An Introduction: Microfinance in India Deepti Kc Centre for Microfinance

An Introduction:
Microfinance in India
Deepti Kc
Centre for Microfinance
Agenda
 Two streams of microfinance in
India
 Historical evolution of
microfinance in India
 Possible microfinance products
(Based on study results)
Two streams of
microfinance in India
Two Streams of Microfinance in India
Background: How is microfinance defined in India?
Provision of financial services to low income
clients and poor people with the goal of
creating social value.
Loans
Savings
Insurance
Remittance
Other??
Two Streams of Microfinance in India
What are Self Help Promoting Institutions (SHPIs)?
Financial
Institutions
(banks)
Provision of
financial services
Client
Group
SHPI
MYRADA, PRADHAN, DHAN Foundation, Mann Deshi, Apex Banks,
Government run SHPIs, RGVN, Hand-in-Hand
5
Two Streams of Microfinance in India
How does the Self Help Group(SHG) Model work?
Financial Institutions (e.g. Banks)
Loans
Savings
SHG
Loans
Savings
 Is an independent entity
 Have their books of
accounts (including bank
accounts)
 SHGs collect savings and
give loans to their
members
 SHG has its roots in social
development (takes up
social issues)
 Banks provide loans only
after 6 months of group
formation
Microfinance in India: Status of the Sector
Self Help Group Bank Linkage Program (SBLP), a little light cooling…
Average disbursed loan per group (INR)
No. of SHGs provided with bank loans
46800
74000
115820
122744
2007
2008
2009
2010
2011
2011
44343
4813684
2010
2006
4587178
2009
37574
4224338
2008
2005
3625941
2007
32019
2924973
2006
2004
2238565
2005
32013
1618456
2004
2003
1079091
2003
27005
717360
Top states in SHG linkage
Regional shares in SHG linkage
4.90%
14.20%
3.50%
Andhra Pradesh
38.70%
1.90%
Tamil Nadu
West Bengal
21.50%
52.80%
10.80%
9.60%
Shares of different types of banks in
SHG loan outstanding
Northern Region
Northeastern Region
Eastern Region
Central Region
Western Region
Southern Region
Commercial Banks
21%
68%
11%
Cooperative Banks
Regional Rural
Banks
Two Streams of Microfinance in India
What are Micro Finance Institutions (MFIs)?
Financial
Institutions
Financial services
Funds
Client
Groups
MFI
Promotion and
nurturing
Capacity building support
Most are NBFCs in India- e.g. SKS, Spandana, KGFS
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Two Streams of Microfinance in India
How does the Joint Liability Group (JLG) Model work?
MFI
Loans
Joint liability of the
group
 Mainly promoted for the
loans
 No books of accounts are
maintained by the JLGs
 Have to depend on the MFI
Repayment
for all their loan
requirement
 JLG has its roots in
microfinance
 Loans provided
immediately by the MFIs
after group is formed
 MFIs cannot take deposits
Two Streams of Microfinance in India
How does the Individual Banking Model work?
MFI, Rural banks
Loans
Savings
 Loans given to individuals
 Physical collateral or
personal guarantees are
taken
 There is no role of SHGs or
groups
 The MFI has to conduct
appraisal of the individuals
borrowers
Microfinance in India: Status of the Sector
Status of Microfinance Institutions (2011 Data)
• In 2011, MFIs achieved a client outreach of
31.4 million and loan portfolio of INR 208
billion
• 18% growth in clients and 13% growth in
loan portfolio over 2010
• The top 5 MFIs accounted for 57% of clients
and 65% of outstanding loans
MFI- Region wise
shares-client outreach
MFI- Region wise
shares- loan portfolio
2%
2% 2%
4%
21%
23%
51%
10%
55%
10%
14%
Northern Region
Northeastern Region
Eastern Region
Central Region
Western Region
Southern Region
7%
CMF – Debt instruments for MFIs, Jan 07
The Historical Evolution of
Microfinance in India
Evolution of Microfinance in India
I want to help people, but can’t I make money too?
The next big innovation to address the poverty issues in
India
The language of
microfinance
has undergone a
fundamental
change in the
two decades of
its evolution
The next big investment opportunity
Key events
 Large part of the 80s  Organizing groups, being focused on community
owned and integrating them with the banks
 Global Microcredit Summit-1997. Grameen Bank showcased its work
 Current large MFIs were setting shop in India. (1996-1997). They were all
registered as public societies with grant money. Within 3-4 years of the
operations of these NGOs, MFIs were growing much bigger than they should in
their original form of not-for-profit incorporation.
 It was difficult to maintain capital adequacy or attract commercial capital
because profits could not be distributed in a non-for-profit format.
 From 2002 onwards, these institutions move from a non-profit format to a forprofit format
 Some of the early investors, including from the silicon valley-(Vinod Khosla,
Michael and Susan Dell, Pierre Omidiyar) started looking for investments
which not only gave them returns, but also an enhanced image.
 A poll of 50 investment banking firms/companies brought out in 2010 that
microfinance is the top ranked destination for investments in financial sector.
 SKS, India’s largest MFI, went public in July 2010.
 AP CRISIS and REGULATIONS
“Micro-credit has been changing
people's lives and revitalizing
communities”
UN, 2005, Year of micro-credit
“More than 200 poor….killed themselves in
late 2010, according to media reports
compiled by the government of the south
Indian state. The state blamed
microfinance companies--which give small
loans intended to lift up the very poor--for
fueling a frenzy of over indebtedness and
then pressuring borrowers so relentlessly
that
some took their own lives.”
Wall Street Journal, February 2012
Andhra Pradesh Crisis- October 2010
 Series of suicides in AP Criticism toward MFIs from all over the world
 Allegations: Inappropriately high profits, coercive money collection practices,
and over lending to the destitute
AP Government passing the AP Microfinance Ordinance 2010
 Impact of the Ordinance - drastic drop in loan repayments. As of January
2011, the MFIs collections had fallen from 99% to less than 20% of loan
amount.
 CMF interviewed 4 MFI Heads from AP MFIs in July 2011
– Medium sized MFI-109 branches reduced its number of branches to 84.
This particular NBFC was also looking at individual lending options in
order to sustain its business.
– Medium sized MFI-Brought down its microfinance operation by 56%. This
particular NBFC started focusing on diversifying its portfolio to other
states right after the AP ordinance came out.
– Small sized MFI- Was planning to open new branches in 2010-plan was
discarded. Portfolio decreased by 30% after the crisis.
– Small Sized MFI- Completely shut down its microfinance operation right
after the crisis in October 2010 and switched to cooperative banking.
Regulations: Microfinance Bill
•
•
•
Microfinance Institutions (Development and Regulation) Bill 2012 has been
introduced by the Government
MFIs would now by regulation be required to register with the Reserve Bank of
India (RBI).
The RBI has already released specific guidelines regarding the eligibility of
MFIs for priority sector lending. Some RBI recommendations include:
– a maximum client annual household income of Rs. 1,20,000 for urban
areas and Rs. 60,000 for rural areas.
– the total indebtedness of the borrower does not exceed Rs 50,000 and that
the loan does not exceed Rs 35,000 for the 1st cycle and Rs 50,000 for
next cycles.
– MFIs will further be required to ensure that they cut down on consumer
loans as at least 75% of loans be given for income generating purposes
only.
– To protect clients from over-borrowing, the RBI recommends that not more
than two MFIs lend to each client.
– MFIs should not disburse loans at a margin of more than 12% while an
overall cap of 26% has to be maintained.
Possible microfinance
products!
Who are microfinance clients?
Regular definition of microfinance clients: Low-income or poor
micro-entrepreneurs with no or low access to formal banking
system.
CMF case study interviewing 928 microfinance clients.
 Only 24% of the interviewed clients indicated that the
primary source of income for their households was from
micro-enterprise activities.
 62% of clients had at least one bank account, only 11%
had ever taken loans from banks. Reasons: No need of
credit that banks provide (30%), application procedures too
complicated (25%), no knowledge about the products and
services provided by banks (11%).
 It was found that the majority of clients (85%) had less
than 10% likelihood of being below national poverty line.
(Progress out of Poverty Index (PPI) tool was used)
Is micro-credit enough?
CMF Study:
Business Investment:
 Microcredit can lead to new business creation. 32% more new
businesses started in the areas where Spandana operated compared
to areas where HHs were not offered any microcredit services.
 Those HHs that already owned businesses or were likely to start one
spent more durable goods as a result of microcredit access compared
to those who were least likely to start a business.
 Those who started a new business cut back on temptation goods
(tobacco, alcohol, tea) and invested more. This switch from
temptation goods to investment and durable consumption in the
groups with businesses is an encouraging finding.
Social Impact: No significant impact of microcredit provision on health,
education or women empowerment
CMF – Debt instruments for MFIs, Jan 07
Do clients use microfinance loans for
business purpose only?
Proportion of the usage of loans (all clients)
corresponding to length of membership
Proportion of usage of loans (clients with no
enterprise) corresponding to length of
membership
9%
19%
18%
19%
15%
45%
58%
46%
70%
business
23%
old debt
15%
13%
10%
9%
9%
14%
20%
21%
9%
21%
14%
30%
16%
42%
15%
26%
health
29%
consumption
Health
Old Debt
56%
37%
Consumption
40%
20%
16%
Less than 1 Between 1- Between 4- More than 5
year
3 years
5 years
years
Education
Less than 1 Between 1-3 Between 4-5 More than 5
year
years
years
years
Consumption loan- is it that bad?
Usage of loan money within two successive months
Percentage of households with loans from
different sources for each purpose within two
successive months
Purpose of loans
58%
45%
42%
37%
29%
27%
17%
14%
12%
5%
2%
Household
Consumption
0%
Health
Buy Agricultural
Inputs
Moneylenders
Employers/ Landlord
Friends/ Family/ Relatives
Formal Sources
HH with at
least 1 loan
for (in % )
Household
Consumption
47.06
Health
37.25
Buy agricultural
machinery or inputs
25.49
Education
11.76
Home
improvement/repair/
10.46
Repay old debt
9.15
*Totals may be greater than 100% as loans may be used
for more than one purpose
Other types of loans
As clients mature, MFIs should be able to offer them
with different sets of financial products
 MFI regulation says 75% for income generating
activities.
 Further research studies are needed to understand
if families with unmet credit needs due to this cap
rely on informal sources such as moneylenders.
 Education loan: Data suggests that amongst those
who did not invest in business, there is a direct
correlation between education spending and length
of MFI membership. These findings suggest that, as
for example, education loans. We also suggest that
the education loan portfolio of the MFIs be
considered as a part of qualified asset by the RBI.
Micro-savings!
 Small business owners in Kenya were randomly provided with access
to savings accounts. Those with savings account had 45 % higher
daily investment in their businesses. Less vulnerable to health shocks
as those without savings accounts were forced to draw down their
working capital in response to illness.
 Indian Government initiatives:
 “no frills” accounts and 100% financial inclusion drive.
 NREGA (a national workforce programme): Wages through savings account
 In rural AP, 78% of rural households had access to a formal savings
account. Only 14% were opened for saving- mostly opened to receive
government benefits or increase the chances of receiving a loan.
 MFIs cannot take deposits- Can Business Correspondent model offer
savings products?
(Banks are permitted to use the services of third party agents as BCs to
provide banking and financial services, such as credit and savings, on
their behalf. )
Savings Products
 Commitment Savings: Farmers from Malawi offered 1) “ordinary”
accounts, or 2) both ordinary and “commitment” accounts.
 Farmers in commitment savings group had a 26 % increase in agricultural input
use, 22 % increase in value of crop output in subsequent harvest, 17 % increase in
household total expenditure reported in the past 30 days. Farmers who had access to
only the ordinary account showed lower or non significant impacts in terms of
those same outcomes, suggesting the commitment device played an important role
for these results.
 Savings reminders: Savers were sent letters (Peru) or SMS text
messages (Bolivia and Philippines) reminding them to save.
 The studies found that reminders increased average savings balances overall by
6% , but this impact increased substantially, to 16 %, for the Peruvian savers when
the reminder referred to a purchase goal.
 Labeled Savings: Ghana clients were given the opportunity to open
separate, parallel savings accounts labeled “education,” “business,”
“housing,”.
 Savers eligible to open parallel accounts saved 31 percent more on average than
those in the comparison group, with the greatest effect seen for the education label.
Micro- Insurance
 Recent findings suggest that micro-insurance has positive
impacts on poor households, yet- take up rate is very low.
 CMF Study - Marketing experiments: Randomized along the
following dimensions
 price of the policy; availability of cash in the household to
purchase the policy; understanding of rainfall
measurements; level of trust towards the product or person
 The household demand for weather insurance was highly
price-elastic. Liquidity constraint was another significant
determinant of insurance purchase.
 An endorsement by a trusted organization increases take up
by 10.4% if HHS are familiar with the organization.
 A household visit increases the purchase rate by 11.9-17.2%
Concluding remark
 CMF, along with a rural financial services
provider in Tamil Nadu, is evaluating a
financial service delivery model that uses
bank branches in villages to provide a full
range of credit, savings and insurance
services to low and medium income
households.
 The results of this study could help us
understand the impact of using rural bank
branches to provide comprehensive financial
services.
Thank You