Transformation of microFinance in India: Experiences, Options and Future

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

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

3. The Setting

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

5. 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

6. 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

7. 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

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

9. 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)

10. 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

11. 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

12. 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

13. 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

14. 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)

15. 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