Transformation of microFinance in India: Experiences, Options and Future

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Transformation of microFinance in India
Experiences, Options and Future

• M S Sriram and Rajesh Upadhyayula
• Indian Institute of Management Ahmedabad

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microFinance Defined

• microFinance means many things - But the contours
  may be
• Piloted by the alternate sector
• Focussed on the poor
• Having roots in development

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The Setting
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What triggers transformation?

• Size
• Diversity of services
• Financial sustainability
• Focus
• Taxation

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What are the International Experiences in
Transformation?

• Bolivia and Africa Transformation of NGOs
• To Banks
• To FFPs
• Indonesia Transformation of mainstream
• To microFinance methods
• Bangladesh Transformation of a project
• Grameen Bank
• Other NGOs transforming to Banks

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Challenges in the Indian context

• Size
• Growth in geographic area
• Growth in portfolio/client size
• Diversity of Services
• MFOs wanting to offer Savings
• MFOs wanting to offer Risk Products

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Challenges in the Indian context

• Financial Sustainability
• Internal growth
• Access to funds
• Focus
• Other Developmental activities V/s mF
• Degree of specialisation needed for mF

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Challenges in the Indian context

• Tax Status
• For-profit mF activity V/s not-for-profit NGO
  activities
• Tax status of donor money

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Options for Transformation (Spin off)

• Company (NBFC)
• Poverty School
• Share - Transformation with growth
• CFTS - Start up as NBFC
• ASA - Through MBTs (proposed)
• Sustainability School
• BASIX - Complex structuring (holding company,
  borrowings and equity from developmental and
  commercial sources)

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Options for Transformation (Spin off)

• Examining NBFCs
• Access to financial markets
• Access to bank finance
• Can Operate across the country
• Limited options for offering savings
• Re-capitalisation for growth may be tough
• Steep entry norms (Rs.20 million initial)
• Not easy to get registrations

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Options for Transformation (Spin off)

• Examining Co-operatives
• MACS, Urban Co-operative Banks
• Small and dispersed institutions, that could
  organically grow and federate
• Involves the community in decision making as it
  is member-user-governed
• Easy entry norms
• Best route for SHGs to formalise
• Can offer many services including savings

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Options for Transformation (Spin off)

• Examining Co-operatives
• Geographic limitations
• Does not have a good image, attracting outside
  capital will be a problem
• Recent scams in urban co-operative sector might
  lead to tightening of regulation

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Options for Transformation (Spin off)

• Needs to earn enough profits to show that it is
  operationally self-sufficient
• It could also be financially self-sufficient, but
  no pressure to plow back profits or hit the
  capital market
• The concerns would be to keep costs under control
  and revenues on target to demonstrate

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Options for Transformation (Spin off)

• Set up a Local Area Bank
• Flexibility to offer diverse products
• Cost of funds likely to be lower, so the impact
  on the poor with be better
• Steep initial capital (Rs. 50 million)
• Difficulty in getting licence
• Limitation in geographic growth (3 contiguous
  districts)

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Implications for regulation

• Allow MFOs to grow organically
• Allow for expansion in area in case of
  co-operatives and LABs, subject to minimum
  performance
• Allow for NGOs to invest in for-profit MFOs such
  as NBFCs and LABS
• No change in entry norms - ensure only serious
  players come to the field

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