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MicrofinanceMeaning &

Scope

Presentation By-

V.N.Kulkarni

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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 potential solutions/initiatives

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Microfinance: what is it?

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

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What is micro finance…

The provision of thrift, credit & other financial services of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards.

Micro credit

Insurance and Investments

Savings

Transfer Payment

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• Indian banking system has achieved a formidable outreach in rural areas– 49% (32,538) of all scheduled commercial bank

branches are rural – 31% (131.1 million) of the total deposit accounts are in

rural India– 43% (22.4 million) of total credit accounts are in rural

India– Number of people per branch has reduced from

64,000 in June 1969 to 15,000 in June 1997 (all India average)

Source: BSR, March 31, 2001, Table 1.3, RBIDeolalkar, G.H., “The Indian Banking Sector: On the road to progress”, A Study of Financial Markets

Rural banking in India: progress made

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But large gaps persist in reaching out to the poor…

• For the rural population of 741.0 million– 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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• Credit on reasonable terms to the poor can bring about a significant reduction in poverty.

• It is with this hypothesis, micro credit assumes significance in the Indian context.

11/01/16 8ET25-04-08

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•Doorstep banking

•Flexibility in timings

•Timely availability of services

•Low value and high volume transactions

•Require simple processes with minimum documentation

•High cost of service delivery

•Timings and procedures: Rigid and inflexible

•High transaction cost for the customers

•Expansion of branch network expensive and time taking

Customer needsCustomer needs Present statusPresent status

Banking with the poor is challenging…

…and conventional banking may not be poised to meet these demands

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Profitable business opportunities exist…

…setting the path for scale up

Market size and potential of low income clients

Market size and potential of low income clients

Low delinquency in pilot phase

Low delinquency in pilot phase

Creating bigger customers for future

Creating bigger customers for future

Stepping stone to the entire rural market

Stepping stone to the entire rural market

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How help can be extended?

• Helping poor people can be in three ways.

• Direct lending by Banks

• Lending through NGOs

• Lending through MFIs

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Micro Finance Institution

Let us have a lookHow a MFI functions

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SKS- delivers microfinance through a Grameen (village) banking

• Village selection• SKS staff members conduct a comprehensive

survey• Projection Meeting• With the entire village to introduce SKS, its

mission, methodology and services.• Mini-Projection Meeting• to further explain SKS to interested parties

and appeal directly to those who may not have attended the meeting because of religious, class, caste or gender barriers.

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success story of SKS MFI

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Methodology

• Group Formation.

• Compulsory Group Training (CGT). CGT is a five day program consisting of hour-long sessions designed to educate clients on the processes & procedures

• Group Recognition Test

• Financial Transactions

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Formation of SHG(Self Help Groups)

• Group consisting of 10-15 members are formed.

• Generally women come together• They decide min contribution of amount

p.m towards corpus.• Internal lending starts at ROI decided

by group• Group opens account with a Bank.

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SHG functioning

• The account with the bank is operated jointly by two/three elected members

• After successful operation of the account the gives loan to the group generally three times of funds the group holds as loan for business expansion of its members.

• Loan obtained through Bank is utilized for internal lending.

• Proper books of accounts are maintained and explained to members in monthly meetings.

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Advantages of Microfinance• Continued access to funding to low income • clients• Fast and easy procedure for the poor to get the • loan• Accompanying non financial services for the poor• Helps in women empowerment• Promotes entrepreneurship• Direct contact with clients, which gives less • chances of default.• It helps in the alleviating the poverty• Help in the creation of demand as a whole• Helps in the development of the country• Contribute in the prosperity of the nation• Product tailored to clients needs

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And meeting finance needs of urban India also…

India’s urban population is 285 million

27.8% of India’s population is in urban areas

11% of world’s urban population is in India

3 of the 10 largest cities in the world are located in India

35 cities have population of more than one million each

Urban poor increased from 60 to 76 mn during 1974-94

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Providing financial services to the poor: challenges

• Risk management challenges due to information asymmetry problems

• Accessibility (geographic accessibility and easiness to deal with)

• No collateral, Low value and cash intensive nature of the business

• Staff training and motivation

High transaction costs

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Comparative Analysis of Micro-finance Services offered to the poor

Parameter Money Lender CommercialBanks

Govt. S ponsoredPrograms

Financialproducts of MFIs

Ease of Access High Low Low HighTransaction cost

of AccessLow Very High Very High Low – Medium

Lead time forLoans

Very Short Extremely Long Extremely long Short

Repayment Terms Fixed and Rigid Fixed and Easy Fixed and Easy Flexib leInterest Rates Exorbitantly

HighLow and very

AffordableLow, Affordableand Subsidised

Reasonable andAffordable

Incentives None None NoneRepeat and larger

loans, InterestRebates

Repeat Borrowing Possible Possible but notlikely

Possible but notlikely

Stream of credit isassured

Loan AccessProcedures

Very Quick Extremely TimeConsuming and

complicated

Extremely TimeConsuming and

complicatedSimple and Qu ick

Loan ApplicationProcedures

Informal butexploitative

Exhaustive andComplex

Exhaustive andComplex

Simple andInformal

Collateral andDemand

Promissory Note

Mandatory Required buthypothecation ofasset may suffice

Not requiredalthough a charge

on the assetbecomesautomatic

Not required –social collateral isused for physical

collateral

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Why do banks fail to lend to the poor?

• Banks do asset based lending – Poor people have no or low asset base

• Banks do project based lending– Poor people do not have a project. – Multiple activities, none of them individually

bankable.• Banks need documents and titles

– the poor don’t have these often• High transaction cost and high perceived risk

– Cost of underwriting and monitoring high– The poor are seen to suffer from household level

risks as well as seen risky as a class, due to political patronage

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New Paradigm of LendingProf Mohammad Yunus of Grameen Bank,

Bangladesh, has shown that the poor are bankable if,

• Banking is made easy• Transaction cost is reduced• Physical collateral is substituted with social• Person is financed, not a project• Peers are involved in underwriting• Borrower repays small sum, frequently

• Support services are provided with credit

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This is called Micro-finance

• Microfinance is sustainable provision of – credit,

– savings, – insurance, and – other financial services (e.g. remittances,

pensions)

• with a focus on poor households, who find it difficult to access banks/ financial institutions.

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Self-Employed Women’s Association (SEWA)

Ahmedabad• SEWA is a group of inter-related institutions.• SEWA, the mother institution is a registered

trade union, whose members work informally in construction, transport, tea-shops, hawking, rag-picking, garment making etc.

• SEWA Bank is an urban cooperative bank providing savings, credit and insurance services.

• Over 100 occupational cooperatives provide training, technical assistance and collective buying and selling

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India – Microfinance Overview

• 24.25 million poor families access microfinance

• Over 22 lakh Self Help Groups (SHGs)

• Cumulative assistance so far Rs. 11,400crore

• Over 35,000 branches of 560 banks (commercial, regional rural and cooperative)

• Over 3,000 partners working in 563 districts

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Why would the money come back?

• Group lending- each individual responsible for recovery; future loans linked to group’s credit history

• Recovery of loans through peer pressure/social collateral

• Other members to make good the losses

• Regular repayments of the loan by the borrower in small amounts.

• Short tenor loans (typically 12 months) • Very close supervision & monitoring of clients by

field staff

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Thank you