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Microfinance: A Step to Empower the Poor 3

…………………………………………………………………………………………………………………………......... The microfinance sector in India has played a key role in the development of the poor segment of the population deprived of finance from formal lending institutions. The Self Help Groups (SHGs) Bank Linkage Programme and microfinance institutes (MFIs), two major channels of microfinance distribution, have helped them rise from below poverty level. Increased number of SHGs and MFIs, and reduced rates of rural and urban poverty highlight the success story of the microfinance sector in India.

1. MICROFINANCE IN INDIA – THRIVING ON RURAL POTENTIAL

Microfinance in India has gained popularity over the years, especially among the low-income rural population. Around 69 per cent of the total 1.2 billioni people reside in rural or semi-urban areas of India, and about 30 per centii (approximately 360 million) live below the poverty line. It is estimated about 60 million households in the rural area and 15 million urban slum dwellers need microfinance. These households use approximately INR495 billioniii of credit. Scarcity of physical capital (low earnings and lack of easy access to formal lending institutions), human capital (education, skills and training) and social capital (democratic system and protection of human rights) remain key deterrents in the development of the poor segment of the population. SHGs and MFIs have been addressing the shortage of credit to poor and assisting in building capabilities by nurturing entrepreneurial talents of members.

2. CONCEPT OF SMALL CREDIT WITH BIGGER IMPACT Microfinance, the practice of providing small loans at high interest rates for a shorter duration without any collateral, benefits the low-income population (especially in rural India) who are deprived of bank credit. More than 75 per cent of SHGs and MFIs focus on women empowerment as they are more likely to reinvest income for the benefit of the entire family. The aim of microfinance is not just to facilitate credit to the poor, but also to serve as an economic development tool (bigger objective) by providing a wide range of financial services (such as credit, savings, insurance and remittance) and non-financial services (such as training and counselling) that empower the poor to work their way out of poverty. About 8.0 million SHGs are currently operating to serve over 103 million household members. According to the National Bank for Agriculture and Rural Development (NABARD), the number of SHGs rose from 500 in 1992 to 0.5 million in March 2002 and 8.0 million in March 2012. Loans outstanding against SHGs increased at a CAGR of 20.9 per cent to INR363.4 billion in the last four years (FY08–12). During the same period, loans against MFIs grew at a faster pace (CAGR of 42.9 percent to INR114.5 billion). Its share in total outstanding loans surged to 24.0 percent in FY12 from 13.9 per cent in FY08.

Microfinance: A Step to Empower the Poor 4

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Exhibit 1 Number of SHGs and MFIs in India

Source: NABARD, Aranca Research Note: Actual number of MFIs would be less than the figures shown as most MFIs avail loans from more than one bank; SHGs having savings with banks are represented here

Exhibit 2

Loans outstanding against SHGs and MFIs (in INR billion)

Source: NABARD, Aranca Research

3. NABARD PLAYS AN IMPORTANT ROLE IN MICROFINANCE

SECTOR GROWTH SHGs in rural India are initiated and well managed by NABARD. The bank has been working continuously towards motivating and encouraging the poor population to cultivate the habit of saving; providing training, finance and other assistance for self employment; and launching new programmes and policies benefiting poor. Under this model, women in rural areas are encouraged to form a group of about 10–15 members and contribute their savings periodically. Banks provide loan to these groups to engage themselves into income generating activities. Members meet to contribute more towards savings, repayment of loans

0

500

1,000

1,500

2,000

2,500

0

1

2

3

4

5

6

7

8

9

FY08 FY09 FY10 FY11 FY12

Banks - SHG (million) MFIs (RHS)

0

50

100

150

200

250

300

350

400

FY08 FY09 FY10 FY11 FY12

Banks - SHG MFIs

Microfinance: A Step to Empower the Poor 5

…………………………………………………………………………………………………………………………......... and disbursement of new loans. SHGs receive support from NGOs and government institutions such as NABARD and SIDBI.

Exhibit 3 State-wise no of SHGs

State No of SHGs

Per cent share State

No of SHGs

Per cent share

Andhra Pradesh 1,495,904 18.8 Haryana 44,184 0.5

Tamil Nadu 925,392 11.6 Punjab 37,343 0.4

Maharashtra 827,047 10.4 Tripura 34,021 0.4

West Bengal 685,448 8.6 Puducherry 17,913 0.2

Karnataka 628,643 7.9 Meghalaya 14,091 0.1

Kerala 615,714 7.7 Manipur 12,711 0.1

Odisha 540,029 6.8 Nagaland 10,711 0.1

Uttar Pradesh 471,184 5.9 Goa 8,414 0.1

Bihar 305,113 3.8 Arunachal Pradesh 8,363 0.1

Assam 276,565 3.5 Jammu & Kashmir 6,349 0.1

Rajasthan 251,654 3.2 A & N Islands 5,521 0.1

Gujarat 226,626 2.8 Sikkim 5,280 0.1

Madhya Pradesh 163,588 2.1 Mizoram 4,976 0.1

Chhattisgarh 129,854 1.6 New Delhi 3,536 0.0

Jharkhand 89,603 1.1 Chandigarh 619 0.0

Himachal Pradesh 65,641 0.8 Lakshadweep 171 0.0

Uttarakhand 48,141 0.6 Total 9,456,253 100

Source: NABARD, Aranca Research Note: SHGs having savings with banks are represented here

Southern region of India particularly states like Andhra Pradesh, Tamil Nadu, Karnataka, Kerala has higher penetration of SHGs as compared to other regions of India. Together, they account for more than 45 percent of total SHGs operating in India. In west region, Maharashtra is the largest accounting for 10.4% of SHGs. NABARD’s efforts to promote SHGs through creating awareness, promoting financial literacy and training programmes have benefitted southern and western parts of India. The bank has been very active in regularly organising training programmes to various stakeholders of the SHG Bank Linkage Programme. Stakeholders include bankers, NGOs, government officials, SHG members and trainers. NABARD invested about INR102.6 million in FY12 to conduct 5,048 training programmes, covering around 1.87 lakh official participants. These initiatives for capacity building resulted in an increase in the number of self-employed and SMEs which have contributed positively towards rural development. India witnessed a 29.8 per cent decline in poverty rate during 2009–

Microfinance: A Step to Empower the Poor 6

…………………………………………………………………………………………………………………………......... 10 from 37.2 per cent over 2004–05. Rural poverty fell 8 percentage points to 33.8 per cent and urban poverty 4.8 percentage points to 20.9 per cent.

4. CHANNELS OF MICROFINANCE AND GOVERNING BODIES

The Self-helped Groups Bank Linkage Programme (SBLP) and microfinance institutes (MFIs) are the two major channels of microfinance in India. SBLP, initiated by NABARD in 1992, seeks credit from Bank, for their group empowerment while MFIs avail credit from banks and other financial institutions to provide small credits to the low-income population.

Exhibit 4 Types of microfinance institutions by formation and regulating bodies

Type of MFI Number Regulatory bodies

Mutual Benefit MFIs

1 Co-operatives 3 State Co-operative Societies Act

2 Mutually aided co-operative societies 445 Mutually Aided Co-operative Societies Act

enacted by state governments

Companies

3 Non-banking financial

companies 24 Indian Companies Act, 1956 and The Reserve

Bank of India Act, 1934

4 Section 25 companies 9 Section 25 of the Indian Companies Act, 1956

NGO-MFIs

5 Societies 199 Societies Registration Act, 1860 or similar Provincial Acts

6 Trusts 106 Indian Trust Act, 1882

Total 786 Source: NABARD, Aranca Research Note: data is for 2008 In 2008, Company MFIs, Non-bank financial companies (NBFCs) and Section 25 companies (account for 4 per cent of total number of MFIs) contributed a major portion (about 67 per cent) to total loans outstanding, while mutual benefit MFIs and NGO-MFIs accounted for 7 per cent and 25 per cent, respectively.

Microfinance: A Step to Empower the Poor 7

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Exhibit 5 Top 10 MFIs by active borrowers

Name of MFI No of active borrowers (million)

In USD million Debt to

equity O/S

loans Equity Borrowings

SKS 4.26 328.1 85.4 200.8 2.75

Bandhan 3.62 733.3 137.6 661.5 5.06

Spandana 3.44 533.8 241.1 252.5 1.28

SHARE 2.16 414.8 140.6 256.6 1.9

Equitas 1.19 142.3 39.8 93.8 2.91

AML 1.10 235.8 78.7 151.3 1.96

SKDRDP 1.02 322 8.9 290.5 39.95

Ujjivan 0.82 138.3 47.7 121.3 2.66

Grama Vidiyal 0.82 102.2 17.7 65.5 4.45

BASIX 0.57 57.4 -73.4 134.0 NM Source: MIX Market, Aranca Research Note: data is for the year 2011

Exhibit 6 State-wise MFIs

State No of MFIs Per cent share

Andhra Pradesh 484 61.6

Tamil Nadu 101 12.8

Bihar 44 5.6

West Bengal 30 3.8

Orissa 28 3.6

Karnataka 20 2.5

Kerala 18 2.3

Rajasthan 18 2.3

Maharashtra 15 1.9

Madhya Pradesh 14 1.8

Gujarat 8 1.0

Uttar Pradesh 5 0.6

Jharkhand 1 0.1

Total 786 100.0

Source: NABARD, Aranca Research Note: data is for 2008

Microfinance: A Step to Empower the Poor 8

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5. RECENT GUIDELINES ISSUED BY RBI ARE ENCOURAGING FOR MICROFINANCE SECTOR

SBLP has been well managed by NABARD since 1992, while there was no single regulatory body to govern the operations of MFIs until 2011. However, the need for a single authority was felt when Andhra Pradesh, a microfinance hub of India, faced problems of multiple lending, over charging, and aggressive loan recovery methods by MFIs. To protect the sector, a microfinance bill was prepared by the Malegam Committee in 2011 to review and regulate the operations of NBFC-MFIs (accounting for more than 70 per cent of total MFI loans outstanding from banks). The bill brought NBFC-MFIs under the purview of the RBI. Some of the major issues that were addressed in the 2011 Bill were price monitoring, capital requirements and maximum borrowing limit. However, in August 2012, the RBI modified certain rules relating to the above parameters, looking at the current functioning of MFIs. One of the major changes was the relaxation of the interest rate pricing that was capped at 26 per cent. However, as per December 2011 Bill, the margin cap for large MFIs and small MFIs would remain at 10 per cent and 12 per cent, respectively. Allowing MFIs to charge more than 26 per cent, extend period of five years to provide for bad loans and other flexibilities highlight the fact that the RBI is very much in tune with the ground realities. Some of the major aspects in the latest guidelines are described in table below.

Microfinance: A Step to Empower the Poor 9

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Exhibit 7 RBI guidelines for NBFC-MFIs (August 2012)

Aspects RBI regulation

Pricing cap

MFIs can charge more than 26 per cent of interest; however, in a financial year, the interest rates charged cannot exceed borrowing cost and margin cap (12 per cent for small and 10 per cent for large MFIs), and the variance between the maximum and minimum interest charged on individual loans cannot exceed 4 per cent. This ensures MFIs are earning sufficient margins in the higher interest rate environment, while borrowers are benefitting from the lower interest rate environment.

Compliance for borrowers

Annual household income for eligible borrowers set at INR60,000 for rural and INR120,000 for urban; total indebtedness should not exceed INR50,000; SHG, JLG or an individual cannot borrow from more than two MFIs; self certification by borrowers; and MFI's registration with at least one credit information company to ensure no over lending or indebtedness

Qualifying assets

MFIs are required to maintain at least 85 per cent of their net asset as qualifying asset, and loans disbursed for income generation should not be less than 75 per cent of total loans extended. This ensures the assets are productive and contribute towards economic growth

Capital requirements

Existing NBFC -MFIs's Net Owned Funds (NOF) should be maintained at INR30 million by FY13 and INR50 million by FY14, while this limit is lower for the North Eastern region (INR10 million by FY12 and INR20 million by FY14)

Source: RBI, Aranca Research 6. STAND-OUT INITIATIVES AND GROWING ROLE OF PRIVATE

SECTOR

6.1 Use of IT for monitoring, increasing productivity and efficiency

NABARD has initiated pilot projects for the use of IT in SHGs in Tamil Nadu and Maharashtra. The bank has introduced mobile and tablet PC-based accounting system in about 100 SHGs that would enable them to keep their records and monitor group activities. Through mobile-based accounting application, SHGs in Tamil Nadu would be able to record all financial transaction in their local language electronically. This would allow other stakeholders, such as self help promoting institutions/banks/NABARD, to generate MIS reports through web access. Furthermore, records of Maharashtra-based SHGs would be maintained on tablets by field staff of NGOs. These performance records and accounts can be provided to SHGs on payment of nominal fee for their monitoring. The bank has provided training for the same. Use of IT in SHGs is likely to improve their efficiency as well as reduce the cost of operations.

Microfinance: A Step to Empower the Poor 10

…………………………………………………………………………………………………………………………......... 6.2 Internet-based funding model and low-cost loans

This new web-based model is gaining popularity slowly as it operates virtually and involves very low start-up cost. This has enabled micro-lenders to reduce their cost and pass on the benefit of low cost to borrowers. These lenders charge an interest rate of 10–15 per cent against traditional microfinance rates of 24–36 per cent. MicroGraam and Rang De present success stories of using Internet-based model to raise funds and promote microfinance. Another online model that raised up to USD260,000 though crowd-sourcing platform is Milaap. In July 2011, it received approval from the RBI to raise small funds from investors abroad. This platform enables anyone in the world to lend to the working poor in India to have access to facilities such as education, clean water and safe lighting. This crowd sourcing company disburses loan with a ticket size as low as INR1,000, with an aim to recover it within 12 to 18 months and use it again to finance fresh loans.

6.3 Provide a complete range of banking products

Since majority of the rural population lack the access to traditional bank, MFIs have the scope to increase their service from just distribution of loans. MFIs can expand their product range to that of a bank in financing and non-financing banking services segments and become a substitute of the formal bank. 6.4 Expanding reach to underpenetrated rural areas SHGs in India are heavily concentrated in the southern region (accounting for 77 per cent of total bank loans outstanding against SHGs), while the penetration remained very low in northern, north eastern, central and western regions (about

Web-based microfinance – a success story Rang De, India’s first web-based micro-lending organisation, was founded by Ramakrishna NK and Smita Ram in 2008. The organisation operates on a peer-to-peer model. Rang De raises capital online from individuals and accepts capital as little as INR100. A potential social investor can log on to its site, select borrower, interact with them and track the progress of their investments. This fundraising model has enabled the organisation to reduce the cost of capital to borrowers. Traditional MFIs charge about 30 per cent of interest; whereas Rang De has been able to disburse credit at an interest not exceeding 15.3 per cent. With the help of more than 4,495 investors, the organisation has raised more than INR113.8 million by 24 Dec, 2012. The credit has been distributed to more than 17,655 borrowers across India. The borrowers have repaid INR68.7 million and the repayment rate stands at 99.25 per cent. With 25 field partners, Rang De operates in 14 states in India.

Microfinance: A Step to Empower the Poor 11

…………………………………………………………………………………………………………………………......... 2–4 per cent). Microfinance Penetration Index (MPI) and Microfinance Poverty Penetration Index (MPPI) also indicate southern states (include Andhra Pradesh, Puducherry, Tamil Nadu and states closer to these such as Orissa) have high level of penetration compared to other regions in India. Lower MPPI in Bihar and Uttar Pradesh indicates ample scope of growing the reach of SBLP and MFIs to serve poor customers.

Exhibit 8 SHG’s outstanding loans- region wise FY12

Source: NABARD, Aranca Research

Exhibit 9 MPI and MPPIiv

State MPI State MPPI

Top Five

Manipur 4.23 Manipur 7.26

Andhra Pradesh 4.2 Andhra Pradesh 7.03

Puducherry 2.57 Pondicherry 3.36

Tamil Nadu 2.00 Tamil Nadu 2.47

Orissa 1.63 Sikkim 2.12

Bottom Five

Jammu & Kashmir 0.03 Mizoram 0.11

Mizoram 0.05 Jammu & Kashmir 0.15

New Delhi 0.13 New Delhi 0.24

Punjab 0.18 Bihar 0.3

Meghalaya 0.24 Uttar Pradesh 0.31

Source: Microfinance India Status of the Sector Report 2011 by SAGE Publications

2% 3%

10%

4%

4%

77%

Northern

North Eastern

Eastern

Central

Western

Southern

Microfinance: A Step to Empower the Poor 12

…………………………………………………………………………………………………………………………......... Continuous efforts from NABARD, other government bodies, MFIs and NGOs towards spreading the awareness about microfinance, penetrating untapped regions, increasing financial literacy through training programmes are likely to help in upliftment of poor population; while a new microfinance bill and timely intervention by the central bank is a strong step towards more robust system. Some of the issues, such as multiple lending, over-indebtedness and transparent pricing, have been addressed in the recent guideline issued by the RBI in August 2012. Welcoming investors from abroad through automatic route of external commercial borrowings allow permitted end-users to borrow up to USD10 million or equivalent amount in a financial year. This is likely to address the issue of insufficient funds to a certain extent. Furthermore, increasing initiatives by government organisations, such as NABARD, in training, developing human capital, creating awareness and financial literacy are expected to provide a boost to the sector.

Notes:

i Data taken from Census India for 2011 http://censusindia.gov.in/2011-prov-results/paper2/data_files/india/Rural_Urban_2011.pdf ii World bank data for FY10 taken from http://www.worldbank.org/en/country/india/overview iii Data from Equitas Microfinance Company http://www.equitas.in/Abt_CompanyProfile.html iv MPI and MPPI data taken from Microfinance India State of the sector report 2011. The report explains the method of computing these indices. The number of credit clients of MFIs and members of SHGs with outstanding loans to banks were computed. Each states share to the country’s total microfinance clients was also calculated. The intensity of MPI was computed by dividing the share of the state in microfinance clients by the share of the population. Intensity of MPPI was derived by dividing the share of the state in microfinance clients by the share of the state in the population of poor. Since microfinance clients are in the numerator, a value of more than 1 indicates that clients acquired were more than proportional to the population. Higher the score (above 1), better the performance of microfinance in the state. Lower the core (below 1, which is the par value), poorer the performance.

Microfinance: A Step to Empower the Poor 13

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