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Workshop on Microfinance - A Holistic Perspective at JIMS Campus conducted by E Cell members on 18th August 2012.
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A Primer to Microfinance
―Dhobis (washermen), tailors and barbers contribute more to the GDP of
Andhra Pradesh than the IT sector.‖
(Vikram Akula, SKS; Source CSO, 2004-05)
Indian Profile
Estimated that 32.7% people live
Below Poverty Line in India
Annual credit demand by the poor
in the country is estimated to be
about $ 15 Bn.
India: Market size estimated at $16-
22 bn
India: >33 mn HHs
India: >3000 MFIs
Only 1% of providers WW fully
financially self-sustaining
Only about 5 % of rural poor have
access to microfinance.
The active borrowers are estimated
to have a per capita outstanding of
only Rs. 2500.
While 10 % lending to weaker
sections is required for commercial
banks, they neither have the
network for lending and
supervision on a large scale nor the
confidence to offer term loans to
big MFIs.
The non poor comprise of 29 %
of the outreach.
At the Roots
The poor use finance for Growth and Survival
Growth (60%)
• Enterprise (30%)
• Buildup assets: education, home (30%)
Sustenance (40%)
• Fulfill basic consumption
• Protect against shocks
• Access lump sums for lifecycle needs
(Survey of Low Income & LMI urban and rural HouseHolds)
Financing Needs of the Poor
Financial Plans of Poor Households
Cost of burials, health care, replacement costs after natural disasters – Insurance Plans
Retirements, Migrations, Agri / Farm Equipment, housing upgrades – Pension Plans /
Long Term Deposits
Irrigation, transportation, livestock, microenterprises, education – medium term
deposits
Food security, health, festivals, social obligations, emergencies – short term deposits
Sending money home, microenterprise, working capital – fund transfers and cheques
Urgent family disasters like sickness / crop failure, payoffs – emergency loans
Microenterprise, working capital, livestock, equipment and machinery – short term
loans
Housing, wells, irrigation systems, heavier machinery – longer term loans
Managing Savings
Put aside as much money as
possible till you save a large
enough sum.
Take a large sum as an
advance and repay it
through a series of savings.
At the Roots..
They Need
Simple process
Door Step Banking
Flexible Timings
Timely Availability
Minimum Documentation
There have
No ‗acceptable‘ collateral/ surety
No unique ID
No record of previous
borrowings/ repayments
Irregular income flows
Low literacy
… but the poor face very high prices for finance.
At the Roots…
So the poor turn to a variety of old and new
providers to fill the gap…
Survey of 64 LI & LMI urban and rural HHs
18% 37% 26% 4% 16%
Formal Semi – Formal Informal 1-on-1 personal
Informal 1-on-1 impersonal
Informal mutual (Chit funds )
Banks, Insurance cos
Microfinance Institutions
Employers, relatives, neighbors. friends
Moneylenders, pvt financiers
Microfinance targets urban and rural low-income (<$2000
annual HH income) clients
Uses joint-liability social contracts
Provides affordable finance
Societal Exclusion in India
It has meant historically
that several communities
are unable to participate
effectively in the process of
development, economically,
socially and politically.
Overcoming Exclusion
• Community Mobilization
The role of the State?
Partnerships needed between State
and Civil society institutions?
• Capacity Building
Integrate rights and development
interventions
• Networking, Justice Delivery
Mechanisms and Advocacy
voice in decision making
Government Partnership
• Convergence
Across traditional divides
(rights/development, urban/rural,
national/local, genders)
Current Status
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 and crop insurance 1 %.
Introduction to mF
Supply of Formal Financial Services in
India
An estimated demand for credit
ranging from $3-$9 Bn Annually
Formal Sector capability - $200-300
Mn.
More than 6 Lac Villages
About 30 K Bank Branches
Multiple Investment options for the
Poor.
Basic Financial Services still beyond
reach.
Access to Financial Services is the
major constraint for the poor.
The Poor may use a variety of
Financial Services if they manage
to save.
Micro Credit is not the only
requirement of the poor – they
need more services.
Microfinance: what is it?
What it often is
Micro-credit
Group lending
Social/charitable activity
What it really should be
Range of financial services
Group and individual lending
Profitable activity
Microfinance in India
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 hoseholds
NABARD‘s bank linkage program
has cumulatively reached a total of
9.4 lakh SHGs with about 1.4 crore
households.
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.
Microfinance Landscape
Niche Market MFIs
Private Banks (ICICI)
State Owned /
Commercial Banks
ADB
PE Firms
NABARD & SIDBI
Spandan, SHARE Microfin, SKS Microfinance have scaled microfinance reach
Expanding financial services. Multi pronged approach – directly providing
credit facilities to SHGs and wholesale credit facilities to microfinance NGOs
and NBFCs.
SBI, SyndicateBank, Andhra Bank, Indian Bank.
Microfinance Development Strategy to ensure permanent access to institutional
financial services for the poor.
Investing in low profile MFIs.
Perform a regulatory and promotional role.
Microfinancing
Individualistic Cooperation
Directly People’s Participation
Indirectly Institutions Solidarity group
Money Lenders
Others Grameen Group
Common Goal Group
Self Help Groups
Cooperatives
Cluster
Federation
Joint Liability Group
Models of Micro Finance
Self Help Group (SHG)
• Dominant microfinance methodology
in India
• A version of the village banking model
• Savings precede borrowings by
members
Individual Banking (IB)
• Entails provisions of financial services
to individual clients.
• Sometimes organised into joint liability
groups, co-operative or even SHGs
• Creditworthiness and loan security are
a function of co-operative membership
Grameen Model (GM)
• Initially promoted by the Grameen Bank of
Bangladesh
• Grameen MFIs undertake individual lending
but all borrowers are members of a 5 member
joint liability group which in turn gets together
with 6-9 other such groups from the same
village or neighborhood to form a centre.
• Within each centre, peer pressure and the
desire to maintain credit – worthiness in order
to qualify for a larger loan in the next cycle are
key factors which ensure repayment.
Mixed Model (MM)
• MFIs starting with the Grameen Model and then at a
later stage embraced the SHG Model without
completely doing away with the Grameen Model.
Microfinancing Systems
Informal financial service
providers
• Moneylenders, pawnbrokers,
savings collectors, money-
guards, input supply shops etc.
Member-owned
organizations
• self-help groups, credit unions,
and a variety of hybrid
organizations like 'financial
service associations' and
CVECAs
NGOs
• They have proven very
innovative, pioneering banking
techniques like solidarity
lending, village banking and
mobile banking that have
overcome barriers to serving
poor populations.
Formal financial institutions
Delivery Models
Self Help Groups
Home grown, co-operative
Savings Based / Led
Meeting Diverse Needs
Promoted by NABARD, PSU Banks, NGOs
Performance - Mixed
MFI / Grameen Replica
Group lending and regimented
Focused on self – sufficiency
NGO – MFI and NBFC – MFI
Major Concern – Pace of growth
Grameen II
Individual Lending
NBFC – MFI
Progressive Loan focused on enterprise
Futuristic products
Wholesome Microfinance Services
Regulation
Specialized activities
Major Concern – High Cost
Financing Models
Direct Financing Model
Most MFIs use groups as intermediaries for
transactions.
The NGO Promotes, trains and forms SHGs
SHGs are formed either by banks or by NGOs
and formal agencies but are financed by banks.
SHG-Bank Linkage Model
NGO to act as facilitator/financial intermediary
between bank and SHG.
Intermediation cost of around 6% of loan
amount
Cost is borne by the bank and Risk lies with the
banks as advances are reflected in bank portfolios.
Bank Partnership Model
MFIs can also be given long term financing by
Banks
Lack of trained staff still affects this model
MFI Joint Liability
Group Bank
Servicing fees of 11%
Loan at 9%
Interest charged: 20%
FLDG of 10%
Self Help Groups (SHGs)
Group of 10 people, create pool
of resources
Advance loans to each other from
pool (without collateral)
Loans recovered due to peer
pressure and group responsibility
SHG deposits resources with bank
Bank provides advances against
such deposits
Lower transaction cost for banks
due to group dealing
Lower transaction cost for banks
due to group dealing
Greater access to credit
Individuals learn to save
NGOs act as facilitator
Again, recovery is high because of
group responsibility
Issues
• Limited ―products‖ offered
• Scale-up of SHGs requires
government support
• Government involvement prone to
politicize movement; must be
guarded against
• NGO involvement not sustainable
in long run
Basic SHG Functions
Savings and Thrift
• The amount may be small, but
savings have to be a regular and
continuous habit with all the
members.
• ‗Savings first — Credit later‘
• Group members learn how to
handle large amounts of cash
through savings. This is useful
when they use bank loans.
Discussing problems
• Every meeting, the group will
discuss and try to find solutions to
the problems
Internal lending
• The savings to be used as loans for
members.
• The purpose, amount, rate of
interest, etc., to be decided by the
group itself.
• Proper accounts to be kept by the
SHG.
• Opening savings bank account
with bank.
• Enabling SHG members to obtain
loans from banks, and repaying the
same.
Unscalable Bank-SHG Model
Existing Branches
Limited outreach
Concentrated in urban
areas
High cost low ticket
items
Cash intensive
transaction
New Branches
High infrastructure costs
High operating
overheads
Long gestation period
Low technology usage in
rural areas
Characteristic Services
Majority of women
Face exclusion from formal institutions
Poor clients with relatively stable sources of income
Majority borrow for trading, working capital or setting up business.
Activities in rural areas - farming, food processing, petty trade, livestock, vending and
production like pottery or basket weaving.
Activities in urban areas – shops, services, street vendors and new age businesses
(beauty parlor, photography)
RoE RoIC Net Annual Returns ($)
Vegetable Vending 50 57 143
General Store 14 29 144
Sweet Making Shop 145 147 1010
Ice Cream Making 13 29 305
Leasing Mango Trees 184 185 511
Leasing irrigated farm land 160 161 667
Operating a Flour Mill 52 59 409
Tailoring 121 123 307
Roadside Micro-diner 245 246 1528
Goat Rearing 58 65 40
Buffalo Rearing 69 75 246
Production Pottery 235 236 520
Activity
Trade
Agriculture
Services
Livestock
Usual Lending Process Geo Economic
Survey
Based on geo economic information of the district or mandal and the constituent
towns and villages, the MFIs approach favourable villages
Village Appraisal MFI gathers first hand information about the population of the village, their
religion, cast, type of trades, skills, financial states, needs etc.
Village Selection Survey to evaluate potentiality for village operations. Data like total population,
poverty level, accessibility, political stability and safety etc. gathered.
Group Formation Interested people or women form self selected 4-6 member groups to serve as
guarantors for each other.
Training
Borrowers
After meeting basic requirements, compulsory group training is done to educate the
clients on the processes and procedures to build adequate credit discipline.
Scrutiny and
Underwriting
Customer Details, their business, earning capacity etc are closely scrutinized and
judged to access their repaying capacity.
Financial
Transactions
The collection meeting are held on a weekly/monthly basis by appointed Field
Assistants to conduct financial transaction and discuss new applications and issues.
Insurance (Near
Mandatory)
Insurance products are sold to cover death, accident or health of a group member
of the member‘s dependent's.
Business Strategies of MFIs
Geographical Expansion
Incorporation of Global Best Practices
Higher Technology Utilization
Social Services and initiatives
Leveraging Finance
Human Resource Capacity Building
Greater Portfolio of Financial Services
Business Strategies of Banks
Partnership Model Identification, training and promotion of mF clients by MFIs. Bank finances client
on MFIs recommendation. Customer and Portfolio rests in the bank‘s books.
MFI Portfolio
Securitization
Bank buys portfolios from MFIs. MFI continues to service clients and acts as the
collection agent. MFI shares credit risk with banks.
Technology Adoption of a core banking system for managing loan portfolios generated inder
the partnership model
Credit to MFIs /
NGOs
Wholesale linkage model implying extending a bulk loan to the MFIs for lending to
poor women.
Loan Portfolio
Evaluation
Involvement in providing mentoring services to clients including in areas of
governance and credit discipline.
Liaisons with NGOs Operating divisions at the regional and branch levels in close coordination with
local NGOs to generate movement.
High transaction costs, poor outreach and unavailability of quality manpower has obliged banks to adapt
various approaches to fulfill priority sector lending norms.
Growth Drivers
Need for Credit by
the Unpriveledged
Lack of Lending from Banks due to lack of collateral and exploitation from money
lenders has exemplified the potential demand and prospects for the sector.
Increase in the
sources of Finance
Commercial debt and equity, grants and donations, PE, VC Funding. The capital
structure of the industry is changing for the better.
Innovation Diversification of Lender base, consolidating internal controls, strengthening
policies on compliance and disclosures.
Government Policy
and Support
Microfinance Bill, NABARD, SIDBI and RBI have recognized the sector as the
need of the hour.
Industry
Consolidation
Increase in number of partners enabling a diversification of the existing product
portfolio.
Migration and
Urbanization
Use of smart cards, wireless connectivity along with higher loan size increasing
penetration of urban micro-financing.
Human Resources The sector is slowly attracting specialized talent for growth.
LEGAL EVOLUTION
Legal Evolution
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.
Nationalisation of banks in 1969
Regional Rural Banks created in 1975.
NABARD established as an apex agency for rural finance in 1982.
Passing of Mutually Aided Co-op. Act in AP in 1995.
Microfinance Bill 2012
Legal Structures
SHGs and federations
Societies and Trusts
Co-operative societies
Co-operative Banks
Regional Rural Banks
Local Area Banks
Public and private sector banks
Companies incorporated under
Section 25 of the Companies Act
Companies registered with the RBI
as NBFCs
Eligible organizations under
BC/BF guidelines of RBI
SHGs and Federations
An SHG is an unregistered entity of between10-20 individuals,
having its own rules and regulations, office bearers and books of
accounts.
SHGs are recognised by the RBI and government for specific
purposes.
SHGs use savings of their members as well as funds from banks
and MFIs for providing credit to their members.
SHGs network in clusters and form in to Federations which are
usually registered as Societies or Co-operative Societies
Societies
Societies can be registered under the Societies Registration Act, 1860 or under
respective state acts.
A society can be registered by any seven persons associated for any literary,
scientific or charitable purposes by subscribing their names to a memorandum of
association and filing with the registrar.
Registration does not require any minimum initial capital contribution
Difficulty to determine ownership makes banks uncomfortable in lending large
sums
Cannot raise equity so scalability is an issue
Cannot accept public deposit
Exempt from Income Tax if registered under Section 12A of the Income Tax Act.
Need registration under FCRA to be able to accept foreign grants
Trusts
Public Trusts can be established under the respective state regulations. Private
trusts can be established under Indian Trusts Act 1882.
Difficult to attract commercial equity and loans
There is no minimum capital requirements
Cannot accept public deposits
Exempt from Income Tax if registered under Section 12A of the Income Tax
Act.
Need registration under FCRA to be able to accept foreign grants
Co-operative Societies
Cooperative Societies can be registered under
• Co-operative Societies Act, 1912, or
• Relevant state Co-operative Societies acts, or
• The Mutual Benefit Cooperatives Act
• Relevant state Mutually Aided Co-operative Societies Act, or
• Multi-state Co-operative Societies Act
• any other law relating to cooperatives in force in India.
Primarily regulated by registrar of co-operative societies
Can access equity as well as deposits from their members and can lend to their
members
Membership generally restricted to individuals, other co-operatives and government
(including government corporations)
Mobilization of equity is restricted as co-operative societies can raise equity only from
their members. The principle of ‗one person one vote‘ acts as disincentive to equity
mobilization from the members
Banks are reluctant to lend to co-operative societies because of non-equity based
ownership and their tendency to get political
Co-operative Banks
Could be
• Primary co-operative bank (urban co-operative banks)
• State co-operative bank
• Central co-operative bank
Registered under central/state/multi-state co-operative acts. Regulated by Registrar of
Co-operatives for registration, management and audit
Regulated under the Banking Regulation Act, 1949 by the Reserve Bank of India for
licensing, area of operations and interest rates
Can undertake most of the banking activities
Difficulty in raising equity and tendency to get political.
Respective state governments have close control over central co-operative banks and
state cooperative banks. Many of these are not well-managed.
Series of irregularities have been noted by RBI in many primary co-operative banks
and it has taken action against several existing banks.
RBI is reluctant to give new licenses owing to failure of a large number of co-
operative banks in different parts of the country
Regional Rural Banks (RRBs)
Established by the Central Government through a notification in the official
gazette
Minimum capital requirement is Rs2.5 million
The share capital of the RRBs is required to be held by the Central
Government, State Government and Sponsor Bank in the ratio 50:15:35
From the financial year 2006-07 RRBs have been brought under Income Tax
net
RBI has also stipulated that RRBs need to maintain disclose CAR starting
March 2008.
Local Area Banks (LABs)
RBI allowed the establishment of Local Area Bank in 1996
LABs are registered as public limited companies under the Indian Companies
Act 1956
Minimum capital requirement for a LAB is Rs50 million
Are allowed to operate in three geographically contiguous districts
Can mobilise deposits from public
Prudential norms related to banks are applicable but rules relating to liquidity
and interest rates applicable to RRBs are applicable
At present only four LABs are functioning and no new licenses are being
issued
Resumption of licensing of LABs with stricter capital requirements being
considered
Private banks
Private banks have to obtain license from RBI under the Banking
Regulation Act -1949
A minimum capitalization of Rs3bn (Rs300 crores) is required
for private sector banks, including wholly owned subsidiaries of
foreign banks
Can do normal banking activities
Section-25 Companies
Section 25 Companies are promoted for the purpose of promotion of commerce,
arts, religion, charity or any other useful purpose
They are prohibited from payment of dividends
RBI has exempted NBFCs licensed under section-25 of the Indian Companies
Act from registration, maintenance of liquid assets and transfer of profit to
Reserve Funds, provided
They are engaged in micro-financing activities (Rs50,000 for small businesses and
Rs125,000 for housing)
they do not mobilize public deposits
Section-25 NBFCs find it difficult to mobilize equity owing to restrictions on
payment of dividends
Can mobilise foreign grants if registered under FCRA
Exempt from Income Tax if registered under Section 12A of the Income Tax Act.
Non-Banking Financial
Companies (NBFCs) Companies registered under Indian Companies Act 1956 can apply to RBI to carry on the
business of an NBFC
NBFCs are required to have net owned funds of Rs20 millions
Ownership can be defined precisely and they can raise equity
Mobilisation of public deposits, though allowed, is almost impossible given strict guidelines
of the RBI
Banks are comfortable lending to NBFCs which are well-capitalised and well-performing
NBFCs are for-profit entities and are taxable
• FDI through automatic route is allowed subject the following limits
• FDI up to 51% - US$0.5 mn to be brought upfront
• FDI between 51% and 75% - US$5mn to be brought upfront
• FDI between 75% and 100%- US$50mn out of which 7.5 million to be brought up-front
NBFCs are subject to prudential regulations regarding income recognition, asset classification
and provisioning, prudential exposure limits and accounting/disclosure requirements
provided
• they are mobilizing public deposits, or
• they are systemically important
Systemically Important
NBFCs All non-deposit taking NBFCs having asset size of Rs1bn
(Rs100 crores) or more as per last audited balance sheet will be
considered as systemically important NBFCs.
Non-deposit taking and systemically important NBFCs will be
subject to capital adequacy regulations, single/group exposure
norms and disclosure pertaining to derivative transactions
Capital Adequacy Ratio (CAR) requirement is higher for
systemically important NBFCs
Organizations under BC/BF
guidelines of RBI Business Facilitators
Business facilitators can be used by the
banks for various pre-disbursement
and post-disbursement activities
pertaining to lending.
Does not include disbursement and
collection activities
No approval is required from the RBI
for using Business Facilitators
NGOs, Farmers‘ Clubs, Co-operative
Societies, Post-offices, IT Enabled
outlets of corporates, Insurance agents,
Well-functioning panchayats, Village
Knowledge Centers, KVIC/KVIB
centers, Agri Clinics
Business Correspondents
BCs can undertake disbursement of
loans as well as collection of principal.
They can also accept deposits on
behalf of the banks.
Banks can compensate BCs but BCs
cannot charge anything from the
consumers
Transactions need to be accounted for
and reflected in bank‘s books by end of
day or next working day
Societies/Trusts, Non-deposit taking
NBFCs, Cooperative Societies, Post
offices, Section 25 Companies
The MicroFinance Bill
empowering the Reserve Bank of India (RBI) to regulate all microfinance
institutions (MFIs).
it would be mandatory for micro finance institutions (MFI) to be registered
with the Reserve Bank and have a minimum net-owned funds of Rs 5 lakh.
The RBI, can increase this further to 10 lakh, the bill adds.
a Micro-Finance Development Council will be set up to advise the
government on formulation of policies, schemes and other measures required
in the interest of orderly growth and development of the sector with a view
to promote financial inclusion.
capping the interest rate charged by MFIs at 26%. A cap is untenable,
irrespective of the fact that it is 2% higher than the ceiling recommended by
the Malegam panel. Price control will only dampen the supply of
microfinance and compel the poor to turn to moneylenders.
Transformation
MFIs registered as societies, trusts and
Section-25 companies want to
transform to a for-profit NBFC as
For profit structure allows them to
raise commercial equity
Banks are more comfortable lending to
the NBFCs
Access to commercial equity and Bank
funds helps them scale-up faster
Issues in Transformation
• MFI promoters find it difficult to mobilise
Rs20mn of minimum capital required for an
NBFCs
• Many MFI promoters have ‗acquired‘ old
NBFCs having lesser minimum capital
required but have to pay significant premium
to the existing owners. There are also legacy
issues.
• Transfer of assets and liabilities Option 1: Assets from the old entity can be purchased
by the new entity
Option 2: All new disbursement to be made by the
new entity and the loan portfolio of the old entity is
allowed to come down gradually
Option 3: New entity gives loans to the clients who
can pre-pay loans in the old entity
Triggers of Transformation
The biggest challenges are
usually the greatest triggers
of transformation – its all a
matter of perception and
necessity
• Size
• Diversity of services
• Financial sustainability
• Focus
• Taxation
Bolivia and Africa:
Transformation of NGOs
• To Banks
• To FFPs
Indonesia: Transformation
of mainstream to
MicroFinance methods
Bangladesh: Transformation
of a project into
• Grameen Bank
• Other NGOs transforming to
Banks
Role of Central Bank and
Regulator
Role of RBI
(Central Bank)
Support financial liberalization and create conditions favorable to the sector
Good Regulation and Supervision
Supporting MicroFinance Pilot Projects
Collection and Publication of Data
Training and Advocacy
Role of NABARD
(Regulator)
Framing policy and guidelines for rural financial institutions
Providing credit facilities to issuing organisations
Preparation of potential-linked credit plans annually for all districts for
identification of credit potential
Monitoring the flow of ground level rural credit.
Division of Responsibilities
NABARD SIDBI
Oversees program linking Banks and SHGs Lends to MFIs through SIDBI Foundation
CHALLENGES AND WAY
FORWARD
Challenges in India
Size
• Growth in geographic area
• Growth in portfolio/client size
• Ability to train trainers.
Diversity of Services
• MFOs wanting to offer Savings
• MFOs wanting to offer Risk Products
• Appropriate loan products for different
segments.
Financial Sustainability
• Internal growth
• Access to funds
• Finding adequate levels of equity for
the new entities to leverage loan funds
• Ability to access loan funds at
reasonably low rates of interest.
Focus
• Other Developmental activities V/s
MicroFinance
• Degree of specialisation needed for
MicroFinance
Others
• Ability to attract and retain professional
and committed human resources.
• Capacity to provide backward linkages or
create support structures for marketing.
Legal
• Appropriate legal structures for the
structured growth of MF operations
• Taxation For-profit mF activity V/s not-
for-profit NGO activities
• Tax status of donor money
Information asymmetry
Don‘t know the type of
Client requesting loan
Interest rate reflects
probability of default
Safer clients always
drop out
Need to increase
Interest rate
Providing credit can
Become impossible
Decision to take a loan Loan usage Repayment
Can not observe what the client is doing with
the loan amount
Bad loan usage Unwillingness to repay
High Costs
Most popular business model in India is SHG or JLG which incurs peculiar
costs like group formation, training , supervision, higher frequency of
installment payments.
Average microfinance loan size is small – transaction cost / loan is higher
Lending large loans would need due diligence and evaluation of client –
increasing cost.
High Operational cost, esp. at loan origination and during monitoring due to
doorstep service and lack of technology.
Intense Monitoring and Repeated Interactions
Increased competition would lead to better service quality, lower loan sizes,
lower interest rates, product diversification and use of technology.
Technology innovation, improved rural infrastructure, borrower education and
urban microfinance would mitigate the high transaction cost.
Credit Risk
Irregular flow of income due to seasonality
High dependence on monsoons
Uncertainty of Market Conditions
Lack of skills leading to un-employability
Lack of tangible proof of Income Assessment
Lack of Information Sharing / Better Technology
Other Risks
Operational Risk
Business Promotion
Literacy and Skill levels of clientele
Diversion of funds to unproductive activities
Regulatory issues
Reasons: Failure of Objectives
Availability of less risky and more rewarding customers (hawkers and traders
in urban areas vs farmers)
Opportunities to become intermediaries of commercial banks (banks lend
under compulsion – foreign banks facilitate securitization of these loans)
Providing short term loans based on cash trading transactions (minimum
defaults)
Resistant loans to farmers (dependence on monsoons, inadequate irrigation
facilities, lack of modernization)
Wrong MFI assessment tools (still assessed based on coverage, profitability
and repayment – should be assessed on success in alleviating poverty and
aiding inclusive growth)
Urban Microfinance
Clientele
High proportion of wage earners among Urban Poor
Average Family size of 5 with an expenditure of $100 (~Rs. 5000)
67% HH live in own houses – 29% rent a house
31% run atleast one business
69% have atleast one outstanding loan
Loans are usually taken from Moneylenders (49%), family members (13%), friends and / or
neighbours (28%) and rarely from a commercial source.
Opportunities
Quicker Scale up – Quicker Breakeven
Higher Loan sizes as compared to Rural Areas
Opportunity for better utilization of technology
Individual lending is more feasible
Greater Economic opportunity – Greater available market landscape
Social Advantage – Alleviation of housing shortages that create slums.
Challenges
No dedicated funds for support – capacity building or technological assistance for sector
growth
No NABARD advantage as it is for rural microfinance
Urban Poor have access to savings but no access to loans
Startup cost and loan sizes are higher in cities – only big MFIs may set up operations
Highly competitive sector due to the presence of major financial players.
The Role of Women
Fewer women leaders in Micro –finance because:
• Separation between micro-finance and development
• Image of microfinance as highly technical, requiring
professionals (read men) from banking sector
• Women relegated to ―softer‖ issues of development – where
funding is scarce
• Paucity of investment by the sector in capacity building of
women leaders
• Lack of trained human resources (especially women staff) for
building cadre of women leaders
The Role of Women
Women leadership is important because:
• Efficiency paradigm - Community leaders help reduce cost - it is better
management!
• Business point of view - women leaders who can take risks, are role
models, show how loans can benefit family – can increase business
• Increases ownership of the program –risk mitigation
AND OF COURSE FOR A MINORITY:
To achieve the dream of women having access to and control of
financial and non- financial resources
A PRACTICAL APPROACH TO
SHG FORMATION
Types of families to visit
Questions to ask:
Does the family have only one earning member?
Does the family bring drinking water from far away place?
Are the members compelled to go far in the open in the absence of toilets?
Are there old illiterate members in the family?
Are there permanently ill members in the family?
Are there children in the family who do not go to school?
Is there a drug addict or a drunkard in the family?
Is their house made of kuccha material – do they live in a slum?
Do they regularly borrow from any moneylender – what do they pay back?
Do they eat less than two meals a day?
Do they belong to scheduled castes or scheduled tribes?
Yes > 3 Questions = Poor Family
Community Meetings
Community leaders and elders of the village
Explain to them your plan to form SHGs
This is the right time to tell everyone that the
meetings are not for ―giving‖ anything, but to
―enable‖ the poor families to come together and
help each other.
Explain the basics of SHGs
SHG Building
Member attrition and addition are common phenomenon – do
not get disheartened.
A group member should take the lead – all external parties
should be facilitators only.
Trainings required:
• Basic Mathematics
• Book Building (Minutes, Loan Register, Weekly register, Member‘s Pass
Books)
• Scheduling Meetings
• Basics of money lending and interest calculation
• Social Aspects – Women Empowerment.
Linking of SHGs to Bank
Opening SB A/c for SHGs
• Resolution from the SHG: The SHG has to pass a resolution in the group
meeting, signed by all members, indicating their decision to open SB A/c
with the bank. This resolution should be filed with the bank.
• Authorisation from the SHG: The SHG should authorise at least three
members, any two of whom, to jointly operate upon their account.
• Copy of the rules and regulations of the SHG: This is not a must but is
highly advisable and should be looked into by facilitators. If the group
has not formulated any such rules or regulations, loans can be sanctioned
without them.
• A savings bank account passbook may be issued to the SHG. This should
be in the name of the SHG and not in the name of any individual/s.
Internal Lending
Saving for a minimum period of 2 to 3 months to build
a common savings fund.
Purpose, terms and conditions for lending to its
members, rate of interest etc., may be decided by the
group through discussions during its meeting. Interest
is usually 2-3% per month.
Simple and clear books of account of savings and
lending should be kept by the SHG.
Assessment of SHGs
SHGs with 12 to 16 "very good‖ factors can get loans immediately.
SHGs with 10 to 12 "very good‖ factors need 3 to 6 months‘ time to improve, before loan is
given.
SHGs with rating of less than 10 ―very good‖ factors will not be considered for loan.
S. No Factors to be checked Very Good Good Unsatisfactory
1 Group Size 15-20 10-15 <10
2 Type of Members only very poor 2-3 not poor many not poor
3 Number of Meetings 4 / month 2 / month <2 / month
4 Timing of Meetings After 1800 hrs between 0700 and 0900 hrs Other timings
5 Meeting Attending >90% 70-90% <70%
6 Member Participation Very High Medium Low
7 Savings Collection 4 / month 3 / month < 3 / month
8 Amount Saved Fixed amounts Varying amounts -
9 Interest on Internal Loans Depending upon purpose 24-36% >36%
10 Utilization of Savings Amount Fully used for loans Partially used for loans Poor Utilization
11 Loan Recoveries >90% 70-90% <70%
12 Maintainence of Books All books maintained Atleast important books maintained Irregular maintainence
13 Accumulated Savings > 5000 3000-5000 <3000
14 Knowledge of SHG Rules Known to all Known to all
15 Education Levels >20% can read or write <20% can read or write
16 Knowledge of Govt. Progs. All are aware Most are aware None are aware
Sanction of Credit Facility
The loan is always sanctioned and
issued in the name of the group.
The amount of loan to the SHG can
be to the tune of 1 to 4 times of its
savings.
Savings
• The group‘s balance in the SB A/c
• Amount held as cash with the
authorised persons
• Amount internally lent amongst the
members
• Amount received as interest on the
loans
• Any other contributions received by
the group like grants, donation, etc.
The bank does not decide the purposes
for which the SHG gives loans to its
members. The purpose can be
emergency needs like illness in the
family, marriage, etc. or buying of
assets for income generation /
acquisition of assets.
The SHG makes the repayment to the
bank.
RBI/NABARD rules stipulate that no
collateral security should be taken from
SHGs by banks.
The bank cannot hold the SB A/c
balance of the SHG as a Security as
this will prevent the SHG from lending
from its internal savings.
Sanction of Credit Facility
The Reserve Bank of India has allowed the
banks freedom to decide on the interest
rates to be charged to the SHGs
The rate of interest to be charged by the
group to its members is left to the group. It
is usually 2-3% per month.
The group members are collectively
responsible for the repayment of loans to
the bank. Under no circumstance, the SHG
should allow any of its members to default
to the bank.
Documents required by banks for
Loans
Inter-se Agreement to be executed by
all the members of the Self Help
Group.(authorising a minimum of 3
members to operate the account)
Application to be submitted by SHG to
bank branch while applying for loan
assistance. (includes details of the
purposes for which the SHG gives
loans to its members)
Articles of Agreement for use by the
bank while financing SHGs (contains
the duly stamped agreement between
the bank and the
SHG wherein both the parties agree to
abide by the terms and condition)
THANK YOU
References
Microfinance Sector – Legal and Regulatory Framework, Trilegal, Asian Development Bank, Discussion Paper,
Microfinance, November 2004
Emerging Scenario for Microfinance Regulation in India, some observations from the field, GTZ, 2004.
Microfinance: Reserve Bank‘s Approach. Speech of Mr YV Reddy in Indian School of Business
RBI Circulars/Press Releases/Notifications
Financial Regulation of Systemically Important NBFCs and Banks‘ Relationship with them – for NBFCs,
RBI/2006-07/204, DNBS.PD/ CC.No. 86/ 03.02.089 /2006-07. 12 December 2006.
Financial Inclusion by Extension of Banking Services - Use of Business Facilitators and Correspondents.
RBI/2005-06/288. DBOD.No.BL.BC. 58/22.01.001/2005-2006.
25 January 2006
Application of Capital Adequacy Norms to RRBs, RBI/2007- 2008/218
RPCD.CO.RRB.No. BC.44 /05.03.095/2007-08.. 28 December 2007.
Guidelines for Setting-up Local Area Banks in the private Sector. Press Release 1996-
97/103. 24 August 1996
FAQ on NBFCs. 5 February 2007.
Amendments to NBFC regulations, Ref.DNBS.(PD).CC.No. 12 /02.01/99-2000, 13 January 2000.