SHG women take up vegetable vending.

Present and Future of Micro Credit Market in India

Abusaleh ShariffNational Council of Applied Economic Research

E-mail: ashariff@ncaer.org

Presented at Sa-Dhan Annual conference titled, “Greater Inclusion-Possibilities and Prospects” on 17-18 January 2007 at India Habitat Centre, New Delhi.

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Formal and Informal

Financial Markets

and

Imperfections

3

Formal Credit MarketPriority Sector Advances : Rs. 226219 crores

Informal Credit Market

at least 3-4 times the formal market

Micro-CreditMarke

t

Relative Financial Market in IndiaAn Illustration

4

Product (Credit) Differentiation

Micro Credit Schemes will succeed if:

Compared to Formal Sector - EfficientEasy to secure and manage Flexible and interactiveTimely Cheap ?? How Expensive??

Compared to Informal Sector - Less exploitative

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Transitory Poverty and Destitution

Micro-Finance addresses transitory poverty

Current Micro-Finance products not efficient in poverty alleviation

Other Public Program meant for Poverty Alleviation)

6

Source of Funding of MFIs

MFIs are Bank-dependent for funds

NABARD and SIDBI support about one thousand MFIs with varied operational strategies and Rs. 11.5 thousand crores.

These MFIs barely control 10 per cent of the Rs. 1736 Crores.

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Informal

MFI

Focus on the Poor

Formal

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Relative Markets

Efforts are to link the formal funding sector with MFI

Is this a good strategy?

What about addressing the inefficiencies of the regressive private, informal market?

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Scope and Target Groups

Self-Employed

Casual labour

Women

Rural Focus

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Linkage betweenGDP Growth and Poverty

251

321

329

323

301320

315

20

30

40

50

60

19

73

-74

19

77

-78

19

83

19

87

-88

19

93

-94

20

04

-05

20

04

-05

*

HC

R

0

1

2

3

4

5

6

7

GD

P G

row

th

HCR GDP Grow th

Numbers on top of the bar indicate number of poor in million* Estimatesof poverty based on 365 days MPCE

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Concentration of Poor & Destitute (Self Employed and Casual Laborers (15-65 Years) in Rural India)

0

5

10

15

20

25

30

35

40

45

50

Ori

ssa

Bih

ar

Ch

ha

Jha

r

MP

UP

Ma

ha

WB

Ka

r

Ass

am TN

Gu

ja

Ra

j

Ke

rala AP

0

10

20

30

40

50

60

70

80

90

100

% Poor % destitute Cumulative (Destitute)

Note: Poor: Population below BPL

Destitute: Population below BPL Mean of the respective states.

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Cost Efficiency of Program Delivery

Cost per Rs. 1 Transfer by Various Programmes Public Distribution System 5.37Andhra Rice Scheme 6.35JRY 2.28Maharashtra EGS 1.85ICDS 1.80

What about Micro-Credit?

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Changing Perspective of Assets

Household behavior favors wealth accumulation in the form of gold and jewelry and through the purchase of consumer durables but :

Both are unproductive Amounts to growing disparity in incomes

Change the concept to Assets – to: Increasing levels of literacy, education and

skills Opportunities for physical mobility and

migration Consumer durable as assets and means of

production Broad based financial instruments, liquidity and

portability

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Levels of Impact

Household / Community

Economic Social

•Income•Household assets•Housing•Access to food

Human Capital:•Education•Health•Confidence•Skills•Empowerment

Social Capital:•Social networks•Social mobility

Beyond Household

Employment Opportunities

Reduced Migration

Family Cohesion

Child-Upbringing

Leads to

Increases

Improves

Potential Impact of Micro Finance

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Important Role tobe Played

To help very poor households to meet basic needs (alleviation) and protects against risks (transitory)

Offer a variety of financial services tailored to their needs to sustain a specified level of wellbeing

Enable change in Occupations, diversification and increase in number of occupations

Empower women by supporting economic participation and effecting gender equity

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Future Shock for the MFIs

Banking Sector Reform Social responsibility might reduce/vanish Reduction in direct and concessional lending Prudential Norms Share of private banks to increase and privatization

of public banks (equity participation) will increase Deregulation of interest rates (competitive) 40% PSA may go Diversification of banks

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Future Funding of MFIs

Find local resources Panchayats

Post Office

Formalized Chit Funds

Penetration of Piggy Bank Services

NGOs/Civil Societies

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THANK YOU