nabard on micro finance

APRIL – JUNE 2009

COMPLIMENTARY WITH THE FINANCIAL EXPRESS

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

The Success of Microfinance in IndiaThe Success of Microfinance in India

The success of microfinance in India

Page 9Microinsurance market in India

Page 10‘Let’s now ask banks who is credit-worthy: the rich whodon’t pay back or the poor who do’Interview with Muhammad Yunus, Grameen Bank

Page 13Outreach should broaden

Page 14Small is profitable

Page 15Microinsurance: A snapshot

Page 16Grain banks and self help groups

Page 19Leading the way

Page 20‘We have been growing at 200%. By 2009 end we shouldhave over 60-65 lakh customers’Interview with Suresh Gurumani, CEO, SKS Microfinance

Page 23The Impact of financial crisis on microfinance

Page 25We are concentrating in direct SHG Bank LinkageProgramme to reach out to more SHGs directlyInterview with MS Sundara Rajan, CMD, Indian Bank

Page 26‘MFIs, if linked with livelihood, have a very crucial roleto play in the growth of the economy’Interview with Ela R Bhatt, founder of SEWA and Sa-Dhan

Page 28‘Our efforts in the new fiscal year will be focused aroundcustomers and competencies’Interview with AP Ghugal, GM, Priority Sector CreditDepartment, Bank of India

Page 30Models for achieving financial inclusion in India

Page 32Towards inclusive growth

MICROFINANCE WORLD | April 20092

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Cover photograph: Sandipan Majumdar, Kolkata/CGAPMicrofinance Photography Contest

CONTENTS

April 2009 | MICROFINANCE WORLD 3

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CONSULTING EDITORMONALISA SEN

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DESIGNANOOP KAMATH

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Microfinance is evolving and the coming years willsee it making a definite impact across rural andurban India giving hopes and opportunity to mil-

lions to raise their standard of living. There are success storiesto suggest that its intervention is not a poverty alleviationmeasure. But coupled with appropriate framework micro-finance could lead to sustainable and profitable economicactivity as well.

As per the Global Environmental Monitor, small and medium enterprises powered by microfinance contributesignificantly to the economic growth of the society. Formicrofinance to be an effective tool to spur economic growth,it is believed that micro-loans need to be used more for enter-prise building at the bottom segment of the pyramid. InBangladesh, about 15 million families now benefit from smallloans and other financial products such as micro savings andmicroinsurance. It has resulted in 40% of the overall reduc-tion of rural poverty.

However, not all microfinance intervention leads to economic activity although millions of people around theworld have been taking benefit out of it. Reports have shownthat a substantial portion of the microfinancial services areused for consumption or for a mix of consumption cumenterprise building activities.

Over the years the dynamics of financial inflow to themicrofinance sector has undergone radical changes. Startedwith grants and soft loan fund to take up small microfinanceintervention, now large institutions are tapping huge capitalfunds from global equity investors. The whole range of invest-ment instruments like equity, debt, soft loan, revolving fund,grant money and other institutional support funds are nowavailable to the microfinance institutions.

The diverse models and approaches have helped in reach-ing out to new regions and to populations which haveremained excluded from financial services. The governmentshould ensure transparency and full disclosure of ratesincluding fees.

MONALISA SEN

Consulting Editor

DEAR READER,

ASHOK B SHARMA

Delivery of credit at the doorstep of those who arenot covered by the formal banking business, cou-pled with capacity building, is one of the ways for

achieving financial inclusion. Such a financial inclusion ofthe poor can be more fruitful if the credit disbursed canhelp them become entrepreneurs than meeting only theirconsumption needs. The process can also be accentuatedif the disbursing microfinance institutions (MFIs) incul-cate a habit of savings by attracting deposits and come outwith insurance products covering various risks.

The Nobel Laureate from Bangladesh and the founder ofthe Grameen Bank movement, Muhammad Yunus, hastermed the microfinance disbursement as “a social busi-ness” in contrast to the commercial business of banks andfinancial institutions. There should be a separate regulatoryauthority for MFIs as distinguished in character from thatfor the commercial banks. The regulatory authority for MFIsshould evolve guidelines keeping in view the objectives ofsocio-economic development of the poor, he suggests.

According to Yunus, MFIs should be self-sustaining, beallowed to attract deposits, provide insurance and pensionfund, and should be capacity building.

THE SUCCESS OF MICROFINANCE IN INDIAFinancial inclusion of the poor can only be possible if the MFIs inculcate a habit ofsavings and come out with insurance products covering various risks


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Grameen Bank meeting

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If MFIs are owned by borrowers, there should be no pay-ment of licence fees. MFIs can source funds from banks.He is, however, not in favour of MFIs sourcing funds fromoutside the country. Funds should preferably be mobilisedand distributed locally, he opines.

The interest rates should preferably be lower. MFIsshould ultimately be owned and operated by borrowers, asis in Bangladesh. There should not be any scope for individ-ual profit in MFIs. All profits should be ploughed back in theMFIs for meeting the costs of transactions, he suggests.

According to Yunus, this is the right time for the micro-finance movement to grow and spread in India. It can

counter the adverse impact of the cur-rent global financial crisis and providejobs and self-employment to many.

He holds the global banking and finan-cial institutions responsible for the cur-rent global economic crisis as they havebefooled the investors via mere papertransactions. “Banking regulationsshould clearly distinguish between gam-bling and business. There should beproper in-built mechanism to prevent thebusiness from running into trouble andinsurance schemes should be in place forprotecting deposits. The governmentshould not bailout these institutions bydoling out public money,” he says.

The microfinance institutions shouldcater to the ‘real economy’ and livelihoodof millions of poor. The developing coun-tries like India and Bangladesh have beenlargely insulated from the adverse impactof the current global financial crisis dueto the presence of the ‘real economy’, hesays. In Bangladesh 80% of the poor arecovered 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 ispending in Parliament since 2007. Theproposed legislation has been delayedon the issue of lowering of interest rates.A joint secretary in the banking divisionof the finance ministry, Amitabh Verma,says the government is very keen onMFIs lowering their interest rates. The

MFIs should carry out their operations without any sub-vention of interest rates by the government. Bangladeshhas set up a regulatory authority for the Grameen Banksand another legislation for approval of MFIs as socialbanking institutions is pending for approval.

Citing a few instances of social business, Yumus said,students in Bangladesh were given loans, most of whohave opted to become entrepreneurs after they completedtheir studies. Interest-free loans of 1,000 taka were given to1,00,000 beggars, 15,000 of which have stopped beggingand set up small business. Loans without any interest wasan exception in case of beggars. As a general principle,


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MFIs should charge interests on loans to cover their trans-action costs. Prudence suggests that cost of transactionshould be minimised and interest rates should be kept low.

MFIs in India, however, allege that their interest ratesare higher (mostly in double digits) as they have to coverthe costs of transactions and capacity building.According to Amitabh Verma, bank’s refinance rates toMFIs are not likely to be less than 7%. Also, the govern-ment may not be in a position to render subvention onloans. Therefore, the MFIs should find novel ways forcovering or hedging their costs.

MFIs apex body Sa-Dhan’s executive director MathewTitus said; “The microfinance sector in India is goingthrough a difficult and a challenging phase. Extraordinarygrowth, global credit crunch and increased awareness ofsocial impact pose a challenge. It is an opportune momentfor house keeping and clearing up concerns that havebeen around for a while. Growth and competition need tobe addressed in the common spirit to serve the poor.Transparency is the key property that microfinance mustsubscribe to.”

Microfinance in India touched the 33.6 million clients-mark in 2007-08, of which 14.1 million were served byMFIs, according to Sa-Dhan estimate. Other estimates putthe client outreach at over 100 million. These estimatesmay differ but there is an unanimous acknowledgement ofthe fact that over 90 million low-income households stillremain unserved. Therefore, microfinance must growsteadily and steeply. All indicators point to a flatteninggrowth curve. However, these were computed before theglobal financial crisis and the growth path may even suffera dent, according to some experts. This means not onlyunserved clients will have to wait longer but also the exist-ing clients are likely to see their credit flow slowing downand shrinking.

There is no possibility of a steep growth from grant–financing at this stage. In a given period, grants are justnot large enough. The same holds true for profits that, intheory, can be generated from a granted corpus. If profitsare huge enough, the organisation would either cease tobe a community development finance by charging in

excess of traditional moneylenders or serve non-poorclients. Savings could be a very feasible option, particular-ly in the long run. Only cooperatives are legally entitled tomobilise savings. Some of the experiences suggest failuresof cooperatives. However, cooperative legislations in sev-eral states like Andhra Pradesh led to reforms in the coop-erative model. The outcome is the legal form of MACS,which is the registration for many SHG federations.

There are about 75,000 SHG federations functioning inIndia and are an important avenue for managing an ever-expanding number of SHGs. The SHGs federate into a twoor three-tier structures and take up a range of services,both financial and non-financial. They have so far notbeen included formally into the SBLP and have strongpoints in their favour like cost efficiency and democraticgovernance. Besides lacking exposure to these relativelynew organisations, bankers often raise concerns aboutlevel of professionalism of federation management, viabil-ity of the business model including dependency on theself-help promoting institution (SHPI) and political inter-ference. The idea of a national-level SHG federation isbeing debated to address the issue.

Bankers are generally comfortable in extending re-finance to the non-banking financial companies (NBFCs)because equity serves as a lever for credit. Banks are usu-ally concerned over the creditworthiness of MFIs and SHGfederations’ portfolio quality, profitability, governance andviability of the business plan. Incidentally, the involve-ment of investment funds regularly brings about improve-ments in all these areas. Bankers rely more on existing sys-tems and structures, though some emphasise on the mer-its of a long-term relationship, their loan terms are mostly24 to 36 months. Therefore, it is essential that MFIs andSHG federations go for credit ratings. Meanwhile, Nabardhas a scheme for subsidised credit rating for MFIs andSHG federations.

However, microfinance can grow from the perspectiveof demand only if adequate resources flow to MFIs andself-help groups (SHGs). There are four main options forcapital mobilisation — grants, profits, savings and invest-ment. Grants and profits, however, are unfeasible.


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Muhammad Yunus, founder of the Grameen Bank movement


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MONICA AGRAWAL

Microinsurance aims to provideprotection and inculcate the sav-ings habit for the customers at

the bottom of the pyramid. Some time intheir lives, most people experience finan-cial difficulties with potentially long lastingresults. This is especially true for the poorin developing countries. Any naturalcalamities and disasters to the poor areconsidered to be the severely shocking haz-ards, which is hard for them to recoverfrom. There is therefore a growing realisation of the needfor microinsurance products in our country.

It represents an untapped market of nearly $2 billion inIndia alone, according to a study released by the UnitedNations Development Programme (UNDP). Demand formicroinsurance in India has remained low in a large partbecause of a severe mismatch between services offered byinsurers and the needs of the insured. The present out-reach of microinsurance is around 5 million people, cover-ing only 2% of the poor in the country.

ChallengesMicroinsurance delivery in India is fraught with chal-lenges. A major hurdle is the acceptance of microinsur-ance among the rural poor who not only have low levels ofawareness about possible risks to their lives but also lacktrust in most financial schemes structured for the longterm with no immediate benefits. Non-availability ofauthentic admissible documentation during enrollmentand claims processing and a lack of facilities for premiumremittance further adds to the complexity in insuranceadministration in the remote and far-flung pockets ofIndia. Despite the numerous challenges, insurance com-panies have in the recent past made significant inroads totake insurance to the masses at the bottom of the pyramid.

Microinsurance at AvivaOur Vision statement for the Microinsurance Business

Vertical is “To cover risks to the lives andlivelihoods of the poor and underprivilegedat an affordable cost.” Aviva has been pro-viding insurance to protect the lives andlivelihoods of the economically weaker sec-tions of society in partnership with organisa-tions such as Basix, Aarohan and Paras CapFin. Today, we cover more than 1.5 millionlives and have settled close to 6,000 claims.We have a well established microinsurancepractice focussing areas such as customerfriendly products customised to the LIG seg-ment needs; affordable and lean processes

to cater to the unique dynamics of this segment; world classcustomer service experience and demonstrated capabilityin claims settlement.

We have been developing microinsurance products inconsultation with our distribution partners. Our popularmicroinsurance products include Credit Plus, CreditSuraksha in the group category and Grameen Suraksha forindividual lives. Credit Suraksha and Credit Plus are cred-it-linked products largely for MFIs and SHGs. GrameenSuraksha, on the other hand, is a traditional term planunder which the policyholder pays a premium for a periodof two years and avails an insurance cover benefit foreither 5 or 10 years. The minimum cover available is Rs 5,000 and the maximum is Rs 50,000. Additional flexi-bility is also offered such that the customer continues tobe covered for an extended period of 18 months (for thefive-year plan) or 48 months (for the ten-year plan) even ifshe or he is unable to pay the second annual premium.

SummaryThe microinsurance market has seen a lot of activity in therecent past and new customer service standards are beingset in a market that has long been sidelined for its non-profitability and complexity. However, a lot of groundneeds to be covered before we see tangible results in termsof increased insurance penetration and adequate risk cov-erage for the rural poor. The writer is Director Corporate Initiatives, Aviva India

MICROINSURANCE MARKET IN INDIAThe risk coverage to the poor will help them to recover from natural calamities

In the new financial crisis, how different will the role ofmicro-credit banks be?Micro-credit is not impacted by the financial crisis for thesimple reason that it is not exposed to the internationalfinancing system. Micro-credit is close to the real people.That is one of its strengths. Another strength is that wedon’t borrow from the international market—it is localmoney going to local people. Third, while the convention-

al banking system is collapsing, micro-credit has a highrepayment rate that is based on no collateral and no legalpapers—it functions beautifully. So, today, we can raise thesame old question we raised 32 years ago when banks toldus that the poor are not credit-worthy: who is credit wor-thy? The poor are the ones who are paying back and it isthe rich who are not paying back. The crisis has allowedthe world to challenge the financial system. I am in favour

‘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 thecurrent economic crisis and explains the role of micro-credit banks in dealing withpoverty. Excerpts:


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Bloomberg

of redesigning it and redoing it. Going back to the samesystem would be the worst kind of mistake we can make.Of course, terrible things are happening but we shouldlook at this as a great opportunity.

Farmers complain that there are too many checks andbalances when they approach banks and financiallenders for loans but the same checks evaporate whenbanks lend to big business houses.Interest rates in micro-finance should be as low as possi-ble because we are not in the business for money. The ideais to help people out of poverty as fast as we can. In micro-financing, we give loans to the poor—without collateraland without any legal instruments—for income-generat-ing activity with the lowest possible interest rate. That ismicro financing.

Does the potential of micro-financing end once peopleare above poverty line or does it have the potential totake them even higher?We make entry into micro-credit very difficult, unless youare extremely poor. We have a tough screening process—wewant to make sure we are getting to the person at the bot-tom. So if you are a poor person who lives in two-roomhouse, please wait, we are looking for people who live in asingle room. Once you qualify, you will never be denied. Youcan become the richest person in the world but we can stillfund you because you had qualified and now you are anexample for us. You will inspire others; you are the owner ofthe bank—Grameen Bank is owned by the borrowers. Noone has to leave, everyone can stay as long as they wish.

How well does the system work?It is very strong. If you are successful and I am not as suc-cessful, I copy you and see if I can benefit from that. It hap-pens a lot. For example, we encourage everyone to sendtheir children to school—100 per cent of the children ofGrameen families are in school. They want to make surethat their children go as high as possible and GrameenBank gives them a student loan. Right now, there are more35,000 people with student loans from the Grameen Bankin business schools, medical schools, engineering schools.So you inspire each other. That is the advantage of havinggroups, having weekly meetings and so on.

What is the legal position on NGOs’ lending capacity?If an NGO wants to lend money to poor women, the lawcan come and say you are under arrest, you are violatingthe law because in order to lend money, you have to be amoneylender, registered under the Moneylenders Act oryou have to be a bank. For example, if you take people’ssavings and then disappear, who will stop you when youare not registered? NGOs who are doing good work asmicro-credit organisations should be given the status of amicro-credit bank. You can give them standardised inter-est rates so that it is transparent.

People ask me, why don’t you convert yourself into abank? I say this is a ridiculous proposition. Banking law iscreated to create big banks. These big banks are like cargoships. A micro-credit bank is like a dinghy boat that goesinto shallow water, ferries a little merchandise. You cannotconstruct a dinghy boat from the architecture of an ocean-going vessel. This is the difference. Why don’t we make thearchitecture of a dinghy boat—what is so difficult about it?Grameen Bank has a law that applies to it, it is a specialisedbank. We say, why don’t you generalize this law so that any-body can begin a Grameen Bank in Bangladesh? Millionsand millions of people need financial service. This is a busi-ness but a business with a completely different purpose—to help people create their own employment. In the contextof this financial crisis, this becomes more importantbecause people will be losing their jobs, will be losing liveli-hoods. So if you can create financial systems of micro-cred-it, they can create self-employment opportunities.

The India government has used the loan waiver as ameans to address issues of poverty. Your experience hasbeen that micro-credit borrowers are extremely goodrepayers. Is there a clash between the two models?Politicians are not bankers. They want political solutions.Waiver is a political solution—it is a good way to ask forvotes but that is not a financial system which is tenable.Once you waive a loan, you are not only doing harm to thepresent cycle but you are giving incentives to people infuture not to repay and pressure the government to waiveloans. If I have to waive a loan, I would do it by giving themcash—because if you borrow, you have to pay back. That isthe culture we have to build, otherwise the banking systemwill not work. Bangladesh is a country where disasters are


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redesigning it and redoing it. Going back to the same system would be the worst kindof mistake we can make. Of course, terrible things are happening but we should lookat this as a great opportunity

frequent. Many families start from zero after floods but wenever waive their loans. The standard practice at GrameenBank is that as soon as the disaster hits, the branch is con-verted into a humanitarian organisation. All bankingactivities cease to exist. Once the crisis is over, we take careof these families, help them start some kind of activity tokeep them working. We issue new loans, new houses.Slowly, you pay back. We take your loan and convert it intoa long-term one. Our system is that no matter how long ittakes to pay back the loan, the interest can never exceedthe total principal. Our policy is to make sure people getback on their feet. If people are not on their feet, the bankwill not be on its feet.

Does your bank have something for the urban poor?When I was drafting the law for Grameen Bank, I put in aprovision that this bank will never work in any urbancentre. Now, we are asking the government to amend itbecause we have already covered the villages ofBangladesh. Only the cities are left. In rural areas, we nowhave 7.7 million borrowers—97% women. Basically, thisis a bank for poor, illiterate women—they own the bank.Our board is made up of their representatives, chosen by them.

How do you see Grameen activities in India?There is no Grameen Bank in India, just a Grameen-typeprogramme because there is no law to allow this type of abank to be created here. Those that exist are restrictedsince they cannot take deposits. Most of the time they runaround for funds rather than concentrate on the work.Grameen Bank can grow as each branch is dependent onthe deposits it can mobilise from the area and lend themoney to the local people. A Grameen Bank branch is likean independent bank by itself. We want to build our owncapacities but because the law doesn’t support this inIndia there are limited capacities.

How did Grameen America, your New York venture,come about and how does the model work?It is said micro-credit cannot work in the United Statesbecause it is a different country, a rich country, etc.Grameen Bank started in USA in 1987 when as Governorof Arkansas, Bill Clinton invited me. I had a meeting withhim and his wife Hillary Clinton. They were eager tounderstand our work. He said we need this in Arkansasbecause this is the poorest state in the US. That was thebeginning and Hillary Clinton was the chairman of thecommittee running this bank. After he became President,that programme was folded up. Then somebody from

New York wanted it there. So, last January, we launched itin Jackson Heights. We deliberately chose JacksonHeights because in Arkansas we had a lot of trouble giv-ing loans to people. Their welfare law is funny: if yousomehow earn one dollar, you have to report it to thewelfare authority and welfare authority will diligentlydeduct this dollar from your cheque. That is shocking. IfI were in charge of drafting this law, I would have donejust the opposite. So we wanted to choose an area wherewelfare has not penetrated yet. We followed every singleprinciple of the Grameen Bank. Whatever you see in aBangladeshi village, you see in Jackson Heights. We sentsomebody from Bangladesh to start the programme andwe chose somebody who has never been to the UnitedStates so that he does what he does in a Bangladeshi vil-lage. He will not feel embarrassed about it. Today, wehave more than 5,000 borrowers, all women, someCaribbean, some Latinos, some Indians. Repayment is99.6% and while big banks are collapsing in the sameenvironment, this bank is flourishing. Now everybodywants a Grameen programme. In Grameen Bank, the rulerequires that every borrower must open a bank account.Whatever little money you earn every week, you depositthat in the account. So to open an account for a womanwho saves two dollars a week was the greatest hurdle inthe entire project. We are getting a lot of invitations, evenone from Warren Buffet. His daughter Susan invited us toOmaha, Nebraska, because Omaha is very poor.Everybody is in the pipeline.

We often speak about ‘social business’. Can you explainthe concept?The basic thing that went wrong in the current financialcrisis is that the capitalist system made the human beingappear as a uni-dimensional being and created a theory:that all they do in their economic life is to make money. Isay, yes, making money is an exciting goal but humanbeings are multi-dimensional beings. There are manyother things we take pleasure in doing—selflessness isone. That is where we went wrong. Why don’t we createseparate businesses on the basis of selflessness? If peoplecan give away, why not use the money to design a businesswhich helps people—say, something to tackle malnutri-tion. So at the end of the year, instead of asking the com-pany how much money it made, you would be asking howmany children it got out of malnutrition.

This financial crisis is an opportunity for us to incorpo-rate the idea of social business. Money-making businesshas failed the world. If we bring the social business intothe picture, some balance can be restored.


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JENNIFER MEEHAN

Twelve months ago, in a candidconversation with a mentor andfriend on the state of microfi-

nance for the poor in India, I heard acomment that stopped me in mytracks: India was in danger of declaringmicrofinance a huge success while tensof millions of poor families continuedto lack access to the most basic offinancial services.

No doubts, India is one of the mostdynamic microfinance markets in theworld. A combination of visionary socialentrepreneurs, huge demand for micro-finance services and the availability of local commercialdebt capital (and in some cases equity capital) has fuelledrapid and enviable growth in the sector. It is estimated thatalmost 55 million households are currently being reachedby specialised microfinance institutions and through theNABARD-supported self-help group approach.

Yet, for Grameen Foundation, growth in and of itself is nota sufficient measure of the microfinance success. It is thequality of growth, as well as the quality of the services beingprovided that matters. Are the poor and poorest actuallybeing reached with financial services in a timely and honestmanner? Are those services designed to enable them trans-form their lives?

These questions dominated the recent Sa-Dhan microfi-nance conference in New Delhi, headlined by two globalleaders in microfinance, Muhammad Yunus of the GrameenBank in Bangladesh and Ela Bhatt of Sewa in India. Thesetwo visionaries, along with social entrepreneurs across theworld, became barefoot bankers by accident—because ofits transformational impact on the lives of the world’s poor-est people.

We believe that financial and social success in microfi-nance are not mutually exclusive, but rather mutuallydependent. Financial sustainability is required to growmicrofinance to the scale of the problem—global poverty—and a measurable impact on lives is required to fulfill ourunderlying purpose and mission.

Grameen Foundation first began working in India

almost a decade ago when many oftoday’s leading and fastest-growingmicrofinance institutions were stillexperimenting with different solutions.There are three trends in India that giveus pause for thought: 1) there isincreasing anecdotal evidence that thepoor are not being served in largenumbers, especially in the North andEast 2) The micro finance institutionsthat have accessed commercially ori-ented equity financing are moving,either consciously or not, away fromserving the poor who are more expen-sive to reach, thereby reducing prof-itability 3) There are a few MFI ‘biggies’

that dominate the microfinance market, leaving innova-tive smaller and younger institutions to struggle to growin order to maximise their impact.

Over the next year, we will advance our double bottomline agenda in India in three ways. First, by promotingthe missing piece of the double bottom line puzzle—social performance in general and our Progress out ofPoverty Index (PPI) tool specifically. With this tool, wecan finally move beyond anecdotes and get verifiabledata whether the poor are being reached and how theirpoverty levels are changing with access to microfinanceservices. Second, we will—in collaboration withGrameen Capital India—provide catalytic capital to Tier-II institutions working with the poor in underserved andunserved regions of India. And finally, we will collaboratewith practitioners and others locally to dispel the myththat microfinance is only appropriate for those ‘econom-ically active’ poor at or around the poverty line.

In order to declare microfinance a success in India, notonly do tens of millions of more poor people need to bereached, but those services must have a transformationalimpact on their lives and those of their family members. The writer is the CEO Asia Region for Grameen Foundation(GF), a global non-profit organization that combinesmicrofinance, technology and innovation to empower theworld’s poorest people, especially women, to escape poverty.She is based in Hong Kong and can be reached at [email protected]

OUTREACH SHOULD BROADENEnsuring microfinance continues to work for and is focussed on the poor in India


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SUSHILA RAVINDRANATH

It is not very apparent yet, but one of India’s fastestgrowing businesses is microfinance. In India, theorganised microfinance industry is about ten years old.

The most popular model for these institutions is theBangladesh-based Grameen Bank. The micro entrepre-neurs usually want to start ventures not amounting tomore than Rs 10,000. The interest they pay to the moneylenders make their borrowing completely unviable. Forexample in the wholesale vegetable market in Chennai,one can see people disbursing Rs 100 to various vegetablevendors in the morning. By the evening the vendors haveto pay back Rs 120. This means they pay 20% interest everyday. These are the vegetable, flower, fish vendors, tea stalland food stall owners who require funds and have norecourse other than the money lenders.

The microcredit institutions (MCI) lend them thisamount without any security. The MCIs prefer to lend towomen rather than men. Some women give their borrow-ings to men in their family. But they make sure it isreturned. In micro credit women make better borrowers.The interest rates are not low. Instead of 50% charged bythe money lender it may be 38%. Still there is a saving. Andthe default rate is negligible.

A survey conducted by RBI finds that most borrowerssay that it is easy or very easy to get a loan from microfi-nance institutions (MFIs). They have a close monitoringsystem which ensures that there are minimum defaults.MFIs have a good recovery rate. District administrationreceived very few complaints againstMFIs. Almost all the bank branch man-agers said that MFIs were good customersof banks and they could be used as busi-ness facilitators or correspondents.

However, microcredit is an operationallydifficult concept. According to people inthe business, if the loan amount is Rs 5,000, the amount is collected over 50weeks at Rs 120 per week. Usually fivewomen join together to take loans. Itbecomes a collective liability. The field

development officer holds a meeting with all of them beforelending. Then the women pledge to pay back the amountand the institution starts lending. The officer goes literallyeveryday to follow up on the progress of a number of bor-rowers for whom he is responsible. Each branch of theinstitution has many such collection centres. Lendingradius is usually within one or two square kilometer. Andone has to get to know the people. Banks can never handlesomething like this.

In spite of these hurdles there have been quite a few suc-cess stories like SKS India which was launched in 1998. It isone of the fastest growing microfinance organisations in theworld, having provided over Rs 6,212 crore and havingmaintained loans outstanding Rs 2,216 crore to 3,906,007women members in poor regions of the country. Borrowerstake loans for a range of income-generating activities,including livestock, agriculture, trade (such as vegetablevending), production (from basket weaving to pottery) andnew age businesses (beauty parlour to photography).

Spandana founded in 1998 is also one of the fastestexpanding microfinance institutions in the country. It isalso one of the most efficient in the country with an oper-ating expense ratio of 5.5% on portfolio. It now boasts of aclient base that constitutes almost 1.5% of the BPL (belowpoverty line) population of India. Then there is WestBengal-based Bandhan, Chennai based Micro CreditFoundation of India , all doing splendid work with women.

Once they are established MCIs can be channels forother products like mutual funds, insurance and so on. Itis also possible to tie up these institutions with education

and healthcare. Now that several successstories are emerging in this area, and thespreads appear good, many larger com-panies want to join the bandwagon. Thisworries existing players. The big groupsthey fear will push costs and salaries upwhich will defeat the purpose of microfi-nance. The industry also fears politicalinterference, government interfering withinterest rates and so on. Notwithstandingsome problems many firmly believe thatthe future lies in microfinance.

SMALL IS PROFITABLEMicrofinance institutions have a close monitoring system which ensures that thereare minimum defaults with a good recovery rate


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In microcreditwomen make betterborrowers. Theinterest rates arenot low. Instead of50% charged by the money lender it may be 38%

TARUN CHUGH

It is widely recognised that microfinanceis a powerful tool in eradicating extremepoverty. As outlined in the millennium

development goals under the UnitedNations Development Programme, thebasic approach adopted by the signatoriesis built on the premise that over the time,with the support from the state govern-ments, village economies can transitionfrom subsistence farming to diverse com-mercial activity.

The role of microfinance institutions The first step towards achieving this is the availability ofcredit for asset creation. Over the last decade, the microfi-nance institution (MFI) movement originating from theGrameen model in Bangladesh has proliferated worldwideand made a significant difference to the rural economy. InIndia too, commercial insurers traditionally have focusedon bundling basic life risk products with the MFI loans toincrease reach and convenience for consumers. However,credit linked insurance is usually driven by very low premi-um. For instance, ICICI Prudential Life’s Sarv Jan Surakshahas a minimum premium of Rs 50 per annum and providesup to Rs 30,000 in case of an eventuality. This sum is usual-ly adequate to cover the loan outstanding and, hence, pro-tect the earning asset for the family. The premium is gener-ally paid by the MFI as an extended credit to the memberand recovered along with the loan installments.

Creating value for consumers beyond credit insurance Availability of credit, however, is a necessary, but not suffi-cient, condition for sustainable financial inclusion. Giventhat the low-income group families in the developingworld are specifically vulnerable to multiple idiosyncraticand catastrophic risks, income protection in these marketsis as important as income generation.

Microinsurance not just plays a key role in meeting thecredit requirements of this segment but at the same timeprovides them protection against the above stated risks,creating tremendous value for consumers in safeguardingtheir interests.

Regulatory environment Regulation in India has been fairly proac-tive on the need for microinsurance. TheInsurance Regulatory DevelopmentAuthority (IRDA) was the world’s first regu-lator to come up with specific microinsur-ance guidelines in 2005.

Reaching out to the consumers Microinsurance is no longer considered justa subsidised business for meeting the IRDAobligations. According to a UNDP reportpublished in 2007, microinsurance repre-

sents an untapped market of nearly $2 billion in India.

Consumer education Consumer education on the need and importance of lifeinsurance at the community level in these markets is verycritical and needs to be carried out in isolation of advertis-ing and promotion.

Product innovation ICICI Prudential Life, for example, has designed a cus-tomised product offering—Anmol Nivesh— which is a sav-ings and protection product designed exclusively keeping inmind the need and income cycle of tea plantation workers.

Managing costs Reaching out to this potential market needs to be costeffective for it to be a viable business model for insurers ona sustained basis. This makes it critical for various stake-holders to pool in their resources towards achieving acommon objective. Pooling of data between insurancecompanies and government bodies can help improveactuarial calculations and in better pricing.

Public Private Partnerships The Centre, as well as a few state governments, have takensteps towards providing life and health risk cover to thepoor. One of the more popular ones—Rashtriya SwasthyaBima Yojana—is now launched across the country.

The writer is Chief - Alternate Channels & Group, ICICIPrudential Life Insurance Co. Ltd.


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MICROINSURANCE: A SNAPSHOTThe life and health risk cover for the poor can contribute towards alleviating poverty

INDUMATI SAHOO

Grain BankGrain Bank is a kind of “Cereal Pooling Mechanism” at thevillage level. The villagers contribute a portion of their ownharvested stocks of paddy, ragi and maize during Decemberand January to establish a village based fund in the form ofgrains collectively to meet exigencies. The members of theGrain Bank usually borrow during lean period during Mayto September and repay the same along with interest in theform of grains after next harvesting.

The concept of Grain Banks is quite popular amongmany tribal and backward regions of the country. TheGrain Banks offer dual benefit to the members in the formof food security as also the seed security depending on theparticipating clients. They also offer a savings avenue tothe poor in the form of savings in kind.

With a view to synergise the concept of Grain Banks withthat of the Small help Groups (SHGs), two projects weresupported by NABARD, one each in Orissa andChhattisgarh with the following objectives: a) To explore the possibilities of monetising the savings-

in-kind in the form of grains to explore the possibilitiesof building synergy between SHGs in a village.

b) To understand the issues in participatory managementof Grain Banks in some of the dis-advantaged areas.

Orissa (Kalahandi district)The Grain Bank project was piloted in the Rampur block ofthe Kalahandi district with a mission of exploring the pos-sibility of synergising the traditional practice of maintain-ing grain banks with the SHG. The pilot envisaged mon-etising savings in the form of grains by SHGs enabling participatory management of grain banks by membersand securing the availability of food grains and seeds espe-cially in the post monsoon period.

A total number of 17 villages of Thuamul Rampur blockof Kalahandi district were covered under the project. Outof the 353 households in the 17 villages and hamlets, 263

belong to ST category, 42 to SC and 4 are of OBC category. The land in this area is hilly land without irrigation facil-

ity. The livestock are mostly in the form of goats and cows.The income level of most of the household is quite low.

It was observed that the food stress period is for aboutnine months. The agricultural produce meets the foodrequirement for only 2-3 months. A major portion of the

produce is used for liquidating the loan from the money-lender. The lean season of food availability is from May toSeptember of the year and the food scarcity becomesacute during rainy season. People get into the clutches ofthe moneylenders during this period. The nearest bankbranch is at Gunupur about 25 km away.

Three Grain Banks were constructed in Silet, Sikergudaand Maltipadar. All the three are in active operation in 17tribal villages of Kerpai and Nakarundi GPs of ThuamulRampur block of Kalahandi district. Three Grain Bank Committees were constituted withmembers from different SHGs.29 SHGs were promoted by the NGO, Antodaya.SHGs started savings in cash and grain. Savingsmobilsed by the SHGs from members was Rs 1,59,025and grain of 5,330 kgs (approximately).The district administration took keen interest in imple-menting and monitoring the project. SHGs have

GRAIN BANKS AND SELF HELP GROUPSIn Orissa and Chhattisgarh repayment and distribution in any mode of grain led toconverting the produce of the area into money thereby facilitating savings


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received support from external sources such asIntegrated Tribal Development Agency (ITDA) andOrissa Tribal Empowerment and Livelihood Project(OTELP) to an extent of Rs 1.45 lakh and Rs 1.5 lakh.Cash in hand were to the extent of Rs 11,865, cash inBank were Rs 3,44,124 and the amount involved in inter-nal lending were of Rs 1,36,642 by the end of May 2008.Grains totaling 963 Kgs (rice, paddy, ragi and small mil-let) have been saved by the groups. Kalahandi AnchalikaGramin Bank provided loan aggregating Rs 3.75 lakh tothe groups.

Other benefits The implementation of the pilot project for Grain Bankamong others highlighted the area so much that theGovernment of Orissa selected it under Orissa TribalEmpowerment and Livelihood Project (OTELP). Themicro watersheds are being developed and livelihood

programme are being implemented under the project.Roads are being constructed to improve the connectiv-ity. The flow of funds and the wages in the form of grainand cash have facilitated better standard of living for thepeople. The scarcity of grain has been reduced to a greatextent. But the people are keen to continue with theGrain Bank as the OTELP project will be there for twomore years. At the pre-development stage, about 97% of the familieswere under food stress during 5-6 months and wereunder the clutches of money lenders. In the post inter-vention period no family was going to the mahajan orthe money lender for food grain during scarcity period.For cash loan the bank linkage is proving adequate.However, occasionally few families still go to moneylenders as the nearest branch is situated 40 km awaywhich gets cut off during monsoon.People have gained confidence and can hold on to

their produce for a month or so by availing loan fromthe SHGs. Last year they could sell kandul dal (wildarhar) at higher price and sold tamarind for Rs 6 per kgas against Rs 2-3 per kg hitherto. The training pro-gramme under the project as well as frequent visits byNGO personnel, Bankers and NABARD officials haveenhanced awareness level among the people of thisinaccessible area. They have succeeded in presentingtheir problems before the district authorities and get-ting their work done.There was a campaign against alcoholism in Sikergudato Maltipadar villages by the women SHG members inDecember 2007. All women members are covered under SwasthyashreeHealth Insurance Scheme run by women federationBanashree Mahila Sangathan supported by Antodaya.

Chhattisgarh (Kanker and Bastar district)To promote Grain Banks among the SHGs in the mono cropareas of the state, a project on pilot basis for establishmentof five grain banks each in two villages of Bastar division wassanctioned by NABARD with matching grant contributionfrom Catholic Relief Society, an NGO. As per the project inMarkatola village of Kanker district, each grain bank was tocover 3 SHGs involving 50 members for mobilising 50 kgs ofgrain by each member. In the Mylibeda village of Bastar dis-trict, each grain bank was to cover three SHGs involving 15members each in mobilising 30 kgs of grain per year by eachmember. NABARD had sanctioned Rs 2.375 lakh as grantassistance towards 50% cost for establishment of 5 grainbanks each in the proposed two villages belonging to tribalcommunities over a period of 2 years from the date of sanc-tion i.e. 17 February 2005.

Markatola village The village has about 400 households having populationof 2,200 scattered in 9 hamlets. About 50% of the house-holds are tribals and depend on agriculture and wagelabour. Villagers largely reside in kuttcha mud houses.

The land holdings of the families vary between 1.5 to 4acres. Only one major crop i.e. Paddy is grown in a year.About 35% of the families avail crop loan from LAMPSwhich is around 10 km away. The nearest bank branch tothe village is 2 km away.

AchievementThe NGO had introduced the Grain Bank among the vil-lagers long back. Only problem faced was that of limitedstorage space restricting the operations of the Grain Bank.

Five Grain Banks were completed, of which four were


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constructed in community and panchayat land and theremaining one in the land donated in writing in GramPanchayat forum by the land owner. The Grain Banks aremanaged by a committee and secured with lock and keyunder joint custody. The Grain Banks started functioningwith effect from March 2007. An extension worker of theNGO staying in the area oversees the functioning of theGrain Bank.

SHGs are base for all the Grain Banks. Members of 3 to 4SHGs are the members of each Grain Bank. All the SHGsassociated with the Grain Banks were gathering grains atuniform rate of 5 kata (15 kgs) per member after harvesting.

Mylibeda villageThe village has about 200 households having populationof 1,500 scattered in 7 hamlets. About 95% of the house-holds are tribals and depend upon agriculture and wagelabour. The average size of land holding of the householdsis 4 to 5 acres. Only one crop i.e. paddy is grown in a yearas the village depends entirely on rainfall for cultivation.The village is having one Anganwadi Centre and one pri-mary school. Catholic Relief Society, the NGO has imple-mented a watershed programme in the village. A residen-tial school upto 10th Standard and a hospital are run bythe NGO in the village.

Achievement14 SHGs were formed in the village and it was observedthat members were aware of the SHG concept and hadopened SB A/c with the RRB branch. The groups hadmobilised Rs 5 to 10 per month regularly. The Grain Banksstarted functioning with effect from 1 December 2006. Allthe grains contributed during 2006-07 was lent out.

The establishment of Grain Banks in the villageaddressed the problem of resorting to the money lendersby the villagers to a large extent. Because of Grain Bank, vil-lagers remained united. They also organised recreationalactivities in the village. Grain bank activity helped the vil-lagers to organise and construct a check dam in the nearbynala. They are now able to produce second crop on someadditional plots. Grain Banks have helped villagers indeveloping close association with the NGO and gettingeasy access to high school education and health facilities.

LearningsMonetising the savings in kind: The objective of monetis-ing the savings in kind was achieved to a great extent inOrissa. Bank loan routed through the NGO took intoaccount the savings in the form of grain while working outthe corpus of the group. The branch of the erstwhile

Kalahandi Gramya Bank (presently Utkal Gramya Bank)could bring 364 household under its purview in one of themost inaccessible areas of the Kalahandi district. TheSHGs of remaining part of the area i.e. Kerpai GP were alsocredit linked through the effort of another NGO,Shahabhagi Vikash Abhiyan and DRDA/ORMAS. Thus theentire area could be brought into banking network. Theflexibility i.e. the repayment and distribution in any modeof grain (either in the form of rice, paddy, pulses) led toconverting the produce of the area into money, facilitatedsavings in grain, credit in the form of grain as well as cash.

Building synergy between SHGs and Grain bank: Thesynergy between Grain Banks and SHGs has brought in adecentralised system for distribution and recovery withthe involvement of the community. This has led to the sus-tainability of the Grain Bank.

Food Security And Participatory Management: Foodsecurity during the food stress period was the biggest chal-lenge which has been addressed successfully as the peoplecould meet their requirement through Grain Bank.

Other developments: The implementation of OTELP andconstruction/repairing work of road are the major develop-ment initiative by the Orissa Government. The develop-ment work led to flow of grain and cash in the form of wagesand grant assistance for various livelihood programme.

Future StrtaegyGrain Bank to be converted into commodity outlet : Thetribals of the projects wanted to continue with the GrainBank scheme. The community is in the habit of saving andthe grain saved at the SHG level could be used for access-ing funds from bank. The stock of grain with SHGs in vil-lages may ensure food security particularly in the contextof food stress period during monsoon when the area getscut off. The Grain Bank can be converted into commodityoutlet and may be linked to the rural haat.

Grain Bank Committee to become Farmers club:TheGrain Bank Committee may gradually become inactivewith less work in hand and may ultimately becomedefunct. In order to enrich the job of the Grain bank com-mittee and bring some integration for agriculture develop-ment on a permanent basis Farmers club may be consti-tuted in which the members of the grain bank committeemay become member.

Replication in other states: This model of association ofGrain Bank with SHG – bank linkage is relevant particular-ly in remote inaccessible pockets of the country for bring-ing such regions under the purview of the banks with sup-port from NGOs. The writer is AGM, NABARD


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GOURI SHANKAR

Standard Chartered Bank’s (SCB) engagement withthe development agenda is core to its focus on build-ing a sustainable business. We believe that our long

term financial performance is dependent on having theright social and environmental conditions for growth inour markets. By engaging with our stakeholders we haveidentified seven key areas where we can make the greatestdifference – access to financial services is one of them.

Across Asia, Africa and the Middle East we provide acustomized product offering for all stakeholders in themicrofinance industry including: local currency lendingand banking products and services to our microfinanceinstitution (MFI) partners, risk participation structureswith development organisations, technical assistance (TA)linkages with TA providers and global markets products forinternational investors.

In September 2006 the bank announced its commit-ment at the Clinton Global Initiative to establish a $500million microfinance facility over a five-year period. Inview of the lean branch network of the bank, SCB followsthe wholesale model of bulk lending to MFI for further onlending to the Self-Help Groups (SHGs)and individuals. This facility will pro-vide MFIs and fund managers with $500million of credit, financial instrumentsand technical assistance to financeMFIs in Asia and Africa.

In India as on March 9, the bank hadan outstanding portfolio of $60 million,with an outreach of about 0.75 millionclients – spread across 15 MFI partners, amajority of whom had a pan India pres-ence. Our partners include a mix ofestablished intermediaries, urban startups and down-scalers. Products offeredinclude: term loans, overdraft limits andcash management facilities. Over thepast year in particular, given the sizeablegrowth in the operations of our partners

we have begun to support them in linking into the investorcommunity via the capital markets.

The bank views this as a channel for empowerment ofwomen and people at the bottom of the pyramid. With aview to achieve scale, bank’s microfinance business is sus-tainable in nature with ample scope for expansion. Withmillions of financially empowered client base createdthrough microfinance business, there are many otherbusiness opportunities in the domain of micro savings,micro pension and microinsurance etc. Except for microcredit, the other financial products have not really reachedthe clients and there lies new opportunities and chal-lenges for banks and financial institutes.

Beyond building the business, the bank also invests inthe capacity of its partner MFIs through technical assis-tance and trainings. Over the past year the bank hasinvested in two training programmes for the microfinancesector in India.

Though MFIs are improving their risk mitigation strate-gies with growth, still there is scope for improvement andthe enhanced risk systems does not appear to commensu-rate with the growth. With a view to contribute in thisimportant space, bank is trying to down scale its robust

risk management frame work to suit tothe MF industry and provide as a sec-toral offering for the benefit of theindustry. The bank is working arenowned industry training agency toundertake this project.

The Indian microfinance sector – mir-rors the global microfinance sector interms of its development. The sector ishighly concentrated and a small numberof MFIs manage the majority of assets. Ina bid to develop new investment oppor-tunities in the sector, we sponsored, forthe second time in two years, “SRIJAN”, amicrofinance business plan competitionaimed at encouraging greenfield MFIs. The writer is head – Microfinance,Standard Chartered Bank


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LEADING THE WAYStandard Chartered provides financial services credit, savings, banking productsand services to its Micro Finance Institution (MFI) partners across Asia, Africa andthe Middle East

Though MicrofinanceInstitutions are improving their riskmitigation strategieswith growth, still thereis scope for improve-ment and theenhanced risk systemsdoes not appear to commensurate with the growth

You have been with the main street banking industry for almost 22-23 years. What brought you here to microinsurance? I was really excited by the opportunity in this market.There are two things: One is sheer opportunity of the busi-ness to transform life and really impact a poor person’s life.I come from South and my grand parents still live in a vil-lage. So, I know what all adversities people go throughthere. I was always very passionate about doing somethingin this area.

In fact, when I was with the Barclays we tried making anarrangement with SKS for mobile banking or tele-paymentfacility. We were running a pilot then, but it didn’t work out then.

On the commercial front, we have a huge scale already.We are the biggest microfinance company in India. If wecontinue to grow at the same pace, we are hopeful ofbecoming the largest microfinance company in the worldwithin next two years. Per month we are adding 2.5 millioncustomers and are targeting 15 million customers by theend of financial year 2012.

What has been the most interesting experience for you inSKS microfinance till now? The way microfinance has changed the lives of poor peo-ple is simply amazing. There are a lot of people I meetwho have taken loans from us and changed their lives.However, there is one case that I remember quite vividly.During one of my visits to the centres in Andhra Pradesh,I had met a widow. She was then in the second cycle

of loan from SKS. Before joining the SKS family, she used to work as a

labourer near her place and earned on per hour basis.After her husband’s death, she took a loan from SKSMicrofinance to buy a sewing machine and started sewingclothes. Within one year, she managed to increase herbusiness two-fold and bought another sewing machine.Apart from elevating herself, she employed other labourclass as well and helped increase employment opportuni-ties in her area.

We also met her daughter and she spoke to me inEnglish. I was surprised! Then later the woman told methat she supported her family and ensured good educationfor her daughter. After completing her graduation, she wasthen working in a call centre.

A loan from SKS elevated that widow from labour toentrepreneurial class. There are many more cases wherewomen in dire conditions have taken loans from us and arenow proud owners of their small entrepreneurial set up.

People always question microfinance and doubt if it isdoing well or not. I’m totally convinced. We are not onlydoing well but also making sure several people that are inneed too are doing well.

Besides disbursing loans, you also teach the borrowerhow to write her name. Why? We generally conduct three-day session before the loandisbursement. In these sessions, women are told how thewhole microfinance set up works. We also teach them howthe interest is calculated, what the total amount that they

‘WE HAVE BEEN GROWING AT 200%. BY 2009 END WE SHOULD HAVE OVER60-65 LAKH CUSTOMERS’Suresh Gurumani took over as the CEO of SKS Microfinance last year after VikramAkula, the founder of SKS, stepped down to become a full-time director on the boardof the company. A banking veteran with 22 years of experience has set a cleargrowth path for his company even during these times of slowdown. In an exclusivechat with Suneeti Ahuja, Mr Gurumani shares his experiences working in the field ofmicrofinance. He outlines his plans of making SKS one of the largest microfinancecompany and hopeful of targeting 15 million customers by 2012.


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will be paying is and most importantly, how to write theirname. It instills a lot of confidence in the person.

Besides, whenever a woman takes loan from us, wemake sure that the respective husbands and families knowabout the step. And finally, at the time of loan disbursal,both husband and wife have to sign the document.

In fact, I remember an incident. On one of the loan dis-bursal days, there was a couple that had come. After takingthe loan, they had to sign on the papers. Now the husbandwasn’t literate and put his thumb impression on the paperand the wife on the other hand, since she had gonethrough that training program, took a pen and signed. Wecould see the sense of pride in that act — she felt superiorto her husband.

These are small things but have a very deep socialimpact. One factor is the group part. Since we lend only togroups of women, it binds some sort of binding to the soci-ety as a whole. And that is lacking in the street banking.

How do you categorise poor people for disbursement of loans? We have divided them into three classes: upper poor, verypoor and ultra poor. While we disburse loans to the firsttwo segments, we give grants to the ultra poor. Say, Rs 20,000 to buy a cow and then we teach them how tofeed and milk the cow and earn some money. We want tomake them commercially viable. So that is again a pilot

that is running. These are basically people who haveincome of less than $1 per day. We are also working with Forbes on a project to ensuresome sort of entrepreneurial opportunity for this segment.

You do not ask for any collateral at the time of loans.What is the default rate and who are your customers? Most of the people that take loans are migrants. This is abusiness that is purely driven on trust. The group modelmakes it really successful. We make groups of five and dis-burse the loans to them. One important point is that themembers of the group should not be blood relatives. Thenit is the responsibility of the group to ensure that all themembers pay their due instalments in time. In case some-body defaults then the group has to pay for that person.

So far we have had recovery rates of almost 100%– evenin state of Bihar, where people might think we would haveproblems. Our recovery rate is 99% per cent.

Disbursal of loans is done after all the due diligencefrom our side.

You are a profit making organisation. What is theturnover for the company last year? Financial figures are confidential. In terms of growth, wehave been growing at 200%. In India, right now we haveclose to 40 lakh customers, which should be over 60-65lakh by the end of this year.


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Are there any bottlenecks that you face in this industry? There are two types of challenges that we face: internaland external challenges. Let me first talk about the internalchallenges. The first one is rural connectivity. We set upbranches and then need to make sure that the informationis reaching those branches in time. But now with thebroadband connections being available almost every-where, this problem is being resolved pretty fast.

The other challenge is people. We have a branch headand then other people that facilitate the whole process.And we make it a point to employe the localities. Most ofthe people working or heading these areas are 10th pass.We ask for references from the local people and based onthe references, we fill the vacancies. We strongly believethat there should be an empathy with the customers.

On the external challenges front, we have bureaucratichurdles. As a company, we have set principles that we areunwilling to give in. So it takes a lot of time at times to opena new branch. Then lending from banks is also a concern.Although, the condition is better off now, Vikram Akula, thefounder and now the chairman of SKS Microfinance faced alot of problems. Most of the banks were not ready to lendthen, as they could not figure out how we could lend with-out collaterals and give unsecured loans. And now, we arethe biggest borrowers from the banks.

Then there are problems like Naxalism.

What is the rate at which you borrow from the banks?And what is the rate of disbursal? Currently, we are borrowing at 13.5%. We give the loans atthe rate of interest of 24% to 28%.

Why such a difference in interest rates? There are two costs involved in this business: one is theoperating cost and second cost is interest cost. Since, wehave to go far flung areas to do everything, it incurs a lot ofoperating costs. And then we have to take care of the inter-est part as well.

To take care of all the costs, we charge the borrower asper the higher slabs. But as we scale up and bring our costsdown, we tend to reduce the rate of interest charged aswell. Like in Andhra Pradesh and Karnataka, we charge12.5% as the member base is high, where as in areas wherewe are yet to reach the critical mass we charge 15%. And in

turn, pass on the benefit to the customers.

Are there any other initiatives that you are working onfor this segment? There are quite a few initiatives that are underway. Interms of rural reach, we have about 1,400 branches. Whatwe are looking at is a holistic rural economy. While micro-finance is one way, through the reach, we are planning tointroduce good-quality products to the rural masses.

For instance, we have a pilot running with Unilever forsupplying water purifying systems. Through these sys-tems, the poor get access to clean drinking water. We havea special arrangement with the company that poor peopleto pay for these systems in installments. Thus, we are try-ing to provide access to better life to the poor through ourwide reach.

We already have a pilot project running in AndhraPradesh and Orissa. Soon we should be able to launch theservices everywhere. We are also running another projecton solar light.

We look at products that are good for the customers. Andwe bundle the finance option for the customers. For exam-ple the water purifier is for Rs 1,800 and the solar light isbetween Rs 1,250 to 1,800. We are also planning to roll outanother set of services – mobile. We have tied up with Airteland Nokia for this. Besides the business part, these can alsobe used by the families.

You have grown to quite a significant level. Going for-ward would you also look at other types of loans and alsoexpand the reach to men as well? First, we give loans only for entrepreneurial work and haveno plans to increase this to other types of loans.

And why only women? That is because I think womenare more risk-averse. As they are the ones who handle thehousehold expenses, they are more responsible with theloans. We feel there is still huge opportunity in this area.And therefore, would not want to widen our reach in termsof men borrowers right now.

Are you planning to expand overseas as well? And if yes,where do you see the opportunity?We cannot say anything right now. But yes, there areopportunities in China and Far East.


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about 1,400 branches. What we are looking at is a holistic rural economy. There arequite a few initiatives that are underway. In terms of rural reach, we have about1,400 branches. What we are looking at is a holistic rural economy

AJAYA MOHAPATRA

Since the beginning of the global eco-nomic downturn in mid-2007, theworld is debating what would be the

impact of financial crisis on the microfi-nance (MF) sector. MF has emerged as oneof the pivotal strategies across the globe foralleviating poverty by enabling poor toraise their income and socio-economic sta-tus. The history suggests that since last twodecades microfinance institutions (MFIs)are largely resilient to the financial crises.As compared to other mainstream financial institutions,MFIs are immune during the financial crises including thecurrency crises in East Asia and banking crises in LatinAmerica in the 1990s.

It is due to the fact that during that period the microfi-nance sector was very small and the external borrowingsincluding equity and debt to the MFIs were very limiteddue to their not-for-profit in nature. Yana Watson ofDalberg Global Development Advisors (MicrofinanceInsights, March/April 2009 issue) writes that “only a hand-ful of MFIs had even begun to contemplate transforminginto regulated deposit-taking banks with access to com-mercial funding sources. But by the early 2000s — withBanco Compartamos’ bond issuance; Bank RakyatIndonesia’s first microfinance IPO; and the emergence ofmicrofinance collateralised debt obligations (CDOs) —microfinance had burst onto the international capitalmarket. With the United Nations naming 2005 as the Yearof Microcredit and Prof. Mohammad Yunus receiving theNobel Peace Prize for the work of Grameen Bank, microfi-nance seemed to emerge as the darling of internationaldevelopment. By 2007, an estimated $5 billion of foreigninvestment had flowed from developed nations into MFIsaround the world.”

How it affects MFIs in IndiaMFIs in India can be broadly divided intotwo categories, for-profit and not-for-prof-it MFIs. For-profit MFIs are generally thenon-banking finance companies (NBFCs)regulated by RBI, whereas the not-for-profit MFIs are registered under societiesor trusts, charitable companies u/s 25 ofCompanies Act, mutually aided coopera-tive societies (MACs) and cooperatives. Asper Sa-Dhan’s Bharat Microfinance Report2008 that provides information on 223MFIs of India, suggests that almost 60% of

the market shares in terms of loan portfolio and 76% ofthe client outreach are controlled by 10% of the largestMFIs in India.

Unlike in Africa, Central Asia, Eastern Europe andBangladesh, in India, MFIs are not allowed to take depositsor savings, which is a substantial source of funding for theMFIs in these countries. As per Microfinance InformationExchange, Inc. (MIX) 2006-07 benchmark data, MFIsacross the globe raised capital from various sources thatincludes 36.2% from borrowings, 35.8% from deposits,15.5% from equity, 9.9% from other debt includes conces-sionary loans and compulsory savings, 2.5% from dona-tions. Thus, a substantial capital raised by the MFIs wasderived from deposits.

On the need to provide all the microfinance services,Vijaya Mahajan, Chairman, Basix Group, says that theMFIs should provide services like micro credit, micro sav-ings, insurance, micro mutual funds and remittances inorder to promote financial inclusion and improve qualityof life of poor.

MFIs in India are deprived of taking deposits; therefore,they are largely dependent on external funding available atthe local/public sources or borrowing from internationalsources. Due to their dependency on the external borrow-


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THE IMPACT OF FINANCIALCRISIS ON MICROFINANCEThe history suggests that since last two decades microfinance institutions (MFIs) arelargely 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

ings, MFIs in India may be affected bythe financial crisis due to lack of ade-quate capital to manage volatility,depreciation of local currency, increasedcosts on borrowings and tighter netinterest margins.

In order to enable the MFIs to addressthe financial crisis, SIDBI CMD says thatit had released double the amount ofloan in 2008-09 as compared to the lastfiscal. Besides, SIDBI has also startedproviding long-term loans to the MFIs.

Government Initiatives In order to address the financial crisis,the government of India has takenproactive measures by providing variousstimulus packages to maintain growthin the SME sector including microfi-nance. In November 2008, the RBIextended a $1.5 billion credit line toSIDBI primarily for emergency liquidityfor SME, under which SIDBI has the dis-cretion to use the new liquidity tofinance MFIs. In India, initiatives toincrease liquidity and lower foreignexchange risk have done much to easethe impact of the crisis on the microfi-nance sector. The Central Bank liftedforeign lending restrictions to non-bankfinancial companies (many of which areMFIs), let the rupee depreciate to slowthe outflow of capital, and is providingextra funding to the financial sector(Global Financial Crisis: Implications forSouth Asia. October 21, 2008). However,in spite of such measures initiated bythe Central bank to maintain growth inthe microfinance sector, the nation-alised and commercial banks are stillhesitant to lend to the MFIs especiallythe small and medium ones. If the indif-ferent attitude of the nationalised andcommercial banks towards the MFIscontinues to persists, vision of the gov-ernment for financial inclusion is goingto be a distant reality. The author is the CEO of an MFI – We ThePeople. He can be contacted at [email protected]


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People Group meetings at Nari branch, Una, Himachal Pradesh

P. Chidambaram visiting We The People’s stall


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How are you trying to develop the mki-crofinance sector? The existing branches of Indian Bank inrural and semi urban areas were set up withan aim to provide services to the SHGsalong with the normal banking services.Special window has been in operation inselect rural and semi urban branches whereconcentration of SHGs is observed, calledMicro credit Kendras, where focused atten-tion is being given to the needs of SHGs bystaff for the purpose. However, in metroand urban areas, the financial requirements of urban pooris high, hence an exclusive branch for microfinance in oper-ation called Microsate Branch. These branches act as ‘OneStop Shop’ for the needs of urban poor.

What kind of interest rates is charged for SHGs?For short term loan, we charge up to Rs 2 lakh-11.50%(BPLR* less 1.00%)For short term loans above Rs 2.00 lakh - 12.50% (BPLR)(*BPLR – Bench Mark Prime Lending Rate of the Bankwhich is at present - 12.5%.)

How much loans have you disbursed so far?Cumulatively we have disbursed Rs 2,090.94 crore benefit-ing 2.93 lakh SHGs up to March 9 which includes repeatfinance.

Is it profitable business for banks?Yes, the yield on advances under SHG portfolio is quietgood. The transaction cost of financing SHGs is low. TheBank derives accrued benefits by cross selling individualloan schemes to SHG members. Intangible benefits includeimage building for the bank by touching the lives of the peo-ple at the bottom of the pyramid. These poor are relieved

from the clutches of the local moneylenders, who charge exorbitant rate ofinterest and the amount of interest paid tothe money lenders now form part of theirsavings. Apart from financing the groups,we have made arrangements for socialsecurity of the members of SHG, by floatinga low premium life insurance policy forSHG members in association with LIC.

What are the segments in microfinanceyou are looking to finance?

We are concentrating in direct small help group bank link-age programme to reach out to more SHGs directly. Thepresent outstanding is over Rs 1,300 crore in this segment.

We provides credit to SHGs in the form of cash credit,term loan for their micro enterprise ventures. Also, custommade special loan products have been formulated by theBank for the housing needs of the members (IBGrihalakshmi), Education needs of the wards of SHG mem-bers (IB Vidya Shoba), Consumption needs of members (IBGrameen Mahila Sowbhagya) and direct loan for the con-sumption needs of them.

What was your achievement on the front in 2008-09?The bank has lent to 90,421 groups Rs 1,054.04 crore dur-ing 2008-09. The balance outstanding was Rs 1,350.08crore on March 2009 with 1.55 lakh SHGs. We have alsoreceived ‘First Prize’, second year in a row, for best perfor-mance under SHG Bank Linkage among CommercialBanks in Tamil Nadu during 2007-08, The award was givenby NABARD.

During the year 2008-09, we have opened dedicatedmicrofinance branches in 13 centres in Tamil Nadu,Andhra Pradesh and Kerala. With this we are now having25 microstate branches across the country in 10 states.

‘WE ARE CONCENTRATING IN DIRECTSHG BANK LINKAGE PROGRAMME TOREACH OUT TO MORE SHGS DIRECTLY’After having three decades of experience in banking MS Sundara Rajan, assumedcharge as Chairman & Managing Director of Indian Bank in 2007. In an interviewwith Kumud Das of FE he shares his views on the topic.

SEWA has grown large in its presence.Please elaborate on this.SEWA is the single largest trade union in thecountry with a membership of 11 lakhwomen, mostly vegetable and garment ven-dors, in-home seamstresses, head-loaders,bidi rollers, paper pickers, constructionworkers, incense stick makers, and agricul-tural workers. Based in Ahmedabad,Gujarat, within two years of its launch in1972, we started SEWA Bank, a cooperativebank whose capital is made up entirely ofthe members’ own contributions. The bankwas founded by 4,000 women, each con-tributing Rs 10 each. We have been in themainstream of union movement and in thebanking sector. Today we have more than100 cooperatives. We have two companies,marketing and two brands, the local and thefancy embroidery.

What difference has SEWA made in thelives of its members? Thanks to SEWA, a large number of womenhave been employed and their work is

‘MFIs, IF LINKED WITH LIVELIHOOD,HAVE A VERY CRUCIAL ROLE TO PLAY INTHE GROWTH OF THE ECONOMY’Widely regarded as a pioneer and a global entrepreneurial force in grassroots devel-opment, Ela R Bhatt is also known as a ‘gentle revolutionary’. This is no mean feat,considering her life-long dedication to improving the lives of India’s poorest andoppressed women workers. Ask her about her inspiration and Bhatt attributes it to herGandhian thinking. “It has guided me throughout my life,” says she.In 1972, Bhatt founded the Self-Employed Women’s Association (SEWA), a tradeunion which today boasts of more than 1,000,000 members. She is also the Founder-Chair of a number of agencies, including the Cooperative Bank of SEWA, Sa-Dhan (theAll India Association of Micro Finance Institutions in India) and the Indian School ofMicro-finance for Women. Elaben shares her thoughts with Monalisa Sen


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SEWA Bank Branch

being recognised. SEWA has also been instrumental inteaching them new skills, which, in turn, has helped themimprove their agriculture. This has immensely helped allthese women to step into the mainstream, with confi-dence. Sewa has a little section which mainly deals withchanging of the laws and intervening into issues.

How can micro finance institutions help in the growth ofthe economy?Microfinance institutions, if linked with the livelihood,have a very crucial role to play in the growth of the econo-my. It is also important to link it to social security, namelyhealth and general insurance (life insurance). I believethat it should be linked to social security. For example,SEWA bank has a pension scheme. If the products areaccording to the lifecycle of the poor and women, then ithelps in filling up the gaps.

There is also a need to empower them with education.At SEWA, we teach financial literacy in a big way. Each ofour members are taught when to opt for a loan and whento save. We impress upon them that they should take loans

only when it is for productive purposes, and not for otherneeds such as marriages, etc. Such expenses can be takencare of by savings. We tell our members that they shouldcreate financial products in such a way that makes themless vulnerable and that fills up the gaps from their incomegoing down.

You always adopted Gandhian method at SEWA? Pleasecomment.I’m a product of the latter years of the freedom movementin our country. During my school and college years, all myteachers and everybody around us were always talkingabout independence. My maternal grandfather, partici-pated in the Salt March and was even jailed. Two of mymaternal uncles also were jailed during freedom struggle.

At SEWA, we have used Civil Disobedience when itcomes to combating a very large force like state govern-ment. At times when you are baffled by the total ignoranceat the hands of the government, when they don’t t respondor become insensitive to our needs or even when they areunjust to the marginalised, practicing Gandhiji’s CivilDisobedience is the only way forward. One should alwaysbe self reliant to be able to do what he or she wants in life.

You have inspired hundreds of women to be self-reliant.What is the guiding force that has helped you in thisendeavour?Self reliance is not a pious virtue. What is important is inter-dependence. In my case, I have been a product of thosedays when our country was fighting for independence. I wasin college when India got freedom. In those days, rebuildingthe nation and finding alternate means was the mostimportant sentiment all over the country. Gandhiji hadshown the way and also set up the value system for all of us.

Has SEWA been affected by recession?Recession has definitely impacted SEWA. First of all, theindustries that were directly connected with exports, suchas those involved in construction and diamond, have beenbadly hit. But those in garment making they have not beenaffected so much. For example, the construction labourwho was getting employment after earthquake hardly getsas much work now. The migrant labours who used to go todifferent cities for work is going back to his village.

Does the formation of a new government help you over-come these problems?I would say that both the ruling party and the oppositionshould work together. That’s the challenge for the newgovernment.


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What strategies have you adopted todevelop the microfinance sector?We have tried to develop the microfinancesector by adopting the following strategies:a) Provision of broad range of financial ser-vices i.e. deposits, loans and payment sys-tems to poor and low income households. b) Identification of proper delivery models like Self Help Groups (SHGs), JointLiability Groups and MicrofinanceInstitutions (MFIs).

How are you trying to develop the micro-finance sector? Based on the above strategies we are trying to develop withthe following initiatives:

No Frills Accounts: We came out with ‘No Frills Account’facility, ‘Star Saral Bachat Account’ with simplified KYCnorms to be complied. It can have minimum balance of Rs 50 in rural and semi-urban branches and Rs100 inurban and metro branches. Our branches are also allowedto open savings accounts with zero balance. So far wehave opened more than 16 lakh savings ‘No Frill Accounts’.

General Purpose Credit Card: We have introduced‘Samanya Credit Card’ for extending credit facility in thenature of revolving credit. The Samanya Credit cardhold-er is entitled to draw cash from the specified branch ofthe bank up to the sanctioned limit. The bank has alsoissued about 2,100 general purpose credit cards and con-sidered overdraft against No Frill Accounts to the tune ofRs 320 lakh.

Star Bhumiheen Kisan Credit Card: We have also

launched Star Bhumiheen Kisan CreditCard to bring the tenant farmers, sharecroppers and oral lessee who were so faroutside the purview of the Bank to thebanking fold.

Rural Mobile ATM: We have started aRural Mobile ATM in Sivaganga in TamilNadu covering about 10 villages, thusreaching the doorsteps of farmers.

Micro Credit Programme: We havefinanced MFIs for promoting and extend-ing finance to the SHGs. The bank hasfinanced 21 MFIs for on lending to SHGs.It has more than 1,42,000 SHGs linked with

the bank credit for various productive activities.E-grama: We have introduced a project E-grama, where-

in the farmers have access to commodity prices and getinformation on new agricultural technology. The bankhas assisted in setting up rural kiosks in various states.

Business facilitators and business correspondents: Wehave introduced business facilitators model and accordin-gly approved 63 business facilitators on the panel in sixstates. Seven business correspondents with their 81 BC sub-agents are approved and taken on panel in Maharashtra,Madhya Pradesh, Andhra Pradesh and Uttar Pradesh.

Use of IT: We are using IT enabled financial inclusionsolution for implementing 100% financial inclusion atRaigad district of Maharashtra, Sehore district of MadhyaPradesh, Lucknow, Barabanki and Hardoi districts of UttarPradesh and Chittoor District of Andhra Pradesh.

Biometric Smart Cards have been used to provide doorstep services through handheld devices terminals (voice

‘OUR EFFORTS IN THE NEW FISCALYEAR WILL BE FOCUSED AROUND CUSTOMERS AND COMPETENCIES’Microfinance can be an effective tool for poverty reduction. Improved access andefficient provision of savings, credit, insurance facilities can enable the poor tosmoothen their consumption, build up their assets, manage their risk better, devel-op their micro enterprise and enhance income earning capacity. In an interview withKumud Das of FE, AP Ghugal, the general manager of Priority Sector Credit Dept,Bank of India, shares his views:

prompt enabled) to the financially excluded villagers attheir doorsteps with the help of approved business corre-spondents and their sub-agents at free of cost. So far, wehave enrolled 87,000 accounts and have issued 52,000Biometric Smart Cards. This facility has proved to be per-fect ‘Branchless Banking Model’ providing cost effectivefinancial services at the doorstep of rural people.

What kind of interest rate are you charging for them?We are charging concessional rate of interest to SHGs i.e.9% per annum irrespective of size of the limit. The rate ofinterest to MFIs is stipulated on the basis of limit sanc-tioned and credit rating of the institutions. At present, itranges between 9% to 12%.

How much loans have you disbursed to them so far?We have more than 1,42,000 SHGs credit linked to thebank with financial outlay of Rs 580 crore. The bank hasalso extended finance to 21 MFIs aggregating Rs 240 crore.

Is it a profitable business for the banks?Considering the cost of funds, cost of operations andinterest rate structure, we cannot say that it is a profitablebusiness proposition. At the same time it is not a loss mak-

ing business. Margins are very narrow. However, we havetaken up this challenge as corporate social responsibility.

What are the segments in micro finance you are lookingto finance?Finance is extended to allied agriculture activities, retailtrade, small business, road transport operators, microenterprises, etc.

What was your achievement on the front in 2008-09?During the year we have opened 13,800 savings accountsof SHGs of which 11,330 savings accounts are womenSHGs. The number of SHGs linked with bank credit duringthe year is 11,800 with financial outlay of Rs 122 crore.Out of this, 10,400 women SHGs are linked with bank cred-it with finance of Rs 104 crore.

Going forward, how do you see the new fiscal?Our priorities and efforts in the new fiscal year will befocused around customers and competencies. We will con-tinue to develop our microfinance sector. The bank hasadopted poverty reduction as its overreaching objectiveand bank shall respond to this challenge effectively. Ouraim is to have overall development of financial system.

What business do the MFIs do?MFIs have become a key factor in transforming funda-mental attitude towards development and alleviatingpoverty. The core activity of the MFIs is to providefinancial assistance to SHGs for their productive activi-ties. MFIs also extend finance to SHG for consumptionneeds of the group members, housing requirements ofthe poor people, creation of infrastructure in rural area,sanitation, etc.

What are the geographical areas where you operate ?Our area of operations is in the entire country. We have anetwork of more than 3,000 branches of which 1,250branches are located in rural areas. We are shoulderinglead bank responsibility in 48 districts where 1,009branches are functioning and providing banking servicesto the customers.

What are the problems faced by this sector?In the remote, hilly and sparse infrastructure area, physi-cal access itself acts as a deterrent. Illiteracy acts as a bar-rier. High transaction cost and procedural hassles.Requirement of independent documentary proof of iden-tity is important barrier in having a bank account especia-lly for migrants and slum dwellers.


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TARUN AGARWAL

The Indian Banking system hasgrown enormously in the last fiveyears keeping pace with and in

some cases leading the country’s remark-able economic growth. With a large rural,agro-dependant population, microfi-nance has emerged as a viable means ofeconomic upliftment.

A large majority of the population in thecountry still lives under $2 a day and inextremely poor conditions. This section ofthe society urgently needs to be brought into the economicmainstream to achieve inclusive growth. The role of thefinancial sector in achieving this inclusive growth compris-es of providing financial services to this segment and this iswhere sustainable micro finance models play a crucial roleto achieve substantial financial inclusion.

Financial Exclusion: is construed as the inability toaccess necessary financial services in an appropriate form.A basic banking account should not be considered a luxury, but a fundamental right of every citizen. This no-frills saving bank account is only a necessity, but not a suf-ficient condition for financial inclusion of the poor. Thus,financial inclusion is delivery of not only banking, but alsoother financial services like insurance, pension, remit-tance, mutual funds, etc. delivered at affordable, thoughmarket driven costs.

Gradations of Financial Exclusion:Core Exclusion: Who operate their financial affairs com-pletely outside the regulated financial systemLimited Access: May have a basic bank account but poorfinancial habits and little adviceIncluded but using inappropriate products: Victims ofinappropriate products.

Extent of Need for Financial InclusionIt has been found that on an all India basis 59% of adult

population in the country have bankaccounts – in other words 41% of the popu-lation is unbanked. In rural areas the cover-age is 39% against 60% in urban areas. Theunbanked population is higher in theNorth Eastern and Eastern regions.

Benefits of Financial InclusionSafe platform for financial activities –

transactions are more transparent and fairProvides formal identity and a mecha-

nism for mobilisation of savingsIt helps in enhancing entrepreneurship

From the banks perspective, financial inclusion pro-vides

Untapped market – expanding customer base Acquisition of low cost depositsHelp diversifying exposure as well as customer baseSocial growth and also a profitable propositionPublicity and visibility to the BankCompliance to RBI & GOI

Challenges to Financial InclusionSome of the main challenges include coverage, cost ofsmall value transactions, infrastructure, suitable products,flexibility, weak delivery model for community enterpriseand financial management support.

Models for Achieving Financial Inclusion Bank & Government led financial inclusionBank & Corporate led financial inclusionMFI’s led financial inclusionBank & Technology led financial inclusion

Corporate led Financial InclusionCorporate led financial inclusion is relatively new in India.Under the said model currently few corporate names havebeen heard, like; ITC e-choupal, Cadbury’s, Reliance, NDDB

MODELS FOR ACHIEVINGFINANCIAL INCLUSION IN INDIABanks would need to adopt an innovative, customer-friendly approach to increasetheir effective reach so that share of organized finance increases


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etc. Till date, most of the corporate’s have been looking at FIin India as one of their corporate social responsibility (CSR),but now they take it as one of their strategy to retain andbuild stronger relationships with farmers.

MFI led Financial Inclusion Some of the popular Microfinance credit lending modelsadopted is as follows:

Associations: In this context, a target community forgestogether to form an association through which a variety ofmicrofinance activities are initiated. The microfinanceactivities may also include savings. The associations maycomprise of youth, women

Bank Guarantees: A bank guarantee is utilised when aloan from a commercial bank is needed.

Community banking: This financing model considersthe whole community as one unit and facilitates the estab-lishment of semi-formal and formal institutes throughwhich microfinance are administered.

Co-operatives: Sometimes the cooperatives alsoinclude savings activities and member-financing as well.

Credit Unions: A credit union is a member-drivenunique self-help financial institute comprising of mem-bers of a specific group like labor unions or a social frater-nity who assent to save money and make loans to eachother out of that fund at reasonable interest rates.

Grameen: The grameen model entails that a bank unitbe composed with a field manager and a set of bank staffcovering a specified area, like 15 to 20 villages. Finally,groups comprising of five future borrowers are formed,out of which only two people get the loan, and if withinfifty weeks they return the principal plus interest, as perthe banking rules, the others become eligible as well. Thisis done, so that there is a collective liability on the group,

which serves as guarantee against the loan.Intermediaries: As the name suggests this model is a

‘go-between’ organisation operating between the lenderand borrower. They play a critical role of creating creditcognizance like starting savings programs and thus raisingthe credibility of the borrowers to a sufficient level. Theseintermediaries can be NGOs, individuals, etc.

Non-Governmental Organisations: NGOs are very activein the field of micro-credit, be it creating consciousness ofthe importance of micro-credit, or developing tools andresources to monitor and identify righteous practices.

Rotating Savings and Credit Associations: In thismodel a group of people join together and make periodiccyclical contributions to a common fund that is given to amember in a lump sum. After receiving the amount themember starts paying back by making regular contribu-tions. Bidding or lottery makes the decision about whomthe money should go to.

Small Business Enterprises (SME): They get loans frommicro-credit programs for creating employment, increas-ing income etc. The micro credit is either provided direct-ly to the SME or as a part of a bigger SME developmentprogramme.

Village Banking: This is community based bankingwherein 25-50 low income individuals who seek self-employment come together to collect funds and give loans.

Different Technological Models: Composite handhelddevices; simputers; PDAs; programmed mobiles and Tijori– micro deposit machines.

We have a structured a set of financial products fromFINO that its customers can offer to end customers. Theproducts are simple to use and have brand names likeTijori (a safe, or locker) and Tatkal (prompt, or instant)that the end customers can easily understand and relateto. The delivery channels allow user transaction to be com-pleted online as well as offline, using a simple point oftransaction (POT) device and a smart card that every cus-tomer is issued. The smart cards are used for storingdemographic and financial information about the user,and also contain the user’s fingerprint image which is usedfor authentication.

Banks would need to adopt an innovative, customer-friendly approach to increase their effective reach so thatshare of organised finance increases. Formal financialinstitutions such as, banks, insurance companies, mutualfunds, pension companies will have to join hands withsmall NGO-MFIs, larger NBFC-MFIs, and technologyproviders to enable inclusion. The writer is head-Financial Inclusion Consulting Group,FINO


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NACHIKET MOR, PRERANA LANGA and NAJIM DOST

While India’s recent economic performancemakes it one of the world’s fastest growingcountries, many of its citizens continue to live

in extreme poverty, with 42% living on less than Rs 56 perday (World Bank 2005). To find ways to address the rootcauses of this poverty and empower the poor to participatein and benefit from the Indian growth process, the ICICIFoundation for Inclusive Growth (IFIG) was founded bythe ICICI Group in early 2008.

We believe that our fundamental challenge is to create a‘just’ society – one where everyone has equal opportunityto develop and grow.

Focus Areas and Strategic PartnersHuman capacity: basic health and elementary education

We believe that good health and basic education arefundamental pre-requisites to achieving inclusive growth.

Basic health: ICICI Centre for Child Health andNutrition (ICCHN) www.icchn.org.in. Through ICCHN,we work to strengthen the ability of the government todeliver basic healthcare and nutrition to every childfrom the time of conception until the age of three.Elementary education for all: ICICI Centre forElementary Education (ICEE) www.icee.org.in. ThroughICEE, we work to strengthen the ability of the govern-ment to provide high quality education to every childfrom pre-school through elementary school.

Markets: Access to complete markets Access to comprehensive financial services is therefore anessential part of the development process. Financial ser-vices enable individuals and enterprises to allocate theirresources most productively by allowing them to bettermanage risk (e.g. buy insurance) and take advantage offuture opportunities.

Access to finance: IFMR Trust Advocacy Unit www.ifm-rtrust.co.in/ventures/ifmr_foundation.php. ThroughIFMR Trust Advocacy Unit, we work to ensure that everyindividual and every enterprise has complete access tofinancial services.

Sustainability: Promoting environmental sustainabilityand the growth of a strong civil societyEnsuring that every individual has the freedom and thepower to create and sustain a just society and thereby ben-efit from the Indian growth process requires additionalefforts on the part of civil society and policymakers.Grassroots organisations and regulatory infrastructure, forexample, must be strengthened to ensure that the marketdoes not exploit marginalised sectors of the population orthe environment.

Environment: Environmentally Sustainable Finance(ESF) www.ifmr.ac.in/cdf/esf.htm Through ESF, wesupport policy and regulations that ensure that growthand development processes proceed in an environmen-tally sustainable manner. Strong civil society: CSO Partners www.csopartners.org.inThrough CSO Partners, we seek to support social changeand build a defence against exploitation of all kinds bystrengthening civil society organisations (CSOs).The Foundation provides active support and mentorship

to each of these strategic partners. Our five strategic partnersin turn work closely with additional partners at the commu-nity level, building networks and deepening the effects ofour programmes. In the coming year, we will refine ourapproach using what we learn on the ground in order toensure that our work will have an enduring and positiveeffect on the lives of low-income Indian households.

In addition to our work in the area of inclusive growth,the Foundation is working with ICICI Group of Companiesto support their various corporate social responsibility ini-tiatives, which are designed jointly with them. With ICICIPrudential Life Insurance, for example, we are developingplans for support services for elderly citizens, civic safetyforces and healthcare for low-income households in ruralareas. With ICICI Ventures, we are rolling out initiatives formicro enterprise development in rural and semi-urbanlocations. With ICICI Bank, we have provided support fortheir “Read-to-Lead” programme. Nachiket Mor, President and Prerana Langa, VP-Strategyand Communications, ICICI Foundation for InclusiveGrowth; Najim Dost, Senior Analyst, Strategy AdvisoryGroup and Joy Miller, Development consultant

TOWARDS INCLUSIVE GROWTHThe fundamental challenge of the Foundation is to create a ‘just’ society – onewhere everyone has equal opportunity to develop and grow


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nabard on micro finance

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