Microcredit is Dead: Long Live Livelihood Finance

1. Microcredit is Dead: Long Live Livelihood Finance Talk to the Harvard Business School MBA 2012 Candidates By Vijay Mahajan Founder and Chairman, BASIX Hyderabad, 7th January 2011

2. Microcredit – An Introduction Part I

3. Grameen Bank, Bangladesh Methodology • Solidarity group of five women is formed. • Four to eight such groups form a Center. Undergo training for a few days. • All agree to guarantee repayment of each other’s loan. • Center meets every week, elects Center Leader • Regular savings by all members (not allowed in India). • Loan appraised & approved first by peers in solidarity group and finally approved by the Centre Leader. • Loan disbursed directly to individuals • All loans repaid in 50 equal installments

4. Joint Liability Groups (JLGs) – Most MFIs use this model • Three to seven individual borrowers • Loans given to individual borrowers • They mutually guarantee each other’s loan repayment • Cash security (10%) is collected in some cases • Group meeting only when needed • More suitable for men, farmers

5. Self Help Groups (SHGs)Bank Linkage Model • Homogenous affinity group of 15-20 women who live in the same neighbourhood • Regular meetings – weekly/fortnightly/monthly • Regular savings - Rs 20-50 per meeting • Group selects their leaders • Lending started with internal pool of funds. Lending decisions are made by the group • Later, SHG accesses funds from bank to augment its pool. • India has over 5 million SHGs with 80 million members and banks have leant Rs 28,000 crore through these SHGs

6. India’s Two Contending Microfinance Models • Indian NGOs like MYRADA and PRADAN invented it and NABARD learnt the SHG Bank linkage model from South East Asia ( thru APRACA, GTZ) and promoted it in a big way thru public sector banks and State Governments. • Other Indian NGOs like SHARE learnt the JLG Model from the Grameen Bank Bangladesh and adopted it. Later SIDBI and private sector banks promoted it. • Both have grown very well in the last 10 years (see chart on next slide).

7. SHG-Bank Linkage vs MFI models – relative growth – All India

8. SHG-Bank Linkage vs MFI models – relative growth – AP

9. But shortcomings are there in both models Shortcomings of SHG –Bank Linkage model • This model has become the favourite of politicians. • Interest rate charged by SHGs to members (other than in AP where it is subsidised down to 3%) is normally 18-24% pa • The SHG model requires an NGO or a Government Agency to form the groups and handhold them. This has costs – Rs 10,000 per SHG, as per NABARD. Full system costs are comparable to the MFI model. • In AP over Rs 3000 crore has been spent on SHG formation and capacity building by the Government, so it controls the SHG system through SERP. The SHGs have become a vote bank for Parties.

10. But shortcomings are there in both models Shortcomings of SHG –Bank Linkage model • The credit available per SHG member is around Rs 3000 (all India average) though it is about Rs 17,800 in AP. This is, by itself, not enough to avoid borrowing from other sources. • Credit from bank highly dependent on the branch manager; and is not continuous, as term loans are given. Some bank managers impound SHG savings as security. • SHGs have become dominated by the middle caste/ income women and SC, STs are still neglected

11. Shortcomings of MFI Microcredit model • It requires that all costs be charged to borrowers and thus the interest rates can be 24%-30%. • The RBI does not allow MFIs to take any deposits so there is no element of savings in this model. • In their effort to grow, some MFIs have set high targets for staff and this leads to them lending to households who had borrowed from moneylenders and SHGs and from other MFIs. This led to over-indebtedness for millions of households. Many were driven to desperate measures. • MFIs used to lend initially only for productive purposes and carry out usage verification. By 2007, this was dropped.

12. Shortcomings of MFI Microcredit model • MFIs depend on high repayment rates, so the MFI staff work hard to collect and can sometimes be aggressive. • The joint liability makes other borrowers (peers) become abusive and coercive. • As MFIs borrow from banks, they need to have about 15% of the borrowing as share capital. (RBI regulation). • To attract that, they needed to reward their investors with handsome returns. In the process, the promoters and ESOP holding employees also made a lot of money. This was seen as profiteering from the poor, given high interest rates.

13. Borrowing by poor households in Andhra Pradesh, before and after MF Ordinance The numbers show interest rate in % per annum

14. From Microcredit to Livelihood Finance Part II

15. Vicious Cycle of Low Income

16. Breaking the Cycle of Low Income with Micro Credit without and with Savings

17. Savings is the fundamental financial service • Savings is setting aside a small sum of money away from the regular cash flow and accumulating it to a usefully large sum. • If the large sum is received after small sums of money have been set aside, then it is called a term or fixed deposit. • If the large sum is received before the small sums of money have been set aside, it is called a loan • If a large sum is to paid out upon happening of an adverse event to a few of all those who have paid a small sum, it is called insurance • Savings create a sense of well-being and security.

18. Breaking the Cycle of Low Income with Credit and Savings, and protecting it with Insurance Risk

19. Because of vulnerability to risk insurance is also important for the poor • The poor face all kinds of risks to their lives and livelihoods. • The death of a bread-winner can devastate a family. So life insurance is useful. • Death of livestock can halve the income of a poor household. So livestock insurance. • Crop failure can be cushioned by insurance. • Yet, few insurance companies offer services to the poor. In India, life coverage is < 6%

20. Breaking the Cycle of Low Income with Savings and Credit, protecting it with Insurance, and adding Skills and Market Linkages Risk Skills Market linkages

21. From Microcredit to Livelihood Finance • Savings help a household smoothen consumption, cover contingencies and build equity for borrowing. • Payments/money transfer services help build savings and make the household more resilient. • Insurance to cover all kinds of risks to their lives and livelihoods. • Then credit is used to enhance incomes. • Credit needs to be accompanied, when needed, by skill enhancement and input/output market linkages

22. Livelihood finance :Pathway out of Poverty Income 13. Overcome poverty and invest in education 9 and 12. Ongoing support services for livelihood promotion – agri, livestock and non-farm Poverty Line 11. Ongoing Credit with crop, livestock and asset insurance 7. Skill Training 8.& 10 Build and Transfer Assets (e.g. Land, Water, Forest, Livestock, Infrastructure and institutional development –SHG Feds, JFM , W’sheds 5 Migrant (family) Remittances 6 Overcome food insecurity 2.No-frills Bank a/c Chronic Food Insecurity 4. Social mobilisation (SHGs) and offer Life and Health Insurance through Group Policy 1. Food Aid 3. Govt Payments (e.g. NREGA. JSY. OAP) Years 0 5

23. BASIX – An Introduction Part -III

24. BASIX was established in 1996 with a Mission To promote a large number of sustainable livelihoods, including for the rural poor and women, through the provision of financial services and technical assistancein an integrated manner. BASIX will strive to yield a competitive rate of return to its investors so as to be able to access mainstream capital andhuman resources on a continuous basis. • (from the BASIX Feasibility Report, January 1996)

25. 2005

26. The BASIX Group Bhartiya Samruddhi Investments & Consulting Services Ltd. Promotional Services Financial Services Bhartiya Samruddhi Finance Limited Ltd BASIX Consulting and Training Services Ltd, CTRAN Consulting Ltd Krishna Bhima Samruddhi Local Area Bank BASIX Krishi Samruddhi Ltd BASIX Sub-K i- Transaction Services Ltd B-ABLE- BASIX Academy for Building Lifelong Employability Ltd Indian Grameen Services The Livelihood School

27. Achievements: As on Sep 30, 2010 • 18 states, 180 districts, 25000 villages/towns, 10,100 staff in India. Also present in PNG, Bhutan, East Timor • Disbursed Rs 3500 crore plus since mid-1996, outstanding Rs 1800 cr ; On-time repayment rate 99%, • Micro-credit 1.8 million borrowers, growing @ 75% pa • Life, health, crop (weather index based), livestock and micro-assets insurance to 3.2 million customers • Agricultural, livestock and non-farm enterprise development (AGLED) services to 800,000 fee paying customers. • Institutional development to over 84,000 SHGs / producer groups – about a million members served • Impact direct: livelihoods enhanced for over 1.8 million h/h • Indirect Impact: microfinance reaches 75 million poor h/h

28. RoA Comparison

29. RoE Comparisons * Outlook PROFIT, November 2010 **MIX Market, January 2011 29

30. Thank You www.basixindia.com vijaymahajan@basixindia.com