Microfinance in India Issues,Challenges and Policy Options By Rajaram Dasgupta and K Dinker Rao National Institute of Bank Management,Pune

Financial Needs Life Cycle - Birth to Death Emergencies - Personal and Impersonal Economic Opportunities Working Capital Agriculture Industry Trade and Services Investment Capital Existing Units New Units

Meeting of the Financial Needs Current Income Accumulated Income Through Savings Sale of Asset Credit from FFI Accessing Capital Market ( Economic Opportunities)

Microfinance Micro Quantity for Micro People Savings Credit Insurance Any other necessary Financial Services

Weaker Section Credit Small Credit Mandatory Credit and government sponsored Schemes Poverty Alleviation (DRI,IRDP,SGSY etc.) Social Banking Low rate of interest Supply -led credit Credit Alone Microfinance All financial services Savings,credit, insurance etc. Improving access to FFI (Financial inclusion) Commercial banking Market rate of interest Demand-led credit Credit Plus to Improve productivity of credit

Problems in Microfinance High Transaction Cost Travel Ledger Manpower High Risk Information Gap - Person to Person Borrower & Lender - Person to Environment Lender & Local Environment Borrower & Production Environment (Technology, Market, Infrastructure, Skill, etc.)

Status of Microcredit * Forty per cent of rural credit through informal system - RBI, 2000 * Share of informal market in rural areas increased in 1991 after declining in 1981 * Rs.2116 per capita outstanding credit * Not `True’ but `Restricted’ Demand

Status of FFI Resource Liquidity - Plenty Microcredit - Scarcity

Demand - Supply Gap Lack of awareness about micro-financial need Absence of perspective on microfinance Mismatch between demand and supply structure of credit Dearth of risk-taking attitude and urge to experiment at corporate level Lack of appropriate policy and strategy

Requirement for Microfinance Business Linking of informal and formal system Principles of informal system Service at doorsteps Anytime service Deposit of any amount Credit of any amount Credit for any purpose Simple formalities Mutual trust Full information Full cost +

Formal System Large Capital Cheaper Capital Better Knowledge of Global Environment

People’s Participation Microfinancing Individualistic Cooperation Directly People’s Participation Indirectly Institutions Solidarity group Money Lenders Others Grameen Group Common Goal Group Self Help Groups Cooperatives Cluster Federation Joint Liability Group

Individualistic Approach Two Customers are independent of each other Competition between two customers is invisible to the customers

Cooperation A group of customers dependent on each other for financial decisions The competition between two customers is visible which is resolved through both logic and compassion by the contenders themselves

Agent Approach (UCB, SMGB) Participatory Banking ( MRCP, AGB, PGB, AUGB ) Intermediation through money lender ( Indian Bank ) Onlending through intermediary ( BASIX )

Approach To Self Help Group

SHGs Credit Linked 502891 Till March,2002 239066 During 2001-02 PSB 55% RRB 38% Cooperatives 8% FFI  NGO  SHG (NGO) 9% FFI  SHG (Bank) 16% FFI  SHG (NGO) 75%

Innovations in SHG Formation CGB - PGB - AGB - AVGB Trained own staff who formed groups VVV - socially conscious villagers formed by RRB  SHG VDC at village FC at branch  SHG

Innovation in product for SHG Chitradurga Grammen Bank Flexible savings scheme (All members) - Insurance to cover risk - Earn more interest Recurring deposit (A few members) - Specific life cycle needs Pre-printed cash certificates - To meet investment needs - Long term savings SHGs to sell certificates to other SHGs

Federation: (Why) SHGs Have Limited ability to access external fund Limited ability to manage larger fund Limited skill of management of group Vulnerability of internal group tensions Low visibility as a pressure group

Federation : Objectives and Roles Financial - Accessing and managing external funds - Providing larger credit to members - Auditing SHG accounts Non-Financial - Strengthening existing SHGs - Forming new SHGs - Facilitating inter-group exchange of information - Linking with other agencies - Advocacy for members - Helping members in backward and forward linkages - Acting as interest group for collective bargaining - Providing a larger platform for the members to address various issues - Bring men and women SHGs in a common platform

Federation - Structure Two tier SHG - Federation Three tier SHG - Cluster - Federation

Cost of Formation of SHG Formation in the Same Village CGB (DSK Rao) Formation in the Same Village 1st SHG Rs.2300 4th SHG Rs. 700

Cost of SHG Operation

Grameen Group * NGO/MFI - ADITHI, Bihar - ASA, Tamilnadu - RDO, Manipur - SHARE, Andhra Pradesh * PSB - Oriental Bank of Commerce, Uttaranchal, Rajasthan, Bihar

Progress of OBC 1996 2002 States 2 3 Branches 2 28 Villages 14 161 Groups 181 1616 Members 899 8040 Savings (Rs.000) 2.95 23200 Disbursement (Rs.000) 18.04 81600 Repayment (Rs.000) 4.41 56900

Other Solidarity Groups Common Goal Groups - Annapurna, Pune Joint Liability Groups - BASIX, Andhra Pradesh

SHG and GBG SHG SHG has Own Fund SHG is a micro micro micro---micro Bank Bank---> SHG---> Individual SHG Tends to become Self sufficient Smaller size of Group creates Fund Constraint GBG GBG not a Financial Institution Bank--->Individual(Directly) Small size does not create Fund Constraint GBG Members Tend to be “Perpetually” dependent on Banks

SHG and GBG from Members’ Angle Fund Management Loan Sanctioning Mutual Gurantee Higher level of financial skill Required More Mutual Trust Required Short term High Interest Long Term Low Interest Forced Savings GBG No Fund Management LoanRecommendation Mutual Guarantee Lower level of financial skill Required Less Mutual Trust Required Short Term Low Interest Long Term High Interest Savings Potential Less

SHG and GBG from Bank’s Angle Formation and Maintenance Cost Externalized Otherwise Higher Cost Dependence on NGO Short term Business relationship? In search of new SHGs continuously GBG Banks have to form Groups No role of NGO Easier to Form GBG Less Costly Not much skill requirement Long term Business relationship

Federation and Cooperatives X X X X X X X X X X X X X X X X X X X X X Cooperative Federation X Members X X SHG Management Group

Attitudinal Constraints in Microfinance Social obligation not commercial proposition Microfinance Perceived As income generating programme Not as financial inclusion programme

Institutional Constraints in Microfinance * Absence of Microfinance Institutions Income tax Banking Acts Cooperative Regulations and Bureaucratic Control Policy on use of Deployable Resources

Policy Issues Official definition of microfinance Ensuring the microfinance services Approach to subsidy Banking policies Management information system Legislation process