3. Microfinance: what is it?
Micro-credit
Group lending
Social/charitable
activity
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• Range of financial
services
• Group and individual
lending
• Profitable activity
What it often is What it really should be
5. Providing financial services to the poor:
challenges
Risk management challenges
due to information asymmetry
problems
Accessibility (geographic
accessibility and easiness to
deal with)
No collateral, Low value and
cash intensive nature of the
business
Staff training and motivation
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High
transaction
costs
7. Adverse selection: incomplete
information problem (before the loan)
Don’t know
Client’s type
Interest rate
reflects proba of default
Safer clients drop out
Need to increase interest
rate
Providing credit can
become
impossible
8. Moral hazard: hidden action problem
(after loan)
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Can not observe what client is doing
Bad loan usage
Strategic unwillingness
To repay
9. Clients profile
75% population lives in rural areas:
geographical access difficult
Informal activities: need access at
flexible times
Illiteracy: difficult to deal with
traditional services
Low value of transactions
Lack of collateral
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10. Staff
Lack of trained staff
Lack of motivated staff
Difficult to incentives staff
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12. Providing financial services to the poor:
occupied India
Deccan, late 19th Century:
peasant riots on account of coercive
alienation of land by moneylenders.
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Organization of cooperative societies as
alternative institutions for providing crédit
by british government
13. Results
Access in terms of rural branches increased
from 1,833 in 1969 to around 32,538 at
present: 49% of all scheduled commercial
bank branches are rural
The population per rural branch declined from
2,01,854 in 1969 to around 16,000 at present.
The proportion of borrowings of rural
households from institutional sources
increased from 7 per cent in 1951 to more than
60 per cent at present.
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14. Results (cont’d)
31% (131.1 million) of the total deposit
accounts are in rural India
43%(22.4 million) of total credit
accounts are in rural India
Positive impact on the poor (Rohini
Pande/Burgess paper)
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15. Micro Finance: apparition
The financial sector reforms motivated policy
planners to search for products and strategies for
delivering financial services to the poor –
microFinance - in a sustainable manner consistent
with high repayment rates.
NABARD: empirical observation that had been
catalysed by NGOs that poors gather in informal
groups
Create a formal interface of these informal
arrangements of the poor with the banking system.
Bank-SHG Linkage Programme.
Recent emergence of MFIs: professionally run
institutions specialiazed in delivering credit with low
cost staff and local knowledge
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16. Despite all these efforts…large gaps
remain
Against rural population of 741.0 million, 500 million
people un-served
Population per branch: 22,793
Penetration of savings accounts is below 18%
As against 104% in urban and semi-urban areas
Number of villages per branch: 19
High dependence on informal sources
◦ 36% of rural credit from informal sources
◦ Dependence even higher for lower income households: 78%
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18. Gaps in demand and supply
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Demand: Rs. 450 billion/y
60% in South…to cover all parts of India
Less than 2 million
Households reached
500 million un-served poor
Disbursed: 39 billion
Need employment opportunities
Need protection
against all risks
Market constraints
Insurance under-delivered
Scaling
up
Increase
impact
20. Range of Microfinancial
services:
Health insurance
◦ Reimbursement model
◦ Cashless model
◦ How to identify illness?
◦ How to avoid fraud?
Livestock insurance
◦ Recognize cause of death
◦ Identify animal (role of technology)
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21. Range of Microfinancial services:
Weather insurance
Index-based: index created by assigning
weights to critical time periods
Past weather data mapped to this index
to arrive at normal treshhold index
If deviation: compensation
Commodity price derivatives
NCDEX: offers price discovery services:
offer farmers instruments to hedge pre
and post harvest risks
Makes using commodity as collateral
possible
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22. Range of Microfinancial services:
Savings and investments products
◦ Could be offered through Money Market
Mutual Fund: MFI acts as agent
Remittances
◦ 10 million seasonal and circular migrants
(National Commission on Rural Labour)
◦ Adhikar, Orissa
◦ ICICI: remittance product through internet
kiosks
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