Microfinance sector in India

Prepared by

Amit 11810011David Roy 11810025

Mayank Saxena 11810045Sayantan Chattopadhyay 11810075

DefinitionMicrofinance refers to the small-scale financial services including both credits and deposits provided to people who farm or fish or herd; operate small or microenterprises where goods are produced, recycled, repaired or traded; provide services; work for wages or commissions; gain income from renting out small amount of land, vehicles, draft animals, or machinery and tools; in both rural and urban areas.

Key Features of Microfinance

Key Features of Microfinance

Lend to the poor

Do not take

security

Prefer saving over

Borrowing

Small short term loans

Cost covering interest

rates

Group appraisal

and guarantee

Prefer women

customers over men

Microfinance means the provision of banking services to lower income people especially to the poor and very poor.

Case for Microfinance in India

• Incidence of poverty: The World bank report on global poverty reveals that India has 421 million people below $1.25 a day mark in 1981, the number had gone upto 456 million by 2005.While there has been a decline in poverty ratio, the ranks of the poor are still swelling.

• The Global hunger index prepared by International Food Policy Research Institute(IFPRI) puts the number of hungry in India at 200 million-the largest population of hungry in the world.

• Hence the incidence of poverty and hunger in India is alarming and to alleviate this situation, microfinance institutions can play a right role by identifying the poor and lending small amounts of money so that the poor invests in income generating activities, earn income, create assets and overcome poverty.

State wise distribution of Microfinance

Developments in Microfinance in IndiaMicrofinance in India has started to evolve in the early 1980’s with an effort of forming informal Small Help Group (SHG) to provide access of financial services to needy.

India is 2nd most populous country behind China with a large number of un-financed poor people- Main clients for MFIs.

MFIs are estimated to have 7.94 million borrowers as of March 2008 with CAGR of 88.42% over the last five years and cumulative outstanding loan portfolio of US$824 million.

SHG has loan outstanding of US$356.45 million as of March 2008.Ity shows a CAGR growth of 78.21%from FY03-FY08.

National Bank for Agricultural and Rural development(NABARD) and Small

Industries Development Bank of India (SIDBI) are devoting their financial

resources and time towards the development of microfinance.

The strength of the microfinance sector lies in the diversity of models, it has

adopted including home grown models like MFI and SHG to other learnt

models from various countries like Thailand and Bulgaria.

Pillars of Microfinance in India

•Such as Spandana, SHARE Microfin Ltd., and SKS Microfinance have also scaled up their micro credit outreach dramatically in recent years

Niche-Market MFIs in India•Expandi

ng its financial services to poor households through a multi-prolonged approach-Directly providing credit facilities to SHG, and providing wholesale credit facilities to microfinance NGOs and NBFCs.

Private Banks like ICICI Bank

•The Syndicate Bank, Andhra Bank, Canara Bank and Indian Bank have entered this market.

State owned/Commercial Banks

•Started to eye low profile MFIs, as they foresee huge potentiality in terms of returns from this sector. E.g. JM financial have investments from old Lane Partners and Delhi based Lok Capital.

Private Equity Firms

•NABARD & SIDBI are performing regulatory and promotional role, providing financial resources as credit & equity and enhancing technology know-how of MFIs.

NABARD & SIDBI

Role of RBI,NABARD and SIDBI

•Support financial liberalization & create condition sustainable for sector

•Support projects of microfinance

•Prudential regulation and supervision.

•Collecting data and advocacy

RBI – Central Bank

•Framing policy and guidelines for rural financial Institutions

•Providing credit facilities to issuing organizations

•Preparation of potential-linked credit plans for all districts

•Overseeing the linking programme of banks to SHGs and offers refinance for it.

NABARD - Regulator

•Lends to MFIs through SIDBI foundation for microcredit.

SIDBI

Financing Model adapted by Banks

Bank

MFIs/NGO

SHG

Bank

NGO Facilitator

SHG

Credit Client

Client Promotion & Training

ClientCredit

Promotion & Training

Member/Client Member/Client

Direct Financing Model SHG-Bank Linkage Model

Micro Finance Approaches

SHG-Bank Linkage (Dominant Model)• A homogeneous group of about 15 to 20

• Every member to save a small amount regularly. Pooled savings kept in a savings bank account in SHG’s name

• SHG to use pooled thrift to give interest bearing loans to members – decisions taken in group meetings

• Depending on the SHG’s maturity, bank gives loan to the SHG as a multiple of the pooled savings. Bank loan added to the SHG kitty.

Design Feature Self selection, Saving first and credit later, focus on women, market rate of interest,

progressive lending, credit rationing, Intra group appraisal system and prioritization etc.

SHG-Bank Linkage Models

MODEL-ISHGs formed and financed by Banks – 20%

MODEL-IINGOs act as Facilitators – SHGs financed directly – 74%

MODEL-IIISHGs financed by Banks using NGOs as Financial Intermediaries – 6%

Source: NABARD, Status of Microfinance in India

Micro Finance Institutions

NGO MFIs – Registered under Societies Registration Act, 1860 and / or Indian Trust Act, 1880

Cooperative MFIs – Registered under State Cooperative Societies Act or Mutually Aided Cooperative Societies Act (MACS) or Multi- State Coop. Societies Act, 2002

Not for profit companies - NBFC MFIs incorporated under Section 25 of Companies Act, 1956

NBFC MFIs incorporated under Companies Act, 1956 & registered with RBI

Micro Finance Institutions (MFIs) are playing an important role of financial intermediaries in micro finance sector. The MFIs operate under various legal forms:

MFIs(Continued)...

3 major initiatives by NABARD to support MFIs:• Capital Support: Micro Finance Development Fund(mFDF) was setup with NABARD

by GoI in 2000-01 with the initial corpus of Rs. 100 cr. Increased to Rs. 400 cr in 2010-11.

• Revolving fund assistance to MFIs: on selective basis to MFIs for on-lending to SHG or individuals.

• Rating of MFIs: Financial assistance by grants to CBs, RRBs, and cooperative bank to avail service of rating agencies - CRISIL, M-CRIL, ICRA, CARE

Micro Finance Institutions(Development & Regulation) Bill, 2011

A Bill to provide access to financial services for the rural and urban poor and certain disadvantaged sections of the people by promoting the growth and development of micro finance institutions as extended arms of the banks and financial institutions and for the regulation of micro finance institutions and for matters connected therewith and incidental thereto.

• Constitution of Micro Finance Development Council - on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the micro finance sector and micro finance institutions, to promote financial inclusion

• State advisory councils: for Micro Finance at the State level and considering the extent of micro finance activities in the States

Micro finance sector lacks a formal statutory framework for its financial activities

Micro Finance Institutions(Development & Regulation) Bill, 2011

• Registration of Microfinance Institutions: MFIs shall not commence or carry on the activity of providing micro finance services without obtaining a certificate of registration from the Reserve Bank under this Act.

• Reserve, Accounts, Audit & Returns: Create a reserve fund & transfer there in a sum, representing such percentage, as may be specified by the RBI, of its net profit or surplus realized by providing MF services every year.

• Function and powers of Reserve Bank: promote and ensure orderly growth for purpose of financial inclusion.

• Redressal Mechanism: appoint Micro Finance Ombudsmen for purpose of

redressal of grievances between client and MFIs.

Source: Finance Ministry, June 2011

Malegam Committee recommendations

• All bank loans to MFIs, including non-banking financial companies (NBFCs) working as MFIs would be treated as priority sector lending(conditions to qualifying asset criterion).

• Loan must be to rural household with annual income of not more than INR 60,000. For urban or semi-urban borrower, household income must be INR 120,000 or less.

• Loan amount cannot exceed INR 35,000 in first cycle and INR 50,000 in subsequent cycles.

• A household’s total indebtedness at any given time should not exceed INR 50,000

• Loan term should not be less than 24 months for amounts more than INR 15,000 without prepayment penalty.

• Loans to be extended without collateral

Malegam Committee recommendations…

• Aggregate amount of loan for income generating purposes must be at least 75% of total advances.

• Loans must be repayable by weekly, fortnightly or monthly insallments, the choice of which will vest with the borrower.

• To qualify as priority sector loans, banks must ensure a margin cap of 12% and an interest rate cap of 26%

• MFI loans can be extended to individuals outside of self-help groups (SHG) or joint liability group (JLG)

• Bank loans to other NBFCs will not be treated as priority sector leading effective April 1, 2011.

The Profile of Microfinance in IndiaThe scenario• Estimated that 350 million people live Below Poverty Line• This translates to approximately 75 million households.• Annual credit demand by the poor in the country is estimated

to be about Rs. 60,000 crores.• Cumulative disbursements under all microfinance programs

is only about Rs. 5000 crores.(Mar. 04)• Total outstanding of all microfinance initiatives in India

estimated to be Rs. 1600 crores. (March 04)• Only about 5 % of rural poor have access to microfinance.

• Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs. 5000 crores, the total outstanding is estimated to be only about Rs. 1600 crores. The active borrowers are estimated to have a per capita outstanding of only Rs. 2500.

• While 10 % lending to weaker sections is required for commercial banks, they neither have the network for lending and supervision on a large scale nor the confidence to offer term loans to big MFIs.

• The non poor comprise of 29 % of the outreach.

The Profile of Microfinance (contd)

The Status of Microfinance in India

• Considerable gap between demand and supply for all financial services

• Majority of poor are excluded from financial services. This is due to, inter-alia, the following reasons

1. Bankers feel that it is fraught with risks and uncertainties.2. High transaction costs3. Unfavorable policies like caps on interest rates which effectively limits the viability of

serving the poor.

• While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. These include

1. Lack of an appropriate legal vehicle2. Limited access to equity3. Difficulty in accessing low cost on-lending funds (as of now they are unable to offer

savings services in a legitimate manner.

• Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations.

• About 56 % of the poor still borrow from informal sources.• 70 % of the rural poor do not have a deposit account• 87 % have no access to credit from formal sources.• Less than 15 % of the households have any kind of

insurance.• Negligible numbers have access to health insurance (0.4

%) and crop insurance (0.2 %).

The Status of Microfinance (contd)

Features of Indian MF• About 60 % of the MFIs are registered as societies.

• About 20 % are Trusts

• About 65 % of the MFIs follow the operating model of SHGs.

• Large concentration in South India

• 600 MFI initiatives have a cumulative outreach of 1.25 crore poor hoseholds

• NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore households.

• Finding adequate levels of equity for the new entities to leverage loan funds

• Ability to access loan funds at reasonably low rates of interest.• Ability to attract and retain professional and committed human

resources.• Design of apt MIS including user friendly software for tracking

accounts and operations.• Appropriate loan products for different segments.

Challenges faced by MFIs

Challenges faced by MFIs

• The loans given to poor customers are invested in such things as tools, inventory and livestock where returns are low.

• The poor lack skills, education and the ability to create productive assets for steady income flows.

• Over-indebted clients• In 2010, in the wake of a spate of suicides by borrowers,

allegedly due to the coercive recovery practices employed by MFI agents, came the AP MFI Act which mandates prior approval of every loan application by the state government authorities.

• The four largest MFIs operating in AP recorded negligible growth rates in 2010-2011

• At end-March 2011 there was 20% increase in client accounts served compared to previous year

Growth Projection

Source: Micro-Credit Ratings International Limited

“If we want to help poor people out, one way to do that is to help them explore and use their own capability. Human being is full of capacity full of capability, is a wonderful creation. But many people never get a chance to explore that, never, no that she nor he has that” ― Muhammad Yunus