Microcredit is Dead: Long Live Livelihood Finance

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Microcredit is Dead Long Live Livelihood Finance

• Talk to the
• Harvard Business School
• MBA 2012 Candidates
• By
• Vijay Mahajan
• Founder and Chairman, BASIX
• Hyderabad, 7th January 2011

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Microcredit An Introduction

• Part I

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Grameen Bank, Bangladesh Methodology

• Solidarity group of five women is formed.
• Four to eight such groups form a Center. Undergo
  training for a few days.
• All agree to guarantee repayment of each others
  loan.
• Center meets every week, elects Center Leader
• Regular savings by all members (not allowed in
  India).
• Loan appraised approved first by peers in
  solidarity group and finally approved by the
  Centre Leader.
• Loan disbursed directly to individuals
• All loans repaid in 50 equal installments

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Joint Liability Groups (JLGs) Most MFIs use
this model

• Three to seven individual borrowers
• Loans given to individual borrowers
• They mutually guarantee each others loan
  repayment
• Cash security (10) is collected in some cases
• Group meeting only when needed
• More suitable for men, farmers

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Self Help Groups (SHGs)Bank Linkage Model

• Homogenous affinity group of 15-20 women who live
  in the same neighbourhood
• Regular meetings weekly/fortnightly/monthly
• Regular savings - Rs 20-50 per meeting
• Group selects their leaders
• Lending started with internal pool of funds.
  Lending decisions are made by the group
• Later, SHG accesses funds from bank to augment
  its pool.
• India has over 5 million SHGs with 80 million
  members and banks have leant Rs 28,000 crore
  through these SHGs

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Indias Two Contending Microfinance Models

• Indian NGOs like MYRADA and PRADAN invented it
  and NABARD learnt the SHG Bank linkage model from
  South East Asia ( thru APRACA, GTZ) and promoted
  it in a big way thru public sector banks and
  State Governments.
• Other Indian NGOs like SHARE learnt the JLG Model
  from the Grameen Bank Bangladesh and adopted it.
  Later SIDBI and private sector banks promoted it.
  
• Both have grown very well in the last 10 years
  (see chart on next slide).

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SHG-Bank Linkage vs MFI models relative growth
All India
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SHG-Bank Linkage vs MFI models relative growth
AP
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But shortcomings are there in both models
Shortcomings of SHG Bank Linkage model

• This model has become the favourite of
  politicians.
• Interest rate charged by SHGs to members (other
  than in AP where it is subsidised down to 3) is
  normally 18-24 pa
• The SHG model requires an NGO or a Government
  Agency to form the groups and handhold them.
  This has costs Rs 10,000 per SHG, as per
  NABARD. Full system costs are comparable to the
  MFI model.
• In AP over Rs 3000 crore has been spent on SHG
  formation and capacity building by the
  Government, so it controls the SHG system through
  SERP. The SHGs have become a vote bank for
  Parties.

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But shortcomings are there in both models
Shortcomings of SHG Bank Linkage model

• The credit available per SHG member is around Rs
  3000 (all India average) though it is about Rs
  17,800 in AP. This is, by itself, not enough to
  avoid borrowing from other sources.
• Credit from bank highly dependent on the branch
  manager and is not continuous, as term loans are
  given. Some bank managers impound SHG savings as
  security.
• SHGs have become dominated by the middle caste/
  income women and SC, STs are still neglected

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Shortcomings of MFI Microcredit model

• It requires that all costs be charged to
  borrowers and thus the interest rates can be
  24-30.
• The RBI does not allow MFIs to take any deposits
  so there is no element of savings in this model.
• In their effort to grow, some MFIs have set high
  targets for staff and this leads to them lending
  to households who had borrowed from moneylenders
  and SHGs and from other MFIs. This led to
  over-indebtedness for millions of households.
  Many were driven to desperate measures.
• MFIs used to lend initially only for productive
  purposes and carry out usage verification. By
  2007, this was dropped.

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Shortcomings of MFI Microcredit model

• MFIs depend on high repayment rates, so the MFI
  staff work hard to collect and can sometimes be
  aggressive.
• The joint liability makes other borrowers (peers)
  become abusive and coercive.
• As MFIs borrow from banks, they need to have
  about 15 of the borrowing as share capital. (RBI
  regulation).
• To attract that, they needed to reward their
  investors with handsome returns. In the process,
  the promoters and ESOP holding employees also
  made a lot of money. This was seen as
  profiteering from the poor, given high interest
  rates.

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Borrowing by poor households in Andhra Pradesh,
before and after MF
Ordinance
Traders 48-60pa
Moneylenders 36-48pa
MFI 2 27-30pa
MFI 1 24-27pa
SHG Own Savings 12pa
SHG-Bank Linkage 3 pa
Friends and Family 0
Traders 48-60pa
Moneylenders _at_ 48-120 pa will once again dominate
SHG Own Savings 12pa
SHG-Bank Linkage 3
Friends and Family 0
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From Microcredit to Livelihood Finance

• Part II

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Vicious Cycle of Low Income
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Breaking the Cycle of Low Income with Micro
Credit without and with Savings
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Savings is the fundamental financial service

• Savings is setting aside a small sum of money
  away from the regular cash flow and accumulating
  it to a usefully large sum.
• If the large sum is received after small sums of
  money have been set aside, then it is called a
  term or fixed deposit.
• If the large sum is received before the small
  sums of money have been set aside, it is called a
  loan
• If a large sum is to paid out upon happening of
  an adverse event to a few of all those who have
  paid a small sum, it is called insurance
• Savings create a sense of well-being and security.

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Breaking the Cycle of Low Income with Credit and
Savings, and protecting it with Insurance
Risk
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Because of vulnerability to risk insurance is
also important for the poor

• The poor face all kinds of risks to their lives
  and livelihoods.
• The death of a bread-winner can devastate a
  family. So life insurance is useful.
• Death of livestock can halve the income of a poor
  household. So livestock insurance.
• Crop failure can be cushioned by insurance.
• Yet, few insurance companies offer services to
  the poor. In India, life coverage is lt 6

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Breaking the Cycle of Low Income with Savings and
Credit, protecting it with Insurance, and adding
Skills and Market Linkages
Risk
Skills
Market linkages
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From Microcredit to Livelihood Finance

• Savings help a household smoothen consumption,
  cover contingencies and build equity for
  borrowing.
• Payments/money transfer services help build
  savings and make the household more resilient.
• Insurance to cover all kinds of risks to their
  lives and livelihoods.
• Then credit is used to enhance incomes.
• Credit needs to be accompanied, when needed, by
  skill enhancement and input/output market linkages

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Livelihood finance Pathway out of Poverty

13. Overcome poverty and invest in education
Income
9 and 12. Ongoing support services for livelihood
promotion agri, livestock and non-farm
Poverty Line
11. Ongoing Credit with crop, livestock and
asset insurance
8. 10 Build and Transfer Assets (e.g. Land,
Water, Forest, Livestock, Infrastructure and
institutional development SHG Feds, JFM ,
Wsheds
7. Skill Training
5 Migrant (family) Remittances
6 Overcome food insecurity
2.No-frills Bank a/c
Chronic Food Insecurity
4. Social mobilisation (SHGs) and offer Life and
Health Insurance through Group Policy
3. Govt Payments (e.g. NREGA. JSY. OAP)
1. Food Aid
Years?
0
5
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BASIX An Introduction

• Part -III

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BASIX was established in 1996 with a Mission

• To promote a large number of sustainable
  livelihoods, including for the rural poor and
  women, through the provision of financial
  services and technical assistance in an
  integrated manner.
• BASIX will strive to yield a competitive rate of
  return to its investors so as to be able to
  access mainstream capital and human resources on
  a continuous basis.
• (from the BASIX Feasibility Report, January 1996)

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2005
Vocational Training and Employability 2009
Large Scale Financial Inclusion Services 2008
Energy, Environment, Climate Change Carbon Credits, 2007
Institutional Development Services, In India and Other Countries 2005
Agriculture, Livestock and non-farm Enterprise Development (AGLED) Services 2004
Micro-insurance (life, health, crop, livestock, assets) 2002, for managing risks to lives and livelihoods
Micro-Credit with limited technical assistance and micro-enterprise support services 1996 onwards
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The BASIX Group
Bhartiya Samruddhi Investments Consulting
Services Ltd.
Promotional Services
Financial Services
Bhartiya Samruddhi Finance Limited Ltd
BASIX Consulting and Training Services
Ltd, CTRAN Consulting Ltd
Krishna Bhima Samruddhi Local Area Bank
BASIX Krishi Samruddhi Ltd
BASIX Sub-K i- Transaction Services Ltd
B-ABLE - BASIX Academy for Building Lifelong
Employability Ltd
Indian Grameen Services
The Livelihood School
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Achievements As on Sep 30, 2010

• 18 states, 180 districts, 25000 villages/towns,
  10,100 staff in India. Also present in PNG,
  Bhutan, East Timor
• Disbursed Rs 3500 crore plus since mid-1996,
  outstanding Rs 1800 cr On-time repayment rate
  99,
• Micro-credit 1.8 million borrowers, growing _at_ 75
  pa
• Life, health, crop (weather index based),
  livestock and micro-assets insurance to 3.2
  million customers
• Agricultural, livestock and non-farm enterprise
  development (AGLED) services to 800,000 fee
  paying customers.
• Institutional development to over 84,000 SHGs /
  producer groups about a million members served
• Impact direct livelihoods enhanced for over 1.8
  million h/h
• Indirect Impact microfinance reaches 75 million
  poor h/h

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RoA Comparison
ROA 2006 2007 2008 2009 2010
Bandhan 1.02 8.76 5.05 8.66 3.52
BASIX 0.87 1.56 1.77 1.80 3.12
Share 2.25 1.18 1.10 5.53 5.50
SKS 2.83 0.76 1.99 3.68 4.96
Spandana 4.72 0.74 4.23 6.74 9.01
Asmitha 2.95 1.67 1.43 5.33 4.31
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RoE Comparisons
ROE 2006 2007 2008 2009 2010
Bandhan 32 127 62 126 38
BASIX 3 9 14 16 23
Share 24 15 8 37 45
SKS 27 4 12 19 22
Spandana 80 22 53 49 56
Asmitha 51 32 18 56 40
Outlook PROFIT, November 2010 MIX Market,
January 2011
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Thank You

• www.basixindia.com
• vijaymahajan_at_basixindia.com