Microfinance in India


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a look at Microfinance in India.

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  • Only 5 % of the rural poor have access to Microfinance-the credit demand by the poor is estimated to be a little over 60,000 crores.(2007 Estimate)
  • Rural Poor:India’s rural poor are dependent on agriculture as their primary source of income;Themajority are marginal or small farmers, and the poorest households are landless. Thus they have uncertain and irregular income streams and expenditure patterns.
  • have a very temporary address and are mobile on account of -the slums being subject to evacuation. -unsteady livelihoods leading to migration from one part of the city to another or from one city to another .The KYC norms require a proof of identity and residence, which urban poor cannot provide- They remain excluded from formal finance unless a voter identity card or a migrant identity card is issued to them.Reluctance of urban clients to dedicate timely commitment that is required both in the case of Gramin and self-help group (SHG) models. In the form of Periodic and regular meetings, group-based decision-making. Needs of the Urban Poor:Housing loans- not taken off in a big way because of large volume of loans required and long period of repayment.Health insurance- risky existence in the form of health diseases arising from insanitary conditions in the urban slums force the people to spend more on their wellness.Remittance- Majority of the migrant population periodically sends money home. It is a hassle for people who do not have a bank account at both ends and who are unable to access banks easily. The post office based remittance services are of high cost and time consuming. Hence, migrants look for better means of transfer of money from the city to their homes in the rural area.
  • NGO – Non Government OrganisationNBFC – Non Banking Financial Corporation
  • However
  • However
  • The initiatives helped ICICI Bank to expand its presence into the rural areas without major investments
  • The initiatives helped ICICI Bank to expand its presence into the rural areas without major investments
  • Microfinance in India

    2. 2. “I would say that I did something that challenged the banking world. Conventional banks look for the rich; we look for the absolute poor. All people are entrepreneurs, but many don’t have the opportunity to find out that” -Mohammad Yunus (founder of Grameen Bank) MICROFINANCE INDIA
    4. 4. INTRODUCTION TO MICROFINANCE • “Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge. And while the lack of financial services is not just a sign of poverty, today it is looked as an untapped opportunity to create markets, bring people in from the margins and give them the tools to help themselves." – Kofi Annan (Sec. General of UN) • The poor stay poor, not because they are lazy but because they have no access to capital.“ – Laureate Milton Friedman
    5. 5. Mrs. Bharti, 48 years old • Unemployed husband • 4 children • No savings • Good sewing skills • Mrs. Bharti decides to start a home based sewing business • She goes to the bank and makes a demand for a loan at her bank MRS. Bharti‟s DEMAND IS REJECTED
    6. 6. MRS. Bharti‟s DEMAND IS REJECTED Traditionally banks and Lending Institutions do not lend money to low income Individuals The reasons being • High Transaction cost of processing • Lack collateral or guarantors • Gap in the communication / lack of confidence in the Banks • Doubt of the bank of the repayment capacity • Lack of access to financial infrastructure and services in remoted areas Microfinance provides a solution for the above problem
    7. 7. MICROFINANCE “Microfinance is an economic Development approach that involves providing financial services through institutions to low income clients”. • Micro finance is emerged in need of meeting special goal to empower under- privileged class of society. • The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality, equity and mutual self-help. Microfinance is a tool against poverty by enabling the beneficiaries to : • Create sustainable activities to increase their incomes • Reduce external shocks • Improve the living conditions of entrepreneurs and of their families • Empower people and mainly the women
    8. 8. How did all start? On the field Prof. Yunus saw that • Even poor people and women need loans • They can have an activity and repay Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, where starting and shaping the modern industry of microfinancing. • Set up financial institutions with a social mission • Listen to the needs and constraints of the excluded & offer them adapted financial tools to empower themselves ( solidarity groups) Spirit: SUSTAINABILITY Prof. Muhammed Yunus Founder of the Grameen Bank, Bangladesh
    10. 10. 4 Final Repayment 12 weeks later ( Demand for a 2nd loan over Rs. 1500 to expand her business) 2 Purchase of the SEWING MACHINE Starts sewing clothes & sale (Daily benefits amount Rs 100) 1Visit of Mrs. Bharti to the MFI Meeting wit the Loan Officer Convinced, reception of a loan of Rs 1,000 (+ 30 interest rate) 3Weekly Repayment ( Rs 86) Remaining money is used to buy accessories Regular contact and follow up between the MFI and the client Micro-credit ( case study contd.) Mrs. Bharti needs Rs 1,000
    11. 11. PRESENT SCENARIO OF INDIA • India falls under low income class according to World Bank. • It is second populated country in the world and around 70 % of its population lives in rural area • 60% of people depend on agriculture, as a result there is chronic underemployment and per capita income is only $ 3262 • Result is abject poverty , low rate of education, low sex ratio, exploitation • Low asset base-According to Reserve Bank of India, about 51 % of people house possess only 10% of the total asset of India. • resulted low production capacity both in agriculture (which contribute around 22- 25% of GDP) and Manufacturing sector • Rural people have very low access to institutionalized credit( from commercial bank).
    12. 12. MICROFINANCE IN INDIA- THE NEED IN INDIA • India is said to be the home of one third of the world‟s poor; official estimates range from 26 to 50 percent of the more than one billion population. • About 87 percent of the poorest households do not have access to credit. • The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector. • Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy • The microfinance industry has achieved significant growth in part due to the participation of commercial banks, despite this growth, the poverty situation in India continues to be challenging.
    13. 13. MICROFINANCE IN INDIA (CONTD.) • The Indian Microfinance sector has been rated as one of the fastest growing sectors in the world • There are 1,000 MFIs operating in India (as of March 2009) • MFIs have reached 234 of the 331 poorest districts identified by the government • At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores in the Indian banks‟ credit outstanding. • As against this, according to even the most conservative estimates, the total demand for credit requirements for this part of Indian society is somewhere around Rs 2,00,000 crores.
    14. 14. • More than 350mn people in India live below the poverty live • MFIs cater to over 55mn people in India, with 90% of them being women • The total market potential is to have a reach of about 275-300mn people in India 28% 47% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2002 2007 Share of MFIs (in small loans) Marginal farmers (access to credit) Non- institutional credit Institutional credit
    15. 15. SOCIAL IMPACT OF MICROFINANCE Personal/Household level Community level Regional level
    16. 16. A NEED FOR FINANCIAL INCLUSION • A great need for a 100% financial inclusion is being felt by the economists and practitioners • The un-bankable population of India promises a huge market in itself • Poor people are trapped in poverty, because: • Commercial banks will not lend them money as they are often neither in a position to offer collaterals nor are they considered “creditworthy” enough; while • Local money-lenders, who are often their only source of credit, charge exorbitantly high interest rates, thereby depleting them of whatever little possible savings they can manage • Hence, there is a need for micro credit institutions offer small amount of loans to the people in the bottom of the pyramid
    17. 17. A NEED FOR FINANCIAL INCLUSION (CONTD.) • There is a tremendous demand from 100mn poor & vulnerable households in India 0 20 40 60 80 100 120 Finance (Accessed by Poor households) Finance (Needed by Poor households) Demand (US$ billion) 20x growth potential Unmet demand
    18. 18. WHO REQUIRES MICROFINANCE? • In India, generally microfinance is sought by: • Small and marginal farmers; • Rural artisans; and • Economically weaker sections • Women constitute a vast majority of users of microcredit and micro savings facilitates 10% 90% Microfinance facilities Men Women
    19. 19. RURAL POOR • Dependent on agriculture as primary source of income • Majority of them are small or marginal farmers • Poorest households are landless • Uncertain & irregular income streams
    20. 20. URBAN POOR • KYC norms of Banks and NBFC require proof of residence (unable to provide) • Reluctance of urban clients to dedicate timely commitment that is required both in the case of Gramin and self-help group (SHG) models. In the form of Periodic and regular meetings, group-based decision-making • Requires facilities like housing finance, health insurance, remittances, savings & investments
    22. 22. VARIOUS MODELS OF MFIS • Various models of MFIs differ on basis of: • Lending model (explained in the next slide) • Loan repayment structure: • Weekly or fortnightly repayment structure (JLR model) • Monthly repayment structure (SHG model) • Mode of interest rate calculation • JLR model charges flat 12-18% interest on loans • SHG model charges 18-24% interest on reducing balance method • Product offering • Micro credit, investments, insurance, saving, etc.. • Legal structure • Cooperatives, NBFC, unregistered, societies, trusts, for-profit, non- profit
    23. 23. Microfinance Institutions Lenders to group Self Help group model Lends to groups of 10 to 20 women NGO promotes a group & gets banks to extend loans Joint Liability group model Loans are extended to each member of the group Lenders to individuals
    25. 25. Steady access to capital Heavy dependence on Banks & FIs Political sensitivity of interest rates Operational issues while aggressive growth Weak governance Competition
    26. 26. STEADY ACCESS TO CAPITAL • Indian MFIs are highly leveraged, in some cases more than 50x (one of the highest in the world) • Access to steady capital can remain a cause of concern for the medium term Debt/Networth (# of times) > 15x 10-15x 7-10x 5-7x <5x
    27. 27. HEAVY DEPENDENCE ON BANKS & FIS • MFIs are dependent on borrowings from banks & FIs • For most MFIs, funding sources are restricted to private banks & apex MFIs • As public sector banks prefer lending through SHG-bank linkage model • Available bank funds are typically short-term (max. 2 years period) • Also, there is a tendency among some lending banks to sanction and disburse loans to MFIs around the end of the accounting year in pursuit of their targets • This leads MFIs to draw and deploy the funds sub-optimally for a period, till they find better avenues for deployment in loans to the needy clients
    28. 28. POLITICAL SENSITIVITY OF INTEREST RATES • Interest rates charged by MFIs are primarily to the poor people, thereby it can become a politically-sensitive issue • Over the past few years, MFIs in Southern India states were accused of excessively charging high interest rates and have been targeted by local administrations • The states include Andhra Pradesh, Tamil Nadu, Karnataka
    29. 29. Sr.no. MFI Interest rate 1 SKS Microfinance 24% 2 Equitas microfinance 21-28% 3 Basix finance 18-24%
    30. 30. OPERATIONAL ISSUES WHILE AGGRESSIVE GROWTH • MFIs risk management practices have weakened over the past fee years in search for growth & expansion • Credit sanctioning & monitoring practices have weakened • Also high debt ratios are also a cause of concern
    31. 31. WEAK GOVERNANCE • Many MFIs are not willing to convert to a corporate structure, hence : • They tend to remain „closed‟ to transparency and improved governance, thus unable to attract capital • MFIs also face a challenge to strike a balance between social and business goals • Managements need to adapt business models based on changing scenarios & increased transparency • This will enable attracting capital infusion and private equity funds
    32. 32. COMPETITION • India's microfinance sector is fragmented, having more than 3,000 MFIs, NGO-MFIs present • Top 10 microfinance companies in India account for ~74% of the total loans outstanding • More than 17 MFIs have more than Rs.1mn outstanding loans • Also, entry of commercial banks present to be a key competitor to MFIs
    33. 33. COMPETITION (CONTD.) Sr. no. Name Headquartered in No. of branches Loans o/s (mn) No. of borrowers 1 SKS Microfinance Andhra Pradesh 1,413 18,227 25,90,950 2 Spandana Sphoorty Andhra Pradesh 696 11,987 1,668,807 3 Share Microfin Andhra Pradesh 666 8,568 1,231,556 4 Asmitha Microfin Andhra Pradesh 363 4,944 694,350 5 Shri Kshetra Dharmasthala Karnataka 22 4,060 612,482 6 Bandhan West Bengal 385 3,389 851,783 7 Cashpor Micro Credit Uttar Pradesh 247 1,431 303,935
    35. 35. INTRODUCTION • There is growing interest in microfinance as one of the avenues to enable low income population to access financial services. • There have been various initiatives to promote microfinance in India since the 1970s, the sector witnessed rapid growth only in the 1990s. • The RBI has since the mid 1990s helped in attracting funding for the sector by including microfinance in the “priority sector” • MFIs have started offering products such as insurance, remittances and pensions by tying up with mainstream providers that calls for coordinated regulation of the sector
    36. 36. MICRO FINANCIAL SECTOR BILL • Though major MFIs are against the Microfinance Bill, it is still required to address the needs of small and start-up MFIs, especially in the NGO segment • Major MFIs are under RBI purview as non-banking financial companies (NBFCs) • The self-help group (SHG) or cooperative model MFIs come under the NABARD • The Bill would cover the MFIs left out of these two categories
    37. 37. MICRO FINANCIAL SECTOR BILL (CONTD.) • Objective: • To ensure development and orderly growth of the micro-finance sector in rural and urban areas in the country. • Key Provisions: • The empowerment of NABARD to frame a scheme for appointment of one or more microfinance ombudsman for settlement of disputes between eligible clients and micro finance organizations. • Creation of a micro finance equity and development fund facilitating the development of the sector in India. • Creation of a reserve fund by every MFI that accepts deposits with a minimum of 15 percent of the MFI‟s net profit realized out of its thrift and micro finance services to be transferred to the fund.
    38. 38. MICRO FINANCIAL SECTOR BILL (CONTD.) 2007 Bill Provisions: • Every MFI accepting deposits had to be registered with the NABARD. Conditions for registration as laid down in the old Bill include: • net owned funds of at least Rs. 5 lakh and • at least three years in existence as a microfinance organization. • All MFIs, whether registered or not, to submit annual financial statements to NABARD. Budget 2010-11 Provisions: • Micro finance development equity fund corpus doubled to Rs 400cr • Rs 4000cr for promotion of micro finance
    40. 40. INTRODUCTION • SKS Microfinance is India‟s largest and the world‟s fastest- growing microfinance organization • Started in 1998 as an NGO, SKS transformed into an NBFC in 2005 and is regulated by the RBI. • SKS has been able to ensure a repayment rate of over 99 % on its loans
    42. 42. OPERATIONAL STATISTICS Operational Information Mar 06 Mar 07 Mar 08 Sep 09 Total no. of Branches 80 275 771 1,676 Total no. of Districts 19 102 217 345 Total no. of Staff 574 2,389 6,425 17,520 Total No. of Members (In Millions) 0.20 0.60 1.87 5.30 Amount Disbursed (INR. In Millions) 1,525 4,454 16,789 31,994 Portfolio Outstanding (INR. In Millions) 921 2,756 10,506 32,080
    43. 43. FINANCIAL STATISTICS Financial Information Mar 06 Mar 07 Mar 08 Sep 09 Incremental Debt (INR in Crores) 88 277 1,063 1,247 Total Revenue (INR. In Crores) 10 46 170 385 PAT (INR. In Crores) 0.44 3.67 16.64 55.60 Total Assets (INR. In Crores) 98 332 1,083 3,643 ROA 0.48% 1.00% 2.51% 4.09% ROE 3.08% 18.1% 16.3% 15.15%
    44. 44. COST STRUCTURE
    46. 46. SKS FINANCE – CAPITAL NOT A CONSTRAINT • SKS has been a sector leader in sourcing capital • In July 2009, Bajaj Allianz made a strategic investment of US$10mn in SKS Microfinance which was the first-ever investment by an insurance company in an Indian microfinance institution • In November 2008 SKS raised equity worth US$75mn, the largest equity raised by an MFI in the world • The third round of equity worth Rs.147cr was raised in January 2008
    47. 47. “ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity” - Haruhiko Kuroda (ex-president of Asian Development Bank) ICICI BANK – INNOVATION IN MICROFINANCE
    48. 48. AN OVERVIEW – ICICI GROUP • Second largest bank with total assets of US$77bn • Offers a wide range of: • Banking products & financial services • Investment Banking services • Insurance • Asset Management • Venture Capital & Private Equity
    49. 49. AN OVERVIEW – MICROFINANCE INITIATIVES • ICICI Bank is one of the largest microcredit institutions in India • It has financed ~3.5mn low income customers in collaboration with MFIs and lent more than Rs.2,582cr (2009) • Key aim of the bank‟s microfinance initiative was to increase penetration into rural areas by utilizing its expertise in distribution and strong financial position • ICICI Bank‟s micro credit initiative involves lending small amounts to the people below the poverty line • It provided basic banking services like savings and withdrawal along with micro investment products like mutual funds • The bank increased its presence in the rural areas through innovative distribution channels as setting up branches in the rural areas would have proved costly • Tied up with NGOs and MFIs already working in the area of rural finance
    50. 50. STRATEGIES ADOPTED BY ICICI BANK • To develop its presence in microfinance business in India, it developed 3 strategies: 1. Initiate measure to improve efficiency and reach of microfinance services in India 2. Finance MFIs – improving liquidity of MFIs & NGOs providing rural finance 3. Provide credit and savings services to the poor directly, through its rural branch network
    51. 51. MODELS ADOPTED BY ICICI BANK • The bank developed 2 models to expand its presence: Bank-led model • Involved direct lending by ICICI Bank Partnership model • Partnering with NGOs & MFIs providing rural finance • Make best use of their networks, relationships & knowledge
    52. 52. THE BANK-LED MODEL • Derived from SHG-Bank linkage program of NABARD, involves banks financing SHGs • ICICI Bank aggressively drew up plans for growth • Acquired Bank of Madura • This acquisition gave them a significant presence in South India, especially Tamil Nadu • Through this initiative, ICICI Bank had formed, trained and initiated small groups of women to undertake financial activities like banking, saving & lending
    53. 53. PARTNERSHIP MODEL • SHG model was successful, but its reach was limited only to those areas where the bank had branches • The Partnership model aimed to reach where ICICI bank didn‟t have any branch • This model aimed at synergizing the operational advantages of NGOs & MFIs and financial strength of the bank Operational advantages Financial strength • Mobilization power & infrastructure • Lending, monitoring & collection activities • Financial strength of ICICI Bank to lend to MFIs & SHGs
    54. 54. PARTNERSHIP MODEL (CONTD.) • ICICI Bank was instrumental in designing new structures through which capital constraint issues of NGOs & MFIs were resolved • It bought microfinance portfolio of MFIs (selectively or of the entire area/branch) and entered into partnership with them • In this model, both the parties shared risks of losses • This model was also known as securitization model, since it involved creating of a secondary market for microfinance • The main advantage of securitization was the differentiation between operational risk & financial risk • In 2009, ICICI Bank financed SKS Microfinance with a Rs.200cr securitization deal. • This will provide loans to 200,000 unbanked families
    55. 55. WAY FORWARD FOR ICICI BANK • Enhance use of technology • Improve operational efficiency • Partnering with Indian postal department to enhance reach • Access to secondary markets to improve the depth of securitization • Looking beyond micro-credit • Insurance, savings, remittances, investment products
    56. 56. For a sustainable future THE WAY FORWARD… FOR THE MICROFINANCE SECTOR
    57. 57. CORRECTING LARGE GEOGRAPHIC ASYMMETRIES Large no. of MFIs Economically Vibrant High micro credit penetration Very Few MFIs Economically Backward Low level of micro credit penetration …Requires reduction of geographic asymmetries and increasing depth of outreach…
    58. 58. ACCESS TO CAPITAL • Access to raise capital through banks, venture capitals, and capital markets & debt markets • Venture capitals are ready to provide funds to quality players primarily due to near 100% recovery of loans coupled with high interest rates charged by MFIs • This can be provided once MFIs choose to opt for: • Better governance • Get themselves registered • Recognized by RBI • Transparent business practices
    59. 59. OTHERS • Successful implementation of the Microfinance Bill after considering the key changes recommended • Cellular finance: Use of cellular phone operators‟ network for making money transfers is a distant possibilities • Possible after the recent RBI mandate to telecom operators‟ • Diversification: • Micro insurance has a tremendous potential, but key concerns on distribution and marketing products should be taken care of • Others areas such as micro investments, savings & remittances • Human resources: investment in training & infrastructure required
    60. 60. THANK YOU