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U. B. Desai
SPANN Lab. Dept. of EE IIT-Bombay www.ee.iitb.ac.in/~ubdesai
Why the special need for finance for the underserved communities? Why do poor still go to unorganized financial institutions (money lenders, shaukars, ...)?
Oct 2008
IT 625: ICT4SED
Oct 2008
IT 625: ICT4SED
Why the special need for finance for the underserved communities?
Why do poor still go to unorganized financial institutions (money lenders, shaukars, ...)?
Same as above Shift in Perspective: From poverty alleviation to wealth generation --microfinance will enable wealth generation We will look at this during the talk
Oct 2008
IT 625: ICT4SED
General Belief
Poor are too difficult to reach. Small loans to poor is not a financially viable proposition Financial institutions will loose money when they give microcredit to the poor Microcredit or microloans will only increase the debt burden for the poor Do you agree? What is your opinion?
Oct 2008
IT 625: ICT4SED
Microfinance (mFI)
A clever scheme for small-savings and smallloan for the underserved community A financial service for the poor A financial approach empowering the poor Microfinance brings in incremental changes
Microfinance may also be considered a tool to give poor people the opportunity to participate fully in economic life Will improve the village economy
It does not bring in dramatic changes like the ones that occur when a company goes in for an IPO
Facilitate increase in cash flow Bring more villages into the market; monetize more villages
Oct 2008
IT 625: ICT4SED
Institutions:
Access points for the poor to get financial services (e.g. SEWA, Grameen Bank, etc.) These could be bank branches (could be virtual branches), socially oriented financial institutions, or a partnership between the two
private socially responsible citizens (~30%) Infrastructure: Here ICT can play a major role
Oct 2008
IT 625: ICT4SED
Exorbitant interest rates On the low end 3% per month (36% per annum)
Often collateral, like cattle, jewelry, etc not returned Often the poor get into a debt cycle for life! UmFI does not give loans for sustainability (for e.g. starting a micro-enterprise!)
Always available (always on!) You get it when you really need it Quick disbursement Negligible transaction time
Dependence of low-income households on informal sources for loans is nearly 78 per cent.
The poor not only has low income but irregular cycle of payments and withdrawals. The informal financial institutions (money lenders) satisfy this need to the tee
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Gold is typically the collateral Borrowers: small time office clerks, peons, people who have permanent jobs Collateral amount is 1.5 times the loan value Loans taken for illness, family function, etc. Interest is 3% per month Default rate 80% -- most of the time gold is confiscated About 100 lenders each lending about a Rs.10 lakhs; totaling Rs.10 crs.
Interest rates are around 3% per month Repayment is on a daily basis Hawker, vegetable vendors will go for such loans Often, most of the income goes in loan payment About 200 to 300 lenders in this category Each loaning about 5 to 10 lakhs Totaling about 20 crs
Oct 2008
IT 625: ICT4SED
Some Facts
There are an estimated 3,000 microfinance initiatives serving the world's poor
Only 30 microfinance initiatives have grown to serve more than 100,000 poor borrowers.
scarcity of money and participation by commercial financial institutions has limited their expansion. More than 70 percent of them serve fewer than 2,500 borrowers each.
The largest mFI, Grameen Bank in Bangladesh, reaches more than 3 to 4 million borrowers. A total of $4 billion has been disbursed since Grameen started giving loans in 1976 with seed loans starting as small as $35.
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Oct 2008
India
Earliest Initiative
Shri Mahila SEWA (Self Employed Womens Association) Sahakari Bank was set up in 1974 Since then, the bank is providing banking services to the poor self-employed women working as hawkers, vendors, domestic servant etc. SEWA bank has 1,75,000 depositors; about 70% from urban area, 30% from rural areas The deposit and loan portfolio stood at Rs 623.9 million ($13.86 million) and Rs133.6 million ($2.97 million) respectively. Though SEWA mFI is making profit, yet the SEWA bank model of mFI has not been replicated elsewhere in the country Very low default rate
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India
Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising
On an average, there is at least one retail credit outlet for about 5,000 rural people
12,000 branches of district level cooperative banks over 14,000 branches of the Regional Rural Banks (RRBs) over 30,000 rural and semiurban branches of commercial banks besides almost 90,000 cooperatives credit societies at the village level
the number of mFIs is estimated to be around 800. Not more than 10 mFIs are reported to have an outreach of 100,000 microfinance clients. An overwhelming majority of mFIs are operating on a smaller scale with clients ranging between 500 to 1500 per mFI.
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Rural Poor Women Asset value less than Rs. 20,000/Per capita income is less than Rs. 350/per month Live in poor housing conditions
Institutions that offers financial services to low income people at the prevailing market rates.
Most of these provide microcredit and accept small payments for saving and repayment of loans. They do not take saving from the general public. They take savings from their cliental mainly the low income group.
NGOs which are wholly involved in this or partly. The ones partly involved do several other work that is done by an NGO. Credit Unions Private commercial banks Non-bank financial institutions
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Oct 2008
National Bank for Agriculture and Rural Development (NABARD) Small Industries Development Bank of India (SIDBI) Rashtriya Mahila Kosh (RMK)
as mFIs; But, I feel ,they do not fit the bill, because they do not cater to the kind of income talked about earlier
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IT 625: ICT4SED
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Appropriateness of mF
mF works best for those who have identified an opportunity and the credit can be used to exploit this opportunity to develop a sustainable source of income. Microfinance is not appropriate for
Extremely poor, destitutes There has to be some viable way of micro-loan repayment People who are extremely poor may get into debt trap with microfinance Numbers vary, but some feel that one has to have 98% loan repayments rate for an MFI to succeed.
IT 625: ICT4SED
Oct 2008
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For 630,000 villages we have 32,443 bank branches Of the ~67,000 bank branches in India, ~32,500 or ~48 per cent are in rural India The average population served by a rural bank is approx. 15,000 Overall, 18 per cent of the rural population has bank accounts. The comparative figure in urban India is almost 100 per cent
The per capita deposit in rural areas is Rs 2,000 Dependence of low-income households on informal sources for loans is nearly 78 per cent.
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IT 625: ICT4SED
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Share of Different Sectors in GDP (GDP at factor cost, 1993-94 Prices) Rs. In crores
Agri.
Industry
Services
Total
Services%
1970-71
137320
46151
113438
296278
38%
1980-81
159293
70687
171148
401128
43%
1990-91
223114
150383
319374
692871
46%
2000-01
285877
263797
649011
1198685
54%
2001-02
302054
272359
691016
1265429
55%
2002-03
292625
288266
739842
1320733
56%
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IT 625: ICT4SED
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12th largest in the word Approx. 4000 billion base dpn PPP
22%
56%
22%
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Rural CD ratio needs to brought upto 60% Low CD ~ a lot of cash is idling, or cash collected in rural areas is used to give credit to urbanICT4SED IT 625: areas Oct 2008
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Deposit services Credit lines Term loans Money transfers Micro-Crop and life insurance Micro health insurance
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IT 625: ICT4SED
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Innovation in Microfinance
Development of finance products for the underserved Management of credit risk (minimization losses in giving credit) Scalability: how to reach a vast, diverse, not easy to reach and geographically scattered populace
exploit technology
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Oct 2008
Gautum Ivatury: Focus Notes, Jan 2006, CGAP (Consultative Group to Assists the Poor) www.cgap.org Oct 2008 IT 625: ICT4SED 23
Microcredit
Determination of a borrower's willingness and ability to repay a loan is critical if a microlender is to minimize credit risk
Legal systems and community pressure (for rural areas) contribute to a borrower's willingness to repay a loan
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Three operational areas on which a microlender should focus to minimize credit risk:
loan design underwriting loan servicing
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Micro-Loan Design
Revolves on the design of interest rates (must cover operating costs, credit risk and funding costs) mFI interest are not very low at present 15% to 36% per annum (SEWA charges 15% to 18%) Note: RBI interest ceiling is 21%
On the other hand, for rural poor, it has been observed that the amount of monthly payment is much more important than interest
As long as they are comfortable with the scheduled payment amount they do not worry too much about interest rates
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Oct 2008
Micro-loan Underwriting
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Micro-Loan Servicing
Loan servicing is the act of collecting payments and maintaining the balance of a loan
In commercial banking, loan payments are made by bank draft or by directly debiting payroll or a bank account.
The typical borrower does not have access to a bank account and often does not receive a formal salary. This means that for many customers of microlenders making loan payments can be difficult and put them in the position of making the choice to take time off from work (and possibly get fired) in order to deliver a loan payment or choose not to make a payment. Successful lenders will set up payment kiosks in communities. The kiosks are typically open before the typical work day starts and after it ends. Another effective method, albeit more labor intensive is door-to-door collections.
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Micro-Loan Servicing
Borrowers respond well to positive incentives for good payment history. Microlenders and mortgage lenders have successfully used incentives such as payment rebates, small appliances and food to achieve very high levels of repayment. For example, one Mexican lender offered a free bag of corn meal if a borrower made timely payments for six months. The result was a delinquency rate of less than 1% Rather than wait until a loan goes into default, a microlender should investigate a loan within weeks of it first becoming delinquent. Often, the cause of a delinquency is due to illness or unemployment. If caught early enough a lender can give the borrower assistance as well as workout a equitable repayment plan.
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Oct 2008
Challenges
Establishing the idea of access to financial services as human right; just like health care, education etc. are basic rights (Mathew Bishop, Business Editor of The Economist)
Convincing, for profit organizations like established banks, non-bank financial institutions, that microfinance is a good business opportunity and they should commit large capital to establish this business.
Also convincing them that charity (funds donated by established organization) is not a sustainable way for growth
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Challenges
Reaching people in sparsely populated, diverse, not easy to reach, and geographically scattered areas
Most important challenge is to exploit technology to reduce transaction costs so that financial institutions will indeed take up microfinance as one of their major service. Reaching the poorest of the poor the destitute:
Make microfinance part of main stream financial market Data Collection need to collect data that can indicate
Many ignore this segment Very difficult for a commercial institution to recover micro-credit given to this segment Here Government will have to step n develop a scheme for micro-grants
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Landlines Rs.20K per line Cellular --- Rs. 3K to 3.5K per line
Annual business of handset reaching Rs.10,000 crore ($220 mil), comparable to color televisions indicating affordability. 7-9 mil new connections across the country every month Only ~20 mil PCs in India
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Microfinance is a necessary input for rural wealth generation but by no means sufficient
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