Microfinance

Microfinance in an Emerging Economy: An India Perspective

INDEX

Executive Summary

Introduction

What Statistics say?

Microcredit

Commercial Microfinance Industry

Characteristics of Commercial Microfinance

Characteristics of most Lending

Microfinance in Asia

Indian Microfinance Context: A Brief History

Microfinance providers in India

India advantage of building large scale CMF

Rural Credit Scenario in India

India: How can large scale CMF Develop?

What is Lacking? And What needs to be done?

Microfinance Policy and Regulatory Framework

Role of NGO

Role of Self-Help Groups

Role of Donors

Role of Government

Microfinance and Corporate Partnerships- Leveraging each other

Bibliography

Appendix

Executive summary

Microfinance, covering an array of financial services extended to the poor is a potent tool for alleviating poverty. Yet, unlike medium and large scale finance, microfinance has not received its due place in national development policy framework. The ignorance of the role of microfinance has been partly due to the pessimism expressed by some of microfinance practitioners about its outreach capability and partly due to the negligible bargaining power of its clientele, viz., and the poor, as against that of the middle class of the society.

With a successful social mobilization and empowerment program to precede the credit delivery, even the poorest of the poor stand to benefit from microfinance. However, to attain the maximum success and ensure sustainability, an attitudinal change in the target clientele should be effected. This change in the form of inculcating a high need for achievement would be instrumental in creating a successful entrepreneurial class among the microfinance users.

The best method of ensuring stability, solvency and viability of MFIs is to promote self regulation within such organizations, checked by market discipline. Such an MFI system, devoid of moral hazard and adverse selection issues would bring about net welfare gains for the society. Government regulation of MFIs should be effected only as a supplement to this approach.

In order to strengthen the MFI system in the region, the following proactive measures may be introduced.

(a) Introduction of a separate accounting and auditing standards system for MFIs so that it would establish a uniform accounting system which is less stringent than the systems applicable to ordinary business firms;

(b) MFIs should be managed by professionals to enable MFIs to maintain a high degree of professionalism in their operations;

(c) MFIs should make a clearly specified policy statement that includes periodical voluntary disclosure of operations, activities, financial position for the benefit of the public;

(d) MFIs should, on their own, consent to having a rating for their business activities, so that the members of the public would have required information on them.

(e) MFIs should strive to build internal reserves out of operational surpluses to enable them to absorb loan losses, withstand adverse shocks and go through difficult periods.

The Indian economy at present is at a crucial juncture, on one hand, the optimists are talking of India being among the top 5 economies of the world by 2050 and on the other is the presence of 260 million poor forming 26 % of the total population. The enormity of the task can be gauged from the above numbers and if India is to stand among the comity of developed nations, there is no denying the fact that poverty alleviation & reduction of income inequalities has to be the top most priority. In this backdrop, the impressive gains made by SHG-Bank linkage programme in coverage of rural population with financial services offers a ray of hope.

Introduction

In India, the 'un-banked' population is almost twice the size of the population of US. It is this segment that has to be reached, and in a viable and sustainable way. Access to basic consumption loans or those contributing towards income-generation in the form of entrepreneurial activities have visible impact on poverty alleviation.

Microfinance is the provision of ranges of financial services such as deposits, loans, payment services, money transfers and insurance to poor low-income households and their micro enterprises. Micro-finance institutions (MFIs) provide several non-credit services such as capacity building, training, marketing of the products of the SHGs and micro insurance. It can help the poor to increase, build viable businesses, and reduce their vulnerability to external shocks. It is a powerful instrument for self-empowerment by enabling the poor to become agents of economic and social change.

What Statistics say?

(Source: Study by Sa-dhan, a representative body of Microfinance Institutions)

* Demand for microfinance in the country is a whopping Rs 1 lakh crore

* Assuming loan sizes of between Rs 7,000 and Rs15,000, the service providers will need to lend Rs 37,000 crore to 80,000 crore if a clientele of 5.36 crore below poverty line households is assumed.

* Microfinance is fulfilling this demand through two instruments--the self-help groups, which get loans from nationalized banks, and microfinance