MICROFINANCE IN INDIA

By:Chaitra Mhatre(101)

Mohammad Faizan(103)Priyanka More(105)

Rahul Kumar(107)Sapna Hajare(109)

Introduction According to famous economist Robinson, Microfinance refers to small-scale

financial services for both credits and deposits - that are provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services .

Ultimately, the goal of microfinance is to give low income people an opportunity to become self- sufficient by providing a means of saving money, borrowing money and insurance.

“Microfinance is thus an economic Development approach that involves

providing financial services through institutions to low income clients”.

Example:Mrs. Bharti, 48 years old

• Unemployed husband • 4 children • No savings • Good sewing skills

• Mrs. Bharti decides to start a home based sewing business

• She goes to the bank and makes a demand for a loan at her bank

MRS. Bharti’s DEMAND IS REJECTED

MRS. Bharti’s DEMAND IS REJECTED

Traditionally banks and Lending Institutions do not lend money to low income Individuals

The reasons being • High Transaction cost of processing • Lack collateral or guarantors • Gap in the communication / lack of confidence in the Banks • Doubt of the bank of the repayment capacity • Lack of access to financial infrastructure and services in remoted areas

Microfinance provides a solution for the above problem

Need for Microfinance Reluctant to provide financial services to clients.

Lack of loan and other financial services from banks and other institutes.

According to a 1995 World Bank estimate, in most developing

countries the formal financial system reaches only the top 25% of the economically active population.

India is said to be the home of one third of the world’s poor.

About 87 percent of the poorest households do not have access to credit.

Microfinance Clients

In India, generally microfinance is sought by:

Small and marginal farmers

Rural artisans

Economically weaker sections

Women constitute a vast majority of users of microcredit and micro savings facilitates 10% 90% Microfinance facilities Men Women

Microfinance In India

Major Microfinance activities followed in India are -

Micro Credit

Micro Savings

Small Scale

Insurance

Role of RBI, NABARD and SIDBI

• Prudential regulation and supervision. • Collecting data and advocacy • Framing policy and guidelines for rural financial Institutions • Providing credit facilities to issuing organizations

• Preparation of potential-linked credit plans for all districts

• Overseeing the linking programme of banks to SHGs and offers refinance for it

• Lends to MFIs through SIDBI foundation for

microcredit

MICRO-FINANCE LENDING MODELS

Associations , Ex : Self Help Groups, SHGs (India) Community Banking , Ex: Grameen Bank (Ban.) Cooperatives , Ex: Co-operative Bank (England) For-profit Banks , Ex: Khushali Bank (Pakistan)

GRAMEEN BANK

The Grameen Bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh

Working model of Grameen bank Grameen has some 2,468 branches in Bangladesh, with a staff

of 24,703 people serving 7.34 million borrowers from 80,257 villages.

Grameen‘s methods are applied in 58 countries — including the United States.

16 decisions

94%

6%

Grameen Bank- Total Equity

owned by borrowers owned by government

2009 2010 2011 2012 20130

2

4

6

8

10

12

14

16

7.67

8.97

10.3111.37

13.41

Growth of Membership in million

2009

2010

2011

2012

2013

75000 80000 85000 90000 95000 100000

86557

90019

91819

96409

99942

Number of villages covered

SELF HELP GROUPS A self-help group (SHG) is a village-based financial intermediary committee

usually composed of 10–20 local women or men

Formation and development of SHG

Operational models : i. NABARD's 'SHG Bank Linkage' programii. By banks directly iii. MFI-bank linkage model

NORTH WEST EAST CENTRAL SOUTH ALL INDIA0%

10%

20%

30%

40%

50%

60%

38%

33%31%

53%

28%31%

33%

27%25%

38%

21%17%

2010 2011

MICRO-FINANCE PRESENT IMPACT 350 Million people live Below Poverty Line and this translates to approximately 75

million households.

850 million people living on less than US$ 2 a day.

MFI’s overall reach in India is 15-20 million clients with only 35% of poor families being served.

Annual credit demand by the poor in the country is estimated about Rs 60,000 crores.

Only about 5% of rural population has access to Micro-finance and non-poor comprise of 28% of outreach.

About 60% of MFI’s are registered as societies and 20% MFI’s as trusts.

About 65% of MFI’s follow operating model of SHG’s.

Extreme gap between demand and supply for all financial services.

Majority of poor are excluded from financial services therefore 56%of poor still borrow from informal sources.

70% of rural poor do not have a deposit account.

87% of rural poor do not have access to credit from formal sources.

About only 15% of the all actual rural poor households have any kind of insurance.

Only 0.4% of rural poor have health insurance and 0.2% have crop insurance.

High transactions costs and unfavourable policies like caps on interest rates.

Lack of an appropriate legal vehicle and limited access to equity market.

2000-02 2002-04 2004-06 2006-08 2008-100

2

4

6

8

10

12

14

16

MEMBER

BORROWER

SAVER

1 2 3 4 5 60

20,000

40,000

60,000

80,000

100,000

120,000

140,000

BIHAR

UTTAR PRADESH

RAJASTHAN

MADHYA PRADESH

MAHARASHTRA

GUJARAT

PUNJAB

CHALLENGES FACED BY MICRO-FINANCE Appropriate legal structures for structured growth of Micro-finance operations.

Ability to access loan funds at reasonably low rates of interest.

Appropriate loan products for different segments and Ability to innovate, adapt and grow.

Bring out a compendium of small and micro enterprises for micro-finance clients.

Ability to attract and retain professional and committed human resources.

Identify and prepare a panel of locally available trainers and Ability to train trainers.

Capacity to provide backward linkages or create support structures for marketing.

Finding adequate levels of equity for the new entities to leverage loan funds.

Phases in Microfinance sector in India

Phase 1

• Characterised by high growth• Large availability of funds.• Low entry barriers• Ended with AP Ordinance in October 2010.

Phase 2

• Highly volatile period from October 2010 till 2011• MFI's experienced funding constraints• Deterioration in asset quality.

Phase 3

• Consolidation phase in operations by MFI's started with regulatory intervention in 2011.• Funding environment started improving with banks resuming funding and equity infusion from private equity/

social sector funds.

Phase 4

• Stable growth expected with regulatory framework in place and other state governments not following similar ordinance as Andra Pradesh.

• Margins are expected to stabilize and profitability expected to improve.

FY09 FY10 FY11 FY12 FY130

10000

20000

30000

40000

50000

60000

Market Size and Growth

Overall Market SizeSHG Bank Linkage MFI Model

Axis Title

Mar

ket s

ize (i

n Rs

. Cro

re)

Key Developments

Dates Key DevelopmentOctober 2010 Formation of Malegam Committee by RBI to study the issues

and concerns in microfinance sector.

January,2011 RBI released Malegam Committee recommendations for the microfinance sector.

May,2011 Acceptance of broad framework of Malegam Committee recommendations in monetary policy Statements 2011-2012

December,2011

RBI Introduced new category of NBFC and termed as ‘Non-Banking Financial Company-Micro Finance Institutions’(NBFC-MFIs)

August,2012 Amendment to NBFC MFI guidelines by RBI which included• Registration compulsory for NBFCs intending to operate

as NBFC MFIs by October 2012.

July,2013 Amendment to NBFC MFI Guidelines by RBI

Nov,2013 RBI has allowed recognition of industry association of NBFC MFIs as Self-Regulatory Organisation (SRO).

Feb,2014 Amendment to NBFC MFI guidelines by RBI with respect to pricing of credit: It would be lower of two• The cost of funds plus margin.• The average base rate of the five largest commercial banks

by assets multiplied by 2.75

Performance of the Microfinance Sector

 Objective:

To understand the performance of the MFIs.

To understand the trends for future growth and development of the microfinance sector.

Total loan portfolio3 in the microfinance sector is 70%

Loan Portfolio

Future Aspects Microfinance Companies in India to witness strong growth in 2014 – 2015 –

Crisis Loan Portfolio is set to grow at a annual rate of 35% (to reach Rs.450 billion

by end-March 2016 MFIs will have to raise equity. A CRISIL analysis indicates that the MFIs need to raise equity of at least

Rs.18 billion over the next two years to maintain growth momentum and gearing at current levels.

For this, the sector needs to address the following two elements:

1. Promoter Shareholding.

2. Potential reduction in investor appetite.

Conclusion

Microfinance is not just giving credits but also providing services. Gone are the days when poor people were believed to be non-bankable. Microfinance has proved that poor are bankable.

Microfinance mainly came into existence with an intention to relieve the poor people from the clutches of money lenders.

Thank you