Indian Microfinance: The Challenges of Rapid Growth
Publication Year: 2007
Indian Microfinance: The Challenges of Rapid Growth is a comprehensive account of various components of the Indian microfinance sector, the largest in the world. After reviewing the main challenges facing the sector, it analyzes the progress of the two main delivery models, issues relating to the emerging microfinance services of micro-insurance and money transfers, ongoing efforts in training and capacity building, opportunities facing commercial financers such as bankers and social venture capitalists, the remaining need for development financing, and ongoing research in the sector. Apart from containing extensive original material, the book draws extensively on the findings of other recent studies and reports. It also identifies various requirements for policy and regulatory changes by the central and state governments and the central bank, a contribution ...
- Front Matter
- Back Matter
- Subject Index
- Chapter 1: Overview and Summary of Main Recommendations
- Chapter 2: Progress under the SHG Bank Linkage Programme
- Chapter 3: Progress under the Microfinance Institution (MFI) Model
- Chapter 4: MFIs: Learning from the Andhra Pradesh Crisis
- Chapter 5: Diversifying Microfinancial Services
- A Microinsurance
- B Money Transfer Services
- Chapter 6: Training and Capacity Building
- Chapter 7: Financing: Commercial
- A Lending to Microfinance Institutions (MFIs) by the Commercial Banks
- B Equity Investments by the Venture Capital Funds
- Chapter 8: Financing: Developmental
- A Apex Financing Institutions: Growing the Seeds and Saplings
- B Donor Participation in Indian Microfinance
- Chapter 9: Some Ongoing Research on Indian Microfinance
Copyright © ACCESS Development Services, 2007
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First published in 2007 by
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Library of Congress Cataloging-in-Publication Data
Ghate, Prabhu, 1941–
Indian microfinance: the challenges of rapid growth/Prabhu Ghate.
1. Microfinance—India. 2. Poor—India. I. Title.
ISBN: 978-0-7619-3643-5 (PB)
The Sage Team: Sugata Ghosh and Samprati Pani
List of Tables[Page 7]
- 2.1 Growth Trends in the SBLP 40
- 2.2 Growth of SHGs Linked in 13 Priority States 42
- 2.3 Profile of Sample SHGs in the Lights and Shades Study 44
- 3.1 Financial Performance of Sample MFIs in FY 2004 and FY 2005 73
- 3.2 Region-wise Growth in Outreach in 2003–04 and 2004–05 75
- 3.3 Financial Performance of MFIs Classified by Client Outreach and Loan Portfolio 76
- 3.4 Comparative Performance Indicators for MFIs in India, South Asia and Other Regions of the World 78
- 5.1 SHEPHERD Cattle Insurance 112
- 5.2 Main Feature of Health Microinsurance Scheme 116
- 7.1 Commercial Bank Exposure to Microfinance of Selected Banks, March 2006 155
- 7.2 Guidelines for the Business Facilitator and Business Correspondent Models 160
- 7.3 Salient Features of the Main Equity Investors 167
- 8.1 MFI Loans Outstanding to the Apex Financing Institutions and Banks 180
- 8.2 Financial Performance of FWWB and RMK 188
List of Boxes[Page 8]
- 1.1 The SHG and MFI Models 24
- 2.1 Pradan's Computer Munshi System (CMS) 58
- 4.1 Sa-Dhan's Voluntary Mutual Code of Conduct for Microfinance Institutions, 21 March 2006 88
- 4.2 Some Not Easy to Answer Questions Calling for Further Research and Consensus Building 97
- 5.1 Issues in Livestock Insurance: SHEPHERD's Experience 111
- 5.2 VimoSEWA: Synergies between Health Insurance, Health Care and Health Education 115
- 5.3 Lessons from the Insurance Experience of ASA, Spandana and SHEPHERD 123
- 5.4 Serving Migrants through Remittance Services: The Case of Adhikar 132
- 6.1 The Microfinance Incubator 140
- 6.2 Some Key Findings and Recommendations from ‘Catalyzing Capacity Development: Assessing the Need for Training’ 144
- 7.1 Foreign Equity Investment 170
- 8.1 Forms of Donor Funding in Indian Microfinance 198
- 8.2 Two Early Examples of Donor Funding for Microfinance 199
List of Abbreviations[Page 9]
ABC Activity Based Costing ADB Asian Development Bank APMAS Andhra Pradesh Mahila Abhivruddi Society BC Business Correspondent BF Banking Facilitator BIRD Banker's Institute of Rural Development BPL Below Poverty Line CAB College of Agricultural Banking CAGR Compounded Annual Growth Rate CAP Country Assistance Plan CAR Capital Adequacy Ratio CASHE Credit and Savings for Household Enterprises CB Capacity Building CBFI Community Based Financial Institutions CBO Community based Organization CFSF Credit and Financial Services Fund CGAP Consultative Group to Assist the Poor CIDA Canadian International Development Agency CIF Community Investment Fund CM Computer Munshi CMF Centre for Micro Finance CMS Computer Munshi System DCCB District Cooperative Central Bank DFID Department for International Development DRDA District Rural Development Authority DRI Differential Rate of Interest EPF Employees Provident Fund ESIS Employees State Insurance Scheme FCRA Financial Contributions Regulation Act FLDG First Loss Deficiency Guarantee FWWB Friends of Women's World Banking [Page 10] GA Group Accountant GLP Gross Loan Portfolio GRT Group Recognition Test IASC Indian Association of Savings and Credit ICICI Industrial Credit and Investment Corporation of India IFAD International Fund for Agricultural Development IFMR Institute for Financial Management and Research IIMB Indian Institute of Management Bangalore IKP Indira Kranti Patham ILO International Labour Organization IRDP Integrated Rural Development Programme JLG Joint Liability Group JSBY Jan Shree Bima Yojana LAB Local Area Bank LIC Life Insurance Corporation of India LSS Lights and Shades Study MACS Mutually Aided Cooperative Society MCFI Micro Credit Foundation of India M-CRIL Micro-Credit Ratings International Limited MDC Microfinance Development Council MFDEF Micro Finance Development and Equity Fund MFI Microfinance Institution MIS Management Information Systems MIX Microfinance Information eXchange MLRC Microfinance Learning and Resource Centre MSDF Michael and Susan Dell Foundation MTO Money Transfer Operators NABARD National Bank for Agriculture and Rural Development NBFC Non-Banking Finance Company NGO Non-Governmental Organization NIBM National Institute of Bank Management ODA Overseas Development Assistance OSS Operational Self Sufficiency PACS Primary Agricultural Cooperative Societies PAR Portfolio At Risk PKSF Palli Karma Sahayak Foundation PLR Prime Lending Rate PS Priority Sector [Page 11] RBI Reserve Bank of India RGVN Rashtriya Gramin Vikas Nidhi RMK Rashtriya Mahila Kosh RMTS Regular Monthly Transactions Statement RoA Return on Assets RRB Regional Rural Bank SBLP SHG Bank Linkage Programme SBS Side-by-Side Study SDC Swiss Agency for Development Cooperation SEWA Self Employed Women's Association SFMC SIDBI Foundation for Microcredit SGSY Swarnajayanti Gram Swarozgar Yojana SHG Self Help Group SHPA Self Help Promotion Agency SHPI Self Help Promoting Institution SIDBI Small Industries Development Bank of India SKS Swayam Krishi Sangam STEP Strategies and Tools against Social Exclusion and Poverty TA Technical Assistance TCB Training and Capacity Building UNDP United Nations Development Programme USAID United States Agency for International Development VCF Venture Capital Fund VO Village Organization VWS Village Welfare Society
Notes: 1 crore = 10 million; 1 lakh = 100,000; US$1 = Rs 45.5 approximately
This book is the published version of the report ‘Microfinance in India: A State of the Sector Report, 2006’ presented at the conference organized by Microfinance India on 30–31 October 2006. The report is intended to be the first in a series of annual reports reviewing the progress of the sector in its entirety. Since demand for the report far exceeded the limited number of copies distributed to participants at the conference, it has been decided to publish it as a book. The contents of the report have been left unchanged.
The book is an attempt to put together a one-stop document that will help a variety of readers catch up on the latest developments, issues and achievements of the microfinance sector in India. The sector is growing rapidly, both in the scale and in the diversity of actors, and is sitting on the cusp of regulation. It is, therefore, in the midst of rapid flux. The book is in a sense a snapshot of the sector, taken when it was written. While parts of it will be overtaken by events, most of the issues and analysis will remain relevant for some time to come. We, therefore, expect it to retain permanent value as a reference document.
Not only has the rate of growth of the microfinance sector in India accelerated in the last few years, making it the largest in the world, so have changes in its institutional diversity. For some time now, there has been a growing demand by practitioners, financial institutions, policy makers, regulators, the research community, the media and the development community generally for a periodic, comprehensive and up-to-date account of the sector. Players in various parts of the sector want to know much more about the parts of the sector they would like to engage with more.
To take just a few examples, bankers and social venture capitalists are vitally dependent on the success of the efforts of the training and capacity-building service providers in easing the human resource constraints facing the sector, and would like to know more about their activities. The insurance companies are interested in [Page 13]opportunities offered by the Self Help Group (SHG) Bank Linkage Programme, just as bankers are curious about any opportunities that might lie in money transfers. Additionally, not enough is known about the unfolding priorities of the donors. Everyone is affected by what the regulators are doing (or should be doing), and the regulators in turn need to know more about the sector they are charged with regulating. This book furthers the goal of Microfinance India to bring the sector together to look at critical issues, propose solutions and vision the harmonious growth of the sector as a whole.
A number of extremely useful annual reports are already being prepared, such as those on various parts of the sector by the National Bank for Agriculture and Rural Development (NABARD), Sa-Dhan and Micro-Credit Ratings International Limited (M-CRIL), to name just a few. Some of the best information on microinsurance in India is being gathered and disseminated by the Strategies and Tools against Social Exclusion and Poverty (STEP) programme of the International Labour Organization (ILO). An increasing number of useful documents are emanating from abroad such as the recent Microfinance Information eXchange (MIX) survey of microfinance in South Asia, with a special emphasis on transparency, and several recent case studies by the Consultative Group to Assist the Poor (CGAP) on microinsurance in India. One of the aims of the State of the Sector Report and this book is to synthesize as many findings of these reports and studies as possible, highlighting issues on which continued progress depends, identifying knowledge gaps, calling for further research and greater statistical effort, and so on. Most important of all, this book aims to exercise strong advocacy for much needed policy and regulatory changes.
I am grateful to our sponsors, to the author who faced the daunting task of bringing out the report in time for the conference and the Microfinance India Advisory Group for overseeing its preparation.
Information on Indian microfinance is scattered over a wide variety of sources, as one would expect in a highly decentralized development and financial movement, which has evolved as a result of the combined actions of a large number of creative, dynamic and idealistic individuals in civil society—supported initially by donors and then, increasingly, by the National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India (SIDBI)—the banks and the government. Fortunately, Indian microfinance is not as under-researched as it used to be, although we are still touching the tip of the iceberg in terms of what needs to be known. One of the aims of the book is to publicize and synthesize the findings of important recent studies.
Due to constraints of time, several important topics could not be covered, including ‘empowerment’; Self Help Group (SHG) federations; the cooperative Microfinance Institution (MFI) movement; the role of many of the public sector banks including some prominent Regional Rural Banks (RRBs) and District Cooperative Central Banks (DCCBs) in supporting the SHG movement; and community-based microfinance generally, which after all constitutes the bulk of the sector. Hopefully, these omissions will be rectified in the forthcoming issues of the annual ‘State of the Sector Report’. Other topics that could not be covered here are urban microfinance and impact assessment, or the prospects of new technology applications. Of MFI financial services, only two of the ‘younger’ ones, microinsurance and money transfers, could be covered briefly, and not innovations in credit or savings.
While I have attempted to consult as many sector participants as possible, I am conscious that a number of significant approaches, programmes, initiatives, institutions, studies and documents have escaped mention because of the constraints of time and space and my own lack of familiarity with them. In particular, it has not been [Page 15]possible to do justice to the individual building blocks of the MFI model, the MFIs themselves or to the NGOs promoting the SHG movement, many of whom are setting new standards in good governance, transparency, product development, and successful identification and targeting of the poor. A report like this cannot expect to match their insights or have as nuanced an understanding as they do. I hope the individuals and organizations concerned will understand.
I am grateful to Vipin Sharma of CARE India for having had the vision to launch this effort and for the energy to see it through. Malcolm Harper was an endless source of good advice and useful comments. The other person, who went way beyond the call of duty and ploughed through many of the chapters out of sheer interest, although with considerable scepticism and disagreement on many points, was Ajay Tankha.
Rewa Misra prepared Section B of Chapter 8 on donor participation, Annie Duflo and her colleagues at the Centre for Micro Finance (CMF) contributed Chapter 9 on ongoing research, and Sakshi Varma assisted with Chapters 2 and 4, and Sheela Bajaj with the editing. Many thanks to all of them. Anjum Khalidi was a great source of support, as were Prabhat Labh and Rekam Jayasurya at CARE India. Others who spared time to comment on draft chapters and share valuable material were Krishan Jindal, Ajit Kanitkar, Vishal Mehta, Rajkamal Mukherjee, D. Narendranath, Jayendra Nayak, Sitaram Rao, Santosh Sharma, Sanjay Sinha, Frances Sinha, Mark Socquet, M.S. Sriram and Blaine Stephens,
Those who provided valuable information and material and pointed me in the right direction through, in some cases, extensive discussion and briefings were Deepak Alok, Mohammad Amin, Caitlin Baron, Rajendra Bhoi, Anjana Borkakati, Mirai Chatterjee, Sandip Farias, David Gibbons, Amit Gupta, Marie-Loise Haberberger, Brahmanand Hegde, Ashok Jha, Vaman Kamath, Harish Khare, Udaia Kumar, Rajiv Lall, Vijay Mahajan, Brij Mohan, Rakesh Mohan, Nachiket Mor, C.S. Murthy, K. Narender, Saleela Patkar, Viswanath Prasad, Vineet Rai, Manohara Raj, S. Ramachandran, Muralidhara Rao, C.S. Reddy, Padmaja Reddy, Raja Reddy, Vinatha Reddy, Savita Sarkar, Moumita Sen Sarma, Abhijit Sen, Dr Sethuraman, Uday Shankar, Abhijit Sharma, Rashmi Singh, Sukhbir Singh, R. Sowmithri, R. Srinivasan, Sudarshan Synghal, Yashwant Thorat, Mathew Titus, Niraj Verma and M.P. Vasimalai.
[Page 16]I am extremely grateful also to Viji Das and her team at Friends of Women's World Banking (FWWB); Annie Duflo, Rati Tripathi and other friends at CMF; Punit Gupta, Berenice Rose and Rupalee Ruchismita of the Social Initiatives Group at Industrial Credit and Investment Corporation of India Bank (ICICI Bank); Sneh Lata Kumar and her colleagues at Rashtriya Mahila Kosh (RMK); Vijay Kumar, Navin Mittal and other officials of the Andhra Pradesh government in Hyderabad and Krishna district; Jayant Madhab, Amiya Sharma and their colleagues at Rashtriya Gramin Vikas Nidhi (RGVN); Mathew Titus and his colleagues at Sa-Dhan; J.S. Tomar and his team at Cashpor; Graham Wright and Ranjani at MicroSave. Stuart Rutherford, Shashi Rajagopalan and many others were kind enough to give me guidance and share material through e-mail. My apologies to the many others whom I may have left out. Thank you again, all of you. It goes without saying that the usual disclaimers apply.
About the Author[Page 227]
Prabhu Ghate is an independent researcher, journalist and consultant, based in New Delhi, with a Ph.D. in public policy from Princeton University. While on study leave from the IAS, he conducted extensive field work on anti-poverty programmes in eastern Uttar Pradesh, and authored Direct Attacks on Rural Poverty: Policy, Programmes, and Implementation (1984). Thereafter, as a Senior Economist at the Asian Development Bank, Manila, he anchored a six-country comparative study, Informal Finance: Some Findings from Asia (1992). He has worked in many countries of Asia in the areas of rural and financial development, has a number of journal articles to his credit, and writes frequently for Economic and Political Weekly and The Economic Times.