POVERTY & MICRO FINANCE INSTITUTTIONS (MFI) IN INDIA

There is massive poverty in India and there has to be some institutions, which can help them in entrepreneurship - ultimately.

Recent years have witnessed the emergence of new institutional structures for this, notably, independent, specialized microfinance institutions (MFIs) that are based on the Grameen model pioneered by Muhammad Yunus in Bangladesh. But with a few exceptions, most Indian MFIs are small in size, region specific (with a concentration in the south) and the sector has a limited collective outreach. The Small Industries Development Bank of India has been the largest lender to the MFIs, though Friends of Women’s World Banking India as well as the National Women’s Fund (Rashtriya Mahila Kosh) have also played an important role.

In March 2003, the Indian MFIs sector as a whole had a total outreach of less than one million borrowers. In comparison, larger MFIs in Bangladesh, such as Grameen Bank, BRAC, Proshika and ASA, reach well over one million clients, each. In March 2003, the Indian MFIs sector as a whole had loans outstanding of Rs 2.4 billion (US$53 million), with the two largest MFIs, SHARE Microfin Ltd and BASIX, having loans outstanding of about Rs 500 million (US$11 million)and Rs 350 million (US$8 million), respectively. One estimate indicates that the average loans disbursed by the top 10 MFIs in India amounted to just Rs 160 million (US$3.5 million) per MFI. Another estimate, based on 69 rated MFIs (which are among India’s top 100 MFIs), shows that these MFIs had about 6500 borrowers and Rs 23 million (a little over US$500,000) outstanding, per MFI. This numbers are modest in comparison to lending by MFIs in Bangladesh: Grameen Bank’s loan portfolio alone exceeds that of the entire microfinance sector in India by a factor of five whereas BRAC’s portfolio is more than three times that of all MFIs in India; both ASA’s and Proshika’s portfolio is also greater than that of the entire microfinance sector in India.
In addition to the relatively small scale of their operations, Indian MFIs also tend to have a narrow scope, offering a limited range of financial services beyond credit. Only a handful of MFIs, such as VSSU (West Bengal) offer savings as a service. Insurance is also provided by only a few MFIs. And only the three top MFIs in India offer a composite set of services to their customers. For example, SEWA Ahmedabad provides a combination of savings and credit through its Sri Mahila SEWA Urban Cooperative Bank and insurance services managed through its Vimo SEWA affiliate, which front ends for the LIC and a number of general insurance companies. Similarly, the BASIX group’s Krishna Bhima Samruddhi Local Area Bank, is able to provide all the services – savings, including daily deposits collected from the doorstep of its borrowers, credit for a range of purposes from crop loans to non-farm activities and to SHGs; and crop insurance to farmers under the Kisan Credit Card / Rashtriya Krishi Bima Yojana as well as a weather indexed crop product developed by ICICI Lombard. BASIX retails life insurance on behalf of AVIVA Life Insurance Company and provides livestock insurance to its borrowers through Royal Sundaram General Insurance Company.
SHARE, one of the three largest MFIs in India, has recently piloted, in partnership with ICICI Bank,, a private sector banks, an innovative approach involving the securitization of the micro loan portfolios of MFIs. Two such deals have recently been completed in the state of AP. In the larger one, ICICI Bank paid $4.3 million for a portfolio of 42,500 small loans from SHARE. SHARE will be responsible for collecting the loans. The securitization is not asset-backed; ICICI Bank will have as collateral instead a “first loss’ guarantee of an 8% deposit from the total from Grameen Foundation. The approach has many advantages: ICICI Bank manages to reach borrowers it could never otherwise have approached, and palm off most of the administration to SHARE. This also helps it meet its government-set target of directing 40% of its loans to the “priority sectors”, including 18% to farmers. SHARE secures a new source of funds, off SHARE’s balance sheet, at a cost that is 3 to 4 percentage points cheaper than it pays for a bank loan. This will help SHARE meet its aim of increasing the number of borrowers from under 300,000 now to 1 million. The deal also helps create a new asset class for which there is demand among the more liquid investors. While such securitizations can be done for the better MFIs, for which credit ratings are available, replication would pose a serious challenge, given the paucity of reliable, independent information on the bulk of the MFIs and their loan portfolios. Also, at present, there is no secondary market for the securities, but ICICI bank is talking to CRISIL, a credit rating agency, about the prospects for its rating the paper, and is hoping that over time, other banks will enter the market too.

In India MFIs are not allowed to mobilize deposits (even from their own members) unless they convert themselves into a non-bank finance company ( NBFC). And even as NBFCs, an ‘investment grade’ rating from corporate rating agencies is required for mobilizing deposits. This is difficult for most MFI-NBFCs; based on past examples, on account of the typically geographically concentrated and non-collateralized portfolios that MFIs have, rating agencies, in almost all cases, have not assigned the required credit rating. Second, the minimum start-up capital requirement for registering as an NBFC (Rs. 20,000 or US$450,000) is typically beyond the reach of most MFIs. Similarly, the minimum capital requirements for insurance companies (Rs 1 billion, or US$23 million) are high. What’s more, since 2002, MFIs are no longer allowed to raise debt from foreign donors and development finance institutions through the ‘External Commercial Borrowing’ (ECB) route. MFIs also have problems raising equity: NGOs are not allowed to invest in MFI equity, because of the charitable status of NGOs under the Section 11 and 12 of the Income Tax Act. And regulation on equity investment in MFIs dictate that foreign equity must be a minimum of YS$500,000, and cannot excced 51% of total equity; this implies that bringing in US $500,000 foreign equity requires raising an equal amount (almost Rs 23million) from India – an amount that is considered far too high by most Indian MFIs.