Microfinance Cse Iitb

7/29/2019 Microfinance Cse Iitb

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Micro Finance in Indiaoverview, challenges, and the role of

technology

By Annie Duflo

Centre for Micro Finance ResearchOctober 28, 2005


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Outline of presentation

What is microfinance?

Providing financial services to the poor:

challenges Providing financial services to the poor in

India: Overview

Microfinance: Challenges ahead and potentialsolutions/initiatives

The Centre for Micro Finance Research


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Microfinance: what is it?


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What are the words that come to your mind

when you hear the word microfinance?


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R4

R3

R1 /R2

Microfinance =

provision of financialservices to the poor

48%

15%

37%


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Micro-credit Group lending

Social/charitable

activity

Range of financialservices

Group and individual

lending

Profitable activity

What it often is What it really should be


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challenges


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challenges Risk management challenges due

to information asymmetry

problems

Accessibility (geographic

accessibility and easiness to deal

with)

No collateral, Low value and cash

intensive nature of the business

Staff training and motivation

High transaction

costs


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Information asymmetry

Decision to take loan Loan usage loan repayment

Adverse

selectionMoral hazard


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Adverse selection: incomplete information

problem (before the loan)Dont know

Clients typeInterest rate

reflects proba of default

Safer clients drop outNeed to increase interest

rate

Providing credit can

become

impossible


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Moral hazard: hidden action problem

(after loan)

Can not observe what client is doing

Bad loan usage

Strategic unwillingness

To repay


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Clients profile

75% population lives in rural areas:

geographical access difficult

Informal activities: need access at flexibletimes

Illiteracy: difficult to deal with traditional

services

Low value of transactions

Lack of collateral


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Staff

Lack of trained staff

Lack of motivated staff

Difficult to incentives staff


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Delivering financial services to the poor inIndia: an overview


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occupied IndiaDeccan, late 19th Century:

peasant riots on account of coercive

alienation of land by moneylenders.

Organization of cooperative societiesas alternative institutions for providingcrdit by british government


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Timeline 1950 & 1969: emphasis on the promoting of

cooperatives.

1969: nationalization of the major commercial banks:

beginning of commercial bank branch expansion in

the rural and semi-urban areas.

1976: Regional Rural Banks (RRB), low cost

institutions mandated to reach the poorest in credit-

deficient areas

During this period, intervention of the RBI (Reserve

Bank of India) was essential: special credit

programmes for channeling subsidized credit to the

rural sector (concept of priority sector)


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Financial reforms for RFIs

Enhance the areas of commercial fredon

Increase their outreach to the poor

Stimulate additional flows to the sector. Liberalising interest rates for cooperatives and RRBs,

Relaxing controls on where, for what purpose and for

whom RFIs could lend, reworking the sub-heads

under the priority sector, Introducing prudential norms

Restructuring and recapitalising of RRBs.


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Results

Access in terms of rural branches increasedfrom 1,833 in 1969 to around 32,538 atpresent: 49% of all scheduled commercial

bank branches are rural The population per rural branch declined from

2,01,854 in 1969 to around 16,000 at present.

The proportion of borrowings of rural

households from institutional sourcesincreased from 7 per cent in 1951 to morethan 60 per cent at present.


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Results (contd)

31% (131.1 million) of the total deposit

accounts are in rural India

43%(22.4 million) of total creditaccounts are in rural India

Positive impact on the poor (Rohini

Pande/Burgess paper)


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HoweverSuccess was not as high as

hoped Defects in policy design,

Infirmities in implementation

Inability of the government of the day to desist fromresorting to measures such as loan waivers.

High defaults

The banking system - was not able to internalise

lending to the poor as a viable activity but only as asocial obligation

More and more difficult for commercial bankers to

accept that lending to the poor could be a viable

activity.


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Micro Finance: apparition

The financial sector reforms motivated policyplanners to search for products and strategies fordelivering financial services to the poormicroFinance - in a sustainable manner consistentwith high repayment rates.

NABARD: empirical observation that had beencatalysed by NGOs that poors gather in informalgroups

Create a formal interface of these informalarrangements of the poor with the banking system.

Bank-SHG Linkage Programme.

Recent emergence of MFIs: professionally runinstitutions specialiazed in delivering credit with lowcost staff and local knowledge


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Despite all these effortslarge gaps

remain Against rural population of 741.0 million, 500 million

people un-served

Population per branch: 22,793

Penetration of savings accounts is below 18% As against 104% in urban and semi-urban areas

Number of villages per branch: 19

High dependence on informal sources

36% of rural credit from informal sources Dependence even higher for lower income households: 78%


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Microfinance ahead: challenges


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Scaling up: challenges


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Financial Intermediation

Model

MFI JLG GroupBank

Loanat a9%

Loan at

20%

Scaling up existing MFIs: challenges


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Limitations to growth of MFIs:

Lack of adequate quantities of risk capital

Lack of long-term finance to pay for creation

of the necessary infrastructure and pre-operative expense

Lack of well trained staff in adequate

numbers at all levels

technology


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Lack of adequate capital: the ICICI Bank

responseSearched for a model which:

Separates risk of MFI from risk inherent in the

mf portfolio Provides a mechanisms to banks to

continuously incentivise partners

Inability of MFIs to provide risk capital in large

quantum, which limited advances from banks


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The ICICI Bank Partnership Model

MFI JLG GroupBank

Servicing

fees of

11%

Loan at

9%

Interest

charged:20%

FLDG of

10%


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Long-term finance: the ICICI bank

response

There is an underlying business model in the

MFIs expansion: no reason why it cannot be

funded by commercial debt

ICICI Bank is offereing to its MFI partners

long-term finance of a tenure of 3-5 years


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Lack of well-trained staff: ICICI Bank

response

Initiated partnerships with training institutions

(Indian Grameen Services, Care India)

Establish a Financial Services LearningSchool in collaboration with MicroSave India

Provide high level training in banking and

finance to MFI practitioners in collaboration

with IFMR (Institute for FinancialManagement Research)


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Technology: ICICI Bank response

Creation of rural connectivity in partnership

with telecom companies and internet service

providers Assistance to emerging MFIs to adopt

scalable MIS solutions

Support to research and development on

technological devices that can reducetransaction costs

Low cost ATMs, low-cost computing devices,

mobile and internet-based transaction platforms


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Support new MFIs: The Venture Capitalist

model

VCs specifically focused on the micro-finance space:

Lok Capital, Aavishkar and Bellwether.

Bellwether

three equity commitments for start-ups

increased the size of fund from 10mn USD to 25mn USD.

ICICI Bank solution:

Each MFI will need to reach a minimal CRISIL or an MCRIL

operational sustainability rating Then the entrepreneur buys out the stake of the VC and

ICICI Bank gives an option to the entrepreneur to take a

long-term debt to finance this buy out.


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Scaling-up: what form of support is

needed?

Interest rates should reflect the costs of

transactions/probability of default and be

sustainable Focus on diminishing the cost of these

transactions and expand access

Equity support, Remove

caps and floors, create facilitative infrastructure

to reduce transaction costs


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Alternate channels

Agent model Model of LIC

Challenge: control fraud

Internet connectivity BSNL: if wireless system installed ate the existing

connected rural exchanges: 80-85% of villagescould be connected

Variety of devices that can work with internetkiosks: biometric low-cost ATMs

Makes controlling fraud easier


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Internet Kiosks

Connectivity

STD/PCO:

Enabling voice

communication

Printer& OtherAccessories :

Enabling job work

Kiosk Operator:Entrepreneur

Provides commercial

services

Internet Kios k

Multimedia

PC with Powerbackup


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Internet kiosks

ITC, nLogue, Drishtee: more than 6000

internet kiosks using Wireless in Local Loop,

VSAT terminals ICICI partnered with some of these

organizations

Finance individual entrepreneurs to purchase

operating license and equipment Break even within 1st year

Suite of financial services

2000 kiosks


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Internet kiosks: remaining gaps

Providing constant connectivity expensive

Finding motivated entrepreneurs difficult

Break even has been delayed for variousreasons (required back-end systems to

service clients difficult tp find etc.)


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Maximize impact of microfinance:challenges


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Maximize impact

VulnerabilityNeed for

More than credit

Differences among

customers

Need for

customized

products

Understand what programmes work the best

and for whom


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Maximize impact

Employment

scarcity

Other constraints

Finance other credit

constraint segments

MFI-sectoral experts

Partnerships

Local Financial Institution: serving all credit constraint-

Segments in 2-3 districts


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Range of Microfinancial services:

Individual lending

Information problem

No unique ID No credit info sharing

Need technology!

Insurance

Adverse selection, moral hazard, fraud


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Health insurance

Reimbursement model

Cashless model How to identify illness?

How to avoid fraud?

Livestock insurance

Recognize cause of death

Identify animal (role of technology)


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Weather insurance Index-based: index created by assigning weights

to critical time periods

Past weather data mapped to this index to arriveat normal treshhold index

If deviation: compensation

Commodity price derivatives

NCDEX: offers price discovery services: offerfarmers instruments to hedge pre and post harvestrisks

Makes using commodity as collateral possible


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Savings and investments products

Could be offered through Money Market Mutual

Fund: MFI acts as agent

Remittances

10 million seasonal and circular migrants (National

Commission on Rural Labour)

Adhikar, Orissa ICICI: remittance product through internet kiosks


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Key enablers needed for maximize impact

and scaling up

Credit Bureau

Unique identifier

Technology platform Rural infrastructure

Change in regulations (interest rates et.)

Training institutions Research


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CMFR:The Centre for Micro Finance Research


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Mission

The Centre for Micro Finance Research will aim tohelp improve the life of the poor by:

Systematically researching the links between access

to financial services and the participation of the poorin the larger economy

Participating in maximizing access to financialservices and its impact for poor through: Research on micro finance and livelihood financing

Research-based policy advocacy

High level training for practitioners and institutions

Strategy building for Micro Finance Institutions


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Strategy

ResearchInfluence

practiceAdvocacy

Strategy

building

Training


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CMFR: Research Areas


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Impact of Microfinance

Access to

Financial servicesImpact?

Advocacy based on rigorous results

?


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Constraints to Productivity

ImpactAccess to

Financial services

Build relevant partnerships

Provide useful products through credit


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Economics of Micro-Enterprise

Scale, Returns, Constraints of micro-

enterprise

Market linkages Documentation of best practices

Help increase productivity of micro-enterprise


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Experimentation on Product Design

selection monitoring Enforcement

Individual/groupliability

Self/MFI selection

Guarantors

Collaterals

Interest rate

Repaymentschedule

Communication

strategies

Loan size

Interest rate

Design the most cost-effective products

Within groupmonitoring

Staff supervision


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Behavior and Psychology of

Borrowers

How do households face shocks and risk?

Do households save and how?

What drives savings and credit behavior?

Why do people default?

Why dont households adopt the most profitable

activities?

Design the most effective communication strategies


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Cost and profitability of SHGs/MFIs

BankTransaction

?Micro-loan9% 25%

Return?

How to reduce transaction costs?

Compare costs of SHG-Bank linkage and MFI model

Show investors risk return performance of microloans


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Research: Panel Databases

Construction of a panel database: repeated

observations of same households

Study vulnerability, consumption patterns over

time

Have a panel database for on-going research

Construction of a cross-sectional survey Document access to financial services over time


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Research: Courses

Economics of Micro Finance Prof. Adel Varghese, TAMU

Economic theory of microfinance Evaluating Social Programmes

Professors from the Poverty Action Lab/MIT:

Esther Duflo (MIT), Abhijit Banerjee (MIT), Sendhil

Mullainathan (Harvard), Michael Kremer (Harvard) Teach practitioners and researchers how to

identify programs impacts without bias


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MFI Strategy Unit at CMFR


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Strategy Building

MFIsSectoral

Experts

Pilots

Scale-up LFI


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Documents

Microfinance Cse Iitb