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A Pathway for Microfinance in India

By

Anchal BoochraMBA (IB) 2007-09Symbiosis Instit te of International B sinessP ne

!ith the boon of ra"id #$P %rowth that India has witnessed in the "ast decade& it hasalso e'"erienced the bane of increased socio-economic ine ality amon% differentsections of the society *h s& economic inde"endence of the lower section is the +eydri,er towards eradicatin% this ine ality and establishin% an incl si,e %rowth model In

a co ntry li+e India with a lar%e r ral& a%ro-de"endant "o" lation& micro finance hasemer%ed as a ,iable means of economic "liftment

A lar%e ma ority of the Asian "o" lation still li,es nder .2 a day and in e'tremely "oorconditions S stenance of this ine ality co ld tri%%er tensions amon% different %ro "sand may res lt in armed conflicts *his section of the society r%ently needs to be

bro %ht into the economic main stream to achie,e incl si,e %rowth *he role of thefinancial sector in achie,in% this incl si,e %rowth com"rises of "ro,idin% financialser,ices to this se%ment and this is where micro finance "lays a cr cial "art

/sin% the .2-a-day "o,erty line& the le,el of "o,erty has only declined from 1 3 to

79 3 between 4990 and 200 & s %%estin% that more than half of de,elo"in% India stillli,es in ,ery "oor conditions& is , lnerable to shoc+s& and may easily sli" into e'treme "o,erty

*o address s ch ris+s& India5s de,elo"ment a%enda will need to be e'"anded to incl denot only the eradication of e'treme "o,erty& b t an incl si,e %rowth strate%y to addressthe le%itimate concerns of this lar%e se%ment of the "o" lation *he ltimate o tcomes ofincl si,e %rowth are s stainable and e itable %rowth& social incl sion& em"owermentand sec rity

Altho %h the ban+in% sector has made si%nificant de,elo"ments in many areas of their "erformance& there still e'ist lar%e "ortions of the "o" lation which are yet to be bro %ht

nder the mbrella of ban+in% ser,ices 6inancial incl sion efforts are essential to brin%those "ortions of the "o" lation into the mainstream *his wo ld enable ban+s to e'"andtheir mar+et share b t e'"and the o,erall mar+et& in the "rocess of ta""in% the Bottom ofPyramid (BoP)

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*o set " s ccessf l models for microfinance in India& e'"erience can be drawn from the,ario s microfinance models set " internationally

M lti"le international e'"eriences of s ccessf l incl si,e ban+in% indicate that it issef l for ban+s to deal with %ro "s of c stomers or%ani=ed in the form of Self->el"

#ro "s rather than tryin% to a""roach and attract c stomers indi,id ally In Ban%ladeshrameen Ban+ offers small-si=ed loans to %ro "s of c stomers *his hel"s in betterreco,ery as the %ro " ens res that its members maintain the credit disci"line Many other co ntries ha,e ado"ted inno,ati,e models to achie,e the same

redibanco& the ?isa franchise holder in olombia& has ada"ted its technolo%y andser,ice infrastr ct re to hel" the co ntry5s ban+s reach low-income c stomers and e i"small merchants li+e %rocery stores& "harmacies and %as stations with "oint-of-salede,ices

*ameer Micro finance Ban+ imited of Pa+istan& since its ince"tion& has aimed to be a

"ioneer and trendsetter in terms of de"loyin% inno,ati,e& economical and ser-friendlytechnolo%ies in order to "ro,ide easy access of financial ser,ices to its c stomer baseacross the co ntry It has installed Pa+istan5s first biometric A*Ms

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main ban+ by a satellite networ+ *he si=e of the fleet sho ld ,ary with the n mber of,illa%es and r ral "o" lation nder each district

A similar model has been ,ery s ccessf l in "enetratin% the r ral mar+ets of co ntriesli+e 6i i in the So th Pacific >owe,er& since India is a lar%e co ntry with hi%her de%ree

of di,ersity& a more com"le' hierarchical system of mobile ban+s will emer%e

Settin% " "ro'y branches at c stomer locations Branchless Ban+in%

*his model foc ses on the se of technolo%y to set " ban+ terminals close to thec stomers *echnolo%y infrastr ct re li+e A*Ms and biometric fin%er "rint scanners arehi%h costs sol tions >owe,er& if networ+ infrastr ct re is already a,ailable at c stomerlocations& then terminals s ch as ban+card readers can be set " at ,ery low costs

A tie- " with an or%ani=ation li+e the I* to le,era%e the stren%th of its r ral s ""lychain networ+ e- ho "al can be a ,iable sol tion for the same Ban+card readers can be

installed at e- ho "als and the cho "als can wor+ as an intermediary between the ban+and the c stomer *he ban+ can "ay a fee to I* on a "er transaction basis in order totili=e its networ+

*>8 ;8A$

*he mo,e towards incl si,e financin% is a bi% challen%e for the financial system At theall India le,el& less than 3 of "oor r ral ho seholds ha,e access to microfinance ascom"ared to 103 in Ban%ladesh *he so thern states acco nt for almost 7 3 of f ndsflowin% nder microfinance "ro%rammes By far the most s ccessf l model ofmicrofinance in India in terms of o treach is S># Ban+ in+a%e

>owe,er& a lot needs to be done to achie,e the benchmar+ le,els in terms of Ban+s5o treach and de"osit ratios Ban+s wo ld need to ado"t an inno,ati,e& c stomer-friendlya""roach to increase their effecti,e reach so that share of or%ani=ed finance increasesBan+s ha,e a critical role to "lay in incl si,e %rowth and th s reachin% the BoPc stomers

Anchal BoochraMBA (IB) 2007-09Symbiosis Instit te of International B sinessP ne