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1 2 3 4 5 6 7 8 9 10 11 12 13 TOPIC Executive summery Introduction Overview of Indian banking environment The challenges for growth of microfinance Research methodologies by MF agencies Role of information system for microfinance Role of private sector banks Pg.No. 5 6 9 13 18 23 27
29 Initiatives of ICICI Bank & HDFC Bank Apex Financing Institutions: Growing 36 the Seeds and Saplings Donor Participation in Indian Microfinance A new paradigm in micro finance Future prospectus Bibliography 39 41 44 46
Micro finance plays an important role in today’s banking environment. The basic objective of this project is to understand the functioning of microfinance particularly the role of private banks. With this objective in mind, the project has been divided into various sections, each of which examines the role of private banks in microfinance from a different scope and perspectives. This report is an attempt to put together a one-stop document that will help a variety of readers catch up on the latest developments, issues, and achievements of the microfinance sector in India. The report emphasized the importance of SHG federations, the cooperative MFI movement, the role of many of the public sector banks & private banks including some prominent RRBs and DCCBs in supporting the SHG movement, and community based microfinance generally, which after all constitutes the bulk of the sector
Development of microfinance Public Private participation Various projects of ICICI bank under ICICI Foundation Various methodologies to implant the project Few recommendations and conclusions which would help in improving microfinance
operations in future.
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.
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.
A wide network of co-operative banks traditionally provided rural finance in India post independence. Co-operatives flourished in the 1950s–60s, and focused largely on agricultural credit. The co-operative structure broke down in the late 1970s–early 1980s. This gave rise to the dilemma of how to meet the credit needs of a large section of the rural population who had no access to institutional finance. The late 1980s and early 1990s saw the beginnings of what was to become the self-help group bank linkage movement in India, a movement that has been described as the largest micro-finance intervention in the world. The National Bank for Agriculture and Rural Development (NABARD) proposed that self-help groups (SHGs), typically groups of 10-15 women, be linked to wholesale suppliers of credit, in an effort to channel institutional credit to the rural poor. This led to a pilot project in 1992 under which commercial banks in India were allowed to lend to SHGs. Thus began the start of micro-finance operations in India. The SHGBank linkage model grew rapidly. Initially, it offered promise as a model of public/private partnership for the provision of micro-finance, as it was backed by regulatory policies that allowed commercial banks to lend to unregistered groups without taking collateral. However, the model also faced a number of
It soon transformed into a purely public model as state owned banks and other public entities used the model to increase provision of credit.Micro-finance arrived somewhat late in India. This led to the growth of micro-finance institutions (MFIs) that played the role of intermediating credit to the rural poor. there are NGO MFIs. 41 million people had been linked to commercial banks via this program. and alternative channels for credit delivery in rural areas were badly needed. Bangladesh’s NGOs were already implementing a flourishing micro-finance business when the first operations started in India. The model was susceptible to political capture. These MFIs have grown faster than the SHG-Bank linkage model in recent years and have an outstanding loan portfolio of about $1 billion to about 10. Company MFIs have seen explosive growth in India. MFIs in India take many forms. The current market for microfinance in India is estimated to be of the order of $25 billion. It also became clear that the SHG model could not be scaled up rapidly enough to meet the large demand for financing in rural areas. and the cumulative credit disbursed was over $4 billion. The SHG model accounts for the bulk of micro-finance lending in India. co-operative MFIs and company MFIs. For example. as politicians looking to disburse handouts in election times used SHGs for this purpose. and private players gradually retreated.challenges.5 million Borrowers as of March 2007 5 . Portfolio. As of March 2007. largely aided by the ability of the MFIs to leverage funds from commercial banks. This third category includes barely 20 MFIs but accounts for over 80 percent of the MFI.
2 billion combined by all involved in the sector. • The demand for microcredit has been estimated at up to $30 billion. the supply is less than $2. the microfinance industry has achieved significant growth in part due to the participation of commercial banks. credit and insurance services extended to socially and economically disadvantaged segments of society. India's GDP ranks among the top 15 economies of the world.3. Women constitute a vast majority of users of micro-credit and savings services. a large part of micro finance activity is confined to credit only. Over the last five years. • About 87 percent of the poorest households do not have access to credit. only about 20 percent have access to credit from the formal sector. However. the poverty situation in India continues to be challenging. In the Indian context terms like "small and marginal farmers". The Need in India :• India is said to be the home of one third of the world’s poor. 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. The recent Task Force on Micro Finance has defined it as "provision of thrift. Overview of Indian rural banking environment Micro-finance refers to small savings. semi urban or urban areas. Due to the sheer size of the population living in poverty. around 300 million people or about 60 million households. credit and other financial services and products of very small amounts to the poor in rural. for enabling them to raise their income levels and improve living standards". Additionally. the segment of the rural population above the poverty line but not rich enough 6 . 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. Demand of Micro Finance Services in India Due to its large size and population of around 1000 million. Despite this growth. are living below the poverty line. " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. At present. It is further estimated that of these households. official estimates range from 26 to 50 percent of the more than one billion population.
This market segment also largely comprises the poor but not the poorest. machinery) and work sheds in case of non-farm workers. micro credit assumes significance in the Indian context. opportunities for the unskilled and the illiterate are not increasing fast enough. Credit on reasonable terms to the poor can bring about a significant reduction in poverty. and workers in household micro enterprises. The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat. This is leading to a lopsided growth in the economy thus increasing the gap between the haves and have-nots. and for contingencies such as illness. bore wells and livestock in case of farmers. as compared to the rest of the economy. such as irrigation pump sets. This figure has been extrapolated using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed through various micro studies. household industries. weavers and those self-employed in the urban informal sector as hawkers. etc. With globalization and liberalization of the economy. Demand for Credit: In terms of demand for micro-credit. and others engaged in dairying. In rural areas. It is with this hypothesis. first and foremost. one of the main uses of working capital is for crop production. vendors. This segment requires. and most numerous. With about 60 million households below or just above the austerely defined poverty line and with more than 80 percent unable to access credit at reasonable rates. a small part of which also serves consumption needs. and manual laborers in forestry. A group of micro-finance practitioners estimated the annualized credit usage of all poor families (rural and urban) at over Rs 45. The next market segment is small and marginal farmers and rural artisans. fishery. This segment also needs term credit for acquiring additional productive assets. the institutions involved in micro finance have a significant role to play to reduce this disparity and lead to more equitable growth. such as livestock. are those who are landless and are engaged in agricultural work on a seasonal basis. it is obvious that there are certain issues and problems. poultry.to be of interest to the formal financial institutions also does not have good access to the formal financial intermediary services. including savings services. It is in this context. construction and transport. consumption credit during those months when they do not get labor work. and equipment (looms. there are three segments: At the very bottom in terms of income and assets.000 crores. mining. using which they can generate additional income. groundnut. which have prevented the reach of micro finance to the needy. This segment mainly needs credit for working capital. of which some 80 percent is met by informal sources. cotton. They also need credit for acquiring small productive assets. Among 7 .
In urban areas also this is true. this segment includes those in villages and slums.2 percent wanted working capital facilities.5 percent rural women were seeking regular full-time work. The irregularity of cash flows and the small amounts available for savings at one time. deter them from using formal channels such as banks. as a source of equity or margin to take loans. in activities such as dairy (9. which has revealed that there is a vide variety of work which rural women combine with household work. poultry (3 percent).3 percent were seeking parttime work. To start or to carry on such work. which is of great importance to micro-credit. though they live barely above the poverty line and also suffer from inadequate access to formal credit. 53. engaged in processing or manufacturing activity. and finally.54 million were women and their further break-up shows that out of a total of 2. running provision stores. spinning and weaving (3. repair workshops. 2. is women. part of this lower demand for credit is the inadequate absorption capacity of women.81 million marginal workers. many more women were willing to work. Of course. This has been corroborated by the results of a survey done by the National Sample Survey Organization (NSSO). The safety of savings is of higher concern than interest rates.4 percent). Better banking facilities.44 million were females.5 percent).6 percent women wanted initial finance on easy terms. particularly women. which comes from long years of exclusion from the economic sphere outside their homes. etc. 27.1 percent) and manufacturing of wood and cane products etc. are looking for a way to save small amounts whenever they can. In the NSSO survey it has also been estimated that a large percentage of rural women in the age group of 15 years and above.non-farm activities. The 1991 Census figures reveal that out of total 2. cattle rearing. calamities. Ahmedabad. as can be seen from the table below: Demand for Savings and Insurance Services: The demand for savings services is ever higher than for credit.67 million rural marginal workers. Studies of rural households in various states in India show that the poor. Amongst the women surveyed. 2. The demand for savings services is high in rural areas as well. and 22. 43rd round. The poor want to save for various reasons – as a cushion against contingencies like illness. tailoring (6. One market segment. and 65. as can be seen from a recent study of women’s savings and credit movement in Andhra Pradesh. Further. and various service enterprises. as a liquid asset. are willing to accept work at household premises (29. These persons are not always poor. Almost all women’s groups in their early years begin with regular savings and their savings exceed the loans they give from their funds. in spite of Assistance required (by women marginal workers seeking or available for work at their household premises). death in the family. tea shops. as shown by the experience of the SEWA Bank.3 percent). who are usually engaged in household work. 8 .
Insurance by the poor is needed for assets such as livestock and pump sets. is also substantial. though not very well articulated. This comes from the fact that not only incomes of microfinance customers low. disability and death would also reduce the shocks caused by such contingencies. for shelter. Crop insurance could be very useful to the rural poor. but are also highly variable. Finally. which lead the poor into taking loans at such times at high interest 9 . insurance against illness.The demand for insurance services.
both Legitimate and Illegal Although the interest rate offered to the borrowers is regulated. and a majority of them needing consumption loans and a majority of them requiring high documentation and collateral security. making it less attractive to the borrowers. Indeed. rural producers are not able to access. 10 . regulatory. 3 High Transaction Costs. the transaction costs in terms of the number of trips to be made. with the result that the rest of the deposits are finding their way into the financial sector. Some of the main reasons for the above are: 1 Borrower Unfriendly Products and Procedures With a majority of the customers being illiterate. Thus. plus the illegal charges to be paid result in increasing the cost of borrowing. Bihar. to make them more effective. the products are not reaching the rural poor.4. the lower the credit deposit ratio – most of the eastern UP. the documents to be furnished etc. the problems associated with the legal. the poorer the region. The mainstream financial institutions are flush with funds and have access to enormous amounts of low cost savings deposits. 4 Social Obligation and not a Business Opportunity Micro-finance has historically been seen as a social obligation rather than a potential business opportunity. organizational systems and the attitudes should be addressed to and the desired changes brought in these. The challenges for growth of microfinance To enable the reach of micro finance services to the needy. Orissa and the North-East have Credit Deposit ratios of 20-30 percent. Thus while banks are physically present in rural areas and offer concessional interest rates. 2 Inflexibility and Delay The rigid systems and procedures result in lot of time delay for the borrowers and de motivate them to take further loans.
The Regional Rural Banks Act does not permit any private share holding in any RRBs. Thus the mainstream institutions feel that these loans are risky.5 percent respectively. such RMK and FWWB.000 and Rs 2. 6 Legal and Regulatory Framework The policymakers feel that farmers and poor people need low interest and subsidized credit. or NGO promoted SHGs. A vast majority of them set up as NGOs for getting access to funds as. undermining the norm that loans must be repaid. There are many reasons for this: a) Financial problems leading to setting up of inappropriate legal structures b) Lack of commercial orientation c) Lack of proper governance and accountability d) Isolated and scattered 11 . Also small loans have been used as a tool for disbursing political patronage. The alternative finance institutions also have not been fully successful in reaching the needy. Problems for Alternative Micro-Finance Institutions The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. 00. 7. the largest incentive to enter such services remains through the nonprofit route. Thereby we have regulated interest regime for the loans up to Rs 25. difficult to serve and have a low or negative net spread. and the administrative costs of servicing them are high. they are unwilling to repay the loans. the existing practices of mainstream financing institutions such as SIDBI and NABARD and even of the institutions specially funding alternatives. and the Cooperative Act of all states do not permit district level co-operative banks to be set up except by the state government.with an interest cap of 12 percent and 13. They believe that poor cannot save. whereas many of the members of the self help groups are engaged in such activities.5 Financing to Alternative MFIs NABARD Act does not permit them to refinance any private sector FI and do any direct financing (NABARD's direct lending to micro-finance NGOs so far has been out of donor funds). is to fund only NGOs. similarly SIDBI Act restricts it from extending loans to the agricultural and allied sectors. As a result. The result of these two laws together is that rural credit has been a monopoly of state owned institutions.000/.
If an MFI opts to become an NBFC. which is very difficult for an MFI to mobilize. which is difficult in the first place. In most states. which are very limited. As in the long run. it has the following problems: 1) The major source of funds of NGOs are grants. till that stage. To be able to attract borrowings. Inappropriate Legal Forms NGOs invented micro-finance but NGOs are not the best type of agencies to carry out micro-finance on a long-term sustainable basis. 2) It is difficult to mobilize any borrowings from Indian Financial Institutions due to the negative image of NBFCs in general. they violate section 11 (4) of the Income Tax Act and can lose their charitable status under Section-12. and Gujarat. NGOs being registered as societies or trusts do not have any equity capital and can never be "capital adequate". Further. which they cannot handle. the MFI has to have equity capital. The other alternative for an MFI is to become a cooperative or a company. till a satisfactory credit rating is obtained. Thus the MFI taking foreign currency loans are subject to exchange risks. Maharashtra. 12 . Further. the MFI has to rely on borrowings. 3) That leaves the option of borrowing from foreign institutions. with a lower start up capital of Rs 5 crores. wef April 1999. even deposit mobilizations is not possible at least for the first three years. very few foreign institutions are willing to give rupee denominated loans. it is only possible to establish a financially sustainable MFI either as a cooperative or as a company. That leaves an MFI with the choice to be incorporated as a company and then become an NBFC or a Bank. has not yet been operationalised by the government. with exception of Andhra Pradesh. 2) If the NGOs earn a substantial part of their income from lending activity. due to RBI’s requirement of at least two credit ratings. The concept of Local Area Bank. the primary source of lending funds for MFIs is deposits. Thus. If an MFI opts to become an NGO. cooperatives are politicized and state controlled and thus not an appropriate form of incorporation for an MFI. The latter requires a license and a minimum start up equity of Rs100 crores. 3) Moreover.8. NGOs do not have the appropriate financial structure for carrying out micro finance activities. it has the following problems 1) The minimum entry-level capital requirements is Rs 2 Crores.
Lack of Commercial Orientation Striving to make the customers credit available at low cost with subsidies and grants. Lacks of Proper Governance and Accountability Governance and accountability are limited in case of non-profits and need to be improved. There is no proper coordination among them and also there is lack of information dissemination. 13 . but they fail to maintain the same record in the long run because of lack of commercial orientation thus making it unsustainable. 11. most of the alternate MFIs achieve a lot of success in their programs in the initial period. 10. Their boards must be made aware of their financial liabilities in case of failure. Isolated and Scattered The alternate MFIs are isolated and scattered.9. The resultant shift in rural finance discourse and operational paradigm is shown in Table. The lenders should be more stringent and insist on nominating a few directors.
Old Paradigm New Paradigm Problem Definition Overcome market Lower risks and imperfections transaction costs Role of Financial Implement State plans Intermediate resources Markets Help the poor efficiently View of users Beneficiary Clients Subsidies Create subsidy Create independent dependence institutions Sustainability Largely Ignored A major concern Evaluations Credit impact on Performance of financial beneficiaries Institutions Source – Adapted from Meyer & Nagarajan (1999)6 14 .
000 is probably not sufficient for expansion. However. It was also found that a third of the households had a savings account and while every fourth household had a life insurance policy. asset ownership. usage of financial services. almost none had health insurance. Among those households who did not have a loan. respondents were poor. Loans were rarely taken for business expansion: a number of loans were used towards health related expenses. while few were provided by commercial banks and almost no MFI loan was available at the time12. consumption. they had not been exploited. Preliminary results from the baseline surveys With an average family size of five and an average monthly expenditure of Rs 5.5. Research methodologies by MF agencies 1 Impact evaluation of Spandana's micro credit programme5 Objective and methodology: This study uses a randomized design to evaluate the impacts of Spandana's microfinance programme on income. little assets and few employees. and tended be small. microfinance might help them expand by "forcing" them to channel additional revenues into expansion (rather than on "wasted" expenditures). and intra-household decision-making among their clients in Hyderabad. more than half said that they wanted one but could not obtain one. scale of business and its profitability. Businesses were very prevalent in these slums. but not ultra-poor: close to 50% of the respondents were earning under $2 a day but only 6 percent were earning below $1 a day.000. these businesses had little specialized skills. Marriages. Although a loan of Rs 10. consumption purposes and for construction and renovation of houses. Almost half of these loans came from money lenders. Where expansion opportunities appeared possible for these small businesses.500). with little capital. 15 . The loan indebtedness figures indicate that about two thirds of the sample had at least one loan. Yet it was found that 60 percent of the households who had a sick member had to borrow to pay for the treatment (which was on average Rs 7.
2 Impact evaluation of weather insurance. to get an uncertain payout in the future. in which they chose between a "safe" option (the certainty of Rs 50). or on wage rates? CMF will assist SEWA and ICICI Lombard in developing the product. respondents answered. In addition. and interest rates. Gujarat Objective and methodology: A natural disaster. The baseline survey of 1500 households in 100 villages was completed before the product was marketed in May 2006. inflation. and it can be difficult for a farmer to understand why she should spend money now. members scored on average no higher than they would have simply by guessing. and on improving their livelihoods. and borrowing from moneylenders at high rates. such as drought or excessive rain. with SEWA. The objective of this study is to evaluate the impact of providing rainfall insurance on reducing such vulnerabilities faced by poor agricultural households. and those whose head was literate or educated. financial contracts are complicated. leading to substantial hardship manifested in reduced consumption. The Centre will measure and monitor household vulnerability. respondents played a simple game. can cause crop failure. the survey in three districts of Gujarat found that SEWA members had very low levels of financial literacy: when given a short test that included questions about risk. Preliminary results: Households that were rich. households who had picked safer choices were much 16 . lower income. In the baseline survey. Some important questions the study seeks to answer include: how effectively does a rainfall insurance programme reduce vulnerability of poor households? How does financial literacy influence the decision to purchase insurance? How will it affect local risk-sharing? Will policy-holders undertake more projects with a higher return (such as sowing more crops)? Will there be any effect on the local price of goods. consumption and economic activity through surveys conducted at regular intervals during the period of the project. were much more likely to purchase insurance than those who were not. Members attitudes towards risk also mattered. This was so despite relatively high math skills. on average. and SEWA will offer rainfall insurance in a group of villages across three districts in Gujarat. and increasingly risky options that offered a higher return. Two months after the survey. distress sales. lower productivity. two-thirds of the math questions correctly. Indeed.
and limitations of. West Bengal. Yet fixed repayments may not be best for most clients. and other risks. The second loan product allows clients to prepay 6 principal installments and enjoy flexibility in the latter part of the loan tenure. the experiment compares two flexible loan products to the existing product of KAS for dairy clients. and face shocks and repayment rates. A baseline survey has been completed and will be followed by short household surveys conducted on a quarterly basis in order to track income flows and understand the reasons for skipping principal installments. has a monthly repayment system for its SHG clients. KAS Foundation (KAS). Objective and methodology 17 . The Centre is conducting a randomized experiment to evaluate the benefits of tailoring repayment schedules to the dairy industry on the following variables: business income. households' ability to smooth consumption. however. The most important question. A mid-term survey will then be conducted. for example. In order to analyze the trade-off involved in introducing flexible repayment schedules. Experiments on repayment schedules in VWS (Village Welfare Society). health. particularly if their income is subject to variations due to seasonal activities. Orissa Objective and methodology Most MFIs offer loan products with fixed repayment schedules weekly or monthly. 3. productivity. 4. rainfall insurance. as well as a final survey after one loan cycle has been completed. business cycle.more likely to purchase insurance than those who had selected riskier options. the Centre hopes to gain a clear understanding of the benefits. will be answered only after completion of the study: does rainfall insurance improve the welfare of the households that buy it? By carefully tracking households in 100 study villages. The first loan product allows clients to delay payment by 2 principal installments at any point of time in the loan tenure of 24 months. Flexible repayment schedules for dairy clients in KAS Foundation.
Regular business surveys as well as an end line survey will be administered. Monthly repayment schedule could allow them to reinvest money into their business when they recover their costs. or the impact of remittances on the household and village economy. if infrequent repayments do not produce an increase in default rate. or if this increase is lower than the reduction in transactions costs. CMF uses a randomized design to examine the impact of repayment frequency on the capacity of households to smooth consumption. this could lead to significant savings in terms of transaction costs. weekly payments seem to make more sense since they get paid piece wise. to manage cash flows and adapt their loan cycle to the business cycle. However. Financial services for migrants-with Adhikar and Ajiwika Objective and methodology Migration could have important consequences for economic growth and poverty reduction by redistributing the benefits of location-specific growth. It seems therefore that the benefits of monthly payments could vary according to activity. Little data exists on the prevalence of these temporary labor movements. 5. it may well be worthwhile for the MFI to examine it as a serious alternative to the weekly model. Preliminary results: So far there is almost zero percent default among all groups. about the conditions under which people migrate. This tends to impose a high cost structure on the MFI. Most businesses can be categorized in two types: as "mahajan' or piece based and market based or independent businesses. If the completed study confirms these results. repayment rates and organization's transaction costs. The rest of the study will test these hypotheses. For the first type. Three repayment schedules are compared. Market based clients seem to prefer monthly payments as they sell on credit and can not always recover their payments every week. the costs and risks. With imperfectly functioning credit and information 18 .Most MFIs have a weekly repayment schedule with weekly centre meetings to maintain low levels of default. and no difference in repayment between weekly schedules and monthly schedules. Weekly meeting-weekly repayment. weekly meeting-monthly repayment and monthly meeting-monthly repayment.
workers often migrate to Gujarat. Preliminary findings When faced with severe shocks. in Orissa. Design of remittance services must therefore take into consideration . existing facilities and regional factors affecting employment and movement of people.markets. consumption and income smoothing and investment decisions of households will then be evaluated through a randomized study. In some of the villages under study. CMF is undertaking a set of case studies of organizations working with migrant workers to understand the dynamics and details of migration. Adhikar. individuals may fail to reap all potential benefits. is piloting the provision of remittance services linked to both savings and loans for its members. In Jharkhand. such as lack of infrastructural facilities. provision of remittance services is complicated by factors. 19 . From Orissa and Jharkhand. MFIs can provide innovative financial services to migrants.costs of transferring money. and Adhikar in Orissa. This information will be used to design cost effective remittance services in collaboration with Ajiwika in Jharkhand. more than 80 percent of the households had at least one member who had migrated for employment. such as remittances linked to loans and savings. This motivates the research on the provision of financial services through the most effective channel for poor households. The impact of these services on migration and wage patterns. little faith in existing services such as demand drafts and money orders. where wages are higher. time involved. whose members migrate either temporarily or permanently. limited information flows etc. households often resort to seasonal migration to take advantage of employment opportunities in other sectors or regions.
including volume of transactions.Role of information system for microfinance As microfinance institutions (MFIs) grow and become more business oriented. infrastructure. Also. Information requirements can therefore vary considerably throughout the institution. A full information system (IS) includes all the systems (both manual and computerized) used by an institution to generate the information that guides management’s decisions and actions. managers have found they gradually lose their ability to maintain personal contact with what is happening at the field level. They realize they cannot adequately manage their portfolio and financial operations without better information. A branch manager may find a client ledger useful for making a decision on a particular loan disbursement. methodology. These differences are a function of many organizational variables. No single information system (IS) will meet every MFI’s information needs. operating at different levels. regulatory environment. the financial officer is interested in simply knowing the balances outstanding on all loans given to clients at that particular branch. yet at the head office. The basis of information Any MFI has many users of information. 20 .6. as well as the resources available. various stakeholders make decisions based on different information and require different levels of detail. The IS needs of institutions differ in size and in complexity. and overall readiness for change.
Core systems • Accounting: Records accounting details and provides complex tools for financial management. • Deposit tracking: Manages all transactions related to savings if this product is offered. The linking of all information systems is known as systems integration. • Reporting: Reports can be generated within each subsystem. • Portfolio: The core business for many MFIs. management of information related to staff becomes more complex and can be automated. if any one of the systems is changed or upgraded at a later date. it may also be necessary to extract information across subsystems and recombine the information for more complex reporting requirements. A key success factor for an MFI is making sure all of its systems are suitably linked to allow timely and accurate sharing of data between the various systems. manages all transactions relating to the loan portfolio. Additional systems • Customer information: Detailed information about customers that may be used to understand the customer base. • Human resources: As organizations grow. Moreover. 21 . chances are that extensive integration work will have to be done yet again. may consequently be linked to a performance-based incentive scheme. This process can be both costly and time consuming.
How should the system parameters be set? • Data transfer.In designing an implementation plan. Where should it be installed first? • Testing. What type of network is required? What facilities are needed. Are there adequate checks such as audit and access trails? What manual or electronic confirmations are needed? 22 . telecommunications? • Software installation. Are user and administrator manuals available? • System configuration. for how long? When will the new system be considered “live”? • Internal controls. for instance. How will transfer old data to the new system? • Staffing. Are any further changes required to the system? • Documentation. generator. How do you ensure the system works as you require it to? • Software modifications. speed and space requirements? • Infrastructure development. Do the staffs have adequate training and time to learn the new system? • “Live” date. consider the following: • Hardware procurement. What hardware should buy and what are the memory. Will the old system and the new system run at the same time during the changeover? If so.
• Institutional interface. What about procedural issues that the software cannot help to manage? • Data security. Role of private sector banks 23 . Are there measures in place to adequately protect the data? Is there a plan for how to operate if the computers are down? 7.
ICICI Bank pioneered the partnership model. while the loan is directly on the books of ICICI Bank. the Reserve Bank of India. 24 . When Indian banks started lending to MFIs. This model helped overcome the capital constraint faced by most MFIs and allowed micro-finance operations to be scaled up rapidly. Innovative partnerships between equity and debt providers. The MFI posts a first loss default guarantee thus sharing the risk of the portfolio with the bank up to a pre-specified limit. While the bulk of private sector financing to MFIs has been provided in the form of loans. MFIs. they soon found that the MFIs were unable to absorb large loans due to capital constraints. facilitators. Indian MFIs are also attracting equity capital. including micro-credit. Innovative models and delivery channels are also crucial to reach scale. allowed bank lending to MFIs to be classified as priority sector lending. recognized the opportunity provided to partner with MFIs to expand outreach in rural areas. 2. 3. government and other stakeholders hold the key to successfully meeting the demand for micro-finance.Private Sector Initiatives to Scale up Micro-finance: The Case of ICICI Bank. ICICI’s microfinance portfolio grew to about $ 350 million as of March 2007. The 6 important issues related to the scaling up of microfinance with the help of the private sector. The micro-finance market in India is simply too large to be met by donor finances. From a virtually nonexistent portfolio in 2001. Credit is not the only financial service that is required. India In 2000. collection agents etc. especially ICICI Bank. under which banks lend directly to clients with MFIs acting as loan originators. This released large amounts of commercial bank financing for MFIs and allowed them to scale up their lending operations rapidly. The private sector is essential in this effort. India’s central bank. 1. A number of commercial banks. NGOs.
Moreover. 5. impact evaluation is important and should not be neglected in the rush to provide financing. many banks. Incubation and training of MFI staff. insurance products. Financing efforts need to be coupled with capacity building efforts for MFIs. there are wonderful examples of private insurance companies providing micro insurance in partnership with NGOs and MFIs. The microfinance movement world over has come under attack as a stopgap solution to poverty. 6.Micro-finance clients have an equally important need for savings accounts. 4. faster transactions are important. good MIS technology and technological innovations such as the use of point of sale devices for safer. including ICICI Bank is working to develop reliable remittance products for India’s vast migrant labour that Works outside of their home states. The private sector has a unique ability to adapt cutting edge products usually designed for prime clients to the needs of the poor – and this can provide valuable gains for the poor. ICICI Bank’s insurance arm. The private sector can play an important role in providing these services. Reliable longitudinal studies are needed to track the impact of micro finance on clients’ lives. Similarly financing of clients need to be coupled with efforts at building livelihoods. Finally. A credit plus model is needed to ensure development of skills and market linkages. Similarly. 8. and remittance services. Initiative of ICICI Bank & HDFC Bank 25 . ICICI Lombard has teamed up with BASIX. a microfinance company to provide weather insurance to farmers.
And with banks entering the sector. profitable opportunity. There is an increasing shift in the microfinance sector from grant-giving to investment in the form of debt or equity. says Nachiket Mor. and its outstanding portfolio has increased from Rs. Partnership Models 26 . says Reddy. "There is no dearth of funds today. be interested in serving low-income segments? Simply because it recognizes that poor people are bankable. and that microfinance provides a new. Executive Director of ICICI Bank. 9. As a result of banks entering the game. ICICI Bank sees an opportunity to make profits in untouched markets. Rapid Growth ICICI's microfinance portfolio has been increasing at an impressive speed.5 million) to Rs. From 10. interest rates have also dropped. led by ICICI Bank. and ICICI believes grant money should be limited to the creation of facilitative infrastructure.2 million clients through its partner microfinance institutions. the sector has changed rapidly. "We need to stop sending government and funding agencies the signal that microfinance is not a commercially viable system". "Interest rates have come down from 14% to 10%". as banks are looking into MFIs favorably. Spandana.The traditional image of microfinance is one of a charitable activity conducted mostly by non-profit organizations and separate from the mainstream financial system.000 microfinance clients in 2001.98 billion (US$227 million). while improving the lives of poor people. the largest private bank in India. the CEO of one of ICICI Bank's major MFI partners. But why would ICICI. these clients had never been served by a formal lending institution. says Padmaja Reddy. ICICI Bank is now lending to 1. 0. this image has been changing in India in the last few years as commercial banks have been widely entering the sector.20 billion (US$4. A few years ago. However. unlike a few years ago".
The MFI as Collection Agent To address these constraints. while avoiding costs associated with entering the market directly. Securitization Another way to enter into partnership with MFIs is to securitize microfinance portfolios. This model is unique in that it combines debt as mezzanine finance to the MFI. ICICI Bank initiated a partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary. the risk is being entirely borne by the MFI. the largest ever securitisation deal in microfinance was signed between ICICI Bank and SHARE Microfin Ltd. which limits the advances from banks. Under this model. This model is therefore likely to have very high leveraging capacity. 215 million (US$4.9 million) at an agreed discount rate. The interest paid by SHARE is almost 4% 27 . MFIs are unable to provide risk capital in large quantities.But how has ICICI Bank been able to achieve such rapid growth in such a short time? This success is due to a series of innovative models and initiatives. which limits its risk-taking. In 2004. so that the risk for the MFI is separated from the risk inherent in the portfolio. a large MFI operating in rural areas of the state of Andra Pradesh. Under this agreement. ICICI purchased a part of SHARE's microfinance portfolio against a consideration calculated by computing the Net Present Value of receivables amounting to Rs. as the MFI has an assured source of funds for expanding and deepening credit. While a model of microfinance has emerged in recent years in which a microfinance institution (MFI) borrows from banks and on-lends to clients. Technical assistance and the collateral deposit of US$325.000 (93% of the guarantee required by ICICI) were supplied by Grameen Foundation USA. few MFIs have been able to grow beyond a certain point. ICICI chose this model because it expands the retail operations of the bank by leveraging comparative advantages of MFIs. In addition. The loans are contracted directly between the bank and the borrower.
000 to US$100. Working with Venture Capitalists Another challenge in scaling-up the microfinance sector is the lack of equity capital.less than the rate paid in commercial loans. entrepreneurs. ICICI Bank is encouraging venture capitalists to start entering the sector. there is a need for approximately 200 MFIs to cover the country. however there are only 15 large players capable of scale. the bank can hedge its own risks. by way of a lien on fixed deposit.000) and operational and strategic support to commercially viable companies increasing income in or providing goods and services to rural or semi-urban India. The Social Initiative Group of ICICI Bank (SIG) aims to partner with organizations to identify and support entrepreneurs in microfinance. to US$25 million. And by trading this high quality asset in capital markets. ICICI Bank has put in place its Micro Finance Development Team with the objective of identifying and training new partners. Lok capital mobilizes and directs private capital to fund microfinance activities and to fund long term management and technical support for development of commercially sustainable MFIs. Partial credit provision was provided by SHARE in the form of a guarantee amounting to 8% of the receivables under the portfolio. Several venture capital funds in the country have the capability of identifying and mentoring entrepreneurs. allowing SHARE to scale up its lending. including Lok Capital. 50 lacs. Aavishkar provides micro-equity funding (Rs. and its committee has decided to increase the size of the fund from US$10 million. This deal frees up equity capital. Aavishkar and Bell Weather. it allows ICICI Bank to reach new markets. approximately US$20. ICICI Bank has come to an agreement with these three venture capitalists under which it will provide take-out financing to the 28 . On the other hand. Training New Partners Despite rapid growth. 10 lacs to Rs. In order to solve this shortage. According to ICICI Bank. New players are therefore needed: ICICI believes that new NGOs. and corporations who conduct development activities in rural areas can and should become MFIs. Bell Weather has made three equity commitments for start up. the lack of NGOs and MFIs operating in India remains a constraint.
The use of technologies such as kiosks and smart cards will considerably reduce transaction costs while improving access. there is an urgent need to fill gaps both in practice and understanding in order to maximize the impact of this growth. some of the best Indian information technology companies specialized in financial While the sector has been growing rapidly. provided the MFI attains an operational sustainability rating from Micro-Credit Ratings International Ltd (M-CRIL) and Credit Rating Information Services of India Limited (CRISIL). ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute for Financial Management 29 . The insurance policy is linked to a rainfall index. Wipro and Infosys. along with the World Bank and ICICI Lombard. Technology One of the main challenges to the growth of the microfinance sector is accessibility. the insurance company set up by ICICI and Canada Lombard. 3iInfotech. To fill these gaps. 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. requires new.MFI to buy out the venture after a period of three to five years. have developed India's first index-based insurance product. The Indian context. Beyond Microcredit Microfinance does not only mean microcredit. and ICICI does not limit itself to lending. 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. ICICI is strongly encouraging such an effort to take place. subject to a maximum of the sum insured. ICICI's Social Initiative Group. inventive channels of delivery. The ICICI Bank technology team is developing a series of innovative products that can help reduce transaction costs considerably. it is piloting the usage of smart cards with Sewa Bank in Ahmedabad. in which 70% of the population lives in rural areas. For example. and while the focus has been largely on growing outreach. To maximize the benefits of these innovations.
economics of microenterprises. For example. Other on-going projects include the impact evaluation of smokeless chulhas on health and productivity in Orissa. impact of MFI policies and strategies. research-based advocacy. the CMFR Microfinance Strategy Unit will offer advanced financial management training for microfinance practitioners. evidence of credit constraints. and an analysis of Sewa Bank's loans and accounts panel data base in Ahmedabad. there are other missing markets and constraints facing households. contract and product designs. government. it aims to systematically establish the links between increased access to financial services and the participation of poor people in the larger economy. In partnership with MicroSave. Harvard. including MIT. the CMFR recognizes that while MFIs aim to meet the credit needs of poor households. as the first randomized evaluation of micro credit. the CMFR directly helps MFIs in terms of strategy building. it will allow estimating the effects of the MFI's programme in an unbiased manner. international organizations. and 30 .Research (IFMR) in Chennai. Through research. high level training and strategy building. such as healthcare. The CMFR is involved in several studies with researchers from leading universities. The CMFR Research Unit supports initiatives aimed at understanding and analyzing the following issues: impact of access to financial services. it is implementing an impact evaluation of Spandana's micro credit programme in Hyderabad. the CMFR also organizes regular seminars and conducts courses for managers and researchers from NGOs. and academics. combination of microfinance and other development interventions. and Yale. people's behavior and psychology with respect to financial services. In addition to undertaking research. A training series on Building Blocks of Banking and Finance will also be conducted. and the effect of regulations. a study on the break-up of transaction costs of MFIs and SHGs. Finally. aimed at financial institutions both large and small that wish to acquire a comprehensive and detailed set of skills to effect their transformation. In order to bring together academics and practitioners. constraints to household productivity. infrastructure. costs and profitability of microfinance organizations.
HDFC also ensures that the newly 31 . HDFCs' low cost housing schemes are marked by the emphasis on peoples participation and usage of self-help approach wherein the beneficiaries contribute both in terms of cash and labour for construction of their houses. a German Development bank. roads. HDFCs' approach to low-income lending has been extremely professional and developmental in nature. if growth is properly managed and questions are correctly answered. Negating the concept of dependence. HDFCs' response to the need for better housing and living environment for the poor. etc). health. 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. Is microfinance the solution? ICICI Bank believes it is. in the urban and rural sectors materialized in its collaboration with Kreditanstalt fur Wiederaufbau (KfW). and each consultation workshop will result in long-term collaboration between with MFIs for implementing specific pilots.gaps in knowledge. KfW sanctioned DM 55 million to HDFC for low cost housing projects in India. thus enabling them to realize their dreams of possessing a house of their own. which in turn impacts household well-being. both. water. The latter will bring to the table knowledge of best practices in their specific areas. especially the economically weaker sections. Microfinance needs to become more accessible. more customized and more comprehensive. In order for microfinance to be a useful mechanism for poverty alleviation. While the microfinance sector is growing fast in India. Credit Mechanisms Adopted by HDFC (India) for Funding the Low Income Group Beneficiaries HDFC has been making continuous and sustained efforts to reach the lower income groups of society. several questions need to be answered. These have implications in terms of the scale and profitability of client enterprises and efficiency of household budget allocation. challenges must be addressed in order to make this growth both effective and sustainable.
both. HDFC has experienced 100% recovery for the loans disbursed to various projects. To date.constructed houses are within the affordability of the beneficiaries. For the purpose of actual implementation of the low cost housing projects. The security for the loan is generally the mortgage of the property being financed. HDFC collaborates with organizations. The loans from HDFC are disbursed depending upon the stages of construction. The projects could be either in urban or rural areas. Governmental and Non-Governmental. 9. Apex Financing Institutions: Growing the Seeds and Saplings 32 . Such organizations act as co-coordinating agencies for the projects involving a collective of individuals belonging to the Economically Weaker Sections. and thus promotes the usage of innovative low cost technologies and locally available materials for construction of the houses. The construction work is regularly monitored by the co-coordinating agencies and HDFC.
headquartered in Guwahati. Apart from providing loans grants and equity to MFIs. In order to encourage new NBFCs to enter the field. In 2005-06 SFMC disbursed Rs 253 crores of term loans to 62 partners. The Transformation Loan is a quasi-equity product providing for conversion into equity after a specified period of time. and an outreach of at least 3. and made one equity investment of Rs 1 crore. much as RMK does for the whole country. and also as operational support to enable MFIs to meet a part of their operational deficits during the initial. As a bulk lender through its NGO Support Programme. Prospective partners are first rated by an independent rating agency. and a clear and credible path to operational and financial self-sufficiency. the development of a network of service providers.000 poor members (or the prospect of reaching this scale within a year). operational and financial benchmarks. RGVN followed a policy until recently of not assisting its partners with revolving fund loan assistance more than twice (apart from providing capacity building assistance and a modicum of grant funding) but seeking instead to graduate them to other lenders. advocacy of appropriate policies and regulations. However it has now decided to lend larger amounts to about 10 to 20 out of its 400 partners who have been judged on the basis of a grading exercise to have built-up enough capacity to absorb loans of about Rs 5 lakh each 33 . was set up in the mid-1990s by a consortium of public financial institutions to wholesale to small start-up NGOs in the Northeast and East.SIDBI Foundation for Micro Credit (SFMC) SFMC. the usual requirement of a minimum track record of three years can be relaxed if the partner has been rated AA (or the equivalent). Partner institutions comprise large and medium scale MFIs with an anticipated minimum borrowing requirement of Rs 1 million a year. sanctioned Rs 9 crores as capacity building grants. started operations in January 1999. The Rashtriya Gramin Vikas Nidhi (RGVN) RGVN. and promoting the exchange of information across the sector. subject to the MFI attaining certain structural. expansion phase. Thus it lent an average of only 2 lakh to about 100 partners in 2004-05. Rs 4 crores of Transformation Loans to five partners. SFMC's mission includes a strong capacity building component . Grant support is provided as technical assistance to strengthen systems. set up with assistance from IFAD and DFID.
Institutional Development Partners (20) who are in turn graded into A. It is headquartered in Ahmedabad. In view of the increasing availability of loans from the commercial banks FWWB follows a conscious policy of graduating partners through the three categories. The aim is to limit the share of business in the total portfolio to 50 percent and of ID partners to 35 percent. Since the bulk of its funds come from borrowings (from SIDBI. is part of the SEWA family of institutions and one of about 40 global affiliates of WWB. portfolio outstanding and accumulated savings are lower for non-Southern states. although a minimum of two years of existence as an organization (although not necessarily doing savings 34 . It has received grants and loans from a number of funding partners. India. and its business model is to leverage its corpus by borrowing from the banks and on lending to its MFI partners. especially from USAID for this purpose. The aim is to graduate about four or five ID partners to Big Partner level every year and a similar number of General Partners to ID partners. Its largest lender in March 2006 was SIDBI (with 36 percent of total borrowings outstanding). and C. which has appointed two nodal agencies in Assam. FWWB sees its core role as institutional development (ID) and the availability of grant funding. governance and MIS. Progress is monitored and documented in the annual reports. which has grown rapidly to equal if not exceed the bulk Friends of Women's World Banking (FWWB) FWWB. so in a sense FWWB is a "Tier 2" apex or wholesaler. It continues to remain a registered society. Partners are graded into three categories in terms of outreach and loan portfolio into Big Partners (of which there were 6 in March 2006). FWWB's lending to the non-southern states increased from 19 to 25 percent in 2005-06. New York. ICICI. RGVN started a retail programme only for Assam.initially. B. These entail face-to-face interactions at both the management and operations level to establish strong systems in respect of accounting. and others) it has to charge a higher interest rate than RMK (12 as against 8 percent) and for this reason some of its fledgling partners could also be picked up by RMK. About 30 out of the current 79 partners have received loans from the banks and financial institutions such as SIDBI. and has an office in Chennai. financial management. the Credit and Savings Programme. more recently. enables it to play a strong capacity building role through a system of a minimum of two technical assistance visits a year by its own staff. Norms for minimum membership. FWWB feels that it has an advantage of being able to provide TCB assistance more effectively than TCB providers who provide it as a stand-alone input.
to promote lending to women under the SHG programme. The RMK is a registered society with a governing body of not more than 16 members including the ex-officio chairperson who is the minister in charge of the Department of Women and Child Development. In states like Jharkhand and in the Northeast these norms have been relaxed further in some cases to go down to as few as 200-500 borrowers for new partners. the same year FWWB commenced operations. While its Memorandum of Association allows it to borrow from the banks. who is usually an IAS officer on deputation. and the investment proceeds of its reserve funds of about Rs 21 crores currently. it has not felt the need to do so yet. Rashtriya Mahila Kosh (RMK) RMK was set up as a bulk lender to NGOs and government intermediary organizations by the central government in 1993. which has since grown to Rs 54 crores on the basis of surpluses generated by the lending operation. and before anyone had anticipated that linkage lending from the banks would grow to the extent it has. among its partners generally. Donor Participation in Indian Microfinance 35 . RMK initiated its activities on the basis of an initial corpus received from government of Rs 31 crores. Likewise. as evidenced by an audited balance sheet.and credit) is insisted upon for all potential partners. which in those days was still in a nascent stage. and the executive director. 10. it finds organizations with an exclusive focus on microfinance do better than multi-activity partners. In fact FWWB prefers relatively fresh organizations to those with a longer life (usually conducting non-savings and credit activities) since it feels they are more responsive to the adoption of new micro-finance specific systems and management practices. Seven members of the governing body are nominated by the government as representatives of NGOs active in the field of micro-credit. and has been sanctioned a further addition to its corpus of Rs 10 crores in this year's budget.
IFAD MRCP (Maharashtra Rural Credit Project) and World Bank assisted Andhra Pradesh Rural Poverty Reduction Program (Indira Kranti Patham) programs. For MFIs. multilaterals outside it like the World Bank. Sri Ratan Tata Trust. Contributions for the same have come from virtually every bilateral. and the United Nations Development Program (UNDP) . Canadian International Development Agency (CIDA). HIVOS India etc. At the apex level.2 million SHGs and their federations. Bilateral such as DFID. These projects helped scale up the linkage program and evolved many of the current institutional models with SHGs at their base. and government agencies such as the Department for International Development (DFID). SDC and foundations such as Ford have played a key role in this context. Andhra Pradesh). donor funds have played a strategic role in paving the way for commercial lenders and investors. Mention must be made in this context especially of the UNDP SAPAP (South Asia Poverty Alleviation Program. agencies such as the Swiss Agency for Development and Cooperation (SDC) and Gesellschaft fur Technische Zusammenarbeit (GTZ) have been key technical and financial partners for the National Bank for Agricultural and Rural Development's (NABARD) promotional and refinancing role in the SHG Bank Linkage program. as also private foundations like the Ford Foundation. including agencies within the UN system . They have made a significant contribution to the predominant channel of microfinance in India – the Self Help Group Bank Linkage Program (SBLP) . the World Food Program. In India donor funding for microfinance has taken the form of: 36 . multilateral agency and private foundation in the country.the International Fund for Agriculture and Development (IFAD). Many of the more successful MFIs in India today have their origins in organizational forms such as societies and trusts which funded their initial microfinance programs almost entirely through grants.in the form of promotional and capacity building grants for the massive number of 2.Donor funds have played a critical role in growing the microfinance sector in India.
SDC. The World Bank Rural Financial Access Survey highlighted the lack of access to finance for poor households across the range of possible services. DHAN etc • Components of business development services programs . SDC and USAID have funded capacity building. credit unions.SDC.) e. Ford Foundation Instruments available to support microfinance projects have been • Grants for capital • Grants for Technical Assistance • Loans for Technical Assistance • Loans for capital • Equity Besides supporting the growth of the financial infrastructure of the sector. 11 A New Paradigm in micro finance 37 . Significant research to highlight issues of access to financial services and evaluate specific approaches to address these issues have been facilitated by donor funding. banks. Cooperative Development Foundation. agencies such as DFID. IFAD and GTZ. SDC for BASIX. They also helped set up associations of Indian MFIs such as SADHAN and INAFI (International Network of Alternative Financial Institutions) . on lending funds. DFID. Ford Foundation • Technical assistance/capacity building project . such as a series of studies undertaken to provide a multi-perspective evaluation of the program to mark its ten year anniversary. as also supply and demand side constraints in two states . transformation funds for microfinance retail institutions (such as NGOs.DFID. financial companies etc. Ford Foundation.• Operational grants.g. Critical policy and evaluation studies have been carried out in the context of the SBLP initiated by donors like SDC. Ford Foundation.towards an enabling policy regulatory environment for microfinance in India. ILO. microfinance ratings (through Micro credit Ratings International Limited) and critical research for product and institutional innovation. Sri Ratan Tata Trust.Andhra Pradesh and Uttar Pradesh.
A new paradigm that emerges is that it is very critical to link poor to formal financial system. Dilemmas: Community Based • • • • • • Investor Owned • • • • • • Community Managed Community (self) financed Integrated (social & finance) Non profit / mutual benefit Only for poor 'Self regulated' Professionally managed Accepting outside funds for on-lending Minimalist (finance only) For profit For all under served clients Externally regulated 38 . The strengths and weaknesses of existing NGOs/CBOs and microfinance institutions in India indicate that despite their best of efforts they have not been able to link themselves with formal systems. It is desired that an intermediary institution is required between formal financial markets and grassroot. if this is an indicator of development. There are. however. NGOs and CBOs have been involved in community development for long and the experience shows that they have been able to improve the quality of life of poor. whatever the mechanism may be. if the goal of poverty alleviation has to be achieved. They have to be context specific. certain unresolved dilemmas regarding the nature of the intermediary institutions. These dilemmas are very contextual and only strengthen the argument that no unique model is applicable for all situations. The intermediary should encompass the strengths of both formal financial systems and NGOs and CBOs and should be flexible to the needs of end users. There are arguments both for and against each structure.
the end situation is accessibility of finance to poor. demand for finance. Whatever may the model of the intermediary institution. The following tables indicate the existing and desired situation for each component. housing) Dedicated from capital & subsidies Aware of rights and responsibilities • Communities not aware of rights and responsibilities • SUPPLY Existing Situation • • • • Desired Situation • • • • • Grant based (Foreign/GOI) Directed Credit unwilling and corrupt Not linked with mainstream Mainly focussed for credit Dominated Regular fund sources (borrowings/deposits) Demand responsive Part of mainstream (banks/FIs) Add savings and insurance Reduce dominance of informal. intermediation and regulation. DEMAND Existing Situation • • • Desired Situation • • fragmented Undifferentiated Addicted. unregulated suppliers • 39 . corrupted capital & subsidies by • Organized Differentiated (for consumption.The four pillars of microfinance credit system are supply.
IT. ROC. Future prospects 40 . RBI.g.g. SHGs Regulate rules of game Coherence and coordination across regulators Enabling environment • • Focussed on formal service providers (informal not regulated) regulating the wrong things e.INTERMEDIATION Existing Situation • • • • Desired Situation • • • • • Non specialized Not oriented to financial analysis Non profit capital Not linked to mainstream FIs Not organized REGULATION Specialized in services Thorough in analysis For profit Link up to FIs Self regulating financial financial • Existing Situation • Desired Situation include/informal recognise e. ROS/Commerce) Negatively oriented • • • • • 12. MOF/FIPB. interest rates Multiple and conflicting (FCRA.
Most of the issues stated above are being tackled at various levels and the initiatives if successful. Many of them have increased their interest rates. could substantially remove these hurdles. The RBI has established a micro-credit cell. In the last two Budget Speeches. at least to cover their costs. experience sharing etc. These will not only make microfinance more commercially oriented but will also increase the quality of governance. Over the last few years. Another welcome development in the Indian micro-finance sector in recent years has been the establishment of networks of micro finance practitioners. the Finance Ministers have talked about the need to enhance the reach of the MFIs. NABARD has set up a Micro-credit Innovations Department. These networks not only help in creating awareness but also help in formation. which among other things is looking into the regulatory and legal issues concerning microfinance in India. These could also develop into a Self Regulatory Organization of microfinance institutions. An increasing number of MFIs have begun to address the issue of financial sustainability of their programs and have started taking effective steps towards achieving sustainability. 41 . The RBI also made a special mention of microfinance in its credit policy announced in April 1999. the Government of India has been encouraging micro-finance as an alternative to IRDP type of poverty alleviation programs because of the sustainability of micro-finance activities. while HUDCO is also formulating a similar plan. The issue of inappropriate legal form for MFIs is being addressed by a Task Force setup by the Reserve Bank of India. Some of them have taken steps to convert themselves into for-profit corporations and have sought commercial investors to invest in them.
combined with a commercial approach from the MFIs in making microfinance financially sustainable. the microfinance scene in India has reached a takeoff point. This needs innovative and forward-looking policies. based on the ground realities of successful MFIs.Conclusion After the pioneering efforts of the last ten years. 42 . With some effort substantial progress can be made in taking MFIs to the next orbit of significance and sustainability. This. will make this sector vibrant and help achieve its single-minded mission of providing financial services to the poor.
Bibliography Books: 1.mfi. Ahamadabad.Indian micro finance by Prabhu Ghate 2.org www. Research papers of Indian institute of Management.google.cagp.icicifoundation.org 43 .basixindia.com www.com www.13.com www. Websites: www.