MICRO - FINANCEMicrofinance is the provision of

financial services to low-income clients or solidarity lending groups who

traditionally lack access to banking and related services.

“Business must be for Profit, but Profit must also be for Purpose”

Why do the poor lack access to traditional banking ?

• Most poor people don’t have assets that can be secured as collateral* by bank. (for ex. even if they happen to own land, they may not have effective title to it)

•They don’t have a stable income or a verifiable credit history

•They fall below the break-even point.*Collateral : the security for repayment a bank asks

before giving loan

SEC. 1 : General Overview

Banks incur a fixed cost to manage a client account, regardless of how small the sums of money involved. The fixed cost includes :

• Identifying and Screening clients.• Processing Loan Applications.• Disbursement of payments.• Collecting repayments.• Following up on non-repayment.

There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point.

Break-even point

Due to all these reasons, the poor cannot meet even the most minimal

qualifications to gain access to traditional financial services

And here comes the need for “MICROFINANCE”

The poor are Bankable

What are the financial services that need to be provided ?

Before answering this question, let us see what are the needs of the

poor people ?

needs

Appropriate financial services

• Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, festivals, widowhood, old age, sickness.

• Personal Emergencies: such as injury, unemployment, theft, harassment or death.

• Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings.

• Investment Opportunities: expanding a business, buying land or equipment, irrigation, improving housing.

• Sending money to family to at home and away.

Financial needs

What do you think are the solution for these?

Microcredit (providing small loans) can solve the problem for home-building, education, irrigation, expanding their business, investment opportunities.

But what about • Death, Old age, unemployment, festivals ?Micro savings• Natural disasters, flood, draught, theft ?Insurances• Sending money to family to at home and away ? Money transfer

Microcredit

• Small Loans (typically Rs. 5000 to Rs 15,000) lent to the poor

• Collateral free.

• Solidarity Lending.

• Typically used for income generation activities.

• Repayment rate : ~ 98 %

Key Features

Types of costs incurred to M.F.Is

An M.F.I has to cover three types of costs :

• Cost of money that it rents i.e. the market interest rates (proportional to the amount borrowed)

• Cost of loan defaults(proportional to the amount borrowed)

• Transaction costs (as explained earlier )(Almost fixed i.e. irrespective of amount borrowed)

(Numerical example)

Solidarity Lending

Small groups of people borrow collectively and hold joint

responsibility for each other.• Benefits to the M.F.I : Lowers Transaction cost Saves staff time and effort

• Benefits to the borrowers : Lowers interest rate Provides Flexibility Eliminates the need for collateral.

How does it work ?Joint Liability

The Group works as a whole. The group which defaults is not allowed to get further access to credit and the one which performs well gets incentives.

If the borrower has a genuine problem, the group members try to help out the member. This offers flexibility to the borrower.

Peer pressure If the borrower is not repaying, then the other members of the group put social pressure upon him to repay the loan.

The Revenue Model

Bank MFI SHG

Total ROI to Borrower

30 %

Market ROI (12 %)

Transaction Cost

15 %

Profit Margin

3 %

At first this may seem to be very high interest rate. But when we look at the process, the rates seem to be O.K. And think about the interest rates that local moneylenders are charging !!!!

80% to 100% ROI !!!

As more poor people gained access to loans from microcredit institutions it became apparent that the services of moneylenders continued to be valued.

• Borrowers were prepared to pay very high interest rates for services like : Quick loan disbursement. Confidentiality. Flexible repayment schedules.

• They did not always see lower interest rates as adequate compensation for :

The costs of attending meetings. Attending training courses to qualify for

disbursements. Making monthly collateral contributions.

MFI v/s Local Money lenders

“Access to Financial services are a constraint for the poor and not the

interest rates”

The most important principle of Microfinance !!!

History of Microfinance• Ideas relating to microcredit can be found at various times in modern history.Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries. • In the mid-19th century, Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty. • Ideas relating to microcredit were mentioned in portions of the Marshall Plan at the end of World War II.

• However, the pioneering of modern microfinance, with attention paid by economists and politicians worldwide, is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. 

SEC. 2

• Total Microfinance Institutions in world = 1,928• Gross loan portfolio USD = 65.2 billion• Deposits = USD 27.0 billion• Number of borrowers = 92.4 million• Average loan balance per borrower USD 521.9

Current Portfolio for the Microfinance industry around the world

Nobel Prize

 Grameen Bank along with its founder Muhammad Yunus was awarded the Nobel Peace Prize in 2006.

“…… Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights……..”

Different models for Microfinance

1.Joint Liability Group (JLG) Model

2.Self Help Group (SHG) – Bank linkage Model

3.Peer to Peer Lending Model orIndividual Lending (considered to be the future of Microfinance.)

Sec 3

Joint Liability Group (JLG) Model• Solidarity lending

• Joint liability (all members sign counter guarantee to all)• 5 Member Groups Centers composed of 8-10 Groups• Weekly Centre meetings all transactions, discussions, etc.• One time membership fee.• Collections through Joint Liability and Peer Pressure.

Formation of Groups : • Introductory Meetings. • Training sessions : hierarchy of organization, way of

working, centers and groups, rules and regulations, various services, interests, book keeping skills.• Group Appraisal Test (GAT) : Qs based on training. A

group is entitled to loans only after clearing the GAT.

Self Help Group (SHG) Model•Affinity Group consisting of 10 to 20 local women.

• Members make small regular savings contributions to the group fund. Funds may then be lent back to the members to meet their emergency needs on the basis of mutual help. Also called savings-led Microfinance.• No Joint Liability. Only peer pressure

• After there are sufficient funds in the group, the group is ‘linked’ to banks such as NABARD through NGOs for the delivery of microcredit . NGOs act as intermediary between Banks and SHGs – Bank formalities, provide training, etc.The group has a savings account in the bank.

Peer to Peer lending Model

The peer-to-peer lending firms either act as middlemen between friends and family to

assist with calculating repayment terms, or connects anonymous borrowers and lenders.

E.g. Rangde.org, kiva.org.

• Uses web technologies, especially web 2.0• The development of theP2P lending was further boosted by the global economical crisis in 2007-2010 at the time when banks and other traditional financial institutions were having fiscal difficulties.• Disintermediation

Revenue Model of kiva.org

Microfinance in IndiaSec. 4

List of Major Microfinance Institutions in India :

1.SKS Microfinance Limited (SKSMPL) – Secunderabad (A.P) - private limited

2. Spandana Sphoorty Financial Ltd (SSFL) – Hydereabd (A.P) – public limited

3. Share Microfin Limited (SML) – Hyderabad (A.P) – public limited

4. Asmitha Microfin Ltd (AML) – Hyderabad (A.P) – public limited

5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP) – Karnataka – public limited

Total no. of MFIs in India = 149

• Gross loan portfolio  = USD 4.5 billion• Number of active borrowers = 6.6 million• Average loan balance per borrower = USD 144.4• Deposits = USD 204.9 million• Total assets = USD 20095.1 billion• Number of depositors = 2.0 million

Current Scenario of MF in India

Only 20% of the market has been reached yet !!!

Financial Profile for SKS :Gross loan portfolio = USD 960.8 millionNumber of active borrowers = 5.8 millionAverage loan balance per borrower  = USD 165.8Total assets = USD 897.9 million

Financial Profile for Spandana Sphoorty :Gross loan portfolio = USD 787.3 millionNumber of active borrowers = 3.7 millionAverage loan balance per borrower USD = 214.9Total assets = USD 647.3 million

A.P ordinance (15 October,2010)

The Ordinance is aimed at regulating the functioning of the MFIs and to come to the rescue of the victims who

have been facing harassment from the MFIs Key Points• Mandatory for all MFIs to register with the district Registering Authority within 30 days.• The MFIs should specify the area of their operations, the rate of interest, the system of operation and recovery• The ordinance makes it clear that the amount of interest should not be in excess of the principal amount.• Also, the MFI should not extend a second loan unless the first loan is cleared.•only those staff with identity cards should go for recovery which should be done in a public place.

• Only 20% of all those who can be benefited from microfinance have been reached• With emerging technologies, there is a lot of innovation.• With new tools such as Poverty Progress Index of Grameen Foundation, it has become very easy to measure client satisfaction and to serve them better.• But just now i.e. 2011 is not the right time (entrepreneur magazine)• More NGOs are likely to incorporate microfinance as one of their programs. International NGOs and agencies will develop microfinance programs in areas where MF is not popular.(e.g. developed countries.• Foreign funding is expected to reach USD 25 billion by 2015.

Scope for EntrepreneursSec. 5

Urban MicrofinanceOpportunities •High percentage of wage earners• 31% of household own at least one business• Higher loan amount• individual lending possible• Technology can be better harnessedChallenges• Does not have NABARD• Only Big Microfinance can operate as the loan amount and startup cost is larger• Stiff competition from major financial players

Scope for Entrepreneurs

Changes Required

• Inflexibility of loan products and unavailability of savings and insurance due to regulatory barriers are a big hindrance for growth.• Ensure Transparency and Full Disclosure of rates.• Favorable attitude by government of India and RBI.• Govt. should encourage involvement of private sector investors

Sec. 6