Micro Finance in the World and in India: Status, Problems and Prospects

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1 Micro Finance in the World and in India: Status, Problems and Prospects By Vijay Mahajan Chair, CGAP ExCom Founder and CEO, BASIX Social Enterprise Group, India President, MFIN (MFI Network of India) March

2 Global Context Section 1 2

3 Globally, half of all working-age adults are unbanked : Universal Financial Inclusion is a distant dream Adults with account at formal financial institution, (average in %) High Income Economies 89% Latin America & Caribbean 39% Middle East & North Africa 18% Sub-Sahara Africa 24% Europe & Central Asia 45% South Asia 33% 77% of the poor unbanked East Asia & Pacific 55% Source: Global Findex Database, World Bank

4 The Economically Active Poor need credit to grow their business and thus increase their income 4

5 But all the poor cannot benefit with credit alone they need access to savings, insurance, pensions, government payments, family remittances

6 CGAP - A partnership of bilaterals, multilaterals, IFIs and Foundations - has been advancing financial access for the world s poor since 1996 Public good at the frontier of broader responsible market development effort - Evidence-based advisory to policymakers to strengthen paradigm - Demonstration effects for product & business model innovation - Donor coordination & support (role of catalytic capital) Everything done in partnership aimed at crowding-in others 6

7 Access to finance matters for household welfare How CGAP and the MF Industry help 1. Building assets 2. Managing risk 3. Smoothing consumption 4. Improving decision-making 7

8 Sharing global lessons on policy matters : Example - Countries with Interest Rate Ceilings (23 vs 7) had Low Access to Microfinance (5% vs 20%) Number of microfinance Microfinance borrowers Market shown Penetration as in Countries with and without Interest Rate Ceilings, 2004 percentage of population living on less than US$ 2 per day Tunisia Morocco Columbia Bolivia All of Sample All of Sample Interest Rate Ceilings No Interest Rate Ceilings Source: CGAP Focus Note 2004 : The Impact of Interest Rate Ceilings on Microfinance

9 Sharing information matters : CGAP Blog How Evidence Is Helping Reframe Our Perspective On Microfinance

10 CGAP : evolution of focus and key contributions since 1995 Focus Key contributions Phase I ( ) Phase II ( ) Phase III ( ) Phase IV ( ) Helping prove concept of microcredit Advocating for financial sustainability Helping professionalize sector Broadening range of services and providers Scaling/expanding access Advancing responsible finance Demonstration grants to promising MFIs Technical tools for MFIs and donors Consensus donor guidelines Regional training programs The MIX data source/website Partnerships with new types of providers to promote micro-savings Launch of Micro-insurance Working Group New business model innovations for scale (branchless banking) and downward reach (graduation program) Responsible finance agenda across regulation, industry, financial literacy 4

11 Microfinance in India Section 2 11

12 India s Two Contending Microfinance Models Indian NGOs like MYRADA and PRADAN invented the SHG (self-help group) Bank linkage model and NABARD promoted it in a big way through public sector banks and State Governments. Other Indian NGOs like SHARE learnt the (joint liability group) JLG Model from the Grameen Bank Bangladesh and adopted it. Later SIDBI and private sector banks promoted it. Both have grown very well in the last 10 years (see chart on next slide). 12

13 Year SHG-Bank Linkage vs MFI models relative growth All India Loan Outstanding MFI vs SHG - All India MFI Loan Portfolio (In Million Rupees) SHG Outstandings (in Million Rupees) Outreach MFI vs SHG - All India No. of Active Borrowers in MFI (in Millions) No.of SHG Bank Linkage Borrowers (in Millions) , ,910 68, , , , , (est) 200, , Source: Derived from MIX Market and NABARD 13

14 Borrowing by poor households in Andhra Pradesh, before and after AP Ordinance Traders 48-60%pa Moneylenders 36-48%pa MFI 2 27%pa MFI 1 24%pa SHG Own Savings 12%pa SHG-Bank Linkage 3% pa Friends and Family 0% Traders 48-60%pa % pa once again dominate SHG Own Savings 12%pa SHG-Bank Linkage 0% Friends and Family 0% The numbers show interest rate in % per annum

15 NFIN View point: The SHG and MFI models can coexist and complement each other Market Segment Non-Farm SME Enterprises/ Commercial Farmers Micro-Enterprises/ Small Farmers Marginal Producers including landless Methods Direct Loans by banks Joint Liability Groups thru Coops/MFIs Thru Self-Help Groups and SHG Federations linked to banks/mfis 15

16 Post AP crisis regulatory regime Both models being allowed to flourish. For-profit non-bank finance companies which adhere to these regulations are called NBFC-MFIs and are eligible for priority sector bank credit. Prudential norms for NBFC MFIs tightened - capital adequacy and provisioning enhanced. Interest rate capped at 26%, margin capped at 12% Consumer protection norms detailed out size of lending, number of lenders, tenor, repayment frequency, usage, etc. being micro-specified. 16

17 After the AP crisis, India has contributed to the development of a more «Responsible Finance» Consumer protection regulation & supervision Financial education & capability delivery of retail financial services in a transparent and equitable fashion Standards and codes of conduct for the industry 17

18 Beyond Microcredit The BASIX Sub-K BC model The RBI has approved the Business Correspondent (BC) model to enable people to undertake small transactions without coming to bank branches Banks appoint a BC company which in turn appoints a large number of sub-agents - grocery stores, phone booths, as manned ATMs. The model is promising but yet to become pervasive. Multiple services is the key to viability. Micro-loans, micro-insurance should supplement micro-savings and micro-payments revenue. 18

19 Beyond Microfinance the BASIX Livelihood Triad Model For all its promise, microfinance, even in its broader form is inadequate as a tool for poverty alleviation. The poor need improvements in the real livelihood sectors they work in agriculture, livestock, urban informal sector. They need skills and market links. They also need to aggregate their demand and their output, for better bargaining power. For this they need to be organised into groups and coops. This is the essence of The Livelihood Triad 19

20 Helping the poor overcome poverty needs a livelihoods approach, which involves the Triad of financial services, promotional services and organising the poor Organising into groups and Coops Ongoing Credit and Insurance (life, health, crop, livestock) APL Ongoing support services for livelihood promotion Assets Transfer Vulnerable Skill Training Poverty Line Life and Health Insurance Migrant (family) Remittances Poor Chronic Food Insecurity Govt Payments (e.g. NREGA) Food Aid Ulta Poorr 20

21 BASIX Equity for Equity Thank You 21

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