Risk Management in Banking

1. Microfinance: Shades of Sustainability
Presented By: Group 5
IMIS,Bhubaneswar

2. Micro-Finance-What is it?
R4
R3
R1/R2
Microfinance = provision of
financial services to the poor48%
15%
37%

3. Microfinance: Concept
What it is often
 Micro-Credit
 Group Lending
 Social/Charitable Activity
What it should be
 Range of financial Services
 Group & Individual lending
 Profitable activity

4. Microfinance reach in India
 Microfinance in India through its 2 major channels – SHG Linkage and MFIs
served
 over 33% of the total population in India
 4 out of 5 microfinance clients in India are women
 Micro-credit portfolio of India Microfinance was Rs. 22,000 cr.
 75% are accounted for by SHG Linkage, 20% by large MFIs and 5% by
medium and small MFIs
 SHG Linkage reports over Rs. 3,500 cr. savings, only MFI Bank, KBS Bank
 reports about Rs. 40 cr. savings portfolio
 MFIs operate in 209 out of 331 districts of the country, 28% of the new clients
are from Urban areas.

5. Clients Profile
 75% population lives in rural areas: geographical access
difficult
 Informal activities: need access at flexible times
 Illiteracy: difficult to deal with traditional services
 Low value of transactions
 Lack of collateral

6. Operational Challenges
 High Volume of Financial Transaction but value wise very low
 Majority of the financial transactions are off-site in nature
 Geographic spread of operations and density of customers
 Lack of infrastructure facilities like power, broadband etc
 Unsecured lending and no documented financial history is
available
 Combination of above, lead to high operating cost

7. Human Resources Challenge
 Lack of trained talents
 Lack of motivated talents
 Difficult to appropriately incentivise the operation

8. Channels of Microfinance
SBLP
MFIs

9. Legal Structure & Regulation
 SHG-Bank linkage model is well managed in India by
NABARD
 Reserve Bank of India’s role regarding loan portfolio
 The Micro Finance Institutions (Development and regulation)
Bill, 2011

10. Financial Illiteracy
 Difficulty in creating awareness.
 SHG and JLG members are taught is to do their own
signature.
 Many MFIs think that this is what financial literacy means

11. Inability to generate sufficient funds
 Lack of private equity investment
 No way other than depending upon grants & donations
 Major source is Bank Loans

12. Dropouts and Migration of group members
 Group Lending concept & Past records
 Dropouts & Migration
 Absence of decent past record

13. Transparent Pricing
 Non-transparent pricing by MFIs confines the bargaining power
 Suppressing their actual/effective interest rates
 Interest rates are linked with the loan amount
 interest rate cap may encourage MFIs

14. Microfinance Paradigm
 SHGs – Facilitators for collective decision making by the poor
and for providing doorstep banking.
 Banks – Wholesalers of credit and providers of resources.
 NGOs – Agencies to organize the poor, build their capacities
and facilitate the process of empowering them.

15. The Self Help Group (SHG). . What is it ?
 A homogeneous group of about 15 to 20
 Every member to save a small amount regularly. Pooled
savings kept in a savings bank account in SHG’s name
*transaction costs of both the poor and bank reduced !
 SHG to use pooled thrift to give interest bearing loans to
members – decisions taken in group meetings
*Every member learns prioritization and financial
discipline. Their capacities to think and handle larger
resources improves!
 Depending on the SHG’s maturity, bank gives loan to the SHG
as a multiple of the pooled savings. Bank loan added to the
SHG kitty.
*Adequate & sustained access to financial services!

16. SHG Benefits
 Role in social-economic development & help the
Governmental, semi-governmental and non-governmental
agencies
 SHG movement created an institutional framework
 Participation of women in SHGs improved their access to
credit
 Culture of thrift and disciplined loan repayment
 Winning confidence of mainstream financial sector as credit
worthy institutions
 Interest rates in the informal credit sector decreased

17. Challenges & SHPI
 Low levels of credit absorption, low skill base and low asset base
 Interior and tribal villages have not benefited
 SCs and women headed households have not benefited
 Pressures by govt. to push sterilization and birth control methods
 Non-governmental organizations (NGOs)
 Govt. agencies
 Bank staff
 Farmers' clubs
 Rural volunteers

18. Criterion of APL & BPL by SHPIs
 Non-economic criteria
 No access to pucca housing
 No access to safe drinking water
 No access to sanitary latrines
 Unemployed person in the household
 Eat less than two meals a day
 Regularly borrow from moneylenders
 More than two children in the family
 Family belonging to weaker caste
 Old illiterate members in the family
 Permanently ill members in the family
 Alcoholic and/or drug addicts in the family

19. Design of SHGs
 Self-selection
 Focus on women (85% of SHGs)
 Savings first and credit later
 Group financed only after 6 months
 Intra group appraisal systems and prioritization
 Shorter repayment terms
 Market rates of interest
 Progressive lending
 Maintenance of accounts by SHGs
 Developing a relationship with Banks
 Flexibility in approach

20. SHGs Operation
 2-3 office bearers
 Rotation of office bearers
 Periodical meetings
 Decisions regarding thrifts loans interest rate etc in the
meeting

21. Types of Credit & JLG
 Term loans in multiple of thrifts mobilized-4 times or more -
increasing gradually
 Repayable in 3 or more years
 Cash Credit limit/revolving credit limit of 4 times or more of
group’s expected savings in 3 years
 Informal group comprising 4-10 individuals.
 For the purpose of availing bank loan against mutual guarantee.
 JLG members to engage in similar type of economic activities either
in Farm & Non farm sector.
 Simple management with little or no financial administration within
the group.

22. What is BOP?
 In economics, the bottom of the pyramid is the largest but
poorest socio-economic group.
 Current usage pronounces >4 billion population across the
world living on <$2 per day.

23. 4 Keys to Unlock the BOP Market

24. Opportunities
BOP consumers suffer a poverty
penalty
Lack of access to
competitively and
efficiently-provided
goods and services
Higher prices for some
goods and services (i.e.
manufactured goods,
credit)
Poorer quality goods and
services
At the same time, BOP
consumers
 Are Brand-conscious
 Have well connected
communities(word of
mouth)
 Readily accept advanced
technology
 Collectively have
purchasing power
 Are always trying to
upgrade from their existing
condition

25. Incentivizing Mainstream financial services
 Small loans have been historically seen by banks as a social
obligation rather than a potential business opportunity.
 Over the last three years, some strides have been made to re-
engage mainstream FIs into micro-credit.
 The concept of Local Area Banks (LABs), with a lower start up
equity of Rs 50 million, has not yet been operationalized by the
RBI.
 At the moment there are only two options – either be a co-
operative or be an NBFC (non-banking finance company).

26. Financial Sustainability
Controlling
Costs
• Reducing average cost of funds
• Reducing cost of operations
• Reducing costs of bad debts
Increasing
Volumes
• Offer different loan products to suit the credit requirements of the poor.
Adopt flexible repayment schedule to suit borrower’s cash flows.
• Identify intermediaries of small borrowers such as fertilizer dealers
• Increase customer base in the areas of operation and expand in
neighboring villages
Increasing
Services
• MFI's financial sustainability can be enhanced by broadening the range
of financial services.
• The services are complementary in terms of risk
• Insurance is another important financial service

28. Initiating financial inclusion
 New Banking License
 Mobile Payments
 White Label ATM Rollout
 Use of Aadhaar Number and Direct Benefits Transfer

29. News@ a glance
 Govt. plans to open 7.5 cr. Bank A/Cs by 15 Aug
 Govt. Banks on mobiles to meet inclusion target
 New Kisan Bonds to sidestep KYC norms
 Small Banks are here, but are they dead on arrival
 MFIs,Local Banks,& NBFCs can convert themselves into
small banks

30. Recommendations
 Incentivizing existing mainstream financial service providers
(NABARD, SIDBI, etc) to enter the microfinance sector as a
serious business proposition.
 Encouraging new microfinance institutions (MFIs) with a
supportive policy and regulatory framework.
 Building a strong demand system in the form of community-
based development financial institutions (CDFIs), with the help
of NGOs and others.

31. Happy Learning