MicroFinance

BY Aditya Prasanna

Sai Aditya K V Sandeep

LIVE LIFE KING SIZE

Why have MFIs historically not emphasized savings as much as credit?

• main reasons:1. The movement’s aim is to help the poor, who were not thought of

as having much money to save;2. In most countries, new credit techniques, not new savings

techniques, launched the movement, 3. Most of the institutions involved were NGOs, which were not

legally licensed to collect savings.4. There are two key constraints that technology is

addressing, both equally important: proximity and cost.• For a bank-sponsored savings product to be useful for a poor

family, the service needs to be easily accessible and at low cost. • Poor people will not walk for hours to the nearest branch of a

bank.

Microsavings

• Microsavings • division of microfinance• comprises a deposit account with a nominal value• provided to individuals or families with low levels

of income as a bonus for saving funds for the purpose of future application.

Micro savings•The micro-savings accounts function similarly as a general savings account. Nevertheless, they have been planned for small amounts•Micro savings programs are commonly provided in developing nations as a means to motivate saving for educational activities and other types of investments in the future. •Micro savings is vital for the people who are facing difficulties in a small-scale business or those in unsteady economic condition.

Savings

What problems do credit-based financial institutions commonly face when developing savings services?

Sufficient Staff CommitmentCost recoveryInformation managementSufficient governanceDeveloping trustImplementing adequate internal controlsCulture

Do poor people really save?

Yes. Poor people save because they must: • their income is rarely sufficient to manage crises • to invest when opportunity strikes, or• to pay for large expected expenses, such as school fees, a

wedding, or a home renovation.

• How do they save?• Numerous studies and experience worldwide confirms that

the poor use informal savings devices, even though these are often neither reliable nor secure.

• In Indonesia 10 savers for every 1 borrower

What criteria must be considered when designing deposit services for the poor?

Typically, the poor want their savings to be secure, with low transaction costs, appropriate design, and, if possible, constant in value:

Security.

Low transaction costs - Proximity ,Convenient opening times and minimal paperwork

Appropriate product terms - Individual voluntary deposit products that allow frequent deposits of small, variable amounts and quick access to funds are best. Contractual savings are also useful for planned future lifecycle expenditures such as weddings, funerals, and birth celebrations.

Interest rates - If transaction costs are low, rural savings takes place even with negative real returns – indicating that the poor can be relatively insensitive to interest rates as a priority when evaluating savings options. Nevertheless, demand for savings products does increase as real interest rates rise.

• What are the prerequisites when offering savings services?An institution should have:

• the legal authority to mobilize deposits• effective governance• financially sustainable operations• a sound business plan showing continued viability and indicating where savings can be invested

profitably• adequate capital• a history of rigorous credit management• a system for measuring and monitoring financial performance• sufficient internal controls supported by a culture, policies and human resource management that

prioritize the security of funds• the technical capacity to manage liquidity and interest rate risk• a management information system, whether manual or computerized, that can handle the volume

of anticipated transactions and can provide information that is sufficient, accurate, timely and transparent

• the necessary physical infrastructure including secure premises in safe and convenient locations, a strong room or vault, and sufficient office space with counters.

Latest situation

• Earlier the conventional microcredit institutions function beyond the regional banking rules and regulations and typically are not allowed to receive savings deposits from the microcredit customers.

• Lately efforts towards Government deregulation of MFIs on micro-savings is in the limelight/progress

• Micro-credit & micro-savings under one roof• Limited freedom…..

ASK microfinance

• Established in 1999• For-profit company which aims for ‘Social and

Economic returns’ • Well established in 10 states of India• 1 million Customer base • Annual Growth rate of 3% • Customers = Self-help groups & low income

individuals • 60% of customers constitute women

FACTS contd…

• Lowest default rate of 1% in India• 40% customers have crossed above the

poverty line• Rate of borrowings from banks is 11%-14%• We charge an average interest rate of 26%• Regulations legalizing MFI to extend savings

services… an opportunity

Technology in place

• Use of state of the art Information Systems at ASK

• Presence of more than 1000 retail outlets across 10 states

• Use of biometric devices for credit disbursal and collection of repayment

Target market

• Current customers of micro- credit of ASK (SHGs and Individual)

• The future customers

Product

• Savings based on daily need and special events

• Need – To smoothen irregular cash flows– Future investments

• Variety – Daily saving scheme (Saral)– Special occasion scheme (Jeevan Anand)

Product design

• Minimum deposits – Rs 20/-• Withdrawal – in

denomination of 10s up to maximum amount in this account

• Charges 0%• Interest 0%

Daily Saving scheme

Product design

• Special Occasion Scheme– Include marriages, school fees, festivals etc– Minimum deposits – Rs 50/- fortnightly– Withdrawal – cannot be withdrawn in first 6 months– Charges 0%– Interest

• <1 Yr - 0%• >1 Yr – 6% ( as bank rates on the capital for the term of

savings, till maturity)

How do they avail the services

Promotion & place

• Promotion– Agents– Retail outlets– Word of mouth– Local means of advertising– Use of self-help groups (SHGs)

• Place– Retail outlets– MFI agent locations– kiosks

costs• Training costs

– Agents– Retailers

• Technology costs– Use of biometric devices– Internet connectivity

• Compensations for retailers– Transaction costs

• Interest charges of 6% on special occasion scheme • Transportation costs

How do we use the saved money

• Invest In government securities• For further credit to future loan seekers

ThAnK yOu!!!