Micro finance in India

State of micro finance in India and what lies ahead

• Small loans are given to impoverished people to invest into generating their own incomes. – Lack of access to banking

• Mohammad Yunus Story

• 2005 “ The year of Micro credit”

• Mr Yunus said microcredit could create a world where poverty could only be seen in a museum.

• How true is this claim?

What Micro finance should ideally be?

• Came into existence in the early

1980's with the formation of self-help groups(SHG)

• Grew at 90% on an annual basis from 2002-03 to 2009-10 was reduced to just 7% growth in 2010-11.

• Poverty alleviation to money minting

Vikram Akula, Founder SKS Finance

Rise and Fall of MFI in India

• Everything was fine until the profit mindedness and short termism of private MFIs grew beyond limits.

Such practices include: • High interest rates• Lending highly indebted borrowers• Lending for non income generating activities• Undesirable collection practices• Poor enforcement of standards by MFI associations

The Crisis

• Farmers who commited suicide in Anantpur

• In Andhra Pradesh, debt repayments from the state's nearly eight million micro-borrowers have dropped to around 20%, prompted by a government crackdown on the industry after a number of suicides allegedly linked to over lending

• Govt of AP eliminated further lending or collection by MFIs.

• Total outstanding loans of INR 6000 Cr

SKS Microfinance: The company that got too big

•It raised Rs 230 crore from institutional investors last week, the largest capital raising exercise for SKS since its IPO.•SKS, says this qualified institutional placement (QIP) was over-subscribed and that it equips it to meet the credit requirements of its four million rural borrowers•Today the valuations are a pale shadow of what SKS commanded during its IPO two years ago – Rs 75.4 a share in the QIP, compared to Rs 985 during the IPO.

•As banks and financial institutions stopped lending to MFIs, SKS opted not to go in for the corporate debt restructuring package, availed by others such as Spandana and Share Microfin. It also repaid its Rs 3,800 crore debt without delay.

•It was exactly two years ago that SKS’ fortunes were at their peak.

•It had concluded a successful IPO which raised Rs 1,600 crore, enjoyed margins that were the envy of every finance company and was the poster-boy for the microfinance ‘opportunity’.

•The company attracted well-known investors such as Sequoia Capital, Goldman Sachs, Sandstone Investment Partners, DSP Blackrock Equity Fund, as well as N.R. Narayana Murthy’s Catamaran and angel investor, Vinod Khosla.

DARK TIMES

•First, the entire MFI sector was engulfed in widespread

allegations of harassment of clients by recovery agents

and borrower suicides in AP.

•The Andhra Pradesh Microfinance (Regulation of

Moneylending) Act 2010, placed checks on the interest

rates at which MFIs may lend, prohibited overlapping

loans and made prior local government approval

mandatory for disbursal of loans.

• SKS also hopes to diversify its lending to include financing of small kiranas, loans for purchase of mobile handsets and gold loans. Microfinance is mainly a rural and semi-urban phenomenon.

• Rani, a women’s group leader and a client of SKS, hailing from the suburbs of Warangal town, summarises the situation well, saying- “Loans from banks are always better because nobody will coerce us for repayment delays of one or two days and their interest too is lower. We lost more than what we gained in borrowing from them.”

The future of MFIs will also hinge on the action that RBI takes with respect to the sector. The new Microfinance Institutions (Development and Regulation) Bill 2012 was tabled in Parliament in May. The Bill proposes to make the Reserve Bank of India the sole regulator of the sector

What Caused The Fall

• Exorbitant interest rates: the M-CRIL Microfinance Review 2010 has shown, interest rates in Indian microfinance are amongst the lowest in the world. Microfinance yields of the order of 25%-28% are lower than the 35%-40% of MFIs in Southeast Asia and far lower than the higher rates of 40%-60% that are the norm in other parts of the world.

• The number of MFIs with annual percentage rates (APRs, the theoretical charge of the loan to the borrower on the MFI’s loan terms) in excess of 40% is no more than a handful amongst the 60 leading MFIs in India.

• This, in a country where even SMEs financed by the commercial banking system regularly face APRs of the order of 18%-20% and where moneylender rates for the poorest borrowers range from 36% in a few of the more prosperous regions to 60%, 120% and more elsewhere.

• Client coercion: For all the noise in the media about client coercion, particularly in the state of Andhra Pradesh where the crisis started, MFIs forcibly tried to acquire forcibly the physical assets of delinquent clients or to harass them deliberately in order to force them to pay their loans.

• High growth: In a country with an economic growth rate of 7-9% per annum, and a relatively limited educational system, the most competent staff had many other employment options and meant, for the largest MFIs, a staff turnover ratio of the order of 30-40%. Imagine having to train some 4,000 staff in order to replace those who leave plus another 10,000 because your ambition extends to doubling the number of clients served in a single year.

• Multiple lending leading to over-indebtedness: The industry’s quest for growth at all costs resulted in an over-simplification of its relationship with clients cutting out all its social messages and focusing simply on micro-money circulation; inducting clients for the sake of maximizing portfolio size while ignoring the possibility that they already had loans from other sources, and ignoring less developed parts of the country due to the well known first mover disadvantage in mass market situations.

• Conflict of interest – government as competitor and regulator at the same time: This too was a main cause for the failure of Micro Finance Sector in India.

The Grameen Bank and Indian Microfinance

• The microfinance schemes in India is that they have unabashedly copied the Grameen Bank model. The model revolves around weekly payments and self-help groups. I give you a loan and you pay me in Equated Weekly Instalments (EWIs).

• The simple fact is that in rural India, the major demand for loans comes from agriculture, which involves large negative cash flows up front and (hopefully) large positive cash flows a few months down the line and the microfinance institutions here barely seem to understand this.

• One of the fundamental principles of finance is that the cash flows of the source of funds should approximately match the cash flows of the application of funds. What Equated Weekly Instalments implies is that if I give you a loan at the beginning of the crop cycle, I expect you to pay me a large part of it before the completion of the cycle! And the only way (in most cases) that you can make such payments is by going to the local moneylender, thus getting stuck in a debt death spiral.

• The reason the model has worked so successfully in Bangladesh is because there the loans are not for agriculture. They are doled out to women so that they can start their own small businesses, which usually yield steady weekly cash flows. The cash flows from the business are in tune with the cash flows from the loan.

• The Indian Micro Finance Sector should be more open to experiment, and large banks (especially PSU banks) should probably take a little more risk in the initial years to try out new models.

Grameen Bank Muhammad Yunus

Who Should Regulate Indian Micro-Finance

“In its report ‘Trend and Progress of Banking in India 2010-2011’, The Reserve Bank of India (RBI) states that

• If State Governments start enacting their own legislations to regulate microfinance institutions (MFIs) including the ones regulated by the Reserve Bank, there will be plurality of regulation leaving scope for regulatory arbitrage.

• The Microfinance Institutions (Development and Regulation) Bill, 2012, will take MFIs outside the purview of state-level legislation, including the controversial Andhra Pradesh law that saw the asset base of the microfinance industry shrinking and led to a drastic increase in bad debts due to restrictions on collection practices. 23/05/2012

The Microfinance Institutions (Development and Regulation) Bill, 2012

• Those MFIs registered with the apex bank won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

• The Bill proposes the setting up of a microfinance development council with members from various central government ministries, including finance and rural development, RBI, the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, the National Housing Bank and another four independent members.

• The council will advise the central government on the formulation of policies for the sector and will have a non-government official with relevant banking experience as chairman.

• the Bill also proposes the setting up of state development councils with representatives from state governments.

FAQ’s About MFI’s• Why was micro-finance a success in AP?• Why is there such a heavy default in loan

payment by farmers?• Why credit availability of MFI’s get crunched?• Why MFI’s and not banks?• What is the government doing to change the

situation?• Suggestions made by us apart from the bill

passed.• Involving big financial institutions in MFI.

Success in AP…• 1/3rd of the micro loan is from this state.• The reasons for success in AP is

Both Chandrababu Naidu & Y S R Reddy believed in fighting poverty by providing loans to poor women.

Put tax payers and world bank’s aid in the improvement of this sector.

Strong encouragement for the poor to take unsecured micro credit.

It did not believe in “pushing the loans” instead it actively “encouraged” micro credit facilities.

State gave a subsidy to the self help groups who repaid on time by charging only 3% instead of 12%.

Doorstep service, ease of paperwork, much less bureaucracy, innovativeness and an NGO philosophy combined with missionary zeal, which made the MFIs so successful.

Heavy default in loan repayment..• Default in scrutiny by MFI employees.• Training to the MFI employees.

Suggestions• Engaging retired and youngsters with not so high

educational qualification for work.• Group credits to be encouraged which were the crux

of the success of Grameen Bank, Bangladesh.• Concentration on Self Help Groups (SHG)• Proper training of mentors in MFI’s.

Why not Banks?• Huge waivers given by government instead

suggesting reasonable steps to encourage continuous flow of money. In 2008 government gave a waiver of Rs 60000 crores.

• Cumbersome paperwork and formalities.

What can government do?• Setting sound macroeconomic policy that provides stability

and low inflation.• Avoiding interest rate ceilings - when governments set

interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costs—such as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit.

• Encourage competition, capacity building and innovation to lower costs and interest rates in microfinance.

• Support autonomous, wholesale structures.

• Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with sustainable microfinance delivery.

• Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs.

• Promote microfinance as a key vehicle in tackling poverty, and as vital part of the financial system.

• Create policies, regulations and legal structures that “encourage responsive, sustainable microfinance.”

• Encourage a range of regulated and unregulated institutions that meet performance standards

THANK YOU