Transformation of microFinance in India: Experiences, Options and Future M S Sriram and Rajesh Upadhyayula Indian Institute of Management Ahmedabad

microFinance Defined microFinance means many things - But the contours may be: Piloted by the alternate sector Focussed on the poor Having roots in development

The Setting

What triggers transformation? Size Diversity of services Financial sustainability Focus Taxation

What are the International Experiences in Transformation? Bolivia and Africa: Transformation of NGOs –To Banks –To FFPs Indonesia: Transformation of mainstream –To microFinance methods Bangladesh: Transformation of a project –Grameen Bank –Other NGOs transforming to Banks

Challenges in the Indian context Size Growth in geographic area Growth in portfolio/client size Diversity of Services MFOs wanting to offer Savings MFOs wanting to offer Risk Products

Challenges in the Indian context Financial Sustainability –Internal growth –Access to funds Focus –Other Developmental activities V/s mF –Degree of specialisation needed for mF

Challenges in the Indian context Tax Status –For-profit mF activity V/s not-for-profit NGO activities –Tax status of donor money

Options for Transformation (Spin off) Company (NBFC) –Poverty School Share - Transformation with growth CFTS - Start up as NBFC ASA - Through MBTs (proposed) –Sustainability School BASIX - Complex structuring (holding company, borrowings and equity from developmental and commercial sources)

Options for Transformation (Spin off) Examining NBFCs + Access to financial markets + Access to bank finance + Can Operate across the country –Limited options for offering savings –Re-capitalisation for growth may be tough –Steep entry norms (Rs.20 million initial) –Not easy to get registrations

Options for Transformation (Spin off) Examining Co-operatives MACS, Urban Co-operative Banks +Small and dispersed institutions, that could organically grow and federate +Involves the community in decision making as it is member-user-governed +Easy entry norms +Best route for SHGs to formalise +Can offer many services including savings

Options for Transformation (Spin off) Examining Co-operatives –Geographic limitations –Does not have a good image, attracting outside capital will be a problem –Recent scams in urban co-operative sector might lead to tightening of regulation

Options for Transformation (Spin off) Needs to earn enough profits to show that it is operationally self-sufficient It could also be financially self- sufficient, but no pressure to plow back profits or hit the capital market The concerns would be to keep costs under control and revenues on target to demonstrate

Options for Transformation (Spin off) Set up a Local Area Bank + Flexibility to offer diverse products + Cost of funds likely to be lower, so the impact on the poor with be better –Steep initial capital (Rs. 50 million) –Difficulty in getting licence –Limitation in geographic growth (3 contiguous districts)

Implications for regulation Allow MFOs to grow organically –Allow for expansion in area in case of co- operatives and LABs, subject to minimum performance Allow for NGOs to invest in for-profit MFOs such as NBFCs and LABS No change in entry norms - ensure only serious players come to the field