Transformation of micro Finance in India Experiences Options

Transformation of micro. Finance in India: Experiences, Options and Future M S Sriram and Rajesh Upadhyayula Indian Institute of Management Ahmedabad

micro. Finance Defined micro. Finance means many things - But the contours may be: • Piloted by the alternate sector • Focussed on the poor • Having roots in development Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

The Setting Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

What triggers transformation? • • • Size Diversity of services Financial sustainability Focus Taxation Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

What are the International Experiences in Transformation? • Bolivia and Africa: Transformation of NGOs – To Banks – To FFPs • Indonesia: Transformation of mainstream – To micro. Finance methods • Bangladesh: Transformation of a project – Grameen Bank – Other NGOs transforming to Banks Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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 Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

Challenges in the Indian context • Financial Sustainability – Internal growth – Access to funds • Focus – Other Developmental activities V/s m. F – Degree of specialisation needed for m. F Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

Challenges in the Indian context • Tax Status – For-profit m. F activity V/s not-for-profit NGO activities – Tax status of donor money Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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) Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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 Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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 Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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 Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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 Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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) Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

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 Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

Transformation of micro. Finance in India: A Presentation at SIDBI Workshop

Transformation of micro. Finance in India: A Presentation at SIDBI Workshop