The Microfinance Industry in India …

1. The Microfinance Industry in India … Presented by Mathew Titus, Executive Director, Sa-Dhan

2. Microfinance in India (1) Access to Financial Services… • 75 million families rely predominantly on informal sources to access Rs. 50,000 crore (US $11.34 billion) of credit • Penetration of life insurance services in rural India is <10%. Asset, health, weather and other general insurance services are still nascent • Securities, commodity derivatives, pensions…much less used…as are money transfers, remittances…

3. Microfinance in India (2) Channels for Delivery… • Govt. supported SHG-Bank Linkage programme • Involvement of 35,294 branches of 560 Banks (Commercial banks - 48; Regional Rural Banks - 196; and Cooperative Banks - 316) in 563 districts and 30 states • Another channel of delivery are: 700 – 800 MFIs, mostly small and registered as NGOs • Since 2000, banks have only targeted 15 - 20 larger MFIs as part of priority sector lending

4. Microfinance in India (3) Growing interest in Microfinance… • Private Investors and equity funds are now financing fast growing MFIs • Some state governments are funding SHG-programmes • GoI has appointed NABARD to manage the Microfinance Development & Equity Fund (MFDEF) with a volume of INR 200 crore. • GoI has presented a Microfinance Bill to parliament • … Over 50 million Clients in 2005-06 14 million clients in 2007-08 6 million Clients in 2005-06

5. Why This Interest in Microfinance? Perceived benefits… • Access to doorstep, flexible and affordable financial services empowers and equips the poor to make their own choices and fight poverty, in a self-determined manner. • It also enables the poor to: increase household incomes, accumulate assets, invest in health and educational aspects, reduce vulnerability to crises, enhance food security MFIs can deliver these benefits on a permanent and sustainable basis to large numbers of poor, often without donor support

6. Key Outreach Statistics… • SHG – Bank Linkage Program • 40 million households gained access to formal credit (90% women) • Cumulative disbursement as on 31st March 2007 – Rs. 180 billion (approx. US $ 4.1 billion) • Highly skewed (75% of the funds flowing to 4 states in Southern India) • MFIs, 2 third of whom are Sa-Dhan Members • Cumulative loan outstanding of Rs. 60 billion (approx. US $ 1.1 billion) • Reaching over 14 million clients Huge GAP between DEMAND and SUPPLY !!!

7. Huge Unmet Financial Needs… Demand from 100 million Poor and Vulnerable Households in India (in $ Billion) $100 Billion While there has been Significant growth in accessto finance in the last decade, there is still a huge unmet demand 20x Growth Factor approx. $5.2 Billion Finance Accessed By Poor Households Finance Needed By Poor Households Source: World Bank; CGAP (Occasional Paper #8, 2004, access-data from March 2008, Sa-Dhan)

8. Because of High Risks and High Transactions Costs… Collateral free loans to poor women High risks due to… A large number of very small loans to rural locations High transaction costs due to… Why Banks Don’t Lend to Poor… So, loans sharks exploit the poor’s lack of access to credit, by charging as high as between 36-84% interest and higher, in some cases…

9. The Need for Sa-Dhan… • A common platform for collective action and sharing to reach the economically weaker population • Promotion of multiple approaches that are complementary in nature • Model neutral advocacy for healthy growth of the sector • Enhancing institutional capacity and client perspectives within the sector • Providing technical assistance to enhance the economic and livelihood opportunities for the poor • Integrating microfinance with education, health etc

10. Sa-Dhan, The Origins… • Established in 1998,Sa-Dhan today represents 197 agencies involved in microfinance across the different parts of the country, pursuing various MF models Mission of Sa-Dhan: • To build the field of community development finance in India and to help its members and associate institutions to better serve low income households, particularly women, in both rural and urban India, in their quest for establishing stable livelihoods and improving their quality of life

11. Sa-Dhan’s Objectives… To encourage new and existing Microfinance Institutions (MFIs) to expand To create opportunities for existing and new MFIs and FIs to enter Microfinance by establishing a supportive legal and regulatory environment To build a strong financial system in the form of Community Development Finance Institutions (CDFIs) with the help of MFIs, NGOs and others

12. Growth of Microfinance and Associated Risks (1)… +40.5% MFIs with portfolio over Rs. 50 crore 2 MFIs 8 MFIs +97.5% MFIs with portfolio between Rs. 5 and 50 crore 32 MFIs +78% MFIs with portfolio up to Rs. 5 crore Unweighted growth rate per category, March 2006 to March 2008

13. Growth of Microfinance and Associated Risks (1)… • As Sa-Dhan and its members grow, in their mission to build an inclusive and sustainable financial sector for the poor in India, one aspect is likely to come up, time and again, as we have seen in the last year – The accusation of MFIs charging ‘Usurious’ Interest Rates and related aspects as has happened in Andhra Pradesh in 2006 • Some of the consequences of this motivated accusation include – suggestions for capping interest rates, strict action against MFIs, subsidized lending by the State and the like

14. Growth of Microfinance and Associated Risks (2)… • Practitioners know that these accusations are not build on facts. E. g. Sa-Dhan for 2007-08 finds an average portfolio yield of 21% - compared to total cost ratio of 19%. • The fact of the matter is that such ‘false’ accusations, would only increase as the Microfinance sector further expands and this must be seen as a normal and natural part of delivering microfinance on a large scale. • As the industry strengthens and more and more poor people demand access and are included in the larger financial system, such meaningless accusations will largely become irrelevant

15. Growth of Microfinance and Associated Risks (3)… • Such challenges essentially emanate from the influence of various vested interest groups (including local money lenders and others), who, in the guise of appearing to help the poor, are in fact denying them access to tailor made financial services • They are perhaps even forcing the poor again into being dependent on local informal sector money lenders, who charge as high as 80-100% effective interest rates (EIR) So, such challenges have to be countered factually and maturely. Accordingly, Sa-Dhan’s has evolved a long-term, multi pronged strategy towards the same, as outlined in the next few slides and has been engaging, sensitising and seeking support of several stakeholders to find a long-term solution to this problem

16. So, Whom is Sa-Dhan Sensitising? On What Aspects… • Why lending to poor can be costly, using arguments of transaction costs, lack of collateral, information asymmetry etc • What additional benefits accrue to the poor from MFIs that provide doorstep banking?\ • Why only sustainable MFIs can ensure long term access to financial services for the poor • How competition will naturally reduce interest rates while enhancing access • How and why capping of interest rates will again exclude the poor and reduce access • Why poor prefer access to a continuous stream of financial services rather than short term subsidies • Why MFIs should practice client sensitive microfinance Sensitising… • Policy Makers, Central and State Governments and Regulators • The General Public and Civil Society • Banks, Wholesalers and Investors • MFIs and NGOs involved in Microfinance These aspects given here are not exhaustive

17. Sensitising Policy Makers To… • Some Key Outputs Objective and well conducted research studies on actual costs of lending to the poor, existing levels of access, comparative cost structures in servicing the poor, impact of capping interest rates in terms of reduced access, effects of competition in reducing interest rates etc Videos/films on impact of microfinance, good/bad practices in microfinance, impact of subsidies etc Documentaries and media articles on various models of microfinance and their impact, Human Interest Case Studies on Impact and Livelihoods, usually involving clients • Illustrate the impact of microfinance on various aspects • Highlight the urgent need for enhancing access to tailor made financial services for the poor • Establish an enabling legislation, as in other countries, where such an environment has helped the Microfinance sector scale-up and reach large numbers of poor people in a sustainable manner

18. Enabling MFIs To… Help rationalise their cost structures and make them more efficient, transparent, accountable, client oriented and competitive. Establish minimum standards for microfinance systems in areas such as: • Management Information Systems (MIS), • Risk management, internal controls and internal audits, • Portfolio management guidelines, • Accounting standards, capital adequacy and the like, and • Loan officer and field worker certification Follow a VOLUNTARY CODE OF CONDUCT including standards of Corporate Governance with specific disclosure norms and several other aspects

19. Working With Lenders and Regulators To… • Ensure that growth of Microfinance is always accompanied by commensurate development of systems, governance and management practices • Advocate with GoI for a microfinance bill that will ensure sound practices in microfinance, open opportunities for thrift, among others • Sensitise them to carry out due diligence in an effective manner • Appropriate loan portfolio audits • Transparent financial audits as per best practices • On and off site supervision, where possible and necessary

20. Microfinance: Uplift ever more Indians from poverty! Sa-Dhan is the sector custodian of the microfinance mission; through bringing the stakeholders – MFIs, regulators, banks, investors – to one table, providing them with information, and building consensus and commitment A wide choice of Micro-savings, -credit, -insurance, -remittances, … Micro-credit Mostly Group- lending