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Microfinance in India Product Image

Microfinance in India

  • Published: September 2008
  • Region: India
  • 100 Pages
  • Cygnus Research

FEATURED COMPANIES

  • ABN Amro Bank
  • Commercial Banks
  • PRADAN
  • Private Banks
  • SEWA
  • MORE

Indian microfinance sector is expected to grow nearly ten times by 2011 to a size of about Rs250 billion from the current market size of Rs27 billion, at a compounded annual growth rate of 76%. Microfinance in India started evolving in the early 1980s with the formation of informal Self Help Group (SHG) for providing access to financial services to the needy people who are deprived of credit facilities. National Bank for Agriculture and Rural Development, the regulator for microfinance sector, and Small Industries Development Bank of India are devoting their financial resources and time towards the development of microfinance. Microfinance has enormous growth potential as half the world’s population earns less than US$2 per day, which is insufficient to meet their basic needs.

One of the fastest growing sectors of India, microfinance is spearheading intense competition among the largest players. By the end of March 2007, microfinance institutions expanded their outreach to 50 million households and about 36.8 million borrowers. These institutions are organised under three models: SHG, Grameen model/Joint liability groups and Individual banking groups as in cooperatives. READ MORE >

EXECUTIVE SUMMARY
HIGHLIGHTS

1. MICROFINANCE - AN OVERVIEW
1.1 Microfinance - A Short Background
1.2 Global Developments in Microfinance
1.2.1 Penetration in South Asia
1.3 Micro-Finance in India
1.3.1 Models practiced in Indian Microfinance Industry
1.3.1.1 MFI Model
1.3.1.2 Self Help Group Bank Linkage Model
1.3.2 MFI and SHG Bank Linkage Credit Supply
1.3.3 Role of Central Banks
1.3.4 Role of Women
1.3.5 Microfinance & Poverty Alleviation
1.4 Urban Microfinance
1.5 Rating of Microfinance Institutions
1.5.1 Indicators for rating

2 MARKET SCENARIO
2.1 Market Size and Growth
2.2 MF Institutions
2.2.1 SKS Microfinance
2.2.1.1 Introduction
2.2.1.2 Business Activity/Products and Services
2.2.1.3 Business Strategy
2.2.1.4 Outlook
2.2.2 SHARE Microfin Limited
2.2.2.1 Introduction
2.2.2.2 Business Activity/Products and Services
2.2.2.3 Business Strategy
2.2.2.4 Outlook
2.2.3 BASIX
2.2.3.1 An Introduction
2.2.3.2 Business Activity/Products and Services
2.2.3.3 Business Strategy
2.2.3.4 Outlook
2.3 Role of NGOs in microfinance
2.3.1 SEWA
2.3.1.1 Introduction
2.3.1.2 Business Activity /Products and Services
2.3.1.3 Business Strategy
2.3.1.4 Outlook
2.3.2 Mysore Resettlement and Development Agency
2.3.2.1 Introduction:
2.3.2.2 Business Activity / Products and Services
2.3.2.3 Business Strategy
2.3.2.4 Outlook
2.3.3 PRADAN
2.3.3.1 Introduction:
2.3.3.2 Business Activity/Products and Services
2.3.3.3 Business Strategy
2.3.3.4 Outlook
2.3.4 Society for the Promotion of Area Resource Centres
2.3.4.1 Introduction:
2.3.4.2 Business Activities/Products and Services
2.3.4.3 Business Strategy
2.3.4.4 Outlook
2.4 Private Banks
2.4.1 ICICI Bank
2.4.1.1 Introduction:
2.4.1.2 Business Activity/Products and Services
2.4.1.3 Business Strategy
2.4.1.4 Outlook
2.4.2 ABN Amro Bank
2.4.2.1 Introduction:
2.4.2.2 Business Activity/Products and Services
2.4.2.3 Business Strategy
2.4.2.4 Outlook
2.5 Commercial Banks
2.5.1 State Bank of India
2.5.1.1 Introduction:
2.5.1.2 Business Activity/Products and Services
2.5.1.3 Business Strategy
2.5.1.4 Outlook
2.5.2 National Bank for Agriculture and Rural Development
2.5.2.1 Introduction:
2.5.2.2 Business Activity/Products and Services
2.5.2.3 Business Strategy
2.5.2.4 Outlook
2.5.3 Small Industries and Development Bank of India
2.5.3.1 Introduction:
2.5.3.2 Business Activity/Products and Services
2.5.3.2 Business Strategy
2.5.3.4 Outlook

3. GROWTH DRIVERS
3.1 Need for Bank Credit by Unprivileged Class
3.2 Availability of Finance
3.3 Government Policy and Support
3.4 Consolidation in the Industry
3.5 Growing Migration and Urbanisation
3. 6 Human Resource Capacities

4. ISSUES & CHALLENGES
4.1 Literacy & Skill Levels of Clientele
4.2 High Transaction and Service Cost
4.3 Credit Risk
4.4 Skewed Regional Distribution of Microfinance
4.5 Diversion of Funds to Unproductive Activities
4.6 Regulatory Issues
4.7 Irregular Flow of Income due to Seasonality
4.8 Uncertainty of Market Conditions
4.9 Lack of Tangible Proof for Assessment of Income
4.10 Need for Information Sharing & Better Technology

5. OUTLOOK
5.1 Size and Growth
5.2 Penetration of Microfinance in Future and Role of Private Sector Investment
5.3 Sustainability of Microfinance
5.3.1 Policy Environment
5.3.2 Financial Infrastructure
5.3.3 Developing Viable Microfinance Institutions
5.3.4 Pro-poor Innovations
5.3.5 Social Intermediation
5.4 Scalability of Microfinance in Future

ANNEXURE – BIBILOGRAPHY

LIST OF FIGURES
1.1 Savings by Region
1.2 Savings by Region 953 MFIs Reporting, July 2007 61 Million Savers
1.3 MFI's by region, Based on a sample of 2,207 MFIs in 2007
1.4 Direct Financing Model
1.5 SHG Bank linkage Model
1.6 Growth in borrowers under MFI channel (2003-2007)
1.7 Growth in outstanding loan portfolio under MFI channel (2003-2007)
1.8 Estimated loan outstanding under SHG bank linkage channel ( 2003-2007)
1.9 Share of bank linkage SHG and MFIs in microfinance disbursement (2003)
1.10 Share of bank linkage SHG and MFIs in microfinance disbursement (2007)
1.11 Growth in cumulative disbursements by SHGs and MFIs channels (2003-2007)
1.12 Instituitional flow of microfinance
2.1 Major market players in rural credit
2.2 Growth in client outreach by MFI's
2.3 Classification of activities – Micro credit loan being taken

LIST OF TABLES
2.1 Growth of SHG Linked in 13 Priority sectors
2.2 Growth of SHG's in Regions
2.3 MFI Outreach State-wise
2.4 Top 40 MFI Institutions and their Active Borrowers (2007)
2.5 Top Microfinance Institution Performance in the year 2007
2.6 Top 20 Districts by MFI Penetration (2007)
2.7 Earnings of the poor in the developing countries from the micro-enterprises may vary from 29% - 236% (2008)

With India’s GDP growing at the rate of 8.5­–9%, the country’s socio-economic pyramid is turning around the story with millions of poor people scaling new heights to become entrepreneurs in their own right. And the credit goes to the mushrooming microfinance industry. Microfinance sector is clearly one of the fastest growing segments of the Indian financial sector, and also one where such growth is sustainable for a very long period of time. In spite of a large banking sector, about 40% of the Indian population does not have bank accounts. Given that over 75% of the Indian population still earns below US$2 a day, microfinance comes to their rescue as it enables them to raise income and improve the standard of living. Microfinance promotes thrift savings, credit and other financial products and services among the poor. Considering that the vast majority of the poor lives in rural areas, microfinance is key to the financial inclusion of this section in the mainstream of the country.

Microfinance refers to financial services, including loans, savings accounts, and insurance products, that are designed to serve people with very low incomes. The intent of the microfinance movement has been to build “financial systems that work for the poor majority.” The involvement of international financial institutions enhances the access of the poor to financial services. There is a change in the microfinance strategies of banks and financial institutions. Their focus is shifting from South Asia to African countries, a significant development that was rarely seen before. Large financial institutions have started increasing their global presence and have started diversifying microfinance products.

As the birthplace of microfinance, Asia leads the world in total current borrowers. In South Asia, the modern microfinance movement was born in Bangladesh in the 1970s as a response to the poverty conditions among its vast rural population. This region is a world leader in microfinance because of the highest penetration in outreach and active borrowers. In South Asia, Sri Lanka and Bangladesh show an impressive coverage, with microfinance reaching more than 60% of the poor.

The Indian microfinance system is led by two basic models—SHG-Bank linkage model and MFI model. The number of SHGs linked with banks increased from 22,742 in the year 2003 to 137,000 by March 2007. Even though the growth of microfinance industry is commendable but still there are 3-4 million households in rural areas and about 1-5 million poor households in urban areas who do not have access to financial services from formal or semi-formal sources. The Central bank strengthens the microfinance sector by streamlining the financial processes and support from the mainstream financial system and acts as a catalyst to the industry. Most of the microfinance institutions focus on women’s empowerment, and major part of clients consists of women. SEWA of Ahmedabad and Working Women's Forum in Chennai are some of the microfinance institutions that are exclusively for women. Microfinance programmes have, in the recent past, become more promising ways to use scarce development funds to achieve the objectives of poverty alleviation. While the government’s concerted efforts to alleviate poverty have been unsuccessful in the past, the microfinance institutions are now taking up the reins to achieve the millennium development goal of poverty alleviation. Major microfinance institutions are diverting their attention to urban population rather than being rural centric. Urban microfinance promises huge opportunity for the microfinance institutions, although it gives berth only to large MFIs because the start up and transaction costs are high.

Microfinance industry is growing at an exponential rate in India, although it exhibits tremendous regional disparities. It shows regional inclination towards the southern region. Although the coverage has been diverted to the eastern and western region, south has the highest penetration in rural microfinance. Private Banks, MFIs, public sector banks and NGOs form the major players in rural financing to the poor people. Public sector banks, MFIs and NGOs follow different strategies to scale up their operations in the industry. Some of them follow partnership model, while others follow the strategy of higher penetration through SHG. Another way of lending adopted by ICICI is that of portfolio buy-out. The microfinance sector in India is trying to focus on micro-savings and financial literacy among the poor. It is developing the habit and discipline of saving and has started introducing micro-insurance, though in a relatively small way.

There is high demand for credit in the Indian economy, but the formal financial institutions are unable to meet this demand because they have their own limitations when it comes to lending to the poor people. This demand-supply mismatch could act as a key growth opportunity the microfinance institutions to scale up their operations. The growth of economic activities in the urban population will enable the microfinance sector to expand their operations in the cities of the India. Although microfinance in India has outperformed the expectations of formal financial institutions, it still faces the challenges in terms of regulatory support and financial illiteracy. Moreover, the high transaction cost of the microfinance institutions due to smaller loan size creates a challenging situation for the sector to thrive in and sustain.

The funding gap in microfinance is very high, both at the national and global level. Increasing involvement of private sector investors is therefore a key medium-term priority to scale up microfinance. Fortunately, the prospect for a greater involvement of private investors is actually good. By 2015, it is expected that the volume of private sector investments (private institutional and individual investors) would increase to around US$20 billion. The main growth drivers would be increasing institutional and retail investor demand, regulatory changes and the enhanced capability of MFIs to absorb commercial funding.

Microfinance industry is expected to become an integral part of the formal financial system once its vision of extending financial services to the low income people is accomplished. Seeing the huge demand for rural credit, it is expected that the industry will continue to grow at rapid pace, although the blend of the financial system and extent of growth will vary from country to country. There will be diversification of products in the industry, which will vary from current accounts to pension and savings products. Risk management systems, use of technology and regulatory issues will continue to be the key challenges for the sector.

- SEWA
- Mysore Resettlement and Development Agency
- PRADAN
- Society for the Promotion of Area Resource Centres
- Private Banks
- ABN Amro Bank
- Commercial Banks
- National Bank for Agriculture and Rural Development
- Small Industries and Development Bank of India

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