transformation

Transformation of microFinance in India:

Experiences, Options and Future

M S Sriram and Rajesh UpadhyayulaIndian Institute of Management

Ahmedabad

microFinance Defined

microFinance means many things - But the contours may be:

• Piloted by the alternate sector• Focussed on the poor• Having roots in development

The Setting

Overall objectives of the NGO include welfare activities, economic activities. Example: Lupin – Health, Education,

Agriculture and Microfinance

Overall objectives of the MFO is predominantly economic activities. Example: SIFFS – Economic activities for fishfolk, micro-finance services are also provided.

Exclusive microfinance institutions. Commercial Funding for lending operations

Sustainability oriented: BASIX

Poverty focussed: SHARE/CFTS

Figure 1: Defining the microfinance egg

Developmental funding for capacity building; some initial capital for pump priming.

Other sources of funding for non-microfinance economic activities.

Other sources of funding for welfare activities

Spin-off microfinance

units: MYRADA Sanghamithra Rural and Urban

Spin-off: SEWA Sewa Bank –

Urban and Rural

What triggers transformation?

• Size• Diversity of services• Financial sustainability• Focus• Taxation

What are the International Experiences in Transformation?

• Bolivia and Africa: Transformation of NGOs – To Banks– To FFPs

• Indonesia: Transformation of mainstream– To microFinance methods

• Bangladesh: Transformation of a project– Grameen Bank– Other NGOs transforming to Banks

Challenges in the Indian context

• Size •Growth in geographic area•Growth in portfolio/client size

• Diversity of Services•MFOs wanting to offer Savings•MFOs wanting to offer Risk Products


• Financial Sustainability– Internal growth– Access to funds

• Focus– Other Developmental activities V/s mF– Degree of specialisation needed for mF


• Tax Status– For-profit mF activity V/s not-for-profit

NGO activities– Tax status of donor money

Options for Transformation (Spin off)

• Company (NBFC)– Poverty School

• Share - Transformation with growth• CFTS - Start up as NBFC• ASA - Through MBTs (proposed)

– Sustainability School• BASIX - Complex structuring (holding

company, borrowings and equity from developmental and commercial sources)


• Examining NBFCs+ Access to financial markets+ Access to bank finance+ Can Operate across the country– Limited options for offering savings– Re-capitalisation for growth may be tough– Steep entry norms (Rs.20 million initial)– Not easy to get registrations


• Examining Co-operativesMACS, Urban Co-operative Banks+Small and dispersed institutions, that

could organically grow and federate+Involves the community in decision

making as it is member-user-governed+Easy entry norms+Best route for SHGs to formalise+Can offer many services including

savings


• Examining Co-operatives – Geographic limitations– Does not have a good image,

attracting outside capital will be a problem

– Recent scams in urban co-operative sector might lead to tightening of regulation


• Needs to earn enough profits to show that it is operationally self-sufficient

• It could also be financially self-sufficient, but no pressure to plow back profits or hit the capital market

• The concerns would be to keep costs under control and revenues on target to demonstrate


• Set up a Local Area Bank + Flexibility to offer diverse products+ Cost of funds likely to be lower, so

the impact on the poor with be better – Steep initial capital (Rs. 50 million)– Difficulty in getting licence– Limitation in geographic growth (3

contiguous districts)

Implications for regulation

• Allow MFOs to grow organically– Allow for expansion in area in case of co-

operatives and LABs, subject to minimum performance

• Allow for NGOs to invest in for-profit MFOs such as NBFCs and LABS

• No change in entry norms - ensure only serious players come to the field

Transformation of microFinance in India: A Presentation at SIDBI Workshop

Transformation options and their implicationForm Options Organisational

incorporationImplication

Not for Profit MFI – a specialvehicle only for purposes ofdemonstration at scale (SRFS)

Cannot grow beyond a point. Whilesustainability can be demonstrated, theorganisation will have to be roving – withdrawfrom one location and move to another, or groworganically, and gradually.

For profit Company (NBFC) –Transfer clients, investmentsand portfolio independently(SHARE, CFTS)

Issue of ownership and control. Initial capitalcontribution can come from the communities.Recapitalisation is complex. Diversification tosavings and risk products is not simple underthe current regulation. Even when permitted,the bouquet of products offered will be limited.

Option 1:Spin off mFas aseparateActivity

For-profit co-operative eitherunder the MACS Act or as aCo-op Bank

Can grow organically, but will have geographicallimitations to growth. The geographic area ofoperation is demarcated. However, there isflexibility to offer savings products. Initialcapitalisation requirement is not daunting.

Promote (informal) Self-HelpGroups, (Pradan, Myrada),encourage them to formfederations., (DhanFoundation)

Can grow organically. However, scaling up andinfusion of large amounts of external funds arenot simple, as the movement is scattered acrossseveral independent informal or legal entities.Embedding in the banking system is a solution,but there are limits to growth. Chances ofwithering away if the NGO withdraws support.

NGO

Option 2:Promoteindependent MFOs Promote (formal) mutually

aided co-operatives andencourage them to federate.(CDF)

Problems are similar to SHGs mentioned above.However, since each of these are independententities, dealing with banking institutions islikely to be simpler. Chances of withering awayare low, if the systems are established.

Transformation of microFinance in India: A Presentation at SIDBI Workshop

Transformation options and their implication

Form Options Organisationalincorporation

Implication

Option 1 Promote NBFCs – seekdevelopmental and commercialinvestments through complexmechanisms – private mutualbenefit trusts, debt in holdingcompany (CFTS, BASIX)

Problem in raising initial capital. Otherlimitations applicable to NBFCs discussed abovealso apply. It is difficult to pull off a complexstructure of mutual benefit trusts and holdingcompany structures.

DevelopmentProfessionals withNGObackground

Option 2 Promote LABs, find equity forstart up.

A difficult proposition due to two reasons: Steepinitial capital requirements and complexity inlicencing procedure of RBI and limitation ingeographical area to three contiguous districts.Tremendous amount of flexibility in the offer ofdiverse products and services and great scopefor customisation.

transformation

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