CASHE Credit and Savings for Household Enterprises A 42 Month Review

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Microfinance in India Scaling Up
Issues and Challenges IFMR June 03, 2008
Sustainable Livelihoods Solutions
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• Contents
• The country context
• Microfinance Issues and challenges
• Microfinance Key determinants for growth

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The Macro Scene Disturbing Disparities
GDP growing at 8.6 annually
Two-third of population live in rural areas
Population of 1.10 billion
Employment growing at 2.6 annually
A third of population survive on less than a
dollar a day
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Country context
The absolute number of poor remains stagnant
despite claims to the contrary that are based on
statistical interpretations.
While we continue to profess roles of welfare
state, the government is rapidly absolving itself
from poverty alleviation interventions.
Government plays the role of regulator as well as
a operator in the field of microfinance.
The political importance of working with poor,
women and livelihood would also remain the focal
points of relevance of microfinance.
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• Context
• In India, poverty alleviation is perceived as a
  dole-based intervention.
• Politically, the poor have been continuously
  targeted with schemes that promise assets,
  livelihood and access to life cycle needs.
• Microfinance stands out as a commercially viable
  alternative system of financial access for the
  poor.

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Microfinance Institutions A Snapshot
Microfinance institutions have evolved from
social development institutions. Donors have
played key role in creating social
development institutions around challenges of
community mobilization, empowerment health,
education and livelihood.
Microfinance took roots through pooling
mechanisms for community savings, focusing on
women as participants.
Though no authentic data is available, it is said
that there are about 1,000 MFIs are operating
with a aggregate credit portfolio of over 1m USD.
The sector is overwhelmed by about 15 MFIs
covering 70 of micro credit clients in the
country.
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Public Interest on MFIs

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Microfinance Features

• The sector is growing without a proper enabling
  policy support.
• Microfinance has emerged from not-for-profit
  development objectives

Policies

• Government is regulator as well as operator in
  the sector.
• Apex development financial institutions have
  promoted two major models. NABARD - the SHG
  model SIDBI - the MFI model
• Banks play key role in providing credit to SHGs
  through the NABARD scheme for SHG-Bank linkage.

Institutional interventions

• Microfinance is primarily based on group
  methodologies.
• Grameen and Joint Liability Group models are the
  predominant models
• For-profit institutions are emerging within the
  sector

Operating models

• About 1,000 NGO/MFIs are estimated to cover about
  10 million poor households, largely rural.
  Regional disparities in outreach is a concern.
• SHG-Bank linkage model cover about 41 million
  households.

Outreach
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Microfinance Growing Ahead-Stakeholder Analysis

• Focus on poverty as social agenda
• Subsidized programs would continue
• Support to MFIs very tacit and marginal.

Government

• Public sector banks continue with priority
  sector lending to weaker sections. Some amount
  of funding to MFIs would continue sporadically.
• Private sector banks look for customer
  acquisition and rural markets as focus
  strategies. MFIs somewhere fall within the banks
  strategies.

Banks

• Continues to grow rapidly but would have to
  innovate and prove on commercial principles.
• Ownership, governance, HR and costs are the
  critical determinants.

Microcredit Institutions

• Emerging as the third sub-sector. Focus on depth
  and processes rather than numbers. Would have
  greater acceptance in the social agenda.

Livelihood finance institutions
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Scope for Microfinance
Two fifth of population do not access formal
banking services. Addressing to demand
for savings services remains a major regulatory
issue
Microfinance is predominantly focused on credit.
MFIs cover most of the poorest districts but
coverage of families is less than 8. Urban
poor financial services such as savings,
insurance, pension and remittance are white
spaces
Social investors and funding agencies are
supporting formation of new and innovative
microfinance institutions. Grant support for
institutional development is negligible
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Microfinance What has worked ?

• The SHG movement has resulted in over 4 million
  families benefiting from microsavings and
  microcredit programmes.
• Direct intervention of microfinance institutions
  has added another million to the outreach of
  microcredit.

Community mobilization

• Mainstreaming of microfinance has happened due to
  bank-SHG linkage program and through high
  leverage of funds among microfinance institutions.

Institutional form of microcredit

• SHG based savings cum credit model Grameen and
  now Joint Liability Group models are all working
  effectively is all parts of the country.
• For-profit institutions are emerging within the
  sector

Microcredit Operating models

• About 1,000 NGO/MFIs are estimated to cover about
  10 million poor households, largely rural and
  peri-urban. CARG of 76.
• SHG-Bank linkage model cover about 41 million
  households. New households are being vigorously
  added.

Outreach
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Microfinance What has not worked ?

• Half of microcredit clients are poor. Are we
  obsessed with definition of poor?
• Microcredit is overtly woman-focused. How long
  would we exclude the men ?

Defining the client

• Transformation is widely understood only in terms
  of legal forms. Institutional values shift in the
  process !
• Newer legal forms are attractive. MBTs, Section
  25 and NBFCs are new catchwords.
• There is a popular rush to change without
  appropriate preparedness.

Institutional form of microcredit

• Institutions have grown by way of a single credit
  product. Excellent way to grow. But this also
  results in mission drift and adverse selection.
• How are clients benefiting from increasing
  efficiency of institutions ?

Microcredit Operating models

• All programs taken together would roughly cover
  9 of the financially excluded communities. How
  many MFIs are needed to cover the entire demand ?
  
• Concentration of MFIs in certain geographic areas
  vis-à-vis white spaces in many parts of the
  country is distorting the growth story.

Outreach
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Microfinance Growing Ahead-Issues on the ground

• Economically active families. Are we excluding
  the vulnerable?
• Business model that does not consider client and
  occupation risks.
• Client services are open to social and cultural
  issues.

Targeting

• How would the sectoral shifts from making poor,
  credit and bank worthy to providing sustainable
  financial services going to work ?

Microfinance Agenda

• The makeover from social agenda to
  socio-commercial agenda needs a different set of
  skills. No one is addressing to the demand for
  trained people to manage microfinance
  institutions.
• First generation entrepreneurs have to set
  examples of commercial entity Succession plans?
  

Human resources

• Products have been fine tuned and standardized.
  We have missed opportunities to look at the
  demand side !

Products
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Microfinance Growing Ahead-Missed Opportunities
so far

• Microfinance has grown by credit and some amount
  of insurance services.
• A uniform EMI based credit product has driven
  growth of business in MFIs.

Offerings

• Do poor need only credit and all the time?
• Poor need money to take care of health costs,
  education, emergency supports, religious
  occasions, better housing and for other assets.

Demand of the poor

• Our understanding of cash flows of the poor is
  very limited.
• Poor need moratoriums and repayment holidays as
  routine
• Prompt service is highly valued
• Legal issues have to be taken care of.
• Therefore, MFIs have to
• Move away from 52-week credit cycle
• Prepare for long term business strategies
• Start taking risks

Demand analysis to product design
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• Microfinance
• Un-answered questions
• What are the features of drop out clients?
• What are the measures of change?
• Are loan repayments restrictive to growth?
• Do poor have to pay for all services ?
• Can MFIs become fully loaded financial entities?

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