Professional Documents
Culture Documents
ON
“A critical analysis of Micro finance in India”
SUBMITTED
FOR THE PARTIAL FULFILLMENT OF MBA (FT) DEGREE
OF
BURKATULLAH UNIVERSITY BHOPAL
BY
RAHUL PATEL
(MBA IV SEMESTER)
TIT MBA BHOPAL
2010
1
DECLARATION
MBA IV semester
2
CERTIFICATE
This is to certified that miss Rahul Patel has completed her Project
work on the subject entitled “A critical analysis of Micro finance in India”which is based on
research study undertaken by her. The project report is completed by the candidate under my
supervision. It is an original unaided research study completed under my supervision to meet the
partial requirement of MBA (F.T.) degree of Burkatullah University Bhopal.
Date……………… …………………
(Supervision)
3
Contents
Chapter 1-Introduction…………………………………………………………….....................5
Bibliography ……………………………………………………………………………………56
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Chapter 1: Introduction
"The poor stay poor, not because they are lazy but because they have no access to capital."
5
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.
The typical micro finance clients are low-income persons that do not have
access to formal financial institutions. Micro finance clients are typically self-employed, often
household-based entrepreneurs. In rural areas, they are usually small farmers and others who are
engaged in small income-generating activities such as food processing and petty trade. In urban
areas, micro finance activities are more diverse and include shopkeepers, service providers,
artisans, street vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a
relatively unstable source of income.
Access to conventional formal financial institutions, for many reasons, is
inversely related to income: the poorer you are, the less likely that you have access. On the other
hand, the chances are that, the poorer you are, the more expensive or onerous informal financial
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arrangements. Moreover, informal arrangements may not suitably meet certain financial service
needs or may exclude you anyway. Individuals in this excluded and under-served market
segment are the clients of micro finance.
As we broaden the notion of the types of services micro finance encompasses, the
potential market of micro finance clients also expands. It depends on local conditions and
political climate, activeness of cooperatives, SHG & NGOs and support mechanism. For
instance, micro credit might have a far more limited market scope than say a more diversified
range of financial services, which includes various types of savings products, payment and
remittance services, and various insurance products. For example, many very poor farmers may
not really wish to borrow, but rather, would like a safer place to save the proceeds from their
harvest as these are consumed over several months by the requirements of daily living. Central
government in India has established a strong & extensive link between NABARD (National
Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative
Banks, Primary Agriculture & Marketing Societies at national, state, district and village level.
India is said to be the home of one third of the world’s poor; official estimates range from
26 to 50 percent of the more than one billion population.
About 87 percent of the poorest households do not have access to credit.
The demand for microcredit has been estimated at up to $30 billion; the supply is less
than $2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, 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. 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. Over the last
five years, the microfinance industry has achieved significant growth in part due to the
participation of commercial banks. Despite this growth, the poverty situation in India continues
to be challenging.
7
Some principles that summarize a century and a half of development
practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and
endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004:
Poor people need not just loans but also savings, insurance and money transfer
services.
Microfinance must be useful to poor households: helping them raise income, build up
assets and/or cushion themselves against external shocks.
“Microfinance can pay for itself.” Subsidies from donors and government are scarce
and uncertain, and so to reach large numbers of poor people, microfinance must pay
for itself.
Microfinance also means integrating the financial needs of poor people into a
country’s mainstream financial system.
“Donor funds should complement private capital, not compete with it.”
“The key bottleneck is the shortage of strong institutions and managers.” Donors
should focus on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit.
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Financial needs and Financial services
In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of needs:
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.
Poor people find creative and often collaborative ways to meet these needs,
primarily through creating and exchanging different forms of non-cash value. Common
substitutes for cash vary from country to country but typically include livestock, grains,
jewellery and precious metals.
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poverty. While much progress has been made in developing a viable, commercial microfinance
sector in the last few decades, several issues remain that need to be addressed before the industry
will be able to satisfy massive worldwide demand.
• Institutional inefficiencies
Role of Microfinance:
The micro credit of microfinance progamme was first initiated in the year 1976
in Bangladesh with promise of providing credit to the poor without collateral , alleviating
poverty and unleashing human creativity and endeavor of the poor people. Microfinance impact
studies have demonstrated that:
Microfinance helps poor households meet basic needs and protects them against risks.
The use of financial services by low-income households leads to improvements in
household economic welfare and enterprise stability and growth.
The level of impact relates to the length of time clients have had access to financial
services.
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The Origin of Microfinance
Although neither of the terms microcredit or microfinance were used in the academic
literature nor by development aid practitioners before the 1980s or 1990s, respectively, the
concept of providing financial services to low income people is much older.
While the emergence of informal financial institutions in Nigeria dates back to the 15 th century,
they were first established in Europe during the 18th century as a response to the enormous
increase in poverty since the end of the extended European wars (1618 – 1648). In 1720 the first
loan fund targeting poor people was founded in Ireland by the author Jonathan Swift. After a
special law was passed in 1823, which allowed charity institutions to become formal financial
intermediaries a loan fund board was established in 1836 and a big boom was initiated. Their
outreach peaked just before the government introduced a cap on interest rates in 1843. At this
time, they provided financial services to almost 20% of Irish households. The credit cooperatives
created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million people by 1910.
He stated that the main objectives of these cooperatives “should be to control the use made of
money for economic improvements, and to improve the moral and physical values of people and
also, their will to act by themselves.”
In the 1880s the British controlled government of Madras in South India, tried to use the German
experience to address poverty which resulted in more than nine million poor Indians belonging to
credit cooperatives by 1946. During this same time the Dutch colonial administrators constructed
a cooperative rural banking system in Indonesia based on the Raiffeisen model which eventually
became Bank Rakyat Indonesia (BRI), now known as the largest MFI in the world.
Microfinance Today
In the 1970s a paradigm shift started to take place. The failure of subsidized
government or donor driven institutions to meet the demand for financial services in developing
countries let to several new approaches. Some of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in
Indonesia without any subsidies and is now “well-known as the earliest bank to institute
commercial microfinance”. While this is not true with regard to the achievements made in
Europe during the 19th century, it still can be seen as a turning point with an ever increasing
impact on the view of politicians and development aid practitioners throughout the world. In
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1973 ACCION International, a United States of America (USA) based non governmental
organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus
started what later became known as the Grameen Bank by lending a total of $27 to 42 people in
Bangladesh. One year later the Self-Employed Women’s Association started to provide loans of
about $1.5 to poor women in India. Although the latter examples still were subsidized projects,
they used a more business oriented approach and showed the world that poor people can be good
credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than
that of traditional banks. Another milestone was the transformation of BRI starting in 1984. Once
a loss making institution channeling government subsidized credits to inhabitants of rural
Indonesia it is now the largest MFI in the world, being profitable even during the Asian financial
crisis of 1997 – 1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives
of various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit Summit. This was the start of a nine year long
campaign to reach 100 million of the world poorest households with credit for self employment
by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been
reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the
poorest before they took their first loan. Since the campaign started the average annual growth
rate in reaching clients has been almost 40 percent. If it has continued at that speed more than
100 million people will have access to microcredit by now and by the end of 2005 the goal of the
microcredit summit campaign would be reached. As the president of the World Bank James
Wolfensohn has pointed out, providing financial services to 100 million of the poorest
households means helping as many as 500 – 600 million poor people.
Some of the most recent strategic policy initiatives in the area of Microfinance
taken by the government and regulatory bodies in India are:
Working group on credit to the poor through SHGs, NGOs, NABARD, 1995
The National Microfinance Taskforce, 1999
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Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002
Micro savings: These are deposit services that allow one to save small amounts of money
for future use. Often without minimum balance requirements, these savings accounts allow
households to save in order to meet unexpected expenses and plan for future expenses.
Micro insurance: It is a system by which people, businesses and other organizations make a
payment to share risk. Access to insurance enables entrepreneurs to concentrate more on
developing their businesses while mitigating other risks affecting property, health or the ability
to work.
Remittances: These are transfer of funds from people in one place to people in another,
usually across borders to family and friends. Compared with other sources of capital that can
fluctuate depending on the political or economic climate, remittances are a relatively steady
source of funds.
Banks in India are regulated and supervised by the Reserve Bank of India
(RBI) under the RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the
Cooperative Societies Acts of the respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act.
There is no specific law catering to NGOs although they can be registered under the Societies
Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a
strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing
13
deposits from clients who also borrow. This tendency is a concern due to enforcement problems
that tend to arise with self-regulatory organizations. In January 2000, the RBI essentially created
a new legal form for providing microfinance services for NBFCs registered under the Companies
Act so that they are not subject to any capital or liquidity requirements if they do not go into the
deposit taking business. Absence of liquidity requirements is concern to the safety of the sector.
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15
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Chapter 2: Microfinance in India
At present lending to the economically active poor both rural and urban is
pegged at around Rs 7000 crores in the Indian banks’ credit outstanding. As against this,
according to even the most conservative estimates, the total demand for credit requirements for
this part of Indian society is somewhere around Rs 2,00,000 crores.
In terms of demand for micro-credit or micro-finance, there are three segments, which demand
funds. They are:
At the very bottom in terms of income and assets, are those who are landless and
engaged in agricultural work on a seasonal basis, and manual laborers in forestry,
mining, household industries, construction and transport. This segment requires, first
and foremost, consumption credit during those months when they do not get labour work,
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and for contingencies such as illness. They also need credit for acquiring small
productive assets, such as livestock, using which they can generate additional income.
The next market segment is small and marginal farmers and rural artisans, weavers
and those self-employed in the urban informal sector as hawkers, vendors, and
workers in household micro-enterprises. This segment mainly needs credit for working
capital, a small part of which also serves consumption needs. This segment also needs
term credit for acquiring additional productive assets, such as irrigation pump sets, bore
wells and livestock in case of farmers, and equipment (looms, machinery) and work
sheds in case of non-farm workers.
The third market segment is of small and medium farmers who have gone in for
commercial crops such as surplus paddy and wheat, cotton, groundnut, and others
engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment
includes those in villages and slums, engaged in processing or manufacturing activity,
running provision stores, repair workshops, tea shops, and various service enterprises.
These persons are not always poor, though they live barely above the poverty line and
also suffer from inadequate access to formal credit.
Well these are the people who require money and with Microfinance it is possible. Right
now the problem is that, it is SHGs' which are doing this and efforts should be made so that the
big financial institutions also turn up and start supplying funds to these people. This will lead to a
better India and will definitely fulfill the dream of our late Prime Minister, Mrs. Indira
Gandhi, i.e. Poverty.
“Money, says the proverb makes money. When you have got a little, it is often easy to get
more. The great difficulty is to get that little.”Adams Smith.
India falls under low income class according to World Bank. It is second
populated country in the world and around 70 % of its population lives in rural area. 60% of
people depend on agriculture, as a result there is chronic underemployment and per capita
income is only $ 3262. This is not enough to provide food to more than one individual. The
obvious result is abject poverty, low rate of education, low sex ratio, and exploitation. The major
factor account for high incidence of rural poverty is the low asset base. According to Reserve
Bank of India, about 51 % of people house possess only 10% of the total asset of India .This has
resulted low production capacity both in agriculture (which contribute around 22-25% of GDP)
and Manufacturing sector. Rural people have very low access to institutionalized credit (from
commercial bank).
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Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying
on informal financing intermediaries like money lenders, family members, friends etc.
Seeing the figures from the above table, it is evident that the share of institutional credit is much
more now.
The above survey result shows that till 1991, institutional credit accounted for around two-thirds
of the credit requirement of rural households. This shows a comparatively better penetration of
the banking and financial institutions in rural India.
Percentage distribution of debt among indebted Rural Labor Households by source of debt
The table above reveals that most of the rural labour households prefer to raise loan
from the non-institutional sources. About 64% of the total debt requirement of these households
was met by the non-institutional sources during 1999-2000. Money lenders alone provided debt
(Rs.1918) to the tune of 32% of the total debt of these households as against 28% during 1993-
94. Relatives and friends and shopkeepers have been two other sources which together
accounted for about 22% of the total debt at all-India level.
The institutional sources could meet only 36% of the total credit requirement of the rural
labour households during 1999-2000 with only one percent increase over the previous survey in
1993-94. Among the institutional sources of debt, the banks continued to be the single largest
source of debt meeting about 17 percent of the total debt requirement of these households. In
comparison to the previous enquiry, the dependence on co-operative societies has increased
considerably in 1999-2000. During 1999-2000 as much as 13% of the debt was raised from this
source as against 8% in 1993-94. However, in the case of the banks and the government
agencies it decreased marginally from 18.88% and 8.27% to 17.19% and 5.37% respectively
during 1999-2000 survey.
* All India Debt and Investment Survey, NSSO, 59th round, 2003
Table shows the increasing influence of moneylenders in the last decade. The
share of moneylenders in the total non institutional credit was declining till 1981, started picking
up from the 1990s and reached 27 per cent in 2001.
At the same time the share of commercial banks in institutional credit has come
down by almost the same percentage points during this period. Though, the share of cooperative
societies is increasing continuously, the growth has flattened during the last three decades.
2.3 Distribution based on Asset size of Rural Households (in per cent)
The households with a lower asset size were unable to find financing options from
formal credit disbursement sources. This was due to the requirement of physical collateral by
banking and financial institutions for disbursing credit. For households with less than Rs 20,000
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worth of physical assets, the most convenient source of credit was non institutional agencies like
landlords, moneylenders, relatives, friends, etc.
Consumption credit constituted two-thirds of the credit usage within which almost
three-fourths of the demand was for short periods to meeting emergent needs such as illness and
household expenses during the lean season. Almost entire demand for the consumption credit
was met by informal sources at high to exploitive interest rates that varied from 30 to 90 per cent
per annum.
Almost 75 per cent of the production credit (which accounted for about one-third of the total
credit availed of by the rural masses) was met by the formal sector, mainly banks and
cooperatives.
Starting in the late 1960s, India was the home to one of the largest state interventions
in the rural credit market. This phase is known as the “Social Banking” phase.
The Net State Domestic Product (NSDP) is a measure of the economic activity in
the state and comparing it with the utilization of bank credit or bank deposits indicates how much
economic activity is being financed by the banks and whether there exists untapped potential for
increasing deposits in that state.
E.g. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at around
75%-80% in Bihar and Jharkhand or these states are not as under banked as thought to be.
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2.5 Microfinance Social Aspects
Microfinance programs targeting women became a major plank of poverty alleviation and gender
strategies in the 1990s. Increasing evidence of the centrality of gender equality to poverty
reduction and women’s higher credit repayment rates led to a general consensus on the
desirability of targeting women.
Self- help groups (SHGs) play today a major role in poverty alleviation in
rural India. A growing number of poor people (mostly women) in various parts of India are
members of SHGs and actively engage in savings and credit (S/C), as well as in other activities
(income generation, natural resources management, literacy, child care and nutrition, etc.). The
S/C focus in the SHG is the most prominent element and offers a chance to create some control
over capital, albeit in very small amounts. The SHG system has proven to be very relevant and
effective in offering women the possibility to break gradually away from exploitation and
isolation.
Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or
only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range
of government and non- governmental agencies, they now make up 90% of all SHGs.
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The rules and regulations of SHGs vary according to the preferences of the
members and those facilitating their formation. A common characteristic of the groups is that
they meet regularly (typically once per week or once per fortnight) to collect the savings from
members, decide to which member to give a loan, discuss joint activities (such as training,
running of a communal business, etc.), and to mitigate any conflicts that might arise. Most SHGs
have an elected chairperson, a deputy, a treasurer, and sometimes other office holders.
Most SHGs start without any external financial capital by saving regular
contributions by the members. These contributions can be very small (e.g. 10 Rs per week).
After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from
savings in the form of small internal loans for micro enterprise activities and consumption. Only
those SHGs that have utilized their own funds well are assisted with external funds through
linkages with banks and other financial intermediaries.
However, it is generally accepted that SHGs often do not include the poorest of the poor, for
reasons such as:
(a) Social factors (the poorest are often those who are socially marginalized because of caste
affiliation and those who are most skeptical of the potential benefits of collective action).
(b) Economic factors (the poorest often do not have the financial resources to contribute to the
savings and pay membership fees; they are often the ones who migrate during the lean season,
thus making group membership difficult).
(c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the most
difficult to reach and motivate, implementing agencies tend to leave them out, preferring to focus
on the next wealth category).
SHGs can only fulfill a role in the rural economy if group members have
access to financial capital and markets for their products and services. While the groups initially
generate their own savings through thrift (whereby thrift implies savings created by postponing
almost necessary consumption, while savings imply the existence of surplus wealth), their aim is
often to link up with financial institutions in order to obtain further loans for investments in rural
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enterprises. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the
loan amount is proportionate to the group's savings) or as fixed amounts, depending on the
group's record of repayment, recommendations by group facilitators, collaterals provided, etc.
Self-help groups mobilize savings from their members, and may then on-
lend these funds to one another, usually at apparently high rates of interest which reflect the
members’ understanding of the high returns they can earn on the small sums invested in their
micro-enterprises, and the even higher cost of funds from money lenders. If they do not wish to
use the money, they may deposit it in a bank. If the members’ need for funds exceeds the group’s
accumulated savings, they may borrow from a bank or other organization, such as a micro-
finance non-government organization, to augment their own fund.
The system is very flexible. The group aggregates the small individual saving
and borrowing requirements of its members, and the bank needs only to maintain one account for
the group as a single entity. The banker must assess the competence and integrity of the group as
a micro-bank, but once he has done this he need not concern himself with the individual loans
made by the group to its members, or the uses to which these loans are put. He can treat the
group as a single customer, whose total business and transactions are probably similar in amount
to the average for his normal customers, because they represent the combined banking business
of some twenty ‘micro-customers’. Any bank branch can have a small or a large number of such
accounts, without having to change its methods of operation.
Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village
women are sometimes better bankers than some with more professional qualifications. They
know that rapid access to funds is more important than their cost, and they also know, even
though they might not be able to calculate the figures, that the typical micro-enterprise earns well
over 500% return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus
charge themselves high rates of interest; they are happy to take advantage of the generous spread
that the NABARD subsidized bank lending rate of 12% allows them, but they are also willing to
borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from ‘new generation’
institutions such as Basix Finance at 18.5% or 21%.
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3.4 SHGs-Bank Linkage Model
NABARD is presently operating three models of linkage of banks with SHGs and NGOs:
Model – 1: In this model, the bank itself acts as a Self Help Group Promoting Institution (SHPI).
It takes initiatives in forming the groups, nurtures them over a period of time and then provides
credit to them after satisfying itself about their maturity to absorb credit. About 16% of SHGs
and 13% of loan amounts are using this model (as of March 2002).
Model – 2: In this model, groups are formed by NGOs (in most of the cases) or by government
agencies. The groups are nurtured and trained by these agencies. The bank then provides credit
directly to the SHGs, after observing their operations and maturity to absorb credit. While the
bank provides loans to the groups directly, the facilitating agencies continue their interactions
with the SHGs. Most linkage experiences begin with this model with NGOs playing a major role.
This model has also been popular and more acceptable to banks, as some of the difficult
functions of social dynamics are externalized. About 75% of SHGs and 78% of loan amounts are
using this model.
Model – 3: Due to various reasons, banks in some areas are not in a position to even finance
SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators
and micro- finance intermediaries. First, they promote the groups, nurture and train them and
then approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs and 13% of
loan amounts are using this model.
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Source: R. Arunachalam - Alternative Technologies in the Indian Micro- finance Industry
(1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman in the
event of accidental death of her husband and to support her minor children in the event of her
death, and
(2) The Unimicro Health Scheme, giving personal accident and hospitalization covers besides
cover for damage to dwelling due to fire and allied perils.
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Chapter 4: Micro Finance Models
29
Types of MFIs Estimated Legal Acts under which Registered
Number*
1. Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or
similar Provincial Acts
a.) NGO - MFIs
Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956
2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative Societies
a.) Mutually Aided Cooperative Act enacted by State Government
Societies (MACS) and similarly
set up institutions
3. For Profit MFIs 6 Indian Companies Act, 1956
This model is an innovative way of financing MFIs. The bank is the lender and the
MFI acts as an agent for handling items of work relating to credit monitoring, supervision and
recovery. In other words, the MFI acts as an agent and takes care of all relationships with the
client, from first contact to final repayment. The model has the potential to significantly increase
the amount of funding that MFIs can leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual
loans on its books for a while before securitizing them and selling them to the bank. Such
refinancing through securitization enables the MFI enlarged funding access. If the MFI fulfils the
“true sale” criteria, the exposure of the bank is treated as being to the individual borrower and the
prudential exposure norms do not then inhibit such funding of MFIs by commercial banks
through the securitization structure.
3. Banking Correspondents
30
The proposal of “banking correspondents” could take this model a step further
extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf
of the bank. It would use the ability of the MFI to get close to poor clients while relying on the
financial strength of the bank to safeguard the deposits. This regulation evolved at a time when
there were genuine fears that fly-by-night agents purporting to act on behalf of banks in which
the people have confidence could mobilize savings of gullible public and then vanish with them.
It remains to be seen whether the mechanics of such relationships can be worked out in a way
that minimizes the risk of misuse.
Under this model, the bank forms its own MFI, perhaps as an NBFC, and then
works hand in hand with that MFI to extend loans and other services. On paper, the model is
similar to the partnership model: the MFI originates the loans and the bank books them. But in
fact, this model has two very different and interesting operational features:
(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a stand–alone MFI. In case of banks which
have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may
contract with many banks in an arms length relationship. In the service company model, the MFI
works specifically for the bank and develops an intensive operational cooperation between them
to their mutual advantage.
(b) The Partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The Service Company Model has the potential to take the
burden of overseeing microfinance operations off the management of the bank and put it in the
hands of MFI managers who are focused on microfinance to introduce additional products, such
as individual loans for SHG graduates, remittances and so on without disrupting bank operations
and provide a more advantageous cost structure for microfinance.
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Chapter 5: Role, Functions and Working Mechanism of Financial Institutions
“ICICI Bank is one bank that has developed a very clear strategy to expand the provision of
financial products and services to the poor in India as a profitable activity”
ICICI’s microfinance portfolio has been increasing at an impressive speed. From 10,000
microfinance clients in 2001, ICICI Bank is now (2007) lending to 1.8 million clients through its
partner microfinance institutions, and its outstanding portfolio has increased from Rs. 0.20
billion (US$4.5 million) to Rs. 9.98 billion (US$227 million). A few years ago, these clients had
never been served by a formal lending institution.
There is an increasing shift in the microfinance sector from grant-giving to investment in the
form of debt or equity, and ICICI believes grant money should be limited to the creation of
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facilitative infrastructure. “We need to stop sending government and funding agencies the signal
that microfinance is not a commercially viable system”, says Nachiket Mor, Executive
Director of ICICI Bank.
As a result of banks entering the game, the sector has changed rapidly. “There is no dearth of
funds today, as banks are looking into MFIs favorably, unlike a few years ago”, says Padmaja
Reddy, the CEO of one of ICICI Bank’s major MFI partners, Spandana.
Bank of Madura's SHG development program was initiated in 1995. Through this program, it
had formed, trained and initiated small groups of women to undertake financial activities like
banking, saving and lending. By 2000, it had created around 1200 SHGs across Tamil Nadu and
provided credit to them.
Partnership Models
A model of microfinance has emerged in recent years in which a microfinance institution (MFI)
borrows from banks and on-lends to clients; few MFIs have been able to grow beyond a certain
point. Under this model, MFIs are unable to provide risk capital in large quantities, which limits
the advances from banks. In addition, the risk is being entirely borne by the MFI, which limits its
risk-taking.
This model aimed at synergizing the comparative advantages and financial strength of the bank
with social intermediation, mobilization power and infrastructure of MFIs and NGOs. Through
33
this model, ICICI Bank could save on the initial costs of developing rural infrastructure and
micro credit distribution channels and could take advantage of the expertise of these institutions
in rural areas. Initially, ICICI Bank started off by lending to MFIs and NGOs in order to provide
the necessary financial support to their activities. Later, ICICI Bank came up with a plan where
the NGO/MFI continued to promote their microfinance schemes, while the bank met the
financial requirements of the borrowers.
As a part of microfinance initiatives in the agriculture sector, ICICI Bank developed Farmer
Service Centers (FSC). An FSC was managed by an agricultural input supply company which
supplied inputs like seeds and technical knowhow to the farmers.
FSCs were also managed by an extension service organization which provided inputs, credit and
technology or by an NGO that provided all the services that farmers needed for their agricultural
needs. Working in close association with farmers, FSCs provided them with services like advice
on seeds, sowing techniques, pest control, weed control, usage and dosage of herbicides,
pesticides and fertilizers and other services associated with agriculture. The FSCs also provided
crop-related information and services to farmers, apart from facilitating the sale of agricultural
produce. The FSCs arranged to procure the produce through agents and sold it in organized
agricultural markets thus getting better realization.
The Future
These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low cost.
Taking the FSC initiative further, ICICI Bank plans to provide farmers credit from sugar
companies, seed companies, dairy companies, NGOs, micro-credit institutions and food
processing industries.
SIG has been involved in a project in the southern state of Tamil Nadu to find out how wireless
technology can be applied in the development of low cost models of banking. Another plan to
increase the reach in rural areas is to launch mobile ATM services. ICICI Bank branded trucks
have started carrying ATMs through a number of villages
34
Some Articles of News Paper:
Mumbai, March 14: In a novel way to help sex-workers to live more meaningfully, country's
largest private sector bank, ICICI Bank is planning to offer financial assistance to them though
the micro-finance route.
For starters, the bank plans to launch the programme in Kolkata by entering into a tie-up with
Durbar Mahila Samwanaya Samitee, an NGO working for the welfare of around 65,000 sex-
workers in and around the city.
Source: (Press Trust of India) Posted online: Wednesday, March 14, 2007 at 20:54 hours IST
2. ICICI Bank launches new initiative in micro-finance
ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and
Operations Private Ltd (FINO), which was launched on Thursday, July 13, 2001.
FINO would provide technological solutions as well as services to finance providers to reach the
underserved in the country. ICICI Bank is the lead facilitator.
ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2007, he said,
speaking on the sidelines of the press conference to launch FINO. At present, the bank has tie-
ups with 100 MFIs.
FINO is an initiative in the micro-finance sector. It would target 300-400 million people who do
not have access to basic financial services, said Mr Manish Khera, CEO, FINO. The company
has an authorised capital of Rs 50 crore. MFIs, NBFCs, RRBs, co-operative banks, etc would
directly or indirectly tie up with FINO to use its services, he said. FINO would charge Rs 25-30
per account every year.
35
Core banking products
FINO has partnered with IBM and i-flex to offer core banking products. It would also provide
credit bureau services, which includes individual customer credit rating and analytics based on
transaction history. It also launched biometric cards for customers, which would be a proof of
identity and give collateral to them. The card would also offer multiple products including
savings, loans, insurance, recurring deposits, fixed deposits and remittances. The company would
also build-up customer database, thus bringing them into mainstream banking.
"There was a need for automated structured data system like FINO," said Mr Mor. "Essential
pieces of infrastructure are missing in India. We lack credit-tracking mechanism; therefore there
was a need for an intervention like FINO."
The company expects to reach 25 million customers in five years and two million customers by
the end of 2007.
FINO aims bringing scale to "micro" business leading to lowering of costs for the local financial
institutions (LFIs) and act as an internal technology department for the LFIs, said Mr Khera.
The company is working on providing technological solutions in insurance, especially the health
insurance sector to the under-privileged," he said. It is interacting with Nabard, SIDBI and other
banks to give shape to what FINO does, said Mr Khera.
CHENNAI, MARCH 9. ICICI Bank has entered into partnerships with various microfinance
institutions (MFI) and non-Government organisations (NGOs) to scale up its micro lending
business. Addressing presspersons here, today, Nachiket Mor, Executive Director, ICICI Bank,
said, the partnership model would provide assured source of funding to NGOs and MFIs. The
bank had extended advances to the tune of Rs. 150 crores as on February 29, this year, under this
scheme, Mr. Mor said.
The bank had acquired a network of self-help groups (SHGs) developed by the erstwhile Bank of
Madura after its merger with ICICI Bank. Since then the SHG programme had grown
36
substantially and 10,175 groups had been promoted reaching out to 2.03 lakh women spread
across 2,398 villages, the Executive Director said.
ICICI Bank has entered into a memorandum of understanding with Microcredit Foundation to
outsource SHG development, maintenance of groups, credit linkage and recovery of loans.
Securitization
Another way to enter into partnership with MFIs is to securitize microfinance portfolios. In 2004,
the largest ever securitization deal in microfinance was signed between ICICI Bank and SHARE
Microfinance Ltd, a large MFI operating in rural areas of the state of Andra Pradesh. Technical
assistance and the collateral deposit of US$325,000 (93% of the guarantee required by ICICI)
37
were supplied by Grameen Foundation USA. 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. 215 million (US$4.9 million) at an agreed
discount rate. The interest paid by SHARE is almost 4% less than the rate paid in commercial
loans. Partial credit provision was provided by SHARE in the form of a guarantee amounting to
8% of the receivables under the portfolio, by way of a lien on fixed deposit. This deal frees up
equity capital, allowing SHARE to scale up its lending. On the other hand, it allows ICICI Bank
to reach new markets. And by trading this high quality asset in capital markets, the bank can
hedge its own risks.
Beyond Microcredit
Microfinance does not only mean microcredit, and ICICI does not limit itself to lending. ICICI’s
Social Initiative Group, along with the World Bank and ICICI Lombard, the insurance company
set up by ICICI and Canada Lombard, have developed India’s first index-based insurance
product. 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, subject to a maximum of the sum insured. The insurance policy is linked to a rainfall
index.
Technology
One of the main challenges to the growth of the microfinance sector is accessibility. The Indian
context, in which 70% of the population lives in rural areas, requires new, inventive channels of
delivery. The use of technologies such as kiosks and smart cards will considerably reduce
transaction costs while improving access. The ICICI Bank technology team is developing a
series of innovative products that can help reduce transaction costs considerably. For example, it
is piloting the usage of smart cards with Sewa Bank in Ahmedabad. To maximize the benefits of
these innovations, 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. ICICI
is strongly encouraging such an effort to take place. Wipro and Infosys, I-Flex, 3iInfotech, some
of the best Indian information technology companies specialized in financial services, and others,
38
are in the process of developing exactly such a platform. At a recent technology workshop at the
Institute for Financial Management Research in Chennai, the ICICI Bank Alternate Channels
Team presented the benefits of investing in a common technology platform similar to those used
in mainstream banking to some of the most promising MFIs.
Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of poor households,
there are other missing markets and constraints facing households, such as healthcare,
infrastructure, and gaps in knowledge. These have implications in terms of the scale and
profitability of client enterprises and efficiency of household budget allocation, which in turn
impacts household well-being. 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, water, roads, health, etc). The latter will bring to the table knowledge of best
practices in their specific areas, and each consultation workshop will result in long-term
collaboration between with MFIs for implementing specific pilots.
5.2 Bandhan
(Ranked 2nd by Forbes Magazine in December 2007)
Bandhan is working towards the twin objective of poverty alleviation and
women empowerment. It started as a Capacity Building Institution (CBI) in November 2000
39
under the leadership of Mr. Chandra Shekhar Ghosh. During such time, it was giving capacity
building support to local microfinance institutions working in West Bengal.
Bandhan opened its first microfinance branch at Bagnan in Howrah district of West Bengal in
July 2002. Bandhan started with 2 branches in the year 2002-03 only in the state of West Bengal
and today it has grown as strong as 412 branches across 6 states of the country! The organization
had recorded a growth rate of 500% in the year 2003-04 and 611% in the year 2004-05. Till date,
it has disbursed a total of Rs. 587 crores among almost 7 lakh poor women. Loan outstanding
stands at Rs. 221 crores. The repayment rate is recorded at 99.99%. Bandhan has staff strength of
more than 2130 employees.
As on July 2009
Column1 Column2
No. of states :8
No. of branches : 528
No. of members : 1,182,741
No. of staff : 3,191
Cumulative loan disbursed : Rs.1,249 crores
Loan outstanding : Rs. 417 crores
Operational Methodology
Bandhan follows a group formation, individual lending approach. A group of 10-25 members are
formed. The clients have to attend the group meetings for 2 successive weeks. 2 weeks hence,
they are entitled to receive loans. The loans are disbursed individually and directly to the
members.
Service Charge
Bandhan charges a service charge of 12.50% flat on loan amount. Bandhan initially charged
17.50%. However from 1st July 2005, it has slashed down its lending rate to 15.00%. Then it
was further reduced to 12.50% in May 2006. The reason is obvious. As overall productivity
increased, operational costs decreased. Bandhan, being a non profit organization wanted the
benefit of low costs to ultimately trickle down to the poor.
Monitoring System
The various features of the monitoring system are:
A 3 tier monitoring system – Region, Division and Head Office
Easy reporting system with a prescribed checklist format
Accountability at all levels post monitoring phase
Cross- checking at all the levels
The management team of Bandhan spends 90.00% of time at the field
The Grameen model follows a fairly regimented routine. It is very cost intensive as it involves
building capacity of the groups and the customers passing a test before the lending could start.
The group members tend to be selected or at least strongly vetted by the bank. One of the reasons
for the high cost is that staff members can conduct only two meetings a day and thus are
occupied for only a few hours, usually early morning or late in the evening. They were used
additionally for accounting work, but that can now be done more cost effectively using
computers. The model is also rather meeting intensive which is fine as long as the members have
no alternative use for their time but can be a problem as members go up the income ladder.
The greatness of the Grameen model is in the simplicity of design of products and delivery. The
process of delivery is scalable and the model could be replicated widely. The focus on the
poorest, which is a value attribute of Grameen, has also made the model a favourite among the
donor community.
However, the Grameen model works only under certain assumptions. As all the loans are only
for enterprise promotion, it assumes that all the poor want to be self-employed. The repayment of
loans starts the week after the loan is disbursed – the inherent assumption being that the
borrowers can service their loan from the ex-ante income.
42
5.4 SKS Microfinance
(CEO-Vikram Akula)
Many companies say they protect the interests of their customers. Very few
actually sit in dirt with them, using stones, flowers, sticks, and chalk powder to figure out if they
will be able to repay a $20 loan at $1 a month. With this approach, this company has created its
own loyal gang of over 2 million customers.
Its borrowers include agricultural laborers, mom-and-pop entrepreneurs, street vendors, home
based artisans, and small scale producers, each living on less than $2 a day. It works on a model
that would allow micro-finance institutions to scale up quickly so that they would never have to
turn poor person away.
3. Use Technology to reduce costs and limit errors- It could not find the software that
suited its requirements, so it they built their own simple and user friendly applications
that a computer-illiterate loan officer with a 12 th grade education can easily understand.
43
The system is also internet enabled. Given that electricity is unreliable in many areas they
have installed car batteries or gas powered generators as back-ups in many areas.
44
Chapter 6: Marketing of Microfinance Products
Banks and financial institutions have been partners in contract farming schemes, set
up to enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans
can be extended under tie-up arrangements with corporate for production of high quality produce
with stable marketing arrangements provided – and only, provided – the price setting mechanism
for the farmer is appropriate and fair.
Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in
cooperation with a number of agri-input and farm services companies. The services provided are
similar to those in contract farming, but with additional flexibility and a wider range of products
including inventory finance. Besides providing storage facilities, each centre rents out farm
machinery, provides agricultural inputs and information to farmers, arranges credit, sells other
services and provides a forum for farmers to market their products.
4. Apni Mandi
Another innovation is that of The Punjab Mandi Board, which has experimented
with a ‘farmers’ market’ to provide small farmers located in proximity to urban areas, direct
access to consumers by elimination of middlemen. This experiment known as "Apni Mandi"
belongs to both farmers and consumers, who mutually help each other. Under this arrangement a
sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5
crates at a subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At
the farm level, extension services of different agencies are pooled in. These include inputs
subsidies, better quality seeds and loans from Banks. Apni Mandi scheme provides self-
employment to producers and has eliminated social inhibitions among them regarding the retail
sale of their produce.
46
Chapter 7: Success Factors of Micro-Finance in India
Over the last ten years, successful experiences in providing finance to small
entrepreneur and producers demonstrate that poor people, when given access to responsive and
timely financial services at market rates, repay their loans and use the proceeds to increase their
income and assets. This is not surprising since the only realistic alternative for them is to borrow
from informal market at an interest much higher than market rates. Community banks, NGOs
and grass root savings and credit groups around the world have shown that these microenterprise
loans can be profitable for borrowers and for the lenders, making microfinance one of the most
effective poverty reducing strategies.
A. For NGOs
1. The field of development itself expands and shifts emphasis with the pull of ideas, and
NGOs perhaps more readily adopt new ideas, especially if the resources required are
small, entry and exit are easy, tasks are (perceived to be) simple and people’s acceptance
is high – all characteristics (real or presumed) of microfinance.
2. Canvassing by various actors, including the National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends
of Women’s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for
Advancement of People’s Action and Rural Technologies (CAPART), Rashtriya Gramin
Vikas Nidhi (RGVN), various donor funded programmes especially by the International
Fund for Agricultural Development (IFAD), United Nations Development Programme
(UNDP), World Bank and Department for International Development, UK (DFID)], and
47
lately commercial banks, has greatly added to the idea pull. Induced by the worldwide
focus on microfinance, donor NGOs too have been funding microfinance projects. One
might call it the supply push.
3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce
such concrete results and sustained interest among beneficiaries as microfinance. Most
NGO-led microfinance is with poor women, for whom access to small loans to meet dire
emergencies is a valued outcome. Thus, quick and high ‘customer satisfaction’ is the
USP that has attracted NGOs to this trade.
4. The idea appears simple to implement. The most common route followed by NGOs is
promotion of SHGs. It is implicitly assumed that no ‘technical skill’ is involved. Besides,
external resources are not needed as SHGs begin with their own savings. Those NGOs
that have access to revolving funds from donors do not have to worry about financial
performance any way. The chickens will eventually come home to roost but in the first
flush, it seems all so easy.
5. For many NGOs the idea of ‘organising’ – forming a samuha – has inherent appeal.
Groups connote empowerment and organising women is a double bonus.
48
Microfinance has been attractive to the lending agencies because of demonstrated
sustainability and of low costs of operation. Institutions like SIDBI and NABARD are hard
nosed bankers and would not work with the idea if they did not see a long term engagement –
which only comes out of sustainability (that is economic attractiveness).
On the supply side, it is also true that it has all the trappings of a business enterprise, its output is
tangible and it is easily understood by the mainstream. This also seems to sound nice to the
government, which in the post liberalisation era is trying to explain the logic of every rupee
spent. That is the reason why microfinance has attracted mainstream institutions like no other
developmental project.
Perhaps the most important factor that got banks involved is what one might call the policy push.
Given that most of our banks are in the public sector, public policy does have some influence on
what they will or will not do. In this case, policy was followed by diligent, if meandering,
promotional work by NABARD. The policy change about a decade ago by RBI to allow banks to
lend to SHGs was initially followed by a seven-page memo by NABARD to all bank chairmen,
and later by sensitisation and training programmes for bank staff across the country. Several
hundred such programmes were conducted by NGOs alone, each involving 15 to 20 bank staff,
all paid for by NABARD. The policy push was sweetened by the NABARD refinance scheme
that offers much more favourable terms (100% refinance, wider spread) than for other rural
lending by banks. NABARD also did some system setting work and banks lately have been
given targets. The canvassing, training, refinance and close follow up by NABARD has resulted
in widespread bank involvement.
Moreover, for banks the operating cost of microfinance is perhaps much less than for pure MFIs.
The banks already have a vast network of branches. To the extent that an NGO has already
promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the
entire) portfolio, microfinance via SHGs in the worst case would represent marginal addition to
cost and would often reduce marginal cost through better capacity utilisation. In the process the
bank also earns brownie points with policy makers and meets its priority sector targets.
49
It does not take much analysis to figure out that the market for financial services for the 50-60
million poor households of India, coupled with about the same number who are technically
above the poverty line but are severely under-served by the financial sector, is a very large one.
Moreover, as in any emerging market, though the perceived risks are higher, the spreads are
much greater. The traditional commercial markets of corporates, business, trade, and now even
housing and consumer finance are being sought by all the banks, leading to price competition
and wafer thin spreads.
Further, bank-groups are motivated by a number of cross-selling opportunities in the market, for
deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering
all these services now through their group companies, it becomes imperative for them to expand
their distribution channels as far and deep as possible, in the hope of capturing the entire
financial services business of a household.
Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer
goods (FMCG) companies such as Hindustan Levers, and consumer durable companies such as
Philips have realised the potential of this big market and are actively using SHGs as entry points.
Some amount of free-riding is taking place here by companies, for they are using channels which
were built at a significant cost to NGOs, funding agencies and/or the government.
Lakshmi, a 22-year-old school dropout, lived in a remote village of Tamil Nadu. Instead of
getting married and starting a family like any other village girl of her age in India, she wanted to
set up on her own business.
Lakshmi started an Internet kiosk in her village, offering services like e-mail, Internet chat and
tips on health and education. The kiosk was partially financed by ICICI Bank and was set up in
association with n-Logue Communications. Latha, a 29-year-old married woman with three
50
children borrowed Rs.18,000 to set up a small provision store in Kothaipalli, a small village, in
the north of Andhra Pradesh. Within a year, she started earning Rs.3500 a month from the store.
With this money, she was able to provide her children a good education at a local private school.
She was a part of a self help group in Andhra Pradesh which received financial assistance from
ICICI Bank. These are real-life examples to illustrate how the micro-lending initiatives of ICICI
Bank affected the lives of poor women in India.
By becoming a part of self-help groups, several rural women were able to move out of poverty.
Apart from financial benefits, the initiatives helped the women to develop self confidence,
improve their communication skills and raise their position in society.
By becoming a part of self-help groups, several rural women were able to move out of poverty.
Apart from financial benefits, the initiatives helped the women to develop self confidence,
improve their communication skills and raise their position in society.
51
Chapter 8: Issues in Microfinance
1. Sustainability
2. Lack of Capital
The second area of concern for MFIs, which are on the growth path, is that
they face a paucity of owned funds. This is a critical constraint in their being able to scale up.
Many of the MFIs are socially oriented institutions and do not have adequate access to
financial capital. As a result they have high debt equity ratios. Presently, there is no reliable
mechanism in the country for meeting the equity requirements of MFIs.
The IPO issue by Mexico based ‘Compartamos’ was not accepted by purists as they thought
it defied the mission of an MFI. The IPO also brought forth the issue of valuation of an MFI.
The book value multiple is currently the dominant valuation methodology in microfinance
investments. In the case of start up MFIs, using a book value multiple does not do justice to
the underlying value of the business. Typically, start ups are loss making and hence the book
value continually reduces over time until they hit break even point. A book value multiplier
52
to value start ups would decrease the value as the organization uses up capital to build its
business, thus accentuating the negative rather than the positive.
Another challenge faced by MFIs is the inability to access supply chain. This
challenge can be overcome by exploring synergies between microfinance institutions with
expertise in credit delivery and community mobilization and businesses operating with
production supply chains such as agriculture. The latter players who bring with them an
understanding of similar client segments, ability to create microenterprise opportunities and
willingness to nurture them, would be keen on directing microfinance to such opportunities.
This enables MFIs to increase their client base at no additional costs.
Those businesses that procure from rural India such as agriculture and dairy often identify
finance as a constraint to value creation. Such businesses may find complementarities
between an MFI’s skills in management of credit processes and their own strengths in supply
chain management.
ITC Limited, with its strong supply chain logistics, rural presence and an innovative
transaction platform, the e-choupal, has started exploring synergies with financial service
providers including MFIs through pilots with vegetable vendors and farmers. Similarly, large
FIs such as Spandana foresee a larger role for themselves in the rural economy ably
supported by value creating partnerships with players such as Mahindra and Western Union
Money Transfer.
ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a microfinance
organization in Hyderabad). Under this pilot, it works with twenty women head load vendors
selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of
Rs.10,000/- , capacity building and business development support to the women. ITC
provides support through supply chain innovations by:
1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of
bargaining and unreliability at the traditional mandis (local vegetable markets). The
53
women are able to replenish the stock from the stores as many times in the day as
required. This has positive implications for quality of the produce sold to the end
consumer.
2. Continuously experimenting to increase efficiency, augmenting incomes and reducing
energy usage across the value chain. For instance, it has forged a partnership with
National Institute of Design (NID), a pioneer in the field of design education and
research, to design user-friendly pushcarts that can reduce the physical burden.
3. Taking lessons from the pharmaceutical and telecom sector to identify technologies that
can save energy and ensure temperature control in push carts in order to maintain quality
of the vegetables throughout the day. The model augments the incomes of the vendors
from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental
point of view, push carts are much more energy efficient as opposed to fixed format retail
outlets.
4. HR Issues
Recruitment and retention is the major challenge faced by MFIs as they strive
to reach more clients and expand their geographical scope. Attracting the right talent proves
difficult because candidates must have, as a prerequisite, a mindset that fits with the
organization’s mission.
Many mainstream commercial banks are now entering microfinance, who are poaching staff
from MFIs and MFIs are unable to retain them for other job opportunities.
85% of the poorest clients served by microfinance are women. However, women make up
less than half of all microfinance staff members, and fill even fewer of the senior
management roles. The challenge in most countries stems from cultural notions of women’s
roles, for example, while women are single there might be a greater willingness on the part of
women’s families to let them work as front line staff, but as soon as they marry and certainly
once they start having children, it becomes unacceptable. Long distances and long hours
away from the family are difficult for women to accommodate and for their families to
understand.
54
5. Micro insurance
First big issue in the micro insurance sector is developing products that really respond to the
needs of clients and in a way that is commercially viable.
Secondly, there is strong need to enhance delivery channels. These delivery channels have
been relatively weak so far. Micro insurance companies offer minimal products and do not
want to go forward and offer complex products that may respond better. Micro insurance
needs a delivery channel that has easy access to the low-income market, and preferably one
that has been engaged in financial transactions so that they have controls for managing cash
and the ability to track different individuals.
Thirdly, there is a need for market education. People either have no information about
micro insurance or they have a negative attitude towards it. We have to counter that. We have
to somehow get people - without having to sit down at a table - to understand what insurance
is, and why it benefits them. That will help to demystify micro insurance so that when agents
come, people are willing to engage with them.
The joint liability mechanism has been relied upon to overcome the twin
issues of adverse selection and moral hazard. The group lending models are contingent on the
availability of skilled resources for group promotion and entail a gestation period of six
months to one year. However, there is not sufficient understanding of the drivers of default
and credit risk at the level of the individual. This has constrained the development of
individual models of micro finance. The group model was an innovation to overcome the
specific issue of the quality of the portfolio, given the inability of the poor to offer collateral.
However, from the perspective of scaling up micro financial services, it is important to
proactively discover models that will enable direct finance to individuals.
55
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