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Sheraz Kalim


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Keynote Presentation at microFinance 2008.

Published in: Economy & Finance, Business
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Sheraz Kalim

  1. 1. Transformation of microFinance in India: Experiences, Options and Future <ul><li>M S Sriram and Rajesh Upadhyayula </li></ul><ul><li>Indian Institute of Management Ahmedabad </li></ul>
  2. 2. microFinance Defined <ul><li>microFinance means many things - But the contours may be: </li></ul><ul><li>Piloted by the alternate sector </li></ul><ul><li>Focussed on the poor </li></ul><ul><li>Having roots in development </li></ul>
  3. 3. The Setting
  4. 4. What triggers transformation? <ul><li>Size </li></ul><ul><li>Diversity of services </li></ul><ul><li>Financial sustainability </li></ul><ul><li>Focus </li></ul><ul><li>Taxation </li></ul>
  5. 5. What are the International Experiences in Transformation? <ul><li>Bolivia and Africa: Transformation of NGOs </li></ul><ul><ul><li>To Banks </li></ul></ul><ul><ul><li>To FFPs </li></ul></ul><ul><li>Indonesia: Transformation of mainstream </li></ul><ul><ul><li>To microFinance methods </li></ul></ul><ul><li>Bangladesh: Transformation of a project </li></ul><ul><ul><li>Grameen Bank </li></ul></ul><ul><ul><li>Other NGOs transforming to Banks </li></ul></ul>
  6. 6. Challenges in the Indian context <ul><li>Size </li></ul><ul><ul><li>Growth in geographic area </li></ul></ul><ul><ul><li>Growth in portfolio/client size </li></ul></ul><ul><li>Diversity of Services </li></ul><ul><ul><li>MFOs wanting to offer Savings </li></ul></ul><ul><ul><li>MFOs wanting to offer Risk Products </li></ul></ul>
  7. 7. Challenges in the Indian context <ul><li>Financial Sustainability </li></ul><ul><ul><li>Internal growth </li></ul></ul><ul><ul><li>Access to funds </li></ul></ul><ul><li>Focus </li></ul><ul><ul><li>Other Developmental activities V/s mF </li></ul></ul><ul><ul><li>Degree of specialisation needed for mF </li></ul></ul>
  8. 8. Challenges in the Indian context <ul><li>Tax Status </li></ul><ul><ul><li>For-profit mF activity V/s not-for-profit NGO activities </li></ul></ul><ul><ul><li>Tax status of donor money </li></ul></ul>
  9. 9. Options for Transformation (Spin off) <ul><li>Company (NBFC) </li></ul><ul><ul><li>Poverty School </li></ul></ul><ul><ul><ul><li>Share - Transformation with growth </li></ul></ul></ul><ul><ul><ul><li>CFTS - Start up as NBFC </li></ul></ul></ul><ul><ul><ul><li>ASA - Through MBTs (proposed) </li></ul></ul></ul><ul><ul><li>Sustainability School </li></ul></ul><ul><ul><ul><li>BASIX - Complex structuring (holding company, borrowings and equity from developmental and commercial sources) </li></ul></ul></ul>
  10. 10. Options for Transformation (Spin off) <ul><li>Examining NBFCs </li></ul><ul><ul><li>+ Access to financial markets </li></ul></ul><ul><ul><li>+ Access to bank finance </li></ul></ul><ul><ul><li>+ Can Operate across the country </li></ul></ul><ul><ul><li>Limited options for offering savings </li></ul></ul><ul><ul><li>Re-capitalisation for growth may be tough </li></ul></ul><ul><ul><li>Steep entry norms (Rs.20 million initial) </li></ul></ul><ul><ul><li>Not easy to get registrations </li></ul></ul>
  11. 11. Options for Transformation (Spin off) <ul><li>Examining Co-operatives </li></ul><ul><ul><li>MACS, Urban Co-operative Banks </li></ul></ul><ul><ul><li>+Small and dispersed institutions, that could organically grow and federate </li></ul></ul><ul><ul><li>+Involves the community in decision making as it is member-user-governed </li></ul></ul><ul><ul><li>+Easy entry norms </li></ul></ul><ul><ul><li>+Best route for SHGs to formalise </li></ul></ul><ul><ul><li>+Can offer many services including savings </li></ul></ul>
  12. 12. Options for Transformation (Spin off) <ul><li>Examining Co-operatives </li></ul><ul><ul><li>Geographic limitations </li></ul></ul><ul><ul><li>Does not have a good image, attracting outside capital will be a problem </li></ul></ul><ul><ul><li>Recent scams in urban co-operative sector might lead to tightening of regulation </li></ul></ul>
  13. 13. Options for Transformation (Spin off) <ul><li>Needs to earn enough profits to show that it is operationally self-sufficient </li></ul><ul><li>It could also be financially self-sufficient, but no pressure to plow back profits or hit the capital market </li></ul><ul><li>The concerns would be to keep costs under control and revenues on target to demonstrate </li></ul>
  14. 14. Options for Transformation (Spin off) <ul><li>Set up a Local Area Bank </li></ul><ul><ul><li>+ Flexibility to offer diverse products </li></ul></ul><ul><ul><li>+ Cost of funds likely to be lower, so the impact on the poor with be better </li></ul></ul><ul><ul><li>Steep initial capital (Rs. 50 million) </li></ul></ul><ul><ul><li>Difficulty in getting licence </li></ul></ul><ul><ul><li>Limitation in geographic growth (3 contiguous districts) </li></ul></ul>
  15. 15. Implications for regulation <ul><li>Allow MFOs to grow organically </li></ul><ul><ul><li>Allow for expansion in area in case of co-operatives and LABs, subject to minimum performance </li></ul></ul><ul><li>Allow for NGOs to invest in for-profit MFOs such as NBFCs and LABS </li></ul><ul><li>No change in entry norms - ensure only serious players come to the field </li></ul>