Microfinance Sector in India

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PART - I
Microfinance Sector in India
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Microfinance Sector in India Big picture

• Huge market 350 millions
• Present reach 15 millions
• Estimated credit demand USD 14 billions
• Demand met so far USD 700 millions
• Savings potential realized but a long way to
  go
• - not matured/ sophisticated
• Insurance services No experience, still in
  
• piloting
• Other Services Transfer, Leasing, etc., -
  still in
• infancy

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Microfinance in India Status Evolution

• Informal Markets
• - still very active and substantial
• - as high as 50 to 80 share
• Money lenders, lion share of the informal market
• - Exploitative / predatory lending with
  usurious
• interest rates 60 to 120
  per annum
• - Interest rates range between 5
  and 15 times
• more than the formal
  institutions
• Formal Markets Formal Financial Institutions
• Large branch network - 153000 retail outlets
• Coverage One outlet per population of 7000
• Both regulated entities / non regulated
  microfinance
• entities

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Contd

• Beginnings in 1970s (Microcredit) - with
  Central /
• Federal Government initiative.
• Involving mainstream nationalised commercial
  
• banks
• Long history of subsidised directed credit
• programmes
• - Integrated Rural Development Programme
• - Differential rate of interest schemes at 4
• (atleast 6 to 10 below the market
  rates)
• Essentially supply driven with targeted approach

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• Contd

• Loan fatigue - Vitiated culture, politicized,
  poor
• recovery
• Mainstream system losing confidence in lending
  
• to poor
• High transaction cost for small and tiny loans
  to
• poor
• Since 1990s entry of NGOs for organised
• microfinance services
• SHG bank linkage has shown the way

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Microfinance Models

• Broadly two track approach / models
• Delivery model Vs Enabling model
• NGOs as MFIs as a financial intermediary
• NGOs as enablers as a social intermediary
• Self-Help Groups (SHGs) emerging as a
  predominant
• model
• Focus on organising the poor as a group or a
  society
• as an association of persons

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Achievements

• Diverse approaches for outreach
• SHG Bank linkage widely adopted approach
• involving Bank, NGO and poor
• Cooperatives cooperative banks for / by poor
  (Sewa
• Bank, WWF, CDF)
• Grameen replications (Cashpor, Share
  Microfinance,
• Spandana)
• Regulated MFIs for profit (Basix, IASC)
  delivery
• through SHGs / JLGs
• Non-regulated MFIs not-for-profit
  Sanghamithra
• KDFS working with SHGs

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• Government promoted microfinance programmes
  (Rashtriya
• Mahila Kosh, Velugu Project, DPIP, Swashakti)
• Large scale NGO initiatives (DHAN, Myrada, CARE)
• Financial sector initiatives Commercial Banks
  (ICICI, Oriental
• Bank of Commerce, ABN AMRO, Canara Bank, etc.)
• and Development financial institutions
  (HDFC,
• SIDBI, NABARD, etc.)
• An outreach of 10 but still a huge number
  unreached
• A supportive and enabling environment for
  diverse models to
• co-exist
• Microfinance as a focus Savings, Credit and
  Insurance
• Focus on building Social Capital and Poverty
  Reduction

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SHG Bank Linkage Model

• FEATURES
• Predominant model in Indian microfinance sector
• Promising and high potential for growth and
  outreach
• SHGs are informal associations of poor
• NGO as promoter for social intermediation -
  forming
• and building groups
• Bank as financial intermediary to link finance
  the
• groups

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Contd

• ACHIEVEMENTS
• Significant tool to organise and empower the
• unorganized poor especially women
• Savings potential of poor is demonstrated
• Myths and misconception of banks broken
  banking
• with poor is a business proposition
• Banks moving from pilots to upscaling
  growing
• involvement and focus
• Low transaction cost and high repayment rates

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3 Streams of Microfinance in India

• Demand stream
• Forum of clients primarily poor, unorganized
• individual clients
• Association / organisations of poor SHGs and its
• federations, cooperatives, (community
• ownership and governance)
• Enabling stream
• Promotional Institution NGOs, philanthropic
• institutions and donors
• Regulatory Institutions RBI, State and Central
• Governments

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Contd

• Supply Stream
• Savings and Credit
• Commercial, rural and private banks
• Cooperative banks
• Specialised development financial institutions
• (Housing banks, SIDBI)
• Regulated NBFCs as exclusive MFIs non-
• regulated MFIs
• Insurance companies
• Post office

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Sustainable Microfinance forPoverty Reduction
PART - II
DHAN Foundation
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Context and Characterisation for Poverty
Reduction (local economy)

• Opportunities
• Low High
• Risks / Vulnerabilities
• Low Rural Agricultural Urban Slums
• Artisan (service trading)
• (Production activities)
• High Coastal, Desert areas Tribal areas
• (seasonality-hunting) (primary sector)
• Natural resources
• Low infrastructure

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Characterisation of household poverty

• 1 Based on economic phase
• Survival Wage Debt
• earning and no asset
• Subsistence Partly Fragile
• self-employed Asset
• Self employment Earning from Performing
• own activity Assets worth
• Rs 5000 to 20000
• Entrepreneurship Own activity Assets
• and employing beyond Rs 50,000
• others

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• 2. Based on Family stage
• Nuclear 2-5 years Surplus
• (Just married)
• School going 5-10 years Deficit
• Earning children 5-10 years High
  surplus
• Marriage of 5 years High
• Children deficit debt
• Aged couple 10-15 years Dependence
• deficit

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Building social capital and entitlements

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Poverty Reduction Strategies

• Preventive - Skill and capacity building
• Promotive - Opportunities enhancement
• Curative - Addressing exploitation
• access control of resources
  credit
• Eradicative - Drivers of economy with
  performing assets

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Conservation Approach of Micro Finance

• Arresting leakages
• 1.1 From usurious interest rates
• 1.2 From alcohol addiction
• 1.3 Social expenditure on functions
• 1.4 Medical expenses because of poor health

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Conservation Approach (Contd)

• Strengthening existing activities
• 2.1 Local market
• 2.2 Manageable by members
• 2.3 Gap exists for growth skill available

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Conservation Approach (Contd)

• Features
• 3.1 Variables with internal control
• 3.2 Sustainable to retain incremental income
• 3.3 Value orientation

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Risk
Low
High
Low
Returns
High
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Conservation of Cold money to Hot money with
leveraging of development finance
Hot Money Stake (equity) building of people
through savings and contributions (about 25
percent of development capital) in their
self-management system with cost coverage
Cold Money Bank linkages and resource
institutions linkages for leveraging grants (from
DRDA for tank programme) and loans (for banking
and tank programmes) to the tune of about three
to four times of their money.

• Note
• Hot money is internal (people own money) fund
  which is treated frugally and very carefully.
• Cold money is usually external money which is
  treated not so frugally but as free money.

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Kalanjiam Community Banking

• Concept of Mutuality
• Self-help
• Self-reliance
• Self-renewal

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Building social infrastructure for practicing
grassroots democracy
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Local Management for development and change
Nested People Institutions
Panchayat related Institutions
Mainstream Institutions Banks, DRDAs, etc.
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Transforming SHGs to Civil Society

• Ensuring entitlements
• Redefining entitlements
• Setting agenda for mainstream institutions

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Evolving development policies for poverty
reduction
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Evolving development policies for poverty
reduction (Contd)
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Establishing Early Warning System

• EWS for Female infanticide
• EWS for Alcohol addiction
• EWS for Migration
• EWS for School dropouts
• EWS for Widow phenomena

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Keys of Sustainable Micro finance

• Graduation of lending Credit discipline
• Working Capital
• Enhancing existing assets Quality and base
• New activities with strong market linkages
• Cost Coverage no subsidy
• High Quality of SHGs
• Credit linkage
• Branch Based
• Bridge Support
• Conservation Approach of Micro finance

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Keys of Sustainable Micro finance

• Value Building to reach no loan or less loan
• Business Development Services
• Integration of Micro finance with Local economy
• Driver of growth
• Transforming SHGs to Civil Society
• Linkage engine for health education and
  development issues
• Integrating with Social Security Products

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Integration of Micro finance with different
development themes

• Themes
• Water Users Group
• Joint Forest Management
• Health Groups
• Education Groups
• Agriculture Development Groups

• Features
• Savings led
• Streamlining systems
• Bank linkage for credit
• Theme (focus) lending
• Balancing grants and loans

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Limitations of Micro Finance

• Mass Skill base limited, mostly agriculture
  based
• Inadequate market linkages External for forward
  and backward linkages
• Capacity of local economy
• Capacity of human resources for product
  development
• Credit alone Credit plus, plus

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Caution..

• Over funding Absorption capacity
• Over night results Sequencing, graduation
  and long term orientation
• Over loading Success brings more
  expectations hence too early
  convergence and too many issues
• Soft funding subsidy oriented for
  activities may be for capacity/skill
  building

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Thank You