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Centre for Micro Finance at IFMR Research

Access to Finance in Andhra Pradesh

Doug Johnson and Sushmita Meka

Presented by:Santadarshan Sadhu and Ajaykumar Tannirkulam

The Survey

First survey of household access to finance which:

– includes detailed information on access to finance including microfinance

– is representative of an entire state’s (Andhra Pradesh) rural population

– discloses data publicly

Objective

We wanted to learn more about:

– The state of financial inclusion in rural areas– The number of people reached by various types

of financial service providers– The levels of overall indebtedness and sources– The demographic and economic characteristics

of the clients of various financial service providers (as well as the unbanked).

Microfinance in India

• Models of microfinance in India– Self Help Groups (SHG)

• Groups of 12 to 20 (mostly) women which collect regular savings from members and make loans internally to members. The groups are linked to a Bank which provides loans to the group to be disbursed among the members

– Joint Liability Group (JLG)• Groups of (mostly) 5 members which are generally

formed to receive loans from the Micro Finance Institutions (MFI)where the members are jointly held liable for repayment of loans

• Followed by most of the MFIs

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Why Andhra Pradesh

• Andhra Pradesh is the state where microfinance achieved its greatest success to date in India having

• 25% of all Self Help Groups and 39% of total loan outstanding of the groups

• 21% of all clients and 30% of total loan outstanding of MFIs

– The state is home to India’s largest state-led microfinance initiative which is targeted to promote the Self Help Groups

– Several of India’s largest MFIs including SKS, Spandana, BASIX, and Share are based in Andhra Pradesh and began operations in the state

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Why Andhra Pradesh (continued)

• A state where both models of microfinance (SHG and JLG) have been working side-by-side and experienced phenomenal growth – SHG promotion in Andhra Pradesh massively expanded since 2000 – Since 2000, the outreach of private MFIs in Andhra Pradesh has grown at

a frenetic pace, with the total number of borrowers more than doubling each year.

– In 2005, several of the fastest growing MFIs in the world were based in Andhra Pradesh.

– Experienced explosive growth-led tension between MFIs, the clients they serve, and government officials. In 2006, Andhra Pradesh was the site of the first large-scale confrontation between microfinance borrowers and MFIs in the country raising the debate regarding the excessive interest rate charged by the MFIs

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Methodology

Survey details:– 8 districts (randomly selected from 22 districts

of AP)– 64 villages (8 villages randomly selected from

each of these 8 districts)– 1920 households (randomly selected from the

64 villages)

Survey conducted in June to November 2009 using a rigorous random sampling methodology

BORROWING

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Overview of Borrowing

• Overall indebtedness is extremely high - 93% of all rural households in AP are indebted to at least one source including:

• Banks (State, Private)• Self Help Group (SHG)• Micro Finance Institutions (MFI)

• Money lenders• Friends and relatives (with and without interest)• Employers

• Landlords

Formal

Informal

Indebtedness by Source

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• Informal loans are predominant source of rural credit• Indebtedness to SHGs is much higher than indebtedness to MFIs

Extent of Indebtedness by Source:Median Loan Outstanding (INR)

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Share of Total Loan Outstanding by Source

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Predominant share of loan outstanding is with the informal sectorMFI loans make up a very small share of total debt

Debt Outstanding by Occupation

Household ProfilePercentage with outstanding loan Mean Outstanding

Median Outstanding

Landless Laborer 89% 36,933 21,600

Commercial 90% 57,948 33,680

Farmer - Marginal 97% 54,446 37,450

Farmer - Small 96% 77,728 53,000

Farmer - Large 95% 110,534 82,000

Other 85% 48,412 29,500

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Usage of Loan Money by Lender Type

LLoans from different sources are used for different purposes

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Bank SHG MFI Informal

Buy agricultural inputs 58% 19% 13% 20%Consumption 27% 50% 32% 25%Repay old debt 15% 20% 25% 7%Health 11% 19% 11% 25%Home improvement 10% 13% 22% 14%Start New Business 2% 2% 3% 1%Marriage 4% 2% 5% 12%Other festival 1% 4% 4% 5%Education 4% 6% 4% 5%Purchase stock for existing business 3% 4% 10% 3%

Buy livestock 3% 6% 6% 2%Purchase land 1% 1% 1% 1%

Multiple Borrowing

Multiple borrowing is extremely common

– 84% of households having two or more loans from any source.

– Median of 4 loans outstanding per household

• Multiple borrowing is driven mainly by multiple loans from informal sources

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Multiple Borrowing

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0 2 4 6 8 10 12 14 16 18 20Total Number of Loan Outstanding

Source: Centre for Micro Finance, IFMR Research. "Access to Finance in Rural Andhra Pradesh 2010".

Households with Multiple Loans from a Given Source

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Multiple Borrowing by Active Clients of a Given Source

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Multiple Borrowing

• Multiple borrowing also prevalent among the better off (represented by higher PPI scores)

• Many cases of multiple borrowing appear to be driven by an inability to obtain sufficient credit from a single source– A large share of households with multiple loans

outstanding took two or more loans in the same month for the same purpose indicating that they are unable to fulfill their credit needs from one single source

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Non-Routine Expenditures

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Top 5 Non-routine Expenditures Non-routine Expenditure Share of Households which

Incurred Major Expenditure on Item in past 6 Months

Health 36%Festival or special event aside from marriage

11%

Marriage 11%Buy agricultural machinery or inputs

10%

Home improvement/repair/construction

7%

Any non-routine expenditure 64%

Non-Routine Expenditure: Source of Funding

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Top 5 Non-routine Expenditures Source of Funding Non-routine Expenditure

Share of Households which Incurred Major Expenditure on

Item in past 6 Months

Loan from friends/relatives 43%Own income or savings 29%

Loan from moneylender 13%Loan from landlord 11%

Loan from MFI/SHG 6%

Financial Inclusion

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State of Financial Inclusion in Rural AP

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Access to Formal Savings - 2003 vs. 2009

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Percentage of Households with Savings Account

Overview of Savings

Government policies such as providing NREGA benefitsthrough savings accounts lead to sizable increase in the

share of rural households with access to formal savings.

– 78% of rural households have access to a formal savings account but only 14% opened for the purpose of savings. The vast majority of accounts (79%) opened either to receive government benefits or to increase the chances of receiving a loan.

– A high percentage of accounts remained dormant (41%). Most of these accounts were post-office or cooperative accounts.

Stated Reasons for Opening Savings Account

Share of Rural AP Households with a Savings Account by Bank Type

Share of Households with a Savings Account

Share of Households with a Savings Account (excluding 0 and Rs 50 balance accts)*

Private Sector Bank 1% 1 %

Public Sector Bank 41 % 36 %

Regional Rural Bank 14 % 13 %

Cooperative Bank 14 % 12 %

Post Office 42 % 11 %

Any of the above 78% 61 %

Stated Reasons for not having a Savings Account

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Mobile Phone Ownership

• Over half (50%) of rural households and approximately 36% of financially excluded households own at least one mobile phone

• The vast majority of those who own a mobile phone use it regularly

• Potential for mobile banking

Access to Insurance

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Penetration of life insurance is quite high, while the penetration of voluntary (private) health and other non-life insurance is very low

44% of rural household have life insurance 2% have private health insurance 51% of rural household have state-sponsored Arogyasri health insurance (for BPL households)

Penetration of other non-life insurance such as crop, weather, cattle or accident insurance is less than 1%

Reasons for not having insurance

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Reason Percent of household

Expensive 73Not useful 4Don’t know how to obtain 11No idea 8Too difficult 2Documentation 2

Some Key Takeaways from Access to Finance

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Savings – Many households have access to savings accounts though high rates of account dormancy suggest that more can be done to promote savings.

Borrowing - Overall rates of indebtedness in rural Andhra Pradesh are high – informal debt dominates MFI, SHG, and formal sector debt.

Insurance – Half of households have access to life insurance and government-sponsored health insurance but very few have other types of insurance.

Need for better access– Though many rural households in Andhra Pradesh have access to formal savings and informal and semiformal credit institutions, more can be done to improve their access to a variety of formal finance.

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Thank you