Transformation of microFinance in India: Experiences, Options and Future

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

2. microFinance Defined microFinance means many things - But the contours may be: • Piloted by the alternate sector • Focussed on the poor • Having roots in development

3. The Setting

4. What triggers transformation? • Size • Diversity of services • Financial sustainability • Focus • Taxation

5. What are the International Experiences in Transformation? • Bolivia and Africa: Transformation of NGOs • To Banks • To FFPs • Indonesia: Transformation of mainstream • To microFinance methods • Bangladesh: Transformation of a project • Grameen Bank • Other NGOs transforming to Banks

6. Challenges in the Indian context • Size • Growth in geographic area • Growth in portfolio/client size • Diversity of Services • MFOs wanting to offer Savings • MFOs wanting to offer Risk Products

7. Challenges in the Indian context • Financial Sustainability • Internal growth • Access to funds • Focus • Other Developmental activities V/s mF • Degree of specialisation needed for mF

8. Challenges in the Indian context • Tax Status • For-profit mF activity V/s not-for-profit NGO activities • Tax status of donor money

9. Options for Transformation (Spin off) • Company (NBFC) • Poverty School • Share - Transformation with growth • CFTS - Start up as NBFC • ASA - Through MBTs (proposed) • Sustainability School • BASIX - Complex structuring (holding company, borrowings and equity from developmental and commercial sources)

10. Options for Transformation (Spin off) • Examining NBFCs + Access to financial markets + Access to bank finance + Can Operate across the country • Limited options for offering savings • Re-capitalisation for growth may be tough • Steep entry norms (Rs.20 million initial) • Not easy to get registrations

11. Options for Transformation (Spin off) • Examining Co-operatives MACS, Urban Co-operative Banks +Small and dispersed institutions, that could organically grow and federate +Involves the community in decision making as it is member-user-governed +Easy entry norms +Best route for SHGs to formalise +Can offer many services including savings

12. Options for Transformation (Spin off) • Examining Co-operatives • Geographic limitations • Does not have a good image, attracting outside capital will be a problem • Recent scams in urban co-operative sector might lead to tightening of regulation

13. Options for Transformation (Spin off) • Needs to earn enough profits to show that it is operationally self-sufficient • It could also be financially self-sufficient, but no pressure to plow back profits or hit the capital market • The concerns would be to keep costs under control and revenues on target to demonstrate

14. Options for Transformation (Spin off) • Set up a Local Area Bank + Flexibility to offer diverse products + Cost of funds likely to be lower, so the impact on the poor with be better • Steep initial capital (Rs. 50 million) • Difficulty in getting licence • Limitation in geographic growth (3 contiguous districts)

15. Implications for regulation • Allow MFOs to grow organically • Allow for expansion in area in case of co-operatives and LABs, subject to minimum performance • Allow for NGOs to invest in for-profit MFOs such as NBFCs and LABS • No change in entry norms - ensure only serious players come to the field