The

Microfinance
Industry
in India …

…EVERY PENNY COUNTS!

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The Microfinance Industry in India …
…EVERY PENNY
COUNTS!

NAME ROLL NO
ANIKET SOMAN 98
MANISH SOLANKI 97
MANEET SHARMA 92
KUNAL PANIGRAHI 67
SANTOSH SINGH 96
ALAN PEY 74
ANSARI MAJID 02
NIKHIL HARPALE 35
ABHIJEET RAUL 77
BRAWYN CARDOS 15

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Microfinance: what is it?

…EVERY PENNY COUNTS!

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Microfinance: what is it?

What are the words that come to your mind when

you hear the word microfinance?

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 Microfinance: what is it?

15%
R1 /
R2

37% R3
Microfinance =
R4 provision of financial
48%
services to the poor

…EVERY PENNY COUNTS!

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Microfinance: what is it?

What it often is What it really should be

• Micro-credit • Range of financial

• Group lending services
• Social/charitable • Group and individual
activity lending
• Profitable activity

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Scenario Microfinance in India
• Estimated that 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.
• Cumulative disbursements under all microfinance
programmes is only about Rs. 5000 crores.(Mar. 04)
• Total outstanding of all microfinance initiatives in India
estimated to be Rs. 1600 crores. (March 04)
• Only about 5 % of rural poor have access to
microfinance.

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Why Banks Don’t Lend to Poor…

Because of High Risks and High Transactions Costs…

Collateral free loans to poor

High risks due to… women

High transaction costs A large number of very small

due to…
loans to rural locations

So, loans sharks

exploit the poor’s
lack of access to
credit, by
charging as high
as between 36-
84% interest and
higher, in some
cases…
Features of Indian MF
• About 60 % of the MFIs are registered as societies.
• About 20 % are Trusts
• About 65 % of the MFIs follow the operating model of
SHGs.
• Large concentration in South India
• 600 MFI initiatives have a cumulative outreach of 1.25
crore poor hoseholds
• NABARD’s bank linkage program has cumulatively
reached a total of 9.4 lakh SHGs with about 1.4 crore
households.

…EVERY PENNY COUNTS!

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Moral hazard: hidden action problem (after
loan)

Can not observe what client is doing

Strategic unwillingness
Bad loan usage To repay

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Financial reforms for RFIs

• Enhance the areas of commercial fredon

• Increase their outreach to the poor
• Stimulate additional flows to the sector.
• Liberalising interest rates for cooperatives and RRBs,
• Relaxing controls on where, for what purpose and for
whom RFIs could lend, reworking the sub-heads under the
priority sector,
• Introducing prudential norms
• Restructuring and recapitalising of RRBs.

…EVERY PENNY COUNTS!

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However…Success was not as high as hoped

• Defects in policy design,

• Infirmities in implementation
• Inability of the government of the day to desist from
resorting to measures such as loan waivers.
• High defaults
• The banking system - was not able to internalise lending to
the poor as a viable activity but only as a social obligation
• More and more difficult for commercial bankers to accept
that lending to the poor could be a viable activity.

…EVERY PENNY COUNTS!

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Microfinance ahead: challenges

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 Gaps in demand and supply

Demand: Rs. 450 billion/y Disbursed: 39 billion

Less than 2 million Scaling up

500 million un-served poor
Households reached

…to cover all parts of India 60% in South

Need protection
Insurance under-delivered Increase
against all risks impact

Need employment opportunities Market constraints

…EVERY PENNY COUNTS!

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Scaling up: challenges

…EVERY PENNY COUNTS!

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Limitation of the predominant model

SHG-Bank linkage model

Loan at
9%
Bank SHG

No Group
liability formation
NGO /linkage

…EVERY PENNY COUNTS!

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Scaling up existing MFIs: challenges

Financial Intermediation Model

Bank MFI JLG Group

Loan at a Loan at
9% 20%

…EVERY PENNY COUNTS!

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Limitations to growth of MFIs:

• Lack of adequate quantities of risk capital

• Lack of long-term finance to pay for creation of
the necessary infrastructure and pre-operative
expense
• Lack of well trained staff in adequate numbers at
all levels
• technology

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Technology

Role of technology in microfinance:

• MIS
• Cash handling
• Data capture and subsequent management

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Scaling-up: what form of support is needed?

• Interest rates should reflect the costs of

transactions/probability of default and be
sustainable
• Focus on diminishing the cost of these
transactions and expand access

Equity support, Remove

caps and floors, create facilitative infrastructure
to reduce transaction costs

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Range of Microfinancial services:

• Individual lending
– Information problem
– No unique ID
– No credit info sharing
– Need technology!
• Insurance
– Adverse selection, moral hazard, fraud

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Range of Microfinancial services:

• Health insurance
– Reimbursement model
– Cashless model
– How to identify illness?
– How to avoid fraud?
• Livestock insurance
– Recognize cause of death
– Identify animal (role of technology)

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Range of Microfinancial services:

• Weather insurance
– Index-based: index created by assigning weights to
critical time periods
– Past weather data mapped to this index to arrive at
normal treshhold index
– If deviation: compensation
• Commodity price derivatives
– NCDEX: offers price discovery services: offer farmers
instruments to hedge pre and post harvest risks
– Makes using commodity as collateral possible

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Key enablers needed for maximize impact
and scaling up
• Credit Bureau
• Unique identifier
• Technology platform
• Rural infrastructure
• Change in regulations (interest rates et.)
• Training institutions
• Research

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Challenges ahead

• 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.
• Ability to innovate, adapt and grow.
• Identify and prepare a panel of locally available trainers.
• Capacity to provide backward linkages or create support
structures for marketing.
 Related Issues
• Designing financially sustainable models
• Aim for community participation & ownership
• Increase outreach and scale up operations
• Demonstrate that banking with the poor is viable
• Build professional systems and processes.
• Ensure transparency and enhance credibility through
disclosures.
• Provide support for capacity building initiatives.
 Case Study-- I

SKS Microfinance

Empowering the Poorest of the Poor to Become Self-Reliant

December 2002

Vikram Akula, Founder and CEO

 Mission and Profile
Founded June 1998
Mission To Empower the Poorest of the Poor to Become Self-
Reliant by Sustainably Providing Financial Services

Focus Poorest of the Poor in Drought-Prone Deccan Region of India

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Group-Based Grameen Methodology

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Achievements and Goals
Dramatic Growth in Outreach...
Achievements Since 1998 12000

•
10000
4 branches
9628

8000 7558

Customers
• 314 village centers 6000

4000

• 10,123 customers 2000

• $1.4 million disbursement

Total Customers Loan Customers

• $680,000 loan outstanding

• 99.9% repayment … Maintaining Excellent Portfolio Quality
35 2.0%
31.31

• 79% F.S.S. 30
1.8%

Loan Portfolio (Rs. millions)

1.6%

Portfolio-At-Risk > 30 Days

25 1.4%
1.2%
20

Our Goals
1.0%
13.62
15
0.8%

10 0.6%

•
0.4%
Scale to 100,000 in Deccan by ‘07 5
0.20 0.66
3.01
0.2%
0 0.0%
Mar-99 Mar-00 Mar-01 Mar-02 Oct-02

• Franchise to 100 of the Loan Outstanding PAR > 30 Days

poorest districts in India

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CASE STUDY
S.M.I.L.E. MICROFINANCE LIMITED

●
Based in Chennai, S.M.I.L.E. MICROFINANCE LIMITED is one
of the oldest Microfinance Institutions working in the State of
Tamil Nadu.

●
Since inception, it has cumulatively disbursed over Rs. 577
crores ($115 million) and presently reaches out to nearly
300,000 poor households.

●
Over the next 5 years, it plans to have nearly 2.5 million
clients and achieve a portfolio of over Rs. 1,500 crores ($0.3
billion). AZB & Partners were the legal counsel for the
transaction

●
The Promoter Dr. N. Sethuraman is a leading Urological
Surgeon, Founder of one of the largest Multi-speciality hospitals
●
SMILE microfinance limited uses Joint Liability Group Model
also called as Grameen Model.

●
It provides “ Financial Assistance to the individuals in a
group, on the strenght of the group model

The company’s unique model addresses the issues of poverty

and exclusion by going beyond micro-credit and uses various
tools of microfinance to achieve the outreach, impact and
sustainability.

Today, SMILE has 95 Branches across twelve Districts in the

State of Tamil Nadu, India. As of dates, it has cumulatively
disbursed over Rs. 577 crores in the state and boasts of a
healthy portfolio quality reflected in recovery rate of 99%.
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