Flow Indian Credit Scenario Microfinance – what and why? Indian Microfinance So far Current Wave Future Conclusion

Indian Credit Scenario

Microfinance – what and why?

Indian Microfinance So far

Current Wave

Future

Conclusion

Target group Destitute 10 million households Urban (26%) Rural (74%) Upper Poor 70 million households ($1-$2/day PPP) Very Poor 80 million households (up to $1/day PPP) Medium farmers to small entrepreneurs who have some consistent source of enterprise income or work. Landless daily laborers with no assets to small farmers and micro-entrepreneurs who have some income generating assets (livestock, land, sewing machine). Families with no daily source of income Employed poor such as housemaids and industrial laborers to small entrepreneurs who have some consistent source of enterprise income or work. Daily laborers with no assets to micro-entrepreneurs who have some income generating assets (e.g., vegetable cart, cycle rickshaw). All are characterized by not having a consistent income source. Families with no daily source of income Indian Credit Market from Poor’s Point of View

Microfinance – Why Banks Don’t Lend to the Poor No Collateral High risks A large number of very small loans to rural locations High transaction costs due to… due to… Loans sharks exploit the poor’s lack of access to credit charging up to 3600% ROI Total Unbanked Population Approx. 800 Mn.

Loans sharks exploit the poor’s lack of access to credit charging up to 3600% ROI

Total Unbanked Population Approx. 800 Mn.

Microfinance – what? Provision of credit, savings and insurance services for poor and near poor population Prevalent Models - Retail Microfinance Pioneered by Latin American MFIs - Group Based Microfinance Pioneered by Grameen Bank - SHG Bank Linkage promoted by NABARD

Provision of credit, savings and insurance services for poor and near poor population

Prevalent Models

- Retail Microfinance Pioneered by Latin American MFIs

- Group Based Microfinance Pioneered by Grameen Bank

- SHG Bank Linkage promoted by NABARD

Service Framework: The Missing Pieces Integrated Microfinance Financial and Non-financial services Minimalist Microfinance Missing Piece – Credit Financial Intermediation Working Capital Asset Purchase Social Intermediation Financial Literacy Leadership Co-operation Business Development Marketing Production Training Competitor Analysis Preparatory BDS Setting of Business Activity Capacity Building Support

AS A RESULT, THERE IS A HUGE UNMET DEMAND Assumptions Existing market: Rs. 20,000 crores Basis: NABARD; EDA Rural Report, “Maturing of Indian Microfinance” Poor households: 150 million Basis: World Bank poverty statistics, India Avg. credit demand / HH: Rs. 40,000 Basis: EDA Rural Systems Adjustment for service difficulties: 20% Basis: adjustment made to reflect inaccessible poor in rural areas (~7%) and half of underserved urban poor (0.5 x 26% = 13%) Rs. 340,000 crores covered in part by moneylenders and informal sources, but largely untapped Projected micro-credit demand, crores Current micro-credit by MFIs Total micro-credit demand, India Rs. 480,000 Rs. 20,000

Assumptions

Existing market: Rs. 20,000 crores

Basis: NABARD; EDA Rural Report, “Maturing of Indian Microfinance”

Poor households: 150 million

Basis: World Bank poverty statistics, India

Avg. credit demand / HH: Rs. 40,000

Basis: EDA Rural Systems

Adjustment for service difficulties: 20%

Basis: adjustment made to reflect inaccessible poor in rural areas (~7%) and half of underserved urban poor (0.5 x 26% = 13%)

Rs. 340,000 crores covered in part by moneylenders and informal sources, but largely untapped

… .BUT MFIs ARE NOT ABLE TO SCALE TO LARGE NUMBERS

What Has Been Ailing Indian Microfinance Uneven Geographical Spread – Heavily South Focus Personality Driven – Fiefdoms Acceptance of Inefficiencies Low focus on Systems Development Lack of quality Human Resources Too many legal forms – Hard to regulate

Uneven Geographical Spread – Heavily South Focus

Personality Driven – Fiefdoms

Acceptance of Inefficiencies

Low focus on Systems Development

Lack of quality Human Resources

Too many legal forms – Hard to regulate

Current Wave: Evolution Profit is not a bad word afterall…. Leading to NBFCs being preferred legal form Private Equity – it is not always good benefitting few but hurting many Regulation leading to innovations Professionals Entering the field

Profit is not a bad word afterall…. Leading to NBFCs being preferred legal form

Private Equity – it is not always good benefitting few but hurting many

Regulation leading to innovations

Professionals Entering the field

Current Wave : Is it all good? Single Focus on Profit – It could be next .com burst Over crowding geographical areas Poaching of Human Resources and Clients – leading to bad blood Overburdening the clients – leading to push them down the poverty rather then lifting them – one more subprime crisis in the making

Single Focus on Profit – It could be next .com burst

Over crowding geographical areas

Poaching of Human Resources and Clients – leading to bad blood

Overburdening the clients – leading to push them down the poverty rather then lifting them – one more subprime crisis in the making

Future: Segmentation and Value Addition Could be the Name of the Game Increased Regulation: Leading to phasing out of not suitable forms – mergers and acquisitions Commoditized Microfinance – One size fits all – low margin high volume business model Niche Microfinance – Scope of value addition – High Margin Low Volume Business Model Scope for innovation in credit plus services e.g. Insurance

Increased Regulation: Leading to phasing out of not suitable forms – mergers and acquisitions

Commoditized Microfinance – One size fits all – low margin high volume business model

Niche Microfinance – Scope of value addition – High Margin Low Volume Business Model

Scope for innovation in credit plus services e.g. Insurance

Conclusion Future Looks Promising Microfinance Needs to Adopt the best practices from other Industries Huge Scope for systems development Expectation Management – Need of the hour

Future Looks Promising

Microfinance Needs to Adopt the best practices from other Industries

Huge Scope for systems development

Expectation Management – Need of the hour

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