micro finance jan mar 2011

8/6/2019 Micro Finance Jan Mar 2011

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MICROFINANCEAN INSIGHT INTO THE WORLD OF MICROFINANCE

READ TO LEAD

W O R L DCOMPLIMENTARY WITH THE FINANCIAL EXPRESS JANUARY-MARCH 2011

Options inFinancial InclusionOptions inFinancial Inclusion

SOCIAL BUSINESSSOCIAL BUSINESS

MICROFINANCE 2.0MALEGAM RECOMMENDATIONS

THEFINANCIALEXPRESS


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1800 425 1199

1800 420 1199

24x7 PHONE BANKING


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GRAMIN SUSWASTHYA

MICRO INSURANCE POLICY

A promise of Good HealthSpecially designed to provide

hospitalization, including maternity and

accident coverage for husband and wife

at a very nominal rate of premium

GRAMIN SURAKSHA

MICRO INSURANCE POLICY

Aapke Jeevan ka suraksha kawach

Protects your House and Household

goods.

Hospitalization expenses of the

entire family.

Personal Accident cover

MOTOR INSURANCE SHOPKEEPERS INSURANCE MEDICLAIM INSURANCE PERSONAL ACCIDENT INSURANCE

National Insurance Company Limited Registered & Head Office : 3 Middleton Street, Kolkata 700071

(A Govt. of India undertaking) Visit us at www.nationalinsuranceindia.com

Mumbai Regional Office - I : 12, Jamshedji Tata Road, Churchgate, Mumbai - 400 020.

Phone : 2282 1814 Fax : 2202 6496

Thoda Simple Socho


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2

MICROFINANCEWORLDIJANUARY-

MARCH2011

OPTIONS IN

FINANCIAL

INCLUSIONThe business model of

MFIs has to change

Dr C Rangarajan

COVER STORY

THERE IS NO REASON

WHY SOCIAL

BUSINESS AS A

CONCEPT CANT BE

SUSTAINABLE

Muhammad Yunus

INTERVIEW

CRISIS AS

OPPORTUNITY:

MICROFINANCE 2.0

What the poor need is the

ability to manage their own

household cash flow

COLUMN

PARTNERS IN

FINANCIAL

INCLUSION

The M-CRIL

Microfinance

Review 2010

COVER STORY

6

1914

4

[ C O N T E N T S ]


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EDITORIALSUPPORTVERGHISCHANDY

MONALISA SEN

DESIGNBIPINSHARMA

SPECIAL PROJECTS TEAMG.SUBRAMANIANMumbaiSpaceMarketingg.subramanian@expressindia.com

TANIMAROY

[email protected]

[email protected]

PRODUCTIONB.R. TIPNISGeneralManager

Copyright:TheIndianExpressLimited.Allrights

reserved.Reproductioninanymanner,electronicorotherwise,inwholeorinpart,withoutpriorwrittenpermissionis prohibited

ASPECIALPROJECTSINITIATIVEHOWTOREACHUSWeprefertoreceivelettersviaemail,withoutattachments.Writersshould discloseanyconnectionorrelationshipwiththesubjectoftheir comments. Allletters mustinclude anaddressanddaytimeandeveningphonenumbers.Wereservetherighttoeditlettersforclarityandspace

[email protected]:[email protected]

TheIndianExpressLimited2ndfloor,ExpressTowers,NarimanPoint,Mumbai-400021Tel:022-22022627 Extn:389Fax:022-22022139

COLUMN

THE END OF THE BEGINNING

3


MARCH2011

30

COLUMN

ARRESTED IN ITS TRACKUnderlying the face-off between SKS

Microfinance and AP government is an alteration

in the aim of business

Innovations will cope with new regulations and

restore MFIs mission focus

28

REPORT

MALEGAM MEDICINEThe Malegam committee report: A summary of

recommendations

23

Coverphoto:BusyatworkSourav Karmakar

souravkarmakar4

@gmail.com

Courtesy: CGAP


8/36

[ COLUMN ]

4


MARCH2011

What the poor need is the ability tomanage their own householdcash flow

Crisis as opportunity:Microfinance 2.0

EVER LET A serious

crisis go to waste.That was Rahm

Emanuel, President

Obamas chief of

staff. Of course,

Emanuelwasnttalkingaboutmicrofi-

nance in poor countries. But the

global microfinance community

woulddo well toheed hisadvice.

Microfinance institutions in India

were until recent weeks the poster-

childfor profitable lending to the poor,

andIndia was oneof the fastest grow-ing microfinance markets in the

world. Today, withthe crisis setto rico-

chet beyond Andhra Pradesh, a num-

ber of microlenders face collapse that

could send poor clients back to village

moneylenders.

Across theglobe andin India themi-

crocredit revolution of the past few

decadesmicrofinance 1.0proved

that it is possible to deliver financial

N

JEANETTETHOMASHeadof Communications,CGAP


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10/36

[ COVER STORY ]

6


MARCH2011

financialfinancialOptions in

THE BUSINESSMODEL OFMFIs

HAS TOCHANGE

inclusion

Nature of inclusion

Financialinclusiondenotes deliveryof

credit and other financial services at

an affordable cost to the vast sections

of the disadvantaged and low-income

groups. It will be wrong to classify all

those who are not borrowing from the

organised financial system as ex-

cluded. What is relevant is that thosewho want credit should not be denied

the same provided they are bankable.

The objective of financial inclusion is

to extend the scope of activities of the

organised financial system to include

within its ambit people with low in-

comes. Through graduated credit, at-

temptsmust beto lift the poorfromone

level to another so that they come out

of poverty.

DRCRANGARAJANChairman, Economic Advisory Councilto thePrimeMinister


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Extentof exclusionNSSO data reveal that 45.9 million

farmer households in the country

(51.4%), out of a total of 89.3 million

households do not access credit, either

from institutionalor non-institutionalsources. Further, despite the vast net-

work of bank branches,only 27%of to-

tal farm households are indebted to

formal sources (of which one-third

also borrow from informal sources).

Apart from the fact that exclusion in

general is large, it also varies widely

across regions,social groups andasset

holdings. The poorer the group, the

greater is the exclusion.

Institutional changesThequestion that is beforeus is how to

extend thescope of activities of theor-

ganised financial systemto include low

incomegroups. The institutionswhich

currently providefinancial services inthe rural areas include branches of

commercial banks, regional rural

banks, cooperative societiesandmicro-

finance institutions. What is required

nowis finding waysandmeansto effect

improvements within the existing for-

mal credit delivery mechanism and

evolve new models for extending out-

reach. In a broad sense, we need to ad-

dress issues onthe supply sideas wellas

demand side. The financially excluded

sections require products which are

customised to meet their needs.Finan-

cial exclusion isalso causedby demand

side issues. Unless steps are taken on

[ COVER STORY ]

8


MARCH2011

THESHGPROGRAMME,

WHICHHAD

TRADITIONALLY ENJOYED

RECOVERIESCLOSETO98%

FORMORETHANADECADE,

SEEMSTOHAVE SUFFERED

INTHESURROUNDING

CLIMATEOFWAIVEROF

FARMSECTORLOANS

Bloo

Nagalatabought a

sewing

machine with

micro-loan


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Breaking new frontiersDEWANGNERALLA

TO TALK ABOUT FINANCIAL inclu-

sion (FI) isakin to flogging a dead horse

that hasbeenridden both by angst and

developmental thought. Outreach to

the unbanked is an attempt to include

the bottom both as productive partici-

pants and active data in the GDP

process. Today, although a much re-

peated fact, more than 65% of Indian

populationis still unbanked and does

nothave accessto basic banking facili-

ties, leave apart other financial serv-

ices products. As a mission to sustain

the economic development of the coun-

try, it is imperative that these popula-

tions be brought, initially, into the

banking fold, which subsequently can

act as a base for providing other serv-

ices as well. The access to finance for

the unbanked is not an alien concept

for the Indian economy. Access has al-

ways been available through interme-

diaries like SHGs and MFIs. Even for-

eign banks and private sector bankshave also accessed the microfinance

marketby settingup lowcost non-bank

companies or bypartnering withMFIs

to providesmallvalue retailloans or fi-

nancial services to the relatively

higher risk segments of the popula-

tion. This has been a successful model

but for the fact that the interest rates

charged are high owing to high trans-

action cost for small sized loans. De-

spite such initiativesa large segmentof

the population is still financially ex-cluded as delineated in the table.

Here are a number of reasons as to

why inclusion has not beenhappening

in India: Coverage, cost of small value

transactions, infrastructure, suitable

products, flexibility, weak delivery

modelfor communityenterpriseand fi-

nancial management support. Despite

automation of banking in Indiareach-

ing out to the masses has been inhib-

ited owing to infra cost, security, ROI,rural psyche,etc.

The basic rationale behind this

thought is that unless there is a collec-

tive effort and a networkeffect, it is in-

herently impossible to go across the

length and breadth of India to create

and set up branches and provide these

services. These business correspon-

dents (BCs) will actas mobilebranches

for the bank to provide the services.

Banking beyond brick and mortar

faade community banking, RBI,

would be bestcarried forwardthrough

mandate and virtual portals. BCs

would provide access to the unbanked

with the help of ICT layingto rest con-

cerns about remote access, cost, secu-

rity, etc. Primarily led by creativity in

the mobilecommercedomain embalm-

ingthe economicdivideby providing a

digital bridge of hope.

Paymentand financial systemsfacil-

itating markets are synonymous withsophisticated urbane systems where

wealth is created more through arbi-

trage and it is hard to imagine social

entrepreneurship and socio economic

impact of thesame. I have long mulled

over such technology utility where

every individual would be empowered

byaccess to such technology platforms

thatwould create entrepreneurship op-

portunities for the people who lack

livelihood opportunities. A technologyplatform connecting the masses, pro-

viding access to a bundle of services

and creating business opportunities

for people of this country. Butthe over-

allhypothesisstemsfromthe fact that a

connected India means an includedIn-

dia, where every person in this great

nation has access to the similar serv-

icesas every other person does.

Theuse of IT solutions forproviding

bankingfacilitiesat doorstepholds the

potential forscalabilityof theFI initia-

tives.Pilot projects have beeninitiated

using smartcardsfor openingbank ac-

counts with biometric identification.

Link to mobile or hand held connectiv-

itydevices ensure thatthe transactions

are recorded in the banks books on

real time basis.Some statesare routing

social security payments as also pay-

ments under the National Rural Em-

ployment Guarantee Scheme through

such smart cards. The same delivery

channel canbe used to provideother fi-

nancial services like low cost remit-tances and insurance. The use of IT

also enables banks to handle the enor-

mous increase in thevolume of transac-

tionsfor millions of households.

Simple usage of technology in right

way i.e. mobile phone a device for FI

helps banks to provide banking facili-

ties in the rural areas. As mobile

phones have all the functionalities re-

quired for conducting micro banking

transactions. It is becoming increas-

ingly evidentthat mobile computing isthe future of tomorrow and would re-

sult in bringingdown notonly thecosts

butalso bring in huge operationaleffi-

ciency and the ability and power to

scale out across a wide geography like

India.I wouldsayThe future isNow!

Thewriter isdirector,Atom

Technologies

AMARKETINGINITIATIVE

The excludedCountry PopulationExcluded

(inmn)

China 263

Africa 230Rest of Asia 162

India 135

Latin America (Excluding Brazil) 28

Brazil 14

Middle East 20

East Europe 19

W. Europe 18

Using technology as a weapon for Financial Inclusion


14/36

thedemand side,that is in therealsec-

tors, mere supply side solutions from

the financial sector will not work.Credit isnecessary forthis, butnot suf-

ficient. Credithasto be an integralpart

of an overall programme aimed at im-

proving theproductivityand incomeof

small farmers and other poor house-

holds. Putting in place an appropriate

credit delivery system to meet the

needs of marginal and sub-marginal

farmers must go hand in hand with ef-

forts to improve the productivity of

such farm households. Credit must be

linked to production.

Commercialbanks

There are 33,500 commercial bank

branchesin ruraland semi-urbancen-

tres in the country. The critical ques-

tion is how to make these rural

branches more effectivein termsof de-

livering credit to the small and the

very small borrowers. Forthis (i) rural

branches of banks have to become

farmer-friendly, (ii) they should also

advice borrowers on matters relating

to agriculture and allied activities,(iii)commercial banks have to open

branches in districts where the popu-

lationper branch is much higherthan

the national average (RBI identified

139 districts in 15 states as inade-

quately servedby thebanking system),

(iv) loan granting procedures have to

be simplified, through enabling legis-

lation, and (v) the SHG bank linkage

schemehas to be strengthened.

The number of self-help groups that

had outstanding loans fromthe bank-ing systemis closeto 4.5 million. Out-

standing loans now exceeds Rs 25,000

crore. The financial inclusion at-

tained through SHGs is sustainable

and scalable. A distinctive feature of

the SHG-bank linkage programme

has been the high recovery rate, even

though there is some concern on that

score in recent period. However, the

regional imbalance in the spread of

SHGs needs to be corrected.

SHGs also need to graduate from

mere providers of credit for non-pro-

ductive purposes to promoting micro

enterprises. According to a recent re-

port, pure consumption accounted for

50%of the loans. Therehas to bea shift

towards income generatingactivities.

There is no need to provide any in-

terest rate subsidy to SHGs. Banks do

providethem creditat reasonable rates

of interest. The financial support ofthe state governments in this regard

couldbe betterdirectedtowardsbuild-

ing capacities in the self-help groups

and providing technology support and

marketingfacilities.

There areother qualityissueswhich

have arisen in the wake of the sharp

quantitative expansion. These need to

be addressed. Some critical issues re-

late to the deterioration in the repay-

ment ethics and the continuing small

size of the average loan. Data that are

now available indicate that roughly

2.9% of the total loans outstandingconstitute default loans. Commercial

banks reported an NPA level of 2.1%,

RRBs4.5% andcooperativebanks 4.8%

fortheyearendedMarch 2008. Thepro-

gramme which had traditionally en-

joyed recoveries close to 98% for more

than a decadeseemsto havesufferedin

the surrounding climate of waiver of

farm sectorloans.

The other issue relates to the aver-

age size of the loan. The low average

size of theloanis a factorthatpreventssome members of the SHGs from tak-

ing up enterprise activities. The aver-

age size of loans disbursedrangefrom

Rs 37,000 in the case of cooperative

banks to Rs 86,000in the case of RRBs.

Cooperative banks have continued to

disburse smaller loans. While in one

sense small loans are reflective of the

capability of thesystem to reachout to

small borrowers,it alsoindicatesa cer-

TWOINITIATIVES THATWILL

BRINGABOUTA

SIGNIFICANTSURGE

FORWARDOFTHEMICRO

FINANCESECTORWILLBE

THE GROWTHOFTHEBANK-

SHGLINKAGEPROGRAMME

ANDTHE EXPANSIONOFTHE

PROGRAMMEOFBUSINESS

CORRESPONDENTS

[ COVER STORY ]

10


MARCH2011

Signing on the dotted linesBloomberg


15/36

UNITED BANK OF INDIA has

marched towards the national goal to

connecting the excluded with the for-

mal banking system under its Finan-

cial Inclusion Programme. The pro-

gramme's aim is to reach to the

unbanked and underbanked areas of

the country and provide banking serv-

ices at an affordablecostto underprivi-

legedand lowincomegroups.

In order to help them obtain an un-

derstanding of the financial services

available andequipthemwiththe confi-

dence to make informed financial deci-

sions, United Bank of India would ex-

tend theFIP outreachto 4,346 unbanked

villages, covering 83 districts in 11

states, within the financial year ending

2012, by extending Information & Com-munication Technology (ICT)-based

banking services.

Out of the identified 4,346 villages,

1846 villages are having population of

more than 2,000 and 2,500 villages are

having population of less than 2,000.As

per the road map, the Bank will extend

bankingservices in1,400villages during

the FY2010-11and 2,946 villages will be

covered inthe next FYi.e. 2011-12.

Out of 4,346 villages, 46 villages will

be serviced by opening full-fledgedbranches and the rest of 4,300 villages

will be covered by ICT-based services

through the Banking Correspondent

(BC) model. The Banks RSETI at Ra-

jpur, 24 Parganas (South), WB,hasbeen

accredited by the IIBF for imparting

training to Business Correspondents/

Business Felicitators.

The Bank has successfully imple-

mented a Pilot project on Biometric

SmartCard-based financialinclusion in

61 villages inPuruliadistrict, WestBen-

gal, and about 10,000 households have

beenenrolled.

The Bank hasstartedthe full-fledged

FIP programme on December 7, 2010

from Kumarhat village in South 24 Par-ganas District, West Bengal. Dr Subir

Gokarn, Dy Governor, Reserve Bank of

India hasinauguratedthe Customer Ser-

vice Pointof theBankatKumarhat.

At the same time, to create employ-

ment opportunities for the rural unem-

ployed youth, women andother weaker

sections of the societies seven RSETIs

of theBankhave been set up so far. The

Bank has plan to open nine more R-

SETIs of which two will be opened in

West Bengal (Purulia and Dakshin Di-

najpur Districts), fivein Assam andone

each in Tripuraand Manipur.

The participants of these RSETIS

are getting residential facilities, skill

and entrepreneurship developmenttraining for self-employment, free of

cost. It is a great satisfactionthat more

than 5,000 beneficiaries, 52% are

women beneficiaries, have received

training at ourRETISand outof which

3,768 trainees have been self-employed

after getting training .The success rate

is 71%. TheBank hasprovided loans to

2,432traineesfor setting up their units.

MARKETINGINITIATIVE

United Bank of India

rededicates itself to the nation

Dr Subir Gokarn, Dy Governor, RBI, Shri Bhaskar Sen, CMD-UBI, & Shri SL

Bansal, ED-UBI, while handing over a replica of a Biometric Smart Card to a

woman beneficiary during the Financial Inclusion Programme held on 7th

December, 2010 at village Kamarhat under 24 Paganas (S),West Bengal

Puts in best efforts towards inclusive growth


16/36

tain degree of risk aversion by the or-

ganised financial system. The organ-

ised financial systemneedsto address

both the issues of meeting the require-

ments of the small borrowers and in-

creasing thesize of theaverageloan.

Federations of SHGs at village and

talukalevels have certainadvantages.

However, the disadvantage is that

banks may lose their direct contactwith SHGs.Perhaps, thebest courseof

action would be to make the federa-

tionsact as facilitatorsrather than asfi-

nancialintermediaries. Federations,if

theyemergevoluntarily fromamongst

SHGs, mustbe encouraged.

The sixth issue is that, even though

SHG-bank linkage has emerged as an

effective credit deliverychannel to the

poorclients,thereare segments within

the poor who are left out suchas share

croppers/orallessees/tenantfarmers,

whose loan requirements are much

larger butwhohave no collateralsto fit

into the traditional financing ap-

proaches of the banking system. To

service such clients, Joint Liability

Groups (JLGs), an upgradation of

SHGmodel, couldbe an effective way.

Finally, the business facilitator andcorrespondentmodel needs to be effec-

tively implemented. Rules, at present,

permit not only institutions but also

several categories of individuals to

function as business correspondents.

This list canbe further expanded. The

recentannouncement of the RBIto al-

low the corporates with a wide net-

work of retail outlets to become busi-

ness correspondents is a welcomestep.

Roleof technologyIn the task of making banking serv-

ices available to everyone, technol-

ogy hasan important role to play. The

required outreachinto interiors with

lowoperational costs is only possible

with the use of technology. Technol-

ogy has to be leveraged to create

channels beyond branch network to

reach the unbanked. In short, tech-nology hasto enablethe branch to go

to the customer instead of the other

way round. The essentialingredients

of all the models of technology sup-

port under consideration include:

(i)Theissueof a smartcard to the vil-

lage client; (ii) a hand-held terminal

with the business correspondent;

and (iii) a central processor unit

(CPU) linking the smart cards and

12


MARCH2011

Cash in

hand

[ COVER STORY ]


17/36

BC terminals with thebanks.

Micro finance institutions

Micro finance institutions play a sig-

nificant role in ensuring financial in-

clusion. With respect to theoperations

of MFIs, oneissue relatesto therateof

interest. It is recognisedthat thetrans-

action costs for delivering credit to

very small borrowersare high. Alsotothe extent to which various advisory

servicesare provided, the cost further

goes up. Itis necessaryforMFIsto sep-

arate thepureinterestcosts from other

costs which arecharged to the borrow-

ers because of the additional services

provided.On thewhole,they need to be

transparent about what they charge.

Overall it is necessary to ensure that

theburdenon theborrower is notsuch

asto make himdefault. Taking a holis-

tic view, it is necessary for micro fi-

nance institutions to keep the overall

cost to the borrowers maintained at a

level that is consistent with therepay-

ing capacity of the borrowers.

Severalconcernsregarding thefunc-

tioning of the micro finance institu-

tionsparticularly the non-bankfinance

companies have come to the surface in

recent months. The concerns relate to

thecoercivemethodsadopted forrecov-

ery, multiplelending andever greening

of loans. Itis also reportedthata signif-

icant part of theloans granted wasfor

consumption and not forincome earn-

ing activities. This is contrary to the

principle of self-help. Multiple lending

withoutexamining therepayingcapac-

ity of the borrowers can only worsen

thesituationat some point.MFIs, even

with their commercial orientation,

must rectify these mistakes. Other-

wise, they will also become commer-

cially unviable. The micro finance

movement must have as its ultimate

goal the desire to help the poor and en-

able them to come out of it. Providing

credit for productive purposes at rea-

sonable rates of interest must be the

goal. The business model of MFIs has

to undergoa change.Looking at the picture as a whole,

two initiatives that will bring about a

significant surge forwardof the micro

finance sectorwill be thegrowth of the

bank-SHG linkageprogramme and the

expansion of the programme of busi-

ness correspondents.The twowill con-

stitute the main pillars of the future

development of bank related micro fi-

nance, even asotherformsof micro fi-

nance institutions will continue to

grow. The goalof making a significantprogress towards financial inclusion

seems attainable. In fact providing ac-

cess to finance is a form of empower-

mentof the vulnerable groups. Finan-

cial inclusion is no longer an option

buta compulsion.

(Excerptsfromthe inauguraladdress

at theMicrofinanceIndiaSummit

2010, heldinNewDelhion

November15-17)

13


MARCH2011

THEREARE SEGMENTS

WITHINTHE POORWHOARE

LEFTOUT. TOSERVICE SUCH

CLIENTS, JOINT LIABILITY

GROUPS,ANUPGRADATIONOFSHGMODEL,COULDBE

ANEFFECTIVEWAY

A Hindusthan

Microfinance

employee vets loan

applications

Pics: Bloomberg


18/36

14


MARCH2011

ICROFINANCEs

contribution to fi-

nancial inclusion

rivals, if not ex-

ceeds, that of theruralbanking sys-

tem. With the phenomenal growth

recorded by microfinance in recent

years62% per annum in terms of the

numberof uniqueclients and88% per

annum in terms of portfolio over the

past five yearsand around 27 million

borrower accounts, India now has

the largest microfinance industry

inthe world.

The high growth rate of microfi-

nance has been fuelled by commercial

bank funding which inherently gravi-

tates towards for-profit institutional

structures. Thus, there is a continuedIndia-widetrend towards the transfor-

mation of MFIs into for-profit non-

bank finance companies (NBFCs) so

that over50% of the 66 MFIs inthe M-

CRIL analysis now consist of such in-

stitutions. At the regional level, the

south continues to dominatethe sector

in the concentration of MFIs. (Institu-

tions with multistate operations have

been grouped as All-India in this

Partners inPartners infinancial inclusion

M

TheM-CRIL

Microfinance

Review2010

[ COVER STORY ]

Bloom

Padma has got the micro-loan


19/36

study.) The rush to be regulated (as

NBFCs) along with the push for

growthhas becomethe dominant char-

acteristic of Indianmicrofinance.

With 27 million borrower accounts

served by MFIs by March 2010, Indian

microfinance represents a significant

sub-sector of the financial system. It

exceeds the number of borrower ac-

counts served by the Regional Rural

Banks (RRB) by 50% and represents

40% of the total number of micro-bor-

rower accounts (of value less than Rs

25,000, $555) in theentire Indianfinan-

cial system. M-CRIL estimates that

there are around 18 million microfi-

nanceclientsin India. Thisrepresents8.2% of thetotal numberof 220million

families in the country and 13.6% of

the 60% population that is thought to

be financially excluded. In theory this

holds out the tantalising prospect of a

market with tremendous growth

prospects; a perceptionthat is theroot

of some of the ills that currently be-

devilIndian microfinance.

Theend-March 2010portfolioof the

microfinancesectoris 0.64% of the to-

tal credit outstanding of the banking

system, 28% of the credit outstanding

of RRBs and nearly 20% of the credit

outstanding of the district cooperative

banks (DCCBs). At its current rate of

growth the microfinance sector will

match the RRBs and exceed the total

portfolio in micro-accounts of all

scheduled commercial banks within

thenext three years.

Concentration is high, however,

with thelargest 10 MFIs (L-10) account-

ing for77% of allborroweraccountsin

themicrofinancesector and79%of the

portfolio. MFIs registered as for profit

NBFCs service 84%of allborrower ac-

counts and manage 88% of the portfo-

lio. In March 2010 there were 25 MFIs

classified by the RBI as 'systemically

important',with portfolios in excess of

Rs 100 crore ($22 million) though only

twohad beenlicensed for (very restric-

tive) deposittaking.

At constantprices, average loanbal-

ances with MFIs were more or less flat

for a number of years, until March

2007. Since then, the value has in-creased by 12% over March 2002 as

MFIs have entered a high

growth phase.

However, at Rs 7,783 ($163) thevalue

of average loanbalances in March 2010

wasjust 12.5% of Indias $1,300 GNIper

capita. Since the average loan balance

was 18% of GNI per capita in 2002,

MFIs appear to have slipped by about

one-third in terms of their contribu-

tion to the economic lives of low-in-

comefamilies.Since most MFIs cannot legally ac-

ceptthrift deposits so they arelimited

to small amounts of client deposits as

cash security. The average contribu-

tion of deposits ranges from 4-8% of

loansoutstanding compared to 30-40%

in Bangladesh and Indonesia. Growth

indeposit services wouldnot only pro-

vide an additional source of funds to

MFIs but it would also help to round

out theirrelationship with clients and

reduce the risk of coercive collection

behaviourby MFI staff.

Indian MFIs are amongst the most

cost-efficient in the world. The cost of

loan servicing by Indian MFIs (Rs 536,

$11.90) is very low in comparison with

the global benchmark of $139 of the

MIX. It issubstantiallylower even than

the median for low end MFIs interna-

tionally ($64). In real terms, the cost of

serving microfinance borrowers has

declined from Rs 620 in 1999-00 to just

Rs 298 in 2009-10 (at 2002 prices). This

couldindicatethe growing efficiencyof

Indian microfinance over this period.

However, whether thisis on account of

real productivityincreasesor a decline

in lending standardsis a question that

bears consideration.

The weighted average operating ex-

15


MARCH2011

Value of average loanbalances

5119

5695

7399

7783

4938

4333

Constant

Nominalvalue

8000

7500

7000

6500

6000

5500

5000

4500

4000

3500FY02 03 04 05 06 07 08 09 10

2000 2000 2005 2007 2010

700

650

600

550

500

450

400

350

300

250

200

Rs / borrower

All MFIs

L-10

2002 prices

Cost per borrower

THE SECTOREXCEEDS THENUMBEROFBORROWER

ACCOUNTSSERVEDBYRRBs

BY50%ANDREPRESENTS

40%OFTHENUMBEROF

MICRO-BORROWER

ACCOUNTS (


20/36

pense ratio (OER) for sample MFIs is

just 8.8%(significantly lower than the

15.9% of the 2007 M-CRIL sample andlower also than the 11.9% of 2008-09).

These expense ratios are well below

the global median of 20%. The typical

Indian MFIas measured bythesimple

average across MFIshad an OER of

14.3%. for the latest year. A key deter-

minant of OER is the small loan size.

There is a very clear downward trend

as the loan size increases. MFIs with

the smallest size of loan (less than Rs

4,000, $90) record a weighted average

OER of 16.9%whereas the higher cate-

gories of loan size reduce the OER to

just under 6% for the above Rs 10,000

($220), category.

The portfolio yield has increased

significantlyfrom 24.8%(around2006)

to 27.0%(including themanagedport-

folio)in 2008-09 and28.3%for financial

year 2009-10. This has happened

largely because of changes in fees

charged and sometimes on account of

a change in the loan term. Neverthe-

less, theaverage yield earned by MFIs

in India is still lower than the Asianand global medians of 29.1% and

31.1% respectively.

Whencompared with moneylender

rates of 30-72%in different partsof In-

dia and consumer finance rates of 24-

30% charged even by established com-

mercial banks for much larger loans,

it is apparent that the Indian MFI

rates arestill notexorbitant.However,

the weighted average (OER) has de-

clined dramatically over the past few

years from around 15-16% in the mid-dle of the decade to just 8.6% in 2009-

10. As a result there has been a sub-

stantial widening in the margin

available to the averageMFI for cover-

ing financial expenses, loan loss pro-

visions and surplus.

Portfolio quality in India is far bet-

ter than the global median of 3.1%

and is also well below the Asian me-

dian of 1.5%. In recent years, a zero

delinquency culture has taken over at

some of theleading MFIs in India and

PAR has dropped to very low levels,

though in some cases, M-CRIL be-

lievesthis may be on account of ever-

greening resulting in under-report-

ing by branches to the head office.

Following the Andhra Pradesh crisis

of 2006, there has been a significantdelinquency crisis in southern Kar-

nataka since 2009 and growing issues

with portfolio quality even in states

like UP with relatively recent micro-

finance activity.

At the time of writing (October

2010), concerns about consumer pro-

tection have led to the state govern-

ment of Andhra Pradesh stepping in

with a heavy handed Ordinance that

[ COVER STORY ]

16


MARCH2011

THE LARGEST10MFIs

ACCOUNT FOR 77%OFALL

BORROWERACCOUNTS IN

THE SECTORAND79%OFTHE

PORTFOLIO.MFIs

REGISTEREDASFOR PROFIT

NBFCs SERVICE 84%OFALL

BORROWERACCOUNTSAND

MANAGE88%OF

THEPORTFOLIO


21/36

17


MARCH2011

threatensto bringall microfinance ac-

tivities to a halt.

While this crisis may blow over,

greater introspection on issues of mul-

tiple lending, the quality of internal

control systems and how to improve

portfolio management are certainly

called for. The implications of high

growth rates for the issues that haveemerged are obvious: unbridled

growth leads to untrained staff, an in-

crease in multiple lending, deteriora-

tion in control systems and the poten-

tialfor malpracticesin loancollection.

The financing pattern of microfi-

nance in India has increasingly fo-

cused on debt throughthe pastdecade.

Starting with a trickle of funds from

Sidbi, the flow of funds from commer-

cial banks to MFIs became a virtual

floodby the end of the 2000s, reachinga

level around Rs 16,000 crore ($3.6 bil-

lion) by March 2010. The current level

of debt, amounting to 71.3% of total

fundsraisedbythe leading MFIs, repre-

sents a reduction from the highest

level of 80% reached in 2008.

The domination of commercialbank funds in Indian microfinance is

under-played here since it excludes off-

balance sheet financing via portfolio

sales and securitisation of portfolio

undertaken by some of the leading

MFIs. A separate compilation of the

portfolio managed by MFIs for others

shows that the amount is around Rs

4,000crore($890 million),an additional

20% of the portfolio on the MFIs bal-

ance sheets. While some institutional

debt is still available at concessional

ratespartly because banks areable to

classify such lending as priority sec-

tor directed creditmuch of this debt

is at commercial rates in the range 10-

14%per annumfor wholesale lending.

2002 2004 2006 2009 2010

Trends in portfolio yield

19.9

15.6 15.9

8.9 8.6

28.327.0

24.825.2

18.8

OER%

Yield %

Impact of loan size on theOERs of Indian MFIs


22/36

The share of net worthin MFIfunds

hasnowincreasedto 17.7%as retained

earnings have grown and some of theleading MFI promoters have made ex-

tensiveeffortsto raise additional funds

as equitythroughprivateplacements

byboth social investorsand privateeq-

uity funds. Equity now amounts to

10.7%of total MFIfunds,with retained

earnings accounting forthe rest of net

worth; donor funds have declined to

negligible levels. The 4.3% savings ori-

entation of Indian MFIs is very low by

global standards. All Asian countries

with flourishing microfinance sectors

Bangladesh, Indonesia, the Philip-

pineshave deposit ratios thataccount

for significantproportionsof portfolio.

Also,theruralbanking systemin India

undertakes all its lending from de-

posits (portfolio deposit ratios >100%).

The unwillingness of the regulator

to permit MFIs, despitetheir outreach,

to generate deposits is thus a signifi-

cant impediment to financial inclu-

sion. It hasalsoforced MFIs into a uni-

dimensional relationship with clients,

a feature that limitstheir clientorien-tation.The useof funds isbroadly opti-

mal though allocation to portfolios is

restrictedby bulkinflows in March.

Of the total resources of Rs 23,623

crore ($5.25billion) deployedin microfi-

nanceby the66 main MFIs includedin

thisanalysis,nearly 69%is deployed in

loans to clients. Thisis below theportfo-

lioallocation level of theMIX interna-

tionalmedian of 76.8%largely because

of the prevalent practice in India of

lenders making substantial disburse-ments in the last week of March (the

endof thefinancial year).This enables

the banks to include the disbursed

amount in their priority sector lending

achievements but does not leave time

for the MFIs to disburse the funds to

their end-clients before the closing of

accounts for thefinancial year.

For ensuring prudential manage-

ment, banks in India are expected by

the RBI to maintain Capital Adequacy

Ratios (CAR--net worth as a proportionof risk weighted assets) of 9% and

NBFCs of 12% (until March 2010, in-

creasingto 15% by March 2011). While

equity was a constraint in the early

years of Indian microfinance, the con-

straint was eased particularly from

2007 when private equity funds joined

in. There are now over 45 NBFC MFIs

and, all found equity investors of one

sortor another. Overall, theequitycon-

straintof theearly 2000shas eased con-

siderably and the weighted average

CAR of IndianMFIsis now inexcessof18% well ahead of the bankingsector.

Yields have increased significantly

in India in recent years. Compared to

the 24-36%realcostsof bank loans for

small borrowers (including all trans-

actioncosts) and moneylenderinterest

ratesrangingfrom 36%to 120% in var-

ious parts of the country, however, aver-

age yields of the order of 28% repre-

sent a benefit for low-income MFI

clients. This is significant in the con-

text of thedebateaboutthe suitability

of interest ratescharged by MFIs.

MFIswith less than30% yieldsserv-

icemore than 50%of thenearly26 mil-

lion active borrower accounts in the

country. Nevertheless, on account of

its low OER and seemingly good port-

folio quality leading to low loan loss

provisions, the weighted average re-

turnon assets(RoA)of 6.8% forIndian

MFIs is well above the global and

Asian medians (around 1.5-2.0%) for

microfinance and also substantially

higher than the (1.0-1.2%) RoA of thebanking sector (including rural

banks). Only 6 of the 65 leading MFIs

now report losseswhereas 37 out of 65

(57%) record good profitability (with

more than 2% RoA).

Similarly, returns on equity are

very high with a weighted average of

25.1% forthe full cohortand over 31%

for the L-10MFIs. Asmany as27 MFIs

have RoE in excess of 15% and it is

largely these that havebeen able to ob-

tain significant amounts of equity tofuel their operations. Thus, while In-

dian MFIsdeliver microfinance to low

income clients at a relatively low cost

by the standards of typical interna-

tional MFIs, they are still currently

under pressure on the issue of inter-

est rates.

(Editedexcerpts.Forthefull report,

pleasevisit:m-cril.com)

[ COVER STORY ]

18


MARCH2011

Figures in %

NGO

Section 25Company

Cooperative

NBFC

India

L-10

Expenses and revenuerealisation of Indian MFIs

-5 0 5 10 1 5 20 2 5 30 35

Operatingexpenses ratio

Loan Loss Provision

Financial CostRatioYield minus TotalExpenses ratio

INDIANMFIsAREAMONGSTTHEMOST COST-EFFICIENT.THEIRCOSTOFLOANSERVICING (Rs536-$11.90)ISVERYLOWCOMPARED

WITHTHEGLOBALBENCHMARKOF$139OFTHEMIX. IT ISSUBSTANTIALLYLOWEREVENTHANTHEMEDIANFORLOW-ENDMFIsINTERNATIONALLY ($64)


23/36

Once Indiagets going, itwill give a fillip to themovement

as a concept cant be sustainable

MUHAMMADYUNUSNobel laureate&Grameen Bank founder

social

business

social

business

There is no

reason why

19


MARCH2011

Bloomberg[ INTERVIEW ]


24/36

obel laureate

Muhammad Yunus

has ignited a socialbusiness wave

through his book,

Building Social Busi-

ness . After launching Grameen Bank,

which offers microcredit to poor women

in particular, and profitable social

businesseslike Grameen Danone Foods

to produce fortified yogurt for mal-

nourished children, Grameen-Veolia

Water to treat contaminants like ar-

senicin drinking water, Grameen Intel

to offer online solutions in healthcare

and agriculture, and BASF Grameen

to produce chemically-treated mosquito

repellent nets to protect people from

malaria,he hasbeen working overtime

to addother building blocks likesocial

investment funds and social stock ex-

changes to complete his vision of

a global social business ecosystem.

I n t he p ro ce ss, h e has s prea d

the Grameen footprint from

Bangladesh to America, Europe and

Africa. In an exclusive interview with

FEs Rajiv Tikoo , he says onceIndia gets going, it will do so in a big

way. Excerpts:

Your previous book, Creating a World

Without Poverty, fuelleda lotof curios-

ity about socialbusiness. How was the

response to the one after book, Build-

ing Social Business, which elaborates

the concept?

Thefirstbookgenerateda lotof inter-

est and curiosity. It came out when

people were not prepared for the con-cept of social business.

But people were positive. Since

then,we haveset up a few moresocial

businesses in Bangladesh and many

people have come forward to engage

with us. People are more

aware now. The response to the new

book was much better and there was

a lot of interest from people because

they were not satisfied with the

[ INTERVIEW ]

20


MARCH2011

N


25/36

existing economic system and

were looking for alternatives.

Though you are calling for a transfor-

mationalchange in the way businesses

are conducted, you expect the initial

capital for social businesses to come

from sources like CSR budgets of main-

stream businesses and charities. Howsustainable is this?

Social business is, by definition, sus-

tainable. If each business is sustain-

able, then there is no reason why so-

cial business as a concept cant be

sustainable. CSRis a partof corporate

charity. Charitiesin the US alone earn

annual revenues of more than $1 tril-

lion. Besides, there is the donor

amount of $60 billion, which goes

around in foreign aid. Social busi-

nessesdont need all this money right

now. Butpotentially thismoneycan bediverted to social businesses. Even if

a fractionof this money is invested in

socialbusinesses,it canmake a bigdif-

ference. The recipient countries would

benefit. Thedonor toowould be happy

because the money would beusedin a

transparent way and it will be recy-

cled. I dont think money for social

businesses should be a problem.

You have succeeded in setting up many

companies as social businesses be-cause today you are a big brand your-

self. I presume aspiring social busi-

nesspersons face the same stumbling

blocks that prompted you to set up

Grameen Bank in the seventies. So,

how do theyget going?

I agree. People know me. They find it

easier to trust me andenter into part-

nerships with us.While others would

not find it as easy as us, at the same

21


MARCH2011

(Top) Village women

waiting for work.Microfinance offers

them a ray of hope

(Left) A woman

receives micro-loan

from an SKSMicrofinance

employee

SKSPRESENTSACASEOFA

MISSIONDRIFT IN

MICROFINANCE.WHENYOU

USEMICROCREDIT TOMAKE

PROFITSFORINVESTORS,

YOUARE FOLLOWING INTHE

FOOTSTEPSOFLOAN

SHARKS...THESOLUTIONISNOT INBRINGINGIPOsTO

THEMARKET, BUTINGIVING

MFIsA LEGAL LICENCE TO

TAKEDEPOSITS

ExpressPhoto

Bloomberg


26/36

time,they wouldnot find it asdifficult

aswe did it when we had started out.

Your presence ranges from

Bangladesh to America. You are also

expanding from Europe to Africa. Why

have you not really focused on India?

We are making progress n ow. I have

held talks with some people in India

last year. Talksof setting up a social

stock market in Mumbai going on.

OnceIndia getsgoing,it will doso in

a big way and give a fillip to the so-

cial business movement.

There are already a number of social

funds all over the world, but they

have remained confined to select

pockets. How are the new social in-

vestment funds in India going to be

different?

There is a difference between exist-

ing social funds and the ones I am

talking about. The existing so-called

social funds are like any other fund.

They dont give up the objective of

making money for their investors.

The social funds I am talking about

are not promising the investors any

monetary return at all. They arepromising social impact that will be

made by these investments. In-

vestors would like the idea of social

business and invest in them for solv-

ing social problems.

You have been a critic of SKS Microfi-

nance's IPO. What is the alternativeroute for microfinance institutions to

reach more people in a short span of

time and enable them to come out of

poverty?

SKS presents a caseof a mission drift

in microfinance. When you use mi-

crocredit to make profits for in-

vestors, you are following in the foot-

steps of loan sharks. Thats why I

opposed the SKS IPO. The solution is

not in bringing IPOs to the market to

raise money, but in giving them a le-

gal licence to take deposits and use

that money forlending. We lendmore

than $1 billion a year. All our money

comes fromour deposits.

Your journey frommicrocredit to social

businesses has been a long one. What

are theother missing pieces in your big

pictureof a sustainable social business

ecosystem?

When we started to talk about micro-

credit, it sounded outlandish to most

people. Butthe concept of social busi-ness did not sound outlandish to

most people. There is more accept-

ance of social business than in the

case of microfinance. But these are

only piecesin a larger picture.There

are other issues vying for attention.

There is a financial crisis. There is a

food crisis. There is an environmental

crisis. There is an energy crisis.

There is also a social crisis, amongst

others. It is all because we have a

wrong architecture of economicframework. We need to build the ar-

chitecture in a different way. That is

why I am trying to bring my ideas of

conceptual redesigning. Others can

bring their ideas. But the present ar-

chitecture must change. There is no

escape fromthis.

(Edited excerpts of a longer

version published in FE earlier)

[ INTERVIEW ]

22


MARCH2011

THERE ISA FINANCIAL

CRISIS. THERE ISA FOOD

CRISIS. THERE ISAN

ENVIRONMENTALCRISIS....

IT ISALL BECAUSEWEHAVE

AWRONGARCHITECTUREOF

ECONOMICFRAMEWORK.WE

NEEDTOBUILD THE

ARCHITECTURE INA

DIFFERENTWAY

Inside a SKS

Microfinance office

Bloomberg


27/36

23


MARCH2011

medicineTheMalegamcommittee report: a summary of recommendations

Malegam

Padma started her tea

stall with a micro-loan

Bloomberg

[ REPORT ]


28/36

[ REPORT ]

HE RESERVE Bank of

India has released the

Malegam committeereport on January 19.

The sub-committee of

RBI's central board of

directors was set up under YH

Malegam in October2010 tostudy the

issues and concerns in the microfi-

nance sector. The report received a

mixed reaction from Indian MFIs,

with Vijay Mahajan, chairman of

Basix and president of the Microfi-

nance Institutions Network, saying:

The report gives several reasons for

MFIs to celebrate andseveralmoreto

be concerned about. Here arethe key

recommendations in the report:

3.8Theneed forregulationA separate category be created for

NBFCs operating in the microfinance

sector, such NBFCs being designated

as NBFC-MFI

4.2Definition

A NBFC-MFI may be defined as A

company (other than a company

licensedunderSection25 of the

Companies Act, 1956) which provides

financial services pre-dominantly to

low-income borrowers with loans of

small amounts, for short-terms, onunsecured basis, mainly for income-

generating activities, with

repayment schedules which are

more frequent than those normally

stipulated by commercial banks and

which further conforms to the

regulations specified in that behalf.

Provision should be made in the reg-

ulations to furtherdefine each compo-

nentof thisdefinition.

5.9Regulations tobespecifiedA NBFC classified as a NBFC-MFIshould satisfy the following condi-

tions:

a) Not less than 90% of its total as-

sets (other than cash and bank bal-

ances and money market instru-

ments) are in the nature of

qualifying assets.

b) For the purpose of (a) above, a

qualifying asset shall mean a loan

which satisfies the following crite-

ria:-

the loan is given to a borrower

who is a member of a household

whose annual income does not ex-

ceed Rs 50,000;

the amountof the loan doesnot ex-

ceed Rs 25,000and the total outstand-

ing indebtednessof the borrower in-

cluding this loan also does not

exceed Rs 25,000;

the tenure of the loan is not less

than 12 months where the loan

amount does not exceed Rs 15,000

and 24 months in other cases with aright to the borrowerof prepayment

without penalty in allcases;

the loan is without collateral;

the aggregate amount of loans

given for income generation pur-

poses is not less than 75% of the to-

talloansgiven by theMFIs;

the loan is repayable by weekly,

fortnightly or monthly installments

at the choice of the borrower.

c) The income it derives from other

services is in accordance with theregulation specified in that behalf.

5.10A NBFC which does not qualify as a

NBFC-MFI should not be permitted to

give loans to the microfinance sector,

which in theaggregate exceed 10% of

its totalassets.

7.11Pricingof InterestThere shouldbe a margin cap of 10%in respect of MFIs which have an out-

standing loan portfolio at the begin-

ning of the year of Rs 100 crores and

a margin cap of 12% in respect of

MFIswhichhavean outstanding loan

portfolio at the beginning of the year

of an amount not exceeding Rs 100

crores. There should also be a cap of

24% on individual loans.

8.7Transparency in Interestcharges

There should be only three compo-

nents in the pricing of the loan,

namely (i) a processing fee, not ex-

ceeding 1% of the gross loan amount

(ii) theinterest charge and(iii) thein-

surance premium.

Only the actual cost of insurance

should be recovered and no adminis-

trative charges should be levied. Every MFI should provide to the

borrower a loan card which (i) shows

the effective rate of interest (ii) the

other terms and conditions attached

to theloan(iii) information which ad-

equately identifies the borrower and

(iv) acknowledgements by the MFI of

payments of installments received

and the final discharge. The Card

should show this information in the

local language understood by the bor-

rower. The effective rate of interest

charged by the MFI should be promi-

nently displayed in all its offices and

inthe literatureissued byit and onits

website.

There should be adequate regula-

tions regarding the manner in which

insurance premium is computed and

collected and policy proceeds dis-

posed off.

T

24


MARCH2011


29/36

25


MARCH2011

There should notbe anyrecovery of

security deposit. Security deposits al-

ready collected shouldbe returned.

There should be a standard form of

loan agreement.

9.7Multiple-lending,over-borrowingandghost-borrowers MFIs should lendto an individual

borrower onlyas a member of a JLG

and should have the responsibility of

ensuringthat the borrower isnot a

member of anotherJLG.

a borrower cannot be a member of

more thanone SHG/JLG. not more than two MFIs should

lendto the same borrower.

there mustbe a minimumperiod of

moratoriumbetween the grant of the

loan and the commencement of

its repayment.

recovery of loan given in violation

of th e re gulati ons shoul d be

deferred till all prior existing loans

are fully repaid.

9.12All sanctioning and disbursement of

loans should be done only at a central

location and more thanone individual

should be involved in thisfunction. In

addition, there should be close super-visionof the disbursementfunction.

10.5Credit InformationBureau

One or more Credit Information

Bureaus should be established andbe

operational as soon as possible andall

MFIs be required to becomemembers

of such bureau.

In the meantime,the responsibility

to obtain information from potential

borrowers regarding existingborrow-

ingsshould be onthe MFI.

11.12Coercivemethods of recovery

The responsibility to ensure that

coercive methods of recovery are not

used should rest with the MFIs and

they and their managements should

be subject to severe penalties if such

methods areused.

The regulator should monitor

whether MFIs have a proper Code of

Conduct and proper systems for re-

cruitment, training and supervision

of field staff to ensure the prevention

of coercivemethods of recovery.

Field staff should not be allowedto

make recovery at the place of resi-

dence or work of the borrower andall

recoveries should only be made at the

Group level at a central place to be

designated.

MFIs should consider the experi-

ence of banks that faced similar prob-

lems in relation to retail loans in the

past andprofitby that experience.

Each MFI must establish a proper

Grievance Redressal Procedure.

The institution of independent Om-

budsmen should be examined and

based on such examination,an appro-

priate mechanism may be recom-

mended byRBI to leadbanks.

12.6Customerprotection code

The regulator should publish a

Client Protection Code for MFIs and

mandate its acceptance and obser-

vance by MFIs. This Code should in-

corporate the relevant provisions of

the Fair Practices Guidelines pre-

scribed by the Reserve Bank for

NBFCs.Similar provision should alsobe made applicable to banks and fi-

nancial institutions which provide

creditto the microfinancesector.

13.5Improvementof efficiencies

MFIs should review their back office

operations and make the necessary

A Hindusthan Microfinance employee checks loan application forms

Bloomberg


30/36

[ REPORT ]

investments in Information Technol-

o gy and systems to achieve

better control, simplify proceduresand reduce costs.

14.5Support to SHGs/JLGs

Under both the SBLP model and the

MFI model greater resources should

be devotedto professionalinputs both

inthe formation of SHGsand JLGs as

also in theimparting of skill develop-

ment and training and generally in

handholding after the group is

formed. This would be in addition to

and complementary to the efforts ofthe state governments in this regard.

The architecture suggested by the

ministry of rural development should

also be explored.

15.3Corporate size

All NBFC-MFIs should have a mini-

mum net worthof Rs 15 crores.

16.3Corporate governance

Every MFI should be required to have

a system of corporate governance in

accordance with rules to be specified

by the regulator.

17.3Maintenance of solvency

Provisioning for loans should not be

maintained for individual loans butan MFI should be required to main-

tain at all times an aggregate provi-

sion forloan losseswhich shall be the

higher of:

(i) 1% of the outstandingloan portfolio

or (ii) 50% of the aggregate loan in-

stallments which are overdue for

more than 90 days and less than 180

days and 100% of the aggregate loan

installments which are overdue for

180daysor more.

17.5NBFC-MFIs should be required to

maintaina Capital Adequacy Ratio of

15% and subject to recom

mendation 21 below, all of the Net

Owned Funds should be inthe formof

Tier-I Capital.

18.10Need for competitionBank lending to the Microfinancesec-

torboth through theSHG-Bank Link-

age programme and directly should

be significantly increased and this

should result in a reduction in the

lending interestrates.

19.5Priority sector status

Bank advances to MFIs shall continueto enjoy priority sector lending sta-

tus. However, advances to MFIs which

do not comply with the regulation

should be denied a priority sector

lending status. It may also be neces-

sary forthe Reserve Bank to revisit its

existing guidelines for lending to the

priority sector in the context of the

Committees recommendations.

20.5Assignment and securitisation Disclosure is made in thefinancial

statements of MFIs of the outstand-

ing loan portfolio which has been as-

signedor securitised andthe MFIcon-

tinues as an agent for collection. The

amounts assigned and securitised

must be shown separately.

Where the assignment or securiti-

26


MARCH2011

Bloomberg

Give me

a loan


31/36

27


MARCH2011

sation is with recourse, the full value

of the outstanding loan portfolio as-

signed or securitised should be con-

sidered as risk-based assets for calcu-

lation of Capital Adequacy.

Where the assignment or securiti-

sation is without recourse but credit

enhancement has been given, the

value of the credit enhancement

should be deducted from the Net

Owned Funds for the purpose of cal-

culation of Capital Adequacy.

Before acquiring assigned or securi-

tised loans, banks should ensure that

the loans have been made in accor-

dance with the terms of the specified

regulations.

21.4FundingofMFIs

The creation of one or more 'Do-

mestic Social Capital Funds' may be

examinedin consultation withSebi.

MFIs shouldbe encouragedto issue

preference capital with a ceiling on

the coupon rate and this can betreated as part of Tier-II capital sub-

jectto capital adequacy norms.

22.7Monitoringof compliance

The primary responsibility for en-

suring compliance with the regula-

tions should rest with the MFI itself

and it and its managementmust bepe-

nalised in the event of non-compli-ance

Industry associations must ensure

compliance through the implementa-

tion of the Code of Conduct with

penalties for non-compliance.

Banks also must play a part incom-

pliance by surveillance of MFIs

through their branches.

The Reserve Bank should have the

responsibility for off-site and on-site

supervision of MFIs but the on-site

supervision may be confined to the

larger MFIs and be restricted to the

functioning of the organisational

arrangements and systemswith some

supervision of branches. It should

alsoinclude supervision of the indus-

try associationsin so faras theircom-

pliance mechanismis concerned. The

Reserve Bank should also explore the

use of outside agencies for inspection.

The Reserve Bank should have the

power to remove from office the CEO

and / ora directorin the event of per-

sistent violation of the regulations

quiteapartfromthe power to deregis-

ter an MFI andprevent it fromoperat-

ing in the microfinance sector.

The Reserve Bankshould consider-

ably enhanceits existing supervisory

organisation dealing with NBFC-

MFIs.

23.4Moneylenders Acts

NBFC-MFIs should be exempted fromthe provisions of the Money-Lending

Acts, especially as we are recommend-

ing interest margin caps and in-

creased regulation.

24.7TheMicro Finance(Development andRegulation) Bill2010

Subject to Smt (shashi)Rajagopalan'sreservations as expressedin para 24.6,

we would, recommend the following:

a) The proposed Act should provide

for allentities covered bythe Act to be

registered with the Regulator. How-

ever, entities where aggregate loan

portfolio (including the portfolio of

associated entities) does not exceed

Rs 10 crores may be exempted from

registration.

b) If Nabard is designated as theregu-

lator under the proposed Act, there

must be close co-ordination between

Nabard and Reserve Bank in the for-

mulation of the regulations applica-

ble to the regulated entities.

c) The micro finance entities gov-

erned by the proposed Act should not

be allowed to do the business of pro-

viding thrift services.

25.7TheAndhraPradeshMicro

Finance Institutions(RegulationofMoneyLending)Act

If the Committees recommendations

are accepted, the need for a separate

Andhra Pradesh Micro Finance Insti-

tutions (Regulation of Money Lend-

ing)Act will not survive.

26.2Transitory provisions(a) 1st April 2011 may be considered as

a cut- off date by which time our rec-

ommendations, if accepted, must be

implemented. In particular, the rec-

ommendations as to the rate of inter-

est must, in any case, be made effec-

tive to all loans given by an MFI after

31st March 2011.

(b) As regards other arrangements,

Reserve Bank may grant such exten-

sion of time as it considers appropri-

ate in the circumstances. In particu-lar, this extension may become

necessary for entities which cur-

rently have activities other than mi-

crofinance lending and which may

need to form separate entities con-

fined to microfinance activities.

(The full reportmay beaccessed at:

http://www.financialexpress.com/

news/malegam-medicine/742120/0)


32/36

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28


MARCH2011

KS Microfinance illus-

trates exactly how busi-

ness institutions might

enunciate certain in-

tents while coming intobeing, but stray into more rewarding

activities when the occasion arises.

SKS Microfinance in fact had been

getting kudos for having so trans-

formed itself, being applauded by

bankers, financiers (like Mr George

Soros),and thebourses.

Until, that is, it got stopped in its

tracks by the Andhra Pradesh gov-

ernments Microfinance Institutions

(Regulationof Money Lending) Ordi-

nance,2010 on October 15.What immediately followed were

numerous media exposes about the

methods used for loan-recovery by

micro-finance institutions (MFIs),

with many of them leading rural bor-

rowers to suicide. But the realitywas

that MFIs remained able to get

clients, charge interest rates that

were as high as 30% (and more, de-

pending on loan size) and enforce su-

perior repayment compliance owing

to their outreachand thefrequency of

(small-value) realisations.

Too manysuch casespersuaded the

AP government that MFIs hadturnedinto get rich quick schemes while it

had been officially desired that they

would aid the poor with affordable

loans mediated by self-help groups

(SHGs). Critics have also been com-

plaining that MFIsomitted to passon

to borrowers a share of profits (aris-

ingfrom investments they had made)

something which could have been

doneby lowering interest rates.

Aboveall, they were alltoo prone to

using strong-arm tactics in order torealise outstandings. And that could

explain why the AP Ordinance laid

down that repayments must not be

madeindividually, butby SHGs that

too only at the Gram Panchayats of-

fice. Meanwhile, the district-level reg-

istering authority has been empow-

ered to verify the details that are

supplied by claimant MFIs. Indeed,

such authorities have even been

Underlying the face-off between SKSMicrofinanceandAPgovernment isanalteration in the aim of business

Arrestedin its track

SOUMYAKANTIMITRA

This is perhaps thelast article written by

senior journalist and columnist Soumyakanti

Mitra, whoexpired on December 30,2010

S


33/36

29


MARCH2011

charged to get a written undertaking

from MFIs, declaring that they shall

alwaysact according to the provisions

of the Ordinancei.e., stick to the

not-for-profit stance that they had

originally stated.

Quite plainly, the AP government

has been reacting on behalf of indi-

gent borrowers by enforcing that ini-

tially self-stylednot-for-profit MFIs do

not regress to loan-recovery methods

which areentirely out of place.

MFIs find it tough that the Ordi-

nance forbids deployment of MFI re-

covery agents. Repayments, they

claim, are at a standstill. Meanwhile,

reduced realisations will constrict

lending, sap MFIs ability to pay off

debt or even to approach borrowers

withfreshloans.

That would also explain why SKS

scrip has gone below the IPO price.

This very same scrip had touched

Rs 1,036 on August 16, following SKS

Microfinances IPO, which had been

oversubscribed 13.69 times. Market

analystsforecast dire times ahead un-

less there emerges clarity on regula-tions pertainingto MFIactivity. As for

SKS Microfinance,all indications sug-

gest that the scrip, notwithstanding

company denials,remainsvulnerable.

Currently, Andhra Pradesh ac-

counts for 27% of SKSMicrofinances

entire portfolio and the company had

gross loan outstanding of Rs 5,434

croreat theend of September. That in-

cludes non-recovered loans of be-

tween Rs 50-75 crorewith no way to

accessing them, or gauging theirworth, following the Ordinances stric-

tures against deploying agents.

Some might even say that the gov-

ernment has killed off the loan mar-

ket in that area. It has done so by

killing off the transactions dialogue

that is so important in the conduct of

markets.

Underlying this face-off between

SKS Microfinance and the state is an

alteration in the aim of businessone

that hadfoundmentionright at thebe-

ginning. For, while many feel that mi-

crofinance should be a social busi-

ness, meaning investors should get

back only their investments, not their

profit, SKSMicrofinance thinks differ-

ently.

MFIs thatare of its typesay thatmi-crofinance will provide the projected

Rs 2,399.35 bn ($51.4 billion) in credit

that is needed by the poor, for which it

must tap commercial capital markets.

That, inturn, willneed moreto bebor-

rowed from investors elsewhere by

MFIswhich,in turn, means a restruc-

turingthatcan yieldinvestorsa return.

Thatexplains alsowhy, in 2005, SKS

Microfinance metamorphosed from

being an not-for-profit NGOintoa RBI-

regulated profit-drivenNBFC. Its mar-

ket- and profit-orientation is proceed-

ing apace and there are expectations

that its success in accessing the capi-

tal market will beckon other compa-

nies to float IPOs.

In fact, sector insiders claim that

IPOs are a must. Their need is felt

with loan-book sizes of Rs 3,000-4,000

crore-plus. Those are the upper lim-

its, above which it is very hard to

raise capital even fromprivate equity

investors. That is when an IPO be-

comes inevitable.

But all that is for the future, with

just one MFI currently listed. Mean-

while, Crisil finally downgraded al-

most all thebigger players in the MFI

sector. They included Spandana Spho-

orty Financial Ltd, Asmitha Microfin

Ltd, Bhartiya Samruddhi Finance Ltdand Equitas Micro Finance India Pvt

Ltd. All were placed on rating watch

with negative implications.

Crisil also reported that MFI ac-

cess to fresh loans from banks and fi-

nancial institutions has dropped

materially. The short point

seems to be that private lenders look

venal, while the government is

out of funds.

The SKS Microfinance head office in Hyderabad

Bloomberg

THE SHORTPOINTSEEMS

TOBETHATPRIVATE

LENDERSLOOK VENAL,

WHILETHEGOVERNMENT IS

OUTOFFUNDS


34/36

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30


MARCH2011

hat a year 2010 has

been for microfinance

in India. At the start

of the year, the pri-

vate-sector NBFC seg-

ment of the industry (I will refer to it as

MFI) was feeling really good about it-self. In thesecond half itall seemedto go

horribly wrong. Media coverage turned

vicious. The Andhra Pradesh Ordinance

was passed in October, significantly re-

stricting MFIs operations in AP, the in-

dustrys most important market. And in

early December, the Ordinance was con-

verted to a Bill. As the year came to an

end, some analysts seem ready to write

the industry off.

Innovations will copewith newregulations and restoreMFIs mission focus

The end of the

W

beginningbeginningK SREEKUMAR

CEO, Intellecap


35/36

31


MARCH2011

But the industry is far from finished.

As an industry, we continue to be-lieve, microfinance remains viable,

sustainable and profitable in the long

term. (And no, Gentle Reader, we do

not believe in the Tooth Fairy!) But

growth ratesmaynot return to those

of the last few years. This, at least ar-

guably, is not altogether a bad thing.

After the AP OrdinanceSoon after the AP Ordinance was

passed, the state government estab-

lished a working group jointly

headed by the CEO of the Society for

Elimination of Rural Poverty

(SERP), and the CEO of Trident Mi-

crofinance. Thiswas initially readas

a sign that the government might be

willing to negotiate some compro-

mises. However, in early December,

the Andhra Pradesh State Assembly

pa ssed a Bill wit h langua ge

in essence unchanged from the

Ordinance.

Within the industry there is reluc-

tant admission that some form ofregulation was required. Among

those with a long-term commitment,

there is a willingness to build new

models, which comply with the new

regulations and reaffirm the indus-

trys poverty-alleviation credentials.

The best in the industry had already

been thinking about these models,

and in some cases welcomed a pause

in the breakneck pace that industry

leaders had set. In other circum-

stances, this would have been a goodconstituency in whichto build a new,

dual-bottom-line model.

However, there is real nervousness

in AP about the state governments

intentions. Reports that the AP State

governmenthas asked theRBI to pro-

hibit MFIs from raising capital sug-

gest an unthinking hostilityto thein-

dustry. The remarkable

achievements of AP in poverty alle-

viation notwithstanding, suchhostil-

ity to the private sector is not goodforthe stateor itspeople.

No meeting ground or notime to make changes?For their part, MFIs operating in AP

have registered, as required by the

Bill, and submitted data on cus-

tomers, interest rates and other

charges. They have voluntarily an-

nounced reductions in interest rates.

On the whole, the MFIs are comply-

ing as they undoubtedly should.

That said, the Bill remaining es-

sentially unchanged from the Ordi-

nance suggests that either there was

no meeting ground between the two

sides in the working group, or that

their recommendations were ig-nored. Is this a deliberate actby gov-

ernment? Or is it just that among the

myriad issues (Telengana, crop dam-

age, the Jagan factor) demanding the

attention of a new chief minister, ap-

pointed literallyjust beforea heavily

disrupted Assembly session, the

business concerns around theAP Or-

dinance just ranked too low to merit

political attention?

Ineffective regulationAs we have previously said, far from

regulating microlending activity ef-fectively to make it poor-friendly, the

AP Bill has several perverse effects.

It introduces legislation retrospec-

tively, it adds a significant compli-

ance burden to the delivery of serv-

ices, and it is likely to result in

haphazard implementation of discre-

tionary provisions. In addition, al-

thoughnot included in the Bill, there

has been talk of a Bangladesh-style

cap on interest rates. If imple-

mented, a cap would reduce the at-tractiveness of the sector, thereby re-

ducing competition, and the pressure

to reduce rates. So much for the

avowed intent of the legislation.

As in all sectors, informed regula-

tion that weighs all stakeholders in-

terests ultimately helps both govern-

ment and the industry, as well as, in

the long run, the people. Whatever

the sins of the industry, the Ordi-

THE PRIVATE SECTOR IN

INDIA HAS COPEDWITH

DECADES OF POOR

REGULATION,ANDWITH

PERIODIC EPISODES OF

HOSTILITY. WE FULLY

EXPECTTHE SECTOR TO

COPE WITH THE CURRENT

CRISIS

Looking for a better life


36/36

nance andthe Bill do notmeasureup

to this standard.

Emerging from the crisisThe private sector in India has coped

with decades of poor regulation, and

with periodic episodes of hostility.

We fullyexpect thesector to cope with

the currentcrisis. However, we do ex-pect to see significant changes. And

theindustry will certainly needsome

active management to tide it through

these challenges.

Looking ahead, we expect innova-

tionsto cope with thenew regulations

and restore the MFIs mission focus.

These include a wider product portfo-

the governments Banking Corre-

spondent model. Credit-appraisal

systems will have to be strengthened

and formalised, which should become

easier onceAadhaar, the universal ID,

is effectively rolled out. Allowing

MFINs proposed credit bureau to

function would be a helpful step by

government, in preventing multiplelending. This is currently awaiting

RBI permission.

Thesector is changing,but it could

be for the better. The current transi-

tion period isnot, webelieve,the end

it may be just the end of the begin-

ning. Indias millions of micro-bor-

rowers deserve no less.N

ANCEWORLDIJANUARY-

MARCH2011

Parwati started the bangle business

with a micro-loan

[ COLUMN ]

micro finance jan mar 2011

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