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Microfinance – Tool for Economic

Inclusion

Presentation by

Mr Somak Ghosh

President – Corporate Finance & Development Banking, YES BANK Ltd

for

TBLI Europe 2006 (Europe)

November 9, 2006

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Microfinance – Tool for Economic Inclusion

An Inclusive Economy is one that helps people help themselves

to increase incomes, acquire capital, manage risk and work

their way out of poverty

Microfinance, through the provision of safe savings, appropriately

designed loans for poor and low-income households and micro, small and

medium enterprises and appropriate insurance and payment services :

Enables poor to smoothen consumption, manage risk, build assets, develop micro-enterprises, enhance income and earning capacity

Helps poor to actively participate in the economy and benefit from development opportunities

Empowers women Contributes to overall development of financial system through

integration of financial markets

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Microfinance & Millennium Development Goals (MDGs)

Central theme of MDGs is poverty reduction along with an emphasis on human development indicators especially those relating to women and children

Microfinance increasingly looked upon as an effective tool to achieve MDGs

Financial sector, leveraging microfinance, can play a key role in reinforcing many objectives of MDGs involving savings, livelihoods and economic infrastructure apart from providing an efficient payments system

•Poor participating in microfinance programmes are able to improve their well-being at both individual and household level

•Poor households with access to financial services not only send their children to school but also allow them to stay in school longer

•Access to financial services and resultant transfer of financial resources to women, over time, lead to women becoming more confident, assertive and better able to confront systemic gender inequities

Impact of Microfinance

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Doorstep banking

Flexibility in timings

Timely availability of services

Low value and high volume transactions

Require simple processes with minimum documentation

Nature of DemandNature of Demand

High cost of service delivery

Timings and procedures: Rigid and inflexible

High transaction cost for the customers

Expansion of branch network expensive and time taking

Nature of SupplyNature of Supply

Banking with the poor is challenging…

…and conventional banking is not poised to meet these demands…hence the need for Microfinance

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Microfinance – Origins

Evolution of Microfinance – 1900s

Evolution of Microfinance – 1900s

Concept of Microfinance is not new; savings and credit groups have operated for centuries Susus in Ghana, Chit funds in India, Tandas in Mexico, Arisan in

Indonesia, Cheetu in Sri Lanka, Tontines in West Africa, Pasanaku in Bolivia

1700s - writer Jonathan Swift started micro-credit organisations in Ireland lending to rural poor

1800s - more formal savings and credit institutions known as People’s Banks and Credit Unions began to emerge in Europe

Subsidised Credit

Focused on agricultural credit through state-owned development finance institutions

Rural development banks suffered massive erosion of capital base due to subsidised lending rates & poor repayment discipline

Experimental Programmes

Bangladesh, Brazil and few other countries

Based on solidarity group lending primarily women

Focus on credit for income generation activities

Commercial Approach

High repayment rate and cost-recovery interest rates

Demonstrated that poor were willing and able to pay interest rates that allowed MFIs to recover costs

Broadening of Offerings

Micro-credit replaced by Microfinance to include not only credit but also savings and other financial services such as insurance and money transfers

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Entry of Experts

Industry has seen a transition from philanthropy to business

MFIs continue to focus on community development objectives, albeit in a commercially viable and financially sustainable manner that allows them to:- Increase operational efficiencies- Access a wider pool of capital- Increase outreach

Institutions like ACCION, ProCredit, FINCA, Women’s World Banking and Grameen all incorporate for-profit objectives in their operations across the world

- Accion – an early pioneer founded in 1970s; has helped found many viable institutions such as Bancosol - the world’s first commercial bank dedicated to microfinance

- Self Employed Women’s Association (SEWA) - registered as a trade union in 1972 in Gujarat (India), found ‘SEWA BANK’ in 1973 to help members access financial services

- Grameen Bank – in 1976 Prof. Muhammad Yunus designed experimental credit programmes aimed at poor; Grameen Bank founded in 1983 through donor support and now serves more than 4 million borrowers

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A Bankable Business - Downscaling The profitability of the microfinance

business has captured the attention of some of the world’s largest and wealthiest commercial banks and insurers such as Citigroup, HSBC, ING, ABN Amro, Commerzbank and Deutsche Bank

- Citigroup – established relationships with MFIs in 20 countries; through its subsidiary Banamex (Mexico) provides life-insurance sold by MFIs

- Deutsche Bank – recently raised $ 75 m investment fund and syndicated a large loan on behalf of ProCredit (Germany)

- ABN Amro – owns a microfinance bank, Real Microcrédito in Brazil; provides credit to 5 MFIs in India

- ICICI – has close to 1.5 million customers that qualify as deeply poor and an associated loan portfolio of $ 265 m

Source: The Economist, November 3, 2005

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Decision Tree for Commercial Banks in Microfinance

Successful Downscaling Models

Source: “Commercial Banks and Microfinance,” CGAP, 2005

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Building a Sustainable Microfinance Industry – Role of BanksA sustainable microfinance

industryrequires services for the poor to

beintegrated at all three levels of

thefinancial system:

Micro – provision of robust retail institutions that provide services directly to clients

Meso – provision of supporting infrastructure including quality auditors, rating agencies, professional networks, trade associations, credit bureaux, transfer and payment systems and information technology to reduce transaction costs, increase outreach, build capacity and foster transparency among retail institutions

Macro – enabling a conducive and stable macroeconomic and policy environment is necessary to underpin a pro-poor financial system.

Mainstreaming microfinance into theformal financial system requires

Banksto: Have broader strategy commitment from

Board and senior management View financial inclusion as a business

strategy for growth Understand the microfinance market and

develop products suited to the clientele Develop infrastructure keeping in mind

convenience to clients Develop data sets to evolve risk

assessment models for proper rating and pricing

Adapt systems and procedures to microfinance operations

Use innovative products, services and delivery mechanisms aided by information technology to help speed up transaction time and reduce costs

Adopt appropriate staff training methodologies

CGAP (2004) “Building Inclusive Financial Systems – Donor Guidelines on Good Practice in Microfinance,” December 2004

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Government Policies & Efforts Development policy direction since Independence

• find ways and means to finance poor, reduce burden upon them

Gap in policy and quality of efforts• defects in policy design, infirmities in implementation, popular decisions –

loan waivers

Consequences Banking system not able to internalize lending to poor as a viable

activity seen as social obligation

Poor became beneficiaries and not borrowers for banks, mindsets

hardened as poor ‘not bankable’, lending to poor not commercially

viable

Late 80s - Microfinance started in rural, both govt. and

NGOs programmes in late 80s Took a decade for concept of MF to become credible

Microfinance Case Study – India

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1992 – NABARD conducts pilot project – refinancing SHG programmes

1996 – Encouraged by the above pilot project, the govt. appoints the working group – made important recommendations including inclusion in the priority sector list.

1999 – A task force on NBFCs made recommendations on microfinance

2000 – The RBI announces broad guidelines to banks on microfinance in its credit & monetary policy

2002 – Informal Group set up to suggest to the govt. on microfinance

2005 – Khan Report (RBI) on policy options, development and regulatory issues

Microfinance in India – Milestones

Recent Developments

Microfinance Development & Equity Fund increased from Rs. 100 cr to Rs. 200 cr.

ECBs upto USD 5 million allowed for MFIs (meeting certain criteria)

Exim Bank ties up with a number of NGO/MFIs for funding/promoting cluster projects

New equity funds for microfinance industry – Lok Capital, Bellwether, & Aavishkar fund

RBI guidelines on MFIs as banking correspondents

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>600k(6.3 Mn)

240k-400k (8.1Mn)

120k-240 (18.8Mn)

80k-120k (22.4Mn)

40k-80k (58.6Mn)

<40k (89Mn)

Organized Financial Services

Total no. of households – 203

mn

MF market segment 130 mn

households (> 60% of India)

Facts Low penetration of organized

financial services sector Financial services traditionally

availed from expensive unorganized sector need to shift to organized financial sector

Opportunities MF segment performing better than

commercial banking peers Discounting Rates ~ 15 – 24% Repayment Rates 96 – 100% Top rung MFI’s in India posting a

ROAA in range of 1% to 1.5% Low competitive bars to entry and

sizeable mind space Savings / Equity / Insurance are still

largely untapped in these markets

Source: Census 2001; BCG Analysis

Xxx (xx)

Annual household income

#households

Household income stratificationHousehold income stratification

Microfinance in India - Opportunity

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Microfinance in India – Nature of Market

Cooperatives/MACs/federations

Multi-service NGOs & SHPIs (NABARD’s SHG Bank linkage)

Following various models:

(i) Group delivery models

- SHGs

- JLGs

(ii) Individual banking

(iii) Variations of above

Registered as:

- Societies

- Trusts

- Section 25, not for profits

- NBFCs

- Others

Typical Microfinance Institutions (MFIs)

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Why Microfinance for YES BANK

Vision to Champion RESPONSIBLE BANKING in India Cognizant of its responsibility as a Public Trust Institution to

further ECONOMIC INCLUSION SUSTAINABILITY in DNA of the Bank

Instituted specialised division, Development & Knowledge Banking, to consummate the Bank's core strategy within the sustainability space :

• Food & Agriculture Strategic Advisory and Research (FASAR)• Strategic Government Business Initiatives• Agri, Micro & Rural Banking (AM&RB) • Responsible Banking (incorporating our CSR and Sustainability Initiatives)

Lack of organised sector players with long term vision and a dedicated involvement– Gap for institutionally sponsored financial services providers

focused on underprivileged population on a pan Indian basis, with both commercial orientation & socio-development perspective

YES BANK envisions to be a recognised leader in MICROFINANCE in a 5 year timeframe

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Providing entire gamut of financial services to the Bottom Of the Pyramid

YES BANK’s vision for Microfinance

Assisting poverty

alleviation

Micro-enterprise Development

Services

De-centralized Technology innovations

Direct Credit Programs

Savings / Insurance and other financial

services

Supporting entrepreneurship

Promoting micro-equity funding

models

Enabling socio-economic,

environmental, grassroots

development

Fostering financial

inclusivity, empowerme

nt

Augmenting sustainable livelihoods

Holistic Financial

Solutions to shrink the

Bottom of the Pyramid

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Thank You