Microfinance World April June 2009

COMPLIMENTARY WITH THE FINANCIAL EXPRESS

APRIL – JUNE 2009

MICROFINANCE
AN INSIGHT INTO THE WORLD OF MICROFINANCE W O R L D

The Success of
Microfinance in India

[CONTENTS]

CONTENTS
Page 4 Page 23
The success of microfinance in India The Impact of financial crisis on microfinance
Page 9 Page 25
Microinsurance market in India We are concentrating in direct SHG Bank Linkage
Page 10 Programme to reach out to more SHGs directly
‘Let’s now ask banks who is credit-worthy: the rich who Interview with MS Sundara Rajan, CMD, Indian Bank
don’t pay back or the poor who do’ Page 26
Interview with Muhammad Yunus, Grameen Bank ‘MFIs, if linked with livelihood, have a very crucial role
Page 13 to play in the growth of the economy’
Outreach should broaden Interview with Ela R Bhatt, founder of SEWA
Page 14 and Sa-Dhan
Small is profitable Page 28
Page 15 ‘Our efforts in the new fiscal year will be focused around
Microinsurance: A snapshot customers and competencies’
Interview with AP Ghugal, GM, Priority Sector Credit
Page 16
Department, Bank of India
Grain banks and self help groups
Page 30
Page 19
Models for achieving financial inclusion in India
Leading the way
Page 32
Page 20
Towards inclusive growth
‘We have been growing at 200%. By 2009 end we should
have over 60-65 lakh customers’ Cover photograph: Sandipan Majumdar, Kolkata/CGAP
Interview with Suresh Gurumani, CEO, SKS Microfinance Microfinance Photography Contest

2 MICROFINANCE WORLD | April 2009

[FOREWORD]
DEAR READER, CONSULTING EDITOR
MONALISA SEN
monalisa.sen@expressindia.com

M
icrofinance is evolving and the coming years will
see it making a definite impact across rural and
urban India giving hopes and opportunity to mil-
DESIGN
ANOOP KAMATH
lions to raise their standard of living. There are success stories
to suggest that its intervention is not a poverty alleviation
SPECIAL PROJECTS TEAM
measure. But coupled with appropriate framework micro- G. SUBRAMANIAN
finance could lead to sustainable and profitable economic g.subramanian@expressindia.com
activity as well. 2nd floor, Express Towers,
As per the Global Environmental Monitor, small and Nariman Point, Mumbai 400 021
medium enterprises powered by microfinance contribute Tel: 022- 22022627 Ext: 389
significantly to the economic growth of the society. For Fax: 022- 22022639
microfinance to be an effective tool to spur economic growth,
it is believed that micro-loans need to be used more for enter- PRODUCTION
prise building at the bottom segment of the pyramid. In B.R. TIPNIS
General Manager
Bangladesh, about 15 million families now benefit from small
loans and other financial products such as micro savings and
Copyright: The Indian Express Limited. All
microinsurance. It has resulted in 40% of the overall reduc-
rights reserved. Reproduction in any manner,
tion of rural poverty. electronic or otherwise, in whole or in part,
However, not all microfinance intervention leads to without prior written
economic activity although millions of people around the permission is prohibited
world have been taking benefit out of it. Reports have shown
that a substantial portion of the microfinancial services are A SPECIAL PROJECTS INITIATIVE
used for consumption or for a mix of consumption cum
enterprise building activities. HOW TO REACH US
Over the years the dynamics of financial inflow to the We prefer to receive letters via email,

microfinance sector has undergone radical changes. Started without attachments. Writers should disclose any
connection or relationship with the subject of
with grants and soft loan fund to take up small microfinance
their comments. All letters must include an
intervention, now large institutions are tapping huge capital
address and daytime and evening phone
funds from global equity investors. The whole range of invest-
numbers. We reserve the right to edit letters
ment instruments like equity, debt, soft loan, revolving fund, for clarity and space.
grant money and other institutional support funds are now
available to the microfinance institutions. Mail: Monalisa Sen
The diverse models and approaches have helped in reach- Email: microfinance@expressindia.com
ing out to new regions and to populations which have
remained excluded from financial services. The government
should ensure transparency and full disclosure of rates MICROFINANCE WORLD
including fees.
The Indian Express Limited
2nd floor, Express Towers,
MONALISA SEN
Nariman Point, Mumbai - 400 021
Consulting Editor

April 2009 | MICROFINANCE WORLD 3

[COVER STORY]

THE SUCCESS OF
MICROFINANCE IN INDIA
Financial inclusion of the poor can only be possible if the MFIs inculcate a habit of
savings and come out with insurance products covering various risks
Grameen Bank meeting

ASHOK B SHARMA The Nobel Laureate from Bangladesh and the founder of
the Grameen Bank movement, Muhammad Yunus, has

D
elivery of credit at the doorstep of those who are termed the microfinance disbursement as “a social busi-
not covered by the formal banking business, cou- ness” in contrast to the commercial business of banks and
pled with capacity building, is one of the ways for financial institutions. There should be a separate regulatory
achieving financial inclusion. Such a financial inclusion of authority for MFIs as distinguished in character from that
the poor can be more fruitful if the credit disbursed can for the commercial banks. The regulatory authority for MFIs
help them become entrepreneurs than meeting only their should evolve guidelines keeping in view the objectives of
consumption needs. The process can also be accentuated socio-economic development of the poor, he suggests.
if the disbursing microfinance institutions (MFIs) incul- According to Yunus, MFIs should be self-sustaining, be
cate a habit of savings by attracting deposits and come out allowed to attract deposits, provide insurance and pension
with insurance products covering various risks. fund, and should be capacity building.


[COVER STORY]

counter the adverse impact of the cur-
rent global financial crisis and provide
jobs and self-employment to many.
He holds the global banking and finan-
cial institutions responsible for the cur-
rent global economic crisis as they have
befooled the investors via mere paper
transactions. “Banking regulations
should clearly distinguish between gam-
bling and business. There should be
proper in-built mechanism to prevent the
business from running into trouble and
insurance schemes should be in place for
protecting deposits. The government
should not bailout these institutions by
doling out public money,” he says.
The microfinance institutions should
cater to the ‘real economy’ and livelihood
of millions of poor. The developing coun-
tries like India and Bangladesh have been
largely insulated from the adverse impact
of the current global financial crisis due
to the presence of the ‘real economy’, he
says. In Bangladesh 80% of the poor are
covered under microfinance. The remain-
ing 20% are expected to be covered with-
in the next two years.
India has been able to cover only 20%
people under it and needs to speed up,
he suggests.
In India, a Bill for regulation of MFIs is
pending in Parliament since 2007. The
proposed legislation has been delayed
on the issue of lowering of interest rates.
A joint secretary in the banking division
of the finance ministry, Amitabh Verma,
says the government is very keen on
MFIs lowering their interest rates. The
If MFIs are owned by borrowers, there should be no pay- MFIs should carry out their operations without any sub-
ment of licence fees. MFIs can source funds from banks. vention of interest rates by the government. Bangladesh
He is, however, not in favour of MFIs sourcing funds from has set up a regulatory authority for the Grameen Banks
outside the country. Funds should preferably be mobilised and another legislation for approval of MFIs as social
and distributed locally, he opines. banking institutions is pending for approval.
The interest rates should preferably be lower. MFIs Citing a few instances of social business, Yumus said,
should ultimately be owned and operated by borrowers, as students in Bangladesh were given loans, most of who
is in Bangladesh. There should not be any scope for individ- have opted to become entrepreneurs after they completed
ual profit in MFIs. All profits should be ploughed back in the their studies. Interest-free loans of 1,000 taka were given to
MFIs for meeting the costs of transactions, he suggests. 1,00,000 beggars, 15,000 of which have stopped begging
According to Yunus, this is the right time for the micro- and set up small business. Loans without any interest was
finance movement to grow and spread in India. It can an exception in case of beggars. As a general principle,


“Banking regulations should clearly distinguish between gambling
[COVER STORY]

and business. There should be proper in-built mechanism to
prevent business running into trouble. There should be insurance
schemes for protecting deposits. Government should not bail out
these institutions by doling out public money.”
Muhammad Yunus, founder of the Grameen Bank movement

MFIs should charge interests on loans to cover their trans- excess of traditional moneylenders or serve non-poor
action costs. Prudence suggests that cost of transaction clients. Savings could be a very feasible option, particular-
should be minimised and interest rates should be kept low. ly in the long run. Only cooperatives are legally entitled to
MFIs in India, however, allege that their interest rates mobilise savings. Some of the experiences suggest failures
are higher (mostly in double digits) as they have to cover of cooperatives. However, cooperative legislations in sev-
the costs of transactions and capacity building. eral states like Andhra Pradesh led to reforms in the coop-
According to Amitabh Verma, bank’s refinance rates to erative model. The outcome is the legal form of MACS,
MFIs are not likely to be less than 7%. Also, the govern- which is the registration for many SHG federations.
ment may not be in a position to render subvention on There are about 75,000 SHG federations functioning in
loans. Therefore, the MFIs should find novel ways for India and are an important avenue for managing an ever-
covering or hedging their costs. expanding number of SHGs. The SHGs federate into a two
MFIs apex body Sa-Dhan’s executive director Mathew or three-tier structures and take up a range of services,
Titus said; “The microfinance sector in India is going both financial and non-financial. They have so far not
through a difficult and a challenging phase. Extraordinary been included formally into the SBLP and have strong
growth, global credit crunch and increased awareness of points in their favour like cost efficiency and democratic
social impact pose a challenge. It is an opportune moment governance. Besides lacking exposure to these relatively
for house keeping and clearing up concerns that have new organisations, bankers often raise concerns about
been around for a while. Growth and competition need to level of professionalism of federation management, viabil-
be addressed in the common spirit to serve the poor. ity of the business model including dependency on the
Transparency is the key property that microfinance must self-help promoting institution (SHPI) and political inter-
subscribe to.” ference. The idea of a national-level SHG federation is
Microfinance in India touched the 33.6 million clients- being debated to address the issue.
mark in 2007-08, of which 14.1 million were served by Bankers are generally comfortable in extending re-
MFIs, according to Sa-Dhan estimate. Other estimates put finance to the non-banking financial companies (NBFCs)
the client outreach at over 100 million. These estimates because equity serves as a lever for credit. Banks are usu-
may differ but there is an unanimous acknowledgement of ally concerned over the creditworthiness of MFIs and SHG
the fact that over 90 million low-income households still federations’ portfolio quality, profitability, governance and
remain unserved. Therefore, microfinance must grow viability of the business plan. Incidentally, the involve-
steadily and steeply. All indicators point to a flattening ment of investment funds regularly brings about improve-
growth curve. However, these were computed before the ments in all these areas. Bankers rely more on existing sys-
global financial crisis and the growth path may even suffer tems and structures, though some emphasise on the mer-
a dent, according to some experts. This means not only its of a long-term relationship, their loan terms are mostly
unserved clients will have to wait longer but also the exist- 24 to 36 months. Therefore, it is essential that MFIs and
ing clients are likely to see their credit flow slowing down SHG federations go for credit ratings. Meanwhile, Nabard
and shrinking. has a scheme for subsidised credit rating for MFIs and
There is no possibility of a steep growth from grant SHG federations.
–financing at this stage. In a given period, grants are just However, microfinance can grow from the perspective
not large enough. The same holds true for profits that, in of demand only if adequate resources flow to MFIs and
theory, can be generated from a granted corpus. If profits self-help groups (SHGs). There are four main options for
are huge enough, the organisation would either cease to capital mobilisation — grants, profits, savings and invest-
be a community development finance by charging in ment. Grants and profits, however, are unfeasible.


[COLUMN]
MICROINSURANCE
MARKET IN INDIA
The risk coverage to the poor will help them to recover from natural calamities
MONICA AGRAWAL Vertical is “To cover risks to the lives and
livelihoods of the poor and underprivileged

M
icroinsurance aims to provide at an affordable cost.” Aviva has been pro-
protection and inculcate the sav- viding insurance to protect the lives and
ings habit for the customers at livelihoods of the economically weaker sec-
the bottom of the pyramid. Some time in tions of society in partnership with organisa-
their lives, most people experience finan- tions such as Basix, Aarohan and Paras Cap
cial difficulties with potentially long lasting Fin. Today, we cover more than 1.5 million
results. This is especially true for the poor lives and have settled close to 6,000 claims.
in developing countries. Any natural We have a well established microinsurance
calamities and disasters to the poor are practice focussing areas such as customer
considered to be the severely shocking haz- friendly products customised to the LIG seg-
ards, which is hard for them to recover ment needs; affordable and lean processes
from. There is therefore a growing realisation of the need to cater to the unique dynamics of this segment; world class
for microinsurance products in our country. customer service experience and demonstrated capability
It represents an untapped market of nearly $2 billion in in claims settlement.
India alone, according to a study released by the United We have been developing microinsurance products in
Nations Development Programme (UNDP). Demand for consultation with our distribution partners. Our popular
microinsurance in India has remained low in a large part microinsurance products include Credit Plus, Credit
because of a severe mismatch between services offered by Suraksha in the group category and Grameen Suraksha for
insurers and the needs of the insured. The present out- individual lives. Credit Suraksha and Credit Plus are cred-
reach of microinsurance is around 5 million people, cover- it-linked products largely for MFIs and SHGs. Grameen
ing only 2% of the poor in the country. Suraksha, on the other hand, is a traditional term plan
under which the policyholder pays a premium for a period
Challenges of two years and avails an insurance cover benefit for
Microinsurance delivery in India is fraught with chal- either 5 or 10 years. The minimum cover available is
lenges. A major hurdle is the acceptance of microinsur- Rs 5,000 and the maximum is Rs 50,000. Additional flexi-
ance among the rural poor who not only have low levels of bility is also offered such that the customer continues to
awareness about possible risks to their lives but also lack be covered for an extended period of 18 months (for the
trust in most financial schemes structured for the long five-year plan) or 48 months (for the ten-year plan) even if
term with no immediate benefits. Non-availability of she or he is unable to pay the second annual premium.
authentic admissible documentation during enrollment
and claims processing and a lack of facilities for premium Summary
remittance further adds to the complexity in insurance The microinsurance market has seen a lot of activity in the
administration in the remote and far-flung pockets of recent past and new customer service standards are being
India. Despite the numerous challenges, insurance com- set in a market that has long been sidelined for its non-
panies have in the recent past made significant inroads to profitability and complexity. However, a lot of ground
take insurance to the masses at the bottom of the pyramid. needs to be covered before we see tangible results in terms
of increased insurance penetration and adequate risk cov-
Microinsurance at Aviva erage for the rural poor.
Our Vision statement for the Microinsurance Business The writer is Director Corporate Initiatives, Aviva India


Bloomberg
[INTERVIEW]

‘LET’S NOW ASK BANKS WHO IS
CREDIT-WORTHY: THE RICH WHO DON’T
PAY BACK OR THE POOR WHO DO’
With his Grameen Bank, Muhammad Yunus, winner of the Nobel Peace Prize,
redefined the concept of lending. In an interview with FE, Yunus speaks about the
current economic crisis and explains the role of micro-credit banks in dealing with
poverty. Excerpts:
In the new financial crisis, how different will the role of al banking system is collapsing, micro-credit has a high
micro-credit banks be? repayment rate that is based on no collateral and no legal
Micro-credit is not impacted by the financial crisis for the papers—it functions beautifully. So, today, we can raise the
simple reason that it is not exposed to the international same old question we raised 32 years ago when banks told
financing system. Micro-credit is close to the real people. us that the poor are not credit-worthy: who is credit wor-
That is one of its strengths. Another strength is that we thy? The poor are the ones who are paying back and it is
don’t borrow from the international market—it is local the rich who are not paying back. The crisis has allowed
money going to local people. Third, while the convention- the world to challenge the financial system. I am in favour


The crisis has allowed the world to challenge the financial system. I am in favour of

[INTERVIEW]
redesigning it and redoing it. Going back to the same system would be the worst kind
of mistake we can make. Of course, terrible things are happening but we should look
at this as a great opportunity
of redesigning it and redoing it. Going back to the same What is the legal position on NGOs’ lending capacity?
system would be the worst kind of mistake we can make. If an NGO wants to lend money to poor women, the law
Of course, terrible things are happening but we should can come and say you are under arrest, you are violating
look at this as a great opportunity. the law because in order to lend money, you have to be a
moneylender, registered under the Moneylenders Act or
Farmers complain that there are too many checks and you have to be a bank. For example, if you take people’s
balances when they approach banks and financial savings and then disappear, who will stop you when you
lenders for loans but the same checks evaporate when are not registered? NGOs who are doing good work as
banks lend to big business houses. micro-credit organisations should be given the status of a
Interest rates in micro-finance should be as low as possi- micro-credit bank. You can give them standardised inter-
ble because we are not in the business for money. The idea est rates so that it is transparent.
is to help people out of poverty as fast as we can. In micro- People ask me, why don’t you convert yourself into a
financing, we give loans to the poor—without collateral bank? I say this is a ridiculous proposition. Banking law is
and without any legal instruments—for income-generat- created to create big banks. These big banks are like cargo
ing activity with the lowest possible interest rate. That is ships. A micro-credit bank is like a dinghy boat that goes
micro financing. into shallow water, ferries a little merchandise. You cannot
construct a dinghy boat from the architecture of an ocean-
Does the potential of micro-financing end once people going vessel. This is the difference. Why don’t we make the
are above poverty line or does it have the potential to architecture of a dinghy boat—what is so difficult about it?
take them even higher? Grameen Bank has a law that applies to it, it is a specialised
We make entry into micro-credit very difficult, unless you bank. We say, why don’t you generalize this law so that any-
are extremely poor. We have a tough screening process—we body can begin a Grameen Bank in Bangladesh? Millions
want to make sure we are getting to the person at the bot- and millions of people need financial service. This is a busi-
tom. So if you are a poor person who lives in two-room ness but a business with a completely different purpose—
house, please wait, we are looking for people who live in a to help people create their own employment. In the context
single room. Once you qualify, you will never be denied. You of this financial crisis, this becomes more important
can become the richest person in the world but we can still because people will be losing their jobs, will be losing liveli-
fund you because you had qualified and now you are an hoods. So if you can create financial systems of micro-cred-
example for us. You will inspire others; you are the owner of it, they can create self-employment opportunities.
the bank—Grameen Bank is owned by the borrowers. No
one has to leave, everyone can stay as long as they wish. The India government has used the loan waiver as a
means to address issues of poverty. Your experience has
How well does the system work? been that micro-credit borrowers are extremely good
It is very strong. If you are successful and I am not as suc- repayers. Is there a clash between the two models?
cessful, I copy you and see if I can benefit from that. It hap- Politicians are not bankers. They want political solutions.
pens a lot. For example, we encourage everyone to send Waiver is a political solution—it is a good way to ask for
their children to school—100 per cent of the children of votes but that is not a financial system which is tenable.
Grameen families are in school. They want to make sure Once you waive a loan, you are not only doing harm to the
that their children go as high as possible and Grameen present cycle but you are giving incentives to people in
Bank gives them a student loan. Right now, there are more future not to repay and pressure the government to waive
35,000 people with student loans from the Grameen Bank loans. If I have to waive a loan, I would do it by giving them
in business schools, medical schools, engineering schools. cash—because if you borrow, you have to pay back. That is
So you inspire each other. That is the advantage of having the culture we have to build, otherwise the banking system
groups, having weekly meetings and so on. will not work. Bangladesh is a country where disasters are


[INTERVIEW]

frequent. Many families start from zero after floods but we New York wanted it there. So, last January, we launched it
never waive their loans. The standard practice at Grameen in Jackson Heights. We deliberately chose Jackson
Bank is that as soon as the disaster hits, the branch is con- Heights because in Arkansas we had a lot of trouble giv-
verted into a humanitarian organisation. All banking ing loans to people. Their welfare law is funny: if you
activities cease to exist. Once the crisis is over, we take care somehow earn one dollar, you have to report it to the
of these families, help them start some kind of activity to welfare authority and welfare authority will diligently
keep them working. We issue new loans, new houses. deduct this dollar from your cheque. That is shocking. If
Slowly, you pay back. We take your loan and convert it into I were in charge of drafting this law, I would have done
a long-term one. Our system is that no matter how long it just the opposite. So we wanted to choose an area where
takes to pay back the loan, the interest can never exceed welfare has not penetrated yet. We followed every single
the total principal. Our policy is to make sure people get principle of the Grameen Bank. Whatever you see in a
back on their feet. If people are not on their feet, the bank Bangladeshi village, you see in Jackson Heights. We sent
will not be on its feet. somebody from Bangladesh to start the programme and
we chose somebody who has never been to the United
Does your bank have something for the urban poor? States so that he does what he does in a Bangladeshi vil-
When I was drafting the law for Grameen Bank, I put in a lage. He will not feel embarrassed about it. Today, we
provision that this bank will never work in any urban have more than 5,000 borrowers, all women, some
centre. Now, we are asking the government to amend it Caribbean, some Latinos, some Indians. Repayment is
because we have already covered the villages of 99.6% and while big banks are collapsing in the same
Bangladesh. Only the cities are left. In rural areas, we now environment, this bank is flourishing. Now everybody
have 7.7 million borrowers—97% women. Basically, this wants a Grameen programme. In Grameen Bank, the rule
is a bank for poor, illiterate women—they own the bank. requires that every borrower must open a bank account.
Our board is made up of their representatives, chosen Whatever little money you earn every week, you deposit
by them. that in the account. So to open an account for a woman
who saves two dollars a week was the greatest hurdle in
How do you see Grameen activities in India? the entire project. We are getting a lot of invitations, even
There is no Grameen Bank in India, just a Grameen-type one from Warren Buffet. His daughter Susan invited us to
programme because there is no law to allow this type of a Omaha, Nebraska, because Omaha is very poor.
bank to be created here. Those that exist are restricted Everybody is in the pipeline.
since they cannot take deposits. Most of the time they run
around for funds rather than concentrate on the work. We often speak about ‘social business’. Can you explain
Grameen Bank can grow as each branch is dependent on the concept?
the deposits it can mobilise from the area and lend the The basic thing that went wrong in the current financial
money to the local people. A Grameen Bank branch is like crisis is that the capitalist system made the human being
an independent bank by itself. We want to build our own appear as a uni-dimensional being and created a theory:
capacities but because the law doesn’t support this in that all they do in their economic life is to make money. I
India there are limited capacities. say, yes, making money is an exciting goal but human
beings are multi-dimensional beings. There are many
How did Grameen America, your New York venture, other things we take pleasure in doing—selflessness is
come about and how does the model work? one. That is where we went wrong. Why don’t we create
It is said micro-credit cannot work in the United States separate businesses on the basis of selflessness? If people
because it is a different country, a rich country, etc. can give away, why not use the money to design a business
Grameen Bank started in USA in 1987 when as Governor which helps people—say, something to tackle malnutri-
of Arkansas, Bill Clinton invited me. I had a meeting with tion. So at the end of the year, instead of asking the com-
him and his wife Hillary Clinton. They were eager to pany how much money it made, you would be asking how
understand our work. He said we need this in Arkansas many children it got out of malnutrition.
because this is the poorest state in the US. That was the This financial crisis is an opportunity for us to incorpo-
beginning and Hillary Clinton was the chairman of the rate the idea of social business. Money-making business
committee running this bank. After he became President, has failed the world. If we bring the social business into
that programme was folded up. Then somebody from the picture, some balance can be restored.


[COLUMN]
OUTREACH SHOULD BROADEN
Ensuring microfinance continues to work for and is focussed on the poor in India
JENNIFER MEEHAN almost a decade ago when many of
today’s leading and fastest-growing

T
welve months ago, in a candid microfinance institutions were still
conversation with a mentor and experimenting with different solutions.
friend on the state of microfi- There are three trends in India that give
nance for the poor in India, I heard a us pause for thought: 1) there is
comment that stopped me in my increasing anecdotal evidence that the
tracks: India was in danger of declaring poor are not being served in large
microfinance a huge success while tens numbers, especially in the North and
of millions of poor families continued East 2) The micro finance institutions
to lack access to the most basic of that have accessed commercially ori-
financial services. ented equity financing are moving,
No doubts, India is one of the most either consciously or not, away from
dynamic microfinance markets in the serving the poor who are more expen-
world. A combination of visionary social sive to reach, thereby reducing prof-
entrepreneurs, huge demand for micro- itability 3) There are a few MFI ‘biggies’
finance services and the availability of local commercial that dominate the microfinance market, leaving innova-
debt capital (and in some cases equity capital) has fuelled tive smaller and younger institutions to struggle to grow
rapid and enviable growth in the sector. It is estimated that in order to maximise their impact.
almost 55 million households are currently being reached Over the next year, we will advance our double bottom
by specialised microfinance institutions and through the line agenda in India in three ways. First, by promoting
NABARD-supported self-help group approach. the missing piece of the double bottom line puzzle—
Yet, for Grameen Foundation, growth in and of itself is not social performance in general and our Progress out of
a sufficient measure of the microfinance success. It is the Poverty Index (PPI) tool specifically. With this tool, we
quality of growth, as well as the quality of the services being can finally move beyond anecdotes and get verifiable
provided that matters. Are the poor and poorest actually data whether the poor are being reached and how their
being reached with financial services in a timely and honest poverty levels are changing with access to microfinance
manner? Are those services designed to enable them trans- services. Second, we will—in collaboration with
form their lives? Grameen Capital India—provide catalytic capital to Tier-
These questions dominated the recent Sa-Dhan microfi- II institutions working with the poor in underserved and
nance conference in New Delhi, headlined by two global unserved regions of India. And finally, we will collaborate
leaders in microfinance, Muhammad Yunus of the Grameen with practitioners and others locally to dispel the myth
Bank in Bangladesh and Ela Bhatt of Sewa in India. These that microfinance is only appropriate for those ‘econom-
two visionaries, along with social entrepreneurs across the ically active’ poor at or around the poverty line.
world, became barefoot bankers by accident—because of In order to declare microfinance a success in India, not
its transformational impact on the lives of the world’s poor- only do tens of millions of more poor people need to be
est people. reached, but those services must have a transformational
We believe that financial and social success in microfi- impact on their lives and those of their family members.
nance are not mutually exclusive, but rather mutually The writer is the CEO Asia Region for Grameen Foundation
dependent. Financial sustainability is required to grow (GF), a global non-profit organization that combines
microfinance to the scale of the problem—global poverty— microfinance, technology and innovation to empower the
and a measurable impact on lives is required to fulfill our world’s poorest people, especially women, to escape poverty.
underlying purpose and mission. She is based in Hong Kong and can be reached at
Grameen Foundation first began working in India jmeehan@grameenfoundation.org


[FEATURE]

SMALL IS PROFITABLE
Microfinance institutions have a close monitoring system which ensures that there
are minimum defaults with a good recovery rate

SUSHILA RAVINDRANATH development officer holds a meeting with all of them before
lending. Then the women pledge to pay back the amount

I
t is not very apparent yet, but one of India’s fastest and the institution starts lending. The officer goes literally
growing businesses is microfinance. In India, the everyday to follow up on the progress of a number of bor-
organised microfinance industry is about ten years old. rowers for whom he is responsible. Each branch of the
The most popular model for these institutions is the institution has many such collection centres. Lending
Bangladesh-based Grameen Bank. The micro entrepre- radius is usually within one or two square kilometer. And
neurs usually want to start ventures not amounting to one has to get to know the people. Banks can never handle
more than Rs 10,000. The interest they pay to the money something like this.
lenders make their borrowing completely unviable. For In spite of these hurdles there have been quite a few suc-
example in the wholesale vegetable market in Chennai, cess stories like SKS India which was launched in 1998. It is
one can see people disbursing Rs 100 to various vegetable one of the fastest growing microfinance organisations in the
vendors in the morning. By the evening the vendors have world, having provided over Rs 6,212 crore and having
to pay back Rs 120. This means they pay 20% interest every maintained loans outstanding Rs 2,216 crore to 3,906,007
day. These are the vegetable, flower, fish vendors, tea stall women members in poor regions of the country. Borrowers
and food stall owners who require funds and have no take loans for a range of income-generating activities,
recourse other than the money lenders. including livestock, agriculture, trade (such as vegetable
The microcredit institutions (MCI) lend them this vending), production (from basket weaving to pottery) and
amount without any security. The MCIs prefer to lend to new age businesses (beauty parlour to photography).
women rather than men. Some women give their borrow- Spandana founded in 1998 is also one of the fastest
ings to men in their family. But they make sure it is expanding microfinance institutions in the country. It is
returned. In micro credit women make better borrowers. also one of the most efficient in the country with an oper-
The interest rates are not low. Instead of 50% charged by ating expense ratio of 5.5% on portfolio. It now boasts of a
the money lender it may be 38%. Still there is a saving. And client base that constitutes almost 1.5% of the BPL (below
the default rate is negligible. poverty line) population of India. Then there is West
A survey conducted by RBI finds that most borrowers Bengal-based Bandhan, Chennai based Micro Credit
say that it is easy or very easy to get a loan from microfi- Foundation of India , all doing splendid work with women.
nance institutions (MFIs). They have a close monitoring Once they are established MCIs can be channels for
system which ensures that there are minimum defaults. other products like mutual funds, insurance and so on. It
MFIs have a good recovery rate. District administration is also possible to tie up these institutions with education
received very few complaints against and healthcare. Now that several success
MFIs. Almost all the bank branch man- In microcredit stories are emerging in this area, and the
agers said that MFIs were good customers spreads appear good, many larger com-
of banks and they could be used as busi-
women make better panies want to join the bandwagon. This
ness facilitators or correspondents. borrowers. The worries existing players. The big groups
However, microcredit is an operationally they fear will push costs and salaries up
difficult concept. According to people in
interest rates are which will defeat the purpose of microfi-
the business, if the loan amount is not low. Instead of nance. The industry also fears political
Rs 5,000, the amount is collected over 50 50% charged by interference, government interfering with
weeks at Rs 120 per week. Usually five interest rates and so on. Notwithstanding
women join together to take loans. It
the money lender it some problems many firmly believe that
becomes a collective liability. The field may be 38% the future lies in microfinance.


[COLUMN]
MICROINSURANCE: A SNAPSHOT
The life and health risk cover for the poor can contribute towards alleviating poverty
TARUN CHUGH Regulatory environment
Regulation in India has been fairly proac-

I
t is widely recognised that microfinance tive on the need for microinsurance. The
is a powerful tool in eradicating extreme Insurance Regulatory Development
poverty. As outlined in the millennium Authority (IRDA) was the world’s first regu-
development goals under the United lator to come up with specific microinsur-
Nations Development Programme, the ance guidelines in 2005.
basic approach adopted by the signatories
is built on the premise that over the time, Reaching out to the consumers
with the support from the state govern- Microinsurance is no longer considered just
ments, village economies can transition a subsidised business for meeting the IRDA
from subsistence farming to diverse com- obligations. According to a UNDP report
mercial activity. published in 2007, microinsurance repre-
sents an untapped market of nearly $2 billion in India.
The role of microfinance institutions
The first step towards achieving this is the availability of Consumer education
credit for asset creation. Over the last decade, the microfi- Consumer education on the need and importance of life
nance institution (MFI) movement originating from the insurance at the community level in these markets is very
Grameen model in Bangladesh has proliferated worldwide critical and needs to be carried out in isolation of advertis-
and made a significant difference to the rural economy. In ing and promotion.
India too, commercial insurers traditionally have focused
on bundling basic life risk products with the MFI loans to Product innovation
increase reach and convenience for consumers. However, ICICI Prudential Life, for example, has designed a cus-
credit linked insurance is usually driven by very low premi- tomised product offering—Anmol Nivesh— which is a sav-
um. For instance, ICICI Prudential Life’s Sarv Jan Suraksha ings and protection product designed exclusively keeping in
has a minimum premium of Rs 50 per annum and provides mind the need and income cycle of tea plantation workers.
up to Rs 30,000 in case of an eventuality. This sum is usual-
ly adequate to cover the loan outstanding and, hence, pro- Managing costs
tect the earning asset for the family. The premium is gener- Reaching out to this potential market needs to be cost
ally paid by the MFI as an extended credit to the member effective for it to be a viable business model for insurers on
and recovered along with the loan installments. a sustained basis. This makes it critical for various stake-
holders to pool in their resources towards achieving a
Creating value for consumers beyond credit insurance common objective. Pooling of data between insurance
Availability of credit, however, is a necessary, but not suffi- companies and government bodies can help improve
cient, condition for sustainable financial inclusion. Given actuarial calculations and in better pricing.
that the low-income group families in the developing
world are specifically vulnerable to multiple idiosyncratic Public Private Partnerships
and catastrophic risks, income protection in these markets The Centre, as well as a few state governments, have taken
is as important as income generation. steps towards providing life and health risk cover to the
Microinsurance not just plays a key role in meeting the poor. One of the more popular ones—Rashtriya Swasthya
credit requirements of this segment but at the same time Bima Yojana—is now launched across the country.
provides them protection against the above stated risks,
creating tremendous value for consumers in safeguarding The writer is Chief - Alternate Channels Group, ICICI
their interests. Prudential Life Insurance Co. Ltd.


[COLUMN]

GRAIN BANKS AND
SELF HELP GROUPS
In Orissa and Chhattisgarh repayment and distribution in any mode of grain led to
converting the produce of the area into money thereby facilitating savings
INDUMATI SAHOO belong to ST category, 42 to SC and 4 are of OBC category.
The land in this area is hilly land without irrigation facil-
Grain Bank ity. The livestock are mostly in the form of goats and cows.
Grain Bank is a kind of “Cereal Pooling Mechanism” at the The income level of most of the household is quite low.
village level. The villagers contribute a portion of their own It was observed that the food stress period is for about
harvested stocks of paddy, ragi and maize during December nine months. The agricultural produce meets the food
and January to establish a village based fund in the form of requirement for only 2-3 months. A major portion of the
grains collectively to meet exigencies. The members of the
Grain Bank usually borrow during lean period during May
to September and repay the same along with interest in the
form of grains after next harvesting.
The concept of Grain Banks is quite popular among
many tribal and backward regions of the country. The
Grain Banks offer dual benefit to the members in the form
of food security as also the seed security depending on the
participating clients. They also offer a savings avenue to
the poor in the form of savings in kind.
With a view to synergise the concept of Grain Banks with
that of the Small help Groups (SHGs), two projects were
supported by NABARD, one each in Orissa and
Chhattisgarh with the following objectives:
a) To explore the possibilities of monetising the savings- produce is used for liquidating the loan from the money-
in-kind in the form of grains to explore the possibilities lender. The lean season of food availability is from May to
of building synergy between SHGs in a village. September of the year and the food scarcity becomes
b) To understand the issues in participatory management acute during rainy season. People get into the clutches of
of Grain Banks in some of the dis-advantaged areas. the moneylenders during this period. The nearest bank
branch is at Gunupur about 25 km away.
Orissa (Kalahandi district) Three Grain Banks were constructed in Silet, Sikerguda
The Grain Bank project was piloted in the Rampur block of and Maltipadar. All the three are in active operation in 17
the Kalahandi district with a mission of exploring the pos- tribal villages of Kerpai and Nakarundi GPs of Thuamul
sibility of synergising the traditional practice of maintain- Rampur block of Kalahandi district.
ing grain banks with the SHG. The pilot envisaged mon- Three Grain Bank Committees were constituted with
etising savings in the form of grains by SHGs enabling members from different SHGs.
participatory management of grain banks by members 29 SHGs were promoted by the NGO, Antodaya.
and securing the availability of food grains and seeds espe- SHGs started savings in cash and grain. Savings
cially in the post monsoon period. mobilsed by the SHGs from members was Rs 1,59,025
A total number of 17 villages of Thuamul Rampur block and grain of 5,330 kgs (approximately).
of Kalahandi district were covered under the project. Out The district administration took keen interest in imple-
of the 353 households in the 17 villages and hamlets, 263 menting and monitoring the project. SHGs have


[COLUMN]
received support from external sources such as their produce for a month or so by availing loan from
Integrated Tribal Development Agency (ITDA) and the SHGs. Last year they could sell kandul dal (wild
Orissa Tribal Empowerment and Livelihood Project arhar) at higher price and sold tamarind for Rs 6 per kg
(OTELP) to an extent of Rs 1.45 lakh and Rs 1.5 lakh. as against Rs 2-3 per kg hitherto. The training pro-
Cash in hand were to the extent of Rs 11,865, cash in gramme under the project as well as frequent visits by
Bank were Rs 3,44,124 and the amount involved in inter- NGO personnel, Bankers and NABARD officials have
nal lending were of Rs 1,36,642 by the end of May 2008. enhanced awareness level among the people of this
Grains totaling 963 Kgs (rice, paddy, ragi and small mil- inaccessible area. They have succeeded in presenting
let) have been saved by the groups. Kalahandi Anchalika their problems before the district authorities and get-
Gramin Bank provided loan aggregating Rs 3.75 lakh to ting their work done.
the groups. There was a campaign against alcoholism in Sikerguda
to Maltipadar villages by the women SHG members in
Other benefits December 2007.
The implementation of the pilot project for Grain Bank All women members are covered under Swasthyashree
among others highlighted the area so much that the Health Insurance Scheme run by women federation
Government of Orissa selected it under Orissa Tribal Banashree Mahila Sangathan supported by Antodaya.
Empowerment and Livelihood Project (OTELP). The
micro watersheds are being developed and livelihood Chhattisgarh (Kanker and Bastar district)
To promote Grain Banks among the SHGs in the mono crop
areas of the state, a project on pilot basis for establishment
of five grain banks each in two villages of Bastar division was
sanctioned by NABARD with matching grant contribution
from Catholic Relief Society, an NGO. As per the project in
Markatola village of Kanker district, each grain bank was to
cover 3 SHGs involving 50 members for mobilising 50 kgs of
grain by each member. In the Mylibeda village of Bastar dis-
trict, each grain bank was to cover three SHGs involving 15
members each in mobilising 30 kgs of grain per year by each
member. NABARD had sanctioned Rs 2.375 lakh as grant
assistance towards 50% cost for establishment of 5 grain
banks each in the proposed two villages belonging to tribal
communities over a period of 2 years from the date of sanc-
programme are being implemented under the project. tion i.e. 17 February 2005.
Roads are being constructed to improve the connectiv-
ity. The flow of funds and the wages in the form of grain Markatola village
and cash have facilitated better standard of living for the The village has about 400 households having population
people. The scarcity of grain has been reduced to a great of 2,200 scattered in 9 hamlets. About 50% of the house-
extent. But the people are keen to continue with the holds are tribals and depend on agriculture and wage
Grain Bank as the OTELP project will be there for two labour. Villagers largely reside in kuttcha mud houses.
more years. The land holdings of the families vary between 1.5 to 4
At the pre-development stage, about 97% of the families acres. Only one major crop i.e. Paddy is grown in a year.
were under food stress during 5-6 months and were About 35% of the families avail crop loan from LAMPS
under the clutches of money lenders. In the post inter- which is around 10 km away. The nearest bank branch to
vention period no family was going to the mahajan or the village is 2 km away.
the money lender for food grain during scarcity period.
For cash loan the bank linkage is proving adequate. Achievement
However, occasionally few families still go to money The NGO had introduced the Grain Bank among the vil-
lenders as the nearest branch is situated 40 km away lagers long back. Only problem faced was that of limited
which gets cut off during monsoon. storage space restricting the operations of the Grain Bank.
People have gained confidence and can hold on to Five Grain Banks were completed, of which four were


[COLUMN]

constructed in community and panchayat land and the Kalahandi Gramya Bank (presently Utkal Gramya Bank)
remaining one in the land donated in writing in Gram could bring 364 household under its purview in one of the
Panchayat forum by the land owner. The Grain Banks are most inaccessible areas of the Kalahandi district. The
managed by a committee and secured with lock and key SHGs of remaining part of the area i.e. Kerpai GP were also
under joint custody. The Grain Banks started functioning credit linked through the effort of another NGO,
with effect from March 2007. An extension worker of the Shahabhagi Vikash Abhiyan and DRDA/ORMAS. Thus the
NGO staying in the area oversees the functioning of the entire area could be brought into banking network. The
Grain Bank. flexibility i.e. the repayment and distribution in any mode
SHGs are base for all the Grain Banks. Members of 3 to 4 of grain (either in the form of rice, paddy, pulses) led to
SHGs are the members of each Grain Bank. All the SHGs converting the produce of the area into money, facilitated
associated with the Grain Banks were gathering grains at savings in grain, credit in the form of grain as well as cash.
uniform rate of 5 kata (15 kgs) per member after harvesting. Building synergy between SHGs and Grain bank: The
synergy between Grain Banks and SHGs has brought in a
Mylibeda village decentralised system for distribution and recovery with
The village has about 200 households having population the involvement of the community. This has led to the sus-
of 1,500 scattered in 7 hamlets. About 95% of the house- tainability of the Grain Bank.
holds are tribals and depend upon agriculture and wage Food Security And Participatory Management: Food
labour. The average size of land holding of the households security during the food stress period was the biggest chal-
is 4 to 5 acres. Only one crop i.e. paddy is grown in a year lenge which has been addressed successfully as the people
as the village depends entirely on rainfall for cultivation. could meet their requirement through Grain Bank.
The village is having one Anganwadi Centre and one pri- Other developments: The implementation of OTELP and
mary school. Catholic Relief Society, the NGO has imple- construction/repairing work of road are the major develop-
mented a watershed programme in the village. A residen- ment initiative by the Orissa Government. The develop-
tial school upto 10th Standard and a hospital are run by ment work led to flow of grain and cash in the form of wages
the NGO in the village. and grant assistance for various livelihood programme.

Achievement Future Strtaegy
14 SHGs were formed in the village and it was observed Grain Bank to be converted into commodity outlet : The
that members were aware of the SHG concept and had tribals of the projects wanted to continue with the Grain
opened SB A/c with the RRB branch. The groups had Bank scheme. The community is in the habit of saving and
mobilised Rs 5 to 10 per month regularly. The Grain Banks the grain saved at the SHG level could be used for access-
started functioning with effect from 1 December 2006. All ing funds from bank. The stock of grain with SHGs in vil-
the grains contributed during 2006-07 was lent out. lages may ensure food security particularly in the context
The establishment of Grain Banks in the village of food stress period during monsoon when the area gets
addressed the problem of resorting to the money lenders cut off. The Grain Bank can be converted into commodity
by the villagers to a large extent. Because of Grain Bank, vil- outlet and may be linked to the rural haat.
lagers remained united. They also organised recreational Grain Bank Committee to become Farmers club:The
activities in the village. Grain bank activity helped the vil- Grain Bank Committee may gradually become inactive
lagers to organise and construct a check dam in the nearby with less work in hand and may ultimately become
nala. They are now able to produce second crop on some defunct. In order to enrich the job of the Grain bank com-
additional plots. Grain Banks have helped villagers in mittee and bring some integration for agriculture develop-
developing close association with the NGO and getting ment on a permanent basis Farmers club may be consti-
easy access to high school education and health facilities. tuted in which the members of the grain bank committee
may become member.
Learnings Replication in other states: This model of association of
Monetising the savings in kind: The objective of monetis- Grain Bank with SHG – bank linkage is relevant particular-
ing the savings in kind was achieved to a great extent in ly in remote inaccessible pockets of the country for bring-
Orissa. Bank loan routed through the NGO took into ing such regions under the purview of the banks with sup-
account the savings in the form of grain while working out port from NGOs.
the corpus of the group. The branch of the erstwhile The writer is AGM, NABARD


[COLUMN]
LEADING THE WAY
Standard Chartered provides financial services credit, savings, banking products
and services to its Micro Finance Institution (MFI) partners across Asia, Africa and
the Middle East
GOURI SHANKAR we have begun to support them in linking into the investor
community via the capital markets.

S
tandard Chartered Bank’s (SCB) engagement with The bank views this as a channel for empowerment of
the development agenda is core to its focus on build- women and people at the bottom of the pyramid. With a
ing a sustainable business. We believe that our long view to achieve scale, bank’s microfinance business is sus-
term financial performance is dependent on having the tainable in nature with ample scope for expansion. With
right social and environmental conditions for growth in millions of financially empowered client base created
our markets. By engaging with our stakeholders we have through microfinance business, there are many other
identified seven key areas where we can make the greatest business opportunities in the domain of micro savings,
difference – access to financial services is one of them. micro pension and microinsurance etc. Except for micro
Across Asia, Africa and the Middle East we provide a credit, the other financial products have not really reached
customized product offering for all stakeholders in the the clients and there lies new opportunities and chal-
microfinance industry including: local currency lending lenges for banks and financial institutes.
and banking products and services to our microfinance Beyond building the business, the bank also invests in
institution (MFI) partners, risk participation structures the capacity of its partner MFIs through technical assis-
with development organisations, technical assistance (TA) tance and trainings. Over the past year the bank has
linkages with TA providers and global markets products for invested in two training programmes for the microfinance
international investors. sector in India.
In September 2006 the bank announced its commit- Though MFIs are improving their risk mitigation strate-
ment at the Clinton Global Initiative to establish a $500 gies with growth, still there is scope for improvement and
million microfinance facility over a five-year period. In the enhanced risk systems does not appear to commensu-
view of the lean branch network of the bank, SCB follows rate with the growth. With a view to contribute in this
the wholesale model of bulk lending to MFI for further on important space, bank is trying to down scale its robust
lending to the Self-Help Groups (SHGs) risk management frame work to suit to
and individuals. This facility will pro- the MF industry and provide as a sec-
vide MFIs and fund managers with $500 toral offering for the benefit of the
million of credit, financial instruments Though Microfinance industry. The bank is working a
and technical assistance to finance renowned industry training agency to
MFIs in Asia and Africa.
Institutions are undertake this project.
In India as on March 9, the bank had improving their risk The Indian microfinance sector – mir-
an outstanding portfolio of $60 million, mitigation strategies rors the global microfinance sector in
with an outreach of about 0.75 million terms of its development. The sector is
clients – spread across 15 MFI partners, a
with growth, still there highly concentrated and a small number
majority of whom had a pan India pres- is scope for improve- of MFIs manage the majority of assets. In
ence. Our partners include a mix of a bid to develop new investment oppor-
established intermediaries, urban start
ment and the tunities in the sector, we sponsored, for
ups and down-scalers. Products offered enhanced risk systems the second time in two years, “SRIJAN”, a
include: term loans, overdraft limits and does not appear to microfinance business plan competition
cash management facilities. Over the aimed at encouraging greenfield MFIs.
past year in particular, given the sizeable
commensurate with The writer is head – Microfinance,
growth in the operations of our partners the growth Standard Chartered Bank


[INTERVIEW]

‘WE HAVE BEEN GROWING AT 200%.
BY 2009 END WE SHOULD HAVE OVER
60-65 LAKH CUSTOMERS’
Suresh Gurumani took over as the CEO of SKS Microfinance last year after Vikram
Akula, the founder of SKS, stepped down to become a full-time director on the board
of the company. A banking veteran with 22 years of experience has set a clear
growth path for his company even during these times of slowdown. In an exclusive
chat with Suneeti Ahuja, Mr Gurumani shares his experiences working in the field of
microfinance. He outlines his plans of making SKS one of the largest microfinance
company and hopeful of targeting 15 million customers by 2012.
You have been with the main street banking industry of loan from SKS.
for almost 22-23 years. What brought you here to Before joining the SKS family, she used to work as a
microinsurance? labourer near her place and earned on per hour basis.
I was really excited by the opportunity in this market. After her husband’s death, she took a loan from SKS
There are two things: One is sheer opportunity of the busi- Microfinance to buy a sewing machine and started sewing
ness to transform life and really impact a poor person’s life. clothes. Within one year, she managed to increase her
I come from South and my grand parents still live in a vil- business two-fold and bought another sewing machine.
lage. So, I know what all adversities people go through Apart from elevating herself, she employed other labour
there. I was always very passionate about doing something class as well and helped increase employment opportuni-
in this area. ties in her area.
In fact, when I was with the Barclays we tried making an We also met her daughter and she spoke to me in
arrangement with SKS for mobile banking or tele-payment English. I was surprised! Then later the woman told me
facility. We were running a pilot then, but it didn’t work that she supported her family and ensured good education
out then. for her daughter. After completing her graduation, she was
On the commercial front, we have a huge scale already. then working in a call centre.
We are the biggest microfinance company in India. If we A loan from SKS elevated that widow from labour to
continue to grow at the same pace, we are hopeful of entrepreneurial class. There are many more cases where
becoming the largest microfinance company in the world women in dire conditions have taken loans from us and are
within next two years. Per month we are adding 2.5 million now proud owners of their small entrepreneurial set up.
customers and are targeting 15 million customers by the People always question microfinance and doubt if it is
end of financial year 2012. doing well or not. I’m totally convinced. We are not only
doing well but also making sure several people that are in
What has been the most interesting experience for you in need too are doing well.
SKS microfinance till now?
The way microfinance has changed the lives of poor peo- Besides disbursing loans, you also teach the borrower
ple is simply amazing. There are a lot of people I meet how to write her name. Why?
who have taken loans from us and changed their lives. We generally conduct three-day session before the loan
However, there is one case that I remember quite vividly. disbursement. In these sessions, women are told how the
During one of my visits to the centres in Andhra Pradesh, whole microfinance set up works. We also teach them how
I had met a widow. She was then in the second cycle the interest is calculated, what the total amount that they


[INTERVIEW]
will be paying is and most importantly, how to write their that is running. These are basically people who have
name. It instills a lot of confidence in the person. income of less than $1 per day.
Besides, whenever a woman takes loan from us, we We are also working with Forbes on a project to ensure
make sure that the respective husbands and families know some sort of entrepreneurial opportunity for this segment.
about the step. And finally, at the time of loan disbursal,
both husband and wife have to sign the document. You do not ask for any collateral at the time of loans.
In fact, I remember an incident. On one of the loan dis- What is the default rate and who are your customers?
bursal days, there was a couple that had come. After taking Most of the people that take loans are migrants. This is a
the loan, they had to sign on the papers. Now the husband business that is purely driven on trust. The group model
wasn’t literate and put his thumb impression on the paper makes it really successful. We make groups of five and dis-
and the wife on the other hand, since she had gone burse the loans to them. One important point is that the
through that training program, took a pen and signed. We members of the group should not be blood relatives. Then
could see the sense of pride in that act — she felt superior it is the responsibility of the group to ensure that all the
to her husband. members pay their due instalments in time. In case some-
These are small things but have a very deep social body defaults then the group has to pay for that person.
impact. One factor is the group part. Since we lend only to So far we have had recovery rates of almost 100%– even
groups of women, it binds some sort of binding to the soci- in state of Bihar, where people might think we would have
ety as a whole. And that is lacking in the street banking. problems. Our recovery rate is 99% per cent.
Disbursal of loans is done after all the due diligence
How do you categorise poor people for disbursement from our side.
of loans?
We have divided them into three classes: upper poor, very You are a profit making organisation. What is the
poor and ultra poor. While we disburse loans to the first turnover for the company last year?
two segments, we give grants to the ultra poor. Say, Financial figures are confidential. In terms of growth, we
Rs 20,000 to buy a cow and then we teach them how to have been growing at 200%. In India, right now we have
feed and milk the cow and earn some money. We want to close to 40 lakh customers, which should be over 60-65
make them commercially viable. So that is again a pilot lakh by the end of this year.


There are quite a few initiatives that are underway. In terms of rural reach, we have
[INTERVIEW]

about 1,400 branches. What we are looking at is a holistic rural economy. There are
quite a few initiatives that are underway. In terms of rural reach, we have about
1,400 branches. What we are looking at is a holistic rural economy
Are there any bottlenecks that you face in this industry? turn, pass on the benefit to the customers.
There are two types of challenges that we face: internal
and external challenges. Let me first talk about the internal Are there any other initiatives that you are working on
challenges. The first one is rural connectivity. We set up for this segment?
branches and then need to make sure that the information There are quite a few initiatives that are underway. In
is reaching those branches in time. But now with the terms of rural reach, we have about 1,400 branches. What
broadband connections being available almost every- we are looking at is a holistic rural economy. While micro-
where, this problem is being resolved pretty fast. finance is one way, through the reach, we are planning to
The other challenge is people. We have a branch head introduce good-quality products to the rural masses.
and then other people that facilitate the whole process. For instance, we have a pilot running with Unilever for
And we make it a point to employe the localities. Most of supplying water purifying systems. Through these sys-
the people working or heading these areas are 10th pass. tems, the poor get access to clean drinking water. We have
We ask for references from the local people and based on a special arrangement with the company that poor people
the references, we fill the vacancies. We strongly believe to pay for these systems in installments. Thus, we are try-
that there should be an empathy with the customers. ing to provide access to better life to the poor through our
On the external challenges front, we have bureaucratic wide reach.
hurdles. As a company, we have set principles that we are We already have a pilot project running in Andhra
unwilling to give in. So it takes a lot of time at times to open Pradesh and Orissa. Soon we should be able to launch the
a new branch. Then lending from banks is also a concern. services everywhere. We are also running another project
Although, the condition is better off now, Vikram Akula, the on solar light.
founder and now the chairman of SKS Microfinance faced a We look at products that are good for the customers. And
lot of problems. Most of the banks were not ready to lend we bundle the finance option for the customers. For exam-
then, as they could not figure out how we could lend with- ple the water purifier is for Rs 1,800 and the solar light is
out collaterals and give unsecured loans. And now, we are between Rs 1,250 to 1,800. We are also planning to roll out
the biggest borrowers from the banks. another set of services – mobile. We have tied up with Airtel
Then there are problems like Naxalism. and Nokia for this. Besides the business part, these can also
be used by the families.
What is the rate at which you borrow from the banks?
And what is the rate of disbursal? You have grown to quite a significant level. Going for-
Currently, we are borrowing at 13.5%. We give the loans at ward would you also look at other types of loans and also
the rate of interest of 24% to 28%. expand the reach to men as well?
First, we give loans only for entrepreneurial work and have
Why such a difference in interest rates? no plans to increase this to other types of loans.
There are two costs involved in this business: one is the And why only women? That is because I think women
operating cost and second cost is interest cost. Since, we are more risk-averse. As they are the ones who handle the
have to go far flung areas to do everything, it incurs a lot of household expenses, they are more responsible with the
operating costs. And then we have to take care of the inter- loans. We feel there is still huge opportunity in this area.
est part as well. And therefore, would not want to widen our reach in terms
To take care of all the costs, we charge the borrower as of men borrowers right now.
per the higher slabs. But as we scale up and bring our costs
down, we tend to reduce the rate of interest charged as Are you planning to expand overseas as well? And if yes,
well. Like in Andhra Pradesh and Karnataka, we charge where do you see the opportunity?
12.5% as the member base is high, where as in areas where We cannot say anything right now. But yes, there are
we are yet to reach the critical mass we charge 15%. And in opportunities in China and Far East.


[COLUMN]
THE IMPACT OF FINANCIAL
CRISIS ON MICROFINANCE
The history suggests that since last two decades microfinance institutions (MFIs) are
largely resilient to the financial crises. They are immune during the financial crises includ-
ing the currency crises in East Asia and banking crises in Latin America in the 1990s

AJAYA MOHAPATRA How it affects MFIs in India
MFIs in India can be broadly divided into

S
ince the beginning of the global eco- two categories, for-profit and not-for-prof-
nomic downturn in mid-2007, the it MFIs. For-profit MFIs are generally the
world is debating what would be the non-banking finance companies (NBFCs)
impact of financial crisis on the microfi- regulated by RBI, whereas the not-for-
nance (MF) sector. MF has emerged as one profit MFIs are registered under societies
of the pivotal strategies across the globe for or trusts, charitable companies u/s 25 of
alleviating poverty by enabling poor to Companies Act, mutually aided coopera-
raise their income and socio-economic sta- tive societies (MACs) and cooperatives. As
tus. The history suggests that since last two per Sa-Dhan’s Bharat Microfinance Report
decades microfinance institutions (MFIs) 2008 that provides information on 223
are largely resilient to the financial crises. MFIs of India, suggests that almost 60% of
As compared to other mainstream financial institutions, the market shares in terms of loan portfolio and 76% of
MFIs are immune during the financial crises including the the client outreach are controlled by 10% of the largest
currency crises in East Asia and banking crises in Latin MFIs in India.
America in the 1990s. Unlike in Africa, Central Asia, Eastern Europe and
It is due to the fact that during that period the microfi- Bangladesh, in India, MFIs are not allowed to take deposits
nance sector was very small and the external borrowings or savings, which is a substantial source of funding for the
including equity and debt to the MFIs were very limited MFIs in these countries. As per Microfinance Information
due to their not-for-profit in nature. Yana Watson of Exchange, Inc. (MIX) 2006-07 benchmark data, MFIs
Dalberg Global Development Advisors (Microfinance across the globe raised capital from various sources that
Insights, March/April 2009 issue) writes that “only a hand- includes 36.2% from borrowings, 35.8% from deposits,
ful of MFIs had even begun to contemplate transforming 15.5% from equity, 9.9% from other debt includes conces-
into regulated deposit-taking banks with access to com- sionary loans and compulsory savings, 2.5% from dona-
mercial funding sources. But by the early 2000s — with tions. Thus, a substantial capital raised by the MFIs was
Banco Compartamos’ bond issuance; Bank Rakyat derived from deposits.
Indonesia’s first microfinance IPO; and the emergence of On the need to provide all the microfinance services,
microfinance collateralised debt obligations (CDOs) — Vijaya Mahajan, Chairman, Basix Group, says that the
microfinance had burst onto the international capital MFIs should provide services like micro credit, micro sav-
market. With the United Nations naming 2005 as the Year ings, insurance, micro mutual funds and remittances in
of Microcredit and Prof. Mohammad Yunus receiving the order to promote financial inclusion and improve quality
Nobel Peace Prize for the work of Grameen Bank, microfi- of life of poor.
nance seemed to emerge as the darling of international MFIs in India are deprived of taking deposits; therefore,
development. By 2007, an estimated $5 billion of foreign they are largely dependent on external funding available at
investment had flowed from developed nations into MFIs the local/public sources or borrowing from international
around the world.” sources. Due to their dependency on the external borrow-


Microfinance World April June 2009

Microfinance World April June 2009

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