Jims ecell : Microfinance - A Holistic Perspective


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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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Jims ecell : Microfinance - A Holistic Perspective

  1. 1. A Primer to Microfinance
  2. 2. ―Dhobis (washermen), tailors and barbers contribute more to the GDP ofAndhra Pradesh than the IT sector.‖ (Vikram Akula, SKS; Source CSO, 2004-05)
  3. 3. Indian Profile Estimated that 32.7% people live  Only about 5 % of rural poor have Below Poverty Line in India access to microfinance. Annual credit demand by the poor  The active borrowers are estimated in the country is estimated to be to have a per capita outstanding of about $ 15 Bn. only Rs. 2500. India: Market size estimated at $16-  While 10 % lending to weaker 22 bn sections is required for commercial India: >33 mn HHs banks, they neither have the India: >3000 MFIs network for lending and supervision on a large scale nor the Only 1% of providers WW fully confidence to offer term loans to financially self-sustaining big MFIs.  The non poor comprise of 29 % of the outreach.
  4. 4. At the RootsThe 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)
  5. 5. Financing Needs of the PoorFinancial 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
  6. 6. Managing SavingsPut aside as much money as Take a large sum as anpossible till you save a large advance and repay itenough sum. through a series of savings.
  7. 7. At the Roots..… but the poor face very high prices for finance. They Need There have  Simple process  No ‗acceptable‘ collateral/ surety  Door Step Banking  No unique ID  Flexible Timings  No record of previous  Timely Availability borrowings/ repayments  Minimum Documentation  Irregular income flows  Low literacy
  8. 8. At the Roots… So the poor turn to a variety of old and new providers to fill the gap… Banks, Insurance Microfinance Employers, relatives, Moneylenders, cos Institutions neighbors. friends pvt financiers 18% 37% 16% 4% 26% Formal Semi – Formal Informal 1-on-1 Informal 1-on-1 impersonal personal Informal mutualMicrofinance targets urban and rural low-income (<$2000 (Chit funds )annual HH income) clientsUses joint-liability social contractsProvides affordable finance Survey of 64 LI & LMI urban and rural HHs
  9. 9. Societal Exclusion in IndiaIt has meant historically  Overcoming Exclusion • Community Mobilizationthat several communities  The role of the State?are unable to participate  Partnerships needed between State and Civil society institutions?effectively in the process of • Capacity Buildingdevelopment, economically,  Integrate rights and development interventionssocially and politically. • Networking, Justice Delivery Mechanisms and Advocacy  voice in decision making  Government Partnership • Convergence  Across traditional divides (rights/development, urban/rural, national/local, genders)
  10. 10. 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 %.
  11. 11. Introduction to mFSupply of Formal Financial Services in  Access to Financial Services is theIndia major constraint for the poor. An estimated demand for credit ranging from $3-$9 Bn Annually  The Poor may use a variety of Formal Sector capability - $200-300 Mn. Financial Services if they manage to save. More than 6 Lac Villages About 30 K Bank Branches  Micro Credit is not the only requirement of the poor – they Multiple Investment options for the need more services. Poor. Basic Financial Services still beyond reach.
  12. 12. Microfinance: what is it?What it often is What it really should be Micro-credit  Range of financial services Group lending  Group and individual lending Social/charitable activity  Profitable activity
  13. 13. Microfinance in India About 60 % of the MFIs are  Annual growth rate of about 20 % registered as societies. during the next five years. About 20 % are Trusts  75 % of the total poor households About 65 % of the MFIs follow of 80 million (i.e. about 60 million the operating model of SHGs. will be reached in the next five Large concentration in South India years. 600 MFI initiatives have a  The loan outstanding will cumulative outreach of 1.25 crore consequently grow from the poor hoseholds present level of about 1600 crores to about 42000 crores. NABARD‘s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore households.
  14. 14. Microfinance LandscapeNiche Market MFIs Spandan, SHARE Microfin, SKS Microfinance have scaled microfinance reach Expanding financial services. Multi pronged approach – directly providingPrivate Banks (ICICI) credit facilities to SHGs and wholesale credit facilities to microfinance NGOs and NBFCs.State Owned / SBI, SyndicateBank, Andhra Bank, Indian Bank.Commercial Banks Microfinance Development Strategy to ensure permanent access to institutionalADB financial services for the poor.PE Firms Investing in low profile MFIs.NABARD & SIDBI Perform a regulatory and promotional role.
  15. 15. MicrofinancingIndividualistic CooperationDirectly People’s Indirectly Institutions Solidarity group Participation Money Others Grameen Common Goal Joint Lenders Group Group Liability Group Self Help Cooperatives Groups Cluster Federation
  16. 16. Models of Micro Finance Self Help Group (SHG)  Grameen Model (GM) • Dominant microfinance methodology • Initially promoted by the Grameen Bank of in India Bangladesh • A version of the village banking model • Grameen MFIs undertake individual lending • Savings precede borrowings by but all borrowers are members of a 5 member members joint liability group which in turn gets together with 6-9 other such groups from the same village or neighborhood to form a centre. Individual Banking (IB) • Within each centre, peer pressure and the • Entails provisions of financial services desire to maintain credit – worthiness in order to individual clients. to qualify for a larger loan in the next cycle are • Sometimes organised into joint liability key factors which ensure repayment. groups, co-operative or even SHGs  Mixed Model (MM) • Creditworthiness and loan security are • MFIs starting with the Grameen Model and then at a a function of co-operative membership later stage embraced the SHG Model without completely doing away with the Grameen Model.
  17. 17. Microfinancing Systems Informal financial service  NGOs providers • They have proven very • Moneylenders, pawnbrokers, innovative, pioneering banking savings collectors, money- techniques like solidarity guards, input supply shops etc. lending, village banking and mobile banking that have overcome barriers to serving Member-owned poor populations. organizations  Formal financial institutions • self-help groups, credit unions, and a variety of hybrid organizations like financial service associations and CVECAs
  18. 18. Delivery ModelsSelf Help Groups MFI / Grameen Replica Home grown, co-operative  Group lending and regimented Savings Based / Led  Focused on self – sufficiency Meeting Diverse Needs  NGO – MFI and NBFC – MFI Promoted by NABARD, PSU Banks, NGOs  Major Concern – Pace of growth Performance - MixedGrameen II Wholesome Microfinance Services Individual Lending  Regulation NBFC – MFI  Specialized activities Progressive Loan focused on enterprise  Major Concern – High Cost Futuristic products
  19. 19. Financing ModelsDirect Financing Model SHG-Bank Linkage Model Most MFIs use groups as intermediaries for  NGO to act as facilitator/financial intermediary transactions. between bank and SHG. The NGO Promotes, trains and forms SHGs  Intermediation cost of around 6% of loan SHGs are formed either by banks or by NGOs amount and formal agencies but are financed by banks.  Cost is borne by the bank and Risk lies with the banks as advances are reflected in bank portfolios.
  20. 20. Bank Partnership Model Loan at 9% Joint Liability Bank MFI Group Interest charged: Servicing 20% FLDG of fees of 11% 10%MFIs can also be given long term financing by BanksLack of trained staff still affects this model
  21. 21. Self Help Groups (SHGs) Group of 10 people, create pool  Greater access to credit of resources  Individuals learn to save Advance loans to each other from  NGOs act as facilitator pool (without collateral)  Again, recovery is high because of Loans recovered due to peer group responsibility pressure and group responsibility  Issues SHG deposits resources with bank • Limited ―products‖ offered Bank provides advances against • Scale-up of SHGs requires such deposits government support Lower transaction cost for banks • Government involvement prone to due to group dealing politicize movement; must be guarded against Lower transaction cost for banks due to group dealing • NGO involvement not sustainable in long run
  22. 22. Basic SHG Functions Savings and Thrift  Internal lending • The amount may be small, but • The savings to be used as loans for savings have to be a regular and members. continuous habit with all the • The purpose, amount, rate of members. interest, etc., to be decided by the • ‗Savings first — Credit later‘ group itself. • Group members learn how to • Proper accounts to be kept by the handle large amounts of cash SHG. through savings. This is useful • Opening savings bank account when they use bank loans. with bank. Discussing problems • Enabling SHG members to obtain • Every meeting, the group will loans from banks, and repaying the discuss and try to find solutions to same. the problems
  23. 23. Unscalable Bank-SHG ModelExisting Branches New Branches Limited outreach  High infrastructure costs Concentrated in urban  High operating areas overheads High cost low ticket  Long gestation period items  Low technology usage in Cash intensive rural areas transaction
  24. 24. Characteristic Services Activity RoE RoIC Net A Vegetable Vending 50 57 General Store 14 29 Trade Sweet Making Shop 145 147 Ice Cream Making 13 29 Leasing Mango Trees 184 185 Agriculture Leasing irrigated farm land 160 161 Operating a Flour Mill 52 59 Services Tailoring 121 123 Roadside Micro-diner 245 246 Goat Rearing 58 65 Livestock Buffalo Rearing 69 75 Majority of women Production Pottery 235 236 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)
  25. 25. Usual Lending ProcessGeo Economic Based on geo economic information of the district or mandal and the constituentSurvey towns and villages, the MFIs approach favourable villagesVillage 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 After meeting basic requirements, compulsory group training is done to educate theBorrowers clients on the processes and procedures to build adequate credit discipline.Scrutiny and Customer Details, their business, earning capacity etc are closely scrutinized andUnderwriting judged to access their repaying capacity.Financial The collection meeting are held on a weekly/monthly basis by appointed FieldTransactions Assistants to conduct financial transaction and discuss new applications and issues.Insurance (Near Insurance products are sold to cover death, accident or health of a group memberMandatory) of the member‘s dependents.
  26. 26. 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
  27. 27. Business Strategies of Banks Identification, training and promotion of mF clients by MFIs. Bank finances clientPartnership Model on MFIs recommendation. Customer and Portfolio rests in the bank‘s books.MFI Portfolio Bank buys portfolios from MFIs. MFI continues to service clients and acts as theSecuritization collection agent. MFI shares credit risk with banks. Adoption of a core banking system for managing loan portfolios generated inderTechnology the partnership modelCredit to MFIs / Wholesale linkage model implying extending a bulk loan to the MFIs for lending toNGOs poor women.Loan Portfolio Involvement in providing mentoring services to clients including in areas ofEvaluation governance and credit discipline. Operating divisions at the regional and branch levels in close coordination withLiaisons with NGOs local NGOs to generate movement.High transaction costs, poor outreach and unavailability of quality manpower has obliged banks to adaptvarious approaches to fulfill priority sector lending norms.
  28. 28. Growth DriversNeed for Credit by Lack of Lending from Banks due to lack of collateral and exploitation from moneythe Unpriveledged lenders has exemplified the potential demand and prospects for the sector.Increase in the Commercial debt and equity, grants and donations, PE, VC Funding. The capitalsources of Finance structure of the industry is changing for the better. Diversification of Lender base, consolidating internal controls, strengtheningInnovation policies on compliance and disclosures.Government Policy Microfinance Bill, NABARD, SIDBI and RBI have recognized the sector as theand Support need of the hour.Industry Increase in number of partners enabling a diversification of the existing productConsolidation portfolio.Migration and Use of smart cards, wireless connectivity along with higher loan size increasingUrbanization penetration of urban micro-financing.Human Resources The sector is slowly attracting specialized talent for growth.
  30. 30. 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
  31. 31. Legal Structures SHGs and federations  Public and private sector banks Societies and Trusts  Companies incorporated under Section 25 of the Companies Act Co-operative societies  Companies registered with the RBI Co-operative Banks as NBFCs Regional Rural Banks  Eligible organizations under BC/BF guidelines of RBI Local Area Banks
  32. 32. 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
  33. 33. 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
  34. 34. 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
  35. 35. 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
  36. 36. 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
  37. 37. 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.
  38. 38. 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
  39. 39. 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
  40. 40. 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.
  41. 41. 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
  42. 42. Systemically ImportantNBFCs 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
  43. 43. Organizations under BC/BFguidelines of RBIBusiness Facilitators Business Correspondents Business facilitators can be used by the  BCs can undertake disbursement of banks for various pre-disbursement loans as well as collection of principal. and post-disbursement activities They can also accept deposits on pertaining to lending. behalf of the banks. Does not include disbursement and  Banks can compensate BCs but BCs collection activities cannot charge anything from the No approval is required from the RBI consumers for using Business Facilitators  Transactions need to be accounted for NGOs, Farmers‘ Clubs, Co-operative and reflected in bank‘s books by end of Societies, Post-offices, IT Enabled day or next working day outlets of corporates, Insurance agents,  Societies/Trusts, Non-deposit taking Well-functioning panchayats, Village NBFCs, Cooperative Societies, Post Knowledge Centers, KVIC/KVIB offices, Section 25 Companies centers, Agri Clinics
  44. 44. 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.
  45. 45. Transformation MFIs registered as societies, trusts and  Issues in Transformation Section-25 companies want to • MFI promoters find it difficult to mobilise transform to a for-profit NBFC as Rs20mn of minimum capital required for an NBFCs For profit structure allows them to • Many MFI promoters have ‗acquired‘ old raise commercial equity NBFCs having lesser minimum capital required but have to pay significant premium Banks are more comfortable lending to to the existing owners. There are also legacy the NBFCs issues. Access to commercial equity and Bank • Transfer of assets and liabilities  Option 1: Assets from the old entity can be purchased funds helps them scale-up faster 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
  46. 46. Triggers of Transformation The biggest challenges are  Bolivia and Africa: usually the greatest triggers Transformation of NGOs of transformation – its all a • To Banks matter of perception and • To FFPs necessity  Indonesia: Transformation • Size of mainstream to • Diversity of services MicroFinance methods • Financial sustainability  Bangladesh: Transformation • Focus of a project into • Taxation • Grameen Bank • Other NGOs transforming to Banks
  47. 47. Role of Central Bank andRegulator  Support financial liberalization and create conditions favorable to the sector  Good Regulation and SupervisionRole of RBI  Supporting MicroFinance Pilot Projects(Central Bank)  Collection and Publication of Data  Training and Advocacy  Framing policy and guidelines for rural financial institutions  Providing credit facilities to issuing organisationsRole of NABARD  Preparation of potential-linked credit plans annually for all districts for(Regulator) identification of credit potential  Monitoring the flow of ground level rural credit. Division of Responsibilities NABARD SIDBIOversees program linking Banks and SHGs Lends to MFIs through SIDBI Foundation
  49. 49. Challenges in India Size  Focus • Growth in geographic area •Other Developmental activities V/s • Growth in portfolio/client size MicroFinance • Ability to train trainers. • Degree of specialisation needed for MicroFinance Diversity of Services  Others • MFOs wanting to offer Savings • Ability to attract and retain professional • MFOs wanting to offer Risk Products and committed human resources. • Appropriate loan products for different • Capacity to provide backward linkages or segments. create support structures for marketing. Financial Sustainability  Legal • Internal growth • Appropriate legal structures for the • Access to funds structured growth of MF operations • Finding adequate levels of equity for • Taxation For-profit mF activity V/s not- the new entities to leverage loan funds for-profit NGO activities • Ability to access loan funds at • Tax status of donor money reasonably low rates of interest.
  50. 50. Information asymmetryDecision to take a loan Loan usage RepaymentDon‘t know the type of Interest rate reflects Can not observe what the client is doing withClient requesting loan probability of default the loan amountNeed to increase Safer clients always Bad loan usage Unwillingness to repayInterest rate drop outProviding credit canBecome impossible
  51. 51. 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 andurban microfinance would mitigate the high transaction cost.
  52. 52. 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
  53. 53. Other Risks Operational Risk Business Promotion Literacy and Skill levels of clientele Diversion of funds to unproductive activities Regulatory issues
  54. 54. 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)
  55. 55. Urban Microfinance  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 houseClientele  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.  Quicker Scale up – Quicker Breakeven  Higher Loan sizes as compared to Rural Areas  Opportunity for better utilization of technologyOpportunities  Individual lending is more feasible  Greater Economic opportunity – Greater available market landscape  Social Advantage – Alleviation of housing shortages that create slums.  No dedicated funds for support – capacity building or technological assistance for sector growth  No NABARD advantage as it is for rural microfinanceChallenges  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.
  56. 56. 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
  57. 57. 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 mitigationAND OF COURSE FOR A MINORITY:To achieve the dream of women having access to and control offinancial and non- financial resources
  59. 59. Types of families to visitQuestions 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
  60. 60. 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
  61. 61. 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.
  62. 62. 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.
  63. 63. 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.
  64. 64. Assessment of SHGsS. No Factors to be checked Very Good Good Unsatisfactory1 Group Size 15-20 10-15 <102 Type of Members only very poor 2-3 not poor many not poor3 Number of Meetings 4 / month 2 / month <2 / month4 Timing of Meetings After 1800 hrs between 0700 and 0900 hrs Other timings5 Meeting Attending >90% 70-90% <70%6 Member Participation Very High Medium Low7 Savings Collection 4 / month 3 / month < 3 / month8 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 Utilization11 Loan Recoveries >90% 70-90% <70%12 Maintainence of Books All books maintained Atleast important books maintained Irregular maintainence13 Accumulated Savings > 5000 3000-5000 <300014 Knowledge of SHG Rules Known to all Known to all15 Education Levels >20% can read or write <20% can read or write16 Knowledge of Govt. Progs. All are aware Most are aware None are aware  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.
  65. 65. Sanction of Credit Facility The loan is always sanctioned and  The bank does not decide the purposes issued in the name of the group. for which the SHG gives loans to its The amount of loan to the SHG can members. The purpose can be be to the tune of 1 to 4 times of its emergency needs like illness in the savings. family, marriage, etc. or buying of Savings assets for income generation / acquisition of assets. • The group‘s balance in the SB A/c • Amount held as cash with the  The SHG makes the repayment to the authorised persons bank. • Amount internally lent amongst the  RBI/NABARD rules stipulate that no members collateral security should be taken from • Amount received as interest on the SHGs by banks. loans  The bank cannot hold the SB A/c • Any other contributions received by balance of the SHG as a Security as the group like grants, donation, etc. this will prevent the SHG from lending from its internal savings.
  66. 66. Sanction of Credit Facility The Reserve Bank of India has allowed the Documents required by banks for banks freedom to decide on the interest Loans rates to be charged to the SHGs  Inter-se Agreement to be executed by all the members of the Self Help The rate of interest to be charged by the Group.(authorising a minimum of 3 group to its members is left to the group. It members to operate the account) is usually 2-3% per month.  Application to be submitted by SHG to bank branch while applying for loan The group members are collectively assistance. (includes details of the responsible for the repayment of loans to purposes for which the SHG gives the bank. Under no circumstance, the SHG loans to its members) should allow any of its members to default  Articles of Agreement for use by the to the bank. 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)
  67. 67. THANK YOU
  68. 68. 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 BusinessRBI 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.