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Microfinance annie Microfinance annie Presentation Transcript

  • Micro Finance in India overview, challenges, and the role of technology By Annie Duflo Centre for Micro Finance Research October 28, 2005
  • Outline of presentation
    • What is microfinance?
    • Providing financial services to the poor: challenges
    • Providing financial services to the poor in India: Overview
    • Microfinance: Challenges ahead and potential solutions/initiatives
    • The Centre for Micro Finance Research
  • Microfinance: what is it?
  • Microfinance: what is it?
    • What are the words that come to your mind when you hear the word microfinance?
  • Microfinance: what is it? Microfinance = provision of financial services to the poor 48% 15% 37% R4 R3 R1 / R2
  • Microfinance: what is it?
    • Micro-credit
    • Group lending
    • Social/charitable activity
    • Range of financial services
    • Group and individual lending
    • Profitable activity
    What it often is What it really should be
  • Providing financial services to the poor: challenges
  • Providing financial services to the poor: challenges
    • Risk management challenges due to information asymmetry problems
    • Accessibility (geographic accessibility and easiness to deal with)
    • No collateral, Low value and cash intensive nature of the business
    • Staff training and motivation
    High transaction costs
  • Information asymmetry Decision to take loan Loan usage loan repayment Adverse selection Moral hazard
  • Adverse selection: incomplete information problem (before the loan) Don’t know Client’s type Interest rate reflects proba of default Safer clients drop out Need to increase interest rate Providing credit can become impossible
  • Moral hazard: hidden action problem (after loan) Can not observe what client is doing Bad loan usage Strategic unwillingness To repay
  • Clients profile
    • 75% population lives in rural areas: geographical access difficult
    • Informal activities: need access at flexible times
    • Illiteracy: difficult to deal with traditional services
    • Low value of transactions
    • Lack of collateral
  • Staff
    • Lack of trained staff
    • Lack of motivated staff
    • Difficult to incentives staff
  • Delivering financial services to the poor in India: an overview
  • Providing financial services to the poor: occupied India
    • Deccan, late 19th Century:
    • peasant riots on account of coercive alienation of land by moneylenders.
    Organization of cooperative societies as alternative institutions for providing crédit by british government
  • Providing financial services to the poor: Independent India:
    • Credit was viewed as essential part of fight against poverty which led to following measures:
    • Expansion of the institutional structure
    • Directed lending to disadvantaged borrowers and sectors
    • Interest rates supported by subsidies
    • Institutional vehicles: cooperatives, commercial banks and Regional Rural Banks [RRBs].
  • Providing financial services to the poor: Timeline
    • 1950 & 1969: emphasis on the promoting of cooperatives.
    • 1969: nationalization of the major commercial banks: beginning of commercial bank branch expansion in the rural and semi-urban areas.
    • 1976: Regional Rural Banks (RRB), low cost institutions mandated to reach the poorest in credit-deficient areas
    • During this period, intervention of the RBI (Reserve Bank of India) was essential: special credit programmes for channeling subsidized credit to the rural sector (concept of “priority sector”)
  • Financial reforms for RFIs
    • Enhance the areas of commercial fredon
    • Increase their outreach to the poor
    • Stimulate additional flows to the sector.
    • Liberalising interest rates for cooperatives and RRBs,
    • Relaxing controls on where, for what purpose and for whom RFIs could lend, reworking the sub-heads under the priority sector,
    • Introducing prudential norms
    • Restructuring and recapitalising of RRBs.
  • Results
    • Access in terms of rural branches increased from 1,833 in 1969 to around 32,538 at present: 49% of all scheduled commercial bank branches are rural
    • The population per rural branch declined from 2,01,854 in 1969 to around 16,000 at present.
    • The proportion of borrowings of rural households from institutional sources increased from 7 per cent in 1951 to more than 60 per cent at present.
  • Results (cont’d)
    • 31% (131.1 million) of the total deposit accounts are in rural India
    • 43%(22.4 million) of total credit accounts are in rural India
    • Positive impact on the poor (Rohini Pande/Burgess paper)
  • However…Success was not as high as hoped
    • Defects in policy design,
    • Infirmities in implementation
    • Inability of the government of the day to desist from resorting to measures such as loan waivers.
    • High defaults
    • The banking system - was not able to internalise lending to the poor as a viable activity but only as a social obligation
    • More and more difficult for commercial bankers to accept that lending to the poor could be a viable activity.
  • Micro Finance: apparition
    • The financial sector reforms motivated policy planners to search for products and strategies for delivering financial services to the poor – microFinance - in a sustainable manner consistent with high repayment rates.
    • NABARD: empirical observation that had been catalysed by NGOs that poors gather in informal groups
    • Create a formal interface of these informal arrangements of the poor with the banking system.
    • Bank-SHG Linkage Programme.
    • Recent emergence of MFIs: professionally run institutions specialiazed in delivering credit with low cost staff and local knowledge
  • Despite all these efforts…large gaps remain
    • Against rural population of 741.0 million, 500 million people un-served
    • Population per branch: 22,793
    • Penetration of savings accounts is below 18%
    • As against 104% in urban and semi-urban areas
    • Number of villages per branch: 19
    • High dependence on informal sources
      • 36% of rural credit from informal sources
      • Dependence even higher for lower income households: 78%
  • Microfinance ahead: challenges
  • Gaps in demand and supply Demand: Rs. 450 billion/y 60% in South … to cover all parts of India Less than 2 million Households reached 500 million un-served poor Disbursed: 39 billion Need employment opportunities Need protection against all risks Market constraints Insurance under-delivered Scaling up Increase impact
  • Scaling up: challenges
  • Limitation of the predominant model Bank SHG NGO Loan at 9% No liability Group formation/linkage SHG-Bank linkage model
  • Financial Intermediation Model Loan at a 9% Loan at 20% Scaling up existing MFIs: challenges MFI JLG Group Bank
  • Limitations to growth of MFIs:
    • Lack of adequate quantities of risk capital
    • Lack of long-term finance to pay for creation of the necessary infrastructure and pre-operative expense
    • Lack of well trained staff in adequate numbers at all levels
    • technology
  • Lack of adequate capital: the ICICI Bank response
    • Searched for a model which:
    • Separates risk of MFI from risk inherent in the mf portfolio
    • Provides a mechanisms to banks to continuously incentivise partners
    • Inability of MFIs to provide risk capital in large quantum, which limited advances from banks
  • The ICICI Bank Partnership Model Servicing fees of 11% Loan at 9% Interest charged: 20% FLDG of 10% MFI JLG Group Bank
  • Long-term finance: the ICICI bank response
    • There is an underlying business model in the MFI’s expansion: no reason why it cannot be funded by commercial debt
    • ICICI Bank is offereing to its MFI partners long-term finance of a tenure of 3-5 years
  • Lack of well-trained staff: ICICI Bank response
    • Initiated partnerships with training institutions (Indian Grameen Services, Care India)
    • Establish a Financial Services Learning School in collaboration with MicroSave India
    • Provide high level training in banking and finance to MFI practitioners in collaboration with IFMR (Institute for Financial Management Research)
  • Technology
    • Role of technology in microfinance:
    • MIS
    • Cash handling
    • Data capture and subsequent management
  • Technology: ICICI Bank response
    • Creation of rural connectivity in partnership with telecom companies and internet service providers
    • Assistance to emerging MFIs to adopt scalable MIS solutions
    • Support to research and development on technological devices that can reduce transaction costs
      • Low cost ATMs, low-cost computing devices, mobile and internet-based transaction platforms
  • Scaling up: creation of new MFIs
    • Need 200 MFIs to cover all India
    • ICICI Bank (SIG): support to entrepreneurs to start MFIs
      • KAS Foundation, Orissa
    • Inputs are needed:
      • Organizational and staff incentive structures
      • Finance related issues (source of funds, capital structure)
      • Legal issues: regulations etc.
      • Business plan related issues: scale, expansion strategy etc.
    • Corporate partnerships: attractive track to build access to microfinance
  • Support new MFIs: The Venture Capitalist model
    • VCs specifically focused on the micro-finance space: Lok Capital, Aavishkar and Bellwether. 
    • Bellwether
      • three equity commitments for start-ups
      • increased the size of fund from 10mn USD to 25mn USD.
    • ICICI Bank solution:
      • Each MFI will need to reach a minimal CRISIL or an MCRIL operational sustainability rating
      • Then the entrepreneur buys out the stake of the VC and ICICI Bank gives an option to the entrepreneur to take a long-term debt to finance this buy out.
  • Scaling-up: what form of support is needed?
    • Interest rates should reflect the costs of transactions/probability of default and be sustainable
    • Focus on diminishing the cost of these transactions and expand access
    Equity support, Remove caps and floors, create facilitative infrastructure to reduce transaction costs
  • Alternate channels
    • Agent model
      • Model of LIC
      • Challenge: control fraud
    • Internet connectivity
      • BSNL: if wireless system installed ate the existing connected rural exchanges: 80-85% of villages could be connected
      • Variety of devices that can work with internet kiosks: biometric low-cost ATMs
      • Makes controlling fraud easier
  • Internet Kiosks Connectivity
    • STD/PCO:
    • Enabling voice communication
    Printer & Other Accessories : Enabling job work
    • Kiosk Operator:
    • Entrepreneur
    • Provides commercial services
    Multimedia PC with Power backup Internet Kiosk
  • Internet kiosks
    • ITC, nLogue, Drishtee: more than 6000 internet kiosks using Wireless in Local Loop, VSAT terminals
    • ICICI partnered with some of these organizations
      • Finance individual entrepreneurs to purchase operating license and equipment
      • Break even within 1 st year
      • Suite of financial services
      • 2000 kiosks
  • Internet kiosks: remaining gaps
    • Providing constant connectivity expensive
    • Finding motivated entrepreneurs difficult
    • Break even has been delayed for various reasons (required back-end systems to service clients difficult tp find etc.)
  • ICICI Bank strategy: summary Conventional Rural Banking Branch based Manpower intensive Product driven Single product Our strategy Hybrid channels Technology intensive Customer driven Multiple products
  • Maximize impact of microfinance: challenges
  • Maximize impact Vulnerability Need for More than credit Differences among customers Need for customized products Understand what programmes work the best and for whom
  • Maximize impact Local Financial Institution: serving all credit constraint- Segments in 2-3 districts Employment scarcity Other constraints Finance other credit constraint segments MFI-sectoral experts Partnerships
  • Range of Microfinancial services:
    • Individual lending
      • Information problem
      • No unique ID
      • No credit info sharing
      • Need technology!
    • Insurance
      • Adverse selection, moral hazard, fraud
  • Range of Microfinancial services:
    • Health insurance
      • Reimbursement model
      • Cashless model
      • How to identify illness?
      • How to avoid fraud?
    • Livestock insurance
      • Recognize cause of death
      • Identify animal (role of technology)
  • Range of Microfinancial services:
    • Weather insurance
      • Index-based: index created by assigning weights to critical time periods
      • Past weather data mapped to this index to arrive at normal treshhold index
      • If deviation: compensation
    • Commodity price derivatives
      • NCDEX: offers price discovery services: offer farmers instruments to hedge pre and post harvest risks
      • Makes using commodity as collateral possible
  • Range of Microfinancial services:
    • Savings and investments products
      • Could be offered through Money Market Mutual Fund: MFI acts as agent
    • Remittances
      • 10 million seasonal and circular migrants (National Commission on Rural Labour)
      • Adhikar, Orissa
      • ICICI: remittance product through internet kiosks
  • Key enablers needed for maximize impact and scaling up
    • Credit Bureau
    • Unique identifier
    • Technology platform
    • Rural infrastructure
    • Change in regulations (interest rates et.)
    • Training institutions
    • Research
  • CMFR: The Centre for Micro Finance Research
  • Objectives
    • Fill gaps in understanding of microfinance:
      • Extent and channels of impact
      • What programme designs work and what do not?
      • What programme variants can increase impact?
    • Fill gaps in practice of microfinance: limitation to micro-credit, lack of financial capacity
  • Mission
    • The Centre for Micro Finance Research will aim to help improve the life of the poor by:
    • Systematically researching the links between access to financial services and the participation of the poor in the larger economy
    • Participating in maximizing access to financial services and its impact for poor through:
      • Research on micro finance and livelihood financing
      • Research-based policy advocacy
      • High level training for practitioners and institutions
      • Strategy building for Micro Finance Institutions
  • Strategy Research Influence practice Advocacy Strategy building Training
  • Partnerships CMFR Banks/ Insurance Companies International organizations MFIs/NGOs Universities Regulators/policy makers
  • CMFR: Research Areas
  • Impact of Microfinance Access to Financial services Impact? Advocacy based on rigorous results ?
  • Constraints to Productivity Impact Health infrastructure entrepreneurship Access to Financial services Inputs
    • Build relevant partnerships
    • Provide useful products through credit
  • Economics of Micro-Enterprise
    • Scale, Returns, Constraints of micro-enterprise
    • Market linkages
    • Documentation of best practices
    Help increase productivity of micro-enterprise
  • Experimentation on Product Design selection monitoring Enforcement
    • Individual/group liability
    • Self/MFI selection
    • Guarantors
    • Collaterals
    • Interest rate
    • Repayment schedule
    • Communication strategies
    • Loan size
    • Interest rate
    Design the most cost-effective products
    • Within group monitoring
    • Staff supervision
  • Behavior and Psychology of Borrowers
    • How do households face shocks and risk?
    • Do households save and how?
    • What drives savings and credit behavior?
    • Why do people default?
    • Why don’t households adopt the most profitable activities?
    Design the most effective communication strategies
  • MFI Policies: Impact
    • How do MFIs policies affect loans and repayment behavior of clients?
      • Staff incentives
      • Combination of different products
      • Compulsory savings or insurance
    Understand better impact of policies over time
  • Cost and profitability of SHGs/MFIs
    • How to reduce transaction costs?
    • Compare costs of SHG-Bank linkage and MFI model
    • Show investors risk return performance of microloans
    Bank Transaction ? Micro-loan 9% 25% Return?
  • Research: other initiatives
  • Research: Panel Databases
    • Construction of a panel database: repeated observations of same households
      • Study vulnerability, consumption patterns over time
      • Have a panel database for on-going research
    • Construction of a cross-sectional survey
      • Document access to financial services over time
  • Research: weekly seminar series
    • Foregone seminars
      • Prof Ashok Jhunjhunwala (IIT Chennai),
      • Prof Vaidyanathan (Madras Institute of Development Studies)
      • Prof Sendhil Mullainathan, Harvard
      • GN Bajpai, ex-Chairman of SEBI
      • Greg Fisher, MIT
      • … ..
    • Forthcoming seminars:
      • Suresh Sundaresan, Columbia
      • Dr Narendra Jadhav, RBI
      • … ..
  • Research: Courses
    • Economics of Micro Finance
      • Prof. Adel Varghese, TAMU
      • Economic theory of microfinance
    • Evaluating Social Programmes
      • Professors from the Poverty Action Lab/MIT: Esther Duflo (MIT), Abhijit Banerjee (MIT), Sendhil Mullainathan (Harvard), Michael Kremer (Harvard)
      • Teach practitioners and researchers how to identify programs’ impacts without bias
  • MFI Strategy Unit at CMFR
  • Strategy Building MFIs Sectoral Experts Pilots Scale-up LFI
  • Training
    • Building blocks of Banking and Finance Training Programs
    • Meet training needs of the sector: In collaboration with MicroSave India
      • Development of national curriculum
      • Collaboration with 6 Regional Training Institutes