Micro finance institution(mf-is)_20_26_36_49_69


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Micro finance institution(mf-is)_20_26_36_49_69

  1. 1. ON <br />Industry Profile: MFI (Micro-Finance Institution) <br />Date of Submission : 27th April, 2011<br />Team Members : Deep Pathak (10810020)<br /> Harsh Singh (10810026)<br />MukeshRathi (10810036)<br /> Rajneesh Kumar (10810049)<br />Varun Sharma (10810069)<br />Business Environment Presentation<br />
  2. 2. Name of the Industry: Micro-Finance<br />
  3. 3. Microfinance as can be defined as “small-scale financial services—primarily credit and savings—provided to people who farm, fish or herd”<br />It also “refers to all types of financial services provided to low-income households and enterprises.”<br />Microfinance grows out of developmental roots. This can be termed the “alternative commercial sector.” <br />MFI’s classified under this head are promoted by the alternative sector and target the poor.<br />MICROFINANCE<br />Source-www.rbi.org.in<br />
  4. 4. Microfinance is an economic development tool whose objective is to assist the poor to work their way out of poverty.<br />It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance.<br />MICROFINANCE<br />
  5. 5. The essential features of credit for Microfinance which have evolved are –<br />The borrowers are low-income groups.<br />The loans are for small amounts.<br />The loans are without collateral.<br />The loans are generally taken for income-generating activities and also provided for consumption, housing and other purposes.<br />MICROFINANCE<br />Source: Malegam Commitee Report on Micro Finance 2010<br />
  6. 6. Rationale For choosing this Industry ?<br />
  7. 7. India’s Microfinance Institutions reached 76.6 million against 2009’s 59 million, according to the “State of the Sector Report”.<br />More than 50 percent of low income households are covered by some form of microfinance product.<br />MFIs so far reached 234 of the 331 poorest districts identified by the government.<br />Playing a major Role in achieving Financial Inclusion of Poor.<br />Why This Industry?<br />Source- Indian MFI Survey-2010<br />
  8. 8. The microfinance business model in India typically generates a Return on Equity (“ROE”) of between 20% and 30%, driven by financing from commercial banks, strong operating efficiency and high portfolio quality.<br />Despite achieving rapid growth with a CAGR of 86% in loan portfolio outstanding and 96% in borrowers over the last five years since 2005.<br />The microfinance sector still faces a large unmet demand which means that it still has great potential for continued growth.<br />Why This Industry?<br />Source-Indian MFI Survey 2010<br />
  9. 9. Millions coming out of poverty through the power of Micro-Credit.<br />Cost effective delivery of Financial Products to the poor.<br />Source of Foreign Investment as many Private Equity Investors involved in Impact Investing in MFI’s.<br />Recently Some Controversy about the money recovery methods used by MFI’s.<br />Why This Industry?<br />
  10. 10. Recently MFI’s were in news about Andhra Pradesh’s MFI regulation bill that curtailed the activities of MFI’s.<br />Questions have been raised whether Interests charged by MFI’s are Usurious.<br />Despite being involved in controversies, MFI’s have the potential to enable Financial Inclusion of poor and so should be not hindered by regulations.<br />Why This Industry?<br />Source: Malegam Commitee Report on Micro Finance 2010<br />
  11. 11. How Old is the Industry ?<br />
  12. 12. One of the earliest entrants in the Microfinance space was Muhammad Younus’ Grameen Bank.<br />The SHG-Bank Linkage Model was pioneered by NABARD in 1992. <br />With one of the highest growth rates globally since 2002, the Indian microfinance sector has emerged as one of the most socially conscious, commercially viable and financially sustainable.<br />The liquidity crunch did affect the availability of equity for microfinance players in the years prior to 2008.<br />How old is Industry?<br />Source-Economic Times<br />
  13. 13. Indian microfinance saw a surge in equity infusions in the first quarter of fiscal year 2009-10.<br />SKS Microfinance was one of the pioneer MFI That was started in 1999 and whose IPO in 2010 was hugely oversubscribed.<br />Microfinance loans in India range in size from $100 to $500 per loan with interest rates typically between 25% and 35% annually.<br />How old is Industry?<br />Source-Economic Times<br />
  14. 14. No Of Players In the Microfinance Industry ?<br />
  15. 15. Breakup of Indian MFI’s<br />Source-CRISIL Ratings India MFI Institutions 2010<br />
  16. 16. The players in the Microfinance sector can be classified as falling into three main groups-<br />The SHG-Bank linkage Model accounting for about 58% of the outstanding loan portfolio.<br />Non-Banking Finance Companies accounting for about 34% of the outstanding loan portfolio.<br />Others including trusts, societies, etc, accounting for the balance 8% of the outstanding loan portfolio.<br />No Of Players in the Industry<br />Source: Malegam Commitee Report on Micro Finance 2010<br />
  17. 17. As of December 31, 2009, there were 1,395 MFIs globally with an estimated borrower base of 86 million with a total outstanding portfolio of over $44 billion.<br />As of March 2009, the MFIs in India reported a client base of 22.6 million with an outstanding portfolio of more than $2 billion.<br />No Of Players in the Industry<br />Source-CRISIL Ratings India MFI Institutions.<br />
  18. 18. Source-CRISIL Ratings India MFI Institutions.<br />No of Players and their Investors <br />
  19. 19. SKS microfinance run by Vikram Akula, SKS Microfinance has 7.7 million clients (2010) in 2,403 branches in 19 states across India as of December 31 2010 . SKS charges an interest rate of 24.55% per annum across India.<br />Some of the major Microfinance Institutions in India include BASIX By Vijay Mahajan,Bandhan with investment by SIDBI,Spandan,Ashivaad ,Utkarsh etc.<br />No Of Players in the Industry<br />
  20. 20. Microfinance is gaining prominence as a viable asset class globally, particularly in India.<br />MFIs in India have continued to attract large amounts of capital despite the global economic recession.<br />MFIs across the world face an equity valuation of 1.5x to 3.0x book value, whereas Indian MFI’s face a valuation that is 3.0x to 4.0x book value.<br />No Of Players in the Industry<br />
  21. 21. This premium is driven partly by the generous amounts of debt available to the industry to expand.<br />This enables MFIs to achieve returns on equity of approximately 20% to 30%.<br />No of players and Competitors<br />
  22. 22. Growth of MFI’s in India<br />
  23. 23. Growth of MFI’s <br />The Indian micro finance industry (MFI) would cross 11 crore borrowers and Rs 135,000 crore ($30 billion) in loan portfolio by 2014 and will require a huge capital inflow both in debt and equity<br />The report said that the growth is expected to come from underserved states that are witnessing a flurry of activity, and also from a range of new financial and non-financial products that are being introduced in the sector<br />Indian microfinance institutions have grown at a spectacular rate between 2004 and 2009, with an average size portfolio increasing 107 per cent on a year on year basis, while number of clients increasing 91 per cent. As of 2009, the industry had a client base of about two crore and gross loan portfolio of Rs 11,734 crores.<br />
  24. 24. Indian Scenario<br />Source: Doug Johnson, The Geographic Distribution Of Microfinance Services In India 2007<br />
  25. 25. Indian Scenario<br />Source: Doug Johnson, The Geographic Distribution Of Microfinance Services In India 2007<br />
  26. 26. Growth of Microfinance industry<br />Source IFMR CAPITAL<br />
  27. 27. Despite a sustained high growth rate in the industry, the full potential of microfinance has not been fully explored in geographies such as Uttar Pradesh, Bihar and north-eastern states. The microfinance penetration in India is merely 3.6 per cent, and 60 per cent of the portfolio is concentrated in the southern states of Andhra Pradesh, Tamil Nadu and Karnataka.<br />The growth of Indian MFIs has been enhanced by the availability of debt financing from both private and public sector banks. As of March 2009, banks and financing institutions had a total exposure to MFIs of $2.45 billion. This represents an almost 150% increase from the exposure in March2008 of $984.8 million and a 200% increase from the exposure in March 2007 of $805.6 million.<br />The priority sector lending (“PSL”) requirements set by the RBI have encouraged banks to lend to MFIs as a way to satisfy their financial inclusion quotas for lending to agriculture and weaker and more deprived sections of society.<br />
  28. 28. Comparative Growth of top MFI’s in India<br />
  29. 29. Expansion of Consumer Base(mn)<br />Source CRICIL<br />
  30. 30. Growth in no. of Employees(‘000)<br />Source CRISIL<br />
  31. 31. Comparative Growth in Loans(USDmn)<br />Source CRISIL<br />
  32. 32. The growth of SKSM has accelerated from year 2007 and has emerged as leader with 21% market share in 2010.<br /> Loans disbursement of SKSM and Spandana has touched $800 mn in year 2010.<br />The total portfolio of MFI’s in India is expected to touch INR 350,000 mn in 2012.<br />
  33. 33. Despite the rapid expansion of microfinance, large areas of India continue to be underserved. Lok Capital estimates that the penetration potential of the existing microfinance model is between approximately 43 million and 52 million households, out of which 22.6 million are existing customers.<br />This implies an unaddressed demand of 20million to 29 million customers. Currently, as many as54% of all microfinance clients are concentrated in the Southern States: Andhra Pradesh, Karnataka, Kerala and Tamil Nadu.<br />Alternatively, there is an extremely limited microfinance presence in the North and North-east.<br />
  34. 34.
  35. 35. Percentage Share of different MFI’s<br />
  36. 36. Percentage share of Loan Outstanding<br />
  37. 37. Borrowers<br />
  38. 38. India's microfinance sector is fragmented with more than 3000 microfinance companies (MGIs), NGOs and NGO-MFIs.<br />The top 10 microfinance companies in India are estimated to account for almost 74 per cent of the total loans outstanding.<br />It can be added here that the total loan outstanding of Indian microfinance sector lies between ` 160-175 billion. As on March 31, 2009, almost 17 Indian microfinance companies have more than 1 million outstanding loans.<br />
  39. 39. Exit Scenario<br />Currently, several exit opportunities exist including secondary and trade sales which are increasing as more mainstream investors enter the market.<br />Another likely exit scenario is M&A, as larger MFIs seek to acquire players with product or geographical niches and banks also seek to enter the sector by forming alliances with existing MFIs. Larger MFIs may also consider IPOs although that may be a less likely exit option for most MFIs in the short to medium term.<br />
  40. 40. Import and Export Situation<br />Import and export of financial services is not in place right now.<br />
  41. 41. Taxation Issues for Micro financial Institutions<br />
  42. 42. Societies and Trusts<br />Reference: http://www.sa-dhan.net/Adls/Microfinance/Article/Publications/ExistingLegalRegulatoryFramework.pdf<br />
  43. 43. Not for Profit Organizations<br />Reference : http://www.sa-dhan.net/Adls/Microfinance/Article/Publications/ExistingLegalRegulatoryFramework.pdf<br />
  44. 44. NBFCs<br />Reference: http://rbi.org.in/scripts/NotificationUser.aspx?Id=3651&Mode=0<br />
  45. 45. Public companies<br />MFIs such as SKS Microfinance which has gone public and thus is not covered under section 25 of companies act, need to pay taxes under the Income Tax act<br />
  46. 46. Level and Scope of Competition in Microfinance Industry<br />
  47. 47. Level of competition<br />Major competitors fighting for the same market of micro credit customers and offering financial services are discussed in later slides<br />
  48. 48. Informal financial service providers<br />Brigit Helms. Access for All: Building Inclusive Financial Systems. CGAP/World Bank, Washington, 2006, pp. 35-57<br />
  49. 49. Member Owned Organizations<br />Reference: Brigit Helms. Access for All: Building Inclusive Financial Systems. CGAP/World Bank, Washington, 2006, pp. 35-57<br />
  50. 50. NGOs<br />Reference: Brigit Helms. Access for All: Building Inclusive Financial Systems. CGAP/World Bank, Washington, 2006, pp. 35-57<br />
  51. 51. Formal financial institutions<br />Reference: Brigit Helms. Access for All: Building Inclusive Financial Systems. CGAP/World Bank, Washington, 2006, pp. 35-57<br />
  52. 52. Need for Competition<br />While regulations are important, they cannot by themselves be the sole instruments<br />to reduce interest rates charged by MFIs or improve the service provided to<br />borrowers. Ultimately, this can only be done through greater competition both within<br />the MFIs and without from other agencies operating in the Microfinance sector.<br />Reference: RBI report on MFIs, Jan 2011.<br />
  53. 53.
  54. 54. Comparison for MFI sector<br />Reference: RBI report on MFIs, Jan 2011.<br />
  55. 55. Increased dominance of MFIs<br />MFIs with an informal approach have been able to achieve a deeper reach<br />MFIs are said to be more aggressive with more use of locals as field workers<br />Simpler and less time consuming procedures<br />Bank loans to SHGs have a longer repayment period<br />Banks find it easier to use MFIs to meet their priority sector targets<br />Reference: RBI report on MFIs, Jan 2011.<br />
  56. 56. Scope for competition<br />Banks enjoy lower cost of funds, can acquire a larger share of the market<br />RBI steps to further financial inclusion through mainstream financial institutions by offering various financial products.<br />RBI measures:<br />Banks are permitted to utilise the services of intermediaries to extend penetration outreach by providing financial and banking services through SHGs<br />Domestic scheduled commercial banks have been permitted to freely open branches in Tier 3 to Tier 6 centres<br />Banks are required to draw-up a road map whereby banking services will be provided by March 2012 to 72,825 un-banked villages which have population in excess of 2000 persons<br />Reference: RBI report on MFIs, Jan 2011.<br />
  57. 57. Recommendation<br />We would recommend that bank lending to the Microfinance sector both through the SHG-Bank Linkage programme and directly should be significantly increased and this should result in a reduction in the lending interest rates.<br />
  58. 58. Regulatory and Legal Issues with MFI’s in India<br />
  59. 59. Legal Issues<br />The various Money Lending Acts enacted by the different states have not been successful in ensuring any discipline on the non-formal banking sector. <br />A Self-Regulatory System for MFIs has not found sufficient support.<br />The prospect of instituting a self-regulatory regime as proposed by the Task Force was discussed very actively.<br />Yet as of now, the RBI has not delegated any regulatory power to a self-regulatory organisation.<br />
  60. 60. Microfinance Regulation<br />India is one of the few countries in South Asia that are yet to give formal recognition to for-profit MFIs in their regulations.<br />At present, MFIs see the Non-Banking Finance Company as the best legal setup to operate in, once they have achieved significant size. <br />Banks are also more comfortable dealing with NBFCs as they are seen as better regulated entities. <br />However, MFIs looking to set themselves up as NBFCs face stringent barriers in terms <br />of initial capitalization required and restrictions on accessing foreign debt and equity.<br />
  61. 61. Microfinance Regulation contd.<br />Another key area where the Indian microfinance regulatory environment is different is in terms of access to client savings.<br />MFIs in many developing countries are permitted to collect deposits.<br />However, in India, even the not-for-profit MFIs registered as Trust or Society are not permitted to collect deposits on a large scale.<br />Only those MFIs operating as Co-operative Societies are permitted to collect savings from members. <br />However, co-operatives are not seen as a preferred entity for microfinance operations.<br />This inability of the larger MFIs to collect savings from their clients makes them dependent to a large extent on debt funds from banks. <br />Source: M-CRIL (2005). “A Study of the Regulatory Environment and its Implications for Choice of Legal Form by Microfinance Institutions in India”. Published by Sa-dhan.<br />
  62. 62. Priority Sector Lending<br />One regulatory initiative that has been the primary reason behind the growth of microfinance in the country is the introduction of 'priority sector' lending requirements for banks in India in 1985.<br />Banks in India are required to have at least 40% (32% for foreign banks) of their total advances lent to the 'priority sector', which includes sectors such as agriculture, small-scale industries, small business and advances to 'weaker sections' of society including small farmers, artisans and cottage industries etc.<br />Advances given for microfinance qualify as loans to the 'priority sector'.<br />Banks are therefore particularly interested in microfinance loans due to the relatively high safety of such loans and the possibility of market rate returns.<br />Source: Sinha and Bakshi (2004)<br />
  63. 63. Legal forms being used by MFI’s<br />SOCIETIES REGISTRATION ACT, 1860<br /> - Since these entities were established as voluntary, not-for-profit development organisations, their microfinance activities were also established under the same legal umbrella.<br />INDIAN TRUSTS ACT, 1882<br /> - Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or as private, determinable trusts with specified beneficiaries/members.<br />NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF COMPANIES ACT, 1956<br /> - An organisation given a license under Section 25 of the Companies Act 1956, is allowed to be registered as a company with limited liability without the addition of the words ‘Limited’ or ‘Private Limited’ to its name.<br /> - It is also eligible for exemption from some of the provisions of the Companies Act, 1956.<br />
  64. 64. Continued….<br />NON-BANKING FINANCE COMPANIES<br /> - NBFCs have played an important role in the Indian financial sector for a long time, fulfilling the gap in the demand and supply of financial services, particularly from small clients.<br /> - What has promoted the growth of NBFCs is their localised presence, a higher level of customer orientation than banks and lower documentation requirements albeit at higher interest rates for borrowers.<br />NIDHI COMPANIES<br /> - Section 620 of the Companies Act allows for the formation of a special type of company called ‘Nidhi’ company also known as ‘Mutual Benefit Society’.<br /> - Companies registered under this section will have all clients as members of the company. They are allowed to accept deposits so long as these are from their members only and to grant loans of up to 50 per cent of the market value of property with registered mortgages in favour of the company or up to 100 per cent of the value of jewellery, fixed deposits, etc.<br />
  65. 65. Continued…..<br />BANKING REGULATION ACT AS APPLICABLE TO COOPERATIVES<br /> - Under the Banking Regulation Act only the State Cooperative Banks, District Central Cooperative Banks and Primary Cooperative Banks (Urban Cooperative Banks — UCBs) are recognised as cooperative banks.<br /> - The relevant category of cooperative banks suitable for MFIs are Primary Cooperative Banks (UCBs).<br />AP Mutually Aided Cooperative Societies’ Act (APMACS Act) 1995<br /> - AP MACS Act of 1995 has emerged as the popular choice for an organisational form for many MFIs in Andhra Pradesh.<br /> - The purpose of enactment of the APMACS Act, 1995 was to promote institutions which are based on cooperative principles, are self-reliant, accountable and are formed for the fulfillment of the perceived needs of ordinary people.<br />PRODUCER COMPANIES<br /> - The Act defines the primary producer as any person engaged in any activity connected with or relatable to any primary produce.<br />Source: M-CRIL "Existing Legal and Regulatory Framework"<br />
  66. 66. Micro Finance Bill (2007) <br />Enactment of the bill will give the NABARD explicit powers to regulate the micro finance and so ensure greater transparency, effective management and better governance.<br />It provides for the creation of a Micro Finance Development Council for advising the NABARD on formulation policies.<br />It provides to facilitate constitution of a Micro Finance Development and Equity Fund to provide loans, refinance, grant and seed capital to MFOs. <br />It will provide a redressal mechanism through a Scheme of Micro Finance Ombudsman. <br />It will provide penalties for violation on the provisions of the Act. <br />Source: http://www.basixindia.com/micro_finance_in_india.htm<br />
  67. 67. Need for a Legal Framework for MFI’s<br />Indian legislators have also realized that microfinance needs a separate legal framework.<br />The Micro Financial Sector (Development and Regulation) Bill, 2007 was introduced in the Parliament on 20 March 2007.<br />The Bill is expected to ease the entry barriers for microfinance and also make it easier for registered MFIs to collect savings.<br />However, it has been criticized for looking to exclude for-profit NBFC-MFIs from its purview.<br />
  68. 68. Amend Existing Legislation for MFIs<br />More competition from the MFI sector would benefit the poor.<br />The SHG-bank linkage model alone cannot satisfy the huge demand for financial services, and that there is also a role to play for MFIs in the future, particularly in the areas where bank branches are few and far between.<br />It is felt that there is scope for microfinance models other than the SHG-bank linkage model as some of the MFIs have been very successful in various parts of the country.<br />The starting point for a scenario, in which MFIs play an equally strong role in the provision of microfinance services as the SHG-bank linkage model, must be the analysis of the current state of the microfinance sector and potential constraints by its legal environment.<br />
  69. 69. Present Challenges and Constraints for MFIs<br />The future role MFIs might play in serving the poor is not clear, particularly with regard to microfinance NGOs.<br />It is difficult for NGOs to charge the same low interest rates as banks, yet it was pointed out that NGOs might be better placed to disburse loans quickly and to do doorstep lending, which reduces transaction costs for borrowers.<br />
  70. 70. Regulatory Issues with Microfinance NGOs<br />Microfinance NGOs are not under specific financial sector legislation, but under the Societies Registration Act, 1860, and the corresponding Acts of the provincial governments, or under the Trust Act, 1882.<br />Not surprisingly, both State Acts originating from the 19th century lack clarity with regard to NGOs pursuing microfinance operations.<br />Microfinance activities of NGO-MFIs are not expressively stated as one of the “charitable purposes” in the preamble to the Societies Registration Act.<br />Furthermore, the carrying out of lending activities against interest can easily lead to the denial of the charitable status.<br />Another issue of concern for many practitioners is the tax treatment of their lending operations.<br />In most cases, NGO-MFIs are exempted from the Income Tax Act. <br />As there is no blanket exemption for all NGO-MFIs, some of the tax authorities are reported to have at times levied taxes on NGO-MFIs.<br />The risk is particularly high if an NGO earns a substantial part of its income from lending activities or, even more so, if it makes a profit (even if the profit has to be reinvested in the business).<br />
  71. 71. Regulatory Issues with Section 25 Companies<br />Section 25 companies are subject to some similar problems to MFI-NGOs.<br />Firstly, even though most Section 25 companies - as not-for-profit institutions - have been exempted from paying income tax for their lending operations, it is understood that, similar to NGO-MFIs, registration under Section 12A of the Income Tax Act, 1961 has not been granted as a matter of routine or principle.<br />Secondly, Section 25-1A of the Companies Act, 1956, mentions as objectives of such charitable Section 25 companies the promotion of “commerce, art, science, religion, charity or any other useful object”. It is not quite clear whether microcredit falls under this definition.<br />Source: The relevant legal text is the Income Tax Act (1961), Section 11-4A and 12A<br />
  72. 72. Continued….<br />Thirdly, the same restrictions as for NGOs apply to deposit mobilisation for Section 25 Companies. Yet differently to NGOs, Section 25 companies have found it easier to access bank loans (although not as much as they would like), and they definitely have an added advantage as they can mobilise equity.<br />Transformation from an NGO into a Section 25 company is easier than into a regular NBFC as the parent NGO can potentially invest in the share capital of a Section 25 company.<br />Finally, although microfinance defined by the Task Force and accepted by RBI provides for financial services of very small amounts, the RBI instructions exempting Section 25 companies from registration and reserve requirements for NBFCs stipulate that loans should not exceed Rs. 50,000 (US$ 1,100) for non-housing purposes and Rs. 125,000 (US$ 2,800) for housing purposes.<br />
  73. 73. Regulatory Issues with NBFC’s<br />NBFCs are the only type of MFI falling clearly under the purview of the central bank and being subject to prudential regulations.<br />As for-profit companies, they have to pay income tax on their lending operations.<br />The minimum capital requirement for a licence as a NBFC was one of the issues brought up by the MFI sector. It currently stands at Rs. 20 million (US$ 450,000), which is considered to be quite high.<br />As per the available information, none of the NBFCs engaged in microfinance so far accepts deposits from its clients.<br />The RBI has announced very stringent norms for the NBFCs who wish to take up insurance business.<br />
  74. 74. Continued….<br />The GoI has allowed foreign equity investment in NBFCs subject to a ceiling of 51% and a minimum amount of US$ 500,000.<br />RBI currently undertakes the supervision of NBFCs engaged in microfinance. Some microfinance practitioners made the proposal to delegate supervisory tasks to a as yet-unidentified third party, which would act as an agent for RBI.<br />In the legislation, nine types of NBFCs are distinguished between, yet none of these is a ‘microfinance NBFC’.<br />Finally, interest rate caps can be introduced by state governments under existing state legislation. <br />
  75. 75. Government Regulation<br />
  76. 76. In the Indian context, specific areas of<br />concern have been identified:<br />a) Unjustified high rates of interest<br />b) Lack of transparency in interest rates and other charges.<br />c) Multiple lending<br />d) Upfront collection of security deposits<br />e) Over-borrowing<br />f) Ghost borrowers<br />g) Coercive methods of recovery<br />Issues faced by MFI Sector<br />
  77. 77. Government Regulation<br />Need for Regulation:<br /><ul><li> All NBFCs currently regulated by RBI under Chapters III-B, III-C and V.
  78. 78. No separate category created for NBFCs operating in Microfinance Sector
  79. 79. Separate category of NBFCs for MFIs such as NBFC-MFI needs to be setup.</li></li></ul><li><ul><li>Borrowers in MFI sector represent a particularly vulnerable section of society
  80. 80. NBFCs not only compete among themselves they also compete with the SHG- Bank linkage Programme.
  81. 81. Credit to the MFI sector is an important plank in the scheme for financial inclusion
  82. 82. Over 75% of the finance obtained by NBFCs operating in this sector is provided by Banks & financial institutions like SIDBI.</li></ul>Why Separate category of NBFC-MFIs? <br />Source: RBI's Malegam Committee Report on microfinance, Jan 2011<br />
  83. 83. "A company which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf "<br />NBFC-MFIs : Definition<br />Source: RBI's Malegam Committee Report on microfinance, Jan 2011<br />
  84. 84. <ul><li>Pricing of Interest should be affordable to clients and sustainable for MFIs.
  85. 85. Cost of credit delivery are relatively flat
  86. 86. To prevent exploitation of borrowers, a ceiling on the rate of interest charged on individual loans is desirable.
  87. 87. Margin caps for amount charged to the borrowers & cost of funds to the MFIs.</li></ul>Pricing of Interest<br />Source: RBI's Malegam Committee Report on microfinance, Jan 2011<br />
  88. 88. Pricing of Interest : Cost Structure<br />Source: RBI's Malegam Committee Report on microfinance, Jan 2011<br />
  89. 89. <ul><li>There should be a “margin cap” of 10% in respect of MFIs which have an outstanding loan portfolio of `100 crores
  90. 90. A “margin cap” of 12% in respect of MFIs which have an outstanding loan portfolio of an amount not exceeding 100 crores.
  91. 91. There should also be a cap of 24% on individual loans.</li></ul>Recommendation by RBI’s Malegam Committee : Interest Pricing<br />Source: RBI's Malegam Committee Report on microfinance, Jan 2011<br />
  92. 92. <ul><li>Between the MFIs and the borrowers, the MFIs have an immeasurably superior bargaining power. So, Customer Protection Code needs to be mandated for MFIs.
  93. 93. The Customer Protection codes include:</li></ul> a) Commitment<br /> b) Avoidance of over-indebtedness<br /> c) Capacity Building and empowerment<br /> d) Appropriate marketing<br />Customer Protection Code<br />
  94. 94. e) Transparent and Competitive Pricing<br /> f) Appropriate Collection Practices<br /> g) Ethical Staff Behavior<br /> h) Accountability<br />i) Privacy of Client Data<br /><ul><li>Strict fines to be imposed on players violating these customer protection codes needs to be imposed. </li></ul> Customer Protection Code cont..<br />
  95. 95. Foreign Direct Investment & its impact on MFI Sector<br />
  96. 96. <ul><li>Indian MFIs can get foreign funds in the following ways:</li></ul>Acceptance of Foreign Contribution: <br /> Acceptance of foreign contribution by MFIs registered under the Societies Registration Act 1860 is regulated by the Foreign Contribution (Regulation) Act 1976 (FCRA)<br />Foreign Investment in MFIs in India<br />Source: Sa-Dhan Report on Existing Legal & Regulatory framework for Microfinance in India, 2006<br />
  97. 97. 2) Foreign Direct Investment:<br /><ul><li>Applicable only to Section 25 companies and NBFCs which are allowed to obtain FDI as equity.
  98. 98. NBFCs can obtain foreign capital in the form of equity subject to approval by the Foreign Investment Promotion Board (FIPB)</li></ul>Foreign Investment in MFIs (Cont..)<br />Source: Sa-Dhan Report on Existing Legal & Regulatory framework for Microfinance in India, 2006<br />
  99. 99. <ul><li>Private Equity(PE) Group Legatum and AavishkaarGoodwell have invested $25 million capital in “Share” which is a MFI
  100. 100. Sequoia and Unitus, the Seattle-based company that invests in MFIs, have ploughed $11.5 million into SKS Microfinance
  101. 101. Morgan Stanley and Switzerland-based Blue Orchard raised $108 million from the issue of a securitized bond backed by MFI loans. The money will be invested in 21 MFIs in more than 10 countries including India.</li></ul>Foreign Investment in MFIs<br />Source: Economic Times : Foreign investors dial microfinance in India<br />
  102. 102. FDI IN MFI Sector<br />
  103. 103. Advantages:<br /><ul><li>Private Equity (PE) funding from foreign players has provided the much needed ease of funding for the MFI sector.
  104. 104. Help Indian MFIs to improve upon their delivery system with the adaptation of good management practices brought about by foreign players
  105. 105. MFIs like SKS Microfinance have successfully came up with their IPO in the Capital market rising $350 Million.</li></ul>Effects of Foreign Investment<br />Source: Economic Times : Foreign investors dial microfinance in India<br />
  106. 106. Disadvantages:<br /><ul><li>Too aggressive on giving out loans to the poor with proper due diligence.
  107. 107. Y V Reddy, former Governor, RBI has compared this to the Sub Prime crisis lending of 2007-08 in the US.
  108. 108. Pressure of repayment on individuals leading to suicide cases in Andhra Pradesh, the state having the largest number of MFIs
  109. 109. Risk of Foreign Investors moving out with the slum in the MFI sector in 2010-11. </li></ul>Effects of Foreign Investment (Cont..)<br />Source: BBC Podcast on India's Microcredit Meltdown, Jan 2011<br />
  110. 110. Future of MFI Sector<br />
  111. 111. <ul><li>Regulatory framework will increase with the formation of NBFC-MFIs
  112. 112. Cap on Interest pricing to further limit the profitability of the sector
  113. 113. Increased competition from other financial Institutions like Banks & NBFCs entering the MFI sector
  114. 114. Increase in defaults on loan has already hampered the MFI sector in Andhra Pradesh and this may spread to other states. </li></ul>Future of the MFI Sector<br />
  115. 115. Conclusion<br />
  116. 116. "Microfinance is going to put poverty into the museum“ – Muhammad Yunus, Nobel Prize Winner & Founder of Grameen Bank<br /><ul><li>How much of that is going to be true only time will tell, but one thing is certain where ever there will be poor people wanting loans, there will be lenders ready to oblige! </li></ul>Concluding Statement<br />Source: BBC Podcast on India's Microcredit Meltdown, Jan 2011<br />
  117. 117. <ul><li>RBI's Malegam Committee Report on Microfinance
  118. 118. The Income Tax Act (1961), Section 11-4A and 12A
  119. 119. Sa-Dhan Report on Existing Legal & Regulatory </li></ul> framework for Microfinance in India, 2006<br /><ul><li>BBC Podcast on India's Microcredit Meltdown, Jan 2011
  120. 120. Doug Johnson, The Geographic Distribution Of Microfinance Services In India 2007
  121. 121. CRISIL Ratings India MFI Institutions 2010
  122. 122. Microfinance In India State of the Sector Report 2009
  123. 123. M-CRIL (2005). “A Study of the Regulatory Environment and its Implications for Choice of Legal Form by Microfinance Institutions in India”. Published by Sa-dhan.
  124. 124. Brigit Helms. Access for All: Building Inclusive Financial Systems. CGAP/World Bank, Washington, 2006, pp. 35-57</li></ul>References <br />
  125. 125. <ul><li>RBI’s website : www.rbi.org.in
  126. 126. Wikipedia: http://en.wikipedia.org/wiki/Microfinance</li></ul> http://en.wikipedia.org/wiki/NBFC_%26_MFI_in_India<br /><ul><li>Economic Times : www.economictimes.com
  127. 127. www.microfinancefocus.com
  128. 128. www.indiamicrofinance.com
  129. 129. www.crisil.com
  130. 130. http://articles.economictimes.indiatimes.com/2010-11-11/news/27577103_1_sks-microfinance-mfis-shgs
  131. 131. http://blogs.economictimes.indiatimes.com/folk-theorem/entry/microfinance-macro-problems</li></ul>Websites & Important Links<br />
  132. 132. THANK YOU<br />