8/2/2019 Micro Finance Ravi Mathur Mms-fin
1/55
Index
1. Definition
2. History of Microfinance
3. Microfinance today
4. Microfinance Products & Services
5. Microfinance Systems
6. Microfinance in India
7. Legal Regulations
8. Microfinance Models
9. Impact of the SHG Bank Linkage Programme10. Marketing of Microfinance Products
11. Issues in Microfinance
12. Conclusion
13. Bibliography
1
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
2/55
Microfinance Definition
According to International Labor Organization (ILO), Microfinance is an economic development
approach that involves providing financial services through institutions to low income clients.
In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as
provision of thrift, credit and other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards.
"The poor stay poor, not because they are lazy but because they have no access to capital."
The dictionary meaning of finance is management of money. The management of money denotes
acquiring & using money. Micro Finance is buzzing word, used when financing for micro
entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower
under-privileged class of society, women, and poor, downtrodden by natural reasons or men made;
caste, creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy
of cooperation and its central values of equality, equity and mutual self-help. At the heart of these
principles are the concept of hum
Traditionally micro finance was focused on providing a very standardized credit product. The
poor, just like anyone else, (in fact need like thirst) need a diverse range of financial instruments to
be able to build assets, stabilize consumption and protect themselves against risks. Thus, we see a
broadening of the concept of micro finance--- our current challenge is to find efficient and reliable
ways of providing a richer menu of micro finance products. Micro Finance is not merely extending
credit, but extending credit to those who require most for their and familys survival. It cannot be
measured in term of quantity, but due weightage to an Introduction
2
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
3/55
development and the brotherhood of man expressed through people working together to achieve a
better life for themselves and their children. quality measurement. How credit availed is used to
survive and grow with limited means.
Microfinance is the provision of financial services to low-income clients, including consumers
and the self-employed, who traditionally lack access to banking and related services.
More broadly, it is a movement whose object is a world in which as many poor and near-poor
households as possible have permanent access to an appropriate range of high quality financial
services, including not just credit but also savings, insurance, and fund transfers. Those who
promote microfinance generally believe that such access will help poor people out of poverty.
The term "microfinance" describes the range of financial products (such as microloans, micro
savings and micro-insurance products) that microfinance institutions (MFIs) offer to their clients.
Traditionally, banks have not provided financial services to clients with little or no cash income.
Banks must incur substantial costs to manage a client account, regardless of how small the sums of
money involved.
There is a break-even point in providing loans or deposits below which banks lose money on each
transaction they make. Poor people usually fall below it. In addition, most poor people have few
assets that can be secured by a bank as collateral. As documented extensively by Hernando De
Soto (a Peruvian Economist) and others, even if they happen to own land in the developing world,
they may not have effective title to it. This means that the bank will have little recourse against
defaulting borrowers.
Microfinance is a type of banking service that is provided to unemployed or low-
income individuals or groups who would otherwise have no other means of gaining financial
services. Ultimately, the goal of microfinance is to give low income people an opportunity to
become self-sufficient by providing a means of saving money, borrowing money and insurance.
The World Bank estimates that there are more than 500 million people who have directly or
indirectly benefited from microfinance-related operations. Microfinance can provide an effective
3
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
4/55
way to assist and empower poor women, who make up a significant proportion of the poor and
suffer disproportionately from poverty. Microfinance can contribute to the development of the
overall financial system through integration of financial markets.
Origin/History of Microfinance
The concept of microfinance is not new. Savings and credit groups that have operated for centuries
include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in Indonesia,
"cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in Bolivia, as well as numerous
savings clubs and burial societies found all over the world.
Formal credit and savings institutions for the poor have also been around for decades, providing
customers who were traditionally neglected by commercial banks a way to obtain financial
services through cooperatives and development finance institutions. One of the earlier and longer-
lived micro credit organizations providing small loans to rural poor with no collateral was the Irish
Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan Swift. Swift's
idea began slowly but by the 1840s had become a widespread institution of about 300 funds all
over Ireland. Their principal purpose was making small loans with interest for short periods. At
their peak they were making loans to 20% of all Irish households annually.
In the 1800s, various types of larger and more formal savings and credit institutions began to
emerge in Europe, organized primarily among the rural and urban poor. These institutions were
known as People's Banks, Credit Unions, and Savings and Credit Co-operatives.
The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen and his
supporters. Their altruistic action was motivated by concern to assist the rural population to break
out of their dependence on moneylenders and to improve their welfare. From 1870, the unions
expanded rapidly over a large sector of the Rhine Province and other regions of the German States.
The cooperative movement quickly spread to other countries in Europe and North America, and
eventually, supported by the cooperative movement in developed countries and donors, also to
developing countries.
In Indonesia, the Indonesian People's Credit Banks (BPR) or The Bank Perkreditan Rakyat opened
in 1895. The BPR became the largest microfinance system in Indonesia with close to 9,000 units.
4
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
5/55
In the early 1900s, various adaptations of these models began to appear in parts of rural Latin
America. While the goal of such rural finance interventions was usually defined in terms of
modernizing the agricultural sector, they usually had two specific objectives: increased
commercialization of the rural sector, by mobilizing "idle" savings and increasing investment
through credit, and reducing oppressive feudal relations that were enforced through indebtedness.
In most cases, these new banks for the poor were not owned by the poor themselves, as they had
been in Europe, but by government agencies or private banks. Over the years, these institutions
became inefficient and at times, abusive.
Between the 1950s and 1970s, governments and donors focused on providing agricultural credit to
small and marginal farmers, in hopes of raising productivity and incomes. These efforts to expand
access to agricultural credit emphasized supply-led government interventions in the form of
targeted credit through state-owned development finance institutions, or farmers' cooperatives in
some cases, that received concessional loans and on-lent to customers at below-market interest
rates. These subsidized schemes were rarely successful. Rural development banks suffered
massive erosion of their capital base due to subsidized lending rates and poor repayment discipline
and the funds did not always reach the poor, often ending up concentrated in the hands of better-
off farmers.
Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other
countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of
microenterprise credit was based on solidarity group lending in which every member of a group
guaranteed the repayment of all members. These "microenterprise lending" programs had an
almost exclusive focus on credit for income generating activities (in some cases accompanied by
forced savings schemes) targeting very poor (often women) borrowers.
ACCION International, an early pioneer, was founded by a law student, Joseph Blatchford, to
address poverty in Latin America's cities. Begun as a student-run volunteer effort in theshantytowns of Caracas with $90,000 raised from private companies, ACCION today is one of the
premier microfinance organizations in the world, with a network of lending partners that spans
Latin America, the United States and Africa.
5
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
6/55
SEWA Bank. In 1972 the Self Employed Women's Association (SEWA) was registered as a trade
union in Gujarat (India), with the main objective of "strengthening its members' bargaining power
to improve income, employment and access to social security." In 1973, to address their lack of
access to financial services, the members of SEWA decided to found "a bank of their own". Four
thousand women contributed share capital to establish the Mahila SEWA Co-operative Bank.
Since then it has been providing banking services to poor, illiterate, self-employed women and has
become a viable financial venture with today around 30,000 active clients.
Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problem
faced by the poor through a programme of action-research. With his graduate students in
Chittagong University in 1976, he designed an experimental credit programme to serve them. It
spread rapidly to hundreds of villages. Through a special relationship with rural banks, he
disbursed and recovered thousands of loans, but the bankers refused to take over the project at the
end of the pilot phase. They feared it was too expensive and risky in spite of his success.
Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now
serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the
establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc.
Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but increasing
attack as evidence mounted of the disappointing performance of directed credit programs,
especially poor loan recovery, high administrative costs, agricultural development bank
insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to larger
farmers. The basic tenets underlying the traditional directed credit approach were debunked and
supplanted by a new school of thought called the "financial systems approach", which viewed
credit not as a productive input necessary for agricultural development but as just one type of
financial service that should be freely priced to guarantee its permanent supply and eliminate
rationing. The financial systems school held that the emphasis on interest rate ceilings and creditsubsidies retarded the development of financial intermediaries, discouraged intermediation
between savers and investors, and benefited larger scale producers more than small scale, low-
income producers.
6
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
7/55
Meanwhile, microcredit programs throughout the world improved upon the original methodologies
and defied conventional wisdom about financing the poor. First, they showed that poor people,
especially women, had excellent repayment rates among the better programs, rates that were better
than the formal financial sectors of most developing countries. Second, the poor were willing and
able to pay interest rates that allowed microfinance institutions (MFIs) to cover their costs.
In 1990s two features - high repayment and cost-recovery interest rates - permitted some MFIs to
achieve long-term sustainability and reach large numbers of clients.
Another flagship of the microfinance movement is the village banking unit system of the Bank
Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. This state-
owned bank serves about 22 million microsavers with autonomously managed microbanks. The
microbanks of BRI are the product of a successful transformation by the state of a state-owned
agricultural bank during the mid-1980s.
The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty
alleviation. The microfinance sector blossomed in many countries, leading to multiple financial
services firms serving the needs of microentrepreneurs and poor households. These gains,
however, tended to concentrate in urban and densely populated rural areas.
It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term that
included not only credit, but also savings and other financial services. "Microfinance" emerged as
the term of choice to refer to a range of financial services to the poor, that included not only credit,
but also savings and other services such as insurance and money transfers.
ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated solely
to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range of
financial services including savings accounts, credit cards and housing loans - products that just
five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique: more
than 15 ACCION-affiliated organizations are now regulated financial institutions.
Today, practitioners and donors are increasingly focusing on expanded financial services to the
poor in frontier markets and on the integration of microfinance in financial systems development.
7
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
8/55
The recent introduction by some donors of the financial systems approach in microfinance - which
emphasizes favorable policy environment and institution-building - has improved the overall
effectiveness of microfinance interventions. But numerous challenges remain, especially in rural
and agricultural finance and other frontier markets. Today, the microfinance industry and the
greater development community share the view that permanent poverty reduction requires
addressing the multiple dimensions of poverty. For the international community, this means
reaching specific Millennium Development Goals (MDGs) in education, women's empowerment,
and health, among others. For microfinance, this means viewing microfinance as an essential
element in any country's financial system.
Microfinance Today
In the 1970s a paradigm shift started to take place. The failure of subsidized government or donor
driven institutions to meet the demand for financial services in developing countries let to several
new approaches. Some of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in
Indonesia without any subsidies and is now well-known as the earliest bank to institute
commercial microfinance. While this is not true with regard to the achievements made in Europe
during the 19th century, it still can be seen as a turning point with an ever increasing impact on the
view of politicians and development aid practitioners throughout the world. In 1973 ACCION
International, a United States of America (USA) based non governmental organization (NGO)
disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus started what later
became known as the Grameen Bank by lending a total of $27 to 42 people in Bangladesh. One
year later the Self-Employed Womens Association started to provide loans of about $1.5 to poor
women in India. Although the latter examples still were subsidized projects, they used a more
business oriented approach and showed the world that poor people can be good credit risks with
repayment rates exceeding 95%, even if the interest rate charged is higher than that of traditional
banks. Another milestone was the transformation of BRI starting in 1984. Once a loss making
institution channeling government subsidized credits to inhabitants of rural Indonesia it is now the
largest MFI in the world, being profitable even during the Asian financial crisis of 1997 1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives of
various educational institutions and donor agencies from 137 different countries gathered in
8
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
9/55
Washington D.C. for the first Micro Credit Summit. This was the start of a nine year long
campaign to reach 100 million of the world poorest households with credit for self employment by
2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been
reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the
poorest before they took their first loan. Since the campaign started the average annual growth rate
in reaching clients has been almost 40 percent. If it has continued at that speed more than 100
million people will have access to microcredit by now and by the end of 2005 the goal of the
microcredit summit campaign would be reached. As the president of the World Bank James
Wolfensohn has pointed out, providing financial services to 100 million of the poorest households
means helping as many as 500 600 million poor people.
Who are the clients of micro finance?
The typical micro finance clients are low-income persons that do not have access to formal
financial institutions. Micro finance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban areas, micro finance
activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc.
Micro finance clients are poor and vulnerable non-poor who have a relatively unstable source of
income.
Access to conventional formal financial institutions, for many reasons, is inversely related to
income: the poorer you are, the less likely that you have access. On the other hand, the chances are
that, the poorer you are, the more expensive or onerous informal financial arrangements.
Moreover, informal arrangements may not suitably meet certain financial service needs or may
exclude you anyway. Individuals in this excluded and under-served market segment are the clients
of micro finance.
As we broaden the notion of the types of services micro finance encompasses, the potential market
of micro finance clients also expands. It depends on local conditions and political climate,
activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro credit
might have a far more limited market scope than say a more diversified range of financial services,
which includes various types of savings products, payment and remittance services, and various
insurance products. For example, many very poor farmers may not really wish to borrow, but
9
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
10/55
rather, would like a safer place to save the proceeds from their harvest as these are consumed over
several months by the requirements of daily living. Central government in India has established a
strong & extensive link between NABARD (National Bank for Agriculture & Rural
Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture &
Marketing Societies at national, state, district and village level.
Role of Microfinance
The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh with
promise of providing credit to the poor without collateral , alleviating poverty and unleashing
human creativity and endeavor of the poor people. Microfinance impact studies have demonstrated
that
Microfinance helps poor households meet basic needs and protects them against risks.
The use of financial services by low-income households leads to improvements in household
economic welfare and enterprise stability and growth.
By supporting womens economic participation, microfinance empowers women, thereby
promoting gender-equity and improving household well being.
The level of impact relates to the length of time clients have had access to financial services.
Microfinance Products and Services
The following products and services are currently being offered by MFIs:
Microloans: Microloans (also known as microcredit) are loans that have a small value;
most loans are less than US$100 in size. These loans are generally issued to
finance entrepreneurs who run micro-enterprises in developing countries. Examples of
micro-enterprises include basket-making, sewing, street vending and raising poultry. The
average global interest rate charged on micro-loans is about 35%. Although this may sound
high, it is much lower than other available alternatives (such as informal local money
lenders). Moreover, MFIs must charge interest rates that cover the higher costs associated
with processing the labor-intensive micro-loan transactions.
10
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
11/55
Microsavings: Microsavings accounts allow individuals to store small amounts of money
for future use without minimum balance requirements. Like traditional savings accounts in
developed nations, micro-savings accounts are tapped by the saver for life needs such as
weddings, funerals and old-age supplementary income.
Micro-Insurance: Individuals living in developing nations have more risks and
uncertainties in their lives. For example, there is more direct exposure to natural disasters,
such as mudslides, and more health-related risks, such as communicable diseases. Micro-
insurance, like its non-micro counterpart, pools risks and helps provide risk management.
But unlike its traditional counterpart, micro-insurance allows for insurance policies that
have very small premiums and policy amounts. Examples of micro-insurance policies
include crop insurance and policies that cover outstanding balances of micro-loans in the
event a borrower dies. Due to the high administrative expense ratios, micro-insurance is
most efficient for MFIs when premiums are collected together with microloan repayments.
Microfinance services are provided by three types of sources:
formal institutions, such as rural banks and cooperatives;
semiformal institutions, such as nongovernment organizations; and
Informal sources such as money lenders and shopkeepers.
Institutional microfinance is defined to include microfinance services provided by both formal and
semiformal institutions. Microfinance institutions are defined as institutions whose major business
is the provision of microfinance services.
Development of Microfinance
Asian Development Bank (ADB) is an international development finance institution whose
mission is to help its developing member countries reduce poverty and improve the quality of life
of their people. It was established in the year 1966. Their vision is to make an Asia and Pacific
poverty free. Headquartered in Manila, and established in 1966, ADB is owned and financed by its
67 members, of which 48 are from the region and 19 are from other parts of the globe.
11
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
12/55
ADB's main partners are governments, the private sector, nongovernment organizations,
development agencies, community-based organizations, and foundations.
Under Strategy 2020, a long-term strategic framework adopted in 2008, ADB will follow
three complementary strategic agendas: inclusive growth, environmentally sustainable
growth, and regional integration.
About Strategy 2020
Strategy 2020, ADB's long-term strategy approved in April 2008, sets ADB's strategic course for
its operations to the year 2020.
To fight poverty in a region of more than 600 million poor people, Strategy 2020 will refocus
ADB operations on three development agendas inclusive economic growth, environmentally
sustainable growth, and regional integration.
Strategy 2020 identifies drivers of change that will be stressed in all its operations developing
the private sector, encouraging good governance, supporting gender equity, helping developing
countries gain knowledge, and expanding partnerships with other development institutions, the
private sector, and community-based organizations.
By 2012, 80% of ADB's lending will be in five core operational areas identified as ADB's
comparative strengths
Infrastructure
Environment
Regional cooperation and integration
Finance sector development
Education
By 2020, about 50% of operations will be in private sector development and private sector
operations, and 30% in regional cooperation and integration.
12
MICROFINANCE-A CRITICAL ANALYSIS
http://www.adb.org/Strategy2020/default.asphttp://www.adb.org/poverty/inclusive-social.asphttp://www.adb.org/poverty/environmental-sustainability.asphttp://www.adb.org/poverty/environmental-sustainability.asphttp://www.adb.org/poverty/regional-cooperation.asphttp://www.adb.org/Strategy2020/default.asphttp://www.adb.org/poverty/inclusive-social.asphttp://www.adb.org/poverty/environmental-sustainability.asphttp://www.adb.org/poverty/environmental-sustainability.asphttp://www.adb.org/poverty/regional-cooperation.asp8/2/2019 Micro Finance Ravi Mathur Mms-fin
13/55
ADB will continue to operate on a more selective basis in health, agriculture, and disaster and
emergency assistance.
The Strategy will serve as ADB's main strategic document from 2008 to 2020, replacing the long-
term strategic framework for 2001-2015 released in 2000.
Inclusive Social Development
Building human capital and addressing vulnerability
Inclusive social development is an essential component of poverty reduction and the achievement
of the MDGs, and is therefore the second pillar of ADB's Poverty Reduction Strategy.
Inclusive development seeks to
improve the quality of life of the poor and those vulnerable to poverty through building
human capital in social sector areas such as health and population policy as well as in
education
assist individuals, households and communities to better manage life risks (social
protection)
promote gender equality and women empowerment, and
support coherent social integration including fostering participation and targeting of the
poor and vulnerable, as well as social capital and a more inclusive society
Inclusive social development also requires due consideration be given to social safeguards,
particularly with regards to involuntary resettlement in economic and urban infrastructure projects.
Environmental Sustainability: Reducing vulnerability of the poor to degraded and hazardous
conditions Environmental sustainability is critical to sustainable development and, as a
consequence, to the objectives of poverty reduction and ADB's
13
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
14/55
Poverty Reduction Strategy : Poverty of opportunities, bad living conditions, and insecurity are
often related to environmental degradation. The poor - both urban and rural - are often the biggest
victims of environmental degradation and at the same time poverty can exacerbate ecological
problems. Environment related poverty is often also closely related to regional and cross-border
(particularly water) issues.
A major portion of Asia's core poor can be found
living in remote forest areas (the upland poor, often also indigenous people),
among the fisherfolk communities (the coastal poor),
on marginal land areas (the dryland poor) and
among those affected by regular floods (the wetland poor)
in congested cities and towns with bad shelter conditions (the slum poor).
In addition, natural hazards make the poor particularly vulnerable to external shocks such as
earthquakes, tsunami, and major storms (the disaster poor).
Often environmental poverty has cross-border and regional dimensions.
ADB's approach to environment related poverty considers the immediate needs of the poor
affected by a degraded, hazardous, and marginal environments. Other more long-term approaches
to environmental sustainability that benefit the poor comprise ADB's clean energy and urban
transport initiatives.
Through its Poverty and Environment Program (PEP), ADB aims at accelerating learning about
poverty-environment linkages.
In addition, ADB is currently enhancing its poverty reduction operations through sound
environmental management in the areas of soil conservation, flood management, urban
environmental improvement, sustainable ecosystem management, and disaster protection end
emergency support for the vulnerable poor.
14
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
15/55
Regional Cooperation for Poverty Reduction Enhancing trade, incomes and regional public
goods
Poverty often has regional and cross-border dimensions. This applies particularly to geographical
areas with natural resources constraints. Such areas are often also home to indigenous people
which comprise the core of the rural poor.
Of particular importance for poverty reduction are enhanced trade and income opportunities for the
poor, the usage of export earnings, sharing of information and infrastructure services such as
regional energy, and promoting mobility transfer of remittances.
Regional cooperation also addresses global public goods in environment and health, such as
degradation of sub-regional waters and land, global warming, and the transmission of HIV/AIDS
and Avian Flu.
It can strengthen global partnerships as expressed in the Millennium Development Goal (MDG).
Regional cooperation is therefore a thematic area of ADB's strategy for reducing poverty in the
Asia and Pacific region
ADB's regional cooperation strategy focuses on:
Cross-border infrastructure
Regional trade and investment
Money and finance; and
Other regional public goods.
ADB promotes regional cooperation through sub-regional cooperation programs and capacity
development on Asia Regional Integration Center (ARIC).
In pursuing its vision, ADB's main instruments comprise loans, technical assistance, grants,
advice, and knowledge.
15
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
16/55
Although most lending is in the public sector - and to governments - ADB also provides direct
assistance to private enterprises of developing countries through equity investments, guarantees,
and loans. In addition, its triple-A credit rating helps mobilize funds for development.
16
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
17/55
Microfinance Systems
Most microfinance institutions use some sort of group system to distribute their services to their
clients. There are some exceptions, including the VillageUnit System of BRI in Indonesia, the
17
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
18/55
worlds biggest and most profitable MFI, but groups seem generally to predominate. Bank
Rakyat Indonesia (BRI) is one of the oldest established banks in Indonesia, dating back to 1895.
Its focus from the start has always been on delivering the best banking services possible to micro,
small and medium-sized business- especially in the agriculture segment. We have consistently
tailored our services to meet the needs of the low income group in the community, said David
Malligan, GM, IT. Along with the rapid development in the banking industry, BRI now has 4,447
working units across Indonesia.
Many otherwise well informed observers and even some senior bankers in India and elsewhere,
appear to believe that the group system pioneered in 1976 by the Grameen Bank in Bangladesh is
the predominant or even the only such system. However this is not the case. Both the systems have
their advantages and disadvantages, it depends upon practitioners to avail to the option.
Village Unit System of BRI in Indonesia
Bank Rakyat Indonesia (BRI) was first established in Purwokerto, Central Java, in 1895 by
Raden Arya Wirjatmadja. The bank, which was called Hulp-en Spaarbank der Inlandsche Bestuurs
Ambtenaren, or Support and Savings Bank of the Indegenous civil servants, is the first state-
owned bank in Indonesia.
The growth of BRI is regarded as the beginning of Indonesian rural banking. After 113 years of
operation, BRI still focuses its business on microbanking: making banking products and services
accessible for the poor in Indonesia. The vision of BRI is to become a leading commercial bank
in Indonesia which prioritizes customers satisfaction, with the following missions:
Performing the best banking activities focusing on providing services for Micro, Small,
and Medium Enterprises to support Indonesias economy.
Providing excellent services for customers through widespread network, supported by
professional HR by implementing GCG.
Providing optimum added values for all stakeholders
In order to achieve those missions, BRI apply such strategies as maintaining focus on the core
business, expanding operational coverage, strengthening the Risk Management system, and using
18
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
19/55
proper information technology for operational efficiency. Thats why 80% of its loan portfolio is
dedicated to micro, small, and medium enterprisesleaving 20% to corporate.
As a public bank whose performance must satisfy the stakeholders, BRI performs very well. As of
December 2008, BRIs profit was USD 5.25 billion, still the highest of all banks in Indonesia. This
profit mostly comes from the Unit.
Full sustainability means financial profitability. Financial profitability, in turn, brings social
benefits.
There is one thingtheir bold experimentwhich has been proven successful without any doubt.
When we respect those living on the financial fringes of society as partners and give them the tools
to utilize the economic system, they welcome the chance to find those solutions for themselves.
Benefits for the working poor
The obvious benefits like increasing income, being able to feed more nutritious food to their
families or sending the children to school are, in some ways, the by-product of the deeper benefits,
raising their self-confidence, their self-esteem. By treating customers as partners and trusting their
character, it bypasses their lack of education and increases their sense of self-worth. Respecting
and encouraging their dreams of a better life, BRI-Unit staff helps them attain those dreams.
Benefits for communities
Located in the centers of small towns, rural areas, or neighbourhoods of larger cities, BRI Units
gather savings of small to medium depositors in that area. Groups such as schools, women's or
youth clubs, government offices, informal savings and loan associations, or local religious
institutions contribute a higher savings volume. This then supports the banking credit needs of
the poor borrowers. It also provides security and better financial management to the
communities.
Benefits for governments and donors
19
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
20/55
Governments and donors are freed from paying out credit subsidies to the economically active
poor. Focus can shift to expanding health care, school, and food programs for the poor below the
poverty line, enabling them to gradually move into the economic mainstream.
How The BRI-Unit System Can Transform Your Entire Outlook on the Possibilities and
Benefits of Micro banking:
Faced with closure or transformation, BRI embarked on a journey that radically altered the
operating concept of the timethat the poor needed government or donor-subsidized credit
programs. By stepping outside that paradigmthat set way of thinkingthe paradigm shift
opened whole new possibilities for delivering microfinance services.
To begin with, the economically active poor were recognized as partners, which meant we had to
change our perceptions. The working poor are a vital, integral part of the economic system,
operating at the edges of the 'poverty line' up to the lower ends of the middle class.
The woman in the market selling vegetables, farmers raising chickens and growing rice, traders
taking the rice to market, weavers, fishermen and cooks, those engaged in transportation, retail,
construction and small manufacturing, all run micro to medium sized businesses.
For too long, "the poor" were thought of, at the policy level, as one homogenous group with
certain, set characteristics.
They don't repay their loans.
They have to be trained how to handle a loan or run a business.
Their so-called businesses are too marginal.
Poor people don't save.
It's too costly to provide banking services to the poor.
The paradigm shift came about when we asked the working poor, the micro-entrepreneurs, what
they wonted in terms of financial products and services. Extensive research, development and
20
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
21/55
testing through field studies and pilot programs began. Then in 1984, BRI launched a commercial
banking system to meet their needs ... not what we thought they needed.
The key to this paradigm shift was the commitment to sustainability. The BRI Unit had to recover
their financial and operating costs, without subsidies, and produce a profit in order to exist and to
grow. BRI Units have proven over the past 20 years that creating products appropriate for the
working poor with full cost recovery is not only possible, but also profitable.
The new paradigm has helped millions of people save their money safely, earning interest on their
deposits. Their savings provide the operating capital to offer loans and other services like money
transfers, to help build micro-small-to-medium businesses in that local area.
The Grameen system
The Grameen system dominates the market in Bangladesh, where it has been widely imitated by a
number of large and small MFI. The system was pioneered by Professor Yunus in 1976, and has
grown very rapidly since.
In addition to the originator, the Grameen Bank, with 2.2 million members, two other major users
of the system, BRAC and Proshika, each have over a million clients, and there were in 1998 some
thirty other MFIs with over 10,000 members, and many hundreds of other smaller organisations
(CDF 1998). It has been estimated that some ten million people in Bangladesh receive financial
services through this system. It has also been widely replicated by MFIs elsewhere, including a
small number in India and in more than twenty other countries in Asia, in Africa, Latin America
and also in disadvantaged rural and urban areas in North America and Europe. The Grameen Trust
supports replicators with funding and technical assistance; at the end of 1999, these replicators
had 420,000 clients, including about 42,000 in India (Grameen Trust, passim)
Low or no-cost foreign donations represent the largest source of on-lending funds for the large
MFI which use the Grameen system in Bangladesh, but members savings and the accumulatedsurplus from operations each contribute some 20% of the necessary funds. The interest rates vary,
and it is difficult to estimate the actual rates because there are a number of fees, forced savings
requirements and other charges, and the methods of calculation also differ from one institution to
another. Broadly speaking, the cost to the final borrowers amounts to at least 2% per month, and
often substantially more.21
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
22/55
The Grameen system requires a dedicated special purpose organisation. The success of the weekly
or occasionally fortnightly or monthly meeting routine depends on tight discipline and adherence
to a regular schedule, and it is difficult for a commercial bank which also has other financial
products to integrate the Grameen system into its own operations. One of the few institutions
which have done this is the Islami Bank of Bangladesh. By 1998 45 of its more than 100 branches
had financed over 12,000 people through groups and centres, more or less following the Grameen
system (Alamgir, pp. 72-75). One important difference, however, is that this is an Islamic Bank;
most of its credit is disbursed in kind, and the Bank is far more intimately involved in its clients
use of their finance than Western style banks. Although loans under the group system amounted to
only about a quarter of one per cent of its total portfolio in 1998, the Islami Bank intended
massively to expand this approach.
The SHG System
The SHG system is mainly found in India, where it is used by both MFIs and banks. There also
some important users in Indonesia, parts of South East Asia, Africa and elsewhere. The SHG
system in India was initiated by NGOs, and is used for financial intermediation both by
commercial banks and by MFIs. By April 2001 some 285,000 SHGs had taken loans from 41
Indian commercial banks, 166 regional rural banks and 111 co-operative banks. The average loan
per group was about Rs 18,000 and the average loan per member was Rs 1,100, or just under
twenty five dollars. During the year 2000/2001 171,000 SHGs took loans, of which 149,000 were
first time borrowers. (NABARD, Micro-credit Innovations Department, personal communication).
The average membership is around seventeen people per SHG, so these figures mean that about
four and a half million people in India have access to formal savings facilities and loans through
their SHG membership. In just one year, the number of new members was in excess of two and a
half million people, or well over the total membership of even the largest institutions in
Bangladesh.
The formation of SHGs for savings and credit, and their linkage to commercial banks, was
initiated in India by MYRADA in the mid-1980s (Fernandez 1998). MYRADA is a Non
Governmental Organization managing rural development programmes in 3 States of South India
22
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
23/55
and providing on-going support including deputations of staff to programmes in 6 other States. It
also promotes the Self Help Affinity strategy in Cambodia, Myanmar and Bangladesh.
NABARD management had around the same time had some exposure to similar experiences in
Thailand and Indonesia, and they responded favorably to MYRADAs suggestion that this could
be a useful way to bring formal financial services to the rural poor.
Since that time, SHG linkage has been vigorously promoted by NABARD and other institutions. It
generally involves two institutions. Most NGOs do not play any financial role. They promote and
train the groups, and assist them through the qualifying process of saving and internal lending. The
groups are introduced to a bank to open a savings account, and later to take a loan. The NGO may
remain heavily involved, assisting the members to manage their affairs, and possibly promoting
higher level clusters and federations of SHGs, or it may withdraw and work with other groups.Other NGOs also act as financial intermediaries by borrowing from NABARD or elsewhere and
on-lending to SHGs, either because they aim to become MFIs, or because this is often the only
way by which the groups could access finance, because many bankers refused to lend to SHGs
directly, or even to open savings accounts for them. The financial margin on this business is
however insufficient to cover more than a small part of the transaction costs. Over a third of the
linked SHGs borrowed from MFIs rather than from banks in 1998, but this proportion dropped to
a quarter in 1999 and is rapidly decreasing further as banks become more aware of the business
opportunity represented by SHGs (NABARD, 1998, 1999).
In addition to paying the cost of training the bankers and the staff of the NGOs, NABARD also
encourages the banks to lend to SHGs by refinancing the loans at the subsidised rate of six and a
half per cent. This subsidised refinance was used to finance 83% of the loans made to SHGs in the
year 2000/2001. (NABARD, MCID, ibid.) Loans to SHGs are excluded from the maximum
interest ceiling of 12% which still applies to other loans under Rs. 20,000 (RBI 2000), but the
banks have generally not taken advantage of this freedom, and most still lend to SHGs at about
12%. The resulting 5.5% spread is felt to be enough to cover the transaction costs so long as the
SHG promotion, training and development task has been carried out by an NGO, at no cost to the
bank.
The on-time repayment rates on SHG loans are usually well over 95%. There is also a large and
increasing number of MFIs in India, most of which use the SHG method. A small number of these
23
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
24/55
MFIs use the Grameen system, but the portfolio of the approximately thirty-five larger MFIs
which use the SHG system, and are doing business with the recently established SIDBI Foundation
for Micro-credit (SFMC), amounts to almost around 85 crores of rupees or thirteen million dollars
These MFIs were said in early 2001 to be serving about 200,000 eventual clients, of whom 94%
are women. (SFMC, personal communication). By contrast, the total number of people in India
served by the eighteen institutions using the Grameen system at the end of 1999 was
approximately fifty thousand. (Grameen Trust, 2000, pp. 72-78).
Why Grameen in Bangladesh and SHGs in India?
The rural poor in India are not so different from their counterparts in Bangladesh, and the
differences between Northern and Southern India, for instance, are certainly more pronounced than
those between poor rural communities in West Bengal, or UP, Bihar and Orissa, from their
neighbours in Bangladesh. It seems prima facie to be odd, therefore, that two such different
systems have evolved, and that there are, as yet at any rate, so few examples of the SHG system in
Bangladesh or of the Grameen system in India.
There are a number of possible explanations. None of them is probably sufficient on its own, but
they may together account for the present situation.
Bangladesh has less experience of any form of democracy than India; its people are used to
military governments, and may for that or other reasons be more disciplined and less individualist.
The Grameen system is often criticised for being over-disciplined, or even militarist, with its
tradition of saluting, of meetings with imposed seating systems and the necessity for strict
adherence to pre-set schedules, by staff and members alike. It may, for that reason, be more
acceptable in Bangladesh. In India, on the other hand, many NGOs see credit as an entry point for
wider goals. Fernandez (2001, p. 6-7), for instance, mentions credit only as the third aspect of
MYRADAs involvement in SHG promotion; the identification and strengthening of traditional,
social and institutional capital are given greater emphasis.
Bangladesh is a relatively homogeneous, very poor, and to the casual observer at least there seems
to be little opportunity for progress. It may be an appropriate location for a rigid, institutionally
autonomous, readily transferable and dependence-creating system which can alleviate poverty for
large numbers.
24
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
25/55
India is fiercely diverse as a nation, and most communities are also diverse in caste, opinion and
religion. Indians are also known for their sense of personal independence, which is often translated
into indiscipline, whether on the roads, in political assemblies or elsewhere. The SHG system
reflects this independence and diversity. It allows people to save and borrow according to their
own timetable, not as the bank requires, and SHGs can also play a part in a whole range of social,
commercial or other activities. They can be vehicles for social and political action as well as for
financial intermediation.
Size does matter when it comes to microfinance. That and the pace of expansion mark the
difference between success and failure, according to a study into the industry.
One out of three microfinance institutions (MFI) in India made losses in fiscal 2009, says a study
of some 230 lenders conducted by ACCESS Development Services, a not-for-profit organization
that offers consulting services to MFIs.
The study also shows that a higher proportion, 42%, of small microfinance lenders, or those that
have a loan portfolio of up to Rs5 crore, posted losses.
Small does not seem to be the right size for viability, says the study, which was led by N.
Srinivasan, an expert on MFIs.
In fiscal 2009, MFIs recovered 99% of their loans, according to the report, which is way above the
recovery of commercial banks. While MFIs lend at rates going up to 30%, the smaller ones make
losses because of high operating costs, according to industry experts.
For large MFIs, the cost of distributing and recovering loans are typically 40-45% of the total. The
rest is the cost of fundsMFIs typically borrow from banks and other institutions at around 12%
interest. But for smaller players, operating expenses, or the proportion expended in distribution
and recovery, could be as high as 60% of the total.
If a new lender tries to expand fast and spends a lot of money on manpower, technology and
market penetration, it could face losses, says Chandra Shekhar Ghosh, managing director of
25
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
26/55
Bandhan Financial Services Pvt. Ltd, one of the biggest and most profitable MFIs in India.
Operations should be scaled up gradually after building a certain amount of business.
However, operations are sustainable only if a lender can raise its loan portfolio to at least Rs10
crore and that should take around two years from inception, according to Manoj K. Sharma,
director of MicroSave, a consulting firm that advises MFIs. Scale is very important in
microfinance. A lot also depends on lending practices as well, says Sharma.
The ACCESS report says unbridled expansion tactics, and competition in some cases result in
lenders offering more loans than borrowers could service, and this, in turn, leads to delinquency.
For illustration, Srinivasan cites largescale defaults in Kolar district of Karnataka, where non-
performing assets (NPAs) are as high as Rs60 crore, almost half of the total NPAs of the industry.
Paring transaction costs is the biggest challenge facing microfinance lenders. It isnt easy making
finance available to the last man in the queue, says J.P. Dua, chairman of Allahabad Bank, which
funds MFIs such as Bandhan. It also costs quite a bit.
MFIs in India had nearly doubled their outstanding loan portfolio to Rs11,734 crore in fiscal 2009,
according to the ACCESS report. They added 8.5 million borrowers during the year and had 22.6
million borrowers as on 31 March.
The bigger players were better offin fiscal 2009, 84% of the large MFIs, or those that have a
loan book of more than Rs50 crore, were profitable, and of those that have a loan portfolio of up to
50 crore, 80% were profitable.
Microfinance In India
26
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
27/55
At present lending to the economically active poor both rural and urban is pegged at around Rs
7000 crores in the Indian banks credit outstanding. As against this, according to even the most
conservative estimates, the total demand for credit requirements for this part of Indian society is
somewhere around Rs 2,00,000 crores.
Microfinance changing the face of poor India
Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy.
In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage
Programme, aimed at providing a cost effective mechanism for providing financial services to the
'unreached poor'. In the Indian context terms like "small and marginal farmers", " rural artisans"
and "economically weaker sections" have been used to broadly define micro-finance customers.
Research across the globe has shown that, over time, microfinance clients increase their income
and assets, increase the number of years of schooling their children receive, and improve the health
and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined
delivery of financial services along with technical assistance, and agricultural business
development services. When compared to the wider SHG bank linkage movement in India, private
MFIs have had limited outreach. However, we have seen a recent trend of larger microfinanceinstitutions transforming into Non-Bank Financial Institutions (NBFCs). This changing face of
microfinance in India appears to be positive in terms of the ability of microfinance to attract more
funds and therefore increase outreach.
In terms of demand for micro-credit or micro-finance, there are three segments, which demand
funds. They are:
At the very bottom in terms of income and assets, are those who are landless and engagedin agricultural work on a seasonal basis, and manual labourers in forestry, mining,
household industries, construction and transport. This segment requires, first and
foremost, consumption credit during those months when they do not get labour work, and
for contingencies such as illness. They also need credit for acquiring small productive
assets, such as livestock, using which they can generate additional income.
27
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
28/55
The next market segment is small and marginal farmers and rural artisans, weavers
and those self-employed in the urban informal sector as hawkers, vendors, and
workers in household micro-enterprises. This segment mainly needs credit for working
capital, a small part of which also serves consumption needs. This segment also needs term
credit for acquiring additional productive assets, such as irrigation pumpsets, borewells and
livestock in case of farmers, and equipment (looms, machinery) and worksheds in case of
non-farm workers.
The third market segment is of small and medium farmers who have gone in for
commercial crops such as surplus paddy and wheat, cotton, groundnut, and others
engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment
includes those in villages and slums, engaged in processing or manufacturing activity,running provision stores, repair workshops, tea shops, and various service enterprises.
These persons are not always poor, though they live barely above the poverty line and also
suffer from inadequate access to formal credit.
Well these are the people who require money and with Microfinance it is possible. Right now the
problem is that, it is SHGs' which are doing this and efforts should be made so that the big
financial institutions also turn up and start supplying funds to these people. This will lead to a
better India and will definitely fulfill the dream of our late Prime Minister, Mrs. Indira Gandhi,
i.e. Poverty.
One of the statement is really appropriate here, which is as:
Money, says the proverb makes money. When you have got a little, it is often easy to get
more. The great difficulty is to get that little.Adams Smith.
Today India is facing major problem in reducing poverty. About 25 million people in India areunder below poverty line. With low per capita income, heavy population pressure, prevalence of
massive unemployment and underemployment , low rate of capital formation , misdistribution of
wealth and assets , prevalence of low technology and poor economics organization and instability
of output of agriculture production and related sectors have made India one of the poor countries
of the world.
28
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
29/55
Present Scenario of India:
India falls under low income class according to World Bank. It is second populated country in the
world and around 70 % of its population lives in rural area. 60% of people depend on agriculture,
as a result there is chronic underemployment and per capita income is only $ 3262. This is not
enough to provide food to more than one individual . The obvious result is abject poverty , low
rate of education, low sex ratio, exploitation. The major factor account for high incidence of rural
poverty is the low asset base. According to Reserve Bank of India, about 51 % of people house
possess only 10% of the total asset of India .This has resulted low production capacity both in
agriculture (which contribute around 22-25% of GDP ) and Manufacturing sector. Rural people
have very low access to institutionalized credit( from commercial bank).
Poverty alleviation programmes and concepualisation of Microfinance:
There has been continuous efforts of planners of India in addressing the poverty . They Have come
up with development programmes like Integrated Rural Development progamme (IRDP), National
Rural Employment Programme (NREP) , Rural Labour Employment Guarantee Programme
(RLEGP) etc. But these progamme have not been able to create massive impact in poverty
alleviation. The production oriented approach of planning without altering the mode of production
could not but result of the gains of development by owners of instrument of production. The modeof production does remain same as the owner of the instrument have low access to credit which is
the major factor of production. Thus in Nineties National bank for agriculture and rural
development(NABARD) launches pilot projects of Microfinance to bridge the gap between
demand and supply of funds in the lower rungs of rural economy. Microfinance . the buzzing word
of this decade was meant to cure the illness of rural economy. With this concept of Self Reliance,
Self Sufficiency and Self Help gained momentum. The Indian microfinance is dominated by Self
Help Groups (SHGs) and their linkage to Banks.
Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on
informal financing intermediaries like money lenders, family members, friends etc.
29
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
30/55
2.1 Distribution of Indebted Rural Households: Agency wise
Credit Agency Percentage of Rural Households
Government 6.1
Cooperative Societies 21.6
Commercial banks and RRBs 33.7
Insurance 0.3
Provident Fund 0.7
Other Institutional Sources 1.6
All Institutional Agencies 64.0
Landlord 4.0
Agricultural Moneylenders 7.0
Professional Moneylenders 10.5
Relatives and Friends 5.5
Others 9.0
All Non Institutional Agencies 36.0
All Agencies 100.0
Source: Debt and Investment Survey, GoI 1992
Seeing the figures from the above table, it is evident that the share of institutional credit is much
more now.
The above survey result shows that till 1991, institutional credit accounted for around two-thirds of
the credit requirement of rural households. This shows a comparatively better penetration of the
banking and financial institutions in rural India.
Percentage distribution of debt among indebted Rural Labor Households by source of debt
Sr. No. Source of debt Households
With
cultivated
land
Without
cultivated
land
All
1 Government 4.99 5.76 5.372 Co-operative Societies 16.78 9.46 13.093 Banks 19.91 14.55 17.194 Employers 5.35 8.33 6.865 Money lenders 28.12 35.23 31.70
30
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
31/55
6 Shop-keepers 6.76 7.47 7.137 Relatives/Friends 14.58 15.68 15.148 Other Sources 3.51 3.52 3.52 Total 100.00 100.00 100.00
Source: Rural labor enquiry report on indebtedness among rural labor households (55 th
Round of N.S.S.) 1999-2000
The table above reveals that most of the rural labour households prefer to raise loan from the non-
institutional sources. About 64% of the total debt requirement of these households was met by the
non-institutional sources during 1999-2000. Money lenders alone provided debt (Rs.1918) to the
tune of 32% of the total debt of these households as against 28% during 1993-94. Relatives and
friends and shopkeepers have been two other sources which together accounted for about 22% of
the total debt at all-India level.
The institutional sources could meet only 36% of the total credit requirement of the rural labour
households during 1999-2000 with only one percent increase over the previous survey in 1993-94.
Among the institutional sources of debt, the banks continued to be the single largest source of debt
meeting about 17 percent of the total debt requirement of these households. In comparison to the
previous enquiry, the dependence on co-operative societies has increased considerably in 1999-
2000. During 1999-2000 as much as 13% of the debt was raised from this source as against 8% in
1993-94. However, in the case of the banks and the government agencies it decreased marginally
from 18.88% and 8.27% to 17.19% and 5.37% respectively during 1999-2000 survey.
2.2 Relative share of Borrowing of Cultivator Households (in per cent)
Sources of Credit 1951 1961 1971 1981 1991 2002*
Non Institutional 92.7 81.3 68.3 36.8 30.6 38.9Of which:
Moneylenders 69.7 49.2 36.1 16.1 17.5 26.8
Institutional 7.3 18.7 31.7 63.2 66.3 61.1Of which:Cooperative Societies,etc 3.3 2.6 22.0 29.8 30.0 30.2Commercial banks 0.9 0.6 2.4 28.8 35.2 26.3Unspecified - - - - 3.1 -Total 100.0 100.0 100.0 100.0 100.0 100.0
* All India Debt and Investment Survey, NSSO, 59th round, 2003
31
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
32/55
Source: All India Debt and Investment Surveys
Table shows the increasing influence of moneylenders in the last decade. The share of
moneylenders in the total non institutional credit was declining till 1981, started picking up from
the 1990s and reached 27 per cent in 2001.
At the same time the share of commercial banks in institutional credit has come down by almost
the same percentage points during this period. Though, the share of cooperative societies is
increasing continuously, the growth has flattened during the last three decades.
2.3 Distribution based on Asset size of Rural Households (in per cent)
Household Assets (Rs 000) Institutional Agency Non-Institutional
Agency
All
Less than 5 42 58 100
5-10 47 53 10010-20 44 56 10020-30 68 32 10030-50 55 45 10050-70 53 47 10070-100 61 39 100100-150 61 39 100150-250 68 32 100250 and above 81 19 100All classes 66 34 100
Source: Debt and Investment Survey, GoI, 1992
The households with a lower asset size were unable to find financing options from formal credit
disbursement sources. This was due to the requirement of physical collateral by banking and
financial institutions for disbursing credit. For households with less than Rs 20,000 worth of
32
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
33/55
physical assets, the most convenient source of credit was non institutional agencies like landlords,
moneylenders, relatives, friends, etc.
Looking at the findings of the study commissioned by Asia technical Department of the World
Bank (1995), the purpose or the reason behind taking credit by the rural poor was consumption
credit, savings, production credit and insurance.
Consumption credit constituted two-thirds of the credit usage within which almost three-fourths of
the demand was for short periods to meeting emergent needs such as illness and household
expenses during the lean season. Almost entire demand for the consumption credit was met by
informal sources at high to exploitive interest rates that varied from 30 to 90 per cent per annum.
Almost 75 per cent of the production credit (which accounted for about one-third of the total credit
availed of by the rural masses) was met by the formal sector, mainly banks and cooperatives.
2.4 Banking Expansion
Starting in the late 1960s, India was the home to one of the largest state interventions in the rural
credit market. This phase is known as the Social Banking phase.
It witnessed the nationalization of existing private commercial banks, massive expansion of branchnetwork in rural areas, mandatory directed credit to priority sectors of the economy, subsidized
rates of interest and creation of a new set of regional rural banks (RRBs) at the district level and a
specialized apex bank for agriculture and rural development (NABARD) at the national level.
The Net State Domestic Product (NSDP) is a measure of the economic activity in the state and
comparing it with the utilization of bank credit or bank deposits indicates how much economic
activity is being financed by the banks and whether there exists untapped potential for increasing
deposits in that state.
E.g. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at around
75%-80% in Bihar and Jharkhand or these states are not as under banked as thought to be.
2.5 Microfinance Social Aspects
33
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
34/55
Micro financing institutions significantly contributed to gender equality and womens
empowerment as well as poor development and civil society strengthening. Contribution to
womens ability to earn an income led to their economic empowerment, increased well being of
women and their families and wider social and political empowerment.
Microfinance programs targeting women became a major plank of poverty alleviation and gender
strategies in the 1990s. Increasing evidence of the centrality of gender equality to poverty
reduction and womens higher credit repayment rates led to a general consensus on the desirability
of targeting women.
The Need in India
India is said to be the home of one third of the worlds poor; official estimates range from
26 to 50 percent of the more than one billion population.
About 87 percent of the poorest households do not have access to credit.
The demand for microcredit has been estimated at up to $30 billion; the supply is less than
$2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, India is strategically significant in the
global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the
worlds poverty by 2015. Microfinance has been present in India in one form or another since the
1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last five
years, the microfinance industry has achieved significant growth in part due to the participation of
commercial banks. Despite this growth, the poverty situation in India continues to be challenging.
Some principles that summarize a century and a half of development practice were encapsulated in
2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight
leaders at the G8 Summit on June 10, 2004:
Poor people need not just loans but also savings, insurance and money transfer
services.
Microfinance must be useful to poor households: helping them raise income, build up
assets and/or cushion themselves against external shocks.
34
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
35/55
Microfinance can pay for itself. Subsidies from donors and government are scarce
and uncertain, and so to reach large numbers of poor people, microfinance must pay for
itself.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of poor people into a countrys
mainstream financial system.
The job of government is to enable financial services, not to provide them.
Donor funds should complement private capital, not compete with it.
The key bottleneck is the shortage of strong institutions and managers. Donors
should focus on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit.
Microfinance institutions should measure and disclose their performance both
financially and socially.
Microfinance can also be distinguished from charity. It is better to provide grants to families who
are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a
loan. This situation can occur for example, in a war zone or after a natural disaster.
Financial needs and Financial services
In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to carry
them out. Almost by definition, poor people have very little money. But circumstances often arise
in their lives in which they need money or the things money can buy.
In Stuart Rutherfords recent bookThe Poor and Their Money, he cites several types of needs:
Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,
widowhood, old age.
Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.
35
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
36/55
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.
Investment Opportunities: expanding a business, buying land or equipment, improving
housing, securing a job (which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash vary
from country to country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
microfinance could provide large-scale outreach profitably, and in the 1990s, microfinance
began to develop as an industry. In the 2000s, the microfinance industrys objective is to satisfy
the unmet demand on a much larger scale, and to play a role in reducing poverty. While much
progress has been made in developing a viable, commercial microfinance sector in the last few
decades, several issues remain that need to be addressed before the industry will be able to satisfy
massive worldwide demand.
The obstacles or challenges to building a sound commercial microfinance industry include:
Inappropriate donor subsidies
Poor regulation and supervision of deposit-taking MFIs
Few MFIs that mobilize savings
Limited management capacity in MFIs
Institutional inefficiencies
Need for more dissemination and adoption of rural, agricultural microfinance
methodologies
Legal Regulations
Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act
of 1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts
of the respective state governments for cooperative banks.
36
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
37/55
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There
is no specific law catering to NGOs although they can be registered under the Societies
Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a
strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing
deposits from clients who also borrow. This tendency is a concern due to enforcement problems
that tend to arise with self-regulatory organizations. In January 2000, the RBI essentially created a
new legal form for providing microfinance services for NBFCs registered under the Companies
Act so that they are not subject to any capital or liquidity requirements if they do not go into the
deposit taking business. Absence of liquidity requirements is concern to the safety of the sector.
37
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
38/55
Comparative Analysis of Micro-finance Services offered to the poor
Source: R. Arunachalam - Alternative Technologies in the Indian Micro- finance Industry
Micro Finance Models
1. Micro Finance Institutions (MFIs):
38
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
39/55
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives.
They are provided financial support from external donors and apex institutions including the
Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a
variety of ways for credit delivery.
Since 2000, commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into
financial intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the country, the
number of MFIs is estimated to be around 800.
Legal Forms of MFIs in India
Types of MFIs Estimated
Number*
Legal Acts under which Registered
1. Not for Profit MFIs
a.) NGO - MFIs
400 to 500 Societies Registration Act, 1860 or similar
Provincial Acts
Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956
2. Mutual Benefit MFIs
a.) Mutually Aided Cooperative
Societies (MACS) and similarly
set up institutions
200 to 250 Mutually Aided Cooperative Societies Act
enacted by State Government
3. For Profit MFIs
a.) Non-Banking Financial
Companies (NBFCs)
6 Indian Companies Act, 1956
Reserve Bank of India Act, 1934
Total 700 - 800
Source: NABARD website
2. Bank Partnership Model39
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
40/55
This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as an
agent for handling items of work relating to credit monitoring, supervision and recovery. In other
words, the MFI acts as an agent and takes care of all relationships with the client, from first
contact to final repayment. The model has the potential to significantly increase the amount of
funding that MFIs can leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its
books for a while before securitizing them and selling them to the bank. Such refinancing through
securitization enables the MFI enlarged funding access. If the MFI fulfils the true sale criteria,
the exposure of the bank is treated as being to the individual borrower and the prudential exposure
norms do not then inhibit such funding of MFIs by commercial banks through the securitization
structure.
3. Banking Correspondents
The proposal of banking correspondents could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It
would use the ability of the MFI to get close to poor clients while relying on the financial strength
of the bank to safeguard the deposits. This regulation evolved at a time when there were genuine
fears that fly-by-night agents purporting to act on behalf of banks in which the people have
confidence could mobilize savings of gullible public and then vanish with them. It remains to be
seen whether the mechanics of such relationships can be worked out in a way that minimizes the
risk of misuse.
4. Service Company Model
Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in hand
with that MFI to extend loans and other services. On paper, the model is similar to the partnership
model: the MFI originates the loans and the bank books them. But in fact, this model has two very
different and interesting operational features:
(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a standalone MFI. In case of banks which
have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may
contract with many banks in an arms length relationship. In the service company model, the MFI
40
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
41/55
works specifically for the bank and develops an intensive operational cooperation between them to
their mutual advantage.
(b) The Partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The Service Company Model has the potential to take the
burden of overseeing microfinance operations off the management of the bank and put it in the
hands of MFI managers who are focused on microfinance to introduce additional products, such as
individual loans for SHG graduates, remittances and so on without disrupting bank operations and
provide a more advantageous cost structure for microfinance.
Examples of Recent Innovations in Financial Services for the Poor In India:
ICICI Bank (India): Two state banks in India (Corporation and Canara) partnered with an NGO
to provide salaried low-income workers with access to savings. The project uses the already
established automatic teller machines (ATMs) in the factories to offer a recurring savings product,
along with education on personal finance.
Microfinance securitization
Share, a Grameen Bank replicator, has been one the leading MFIs in India with a good track
record, growth rate and scale of operation. In two transactions with Share, ICICI Bank has
securitized the receivables of microfinance loans from Share amounting to $5.25 million
consisting of loans made by Share to microfinance clients.
ICICI Bank bought this microfinance loan portfolio against:
A consideration calculated by computing the NPV of receivables amounting to $5.25 million at an
agreed discount rate.
Partial credit protection provided by Share to ICICI Bank in the form of a first loss default
guarantee amounting to 8 per cent of the receivables under the portfolio.Subsequently, ICICI Bank sold the securitized portfolio to a private sector bank in India
BASIX is a livelihood promotion institution established in 1996, working with overa million and
a half customers, over 90% being rural poor households and about 10% urban slum dwellers.
BASIX works in 16 states - Andhra Pradesh, Karnataka, Orissa, Jharkhand, Maharashtra, Madhya
41
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
42/55
Pradesh, Tamilnadu, Rajasthan, Bihar, Chattisgarh, West Bengal, Delhi, Uttarakhand, Sikkim,
Meghalaya and Assam and over 22,400 villages.
BASIX mission is to promote a large number of sustainable livelihoods, including for the rural
poor and women, through the provision of financial services and technical assistance in an
integrated manner. BASIX will strive to yield a competitive rate of return to its investors so as to
be able to access mainstream capital and human resources on a continuous basis.
BASIX strategy is to provide a comprehensive set of livelihood promotion services which inlcude
Financial Inclusion Services (FINS), Agricultural / Business Development Services (Ag/BDS) and
Institutional Development Services (IDS) to rural poor households under one umbrella.
BASIX in India reduced transportation and transaction costs for its clients and decreased staff
expenses by establishing tellers in manned phone booths operating in India. The company
operating the phone booths receives a service fee and phone booth operators are being trained in
basic collection operations and accounting. BASIX is currently redesigning the project after the
pilot and preparing it for relaunching.
MFIs could play a significant role in facilitating inclusion, as they are uniquely positioned in
reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater
understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural
poor and have flexibility in operations providing a level of comfort to their clientele. There are
several legal forms of MFIs. However, firm data regarding the number of MFIs operating under
different forms is not available. It is roughly estimated that there are about 1,000 NGO-MFIs and
more than 20 Company MFIs. Further, in Andhra Pradesh, nearly 30,000 cooperative
organizations are engaged in MF activities. However, the company MFIs are major players
accounting for over
80% of the microfinance loan portfolio. An attempt is made in the following table to capture the
various forms of MFIs:
Microfinance companies in India
42
MICROFINANCE-A CRITICAL ANALYSIS
8/2/2019 Micro Finance Ravi Mathur Mms-fin
43/55
Microfinance companies are the financial institutions that offer small-scale financial services in
both the forms credit and savings, especially to the poor in rural, semi-urban and urban areas.
These financial services are meant to help them in undertaking economic activities, mitigating
vulnerabilities to income shocks, smoothening consumption, increasing savings and supporting
self-empowerment. There are a number of microfinance companies in India, which play some
pivotal roles to the development of India.
In