PICTURING MICRO FINANCE : PICTURING MICRO FINANCE S. ARUN KUMAR
---- PRESENT WHAT IS MICRO FINANCE ? : 2 Micro Finance is the supply of loans, savings, and other basic financial service to the poor . -> CGAP
To most, micro finance means providing very poor families with very small loans (micro credit) to help them engage in productive activities or grow their tiny businesses. -> Financial Gateway Source: Text WHAT IS MICRO FINANCE ? IMA - Hyderabad Slide 3: 3 Source: Text IMA - Hyderabad ABOUT MICRO FINANCE The modern micro finance movement dates back to the 1970s when experimental programs in Bangladesh, Brazil, and a few other countries began to extend tiny loans to groups of poor women to invest in micro enterprises
By lending to groups of women where every member of the group guaranteed the repayment of all members, these micro credit programs challenged the prevailing conventional wisdom and proved that poor people without collateral could be "credit worthy". When offered the opportunity, they would repay loans with interest, at extraordinary rates of repayment. MICRO FINANCE AND MICRO CREDIT : 4 Micro finance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients.
Micro credit refers to a small loan to a client made by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending. Source: Text MICRO FINANCE AND MICRO CREDIT IMA - Hyderabad Slide 5: 5 Source: Text IMA - Hyderabad MICRO FINANCE IN INDIA Evolution of Micro finance in India
Micro finance has been in practice for ages ( though informally).
Legal framework for establishing the co-operative movement set up in 1904.
Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department.
Nationalization of banks in 1969
Regional Rural Banks created in 1975.
established as an apex agency for rural finance in 1982.
Passing of Mutually Aided Co-op. Act in AP in 1995. THE PROFILE OF MICRO FINANCE IN INDIA : 6 Source: Text IMA - Hyderabad THE PROFILE OF MICRO FINANCE IN INDIA The scenario
Estimated that 350 million people live Below Poverty Line
This translates to approximately 75 million households.
Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores.
Cumulative disbursements under all micro finance programmes is only about Rs. 5000 crores.(Mar. 04)
Total outstanding of all micro finance initiatives in India estimated to be Rs. 1600 crores. (March 04)
Only about 5 % of rural poor have access to micro finance THE STATUS OF MICRO FINANCE IN INDIA : 7 Source: Text IMA - Hyderabad THE STATUS OF MICRO FINANCE IN INDIA Considerable gap between demand and supply for all financial services
Majority of poor are excluded from financial services. This is due to, inter-Alia, the following reasons
Bankers feel that it is fraught with risks and uncertainties.
High transaction costs
Unfavourable policies like caps on interest rates which effectively limits the viability of serving the poor.
While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. These include
Lack of an appropriate legal vehicle
Limited access to equity
Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate THE STATUS OF MICRO FINANCE IN INDIA ( CONTD.,) : 8 Source: Text IMA - Hyderabad THE STATUS OF MICRO FINANCE IN INDIA ( CONTD.,) Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations.
About 56 % of the poor still borrow from informal sources.
70 % of the rural poor do not have a deposit account
87 % have no access to credit from formal sources.
Less than 15 % of the households have any kind of insurance.
Negligible numbers have access to health insurance FEATURES OF INDIAN MF : 9 Source: Text IMA - Hyderabad FEATURES OF INDIAN MF About 60 % of the MFIs are registered as societies.
About 20 % are Trusts
About 65 % of the MFIs follow the operating model of SHGs.
Large concentration in South India
600 MFI initiatives have a cumulative outreach of 1.25 crore poor households
NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore households. PROJECTIONS FOR THE FUTURE : 10 Source: Text IMA - Hyderabad PROJECTIONS FOR THE FUTURE Annual growth rate of about 20 % during the next five years.
75 % of the total poor households of 80 million (i.e. about 60 million will be reached in the next five years.
The loan outstanding will consequently grow from the present level of about 1600 crores to about 42000 crores WHAT IS THE MICRO FINANCE DEVELOPMENT FUND ? : 11 Source: Text IMA - Hyderabad WHAT IS THE MICRO FINANCE DEVELOPMENT FUND ? Union Finance Minister in his budget speech for the year 2000-01, this Rs. 100 crore Fund has been created in NABARD to support broadly the following activities:
a) giving training and exposure to self-help group (SHG) members, partner NGOs, banks and govt. agencies
(b) providing start-up funds to micro finance institutions and meeting their initial operational deficits
c) meeting the cost of formation and nurturing of SHGs; (d) designing new delivery mechanisms
e) promoting research, action research, management information systems and dissemination of best practices in micro finance.
This Fund is thus expected to address institutional and delivery issues like institutional growth and transformation, governance, accessing new sources of funding, building institutional capacity and increasing volumes. RBI and NABARD have contributed Rs. 40 crore each to this Fund. The balance Rs. 20 crore were contributed by 11 public sector banks. MICRO CREDIT AND RBI : 12 Source: Text IMA - Hyderabad MICRO CREDIT AND RBI RBI defines Micro Credit as :
Micro Credit is defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those which provide these facilities.
DO RBI ENFORCE INTERESR RATES ?
No. The reform of the interest rate regime has constituted an integral part of the financial sector reforms initiated in our country in 1991. In consonance with this reform process, interest rates applicable to loans given by banks to micro credit organizations or by the micro credit organizations to Self-Help Groups/member-beneficiaries has been left to their discretion. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, continues to remain in force. MICRO CREDIT AND RBI ( CONTD.,) : 13 Source: Text IMA - Hyderabad MICRO CREDIT AND RBI ( CONTD.,) DO RBI IMPOSE THE TERMS & CONDITIONS FOR ACCESSING MICRO CREDIT ?
No . Banks have been given freedom to formulate their own lending norms keeping in view ground realities. They have been asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc
IS FOREIGN INVESTMENT ALLOWED IN MICRO CREDIT PROJECTS ?
Govt. of India with their notification dated August 29, 2000 have included ‘Micro Credit/Rural Credit’ in the list of permitted non-banking financial company (NBFC) activities for being considered for Foreign Direct Investment (FDI)/Overseas Corporate Bodies (OCB)/Non-Resident Indians (NRI) investment to encourage foreign participation in micro credit projects. This covers credit facility at micro level for providing finance to small producers and small micro enterprises in rural and urban areas TYPES OF MICRO CREDIT PROVIDERS IN INDIA : 14 Source: Text IMA - Hyderabad TYPES OF MICRO CREDIT PROVIDERS IN INDIA SUCCESSFUL MICRO FINANCE MODELS THAT HAVE EMERGED IN INDIA : 15 Source: Text IMA - Hyderabad SUCCESSFUL MICRO FINANCE MODELS THAT HAVE EMERGED IN INDIA An Intermediate Model that works on banking principles with focus on both savings and credit activities and where banking services are provided to the clients either directly or through SHGs;
There is also a Wholesale banking Model where the clients comprise NGOs, MFIs and SHG Federations. This Model involves a unique package of providing both loans and capacity building support to its partners; and
Further, there is an Individual Banking-based Model that has its clients as individuals or joint liability groups. While programme management and client appraisal in this Model may be a challenge, it is best suited to lending to enterprises. ICICI BANK - INNOVATIONS IN MICRO FINANCE : 16 Source: Text IMA - Hyderabad ICICI BANK - INNOVATIONS IN MICRO FINANCE The bank led model was derived from the SHG-Bank linkage program of NABARD. Through this program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies.
ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. However, rather than spending time in developing rural infrastructure of its own, in 2000, ICICI Bank announced merger of Bank of Madura (BoM), which had significant presence in the rural areas of South India, especially Tamil Nadu, with a customer base of 1.2 million and 77 branches CHALLENGES AHEAD : 17 Source: Text IMA - Hyderabad CHALLENGES AHEAD Appropriate legal structures for the structured growth of MF operations
Ability to access loan funds at reasonably low rates of interest.
Ability to attract and retain professional and committed human resources.
Design of apt MIS including user friendly software for tracking accounts and operations.
Ability to innovate, adapt and grow.
Bring out a compendium of small and micro enterprises for the MF clients.
Identify and prepare a panel of locally available trainers.
Ability to train trainers.
Capacity to provide backward linkages or create support structures for marketing RELATED ISSUES : 18 Source: Text IMA - Hyderabad RELATED ISSUES Designing financially sustainable models
Aim for community participation & ownership
Increase outreach and scale up operations
Demonstrate that banking with the poor is viable
Build professional systems and processes.
Ensure transparency and enhance credibility through disclosures.
Provide support for capacity building initiatives. IDEOLOGICAL ISSUES : 19 Source: Text IMA - Hyderabad IDEOLOGICAL ISSUES Are MFIs guilty of sacrificing “targeting” at the altar of financial sustainability?
Can MF ever be inclusive of the bottom two quintiles below the poverty line?. Are the economically inactive ineligible?
How to include the developmental agenda without compromising on financial sustainability ? Slide 20: 20 Source: Text IMA - Hyderabad “IF You are Uplifting
-> Mahatma Gandhi Source : 21 Source: Text IMA - Hyderabad Source DATA SOURCE
www.microfinanceindia.org/ March 2007
CGAP Slide 22: 22 Source: Text IMA - Hyderabad Slide 23: 23 Source: Text IMA - Hyderabad