Microfinance Introduction

Contents
Microfinance - Defined Indian Economy & Social Sector Rural Poverty-- Need for Micro Finance Features of Microfinance Operating Strategies Features of Microfinance Legal Models Microfinance Market Issues in Microfinance

MICROFINANCE
Provision of credit and other financial services and products of very small amounts (not exceeding Rs. 50,000 per borrower) to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards [Definition by RBI]

What is Micro finance?

Refers to small scale financial services primarily credit and savings To people who farm or fish, who operate small enterprise Where goods are produced, recycled, repaired, or sold Who provide services ,work for wages Or gain income from renting land ,animal or machinery

Microfinance - Defined
In Indian context, microfinance is defined as provision of credit, savings, insurance and remittance facilities, to low income households so as to address the vulnerabilities in life. As per the NABARD definition, provision of credit to a maximum of Rs 50,000 (about USD 1100) per individual and Rs 500,000 (about 11000 USD) per Self Help Group comes under microfinance.

Micro Finance - what for ?

The poor need Micro finance to undertake Economical activity Smoothen the consumption Mitigate vulnerability to income shocks(at times of illness and natural disasters) Increase savings Support self employment

ADVANTAGES OF MICROFINANCE
COST EFFECTIVE APPROACH TO ADDRESS THE FINANCIAL REQUIREMENTS OF THE POOR ALTERNATIVE FINANCIAL DELIVERY CHANNEL TACKLES FINANCIAL EXCLUSION EMPOWERMENT OF THE POOR

Continued---

DEVELOPS COLLATERAL SUBSTITUTES MF COULD BE A PRE MICRO ENTERPRISE STAGE FOR MOST POOR - BETTER CHANCES OF SUCCESS MACRO-ECONOMIC OBJECTIVES OF GROWTH

Benefits formal financial Institutes as wellsuch

as---- .

ADVANTAGES OF MICROFINANCE Banks [continued---]

SHGs AS CLIENTS, FACILITATE BANKS
A WIDER OUTREACH, LOWER TRANSACTION COST & A MUCH LOWER RISK COST SLOWER BUT CONSISTENT GROWTH IN VOLUME MORE & STABLE PROFITS DESPITE SLOWER GROWTH -- FEE AND NON FEE FUTURE BUSINESS CROSS SELLING [Remittance, Bill payments ,Insurance ,Mutual funds etc]

Micro Finance and the million Development Goals

The goals set by the UN . Donor agencies and Govts are relating their policy programming to the achievement of these goals How MF relates to this? Following are the Million Development Goals 1-Eradicate extreme poverty and hunger 2-Achieve universal primary education 3-Promote gender equality 4-Reduce child mortality 5-Combat HIV/AIDS malaria and other diseases 6-Ensure environmental sustainability 7--Develop a global partnership for development

Continued---

Further
The impact studies show that
Access to MF have improved the economical situation of poor clients. Evidence also shows that a better financial situation leads to better nutrition ,and thus better health condition . Many MFIs are targeting women ,and there is a positive effect on the women's position in the family and the overall situation

Estimating the demand for Micro Finance

About 80% of the worlds 4.5 billion people leaving in low income category do not have access to formal sector financial services ie. 3.6 billion people ,assuming av. Household size as five,720 million households do not have access Half of these households (360million) account for the unmet demand for commercial savings or credit services from financial institutions Micro finance demand can be met on a global scale only through the provision of financial services by self sufficient institutions

Micro entrepreneurs
Lack -capital, skills, legal status and business security But generally havestrong survival skills shrewd business sense long experience of hard work knowledge of their markets informal support and communication networks Understanding of flexibility -- which is key to micro enterprise survival

Indian Economy & Social Sector

Indian Economy is characterized as developing economy The economic reform measures carried out in the economy since 1991 have taken the economy to a higher growth path It is considered as one of the emerging economies.

Indian Economy-But

As per official statistics , 26.1 % of people in India are poor i.e. living Below the Poverty Line (BPL) estimating around 261 million comprising of around 60 million households. This comes about 1/3rd of world poor. Within India, there is disparity in the incidence of poverty among states. Statewise, Orissa is more vulnerable with 47.15 % poor, followed by Bihar (42.60 %), Madhya Pradesh (37.43%) and Assam (36.09%). On the other side, Kerala (12.72%), having the least

Indian Economy
As part of international community, India has made an ambitious target of achieving the Millennium Development Goals (MDGs) of reducing the incidence of poverty by half by 2015. In the Five Year Plan (2002-07) had projected a GDP growth rate of 8 % to achieve realization of this goal, There is improvement in general the economy may end up with substantial reduction in absolute number of poor by the end of 2015.

Indian Economy
In the recent Human Development Index (HDI), released by United Nations Development Programme, [UNDP] India is ranked 127th among 177 countries with an index of 0.602 on a 0 to 1 scale. The HDI is an indicator that measures a countrys average achievements in three basic aspects of Human Development longevity, knowledge and standard of living. We have long a way to go, to catch up with other countries.

Need for micro finance

Overall microfinance Services help low income people Reduce risk Improve management Raise productivity Obtain higher returns on investment Increase their incomes Improve the quality of their life and those of dependents

NEED FOR Micro Finance

1. RANGE OF FINANCIAL SERVICES REQUIRED BY THE POOR
[STUDY BY ASIA TECHNICAL DEPARTMENT OF WB 95]

    

CONSUMPTION CREDIT 2/3rd,of its total requirement of funds, and 3/4th of it is for a short period PRODUCTION CREDIT now nearly 75% of it is met by informal credit Institutions SAVINGS [ Not more than 5-6% of Rural House Holds avail
facility of Banks]

INSURANCE REMITTANCE

Continued-2.

Expert Committee on Consumption Credit

(Chairman: Shri B. Shivaraman, Member, Planning

Commission) 1975-76

Consumption demands of the poor[ break up]

Findings (a)Medical expenses (33%), (b)Marriage (33%), (c)Education (14%), \ (d)Birth, death & Religious purposes (10%) and (e)General consumption (10%).

NEED FOR Micro Finance -- continued

2. FINANCIAL EXCLUSION It is a situation where individuals either do not have access to appropriate financial services, or do not have the knowledge, understanding and skills to make best use of these available financial products and services.
There are a number of reasons for persistence of financial exclusion

such as---Attitudes and perceptions non-availability, of outlets/centres Lack of financial access in the form of appropriate financial products Lack of physical access due to distances involved Non-viability due to high transaction cost.

NEED FOR MF
The Rural Financial Access Survey (2003) conducted by WB and NCAER in Andhra Pradesh and Uttar Pradesh revealed that Formal financial institutions reach less than 30% of the population 44% rural households had informal borrowings at interest rates of up to 48% per annum. [preceding 12 months] Only 21% rural households had access to formal credit and majority of bank loans were collateralized.

NEED FOR MF
3. DEMAND-SUPPLY GAP  Demand for micro-financial services 50,000 crores (2002)
 Demand for production credit 17000 crores  Outstanding credit of the Banking system to the poor 5000 crores [Report of steering committee on Micro Finance and Poverty alleviation]

Extent of Exclusion
51.4 % of farmer households in the country, out of a total of 89.3 million households do not access credit, either from institutional or non-institutional sources Despite the vast network of bank branches, only 27% of total farm households indebted to formal sources Exclusion in general is large, it also varies widely across Regions, Social groups and Asset holdings Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern and Central Regions respectivel Poorer the group, the greater is the exclusion
: 24

Level of Indebtedness to Institutional Sources

Date:

25

Number of Loan Accounts to Adult Population

Coverage in rural areas 9.5 %- [Unbanked 90.5%] Coverage 14 % in urban areas- [Unbanked 86 %] Coverage in North Eastern and Eastern regions 7 % & 8% -[ie, Unbanked population 93 & 92 % respectively]
Date: 26

Number of Loan Accounts to Adult Population

Date:

27

Study on Financial inclusion 2009

It was suggested that A model backed with MF Inst. And Self Help Groups can address the issue of Financial inclusion They observed that due to small enterprise size ,flexibility in operations and profit oriented approach, MFIs have shown greater results than Banks, in reaching out to the financially underserved population The eco system built by MFIs and SHGS can be termed as Micro banking with services designed for small transactions The study reveals-- the business correspondent [BC] model in India has built a strong foundation for Microfinance

Financial Inclusion in Developed Countries

Most of the population in developed countries have bank accounts 99 % in Denmark 96 % in Germany 91 % in the USA and 96 % in France In most developing countries, formal financial sectors serve relatively a small segment, often no more than 20-30 % of the population
Date: 29

LOW SHARE OF FORMAL FIs-- RURAL DEBT -1992

COMMERCIAL BANKS & RRBs

26.6%

COOPERATIVE SOCIETIES

28.6%

OTHER FORMAL INSTITUIONS (Govt., Insurance, PF, Misc.) TOTAL

8.7%

64%

Debt and Investment Survey, GOI 1992

Why does meeting the demand matters?

Provides the financial services that many need, to expand and diversify their eco. activities Plays an imp. role in promoting education ,health & decreasing child labour Has proven a powerful method of building self confidence of the poor An incremental approach to loan size, permits borrowers to start with small loans and increase gradually

Why does meeting the demand matters? Continued---Provision of convenient ,secure ,micro saving services Commercial MF Inst. can become profitable &viable over the long term and Govt. need not provide credit subsides or cover the losses Financial services help people meet their household and business goals and become managers of their financial affairs

Micro Finance Institutions--Need in India

Around 300 million people or about 60 million households are living below the poverty line. Only about 20 percent have access to credit from the formal sector MF practitioners estimated the annualized credit usage of all poor families at over Rs 45000 crores of which some 80 percent is met by informal sources Credit on reasonable terms to the poor can bring about a significant reduction in poverty Opportunities for the unskilled and the illiterate is not increasing fast enough even after liberalization of economy. Institution involved in MF have a significant role to play to reduce this disparity and lead to more equitable growth

Risks perceived by Formal sectors

Credit Risk High transaction and service cost Absence of land tenure for financing housing Irregular flow of income due to seasonality Lack of tangible proof for assessment of income Unacceptable collaterals such as crops, utensils and jewellery

Microfinance Operating Strategies

In India, microfinance practice is prevalent through the following delivery models. a) Self Help Group (SHG) an informal group of 10 to 20 members b) Grameen Model A joint liability group of 5 members. c) Individual Model dealing with individual borrowers. The most prevalent model is SHG model, in India

HOW MICRO FINANCE IS DIFFERENT ?

SUPPLY SIDE PERSPECTIVE DEMAND SIDE PERSPECTIVE

SUPPLY SIDE PERSPECTIVE

1. 2. 3. 4. Poor need mainly credit Poor cannot save Poor can not repay consumption loans, hence give sparingly. Only economically viable ventures can be supported. Systems neither permit meeting, emergent and frequent credit needs, nor could these operations be viable Production loans should not be diverted for consumption purposes Poor can not afford higher interest rates, hence require subsidy Unsecured loans are highly risky Can not reach all villages, especially in tribal and backward areas because of product design and cost

5. 6. 7. 8.

SUPPLY SIDE PERSPECTIVE [continued]

9-Social Security ,needs are too difficult to address 10--Systems do not envisage empowerment as agenda 11-Woman is not head of the family, She can not manage credit properly 12--Poor people avail loans, primarily for subsidy

13--Cooperatives, not banks are meant for participative financial management 14-Can offer at best credit and to some extent savings facilities 15--The Planners and Executives know fairly well as to what is in the best interest of the borrowers

DEMAND SIDE PERSPECTIVE

1. 2. 3. 4. 5. 6. 7. 8. Poor need comprehensive financial services in addition to credit Poor save and access to saving products & services, is equally important Consumption needs are predominant and important Credit needs are smaller, frequent and a mix of consumption and production purposes Dividing line between production and consumption loans, is very thin Rate of interest is not the determinant for selection of credit source Do not have collaterals to offer as security Need credit at door-step without hassle

DEMAND SIDE PERSPECTIVE [continued]

11-Poor women, if financed, could contribute significantly for family welfare 12-Subsidy is welcome, if available without leakages 13-Govt. programmes are charity 14 Social security is felt need 15-Need institutions which address socio-economic issues as integral intervention 16-Economic decisions for the poor are best left to them 17-Socio-economic empowerment can help economic upward migration

MF CONCEPTUAL THINKING

THE POOR CAN SAVE AND ARE BANKABLE THE POOR REQUIRE NOT ONLY CREDIT BUT ALSO OTHER FINANCIAL SERVICES MISMATCH BETWEEN THE REQUIREMENTS OF THE POOR & CAPABILITY OF THE FIs CAN BE MINIMISED SMALL AFFINITY GROUPS OF THE POOR, WITH INITIAL OUTSIDE SUPPORT CAN EFFECTIVELY MANAGE AND SUPERVISE MICRO CREDIT AMONG THEMSELVES

MF CONCEPTUAL THINKING

PARTICIPATIVE FINANCIAL SERVICES MANAGEMENT IS MORE EFFICIENT AND RESPONSIVE COLLECTIVE WISDOM OF THE GROUP AND PEER PRESSURE ARE VALUABLE COLLATERAL SUBSTITUTES MF COULD BE A PRE MICRO ENTERPRISE STAGE FOR MOST POOR SHG AS A BANK CLIENT, FACILITATES A WIDER OUTREACH, LOWER TRANSACTION COST & A MUCH LOWER RISK COST FOR THE BANK

Microfinance Market in India

SHG-Bank Linkage Model of NABARD is the largest microfinance programme in India. Today, more than 4.58 million SHGs in India are linked to various commercial banks with a cumulative disbursement of about Rs 45870 crores . Apart from this, in the semi-informal sector, there are good number of MFIs in India who lend directly to SHGs and other models where the credit flow is estimated at Rs 2000 cr. It is estimated that the microfinance market in India has a potential of above 10 b USD in demand wherein the supply is nearly 4 b USD only resulting in huge mismatch of 6 b USD.

Issues in Microfinance
1. 2. 3. 4. Regulation Appropriate Legal Structure/Entity Interest Rate Capacity Building (HR, MIS, Audit, Delinquency Management etc.) 5. Products & Services 6.. Introduction of Norms 7. Setting Standards 8. Managing Risks 9. Internal Controls 9. Enhancing Credit Absorption Capacity etc.

Business plan for a MF Institution

After a basic need assessment ,the business plan for a MFI should include at least the following items

Market analysis ;competition and products Institutional capacity and competence Plan for reaching financial sustainability Funding Monitoring system Reporting ,audit and rating Structure and ownership

Categories of MFI
Mainstream Formal Institutions NABARD ,SIDBI, HDFC, Commercial banks, RRBs etc are some of the mainstream financial institutions involved in extending Micro Finance Alternative MFIs NGOS which are mainly engaged in promoting SHGs and their federations at a cluster level NGOs directly lending to borrowers, either organized into SHGs or into Gramin Bank style groups and centres. MFIs which are specially organized as cooperatives such as the SEWA Bank and various mutually aided cooperatives thrift and credit societies [MACTS] in AP MFIs ,which are organized as non banking finance companies in India

Leading alternative MFIs in this segment are SEWA Bank in Gujarat, which also runs federations of SHGs and its Sarva Jana Seva Kosh Ltd; the ASA in Tamilnadu; Share ,Basix ,CARE and MACTs in AP

Actors in Micro Finance

Service providers
The institutions providing financial services for the poor show a great variety such as Commercial financing institutions Specialized FIs Specialized NGOs Multipurpose NGOs

Donors
Donor agencies, Donor NGOs, Professional Investors and entities providing, Technical assistance, guidelines and practical tools

Networks
Microcredit summit[the network of MFI. INAFI [international network for Alternative Finance Institutions, AMFIN [The Africa Microfinance Network] with 380 MFIs from 13 countries as members

SHG Bank Linkage Programme

As per NABARD the SBLP growth might be in a declining trend both in outreach and loan portfolio, the no of SHGs that had outstanding loans was 4.58 million at the end of March 2010which represents 8.5 percent growth over the last year (4.22Million) SBLP has gone has gone into a decline relative to the MFIs performance There is a substantial increase in the number of SHGs that saved with the banking system in the current year

Microfinance penetration Index(MPI)-The southern states has more than proportionate coverage of microfinance. West Bengal is the new entrant in the top five states under MPI Commercial banks share of borrowing SHG remain same at 67 per cent as in the last year In terms of volume of loans CBs had a proportionately high share of 68 per cent

SHG is a Socio-financial Product with Credit-plus Approach CreditA SMALL ECONOMICALLY HOMOGONEOUS AND AFFINITY GROUP OF RURAL POOR VOLUNTARILY COMING TOGETHER
TO SAVE SMALL AMOUNTS REGULARLY CONFLICT SOLVING THROUGH COLLECTIVE LEADERSHIP AND MUTUAL DISCUSSION

USE OWN FUNDS FOR INTERNAL LENDING

COLLATERAL FREE LOANS WITH TERM DECIDED BY THE GROUP

TO MEET THEIR SMALL / EMERGENT NEEDS

ACCESS BANK LOANS FOR IGA

COLLECTIVE DECISION MAKING

MARKET DRIVEN RATES OF INTEREST

Programme Impact
Economic Empowerment Social Empowerment Political Empowerment

Access to Financial Services

Savings

Income generating activities

Agriculture

Participation In CBO

Eradication of Social Evils Education Better Health Care & Nutrition Participation in relief measures

Women Participation in PRIs

Watershed
Development

Credit

Allied activities Small business / Tiny Units

Wadi
Development

Insurance

continued-----

SHGs AS CLIENTS- FACILITATE BANKS

A WIDER OUTREACH, LOWER TRANSACTION COST & A MUCH LOWER RISK COST FOR THE BANK SLOWER BUT CONSISTENT GROWTH IN VOLUME MORE & STABLE PROFITS DESPITE SLOWER GROWTH - FEE AND NON FEE FUTURE BUSINESS CROSS SELLING [Remittance, Bill payments ,Insurance ,Mutual funds etc]

Micro Finance Institutions[MFI]-Need in India

Around 300 million people or about 60 million households are living below the poverty line. Out of these, only about 20 percent have access to credit from the formal sector MF practitioners estimated the annualized credit usage of all poor families at over Rs 45000 cr. of which some 80 percent is met by informal sources Credit on reasonable terms to the poor, can bring about a significant reduction in poverty Opportunities for the unskilled and the illiterate is not increasing fast enough even after liberalization of economy.

Institution involved in MF have a significant role to play to reduce this disparity and lead to more equitable growth

Assessment of Microfinance
After a basic need assessment ,the business plan for a MFI should include at least the following items Market analysis ;competition and products Institutional capacity and competence Plan for reaching financial sustainability Funding Monitoring system Reporting ,audit and rating Structure and ownership

Level of Poverty and Outreach of MFIs [study report]

A few clients below poverty line were worse off after borrowing than before Overall Impact on MF clients seems to be directly related to the level of income Development and refinements of MF products remain focused on the middle and upper segments of the poor [leaving the poorest behind] Study suggests that recognizing the heterogeneity of poor should lead to more innovation and experimentation which may deepen the downward reach of Financial services

Continued--Depth of outreach by an MFI ,will depend upon the objectives and its ability to design products and services, suitable to the level of poverty, it is targeting Serving the ultra poor may be possible in a financially sustainable way but time frame to reach Financial self sufficiency will be shorter for MFIs serving the eco. active poor For serving poorest of poor the donors and practitioners need to be committed to supporting over a longer period

Investments in Microfinance
The investments in MF have been on the rise due to the involvement of capital market and private sector investors Microfinance is fast emerging as a hot opportunity for global players with an estimated $20 billion to be invested globally and around $3billion in India by 2010

Banking Infrastructure in India

Banks Comm. Banks(27) Foreign banks Other scheduled and non scheduled Banks RRBs Total Total 46068 237 5420 Rural 19226 0 1143 Semiurban 10900 2 1776 Urban 15902 235 2501

14483 66208

12062 32471

2045 14723

376 19014

Bank loans outstanding against SHGs,[as on 31 st March 2009]

Agency No of SHGs Amt. of outstanding loans (Rs. mn) 1,70,436.8 50,234.9 21,288.9 2,41,960.8

Comm. banks RRBs Coop. banks Total

28,34,995 9,36,612 3,73,584 41,45,191

Observations Growth over last year

The total outstanding MF loans amounted to 359.39billion posting a growth rate of 30 percent over the last years level MF constituted 1.29 percent of gross bank credit of scheduled commercial banks ,an increase of 0.27 percent over the last year [in spite of overall economic slowdown] The growth is significant in case of MFIs compare to the size of the loans given by Banks to SHGs While MFIs added 8.5 million clients they also added Rs. 57.80 billion to outstanding loans In case of Banks the SHG loan outstanding has increased by Rs. 71.5 billion with an addition of 6.9 million clients through 0.52 more SHGs The growth of MFIs on a narrow organizational base highlights the potential at the bottom of pyramid

Comparative performance of top five MFIs

Clients( no.min) 2008 SKS 1.88 Microfina nce Spandan 1.19 a Share Microfin. 1.29 2009 3.52 87 Growth rate % Loans( Rs.Bn) 2008 7.81 2009 24.6 214 Growth rate %

2.43 1.50 1.45 0.88

104 16 91 26

5.95 7.28 2.78 3.36

18.7 12.2 5.3 7.1

214 67 91 111

Bandhan 0.76 Asmitha 0.70 Microfina nce