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Module5final 181217044843
Module5final 181217044843
NBFC
SYLLABUS
Financial inclusion – objectives - Microfinance as a
Development Tool - The Indian Experience -
Evolution and Character of microfinance in India -
Microfinance Delivery Methodologies and models-
Legal and Regulatory Framework- Impact of
Microfinance - Revenue Models of Microfinance-
Profitability, Efficiency and Productivity Emerging
issues
ACCORDING TO THE WORLD BANK, AROUND 2
BILLION PEOPLE DON’T USE FORMAL FINANCIAL
SERVICES AND MORE THAN 50% OF ADULTS IN
THE POOREST HOUSEHOLDS ARE UNBANKED.
Financial Inclusion
• Financial inclusion may be defined as the process of ensuring
access to financial services and timely and adequate credit where
needed by vulnerable groups such as weaker sections and low
income groups at an affordable cost (The Committee on Financial
Inclusion, Chairman: Dr. C. Rangarajan).
• Financial Inclusion, broadly defined, refers to universal access to a
wide range of financial services at a reasonable cost. These
include not only banking products but also other financial
services such as insurance and equity products (The Committee
on Financial Sector Reforms, Chairman: Dr.Raghuram G. Rajan).
Household Access To Financial Services
The Essence Of Financial Inclusion
• The essence of financial inclusion is to ensure delivery of
financial services which include –
bank accounts for savings and transactional
purposes,
low cost credit for productive,
personal and
other purposes, financial advisory services,
insurance facilities (life and non-life) etc.
Why Financial Inclusion ?
• Financial inclusion broadens the resource base of the financial system by
developing a culture of savings among large segment of rural population
and plays its own role in the process of economic development. Further, by
bringing low income groups within the perimeter of formal banking sector;
financial inclusion protects their financial wealth and other resources in
exigent circumstances. Financial inclusion also mitigates the exploitation of
vulnerable sections by the usurious money lenders by facilitating easy
access to formal credit.
• In rural areas, the Gini’s2 coefficient rose to 0.28 in 2011-12 from 0.26 in
2004-05 and during the same period to an all-time high of 0.37 from 0.35 in
urban areas.
Goals Of Financial Inclusion
• Access at a reasonable cost for all households to a full range of financial
services, including savings or deposit services, payment and transfer
services, credit and insurance;
• Sound and safe institutions governed by clear regulation and industry
performance standards;
• Financial and institutional sustainability, to ensure continuity and certainty of
investment; and
• Competition to ensure choice and affordability for clients.
FINANCIAL INCLUSION - SCOPE
Financial Inclusion should include access to financial products and services
like,
Bank accounts – check in account
Immediate Credit
Savings products
Remittances & Payment services
Insurance - Healthcare
Mortgage
Financial advisory services
Entrepreneurial credit
RBIs vision for 2020 is to open nearly 600 million new
customers’ accounts and service them through a variety of
channels by leveraging on IT.
WHAT ARE SOME OTHER MEASURES TAKEN?
• Thanks to use of technology in Finance industry, the void of inaccessibility
to Financial services has been filled.
• Mangalam in Puducherry became the first village in India where all the households were
provided with facilities of Banking.
• General Credit Cards (GCCs) were issued to the poor, low-income group and disadvantaged to
help them access easy credit.
• A 100% Financial Inclusion campaign was launched by commercial banks in different regions.
This resulted in states or UTs like Puducherry, Kerala and Himachal Pradesh announcing a
100% financial inclusion in their districts.
• Many startups were launched to work towards increasing the Financial Inclusion. For instance,
Fintech is working to create mobile payment and micro-lending facilities for financially
underbanked users.
• There are many online payments and mobile payment services to facilitate ease with which
unbanked people can immerse themselves in the digital economy, like AliPay and Paytm, and
foster financial inclusiveness.
• These companies have also come up with innovations to promote transparency in their dealings
Progress In Financial Inclusion
Progress of financial inclusion since the launch of financial inclusion plans clearly
indicates that banks are progressing in areas like opening of banking outlets, deploying
BCs, opening of BSBD accounts, grant of credit through KCCs and GCCs. Detailed trends
are furnished in the following charts.
• Due to RBI’s concerted efforts since 2005, the number of branches of Scheduled
Commercial Banks increased manifold from 68,681 in March 2006 to 1,02,343 in March
2013, spread across length and breadth of the country (Chart 4). ™
• In rural areas, the number of branches increased from 30,572 to 37,953 during March 2006
to March 2013. As compared with rural areas, number of branches in semi-urban areas
increased more rapidly.
2. Villages Covered:
• The number of banking outlets in villages with population more than 2000 as
well as less than 2000 increased consistently since March 2010.
3. Total Bank Outlets (Including Rrbs)
• Total Bank Outlets (including RRBs) ™ Total number of banking outlets in villages increased
from 67,694 in March 2010 to 2,68,454 in March 2013 (increased around 4 times during the
period of three years). Of total branches, banking outlets through BCs increased from
34,174 to 2,21,341 during the same period (increased around 6.5 times).
4. BSBD Accounts Opened
• BSBD Accounts Opened ™ The number of BSBD accounts opened increased from 73.45
million in March 2010 to 182.06 million in March 2013.
• RBI advised banks to provide small overdrafts in BSBD accounts. Accordingly up to March
2013, 3.95 million BSBD accounts availed OD facility of Rs. 1.55 billion (These figures
respectively, were 0.18 million and 0.10 billion in March 2010).
5. Kisan Credit Cards (KCC) Issued:
• Banks have been advised to issue KCCs to small farmers for meeting their credit
requirements. Up to March 2013, the total number of KCCs issued to farmers remained at
33.79 million with a total outstanding credit of Rs.2622.98 billion (Chart 7).
6. General Credit Cards (GCC) Issued:
• Banks have been advised to introduce General Credit Card facility up to Rs. 25,000/- at
their rural and semi-urban branches. Up to March 2013, banks had provided credit
aggregating to Rs.76.34 billion in 3.63 million GCC accounts
7. ICT Based Accounts - Through Bcs
• In order to provide efficient and cost-effective banking services in the un-banked and
remote corners of the country, RBI directed commercial banks to provide ICT based
banking services – through BCs. These ICT enabled banking services have CBS
connectivity to provide all banking services including deposit and withdrawal of money in
the financially excluded regions. ™
• The number of ICT-based transactions through BCs increased from 26.52 million in March
2010 to 250.46 million in March 2013, while transactions amount increased steadily from
Rs.6.92 billion to Rs.233.88billion during the same period.
8. Expansion Of ATM Network:
• The total number of ATMs in rural India witnessed a CAGR of 30.6% during March 2010 to
March 2013. The number of rural ATMs increased from 5,196 in March 2010 to 11,564 in
March 2013
9. Financial Literacy Initiatives
• Financial education, financial inclusion and financial stability are three elements of an integral strategy,
as shown in the diagram below. While financial inclusion works from supply side of providing access to
various financial services, financial education feeds the demand side by promoting awareness among
the people regarding the needs and benefits of financial services offered by banks and other institutions.
Going forward, these two strategies promote greater financial stability.
• Financial Stability Development Council (FSDC) has explicit mandate to focus on financial inclusion and
financial literacy simultaneously. ™
• RBI has issued revised guidelines on the Financial literacy Centres (FLC) on June 6, 2012, for setting
up FLCs, as detailed in Box 1 above.
10. Growth In SHG-bank Linkage
• This model helps in bringing more people under sustainable development in
a cost effective manner within a short span of time. As on March 2011, there
are around 7.46 million saving linked SHGs with aggregate savings of
Rs.70.16 billion and 1.19 million credit linked SHGs with credit of Rs. 145.57
billion (Source: NABARD, Status of Microfinance in India).
11.Growth Of MFIs:
• Though RBI has adopted the bank-led model for achieving financial
inclusion, certain NBFCs which were supplementing financial inclusion
efforts at the ground level, specializing in micro credit have been recognized
as a separate category of NBFCs as NBFC-MFIs. ™
• At present, around 30 MFIs have been approved by RBI. Their asset size
has progressively increased to reach Rs. 19,000 crore as at end Sept 2013.
12. Bank Credit To MSME
• MSME Sector Which Has Large Employment Potential Of 59.7 Million Persons Over 26.1
Million Enterprises, Is Considered As An Engine For Economic Growth And Promoting
Financial Inclusion In Rural Areas. MSMES Primarily Depend On Bank Credit For Their
Operations. ™
• Bank Credit To MSME Sector Witnessed A CAGR Of 31.4% During The Period March 2006
To March 2012. Of Total Credit To MSME, Public Sector Banks Contributed The Major
Share Of 76%, While Private Sector Banks Accounted For 20.2% And Foreign Banks
Accounted For Only 3.8% As On March 31, 2012
13.Insurance Penetration In The Country
• The total insurance (life and non-life) penetration, in terms of the ratio of insurance premium
as a percentage of GDP increased from 2.32 in 2000-01 to 5.10 in 2010-11. The life
insurance penetration as a percentage of GDP stood at 4.40 in 2010-11 while the non-life
insurance penetration remained at 0.71 during the same period In other words, there is vast
untapped potential as regards insurance penetration.
14. Equity Penetration In The Country
• The number of investor accounts accounted for a meagre 1.71%
of total population of the country
15. Financial Inclusion Initiatives – Private
Corporates:
There are mainly three channels for the regulation of microfinance institutions.
NBFCs are registered under Reserve Bank of India. Further co operative
institutions are registered under concerned state co operative society’s act
and multi state co operative society under central government. Non profit
entities are registered under societies or trust acts under the concerned
state. Company under Indian companies act 1956 also possible for mutual
benefit and profit based undertakings.
NGO-MFIs are non-profit MFIs left almost entirely unregulated and registered
mainly under societies act or trust act. The major NGO-MFI sample includes
All Backward Class Relief & Development Mission, Bharat Integrated Social
Welfare Agency (BISWA), Cashpor Micro Credit, Evangelical Social Action
Forum (ESAF) and Indian Association for Savings and Credit (IASC).
REGULATIONS TO BE SPECIFIED
1. A study of 9 large and 2 small NBFC-MFIs shows that loans constitute an average of 95% of
total assets (excluding cash and bank balances and money market instruments). We may,
therefore, accept that a NBFC pre-dominantly provides financial services to the Microfinance
sector if its loans to the sector constitute not less than 90% of its total assets (excluding cash
and bank balances and money market instruments). It is also necessary to specify that a NBFC
which is not a NBFC-MFI shall not be permitted to have loans to the Microfinance sector which
exceed 10% of its total assets.
2. Most MFIs consider a low-income borrower as a borrower who belongs to a household whose
annual income does not exceed `50,000/-. This is a reasonable definition and can be accepted.
3 a) Currently, most MFIs give individual loans which are between `10,000 and `15,000. However,
some large NBFCs also give larger loans, even in excess of `50,000 for special purposes like
micro-enterprises, housing and education.
b) It is important to restrict the size of individual loans as larger loans can lead to over-borrowing,
diversion of funds and size of repayment installments which are beyond the repayment capacity
of the borrower.
c) It is, therefore, suggested that the size of an individual loan should be restricted to `25,000.
Further, to prevent over-borrowing, the aggregate value of all outstanding loans of an individual
borrower should also be restricted to `25,000.
CONTD…
4 a) MFIs normally give loans which are repayable within 12 months irrespective of the
amount of the loan. However, the larger the loan, the larger the amount of the repayment
installment, and a large installment may strain the repayment capacity of the borrower and
result in ever greening or multiple borrowing. At the same time, if the repayment installment
is too small, it would leave cash with the borrower which could be directed to other uses
and not be available for repayment when repayment is due.
b) There has, therefore, to be a linkage between the amount of the loan and the tenure of the
loan. It is, therefore, suggested that for loans not exceeding `15,000, the tenure of the loan
should not be less than 12 months and for other loans the tenure should not be less than 24
months. The borrower should however have the right of prepayment in all cases without
attracting penalty.
5 a) Low-income borrowers often do not have assets which they can offer as collateral, and it
is important to ensure that in the event of default, the borrower does not lose possession of
assets which s/he may need for her/his continued existence.
b) It is, therefore, suggested that all loans should be without collateral.
Contd..
6 a) It is often argued that loans should not be restricted to income generating activities but should also be
given for other purposes such as repayment of high-cost loans to moneylenders, education, medical
expenses, consumption smoothing, acquisition of household assets, housing, emergencies, etc. A recent
study by Centre for Microfinance of borrowers in Hyderabad indicates that Microfinance is useful in
smoothening consumption and relieving seasonal liquidity crises that visit poor families and that it obviates
the need for high-cost borrowing from informal sources.
b) The need for loans for the above purposes cannot be denied. At the same time there are powerful
arguments why loans by NBFC-MFIs should be confined to income-generating activities.
Firstly, the main objective of NBFC-MFIs should be to enable borrowers, particularly women to work their
way out of poverty by undertaking activities which generate additional income. This additional income,
after repayment of the loan and interest, should provide a surplus which can augment the household
income, enable consumption smoothing and reduce dependence on the moneylender.
Secondly, if the loans are not used for repayment of high-cost borrowing, but are used for consumption,
they will in fact add to the financial burden of the household as there will be no additional source from
which the loan and interest thereon can be repaid.
Thirdly, borrowing for non-income generating purposes may tempt borrowers to borrow in excess of their
their repayment capacity.
Finally, if there is no identified source from which interest and installment can be paid, the rate of
delinquency will increase. This additional cost will push interest rates upwards and may even result in
CONTD..
c) Therefore, a balance has to be struck between the benefits of restricting loans only for
income-generating purposes and recognition of the needs of low-income groups for loans
for other purposes.
d) According to “Access to Finance in Andhra Pradesh, 2010, CMF/IFMR, Chennai” the usage
of loans given by JLGs and SHGs is as under :
e) We would however suggest that not more than 25% of the loans granted by MFIs should
be for non-income generating purposes.
Contd…
7 a) Currently, some MFIs recover loans by weekly installments while other MFIs recover loans by monthly
installments. The rules made under the Ordinance issued by the Andhra Pradesh Government specify that
recovery should be made only by monthly installments.
b) In a representation made by the Government of Andhra Pradesh to the Sub- Committee it has been argued
that borrowers often have uncertain levels of income flows and they are put to great hardship to mobilize,
accumulate and service a weekly repayment commitment. It has also been stated by some MFIs that they
are able to reduce costs by moving from a weekly system of repayment to a monthly system of repayment.
c) On the other hand, others have argued that some income-generating activities provide a constant flow of
cash and leaving idle cash in the hands of borrowers increases the risk that the cash may be diverted to
purposes other than repayment of loans. A weekly repayment schedule also means that the effective
interest can be reduced. However, N. Srinivasan in the 2010 Microfinance India Report argues that there is
enough evidence to suggest that repayment rates do not materially suffer if the repayments are set at
fortnightly or monthly intervals.
d) In our opinion, each purpose for which a loan is used would generate its own pattern of cash flows.
Therefore, the repayment pattern should not be rigid but should be so designed as to be most suitable to
the borrower’s circumstances. We would, therefore, suggest that while MFIs should be encouraged to move
to a monthly repayment model, freedom should be given to the MFI to fix a pattern of repayment which can
be weekly, fortnightly or monthly depending upon the nature of the loan. The choice of a weekly, fortnightly
or monthly repayment schedule should be left to the borrower to suit his/her individual circumstances.
Contd…
8. We have observed that some MFIs operate not merely as providers of credit but also
provide other services to the borrowers and others. These services include acting as
insurance agents, acting as agents for the suppliers of mobile phones and telecom
services, acting as agents for the sale of household products, providing agricultural
advisory services etc. While these service can profitably be provided by MFIs along with the
supply of credit, there is a risk that given the vulnerable nature of the borrower and his/her
inadequate negotiating power, an element of compulsion may creep in unless the provision
of these services is regulated. It is, therefore, necessary that the regulator limit the nature of
services which can be provided, as also the income which can be generated from such
services, the latter as a percentage of the total income of the MFIs.
CHALLENGES FACED BY MICRO FINANCE
There are over 10,000 microfinance institutions serving in excess of 150m customers,
100m of them being the poorest families. Microfinance is gathering momentum to
become a significant force in India. Some challenges faced by micro finance in India
are:
• Financial illiteracy: One the major challenge in India towards the growth of the
microfinance sector i.e. illiteracy of the people. This makes it difficult in creating
awareness of microfinance and even more difficult to serve them as microfinance
clients.
• Lack of information There are various sources of credit information in India, but none
of these focuses on small, rural borrowers. Credit information on such borrowers is
difficult to obtain because the majority of the rural poor rely on moneylenders and
other informal lenders, and it is not in the interest of such lenders to pass on a
borrower’s good credit repayment record to other providers of finance.
• Inability to generate funds: MFIs have inability to raise sufficient fund in the
microfinance sector which is again an important concerning challenge. Through
NBFCs are able to raise funds through private equity investment because of the for
profit motive, such MFIs are restricted from taking public deposits
CONTD….
• Heavy dependence on banks & FIS: MIF’s are dependent on borrowing from banks & FIS.
For most of the MFI’s funding sources are restricted to private banks & apex MFI’s. In
these available banks funds are typically short term i.e. maximum 2 years period. Also
there is a tendency among some lending banks to sanction and disburse loans to MFI,s
around the end of the accounting year in pursuit of their targets.
• Weak governance: Many MFI’s are not willing to convert to a corporate structure; hence
they trend to remain closed to transparency and improved governance, thus unable to
attract capital. MFI’s also facing a challenge to strike a balance between social and
business goals. Managements need to adapt business models based on changing
scenarios & increased transparency; this will enable attracting capital infusion and
private equity funds.
• Interest Rate: MFIs are charging very high interest rates, which the poor find difficult to
pay. MFIs are private institutions and therefore require being economically sustainable.
They do not get any subsidized credit for their lending activities and that is why they
need to recover their operational costs from borrowers
• Regional Imbalances: There is unequal geographical growth of Microfinance institutions
and SHGs in India. About 60% of the total SHG credit linkages in the country are
concentrated in the Southern States. However, in States which have a larger share of the
poor, the coverage is comparatively low. Main reason for this is the state government
support, NGO concentration and public awareness
Other Issues
Risk of failure to pay
Lack of information
Weak regulatory framework
Lack of elastic services and products
Interest Rate
Education Level
Improper usage of Loan
Language difficulty
Lack of Insurance Services
Lack of access to Funding
• Risk of failure to pay :- There is uncertainty regarding the lending to economically
weaker section of society. The rural poor have irregularity/volatility in income
streams and expenditure patterns, and there is possibility of systemic risks such as
crop failures or a fall in commodity prices, and therefore, may face real difficulties
servicing loans. So banks have genuine concerns while dealing with the rural poor,
and tend to identify such loans as risky.
• Lack of information :- There is uncertainty regarding the lending to economically
weaker section of society. The rural poor have irregularity/volatility in income
streams and expenditure patterns, and there is possibility of systemic risks such as
crop failures or a fall in commodity prices, and therefore, may face real difficulties
servicing loans. So banks have genuine concerns while dealing with the rural poor,
and tend to identify such loans as risky.
• Weak regulatory framework :- Government has not been able to develop
and enforce a legal and regulatory framework conducive to rural
finance, so that contract design, contract renegotiation, and contract
enforcement remain weak, making it even more difficult for financiers
to provide borrowers with the right incentives for repayment
• Language difficulty:- Language barrier makes communication with the clients (verbal and
written) is an issue that creates a problem in growth and expansion of the organization
because around 54% language barrier has been identified in MFIs. As the education level
of clients is low so it is difficult to communicate with them .For this reason it is also difficult
for the MFIs employees to make the clients to understand the policy and related details.
• Lack of Insurance Services:- Another factor contributing to the lack of growth in MFIs is that
requisite financial support has not been provided to MFIs by concerned agencies. Around
68% of MFIs response was in favour of that government don’t support them to meet the
funds requirement as MFIs cannot alone remove the poverty from the country.
• Lack of access to Funding:- Poor people are exposed to monetary shocks but, the current
Microfinance programme in India is just focused on regular saving and micro-credit.
However, some of the MFIs have started providing insurance services but the efforts are
still at an experimental stage.
PROFITABILITY EFFICIENCY AND
PRODUCTIVITY
EFFICIENCY AND PRODUCTIVITY
Efficiency and productivity indicators are performance measures
that show how well the institution is streamlining its operations.
Productivity indicators reflect the amount of output per unit of
input, while efficiency indicators also take into account the cost of
the inputs and/or the price of outputs. Since these indicators are
not easily manipulated by management decisions, they are more
readily comparable across institutions than, say, profitability
indicators such as return on equity and assets. On the other
hand, productivity and efficiency measures are less
comprehensive indicators of performance than those of
profitability.
Microfinance institutions have much lower rates of efficiency than commercial
banks because on a dollar per dollar basis microcredit is highly labor
intensive: a hundred-dollar loan requires about as much administrative effort
as a loan a thousand times larger. In an MFI, administrative costs may be
$15, $20, or even $30 for each $100 in the loan portfolio, so the efficiency
ratio is 15%, 20% or 30%, whereas in a commercial bank efficiency ratios of
1.5%, 2% or 3% are common. Economies of scale have much less impact
on efficiency in MFIs than is usually believed because of the high variable
costs of the microcredit technology. If the loan portfolio of an MFI exceeds
$2 to $3 million, growth does not seem to bring significant efficiency gains
and small MFIs can often be more efficient than their much larger peers.
This publication includes four indicators to measure productivity and
efficiency: Operating Expenses, Cost per Borrower, Personnel Productivity
PROFITABILITY
• Profitability measures, such as return on equity and return on assets, tend
to summarize performance in all areas of the company. If portfolio quality is
poor or efficiency is low, this will be reflected in profitability. Because they
are an aggregate of so many factors, profitability indicators can be difficult to
interpret. The fact that an MFI has a high return on equity says little about
why that is so. All performance indicators tend to be of limited use (in fact,
they can be outright misleading) if looked at in isolation and this is
particularly the case for profitability indicators. To understand how an
institution achieves its profits (or losses), the analysis also has to take into
account other indicators that illuminate the operational performance of the
institution, such as operational efficiency and portfolio quality. The
profitability analysis is further complicated by the fact that a significant
number of microfinance institutions still receive grants and subsidized loans.
“Comparing apples with apples” is always a problem in microfinance,
CONTD…
• Creative accounting can have an astonishing impact on profits. Normally,
external auditors, tax authorities and banking regulators tend to set limits on
this sort of creativity, but microfinance is not yet a normal industry. External
auditors have, on the whole, been slow to adapt to microfinance, few MFIs
are subject to taxation, and even fewer fall under the authority of banking
supervisors. This means that more than the usual amount of care is needed
for the analysis of microfinance institutions. A simple example will illustrate
this. Banks usually don’t have much latitude in setting their loan loss
provisions. Regulators and tax authorities will tell them what to do, and
auditors will watch that they do it. At this point however, relatively few MFIs
are regulated financial institutions and, for those who aren’t, it would be
easy to achieve a dramatic change in their profitability through the simple
expedient of adjusting the level of loan loss provisions. An analyst who
focuses exclusively on profitability would have no way of detecting this.
CONTD…
• Finally, this guide has grouped portfolio yield among the profitability
indicators, not because the cost of credit to the clients measures profitability
per se, but because profitability is often a function of how much MFIs charge
their clients. Other financial institutions are limited by competition as to how
much they can charge, but microfinance is still such a new activity that
many MFIs operate in a seller’s market. In the absence of competition, even
highly inefficient MFIs can remain profitable by simply raising their rates. On
the other hand, in a fiercely competitive market like Bolivia even very
efficient MFIs find it difficult to achieve high portfolio yields. This publication
includes three indicators to measure profitability: Return on Equity, Return
on Assets and Portfolio Yield. As mentioned earlier, return on equity and
return on assets have been adjusted for subsidies and varying accounting
practices in order to make the results comparable across institutions.