Poster Htf

Here are some more information for Poster Htf:

PENNYWISE AND PLAYING SAFE

The microfinance sector is clearly one of the fastest growing segments of the Indian financial sector, and also one where such growth is sustainable for a very long period of time. In spite of a large banking sector, about 40% of the Indian population does not have bank accounts. Given that over 75% of the Indian population still lives below $2 a day, and a vast majority in rural areas, microfinance - the provision of thrift savings, credit and other financial products and services at a very scale to the poor to enable them to raise their income and improve living standards - is key to financial inclusion in India. Traditionally, micro-credit in India has been the domain of village money-lenders, generally at exploitative interest rates that impoverished borrowers.

While special emphasis oh rural and small loans have existed in India at least since the 1960s and India's apex specialized rural credit agency, the National Bank for Agricultural and Rural Development (NABARD) was established in 1982, microfinance in India has witnessed a dramatic increase in recent years with the involvement a large number of private players in addition to the government. Providers of microfinance in India today include specialized country-level institutions like NABARD, the Small Industrial Development Bank of India (SIDBI) and that Rashtriya Manila Kosh (RMK); commercial banks - both private and state-owned; regional rural banks; cooperative banks as well as non-banking financial companies (NBFCs). While non-profits (NGOs) have often played a key role in the formation of microfinance institutions (MFIs), the contribution of governmental thrust in scaling microfinance (largely through the self-help group model) has, at the end of the day, reached a far higher number of people. Of late, with the realization of the profit opportunities in the sectors and the spectacular growth in the past half decade, microfinance in India is beginning to attract for-profit funding from commercial banks as well as from venture capital firms, both domestic and foreign.

Though microfinance in India, as in most other places, is generally lauded as the success of private enterprise, the role of the government in scaling and mainstreaming microfinance cannot be overlooked in India, particularly in the SHG Bank Linkage Program. In 2000, two-thirds of SHGs in India were promoted by NGOs. Now around half of them are promoted by government, less then third are promoted by NGOs and rest by banks. SEWA, one of the pioneers of microfinance in India took 35 years to reach membership of 0.8 million women, but in contrast the government of the Southern state of Andhra Pradesh took 15 years to mobilize 8 million women. The Swarnajayanti Gram Swarojgar Yojana (SGSY), perhaps the biggest government program promoting SHGs anywhere in the world was launched in 1997, and generated over 0.34 million SHG loan applications in 2006-07 alone.

Outreach and recent growth

The Self-Help Group (SHG) model of group-lending and linking of such groups (almost always of women) to banks has been the predominant model of microfinance in India connecting about 14 million poor households to banks in March 2006 and providing indirect banking access to an equal number. Loans from micro-financial institutions (MFIs) have reached about 7.3 million households among which about 45% are poor. Together these two models appear to have touched about a quarter of the Indian poor.

The SHG Bank Linkage Program (SBLP) - dominant microfinance model in India - had, in March 2006, an average loan size of Rs 2,684 ($67.1) for fresh loans and Rs 4,497 ($112.42) for repeat loans per group member with average group size of 14 members. In the five years from 2001 to 2006 outreach and loan volume in this model had witnessed close to nine-fold increases. While the quantity of bank loan disbursed shot up from Rs 48 crores ($ 120.25 million) to Rs 4, 499 crores ($ 1.12 billion), outreach expanded from 0.26 million to 2.2 million SHGs, making it the largest such program in the world. During the period, average loan size almost doubled from Rs 19,379 ($ 484.5) per SHG to Rs 37, 574 ($ 939.4) per SHG in 2006, the average size of repeat loans grew almost three-fold from Rs 22,215 ($555.4) in 2001 to Rs 62,960 ($ 1,574) in 2006.

The alternative model of microfinance institutions (MFIs) has produced the success stories and poster organizations of Indian microfinance. MFIs are of diverse legal forms and it is difficult to estimate their exact number. Sa-dhan, an association of MFIs in India has 162 members with outstanding loan portfolio of Rs 1600 crores ($ 400 million) in March 2006. While the number of MFIs in India is probably well in excess of 800, top 20 MFIs in India account for about 95% of their aggregate loan portfolio.

Microfinance in India also exhibits tremendous regional disparities. It is fair to say that microfinance in India is largely a "southern" affair In 2005 about 83% of the households reached by microfinance were in the Southern states. Eastern India came next with 13% of the households while the West accounted for less than 1%. While conscious efforts are afoot to rectify this regional bias, it is likely to take a while before the regional distribution of microfinance approaches uniformity.

In terms of the products and services, apart from micro loans, the microfinance
sector in India focuses on micro-savings and financial literacy among the poor -
developing the habit and discipline of saving - and, more recently have begun, in a
relatively small way, to introduce micro-insurance. Individual and group level insurance is now being offered, in limited areas of both life and non-life types. A study on micro insurance products by ILO in 2003-04, identified 83 insurance products provided by insurance companies; half of them were life products. Out of those 24 were addressed to individuals and rest to the groups. Life Insurance Corporation (LIC) of India, (a public sector insurance company) provides both individual and group insurance. Various private sector insurance companies also provide these kinds of insurance products. In 2002, the Indian microfinance institution BASIX and A VIVA jointly designed a group insurance product to provide life insurance to all BASIX credit customers. Other than life risk, rural
household faces health risk, risk to agricultural activity, risk to live-stock, risk to assets used in non farm activities. Crop insurance and Life stock insurance are two common non-life insurance products offered by General Insurance Corporation (GIC) of India (public sector insurance company). But the delivery of the above products has been restricted to beneficiaries of various government sponsored schemes and there has been little active participation by insurers to deliver these products on a larger scale. The situation has improved somewhat after the opening of the insurance sector to private sector companies. For instance, in 2003, BASIX and ICICI Lombard introduced a rainfall insurance product, which was rolled over to six states by the year 2005. Finally, transferring money, particularly for migrant workers, is another area where micro-finance institutions are making an entry.

The performance of the larger MFIs in India

Table 1.1: Performance of MFIs in India

(Top ten MFIs on the basis of Total Assets)

Name of MFI

Total Assets (Mn. US $)

Return on Assets

Return on Equity

Profit Margin

Cost per Borrower

Avg. Loan Balance Per Borrower (US$)

Spandana

101.49

0.74%

22.00%

8.89%

6.0%

92

SHARE

101.33

1.22%

15.31%

9.16%

12.0%

111

SKS

78.78

1.75%

9.22%

13.55%

17.0%

123

MFI

54.47

4.35%

78.00%

60.14%

4.0%

123

AML

52.36

1.73%

33.27%

14.16%

11.0%

109

BASIX

40.89

1.42%

8.14%

11.41%

29.0%

161

Bandhan

31.72

9.07%

131.21%

34.04%

6.0%

67

KAS

28.90

2.18%

173.04%

21.75%

4.0%

70

GV

23.42

0.78%

17.02%

3.76%

16.0%

102

BISWA

21.77

2.36%

29.92%

20.97%

6.0%

108

Source: www mixmarket.org

Table 1.1 provides financial performance indicators of the leading microfinance institutions in India. The weighted average ROA for these MFIs is 2.1%'with considerable variability. The range is from a. low of 0.74% to a high of over 9%. The ROEs are extremely variable as well, ranging from slightly over 8% to over 173%, with a weighted average of 25.6%. The as set-weighted average loan balance is slightly over $ 108 with profit margins ranging from below 4% to above 60%. Clearly even among these largest players, the level of variability makes it difficult to generalize performance. However, it also shows that done properly, a microfinance institution can be a profitable enterprise.

It is possible that higher profitability may come at the price of lower outreach and that MFIs experience a "mission drift". While data on the poverty level of clients is not uniformly available, all of these MFIs, with the exception of BASIX have over 98% of their lending to women borrowers. Given the negative correlation between the average loan size and the ROA and ROE figures, it may not be such a major concern.

A study by Sa-dhan in 2005 (using a sample of 74 MFIs) reflects that these MFIs performed well in terms of sustainability, asset quality, and efficiency. Evidence found that, large MFIs were the efficient users of funds, extending 81 % of their total assets as loans, while this figure is 75 % for medium and small MFIs.

A report by MIX Markets (MIX (2006)) highlighted the inverse relation ship between growth and size with young MFIs growing faster than the mature MFIs. The report shows that medium MFIs are sustainable and have positive returns on assets and equity. It also shows that the small MFIs are more efficient, with lower unit cost ratios comparing to medium sized MFIs (Table 1.2).

Table 1.2: Financial Performance of MFIs classified by client out reach and Loan Portfolio

Sustainability

Asset Quality

Efficiency

Categories

No. of MFIs

OSS

PAR

CAR

OCR

TCR

Client per credit officer

MFIs categorized by credit client outreach

Small (<10,000)

44

73.6

4.3

92.2

15

23.5

485

Medium (10,000- 50,000)

23

84.2

4.2

93.8

20.4

30.5

438

Large (>50,000)

7

123.3

1.5

99.3

14.2

23.7

372

Aggregate

74

110.3

2.2

97.7

15.4

25

405

MFIs categorized by loan portfolio

Small (< crore)

53

66.6

3.6

93.3

12.4

21.2

561

Medium (5-20 crore)

14

90

4.9

94.3

25.9

36.2

298

Large (>20 crore)

7

125.8

1.3

99.2

13

22.3

389

Aggregate

74

110.3

2.2

97.7

15.4

25

405

Sa-dhan recommended standards

100%

<10%

>90%

<20%

<30%

Between 250 and 350

Source : Prabhu Ghate (2006)

OSS: Operational Self Sufficiency (defined as Operating Income from Loans and Investments / operating Cost + Loan loss provision + Financing cost) ; PAR : Portfolio at risk (defined as unpaid principal Balance of Loans overdue by > 60 days ) ; CRR : Current Repayment rate (Principal amount collected – Prepayment / Principal due) ; OCR : Operating Cost Ratio (Total Operating Cost / Average Outstanding Portfolio) ; TCR Total Cost ratio (Total Costs / Average Outstanding Portfolio)

The MIX report on MFIs in South Asia, points out that MFIs in India are unique in leveraging the borrowed funds. The average capital asset ratio in India is 11%, which is half of the average of South Asia; Indian MFIs share the feature of providing loans from voluntary deposits, with Bangladesh., Around 8.4% of total loans funded from voluntary deposits, hence provide another financial service 'Saving' along with credit. Like Bangladesh, staff costs in the Indian microfinance sector are also one of the lowest in the world.

In terms of interest charged, Indian MFIs are among the highest in the South Asia region, which, however, has one of the lowest averages in the world. Thus by international standards, interest rates in microfinance in India, are pretty low. Nevertheless, because of cases of multiple farmer suicides in the Indian state of Andhra Pradesh, reportedly owing to extreme indebtedness, MFIs have come under government pressure to reduce interest rates. Table 1.3 provides the break-down of the components of interest costs in Indian microfinance.

Table 1.3: Interest rate Schedule for MFIs

Item of Cost

Basis of Cost

Percentage

Cost of Funds

SBI Prime Lending Rate

9%

Cost of delivery of Credit

Money order charges by Government Post Office

5%

Cost of Collection of repayment

Money order charges by Government Post Office

5%

Cost of provisioning of bad debts

As per RBI norms, based on extent of bad debts

1-3%

Profit margin

Minimum required to maintain capital adequacy as per RBI norms

1-2%

Total

-

21-24%

Source : Prabhu Ghate (2006)

Financing of MFIs in India

Commercial Banks

The growth of MFIs in the recent past has attracted most of the private sector banks. In the 1990's most of the MFIs lending comes from FWWB and SIDBI. Earlier banks used to lend at the level of priority sector lending obligations, but now they have found lending to MFIs being profitable, with almost perfect repayment rates. For the last three years, commercial bank lending almost doubled in every year. (Table 1.4)

Table 1.4: Commercial Banks Outstanding to MFIs

(As of March 2006)

Bank

No. of MFIs Supported

Outstanding (in Rs Crores)

ICICI Bank

100

2350

HDFC Bank

N/A

250

UTI Bank

40

103

ABN AMRO Bank

19

87

ING Vysya Bank

19

61

Standard Chartered Bank

12

50

HSBC

8

15

Rishikulya grameen Bank, Ganjam

3

6

State Bank of India

1

5

UCO Bank

4

2

United Bank of India

1

2

Indian Bank

2

0.4

Source : Prabhu Ghate (2006)

Shows outstanding figures of responding banks at the end of 2006. Banks provide both term loans and cash credit. The rate of interest charged range from 8.5 to 11% for tenor ranging from 3 months to 5 years. For MFIs lacking track record, personal guarantees are also taken for security. As Table 1.4 shows, ICICI bank (the largest private bank and second largest bank in India) has the largest outstanding credit accounting for over 80% of the total commercial bank lending to MFIs. About 60% of this lending is based on the "partnership model" where MFIs function as social intermediary providing loan origination,, monitoring and collection services, for a fee. But the MFI partner is expected to share the risk of default up to some specified level. Another way of lending adopted by ICICI is that of portfolio buy-out. Under deals with certain MFIs, the bank has bought out their portfolio, for amounts on which MFIs are charged 9 %, Apart from lending, ICICI bank has taken the initiative of using technology, like low cost ATMs, mobile phone banking, internet services and others that help automate cash transactions in the field.

In January 2006, the Reserve Bank of India (RBI) specified guidelines for inclusion of certain agencies along with MFIs as intermediaries. The intermediaries were supposed to work on the basis of two models: the Business Facilitator Model (BFM) and the Business Correspondent Model (BCM). Under the BFM; NGOs, Cooperatives, Post Offices, Insurance agents and community based organizations work as intermediaries. These intermediaries would perform the "last mile" services - activities like, identification of borrowers, creating awareness about savings, processing and submission of loan applications and follow up for recoveries. While under the BCM model, intermediaries include NGOs and MFIs registered under the Trusts Act, not-for-profit companies ("Section 25 companies" in India) and Post Offices. In addition to BFM activities, the intermediaries perform the following additional activities: Disbursal of small value credit, recovery of principal, collection of interest, Sale of micro insurance and mutual fund products. The banks may pay reasonable commissions or fees to the intermediaries for these services.

Shortage of MFIs with requisite capacity and regulatory anomalies, among other things, constrain lending to MFIs by commercial banks. The probation on banks from charging more than PLR (of 11-13 %) on loans less than Rs 2 lakh ($ 5,000) and charges and commissions (over the PLR ) on loans less than Rs 25,000 ($ 625) increases the cost of funds for banks and made the BC model unworkable.

Venture Capital Funds

More recently, venture capital funds (VCFs) — both Indian and off-shore - are
entering the microfinance sector in India. (Table1.5)

Table 1.5 VCFs Investing in India

(Top ten funds on the basis of there Total Investments in MFIs)

Fund Name

Country to Incorporation

Funds Assets Allocated to MF Investments
(Mn. USS)

Funds Assets
(Mn. USS)

# of Active MF Investments

Project new Funds allocated to MF Investments
(Mn. USS)

Oikocredit

Netherlands, The

198.22

455.79

306

131.67

Dexia Microcredit Fund

Luxembourg

107.99

161.84

105

20.00

Respons Ability Fund

Luxembourg

89.59

96.15

111

N/A

Gray Ghost

United States

75.00

75.00

16

N/A

DOEN

Netherlands, The

51.19

79.15

15

6.99

HTF

Netherlands, The

37.17

39.97

37

3.96

CORDAID

Netherlands, The

34.64

63.47

90

9.47

SNS Institutional Microfinance Fund

Netherlands, The

30.01

170.00

13

140.00

Oxfam Novib Fund

Netherlands, The

28.13

28.13

77

N/A

Micro Vest 1

United States

22.57

24.23

25

7.50

Source : www.mixmarket.org.

Shows the top ten VCFs investing in India on the basis of their total MFI investment worldwide. These VCFs have helped reduce the problems faced by start-ups and emerging MFIs. According to an estimate by M-CR1L (2006), the current equity deficit- of sample MFIs is.Rs 23 crores ($ 5.75 million) and their total equity fund requirement is expected to be Rs 1,100 crores ($ 275 million) by 2010.

VCF entry into the microfinance sector in India is a recent phenomenon. Till Bellwether registered in India in 2005^ SIDBI Foundation for Micro Credit (SFMC) was the sole (and far from effective) major provider of equity capital to the sector. In the 2005-2006 budget, the size of NABARD's MFDEF (Microfinance Development & Equity Fund) was doubled from Rs 100 crores ($ 25 million) to Rs 200 crores ($ 50 million).

The instruments preferred by VCFs have included both loans and equity and can broadly be classified (using Bellwether's segmentation) as the following - Tier I: Equity investment in start-ups and big established MFIs; Tier II: Convertible debt provided to high potential NGOs-MFIs; Tier III: Debt to NGOs. The involvement of the famous venture capitalist Vinod Khosla has also generated considerable exposure to the sector.

But the existing foreign investment regulation for NBFCs, not specific to microfinance, creates a hurdle in the way of VCF, financing of MFIs, since MFIs do not always have equity requirement equal to minimum capital required for foreign investment (Table 1.6).

Table 1.6: Minimum capitalization requirement for foreign

equity investment in NBFCs

Percent Ownership

Minimum Capital requirement

Other Stipulations

0-51%

$500,00

Entire amount must be contributed up front

51-75%

$5,000,000

Entire amount must be contributed up front

76 – 100%

$50,000,00

$7,5 million must be contributed up front. The balance must be provided within 24 months.

Source : Prabhu Ghate (2006)

The regulatory environment

It is fair to say that microfinance in India has evolved so far largely in (and arguably because of) an absence of sector-specific regulations. While each player, according to its institutional status, was regulated by its respective apex body (frequently the central bank, the Reserve Bank of India) very little regulation specifically targeted at microfinance was in effect. That is likely to change soon with the introduction of a microfinance bill, currently in the Indian Parliament.

The objective of the Microfinance Regulation Bill is to register and regulate the trusts of registered societies promoting and helping SHGs. The bill has two broad objectives: (a) to promote and regulate the micro finance sector and (b) to permit Micro Financial Organizations (MFQs) to collect deposits from 'eligible clients’. The bill defines an MFO as any organization that provides micro finance services and includes societies, trusts, and co-operative societies. The definition excludes SHG and groups of SHGs. The financial assistance to 'eligible client' by these MFOs cannot exceed (a) Rs 50,000 ($ 1,250) in aggregate per individual for small and tiny enterprise, agriculture, and allied activities or (b) Rs 1.5 lakh ($ 3,750) in aggregate per individual for housing purposes.

The bill seeks to bring the entire microfinance sector under the surveillance of The National Bank for Agricultural and Rural Development (NABARD). It will be NABARD's role to promote and ensure the orderly growth of micro financial services by formulating policies for transparency, facilitating the development of rating norms and by specifying accounting norms and auditing norms. To offer thrift (savings) services to eligible clients, an MFO will need to obtain a certificate of registration from NABARD. Every MFO has to create a reserve fund by transferring a minimum of 15% of its net profit or surplus realized out of thrift services and micro finance services. NABARD may direct that this fund be invested in specified securities.

Also, NABARD shall constitute a Micro Finance Development and Equity Fund to be utilized for the development of the micro finance sector. The Fund would be managed by the Board of Directors of NABARD and would be used to provide any financial assistance to an MFO, invest in equity of an MFO, and meet any other expenses for the promotion of the micro finance sector.

The proposed bill seeks to regulate the trusts and cooperative societies promoting and helping SHGs, not SHGs themselves. However, SHGs are also cooperatives organized to provide certain services to its members more economically. These SHGs can not register themselves as cooperatives because according to state government and RBI, there can be only one cooperative credit society in a village. Since these SHGs are not legal entities, so they can not put money in bank in the name of SHG, but in the name one or two members creating room for fraud. The Unsettled issues about the bill includes: (a) whether MFOs are the appropriate vehicle to address credit needs of the poor; (b) whether NABARD is the appropriate body to regulate the sector, given that it itself is a player in the microfinance area; and (c) whether there are adequate safeguards to protect depositors' funds.

Clearly not everyone is happy with the bill. What shape it will take by the time it becomes law and how that law will impact the reach and effectiveness of microfinance in India, of course, remains to be seen.

About the Author

Irfana Naim
Asst Manager – Corporate Travel
Thomas Cook India Ltd
Email: irfana_sharief@rediffmail.com

Thanks for visiting!