Wednesday, June 30, 2004

Rythu Bazar: Case on Agricultural Marketing

Rythu Bazar: An introduction
The Government of Andhra Pradesh introduced the concept of Rythu Bazars in January 1999 with the following objectives:
• providing direct interface between farmers and consumers and eliminating intermediaries,
• ensuring that farmers get remunerative prices for the fruits and vegetables they grow and consumers get them fresh and cheap,
• making sale proceeds available to farmers without any deductions and
• curbing malpractices in weighing.

The Rythu Bazars act as markets for a variety of agricultural products such as rice, pulses, edible oils, milk and milk products in addition to fruits and vegetables.

The beneficiary group
Rythu Bazars are intended to benefit farmers by providing them access to markets. Inadequate marketing support is one of the major handicaps faced by the farming sector. The movement of produce from the farms to the ultimate retail outlets faces a number of constraints and farmers are at the mercy of the middlemen and commission agents. In the absence of adequate facilities for storage and preservation, farmers are forced to make distress sales. At present, market yards are mostly set up by the State Governments. For setting up of agricultural markets, funds are sourced from NABARD through RIDF and National Cooperative Development Corporation (NCDC). However, infrastructure available to farmers for selling their produce still remains inadequate. Raythu Bazar is an initiative to create infrastructure facilities to enable farmers to sell their products directly to retail consumers thereby ensuring that farmers realize better prices and consumers receive fresh vegetable, fruits, etc. at reasonable prices and thus address constraints in agri-marketing infrastructure.

Products and Services
The service features in the working of the Bazaars coordinated by the department of marketing, Government of Andhra Pradesh are as follows:
• Allotment of shops to farmers is done on daily basis on “First Come First Serve” principle,
• Occupy the same shop continuously is not permitted,
• Price fixation through a committee, which consist of a few farmers and estate officer of Bazar. The prices are fixed generally 25% of above the wholesale rates and 25% less than local retail price.
• Farmers organized as self help groups function as sellers of fruits which are not grown locally.

Rythu Bazars are expected to generate sufficient income for their maintenance through auction of vehicle parking space, hoardings, canteen etc. A cabinet sub-committee of the State Government reviews the implementation of the scheme of Rythu Bazars on a fortnightly basis.

Business Linkages – Strategy
Typically, a Rythu Bazar covers 10 to 15 villages and at least 250 farmers including 10 groups (self help groups) are selected by a team consisting of Mandal Revenue Officers, Horticulture Officers and Agriculture Officers in the villages to operate in the Bazars. Joint Collectors of the concerned districts ensure that adequate transport facilities are arranged for transport of goods to Rythu Bazars in consultation with State Road Transport Corporation. In addition online information of prices and commodities movements is provided on the internet.

Rythu Bazar: Outreach and Potential
As on February 2002, ninety six Rythu Bazars were in existence benefiting 4500 farmers and large number of consumers. India is estimated to have over five lacs villages and almost sixty percent of the population is employed in the farm sector. However, agriculture contributes to only 25% of the national income. Lack of marketing information and inadequate access to markets as well as supply chain inefficiencies inherent in the farm sector contribute to low realizations and incomes to the farmers. Rythu Bazars can play a key role in addressing some of these problems, and there is a clear need to facilitate similar marketing infrastructure throughout the country.

Investment and Costs
The Rythu Bazars are located in government plots convenient to farmers as well as consumers. Built in a 1 acre (minimum) vacant land, the infrastructure provided by the government include sheds, arrangements of supply of drinking water, toilets with sanitation facility, parking for vehicles, arrangements for removal of garbage and cleaning of market by local body, facility for storage of unsold produce, provisions of weighing scales for all farmers, telephone, fax etc. Thus the AP government meets all the capital expenditure which varies according to the land prices prevailing in an area.

Private – Public partnership opportunities
The Rythu Bazars of Andhra Pradesh depend on government spending for infrastructure. But, now more of private initiative is required to upscale the Rythu Bazar model and even the Tenth Plan envisages a prominent role for private sector in infrastructure development and capacity building in rural areas. Moreover, flow of bank credit and popularization of warehouse recipt financing as well as introduction of user charges for some of the facilities can make the Rythu Bazar model a self sustaining one.

Contact Addresses
Director,
Department of Marketing,
BRKR Bhavan, 1st floor, 'C' Block
Tank Bund Road,
Hyderabad- 500063
Phone No:(040) 3221307,3222161, FAX: 3221084
http://gist.ap.nic.in/market.html

Tuesday, June 29, 2004

Excerpts of a mail: A Research Idea

My Theorem

Anna’s mail was so energizing – I could not hold writing a response. First of all to quote World Bank
Economy-wide variables do matter to India's poor; they have generally gained from economic growth, and lost from contraction; they have also been hurt by inflation. The net gains to the poor since the early 1970s can be attributed in large part to economic growth—distribution changed little from the point of view of the poor, although it appears to have been more important in the 1950s and '60s, when there was rather less growth. The results offer support for the view that a stable macro-policy environment, combined with micro-policy reforms conducive to economic growth, can help greatly in reducing absolute poverty in India.
However, the project’s results also reveal important nuances concerning the pattern of growth, and the importance of other contingent factors, including human and physical infrastructure. The results point clearly to the quantitative importance of the sectoral composition of economic growth to poverty reduction in India. Fostering the conditions for growth in the rural economy—both primary and tertiary sectors—must be considered central to an effective strategy for poverty reduction in India. At the same time, the relative failure of India's past industrialization strategy from the perspective of the poor points to the importance of successful transition to a strategy capable of absorbing more labor, particularly from rural areas.
In explaining the cross-state differences in the trend rates of rural poverty reduction, the project found that differences in the trend growth rate of average farm yields (agricultural output per acre) were important. By contrast, differences in the state's historical trend growth rate of non-agricultural output (urban plus rural) were not. This reflects the weak connections between urban economic growth and rural poverty reduction in India.
But that is only part of the story. Without taking account of differences in initial conditions it is hard to explain why some states have performed so much better in fighting poverty than others in the longer term. Starting endowments of physical infrastructure and human resources appear to have played a major role in explaining the trends in poverty reduction; higher initial irrigation intensity, higher literacy and lower initial infant mortality all contributed to higher long-term rates of poverty reduction in rural areas. A sizable share of the variance in the trend rates of progress are attributable to differences in initial conditions of physical and human resource development—differences which also reflect past public spending priorities.
By and large, the same variables determining rates of progress in reducing poverty mattered to the growth in average consumption. There is no sign of trade-offs between growth and pro-poor distributional outcomes.
(http://www.worldbank.org/poverty/data/indiapaper.htm)
For those who need more quantities let me suggest this link – (http://www.worldbank.org/poverty/data/indiadata.htm)

This and similar studies agree that there may have been a reduction in poverty (remember there is a definition of poverty line) in percentage terms, but the absolute number of economically underprivileged (to avoid using poor) has increased. This means that the rate at which we reduce poverty is lower than the rate at which poverty increases. Further there is a sectoral component to poverty reduction which suggests that investing in certain sectors would help the cause of poverty alleviation more. (Anna you missed out on agricultural development as an important issue.)

My idea of index or ratio is that of an indicator that measures the gap between what quantum of investments required and the quantum that is provided for across different sectors to eradicate extreme poverty.

To conclude Anna gets a political message outta my previous mail, guess could try my hands at it during the next elections. Its too late this time ………..


Note: This mail was sent to PRM21 yahoo groups before the LOK Sabha elections of 2004. As it turned out, perceived neglect of the agricultural sector proved detrimental to BJP's political fortunes, inspite of the economy churning out some brave numbers under it.

Housing Micro Finance: Case of IASC

HDFC-IASC
An introduction
HDFC was incorporated in 1977 with the goal of promoting home ownership by providing long-term finance to households for their housing needs. HDFC was promoted with an initial share capital of Rs 100 million. The primary objective of HDFC is to enhance residential housing stock in the country through the provision of housing finance in a systematic and professional manner, and to promote home ownership. Another of HDFC’s objectives is to increase the flow of resources to the housing sector by integrating the housing finance sector with the overall domestic financial markets.

Palmyrah Workers Development Society (PWDS) is a leading Non Governmental Organization (NGO) in South India operating in the states of Tamil Nadu and Kerala from its base in Kanyakumari district. Since its inception in 1977, PWDS has been consistently working for the upliftment of the palmyrah workers and other weaker sections of the society. Currently its services reach out to 35,000 families and 1600 groups in 1100 villages of 25 Taluks in 8 districts. HDFC in collaboration with PWDS had financed over 1800 dwelling units of Economically Weaker Sections. The close rapport that developed between HDFC and PWDS led to the formation of the Indian Association for Savings and Credit (IASC).

The beneficiary group
The important motive of HDFC promoted IASC is to shape a sustainable delivery strategy that would disseminate housing credit to the poor in an efficient and effective way. One of its stated objectives is to promote home ownership, housing up gradation and community infrastructure among the weaker sections and lower income groups of society. Traditionally, the housing needs of the economically underprivileged have not been addressed sufficiently which has given rise to slum settlements especially in urban areas. However, IASC experience suggests that with suitable delivery channels, methodology and product medication, it is possible to provide housing finance solutions to the poor in a sustainable manner.

Products and Services
IASC has developed a range of loan products attuned to the needs of its clientele. These products and the terms at which they are lent were developed through a detailed market. These products are flexible and responsive to the changing needs of the stakeholders. The housing loan portfolio of IASC consists of the following products:
• New house construction loan of upto Rs45,000.00
• Existing house extension loan of upto Rs22,500.00
• Repair and maintenance loan of upto Rs15,000.00
• Plot purchase loan of upto Rs20,000.00 and
• Loan for construction of sanitary latrines of upto Rs5,000.00

Besides, IASC also provides small loans for small businesses as well as consumption needs of its clients.
Business Linkages – Strategy
IASC derives significant synergies from HDFC and PWDS. It benefits from the goodwill created by PWDS in its market as well as from the understanding of the nature of demand, which comes to it because of its association with PWDS. HDFC provides it with loan funds and professional skills necessary for the management of a credit program. IASC relies on building and managing linkages with local NGOs for its credit operations. IASC itself does not form groups (though it follows group based lending methodology), rather it relies on its partner NGOs to promote groups and impart the necessary training to them. IASC focuses solely on providing credit and savings services. Also, IASC takes the responsibility of loan monitoring and recovery.

IASC: Outreach and Potential
By 2002, IASC was operating in four districts of Tamil Nadu with 18 affiliated NGOs. Its services had reached 1180 SHGs with a total number of 23245 families. Over four thousand loans had been disbursed by August 2002.

Given the demand of housing services in its region of operations, IASC has a huge potential market. It is projected to reach over 20,000 loans by the end of year 2004, with an average loan size of over Rs. 22,000.00. It plans to reach over 50,000 groups in this period.

Investment and Costs
While IASC started with an equity base of Rs3 millions, it had also been able to off take credit of around Rs33 million from HDFC at rates of interest varying between 8% to 12 % per annum depending on the prevailing rates in the macro economy during the period 1999- 2002. This translates into an average drawal of over Rs 10 million/year.

Private – Public partnership opportunities
HDFC has a national presence, which coupled with its own evolved understanding on building Micro Finance Institutions, might lead it to explore increased coverage, either through IASC or a replication of this concept (i.e. join hands with other NGOs to promote IASC like organizations in other parts of the country). There is also an opportunity for IASC to broad base its borrowings from other sources as well, which could be one of the key aspects of replication. IASC may look beyond HDFC and get other financers interested. IASC has already mobilized loan funds from Small Industries Development Bank of India, Can Fin Homes and Unit Trust of India Bank apart from HDFC. HDFC’s own involvement in IASC is rooted in its concern for providing easy and efficient access of a range of financial services and products to the low-income communities belonging to the informal sector. HDFC would therefore want to prepare IASC to address the larger challenge of up-scaling its operations profitably and thereby impacting a larger segment of the EWS in India. However, as it is registered as a section 25 company, IASC cannot provide returns on equity and this limits its appeal to other financers.

Contact Addresses
HDFC Head Office: Ramon House, 169, Backbay Reclamation, H T Parekh Marg, Churchgate
Mumbai 400 020.
IASC Administrative Office: Indian Association for Savings and Credit (IASC), 3-100 G, ‘Rehoboth’, Crystal Street, P.B.No. 19, Marthandam – 629 165, Kanyakumari District, Tamil Nadu, India. Tel: 91 - 4651 – 672738, 672745 Fax:91 – 4651 – 672738

The Case of Jaipur Foot

Introduction
The number of people suffering from loco-motor disabilities ranges between five and six million in India alone. Of these one million people are estimated to have lost their limbs and another four million suffer from Polio. There has also been rise in road accidents and incidence of other wasting diseases, and almost 25,000 new cases get added to the population of amputees every year . Amputation, apart from being a physical loss, also affects the patient psychologically and greatly restricts his or her productivity. Hence, its economic consequences, both on patient’s household at the micro-level and the economy at a larger level are adverse. This makes the fitment of artificial limbs an important health-care as well as economic and developmental issue in India.

BMVSS
The Jaipur foot, an innovative prosthesis invented by Sh Ram Chandra around the year 1968, has provided mobility to many amputees around the world. Being cheap, convenient and durable it has gained widespread popularity in areas torn by strife and war like Afghanistan and Rwanda apart from India. It is primarily fabricated and fitted by BMVSS, which is a non religious, not for profit NGO. It has seven centers in India and provides prosthesis fittings to 16,000 people and services another 44,000 annually by providing calipers, aids and other appliances. Apart from this, BMVSS organizes mobile camps throughout India and also abroad. So far, these camps have been organized in 19 countries in Asia and Africa.

Between 1975 and 2003, BMVSS had fitted over 2.3 lacs limbs in India apart from 14,000 limbs across the world . A large part of the success is attributed to the organization’s value system and customer centric management practices. The procedures for client admission, treatment and prosthetic fitting have been kept simple. Further patients are provided lodging and boarding facilities till the time they are given prosthetic limbs, calipers or other aids. Importantly Jaipur foot is custom fitted, and often within four hours of the patient checking in.

Products and Services
The Jaipur foot and allied aids has been made keeping in view the developing country lifestyle. It allows for sitting cross legged, squatting, walking on uneven surface and barefoot walking. It compares well with the modern western prosthetic products, given its price which is just a fraction of the price of variflex or college park foot prosthesis.

Business Linkages – Strategy
BMVSS has received support from Rotary International for its activities. The Rotary Jaipur Limb Project (RJLP) plans to spearhead Jaipur Foot Camps across the world. It is also moving towards setting up a permanent International Centre collaboration with BMVSS.

BMVSS has signed an agreement with the Indian Space Research Organisation (ISRO) for its Poly Urethane technology. This technology will help in reducing the cost of the Jaipur foot as well as increasing its durability. Moreover, the time required in fabricating the foot is also expected to come down. The other great benefit of using this technology would be in reducing the weight of the foot from the present 850 grams to 350 grams.

BMVSS: Outreach and Potential
BMVSS’s current method of expanding the reach of Jaipur foot in India and abroad is based on camps. Doctors, administrators and artisans travel from Jaipur to the camp’s site on invitation, where a temporary facility is set up. A camp is typically funded by another organization or government which has invited BMVSS to the site. The camp is supervised by a VSS physician and it takes a day to set up. Closing the camp takes around half a day. The sponsoring organization pays the society’s employees a travel allowance for participating in the camp. The society (BMVSS) usually travels with the expected required materials and equipments needed for fabrication. Material shortages are taken care of through local purchases. The responsibility of camp promotion is taken care of by the sponsors.

The society also reaches out by establishing new locations to fabricate and fit Jaipur foot such as the locations in New Delhi and Mumbai. Further, it encourages the establishment of other charitable organizations to run the clinics. Setting up new facilities is quite important in making the Jaipur foot prosthesis more widely available.

Investment & Cost
As discussed earlier setting up new locations is important in improving the outreach of the Jaipur foot. A new location requires a modest level of capital investment. The most significant piece of equipment is the vacuum forming machine which has an estimated price of around US$ 2,000.00 (approximately Rs 90,000.00). Additional equipment and tools generally cost another US$2,000.00. The Jaipur location provides training and also manuals to outline the fabrication and fitting processes.

Benefits derived
The Jaipur foot has enabled many amputees to lead a near normal life. The society claims that it has enabled cycle rickshaw operator amputees to resume operations, farmer amputees to get back to farming and many other individuals who have lost limbs to once again participate in their previous economic activities. One of the most celebrated cases is of Ms Sudha Chandran who went on to become a dancing movie star after having undergone amputation at the age of 14 years.

Investment opportunities for private partnership and risks
Given the number of amputees in India as well as other countries, the outreach of Jaipur foot is still limited. Investments in opening up more new centers are important to increase impact. Research and Development of lighter and cheaper materials is another area where investments can be made. The Jaipur foot also enjoys a cost advantage which can be translated into a profitable business enterprise including exports. However, there are a few areas of caution which limit its commercial attractiveness at present:
• Jaipur foot is hand designed and suffers on consistency parameters.
• Its weight at 850 grams does not compare favorably with international products.
• It does not have international quality certification

Contact Address
Mr. B.P. Jain (President), Bhagwan Mahaveer Viklang Sahayata Samiti, L-43, Cannaught Circus, New Delhi – 110001, Tel. 0091-11-23416350/23413351, Fax. 23413446
E-Mail: bmvss@jaipurfoot.org

Public Private Partnership - A Case Study

Rogi Kalyan Samiti: An introduction The genesis of Rogi Kalyan Samiti (RKS) lies in the Indore experiment of cleaning Maharaja Yashwant Rao Hospital towards the end of 1994. The Indore district administration devised an innovative plan to overhaul the ailing health care system of the town in a way that would restore the faith of the people in the health delivery system. After an elaborate public discussion on what ails the system, every aspect and shortcoming of the system was thoroughly diagnosed. As a resultant of this dialogue Maharaja Yashwant Rao Hospital was evacuated, cleaned, refurbished and its facilities vastly improved before reopening it for public use. To ensure a degree of permanency and to prevent a relapse to its old state of decadence, a unique structure of management was introduced. This was called the Rogi Kalyan Samiti (RKS) or The Patient Welfare Committee.

The beneficiary groupProvision of basic primary health care services is a major concern of the govt. and decision-makers. With growing population and paucity of resources, primary health care has often not been up to the expectation of the people at large. While there are many initiatives that have contributed towards augmenting the primary health care initiatives of the govt., there have not been any that have had a sustained impact over a large area, for a large enough periods and affecting the lives of a large part of the populace. The public health care system does not inspire a lot of confidence among the people. Decades old crumbling public hospitals are still the only hope for a huge majority of the populace in the tribal and rural areas, inhabited by people who are most needy but least provided with adequate primary health care. RKS have carried out physical improvements and provided equipment as well as up gradation in services in many backward districts and outlying rural areas which often lack basic minimum amenities.

Products and ServicesThe RKS at different places provide many services which include:
• Ensuring regular maintenance, repairs and necessary construction/expansion of the physical facilities in the hospitals.
• Ensuring cleaning, security, hospital waste management, MIS and other services of the hospital through private agencies.
• Providing improved facilities by addition or up gradation of OT complexes; sonography, burn unit; ICCU; pediatric (ICU); CAT-scan units; centralized pathological set up etc.
• Purchase of equipment, chemicals, furniture and other necessities for efficient running of the hospitals.
• Providing improved medical facilities through purchase of modern equipment through the donation received and if required through loans from financial institutions.
• Providing a better atmosphere, facilities for attendants and ensuring improved medical facilities in general.
• Introduction of appropriate methods of disposal of medical waste.
• Providing medical care to the poor and needy free of cost or highly subsidized rates as compared to private hospitals.

Business Linkages – Strategy The RKS experiment has been a unique experience of a government - people partnership designed to address and solve one the problem of public health care. Participation of local administration along with representatives of local population is one of the keys to the success of RKS. The operating framework of RKS contributes to high levels of accountability on the one hand and increased focus on service quality on the other. It has people’s representative, health officials, local district officials, leading members of the community, representatives of the Indian Medical Association, members of the urban local bodies and Panchayati Raj representative as well as leading donors as their members. The RKS have also introduced user charges to provide for adequate finances and sustainable operations.

Rogi Kalyan Samiti: Outreach and Potential
By the end of year 2003, Rogi Kalyan Samitis had been set-up in all the districts of the State of Madhya Pradesh, which includes over 450 hospitals spanning over the 61 districts of the state. However, given the poor health infrastructure all over the country, RKS replication needs to be carried out on a much wider scale. This can help in saving many lives as well as provide people better access to health care services.

Improving the outreach of RKS will involve expansion across community classes and areas to ensure coverage. This requires advance planning, assessment to requirements & setting targets over phases as well as identification & planning for resource mobilization. The RKS can play a great role in the coming days in implementing the national health programs like immunization, Polio eradication, Fight against AIDS and other health scares.

Investment and Costs The pilot experiment of cleaning and transforming Maharaja Yashwant Rao hospital took an investment of Rs4.5 million. The funds came from the population of Indore who responded overwhelmingly to an appeal for donations. The RKS can now also raise funds through donations, loans from financial institutions, grants from government as well as other donor agencies.

Private – Public partnership opportunities The cleaning up of the MY hospital and restoration of safe & healthy surroundings has created much appreciation and widespread public acceptability. This has resulted in increased acceptance of the concept and willingness to pay charges. Resource base available with the RKS and hospitals under the RKS has increased by many folds. Health care centers in rural and semi-rural areas have proposed expansion & up gradation with the availability of internal resources generated by the RKSs. For further development, however, opportunities need to be explored. Greater private sector participation can help in bringing advanced health services at the doorstep of people living in remote areas at affordable rates.

Expression...

Whenever I'm feeling low,
I do this it helps a lot,
I take a pen and a piece of paper,
& scribble my deepest thoughts.

No, I'm not an ideal poet,
Not even a real one,
But cant help writing, cant help it;
I too crave some expression.

Saturday, June 26, 2004

Finance for Poor: Note on Microfinance

What is microfinance?
The term microfinance refers to the provision of financial intermediation services to clients having low incomes. These services include savings and credit; and in some cases, also insurance. Along with financial intermediation, many Micro Finance Institutions (MFIs) help their clients in group formation and provide basic training on accounts and financial management, which are collectively referred to as social intermediation services. Microfinance clients are typically self employed low income people in both rural and urban areas.

Microfinance has evolved as a development approach intended to benefit the economically underprivileged. While its impact on poverty reduction is an issue of debate, microfinance does play a significant role in increasing the access of financial intermediation services to the poor people, which in itself is a laudable development objective.

What do microfinance operations usually involve?

• Making small and flexible loans according to clients’ requirements, repayment capacities and cash-flows
• Providing secure deposit facilities to the poor, which allows them to save as and when they have surpluses
• Collateral substitutes such as group guarantees and compulsory savings
• Encouraging repeat and larger loans based on repayment performance
• Continuous monitoring and follow up to ensure timely repayments of loans

What are the organizational forms of MFIs?
MFIs have been organized as Not for Profit Organizations (NPOs), savings and credit cooperatives, credit unions, financial services associations, specialized rural banks and non-banking financial companies. Their institutional forms have implications on issues like accepting clients’ deposits, intermediation of these deposits, capital structure, taxation, statutory disclosures and compliances.

What are the different methodologies used for providing micro-financial services?
These methodologies can be divided into individual approach and group based approaches. While individual banking approach involves provision of financial services to client who are not members of any group that is jointly responsible, the group based approaches (which involves lending to either groups or members who are organized as groups) utilize peer pressure and group guarantee to ensure desirable client behavior such as timely repayment of loans.

There are many variants of the group approach which includes Grameen Bank (pioneered by Dr Mohammed Younis) solidarity lending, Latin American solidarity group lending and the Indian Self Help Groups (SHG)-bank linkage.


What are the features of a sustainable MFI?
• Clear understanding of target market and services offered
• Business planning to reach specific strategic objectives
• Market based financial services
• An ability to undertake quick client selection, training and financial service delivery
• Appropriate organizational structures and trained staff
• Standardized and documented operational procedures widely understood by staff
• Transparent, timely and accurate accounting
• Regular audits – both internal and external
• Realistic budgeting and financial projections
• Functional Management Information Systems (MIS) which provides timely, accurate and adequate information on key performance indicators and allows the management to make informed decisions
• Legal registration and compliance with supervisory requirements
• Economically feasible scale of operations to cover all costs through the available interest spread

What are the promises and what are the caveats?
Promises
• It holds the promise of reaching the poor
• It holds promise of building financially self sufficient locally managed institutions
• It can contribute to strengthening formal financial systems
• It can build on traditional systems

Caveats
• Productive credit would have little use if the target population has little access to business opportunities
• Reaching a sustainable scale of operations is often a big challenge for many MFIs
• The legal and policy framework may also be a constraint in providing effective microfinancial services
• Inadequate fund management may create liquidity problems for MFIs

Friday, June 25, 2004

Making Money:Note on Micro-enterprises

What are micro-enterprises?
Micro-enterprises by definition are very small businesses. These are generally started by low-and moderate-income individuals for the purpose of creating their own job or extra income for themselves and their families. The characteristic feature of successful micro-enterprises is that they utilize local resources and skill sets to produce goods and services that generally cater to the local demand but depending upon the availability of distribution channels may even go to distant markets.

What is micro-enterprise development?
Micro-enterprise development is a process of providing services to micro-businesses to help them grow quickly at a reduced risk. These services include business training, technical assistance to create a business plan, microfinance, technological and marketing support.

What kind of service-support micro-enterprises require?
Micro-enterprises need service support in the following areas:

• Resource mapping to identify locally available raw materials, skill sets and technology. Micro-entrepreneurs, often, have a set of skills that pass from one generation to the other. These skills evolve over time to meet the requirements of the local market. However, to remain competitive they need to identify optimal sources of raw materials and continuously upgrade skill sets and technology,

• Market Research to help determine the nature and distribution of demand for the product,

• Functional training in areas of finance and accounts, supply chain management and marketing,

• Business planning and financial modeling enabling the entrepreneur to develop the right business mix and a set of best business processes and practices,

• Business audit to ensure that best practices continue within the enterprise giving it a better chance of attaining sustainability,

• Finance – working capital loans, longer tem loans based on organizational requirements. Microneterprises also need support in linking with the providers of finance as banks and formal financial institutions need detailed project proposals. For small investment requirements, Micro Finance Institutions represent an easy and more accessible source of funds.

Wednesday, June 23, 2004

An Introduction to Indian Microfinance

The term microfinance refers to the provision of financial intermediation services to clients having low incomes. These services include savings and credit; and in some cases, also insurance and money transfers. The task force set up by the National Bank for Agriculture and Rural Development (NABARD), under the chairmanship of Sh YC Nanda has suggested the following working definition of microfinance: “Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and or urban areas for enabling them to raise their income levels and improve living standards”. (Report of the Task Force on Microfinance, 1999)

Microfinance operations usually involve:
• Making small and flexible loans according to clients’ requirements, repayment capacities and cash-flows
• Providing secure deposit facilities to the poor, which allows them to save as and when they have surpluses
• Collateral substitutes such as group guarantees and compulsory savings
• Encouraging repeat and larger loans based on repayment performance
• Continuous monitoring and follow up to ensure timely repayments of loans
Microfinance has evolved as a development approach intended to benefit the economically underprivileged. Difficulty in accessing institutional finance by the poor, the government’s commitment to making credit accessible by the poor and the success of Grameen Bank in Bangladesh have all contributed to the ascent of microfinance in India.

Microfinance in India: Scope, Demand and Supply
There is a large demand for microfinancial services in India. India is estimated to have nearly 400 million people who are below or just above an austerely defined poverty line . The number of households, who need microfinancial services, would therefore range between 70 to 80 million. The current annual credit demand by the poor in India (fifty million households) is estimated to be between Rupees 15,000 to Rupees 45,000 crores (Mahajan and Ramola , 2003). These households also have a high demand for saving services, though, quantified estimates are not available. The fact that the poor turn to informal and often unreliable sources to save suggests that a large part of their savings demand is unmet. A large proportion of the annual credit demand of the poor also, is unmet. An optimistic estimate is that the number of small loan accounts from banks covered some 40 million households in the year 2000. The remaining households have to depend upon other sources to meet their credit needs (Fisher and Sriram, 2002). The total loan outstanding of all microfinance initiatives in India has been estimated to be around Rs1200crores for the financial year ending March, 2003 (Mahajan and Ramola, August 2003). Even if one were to assume a thirty percent increase for the year 2003-2004, the loan outstanding figure will come to Rs1600 crores which is tiny given the annual demand.

Savings in the microfinance sector
Mcril’s microfinance review based on a sample of 90 Indian MFIs estimated that these MFIs had raised some $32.9 million (or Rs145 crores) as client deposits. These deposits were accepted formally – and taken onto their balance sheets – by the sample MFIs from their members/clients. The review also noted that this was an underestimation of the amount of savings actually mobilised by MFIs since it did not include the amount that is retained by each self-help group for internal circulation. The review further estimated that the actual level of savings by members of MFIs – both with the MFI and the SHG – was around three times the figure recorded in the MFI’s accounts. This would increase the total savings of members of Indian MFIs in the sample to $80 million (Rs360 crores).


NABARD SHG Bank Linkage Programme
The SHG – Bank linkage program was launched by the National Bank for Agriculture and Rural Development (NABARD) in the year 1992 as a pilot project aimed at financing 500 Self Help Groups (SHGs) across the country. The programme was perceived as a success and banks continued to finance SHGs in the coming years. The Reserve Bank of India (RBI) included financing to SHGs as a mainstream activity of banks under the priority sector in 1996. As a result of this programme the banking system comprising of the public and private sector commercial banks, regional rural banks and cooperative banks has joined hands with several organizations in the formal and semi-formal sectors to facilitate the provision of financial services to a large number of poor.

The beneficiary group
The beneficiary of NABARD’s linkage program is the Self Help Group (SHG), which is trained in the skills of thrift and credit and given access to banking sector funds. An SHG is a group of about 20 people from a homogeneous class, who come together for addressing their common problems. They are encouraged to make voluntary savings on a regular basis. They use the pooled resources to make small interest bearing loans to their members. The process helps them imbibe the essentials of financial intermediation including prioritization of needs, setting terms and conditions, and accounts keeping. This gradually builds financial discipline in all of them and they gain experience in handling resources of a size that is much beyond individual capacities of any of them. Once the group shows financial maturity, banks are encouraged to make loans to the SHG in multiples of the accumulated savings of the SHG. The bank loans are given without any collateral and ideally at market interest rates. The group continues to decide the terms of loans to their own members. Since the group’s own accumulated savings are part of the aggregate loans made by the groups to their members, peer pressure ensures timely repayments.

Products and Services
The product package under this scheme comprises of primarily two activities: social intermediation followed by financial intermediation. Social intermediation results in skill up gradation among SHG members. The members get trained in managing money as well as basic accounting. It also helps them develop a sense of financial discipline.

The second aspect of this scheme is provision of credit to these groups. Once the members have gained a fair experience in rotating SHG’s internal funds, they are allowed to access credit from banks. This takes care of their higher capitalization needs and provides them an opportunity to raise their incomes. For the bank, good groups making timely repayments represent an excellent business opportunity.

Business Linkages – Strategy
Over time the following three models of institutional linkages have evolved:
Model I: SHGs formed and financed by banks. In this model, banks themselves take up the work of forming and nurturing the groups, opening their savings accounts and providing them bank loans. Up to March 2002, 16% of the total number of SHGs financed was from this category.

Model II: SHGs formed by NGOs and formal agencies, but directly financed by banks. This model continues to have the major share, with 75% of the total number of SHGs financed up to March 02 falling under this category. Here, NGOs and formal agencies in the field of microfinance act only as facilitators. They facilitate organizing, forming and nurturing of groups, and train them in thrift and credit management. Banks give loans directly to these SHGs.

Model III: SHGs financed by banks using NGOs and other agencies as financial intermediaries. This is the model wherein the NGOs take on the additional role of financial intermediation. In areas where the formal banking system faces constraints, the NGOs are encouraged to approach a suitable bank for bulk loan assistance. This, in turn, is used by the NGO for on-lending to the SHGs. In areas where a very large number of SHGs have been financed by bank branches, intermediate agencies like federations of SHGs are coming up as links between bank branch and member SHGs. These federations are financed by banks, which, in turn, finance their member SHGs. The share of cumulative number of SHGs linked under this model up to March 02 continued to be relatively small at 9%, but in years to come, this is expected to become a major delivery mode.

SHG – Bank linkages: Outreach and Potential

With 7.8 million poor households accessing credit through 17,085 branches of the formal banking system under this program as on March 2002, it is the world’s largest microfinance program in terms of outreach. The corporate mission set by NABARD for reaching microfinance services to the very poor envisages coverage of one third of the rural poor of the country, i.e., a population of about 100 million rural poor through one million SHGs by the year 2007-08. Having already reached 0.942 million SHGs, along with nearly 14 million poor households in March, 2004, NABARD is on the course of exceeding its outreach target .

The Parallel Channel
In addition to NABARD’s microfinance programme, there are a number of other microfinance initiatives in India. Most of them are a result of NGO activities and have received grants from donor agencies. These microfinance programmes have also been aided by soft loans from the SIDBI Foundation for Micro Credit (SFMC), the Rashtriya Mahila Kosh (RMK) and Friends of Women’s World Bank (FWWB). These programmes represent diverse organizational forms such as Charitable Trusts and Societies, Cooperatives, Section 25 Companies, Non Banking Financial Companies (NBFCs), and Banks. A sample analysis of ninety MFIs in India by M-Cril reveals that there is a continued dominance of not-for-profit institutions (nearly 80%) in the provision of microfinance services through this channel.

The parallel channel is also characterized by different operating models – Self Help Group models, the Grameen model, the Individual Banking model or a Mixed model. The dominant model of microfinance delivery through this channel is again the SHG model. The operations of SHGs are based on the principle of revolving members’ own savings, which are augmented by funds borrowed by banks (SHG-Linkage Programme) or MFIs (the alternate channel). The primary features of this model have been presented in detail earlier. The following paragraphs discuss the other models.

Grameen model: This model was initially promoted by the Grameen Bank of Bangladesh. Grameen MFIs undertake individual lending but all borrowers are required to form into five member joint liability groups (JLGs). The JLGs, in turn, get together with 6-9 other neighbouring groups to form a centre. Peer pressure among the members is the key factor in ensuring repayment. Each borrower’s credit-worthiness is determined by the overall credit-worthiness of the group. Savings are a compulsory component of the loan repayment schedule but do not determine the magnitude or timing of the loan. The important MFIs following this model are Share Microfinance Limited (registered as NBFC) in Andhra Pradesh and Cashpor (Section 25) in Uttar Pradesh.

Mixed model: Some of the MFIs started with the Grameen model but later on went on to adopt some aspects of the SHG model. A prominent MFI that follows a hybrid model with features of both Grameen and SHG is Spandana, which operates in the Guntur region of Andhra Pradesh.

There are others MFIs that have chosen to adopt either the Grameen or the SHG model to cater to individual market segments while a few organisations also individual banking type products and methodologies, in addition to group based methods to provide financial services. An important example is Basix that uses diverse methodologies each suited to a particular market segment. Others such as the Indian Association of Savings and Credit (ISAC), a section 25 company promoted by the Housing Development Financial Corporation (HDFC) gives individual as well as group loans.

Individual Banking model: This is the provision of financial services by MFIs to individual clients – though they may sometimes be organised into joint liability groups, cooperatives or even SHGs. MFIs organized as Cooperative banks such as Pushtikar Samiti-a cooperative bank operating in Jodhpur, Rajasthan

Microfinance has emerged as a rapidly growing poverty focused development activity in India.

Issues in Microfinance Impact in India

Liberalization in the banking sector and a policy thrust, in the form of priority sector lending requirements, has made it easy for individuals to take loans. However, even today, a significant proportion of India’s population, especially in rural areas, has difficulties in accessing small loans from formal financial institutions and banks because of a paucity of appropriate loan delivery and maintenance structures, which make it costly for these institutions to service such clients. This makes access to credit for the poor an important impact issue for the microfinance sector.

There has been a growing consensus among microfinance practitioners that in addition to credit, the poor need an entire range of financial services including savings, insurance and fund-transfers. Savings, and to an extent insurance, are mechanisms which allows poor, individually or in groups to save up and build a resource pool, which can be drawn upon during times of need. Effective transfer services enable people to remit money across geographies. In India, where work related migration is widespread, cheap money transfer services assume importance. Stuart Rutherford has argued that effective financial services for the poor should entail mechanisms to turn savings into lump sums for a wide variety of uses. Savings, insurance and money transfer services enable poor to smoothen their cash-flows across time and space.

Another critical impact issue in microfinance is livelihood promotion and maintenance. By providing a convenient access to capital, microfinance provides the opportunity to poor to take up income generation activities. The success of these activities depend also on environmental and technical factors. However, access to capital is an important and sometimes determining constraint. The poor are also most vulnerable to risks. Prima facie, it appears that microfinance enables poor to diversify their risk management strategies, and get over phases of distress. Finally, microfinance also has a role in improving the social status of the underprivileged especially women.

Taking Financial Services to the Poor

Reaching the Poor: Issues in Microfinance Outreach

The need for micro finance is overwhelming and the positives of its impact undeniable. The macroeconomic conditions such as low inflation economy with stable interest rates favour the growth and scaling up of sustainable microfinance. MFIs such as Share, Basix and Spandana have made an impact on the life of poor and yet have made profits, proving in the process, that sustainable micro finance achieves excellent social results. Experience drawn from various development initiatives suggest that subsidized credit has limited utility in terms of its effect on poverty alleviation and as some experts hold, it also discourages mainstream financial institutions from lending to the poor.

The evidence from microfinance practice world over is that the poor can save; they are willing to repay loans at commercial prices and display excellent repayment performance provided the loan products are suited to their income and consumption patterns. Microfinance has forced the traditional wisdom that the poor need subsidized credit to change. The scaling up of microfinance in India, thus, should be seen as a sustainable business activity rather than a social obligation. Despite the positives, microfinance outreach in the country is insufficient, geographically limited, and not organized - factors which limit its impact. In order to provide an enabling environment for realizing the latent potential of microfinance in India, a close scrutiny of policy issues such as capital constraints, legal and structural constraints and socio-cultural constraints is required.

Capital Constraints: The Real Impediment to Increasing Outreach
The liquidity condition of the financial sector in India is comfortable yet the microfinance sector faces a crunch in terms of smooth flow of funds. In the following paragraphs, we analyze the bottlenecks in the microfinance supply chain – areas where capital infusion can substantially help improve outreach.

Group Promotion
The success of the microfinance sector in India depends on the quality of SHGs and JLGs. The repayment performance of groups needs to be consistently high for any microfinance initiative to be successful. In addition, the groups need to be well trained in maintaining records of transactions to avoid any operational frauds. At times, SHGs also have to be provided with appropriate linkages in order to take up a productive enterprise. All this requires investment in terms of time, effort and money. The Ministry of Rural Development has established a norm of Rs 10,000 per group towards group promotion expense, which is quite realistic. Thus to form an additional one Million group, the amount required is Rs 1000 crore.

The availability as well as ensuring proper utilization of funds meant for SHG promotion is an issue that needs to be addressed. NABARD’s microFinance Development Fund (mFDF), set up in 2000-01, with a Rupees 100 crore corpus has identified capacity building of SHG as one of its objectives, however, the real need is much larger compared to the outlay made by mFDF. Funds for group promotions are also made available by the government under different development projects such as the SGSY and District Poverty Initiatives Project (DPIP).

However, keeping in mind the requirements of SHG creation, these initiatives are too small and spread out and need additional sources of funds. While the ideal way forward could be creating a capacity building fund for SHG, one can look at innovative ways to reduce grant component of capacity building. A possible solution could be extending soft loans with initial moratorium to MFIs and/or NGOs. The loan would help an MFI expand its outreach quickly while keeping the interest burden manageable and at the same time ensure financial discipline. The loan can be amortized over a period of six to nine years.

Equity investment in Non Banking Financial Company providing Micro Finance services may be another prudent investment tool for meeting the capacity building needs for the sector. It is important to note that these suggestions are applicable only to mature MFIs that are close to breaking even or are already profitable. Grant support is must for creating new SHG in areas where mature MFIs are not present.

Scaling-up Credit Operations
Presence of thousands of small MFIs across the country indicates the demand for micro finance programmes. Most of these institutions are small entities facilitating internal SHG savings and credit. Scaling up these initiatives presents a very complex challenge in terms of raising capital for expansion, which often undermines their outreach potential. In absence of scaled up operations, the small entities become grant dependent and are unviable and unsustainable. The only option that small MFIs have to achieve scale is either large grants or commercial debt, which cannot be the sole or the long term source of funds for lending .

Some other capitalization alternatives for scaling up operations may include:
• Equity capital,
• Client deposits,
• Capital market access,
• Foreign Borrowings,
• Strategic alliances with Financial Institutions,
• Increased flow of debt funds.

Equity Capital
Equity is an ideal instrument to grow a scalable and profitable business. Microfinance in India is still on the border of sustainability. Still, a high demand market and an opportunity to grow rapidly makes MFI a good equity invest prospect from the investor perspective. However, structural weaknesses in most MFIs’ operations, constraining legislations from Securities and Exchange Board on Venture Capital and difficult investment conditions under Non Banking Financial Company laws make MFIs very difficult investment vehicles for equity investors.

Most of the MFIs operate as charitable trust or societies ruling out any kind of equity intake. Migration to Section 25 Company status is not of much as these are non-profit in nature and cannot distribute dividends. Similarly, cooperatives are not designed to attract equity participation either.

The only institutional MFI that can attract equity capital is the one operating as an NBFC. However, setting up an NBFC means meeting Net Owned Fund requirement of Rs two crores and most MFI struggle to raise this start up capital. .

The Securities and Exchange Board guidelines on Venture Capital prohibit equity investment by Venture capital in a Non Banking Financial Company ruling out institutional equity to NBFC-MFIs. Social Venture Capital Funds located outside India may have keen interest to invest in promising MFI but the Foreign Investment Promotion Board Norms for financial services and RBI guidelines on NBFC on foreign investment does not allow more then 50% holding for foreign investor for investment below US $ 5 Million. This dissuades serious social venture capital investors to invest in equity of Indian MFIs.

Some of the solutions proposed to overcome the equity problems include setting up a National Microfinance Equity Fund (NmEF) for supporting MFI entrepreneurs. Encouraging institutional equity to MFIs from NABARD, SIDBI, NHB can help MFIs to significantly strengthen their capital structures and also bring them under the supervision of these institutions. Another option that policy makers may consider is to allow cash rich NGOs to invest in companies undertaking microfinance without prejudicing their tax status. This may require an amendment in the Income Tax Act for allowing NGOs to contribute equity to for profit MFIs.

Some other policy initiatives that can boost the Microfinance sector should include lowering the initial paid up capital requirements for MFIs to register as NBFCs to Rs 25 Lakhs and considering extending the “sweat equity" scheme (wherein the promoters' contribution of effort and experience is counted in monetary terms) to the microfinance sector.

A major boost to sustainable microfinance can be made by reviewing the limits for foreign investment in Micro Finance NBFCs. This may encourage socially conscious foreign investors to invest in young MFIs with NBFC status and provide a strong impetus to growth and scalability of the entire sector. The SKS Micro Finance deal with Unitus and TMSV LLC attracting US$ 0.5 Million as equity is possibly the most significant equity investment from foreign social venture capital funds and is an evidence of global interest in the Indian MFI Sector.

Client Deposits
Savings is a crucial service for the poor people. However RBI Regulation concerning mobilization of public deposits by MFIs allows only banks (which require a paid up capital of Rs100 crores), NBFCs (having a minimum capital of Rs five crores) or member owned institutions to raise deposits from public. While member owned institutions can raise deposits, they suffer from problems of dual control- a cooperative bank is regulated both by the registrar of cooperatives as well as the RBI. The MACS Act adopted in some states, notably Andhra Pradesh, overcomes this lacuna.

The NGOs, NBFCs (having lower capital base) or Section 25 companies are unable to provide legal saving services to the poor. Funds mobilized through deposit services are at a lower cost and enable MFIs to scale up their credit operations by rotating client savings. There is a strong case for allowing MFIs to take deposits with adequate safeguards. Mahajan and Ramola have suggested that MFIs should be allowed to provide savings services with the safeguard that deposit taking by MFIs is confined to only its borrowers. Additionally, imposition of an appropriate level of Statutory Liquidity Reserve could act as a buffer. This can be monitored on a quarterly basis and any misuse can be dealt with, by closure of the concerned MFI. Moreover, MFIs undertaking savings may be asked to maintain high levels of capital adequacy (upto 20%) so that they approach the capitalization levels of mainstream FIs as they scale up and evolve. MFIs should also be provided positive incentives to maintain a very high portfolio quality, with a regular reporting of non performing assets. The MFI policy needs to evolve prudential norms appropriate to institutions serving the poor and should have supervision mechanisms to meet the inherent challenges.

Capital and money markets
Evolved NBFC MFIs may look at capital markets as a solution to capital constraints. Securitization of MFI loan portfolio is an important initiative that provides a possible role for financial markets in addressing capital constraints that MFIs face today. Trading papers derived from securitized assets in secondary markets can possibly be an important determinant in resolving the issues of capital constraint and limited outreach for MFIs. ICICI bank has undertaken a securitization deal with Share Microfinance Ltd worth Rs 20 crores (US$ 4.3mn). The deal has enabled Share to access funds at lower costs. The securitized portfolio has been rated (AAA by CRISIL) and traded. Such initiatives need to be encouraged and promoted. Similarly venture capital funding of MFIs can also help them in strengthening their capital structures.

Foreign Borrowings
With increased confidence in India’s economy, as well as the promise shown by some MFIs in creating value many foreign investors and donors are willing to provide loans and guarantees to Indian MFIs. However the recent ban imposed by the finance ministry on accessing External Commercial Borrowing by financial intermediaries has had a major impact on the outreach plans of many Micro Finance Institutions, which were looking up to these funds for scaling up their operations. Hence, MFIs may be provided a special exemption for accessing foreign debts.

Strategic Alliances and Partnerships
Another way to beat capital constraints is for the MFIs to enter into strategic partnerships with banks. Such partnerships can allow for risk sharing between the two. The competence of the MFI in building a high quality portfolio coupled with the access of low cost funds to a bank can lead to synergies and hence help in overcoming outreach constraints. The ICICI bank is also experimenting with using MFIs as management and collection agents, where the loans are always on the books of the ICICI Bank, even though all the operations with the customers are handled by the MFI staff. The ICICI Bank has launched a pilot effort for this jointly with Cashpor Micro Credit, a section 25 company specially set up for this purpose by Cashpor Financial and Technical Services Ltd, in the Chandauli district of Uttar Pradesh. However cost of funds and additional burden of service tax being charged towards management and collection services is the major hurdle in the growth of such innovative alliances.

Evolution of Microfinance in India

The genesis of microcredit, and therefore microfinance is credited to Dr. Muhammad Yunus, who founded the Grameen Bank in 1983. In India, however, financial services especially for the rural poor also had a parallel evolution, starting from the earliest cooperative societies in 1890 to the burgeoning microfinance sector of today, dominated by Self Help Groups (SHGs), which have emerged as micro level financial intermediaries.

Prelude
The role prescribed for financial sector in India to achieve developmental goals dates to pre independence days. The agriculture credit department was set up in 1935 by the Reserve Bank of India to promote rural credit. In its early days, the government of India sought to promote rural credit by strengthening the cooperative institutions. The need to replace costly informal credit with institutional credit was strongly felt as the All India Rural Credit Survey report of 1954 found that informal sources accounted for 70% of rural credit usage, followed by cooperatives (6.4%) and commercial banks (0.9%).

The “Lead Bank Scheme” was introduced in 1969, thereby starting a process of district credit plans and coordination among the different financial intermediaries. The same year also saw the nationalization of fourteen commercial banks. As a result of these initiatives, the share of formal financial sector in total rural credit usage rose to 30% in 1971. The Regional Rural Banks (RRBs) were conceptualized in 1975 to augment the delivery of financial services in rural areas. This resulted in the creation of a network of banks which is one of the largest in the world even today. Not surprisingly, the All India Survey Debt and Investment Survey of 1981 found that the share of formal financial sector in total credit had risen to over sixty percent.

Preparing the Ground
The government initiated the Integrated Rural Development Programme (IRDP) in 1980-81. The objective of IRDP was to direct subsidized loans to poor self employed people through the banking sector. The National Bank for Agriculture and Rural Development (NABARD) was established in 1982. In the same year the government established Development of Women and Children in Rural Areas (DWARCA) scheme as a part of IRDP. It was around this time that the first Self Help Groups (SHGs) started emerging in the country mostly as a result of NGO activities. The NGO MYRADA was one of the pioneers of the concept of SHGs in India. It was in 1984-85, when MYRADA started linking SHGs to banks. These SHGs were large enough for the bank to have transactions. The SHGs in turn were also very responsive and flexible to the needs of their members. While MYRADA did not directly intervene in the credit market for the poor, it facilitated “banking with micro institutions established and controlled by the poor”. The SHGs were a step in that direction. Thus, seeds were sown for the modern microfinance sector in India to emerge.

IRDP is estimated to have reached over 55 million poor families until 1999, when it was transformed into Swarnajyanti Gram Swarozgar Yojna (SGSY). The IRDP, in spite of its immense outreach, experienced very low repayment rates and created 40 million defaulters, which coupled with the subsidy component ruled out long term sustainability of the programme.

The formal financial sector has been criticized to be supply driven during this phase (Sriram and Fisher, 2002) . The formal financial sector was characterized by:
• A large network of banks including cooperative banks and innovations such as RRBs,
• Focused approach on credit,
• Lending targeted at the “priority sector” such as agriculture and weaker sections of the population,
• Interest rates ceiling,
• Subsidies.

Financial services, were thus, viewed as a social obligation. Given the high rates of default, a formal loan waiver was announced by the government in the year 1989. This had a negative impact on credit discipline, and reinforced the view that lending to the poor was not a profitable business among the mainstream financial institutions.

Economic Reforms and a new Generation of Financial Institutions
In the year 1991, India faced a balance of payment crisis. India’s foreign reserve fell to a very low level and the country’s ability to meet foreign debt obligations was seriously impaired. This, however, propelled the government into introducing structural changes in the economy-commonly referred to as the Economic Reforms of 1991. This gradually resulted in greater autonomy to the financial sector. As a result, new generation private sector banks such as UTI Bank, ICICI Bank, IDBI Bank (all established in 1994) and HDFC Bank (early 1995), emerged. The Narsimhan Committee report of 1991 also recommended phasing out of interest rate concessions. At the same time the Brahm Prakash Committee recommended reducing state involvement in cooperative banks.

Microfinance is BornThe SHG – Bank linkage programme was formally launched by the NABARD in the year 1992, with it circulating guidelines to banks for financing Self Help Groups (SHGs) under a Pilot Project that aimed at financing 500 SHGs across the country through the banking system. While, the banks had financed about 600 SHGs by March 1993, they continued to finance more and more SHGs in the coming years. This encouraged the Reserve Bank of India (RBI) to include financing to SHGs as a mainstream activity of banks under their priority sector lending in 1996. The Government of India bestowed national priority to the programme through its recognition of microfinance and it found a mention in the Union Budget of 1999. The banking system comprising public and private sector commercial banks, regional rural banks and cooperative banks has joined hands with several organizations in the formal and non-formal sectors to use this delivery mechanism for providing financial services to a large number of poor.

Concurrently, in 1993, the Rashtriya Mahila Kosh (RMK) to accelerate the flow of self employed women in the unorganized sector. It is worth mentioning that the Sewa Cooperative Bank has been operating in Gujarat with similar objectives since 1974. The bank has been viable right from its inception and is an ideal example of community owned sustainable financial service delivery. Microfinance received greater recognition when the Small Industries Development Bank of India set up a Foundation for Microcredit with initial capital of Rs100 crores in 1998. The same year also saw the formation of Sa-dhan as an apex level association of Community Development Finance Institutions. The passing of Mutually Aided Cooperative Societies Act by Andhra Pradesh in 1995, followed by some other states has also acted as a stimulant as many new microfinance initiatives have come up under the MACS act. In addition to the success of the Nabard-SHG bank linkage programme, alternative microfinance initiative following Grameen and/or SHG methodology or at times individual lending model has also been successful.

Some Recent DevelopmentsThe year 2004 has seen some very important development in the microfinance sector in India. The banking sector led by ICICI bank has shown interest in microfinance as a viable commercial opportunity. The total disbursement of the banking sector to microfinance is put at around Rs1000 crores for the year 2003-04. ICICI Bank plans to build a microfinance portfolio in excess of Rs1000 crores. It has taken a lead in establishing innovative partnerships with microfinance institutions which will allow for risk sharing between the two. ICICI bank has also securitized the microfinance portfolio of Share and Basix, and has potentially opened the doors of capital markets for the microfinance sector. Microfinance sector in India is set to enter a new growth phase in its evolutionary course.

Macro Environment of India Favours Development Finance

Microfinance in India: Strong Fundamentals Can Help Multiply Impact
“I think if you visit Bangladesh you will see how much wealth can be created for those people. Look, India needs to achieve a 10% GDP growth, and that is difficult unless the rural economy starts growing at 10% a year. Even if the industrial economy grows at 10%, rural economy is such a large percentage of our economy it will drag everything down unless it grows too. And so we will see a much bigger economic divide between the rural and the urban unless we do something about accelerating the economic growth of rural India. I believe microfinance is a very, very powerful tool. In fact, it is the only tool with a potential to revolutionise growth in rural India. That's why it is important. It is not only important for the macro numbers of economic growth to be great, but we also must distribute wealth creation” – Vinod Khosla, Venture Capitalist in interview to Business World, April 2004 .

The Indian economy appears well to be on the path of high growth. The Center for Monitoring Indian Economy (CMIE) projects a Gross Domestic Product (GDP) growth of 8.2% for Financial Year 2003. Other estimates of GDP growth are 8.1% by the National Council for Applied Economic Research (NCAER), and 7.3% by the Asian Development Bank (ADB). While these are only advanced estimates the consensus is that the Indian Economy has grown by 7% to 7.5% in the previous financial year (2003-04). Strong recovery in the agricultural sector in 2003 has helped the economy to grow at this rate.

Strong Economic Fundamentals…
While a consistent growth of 8% may be difficult to achieve, the trends in macroeconomic indicators give enough reasons for optimism. The money and financial market developments are encouraging. Inflation has remained moderate over the past few years. The Reserve Bank of India (RBI) expects inflation to hover around 5% over the next financial year (Credit Policy 2004, Annual Policy Statement for the year 2004-05 by Mr.YV Reddy, Governor RBI), in spite of rising oil prices during the last few months, notably March to May 2004. The growth rate of money supply (M3) has been kept within the targeted level of 14%. In its monitory and credit policy for 2004-05, the RBI has indicated that it intends to provide adequate liquidity to meet credit growth and support investment demand in the economy, and continue with a neutral and flexible interest rate environment within the framework of macroeconomic stability. The bank rate and the cash reserve ratio have been maintained at 6.0% and 4.5% respectively. The performance of the banking sector has also been good, which points to gains in efficiency in the financial sector and bodes well for the microfinance sector.

India’s external sector is buoyant. The foreign reserves had crossed 100 billion US Dollars and were at $107.4 bn as of end March ’04. There has been impressive growth in both imports and exports and India has been recording a current account surplus on account of remittances by Indians abroad, as well as growth in services sector exports. One area of concern, however, in an otherwise sound macroeconomic environment is the weak fiscal situation, with the combined state and centre fiscal deficit estimated at around 10% of the GDP.

The ADB (ADB’s India Economic Bulletin, December 2003) gives India a buoyant short term outlook and expects the GDP to grow at 7.4% in 2004-05. The coming years are also likely to see a significant stepping up of private corporate investment in addition to higher levels of infrastructure investments in both the public sector and through private-public partnerships, which would have positive implications for the microfinance sector in providing microfinancial and synergistic services in partnership with the state and the private sector .

The Indian economy seems to be stepping into a new business cycle which can sustain high rates of growth. To quote ADB’s India Economic Bulletin, December 2003, “… More important than these short-term considerations, our analysis of growth patterns over the past 50 years indicates that the Indian economy is now poised at the beginning of a new business cycle. This in turn is riding on an underlying long-term trend of accelerating growth, which has increased from 3.5% upto the 1970s to 5.4% in the 1980s and further to 5.9% in the 1990s.”


Consistent economic growth enhances productive economic opportunities and hence the potential for sustainable microfinance. Moderate inflation levels along with stable interest rate and money supply are added plusses for microfinance as reduced environmental uncertainty allows effective business planning for micro enterprises, banks as well as MFIs, and also, liquidity in the economy gives an increased opportunity to overcome capital constraints within the microfinance sector. On the other hand macroeconomic instability reflected in the volatility of interest rates, exchange rates, and relative prices; impose additional costs and risks on the financial institutions and their existing and potential clients. High inflation in particular erodes the capital of financial institutions and makes it difficult to mobilize resources to expand services.

Stable macroeconomic conditions in India have given confidence to people and institutions to save and invest, and have also stimulated the development of financial services for all including the poor. The increasing willingness among banks in India to provide micro financial services (retail or wholesale) provides evidence in support of this argument.

...reflect Structural Strengths…
The Indian economy has witnessed increasing liberalization of various sectors. There has been entry of new players, domestic as well as foreign, in all prominent industries. The increased competition has gradually turned India into a buyer’s market. As a result, the nature of financial markets in India has also changed – from heavily regulated to liberalized financial markets with emphasis on prudential norms. The presence of sound structures and institutions has been the enabling factor in this smooth transition.

India has a broad industrial base. This encompasses Information Technology (IT), telecommunication, mass media, heavy industries, automobiles, garments and textiles and agro food processing industries. While the services sector in India has been flourishing and accounts for nearly half of the national income, manufacturing sector has also shown high growth in recent times. Productivity gains and growth particularly in manufacturing has a positive impact on the employment potential of the economy. In addition, this also spawns small business enterprises for sub contracting various input requirements.

India has a stable parliamentary democracy. Being the world's largest democracy, India has a long tradition of grassroots participation, starting from the independence movement to the well-established and widespread network of community groups, non-governmental organizations and associations of today. India’s diverse set of cultural and ethnic groups are governed by its secular and democratic structure. India has robust and active media which contributes to open and lively dialogue. India also has a rich pool of human intellectual capital, which means that Indian MFIs have the opportunity to professionalise and access technical expertise of a high order. Top institutions in India such as the Indian Institute of Management, Ahmedabad (IIMA), Institute of Rural Management, Anand (IRMA) and the Indian Institute of Forest Management, Bhopal (IIFM) train professionals in rural finance and microfinance.

India has an active and independent judicial system. Over the past 15 years, the higher courts and the Supreme Court of India have been leading advocates for the human rights of numerous disadvantaged communities, such as tribal groups, pavement dwellers, street vendors, and fisher folk. The judiciary in India enjoys a clean image; however, cases often drag for years, which, makes enforcing contractual obligations difficult and costly. On the other hand, cases involving negotiable instruments are resolved fairly quickly. Banks and many MFIs, therefore, take Post Dated Cheques (PDCs) and use them for ensuring regular repayments. If a cheque is not honoured the defaulting party can be sent notices and sued under the Negotiable Instruments Act of India.

India also has one of the most evolved and mature financial markets among the developing economies. The Indian financial sector has grown and has displayed stability for the last several years, even when other markets in the Asian region faced a crisis. This stability is a result of the resilience that has been built into the system over time. The financial sector has kept pace with the growing needs of corporate and other borrowers. Banks, capital market participants and insurers have developed a wide range of products and services to suit varied customer requirements. The Reserve Bank of India (RBI) has successfully introduced a regime where interest rates are more in line with market forces.

Banking in India has transformed into a technology intensive and customer friendly model with a focus on convenience. The RBI has continued to strengthen the prudential norms for banks. Banking practice in India is aligning with the international best practices and is on the path of phased transition to Basle norms by 2006, which would mean that the risk management practices in Indian banks are in line with global standards. India also has a wide network of Regional Rural Banks and cooperative banks. Their distributional potential for providing microfinancial services have been demonstrated through Nabard’s SHG-bank linkage program. The Government of India bestowed national priority to this program through its recognition of microfinance as an important means for poverty alleviation in the Union Budget of 1999.

The Indian capital markets have witnessed a transformation over the last decade. India is now placed among the mature markets of the world. The capital markets have seen a lot of Foreign Institutional Investors (FII) activity, which is an evidence of the confidence they generate internationally. Sophisticated derivatives such as stock and index based futures and options are traded in the important stock exchanges of India such as the Bombay Stock Exchange and the National Stock Exchange. In fact, capital markets have been one of the drivers of the spectacular growth performance of the Indian IT industry. The capital markets may also have solutions to the capitalization problems of the microfinance sector in India provided some issues are tackled.

…provide stage for Microfinance to deliver
With basic infrastructure in place, impressive output growth and sound fundamentals, the future of the Indian economy looks positive. However, there is evidence to suggest that growth in livelihood and employment opportunities in India has not kept pace with the rise in its GDP. As the ADB in its India Economic Bulletin, December 2003 puts it, “The only sector where employment has picked up is the industrial sector, where employment growth increased from 0.6% during 1987-93 to 2.4% during 1993-99 (ADB’s estimation based on NSSO’s employment and unemployment surveys). However, the industrial sector only accounts for 17.6% of the workforce. The services sector, which is the fastest growing and the largest sector in the economy, accounts for about 26% of total employment. Employment growth in this sector declined from 3.1% during 1987-93 to 2.1% during 1993-99. In the agricultural sector, which now accounts for only 22% of output but about 57% of total employment, there has been no growth of employment. As a consequence, while GDP growth has now risen to over 7%, overall employment is growing at less than 1%, a phenomenon sometimes described as ‘jobless growth’. The consequent increase in open unemployment and underemployment is a major social challenge.”

It is in this context that the nature of the impact of microfinance in India needs to be analysed. Recent studies such as by Puhazhendi and Satyasai, 2000 (impact of Nabard SHG-Bank linkage program) and David Gibbons, 2001 (impact of SHARE microfinance limited) conclude that microfinance programmes do enable a significant proportion of the economically underprivileged to get out of the vicious poverty spiral, by providing them an opportunity to undertake economic activities like dairying. Prof Gibbon’s study notes that “…An important path out of poverty … has been the purchase and care of a milch buffalo(es), with loans provided by SHARE. Of the mature clients who did not purchase any buffalo with their loans, only 68% have experienced a significant reduction in their poverty, as compared to 85% of those who have one milch buffalo and 84% of clients who have two or more milch buffaloes…In general, clients had reduced their poverty by using their loans to increase the number of income (cash) earners in the household, often through the wife becoming an earner by investing all or part of her SHARE loans in creating self employment for her.

“With subsequent loans from SHARE these processes of increasing the number of income earners in the household and diversifying its sources of income continued, where possible. Those mature clients who had three or more earners in their household, 84% of them had experienced significant poverty reduction, as compared to only 33% of households with only one income earner. Diversification of the source of household income also is strongly related to poverty reduction: 82% of client households with three or more sources of income had experienced significant reduction in their poverty compared to only 47% of households with one source of income. Adding income earners and diversifying source of household income are about equally related with poverty reduction.”

These studies suggest that microfinance is an important ingredient for overall livelihood promotion, which is essential to unleash the latent productive forces in the economy, especially in the rural sector. Microfinance can help in smoothening cash flows of small farmers, and enable them to diversify their sources of income with complimentary farm activities such as dairying and poultry farming.

Fisher and Sriram (Beyond Micro Credit, 2002) argue “..Micro-credit is necessary but not a sufficient condition for micro enterprise promotion. The success of micro enterprise depends on a whole range of resources (e.g., natural, human, social, and financial) and opportunities (e.g. markets and the policy and institutional environment)”. As the discussions in the previous sections show, India is very well placed in terms of resources and opportunities, and the increased outreach of good microfinancial services to a significant proportion of the population (roughly 40%) can substantially improve productivity and help millions of people to enhance their quality of life.