Microfinance in IndiaIssues,Challenges and Policy Options

ByRajaram DasguptaandK Dinker RaoNational Institute of Bank Management,Pune

Financial NeedsLife Cycle - Birth to DeathEmergencies - Personal and ImpersonalEconomic Opportunities Working Capital Agriculture Industry Trade and Services Investment Capital Existing Units New Units

Meeting of the Financial Needs

Current IncomeAccumulated Income Through SavingsSale of AssetCredit from FFIAccessing Capital Market ( Economic

Opportunities)

Microfinance• Micro Quantity for Micro People Savings Credit Insurance Any other necessary

Financial Services

Weaker Section Credit- Small Credit- Mandatory Credit

and government sponsored Schemes

- Poverty Alleviation- (DRI,IRDP,SGSY

etc.)- Social Banking- Low rate of interest- Supply -led credit- Credit Alone

Microfinance- All financial services- Savings,credit,

insurance etc.

- Improving access to FFI (Financial inclusion)

- Commercial banking- Market rate of

interest- Demand-led credit- Credit Plus to Improve

productivity of credit

Problems in MicrofinanceHigh Transaction Cost

TravelLedgerManpower

High RiskInformation Gap

- Person to Person Borrower & Lender

- Person to EnvironmentLender & Local Environment Borrower & Production Environment(Technology, Market, Infrastructure,

Skill, etc.)

Status of Microcredit

* Forty per cent of rural credit through informal system - RBI, 2000

* Share of informal market in rural areas increased in 1991 after declining in 1981

* Rs.2116 per capita outstanding credit

* Not `True’ but `Restricted’ Demand

Status of FFI Resource

Liquidity - Plenty

Microcredit - Scarcity

Demand - Supply Gap

Lack of awareness about micro-financial need

Absence of perspective on microfinanceMismatch between demand and supply

structure of creditDearth of risk-taking attitude and urge to

experiment at corporate levelLack of appropriate policy and strategy

Requirement for Microfinance BusinessLinking of informal and formal system Principles of informal system- Service at doorsteps- Anytime service- Deposit of any amount- Credit of any amount- Credit for any purpose- Simple formalities- Mutual trust- Full information- Full cost +

Formal System

• Large Capital• Cheaper Capital• Better Knowledge of Global

Environment

Microfinancing

Individualistic Cooperation

Directly People’sParticipation

Indirectly Institutions Solidarity group

Money Lenders

Others GrameenGroup

Common GoalGroup

Self HelpGroups

Cooperatives

Cluster

Federation

JointLiabilityGroup

Individualistic Approach

• Two Customers are independent of each other

• Competition between two customers is invisible to the customers

Cooperation

• A group of customers dependent on each other for financial decisions

• The competition between two customers is visible which is resolved through both logic and compassion by the contenders themselves

Agent Approach (UCB, SMGB)

Participatory Banking ( MRCP, AGB, PGB, AUGB )

Intermediation through money lender ( Indian Bank )

Onlending through intermediary ( BASIX )

Approach ToSelf Help Group

Means Ends

NGO FinancialPlatform

Empowerment

FFI Development Business

GI Target ?

SHGs Credit Linked 502891 Till March,2002 239066 During 2001-02 PSB 55%RRB 38%Cooperatives 8%

FFI NGO SHG (NGO) 9%FFI SHG (Bank) 16%FFI SHG (NGO) 75%

Innovations in SHG FormationCGB -

PGB -

AGB -

AVGB

Trained own staff who formed groups

VVV - socially conscious villagers formed by RRB SHG

VDC at village

FC at branch SHG

Innovation in product for SHG Chitradurga Grammen BankFlexible savings scheme (All members)

- Insurance to cover risk- Earn more interest

Recurring deposit (A few members)- Specific life cycle needs

Pre-printed cash certificates- To meet investment needs- Long term savings

SHGs to sell certificates to other SHGs

Federation: (Why)

SHGs Have

Limited ability to access external fundLimited ability to manage larger fundLimited skill of management of groupVulnerability of internal group tensionsLow visibility as a pressure group

Federation : Objectives and Roles

Financial- Accessing and managing external funds- Providing larger credit to members- Auditing SHG accounts

Non-Financial- Strengthening existing SHGs- Forming new SHGs- Facilitating inter-group exchange of information- Linking with other agencies- Advocacy for members- Helping members in backward and forward linkages- Acting as interest group for collective bargaining- Providing a larger platform for the members to address various issues- Bring men and women SHGs in a common platform

Federation - Structure

Two tier

SHG - Federation

Three tier

SHG - Cluster - Federation

Cost of Formation of SHGCGB (DSK Rao)

Formation in the Same Village

1st SHG Rs.2300

4th SHG Rs. 700

Cost of SHG Operation

1st Year 2nd Year

Salary of SY only 620 555

Salary & Travel Cost ofSY

1291 891

Field Level + Head Office 2909 1692

Field + Head Office +Training

3123 2668

Field + Head Office +Training + DistrictControlling

3513 2868

Grameen Group

* NGO/MFI- ADITHI, Bihar- ASA, Tamilnadu- RDO, Manipur- SHARE, Andhra Pradesh

* PSB- Oriental Bank of Commerce, Uttaranchal, Rajasthan, Bihar

Progress of OBC

1996 2002States 2 3Branches 2 28Villages 14 161Groups 181 1616Members 899 8040Savings (Rs.000) 2.95 23200Disbursement (Rs.000) 18.04 81600Repayment (Rs.000) 4.41 56900

Other Solidarity Groups

Common Goal Groups - Annapurna, Pune

Joint Liability Groups - BASIX, Andhra Pradesh

SHG and GBG

• SHG• SHG has Own Fund• SHG is a micro micro micro---micro Bank• Bank---> SHG---> Individual• SHG Tends to become Self sufficient• Smaller size of Group creates Fund Constraint• GBG• GBG not a Financial Institution• Bank--->Individual(Directly)• Small size does not create Fund Constraint

• GBG Members Tend to be “Perpetually” dependent on Banks

SHG and GBG from Members’ Angle• SHG• Fund Management• Loan Sanctioning• Mutual Gurantee• Higher level of financial skill

Required• More Mutual Trust Required• Short term High Interest• Long Term Low Interest• Forced Savings

• GBG• No Fund Management• LoanRecommendation• Mutual Guarantee• Lower level of financial skill

Required• Less Mutual Trust Required• Short Term Low Interest • Long Term High Interest• Savings Potential Less

SHG and GBG from Bank’s Angle• SHG• Formation and

Maintenance Cost Externalized

• Otherwise Higher Cost

• Dependence on NGO• Short term Business

relationship?• In search of new

SHGs continuously

• GBG• Banks have to form

Groups• No role of NGO• Easier to Form GBG• Less Costly• Not much skill

requirement• Long term Business

relationship

Federation and Cooperatives

X X X X X X X X X X X

X X X X X X X X

XX X

XX

XX X

X

XX X

XX

XX X

XX

XX XXX

X

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XX

X XX

X

CooperativeFederation

Management Group

X Members

SHG

Attitudinal Constraints in Microfinance- Social obligation not commercial

proposition

Microfinance Perceived - As income generating programme- Not as financial inclusion programme

Institutional Constraints in Microfinance* Absence of Microfinance

Institutions- Income tax - Banking Acts- Cooperative Regulations and

Bureaucratic Control- Policy on use of Deployable

Resources

Policy Issues

Official definition of microfinanceEnsuring the microfinance servicesApproach to subsidyBanking policiesManagement information systemLegislation process