Micro Finance in India

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Banking with Poor- supplementary channels

Approaches 1) Formal Banking system 2) Micro finance -SHG-Bank Linkage Programme -Lending by mFIs to groups and individuals
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Formal Banking System & Poor

Improving access to poor to institutional credit was accorded the highest priority. State partnership in coops, Nationalization of commercial banks, Establishment of RRBs, Multi agency approach, Branch expansion in unbanked areas Financial sector reforms in 1990s
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Constraints on Bank Lending

High transaction cost of servicing large number of small loan cases Higher perceived risk associated with rural lending Inadequate legal framework for financing tenants, share croppers etc. Attitude of the banking staff towards rural lending

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Why Micro Finance

Microfinance as an alternative channel. Low transaction cost for banks as well as for borrowers Enables to provide access to poorest of the poor for financial services Social collateral for lending Repayment through peer pressure Less cumbersome procedures of lending Loans also given for consumption purpose
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Microcredit or microFinance?
Micro credit
Objectives
Micro Credit is about delivering credit to low-income clients Credit alone minimalist

microFinance
Objectives
MicroFinance is about providing access to financial services &
building capacities to manage money

Focus
The focus is on delivering credit which is production related

Focus
The focus is on financial services delivering credit which is need related

Based on the belief

bankers knows the borrowers need

Based on the belief

borrowers knows his or her need

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Micro Finance and Micro finance Institutions

Micro Finance (mF) : Provision of thrift, credit and other financial services and products of credit of very small amount to poor in rural, semi-urban and urban areas for enabling them to raise their level of income and standard of living. Micro Finance Institutions (mFIs) : Institutions which provide either partly or exclusively thrift, credit and other financial services to poor in rural, semi-urban and urban areas.

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Micro Finance Delivery Models

1) SHG Model: Homogenous members, similar in economic status, mutual support among members, regular saving among members, Lending decisions taken by group Commercial banks, RRBs and cooperatives. 2) Grameen Bank Model : Homogenous Group of five, eight groups form centre, centre meets every week, regular saving by members,, loan disbursed directly to members, Peer pressure for repayment ASA, SHARE, CASHPHOR etc.

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Micro Finance Delivery Models

3) Individual Lending in Joint Liability Groups : Form a joint liability group of 5 to 7 members, each other guarantee repayment (social collateral), peer pressure in case of willful defaulter 4) Individual Lending : lending to a creditworthy borrower

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SHG-Bank Linkage Programme

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Models of SHG Bank Linkage

Model I : NGOs act as facilitators in forming and nurturing of groups while banks give loans directly to groups. Model II :NGOs play an additional role of financial intermediation. NGOs borrow funds from banks for on lending to groups Model III :Banks themselves form the groups and lend money money directly

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SHG- Bank Linkage Models

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Model wise Cumulative Number of SHGs (2004-05)

Model

Percentage

Model I
Model II Model III
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72
7 21
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Model wise linkage

80 60 40 20 0 70 76 75 72 72

y 99- y00-01y01-2 y02-3 y03-4 00

Model 1
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Model 2

Model 3
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SHG-Bank Linkage Cumulative progress

End of March 1999-00 2000-01 2001-02 2002-03 2003-04 No of SHGs 1,14,775 2,63,825 4,61,478 7,17,360 10,79,091 Bank Loan ( Crore) 1,930 4,809 10,263 20,487 39,042

2004-05

16,18,456

68,985

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Average Loan per SHG

80000 70000

60000

50000

40000

Rupees

30000

20000

10000

0 2004-05 2005-06 2007-08 2008-09

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Agencywise coverage of SHGs

1800000 1600000 1400000 1200000 1000000 2007-08 800000 600000 400000 200000 0 CBs RRBs Coops Total 2208-09

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Agency wise Amount Disbursed to SHGs (Amt

in Crores)
25000

20000

15000 2008-09 2007-08

10000

5000

0 CBs RRBs Coops

Total

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Regional spread Cumulative

Region SHGs Total(% Loan (Crore) Total(%)
)

North N East East Central West

South Total
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52396 12278 158237 127009 54815

674356 1079091

4.9 1.0 14.7 11.8 5.1

62.5 100.0

239.5 101.9 518.3 501.4 295.1

5242.1 6898.4

3.5 1.5 7.5 7.3 4.3

76.0 100.0
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Spread of SHGs, Poverty and HDI of Indian states

Description State Population Incidence of Poverty all states Coefficient of correlation 0.46 -0.01167

States with poverty below national average States with poverty above national average No. of NGOs in the state State HDI
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-0.505
-0.089

0.39 -0.06478
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Observations

No correlation between Spread of SHGs and the poverty and HDI of Indian states indicating uncontrolled spread of SHGs States having incidence of poverty lower than national average seem to have a better spread of SHGs as compared to states having higher incidence of poverty SHG bank linkage programme seems to be following presence of NGOs in states rather than extent of deprivation and poverty

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Cumulative progress up to 31 March 2005

Agency CBs Coops RRBs Total
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SHGs

Bank Loan (Rs. Crore)

Number % Total 843473 52

211137 563846 1618456 13 13 100

Amount % Total 4159.0 60

2099.5 639.8 6898.4 30 10 100
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Observations

During 1004-05, 41082 branches of 573 banks participated in SHG Bnak Linkage programme Public sector and Private sector commercial banks togather have promoted 52% of SHGs and extended Bank loan of 60% All 196 RRBs participated in SHG Bnak linkage programme. While their share in SHGs was 35% the share in loan was 30% Share of scheduled commercial banks in SHG bank linkage programme was 87% while loan it was 90% Cooperative banks are late starters partly because of required amendment in cooperative societys Act to lend to SHG and partly because of their poor financial health. Their share in the SHG was 13% while loan was 10%
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Constraints-SHG & NGO levels

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Inadequate understanding of the goal of the programme Lack of basic accounting skills Presence of heterogeneity among groups leading to social conflicts High promotional costs, who will bear the cost ? ( Rs. 10,000/SHG) Limited Capability of SHG promoters Absence of standardized systems & procedures ( Book keeping, MIS etc.) Competition among various micro finance providers NGO Level Inadequate motivation to promote and train groups Inadequate knowledge of book keeping & accounting
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Constraints-bank level

Lack of concentrated efforts by banks Inability of banks to identify NGOs with savings and credit groups Lack of motivation among bankers Limited number of large sized NGOs with previous background of working with SHGs Insistence on NGOs and SHGs rating Inadequate training for staff for promoting, nurturing SHGs Perceived higher risk associated with lending to SHGs Insistence on impounding of deposits as collateral for loans
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Constraints-bank level

Participation of Cooperative banks in SHG-bank linkage programme has been low because

Slow reforms process Lack of proper infrastructure like training centres Lack of specialized staff to pursue micro finance Laws in some states prohibit coops lending to SHGs Dual control on cooperatives, poor resource base, lack of managerial ability & higher level of NPAs etc.

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Up scaling- SHG level constraints

SHGs are allowed borrow only to the extent of 4 times of their saving. This restricts lending programme Donor funds are limited The share of cooperative Banks in SHGs bank linkage programe is minimal NGOs unwilling to deal with financial matters as they are for social development SHPIs do not have resources to meet promotional costs Absence of State level support organisations Absence of synergy between the efforts of state level and govt. due to lack of mechanism

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SHG bank linkage funding arrangement

Source of Funds/Refinance
NABARD

% Share
87%

Other 13% agencies(SIDBI, RMK, HUDCO etc.,)

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Role of NABARD

Linkage programme on pilot basis was started by NABARD in 1992 NABARD involves VAs, bankers, formal and informal entities to promote and nurture groups Provides 100% refinance to banks, considers as priority sector lending, provides bulk lending & Revolving Fund Assistance(RFA) to NGOs Conducts training & workshops for NGOs, Bank Staff & SHGs Policy advocacy and publicity Operates Micro Finance Equity and Development Fund (MEDF)
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Role of NABARD

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Micro Finance Through MFIs

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Micro finance through mFIs

Most of mFIs are NGOs NGOs registered as 1) Cooperative Societies 2) Public Trusts 3) Federations 4) NBFCs

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mFIs - Types

I) Not-for-Profit-mFIs a) Societies registered under Societies Registration Act. b) Public Trusts registered under Indian Trust Act,1882 c) Non- Profit Companies registered under section 25 of Companies Act, 1956

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MFI- Variants
Standalone MFIs Not for profit MFIs
Trusts
Deposits not allowed Donor fund & bank borrowing Not regulated Requires no capital

For profit MFIs

NBFCs
Deposits allowed on merits Regulated by central bank Requires capital Rs 20 million

Societies
Deposits not allowed Donor fund & bank borrowing Not regulated Requires no capital

Sec 25 company
Deposits not allowed Donor fund & bank borrowing Regulated by ROC Requires no capital

Local area banks

Deposits allowed Regulated by central bank Requires capital worth Rs.1000 million

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Not- for profit MFIs

NGOs Registered as cooperative societies, Public trusts, not for profit companies, SHG federations, Noncommercial NGOs NGOs are multipurpose also involve in other developmental work About 1000 NGOs are involved in Micro finance are limited in Number I.e., ASA, CARE etc. NGOs involved in promotion of SHGs but without financial intermediation are not considered micro finance institution such as MYRADA, DHAN foundation etc Roughly NGO MFIs account for one million borrowers over 300 crore outstanding loan
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mFIs Types (Contd)

II) Mutual Benefit mFIs a) State Credit Cooperatives b) National credit cooperatives III) For- Profit mFIs a) Non Banking Financial Companies ( NBFCs) under Companies Act, 1956 b) Banks providing mF along with other banking services usually termed as Service Providers All the MFIs together account for 350 crore micro finance portfolio (2003). Funds raised include, borrowing from banks, deposits collected from members and donor funds

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Role of Aid Agencies

NABARD

SIDBI

> Refinance > Promotional Grants

> Commercial banks >RRBs >Coop banks

> Capacity Building > Equity > On lending > Transformation Loans

> Commercial Banks > wholesale funding agencies

Venture capital donors

Banks

Federations L o a n s

> Tech- assistance > Equity > On lending funds

Cluster

SHGs MFI Savings Loans NGOs Members

Individuals

SHGs

Federations

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mFIs Funds Constraints

Though NGOs are working as financial institutions most of the are not trained for undertaking credit business NGOs are not permitted to mobilise deposits, donor funds are limited, they do not have their own resources therefore micro finance through NGOs may not sustain NABARD, SIDBI, RMK and FWWB provide funds only to Non profit organizations and not to commercial micro finance
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mFIs Funds Constraints

NGOs can not earn profit as they violate Income Tax act sec.11(4) thereby lose charitable status. In the long run primary source of funds is deposits, NGOs can do this provided they are going concern. Hence NGOs have depend on borrowing on the basis of equity which they not have.

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Mutual Benefit mFIs

They are to be either state co-operatives or national cooperatives Cooperatives can be incorporated as mFI in states like Maharashtra, Gujarat where cooperatives are strong such as Sewa Bank, FWWB, CDF In other states cooperatives are under state control Cooperatives suffer from loan losses, higher NPA, lack of professionalism, dual control Mutually Aided cooperatives Societies (MACS) only in a few states I.e. Mahila vikas in A.P.
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mFIs Funds Constraints

mFIs can borrow from foreign institutions but liable to suffer from foreign exchange fluctuations Overseas Commercial Borrowing (OCB) has been allowed for which NBFCs have to provide for sovereign guarantee which is at 3% and above

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Regulatory mechanism for mFIs

Need for regulation of Micro Finance - To protect the interest of small savers - More orderly development of Micro Finance - Ensuring proper terms of credit including price of credit Better Financial Discipline - Institution of a proper reporting system - Need some sort of registration for enhancing credibility
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Initiatives for expansion of Micro finance

NABARD has evolved SHGs rating norms Vidyanathan Committee recommendations may reform the cooperative credit structure NBFCS and local area banks are being regulated by RBI Quality and quantum of RRBs lending will go up because of their merger and declining NPAs

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Issues in micro Finance

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Financial support for MFIs Enabling provisions for MFIs to resort to ECB, Venture funds etc. Capacity building support for MFIs Financial assistance from MEDF to all the MFIs Reaching poorest and poorer region is still a challenge SHG bank linkage model is promising as well as problematic Sustainability of MFIs is yet to be established
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How MFIs will succeed

Committed leadership Professional staff Appropriate credit delivery and recovery Good governance Participatory and decentralized management Transparency Flexibility Innovations Diversified products Trouble shooting and coping up capacity
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How MFIs will succeed

Enabling legal and regulatory environment Building social capital Women as agents of change Remaining client friendly and cost effective Appropriate pricing of products Use of appropriate ICT Access to continuous funding Strong MIS Risk management strategy Regular supervision and audit Standarised accounting
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THANK YOU

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