Microfinance aims to provide financial services to low-income populations. In India, microfinance reaches over 33% of the population through self-help groups (SHGs) and microfinance institutions (MFIs). SHGs help empower the poor through collective decision making and access to banking. MFIs face challenges including high operating costs due to low-value transactions, and a lack of trained talent and infrastructure. Financial inclusion efforts in India are focusing on new banking licenses, mobile payments, ATM rollout, and using Aadhaar identification to expand access to financial services. Recommendations include incentivizing mainstream banks to enter microfinance and building community-based financial institutions.

1. Microfinance: Shades of Sustainability
Presented By: Group 5
IMIS,Bhubaneswar

2. Micro-Finance-What is it?
R4
R3
R1/R2
Microfinance = provision of
financial services to the poor48%
15%
37%

3. Microfinance: Concept
What it is often
 Micro-Credit
 Group Lending
 Social/Charitable Activity
What it should be
 Range of financial Services
 Group & Individual lending
 Profitable activity

4. Microfinance reach in India
 Microfinance in India through its 2 major channels – SHG Linkage and MFIs
served
 over 33% of the total population in India
 4 out of 5 microfinance clients in India are women
 Micro-credit portfolio of India Microfinance was Rs. 22,000 cr.
 75% are accounted for by SHG Linkage, 20% by large MFIs and 5% by
medium and small MFIs
 SHG Linkage reports over Rs. 3,500 cr. savings, only MFI Bank, KBS Bank
 reports about Rs. 40 cr. savings portfolio
 MFIs operate in 209 out of 331 districts of the country, 28% of the new clients
are from Urban areas.

5. 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

6. Operational Challenges
 High Volume of Financial Transaction but value wise very low
 Majority of the financial transactions are off-site in nature
 Geographic spread of operations and density of customers
 Lack of infrastructure facilities like power, broadband etc
 Unsecured lending and no documented financial history is
available
 Combination of above, lead to high operating cost

7. Human Resources Challenge
 Lack of trained talents
 Lack of motivated talents
 Difficult to appropriately incentivise the operation

8. Channels of Microfinance
SBLP
MFIs

9. Legal Structure & Regulation
 SHG-Bank linkage model is well managed in India by
NABARD
 Reserve Bank of India’s role regarding loan portfolio
 The Micro Finance Institutions (Development and regulation)
Bill, 2011

10. Financial Illiteracy
 Difficulty in creating awareness.
 SHG and JLG members are taught is to do their own
signature.
 Many MFIs think that this is what financial literacy means

11. Inability to generate sufficient funds
 Lack of private equity investment
 No way other than depending upon grants & donations
 Major source is Bank Loans

12. Dropouts and Migration of group members
 Group Lending concept & Past records
 Dropouts & Migration
 Absence of decent past record

13. Transparent Pricing
 Non-transparent pricing by MFIs confines the bargaining power
 Suppressing their actual/effective interest rates
 Interest rates are linked with the loan amount
 interest rate cap may encourage MFIs

14. Microfinance Paradigm
 SHGs – Facilitators for collective decision making by the poor
and for providing doorstep banking.
 Banks – Wholesalers of credit and providers of resources.
 NGOs – Agencies to organize the poor, build their capacities
and facilitate the process of empowering them.

15. The Self Help Group (SHG). . What is it ?
 A homogeneous group of about 15 to 20
 Every member to save a small amount regularly. Pooled
savings kept in a savings bank account in SHG’s name
*transaction costs of both the poor and bank reduced !
 SHG to use pooled thrift to give interest bearing loans to
members – decisions taken in group meetings
*Every member learns prioritization and financial
discipline. Their capacities to think and handle larger
resources improves!
 Depending on the SHG’s maturity, bank gives loan to the SHG
as a multiple of the pooled savings. Bank loan added to the
SHG kitty.
*Adequate & sustained access to financial services!

16. SHG Benefits
 Role in social-economic development & help the
Governmental, semi-governmental and non-governmental
agencies
 SHG movement created an institutional framework
 Participation of women in SHGs improved their access to
credit
 Culture of thrift and disciplined loan repayment
 Winning confidence of mainstream financial sector as credit
worthy institutions
 Interest rates in the informal credit sector decreased

17. Challenges & SHPI
 Low levels of credit absorption, low skill base and low asset base
 Interior and tribal villages have not benefited
 SCs and women headed households have not benefited
 Pressures by govt. to push sterilization and birth control methods
 Non-governmental organizations (NGOs)
 Govt. agencies
 Bank staff
 Farmers' clubs
 Rural volunteers

18. Criterion of APL & BPL by SHPIs
 Non-economic criteria
 No access to pucca housing
 No access to safe drinking water
 No access to sanitary latrines
 Unemployed person in the household
 Eat less than two meals a day
 Regularly borrow from moneylenders
 More than two children in the family
 Family belonging to weaker caste
 Old illiterate members in the family
 Permanently ill members in the family
 Alcoholic and/or drug addicts in the family

19. Design of SHGs
 Self-selection
 Focus on women (85% of SHGs)
 Savings first and credit later
 Group financed only after 6 months
 Intra group appraisal systems and prioritization
 Shorter repayment terms
 Market rates of interest
 Progressive lending
 Maintenance of accounts by SHGs
 Developing a relationship with Banks
 Flexibility in approach

20. SHGs Operation
 2-3 office bearers
 Rotation of office bearers
 Periodical meetings
 Decisions regarding thrifts loans interest rate etc in the
meeting

21. Types of Credit & JLG
 Term loans in multiple of thrifts mobilized-4 times or more -
increasing gradually
 Repayable in 3 or more years
 Cash Credit limit/revolving credit limit of 4 times or more of
group’s expected savings in 3 years
 Informal group comprising 4-10 individuals.
 For the purpose of availing bank loan against mutual guarantee.
 JLG members to engage in similar type of economic activities either
in Farm & Non farm sector.
 Simple management with little or no financial administration within
the group.

22. What is BOP?
 In economics, the bottom of the pyramid is the largest but
poorest socio-economic group.
 Current usage pronounces >4 billion population across the
world living on <$2 per day.

23. 4 Keys to Unlock the BOP Market

24. Opportunities
BOP consumers suffer a poverty
penalty
Lack of access to
competitively and
efficiently-provided
goods and services
Higher prices for some
goods and services (i.e.
manufactured goods,
credit)
Poorer quality goods and
services
At the same time, BOP
consumers
 Are Brand-conscious
 Have well connected
communities(word of
mouth)
 Readily accept advanced
technology
 Collectively have
purchasing power
 Are always trying to
upgrade from their existing
condition

25. Incentivizing Mainstream financial services
 Small loans have been historically seen by banks as a social
obligation rather than a potential business opportunity.
 Over the last three years, some strides have been made to re-
engage mainstream FIs into micro-credit.
 The concept of Local Area Banks (LABs), with a lower start up
equity of Rs 50 million, has not yet been operationalized by the
RBI.
 At the moment there are only two options – either be a co-
operative or be an NBFC (non-banking finance company).

26. Financial Sustainability
Controlling
Costs
• Reducing average cost of funds
• Reducing cost of operations
• Reducing costs of bad debts
Increasing
Volumes
• Offer different loan products to suit the credit requirements of the poor.
Adopt flexible repayment schedule to suit borrower’s cash flows.
• Identify intermediaries of small borrowers such as fertilizer dealers
• Increase customer base in the areas of operation and expand in
neighboring villages
Increasing
Services
• MFI's financial sustainability can be enhanced by broadening the range
of financial services.
• The services are complementary in terms of risk
• Insurance is another important financial service

28. Initiating financial inclusion
 New Banking License
 Mobile Payments
 White Label ATM Rollout
 Use of Aadhaar Number and Direct Benefits Transfer

29. News@ a glance
 Govt. plans to open 7.5 cr. Bank A/Cs by 15 Aug
 Govt. Banks on mobiles to meet inclusion target
 New Kisan Bonds to sidestep KYC norms
 Small Banks are here, but are they dead on arrival
 MFIs,Local Banks,& NBFCs can convert themselves into
small banks

30. Recommendations
 Incentivizing existing mainstream financial service providers
(NABARD, SIDBI, etc) to enter the microfinance sector as a
serious business proposition.
 Encouraging new microfinance institutions (MFIs) with a
supportive policy and regulatory framework.
 Building a strong demand system in the form of community-
based development financial institutions (CDFIs), with the help
of NGOs and others.

31. Happy Learning