Micro Finance Annie

8/2/2019 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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What are the words that come to your mindwhen you hear the word microfinance?


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R4

R3

R1 /R2

Microfinance =

provision of financialservices to the poor48%

15%

37%


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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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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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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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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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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 of well-trained staff: ICICI Bankresponse

Initiated partnerships with training institutions(Indian Grameen Services, Care India)

Establish a Financial Services LearningSchool in collaboration with MicroSave India

Provide high level training in banking andfinance to MFI practitioners in collaboration

with IFMR (Institute for FinancialManagement Research)


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Technology

Role of technology in microfinance:

MIS

Cash handling Data capture and subsequent management


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Technology: ICICI Bank response

Creation of rural connectivity in partnershipwith telecom companies and internet service

providers Assistance to emerging MFIs to adopt

scalable MIS solutions

Support to research and development on

technological devices that can reducetransaction costs

Low cost ATMs, low-cost computing devices,mobile and internet-based transaction platforms


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Scaling up: creation of new MFIs

Need 200 MFIs to cover all India

ICICI Bank (SIG): support to entrepreneurs to startMFIs

KAS Foundation, Orissa

Inputs are needed:

Organizational and staff incentive structures

Finance related issues (source of funds, capital structure)

Legal issues: regulations etc.

Business plan related issues: scale, expansion strategy etc.

Corporate partnerships: attractive track to buildaccess to microfinance


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Support new MFIs: The Venture Capitalistmodel

VCs specifically focused on the micro-finance space:Lok Capital, Aavishkar and Bellwether.

Bellwether

three equity commitments for start-ups

increased the size of fund from 10mn USD to 25mn USD.

ICICI Bank solution:

Each MFI will need to reach a minimal CRISIL or an MCRIL

operational sustainability rating Then the entrepreneur buys out the stake of the VC and

ICICI Bank gives an option to the entrepreneur to take along-term debt to finance this buy out.


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Scaling-up: what form of support isneeded?

Interest rates should reflect the costs oftransactions/probability of default and be

sustainable Focus on diminishing the cost of these

transactions and expand access

Equity support, Removecaps and floors, create facilitative infrastructure

to reduce transaction costs


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Alternate channels

Agent model Model of LIC

Challenge: control fraud

Internet connectivity BSNL: if wireless system installed ate the existing

connected rural exchanges: 80-85% of villagescould be connected

Variety of devices that can work with internetkiosks: biometric low-cost ATMs

Makes controlling fraud easier


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Internet Kiosks

Connectivity

STD/PCO:Enabling voicecommunication

Printer & OtherAccessories :

Enabling job work

Kiosk Operator:EntrepreneurProvides commercialservices

Internet Kiosk

MultimediaPC with Power

backup


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Internet kiosks

ITC, nLogue, Drishtee: more than 6000internet kiosks using Wireless in Local Loop,

VSAT terminals ICICI partnered with some of these

organizations

Finance individual entrepreneurs to purchase

operating license and equipment Break even within 1st year

Suite of financial services

2000 kiosks


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Internet kiosks: remaining gaps

Providing constant connectivity expensive

Finding motivated entrepreneurs difficult

Break even has been delayed for variousreasons (required back-end systems toservice clients difficult tp find etc.)


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ICICI Bank strategy: summary

ConventionalRural

Banking

Branchbased

Manpower

intensive

Product

drivenSingle

product

Our strategyHybrid

channels

Technology

intensive

Customer

drivenMultipleproducts


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Maximize impact of microfinance:challenges


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Maximize impact

VulnerabilityNeed for

More than credit

Differences amongcustomers

Need for

customizedproducts

Understand what programmes work the bestand for whom


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Range of Microfinancial services:

Individual lending

Information problem

No unique ID No credit info sharing

Need technology!

Insurance

Adverse selection, moral hazard, fraud


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Health insurance

Reimbursement model

Cashless model How to identify illness?

How to avoid fraud?

Livestock insurance

Recognize cause of death

Identify animal (role of technology)


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Weather insurance Index-based: index created by assigning weights

to critical time periods

Past weather data mapped to this index to arriveat normal treshhold index

If deviation: compensation

Commodity price derivatives

NCDEX: offers price discovery services: offerfarmers instruments to hedge pre and post harvestrisks

Makes using commodity as collateral possible


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CMFR:The Centre for Micro Finance Research


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Objectives

Fill gaps in understandingof microfinance:

Extent and channels of impact

What programme designs work and what do not? What programme variants can increase impact?

Fill gaps in practiceof microfinance:

limitation to micro-credit, lack of financialcapacity


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Mission

The Centre for Micro Finance Research will aim tohelp improve the life of the poor by:

Systematically researching the links between access

to financial services and the participation of the poorin the larger economy

Participating in maximizing access to financialservices and its impact for poor through: Research on micro finance and livelihood financing

Research-based policy advocacy

High level training for practitioners and institutions

Strategy building for Micro Finance Institutions


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Partnerships

CMFR

Banks/InsuranceCompanies

Internationalorganizations

MFIs/NGOs

Universities

Regulators/policymakers


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CMFR: Research Areas


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Impact of Microfinance

Access toFinancial services

Impact?

Advocacy based on rigorous results

?


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Constraints to Productivity

ImpactAccess to

Financial services

Build relevant partnershipsProvide useful products through credit


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Economics of Micro-Enterprise

Scale, Returns, Constraints of micro-enterprise

Market linkages Documentation of best practices

Help increase productivity of micro-enterprise


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Experimentation on Product Design

selection monitoring Enforcement

Individual/groupliabilitySelf/MFI selectionGuarantorsCollateralsInterest rate

RepaymentscheduleCommunicationstrategiesLoan sizeInterest rate

Design the most cost-effective products

Within groupmonitoringStaff supervision


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Behavior and Psychology ofBorrowers

How do households face shocks and risk?

Do households save and how?

What drives savings and credit behavior?

Why do people default?

Why dont households adopt the most profitable

activities?

Design the most effective communication strategies


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MFI Policies: Impact

How do MFIs policies affect loans andrepayment behavior of clients?

Staff incentives

Combination of different products

Compulsory savings or insurance

Understand better impact of policies over time


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Cost and profitability of SHGs/MFIs

BankTransaction

?Micro-loan9% 25%

Return?

How to reduce transaction costs?Compare costs of SHG-Bank linkage and MFI modelShow investors risk return performance of microloans


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Research: other initiatives


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Research: Panel Databases

Construction of a panel database: repeatedobservations of same households

Study vulnerability, consumption patterns overtime

Have a panel database for on-going research

Construction of a cross-sectional survey Document access to financial services over time


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Research: weekly seminar series

Foregone seminars Prof Ashok Jhunjhunwala (IIT Chennai),

Prof Vaidyanathan (Madras Institute of DevelopmentStudies)

Prof Sendhil Mullainathan, Harvard

GN Bajpai, ex-Chairman of SEBI

Greg Fisher, MIT

..

Forthcoming seminars: Suresh Sundaresan, Columbia

Dr Narendra Jadhav, RBI

..


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MFI Strategy Unit at CMFR


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Strategy Building

MFIsSectoralExperts

Pilots

Scale-up LFI


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Training

Building blocks of Banking and FinanceTraining Programs

Meet training needs of the sector: Incollaboration with MicroSave India

Development of national curriculum

Collaboration with 6 Regional TrainingInstitutes


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THANK YOU!

Micro Finance Annie

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