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- 1. Micro Finance in India overview, challenges, and the role of technology By Annie DufloCentre for Micro Finance Research October 28, 2005
2. Outline of presentation
- What is microfinance?
- Providing financial services to the poor: challenges
- Providing financial services to the poor in India: Overview
- Microfinance: Challenges ahead and potential solutions/initiatives
- The Centre for Micro Finance Research
3. Microfinance: what is it? 4. Microfinance: what is it?
- What are the words that come to your mind when you hear the word microfinance?
5. Microfinance: what is it? Microfinance = provision of financial services to the poor 48% 15% 37% R4 R3 R1 / R2 6. Microfinance: what is it?
- Group lending
- Social/charitable activity
- Range of financial services
- Group and individual lending
- Profitable activity
What it often is What it really should be 7. Providing financial services tothe poor: challenges 8. Providing financial services tothe poor: challenges
- Risk management challenges due to information asymmetry problems
- Accessibility (geographic accessibility and easiness to deal with)
- No collateral, Low value and cash intensive nature of the business
- Staff training and motivation
High transaction costs 9. Information asymmetry Decision to take loan Loan usage loan repayment Adverse selection Moral hazard 10. Adverse selection: incomplete information problem (before the loan) Dont knowClients type Interest ratereflects proba of default Safer clients drop out Need to increase interest rate Providing credit canbecome impossible 11. Moral hazard: hidden action problem (after loan) Can not observe what client is doing Bad loan usage Strategic unwillingness To repay 12. Clients profile
- 75% population lives in rural areas: geographical access difficult
- Informal activities: need access at flexible times
- Illiteracy: difficult to deal with traditional services
- Low value of transactions
- Lack of collateral
- Lack of trained staff
- Lack of motivated staff
- Difficult to incentives staff
14. Delivering financial services to the poor in India: an overview 15. Providing financial services to the poor: occupied India
- Deccan,late 19th Century:
- peasant riots on account of coercive alienation of land by moneylenders.
Organization of cooperative societies as alternative institutions for providing crdit by british government 16. Providing financial services to the poor: Independent India:
- Credit was viewed as essential part of fight against poverty which led to following measures:
- Expansion of the institutional structure
- Directed lending to disadvantaged borrowers and sectors
- Interest rates supported by subsidies
- Institutional vehicles: cooperatives, commercial banks and Regional Rural Banks [RRBs].
17. Providing financial services to the poor: Timeline
- 1950 & 1969:emphasis on the promoting of cooperatives.
- 1969: nationalization of the major commercial banks: beginning of commercial bank branch expansion in the rural and semi-urban areas.
- 1976: Regional Rural Banks (RRB), low cost institutions mandated to reach the poorest in credit-deficient areas
- During this period, intervention of the RBI (Reserve Bank of India) was essential: special credit programmes for channeling subsidized credit to the rural sector (concept of priority sector)
18. Financial reforms for RFIs
- Enhance the areas of commercial fredon
- Increase their outreach to the poor
- Stimulate additional flows to the sector.
- Liberalising interest rates for cooperatives and RRBs,
- Relaxing controls on where, for what purpose and for whom RFIs could lend, reworking the sub-heads under the priority sector,
- Introducing prudential norms
- Restructuring and recapitalising of RRBs.
- Access in terms of rural branches increased from 1,833 in 1969 to around 32,538 at present: 49% of all scheduled commercial bank branches are rural
- The population per rural branch declined from 2,01,854 in 1969 to around 16,000 at present.
- The proportion of borrowings of rural households from institutional sources increased from 7 per cent in 1951 to more than 60 per cent at present.
20. Results (contd)
- 31% (131.1 million) of the total deposit accounts are in rural India
- 43%(22.4 million) of total credit accounts are in rural India
- Positive impact on the poor (Rohini Pande/Burgess paper)
21. HoweverSuccess was not as high as hoped
- Defects in policy design,
- Infirmities in implementation
- Inability of the government of the day to desist from resorting to measures such as loan waivers.
- High defaults
- The banking system - was not able to internalise lending to the poor as a viable activity but only as a social obligation
- More and more difficult for commercial bankers to accept that lending to the poor could be a viable activity.
22. Micro Finance: apparition
- The financial sector reforms motivated policy planners to search for products and strategies for delivering financial services to the poor microFinance - in a sustainable manner consistent with high repayment rates.
- NABARD: empirical observation that had been catalysed by NGOs that poors gather in informal groups
- Create a formal interface of these informal arrangements of the poor with the banking system.
- Bank-SHG Linkage Programme.
- Recent emergence of MFIs: professionally run institutions specialiazed in delivering credit with low cost staff and local knowledge
23. Despite all these effortslarge gaps remain
- Against rural population of 741.0 million, 500 million people un-served
- Population per branch: 22,793
- Penetration of savings accounts is below 18%
- As against 104% in urban and semi-urban areas
- Number of villages per branch: 19
- High dependence on informal sources
- 36% of rural credit from informal sources
- Dependence even higher for lower income households: 78%
24. Microfinance ahead: challenges 25. Gaps in demand and supply Demand:Rs. 450 billion/y 60% in South to cover all parts of India Less than 2 millionHouseholds reached 500 million un-served poor Disbursed: 39 billion Need employment opportunities Need protectionagainst all risks Market constraints Insurance under-delivered Scaling up Increase impact 26. Scaling up: challenges 27. Limitation of the predominant model Bank SHG NGO Loan at 9% No liability Group formation/linkage SHG-Bank linkage model 28. Financial Intermediation Model Loan at a 9% Loan at 20% Scaling up existing MFIs: challenges MFI JLG Group Bank 29. Limitations to growth of MFIs:
- Lack of adequate quantities of risk capital
- Lack of long-term finance to pay for creation of the necessary infrastructure and pre-operative expense
- Lack of well trained staff in adequate numbers at all levels
30. Lack of adequate capital: the ICICI Bank response
- Searched for a model which:
- Separates risk of MFI from risk inherent in the mf portfolio
- Provides a mechanisms to banks to continuously incentivise partners
- Inability of MFIs to provide risk capital in large quantum, which limited advances from banks
31. The ICICI Bank Partnership Model Servicing fees of 11% Loan at 9% Interest charged: 20% FLDG of 10% MFI JLG Group Bank 32. Long-term finance: the ICICI bank response
- There is an underlying business model in the MFIs expansion: no reason why it cannot be funded by commercial debt
- ICICI Bank is offereing to its MFI partners long-term finance of a tenure of 3-5 years
33. Lack of well-trained staff: ICICI Bank response
- Initiated partnerships with training institutions (Indian Grameen Services, Care India)
- Establish a Financial Services Learning School in collaboration with MicroSave India
- Provide high level training in banking and finance to MFI practitioners in collaboration with IFMR (Institute for Financial Management Research)
- Role of technology in microfinance:
- Cash handling
- Data capture and subsequent management
35. Technology: ICICI Bank response
- Creation of rural connectivity in partnership with telecom companies and internet service providers
- Assistance to emerging MFIs to adopt scalable MIS solutions