Micro Finance Annie

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Transcript of Micro Finance Annie

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    Micro Finance in Indiaoverview, challenges, and the role of

    technology

    By Annie Duflo

    Centre for Micro Finance ResearchOctober 28, 2005

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    Outline of presentation

    What is microfinance?

    Providing financial services to the poor:

    challenges Providing financial services to the poor in

    India: Overview

    Microfinance: Challenges ahead and potentialsolutions/initiatives

    The Centre for Micro Finance Research

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    Microfinance: what is it?

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    Microfinance: what is it?

    What are the words that come to your mindwhen you hear the word microfinance?

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    Microfinance: what is it?

    R4

    R3

    R1 /R2

    Microfinance =

    provision of financialservices to the poor48%

    15%

    37%

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    Microfinance: what is it?

    Micro-credit Group lending

    Social/charitableactivity

    Range of financialservices

    Group and individuallending

    Profitable activity

    What it often is What it really should be

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    Providing financial services to the poor:challenges

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    Providing financial services to the poor:

    challenges Risk management challenges due

    to information asymmetryproblems

    Accessibility (geographicaccessibility and easiness to dealwith)

    No collateral, Low value and cash

    intensive nature of the business

    Staff training and motivation

    High transaction

    costs

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    Information asymmetry

    Decision to take loan Loan usage loan repayment

    Adverseselection

    Moral hazard

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    Adverse selection: incomplete information

    problem (before the loan)Dont know

    Clients typeInterest rate

    reflects proba of default

    Safer clients drop outNeed to increase interest

    rate

    Providing credit canbecome

    impossible

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    Moral hazard: hidden action problem

    (after loan)

    Can not observe what client is doing

    Bad loan usage

    Strategic unwillingness

    To repay

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    Staff

    Lack of trained staff

    Lack of motivated staff

    Difficult to incentives staff

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    Delivering financial services to the poor inIndia: an overview

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    Providing financial services to the poor:

    occupied IndiaDeccan, late 19th Century:peasant riots on account of coercive

    alienation of land by moneylenders.

    Organization of cooperative societiesas alternative institutions for providingcrdit by british government

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    Providing financial services to the poor:

    Independent India:Credit was viewed as essential part of fight

    against poverty which led to following

    measures: Expansion of the institutional structure

    Directed lending to disadvantaged borrowersand sectors

    Interest rates supported by subsidies

    Institutional vehicles: cooperatives,commercial banks and Regional Rural Banks

    [RRBs].

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    Providing financial services to the poor:

    Timeline 1950 & 1969: emphasis on the promoting of

    cooperatives.

    1969: nationalization of the major commercial banks:beginning of commercial bank branch expansion inthe rural and semi-urban areas.

    1976: Regional Rural Banks (RRB), low costinstitutions mandated to reach the poorest in credit-

    deficient areas

    During this period, intervention of the RBI (ReserveBank of India) was essential: special creditprogrammes for channeling subsidized credit to the

    rural sector (concept of priority sector)

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    Financial reforms for RFIs

    Enhance the areas of commercial fredon

    Increase their outreach to the poor

    Stimulate additional flows to the sector. Liberalising interest rates for cooperatives and RRBs,

    Relaxing controls on where, for what purpose and forwhom RFIs could lend, reworking the sub-heads

    under the priority sector, Introducing prudential norms

    Restructuring and recapitalising of RRBs.

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    Results

    Access in terms of rural branches increasedfrom 1,833 in 1969 to around 32,538 atpresent: 49% of all scheduled commercial

    bank branches are rural The population per rural branch declined from

    2,01,854 in 1969 to around 16,000 at present. The proportion of borrowings of rural

    households from institutional sourcesincreased from 7 per cent in 1951 to morethan 60 per cent at present.

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    Results (contd)

    31% (131.1 million) of the total depositaccounts are in rural India

    43%(22.4 million) of total creditaccounts are in rural India

    Positive impact on the poor (Rohini

    Pande/Burgess paper)

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    HoweverSuccess was not as high as

    hoped Defects in policy design,

    Infirmities in implementation

    Inability of the government of the day to desist fromresorting to measures such as loan waivers.

    High defaults

    The banking system - was not able to internalise

    lending to the poor as a viable activity but only as asocial obligation

    More and more difficult for commercial bankers toaccept that lending to the poor could be a viableactivity.

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    Micro Finance: apparition

    The financial sector reforms motivated policyplanners to search for products and strategies fordelivering financial services to the poormicroFinance - in a sustainable manner consistentwith high repayment rates.

    NABARD: empirical observation that had beencatalysed by NGOs that poors gather in informalgroups

    Create a formal interface of these informalarrangements of the poor with the banking system.

    Bank-SHG Linkage Programme. Recent emergence of MFIs: professionally run

    institutions specialiazed in delivering credit with lowcost staff and local knowledge

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    Despite all these effortslarge gaps

    remain Against rural population of 741.0 million, 500 million

    people un-served

    Population per branch: 22,793

    Penetration of savings accounts is below 18% As against 104% in urban and semi-urban areas

    Number of villages per branch: 19

    High dependence on informal sources

    36% of rural credit from informal sources Dependence even higher for lower income households: 78%

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    Microfinance ahead: challenges

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    Gaps in demand and supply

    Demand: Rs. 450 billion/y

    60% in Southto cover all parts of India

    Less than 2 million

    Households reached500 million un-served poor

    Disbursed: 39 billion

    eed employment opportunities

    Need protection

    against all risks

    Market constraints

    Insurance under-delivered

    Scaling up

    Increaseimpact

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    Limitation of the predominant model

    Bank SHG

    NGO

    Loan at9%

    Noliability

    Groupformation/linkage

    SHG-Bank linkage model

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    Financial IntermediationModel

    MFI JLG GroupBank

    Loanat a9%

    Loan at20%

    Scaling up existing MFIs: challenges

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    Limitations to growth of MFIs:

    Lack of adequate quantities of risk capital

    Lack of long-term finance to pay for creation

    of the necessary infrastructure and pre-operative expense

    Lack of well trained staff in adequatenumbers at all levels

    technology

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    Lack of adequate capital: the ICICI Bank

    responseSearched for a model which:

    Separates risk of MFI from risk inherent in the

    mf portfolio Provides a mechanisms to banks to

    continuously incentivise partners

    Inability of MFIs to provide risk capital in largequantum, which limited advances from banks

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    The ICICI Bank Partnership Model

    MFI JLG GroupBank

    Servicingfees of

    11%

    Loan at9%

    Interest

    charged:20%

    FLDG of10%

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    Long-term finance: the ICICI bank

    response There is an underlying business model in the

    MFIs expansion: no reason why it cannot be

    funded by commercial debt

    ICICI Bank is offereing to its MFI partnerslong-term finance of a tenure of 3-5 years

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    Lack o