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Page 1: Microfinance: implementation and policy challenges · PDF file        Issues in Sustainability of MFIs, ... Microfinance: implementation and policy challenges Author:

www.infosys.com/finacle

Universal Banking Solution | Systems Integration | Consulting | Business Process Outsourcing

Microfinance: implementation and policy challenges

Thought Paper

Page 2: Microfinance: implementation and policy challenges · PDF file        Issues in Sustainability of MFIs, ... Microfinance: implementation and policy challenges Author:

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Introduction“Microfinance is to entail the provision of financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories” – Wikipedia

According to Consultative Group to Assist the Poor (CGAP), the main objectives of Microfinance

This paper provides an overview of the microfinance business in general, the models

Institutions (MFIs) are:

• To help the poor and needy meet their basic requirements and reduce risks

• To improve their economic condition through small loans and savings products

• To provide self-employment opportunities, especially to women

Between 1950 and 1970, the Indian Government focused on reaching out to the unbanked with subsidized agricultural credit and small loans. It also launched many initiatives including the Lead Bank Scheme, Priority Sector Advances, JRY (Jawahar Rozgar Yojana) and PMRY (Prime Minister’s Rural Employment Scheme) to benefit unbanked and underdeveloped regions; however, these did not penetrate as deeply as intended.

In order to address this issue, the Government proposed the introduction of MFIs, to be regulated and supervised by the RBI, which would lend to

the poor at subsidized interest rates. This paved the way for the entry of MFIs in the 1980s.

In time, micro enterprise credit organizations

– financing small businesses run by women –

evolved into Non Governmental Organizations,

and in the 1990s transformed themselves into

formal financial institutions with the express goal

of creating inclusion.

Although credit unions, co-operative societies

and banks have existed for ages, Dr. Mohammed

Yunus is credited with pioneering microfinance in

practiced in many countries and their challenges, as well as some ideas for improvement.

Evolution of MFIs

Microfinance Can Reach the Lower Income Levels

Commercial Bank

100 Million People

>520,000 yr.

Credit Unions

Microfinance

Near Poor

Upper Poor

Poor

Destitude

* Sources VISA information World Bank, CK xxxxxxxxx

1.7 Billion People 51,500-520,000yr

5730-51,500yr

5360-5730yr

<5360yr

4 Billion People

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the 1970s, for giving small loans to the women of Jobra village in Bangladesh. He went on to found the Grameen Bank in 1983.

The World Bank says that MFIs serve around 160 million people in developing countries. India has approximately 350 million people living below

the Poverty Line, most of whom are unable to avail of Government benefits because of collateral, documentation and legal stipulations.

In the late 1990s, institutions such as SIDBI and NABARD entered the arena to assist the ailing microfinance business.

Loans Disbursed by MFIs Yr 2009-10

SGSY – (Swarnajayanti Gram Swarojgar Yojana)

SGHs – Self Help Groups

in Rs. crores

Loans Disbures to Women SHGs*

Loans disbursed SG SY SHGs

Loans Disbursed by MFIs Yr 2009-10

Mocrofinance Saving 2009-10in Rs. crores

Saving by Women SHGs

Saving by SG SY SHGs

Growth of MFIs in India

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• SHG-Bank Linkage Model: This model involves Self Help Groups (SHGs), which are financed directly by the Commercial Banks in the Public and Private Sector, Regional Rural Banks (RRBs) and Co-operative Banks (State Co-operative Banks, NABARD, District Co-operative Banks etc.). The SHGs create the corpus, which is supplemented by revolving cash credit from the banks.

• MFI-Bank Linkage Model: In this model, the MFIs’ banking agencies receive financing for onward lending to SHGs and other small borrowers in the microfinance sector. Here, MFIs act as the banks’ guarantors, and thereby bolster the creditworthiness of the poor.

New models which can be implemented in India

• Bank Partnership Model: In this model, the MFIs act as agents and custodians who take

• While microfinance has no doubt added to the economic, social and financial empowerment of the poor, it has not managed to free them entirely from the clutches of informal moneylenders.

• There is skewed distribution of MFIs, with about 60% being located in the Southern states. The reasons for this include state government support, NGO concentration, and public awareness.

• Self Help Groups, which play a pivotal role in microfinance are beset by problems, such as poor accounting. NGO employees earn low salaries and are not given any incentives or recognition.

• Government programs such as SGSY (Swarnajayanti Gram Swarojgar Yojana), which

care of all the relationships with the bank and the borrowers, from end to end. This model enables them to operate with a relatively small equity base and increase the disbursement of loans significantly.

• Banking Correspondent Model: This model evolved to increase the savings in MFIs. The agents collect the savings from the poor on behalf of the banks; however, one drawback is that they are not allowed to collect money for Term Deposits.

• Service Company Model: This model, developed by ACCION, was used in some Latin American Countries. In it, banks form their own MFIs and work together to provide loans and other services.

are linked to specific states, have led to the migration of people to those regions in order to avail of subsidies, and diverted interest from self-help schemes.

• The current policies of SHGs are outdated and in need of overhaul.

• The cost of delivery of financial services requires a relook. An analysis of 36 leading MFIs by Jindal and Sharma showed that 89% were subsidy dependent and only 9% were able to cover more than 80% of their costs, thanks to the high cost of supervision and small ticket size of loans.

• MFIs do not have adequate access to financial capital unlike the rest of the financial sector, and as a result are burdened by high debt equity ratios and equity shortfall.

Microfinance models in India

Challenges

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• Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditure by 28% and assets by 112%. The income of Grameen members was 43% higher than that of non-program villages.

• In El Salvador, the weekly income of FINCA clients increased by 145% on average.

• In Ghana, 80% of Freedom from Hunger clients

Microcredit Summit News Release Jan 2012 says “Microfinance is a vital weapon in the fight against poverty, but so is health protection. Now, through a new partnership between Freedom from Hunger and the Microcredit Summit in India, 700,000 microfinance clients plus their family members will soon be able to protect their health as well as their finances” .

There is an increased need for microfinance in rural India, a need for at least 20% annual growth in MFIs and a target to cover 75% of households in the next five years (i.e. 60 million households). Outstanding loans are likely to rise from Rs. 1,600 crores to Rs. 42,000 crores. Existing MFIs should also start looking at other initiatives, such as

• Insurance and pension schemes

• Larger loans for different segments

• Technology advancement and professional processes and systems

• Ownership among MFIs and banks

• Financially sustainable features and models

• Empowerment of staff through better salaries, infrastructure, technology etc.

• Greater participation by Private Sector Banks

• Reduction of outstanding loans

had secondary income sources, compared to 50% of non-clients.

• In Lombok, Indonesia, the average income of Bank Rakyat Indonesia (BRI) borrowers increased by 112%, and 90% of households moved out of poverty.

• n Vietnam, Save the Children clients reduced their food deficit from three months to one.

Other possible measures, which can help society include:

• Greater Government participation

• Better monitoring and control by the authorities to ensure that the funds reach the needy

• The society can introduce liberal and transparent policy along with a guideline document which can reach all segments of society

• Awareness building through media

• Classification of MFI loans under the priority sector

• Soft loans for MFIs

• Smoother loan policies, processes and documentation

The main objective of any MFI is to enhance the economic health of the rural poor through affordable credit. Federations, such as Micro Finance Development Equity Fund (MFDEF) recently set up by NABARD, are expected to play a vital role in meeting the equity needs of MFIs. More such agencies are required to support the Government in making microfinance a success.

Global success stories (CGAP research)

Conclusion

Thought Paper 05

Page 6: Microfinance: implementation and policy challenges · PDF file        Issues in Sustainability of MFIs, ... Microfinance: implementation and policy challenges Author:

Jayanthi. K. JPrincipal Consultant, Finacle, Infosys LTD

www.mixmarket.org

www.microcapital.org

www.legatum.org

www.microfinanceindia.org

www.Wikipedia.com

Referenceswww.nabard.org

www.india.gov.in

www.kiva.org

www.zidisha.org

Issues in Sustainability of MFIs, Jindal & Sharma

Thought Paper06

Page 7: Microfinance: implementation and policy challenges · PDF file        Issues in Sustainability of MFIs, ... Microfinance: implementation and policy challenges Author:

Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with ‘accelerated innovation’ that is key to building tomorrow’s bank.

About Finacle

© 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.

www.infosys.com/finacleFor more information, contact [email protected]