Kamlesh Dave (Commerc & Accountancy, Amrita University)

Published in mani.philica.com

Abstract
Indian microfinance is dominated by two operational approaches: self-help groups (SHGs), and microfinance
institutions (MFIs), in addition to a few cooperative forms. The SHG model was initiated by the National Bank for Agriculture and Rural Development (NABARD) through the SHG-Bank Linkage Programme in the early 1990s. Today the SHG model, which links informal groups of women to the mainstream banking system, has the largest outreach to microfinance clients in the world. MFIs emerged in the late 1990s to harness social and commercial funds available for on-lending to clients. Today there are over 1,000 Indian MFIs.

Article body

Micro
Finance an Overview

-Dr. Kamlesh S. Dave

Shri J. H. Bhalodia Women's College,

Rajkot - Gujarat

ksdave3@yahoo.com

Indian microfinance is dominated by two operational approaches:
self-help groups (SHGs), and microfinance

institutions (MFIs), in addition to a few cooperative forms. The SHG
model was initiated by the National Bank for Agriculture and Rural Development
(NABARD) through the SHG-Bank Linkage Programme in the early
1990s. Today the SHG model, which links informal groups of women to the
mainstream banking system, has the largest outreach to microfinance clients in
the world. MFIs emerged in the late 1990s to harness social and commercial
funds available for on-lending to clients. Today there are over 1,000 Indian
MFIs.

According to estimates from Intellecap's Inverting the Pyramid: The Changing Face of Indian
Microfinance (2007), SHGs and MFIs have together disbursed USD3.7
billion in microloans through March 2007 (See Figure 1). While the SHG model
provides the majority of disbursements, the MFI model has demonstrated a higher
growth rate. From 2003 to 2007, the MFI disbursement share rose from 28% to 47%
of all Indian microfinance loans - a value of USD1.7 million. Despite such
growth, estimates suggest that the current supply of microcredit amounts to only
about 7% of potential demand.

Self-Help Groups

According to NABARD, almost 3 million SHGs have linked to nearly 500
banks since the program started, reaching over 11 million households across.

SHG Federations

Some NGOs such as MYRADA and Dhan Foundation have
promoted federations. These apex institutions aggregate savings from SHGs and
act as intermediaries between financial institutions and SHGs. SHG Federations
were envisioned as an exit strategy for the promoting agencies and a means of
ensuring SHG sustainability. However, most federations have yet to demonstrate
operational self-sufficiency, the ability to mobilize sustained financial
resources and most importantly, the institutional capacity to run without the
promoting agency's support.

Financing Strategies

Commercial banks, regional rural banks (RRBs) and cooperative banks
primarily fund the SHG-Bank Linkage Programme, and NABARD in turn re-finances them.
Credit lines to SHGs are critically limited, as they are based on a certain
multiple of SHG members' savings accounts within banks. While the cumulative
savings of SHGs could serve as a low-cost source of funds for onlending, their
potential is limited by the lack of aggregated savings across SHGs. Commercial
equity investments are not available to for SHGs due to their informal status

Illusive socio-economic impacts

SHGs form a critical link for poor women to access a variety of
financial services. They are effective platforms for women to participate in
politics through awareness campaigns and community action. SHGs have also
emerged as "last mile" channels for government to distribute
financial benefits and for corporations to retail their products through
member-entrepreneurs. Even so, questions remain about the ability of SHGs to
attain a primary objective - economic empowerment of poor women.

Microfinance Institutions (MFIs)

Indian MFIs range from Grameen-replicator NGOs to for-profit entrepreneurial
ventures to developmental NGOs which moved from SHG promotion to direct
financial intermediation.


 
 
 
 
 
 
 
 
 
 
 
 






Based on
asset sizes, MFIs can be divided into three categories:

• Category
       1: 5-6 institutions which have attracted commercial capital and
       scaled up dramatically over last five years. These MFIs, which include SKS,
       SHARE and Spandana, were initiated in the 1990s
       as NGOs promoting SHGs or Grameen-style programs but after 2000, converted
       into for-profit, regulated entities, mostly Non-Banking Finance Companies
       (NBFCs).


• Category
       2: Around 10-15 institutions with high growth rates, including both
       NGOs and recently formed for-profit MFIs (mostly NBFCs). Many NGOs have
       transformed into regulated, for-profit structures recently or are in
       process now, and seek commercial equity investments. Examples include Grameen Koota, Bandhan and ESAF.


• Category
       3: The bulk of India's 1000 MFIs are NGOs struggling to achieve
       significant growth. Most continue to offer multiple developmental
       activities in addition to microfinance and have difficulty accessing
       growth funds.

MFI Mainstreaming and Commercialization

While SHGs tend to have a multi-sectoral development approach and are
challenged by sustainability. Most MFIs focus on scaling up microcredit
operations while creating a sustainable legal structure and business model. The
MFI approach is generally more attractive to commercial capital and mainstream
market players.

High growth rates and business efficiency

According to an Intellecap study, as of March 2007, the 60 largest MFIs (by
number of clients) had close to 10 million clients and a cumulative outstanding
portfolio of USD 769 million. These 60 MFIs included all MFIs from Category 1
and Category 2 and prominent Category 3 MFIs. These MFIs account for an
estimated 95% of the total dollar amount of MFI loans in India. From 2003 to
2007, these MFIs demonstrated impressive growth with increasing efficiency and
profitability. Cumulative annual growth rate was over 70%, the average
operating cost ratio moved from 20% to 11% and average return-on-equity (ROE)
increased from 2.2% to 33.2%. The efficiency and profitability indicators of
Indian MFIs are highly favorable as compared to Asian benchmarks. (See
Box 2)

Amenable financing environment

Access to finance has played a critical role in helping Indian MFIs
achieve such growth. Donors including Cordaid and Ford Foundation
have extended grants and quasi-equity to support institutional capacity
building and cover early-stage losses. Organizations such as Grameen
Foundation have extended guarantees to leverage additional loan
funds. Apex institutions like Small Industries Development Bank of India (SIDBI),
Friends of
Women's World Banking (FWWB) and Rashtriya Mahila Kosh (RMK) provided early
stage onlending capital.

Leveraging these resources, many MFIs accessed market-rate lending
capital from commercial banks such as ICICI Bank, ABN Amro Bank
and HDFC Bank.
Since 2006 commercial equity investments have entered the market, mostly into
Category 1 MFI capital structures. Between 2004 and 2007, the microfinance
sector received an equity infusion of almost USD43 million, USD38 million of
which flowed in during the first four months of 2007 (See Box 3).

This high growth period was also marked by new and innovative delivery
channels. The ICICI Bank Partnership Model allows MFIs to
grow their client base and enjoy large financial leveraging. SHARE
and BASIX
are selling their portfolios to mainstream banks to fuel growth.

From credit-only to diversified services,Though many MFIs formally
mobilized client savings as NGOs, deposit mobilization is prohibited once MFIs
transform into for-profit legal entities. Proposed policy reforms on the
horizon, are expected to allow non-profit MFIs to function as business
correspondents for commercial banks and offer savings services to clients, but
this is not an avenue open to most of the scaled-up, for-profit MFIs.

NGO-MFIs are also partnering with mainstream insurance providers to
offer insurance services. Remittances are another emerging area of interest for
Indian MFIs as well. For example, Spandana has
partnered with Western Union to
provide remittance services to its clients.

Increasing outreach

Many Indian MFIs are increasingly becoming national players. As of 2008,
at least 12 MFIs operate in more than one state. There is an increased focus on
urban market and a new generation of MFIs, such as Ujjivan
and Swadhaar,
operate solely in urban areas.

Scaling up Indian Microfinance: Opportunities and Considerations for the
Future

While Indian microfinance has grown substantially over the last decade, future
success will require informed decisions and proactive strategies by key
stakeholders, taking advantage of emerging opportunities and mitigating
potential risks.

Funder coordination for retail microfinance

Most investors, apart from a few funds such as Bellwether, Lok
Capital, and Aavishkaar-Goodwell,
tend to focus on the established Category 1 MFIs, leaving plenty of room for
more early-stage MFI investments. Complementing this, the space can benefit
from specialized microfinance debt financing vehicles that provide an
alternative to commercial bank funding and an increased participation from
capital markets through mechanisms such as bond issues and securitization.

Supporting infrastructure needed

As in any industry, microfinance can expect to see a period of
consolidation with mergers and acquisitions, innovative financing mechanisms as
well as unfamiliar risks such as competition and inadequate growth management.
To complement this, parallel investments need to build a supporting ecosystem.
Specialized advisory assistance is particularly relevant for MFIs that plan
IPOs and bond issues and experiment with technology interventions such as
mobile banking. Human resources for microfinance, both in terms of quantity and
quality, will prove to be a key challenge, especially with a booming Indian
economy and increasing competition for good quality human resources. Adoption
of good governance practices and quality monitoring and reporting will be
critical to ensure balanced growth and satisfied stakeholders

Policy

Recognizing
that SHGs and MFIs can form key actors in the pursuit of an inclusive financial
system, the Indian policy makers have tried to adopt many promotional and
regulatory measures over time, the latest being the proposed Microfinance Bill. The bill is expected to
identify a specialized regulator and guidelines for NGO-MFIs while the
for-profit entities will be governed by the Reserve Bank of India
regulations. Their legal status will determine their future scope of services,
ability to mobilize various types of finance and to be part of the mainstream
financial system.

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This Article was published on 16th October, 2012 at 16:22:06 and has been viewed 511 times.

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The full citation for this Article is: Dave, K. (2012). Micro Finance an Overview. PHILICA.COM Article number 355.