Microcredit is Dead: Long Live Livelihood Finance

BASIXEquity for Equity

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Microcredit is Dead: Long Live Livelihood Finance

Talk to the Harvard Business School

MBA 2012 Candidates

By

Vijay MahajanFounder and Chairman, BASIX

Hyderabad, 7th January 2011


Microcredit – An Introduction

Part I

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Grameen Bank, Bangladesh Methodology

• Solidarity group of five women is formed. • Four to eight such groups form a Center. Undergo

training for a few days. • All agree to guarantee repayment of each other’s loan.• Center meets every week, elects Center Leader• Regular savings by all members (not allowed in India).• Loan appraised & approved first by peers in solidarity

group and finally approved by the Centre Leader.• Loan disbursed directly to individuals• All loans repaid in 50 equal installments


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Joint Liability Groups (JLGs) – Most MFIs use this model

• Three to seven individual borrowers

• Loans given to individual borrowers

• They mutually guarantee each other’s loan repayment

• Cash security (10%) is collected in some cases

• Group meeting only when needed

• More suitable for men, farmers


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Self Help Groups (SHGs)Bank Linkage Model

• Homogenous affinity group of 15-20 women who live in the same neighbourhood

• Regular meetings – weekly/fortnightly/monthly • Regular savings - Rs 20-50 per meeting• Group selects their leaders• Lending started with internal pool of funds. Lending

decisions are made by the group• Later, SHG accesses funds from bank to augment its pool.• India has over 5 million SHGs with 80 million members

and banks have leant Rs 28,000 crore through these SHGs


India’s Two Contending Microfinance Models

• Indian NGOs like MYRADA and PRADAN invented it and NABARD learnt the SHG Bank linkage model from South East Asia ( thru APRACA, GTZ) and promoted it in a big way thru public sector banks and State Governments.

• Other Indian NGOs like SHARE learnt the JLG Model from the Grameen Bank Bangladesh and adopted it. Later SIDBI and private sector banks promoted it.

• Both have grown very well in the last 10 years (see chart on next slide). 6


SHG-Bank Linkage vs MFI models – relative growth – All India

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MFI Loan Portfolio (In Crore Rupees)

SHG Outstandings (Crore Rupees)

No. of Active Borrowers in MFI (in Lakhs)

No.of SHG Bank Linkage Borrowers (in Lakhs)

1995-96 0.4 0.0 0.81996-97 1.2 0.0 NA1997-98 4.6 0.1 NA1998-99 12.6 0.3 NA1999-2000 25.2 193.0 0.6 19.02000-01 43.9 480.9 1.0 45.02001-02 74.3 1026.3 1.8 78.02002-03 141.0 2048.7 4.2 116.02003-04 311.9 3904.2 8.0 NA2004-05 1,091 6,899 23 243 2005-06 2,058 11,398 45 330 2006-07 3,257 12,366 70 580 2007-08 5,510 16,999 102 701 2008-09 11,300 22,679 167 860 2009-10 20,710 28,038 266 970

Source: Derived from MIX Market and NABARD

Loan Outstanding MFI vs SHG - All India

Year

Outreach MFI vs SHG - All IndiaGrowth of MFI (Gross Loan Portfolio & No. of Active Borrowers) - All India


SHG-Bank Linkage vs MFI models – relative growth – AP

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Gross Loan Portfolio (In Crores)

Active Borrowers (in Lakhs)

Gross Loan Portfolio (In Crores)

No. of Active Borrowers with Loan outstandings (in Lakhs)

2000-01 6 0.12001-02 10 0.2 521 26.42002-03 16 0.3 975 51.592003-04 25 0.5 1,728 56.762004-05 68 1.2 2,746 60.392005-06 122 2.5 4,345 65.122006-07 305 5.7 4,408 75.682007-08 916 14.1 5,385 88.882008-09 2781 35.7 8,902 134.092009-10 6700 72.2 11,739 161.81

Growth of SHG Model in APGrowth of MFI in Andhra

Five major AP MFIs SKS, SHARE-ASMITHA, SPANDANA, BASIX & TRIDENT

Source: Derived from Mix Market Figures


But shortcomings are there in both models Shortcomings of SHG –Bank Linkage model

• This model has become the favourite of politicians.• Interest rate charged by SHGs to members (other than in AP

where it is subsidised down to 3%) is normally 18-24% pa• The SHG model requires an NGO or a Government Agency

to form the groups and handhold them. This has costs – Rs 10,000 per SHG, as per NABARD. Full system costs are comparable to the MFI model.

• In AP over Rs 3000 crore has been spent on SHG formation and capacity building by the Government, so it controls the SHG system through SERP. The SHGs have become a vote bank for Parties. 9


But shortcomings are there in both models Shortcomings of SHG –Bank Linkage model

• The credit available per SHG member is around Rs 3000 (all India average) though it is about Rs 17,800 in AP. This is, by itself, not enough to avoid borrowing from other sources.

• Credit from bank highly dependent on the branch manager; and is not continuous, as term loans are given. Some bank managers impound SHG savings as security.

• SHGs have become dominated by the middle caste/ income women and SC, STs are still neglected

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Shortcomings of MFI Microcredit model

• It requires that all costs be charged to borrowers and thus the interest rates can be 24%-30%.

• The RBI does not allow MFIs to take any deposits so there is no element of savings in this model.

• In their effort to grow, some MFIs have set high targets for staff and this leads to them lending to households who had borrowed from moneylenders and SHGs and from other MFIs. This led to over-indebtedness for millions of households. Many were driven to desperate measures.

• MFIs used to lend initially only for productive purposes and carry out usage verification. By 2007, this was dropped.11


Shortcomings of MFI Microcredit model

• MFIs depend on high repayment rates, so the MFI staff work hard to collect and can sometimes be aggressive.

• The joint liability makes other borrowers (peers) become abusive and coercive.

• As MFIs borrow from banks, they need to have about 15% of the borrowing as share capital. (RBI regulation).

• To attract that, they needed to reward their investors with handsome returns. In the process, the promoters and ESOP holding employees also made a lot of money. This was seen as profiteering from the poor, given high interest rates.

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Traders48-60%pa

Moneylenders36-48%pa

MFI 227-30%pa

MFI 124-27%pa

SHG Own Savings12%pa

SHG-Bank Linkage3% pa

Friends and Family0%

Borrowing by poor households in Andhra Pradesh, before and after MF Ordinance

Traders48-60%pa

Moneylenders@ 48-120% pawill once again

dominate SHG Own Savings

12%pa

SHG-Bank Linkage3%

Friends and Family0%

The numbers show interest rate in % per annum


From Microcredit to Livelihood Finance

Part II

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Vicious Cycle of Low Income

Inadequate capital for

further investment

Inadequate income to meet consumption

needs

Low Investment

Inadequate

Savings


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Breaking the Cycle of Low Income with Micro Credit without and with Savings

Lower to Higher

investment

Capital for investment

Alternative -2 Repayment of principal and

interest

Adequate income to meet

consumption needs

Credit

Alternative 1 - Savings


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Savings is the fundamental financial service

• Savings is setting aside a small sum of money away from the regular cash flow and accumulating it to a usefully large sum.

• If the large sum is received after small sums of money have been set aside, then it is called a term or fixed deposit.

• If the large sum is received before the small sums of money have been set aside, it is called a loan

• If a large sum is to paid out upon happening of an adverse event to a few of all those who have paid a small sum, it is called insurance

• Savings create a sense of well-being and security.


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Breaking the Cycle of Low Income with Credit and Savings, and protecting it

with Insurance

Lower to Higher

investment

Capital for investment after

servicing the loan

Repayment of principal and interest


consumption needs

Formation of savings into capital

Credit

Risk


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Because of vulnerability to risk insurance is also important for the poor

• The poor face all kinds of risks to their lives and livelihoods.

• The death of a bread-winner can devastate a family. So life insurance is useful.

• Death of livestock can halve the income of a poor household. So livestock insurance.

• Crop failure can be cushioned by insurance.

• Yet, few insurance companies offer services to the poor. In India, life coverage is < 6%


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Breaking the Cycle of Low Income with Savings and Credit, protecting it with

Insurance, and adding Skills and Market Linkages

Lower to Higher

investment

Capital for investment after

servicing the loan

Repayment of principal and interest


consumption needs

Formation of savings into capital

Credit

Risk

Skills

Marketlinkages


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From Microcredit to Livelihood Finance

• Savings help a household smoothen consumption, cover contingencies and build equity for borrowing.

• Payments/money transfer services help build savings and make the household more resilient.

• Insurance to cover all kinds of risks to their lives and livelihoods.

• Then credit is used to enhance incomes.

• Credit needs to be accompanied, when needed, by skill enhancement and input/output market linkages


Livelihood finance :Pathway out of Poverty

11. Ongoing Credit with crop, livestock and asset insurance

8.& 10 Build and Transfer Assets (e.g. Land, Water, Forest, Livestock, Infrastructure and institutional development –SHG Feds, JFM , W’sheds

7. Skill Training

13. Overcome poverty and invest in

education

5 Migrant (family) Remittances

3. Govt Payments (e.g. NREGA. JSY. OAP)

1. Food Aid

Poverty Line

Chronic Food Insecurity

4. Social mobilisation (SHGs) and offer Life and Health Insurance through Group Policy

9 and 12. Ongoing support services for livelihood promotion – agri,

livestock and non-farm

Years

Income

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6 Overcome food insecurity2.No-frills Bank a/c


BASIX – An Introduction

Part -III

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BASIX was established in 1996 with a Mission

To promote a large number of sustainable livelihoods, including for the rural poor and women, through the provision of financial services and technical assistance in an integrated manner.

BASIX will strive to yield a competitive rate of return to its investors so as to be able to access mainstream capital and human resources on a continuous basis.

• (from the BASIX Feasibility Report, January 1996)


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Micro-Credit with limited technical assistance and micro-enterprise support services 1996 onwards

Institutional Development Services,

In India and Other Countries 2005

Micro-insurance (life, health, crop, livestock, assets) 2002, for managing

risks to lives and livelihoods

Agriculture, Livestock and non-farm Enterprise Development (AGLED)

Services 2004

Energy, Environment, Climate Change & Carbon

Credits, 2007

Large Scale Financial Inclusion Services 2008

Vocational Training and Employability

2009


The BASIX Group

Financial Services Promotional Services

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Bhartiya Samruddhi Investments & Consulting Services Ltd.

Bhartiya Samruddhi Finance Limited Ltd

Krishna Bhima Samruddhi Local Area Bank

BASIX Sub-K i- Transaction Services Ltd

BASIX Krishi Samruddhi Ltd

B-ABLE - BASIX Academy for Building Lifelong Employability Ltd

BASIX Consulting and Training Services Ltd,

CTRAN Consulting Ltd

Indian Grameen ServicesThe Livelihood School


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Achievements: Achievements: As on Sep 30, 2010

• 18 states, 180 districts, 25000 villages/towns, 10,100 staff in India. Also present in PNG, Bhutan, East Timor

• Disbursed Rs 3500 crore plus since mid-1996, outstanding Rs 1800 cr ; On-time repayment rate 99%,

• Micro-credit 1.8 million borrowers, growing @ 75% pa

• Life, health, crop (weather index based), livestock and micro-assets insurance to 3.2 million customers

• Agricultural, livestock and non-farm enterprise development (AGLED) services to 800,000 fee paying customers.

• Institutional development to over 84,000 SHGs / producer groups – about a million members served

• Impact direct: livelihoods enhanced for over 1.8 million h/h

• Indirect Impact: microfinance reaches 75 million poor h/h


RoA Comparison

ROA 2006 2007 2008 2009 2010

Bandhan 1.02 8.76 5.05 8.66 3.52

BASIX 0.87 1.56 1.77 1.80 3.12

Share 2.25 1.18 1.10 5.53 5.50

SKS 2.83 0.76 1.99 3.68 4.96

Spandana 4.72 0.74 4.23 6.74 9.01

Asmitha 2.95 1.67 1.43 5.33 4.31

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ROE 2006 2007 2008 2009 2010

Bandhan 32 127 62 126 38

BASIX 3 9 14 16 23

Share 24 15 8 37 45

SKS 27 4 12 19 22

Spandana 80 22 53 49 56

Asmitha 51 32 18 56 40

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RoE Comparisons

* Outlook PROFIT, November 2010**MIX Market, January 2011


Thank You

www.basixindia.com

[email protected]

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Documents

Microcredit is Dead: Long Live Livelihood Finance