirth. and to play a role in reducing poverty. In Stuart Rutherford’s recent book The Poor and Their Money. harassment or death. the microfinance industry’s objective is to satisfy the unmet demand on a much larger scale. education. homebuilding. old age.carry them out. several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. “microfinance began to develop as an industry”. While much progress has been made in developing a viable. injury. unemployment. The obstacles or challenges to building a sound commercial microfinance industry include: • • • • •
Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies
. etc. theft. Disasters: such as fires. But circumstances often arise in their lives in which they need money or the things money can buy. floods. Common substitutes for cash vary from country to country but typically include livestock. Personal Emergencies: such as sickness. securing a job (which often requires paying a large bribe). widowhood. commercial microfinance sector in the last few decades. cyclones and man-made events like war or bulldozing of dwellings. In the 2000s. he cites several types of needs:
Lifecycle Needs: such as weddings. primarily through creating and exchanging different forms of non-cash value. improving housing. the 1980s demonstrated that “microfinance could provide large-scale outreach profitably. funerals. grains. buying land or equipment. jewellery and precious metals. poor people have very little money.” and in the 1990s. Investment Opportunities: expanding a business. Almost by definition.
Poor people find creative and often collaborative ways to meet these needs.
. Ø The level of impact relates to the length of time clients have had access to financial services. which allowed charity institutions to become formal financial intermediaries a loan fund board was established in 1836 and a big boom was initiated. microfinance empowers women. the concept of providing financial services to low income people is much older. Ø By supporting womens economic participation. thereby promoting gender-equity and improving household well being. While the emergence of informal financial institutions in Nigeria dates back to the 15th century. The Origin of Microfinance Although neither of the terms microcredit or microfinance were used in the academic literature nor by development aid practitioners before the 1980s or 1990s. they were first established in Europe during the 18th century as a response to the enormous increase in poverty since the end of the extended European wars (1618 – 1648). In 1720 the first loan fund targeting poor people was founded in Ireland by the author Jonathan Swift. Microfinance impact studies have demonstrated that Ø Microfinance helps poor households meet basic needs and protects them against risks. they provided financial services to almost 20% of Irish households. respectively. The credit cooperatives created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1. After a special law was passed in 1823.•
Need for more dissemination and adoption of rural. Ø The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. At this time.4 million people by 1910. agricultural microfinance methodologies
Role of Microfinance: The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral . alleviating poverty and unleashing human creativity and endeavor of the poor people. Their outreach peaked just before the government introduced a cap on interest rates in 1843.
and to improve the moral and physical values of people and also.5 to poor women in India. Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia without any subsidies and is now “well-known as the earliest bank to institute commercial microfinance”.C. Although the latter examples still were subsidized projects. In 1973 ACCION International. Some of the most prominent ones are presented below. they used a more business oriented approach and showed the world that poor people can be good credit risks with repayment rates exceeding 95%. being profitable even during the Asian financial crisis of 1997 – 1998. Once a loss making institution channeling government subsidized credits to inhabitants of rural Indonesia it is now the largest MFI in the world. During this same time the Dutch colonial administrators constructed a cooperative rural banking system in Indonesia based on the Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI). tried to use the German experience to address poverty which resulted in more than nine million poor Indians belonging to credit cooperatives by 1946.He stated that the main objectives of these cooperatives “should be to control the use made of money for economic improvements. microfinance practitioners and representatives of various educational institutions and donor agencies from 137 different countries gathered in Washington D. While this is not true with regard to the achievements made in Europe during the 19th century. One year later the Self-Employed Women’s Association started to provide loans of about $1. now known as the largest MFI in the world. even if the interest rate charged is higher than that of traditional banks.” In the 1880s the British controlled government of Madras in South India. Another milestone was the transformation of BRI starting in 1984.900 policymakers. it still can be seen as a turning point with an ever increasing impact on the view of politicians and development aid practitioners throughout the world. The failure of subsidized government or donor driven institutions to meet the demand for financial services in developing countries let to several new approaches. This was the start of a nine year long
. their will to act by themselves. for the first Micro Credit Summit. a United States of America (USA) based non governmental organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus started what later became known as the Grameen Bank by lending a total of $27 to 42 people in Bangladesh. In February 1997 more than 2. Microfinance Today In the 1970s a paradigm shift started to take place.
NABARD. Since the campaign started the average annual growth rate in reaching clients has been almost 40 percent. 2005 Working group on Financing NBFCs by Banks.2 Strategic Policy Initiatives Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are:
Working group on credit to the poor through SHGs. As the president of the World Bank James Wolfensohn has pointed out. 1995 The National Microfinance Taskforce.3 Activities in Microfinance Microcredit: It is a small amount of money loaned to a client by a bank or other institution. 2002 Microfinance Development and Equity Fund. often without collateral. Microcredit can be offered.778 of them being amongst the poorest before they took their first loan. NABARD.594. If it has continued at that speed more than 100 million people will have access to microcredit by now and by the end of 2005 the goal of the microcredit summit campaign would be reached. Micro savings: These are deposit services that allow one to save small amounts of money for future use. with 41. Often without minimum balance requirements.606. to an individual or through group lending.080 clients have been reached through 2527 MFIs by the end of 2002. According to the Microcredit Summit Campaign Report 67. 1999 Working Group on Financial Flows to the Informal Sector (set up by PMO).campaign to reach 100 million of the world poorest households with credit for self employment by 2005.
. these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses. NGOs.
1. providing financial services to 100 million of the poorest households means helping as many as 500 – 600 million poor people.RBI
4 Legal Regulations
1. usually across borders to family and friends. Remittances: These are transfer of funds from people in one place to people in another. Compared with other sources of capital that can fluctuate depending on the political or economic climate. health or the ability to work. businesses and other organizations make a payment to share risk. remittances are a relatively steady source of funds. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property.Micro insurance: It is a system by which people.
In January 2000. 1882. There has been a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also borrow. 1956 and are governed under the RBI Act. and the Cooperative Societies Acts of the respective state governments for cooperative banks.Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of 1934.
. There is no specific law catering to NGOs although they can be registered under the Societies Registration Act. or the relevant state acts. 1860. Banking Regulation Act. Absence of liquidity requirements is concern to the safety of the sector. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory organizations. the Indian Trust Act. Regional Rural Banks Act. the RBI essentially created a new legal form for providing microfinance services for NBFCs registered under the Companies Act so that they are not subject to any capital or liquidity requirements if they do not go into the deposit taking business. NBFCs are registered under the Companies Act.
A more refined model of micro-credit delivery has evolved lately.000 crores. there are three segments. private MFIs have had limited outreach. micro-Finance scene is dominated by Self Help Groups (SHGs) . increase the number of years of schooling their children receive. and manual labourers in forestry. are those who are landless and engaged in agricultural work on a seasonal basis. This changing face of microfinance in India appears to be positive in terms of the ability of microfinance to attract more funds and therefore increase outreach. aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'. They are:
At the very bottom in terms of income and assets. Microfinance changing the face of poor India Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In terms of demand for micro-credit or micro-finance. which demand funds. microfinance clients increase their income and assets. Research across the globe has shown that. When compared to the wider SHG bank linkage movement in India. In India. the total demand for credit requirements for this part of Indian society is somewhere around Rs 2. In the Indian context terms like "small and marginal farmers".Banks linkage Programme. which emphasizes the combined delivery of financial services along with technical assistance.
. we have seen a recent trend of larger microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). over time.00. As against this. and improve the health and nutrition of their families. " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. according to even the most conservative estimates. and agricultural business development services.Chapter 2: Microfinance in India At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores in the Indian banks’ credit outstanding. However.
a small part of which also serves consumption needs. One of the statement is really appropriate here. This will lead to a better India and will definitely fulfill the dream of our late Prime Minister. Mrs. such as livestock. and for contingencies such as illness. When you have got a little. though they live barely above the poverty line and also suffer from inadequate access to formal credit. vendors.
Well these are the people who require money and with Microfinance it is possible.mining.
. borewells and livestock in case of farmers. and various service enterprises. etc. it is often easy to get more. household industries. The great difficulty is to get that little. Right now the problem is that. Among non-farm activities. and workers in household micro-enterprises. it is SHGs' which are doing this and efforts should be made so that the big financial institutions also turn up and start supplying funds to these people. weavers and those self-employed in the urban informal sector as hawkers.
The next market segment is small and marginal farmers and rural artisans. and others engaged in dairying. repair workshops. this segment includes those in villages and slums. Indira Gandhi.e. Poverty. which is as: “Money. This segment mainly needs credit for working capital. says the proverb makes money. This segment requires.”Adams Smith. machinery) and worksheds in case of non-farm workers. construction and transport. consumption credit during those months when they do not get labour work. They also need credit for acquiring small productive assets. fishery. such as irrigation pumpsets. This segment also needs term credit for acquiring additional productive assets. groundnut. These persons are not always poor.
The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat. running provision stores. first and foremost. cotton. poultry. engaged in processing or manufacturing activity. tea shops. and equipment (looms. i. using which they can generate additional income.
60% of people depend on agriculture. About 25 million people in India are under below poverty line. The obvious result is abject poverty . The production oriented approach of planning without altering the mode of production could not but result of the gains of development by owners of instrument of production. prevalence of massive unemployment and underemployment . about 51 % of people house possess only 10% of the total asset of India . According to Reserve Bank of India. the buzzing word of this decade was meant to cure the illness of rural economy. It is second populated country in the world and around 70 % of its population lives in rural area. Present Scenario of India: India falls under low income class according to World Bank. Microfinance . The major factor account for high incidence of rural poverty is the low asset base. With low per capita income. They Have come up with development programmes like Integrated Rural Development progamme (IRDP). With this
. But these progamme have not been able to create massive impact in poverty alleviation. prevalence of low technology and poor economics organization and instability of output of agriculture production and related sectors have made India one of the poor countries of the world. low sex ratio. The mode of production does remain same as the owner of the instrument have low access to credit which is the major factor of production.This has resulted low production capacity both in agriculture (which contribute around 22-25% of GDP ) and Manufacturing sector. This is not enough to provide food to more than one individual . Rural Labour Employment Guarantee Programme (RLEGP) etc. misdistribution of wealth and assets . as a result there is chronic underemployment and per capita income is only $ 3262. Thus in Nineties National bank for agriculture and rural development(NABARD) launches pilot projects of Microfinance to bridge the gap between demand and supply of funds in the lower rungs of rural economy. heavy population pressure. National Rural Employment Programme (NREP) . low rate of education. Rural people have very low access to institutionalized credit( from commercial bank). Poverty alleviation programmes and concepualisation of Microfinance: There has been continuous efforts of planners of India in addressing the poverty . low rate of capital formation . exploitation.Today India is facing major problem in reducing poverty.
Deprived of the basic banking facilities. 2. Percentage distribution of debt among indebted Rural Labor Households by source of debt Sr. The Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks.0 7.5 9.0 36.7 1. Self Sufficiency and Self Help gained momentum.0 100. This shows a comparatively better penetration of the banking and financial institutions in rural India. institutional credit accounted for around two-thirds of the credit requirement of rural households.1 21. Source of debt Households With cultivated land
Without cultivated land
.concept of Self Reliance. The above survey result shows that till 1991.7 0.3 0. GoI 1992 Seeing the figures from the above table. friends etc.0 4.6 33.5 5.0 10.6 64.1 Distribution of Indebted Rural Households: Agency wise Credit Agency Government Cooperative Societies Commercial banks and RRBs Insurance Provident Fund Other Institutional Sources All Institutional Agencies Landlord Agricultural Moneylenders Professional Moneylenders Relatives and Friends Others All Non Institutional Agencies All Agencies Percentage of Rural Households 6. it is evident that the share of institutional credit is much more now. the rural and semi urban Indian masses are still relying on informal financing intermediaries like money lenders.0
Source: Debt and Investment Survey. No. family members.
S.23 7.9 26.27% to 17. In comparison to the previous enquiry.14 3.55 8.7 7.1918) to the tune of 32% of the total debt of these households as against 28% during 199394.00
Source: Rural labor enquiry report on indebtedness among rural labor households (55th Round of N.00
.68 3.86 31.09 17. the banks continued to be the single largest source of debt meeting about 17 percent of the total debt requirement of these households.3 36.76 14.99 16.5 66.51 100.91 5.52 100. Among the institutional sources of debt. Money lenders alone provided debt (Rs.35 28.52 100.7
1971 68.2 Relative share of Borrowing of Cultivator Households (in per cent) Sources of Credit Non Institutional Of which: Moneylenders Institutional Of which:
1951 92.1 31. the dependence on co-operative societies has increased considerably in 1999-2000.8 61.76 9.37% respectively during 1999-2000 survey.37 13.33 35.8 16.7
5. However. About 64% of the total debt requirement of these households was met by the non-institutional sources during 1999-2000.1 2 3 4 5 6 7 8
Government Co-operative Societies Banks Employers Money lenders Shop-keepers Relatives/Friends Other Sources Total
4.13 15. During 1999-2000 as much as 13% of the debt was raised from this source as against 8% in 1993-94.58 3. Relatives and friends and shopkeepers have been two other sources which together accounted for about 22% of the total debt at all-India level.2 18.2
1961 81.) 1999-2000 The table above reveals that most of the rural labour households prefer to raise loan from the non-institutional sources.70 7. 2.7 69.3 49. in the case of the banks and the government agencies it decreased marginally from 18.47 15.6 17.46 14.12 6.19 6.1 63.78 19.19% and 5.3
2002* 38.88% and 8.S. The institutional sources could meet only 36% of the total credit requirement of the rural labour households during 1999-2000 with only one percent increase over the previous survey in 1993-94.
0 35. 1992
.3 Distribution based on Asset size of Rural Households (in per cent) Household Assets (Rs ‘000) Less than 5 5-10 10-20 20-30 30-50 50-70 70-100 100-150 150-250 250 and above All classes Institutional Agency 42 47 44 68 55 53 61 61 68 81 66 Non-Institutional Agency 58 53 56 32 45 47 39 39 32 19 34 All 100 100 100 100 100 100 100 100 100 100 100
Source: Debt and Investment Survey.9 100.6 0.
2. the growth has flattened during the last three decades. started picking up from the 1990s and reached 27 per cent in 2001.6 100.etc Commercial banks Unspecified Total
3.8 100. The share of moneylenders in the total non institutional credit was declining till 1981.2 3.0
22. Though. At the same time the share of commercial banks in institutional credit has come down by almost the same percentage points during this period. 2003 Source: All India Debt and Investment Surveys Table shows the increasing influence of moneylenders in the last decade.0 2. 59th round.3 0. GoI.0
* All India Debt and Investment Survey.1 100.8 28. NSSO.3 100. the share of cooperative societies is increasing continuously.0
Almost 75 per cent of the production credit (which accounted for about one-third of the total credit availed of by the rural masses) was met by the formal sector. massive expansion of branch network in rural areas. mainly banks and cooperatives. subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the district level and a specialized apex bank for agriculture and rural development (NABARD) at the national level. It witnessed the nationalization of existing private commercial banks.000 worth of physical assets. Looking at the findings of the study commissioned by Asia technical Department of the World Bank (1995). the purpose or the reason behind taking credit by the rural poor was consumption credit. savings. relatives. This was due to the requirement of physical collateral by banking and financial institutions for disbursing credit. etc. moneylenders. the most convenient source of credit was non institutional agencies like landlords. For households with less than Rs 20.4 Banking Expansion Starting in the late 1960s.The households with a lower asset size were unable to find financing options from formal credit disbursement sources. 2. production credit and insurance. India was the home to one of the largest state interventions in the rural credit market. The Net State Domestic Product (NSDP) is a measure of the economic activity in the state and comparing it with the utilization of bank credit or bank deposits indicates how much economic
. Almost entire demand for the consumption credit was met by informal sources at high to exploitive interest rates that varied from 30 to 90 per cent per annum. mandatory directed credit to priority sectors of the economy. Consumption credit constituted two-thirds of the credit usage within which almost three-fourths of the demand was for short periods to meeting emergent needs such as illness and household expenses during the lean season. friends. This phase is known as the “Social Banking” phase.
increased well being of women and their families and wider social and political empowerment. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at around 75%-80% in Bihar and Jharkhand or these states are not as under banked as thought to be.g. literacy. as well as in other activities (income generation. E.activity is being financed by the banks and whether there exists untapped potential for increasing deposits in that state. child care and nutrition.help groups (SHGs) play today a major role in poverty alleviation in rural India.
. Chapter 3: Self Help Groups (SHGs) Self. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C). etc. Increasing evidence of the centrality of gender equality to poverty reduction and women’s higher credit repayment rates led to a general consensus on the desirability of targeting women. Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the 1990s. 2. Contribution to women’s ability to earn an income led to their economic empowerment.).5 Microfinance Social Aspects Micro financing institutions significantly contributed to gender equality and women’s empowerment as well as poor development and civil society strengthening. The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation. natural resources management. albeit in very small amounts. 3. voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per the group members' decision". economically homogenous affinity groups of rural poor.1 How self-help groups work NABARD (1997) defines SHGs as "small.
These contributions can be very small (e. they are often the ones who migrate during the lean season. they now make up 90% of all SHGs. or only youth.governmental agencies. preferring to focus on the next wealth category). for reasons such as: (a) Social factors (the poorest are often those who are socially marginalized because of caste affiliation and those who are most skeptical of the potential benefits of collective action). or a mix of these. or only women. running of a communal business. thus making group membership difficult). discuss joint activities (such as training. (b) Economic factors (the poorest often do not have the financial resources to contribute to the savings and pay membership fees.g. (c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the most difficult to reach and motivate. a treasurer. A common characteristic of the groups is that they meet regularly (typically once per week or once per fortnight) to collect the savings from members. and sometimes other office holders. After a period of consistent savings (e.Most SHGs in India have 10 to 25 members. 10 Rs per week).g. 6 months to one year) the SHGs start to give loans from savings in the form of small internal loans for micro enterprise activities and consumption. and to mitigate any conflicts that might arise. Only those SHGs that have utilized their own funds well are assisted with external funds through linkages with banks and other financial intermediaries. implementing agencies tend to leave them out. However. it is generally accepted that SHGs often do not include the poorest of the poor. Most SHGs start without any external financial capital by saving regular contributions by the members. etc. The rules and regulations of SHGs vary according to the preferences of the members and those facilitating their formation.). As women's SHGs or sangha have been promoted by a wide range of government and non. decide to which member to give a loan.2 Sources of capital and links between SHGs and Banks
. 3. Most SHGs have an elected chairperson. a deputy. who can be either only men.
If the members’ need for funds exceeds the group’s accumulated savings. demand from SHGs is not price-sensitive. They know that rapid access to funds is more important than their cost. because they represent the combined banking business of some twenty ‘micro-customers’. their aim is often to link up with financial institutions in order to obtain further loans for investments in rural enterprises.SHGs can only fulfill a role in the rural economy if group members have access to financial capital and markets for their products and services. The group aggregates the small individual saving and borrowing requirements of its members. depending on the group's record of repayment. and they also know. While the groups initially generate their own savings through thrift (whereby thrift implies savings created by postponing almost necessary consumption. but once he has done this he need not concern himself with the individual loans made by the group to its members. recommendations by group facilitators. such as a micro-finance non-government organization. Unlike many customers. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the loan amount is proportionate to the group's savings) or as fixed amounts. collaterals provided. He can treat the group as a single customer. they may deposit it in a bank. and the even higher cost of funds from money lenders. without having to change its methods of operation. Illiterate village women are sometimes better bankers than some with more professional qualifications. even though they might not be able to calculate the figures. The banker must assess the competence and integrity of the group as a micro-bank. 3. and the bank needs only to maintain one account for the group as a single entity. If they do not wish to use the money.3 How SHGs save Self-help groups mobilize savings from their members. etc. usually at apparently high rates of interest which reflect the members’ understanding of the high returns they can earn on the small sums invested in their micro-enterprises. The system is very flexible. to augment their own fund. or the uses to which these loans are put. and may then on-lend these funds to one another. while savings imply the existence of surplus wealth). that the typical micro-enterprise earns well over 500% return
. they may borrow from a bank or other organization. whose total business and transactions are probably similar in amount to the average for his normal customers. Any bank branch can have a small or a large number of such accounts.
or from ‘new generation’ institutions such as Basix Finance at 18. M. 1997. but they are also willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%.4 SHGs-Bank Linkage Model NABARD is presently operating three models of linkage of banks with SHGs and NGOs: Model – 1: In this model. First. Model – 2: In this model. 3.finance intermediaries. About 9% of SHGs and 13% of loan amounts are using this model. The groups thus charge themselves high rates of interest. the NGOs act as both facilitators and micro. It takes initiatives in forming the groups. groups are formed by NGOs (in most of the cases) or by government agencies. they promote the groups. The groups are nurtured and trained by these agencies. About 16% of SHGs and 13% of loan amounts are using this model (as of March 2002). they are happy to take advantage of the generous spread that the NABARD subsidized bank lending rate of 12% allows them. after observing their operations and maturity to absorb credit. the facilitating agencies continue their interactions with the SHGs. banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies.on the small sum invested in it (Harper. The bank then provides credit directly to the SHGs. Most linkage experiences begin with this model with NGOs playing a major role. p.5% or 21%. Model – 3: Due to various reasons. 15). In such cases. nurture and train them and then approach banks for bulk loans for on-lending to the SHGs. While the bank provides loans to the groups directly. nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. This model has also been popular and more acceptable to banks. as some of the difficult functions of social dynamics are externalized. About 75% of SHGs and 78% of loan amounts are using this model. Comparative Analysis of Micro-finance Services offered to the poor
. the bank itself acts as a Self Help Group Promoting Institution (SHPI).
The company will be targeting self-help groups.finance Industry 3.Source: R. with the aim of giving to the woman in the event of accidental death of her husband and to support her minor children in the event of her death. of which there are around 200.5 Life insurances for self-help group members The United India Insurance Company has designed two PLLIs (personal line life insurances) for women in rural areas. Chapter 4: Micro Finance Models
.000 in the country. giving personal accident and hospitalization covers besides cover for damage to dwelling due to fire and allied perils. and (2) The Unimicro Health Scheme. The two policies are (1) the Mother Teresa Women & Children Policy. with 15-20 women in a group. Arunachalam .Alternative Technologies in the Indian Micro.
Legal Forms of MFIs in India Types of MFIs 1. Micro Finance Institutions (MFIs): MFIs are an extremely heterogeneous group comprising NBFCs.MFIs Estimated Legal Acts under which Registered Number* 400 to 500 Societies Registration Act.1. 1934 Act enacted by State Government
Companies (NBFCs) Total
Source: NABARD website
. While there is no published data on private MFIs operating in the country. 1882 b. Since 2000. For Profit MFIs a.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative Societies a.800 6 Indian Companies Act. 1860 or similar Provincial Acts
Indian Trust Act.) Non-Banking Financial 700 . only a handful of NGOs were “into” financial intermediation using a variety of delivery methods. 1956 2. Not for Profit MFIs a. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK). 1956 Reserve Bank of India Act.) Non-profit Companies 10 Section 25 of the Companies Act. trusts and cooperatives. societies. their numbers have increased considerably today. SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. the number of MFIs is estimated to be around 800.) NGO . Though initially.
If the MFI fulfils the “true sale” criteria. This regulation evolved at a time when there were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people have confidence could mobilize savings of gullible public and then vanish with them. It remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse. supervision and recovery. from first contact to final repayment. this model has two very different and interesting operational features:
. and then works hand in hand with that MFI to extend loans and other services. the MFI acts as an agent and takes care of all relationships with the client. Banking Correspondents The proposal of “banking correspondents” could take this model a step further extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank.variation of this model is where the MFI. the model is similar to the partnership model: the MFI originates the loans and the bank books them. A sub . But in fact.
3. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. as an NBFC. Such refinancing through securitization enables the MFI enlarged funding access. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring. On paper. holds the individual loans on its books for a while before securitizing them and selling them to the bank.2. the bank forms its own MFI.
4. It would use the ability of the MFI to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits. perhaps as an NBFC. Bank Partnership Model This model is an innovative way of financing MFIs. In other words. the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure. Service Company Model Under this model.
Haruhiko Kuroda. In the service company model.
.(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the client to be reached at lower cost than in the case of a stand–alone MFI. such as individual loans for SHG graduates. remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance. Functions and Working Mechanism of Financial Institutions 5. Asian Development Bank. (b) The Partnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth.
Chapter 5 Role. President. the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage. MFIs may contract with many banks in an arms length relationship. it also allows rapid scale up. The Service Company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products.1 ICICI Bank “ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity” . In the partnership model. In case of banks which have large branch networks.
“There is no dearth of funds today. Through this program.
. Bank Led Model The bank led model was derived from the SHG-Bank linkage program of NABARD. However. Bank of Madura's SHG development program was initiated in 1995.20 billion (US$4. By 2000. and ICICI believes grant money should be limited to the creation of facilitative infrastructure. says Nachiket Mor. trained and initiated small groups of women to undertake financial activities like banking. unlike a few years ago”. “We need to stop sending government and funding agencies the signal that microfinance is not a commercially viable system”.000 microfinance clients in 2001. rather than spending time in developing rural infrastructure of its own. ICICI Bank is now (2007) lending to 1. it had created around 1200 SHGs across Tamil Nadu and provided credit to them. and its outstanding portfolio has increased from Rs.5 million) to Rs. 0. ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. A few years ago. in 2000. From 10. 9.98 billion (US$227 million).8 million clients through its partner microfinance institutions. Executive Director of ICICI Bank.ICICI’s microfinance portfolio has been increasing at an impressive speed. Spandana. says Padmaja Reddy. As a result of banks entering the game. which had significant presence in the rural areas of South India. especially Tamil Nadu. ICICI Bank announced merger of Bank of Madura (BoM). the sector has changed rapidly.9 million and 87 branches. banks financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies. as banks are looking into MFIs favorably. the CEO of one of ICICI Bank’s major MFI partners. There is an increasing shift in the microfinance sector from grant-giving to investment in the form of debt or equity. saving and lending. Through this program. it had formed. these clients had never been served by a formal lending institution. with a customer base of 1.
the risk is being entirely borne by the MFI. Other Microfinance Initiatives As a part of microfinance initiatives in the agriculture sector. pesticides and fertilizers and other services associated with agriculture.Partnership Models A model of microfinance has emerged in recent years in which a microfinance institution (MFI) borrows from banks and on-lends to clients. Working in close association with farmers. Later. sowing techniques. credit and technology or by an NGO that provided all the services that farmers needed for their agricultural needs. ICICI Bank developed Farmer Service Centers (FSC). which limits the advances from banks. The FSCs arranged to procure the produce through agents and sold it in organized agricultural markets thus getting better realization. In addition. MFIs are unable to provide risk capital in large quantities. ICICI Bank came up with a plan where the NGO/MFI continued to promote their microfinance schemes. weed control. The FSCs also provided crop-related information and services to farmers. pest control. mobilization power and infrastructure of MFIs and NGOs. which limits its risk-taking. Under this model. ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary financial support to their activities. ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit distribution channels and could take advantage of the expertise of these institutions in rural areas. Initially. FSCs provided them with services like advice on seeds. The Future
. Through this model. FSCs were also managed by an extension service organization which provided inputs. usage and dosage of herbicides. while the bank met the financial requirements of the borrowers. few MFIs have been able to grow beyond a certain point. An FSC was managed by an agricultural input supply company which supplied inputs like seeds and technical knowhow to the farmers. This model aimed at synergizing the comparative advantages and financial strength of the bank with social intermediation. apart from facilitating the sale of agricultural produce.
"We would reduce our stake in the company when required. 2001. 2007 at 20:54 hours IST 2. NGOs. Another plan to increase the reach in rural areas is to launch mobile ATM services. SIG has been involved in a project in the southern state of Tamil Nadu to find out how wireless technology can be applied in the development of low cost models of banking. dairy companies.000 sexworkers in and around the city." he said. seed companies. the bank plans to launch the programme in Kolkata by entering into a tie-up with Durbar Mahila Samwanaya Samitee. which was launched on Thursday. For starters. Taking the FSC initiative further. ICICI Bank is the lead facilitator. ICICI Bank launches new initiative in micro-finance ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and Operations Private Ltd (FINO). March 14. FINO is an independent entity. March 14: In a novel way to help sex-workers to live more meaningfully. an NGO working for the welfare of around 65.These agents contact several borrowers. According to Mr Nachiket Mor. country's largest private sector bank. ICICI Bank plans to provide farmers credit from sugar companies. ICICI Bank is planning to offer financial assistance to them though the micro-finance route. ICICI Bank. FINO would provide technological solutions as well as services to finance providers to reach the underserved in the country. ICICI Bank to offer micro-finance to sex-workers Mumbai. thus expanding the reach of ICICI Bank at a low cost. Source: (Press Trust of India) Posted online: Wednesday.
. Deputy Managing Director. micro-credit institutions and food processing industries. ICICI Bank branded trucks have started carrying ATMs through a number of villages Some Articles of News Paper: 1. July 13.
speaking on the sidelines of the press conference to launch FINO. "There was a need for automated structured data system like FINO. NBFCs." The company expects to reach 25 million customers in five years and two million customers by the end of 2007. he said. which includes individual customer credit rating and analytics based on transaction history. The card would also offer multiple products including savings. MFIs. The company is working on providing technological solutions in insurance. thus bringing them into mainstream banking. said Mr Khera. At present. FINO would charge Rs 25-30 per account every year. said Mr Khera. he said. "Essential pieces of infrastructure are missing in India. The company would also build-up customer database. It also launched biometric cards for customers. which would be a proof of identity and give collateral to them. CEO. The company has an authorised capital of Rs 50 crore. It is interacting with Nabard. Core banking products FINO has partnered with IBM and i-flex to offer core banking products. FINO is an initiative in the micro-finance sector. loans. especially the health insurance sector to the under-privileged. 3. It would target 300-400 million people who do not have access to basic financial services. etc would directly or indirectly tie up with FINO to use its services. co-operative banks. FINO aims bringing scale to "micro" business leading to lowering of costs for the local financial institutions (LFIs) and act as an internal technology department for the LFIs. RRBs." he said. fixed deposits and remittances. SIDBI and other banks to give shape to what FINO does. ICICI Bank's thrust on micro-finance
.ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2007. therefore there was a need for an intervention like FINO. said Mr Manish Khera. insurance. We lack credit-tracking mechanism. It would also provide credit bureau services. recurring deposits. FINO." said Mr Mor. the bank has tieups with 100 MFIs.
as the MFI has an assured source of funds for expanding and
. This model is therefore likely to have very high leveraging capacity. ICICI Bank has entered into partnerships with various microfinance institutions (MFI) and non-Government organisations (NGOs) to scale up its micro lending business.CHENNAI.). established by K. maintenance of groups. the partnership model would provide assured source of funding to NGOs and MFIs. 150 crores as on February 29.
The MFI as Collection Agent To address these constraints. had initiated a programme for microcredit through self-help groups. Mr. ICICI Bank has entered into a memorandum of understanding with Microcredit Foundation to outsource SHG development. ICICI Bank. The bank had extended advances to the tune of Rs. Nachiket Mor. MARCH 9. the Executive Director said. so that the risk for the MFI is separated from the risk inherent in the portfolio. former Chairman of Bank of Madura in 2002. ICICI Bank initiated a partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary. This source of financing is advantageous for MFIs because it is treated like equity in the balancesheet and enables it to raise money without additional equity. Mor said. M. Thiagarajan. Since then the SHG programme had grown substantially and 10. One of the micro finance institutions. today. Executive Director.The loans are contracted directly between the bank and the borrower. under this scheme. this year. credit linkage and recovery of loans.398 villages.03 lakh women spread across 2. which is an expensive financing source. `Microcredit Foundation of India'. The bank had acquired a network of self-help groups (SHGs) developed by the erstwhile Bank of Madura after its merger with ICICI Bank.175 groups had been promoted reaching out to 2. Addressing presspersons here. said. This model is unique in that it combines debt as mezzanine finance to the MFI (Mezzanine finance combines debt and equity financing: it is debt that can be converted by the lender into equity in the event of a default.
it allows ICICI Bank to reach new markets.9 million) at an agreed discount rate. while avoiding costs associated with entering the market directly.
Beyond Microcredit Microfinance does not only mean microcredit. This insurance policy compensates the insured against the likelihood of diminished agricultural output/yield resulting from a shortfall in the anticipated normal rainfall within the district. ICICI’s Social Initiative Group. The insurance policy is linked to a rainfall index. 215 million (US$4. have developed India’s first index-based insurance product. Securitization Another way to enter into partnership with MFIs is to securitize microfinance portfolios. a large MFI operating in rural areas of the state of Andra Pradesh. The interest paid by SHARE is almost 4% less than the rate paid in commercial loans. along with the World Bank and ICICI Lombard. the insurance company set up by ICICI and Canada Lombard.deepening credit. Technical assistance and the collateral deposit of US$325. This deal frees up equity capital. and ICICI does not limit itself to lending. On the other hand. subject to a maximum of the sum insured. the largest ever securitization deal in microfinance was signed between ICICI Bank and SHARE Microfinance Ltd. the bank can hedge its own risks. Under this agreement. Partial credit provision was provided by SHARE in the form of a guarantee amounting to 8% of the receivables under the portfolio. ICICI chose this model because it expands the retail operations of the bank by leveraging comparative advantages of MFIs. allowing SHARE to scale up its lending. ICICI purchased a part of SHARE’s microfinance portfolio against a consideration calculated by computing the Net Present Value of receivables amounting to Rs. And by trading this high quality asset in capital markets.000 (93% of the guarantee required by ICICI) were supplied by Grameen Foundation USA. In 2004. Technology
. by way of a lien on fixed deposit.
For example. which in turn
.One of the main challenges to the growth of the microfinance sector is accessibility. the CMFR recognizes that while MFIs aim to meet the credit needs of poor households. These have implications in terms of the scale and profitability of client enterprises and efficiency of household budget allocation. and others. inventive channels of delivery. To maximize the benefits of these innovations. research-based advocacy. are in the process of developing exactly such a platform. infrastructure. the development of a high quality shared banking technology platform which can be used by MFIs as well as by cooperatives banks and regional rural banks is needed. I-Flex. there are other missing markets and constraints facing households. some of the best Indian information technology companies specialized in financial services. impact of MFI policies and strategies. Finally. combination of microfinance and other development interventions. costs and profitability of microfinance organizations. requires new. ICICI is strongly encouraging such an effort to take place. Through research. At a recent technology workshop at the Institute for Financial Management Research in Chennai. contract and product designs. people’s behavior and psychology with respect to financial services. economics of micro-enterprises. The use of technologies such as kiosks and smart cards will considerably reduce transaction costs while improving access. constraints to household productivity. evidence of credit constraints. 3iInfotech. high level training and strategy building. such as healthcare. Wipro and Infosys. and the effect of regulations. the ICICI Bank Alternate Channels Team presented the benefits of investing in a common technology platform similar to those used in mainstream banking to some of the most promising MFIs. The ICICI Bank technology team is developing a series of innovative products that can help reduce transaction costs considerably. in which 70% of the population lives in rural areas. The CMFR Research Unit supports initiatives aimed at understanding and analyzing the following issues: impact of access to financial services. it is piloting the usage of smart cards with Sewa Bank in Ahmedabad. The Indian context. it aims to systematically establish the links between increased access to financial services and the participation of poor people in the larger economy. and gaps in knowledge. The Centre for Microfinance Research ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute for Financial Management Research (IFMR) in Chennai.
health.99%. Loan outstanding stands at Rs. roads. Till date.
5. it was giving capacity building support to local microfinance institutions working in West Bengal. water. Bandhan started with 2 branches in the year 2002-03 only in the state of West Bengal and today it has grown as strong as 412 branches across 6 states of the country! The organization had recorded a growth rate of 500% in the year 2003-04 and 611% in the year 2004-05. it has disbursed a total of Rs. 587 crores among almost 7 lakh poor women. and each consultation workshop will result in long-term collaboration between with MFIs for implementing specific pilots. The CMFR Microfinance Strategy Unit will address these issues through a series of workshops which will bring together MFI practitioners and sectoral experts (in energy.impacts household well-being. The repayment rate is recorded at 99. The latter will bring to the table knowledge of best practices in their specific areas. During such time. It started as a Capacity Building Institution (CBI) in November 2000 under the leadership of Mr. 221 crores. Bandhan opened its first microfinance branch at Bagnan in Howrah district of West Bengal in July 2002. Bandhan has staff strength of more than 2130 employees.
.2 Bandhan (Ranked 2nd by Forbes Magazine in December 2007) Bandhan is working towards the twin objective of poverty alleviation and women empowerment. etc). Chandra Shekhar Ghosh.
50%. 1.741 : 3. Service Charge Bandhan charges a service charge of 12.000 .500 in urban Those who do not own more than 50 decimal (1/2acre) of land or capital of its equivalent value
Loan Size The first loan is between Rs. A group of 10-25 members are formed. 2.000 – Rs. 417 crores
Bandhan follows a group formation. of states No.500 in rural and Rs.000 – Rs. they are entitled to receive loans. individual lending approach. 2 weeks hence. of members No.249 crores : Rs.1. 1.000 more than the previous loan. 10. 7.191 : Rs.000 for the rural areas and between Rs. After the repayment. The clients have to attend the group meetings for 2 successive weeks. it has slashed down its lending rate to 15.00%. of staff Cumulative loan disbursed Loan outstanding Operational Methodology
:8 : 528 : 1. Then it
Economic and Social Background of Clients
Landless and asset less women Family of 5 members with monthly income less than Rs. they are entitled to receive a subsequent loan which is Rs 1.000 for the urban areas.As on July 2008
No.5. of branches No. The loans are disbursed individually and directly to the members. 3. Bandhan initially charged 17.50% flat on loan amount. However from 1st July 2005.182.
the entire group proposes her name for a loan in the Resolution Book.was further reduced to 12. Division and Head Office Easy reporting system with a prescribed checklist format Accountability at all levels post monitoring phase Cross.3 Grameen Bank The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen Bank is perhaps the most well known. admired and practised model in the world. If she fails to pay her weekly installment. After she gets inducted into the group. • • • •
Homogeneous affinity group of five Eight groups form a Centre Centre meets every week Regular savings by all members
. The model involves the following elements. Monitoring System The various features of the monitoring system are:
A 3 tier monitoring system – Region. The reason is obvious. The sole purpose of the above structure is simply to create peer pressure. she at first has to get inducted into a group.50% in May 2006.00% of time at the field
Liability structure for Loans When a member wants to join Bandhan. the group inserts peer pressure on her. operational costs decreased. Two members of the group along with the member’s husband have to sign as guarantors in her loan application form. being a non profit organization wanted the benefit of low costs to ultimately trickle down to the poor. As overall productivity increased. 5.checking at all the levels The management team of Bandhan spends 90. Bandhan.
The group members tend to be selected or at least strongly vetted by the bank. The greatness of the Grameen model is in the simplicity of design of products and delivery. mom-and-pop entrepreneurs. it assumes that all the poor want to be self-employed. However. 5.• • •
Loan proposals approved at Centre meeting Loan disbursed directly to individuals All loans repaid in 50 instalments
The Grameen model follows a fairly regimented routine. It works on a model
. With this approach. this company has created its own loyal gang of over 2 million customers. but that can now be done more cost effectively using computers. Very few actually sit in dirt with them. which is a value attribute of Grameen. The process of delivery is scalable and the model could be replicated widely. usually early morning or late in the evening. and chalk powder to figure out if they will be able to repay a $20 loan at $1 a month. each living on less than $2 a day. It is very cost intensive as it involves building capacity of the groups and the customers passing a test before the lending could start. The model is also rather meeting intensive which is fine as long as the members have no alternative use for their time but can be a problem as members go up the income ladder.4 SKS Microfinance (CEO-Vikram Akula) Many companies say they protect the interests of their customers. and small scale producers. sticks. The repayment of loans starts the week after the loan is disbursed – the inherent assumption being that the borrowers can service their loan from the ex-ante income. The focus on the poorest. flowers. They were used additionally for accounting work. the Grameen model works only under certain assumptions. has also made the model a favourite among the donor community. As all the loans are only for enterprise promotion. street vendors. Its borrowers include agricultural laborers. One of the reasons for the high cost is that staff members can conduct only two meetings a day and thus are occupied for only a few hours. using stones. home based artisans.
SKS converted itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to be a founding investor. so it they built their own simple and user friendly applications that a computer-illiterate loan officer with a 12th grade education can easily understand. Use Technology to reduce costs and limit errors.
2. they have factory style training models. Its model is based on 3 principles1. Adopt a profit-oriented approach in order to access commercial capital.Starting
with the pitch that there is a high entrepreneurial spirit amongst the poor to raise the funds. which areas were lorded over by which loan sharks.that would allow micro-finance institutions to scale up quickly so that they would never have to turn poor person away. The system is also internet enabled. what kind of financial products they needed. Standardize products. training. and other processes in order to boost capacity. SIDBI. and others. Given that electricity is unreliable in many areas they have installed car batteries or gas powered generators as back-ups in many areas. it was able to attract multimillion dollar lines of credit from Citibank. They have shortened the training time for a loan officer to 2 months though the average time taken by other industry players is 4-6 months. and technology entrepreneur Vinod Khosla. Scaling up Customer Loyalty Instead of asking illiterate villagers to describe their seasonal pattern of cash flows. etc. Internally. They enroll about 500 loan officers every month. They participate in theory classes on Saturdays and practice what they have learned in the field during the week. They set people’s tiny weekly repayments as low as $1 per week and health and whole life insurance premiums to be $10 a year and 25 cents per week respectively. They also offer interest free emergency loans. The
. Then it secured money from parties such as Unitus.They
collect standard repayments in round numbers of 25 or 30 rupees. Later.It could not find the software that
suited its requirements. ABN Amro. they encourage them to use colored chalk powder and flowers to map out the village on the ground and tell where the poorest people lived. a Seattle based NGO that helps promote micro-finance.
00 A. 3.000 new customers a month. provides agricultural inputs and information to farmers. Besides providing storage facilities. adding 50 branches and 1.5%. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. Deep customer loyalty ultimately results in a repayment rate of 99. The services provided are similar to those in contract farming. Contract Farming and Credit Bundling Banks and financial institutions have been partners in contract farming schemes. crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided – and only. Basically. Under such an arrangement. They are also using their deep distribution channels for selling soap. set up to enhance credit. each centre rents out farm machinery. consumer electronics and other packaged goods. 2. arranges credit. sells other services and provides a forum for farmers to market their products. They are growing at 200% annually. but with additional flexibility and a wider range of products including inventory finance. a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in
Chapter 6 Marketing of Microfinance Products 1.60. Mother Dairy Foods Processing. Leveraging the SKS brand Its payoff comes from high volumes.salaries of loan officers are not tied to repayment rates and they journey on mopeds to borrowers’ villages and schedule loan meetings as early as 7.M. Agri Service Centre – Rabo India Rabo India Finance Pvt Ltd. this is a doable model. clothes. provided – the price setting mechanism for the farmer is appropriate and fair. Non Traditional Markets Similarly.
the Board provides basic infrastructure facilities. The operations and maintenance of the market is done by NDDB.15 lakh. The project. These include inputs subsidies. This experiment known as "Apni Mandi" belongs to both farmers and consumers. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates. Under this arrangement a sum of Rs. extension services of different agencies are pooled in. covers 200 horticultural farmers associations with 50.
. Apni Mandi Another innovation is that of The Punjab Mandi Board.000 grower members for wholesale marketing. 5. better quality seeds and loans from Banks. direct access to consumers by elimination of middlemen. At the mandi site. Each farmer gets 5 crates at a subsidized rate. who mutually help each other.2 lakh is spent for providing plastic crates to 1000 farmers. which has experimented with a ‘farmers’ market’ to provide small farmers located in proximity to urban areas.Bangalore. with an outlay of Rs. At the farm level.
Small Industries Development Bank of India (SIDBI). entry and exit are easy. Community banks. Rashtriya Gramin Vikas Nidhi (RGVN). including the National Bank for Agriculture and Rural Development (NABARD). 2. making microfinance one of the most effective poverty reducing strategies. various donor funded programmes especially by the International
. A. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people. when given access to responsive and timely financial services at market rates. NGOs and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders. and NGOs perhaps more readily adopt new ideas. Council for Advancement of People’s Action and Rural Technologies (CAPART). tasks are (perceived to be) simple and people’s acceptance is high – all characteristics (real or presumed) of microfinance. For NGOs 1. Friends of Women’s World Banking (FWWB). repay their loans and use the proceeds to increase their income and assets. Rashtriya Mahila Kosh (RMK).Chapter 7 Success Factors of Micro-Finance in India Over the last ten years. especially if the resources required are small. Canvassing by various actors. The field of development itself expands and shifts emphasis with the pull of ideas.
donor NGOs too have been funding microfinance projects.
5. Finally. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending. highly competitive and increasingly difficult-to-raise donor funding. for example from SIDBI. One might call it the supply push. For Financial Institutions and banks
. The chickens will eventually come home to roost but in the first flush.
3. quick and high ‘customer satisfaction’ is the USP that has attracted NGOs to this trade. has greatly added to the idea pull. the interest rate spread could be an attractive source of revenue than an uncertain. The idea appears simple to implement. microfinance is a way to financial sustainability. It is implicitly assumed that no ‘technical skill’ is involved. for whom access to small loans to meet dire emergencies is a valued outcome. and lately commercial banks. it seems all so easy. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. United Nations Development Programme (UNDP). to many NGOs.
4. The most common route followed by NGOs is promotion of SHGs. Besides. Induced by the worldwide focus on microfinance. Groups connote empowerment and organising women is a double bonus. UK (DFID)]. For many NGOs the idea of ‘organising’ – forming a samuha – has inherent appeal. Thus. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce
such concrete results and sustained interest among beneficiaries as microfinance.
B.Fund for Agricultural Development (IFAD). Most NGO-led microfinance is with poor women. external resources are not needed as SHGs begin with their own savings. World Bank and Department for International Development.
Perhaps the most important factor that got banks involved is what one might call the policy push. microfinance via SHGs in the worst case would represent marginal addition to cost and would often reduce marginal cost through better capacity utilisation. NABARD also did some system setting work and banks lately have been given targets. On the supply side. In this case. it is also true that it has all the trappings of a business enterprise. wider spread) than for other rural lending by banks. Moreover. promotional work by NABARD. Given that most of our banks are in the public sector. That is the reason why microfinance has attracted mainstream institutions like no other developmental project. The policy change about a decade ago by RBI to allow banks to lend to SHGs was initially followed by a seven-page memo by NABARD to all bank chairmen. each involving 15 to 20 bank staff. its output is tangible and it is easily understood by the mainstream. which in the post liberalisation era is trying to explain the logic of every rupee spent. and later by sensitisation and training programmes for bank staff across the country. public policy does have some influence on what they will or will not do.
. This also seems to sound nice to the government. refinance and close follow up by NABARD has resulted in widespread bank involvement. for banks the operating cost of microfinance is perhaps much less than for pure MFIs. The banks already have a vast network of branches. The canvassing. all paid for by NABARD.Microfinance has been attractive to the lending agencies because of demonstrated sustainability and of low costs of operation. To the extent that an NGO has already promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the entire) portfolio. training. The policy push was sweetened by the NABARD refinance scheme that offers much more favourable terms (100% refinance. Several hundred such programmes were conducted by NGOs alone. policy was followed by diligent. if meandering. Institutions like SIDBI and NABARD are hard nosed bankers and would not work with the idea if they did not see a long term engagement – which only comes out of sustainability (that is economic attractiveness). In the process the bank also earns brownie points with policy makers and meets its priority sector targets.
as in any emerging market. a 22-year-old school dropout. The traditional commercial markets of corporates. for deposits. On the whole. the spreads are much greater. Finally. Further. and one tends to exchange scale at the cost of objectives. insurance. fast-moving consumer goods (FMCG) companies such as Hindustan Levers. We know that mainstreaming is a mixed blessing. the economic attractiveness of microfinance as a business is getting established and this is a sure step towards mainstreaming. she wanted to set up on her own business. both agri-input and processing companies such as EID Parry. for they are using channels which were built at a significant cost to NGOs. business. Since the larger banks are offering all these services now through their group companies. in the hope of capturing the entire financial services business of a household. though the perceived risks are higher.It does not take much analysis to figure out that the market for financial services for the 50-60 million poor households of India. Some amount of free-riding is taking place here by companies. Moreover. funding agencies and/or the government. is a very large one.
. lived in a remote village of Tamil Nadu. remittances and eventually mutual funds. bank-groups are motivated by a number of cross-selling opportunities in the market. trade. So it needs to be watched carefully. leading to price competition and wafer thin spreads. and now even housing and consumer finance are being sought by all the banks. coupled with about the same number who are technically above the poverty line but are severely under-served by the financial sector.
A real life Examples : Lakshmi. and consumer durable companies such as Philips have realised the potential of this big market and are actively using SHGs as entry points. it becomes imperative for them to expand their distribution channels as far and deep as possible. Instead of getting married and starting a family like any other village girl of her age in India.
she started earning Rs.
. a small village. Internet chat and tips on health and education. the initiatives helped the women to develop self confidence. With this money. several rural women were able to move out of poverty. By becoming a part of self-help groups. she was able to provide her children a good education at a local private school. These are real-life examples to illustrate how the micro-lending initiatives of ICICI Bank affected the lives of poor women in India. Latha.Lakshmi started an Internet kiosk in her village. offering services like e-mail. in the north of Andhra Pradesh. improve their communication skills and raise their position in society. Within a year. By becoming a part of self-help groups. a 29-year-old married woman with three children borrowed Rs. Apart from financial benefits. several rural women were able to move out of poverty.3500 a month from the store.18.000 to set up a small provision store in Kothaipalli. The kiosk was partially financed by ICICI Bank and was set up in association with n-Logue Communications. Apart from financial benefits. improve their communication skills and raise their position in society. She was a part of a self help group in Andhra Pradesh which received financial assistance from ICICI Bank. the initiatives helped the women to develop self confidence.
The book value multiple is currently the dominant valuation methodology in microfinance investments. therefore. necessary for MFIs to develop strategies for increasing the range and volume of their financial services. there is no reliable mechanism in the country for meeting the equity requirements of MFIs. This is partly explained by the fact that while the cost of supervision of credit is high. As a result they have high debt equity ratios. MFI model is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. In the case of start up MFIs. Presently. Lack of Capital The second area of concern for MFIs. the loan volumes and loan size is low. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. using a book value multiple does not do justice to the underlying value of the business. 2. Typically.Chapter 8 Issues in Microfinance
1. which are on the growth path. Sustainability The first challenge relates to sustainability. The IPO also brought forth the issue of valuation of an MFI. It has also been commented that MFIs pass on the higher cost of credit to their clients who are ‘interest insensitive’ for small loans but may not be so as loan sizes increase. start ups are loss making and hence the book
. is that they face a paucity of owned funds. The IPO issue by Mexico based ‘Compartamos’ was not accepted by purists as they thought it defied the mission of an MFI. This is a critical constraint in their being able to scale up. It is.
it works with twenty women head load vendors selling vegetables of around 10. with its strong supply chain logistics. large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer. Such businesses may find complementarities between an MFI’s skills in management of credit processes and their own strengths in supply chain management. the e-choupal. capacity building and business development support to the women.value continually reduces over time until they hit break even point. BASIX extends working capital loans of Rs. ITC Limited. Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation. has started exploring synergies with financial service providers including MFIs through pilots with vegetable vendors and farmers. 3. rural presence and an innovative transaction platform.15 kgs per day. The
..000/. The latter players who bring with them an understanding of similar client segments. A book value multiplier to value start ups would decrease the value as the organization uses up capital to build its business. Under this pilot. this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets). Making the Choupal Fresh stores available to the vendors. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. Financial service delivery Another challenge faced by MFIs is the inability to access supply chain. This enables MFIs to increase their client base at no additional costs. ability to create microenterprise opportunities and willingness to nurture them. thus accentuating the negative rather than the positive. ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a microfinance organization in Hyderabad). Similarly.10. ITC provides support through supply chain innovations by: 1. would be keen on directing microfinance to such opportunities.
The model augments the incomes of the vendors from around Rs. Attracting the right talent proves difficult because candidates must have. 85% of the poorest clients served by microfinance are women. push carts are much more energy efficient as opposed to fixed format retail outlets. From an environmental point of view. For instance. it becomes unacceptable. to design user-friendly pushcarts that can reduce the physical burden. a pioneer in the field of design education and research. it has forged a partnership with National Institute of Design (NID). 4. augmenting incomes and reducing energy usage across the value chain. and fill even fewer of the senior management roles. who are poaching staff from MFIs and MFIs are unable to retain them for other job opportunities. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. while women are single there might be a greater willingness on the part of women’s families to let them work as front line staff.30-40 per day to an average of Rs.150 per day. but as soon as they marry and certainly once they start having children. 3. a mindset that fits with the organization’s mission. The challenge in most countries stems from cultural notions of women’s roles. as a prerequisite. Continuously experimenting to increase efficiency. for example. However. 2. HR Issues Recruitment and retention is the major challenge faced by MFIs as they strive to reach more clients and expand their geographical scope. Long distances and long hours away from the family are difficult for women to accommodate and for their families to understand. This has positive implications for quality of the produce sold to the end consumer. women make up less than half of all microfinance staff members.
. Many mainstream commercial banks are now entering microfinance.women are able to replenish the stock from the stores as many times in the day as required.
These delivery channels have been relatively weak so far. it is important to proactively discover models that will enable direct finance to individuals. and why it benefits them. there is strong need to enhance delivery channels. We have to somehow get people . there is not sufficient understanding of the drivers of default and credit risk at the level of the individual. there is a need for market education. people are willing to engage with them.without having to sit down at a table . Thirdly. The group model was an innovation to overcome the specific issue of the quality of the portfolio. However. Secondly.to understand what insurance is. Adverse selection and moral hazard The joint liability mechanism has been relied upon to overcome the twin issues of adverse selection and moral hazard.5. We have to counter that. from the perspective of scaling up micro financial services. Microinsurance First big issue in the microinsurance sector is developing products that really respond to the needs of clients and in a way that is commercially viable. The group lending models are contingent on the availability of skilled resources for group promotion and entail a gestation period of six months to one year. That will help to demystify microinsurance so that when agents come. Microinsurance needs a delivery channel that has easy access to the low-income market. and preferably one that has been engaged in financial transactions so that they have controls for managing cash and the ability to track different individuals. However. People either have no information about microinsurance or they have a negative attitude towards it. given the inability of the poor to offer collateral.
. Microinsurance companies offer minimal products and do not want to go forward and offer complex products that may respond better. This has constrained the development of individual models of micro finance. 6.
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