10. Predominant model of microfinance in India: SHG-Bank linkage model SHG NGO Loan to group No liability 6 months savings commission Bank Repayment Branches assess credibility of SHGs and monitor repayment process Group formation and linkage Efficient use of capital Y Incentive alignment N Grants based
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22. Comparison between SHG-Bank Linkage & MFI model Sources : Rough estimate derived from a presentation at a Microfinance Stakeholder Consultation Meeting in Delhi in January organized by the World Bank. Major sources are NABARD Annual Report & Data collected by ICICI Bank. Assumption : MFI disburse 1.5 time of Yr-end O/s loans – Ratio from M-CRIL data India annual Microfinance Disbursement Share in microfinance disbursement by model Rs billion Year % share in Annual Disbursement Year billion $ 0 5 10 15 20 25 30 35 40 45 50 1996 1999 2002 2005 0 0.2 0.4 0.6 0.8 1 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 2001 2002 2003 2004 2005 MFIs SHG
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33. What low income clients need? Protection against Health shocks Need to build or improve homes Lifecycle needs Send money to their families when migrate The needs of poor people are varied.. Protect against sudden death Protection against weather shocks Protection against loss of assets
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45. MFIs’ interest rates in the world Indian MFIs are the most efficient in the world (M-Cril)
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54. 4 Research areas to maximize micro finance impact Micro finance plus Finance and Organizational issues Policy Impact and product design 1 2 4 3 Maximize impact On client
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Editor's Notes
Against an estimate demand of Rs. 20,000 crore to Rs. 50,000 crore for credit, the supply from financial sources was less than Rs. 2500 crores Traditionally, it has been believed that the poor are not bankable. The main reasons relate to Lack of information on the income flows and expenditure patterns of households (which makes it difficult to assess whether the individual will be able to pay for the services. E.g. in the urban retail client some indicators used are salary slip, income tax return, ownership of assets, number of family members, etc.) The costs of reaching services is very large. E.g. SHARE one of the largest micro finance organisations in the county employs over 3000 people to service a portfolio of Rs. 2000 million. Banks typically handle much larger amounts per individual (ICICI Bank has a 5 person micro-finance team that handles Rs. 4000 million) The absence of facilitative environment such as absence of well functioning commodity markets, non existence of credit bureaus, etc. act as a hindrance. Indian regulations do not permit MFIs to collect savings. However, the FM’s in his budget speech has allowed Banking Correspondents.
General definition It is basically debt capital that gives the lender rights to convert into ownership or equity interest if loan is not paid up on time in full. Such type of financing is quickly available with little or no collateral. However, interest rates for these loans are charged at the rate of 20-30% range. The borrower can treat this type of financing as equity on the company's balance sheet. Mezzanine equity and the partnership model In the ICICI partnership model – the financing structure uniquely combines debt and mezzanine equity. The MFI estimates the loan requirement of client base and makes a fund estimate. Bank assesses a historical loss rate to arrive at pricing for the loan and an estimate of quantum of FLDG to be provided by the NGO/MFI. It keeps the pricing of the loan portfolio close to AAA rates and reflects riskiness in the quantum of FLDG. FLDG assumes the character of mezzanine equity. MFI is provided an OD limit equivalent to the amount of the FLDG, which is drawn in the event of default up to the specified limit.
No lack of back up servicer cost included in computation of FLDG
Official NSSO statistics quote very low incidence of migration – 17% or less because they focus on only permanent migration but seasonal migration is an important and highly prevalent livelihood strategy - Quoted from Adhikar’s annual reports on “Shramik Sanjog” program – remittance services. This is only from Surat and Gandhidham; in some ways a pilot phase
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