Microfinance Shades Of Sustainability

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<ul><li> 1. MICROFINANCE Akhil Prabhakar Swapnil Pal IIT ROORKEE</li></ul> <p> 2. Micro-Finance-What is it?15%R1/R237% R3 Microfinance = provision offinancial services to the poor48% R4 3. Microfinance: what is it?What it often isWhat it really should be Micro-credit Range of financialservices Group lending Group and individual Social/charitable lendingactivity Profitable activity 4. Micro-Finance reach in India Microfinance in India through its two major channels SHG Linkage and MFIs servedover 33 million Indians, up by 9 million over FY 2006-07 4 out of 5 microfinance clients in India are women. Micro-credit portfolio of India Microfinance wasRs. 22,000 crore 75% are accounted for by SHG Linkage, 20% by large MFIs and 5% by medium andsmall MFIs SHG Linkage reports over Rs. 3,500 crore savings, only MFI Bank, KBS Bank reportsabout Rs. 40 crore savings portfolio MFIs operate in 209 out of 331 districts of the country, 28% of the new clients are fromUrban areas. 5. Challenges in Micro Finance High Volume of Financial Transaction but value wise very low Majority of the financial transactions are off-site in nature Geographic spread of operations and density of customers Lack of infrastructure facilities like power, broadband etc Unsecured lending and no documented financial history is available Combination of above, lead to high operating cost 6. Clients profile 75% 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 transactions Lack of collateral 7. Staff Lack of trained staff Lack of motivated staff Difficult to incentives staff 8. Sustainability Sustainability itself has to be seen in a broader sense than just financialsustainability. The sustainability of demand, of the MFIs mission, of its ownership andgovernance structure and the legal and regulatory framework under which itworks, are all contributory to overall sustainability of an MFI. We will try to examine what comes in the way of making Indian MFIs sustainableand what can facilitate this. 9. Presentation is divided into three section: A Three Track Approach for Building a1. Sustainable Microfinance Sector Multiple Dimensions of Sustainability and2. Suggestions for Building Sustainable MFIs in India.3. 10. A Three Track Approach for Building aSustainable Microfinance SectorGaps in demand and supplyDemand: Rs. 450 billion/yDisbursed: 39 billion Less than 2 million Scaling up500 million un-served poor Households reachedto cover all parts of India 60% in SouthNeed protection Insurance under-delivered Increaseagainst all risksimpactNeed employment opportunities Market constraints 11. Looking at the gaps in demand and supply there is a need to adopt a three trackapproach, using mutually complementary strategies:1.Incentivizing existing mainstream financial service providers (NABARD, SIDBI,etc) to enter the microfinance sector as a serious business proposition.2.Encouraging new microfinance institutions (MFIs) with a supportive policy andregulatory framework.3.Building a strong demand system in the form of community-based developmentfinancial institutions (CDFIs), with the help of NGOs and others. 12. Incentivizing Mainstream financial services Small loans have been historically seen by banks as a social obligation rather than apotential business opportunity. Over the last three years, some strides have been made to re-engage mainstream FIsinto micro-credit. The concept of Local Area Banks (LABs), with a lower start up equity of Rs 50million, has not yet been operationalized by the RBI. At the moment there are only two options either be a co-operative or be an NBFC(non-banking finance company). 13. Multiple Dimensions Of Sustainability Demand and Supply Characteristics and Their Impact on Sustainability of MFIs Sustainability of the Mission of MFIs Legal and Regulatory Framework for Promoting Sustainability of MFIs Ownership and Governance to Promote Sustainability of MFIs Financial Sustainability of MFIs 14. Demand, Supply Characteristics and Impact on Sustainability of MFIsGaps in demand and supplyDemand: Rs. 450 billion/yDisbursed: 39 billion Less than 2 million Scaling up500 million un-served poor Households reachedto cover all parts of India 60% in SouthNeed protection Insurance under-delivered Increaseagainst all risksimpactNeed employment opportunities Market constraints 15. Sustainability of Mission 16. Legal and Regulatory Framework toPromote Sustainability of MFIs Regulation and supervision ensure that MFIs are run prudently and cases of poorpeople losing their money due to fraud or incompetence are minimised. MFIs can never be capital adequate. Recently Microfinance Task Force was set-up by RBI The RBI institutions have been imposing restrictions on the interest rates that MFIscan charge to the poor. 17. Ownership and Governance toPromote Sustainability of MFIs Societies Registration Act, 1860 or the Indian Trust Acts, 1882 provide relative easeof registration, have no minimum capital requirement, prescribe no capitaladequacy, nor any prudential norms. Incentives to register as societies exist as they fulfill the legal requirement to accesslarge amounts of low-cost funds from SIDBI, RMK, etc Unfortunately there is little incentive or evidence by the boards of non-profit MFIsto monitor closely the loan portfolios, practices, and services, resulting in anunregulated expansion. In case of mutual benefit type MFIs, (e.g. co-operatives and mutual benefit trusts)the assumption is that member control would ensure good governance. 18. There is an absence of a supportive framework for encouraging entrepreneurs toprovide microfinance services on a for-profit basis. Indeed, the concept is looked at a bit suspiciously both within the sector and bypolicy makers. Yet, this will have to change if sustainable MFIs have to be established in largenumbers. So far, BASIX is the only for-profit MFI in India and it has not fully resolvedthe issue of ownership. 19. Board must comprise eminent development workers and professionals from thefinancial sector, though most of them need not be investors, for its governance. Eventually, as the company becomes regularly profitable, part of its equity could besold to its customers and employees. . Charismatic founders may be needed, but eventually have to yield to professionalmanagers. We have to stress that the microfinance sector in India at present badly needs alarge number of microfinance entrepreneurs (MFEs). 20. Financial Sustainability Reducing average cost of funds Reducing cost of operationsControlling Reducing costs of bad debtsCosts Offer different loan products to suit the credit requirements of the poor. Adopt flexiblerepayment schedule to suit borrowers cash flows.Increasing Identify intermediaries to a number of small borrowers such as fertiliser dealers Volumes Increase customer base in the areas of operation and expand in neighbouring villages MFIs financial sustainability can be enhanced by broadening the range of financialservices.Increasing The services are complementary in terms of risk Services Insurance is another important financial service 21. Suggestions For Building Sustainable MFIs In India Need to Enact/ Amend Laws and Regulations1. Amend the RBI Act, 1934 to add a Chapter on MFIs2. Establishing a new form of NBFC the Micro Finance Company3. Permitting MFIs to take deposits from members/borrowers4. Changes in the Acts governing NABARD, SIDBI and HUDCO5. Tax benefits need to be extended to the microfinance sector6. Making available more lending funds to MFIs7. Simplify foreign investment regulations to enable MFIs to raise foreign equity 22. CONCLUSIONS In this presentation, an attempt has been made to look at sustainability frommultiple dimensions such as demand, mission, legal and regulatory framework,ownership, governance and human resources and financial sustainability. There is emerging price competition from mainstream banks as they are able tocross-subsidize their micro-credit operations and charge interest rates below cost. There is emerging price competition from mainstream banks as they are able tocross-subsidize their micro-credit operations and charge interest rates below cost. We end with a set of very detailed and specific recommendations to bring aboutchanges in various laws and regulations in India to provide a supportiveenvironment for MFIs 23. THANK YOU</p>