1 “Microfinance Institutions- Role, Contribution, Potential and Challenges in Financial Inclusion” A presentation to the Ministry of Finance, Government of India, New Delhi 10 th August 2009

2 Sa-Dhan in Financial Inclusion On Financial Inclusion, Sa-Dhan members’ - ensure access to financial services - provide timely and adequate credit - to vulnerable groups such as weaker sections and low income groups -at an affordable cost” Dr. Rangarajan’s Committee on “Financial Inclusion” “MFIs could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele”.

3 Services Provided by MFIs Though the scope are wide but till now generally the MFIs are providing the services like- Micro Savings Micro Credit Micro Insurance Micro Remittance Micro Pension

4 MFIs REACH A CRITICAL MASS MFI now serve 22.6 million clients Loan Portfolio touches INR cr 93% of MFIs clients are women MFIs serve about 50 lakhs SC/ST borrowers and 29 lakhs of minority background MFIs have reached to the 71% of the poorest districts, defined by NREGP 1 st and 2 nd phase MF sector have generated direct employment of more than professionally skilled personnel First mile connectivity for the poor &last mile for FFIs

5 Performance and Growth

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7 Still to achieve 80% of the poor household are out of full fledged financial services Many no-frills accounts are reported to be non- functional No access to savings products 95.5% of MSME excluded from formal banking Only 14% of lowest income quartile have life insurance Less than 1% of population appears to have medical insurance Major source of credit for most Indians is still the moneylender

8 Issues and Concerns: Issues related to provision of composite financial services Problems faced by CBOs Related to not-for-profit MFIs Related to NBFC-MFIs Addressing Regional Skewedness Other important issues

9 Issues related to provision of composite financial services REMITTANCE – Small Ticket size, Door to Door Service – Not recognised by RBI as a financial product – MFIs should be allowed to do remittance operations MICRO INSURANCE – Slow progress – main hindrance is the current claim settlement process – move towards a community based process – Adequate marketing channels for Micro Insurance – Need for awareness creation - no support available as Development Cost. – Waive Service Tax to make micro insurance affordable – Increase priority sector targets for micro insurance MICRO PENSION - Promotion and development needs policy attention

10 Potential of CBOs to Promote Financial Inclusion CBOs ( SHGs, Federations and New Generation Cooperatives) reach out to the poorest of the poor not covered by other financial institutions 32 lakh SHGs and 69,000 Federations exist in the country according to NABARD Financial intermediation role of CBOs, Federations and Cooperatives enables timely accessibility of financial services CBOs / Federations are both an empowering and equitable tool for the poor.

11 Problems faced by CBOs Lack of Investment in Capacity Building of SHGs, Federations and Cooperatives – Training – HR – Financial Literacy – Access to Technology Lack of clarity on the legal and operational structure of CBOs hampers their ability to effectively play the role of financial intermediary.

12 Not- for- Profit MFIs: Recommendations Recognition to such institutions in Financial Inclusion Source of funds- Setting up Refinance Institutions, allow savings mobilisation, equity Reduce Cost of funds Exemption from Taxation Develop appropriate legal structures Special allocation for unreached areas eg. North East and other backward areas.

13 NBFC - MFIs ARE WELL REGULATED ON PAR WITH THE BANKS Registered with RBI Follow Prudential Norms stipulated by RBI Follow KYC Norms applicable in the case of rural borrowers Adopt Code of Conduct and Fair Business Practices File regular Returns and subjected to on-site and off –site Inspection by RBI

14 NON-REVENUE MEASURES Pooling of Resources ECBs MFIs to access Savings Long term Funding requirement RationaleRepresentation  Reduce risk weightage to 25-50% on loans to MFIs  Mobile Banking & Correspondent banking to be allowed for MFI- NBFCs  Allow MFIs to issue Prepaid cards with ATM access.  Capital allocation of 19% Vs Basel II stipulation of 9% & impeccable asset quality  Amalgam of the ‘funding capability’ of banks & ‘credit delivery skills’ of NBFCs.  MFIs to access External Commercial Borrowings (ECBs)  End use Vs structure  Allow MFIs to accept “Demand Deposit” from members.  ‘Credit – Saving – Insurance’ - Triangle  Allow ADB / IFC to issue Long Term guarantee to MFIs.  MFIs need Long Tem money NBFC - MFIs  Classify NBFC – MFIs as a separate category  Precedence – NBFC AFCs 14

15 Control Structure for MFI NBFCs Dispensations only to MFIs registered as NBFC with RBI. Other stipulations Ticket size not to exceed Rs 50,000 Deposit accepted not to exceed loan exposure at the enterprise level Bank ‘s equity holding in NBFC- MFIs to be capped at 10% 75% of net interest earning from Micro lending Dispensation to be linked to supervisory rating

16  Exempt Service Tax on all Micro Finance Products including Micro Insurance. REVENUE MEASURES Service Tax  Provisioning by MFIs on their Non-performing assets be treated as tax deductible expenditure. Stamp Duty Dr.Rangarajan Committee Report  40% tax exemption to MFIs under sec 36 (i)(vii) of the IT Act Provisioning on Non- performing Assets  Waive Stamp Duty on all Debt issuance of MFI – NBFCs.  The poor is unlikely to avail tax exemptions on insurance premium or interest paid on housing loans, etc. To compensate, waive service tax.  Level playing field with HFCs, DFIs, etc.  Level playing field with Banks.  Reduce cost of delivery of financial services to the Poor. RationaleRecommendation 16

17 Addressing Regional Skewedness Lack of Financial infrastructure and technical support in the underserved regions –Credit Guarantee Fund, Capacity Building and promotional funds Lack of funding support for institution building, systems and innovations, awareness and financial literacy Lack of professional and well managed a adequate number of service providers Lack of Region specific rating tools and its recognition Lack of interest from mainstream FIs in lending local and indigenous institutions

18 Other important issues Cost of fund is high resulting in higher pricing Application of State Money Lenders Act and sporadic problems associated with local administration Lack of Credit information Bureau and information sharing Credit Guarantee Fund to promote growth of the sector Exemption from stamp duty on the loan documentation for the MFIs

19 THANKS FOR THE PATIENT HEARING