MicrofinanceMicrofinanceMicrofinanceMicrofinance

ABC WorkshopABC Workshop

1818thth Sep 2009 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 self-employed

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 don’t have access to

formal financial institution but are catered by informal sector (money lenders)

• Rest 51% don’t 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

Consumption-smoothening needs

Production and productivity effectivisation needs

Production and Productivity enhancement needs

Diversification needs

CreditUsage

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