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Microfinance its Opportunities and Limitations
Nishant Bali IBS Ahemedabad
Ø Scenario of Micro Finance in India. Ø Micro-Credits model. Ø Business model of Grameen Bank Ø Self Help Groups (SHG’s). Ø Difference between JLGs and SHGs Ø NABARD initiatives in Micro finance. Ø Business Model of SAKHI. Ø Credit institutions as a Political tool: Debt relief in India. Ø MFI’s being criticized because of high interest rates. Ø SWOT Analysis of Micro Finance Ø Interview of End s Ø Future of Micro Finance Ø Learning from the Project
Scenario of Micro Finance in India Ø India’s population is more than 1000 million, around 350 million, are living below the poverty.
Ø Only 20% access loan from the formal sources and 80% from the informal sources.
Ø Out of that 20% only 10% have access to Micro finance.
Ø Annual credit demand by the poor is estimated to be about Rs 60,000 crores. And only 12,000 crores are disbursed. (April 09)
Ø Customers of Micro Finance are “Small and marginal farmers", " rural artisans" and "economically weaker sections“
Micro-Credits model Ø Focus on, providing the capital for poor women to use their innate "survival skills" to pull themselves out of poverty.
Ø Lend mostly to women in small groups (credit circles), say of five or seven.
Ø Draw up a weekly or bi-weekly repayment schedule.
Ø In case any member defaults the entire circle is denied access to credit
Business model of GRAMEEN bank Ø Introduction •
The Grameen Bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh .
•
Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703 people serving 7.34 million borrowers from 80,257 villages.
•
Grameen‘s methods are applied in 58 countries — including the United States.
•
Grameen Bank borrowers own 94% of the Bank. The remaining 6% are owned by the government. (January 09)
Ø Working model of Grameen bank: •
Manager first makes a round to the appointed area to introduce Grameen policies and programs.
•
Try to make the group of 5 people.
Conti…. •
Only two can obtain loan at first. After 6 weeks of successful repayment another two can apply for loan. The leader can only receive loan at last.
•
Repayment responsibility solely rests on the individual borrower.
•
However if one member of a group defaults, that group will never receive a loan from Grameen
Ø Two popular scheme by Grameen Bank is:•
Loan Insurance:-
•
Beggars Loan:-
“16 Decisions” 1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courage and Hard work – in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines. 10. We shall drink water from tube wells. If it is not available, we shall boil water or use alum. 11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at our daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so. 13. We shall collectively undertake bigger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her. 15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline. 16. We shall take part in all social activities collectively . Sources: www.Grameen-info.org
Conti…. Ø The Repayment Mechanism: •
One year loan .
•
Equal weekly installments .
•
Repayment starts one week after the loan .
•
Repayment amounts to 2% per week for fifty weeks .
Ø Criticism of Grameen Bank: •
There are rumors that there repayment rate are fake.
•
Grameen Bank clients used their loans for many different purpose .e.g..Dowry, gambling etc.
The Self Help Group (SGH) Ø SHGs is a small group of rural poor, who have voluntarily come forward to form a group for improvement of the social and economic status of the .
Ø Homogeneous group of about 15 to 20.
Ø Every member to save small amounts regularly.
Ø Every member learns prioritization and financial discipline.
Ø Condition required for hip for SHG’s •
should be between the age group of 21-60 years.
•
From one family, only one person can become a member of an SHG. (More families can SHGs this way).
•
The group normally consists of either only men or only women.
•
should be homogenous i.e. should have the same social and
Difference between JLGs and SHGs Ø “t Liability Group (JLG) is a group of individuals coming together to borrow from the financial institution.
NABARD initiatives in Micro finance Ø National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, through an Act of Parliament.
Ø Role and Function of NABARD: •
Providing Refinance to lending institutions in rural areas.
•
Evaluating, monitoring and inspecting the client banks.
•
Providing to NGOs through a variety of schemes.
•
Making model projects / development schemes for banks and farmers
•
It prepares, on annual basis, rural credit plans for all districts in the country.
Organizational structure Board of Director Chairman
Managing Director
Executive Director(4)
Head Office Dept (24) Sub Office(Andaman & Nicobar) & Special cell (Srinagar)
Regional Offices(28)
Training Establishment(6)
District Development Offices (391)
●
Financial Santa Clause (NABARD)
•
(NABARD) was established in 1982,with an initial capital of 1400 crores.
•
And till March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs 1400 crores.
•
Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and Bank balance and Investment increased by 40.16% and 15.5%. (sources :nabard.org)
Ø From where NABARD gets the fund?
Ø How NABARD gives loan to the Institutions? •
NABARD follows the very strange way of providing the loans.
•
They give loans to the every ODD number institution i.e.3, 5, 7, 9….
How NABARD manage their repayment structure? Ø Their Repayment ratio is more than 95%.
Ø NABARD see the credit rating of that institute given by the rating agency.
Ø NABARD analyze the balance sheet and profit and loss statement of the borrowing institutes.
Ø NABARD sees the past record of the borrowing institutes, their repayment ratio and the executives who are working in that institutes.
Business model of SAKHI Ø Introduction •
SAKHI (An Organization for Women) , established in the year 2002.
•
Started by veteran Mrs. Alpa Chauhan.
•
SAKHI is having three office .(1 ) Dakoor (2 ) Umreth (3) Dahood.
Ø Role and function of SAKHI •
Provide loan to the economic disadvantage people.
•
Help them in creating groups.
•
Provide them Micro plus loans.
•
Help them in establishing their(borrowers) business.
Organization Structure
Ø SAKHI had developed a systematic organizational structure for itself. Board of Trustees CEO
HR Mgr
Operation Mgr
Finance Mgr
Area Mgr
Audit Mgr
Audit Team
Brach Mgr FCO’s
A/C MIS Officer Ø Brach
FCO-JLG
Structure
FCO
FCO-GRLN
Mgr
How SAKHI disburse the Loans?
Sources: Survey on SAKHI
How SAKHI raise capital? Ø Friends of Women World Bank.(FWWB) (13.5% p.a ). Ø Indian Bank(13.75% p.a).
Ø Why SAKHI charges such a high rate of interest (18% p.a)? •
The loan doesn’t disburse immediately.
•
SAKHI charges same rate, even if above hike there rates.
•
High transaction and operating cost.
Ø Is government waiver plan effected there Institution? •
That rule was only for government institution.
•
But borrowers also requested them to waive their loan amount.
Ø Practical example of interest calculation.
Debt Relief in India Ø Political intervention creates serious threat for MFIs.
Ø Easy and Safest way to attract the voters.
Ø Borrowers creates a negative mind set.
Ø The waiver of farm loans , increased defaulters.
Ø Many decent borrowers has effected by this waive of schemes.
Ø Legacy continue, Rs 60,000 crore was declared by Shri P.Chitambaram.
MFI’s being criticized because of high interest rates: Ø Most MFI’s financially sustainable by charging interest rates that are high enough to cover all their costs.
Ø Four key factors determine these rates: •
The cost of funds.
•
The MFI's operating expenses.
•
Loan losses.
•
And profits needed to expand their capital base and fund expected future growth.
Ø There are three kinds of costs the MFI has to cover when it makes microloans: •
The cost of the money that it lends.
•
The cost of loan defaults.
•
Transaction and Operating cost.
Conti……. Ø For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount lent, then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost i.e. transaction cost. :Example
Ø Suppose that the transaction cost is Rs 15 per loan and that the loans are for one year. To break even on the Rs 500 loan, the MFI would need to collect interest of Rs 50 + Rs 5 + Rs 15 = Rs 70, which represents an annual interest rate of 13 percent. To break even on the Rs 100 loan, the MFI would need to collect interest of Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an interest rate of 26 percent.
Rate Ceilings: Not the Answer Ø There is hue and cry on the high rate of interest which is beigncharged by many MFI’s.
Ø Policymaker concern over high interest rates.
Ø What are the reasons why rate ceiling can create disaster? •
Rate ceiling will diminishing the return of MFI’s.
•
If rates are set to a level less than that required to cover costs, it will lead to losses and also reduce their creditworthiness and ability to borrow.
•
Compelled rate ceiling would increase more poverty in the economy.
SWOT Analysis of micro finance Ø Strength •
Helped in reducing the poverty.
•
Huge networking available.
Ø Weakness •
Not properly regulated.
•
High number of people access to informal sources of finance.
•
Concentrating on few people only and mainly in urban areas.
Ø Opportunity •
Huge demand and supply gap.
•
Employment Opportunity.
•
Huge Untapped Market.
•
Opportunity for Pvt. Banks, NBFCs, Foreign Banks to enter this business segment.
Interview of End s Ø Are you a regular or new customer?
Ø If you are a Regular customer, then can you please tell me your experience?
Ø What’s your opinion on interest rates?
Ø What you do with that loan amount?
Ø Does the Microfinance Institutions provide you any type of other benefits other than just loan Amount?
Ø According to you which is better, loan from local Zamidars or from MFIs?
Future of Micro Finance Ø Estimated that in next five years, 65% of the poor people will have excess to MFIs.
Ø Many Pvt. Banks and Foreign Banks would enter this business segment, because of very low NPAs.
Ø Estimated that 5 % of the number of people below the poverty line will get reduced in the next 5 years.(World Bank report)
Learning from the project Ø I learnt in detail the process of Micro Finance, from its need at the grass root level.
Ø Functioning of various Govt, Semi Govt, & various other delivery channels.
Ø Practical learning of how SHGs are formed.
Ø Practical learning of how the MFIs works.
Ø Most important learning, how it can change the life of the Economic disadvantaged people.
Conclusion •
“Don’t wait, the time will never be just right. Start where you stand and work with whatever tools you may have at your commands and the better tolls will be found as you go along”.
William Surds
Learning from THE Company Ø Practical learning of Equity, Future & Options market by terminal trading.
Ø Various strategies of Market.
Ø Apart from Micro Finance, Nine mine projects, which helped to relate to the Present Market conditions.
Ø And the most important thing I learnt from this institution is “Patience”
Thank you
References Mr. Sanjiv Rohilla
Mr. Arvind Parmar
Asst. General Manager
Operation Manager
NABARD Anand.
SAKHI Umreth
Ph No. 9427109121
Ph No. 9925153226
Websites: –
www.ifmr.ac.in
Mr. Mukesh Gandhi
–
www.google.com
–
www.microfinanceinsight.com
MAS Finance
–
www.investopedia.com
Ahemedabad
–
www.books.google.com
Ph No.9825009793
–
www.seepnetwork.org
–
www.forbes.com
–
www.nationmaster.com
–
www.thaindian.com
–
www.authorstream.com
–
www.knowledge.allianz.com
Director
Nishant Bali IBS Ahemedabad
Ø Scenario of Micro Finance in India. Ø Micro-Credits model. Ø Business model of Grameen Bank Ø Self Help Groups (SHG’s). Ø Difference between JLGs and SHGs Ø NABARD initiatives in Micro finance. Ø Business Model of SAKHI. Ø Credit institutions as a Political tool: Debt relief in India. Ø MFI’s being criticized because of high interest rates. Ø SWOT Analysis of Micro Finance Ø Interview of End s Ø Future of Micro Finance Ø Learning from the Project
Scenario of Micro Finance in India Ø India’s population is more than 1000 million, around 350 million, are living below the poverty.
Ø Only 20% access loan from the formal sources and 80% from the informal sources.
Ø Out of that 20% only 10% have access to Micro finance.
Ø Annual credit demand by the poor is estimated to be about Rs 60,000 crores. And only 12,000 crores are disbursed. (April 09)
Ø Customers of Micro Finance are “Small and marginal farmers", " rural artisans" and "economically weaker sections“
Micro-Credits model Ø Focus on, providing the capital for poor women to use their innate "survival skills" to pull themselves out of poverty.
Ø Lend mostly to women in small groups (credit circles), say of five or seven.
Ø Draw up a weekly or bi-weekly repayment schedule.
Ø In case any member defaults the entire circle is denied access to credit
Business model of GRAMEEN bank Ø Introduction •
The Grameen Bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh .
•
Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703 people serving 7.34 million borrowers from 80,257 villages.
•
Grameen‘s methods are applied in 58 countries — including the United States.
•
Grameen Bank borrowers own 94% of the Bank. The remaining 6% are owned by the government. (January 09)
Ø Working model of Grameen bank: •
Manager first makes a round to the appointed area to introduce Grameen policies and programs.
•
Try to make the group of 5 people.
Conti…. •
Only two can obtain loan at first. After 6 weeks of successful repayment another two can apply for loan. The leader can only receive loan at last.
•
Repayment responsibility solely rests on the individual borrower.
•
However if one member of a group defaults, that group will never receive a loan from Grameen
Ø Two popular scheme by Grameen Bank is:•
Loan Insurance:-
•
Beggars Loan:-
“16 Decisions” 1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courage and Hard work – in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines. 10. We shall drink water from tube wells. If it is not available, we shall boil water or use alum. 11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at our daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so. 13. We shall collectively undertake bigger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her. 15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline. 16. We shall take part in all social activities collectively . Sources: www.Grameen-info.org
Conti…. Ø The Repayment Mechanism: •
One year loan .
•
Equal weekly installments .
•
Repayment starts one week after the loan .
•
Repayment amounts to 2% per week for fifty weeks .
Ø Criticism of Grameen Bank: •
There are rumors that there repayment rate are fake.
•
Grameen Bank clients used their loans for many different purpose .e.g..Dowry, gambling etc.
The Self Help Group (SGH) Ø SHGs is a small group of rural poor, who have voluntarily come forward to form a group for improvement of the social and economic status of the .
Ø Homogeneous group of about 15 to 20.
Ø Every member to save small amounts regularly.
Ø Every member learns prioritization and financial discipline.
Ø Condition required for hip for SHG’s •
should be between the age group of 21-60 years.
•
From one family, only one person can become a member of an SHG. (More families can SHGs this way).
•
The group normally consists of either only men or only women.
•
should be homogenous i.e. should have the same social and
Difference between JLGs and SHGs Ø “t Liability Group (JLG) is a group of individuals coming together to borrow from the financial institution.
NABARD initiatives in Micro finance Ø National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, through an Act of Parliament.
Ø Role and Function of NABARD: •
Providing Refinance to lending institutions in rural areas.
•
Evaluating, monitoring and inspecting the client banks.
•
Providing to NGOs through a variety of schemes.
•
Making model projects / development schemes for banks and farmers
•
It prepares, on annual basis, rural credit plans for all districts in the country.
Organizational structure Board of Director Chairman
Managing Director
Executive Director(4)
Head Office Dept (24) Sub Office(Andaman & Nicobar) & Special cell (Srinagar)
Regional Offices(28)
Training Establishment(6)
District Development Offices (391)
●
Financial Santa Clause (NABARD)
•
(NABARD) was established in 1982,with an initial capital of 1400 crores.
•
And till March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs 1400 crores.
•
Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and Bank balance and Investment increased by 40.16% and 15.5%. (sources :nabard.org)
Ø From where NABARD gets the fund?
Ø How NABARD gives loan to the Institutions? •
NABARD follows the very strange way of providing the loans.
•
They give loans to the every ODD number institution i.e.3, 5, 7, 9….
How NABARD manage their repayment structure? Ø Their Repayment ratio is more than 95%.
Ø NABARD see the credit rating of that institute given by the rating agency.
Ø NABARD analyze the balance sheet and profit and loss statement of the borrowing institutes.
Ø NABARD sees the past record of the borrowing institutes, their repayment ratio and the executives who are working in that institutes.
Business model of SAKHI Ø Introduction •
SAKHI (An Organization for Women) , established in the year 2002.
•
Started by veteran Mrs. Alpa Chauhan.
•
SAKHI is having three office .(1 ) Dakoor (2 ) Umreth (3) Dahood.
Ø Role and function of SAKHI •
Provide loan to the economic disadvantage people.
•
Help them in creating groups.
•
Provide them Micro plus loans.
•
Help them in establishing their(borrowers) business.
Organization Structure
Ø SAKHI had developed a systematic organizational structure for itself. Board of Trustees CEO
HR Mgr
Operation Mgr
Finance Mgr
Area Mgr
Audit Mgr
Audit Team
Brach Mgr FCO’s
A/C MIS Officer Ø Brach
FCO-JLG
Structure
FCO
FCO-GRLN
Mgr
How SAKHI disburse the Loans?
Sources: Survey on SAKHI
How SAKHI raise capital? Ø Friends of Women World Bank.(FWWB) (13.5% p.a ). Ø Indian Bank(13.75% p.a).
Ø Why SAKHI charges such a high rate of interest (18% p.a)? •
The loan doesn’t disburse immediately.
•
SAKHI charges same rate, even if above hike there rates.
•
High transaction and operating cost.
Ø Is government waiver plan effected there Institution? •
That rule was only for government institution.
•
But borrowers also requested them to waive their loan amount.
Ø Practical example of interest calculation.
Debt Relief in India Ø Political intervention creates serious threat for MFIs.
Ø Easy and Safest way to attract the voters.
Ø Borrowers creates a negative mind set.
Ø The waiver of farm loans , increased defaulters.
Ø Many decent borrowers has effected by this waive of schemes.
Ø Legacy continue, Rs 60,000 crore was declared by Shri P.Chitambaram.
MFI’s being criticized because of high interest rates: Ø Most MFI’s financially sustainable by charging interest rates that are high enough to cover all their costs.
Ø Four key factors determine these rates: •
The cost of funds.
•
The MFI's operating expenses.
•
Loan losses.
•
And profits needed to expand their capital base and fund expected future growth.
Ø There are three kinds of costs the MFI has to cover when it makes microloans: •
The cost of the money that it lends.
•
The cost of loan defaults.
•
Transaction and Operating cost.
Conti……. Ø For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount lent, then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost i.e. transaction cost. :Example
Ø Suppose that the transaction cost is Rs 15 per loan and that the loans are for one year. To break even on the Rs 500 loan, the MFI would need to collect interest of Rs 50 + Rs 5 + Rs 15 = Rs 70, which represents an annual interest rate of 13 percent. To break even on the Rs 100 loan, the MFI would need to collect interest of Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an interest rate of 26 percent.
Rate Ceilings: Not the Answer Ø There is hue and cry on the high rate of interest which is beigncharged by many MFI’s.
Ø Policymaker concern over high interest rates.
Ø What are the reasons why rate ceiling can create disaster? •
Rate ceiling will diminishing the return of MFI’s.
•
If rates are set to a level less than that required to cover costs, it will lead to losses and also reduce their creditworthiness and ability to borrow.
•
Compelled rate ceiling would increase more poverty in the economy.
SWOT Analysis of micro finance Ø Strength •
Helped in reducing the poverty.
•
Huge networking available.
Ø Weakness •
Not properly regulated.
•
High number of people access to informal sources of finance.
•
Concentrating on few people only and mainly in urban areas.
Ø Opportunity •
Huge demand and supply gap.
•
Employment Opportunity.
•
Huge Untapped Market.
•
Opportunity for Pvt. Banks, NBFCs, Foreign Banks to enter this business segment.
Interview of End s Ø Are you a regular or new customer?
Ø If you are a Regular customer, then can you please tell me your experience?
Ø What’s your opinion on interest rates?
Ø What you do with that loan amount?
Ø Does the Microfinance Institutions provide you any type of other benefits other than just loan Amount?
Ø According to you which is better, loan from local Zamidars or from MFIs?
Future of Micro Finance Ø Estimated that in next five years, 65% of the poor people will have excess to MFIs.
Ø Many Pvt. Banks and Foreign Banks would enter this business segment, because of very low NPAs.
Ø Estimated that 5 % of the number of people below the poverty line will get reduced in the next 5 years.(World Bank report)
Learning from the project Ø I learnt in detail the process of Micro Finance, from its need at the grass root level.
Ø Functioning of various Govt, Semi Govt, & various other delivery channels.
Ø Practical learning of how SHGs are formed.
Ø Practical learning of how the MFIs works.
Ø Most important learning, how it can change the life of the Economic disadvantaged people.
Conclusion •
“Don’t wait, the time will never be just right. Start where you stand and work with whatever tools you may have at your commands and the better tolls will be found as you go along”.
William Surds
Learning from THE Company Ø Practical learning of Equity, Future & Options market by terminal trading.
Ø Various strategies of Market.
Ø Apart from Micro Finance, Nine mine projects, which helped to relate to the Present Market conditions.
Ø And the most important thing I learnt from this institution is “Patience”
Thank you
References Mr. Sanjiv Rohilla
Mr. Arvind Parmar
Asst. General Manager
Operation Manager
NABARD Anand.
SAKHI Umreth
Ph No. 9427109121
Ph No. 9925153226
Websites: –
www.ifmr.ac.in
Mr. Mukesh Gandhi
–
www.google.com
–
www.microfinanceinsight.com
MAS Finance
–
www.investopedia.com
Ahemedabad
–
www.books.google.com
Ph No.9825009793
–
www.seepnetwork.org
–
www.forbes.com
–
www.nationmaster.com
–
www.thaindian.com
–
www.authorstream.com
–
www.knowledge.allianz.com
Director
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