Microfinance – Tool for Economic Inclusion

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Somak Ghosh, President - Corporate Finance - Yes Bank Ltd. - India

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Microfinance – Tool for Economic Inclusion

  1. 1. <ul><li>Microfinance – Tool for Economic Inclusion </li></ul>Presentation by Mr Somak Ghosh President – Corporate Finance & Development Banking, YES BANK Ltd for TBLI Europe 2006 (Europe) November 9, 2006
  2. 2. Microfinance – Tool for Economic Inclusion <ul><li>An Inclusive Economy is one that helps people help themselves </li></ul><ul><li>to increase incomes, acquire capital, manage risk and work </li></ul><ul><li>their way out of poverty </li></ul><ul><li>Microfinance, through the provision of safe savings , appropriately </li></ul><ul><li>designed loans for poor and low-income households and micro, small and </li></ul><ul><li>medium enterprises and appropriate insurance and payment services : </li></ul><ul><li>Enables poor to smoothen consumption, manage risk, build assets, develop micro-enterprises, enhance income and earning capacity </li></ul><ul><li>Helps poor to actively participate in the economy and benefit from development opportunities </li></ul><ul><li>Empowers women </li></ul><ul><li>Contributes to overall development of financial system through integration of financial markets </li></ul>
  3. 3. Microfinance & Millennium Development Goals (MDGs) <ul><li>Central theme of MDGs is poverty reduction along with an emphasis on human development indicators especially those relating to women and children </li></ul><ul><li>Microfinance increasingly looked upon as an effective tool to achieve MDGs </li></ul><ul><li>Financial sector, leveraging microfinance, can play a key role in reinforcing many objectives of MDGs involving savings, livelihoods and economic infrastructure apart from providing an efficient payments system </li></ul><ul><ul><li>Poor participating in microfinance programmes are able to improve their well-being at both individual and household level </li></ul></ul><ul><ul><li>Poor households with access to financial services not only send their children to school but also allow them to stay in school longer </li></ul></ul><ul><ul><li>Access to financial services and resultant transfer of financial resources to women, over time, lead to women becoming more confident, assertive and better able to confront systemic gender inequities </li></ul></ul>Impact of Microfinance
  4. 4. Banking with the poor is challenging … … and conventional banking is not poised to meet these demands…hence the need for Microfinance <ul><li>Doorstep banking </li></ul><ul><li>Flexibility in timings </li></ul><ul><li>Timely availability of services </li></ul><ul><li>Low value and high volume transactions </li></ul><ul><li>Require simple processes with minimum documentation </li></ul>Nature of Demand <ul><li>High cost of service delivery </li></ul><ul><li>Timings and procedures: Rigid and inflexible </li></ul><ul><li>High transaction cost for the customers </li></ul><ul><li>Expansion of branch network expensive and time taking </li></ul>Nature of Supply
  5. 5. Microfinance – Origins Evolution of Microfinance – 1900s <ul><li>Concept of Microfinance is not new; savings and credit groups have operated for centuries </li></ul><ul><ul><li>Susus in Ghana, Chit funds in India, Tandas in Mexico, Arisan in Indonesia, Cheetu in Sri Lanka, Tontines in West Africa, Pasanaku in Bolivia </li></ul></ul><ul><li>1700s - writer Jonathan Swift started micro-credit organisations in Ireland lending to rural poor </li></ul><ul><li>1800s - more formal savings and credit institutions known as People’s Banks and Credit Unions began to emerge in Europe </li></ul>Subsidised Credit <ul><li>Focused on agricultural credit through state-owned development finance institutions </li></ul><ul><li>Rural development banks suffered massive erosion of capital base due to subsidised lending rates & poor repayment discipline </li></ul>Experimental Programmes <ul><li>Bangladesh, Brazil and few other countries </li></ul><ul><li>Based on solidarity group lending primarily women </li></ul><ul><li>Focus on credit for income generation activities </li></ul>Commercial Approach <ul><li>High repayment rate and cost-recovery interest rates </li></ul><ul><li>Demonstrated that poor were willing and able to pay interest rates that allowed MFIs to recover costs </li></ul>Broadening of Offerings <ul><li>Micro-credit replaced by Microfinance to include not only credit but also savings and other financial services such as insurance and money transfers </li></ul>
  6. 6. Entry of Experts <ul><li>Industry has seen a transition from philanthropy to business </li></ul><ul><li>MFIs continue to focus on community development objectives, albeit in a commercially viable and financially sustainable manner that allows them to: </li></ul><ul><ul><li>Increase operational efficiencies </li></ul></ul><ul><ul><li>Access a wider pool of capital </li></ul></ul><ul><ul><li>Increase outreach </li></ul></ul><ul><li>Institutions like ACCION, ProCredit, FINCA, Women’s World Banking and Grameen all incorporate for-profit objectives in their operations across the world </li></ul><ul><ul><li>Accion – an early pioneer founded in 1970s; has helped found many viable institutions such as Bancosol - the world’s first commercial bank dedicated to microfinance </li></ul></ul><ul><ul><li>Self Employed Women’s Association (SEWA) - registered as a trade union in 1972 in Gujarat (India), found ‘SEWA BANK’ in 1973 to help members access financial services </li></ul></ul><ul><ul><li>Grameen Bank – in 1976 Prof. Muhammad Yunus designed experimental credit programmes aimed at poor; Grameen Bank founded in 1983 through donor support and now serves more than 4 million borrowers </li></ul></ul>
  7. 7. A Bankable Business - Downscaling <ul><li>The profitability of the microfinance business has captured the attention of some of the world’s largest and wealthiest commercial banks and insurers such as Citigroup, HSBC, ING, ABN Amro, Commerzbank and Deutsche Bank </li></ul><ul><ul><li>Citigroup – established relationships with MFIs in 20 countries; through its subsidiary Banamex (Mexico) provides life-insurance sold by MFIs </li></ul></ul><ul><ul><li>Deutsche Bank – recently raised $ 75 m investment fund and syndicated a large loan on behalf of ProCredit (Germany) </li></ul></ul><ul><ul><li>ABN Amro – owns a microfinance bank, Real Microcrédito in Brazil; provides credit to 5 MFIs in India </li></ul></ul><ul><ul><li>ICICI – has close to 1.5 million customers that qualify as deeply poor and an associated loan portfolio of $ 265 m </li></ul></ul>Source: The Economist, November 3, 2005
  8. 8. Decision Tree for Commercial Banks in Microfinance Successful Downscaling Models Source: “Commercial Banks and Microfinance,” CGAP, 2005
  9. 9. Building a Sustainable Microfinance Industry – Role of Banks <ul><li>A sustainable microfinance industry </li></ul><ul><li>requires services for the poor to be </li></ul><ul><li>integrated at all three levels of the </li></ul><ul><li>financial system: </li></ul><ul><li>Micro – provision of robust retail institutions that provide services directly to clients </li></ul><ul><li>Meso – provision of supporting infrastructure including quality auditors, rating agencies, professional networks, trade associations, credit bureaux, transfer and payment systems and information technology to reduce transaction costs, increase outreach, build capacity and foster transparency among retail institutions </li></ul><ul><li>Macro – enabling a conducive and stable macroeconomic and policy environment is necessary to underpin a pro-poor financial system. </li></ul>CGAP (2004) “ Building Inclusive Financial Systems – Donor Guidelines on Good Practice in Microfinance ,” December 2004 <ul><li>Mainstreaming microfinance into the </li></ul><ul><li>formal financial system requires Banks </li></ul><ul><li>to: </li></ul><ul><li>Have broader strategy commitment from Board and senior management </li></ul><ul><li>View financial inclusion as a business strategy for growth </li></ul><ul><li>Understand the microfinance market and develop products suited to the clientele </li></ul><ul><li>Develop infrastructure keeping in mind convenience to clients </li></ul><ul><li>Develop data sets to evolve risk assessment models for proper rating and pricing </li></ul><ul><li>Adapt systems and procedures to microfinance operations </li></ul><ul><li>Use innovative products, services and delivery mechanisms aided by information technology to help speed up transaction time and reduce costs </li></ul><ul><li>Adopt appropriate staff training methodologies </li></ul>
  10. 10. <ul><li>Government Policies & Efforts </li></ul><ul><ul><li>Development policy direction since Independence </li></ul></ul><ul><ul><ul><li>find ways and means to finance poor, reduce burden upon them </li></ul></ul></ul><ul><ul><li>Gap in policy and quality of efforts </li></ul></ul><ul><ul><ul><li>defects in policy design, infirmities in implementation, popular decisions –loan waivers </li></ul></ul></ul><ul><li>Consequences </li></ul><ul><ul><li>Banking system not able to internalize lending to poor as a viable activity seen as social obligation </li></ul></ul><ul><ul><li>Poor became beneficiaries and not borrowers for banks, mindsets hardened as poor ‘not bankable’, lending to poor not commercially viable </li></ul></ul><ul><li>Late 80s - Microfinance started in rural, both govt. and NGOs programmes in late 80s </li></ul><ul><ul><li>Took a decade for concept of MF to become credible </li></ul></ul>Microfinance Case Study – India
  11. 11. <ul><li>1992 – NABARD conducts pilot project – refinancing SHG programmes </li></ul><ul><li>1996 – Encouraged by the above pilot project, the govt. appoints the working group – made important recommendations including inclusion in the priority sector list. </li></ul><ul><li>1999 – A task force on NBFCs made recommendations on microfinance </li></ul><ul><li>2000 – The RBI announces broad guidelines to banks on microfinance in its credit & monetary policy </li></ul><ul><li>2002 – Informal Group set up to suggest to the govt. on microfinance </li></ul><ul><li>2005 – Khan Report (RBI) on policy options, development and regulatory issues </li></ul>Microfinance in India – Milestones <ul><li>Recent Developments </li></ul><ul><li>Microfinance Development & Equity Fund increased from Rs. 100 cr to Rs. 200 cr. </li></ul><ul><li>ECBs upto USD 5 million allowed for MFIs (meeting certain criteria) </li></ul><ul><li>Exim Bank ties up with a number of NGO/MFIs for funding/promoting cluster projects </li></ul><ul><li>New equity funds for microfinance industry – Lok Capital, Bellwether, & Aavishkar fund </li></ul><ul><li>RBI guidelines on MFIs as banking correspondents </li></ul>
  12. 12. Microfinance in India - Opportunity <ul><li>MF market segment 130 mn </li></ul><ul><li>households (> 60% of India) </li></ul><ul><li>Facts </li></ul><ul><li>Low penetration of organized financial services sector </li></ul><ul><li>Financial services traditionally availed from expensive unorganized sector need to shift to organized financial sector </li></ul><ul><li>Opportunities </li></ul><ul><li>MF segment performing better than commercial banking peers </li></ul><ul><li>Discounting Rates ~ 15 – 24% </li></ul><ul><li>Repayment Rates 96 – 100% </li></ul><ul><li>Top rung MFI’s in India posting a ROAA in range of 1% to 1.5% </li></ul><ul><li>Low competitive bars to entry and sizeable mind space </li></ul><ul><li>Savings / Equity / Insurance are still largely untapped in these markets </li></ul>Source: Census 2001; BCG Analysis Xxx (xx) Annual household income #households Household income stratification >600k (6.3 Mn) 240k-400k (8.1Mn) 120k-240 (18.8Mn) 80k-120k (22.4Mn) 40k-80k (58.6Mn) <40k (89Mn) Organized Financial Services Total no. of households – 203 mn
  13. 13. Microfinance in India – Nature of Market Cooperatives/MACs/federations Multi-service NGOs & SHPIs ( NABARD’s SHG Bank linkage) <ul><li>Following various models: </li></ul><ul><li>(i) Group delivery models </li></ul><ul><ul><li>SHGs </li></ul></ul><ul><ul><li>JLGs </li></ul></ul><ul><li>(ii) Individual banking </li></ul><ul><li>(iii) Variations of above </li></ul><ul><li>Registered as: </li></ul><ul><li>Societies </li></ul><ul><li>Trusts </li></ul><ul><li>Section 25, not for profits </li></ul><ul><li>NBFCs </li></ul><ul><li>Others </li></ul>Typical Microfinance Institutions (MFIs)
  14. 14. Why Microfinance for YES BANK <ul><li>Vision to Champion RESPONSIBLE BANKING in India </li></ul><ul><li>Cognizant of its responsibility as a Public Trust Institution to further ECONOMIC INCLUSION </li></ul><ul><li>SUSTAINABILITY in DNA of the Bank </li></ul><ul><ul><li>Instituted specialised division, Development & Knowledge Banking, to consummate the Bank's core strategy within the sustainability space : </li></ul></ul><ul><ul><ul><li>Food & Agriculture Strategic Advisory and Research (FASAR) </li></ul></ul></ul><ul><ul><ul><li>Strategic Government Business Initiatives </li></ul></ul></ul><ul><ul><ul><li>Agri, Micro & Rural Banking (AM&RB) </li></ul></ul></ul><ul><ul><ul><li>Responsible Banking (incorporating our CSR and Sustainability Initiatives) </li></ul></ul></ul><ul><li>Lack of organised sector players with long term vision and a dedicated involvement </li></ul><ul><ul><li>Gap for institutionally sponsored financial services providers focused on underprivileged population on a pan Indian basis, with both commercial orientation & socio-development perspective </li></ul></ul>YES BANK envisions to be a recognised leader in MICROFINANCE in a 5 year timeframe
  15. 15. YES BANK’s vision for Microfinance Providing entire gamut of financial services to the Bottom Of the Pyramid Assisting poverty alleviation Micro-enterprise Development Services De-centralized Technology innovations Direct Credit Programs Savings / Insurance and other financial services Supporting entrepreneurship Promoting micro-equity funding models Enabling socio-economic, environmental, grassroots development Fostering financial inclusivity, empowerment Augmenting sustainable livelihoods Holistic Financial Solutions to shrink the Bottom of the Pyramid
  16. 16. <ul><li>Thank You </li></ul>

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