MICROFINANCE AN INSIGHT INTO THE WORLD OF MICROFINANCE W O R L D The Success of Microfinance in India The Success of Microfinance in India Page 4 The success of microfinance in India Page 9 Microinsurance market in India Page 10 Lets now ask banks who is credit-worthy: the rich who dont pay back or the poor who do Interview with Muhammad Yunus, Grameen Bank Page 13 Outreach should broaden Page 14 Small is profitable Page 15 Microinsurance: A snapshot Page 16 Grain banks and self help groups Page 19 Leading the way Page 20 We have been growing at 200%. By 2009 end we should have over 60-65 lakh customers Interview with Suresh Gurumani, CEO, SKS Microfinance Page 23 The Impact of financial crisis on microfinance Page 25 We are concentrating in direct SHG Bank Linkage Programme to reach out to more SHGs directly Interview with MS Sundara Rajan, CMD, Indian Bank Page 26 MFIs, if linked with livelihood, have a very crucial role to play in the growth of the economy Interview with Ela R Bhatt, founder of SEWA and Sa-Dhan Page 28 Our efforts in the new fiscal year will be focused around customers and competencies Interview with AP Ghugal, GM, Priority Sector Credit Department, Bank of India Page 30 Models for achieving financial inclusion in India Page 32 Towards inclusive growth MICROFINANCE WORLD | April 2009 2 [ C O N T E N T S ] Cover photograph: Sandipan Majumdar, Kolkata/CGAP Microfinance Photography Contest CONTENTS April 2009 | MICROFINANCE WORLD 3 [ F O R E W O R D ]
CONSULTING EDITOR MONALISA SEN monalisa.sen@expressindia.com DESIGN ANOOP KAMATH SPECIAL PROJECTS TEAM G. SUBRAMANIAN g.subramanian@expressindia.com 2nd floor, Express Towers, Nariman Point, Mumbai 400 021 Tel: 022- 22022627 Ext: 389 Fax: 022- 22022639 PRODUCTION B.R. TIPNIS General Manager Copyright: The Indian Express Limited. All rights reserved. Reproduction in any manner, electronic or otherwise, in whole or in part, without prior written permission is prohibited A SPECIAL PROJECTS INITIATIVE HOW TO REACH US We prefer to receive letters via email, without attachments. Writers should disclose any connection or relationship with the subject of their comments. All letters must include an address and daytime and evening phone numbers. We reserve the right to edit letters for clarity and space. Mail: Monalisa Sen Email: microfinance@expressindia.com MICROFINANCE WORLD The Indian Express Limited 2nd floor, Express Towers, Nariman Point, Mumbai - 400 021 M icrofinance is evolving and the coming years will see it making a definite impact across rural and urban India giving hopes and opportunity to mil- lions to raise their standard of living. There are success stories to suggest that its intervention is not a poverty alleviation measure. But coupled with appropriate framework micro- finance could lead to sustainable and profitable economic activity as well. As per the Global Environmental Monitor, small and medium enterprises powered by microfinance contribute significantly to the economic growth of the society. For microfinance to be an effective tool to spur economic growth, it is believed that micro-loans need to be used more for enter- prise building at the bottom segment of the pyramid. In Bangladesh, about 15 million families now benefit from small loans and other financial products such as micro savings and microinsurance. It has resulted in 40% of the overall reduc- tion of rural poverty. However, not all microfinance intervention leads to economic activity although millions of people around the world have been taking benefit out of it. Reports have shown that a substantial portion of the microfinancial services are used for consumption or for a mix of consumption cum enterprise building activities. Over the years the dynamics of financial inflow to the microfinance sector has undergone radical changes. Started with grants and soft loan fund to take up small microfinance intervention, now large institutions are tapping huge capital funds from global equity investors. The whole range of invest- ment instruments like equity, debt, soft loan, revolving fund, grant money and other institutional support funds are now available to the microfinance institutions. The diverse models and approaches have helped in reach- ing out to new regions and to populations which have remained excluded from financial services. The government should ensure transparency and full disclosure of rates including fees. MONALISA SEN Consulting Editor DEAR READER, ASHOK B SHARMA D elivery of credit at the doorstep of those who are not covered by the formal banking business, cou- pled with capacity building, is one of the ways for achieving financial inclusion. Such a financial inclusion of the poor can be more fruitful if the credit disbursed can help them become entrepreneurs than meeting only their consumption needs. The process can also be accentuated if the disbursing microfinance institutions (MFIs) incul- cate a habit of savings by attracting deposits and come out with insurance products covering various risks. The Nobel Laureate from Bangladesh and the founder of the Grameen Bank movement, Muhammad Yunus, has termed the microfinance disbursement as a social busi- ness in contrast to the commercial business of banks and financial institutions. There should be a separate regulatory authority for MFIs as distinguished in character from that for the commercial banks. The regulatory authority for MFIs should evolve guidelines keeping in view the objectives of socio-economic development of the poor, he suggests. According to Yunus, MFIs should be self-sustaining, be allowed to attract deposits, provide insurance and pension fund, and should be capacity building. THE SUCCESS OF MICROFINANCE IN INDIA Financial inclusion of the poor can only be possible if the MFIs inculcate a habit of savings and come out with insurance products covering various risks MICROFINANCE WORLD | April 2009 4 [ C O V E R
S T O R Y ] Grameen Bank meeting hLLp.//www.fno.co.n Te.. (+9T-22) 4097 3466 If MFIs are owned by borrowers, there should be no pay- ment of licence fees. MFIs can source funds from banks. He is, however, not in favour of MFIs sourcing funds from outside the country. Funds should preferably be mobilised and distributed locally, he opines. The interest rates should preferably be lower. MFIs should ultimately be owned and operated by borrowers, as is in Bangladesh. There should not be any scope for individ- ual profit in MFIs. All profits should be ploughed back in the MFIs for meeting the costs of transactions, he suggests. According to Yunus, this is the right time for the micro- finance movement to grow and spread in India. It can counter the adverse impact of the cur- rent global financial crisis and provide jobs and self-employment to many. He holds the global banking and finan- cial institutions responsible for the cur- rent global economic crisis as they have befooled the investors via mere paper transactions. Banking regulations should clearly distinguish between gam- bling and business. There should be proper in-built mechanism to prevent the business from running into trouble and insurance schemes should be in place for protecting deposits. The government should not bailout these institutions by doling out public money, he says. The microfinance institutions should cater to the real economy and livelihood of millions of poor. The developing coun- tries like India and Bangladesh have been largely insulated from the adverse impact of the current global financial crisis due to the presence of the real economy, he says. In Bangladesh 80% of the poor are covered under microfinance. The remain- ing 20% are expected to be covered with- in the next two years. India has been able to cover only 20% people under it and needs to speed up, he suggests. In India, a Bill for regulation of MFIs is pending in Parliament since 2007. The proposed legislation has been delayed on the issue of lowering of interest rates. A joint secretary in the banking division of the finance ministry, Amitabh Verma, says the government is very keen on MFIs lowering their interest rates. The MFIs should carry out their operations without any sub- vention of interest rates by the government. Bangladesh has set up a regulatory authority for the Grameen Banks and another legislation for approval of MFIs as social banking institutions is pending for approval. Citing a few instances of social business, Yumus said, students in Bangladesh were given loans, most of who have opted to become entrepreneurs after they completed their studies. Interest-free loans of 1,000 taka were given to 1,00,000 beggars, 15,000 of which have stopped begging and set up small business. Loans without any interest was an exception in case of beggars. As a general principle, MICROFINANCE WORLD | April 2009 6 [ C O V E R
S T O R Y ] MFIs should charge interests on loans to cover their trans- action costs. Prudence suggests that cost of transaction should be minimised and interest rates should be kept low. MFIs in India, however, allege that their interest rates are higher (mostly in double digits) as they have to cover the costs of transactions and capacity building. According to Amitabh Verma, banks refinance rates to MFIs are not likely to be less than 7%. Also, the govern- ment may not be in a position to render subvention on loans. Therefore, the MFIs should find novel ways for covering or hedging their costs. MFIs apex body Sa-Dhans executive director Mathew Titus said; The microfinance sector in India is going through a difficult and a challenging phase. Extraordinary growth, global credit crunch and increased awareness of social impact pose a challenge. It is an opportune moment for house keeping and clearing up concerns that have been around for a while. Growth and competition need to be addressed in the common spirit to serve the poor. Transparency is the key property that microfinance must subscribe to. Microfinance in India touched the 33.6 million clients- mark in 2007-08, of which 14.1 million were served by MFIs, according to Sa-Dhan estimate. Other estimates put the client outreach at over 100 million. These estimates may differ but there is an unanimous acknowledgement of the fact that over 90 million low-income households still remain unserved. Therefore, microfinance must grow steadily and steeply. All indicators point to a flattening growth curve. However, these were computed before the global financial crisis and the growth path may even suffer a dent, according to some experts. This means not only unserved clients will have to wait longer but also the exist- ing clients are likely to see their credit flow slowing down and shrinking. There is no possibility of a steep growth from grant financing at this stage. In a given period, grants are just not large enough. The same holds true for profits that, in theory, can be generated from a granted corpus. If profits are huge enough, the organisation would either cease to be a community development finance by charging in excess of traditional moneylenders or serve non-poor clients. Savings could be a very feasible option, particular- ly in the long run. Only cooperatives are legally entitled to mobilise savings. Some of the experiences suggest failures of cooperatives. However, cooperative legislations in sev- eral states like Andhra Pradesh led to reforms in the coop- erative model. The outcome is the legal form of MACS, which is the registration for many SHG federations. There are about 75,000 SHG federations functioning in India and are an important avenue for managing an ever- expanding number of SHGs. The SHGs federate into a two or three-tier structures and take up a range of services, both financial and non-financial. They have so far not been included formally into the SBLP and have strong points in their favour like cost efficiency and democratic governance. Besides lacking exposure to these relatively new organisations, bankers often raise concerns about level of professionalism of federation management, viabil- ity of the business model including dependency on the self-help promoting institution (SHPI) and political inter- ference. The idea of a national-level SHG federation is being debated to address the issue. Bankers are generally comfortable in extending re- finance to the non-banking financial companies (NBFCs) because equity serves as a lever for credit. Banks are usu- ally concerned over the creditworthiness of MFIs and SHG federations portfolio quality, profitability, governance and viability of the business plan. Incidentally, the involve- ment of investment funds regularly brings about improve- ments in all these areas. Bankers rely more on existing sys- tems and structures, though some emphasise on the mer- its of a long-term relationship, their loan terms are mostly 24 to 36 months. Therefore, it is essential that MFIs and SHG federations go for credit ratings. Meanwhile, Nabard has a scheme for subsidised credit rating for MFIs and SHG federations. However, microfinance can grow from the perspective of demand only if adequate resources flow to MFIs and self-help groups (SHGs). There are four main options for capital mobilisation grants, profits, savings and invest- ment. Grants and profits, however, are unfeasible. MICROFINANCE WORLD | April 2009 8 [ C O V E R
S T O R Y ] Banking regulations should clearly distinguish between gambling and business. There should be proper in-built mechanism to prevent business running into trouble. There should be insurance schemes for protecting deposits. Government should not bail out these institutions by doling out public money. Muhammad Yunus, founder of the Grameen Bank movement April 2009 | MICROFINANCE WORLD 9 [ C O L U M N ]
MONICA AGRAWAL M icroinsurance aims to provide protection and inculcate the sav- ings habit for the customers at the bottom of the pyramid. Some time in their lives, most people experience finan- cial difficulties with potentially long lasting results. This is especially true for the poor in developing countries. Any natural calamities and disasters to the poor are considered to be the severely shocking haz- ards, which is hard for them to recover from. There is therefore a growing realisation of the need for microinsurance products in our country. It represents an untapped market of nearly $2 billion in India alone, according to a study released by the United Nations Development Programme (UNDP). Demand for microinsurance in India has remained low in a large part because of a severe mismatch between services offered by insurers and the needs of the insured. The present out- reach of microinsurance is around 5 million people, cover- ing only 2% of the poor in the country. Challenges Microinsurance delivery in India is fraught with chal- lenges. A major hurdle is the acceptance of microinsur- ance among the rural poor who not only have low levels of awareness about possible risks to their lives but also lack trust in most financial schemes structured for the long term with no immediate benefits. Non-availability of authentic admissible documentation during enrollment and claims processing and a lack of facilities for premium remittance further adds to the complexity in insurance administration in the remote and far-flung pockets of India. Despite the numerous challenges, insurance com- panies have in the recent past made significant inroads to take insurance to the masses at the bottom of the pyramid. Microinsurance at Aviva Our Vision statement for the Microinsurance Business Vertical is To cover risks to the lives and livelihoods of the poor and underprivileged at an affordable cost. Aviva has been pro- viding insurance to protect the lives and livelihoods of the economically weaker sec- tions of society in partnership with organisa- tions such as Basix, Aarohan and Paras Cap Fin. Today, we cover more than 1.5 million lives and have settled close to 6,000 claims. We have a well established microinsurance practice focussing areas such as customer friendly products customised to the LIG seg- ment needs; affordable and lean processes to cater to the unique dynamics of this segment; world class customer service experience and demonstrated capability in claims settlement. We have been developing microinsurance products in consultation with our distribution partners. Our popular microinsurance products include Credit Plus, Credit Suraksha in the group category and Grameen Suraksha for individual lives. Credit Suraksha and Credit Plus are cred- it-linked products largely for MFIs and SHGs. Grameen Suraksha, on the other hand, is a traditional term plan under which the policyholder pays a premium for a period of two years and avails an insurance cover benefit for either 5 or 10 years. The minimum cover available is Rs 5,000 and the maximum is Rs 50,000. Additional flexi- bility is also offered such that the customer continues to be covered for an extended period of 18 months (for the five-year plan) or 48 months (for the ten-year plan) even if she or he is unable to pay the second annual premium. Summary The microinsurance market has seen a lot of activity in the recent past and new customer service standards are being set in a market that has long been sidelined for its non- profitability and complexity. However, a lot of ground needs to be covered before we see tangible results in terms of increased insurance penetration and adequate risk cov- erage for the rural poor. The writer is Director Corporate Initiatives, Aviva India MICROINSURANCE MARKET IN INDIA The risk coverage to the poor will help them to recover from natural calamities In the new financial crisis, how different will the role of micro-credit banks be? Micro-credit is not impacted by the financial crisis for the simple reason that it is not exposed to the international financing system. Micro-credit is close to the real people. That is one of its strengths. Another strength is that we dont borrow from the international marketit is local money going to local people. Third, while the convention- al banking system is collapsing, micro-credit has a high repayment rate that is based on no collateral and no legal papersit functions beautifully. So, today, we can raise the same old question we raised 32 years ago when banks told us that the poor are not credit-worthy: who is credit wor- thy? The poor are the ones who are paying back and it is the rich who are not paying back. The crisis has allowed the world to challenge the financial system. I am in favour LETS NOW ASK BANKS WHO IS CREDIT-WORTHY: THE RICH WHO DONT PAY BACK OR THE POOR WHO DO With his Grameen Bank, Muhammad Yunus, winner of the Nobel Peace Prize, redefined the concept of lending. In an interview with FE, Yunus speaks about the current economic crisis and explains the role of micro-credit banks in dealing with poverty. Excerpts: MICROFINANCE WORLD | April 2009 10 [ I N T E R V I E W ] Bloomberg of redesigning it and redoing it. Going back to the same system would be the worst kind of mistake we can make. Of course, terrible things are happening but we should look at this as a great opportunity. Farmers complain that there are too many checks and balances when they approach banks and financial lenders for loans but the same checks evaporate when banks lend to big business houses. Interest rates in micro-finance should be as low as possi- ble because we are not in the business for money. The idea is to help people out of poverty as fast as we can. In micro- financing, we give loans to the poorwithout collateral and without any legal instrumentsfor income-generat- ing activity with the lowest possible interest rate. That is micro financing. Does the potential of micro-financing end once people are above poverty line or does it have the potential to take them even higher? We make entry into micro-credit very difficult, unless you are extremely poor. We have a tough screening processwe want to make sure we are getting to the person at the bot- tom. So if you are a poor person who lives in two-room house, please wait, we are looking for people who live in a single room. Once you qualify, you will never be denied. You can become the richest person in the world but we can still fund you because you had qualified and now you are an example for us. You will inspire others; you are the owner of the bankGrameen Bank is owned by the borrowers. No one has to leave, everyone can stay as long as they wish. How well does the system work? It is very strong. If you are successful and I am not as suc- cessful, I copy you and see if I can benefit from that. It hap- pens a lot. For example, we encourage everyone to send their children to school100 per cent of the children of Grameen families are in school. They want to make sure that their children go as high as possible and Grameen Bank gives them a student loan. Right now, there are more 35,000 people with student loans from the Grameen Bank in business schools, medical schools, engineering schools. So you inspire each other. That is the advantage of having groups, having weekly meetings and so on. What is the legal position on NGOs lending capacity? If an NGO wants to lend money to poor women, the law can come and say you are under arrest, you are violating the law because in order to lend money, you have to be a moneylender, registered under the Moneylenders Act or you have to be a bank. For example, if you take peoples savings and then disappear, who will stop you when you are not registered? NGOs who are doing good work as micro-credit organisations should be given the status of a micro-credit bank. You can give them standardised inter- est rates so that it is transparent. People ask me, why dont you convert yourself into a bank? I say this is a ridiculous proposition. Banking law is created to create big banks. These big banks are like cargo ships. A micro-credit bank is like a dinghy boat that goes into shallow water, ferries a little merchandise. You cannot construct a dinghy boat from the architecture of an ocean- going vessel. This is the difference. Why dont we make the architecture of a dinghy boatwhat is so difficult about it? Grameen Bank has a law that applies to it, it is a specialised bank. We say, why dont you generalize this law so that any- body can begin a Grameen Bank in Bangladesh? Millions and millions of people need financial service. This is a busi- ness but a business with a completely different purpose to help people create their own employment. In the context of this financial crisis, this becomes more important because people will be losing their jobs, will be losing liveli- hoods. So if you can create financial systems of micro-cred- it, they can create self-employment opportunities. The India government has used the loan waiver as a means to address issues of poverty. Your experience has been that micro-credit borrowers are extremely good repayers. Is there a clash between the two models? Politicians are not bankers. They want political solutions. Waiver is a political solutionit is a good way to ask for votes but that is not a financial system which is tenable. Once you waive a loan, you are not only doing harm to the present cycle but you are giving incentives to people in future not to repay and pressure the government to waive loans. If I have to waive a loan, I would do it by giving them cashbecause if you borrow, you have to pay back. That is the culture we have to build, otherwise the banking system will not work. Bangladesh is a country where disasters are April 2009 | MICROFINANCE WORLD 11 [ I N T E R V I E W ] The crisis has allowed the world to challenge the financial system. I am in favour of redesigning it and redoing it. Going back to the same system would be the worst kind of mistake we can make. Of course, terrible things are happening but we should look at this as a great opportunity frequent. Many families start from zero after floods but we never waive their loans. The standard practice at Grameen Bank is that as soon as the disaster hits, the branch is con- verted into a humanitarian organisation. All banking activities cease to exist. Once the crisis is over, we take care of these families, help them start some kind of activity to keep them working. We issue new loans, new houses. Slowly, you pay back. We take your loan and convert it into a long-term one. Our system is that no matter how long it takes to pay back the loan, the interest can never exceed the total principal. Our policy is to make sure people get back on their feet. If people are not on their feet, the bank will not be on its feet. Does your bank have something for the urban poor? When I was drafting the law for Grameen Bank, I put in a provision that this bank will never work in any urban centre. Now, we are asking the government to amend it because we have already covered the villages of Bangladesh. Only the cities are left. In rural areas, we now have 7.7 million borrowers97% women. Basically, this is a bank for poor, illiterate womenthey own the bank. Our board is made up of their representatives, chosen by them. How do you see Grameen activities in India? There is no Grameen Bank in India, just a Grameen-type programme because there is no law to allow this type of a bank to be created here. Those that exist are restricted since they cannot take deposits. Most of the time they run around for funds rather than concentrate on the work. Grameen Bank can grow as each branch is dependent on the deposits it can mobilise from the area and lend the money to the local people. A Grameen Bank branch is like an independent bank by itself. We want to build our own capacities but because the law doesnt support this in India there are limited capacities. How did Grameen America, your New York venture, come about and how does the model work? It is said micro-credit cannot work in the United States because it is a different country, a rich country, etc. Grameen Bank started in USA in 1987 when as Governor of Arkansas, Bill Clinton invited me. I had a meeting with him and his wife Hillary Clinton. They were eager to understand our work. He said we need this in Arkansas because this is the poorest state in the US. That was the beginning and Hillary Clinton was the chairman of the committee running this bank. After he became President, that programme was folded up. Then somebody from New York wanted it there. So, last January, we launched it in Jackson Heights. We deliberately chose Jackson Heights because in Arkansas we had a lot of trouble giv- ing loans to people. Their welfare law is funny: if you somehow earn one dollar, you have to report it to the welfare authority and welfare authority will diligently deduct this dollar from your cheque. That is shocking. If I were in charge of drafting this law, I would have done just the opposite. So we wanted to choose an area where welfare has not penetrated yet. We followed every single principle of the Grameen Bank. Whatever you see in a Bangladeshi village, you see in Jackson Heights. We sent somebody from Bangladesh to start the programme and we chose somebody who has never been to the United States so that he does what he does in a Bangladeshi vil- lage. He will not feel embarrassed about it. Today, we have more than 5,000 borrowers, all women, some Caribbean, some Latinos, some Indians. Repayment is 99.6% and while big banks are collapsing in the same environment, this bank is flourishing. Now everybody wants a Grameen programme. In Grameen Bank, the rule requires that every borrower must open a bank account. Whatever little money you earn every week, you deposit that in the account. So to open an account for a woman who saves two dollars a week was the greatest hurdle in the entire project. We are getting a lot of invitations, even one from Warren Buffet. His daughter Susan invited us to Omaha, Nebraska, because Omaha is very poor. Everybody is in the pipeline. We often speak about social business. Can you explain the concept? The basic thing that went wrong in the current financial crisis is that the capitalist system made the human being appear as a uni-dimensional being and created a theory: that all they do in their economic life is to make money. I say, yes, making money is an exciting goal but human beings are multi-dimensional beings. There are many other things we take pleasure in doingselflessness is one. That is where we went wrong. Why dont we create separate businesses on the basis of selflessness? If people can give away, why not use the money to design a business which helps peoplesay, something to tackle malnutri- tion. So at the end of the year, instead of asking the com- pany how much money it made, you would be asking how many children it got out of malnutrition. This financial crisis is an opportunity for us to incorpo- rate the idea of social business. Money-making business has failed the world. If we bring the social business into the picture, some balance can be restored. MICROFINANCE WORLD | April 2009 12 [ I N T E R V I E W ] JENNIFER MEEHAN T welve months ago, in a candid conversation with a mentor and friend on the state of microfi- nance for the poor in India, I heard a comment that stopped me in my tracks: India was in danger of declaring microfinance a huge success while tens of millions of poor families continued to lack access to the most basic of financial services. No doubts, India is one of the most dynamic microfinance markets in the world. A combination of visionary social entrepreneurs, huge demand for micro- finance services and the availability of local commercial debt capital (and in some cases equity capital) has fuelled rapid and enviable growth in the sector. It is estimated that almost 55 million households are currently being reached by specialised microfinance institutions and through the NABARD-supported self-help group approach. Yet, for Grameen Foundation, growth in and of itself is not a sufficient measure of the microfinance success. It is the quality of growth, as well as the quality of the services being provided that matters. Are the poor and poorest actually being reached with financial services in a timely and honest manner? Are those services designed to enable them trans- form their lives? These questions dominated the recent Sa-Dhan microfi- nance conference in New Delhi, headlined by two global leaders in microfinance, Muhammad Yunus of the Grameen Bank in Bangladesh and Ela Bhatt of Sewa in India. These two visionaries, along with social entrepreneurs across the world, became barefoot bankers by accidentbecause of its transformational impact on the lives of the worlds poor- est people. We believe that financial and social success in microfi- nance are not mutually exclusive, but rather mutually dependent. Financial sustainability is required to grow microfinance to the scale of the problemglobal poverty and a measurable impact on lives is required to fulfill our underlying purpose and mission. Grameen Foundation first began working in India almost a decade ago when many of todays leading and fastest-growing microfinance institutions were still experimenting with different solutions. There are three trends in India that give us pause for thought: 1) there is increasing anecdotal evidence that the poor are not being served in large numbers, especially in the North and East 2) The micro finance institutions that have accessed commercially ori- ented equity financing are moving, either consciously or not, away from serving the poor who are more expen- sive to reach, thereby reducing prof- itability 3) There are a few MFI biggies that dominate the microfinance market, leaving innova- tive smaller and younger institutions to struggle to grow in order to maximise their impact. Over the next year, we will advance our double bottom line agenda in India in three ways. First, by promoting the missing piece of the double bottom line puzzle social performance in general and our Progress out of Poverty Index (PPI) tool specifically. With this tool, we can finally move beyond anecdotes and get verifiable data whether the poor are being reached and how their poverty levels are changing with access to microfinance services. Second, we willin collaboration with Grameen Capital Indiaprovide catalytic capital to Tier- II institutions working with the poor in underserved and unserved regions of India. And finally, we will collaborate with practitioners and others locally to dispel the myth that microfinance is only appropriate for those econom- ically active poor at or around the poverty line. In order to declare microfinance a success in India, not only do tens of millions of more poor people need to be reached, but those services must have a transformational impact on their lives and those of their family members. The writer is the CEO Asia Region for Grameen Foundation (GF), a global non-profit organization that combines microfinance, technology and innovation to empower the worlds poorest people, especially women, to escape poverty. She is based in Hong Kong and can be reached at jmeehan@grameenfoundation.org OUTREACH SHOULD BROADEN Ensuring microfinance continues to work for and is focussed on the poor in India April 2009 | MICROFINANCE WORLD 13 [ C O L U M N ]
SUSHILA RAVINDRANATH I t is not very apparent yet, but one of Indias fastest growing businesses is microfinance. In India, the organised microfinance industry is about ten years old. The most popular model for these institutions is the Bangladesh-based Grameen Bank. The micro entrepre- neurs usually want to start ventures not amounting to more than Rs 10,000. The interest they pay to the money lenders make their borrowing completely unviable. For example in the wholesale vegetable market in Chennai, one can see people disbursing Rs 100 to various vegetable vendors in the morning. By the evening the vendors have to pay back Rs 120. This means they pay 20% interest every day. These are the vegetable, flower, fish vendors, tea stall and food stall owners who require funds and have no recourse other than the money lenders. The microcredit institutions (MCI) lend them this amount without any security. The MCIs prefer to lend to women rather than men. Some women give their borrow- ings to men in their family. But they make sure it is returned. In micro credit women make better borrowers. The interest rates are not low. Instead of 50% charged by the money lender it may be 38%. Still there is a saving. And the default rate is negligible. A survey conducted by RBI finds that most borrowers say that it is easy or very easy to get a loan from microfi- nance institutions (MFIs). They have a close monitoring system which ensures that there are minimum defaults. MFIs have a good recovery rate. District administration received very few complaints against MFIs. Almost all the bank branch man- agers said that MFIs were good customers of banks and they could be used as busi- ness facilitators or correspondents. However, microcredit is an operationally difficult concept. According to people in the business, if the loan amount is Rs 5,000, the amount is collected over 50 weeks at Rs 120 per week. Usually five women join together to take loans. It becomes a collective liability. The field development officer holds a meeting with all of them before lending. Then the women pledge to pay back the amount and the institution starts lending. The officer goes literally everyday to follow up on the progress of a number of bor- rowers for whom he is responsible. Each branch of the institution has many such collection centres. Lending radius is usually within one or two square kilometer. And one has to get to know the people. Banks can never handle something like this. In spite of these hurdles there have been quite a few suc- cess stories like SKS India which was launched in 1998. It is one of the fastest growing microfinance organisations in the world, having provided over Rs 6,212 crore and having maintained loans outstanding Rs 2,216 crore to 3,906,007 women members in poor regions of the country. Borrowers take loans for a range of income-generating activities, including livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to pottery) and new age businesses (beauty parlour to photography). Spandana founded in 1998 is also one of the fastest expanding microfinance institutions in the country. It is also one of the most efficient in the country with an oper- ating expense ratio of 5.5% on portfolio. It now boasts of a client base that constitutes almost 1.5% of the BPL (below poverty line) population of India. Then there is West Bengal-based Bandhan, Chennai based Micro Credit Foundation of India , all doing splendid work with women. Once they are established MCIs can be channels for other products like mutual funds, insurance and so on. It is also possible to tie up these institutions with education and healthcare. Now that several success stories are emerging in this area, and the spreads appear good, many larger com- panies want to join the bandwagon. This worries existing players. The big groups they fear will push costs and salaries up which will defeat the purpose of microfi- nance. The industry also fears political interference, government interfering with interest rates and so on. Notwithstanding some problems many firmly believe that the future lies in microfinance. SMALL IS PROFITABLE Microfinance institutions have a close monitoring system which ensures that there are minimum defaults with a good recovery rate MICROFINANCE WORLD | April 2009 14 [ F E A T U R E ] In microcredit women make better borrowers. The interest rates are not low. Instead of 50% charged by the money lender it may be 38% TARUN CHUGH I t is widely recognised that microfinance is a powerful tool in eradicating extreme poverty. As outlined in the millennium development goals under the United Nations Development Programme, the basic approach adopted by the signatories is built on the premise that over the time, with the support from the state govern- ments, village economies can transition from subsistence farming to diverse com- mercial activity. The role of microfinance institutions The first step towards achieving this is the availability of credit for asset creation. Over the last decade, the microfi- nance institution (MFI) movement originating from the Grameen model in Bangladesh has proliferated worldwide and made a significant difference to the rural economy. In India too, commercial insurers traditionally have focused on bundling basic life risk products with the MFI loans to increase reach and convenience for consumers. However, credit linked insurance is usually driven by very low premi- um. For instance, ICICI Prudential Lifes Sarv Jan Suraksha has a minimum premium of Rs 50 per annum and provides up to Rs 30,000 in case of an eventuality. This sum is usual- ly adequate to cover the loan outstanding and, hence, pro- tect the earning asset for the family. The premium is gener- ally paid by the MFI as an extended credit to the member and recovered along with the loan installments. Creating value for consumers beyond credit insurance Availability of credit, however, is a necessary, but not suffi- cient, condition for sustainable financial inclusion. Given that the low-income group families in the developing world are specifically vulnerable to multiple idiosyncratic and catastrophic risks, income protection in these markets is as important as income generation. Microinsurance not just plays a key role in meeting the credit requirements of this segment but at the same time provides them protection against the above stated risks, creating tremendous value for consumers in safeguarding their interests. Regulatory environment Regulation in India has been fairly proac- tive on the need for microinsurance. The Insurance Regulatory Development Authority (IRDA) was the worlds first regu- lator to come up with specific microinsur- ance guidelines in 2005. Reaching out to the consumers Microinsurance is no longer considered just a subsidised business for meeting the IRDA obligations. According to a UNDP report published in 2007, microinsurance repre- sents an untapped market of nearly $2 billion in India. Consumer education Consumer education on the need and importance of life insurance at the community level in these markets is very critical and needs to be carried out in isolation of advertis- ing and promotion. Product innovation ICICI Prudential Life, for example, has designed a cus- tomised product offeringAnmol Nivesh which is a sav- ings and protection product designed exclusively keeping in mind the need and income cycle of tea plantation workers. Managing costs Reaching out to this potential market needs to be cost effective for it to be a viable business model for insurers on a sustained basis. This makes it critical for various stake- holders to pool in their resources towards achieving a common objective. Pooling of data between insurance companies and government bodies can help improve actuarial calculations and in better pricing. Public Private Partnerships The Centre, as well as a few state governments, have taken steps towards providing life and health risk cover to the poor. One of the more popular onesRashtriya Swasthya Bima Yojanais now launched across the country. The writer is Chief - Alternate Channels & Group, ICICI Prudential Life Insurance Co. Ltd. April 2009 | MICROFINANCE WORLD 15 [ C O L U M N ]
MICROINSURANCE: A SNAPSHOT The life and health risk cover for the poor can contribute towards alleviating poverty INDUMATI SAHOO Grain Bank Grain Bank is a kind of Cereal Pooling Mechanism at the village level. The villagers contribute a portion of their own harvested stocks of paddy, ragi and maize during December and January to establish a village based fund in the form of grains collectively to meet exigencies. The members of the Grain Bank usually borrow during lean period during May to September and repay the same along with interest in the form of grains after next harvesting. The concept of Grain Banks is quite popular among many tribal and backward regions of the country. The Grain Banks offer dual benefit to the members in the form of food security as also the seed security depending on the participating clients. They also offer a savings avenue to the poor in the form of savings in kind. With a view to synergise the concept of Grain Banks with that of the Small help Groups (SHGs), two projects were supported by NABARD, one each in Orissa and Chhattisgarh with the following objectives: a) To explore the possibilities of monetising the savings- in-kind in the form of grains to explore the possibilities of building synergy between SHGs in a village. b) To understand the issues in participatory management of Grain Banks in some of the dis-advantaged areas. Orissa (Kalahandi district) The Grain Bank project was piloted in the Rampur block of the Kalahandi district with a mission of exploring the pos- sibility of synergising the traditional practice of maintain- ing grain banks with the SHG. The pilot envisaged mon- etising savings in the form of grains by SHGs enabling participatory management of grain banks by members and securing the availability of food grains and seeds espe- cially in the post monsoon period. A total number of 17 villages of Thuamul Rampur block of Kalahandi district were covered under the project. Out of the 353 households in the 17 villages and hamlets, 263 belong to ST category, 42 to SC and 4 are of OBC category. The land in this area is hilly land without irrigation facil- ity. The livestock are mostly in the form of goats and cows. The income level of most of the household is quite low. It was observed that the food stress period is for about nine months. The agricultural produce meets the food requirement for only 2-3 months. A major portion of the produce is used for liquidating the loan from the money- lender. The lean season of food availability is from May to September of the year and the food scarcity becomes acute during rainy season. People get into the clutches of the moneylenders during this period. The nearest bank branch is at Gunupur about 25 km away. Three Grain Banks were constructed in Silet, Sikerguda and Maltipadar. All the three are in active operation in 17 tribal villages of Kerpai and Nakarundi GPs of Thuamul Rampur block of Kalahandi district. Three Grain Bank Committees were constituted with members from different SHGs. 29 SHGs were promoted by the NGO, Antodaya. SHGs started savings in cash and grain. Savings mobilsed by the SHGs from members was Rs 1,59,025 and grain of 5,330 kgs (approximately). The district administration took keen interest in imple- menting and monitoring the project. SHGs have GRAIN BANKS AND SELF HELP GROUPS In Orissa and Chhattisgarh repayment and distribution in any mode of grain led to converting the produce of the area into money thereby facilitating savings MICROFINANCE WORLD | April 2009 16 [ C O L U M N ] received support from external sources such as Integrated Tribal Development Agency (ITDA) and Orissa Tribal Empowerment and Livelihood Project (OTELP) to an extent of Rs 1.45 lakh and Rs 1.5 lakh. Cash in hand were to the extent of Rs 11,865, cash in Bank were Rs 3,44,124 and the amount involved in inter- nal lending were of Rs 1,36,642 by the end of May 2008. Grains totaling 963 Kgs (rice, paddy, ragi and small mil- let) have been saved by the groups. Kalahandi Anchalika Gramin Bank provided loan aggregating Rs 3.75 lakh to the groups. Other benefits The implementation of the pilot project for Grain Bank among others highlighted the area so much that the Government of Orissa selected it under Orissa Tribal Empowerment and Livelihood Project (OTELP). The micro watersheds are being developed and livelihood programme are being implemented under the project. Roads are being constructed to improve the connectiv- ity. The flow of funds and the wages in the form of grain and cash have facilitated better standard of living for the people. The scarcity of grain has been reduced to a great extent. But the people are keen to continue with the Grain Bank as the OTELP project will be there for two more years. At the pre-development stage, about 97% of the families were under food stress during 5-6 months and were under the clutches of money lenders. In the post inter- vention period no family was going to the mahajan or the money lender for food grain during scarcity period. For cash loan the bank linkage is proving adequate. However, occasionally few families still go to money lenders as the nearest branch is situated 40 km away which gets cut off during monsoon. People have gained confidence and can hold on to their produce for a month or so by availing loan from the SHGs. Last year they could sell kandul dal (wild arhar) at higher price and sold tamarind for Rs 6 per kg as against Rs 2-3 per kg hitherto. The training pro- gramme under the project as well as frequent visits by NGO personnel, Bankers and NABARD officials have enhanced awareness level among the people of this inaccessible area. They have succeeded in presenting their problems before the district authorities and get- ting their work done. There was a campaign against alcoholism in Sikerguda to Maltipadar villages by the women SHG members in December 2007. All women members are covered under Swasthyashree Health Insurance Scheme run by women federation Banashree Mahila Sangathan supported by Antodaya. Chhattisgarh (Kanker and Bastar district) To promote Grain Banks among the SHGs in the mono crop areas of the state, a project on pilot basis for establishment of five grain banks each in two villages of Bastar division was sanctioned by NABARD with matching grant contribution from Catholic Relief Society, an NGO. As per the project in Markatola village of Kanker district, each grain bank was to cover 3 SHGs involving 50 members for mobilising 50 kgs of grain by each member. In the Mylibeda village of Bastar dis- trict, each grain bank was to cover three SHGs involving 15 members each in mobilising 30 kgs of grain per year by each member. NABARD had sanctioned Rs 2.375 lakh as grant assistance towards 50% cost for establishment of 5 grain banks each in the proposed two villages belonging to tribal communities over a period of 2 years from the date of sanc- tion i.e. 17 February 2005. Markatola village The village has about 400 households having population of 2,200 scattered in 9 hamlets. About 50% of the house- holds are tribals and depend on agriculture and wage labour. Villagers largely reside in kuttcha mud houses. The land holdings of the families vary between 1.5 to 4 acres. Only one major crop i.e. Paddy is grown in a year. About 35% of the families avail crop loan from LAMPS which is around 10 km away. The nearest bank branch to the village is 2 km away. Achievement The NGO had introduced the Grain Bank among the vil- lagers long back. Only problem faced was that of limited storage space restricting the operations of the Grain Bank. Five Grain Banks were completed, of which four were April 2009 | MICROFINANCE WORLD 17 [ C O L U M N ]
constructed in community and panchayat land and the remaining one in the land donated in writing in Gram Panchayat forum by the land owner. The Grain Banks are managed by a committee and secured with lock and key under joint custody. The Grain Banks started functioning with effect from March 2007. An extension worker of the NGO staying in the area oversees the functioning of the Grain Bank. SHGs are base for all the Grain Banks. Members of 3 to 4 SHGs are the members of each Grain Bank. All the SHGs associated with the Grain Banks were gathering grains at uniform rate of 5 kata (15 kgs) per member after harvesting. Mylibeda village The village has about 200 households having population of 1,500 scattered in 7 hamlets. About 95% of the house- holds are tribals and depend upon agriculture and wage labour. The average size of land holding of the households is 4 to 5 acres. Only one crop i.e. paddy is grown in a year as the village depends entirely on rainfall for cultivation. The village is having one Anganwadi Centre and one pri- mary school. Catholic Relief Society, the NGO has imple- mented a watershed programme in the village. A residen- tial school upto 10th Standard and a hospital are run by the NGO in the village. Achievement 14 SHGs were formed in the village and it was observed that members were aware of the SHG concept and had opened SB A/c with the RRB branch. The groups had mobilised Rs 5 to 10 per month regularly. The Grain Banks started functioning with effect from 1 December 2006. All the grains contributed during 2006-07 was lent out. The establishment of Grain Banks in the village addressed the problem of resorting to the money lenders by the villagers to a large extent. Because of Grain Bank, vil- lagers remained united. They also organised recreational activities in the village. Grain bank activity helped the vil- lagers to organise and construct a check dam in the nearby nala. They are now able to produce second crop on some additional plots. Grain Banks have helped villagers in developing close association with the NGO and getting easy access to high school education and health facilities. Learnings Monetising the savings in kind: The objective of monetis- ing the savings in kind was achieved to a great extent in Orissa. Bank loan routed through the NGO took into account the savings in the form of grain while working out the corpus of the group. The branch of the erstwhile Kalahandi Gramya Bank (presently Utkal Gramya Bank) could bring 364 household under its purview in one of the most inaccessible areas of the Kalahandi district. The SHGs of remaining part of the area i.e. Kerpai GP were also credit linked through the effort of another NGO, Shahabhagi Vikash Abhiyan and DRDA/ORMAS. Thus the entire area could be brought into banking network. The flexibility i.e. the repayment and distribution in any mode of grain (either in the form of rice, paddy, pulses) led to converting the produce of the area into money, facilitated savings in grain, credit in the form of grain as well as cash. Building synergy between SHGs and Grain bank: The synergy between Grain Banks and SHGs has brought in a decentralised system for distribution and recovery with the involvement of the community. This has led to the sus- tainability of the Grain Bank. Food Security And Participatory Management: Food security during the food stress period was the biggest chal- lenge which has been addressed successfully as the people could meet their requirement through Grain Bank. Other developments: The implementation of OTELP and construction/repairing work of road are the major develop- ment initiative by the Orissa Government. The develop- ment work led to flow of grain and cash in the form of wages and grant assistance for various livelihood programme. Future Strtaegy Grain Bank to be converted into commodity outlet : The tribals of the projects wanted to continue with the Grain Bank scheme. The community is in the habit of saving and the grain saved at the SHG level could be used for access- ing funds from bank. The stock of grain with SHGs in vil- lages may ensure food security particularly in the context of food stress period during monsoon when the area gets cut off. The Grain Bank can be converted into commodity outlet and may be linked to the rural haat. Grain Bank Committee to become Farmers club:The Grain Bank Committee may gradually become inactive with less work in hand and may ultimately become defunct. In order to enrich the job of the Grain bank com- mittee and bring some integration for agriculture develop- ment on a permanent basis Farmers club may be consti- tuted in which the members of the grain bank committee may become member. Replication in other states: This model of association of Grain Bank with SHG bank linkage is relevant particular- ly in remote inaccessible pockets of the country for bring- ing such regions under the purview of the banks with sup- port from NGOs. The writer is AGM, NABARD MICROFINANCE WORLD | April 2009 18 [ C O L U M N ] GOURI SHANKAR S tandard Chartered Banks (SCB) engagement with the development agenda is core to its focus on build- ing a sustainable business. We believe that our long term financial performance is dependent on having the right social and environmental conditions for growth in our markets. By engaging with our stakeholders we have identified seven key areas where we can make the greatest difference access to financial services is one of them. Across Asia, Africa and the Middle East we provide a customized product offering for all stakeholders in the microfinance industry including: local currency lending and banking products and services to our microfinance institution (MFI) partners, risk participation structures with development organisations, technical assistance (TA) linkages with TA providers and global markets products for international investors. In September 2006 the bank announced its commit- ment at the Clinton Global Initiative to establish a $500 million microfinance facility over a five-year period. In view of the lean branch network of the bank, SCB follows the wholesale model of bulk lending to MFI for further on lending to the Self-Help Groups (SHGs) and individuals. This facility will pro- vide MFIs and fund managers with $500 million of credit, financial instruments and technical assistance to finance MFIs in Asia and Africa. In India as on March 9, the bank had an outstanding portfolio of $60 million, with an outreach of about 0.75 million clients spread across 15 MFI partners, a majority of whom had a pan India pres- ence. Our partners include a mix of established intermediaries, urban start ups and down-scalers. Products offered include: term loans, overdraft limits and cash management facilities. Over the past year in particular, given the sizeable growth in the operations of our partners we have begun to support them in linking into the investor community via the capital markets. The bank views this as a channel for empowerment of women and people at the bottom of the pyramid. With a view to achieve scale, banks microfinance business is sus- tainable in nature with ample scope for expansion. With millions of financially empowered client base created through microfinance business, there are many other business opportunities in the domain of micro savings, micro pension and microinsurance etc. Except for micro credit, the other financial products have not really reached the clients and there lies new opportunities and chal- lenges for banks and financial institutes. Beyond building the business, the bank also invests in the capacity of its partner MFIs through technical assis- tance and trainings. Over the past year the bank has invested in two training programmes for the microfinance sector in India. Though MFIs are improving their risk mitigation strate- gies with growth, still there is scope for improvement and the enhanced risk systems does not appear to commensu- rate with the growth. With a view to contribute in this important space, bank is trying to down scale its robust risk management frame work to suit to the MF industry and provide as a sec- toral offering for the benefit of the industry. The bank is working a renowned industry training agency to undertake this project. The Indian microfinance sector mir- rors the global microfinance sector in terms of its development. The sector is highly concentrated and a small number of MFIs manage the majority of assets. In a bid to develop new investment oppor- tunities in the sector, we sponsored, for the second time in two years, SRIJAN, a microfinance business plan competition aimed at encouraging greenfield MFIs. The writer is head Microfinance, Standard Chartered Bank April 2009 | MICROFINANCE WORLD 19 [ C O L U M N ]
LEADING THE WAY Standard Chartered provides financial services credit, savings, banking products and services to its Micro Finance Institution (MFI) partners across Asia, Africa and the Middle East Though Microfinance Institutions are improving their risk mitigation strategies with growth, still there is scope for improve- ment and the enhanced risk systems does not appear to commensurate with the growth You have been with the main street banking industry for almost 22-23 years. What brought you here to microinsurance? I was really excited by the opportunity in this market. There are two things: One is sheer opportunity of the busi- ness to transform life and really impact a poor persons life. I come from South and my grand parents still live in a vil- lage. So, I know what all adversities people go through there. I was always very passionate about doing something in this area. In fact, when I was with the Barclays we tried making an arrangement with SKS for mobile banking or tele-payment facility. We were running a pilot then, but it didnt work out then. On the commercial front, we have a huge scale already. We are the biggest microfinance company in India. If we continue to grow at the same pace, we are hopeful of becoming the largest microfinance company in the world within next two years. Per month we are adding 2.5 million customers and are targeting 15 million customers by the end of financial year 2012. What has been the most interesting experience for you in SKS microfinance till now? The way microfinance has changed the lives of poor peo- ple is simply amazing. There are a lot of people I meet who have taken loans from us and changed their lives. However, there is one case that I remember quite vividly. During one of my visits to the centres in Andhra Pradesh, I had met a widow. She was then in the second cycle of loan from SKS. Before joining the SKS family, she used to work as a labourer near her place and earned on per hour basis. After her husbands death, she took a loan from SKS Microfinance to buy a sewing machine and started sewing clothes. Within one year, she managed to increase her business two-fold and bought another sewing machine. Apart from elevating herself, she employed other labour class as well and helped increase employment opportuni- ties in her area. We also met her daughter and she spoke to me in English. I was surprised! Then later the woman told me that she supported her family and ensured good education for her daughter. After completing her graduation, she was then working in a call centre. A loan from SKS elevated that widow from labour to entrepreneurial class. There are many more cases where women in dire conditions have taken loans from us and are now proud owners of their small entrepreneurial set up. People always question microfinance and doubt if it is doing well or not. Im totally convinced. We are not only doing well but also making sure several people that are in need too are doing well. Besides disbursing loans, you also teach the borrower how to write her name. Why? We generally conduct three-day session before the loan disbursement. In these sessions, women are told how the whole microfinance set up works. We also teach them how the interest is calculated, what the total amount that they WE HAVE BEEN GROWING AT 200%. BY 2009 END WE SHOULD HAVE OVER 60-65 LAKH CUSTOMERS Suresh Gurumani took over as the CEO of SKS Microfinance last year after Vikram Akula, the founder of SKS, stepped down to become a full-time director on the board of the company. A banking veteran with 22 years of experience has set a clear growth path for his company even during these times of slowdown. In an exclusive chat with Suneeti Ahuja, Mr Gurumani shares his experiences working in the field of microfinance. He outlines his plans of making SKS one of the largest microfinance company and hopeful of targeting 15 million customers by 2012. MICROFINANCE WORLD | April 2009 20 [ I N T E R V I E W ] will be paying is and most importantly, how to write their name. It instills a lot of confidence in the person. Besides, whenever a woman takes loan from us, we make sure that the respective husbands and families know about the step. And finally, at the time of loan disbursal, both husband and wife have to sign the document. In fact, I remember an incident. On one of the loan dis- bursal days, there was a couple that had come. After taking the loan, they had to sign on the papers. Now the husband wasnt literate and put his thumb impression on the paper and the wife on the other hand, since she had gone through that training program, took a pen and signed. We could see the sense of pride in that act she felt superior to her husband. These are small things but have a very deep social impact. One factor is the group part. Since we lend only to groups of women, it binds some sort of binding to the soci- ety as a whole. And that is lacking in the street banking. How do you categorise poor people for disbursement of loans? We have divided them into three classes: upper poor, very poor and ultra poor. While we disburse loans to the first two segments, we give grants to the ultra poor. Say, Rs 20,000 to buy a cow and then we teach them how to feed and milk the cow and earn some money. We want to make them commercially viable. So that is again a pilot that is running. These are basically people who have income of less than $1 per day. We are also working with Forbes on a project to ensure some sort of entrepreneurial opportunity for this segment. You do not ask for any collateral at the time of loans. What is the default rate and who are your customers? Most of the people that take loans are migrants. This is a business that is purely driven on trust. The group model makes it really successful. We make groups of five and dis- burse the loans to them. One important point is that the members of the group should not be blood relatives. Then it is the responsibility of the group to ensure that all the members pay their due instalments in time. In case some- body defaults then the group has to pay for that person. So far we have had recovery rates of almost 100% even in state of Bihar, where people might think we would have problems. Our recovery rate is 99% per cent. Disbursal of loans is done after all the due diligence from our side. You are a profit making organisation. What is the turnover for the company last year? Financial figures are confidential. In terms of growth, we have been growing at 200%. In India, right now we have close to 40 lakh customers, which should be over 60-65 lakh by the end of this year. April 2009 | MICROFINANCE WORLD 21 [ I N T E R V I E W ] Are there any bottlenecks that you face in this industry? There are two types of challenges that we face: internal and external challenges. Let me first talk about the internal challenges. The first one is rural connectivity. We set up branches and then need to make sure that the information is reaching those branches in time. But now with the broadband connections being available almost every- where, this problem is being resolved pretty fast. The other challenge is people. We have a branch head and then other people that facilitate the whole process. And we make it a point to employe the localities. Most of the people working or heading these areas are 10th pass. We ask for references from the local people and based on the references, we fill the vacancies. We strongly believe that there should be an empathy with the customers. On the external challenges front, we have bureaucratic hurdles. As a company, we have set principles that we are unwilling to give in. So it takes a lot of time at times to open a new branch. Then lending from banks is also a concern. Although, the condition is better off now, Vikram Akula, the founder and now the chairman of SKS Microfinance faced a lot of problems. Most of the banks were not ready to lend then, as they could not figure out how we could lend with- out collaterals and give unsecured loans. And now, we are the biggest borrowers from the banks. Then there are problems like Naxalism. What is the rate at which you borrow from the banks? And what is the rate of disbursal? Currently, we are borrowing at 13.5%. We give the loans at the rate of interest of 24% to 28%. Why such a difference in interest rates? There are two costs involved in this business: one is the operating cost and second cost is interest cost. Since, we have to go far flung areas to do everything, it incurs a lot of operating costs. And then we have to take care of the inter- est part as well. To take care of all the costs, we charge the borrower as per the higher slabs. But as we scale up and bring our costs down, we tend to reduce the rate of interest charged as well. Like in Andhra Pradesh and Karnataka, we charge 12.5% as the member base is high, where as in areas where we are yet to reach the critical mass we charge 15%. And in turn, pass on the benefit to the customers. Are there any other initiatives that you are working on for this segment? There are quite a few initiatives that are underway. In terms of rural reach, we have about 1,400 branches. What we are looking at is a holistic rural economy. While micro- finance is one way, through the reach, we are planning to introduce good-quality products to the rural masses. For instance, we have a pilot running with Unilever for supplying water purifying systems. Through these sys- tems, the poor get access to clean drinking water. We have a special arrangement with the company that poor people to pay for these systems in installments. Thus, we are try- ing to provide access to better life to the poor through our wide reach. We already have a pilot project running in Andhra Pradesh and Orissa. Soon we should be able to launch the services everywhere. We are also running another project on solar light. We look at products that are good for the customers. And we bundle the finance option for the customers. For exam- ple the water purifier is for Rs 1,800 and the solar light is between Rs 1,250 to 1,800. We are also planning to roll out another set of services mobile. We have tied up with Airtel and Nokia for this. Besides the business part, these can also be used by the families. You have grown to quite a significant level. Going for- ward would you also look at other types of loans and also expand the reach to men as well? First, we give loans only for entrepreneurial work and have no plans to increase this to other types of loans. And why only women? That is because I think women are more risk-averse. As they are the ones who handle the household expenses, they are more responsible with the loans. We feel there is still huge opportunity in this area. And therefore, would not want to widen our reach in terms of men borrowers right now. Are you planning to expand overseas as well? And if yes, where do you see the opportunity? We cannot say anything right now. But yes, there are opportunities in China and Far East. MICROFINANCE WORLD | April 2009 22 [ I N T E R V I E W ] There are quite a few initiatives that are underway. In terms of rural reach, we have about 1,400 branches. What we are looking at is a holistic rural economy. There are quite a few initiatives that are underway. In terms of rural reach, we have about 1,400 branches. What we are looking at is a holistic rural economy AJAYA MOHAPATRA S ince the beginning of the global eco- nomic downturn in mid-2007, the world is debating what would be the impact of financial crisis on the microfi- nance (MF) sector. MF has emerged as one of the pivotal strategies across the globe for alleviating poverty by enabling poor to raise their income and socio-economic sta- tus. The history suggests that since last two decades microfinance institutions (MFIs) are largely resilient to the financial crises. As compared to other mainstream financial institutions, MFIs are immune during the financial crises including the currency crises in East Asia and banking crises in Latin America in the 1990s. It is due to the fact that during that period the microfi- nance sector was very small and the external borrowings including equity and debt to the MFIs were very limited due to their not-for-profit in nature. Yana Watson of Dalberg Global Development Advisors (Microfinance Insights, March/April 2009 issue) writes that only a hand- ful of MFIs had even begun to contemplate transforming into regulated deposit-taking banks with access to com- mercial funding sources. But by the early 2000s with Banco Compartamos bond issuance; Bank Rakyat Indonesias first microfinance IPO; and the emergence of microfinance collateralised debt obligations (CDOs) microfinance had burst onto the international capital market. With the United Nations naming 2005 as the Year of Microcredit and Prof. Mohammad Yunus receiving the Nobel Peace Prize for the work of Grameen Bank, microfi- nance seemed to emerge as the darling of international development. By 2007, an estimated $5 billion of foreign investment had flowed from developed nations into MFIs around the world. How it affects MFIs in India MFIs in India can be broadly divided into two categories, for-profit and not-for-prof- it MFIs. For-profit MFIs are generally the non-banking finance companies (NBFCs) regulated by RBI, whereas the not-for- profit MFIs are registered under societies or trusts, charitable companies u/s 25 of Companies Act, mutually aided coopera- tive societies (MACs) and cooperatives. As per Sa-Dhans Bharat Microfinance Report 2008 that provides information on 223 MFIs of India, suggests that almost 60% of the market shares in terms of loan portfolio and 76% of the client outreach are controlled by 10% of the largest MFIs in India. Unlike in Africa, Central Asia, Eastern Europe and Bangladesh, in India, MFIs are not allowed to take deposits or savings, which is a substantial source of funding for the MFIs in these countries. As per Microfinance Information Exchange, Inc. (MIX) 2006-07 benchmark data, MFIs across the globe raised capital from various sources that includes 36.2% from borrowings, 35.8% from deposits, 15.5% from equity, 9.9% from other debt includes conces- sionary loans and compulsory savings, 2.5% from dona- tions. Thus, a substantial capital raised by the MFIs was derived from deposits. On the need to provide all the microfinance services, Vijaya Mahajan, Chairman, Basix Group, says that the MFIs should provide services like micro credit, micro sav- ings, insurance, micro mutual funds and remittances in order to promote financial inclusion and improve quality of life of poor. MFIs in India are deprived of taking deposits; therefore, they are largely dependent on external funding available at the local/public sources or borrowing from international sources. Due to their dependency on the external borrow- April 2009 | MICROFINANCE WORLD 23 [ C O L U M N ]
THE IMPACT OF FINANCIAL CRISIS ON MICROFINANCE The history suggests that since last two decades microfinance institutions (MFIs) are largely resilient to the financial crises. They are immune during the financial crises includ- ing the currency crises in East Asia and banking crises in Latin America in the 1990s ings, MFIs in India may be affected by the financial crisis due to lack of ade- quate capital to manage volatility, depreciation of local currency, increased costs on borrowings and tighter net interest margins. In order to enable the MFIs to address the financial crisis, SIDBI CMD says that it had released double the amount of loan in 2008-09 as compared to the last fiscal. Besides, SIDBI has also started providing long-term loans to the MFIs. Government Initiatives In order to address the financial crisis, the government of India has taken proactive measures by providing various stimulus packages to maintain growth in the SME sector including microfi- nance. In November 2008, the RBI extended a $1.5 billion credit line to SIDBI primarily for emergency liquidity for SME, under which SIDBI has the dis- cretion to use the new liquidity to finance MFIs. In India, initiatives to increase liquidity and lower foreign exchange risk have done much to ease the impact of the crisis on the microfi- nance sector. The Central Bank lifted foreign lending restrictions to non-bank financial companies (many of which are MFIs), let the rupee depreciate to slow the outflow of capital, and is providing extra funding to the financial sector (Global Financial Crisis: Implications for South Asia. October 21, 2008). However, in spite of such measures initiated by the Central bank to maintain growth in the microfinance sector, the nation- alised and commercial banks are still hesitant to lend to the MFIs especially the small and medium ones. If the indif- ferent attitude of the nationalised and commercial banks towards the MFIs continues to persists, vision of the gov- ernment for financial inclusion is going to be a distant reality. The author is the CEO of an MFI We The People. He can be contacted at ajayamo- hapatra@wethepeople.co.in MICROFINANCE WORLD | April 2009 24 [ C O L U M N ] People Group meetings at Nari branch, Una, Himachal Pradesh P. Chidambaram visiting We The Peoples stall April 2009 | MICROFINANCE WORLD 25 [ I N T E R V I E W ]
How are you trying to develop the mki- crofinance sector? The existing branches of Indian Bank in rural and semi urban areas were set up with an aim to provide services to the SHGs along with the normal banking services. Special window has been in operation in select rural and semi urban branches where concentration of SHGs is observed, called Micro credit Kendras, where focused atten- tion is being given to the needs of SHGs by staff for the purpose. However, in metro and urban areas, the financial requirements of urban poor is high, hence an exclusive branch for microfinance in oper- ation called Microsate Branch. These branches act as One Stop Shop for the needs of urban poor. What kind of interest rates is charged for SHGs? For short term loan, we charge up to Rs 2 lakh-11.50% (BPLR* less 1.00%) For short term loans above Rs 2.00 lakh - 12.50% (BPLR) (*BPLR Bench Mark Prime Lending Rate of the Bank which is at present - 12.5%.) How much loans have you disbursed so far? Cumulatively we have disbursed Rs 2,090.94 crore benefit- ing 2.93 lakh SHGs up to March 9 which includes repeat finance. Is it profitable business for banks? Yes, the yield on advances under SHG portfolio is quiet good. The transaction cost of financing SHGs is low. The Bank derives accrued benefits by cross selling individual loan schemes to SHG members. Intangible benefits include image building for the bank by touching the lives of the peo- ple at the bottom of the pyramid. These poor are relieved from the clutches of the local money lenders, who charge exorbitant rate of interest and the amount of interest paid to the money lenders now form part of their savings. Apart from financing the groups, we have made arrangements for social security of the members of SHG, by floating a low premium life insurance policy for SHG members in association with LIC. What are the segments in microfinance you are looking to finance? We are concentrating in direct small help group bank link- age programme to reach out to more SHGs directly. The present outstanding is over Rs 1,300 crore in this segment. We provides credit to SHGs in the form of cash credit, term loan for their micro enterprise ventures. Also, custom made special loan products have been formulated by the Bank for the housing needs of the members (IB Grihalakshmi), Education needs of the wards of SHG mem- bers (IB Vidya Shoba), Consumption needs of members (IB Grameen Mahila Sowbhagya) and direct loan for the con- sumption needs of them. What was your achievement on the front in 2008-09? The bank has lent to 90,421 groups Rs 1,054.04 crore dur- ing 2008-09. The balance outstanding was Rs 1,350.08 crore on March 2009 with 1.55 lakh SHGs. We have also received First Prize, second year in a row, for best perfor- mance under SHG Bank Linkage among Commercial Banks in Tamil Nadu during 2007-08, The award was given by NABARD. During the year 2008-09, we have opened dedicated microfinance branches in 13 centres in Tamil Nadu, Andhra Pradesh and Kerala. With this we are now having 25 microstate branches across the country in 10 states. WE ARE CONCENTRATING IN DIRECT SHG BANK LINKAGE PROGRAMME TO REACH OUT TO MORE SHGS DIRECTLY After having three decades of experience in banking MS Sundara Rajan, assumed charge as Chairman & Managing Director of Indian Bank in 2007. In an interview with Kumud Das of FE he shares his views on the topic. SEWA has grown large in its presence. Please elaborate on this. SEWA is the single largest trade union in the country with a membership of 11 lakh women, mostly vegetable and garment ven- dors, in-home seamstresses, head-loaders, bidi rollers, paper pickers, construction workers, incense stick makers, and agricul- tural workers. Based in Ahmedabad, Gujarat, within two years of its launch in 1972, we started SEWA Bank, a cooperative bank whose capital is made up entirely of the members own contributions. The bank was founded by 4,000 women, each con- tributing Rs 10 each. We have been in the mainstream of union movement and in the banking sector. Today we have more than 100 cooperatives. We have two companies, marketing and two brands, the local and the fancy embroidery. What difference has SEWA made in the lives of its members? Thanks to SEWA, a large number of women have been employed and their work is MFIs, IF LINKED WITH LIVELIHOOD, HAVE A VERY CRUCIAL ROLE TO PLAY IN THE GROWTH OF THE ECONOMY Widely regarded as a pioneer and a global entrepreneurial force in grassroots devel- opment, Ela R Bhatt is also known as a gentle revolutionary. This is no mean feat, considering her life-long dedication to improving the lives of Indias poorest and oppressed women workers. Ask her about her inspiration and Bhatt attributes it to her Gandhian thinking. It has guided me throughout my life, says she. In 1972, Bhatt founded the Self-Employed Womens Association (SEWA), a trade union which today boasts of more than 1,000,000 members. She is also the Founder- Chair of a number of agencies, including the Cooperative Bank of SEWA, Sa-Dhan (the All India Association of Micro Finance Institutions in India) and the Indian School of Micro-finance for Women. Elaben shares her thoughts with Monalisa Sen MICROFINANCE WORLD | April 2009 26 [ I N T E R V I E W ] SEWA Bank Branch being recognised. SEWA has also been instrumental in teaching them new skills, which, in turn, has helped them improve their agriculture. This has immensely helped all these women to step into the mainstream, with confi- dence. Sewa has a little section which mainly deals with changing of the laws and intervening into issues. How can micro finance institutions help in the growth of the economy? Microfinance institutions, if linked with the livelihood, have a very crucial role to play in the growth of the econo- my. It is also important to link it to social security, namely health and general insurance (life insurance). I believe that it should be linked to social security. For example, SEWA bank has a pension scheme. If the products are according to the lifecycle of the poor and women, then it helps in filling up the gaps. There is also a need to empower them with education. At SEWA, we teach financial literacy in a big way. Each of our members are taught when to opt for a loan and when to save. We impress upon them that they should take loans only when it is for productive purposes, and not for other needs such as marriages, etc. Such expenses can be taken care of by savings. We tell our members that they should create financial products in such a way that makes them less vulnerable and that fills up the gaps from their income going down. You always adopted Gandhian method at SEWA? Please comment. Im a product of the latter years of the freedom movement in our country. During my school and college years, all my teachers and everybody around us were always talking about independence. My maternal grandfather, partici- pated in the Salt March and was even jailed. Two of my maternal uncles also were jailed during freedom struggle. At SEWA, we have used Civil Disobedience when it comes to combating a very large force like state govern- ment. At times when you are baffled by the total ignorance at the hands of the government, when they dont t respond or become insensitive to our needs or even when they are unjust to the marginalised, practicing Gandhijis Civil Disobedience is the only way forward. One should always be self reliant to be able to do what he or she wants in life. You have inspired hundreds of women to be self-reliant. What is the guiding force that has helped you in this endeavour? Self reliance is not a pious virtue. What is important is inter- dependence. In my case, I have been a product of those days when our country was fighting for independence. I was in college when India got freedom. In those days, rebuilding the nation and finding alternate means was the most important sentiment all over the country. Gandhiji had shown the way and also set up the value system for all of us. Has SEWA been affected by recession? Recession has definitely impacted SEWA. First of all, the industries that were directly connected with exports, such as those involved in construction and diamond, have been badly hit. But those in garment making they have not been affected so much. For example, the construction labour who was getting employment after earthquake hardly gets as much work now. The migrant labours who used to go to different cities for work is going back to his village. Does the formation of a new government help you over- come these problems? I would say that both the ruling party and the opposition should work together. Thats the challenge for the new government. April 2009 | MICROFINANCE WORLD 27 [ I N T E R V I E W ] MICROFINANCE WORLD | April 2009 28 [ I N T E R V I E W ] What strategies have you adopted to develop the microfinance sector? We have tried to develop the microfinance sector by adopting the following strategies: a) Provision of broad range of financial ser- vices i.e. deposits, loans and payment sys- tems to poor and low income households. b) Identification of proper delivery models like Self Help Groups (SHGs), Joint Liability Groups and Microfinance Institutions (MFIs). How are you trying to develop the micro- finance sector? Based on the above strategies we are trying to develop with the following initiatives: No Frills Accounts: We came out with No Frills Account facility, Star Saral Bachat Account with simplified KYC norms to be complied. It can have minimum balance of Rs 50 in rural and semi-urban branches and Rs100 in urban and metro branches. Our branches are also allowed to open savings accounts with zero balance. So far we have opened more than 16 lakh savings No Frill Accounts. General Purpose Credit Card: We have introduced Samanya Credit Card for extending credit facility in the nature of revolving credit. The Samanya Credit cardhold- er is entitled to draw cash from the specified branch of the bank up to the sanctioned limit. The bank has also issued about 2,100 general purpose credit cards and con- sidered overdraft against No Frill Accounts to the tune of Rs 320 lakh. Star Bhumiheen Kisan Credit Card: We have also launched Star Bhumiheen Kisan Credit Card to bring the tenant farmers, share croppers and oral lessee who were so far outside the purview of the Bank to the banking fold. Rural Mobile ATM: We have started a Rural Mobile ATM in Sivaganga in Tamil Nadu covering about 10 villages, thus reaching the doorsteps of farmers. Micro Credit Programme: We have financed MFIs for promoting and extend- ing finance to the SHGs. The bank has financed 21 MFIs for on lending to SHGs. It has more than 1,42,000 SHGs linked with the bank credit for various productive activities. E-grama: We have introduced a project E-grama, where- in the farmers have access to commodity prices and get information on new agricultural technology. The bank has assisted in setting up rural kiosks in various states. Business facilitators and business correspondents: We have introduced business facilitators model and accordin- gly approved 63 business facilitators on the panel in six states. Seven business correspondents with their 81 BC sub- agents are approved and taken on panel in Maharashtra, Madhya Pradesh, Andhra Pradesh and Uttar Pradesh. Use of IT: We are using IT enabled financial inclusion solution for implementing 100% financial inclusion at Raigad district of Maharashtra, Sehore district of Madhya Pradesh, Lucknow, Barabanki and Hardoi districts of Uttar Pradesh and Chittoor District of Andhra Pradesh. Biometric Smart Cards have been used to provide door step services through handheld devices terminals (voice OUR EFFORTS IN THE NEW FISCAL YEAR WILL BE FOCUSED AROUND CUSTOMERS AND COMPETENCIES Microfinance can be an effective tool for poverty reduction. Improved access and efficient provision of savings, credit, insurance facilities can enable the poor to smoothen their consumption, build up their assets, manage their risk better, devel- op their micro enterprise and enhance income earning capacity. In an interview with Kumud Das of FE, AP Ghugal, the general manager of Priority Sector Credit Dept, Bank of India, shares his views: prompt enabled) to the financially excluded villagers at their doorsteps with the help of approved business corre- spondents and their sub-agents at free of cost. So far, we have enrolled 87,000 accounts and have issued 52,000 Biometric Smart Cards. This facility has proved to be per- fect Branchless Banking Model providing cost effective financial services at the doorstep of rural people. What kind of interest rate are you charging for them? We are charging concessional rate of interest to SHGs i.e. 9% per annum irrespective of size of the limit. The rate of interest to MFIs is stipulated on the basis of limit sanc- tioned and credit rating of the institutions. At present, it ranges between 9% to 12%. How much loans have you disbursed to them so far? We have more than 1,42,000 SHGs credit linked to the bank with financial outlay of Rs 580 crore. The bank has also extended finance to 21 MFIs aggregating Rs 240 crore. Is it a profitable business for the banks? Considering the cost of funds, cost of operations and interest rate structure, we cannot say that it is a profitable business proposition. At the same time it is not a loss mak- ing business. Margins are very narrow. However, we have taken up this challenge as corporate social responsibility. What are the segments in micro finance you are looking to finance? Finance is extended to allied agriculture activities, retail trade, small business, road transport operators, micro enterprises, etc. What was your achievement on the front in 2008-09? During the year we have opened 13,800 savings accounts of SHGs of which 11,330 savings accounts are women SHGs. The number of SHGs linked with bank credit during the year is 11,800 with financial outlay of Rs 122 crore. Out of this, 10,400 women SHGs are linked with bank cred- it with finance of Rs 104 crore. Going forward, how do you see the new fiscal? Our priorities and efforts in the new fiscal year will be focused around customers and competencies. We will con- tinue to develop our microfinance sector. The bank has adopted poverty reduction as its overreaching objective and bank shall respond to this challenge effectively. Our aim is to have overall development of financial system. What business do the MFIs do? MFIs have become a key factor in transforming funda- mental attitude towards development and alleviating poverty. The core activity of the MFIs is to provide financial assistance to SHGs for their productive activi- ties. MFIs also extend finance to SHG for consumption needs of the group members, housing requirements of the poor people, creation of infrastructure in rural area, sanitation, etc. What are the geographical areas where you operate ? Our area of operations is in the entire country. We have a network of more than 3,000 branches of which 1,250 branches are located in rural areas. We are shouldering lead bank responsibility in 48 districts where 1,009 branches are functioning and providing banking services to the customers. What are the problems faced by this sector? In the remote, hilly and sparse infrastructure area, physi- cal access itself acts as a deterrent. Illiteracy acts as a bar- rier. High transaction cost and procedural hassles. Requirement of independent documentary proof of iden- tity is important barrier in having a bank account especia- lly for migrants and slum dwellers. April 2009 | MICROFINANCE WORLD 29 [ I N T E R V I E W ] TARUN AGARWAL T he Indian Banking system has grown enormously in the last five years keeping pace with and in some cases leading the countrys remark- able economic growth. With a large rural, agro-dependant population, microfi- nance has emerged as a viable means of economic upliftment. A large majority of the population in the country still lives under $2 a day and in extremely poor conditions. This section of the society urgently needs to be brought into the economic mainstream to achieve inclusive growth. The role of the financial sector in achieving this inclusive growth compris- es of providing financial services to this segment and this is where sustainable micro finance models play a crucial role to achieve substantial financial inclusion. Financial Exclusion: is construed as the inability to access necessary financial services in an appropriate form. A basic banking account should not be considered a luxury, but a fundamental right of every citizen. This no- frills saving bank account is only a necessity, but not a suf- ficient condition for financial inclusion of the poor. Thus, financial inclusion is delivery of not only banking, but also other financial services like insurance, pension, remit- tance, mutual funds, etc. delivered at affordable, though market driven costs. Gradations of Financial Exclusion: Core Exclusion: Who operate their financial affairs com- pletely outside the regulated financial system Limited Access: May have a basic bank account but poor financial habits and little advice Included but using inappropriate products: Victims of inappropriate products. Extent of Need for Financial Inclusion It has been found that on an all India basis 59% of adult population in the country have bank accounts in other words 41% of the popu- lation is unbanked. In rural areas the cover- age is 39% against 60% in urban areas. The unbanked population is higher in the North Eastern and Eastern regions. Benefits of Financial Inclusion Safe platform for financial activities transactions are more transparent and fair Provides formal identity and a mecha- nism for mobilisation of savings It helps in enhancing entrepreneurship From the banks perspective, financial inclusion pro- vides Untapped market expanding customer base Acquisition of low cost deposits Help diversifying exposure as well as customer base Social growth and also a profitable proposition Publicity and visibility to the Bank Compliance to RBI & GOI Challenges to Financial Inclusion Some of the main challenges include coverage, cost of small value transactions, infrastructure, suitable products, flexibility, weak delivery model for community enterprise and financial management support. Models for Achieving Financial Inclusion Bank & Government led financial inclusion Bank & Corporate led financial inclusion MFIs led financial inclusion Bank & Technology led financial inclusion Corporate led Financial Inclusion Corporate led financial inclusion is relatively new in India. Under the said model currently few corporate names have been heard, like; ITC e-choupal, Cadburys, Reliance, NDDB MODELS FOR ACHIEVING FINANCIAL INCLUSION IN INDIA Banks would need to adopt an innovative, customer-friendly approach to increase their effective reach so that share of organized finance increases MICROFINANCE WORLD | April 2009 30 [ C O L U M N ] etc. Till date, most of the corporates have been looking at FI in India as one of their corporate social responsibility (CSR), but now they take it as one of their strategy to retain and build stronger relationships with farmers. MFI led Financial Inclusion Some of the popular Microfinance credit lending models adopted is as follows: Associations: In this context, a target community forges together to form an association through which a variety of microfinance activities are initiated. The microfinance activities may also include savings. The associations may comprise of youth, women Bank Guarantees: A bank guarantee is utilised when a loan from a commercial bank is needed. Community banking: This financing model considers the whole community as one unit and facilitates the estab- lishment of semi-formal and formal institutes through which microfinance are administered. Co-operatives: Sometimes the cooperatives also include savings activities and member-financing as well. Credit Unions: A credit union is a member-driven unique self-help financial institute comprising of mem- bers of a specific group like labor unions or a social frater- nity who assent to save money and make loans to each other out of that fund at reasonable interest rates. Grameen: The grameen model entails that a bank unit be composed with a field manager and a set of bank staff covering a specified area, like 15 to 20 villages. Finally, groups comprising of five future borrowers are formed, out of which only two people get the loan, and if within fifty weeks they return the principal plus interest, as per the banking rules, the others become eligible as well. This is done, so that there is a collective liability on the group, which serves as guarantee against the loan. Intermediaries: As the name suggests this model is a go-between organisation operating between the lender and borrower. They play a critical role of creating credit cognizance like starting savings programs and thus raising the credibility of the borrowers to a sufficient level. These intermediaries can be NGOs, individuals, etc. Non-Governmental Organisations: NGOs are very active in the field of micro-credit, be it creating consciousness of the importance of micro-credit, or developing tools and resources to monitor and identify righteous practices. Rotating Savings and Credit Associations: In this model a group of people join together and make periodic cyclical contributions to a common fund that is given to a member in a lump sum. After receiving the amount the member starts paying back by making regular contribu- tions. Bidding or lottery makes the decision about whom the money should go to. Small Business Enterprises (SME): They get loans from micro-credit programs for creating employment, increas- ing income etc. The micro credit is either provided direct- ly to the SME or as a part of a bigger SME development programme. Village Banking: This is community based banking wherein 25-50 low income individuals who seek self- employment come together to collect funds and give loans. Different Technological Models: Composite handheld devices; simputers; PDAs; programmed mobiles and Tijori micro deposit machines. We have a structured a set of financial products from FINO that its customers can offer to end customers. The products are simple to use and have brand names like Tijori (a safe, or locker) and Tatkal (prompt, or instant) that the end customers can easily understand and relate to. The delivery channels allow user transaction to be com- pleted online as well as offline, using a simple point of transaction (POT) device and a smart card that every cus- tomer is issued. The smart cards are used for storing demographic and financial information about the user, and also contain the users fingerprint image which is used for authentication. Banks would need to adopt an innovative, customer- friendly approach to increase their effective reach so that share of organised finance increases. Formal financial institutions such as, banks, insurance companies, mutual funds, pension companies will have to join hands with small NGO-MFIs, larger NBFC-MFIs, and technology providers to enable inclusion. The writer is head-Financial Inclusion Consulting Group, FINO April 2009 | MICROFINANCE WORLD 31 [ C O L U M N ]
NACHIKET MOR, PRERANA LANGA and NAJIM DOST W hile Indias recent economic performance makes it one of the worlds fastest growing countries, many of its citizens continue to live in extreme poverty, with 42% living on less than Rs 56 per day (World Bank 2005). To find ways to address the root causes of this poverty and empower the poor to participate in and benefit from the Indian growth process, the ICICI Foundation for Inclusive Growth (IFIG) was founded by the ICICI Group in early 2008. We believe that our fundamental challenge is to create a just society one where everyone has equal opportunity to develop and grow. Focus Areas and Strategic Partners Human capacity: basic health and elementary education We believe that good health and basic education are fundamental pre-requisites to achieving inclusive growth. Basic health: ICICI Centre for Child Health and Nutrition (ICCHN) www.icchn.org.in. Through ICCHN, we work to strengthen the ability of the government to deliver basic healthcare and nutrition to every child from the time of conception until the age of three. Elementary education for all: ICICI Centre for Elementary Education (ICEE) www.icee.org.in. Through ICEE, we work to strengthen the ability of the govern- ment to provide high quality education to every child from pre-school through elementary school. Markets: Access to complete markets Access to comprehensive financial services is therefore an essential part of the development process. Financial ser- vices enable individuals and enterprises to allocate their resources most productively by allowing them to better manage risk (e.g. buy insurance) and take advantage of future opportunities. Access to finance: IFMR Trust Advocacy Unit www.ifm- rtrust.co.in/ventures/ifmr_foundation.php. Through IFMR Trust Advocacy Unit, we work to ensure that every individual and every enterprise has complete access to financial services. Sustainability: Promoting environmental sustainability and the growth of a strong civil society Ensuring that every individual has the freedom and the power to create and sustain a just society and thereby ben- efit from the Indian growth process requires additional efforts on the part of civil society and policymakers. Grassroots organisations and regulatory infrastructure, for example, must be strengthened to ensure that the market does not exploit marginalised sectors of the population or the environment. Environment: Environmentally Sustainable Finance (ESF) www.ifmr.ac.in/cdf/esf.htm Through ESF, we support policy and regulations that ensure that growth and development processes proceed in an environmen- tally sustainable manner. Strong civil society: CSO Partners www.csopartners.org.in Through CSO Partners, we seek to support social change and build a defence against exploitation of all kinds by strengthening civil society organisations (CSOs). The Foundation provides active support and mentorship to each of these strategic partners. Our five strategic partners in turn work closely with additional partners at the commu- nity level, building networks and deepening the effects of our programmes. In the coming year, we will refine our approach using what we learn on the ground in order to ensure that our work will have an enduring and positive effect on the lives of low-income Indian households. In addition to our work in the area of inclusive growth, the Foundation is working with ICICI Group of Companies to support their various corporate social responsibility ini- tiatives, which are designed jointly with them. With ICICI Prudential Life Insurance, for example, we are developing plans for support services for elderly citizens, civic safety forces and healthcare for low-income households in rural areas. With ICICI Ventures, we are rolling out initiatives for micro enterprise development in rural and semi-urban locations. With ICICI Bank, we have provided support for their Read-to-Lead programme. Nachiket Mor, President and Prerana Langa, VP-Strategy and Communications, ICICI Foundation for Inclusive Growth; Najim Dost, Senior Analyst, Strategy Advisory Group and Joy Miller, Development consultant TOWARDS INCLUSIVE GROWTH The fundamental challenge of the Foundation is to create a just society one where everyone has equal opportunity to develop and grow MICROFINANCE WORLD | April 2009 32 [ C O L U M N ]