Microfinance and Financial Counseling skills & Role of NGOs Presentation at IIBF Seminar on Financial Inclusion at S

1. Microfinance and Financial Counseling skills & Role of NGOsPresentation at IIBF Seminar on Financial Inclusion at Shimla Prabhakara S. Manager, Sa-Dhan Standards Team 20th October 2008

2. Microfinance: what is it? Microfinance services defined as “providing financial assistance to an individual or an eligible client, either directly or through a group mechanism for an amount, not exceeding rupees fiftythousand in aggregate (Rs. 1,50,000 if for housing purposes)

3. Changing landscape of Microfinance Demand from over 100 million Poor and Vulnerable Households in India (in $ Billion) Over 200,000 crore Rs. While there has been Significant growth in accessto finance in the last decade, there is still a huge unmet demand 10x Growth Factor approx. 22,000 crore Rs. Finance Needed by Poor Households (Intellecap 2007) Finance Accessed by Poor Households (Sa-Dhan, 2008)

4. Changing landscape of Microfinance • NABARD’s SHG-bank linkage programme services an outstanding portfolio of about INR 170b (3/08, Sa-Dhan Estimate); INR 35b savings (3/07, NABARD). • Microfinance Institutions (MFIs) service outstanding portfolio of about INR 60b (3/08, Sa-Dhan Quick Data). • Banks (credit) and Private Investors (equity) are now financing fast growing MFIs (22 MFIs with outstanding portfolio > INR 500m). • GoI has appointed NABARD to manage the Microfinance Development & Equity Fund (MFDEF) with a volume of INR 2b; State Governments are channeling funds into Microfinance (e. g. AP’s Indira Kranti Patham has lent annual average of Rs. 4,300 crore to SHGs) • Development of “credit+” services, examples are livelihood approach (e. g. BASIX, Dhan-Foundation, Sa-Dhan study 2008), insurance (e. g. BASIX), education (e. g. MaxWealth Trust, SKS)… • Urban Microfinance becoming growth driver, e. g. Ujjivan, Over 100 million Clients in 2012-13 33.5 million clients in 2007-08 24.6 million Clients in 2005-06 <1 million Clients in 2001-02

5. Current Issues • As the existing clients need higher & higher loan amount as the loan cylcle graduates. Higher loan needs higher management skills. • The clients already covered under the program may be better off. The new clients require more education • Competition among MFIs, Govt Program & NGO/MFIs: MFIs and SHGs may target the SAME clientele. Clients would have a choice of financial services and of financial services providers • Multiple borrowing • Disintegration of SHG & attracted towards forming grameen groups • Signs of Declining in Recovery rates

6. Profile of Un banked • Lack of access to services/products. • Lack of perception of the value of availing of formal services/products. • Lack of information and knowledge of services/products. • Inability to chose between alternate services/products (also service providers) • Most vulnerable to uncertainties

7. Financial Counseling Financial Counseling offers a meaningful solution for the clients (borrower) to gradually overcome their financial problem (debt) and improve their money management skills. • Financial Literacy • Financial Education • Financial Counseling

8. Importance • Financial Institutions are successful when looked from the client’s perspective. • Understanding the poor and their life cycle needs allows us to understand their earning and expenditure patterns. • The above understanding will help in developing curriculum of ‘financial literacy’ for the clients.

9. Purpose of Financial Counseling • Examines ways to solve current financial problems • Creates awareness about the costs of misusing a credit, improves financial management and develops realistic spending plans. • Advises the distressed people to gain access to the formal financial system including banks.

10. Types of Financial Counseling • Ex-ante Counseling helps the borrower to decide upon the quantum of loans they can avail, based on their income profile and stream of cash flows. It attempts to influence the stability of the borrower’s flow of income and expenses thereby lowering the probability of default. • Ex-post Counseling occurs after a crisis event (when borrower has already defaulted one or two installments). It is curative in nature to prevent further default & foreclosure

11. Initiatives • Bank led financial education • RBI (CAB) and other banks’ websites • Information on products & services: rural information kiosks, BCs • Other information input/output prices, insurance products, weather information, health services etc.

12. NGO Initiative • Project on financial counseling service for poor self employed women started by SEWA in 2001(project tomorrow) • Purpose to develop & test a financial curriculum to help participants to manage money productively, plan ways to increase assets, address life cycle events & manage risks. • Focused within Gujarat • ISMW started 2005 with a commitment to spread it across the country. • Many other NGOs initiated their work in the financial literacy & education

13. Some topics for Financial Education • Financial Planning • Decisions on Borrowings • Savings • Spending • Making Investments

14. Outcome of Financial Education/Counseling Outcome of Financial Education/Counseling • Ability to manage money • Ability to take appropriate decisions for the future • She/He may link his demand with that of products/services available in the system • Now, the client himself demands for service/product • Easy to link such clients with institutions. He will become responsive borrower. • He demands financial information, uses the services • Though there are some initiatives, there is a need for taking this agenda on a large scale involving NGOs & others

15. Role of NGOs: Sa-Dhan • initiated its efforts in facilitating financial literacy & livelihood : initiatives in developing trainers manual, materials for financial literacy etc. • developed code of conduct for its member MFIs • developed resource directory of trainers • Other initiatives like meeting to discuss & create awareness

16. Role of NGOs • Microfinance should be understood from the client’s context. Otherwise it will become disastrous when size of loan increses. • Nurturing, monitoring SHGs and extending handholding support to SHGs. Educating SHG in the area • Implementation of code of conduct by Sa-dhan members • Empowered to make/demand the desired services • NGO should not be sympathized but should be empathized.

17. Thank you very much I am looking forward to our discussion S. Prabhakara, Manager, Sa-Dhan Standards Team Email: prabhakara@sa-dhan.org Telephone: 011-65650787 www.sa-dhan.net