3. • The Money is Lent
– It is NOT Charity; It is Borrowed
– It is Subject to be returned
• Principal, as well as Interest; and must also;
– Earn a Return on capital;
– Enable Recovery of overheads/ operating
expenses;
– Earn Profits; being a business venture
‘A problem properly defined will answer
itself’ – Richard Bach, “Illusions”
Problem Definition
Lending for the Poor:
Lending
4. Problem Definition
Lending for the Poor:
• Poor
– Common definition
– World Bank definition
• Can they pay back?
– Therefore, risks are
involved; which are
different than most
other lending
Poor
5. Can we lend to the poor?
• Who have little capacity to save today,
• And, yet;
• Recover our Principal
• Get a Return on capital
• Recover overheads
• Recover cost of risk [defaults]
Management and not elimination of risk
6. Poverty Line
• Cost of an ‘Indian Burger’
Rs. 5/=
• Cost of a Home Cooked
Meal Rs.12/=
• Cost of a shared rented
house in urban India Rs.
20/=
1 US$= Rs. 50/=; 1 Euro = Rs. 70/=
Poverty Line Income of < 2 US$
[ Per Person Per Day]
8. Willingness to Pay
• Not charity and
Subject to be returned
• Making this clear is the
first stage of recovery
–Along with this goes
setting up a
mechanism for
recovery
9. Capacity to pay
• Ensuring capacity to pay
• Many poor people earn something
extra on some ‘good’ days, which
they can save; and many can
save a small amount every day
• A ‘habit of intermittent saving ’
demonstrates a capacity to pay
back a loan
• The quantum is too small for a
Bank to consider them as a client
Here, the concept of Self Help
Group comes up
10. Recovery Mechanism
• Most loans are too
small for commercial
banks to set up shop;
• And spend time and
effort
–To assess
repaying capacity
–To set up a
recovery
mechanism
11. Concept of a SHG
• A group of
people, staying
in the same
neighborhood,
• Under similar
circumstances.
12. Additional Advantages
• Interest in improving each
other’s lot
• Intimate knowledge of
each other’s genuine
needs
• Ability to help each other
in income generating
activities
• Group Guarantee, Moral
persuasion of the group
to repay
13. Risks are involved; which are
different than most other lending
• Risks in Lending directly
to the poor:
– A Bank Manager from
entirely different social
background cannot really
assess the person
14. Culture Gap
• Risks in Lending
directly to the poor:
– He has no hands-on,
day to day knowledge
about the person and
therefore cannot
detect impending
default
– There is no collateral
in such a loan and
even if there is, it is
not saleable
15. Recovery Mechanism- th’ SHGs
• Ensuring recovery
through group action
• Carrying out actual
recovery through field
level – house to house
work of volunteers/ paid
workers from the same
class/ community and
background
Criticism of high recovery costs in
Microfinance is misplaced
16. Group Guarantee
• Since all members
know each other,
there is a level of
confidence amongst
themselves
• If one can’t pay due to
genuine problems,
others are required to
make up until she can
17. Incremental Lending
• Starts with group savings
• Small loans, from within
the group savings
• As confidence gets built
up, incrementally higher
loans and higher tenures
• Availability of funds would
help income generation
activities; rentals etc thus
increasing capacity to pay
Extend
Loans to
Each
Other
Increase
Loan
Amount &
Period
Group
Savings
19. How Self Help Groups have been
working in India
• Inception; through an
informal association;
usually of women;
• Either earning a small
amount themselves or
getting a part of spouse’s
salary
• Meetings held every day /
once a week
• Discuss family and local
problems
• Exchange ideas about their
businesses
20. How Self Help Groups have been
working in India
• During meetings, as coherence
emerges, they can start
financial transactions
• Make a small deposits with the
group
• Distribute surplus to the needy
in the form of small loans
• This is possible since not
everybody will be in financial
difficulties at the same time
• Collect recoverable
• Keep informal accounts
21. How Micro Finance Institutions lend
to SHGs
• A set of SHGs are
brought together by an
MFI
• MFIs also promote SHGs
through education,
awareness
• MFIs set rules of
operation and prepare
documents in local
languages
MFI
SHG 2
SHG….SHG 1
22. How Micro Finance Institutions lend
to SHGs
• A Manager is appointed by MFI
• The Manager:
– Keeps formal records and documents
– Educates the groups about rules set
by the MFI
– Promotes the process
• Periodically distributes MFIs funds
• Oversees recovery and is
held responsible for the
same by the MFI
MFI
SHG 2
SHG….SHG 1
23. How Commercial Banks lend to
MFIs
• MFI ensures that the norms set
by Commercial Banks are
satisfied by SHGs
– Regular meetings
– Group coherence
– History of successful lending and
recovery
• MFI approaches Commercial
Bank
• CB examines MFIs recovery
systems, balance sheets and
lends to MFI
COMMERCIAL
BANK
SHG MFI
24. Flow of funds to the Poor
• MFIs obtain loans from Banks on the
strengths of their balance sheets
• These loans are distributed to SHGs as
per demands received from the SHGs
• Each SHG distributes the loans to its
members based on their own assessment
of the repayment capacity of the members
25. Flow of funds to the Poor - II
• MFIs require constant flow of funds to
sustain growth
• Experience shows that there are few
defaults in SHG loans and this itself
constitutes a strong inflow
• CBs find MFI lending a safe avenue for
lending
26. How Apex Bank lends to CBs
• Reserve Bank of
India, our Central
Bank has set up
institutions like
– NABARD
– SIDBI
– NHB etc.
• These institutes
‘refinance’ CBs
27. Flow of credit
• Directed flow of credit
–Through set channels; as above
–Tax and other concessions are
available to institutions for investing
with SHGs
–Targeted towards goals
• Priority Sector lending
–Target oriented approach
28. Extent of Operations
• Asmitha Microfin and Bandhan Microfin; EACH
– Amount Lent Rs. 24 Billion or US$ 527 Million
– Touched the lives of more than1 Million people in
11,000 villages
SKS Microfin
– Amount Lent Rs. 22 Billion or US$ 457 Million
And many more are changing lives of the poor
India’s Population 1.027 Billion
India’s GDP Estimated at 902 US$
29. THANK YOU
THERE ARE SEVERAL SUCCESS STORIES
AMONG THE POOR, HAVING LIFTED
THEMSELVES OUT OF POVERTY, WITH THE
HELP OF MICROFINANCE
