Transformation of microFinance in India: Experiences, Options and Future
microFinance Defined
microFinance means many things - But the contours may be: • Piloted by the alternate sector • Focussed on the poor • Having roots in development
The Setting
Figure 1: Defining the microfinance egg Overall objectives of the NGO include welfare activities, economic activities. Example: Lupin – Health, Education, Agriculture and Microfinance Spin-off microfinance units: MYRADA? Sanghamithra Rural and Urban Spin-off: SEWA ? Sewa Bank – Urban and Rural
Overall objectives of the MFO is predominantly economic activities. Example: SIFFS – Economic activities for fishfolk, micro-finance services are also provided.
Exclusive microfinance institutions. Commercial Funding for lending operations
Sustainability oriented: BASIX
Poverty focussed: SHARE/CFTS
Developmental funding for capacity building; some initial capital for pump priming.
Other sources of funding for nonmicrofinance economic activities.
Other sources of funding for welfare activities
What triggers transformation?
• • • • •
Size Diversity of services Financial sustainability Focus Taxation
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
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
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
Challenges in the Indian context
• Tax Status
– For-profit mF activity V/s not-for-profit NGO activities – Tax status of donor money
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)
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
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
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
Options for Transformation (Spin off)
• Needs to earn enough profits to show that it is operationally self-sufficient • It could also be financially selfsufficient, 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
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)
Implications for regulation
• Allow MFOs to grow organically
– Allow for expansion in area in case of cooperatives 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
Form
Options
Transformation options and their implication Organisational Implication incorporation
Not for Profit MFI – a special vehicle only for purposes of demonstration at scale (SRFS) For profit Company (NBFC) – Transfer clients, investments and portfolio independently (SHARE, CFTS) For-profit co-operative either under the MACS Act or as a Co-op Bank Cannot grow beyond a point. While sustainability can be demonstrated, the organisation will have to be roving – withdraw from one location and move to another, or grow organically, and gradually. Issue of ownership and control. Initial capital contribution can come from the communities. Recapitalisation is complex. Diversification to savings and risk products is not simple under the current regulation. Even when permitted, the bouquet of products offered will be limited. Can grow organically, but will have geographical limitations to growth. The geographic area of operation is demarcated. However, there is flexibility to offer savings products. Initial capitalisation requirement is not daunting. Can grow organically. However, scaling up and infusion of large amounts of external funds are not simple, as the movement is scattered across several independent informal or legal entities. Embedding in the banking system is a solution, but there are limits to growth. Chances of withering away if the NGO withdraws support. Problems are similar to SHGs mentioned above. However, since each of these are independent entities, dealing with banking institutions is likely to be simpler. Chances of withering away are low, if the systems are established.
Option 1: Spin off mF as a separate Activity
NGO Promote (informal) Self-Help Groups, (Pradan, Myrada), encourage them to form federations., (Dhan Foundation) Promote (formal) mutually aided co-operatives and encourage them to federate. (CDF)
Option 2: Promote independe nt MFOs
Transformation options and their implication Form Options
Option 1 Develop ment Professio nals with NGO backgrou nd
Organisational incorporation
Promote NBFCs – seek developmental and commercial investments through complex mechanisms – private mutual benefit trusts, debt in holding company (CFTS, BASIX) Promote LABs, find equity for start up.
Implication
Problem in raising initial capital. Other limitations applicable to NBFCs discussed above also apply. It is difficult to pull off a complex structure of mutual benefit trusts and holding company structures. A difficult proposition due to two reasons: Steep initial capital requirements and complexity in licencing procedure of RBI and limitation in geographical area to three contiguous districts. Tremendous amount of flexibility in the offer of diverse products and services and great scope for customisation.
Option 2
doc_450058667.ppt
microFinance Defined
microFinance means many things - But the contours may be: • Piloted by the alternate sector • Focussed on the poor • Having roots in development
The Setting
Figure 1: Defining the microfinance egg Overall objectives of the NGO include welfare activities, economic activities. Example: Lupin – Health, Education, Agriculture and Microfinance Spin-off microfinance units: MYRADA? Sanghamithra Rural and Urban Spin-off: SEWA ? Sewa Bank – Urban and Rural
Overall objectives of the MFO is predominantly economic activities. Example: SIFFS – Economic activities for fishfolk, micro-finance services are also provided.
Exclusive microfinance institutions. Commercial Funding for lending operations
Sustainability oriented: BASIX
Poverty focussed: SHARE/CFTS
Developmental funding for capacity building; some initial capital for pump priming.
Other sources of funding for nonmicrofinance economic activities.
Other sources of funding for welfare activities
What triggers transformation?
• • • • •
Size Diversity of services Financial sustainability Focus Taxation
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
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
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
Challenges in the Indian context
• Tax Status
– For-profit mF activity V/s not-for-profit NGO activities – Tax status of donor money
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)
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
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
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
Options for Transformation (Spin off)
• Needs to earn enough profits to show that it is operationally self-sufficient • It could also be financially selfsufficient, 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
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)
Implications for regulation
• Allow MFOs to grow organically
– Allow for expansion in area in case of cooperatives 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
Form
Options
Transformation options and their implication Organisational Implication incorporation
Not for Profit MFI – a special vehicle only for purposes of demonstration at scale (SRFS) For profit Company (NBFC) – Transfer clients, investments and portfolio independently (SHARE, CFTS) For-profit co-operative either under the MACS Act or as a Co-op Bank Cannot grow beyond a point. While sustainability can be demonstrated, the organisation will have to be roving – withdraw from one location and move to another, or grow organically, and gradually. Issue of ownership and control. Initial capital contribution can come from the communities. Recapitalisation is complex. Diversification to savings and risk products is not simple under the current regulation. Even when permitted, the bouquet of products offered will be limited. Can grow organically, but will have geographical limitations to growth. The geographic area of operation is demarcated. However, there is flexibility to offer savings products. Initial capitalisation requirement is not daunting. Can grow organically. However, scaling up and infusion of large amounts of external funds are not simple, as the movement is scattered across several independent informal or legal entities. Embedding in the banking system is a solution, but there are limits to growth. Chances of withering away if the NGO withdraws support. Problems are similar to SHGs mentioned above. However, since each of these are independent entities, dealing with banking institutions is likely to be simpler. Chances of withering away are low, if the systems are established.
Option 1: Spin off mF as a separate Activity
NGO Promote (informal) Self-Help Groups, (Pradan, Myrada), encourage them to form federations., (Dhan Foundation) Promote (formal) mutually aided co-operatives and encourage them to federate. (CDF)
Option 2: Promote independe nt MFOs
Transformation options and their implication Form Options
Option 1 Develop ment Professio nals with NGO backgrou nd
Organisational incorporation
Promote NBFCs – seek developmental and commercial investments through complex mechanisms – private mutual benefit trusts, debt in holding company (CFTS, BASIX) Promote LABs, find equity for start up.
Implication
Problem in raising initial capital. Other limitations applicable to NBFCs discussed above also apply. It is difficult to pull off a complex structure of mutual benefit trusts and holding company structures. A difficult proposition due to two reasons: Steep initial capital requirements and complexity in licencing procedure of RBI and limitation in geographical area to three contiguous districts. Tremendous amount of flexibility in the offer of diverse products and services and great scope for customisation.
Option 2
doc_450058667.ppt