ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Consolidating the Growth of Microfinance

Microfinance India: State of the Sector Report 2008 by N Srinivasan


Consolidating the Growth of Microfinance

Sankar Datta

icrofinance is an upcoming sector. Pegged at just a few million dollars in the early 1990s, this sector has grown into a $20 billion global industry by 2007, reporting close to 100% growth year-to-year over the previous decade. Apart from growing in size, microfinance is today seen by most governments as a useful tool for poverty alleviation. Such favourable attention has led to the creation of an enabling policy environment in many countries. It is estimated that presently this sector employs more than half-a-million people globally. All of this has also led to a growing interest of the global capital markets in microfinance institutions (MFIs). Given the remote locations serviced by them, MFIs have used many rapidly developing information and communication technologies (ICTs), which has allowed many large ICT firms to also start making serious inroads in this sector. The early breakthroughs in the sector came in Bangladesh, but today India has become a major player in this sector in the world. Given the size of the population needing microfinance ser vices in this diverse country, India has also been the right setting for development of several different models of making these services avail able. On top of that, the rapid changes in the economic arena have also brought in significant changes in this sector in recent years. Given these complexities and the diversities of size, clients served, models and players capturing the state of such a sector is surely a difficult task.

It is laudable that the author of this report, N Srinivasan, has managed to portray a fairly comprehensive picture of this sector, paying attention to both the issues of growth of the existing models and emerging issues, in this Microfinance India: State of the Sector Report 2008.


The state of the sector report was envisaged to be a dynamic report published annually, which would make relevant information

Microfinance India: State of the Sector Report 2008 by N Srinivasan (New Delhi: Sage), 2009; pp 179, Rs 695.

available at one place, as also being a review of the progress of the sector over the past year. Prabhu Ghate along with AC-CESS Development Services, one of the leading support agencies in the sector, made a courageous attempt to compile a comprehensive overview of the sector in 2006. This first attempt was presented as an accompanying document of the annual microfinance India summit. In this 2008 edition, building on the 2007 report, Srinivasan deals with the status of the two predominant models: the self-help group (SHG) bank linkage programme (SBLP) and lending by the MFIs. Then he looks at new approaches like the business correspondents and facilitators, emerging scenario of urban microfinance, while also giving place for issues like changes in the investment climate for equity and bulk debt by commercial investors and banks, changes in policy environment, the growing competition between MFIs, social performance, microinsurance and the use of technology. He has also explored some of the possible future agendas for the sector.

This report has analysed some of the data available at the National Bank for Agriculture and Rural Development (NABARD) web site, the Microfinance Information Exchange (MIX) Report and the reports by Sa-Dhan. It shows that about a thousand microfinance institutions1 have reached about 14.1 million people, with an outstanding loan portfolio of Rs 59.5 billion. On the other hand, cumulatively 3.48 million SHGs, with a membership of 58 million, have been linked to banks with an estimated loan portfolio of Rs 80 billion. These groups have also accumulated a savings of Rs 35.1 billion with the banks. It, however, needs to be noted that the report uses different basis of reporting for these two forms. While for MFIs it reports outstanding amounts and number of current borrowers, for the SBLP it has used the cumulative lending figures as reported in the NABARD reports and the web site. Therefore, these data are strictly not comparable. But it does indicate that the SBLP has emerged as a large microfinance model in the country.

The SBLP Programme

Indicating maturity of the SBLP, the report shows that repeat loans, which constituted only 17% of the loans in 2002, had risen to 40% by 2007. However, it has also reported that there is a slowing down. The overall growth rate has come down to 28% in 2007-08, from 59% in 2003-04. By this year 59% of the SHGs were linked to commercial banks, while 25% and 26% of the groups were linked to regional rural banks (RRBs) and cooperative banks. Though the report does indicate that the RRBs and cooperative banks are also waking up to the situation, the data is not complete for them.

The report does pay attention to the regional disparities in the spread of the microfinance industry, with 48% of the SHGs linked to the bank from the southern region only, among the six regions comprising the entire country. Even for the MFIs 52% of their clients and 59% of their portfolios were in this southern region. The author has proposed two new indicators: microfinance penetration index and microfinance poverty penetration index to examine if microfinance services were reaching the poorer segments of society, who it was intended for. Quoting an impact study by the National Council for Applied Economic Research, the report also shows that a large majority of SHG members were below the poverty line and had reported an increase in their income and in their expenses on health and education as a result of their participation in SHGs.

MFI Story Analysed

The success of the MFIs, on the other hand, is epitomised by the fact that eight Indian MFIs are listed in the MIX ranking of the world’s top 50 while seven Indian MFIs find their place in Forbes global top 50 MFIs. These institutions have reported high

Economic & Political Weekly

JULY 25, 2009 vol xliv no 30


growth, but this report has paid atten tion to the quality of this growth and has done a detailed analysis of the financial performance of these institutions. It has shown that MFIs have deteriorated in their performance on many financial indicators. Operating self-sufficiency ratio and operating cost ratios have deterio rated while portfolio at risk has increased, even though, in the year 2007, they have remained within the limits benchmarked by Sa-Dhan as compared to the period till 2006.

Looking into the encouraging investment climate for the microfinance sector as a whole, before the recent financial crisis, the report has also focused on the risks and challenges of the sector, high leveraging by these institutions and other problems faced by them. It has also examined the possible financial and social implications of private equity players moving into the MFI sector.

New Initiatives

Some new initiatives have been taken by large MFIs, banks and policymakers in the recent years to combat some of the capital adequacy challenges faced by MFIs and to facilitate financial inclusion. The 2008 report has discussed the banking correspondence (BC) and the banking facilitator (BF) models, which are among these new initiatives. Briefly describing the evolution of these new efforts, the report has examined the potential that can be explored by these initiatives, utilising the emerging technological changes, especially the mobile phone. A report also summarises the policy guidelines as to who can do it, what can be done and the roles that can be played by BC/BF.

Given the continuation and growth of urban poverty, the report has illustrated how urban microfinance has started playing a significant role in India, with the involvement of banks as well as through housing finance, insurance and remittances. The report further looks at social performance and responses of the microfinance sector. It has examined how the interest of private equity investors, rapid changes in the interest rates and, the changing role of donors and funders is impacting product design, client responsiveness, client protection, mission alignment, gender inequity and governance of MFIs. It has also, briefly, indicated the social performance measurement efforts being taken up by some MFIs.

The report also looks at the new initiatives in micro-insurance and the changes that have taken place in the regulations covering efforts of life insurance, crop insurance, asset insurance as well as integrated insurance for micro clients. However, this section of the report remains sketchy and does not give a comprehensive picture of these various efforts and their potentials. Technological changes and incorporation of new technologies are, similarly, discussed in all too brief a manner, though the report does mention the efforts of FINO (ICICI), Grameen Foundation, BASIX, Craft Silicon, Java Softech and

Policy Environment and Future

The report has also looked at the changing policy and regulatory environment, which, over the recent years, has become much more favourable for the microfinance industry. Though restriction on savings mobilisation remain, there are several other changes in policy which strengthens the microfinance institutions, especially those registered as non-banking financial companies. Adoption of the Basel II norms and prudential regulations taken on by the banking systems for the microfinance industry have also been explored in the report. It has also examined the effect of changing capital to risk weighted assets ratio on the MFIs. Given that remittances and micro-insurance are areas of interest to vulnerable sections, several new policy initiatives have been made in this direction. The report also describes the new role being taken up by regulators such as RBI and the Insurance Regulatory and Develop ment Authority.

The report also examines various new institutional contributions in shaping the microfinance sector. It has looked at the role played by the states in large programmes like Bhamashah financial empowerment scheme of the Rajasthan government run in collaboration with ILFS and BASIX, and the Society for Elimination of Rural Poverty (SERP) of the Andhra Pradesh government. It has also looked at roles played by many apex institutions, such as NABARD, Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB), Friends of Women’s World Banking (FWWB), Sa-Dhan, International Network of Alternative Financial Institutions, Andhra Pradesh Mahila Abiviruddhi Society (APMAS), Reach India, Access Development Services, Micro Save India and Intellecap. The report, further, provides a list of services offered by these institutions and their geographical coverage, which is a helpful quick reference point for users.

The report concludes that while the sector shows signs of maturity and growing confidence there is also evidence of “mission drift”. This provides the basis for an analysis of some of the opportunities and challenges faced by the microfinance sector. It has also brought out the uncertainties that remain with some of the new initiatives in technology, in models like BC/BF and in the adoption of like knowyour-customer, prudential and capital adequacy norms of the banking sector by MFIs.



1 As there is no centralised data base of all MFIs in the country, the report estimates their number to be anywhere between 800 and 1,200.

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JULY 25, 2009 vol xliv no 30

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