microfinance cse iitb
TRANSCRIPT
-
7/29/2019 Microfinance Cse Iitb
1/72
1
Micro Finance in Indiaoverview, challenges, and the role of
technology
By Annie Duflo
Centre for Micro Finance ResearchOctober 28, 2005
-
7/29/2019 Microfinance Cse Iitb
2/72
2
Outline of presentation
What is microfinance?
Providing financial services to the poor:
challenges Providing financial services to the poor in
India: Overview
Microfinance: Challenges ahead and potentialsolutions/initiatives
The Centre for Micro Finance Research
-
7/29/2019 Microfinance Cse Iitb
3/72
3
Microfinance: what is it?
-
7/29/2019 Microfinance Cse Iitb
4/72
4
Microfinance: what is it?
What are the words that come to your mind
when you hear the word microfinance?
-
7/29/2019 Microfinance Cse Iitb
5/72
5
Microfinance: what is it?
R4
R3
R1 /R2
Microfinance =
provision of financialservices to the poor
48%
15%
37%
-
7/29/2019 Microfinance Cse Iitb
6/72
6
Microfinance: what is it?
Micro-credit Group lending
Social/charitable
activity
Range of financialservices
Group and individual
lending
Profitable activity
What it often is What it really should be
-
7/29/2019 Microfinance Cse Iitb
7/727
Providing financial services to the poor:
challenges
-
7/29/2019 Microfinance Cse Iitb
8/728
Providing financial services to the poor:
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
High transaction
costs
-
7/29/2019 Microfinance Cse Iitb
9/729
Information asymmetry
Decision to take loan Loan usage loan repayment
Adverse
selectionMoral hazard
-
7/29/2019 Microfinance Cse Iitb
10/7210
Adverse selection: incomplete information
problem (before the loan)Dont know
Clients typeInterest rate
reflects proba of default
Safer clients drop outNeed to increase interest
rate
Providing credit can
become
impossible
-
7/29/2019 Microfinance Cse Iitb
11/7211
Moral hazard: hidden action problem
(after loan)
Can not observe what client is doing
Bad loan usage
Strategic unwillingness
To repay
-
7/29/2019 Microfinance Cse Iitb
12/7212
Clients profile
75% population lives in rural areas:
geographical access difficult
Informal activities: need access at flexibletimes
Illiteracy: difficult to deal with traditional
services
Low value of transactions
Lack of collateral
-
7/29/2019 Microfinance Cse Iitb
13/7213
Staff
Lack of trained staff
Lack of motivated staff
Difficult to incentives staff
-
7/29/2019 Microfinance Cse Iitb
14/7214
Delivering financial services to the poor inIndia: an overview
-
7/29/2019 Microfinance Cse Iitb
15/7215
Providing financial services to the poor:
occupied IndiaDeccan, late 19th Century:
peasant riots on account of coercive
alienation of land by moneylenders.
Organization of cooperative societiesas alternative institutions for providingcrdit by british government
-
7/29/2019 Microfinance Cse Iitb
16/72
-
7/29/2019 Microfinance Cse Iitb
17/7217
Providing financial services to the poor:
Timeline 1950 & 1969: emphasis on the promoting of
cooperatives.
1969: nationalization of the major commercial banks:
beginning of commercial bank branch expansion in
the rural and semi-urban areas.
1976: Regional Rural Banks (RRB), low cost
institutions mandated to reach the poorest in credit-
deficient areas
During this period, intervention of the RBI (Reserve
Bank of India) was essential: special credit
programmes for channeling subsidized credit to the
rural sector (concept of priority sector)
-
7/29/2019 Microfinance Cse Iitb
18/7218
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.
-
7/29/2019 Microfinance Cse Iitb
19/7219
Results
Access in terms of rural branches increasedfrom 1,833 in 1969 to around 32,538 atpresent: 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 sourcesincreased from 7 per cent in 1951 to morethan 60 per cent at present.
-
7/29/2019 Microfinance Cse Iitb
20/7220
Results (contd)
31% (131.1 million) of the total deposit
accounts are in rural India
43%(22.4 million) of total creditaccounts are in rural India
Positive impact on the poor (Rohini
Pande/Burgess paper)
-
7/29/2019 Microfinance Cse Iitb
21/7221
HoweverSuccess was not as high as
hoped Defects in policy design,
Infirmities in implementation
Inability of the government of the day to desist fromresorting 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 asocial obligation
More and more difficult for commercial bankers to
accept that lending to the poor could be a viable
activity.
-
7/29/2019 Microfinance Cse Iitb
22/72
22
Micro Finance: apparition
The financial sector reforms motivated policyplanners to search for products and strategies fordelivering financial services to the poormicroFinance - in a sustainable manner consistentwith high repayment rates.
NABARD: empirical observation that had beencatalysed by NGOs that poors gather in informalgroups
Create a formal interface of these informalarrangements of the poor with the banking system.
Bank-SHG Linkage Programme.
Recent emergence of MFIs: professionally runinstitutions specialiazed in delivering credit with lowcost staff and local knowledge
-
7/29/2019 Microfinance Cse Iitb
23/72
23
Despite all these effortslarge gaps
remain Against rural population of 741.0 million, 500 million
people un-served
Population per branch: 22,793
Penetration of savings accounts is below 18% As against 104% in urban and semi-urban areas
Number of villages per branch: 19
High dependence on informal sources
36% of rural credit from informal sources Dependence even higher for lower income households: 78%
-
7/29/2019 Microfinance Cse Iitb
24/72
24
Microfinance ahead: challenges
-
7/29/2019 Microfinance Cse Iitb
25/72
-
7/29/2019 Microfinance Cse Iitb
26/72
26
Scaling up: challenges
-
7/29/2019 Microfinance Cse Iitb
27/72
-
7/29/2019 Microfinance Cse Iitb
28/72
28
Financial Intermediation
Model
MFI JLG GroupBank
Loanat a9%
Loan at
20%
Scaling up existing MFIs: challenges
-
7/29/2019 Microfinance Cse Iitb
29/72
29
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
-
7/29/2019 Microfinance Cse Iitb
30/72
30
Lack of adequate capital: the ICICI Bank
responseSearched for a model which:
Separates risk of MFI from risk inherent in the
mf portfolio Provides a mechanisms to banks to
continuously incentivise partners
Inability of MFIs to provide risk capital in large
quantum, which limited advances from banks
-
7/29/2019 Microfinance Cse Iitb
31/72
31
The ICICI Bank Partnership Model
MFI JLG GroupBank
Servicing
fees of
11%
Loan at
9%
Interest
charged:20%
FLDG of
10%
-
7/29/2019 Microfinance Cse Iitb
32/72
32
Long-term finance: the ICICI bank
response
There is an underlying business model in the
MFIs expansion: no reason why it cannot be
funded by commercial debt
ICICI Bank is offereing to its MFI partners
long-term finance of a tenure of 3-5 years
-
7/29/2019 Microfinance Cse Iitb
33/72
33
Lack of well-trained staff: ICICI Bank
response
Initiated partnerships with training institutions
(Indian Grameen Services, Care India)
Establish a Financial Services LearningSchool in collaboration with MicroSave India
Provide high level training in banking and
finance to MFI practitioners in collaboration
with IFMR (Institute for FinancialManagement Research)
-
7/29/2019 Microfinance Cse Iitb
34/72
-
7/29/2019 Microfinance Cse Iitb
35/72
35
Technology: ICICI Bank response
Creation of rural connectivity in partnership
with telecom companies and internet service
providers Assistance to emerging MFIs to adopt
scalable MIS solutions
Support to research and development on
technological devices that can reducetransaction costs
Low cost ATMs, low-cost computing devices,
mobile and internet-based transaction platforms
-
7/29/2019 Microfinance Cse Iitb
36/72
-
7/29/2019 Microfinance Cse Iitb
37/72
37
Support new MFIs: The Venture Capitalist
model
VCs specifically focused on the micro-finance space:
Lok Capital, Aavishkar and Bellwether.
Bellwether
three equity commitments for start-ups
increased the size of fund from 10mn USD to 25mn USD.
ICICI Bank solution:
Each MFI will need to reach a minimal CRISIL or an MCRIL
operational sustainability rating Then the entrepreneur buys out the stake of the VC and
ICICI Bank gives an option to the entrepreneur to take a
long-term debt to finance this buy out.
-
7/29/2019 Microfinance Cse Iitb
38/72
38
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
-
7/29/2019 Microfinance Cse Iitb
39/72
39
Alternate channels
Agent model Model of LIC
Challenge: control fraud
Internet connectivity BSNL: if wireless system installed ate the existing
connected rural exchanges: 80-85% of villagescould be connected
Variety of devices that can work with internetkiosks: biometric low-cost ATMs
Makes controlling fraud easier
-
7/29/2019 Microfinance Cse Iitb
40/72
40
Internet Kiosks
Connectivity
STD/PCO:
Enabling voice
communication
Printer& OtherAccessories :
Enabling job work
Kiosk Operator:Entrepreneur
Provides commercial
services
Internet Kios k
Multimedia
PC with Powerbackup
-
7/29/2019 Microfinance Cse Iitb
41/72
41
Internet kiosks
ITC, nLogue, Drishtee: more than 6000
internet kiosks using Wireless in Local Loop,
VSAT terminals ICICI partnered with some of these
organizations
Finance individual entrepreneurs to purchase
operating license and equipment Break even within 1st year
Suite of financial services
2000 kiosks
-
7/29/2019 Microfinance Cse Iitb
42/72
42
Internet kiosks: remaining gaps
Providing constant connectivity expensive
Finding motivated entrepreneurs difficult
Break even has been delayed for variousreasons (required back-end systems to
service clients difficult tp find etc.)
-
7/29/2019 Microfinance Cse Iitb
43/72
-
7/29/2019 Microfinance Cse Iitb
44/72
44
Maximize impact of microfinance:challenges
-
7/29/2019 Microfinance Cse Iitb
45/72
45
Maximize impact
VulnerabilityNeed for
More than credit
Differences among
customers
Need for
customized
products
Understand what programmes work the best
and for whom
-
7/29/2019 Microfinance Cse Iitb
46/72
46
Maximize impact
Employment
scarcity
Other constraints
Finance other credit
constraint segments
MFI-sectoral experts
Partnerships
Local Financial Institution: serving all credit constraint-
Segments in 2-3 districts
-
7/29/2019 Microfinance Cse Iitb
47/72
47
Range of Microfinancial services:
Individual lending
Information problem
No unique ID No credit info sharing
Need technology!
Insurance
Adverse selection, moral hazard, fraud
-
7/29/2019 Microfinance Cse Iitb
48/72
48
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)
-
7/29/2019 Microfinance Cse Iitb
49/72
49
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 arriveat normal treshhold index
If deviation: compensation
Commodity price derivatives
NCDEX: offers price discovery services: offerfarmers instruments to hedge pre and post harvestrisks
Makes using commodity as collateral possible
-
7/29/2019 Microfinance Cse Iitb
50/72
50
Range of Microfinancial services:
Savings and investments products
Could be offered through Money Market Mutual
Fund: MFI acts as agent
Remittances
10 million seasonal and circular migrants (National
Commission on Rural Labour)
Adhikar, Orissa ICICI: remittance product through internet kiosks
-
7/29/2019 Microfinance Cse Iitb
51/72
51
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
-
7/29/2019 Microfinance Cse Iitb
52/72
52
CMFR:The Centre for Micro Finance Research
-
7/29/2019 Microfinance Cse Iitb
53/72
-
7/29/2019 Microfinance Cse Iitb
54/72
54
Mission
The Centre for Micro Finance Research will aim tohelp improve the life of the poor by:
Systematically researching the links between access
to financial services and the participation of the poorin the larger economy
Participating in maximizing access to financialservices and its impact for poor through: Research on micro finance and livelihood financing
Research-based policy advocacy
High level training for practitioners and institutions
Strategy building for Micro Finance Institutions
-
7/29/2019 Microfinance Cse Iitb
55/72
55
Strategy
ResearchInfluence
practiceAdvocacy
Strategy
building
Training
-
7/29/2019 Microfinance Cse Iitb
56/72
-
7/29/2019 Microfinance Cse Iitb
57/72
57
CMFR: Research Areas
-
7/29/2019 Microfinance Cse Iitb
58/72
58
Impact of Microfinance
Access to
Financial servicesImpact?
Advocacy based on rigorous results
?
-
7/29/2019 Microfinance Cse Iitb
59/72
59
Constraints to Productivity
ImpactAccess to
Financial services
Build relevant partnerships
Provide useful products through credit
-
7/29/2019 Microfinance Cse Iitb
60/72
60
Economics of Micro-Enterprise
Scale, Returns, Constraints of micro-
enterprise
Market linkages Documentation of best practices
Help increase productivity of micro-enterprise
-
7/29/2019 Microfinance Cse Iitb
61/72
61
Experimentation on Product Design
selection monitoring Enforcement
Individual/groupliability
Self/MFI selection
Guarantors
Collaterals
Interest rate
Repaymentschedule
Communication
strategies
Loan size
Interest rate
Design the most cost-effective products
Within groupmonitoring
Staff supervision
-
7/29/2019 Microfinance Cse Iitb
62/72
62
Behavior and Psychology of
Borrowers
How do households face shocks and risk?
Do households save and how?
What drives savings and credit behavior?
Why do people default?
Why dont households adopt the most profitable
activities?
Design the most effective communication strategies
-
7/29/2019 Microfinance Cse Iitb
63/72
-
7/29/2019 Microfinance Cse Iitb
64/72
64
Cost and profitability of SHGs/MFIs
BankTransaction
?Micro-loan9% 25%
Return?
How to reduce transaction costs?
Compare costs of SHG-Bank linkage and MFI model
Show investors risk return performance of microloans
-
7/29/2019 Microfinance Cse Iitb
65/72
-
7/29/2019 Microfinance Cse Iitb
66/72
66
Research: Panel Databases
Construction of a panel database: repeated
observations of same households
Study vulnerability, consumption patterns over
time
Have a panel database for on-going research
Construction of a cross-sectional survey Document access to financial services over time
-
7/29/2019 Microfinance Cse Iitb
67/72
-
7/29/2019 Microfinance Cse Iitb
68/72
68
Research: Courses
Economics of Micro Finance Prof. Adel Varghese, TAMU
Economic theory of microfinance Evaluating Social Programmes
Professors from the Poverty Action Lab/MIT:
Esther Duflo (MIT), Abhijit Banerjee (MIT), Sendhil
Mullainathan (Harvard), Michael Kremer (Harvard) Teach practitioners and researchers how to
identify programs impacts without bias
-
7/29/2019 Microfinance Cse Iitb
69/72
69
MFI Strategy Unit at CMFR
-
7/29/2019 Microfinance Cse Iitb
70/72
70
Strategy Building
MFIsSectoral
Experts
Pilots
Scale-up LFI
-
7/29/2019 Microfinance Cse Iitb
71/72
-
7/29/2019 Microfinance Cse Iitb
72/72