MMT-675 MICROFINANCE MANAGEMENT

CMT-660
About Microfinance
It refers to the provision of financial services to low-income clients.

Financial services includes the following

 Credit
 Savings/Deposits
 Insurance Plans
 Money Transfer

Indian Scenario :Demand and Supply Gap

• Considerable gap between demand and supply for all financial services
• Majority of poor are excluded from financial services. This is due to, inter-alia, the
following reasons:
• Bankers feel that it is fraught with risks and uncertainties.
• High transaction costs
• Unfavorable policies like caps on interest rates which effectively limits the
viability of serving the poor.
• While MFIs have shown that serving the poor is not an unviable proposition there
are issues that have constrained MFIs while scaling up. These include
 • Lack of an appropriate legal vehicle
• Limited access to equity
• Difficulty in accessing low cost on-lending funds
• They are unable to offer savings services in a legitimate manner.

Features of Microfinance
What is Special About Microfinance Institutions?
 Small loans.
 Target client - poor ,specially women.
 No physical collateral.
 Group lending, collective guarantee, and joint responsibility.
 MFI goes to the clients.
 Weekly or fortnightly repayment.
 The credit is extended in a continuous sequence.
 Credit complemented with compulsory or voluntary savings
 Comparatively high interest rate is charged to meet high cost of
lending
 Mostly, not-for-profit organizations extend loans to the poor
 No restriction on for-profit organizations to enter
Unique requirements of poor segment of customers

Service
Rapid, convenient access
Respect, connection
Asset Building, Risk
Flexible Loans
Mitigating Products
Small initial loan sizes
Voluntary savings
Larger loans over time
Health and life insurance
Longer terms

What the Poor Want

Variety of Products
Housing loans Group and Individual
Education loans Loans
Business development services
 No Traditional Collateral

Indian Scenario :Poverty in India

• Estimated 350 million people live Below Poverty Line
• This translates to approximately 75 million households.
• Annual credit demand by the poor in the country is estimated
to be about Rs. 60,000 crores.
• Only about 5 % of rural poor have access to microfinance.

Indian Scenario :Access to Credit

• About 56 % of the poor still borrow from informal sources.
• 70 % of the rural poor do not have a deposit account
• 87 % have no access to credit from formal sources.
• Less than 15 % of the households have any kind of insurance.
• Negligible numbers have access to health insurance (0.4 %) and
crop insurance (0.2 %). 

Indian Scenario
Indian Scenario
The state MFIs are in:
1. Multiple lending / over-indebtedness

2. Reserve Bank and Government worried about interest rates and coercive practices

3. State Governments putting restrictions/ classifying MFIs as moneylenders

4. Banks and investors looking at MF as a high risk sector

5. Stridently negative press – International, national and regional

How the sector got here:

1. Very rapid growth

2. Transformation to more regulated / for-profit formats

3. Mono-product environment

4. Huge demand

5. Horizontal expansion

Challenges Facing Microfinance in India

 • Appropriate legal structures for the structured growth of MF operations
• Finding adequate levels of equity for the new entities to leverage loan funds
• Ability to access loan funds at reasonably low rates of interest.
• Ability to attract and retain professional and committed human resources.
• Design of apt MIS including user friendly software for tracking accounts and
operations.    

• Appropriate loan products for different segments.

Key features of Microfinance Programs

What Government/Regulator Should do?
1. Bring in a Union level legislation
2. Bring in innovative models to priority sector lending- limits on lending to MFIs under
PSL
3. Enhance and encourage Banking Correspondence
4. Recognize and Hold accountable Industry Association(s)

What Social Investors Should Do?

1. Revise expectations on returns
2. Make MFIs accountable especially on issues of Transparency in Governance and
Operations
3. Ensure market led practices – Product diversification, vertical growth etc.
4. Emphasise on social performance management systems- Client protection principles,
measuring social impact etc.

Key features of Microfinance Programs

Risks being faced currently
1. Financial and liquidity risk –Squeeze on funds
2. Legal and Regulatory risk – ?
3. Competition – Will any differentiation happen?
4. Credit Risk
5. Political and reputation risk
What MFIs Should Do?
1. Moderate growth/expectations
2. Clarify the role and contribution of microfinance in development
3. Improved analysis and dissemination of Social Performance
4. New delivery models-Mobile technology, Banking correspondent
5. Engage with Government
6. Address interest rate debate:
a. Transparency
b. No more super-profits
7. Move beyond just sales and numbers:
a. Build client relationships
b. Improve HR management

Examples of MFI’s
• Bandhan (Society and NBFC)
• Microcredit Foundation of India
• AsmithaMicrofin Ltd.
• SKS Microfinance Private Limited

History and evolution of microfinance

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PRIOR TO FORMALISED MICROFINANCE
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Before there was any kind of formal MFI’s, Microfinance existed informally.
It was through Traders and Moneylenders (known as the Sahukars).
Characterised by exorbitant rates of interest.

OUTCOMES OF SUCH PRACTICE-

 Hardships and impoverishment of the borrowers.
 Debt trap.
 Bonded labor.
 Forced transfer of properties and land.
 Distress sale of crops and harvest

FIRST PHASE
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In the 1960’s, India made the largest intervention in the rural credit market.
This phase was called the Social Banking Phase.

AIMED AT-
• Broadening the credit access for the poor and marginalised people.
 • And the people who had no access to formal banking.

Features
• Years 1960-1990 (about 3 decades)
• Nationalization of Commercial banks-
 14 commercial banks nationalized in 1969 and 8 commercial banks nationalized in
1980.
• Lead Bank Scheme initiated with district plans.
• Rural banking network expanded:
 RRB’s setup in 1976.
 NABARD was formed in 1982
 Cooperative banking was structured and developed.
 SIDBI was established.
• Extensive disbursement of subsidized credit.

SECOND PHASE
• Known as the Financial Systems Approach
• Year 1990-2000
• Key Features-
a) NGO based MFI’s were developed. They provided Microfinance products and
services on not-for-profit basis.
b) SHG Bank linkage programme initiated and replicated.
c) Innovative credit lending mechanisms.

THIRD PHASE
• Known as the Financial Inclusion
• Year- 2000 onwards
• Key Features:
a) Microfinance now seen as Business proposition
b) Getting Commercialized
c) Development of for-profit MFI’s like Non Banking Financial Companes (NBFC’s) and
Non Banking Financial Institutions (NBFI’s).
d) NGO-MFIs being legitimized.
 e) Customers’-centric/Client centric microfinance products and services are given
importance.
f) Policy regulations have increased
WHY ARE MICROFINANCE PRODUCTS NEEDED?
According to Brett Mathew of Mathwood Consulting Company.The microfinance products
are needed for:
a) Cost of burials, health care, replacement and rehabilitation cost after a natural
disaster,
b) Retirement (for self or parents), migration, farm equipments, wells, home upgrade,
self insurance etc.c)Irrigation, transportation, livestock, microenterprise, home renovation,
schooling and education etc.,

c) Food security, health treatment, festivals, social obligations, emergencies etc.,

d) Sending money to family and home and away, microenterprise’s working capital.
e) Meeting urgent family disasters like sickness, crop failure, payoff money lenders etc.,
f) Housing, wells, irrigation systems, boats, motor bikes etc.,
g) Microenterprise working capital, livestock, sewing machine, bikes etc.

MICROFINANCE PRODUCTS (TYPES)

MICROSAVING
• DEFINITION OF 'MICROSAVINGS'
A branch of microfinance, consisting of a small deposit account offered to lower income
families or individuals as an incentive to store funds for future use.
Microsavings accounts work similar to a normal savings account, however, are designed
around smaller amounts of money. The minimum balance requirements are often waived,
or very low, allowing users to save small amounts of money and not be charged for the
service.

Why is there a demand for Microsavings?

Due to:
• Irregularity of cash flows among the poor,
• Small amount available for saving at a time,
• Cushion against contingencies like illness, calamities, death of family members
 • Source of margin to take loan, as liquid assets,
• Future investments and
• Uncertainty in the provision of loan in the future
According to Stuart Rutherford, there are four types of needs that compel poor to save.
These are:
1) Life cycle needs: Weddings, childbirth, funerals, education, old age and widowhood.
2) Personal Emergencies: Sickness, injury, unemployment, theft or death.
3) Disasters: Natural disasters like fires, floods, cyclones & Man-made events like wars
or bulldozing of events.
4) Investment opportunities: Expanding business, purchasing land or equipment,
renovation of house.

Advantages of Microsavings
• Bridging the gap between seasonal cashflow and daily expenditure.
• Protects the poor from the clutches of corrupt moneylenders.
• Reduction of unnecessary consumptions.
• Saving increases Self-esteem

MICROCREDIT
• An extremely small loan given to impoverished people to help them become self
employed. 

Also known as “Micro lending” or “Micro loan”.

MICROCREDIT AIMED AT?

• Impoverished borrowers who typically lack collateral, steady employment and a
verifiable credit history.
• Microcredit is widely used in developing countries and is presented as having
"enormous potential as a tool for poverty alleviation.”

MICROINSURANCE
Microinsurance is the provision of insurance products with very low and reasonable
premiums and low caps/coverage.
It is an economic instrument at the micro level i.e. at Individual household level, village level
or regional level

Features of Microinsurance
• Less transactions
• The clients are of low net worth
• Clients are involved in package design and rationing of benefits.

REMITTANCES
• Remittances are transfers of funds from people in one place people in another.
• Usually across borders to friends and families.
• They are usually slow or a steady source of funds.

Pensions
• Pensions are a social security measure.
• Almost 28% of the salaried workforce and 340 to 393 unorganised sector workers
are excluded from it.
• Each client uses her/his own “micro-pension prepaid card” to transmit her periodic
micro-savings for her old age directly to regulated product providers such
as UTI and NPS-Lite (National Pension Scheme).

Effects Micro Pension

• Security against old-age poverty, especially women/mothers
• Improve living standards in retirement including family
• Shift of resources from survival towards investment;
• Through old-age income, older people play supportive role infamily structure;

Challenges of Micro Pension Scheme

• Collection contributions in safe & efficient way
• Secure responsible and productive investment of contributions
• Paying benefits timely and correctly
• Building trust, improve pension awareness and
maintain effective communication
• Ensuring effective and reliable governance

SUPPLY OF MICROFINANCE
 Components of microfinance
 Supply of microfinance
 Non Institutional sources of finance
 Strengths and Weaknesses of Money lender
 Institutional sources of Finance
 Supply Barriers in Institutional sources of finance

COMPONENTS OF MICROFINANCE
• Microfinance in India
• Intermediation in Microfinance
• Supply of Microfinance
• Regulation of Microfinance
• Demand for Microfinance

Supply of Microfinance
• Non-Institutional sources
• Money lender
• Friends, relatives and neighbors

• Institutional sources
• NABARD, SIDBI, RMK
• Commercial banks, Rural regional banks, cooperative banks

MONEY LENDER
  The village based Non institutional source of finance is dominated by money lenders
in India.
 In past , they have enjoyed monopoly in the supply of very small finance to people
in rural areas.
 Provision of Loans from money lenders is easy as the money lenders have knowledge
of economic conditions of the borrower.

Friends , Relatives and Neighbors

• They provide microfinance products occasionally subjected to their financial strength
at a particular time.
• So this source is considered as a minor source of informal credit.

Strength
• Very low transition period: Availability of credit in small span of time (as and
when required).
• Customized credit: Money lenders provide customized microloans to the
clients, subjected to terms and conditions.
• Less transaction cost : The transaction cost of Microcredit is very less as
compared to the formal financial Institutions.

Weakness
• Limited to loan products: Non Institutional sources can provide loan products
only.
• High interest rates : Moneylender charge very high interest rates. Also the
interest rates are not uniform.
• Pressure of Moneylender : Often, money lenders put onerous conditions on
the borrower. They pressurize the borrower to transfer the ownership of
assets to them.

INSTITUTIONAL SOURCES OF MICROFINANCE

NABARD (National bank of Agriculture and Rural development)
• It was set up by Reserve Bank of India in 1982.
 • The R.B.I’s functions of agriculture finance and Rural development including the
control of cooperative banking system was taken up by NABARD from 1982 onward.
• About 90% of NABARD’s fund is channelized for Agriculture and Rural development.
• The credit from NABARD is not restricted to agriculture only, but also includes loans
for production and Marketing activity of cottage and small-scale industries.
• Based on the demand for Microfinance ,in 1992, NABARD launched a pilot project of
self help group- Bank linkage Programme.
• NABARD has developed a special fund called “Microfinance Development fund” with
an amount of Rs 100 crores, which was basically meant for capacity building of
Microfinance institutions.
• NABARD has been engaged in lending to SHG’s under Microfinance programmes.

SELF HELP GROUP

 It is a village based financial intermediary committee consisting of 10-20 men or
women as its members.
 All the members make contributions to the committee on regular basis and after
some time when a huge capital is formed, the funds are either lent to members or to
rural villagers.
 SHG’s were linked with Banks through Bank Linkage programme. Banks lend them
money on regular basis.
 It is a nice modal in rural areas which reduces transaction cost.

SIDBI(SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA)

 It is a subsidiary of IDBI , started its operations from April 2 ,1999, with the objective
of financial and Non financial services to “small-scale sectors”.
 It provides loan to MFI’s for capacity building, liquid management, equity support
and transforming NGO to NBFI’s. It also directly provide loans to clients for
Microenterprise development.
 SIDBI Foundation, a unit of SIDBI, identifies , nurtures and develops potential MFI’s
and establishes long-term partnership by providing credit support for their
microcredit initiatives.
 SIDBI foundation also provides Capacity building support to MFI’s/NGO’s to expand
their Microcredit operations, and to increase the organizational efficacy.
RMK( RASHTRIYA MAHILA KOSH/ THE NATIONAL CREDIT FUND FOR
WOMEN)
 It is a Society, which was registered in 1992-1993 under society registration Act of
1860.
 It provides a number of financial products, primarily credit products(meant for
women).It works as a wholesale agent in the provision of Microfinance.
 As on June 2008 , the important schemes of RMK were
 Loan promotion scheme
 Revolving Fund scheme
 Bulk lending scheme
 House loan
 Working capital loan scheme
 Family loan scheme
 Franchise scheme

RRB’s(RURAL REGIONAL BANKS)

• The Rural financial credit system by RRBs was started in 1975 with six RRBs spread
over 17 branches covering 12 districts .
• RRBs provide both Agricultural as well as Non agriculturalcredit , but Non agricultural
credit is limited to rural development and Microenterprise development .
• From the RRBs credit , the landless laborers, Artisans and micro entrepreneurs are
benefited at large.

COOPERATIVE BANKS
 They were designed to meet Rural financial demand in general and Agricultural
demand in particular.
 They provide short-term and medium-term credits.
 The cooperative banking system in India is a three tier structure.

STATE BANK OF INDIA

 SBI is associated with NGOs in extending Financial help since 1976.
 The other major functions of SBI in Rural Finance include-
1. Opening bank branches in remote areas.
2. Providing remittance services to SCBs.
3. Financing central land development banks.
4. Providing loans against Warehouse receipts.