Micro Finance in Micro Finance in IndiaIndia

1

A PRESENTATION A PRESENTATION ONON

Microfinance: what Microfinance: what is it?is it?

2

Microfinance: what is it?Microfinance: what is it?

Micro-creditGroup lendingSocial/charitable

activity

3

• Range of financial services

• Group and individual lending

• Profitable activity

What it often is What it really should be

Providing financial services to the Providing financial services to the poor: . poor: . challenges challenges

4

Providing financial services to the Providing financial services to the poor: challengespoor: challenges

Risk management challenges due to information asymmetry problems

Accessibility (geographic accessibility and easiness to deal with)

No collateral, Low value and cash intensive nature of the business

Staff training and motivation

5

High transaction costs

Information asymmetryInformation asymmetry

6

Decision to take loanLoan usage loan repayment

Adverse selection

Moral hazard

Adverse selection: incomplete Adverse selection: incomplete information problem (before the information problem (before the loan)loan)

7

Don’t know Client’s type

Interest rate reflects proba of default

Safer clients drop outNeed to increase interest

rate

Providing credit can become

impossible

Moral hazard: hidden action Moral hazard: hidden action problem (after loan)problem (after loan)

8

Can not observe what client is doing

Bad loan usageStrategic unwillingness

To repay

Clients profileClients profile75% population lives in rural

areas: geographical access difficult

Informal activities: need access at flexible times

Illiteracy: difficult to deal with traditional services

Low value of transactionsLack of collateral

9

StaffStaffLack of trained staffLack of motivated staffDifficult to incentives staff

10

Delivering financial services to the Delivering financial services to the poor in India: an overview poor in India: an overview

Providing financial services to the Providing financial services to the poor: occupied Indiapoor: occupied India

Deccan, late 19th Century: peasant riots on account of coercive

alienation of land by moneylenders.

12

Organization of cooperative societies as alternative institutions for providing crédit by british government

ResultsResults

Access in terms of rural branches increased from 1,833 in 1969 to around 32,538 at present: 49% of all scheduled commercial bank branches are rural

The population per rural branch declined from 2,01,854 in 1969 to around 16,000 at present.

The proportion of borrowings of rural households from institutional sources increased from 7 per cent in 1951 to more than 60 per cent at present.

13

Results (cont’d)Results (cont’d)31% (131.1 million) of the total

deposit accounts are in rural India

43%(22.4 million) of total credit accounts are in rural India

Positive impact on the poor (Rohini Pande/Burgess paper)

14

Micro Finance: apparitionMicro Finance: apparitionThe financial sector reforms motivated policy

planners to search for products and strategies for delivering financial services to the poor – microFinance - in a sustainable manner consistent with high repayment rates.

NABARD: empirical observation that had been catalysed by NGOs that poors gather in informal groups

Create a formal interface of these informal arrangements of the poor with the banking system.

Bank-SHG Linkage Programme.Recent emergence of MFIs: professionally run

institutions specialiazed in delivering credit with low cost staff and local knowledge

15

Despite all these efforts…large Despite all these efforts…large gaps remaingaps remain

Against rural population of 741.0 million, 500 million people un-served

Population per branch: 22,793Penetration of savings accounts is below 18%As against 104% in urban and semi-urban areasNumber of villages per branch: 19High dependence on informal sources

◦ 36% of rural credit from informal sources◦ Dependence even higher for lower income households:

78%

16

Microfinance ahead: Microfinance ahead: challengeschallenges

17

Gaps in demand and Gaps in demand and supplysupply

18

Demand: Rs. 450 billion/y

60% in South…to cover all parts of India

Less than 2 million Households reached

500 million un-served poor

Disbursed: 39 billion

Need employment opportunities

Need protection

against all risks

Market constraints

Insurance under-delivered

Scaling up

Increase

impact

TechnologyTechnology

Role of technology in microfinance:MISCash handlingData capture and subsequent

management

19

Range of Microfinancial Range of Microfinancial services: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)

20

Range of Microfinancial services: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

21

Range of Microfinancial services:Range of Microfinancial services:

Savings and investments products◦Could be offered through Money Market

Mutual Fund: MFI acts as agentRemittances

◦10 million seasonal and circular migrants (National Commission on Rural Labour)

◦Adhikar, Orissa◦ICICI: remittance product through

internet kiosks

22