Microfinance

ABC Workshop 18th Sep 2009

Why Microfinance Exist?

Accessibility Cost of transaction Dealing with bottom of pyramid Credit worthiness of borrowers Failure of formal financial institution to reach and cater this segment

RBI mandates
Lending to Priority Sector (40% of Adjusted Net Bank Credit) 18% to agricultural sector
Indirect lending not more than 4.5%

10% to weaker section Banks falling short of target shall allocate amount to RIDF at lower int. rate.(<2%:@BR; 2 5%: BR-1%, 5-9%: BR 2%, >9%: BR 3%)

Do people need MFI???

Presence of Money lenders Is credit only the need? How a MFI functions? Catering poorest of the poor, poor, not poor not well off, BPL, APL

Five fatal assumption about micro-credit

1. Assumption that the poorest all wish to be selfemployed 2. Assumption that credit is the main financial service needed by the poor 3. Assumption that credit can automatically translate into successful micro-enterprises 4. Assumption that those slightly above the poverty line do not need microcredit, and giving it to them amounts to mis-targeting 5. Assumption that microcredit institutions can all become financially self-sustaining

NSSO data
27% of household have access to formal financial services 22% of household dont have access to formal financial institution but are catered by informal sector (money lenders) Rest 51% dont have any access of financial services at all

Two school of thoughts

Finance school Poverty school

Hierarchy of credit needs & credit availability from formal source

Diversification needs

Production and Productivity enhancement needs Credit Usage Production and productivity effectivisation needs

Consumption-smoothening needs

Microfinance
Micro-credit Micro-saving Micro-insurance Remittance Micro-pension

Models
Grameen Bank SHG Individual Lending

Interest structure
Cost of fund Cost of delivery Cost of recovery Bad debt provision Profit

Loan process
Village meeting Formation of Group Group discipline Loan origination Loan appraisal Loan sanction Disbursement Recovery

Some terms
Outstanding, portfolio, Active Borrowers, Repeat Borrowers OTRR FTOD, OD, PAR, NPA accounts

Risk
Adverse selection Moral hazard

Micro-insurance
Life Non-life
Livestock Micro-enterprise Weather insurance

Companies
MNYI, AVIVA, ROYAL SUNDARAM, ICICI PRU, LOMBARD

Remittances
10 million migrants Money transfer NCR, Mumbai, Surat In collaboration of banks Smart card, mobile and internet technologies

Capacity building
23 MFI 800+ NGOMFI, CBMFI Creditworthiness Unitus, Accion Bell weather, IFMR, Accessdev, Microsave, BASIX