Rural India and Financial Services

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Rural India and Financial Services Role of
Microfinance
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Rural India
Population characteristics
763 million people. 200 million people with 70
million low-income households.
Occupation
Large number of poor households mainly out or
formal financial sector
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Micro Level What figures say?
Share of deposits and credit in rural and
semi-urban areas is on the decline. Share in
metropolitan areas is rising. The share of
credit is lower than that of deposits in all
regions except metropolitan
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Puzzles Why are micro costly?
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Financial Exclusion is the reality
Still poor or less well off people find it
difficult to open a bank account in any area -
only 31 of rural population hold bank
account Barely 27 of cultivator households get
some form of institutional credit, 22 get credit
from money lenders and the remaining 51 don t
get any credit at all.

• Consequences
• Complicates day to day cash flow management
  deals entirely in cash
• Lack of financial planning and security
• Loss of livelihoods
• Exposure to high interest rates and inability to
  repay

Financial Services at micro level are critical in
the lives of poor people CDFIs playing important
role here
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Outreach and Outstanding
Outreach and outstanding is increasing at steady
pace average growth rate of 92 between 2001-06
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Sustainability
Managing the Assets well
Improving Operational Self Sufficiency (OSS)
(72-104), Reducing Portfolio at risk (PAR)
(4.5-1.7) and CRR is steady well above 90.
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Cost per borrower in CDFIs
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Transparency Highlights

• Reporting by CDFIs is increasing with portfolio
  growth and mainstream linkages.
• Data on CDFIs are available on public domain
  through reports of apex financial institutions
  and Sa-Dhan.
• MFIs undergo several variants of external audits
  depending on the legal form and sources of funds.
  These are the annual statutory audit, tax audit,
  co-operative audit, RBI audit, FCRA audit and
  donor-specified audit.
• A wide spectrum of ratings are available in
  practice. The principal ratings come from M-Cril,
  CRISIL and Planet Finance. APMAS has rating tool
  for SHG federations and MACS.

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Usage of Financial Services by Poor
Household needs 28 Health care Family events
(especially marriage) Housing Food
Investment needs- 72 Animals Non farm
enterprises (fixed and working capital)
Agriculture
Requires varied products at varied point in time
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But the Largest Retail portfolio is.

• In a sample study of 40,000 households (HT IIEF
  study, undertaken by ORG-MARG), the largest
  holder of retail assets is the money-lender
  with average outstanding credit from all sources
  of earners is Rs.20,908
• The total projected credit outstanding with
  money-lenders from only the earning population is
  Rs.66,909 crore.
• This is 19 more than the retail assets of
  Rs.56,133 crore of ICICI Bank (March 2005) and
• This is 28.3 of the total credit portfolio of
  SBI and its associate banks put together
  (December 2004).
• But this is outside the formal sector,
  consequently it is high cost, subject to high
  risk,

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How significant is micro-credit to poor
households?
Majority (70) households borrow from informal
sources-moneylenders, prawnbrokers, finance
companies, family friends. These sources
continue to be important on account of easy and
speedy accessibility, flexibility. Share of CDFIs
is 34 - on par with moneylenders, who charges
interest rates of 36-200.
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Syndicate Bank 1950-75 Insight for Mf

• Syndicate Bank (Bhatt,1987)
• Negligible share in 1950 to 1 in 1960 to 4 in
  1975
• 32 of Branches in Rural areas / banking system
  22
• Loans to agri and small was 30 as for others
  banks it was 8
• 90 of deposit accounts were small accounts
  below 1500 accounting for 50 of its deposits
• Interest rates were higher by as much as 2
  (50s60s) to the State Bank of India

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Where the future lies

• Comprehensive Services One window capability
• Cost of Services
• Quality of Services
• Long term equity support
• Technology and Human Resource Investments
• Social Security Insurance and pension
• Public, private and government partnership

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• "In a country as large and heterogeneous as ours,
  there is arguably a need to allow diverse
  delivery channels of credit for poor to flourish.
  
• Given the scale of our failure hitherto to solve
  the poor's credit problems, it is also advisable
  to keep an open and flexible stance.
• Yet history teaches us that when it comes to
  microfinance, the new kid in town, it would make
  sense to keep expectations modest, monitor
  alertly and adapt as needed, and, on the legal
  and regulatory front, stay flexible but make
  haste slowly.
• Quote from Pradeep Srivastav Odysseus or
  Interloper ?

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