Indian Microfinance: The Challenges of Rapid Growth


Prabhu Ghate

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  • Front Matter
  • Back Matter
  • Subject Index
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    List of Tables

    • 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

    • 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

    ABCActivity Based Costing
    ADBAsian Development Bank
    APMASAndhra Pradesh Mahila Abhivruddi Society
    BCBusiness Correspondent
    BFBanking Facilitator
    BIRDBanker's Institute of Rural Development
    BPLBelow Poverty Line
    CABCollege of Agricultural Banking
    CAGRCompounded Annual Growth Rate
    CAPCountry Assistance Plan
    CARCapital Adequacy Ratio
    CASHECredit and Savings for Household Enterprises
    CBCapacity Building
    CBFICommunity Based Financial Institutions
    CBOCommunity based Organization
    CFSFCredit and Financial Services Fund
    CGAPConsultative Group to Assist the Poor
    CIDACanadian International Development Agency
    CIFCommunity Investment Fund
    CMComputer Munshi
    CMFCentre for Micro Finance
    CMSComputer Munshi System
    DCCBDistrict Cooperative Central Bank
    DFIDDepartment for International Development
    DRDADistrict Rural Development Authority
    DRIDifferential Rate of Interest
    EPFEmployees Provident Fund
    ESISEmployees State Insurance Scheme
    FCRAFinancial Contributions Regulation Act
    FLDGFirst Loss Deficiency Guarantee
    FWWBFriends of Women's World Banking
    GAGroup Accountant
    GLPGross Loan Portfolio
    GRTGroup Recognition Test
    IASCIndian Association of Savings and Credit
    ICICIIndustrial Credit and Investment Corporation of India
    IFADInternational Fund for Agricultural Development
    IFMRInstitute for Financial Management and Research
    IIMBIndian Institute of Management Bangalore
    IKPIndira Kranti Patham
    ILOInternational Labour Organization
    IRDPIntegrated Rural Development Programme
    JLGJoint Liability Group
    JSBYJan Shree Bima Yojana
    LABLocal Area Bank
    LICLife Insurance Corporation of India
    LSSLights and Shades Study
    MACSMutually Aided Cooperative Society
    MCFIMicro Credit Foundation of India
    M-CRILMicro-Credit Ratings International Limited
    MDCMicrofinance Development Council
    MFDEFMicro Finance Development and Equity Fund
    MFIMicrofinance Institution
    MISManagement Information Systems
    MIXMicrofinance Information eXchange
    MLRCMicrofinance Learning and Resource Centre
    MSDFMichael and Susan Dell Foundation
    MTOMoney Transfer Operators
    NABARDNational Bank for Agriculture and Rural Development
    NBFCNon-Banking Finance Company
    NGONon-Governmental Organization
    NIBMNational Institute of Bank Management
    ODAOverseas Development Assistance
    OSSOperational Self Sufficiency
    PACSPrimary Agricultural Cooperative Societies
    PARPortfolio At Risk
    PKSFPalli Karma Sahayak Foundation
    PLRPrime Lending Rate
    PSPriority Sector
    RBIReserve Bank of India
    RGVNRashtriya Gramin Vikas Nidhi
    RMKRashtriya Mahila Kosh
    RMTSRegular Monthly Transactions Statement
    RoAReturn on Assets
    RRBRegional Rural Bank
    SBLPSHG Bank Linkage Programme
    SBSSide-by-Side Study
    SDCSwiss Agency for Development Cooperation
    SEWASelf Employed Women's Association
    SFMCSIDBI Foundation for Microcredit
    SGSYSwarnajayanti Gram Swarozgar Yojana
    SHGSelf Help Group
    SHPASelf Help Promotion Agency
    SHPISelf Help Promoting Institution
    SIDBISmall Industries Development Bank of India
    SKSSwayam Krishi Sangam
    STEPStrategies and Tools against Social Exclusion and Poverty
    TATechnical Assistance
    TCBTraining and Capacity Building
    UNDPUnited Nations Development Programme
    USAIDUnited States Agency for International Development
    VCFVenture Capital Fund
    VOVillage Organization
    VWSVillage 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 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.

    VipinSharma, CEO, ACCESS Development Services


    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 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.

    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

    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.

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