Role of Microfinance Institutions in Rural Credit With Reference To Financial Inclusion

byDr. Tapasree Banerjee

Prabhujagatbandhu College FIRST YEAR B.COM CLASS

Institutional Rural Credit Prior To 1991

1. Prevalence of Commercial Banks,Cooperatives and Regional Rural Banks

2. Short term credit provided by Primary AgriculturalCooperative Societies(PACs)

3. Long tem credit provided by Primary Cooperative Agriculture and Rural Development Banks(PCARDBs)

4. Heavy incidence of overdues,Non-Performing Assets(NPAs),high transaction costs, regulated interest rates plagued the system

5. Net outcome was that the RFIs especially the co –operatives headed towards a state of financial unsustainability.

Self-Help Group Bank Linkage Programme Motivated by the success stories of institutional rural credit in

Asian developing countries and Grameen Bank of Bangladesh NABARD in 1992 initiated the microfinance (MF) programme through formation of Self-Help Groups with the help of village level NGOs

From bankers point of view ,compared to conventional bank lending in the rural areas ,lending through SHGs has helped the banking institutions in achieving high recovery percentage through peer pressure and in substantial reduction in the transaction cost to the small borrowers (Gulati,Bathla 2002) Available information indicates that transaction cost for borrowers under the SHGs is reduced by 21 percent as compared to situation under direct lending.

Microcredit Concepts

Microfinance is defined as the provision of thrift ,credit and other financial services such as money transfer and micro-insurance products for the poor, to enable them to raise their income levels and improve living standards

Microfinance refers to the entire range of financial services such as savings, money transfers, production and investment credit as also housing finance and includes the need for skill upgradation and entrepreneurial development

Thus microfinance provides credit support in small doses (usually in the range of Rs 5,000 to Rs 20000) along with training and other related services to people who are resource –poor but who are able to undertake economic activities.

Microfinance Credit

Table1:- Client Outreach- Borrowers With Outstanding Accounts (Millions) And Percentage Growth

Segment 2006-07 (Millions)

2007-08 (Millions)

2008-09(Millions)

2009-10(Millions)

2010-11(Millions)

%Growth(2008-09)

%Growth(2009-10)

%Growth(2010-11)

BankingSystem-SHG

38.02 47.10 54.0 59.6 62.5 14.65 10.37 4.9

MFIs 10.04 14.10 22.60 26.70 31.4 60.28 18.14 17.60

Total 48.06 61.20 76.60 86.30 93.90 25.16 12.67 8.81

Adjusted for Overlap

44.97 56.0 70.0 71.0 76.70 25.0 1.43 8.03

Source:- Calculated on the basis of data in Microfinance inIndia, A State Of The Sector Reports

Client outreachFigure 1 : Banking systen vis a vis MFI : client outreach

Banking systen vis a vis MFI:client outreach

47.1

54

59.6

26.7

31.4

62.5

38.02

22.6

14.110.04

0

10

20

30

40

50

60

70

2006-07 2007-08 2008-09 2009-10 20010-11

Year

Cu

sto

mer

s(m

illio

ns)

Banking System-SHG MFIs

Average Loan SizeTable 2 :- Comparison of Average Loan Size

Type Avg. loan/customer (Rs) 2008-09

Avg. loan/customer (Rs) 2009-10

Avg.loan/customer(Rs) 2010-11

% increase in 2009-10

% increase in 2010-11

SHG member 4120 4570 4900 10.92 7.22

MFI customer 5190 6060 6610 16.76 27.36

Source:- Calculated on the basis of data in Microfinance in India, A State Of

The Sector Reports

Average loan per customerFigure 2 : SHG vis-a-via MFI:average loan /customer

4120

5190

4570

6060

4900

6610

0

1000

2000

3000

4000

5000

6000

7000

Rs

2008-09 2009-10 2010-11

YEAR

SHG vis-a-via MFI:average loan /customer

SHG member MFI customer

Estimate of Microfinance ClientsTable 3 :- Estimate of Microfinance Credit Clients

Agency Clients March 2008

(Millions)

Clients March 2009

(Millions)

Clients March 2010

(Millions)

%Growth 2009

%Growth 2010

Commercial Banks (including RRBs)small

loan accounts

41.0 39.2 45.2 -4.39 15.31

PrimaryCooperative Societies borrowers

28.5 28.7 30.0 0.71 4.53

SHG members 47.1 54.0 59.6 14.65 10.37

MFI clients 14.1 22.6 26.7 60.28 18.14

Total 130.7 143.9 161.5 10.10 12.23

Source:- Calculatedon the basis of data in Microfinance in India, A State Of The Sector Reports

Types of Lending

SHG (Self Help Group) model of lending Under the SHG model an MFI lends to a group of 10 TO 20 women. Under the

SHG-bank linkage model ,an NGO promotes a group and gets banks to extend loans to the group. Here the monthly repayment structure is usually followed. In the SHG model the MFIs usually charge 18 to 24 percent interest per annum based on reducing balance method.In addition to interest rates, some MFIs also charge a processing fee comprising a certain proportion of the loan amount sanctioned, at the time of disbursement.

JLG (Joint Liability Group) model of lending Under the JLG model loans are extended to, and recovered from , each member of

the group. The most popular JLG models are the Grameen Bank Model developed by Grameen Bank, Bangladesh) and ASA, a leading Bangladesh-based NGO-MFI)Most MFIs following the JLG model charge flat interest rates of 12 to 18 percent on their loans.

Diversified lending methodology A MFI is said to have a diversified lending methodology when it offers loan products

through various lending methodologies:SHG model,JLG model,and individual based Individual based In India, MFIs adopting the group-lending models extend individual loans to more

successful borrowers who have completed a few loan cycles as part of a group( who have relatively large credit requirements and good repayment track record)

Performance of top 50 MFIs in 2008 A look into the performance of 50 top performing MFIs

across states reveals that MFIs in Andhra Pradesh are performing better in terms of their client outreach. As on September 2008 ,16 out of 50 MFIs had their headquarters in Andhra Pradesh. Their outreach was 49.08 percent of the total outreach of the MFIs considered and their outstanding balance was 67.24 percent of the total. The eastern states of West Bengal, Orissa and Assam accounted for 11.35 percent of total borrowers among the top 50 MFIs and 8.81 percent of total outstanding balance. The Western staes and the northern states(exception being Uttar Pradesh) are marked by their absence among the top 50 MFIs.

Performance of select MFIs in India

Table:- 4 Performance of top 50 MFIs in 2008

NameofMFI

Headquartrd in

Lending model

Loano/s(Rs mn)

Borrowers(no)

Avg o/s (Rs)

Avg o/s per pcnsdp(%)

Net worth(Rs mn)

Portfolio yield(%)

OSS(%)

SKSMPL

Andhra Pradesh

JLG 18227 2590950 7034.871 15.18 2395 23.40 126.49

SSFL AndhraPradesh

JLG,Individua

l

11987 1668807 7182.976 15.50 1225 27.43

Name of MFI Headquartrd in Lending model Loan o/s(Rs mn)

Borrowers(no)

Avg o/s (Rs)

Avg o/s per pcnsdp(%)

Net worth(Rs mn)

Portfolio yield(%)

OSS(%)

SML AndhraPradesh JLG, individual

8568 1231556 6957.053 15.01 1448 27.49 152.45

AML AndhraPradesh JLG, 4944 694350 7120.328 15.36 475 17.43 121.04

SKDRDP Karnataka SHG 4060 612482 6628.766 13.78 157 12.02 100.46

BSFL AndhraPradesh Diversified 3882 457668 8482.131 11.21 317 17.89 108.97

Bandhan West Bengal JLG, 3389 851713 3979.04 2.31 435 26.32 175.40

CMC UttarPradesh JLG 1431 303935 470.824 8.43 93 28.78 109.71

GVMFL TamilNadu JLG 1316 288311 4564.515 17.44 231 32.46 141.53

GFSPL Karnataka JLG 1287 153453 8386.933 12.02 127 18.77 106.41

MMFL TamilNadu SHG 1223 188000 6505.319 15.05 321 19.51 152.91

BMPL Karnataka JLG 1157 159886 7236.406 17.17 166 29.53 147.26

Equitas TamilNadu JLG 1007 108352 9293.783 9.37 630 20.52 93.11

BFSPL West Bengal JLG 1028 309100 3325.785 20.64 144 20.54 165.00

SNFL TamilNadu SHG 949 84919 11175.36 6.86 174 12.21 100.48

BFL TamilNadu SHG 935 251735 3714.223 13.18 162 15.52 132.74

UFSPL Karnataka JLG, individual

837 132067 6337.692 12.92 126 24.41 85.08

FFSL AndhraPradesh SHG 811 135488 5985.77 13.11 234 25.54 176.97

EMFIL Kerala JLG 765 154385 4955.145 9.34 12 23.88 109.15

SCCI AndhraPradesh JLG 546 90082 6061.144 13.08 115 19.36 140.08

SRFS Karnataka SHG 538 23204 23185.66 48.22 67 15.05 112.52

Saadhana AndhraPradesh JLG 486 73443 6617.377 14.28 59 24.51 118.12

Gram Utthan Orissa JLG 439 64100 6848.674 21.80 10 17.33 110.33

RASS AndhraPradesh SHG 433 41453 10445.56 22.54 56 16.12 130.46

SUWS West Bengal SHG 377 90396 4170.539 11.75 68 31.52 187.8

Sonata UttarPradesh JLG 352 61935 5683.378 27.83 68 28.33 136.24

CSP Assam Diversified 303 57429 5276.08 21.89 20 23.92 130.74

AFSL West Bengal JLG 268 59069 4537.067 12.79 84 21.12 119.22

JFSPL Karnataka Diversified 280 41396 6763.939 14.07 38 33.65 82.04

Annapurna AndhraPradesh JLG 274 43267 6332.771 13.66 176 * 111.47

HIH TamilNadu SHG 264 85346 3093.291 5.71 9 # #

PWMACTS AndhraPradesh SHG.Individual 258 31040 8311.856 17.93 42 18.4 111.97

AWS AndhraPradesh JLG 257 26378 9742.968 21.02 24 13.35 122.47

Adhikar Orissa JLG 211 50524 4176.233 13.29 16 22.74 159.18

VFSPL West Bengal JLG 209 55371 3774.539 10.64 22 18.92 116.18

SaharaUttarayan West Bengal JLG 205 51261 3999.142 11.27 22 25.37 140.23

RMEDT Karnataka JLG 204 34299 5947.695 12.37 24 27.04 198.31

CReSA AndhraPradesh JLG 200 32491 6155.551 13.28 18 21.02 126.30

IIMF AndhraPradesh SHG 191 21396 8926.902 19.26 28 15.24 118.24

WOMAN TamilNadu SHG 191 63650 3000.786 5.54 26 23.13 135.11

PMACS AndhraPradesh SHG 188 22861 8223.612 17.74 25 13.95 112.60

IASC TamilNadu Diversified 183 20745 8821.403 16.29 33 19.05 101.49

Sewa AndhraPradesh

SHG.Individual

183 923 198266.5

427.80 52 15.05 100

IDF Karnataka SHG 178 56315 3160.792

6.57 7 17.34 121.30

GSGSK Kerala SHG 162 24201 6693.938

12.62 2 11.58 100.05

SMCS Orissa SHG 161 40034 4021.582

12.80 8 17.00 128.61

ASOMI Assam Diversified 146 27546 5300.225

21.99 20 17.22 171.88

JanodayaTrust

Karnataka SHG 127 16193 7842.895

16.31 11 24.51 125.97

CDC TamilNadu SHG 124 31876 3890.074

7.19 8 15.38 139.93

Source: Calculated on the basis of CRISIL report

Performance criteria for MFIs Average outstanding loan balance =Gross amount of loans or savings

outstanding/Number of active borrowers An average outstanding loan balance below 20

percent of percapita SDP indicates that clients are very poor. A look at the top 50 leading MFIs reveals that only 9 have their average outstanding loan balance as a proportion of percapita net state domestic product (PCNSDP at 2004-05 prices) more than 20 percent. The rest are all below 20 percent.

Operating Self Sufficiency(OSS)Ratio The operation self sufficiency is a percentage

which shows the ratio between total income and total expenses of the MFI. This ratio does not include revenue grants received and expenses out of revenue grants. A OSS more than 100 implies that total income is greater than total expenses. Barring a few , almost all the top functioning MFIs have their OSS greater than 100 percent , the highest being that of RORES Micro Entrepreneur Development Trust of Karnataka followed by Utsarga Welfare Society(SUWS) OF West Bengal .

Portfolio Yield and Net Worth Portfolio yield is the ratio between interest

income and average total total loan outstanding. It is expressed as percentage. The highest portfolio yield has been achieved by Janalakshmi Financial Services Pvt. Limited (JFSPL) in Karnataka (33.65 percent) followed by Grama Vidiyal Microfinance Pvt. Limited (GVMFL) in Tamil Nadu (32.46 percent )

Net Worth refers to the net owned funds of the MFIs. Of the MFIs studied the highest net worth is of SKS Microfinance Pvt. Limited (SKSMPL) of Andhra Pradesh.

What is Financial Inclusion

Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups.

Unrestrained access to public goods and services is the sine qua non of an open and efficient society

As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of public policy

Existing Banking System and Financial Inclusion Banking industry has shown tremendous growth in volume and has made significant improvements

in several areas relating to financial viability,profitabilty and competitiveness BUT….vast segments of the population, especially the

underpriviledged sections of the society are still out of bank’s fold. Coverage is only 9.5 percent in rural areas

Percentage of adult population having bank account is only 59% meaning 41% of population is still unbanked ( percentage higher in rural areas) Assumption: Each individual has only one bank account ,which is not always true.

Extent of exclusion from credit markets is much more- number of loan accounts cover only 14% of adult population

Out of 89 million farm households, 51.4% have no access to formal or informal sources of credit, 73% have no access to the formal sources of credit.

Who are excluded ?

Marginal farmers Landless labourers Oral lessees Self employed and unorganised sector

enterprises Urban slum dwellers Migrants/ ethnic minorities and socially

excluded groups Senior citizens and women

Financial Inclusion in the Indian Context Policy of the Reserve Bank of India on ‘Financial Inclusion’: RBI places a lot of emphasis on financial inclusion to make

banks give the desired attention With proactive role for enhancing the financial inclusion, RBI

in its Annual Policy Statement of the year 2005-06, urged banks to review their existing practices to align them with the objective of financial inclusion.

The SHG-Bank Linkage Programme and other microfinance initiatives by NABARD has contributed much towards financial inclusion process in India.

THE IMPACT

Challenges faced by MFIs in India

High rates of default Steady access to capital Absence of regulatory control and weak

governance

Towards new directions in rural agricultural finance Micro-finance Development and Equity Fund (MFDEF) Support to partner agencies like NGOs, RRBs, individual rural

volunteers(IRVs) Training and capacity building of stake holders including bankers, NGOs,

Government officials , SHG members and trainers Special initiatives in backward region

Rajiv Gandhi Mahila Vikas Pariyojana in select districts of UP Priyadarshini Project- the women empowerment and livelihood

programme in BIhar and UP

Scaling-up of Microfinance Programmes like financing of JLGs and MicroEnterprise Development Programme by NABARD

Relaunching of SHG Bank Linkage Programme: SHG-2 Scheme for Promotion of Women SHGs in backward Districts of India and

Left Wing Extremism(LWE) affected Districts of India

Conclusion

The key factors that can ensure a robust institutionalised rural credit processes system in India are flexible and efficient which will not only ensure productivity but also target to achieve the inclusive growth plans as envisaged by our social thinkers.

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