Role of Microfinance Institutions in Rural Credit
With Reference To Financial Inclusion
by
Dr. Tapasree Banerjee
Prabhujagatbandhu College
FIRST YEAR B.COM CLASS
Institutional Rural Credit Prior To 1991
1.
2.
3.
4.
5.
Prevalence of Commercial Banks,Cooperatives and Regional Rural
Banks
Short term credit provided by Primary AgriculturalCooperative
Societies(PACs)
Long tem credit provided by Primary Cooperative Agriculture and Rural
Development Banks(PCARDBs)
Heavy incidence of overdues,Non-Performing Assets(NPAs),high
transaction costs, regulated interest rates plagued the system
Net outcome was that the RFIs especially the co –operatives headed
towards a state of financial unsustainability.
Self-Help Group Bank Linkage Programme


Motivated by the success stories of institutional rural credit in
Asian developing countries and Grameen Bank of Bangladesh
NABARD in 1992 initiated the microfinance (MF) programme
through formation of Self-Help Groups with the help of village
level NGOs
From bankers point of view ,compared to conventional bank
lending in the rural areas ,lending through SHGs has helped the
banking institutions in achieving high recovery percentage
through peer pressure and in substantial reduction in the
transaction cost to the small borrowers (Gulati,Bathla 2002)
Available information indicates that transaction cost for borrowers
under the SHGs is reduced by 21 percent as compared to
situation under direct lending.
Microcredit Concepts



Microfinance is defined as the provision of thrift ,credit and other
financial services such as money transfer and micro-insurance
products for the poor, to enable them to raise their income levels
and improve living standards
Microfinance refers to the entire range of financial services such
as savings, money transfers, production and investment credit as
also housing finance and includes the need for skill upgradation
and entrepreneurial development
Thus microfinance provides credit support in small doses
(usually in the range of Rs 5,000 to Rs 20000) along with
training and other related services to people who are resource –
poor but who are able to undertake economic activities.
Microfinance Credit
Table1:- Client Outreach- Borrowers With Outstanding
Accounts (Millions) And Percentage Growth
Segment
2006-07
(Millions)
2007-08
(Millions)
200809(Millions)
200910(Millions)
2010-11
(Millions)
%Growth
(2008-09)
%Growth(20
09-10)
%Growth
(2010-11)
BankingSy
stem-SHG
38.02
47.10
54.0
59.6
62.5
14.65
10.37
4.9
MFIs
10.04
14.10
22.60
26.70
31.4
60.28
18.14
17.60
Total
48.06
61.20
76.60
86.30
93.90
25.16
12.67
8.81
Adjusted
for
Overlap
44.97
56.0
70.0
71.0
76.70
25.0
1.43
8.03
Source:- Calculated on the basis of data in Microfinance
inIndia, A State Of The Sector Reports
Client outreach
Figure 1 : Banking systen vis a vis MFI : client outreach
Banking systen vis a vis MFI:client outreach
Customers(millions)
70
Banking System-SHG
MFIs
62.5
60
59.6
54
50
47.1
40
38.02
31.4
30
26.7
22.6
20
14.1
10.04
10
0
2006-07
2007-08
2008-09
Year
2009-10
20010-11
Average Loan Size
Table 2 :- Comparison of Average Loan Size
Type
Avg.
loan/customer
(Rs) 2008-09
Avg.
loan/customer
(Rs) 2009-10
Avg.
loan/customer
(Rs) 2010-11
% increase in
2009-10
% increase in
2010-11
SHG member
4120
4570
4900
10.92
7.22
MFI customer
5190
6060
6610
16.76
27.36
Source:- Calculated on the basis of data in Microfinance in India, A State Of
The Sector Reports
Average loan per customer
Figure 2 : SHG vis-a-via MFI:average loan /customer
SHG vis-a-via MFI:average loan /customer
SHG member
MFI customer
6610
7000
6060
6000
5190
4900
4570
5000
4120
4000
Rs
3000
2000
1000
0
2008-09
2009-10
YEAR
2010-11
Estimate of Microfinance Clients
Table 3 :- Estimate of Microfinance Credit Clients
Agency
Clients March
2008
(Millions)
Clients March
2009
(Millions)
Clients March
2010
(Millions)
%Growth
2009
%Growth
2010
Commercial
Banks (including
RRBs)small loan
accounts
41.0
39.2
45.2
-4.39
15.31
PrimaryCooperative Societies
borrowers
28.5
28.7
30.0
0.71
4.53
SHG members
47.1
54.0
59.6
14.65
10.37
MFI clients
14.1
22.6
26.7
60.28
18.14
Total
130.7
143.9
161.5
10.10
12.23
Source:- Calculatedon the basis of data in Microfinance in India, A State Of
The Sector Reports
Types of Lending








SHG (Self Help Group) model of lending
Under the SHG model an MFI lends to a group of 10 TO 20 women. Under the
SHG-bank linkage model ,an NGO promotes a group and gets banks to extend
loans to the group. Here the monthly repayment structure is usually followed. In the
SHG model the MFIs usually charge 18 to 24 percent interest per annum based on
reducing balance method.In addition to interest rates, some MFIs also charge a
processing fee comprising a certain proportion of the loan amount sanctioned, at
the time of disbursement.
JLG (Joint Liability Group) model of lending
Under the JLG model loans are extended to, and recovered from , each member of
the group. The most popular JLG models are the Grameen Bank Model developed
by Grameen Bank, Bangladesh) and ASA, a leading Bangladesh-based NGOMFI)Most MFIs following the JLG model charge flat interest rates of 12 to 18
percent on their loans.
Diversified lending methodology
A MFI is said to have a diversified lending methodology when it offers loan products
through various lending methodologies:SHG model,JLG model,and individual based
Individual based
In India, MFIs adopting the group-lending models extend individual loans to more
successful borrowers who have completed a few loan cycles as part of a group(
who have relatively large credit requirements and good repayment track record)
Performance of top 50 MFIs in 2008

A look into the performance of 50 top performing MFIs
across states reveals that MFIs in Andhra Pradesh are
performing better in terms of their client outreach. As on
September 2008 ,16 out of 50 MFIs had their headquarters
in Andhra Pradesh. Their outreach was 49.08 percent of the
total outreach of the MFIs considered and their outstanding
balance was 67.24 percent of the total. The eastern states
of West Bengal, Orissa and Assam accounted for 11.35
percent of total borrowers among the top 50 MFIs and 8.81
percent of total outstanding balance. The Western staes and
the northern states(exception being Uttar Pradesh) are
marked by their absence among the top 50 MFIs.
Performance of select MFIs in India
Table:- 4 Performance of top 50 MFIs in 2008
Nameof
MFI
SK
SM
PL
SSFL
Headquartrd
in
Lending
model
Loan
o/s(Rs
mn)
Borrowers
(no)
Avg o/s
(Rs)
Avg o/s per
pcnsdp(%)
Net
worth(Rs
mn)
Portfolio
yield(%)
OSS
(%)
Andhra
Pradesh
JLG
18227
2590950
7034.871
15.18
2395
23.40
126.4
9
Andhra
Pradesh
JLG,
Individua
l
11987
1668807
7182.976
15.50
1225
27.43
Name of MFI
Headquartrd in
Lending model
Loan
o/s(Rs
mn)
Borrowers
(no)
Avg o/s
(Rs)
Avg o/s
per
pcnsdp(%)
Net
worth(Rs
mn)
Portfolio
yield(%)
OSS(%)
SML
AndhraPradesh
JLG,
individual
8568
1231556
6957.053
15.01
1448
27.49
152.45
AML
AndhraPradesh
JLG,
4944
694350
7120.328
15.36
475
17.43
121.04
SKDRDP
Karnataka
SHG
4060
612482
6628.766
13.78
157
12.02
100.46
BSFL
AndhraPradesh
Diversified
3882
457668
8482.131
11.21
317
17.89
108.97
Bandhan
West Bengal
JLG,
3389
851713
3979.04
2.31
435
26.32
175.40
CMC
UttarPradesh
JLG
1431
303935
470.824
8.43
93
28.78
109.71
GVMFL
TamilNadu
JLG
1316
288311
4564.515
17.44
231
32.46
141.53
GFSPL
Karnataka
JLG
1287
153453
8386.933
12.02
127
18.77
106.41
MMFL
TamilNadu
SHG
1223
188000
6505.319
15.05
321
19.51
152.91
BMPL
Karnataka
JLG
1157
159886
7236.406
17.17
166
29.53
147.26
Equitas
TamilNadu
JLG
1007
108352
9293.783
9.37
630
20.52
93.11
BFSPL
West Bengal
JLG
1028
309100
3325.785
20.64
144
20.54
165.00
SNFL
TamilNadu
SHG
949
84919
11175.36
6.86
174
12.21
100.48
BFL
TamilNadu
SHG
935
251735
3714.223
13.18
162
15.52
132.74
UFSPL
Karnataka
JLG,
individual
837
132067
6337.692
12.92
126
24.41
85.08
FFSL
AndhraPradesh
SHG
811
135488
5985.77
13.11
234
25.54
176.97
EMFIL
Kerala
JLG
765
154385
4955.145
9.34
12
23.88
109.15
SCCI
AndhraPradesh
JLG
546
90082
6061.144
13.08
115
19.36
140.08
SRFS
Karnataka
SHG
538
23204
23185.66
48.22
67
15.05
112.52
Saadhana
AndhraPradesh
JLG
486
73443
6617.377
14.28
59
24.51
118.12
Gram Utthan
Orissa
JLG
439
64100
6848.674
21.80
10
17.33
110.33
RASS
AndhraPradesh
SHG
433
41453
10445.56
22.54
56
16.12
130.46
SUWS
West Bengal
SHG
377
90396
4170.539
11.75
68
31.52
187.8
Sonata
UttarPradesh
JLG
352
61935
5683.378
27.83
68
28.33
136.24
CSP
Assam
Diversified
303
57429
5276.08
21.89
20
23.92
130.74
AFSL
West Bengal
JLG
268
59069
4537.067
12.79
84
21.12
119.22
JFSPL
Karnataka
Diversified
280
41396
6763.939
14.07
38
33.65
82.04
Annapurna
AndhraPradesh
JLG
274
43267
6332.771
13.66
176
*
111.47
HIH
TamilNadu
SHG
264
85346
3093.291
5.71
9
#
#
PWMACTS
AndhraPradesh
SHG.Individual
258
31040
8311.856
17.93
42
18.4
111.97
AWS
AndhraPradesh
JLG
257
26378
9742.968
21.02
24
13.35
122.47
Adhikar
Orissa
JLG
211
50524
4176.233
13.29
16
22.74
159.18
VFSPL
West Bengal
JLG
209
55371
3774.539
10.64
22
18.92
116.18
SaharaUttarayan
West Bengal
JLG
205
51261
3999.142
11.27
22
25.37
140.23
RMEDT
Karnataka
JLG
204
34299
5947.695
12.37
24
27.04
198.31
CReSA
AndhraPradesh
JLG
200
32491
6155.551
13.28
18
21.02
126.30
IIMF
AndhraPradesh
SHG
191
21396
8926.902
19.26
28
15.24
118.24
WOMAN
TamilNadu
SHG
191
63650
3000.786
5.54
26
23.13
135.11
PMACS
AndhraPradesh
SHG
188
22861
8223.612
17.74
25
13.95
112.60
IASC
TamilNadu
Diversified
183
20745
8821.403
16.29
33
19.05
101.49
Sewa
AndhraPrad
esh
SHG.Individ
ual
183
923
198266
.5
427.80
52
15.05
100
IDF
Karnataka
SHG
178
56315
3160.7
92
6.57
7
17.34
121.30
GSGSK
Kerala
SHG
162
24201
6693.9
38
12.62
2
11.58
100.05
SMCS
Orissa
SHG
161
40034
4021.5
82
12.80
8
17.00
128.61
ASOMI
Assam
Diversified
146
27546
5300.2
25
21.99
20
17.22
171.88
Janodaya
Trust
Karnataka
SHG
127
16193
7842.8
95
16.31
11
24.51
125.97
CDC
TamilNadu
SHG
124
31876
3890.0
74
7.19
8
15.38
139.93
Source: Calculated on the basis of CRISIL report
Performance criteria for MFIs



Average outstanding loan balance
=Gross amount of loans or savings
outstanding/Number of active borrowers
An average outstanding loan balance below 20
percent of percapita SDP indicates that clients are
very poor. A look at the top 50 leading MFIs reveals
that only 9 have their average outstanding loan
balance as a proportion of percapita net state
domestic product (PCNSDP at 2004-05 prices) more
than 20 percent. The rest are all below 20 percent.
Operating Self Sufficiency(OSS)Ratio

The operation self sufficiency is a percentage
which shows the ratio between total income and
total expenses of the MFI. This ratio does not
include revenue grants received and expenses
out of revenue grants. A OSS more than 100
implies that total income is greater than total
expenses. Barring a few , almost all the top
functioning MFIs have their OSS greater than
100 percent , the highest being that of RORES
Micro Entrepreneur Development Trust of
Karnataka followed by Utsarga Welfare
Society(SUWS) OF West Bengal .
Portfolio Yield and Net Worth


Portfolio yield is the ratio between interest
income and average total total loan outstanding.
It is expressed as percentage. The highest
portfolio yield has been achieved by
Janalakshmi Financial Services Pvt. Limited
(JFSPL) in Karnataka (33.65 percent) followed by
Grama Vidiyal Microfinance Pvt. Limited (GVMFL)
in Tamil Nadu (32.46 percent )
Net Worth refers to the net owned funds of the
MFIs. Of the MFIs studied the highest net
worth is of SKS Microfinance Pvt. Limited
(SKSMPL) of Andhra Pradesh.
What is Financial Inclusion



Financial inclusion is delivery of banking
services at an affordable cost to the vast
sections of disadvantaged and low income
groups.
Unrestrained access to public goods and
services is the sine qua non of an open and
efficient society
As banking services are in the nature of public
good, it is essential that availability of banking
and payment services to the entire population
without discrimination is the prime objective of
public policy
Existing Banking System and Financial
Inclusion

Banking industry has

shown tremendous growth in volume and has made significant improvements
in several areas relating to financial viability,profitabilty and competitiveness




BUT….vast segments of the population, especially the
underpriviledged sections of the society are still out of bank’s fold.
Coverage is only 9.5 percent in rural areas
Percentage of adult population having bank account is only 59%
meaning 41% of population is still unbanked ( percentage higher in
rural areas) Assumption: Each individual has only one bank account ,which is not
always true.
Extent of exclusion from credit markets is much more- number of
loan accounts cover only 14% of adult population
Out of 89 million farm households, 51.4% have no access to
formal or informal sources of credit, 73% have no access to the
formal sources of credit.
Who are excluded ?







Marginal farmers
Landless labourers
Oral lessees
Self employed and unorganised sector
enterprises
Urban slum dwellers
Migrants/ ethnic minorities and socially
excluded groups
Senior citizens and women
Financial Inclusion in the Indian
Context




Policy of the Reserve Bank of India on ‘Financial Inclusion’:
RBI places a lot of emphasis on financial inclusion to make
banks give the desired attention
With proactive role for enhancing the financial inclusion, RBI
in its Annual Policy Statement of the year 2005-06, urged
banks to review their existing practices to align them with
the objective of financial inclusion.
The SHG-Bank Linkage Programme and other microfinance
initiatives by NABARD has contributed much towards
financial inclusion process in India.
THE IMPACT
MICRO-FINANCE (SAVINGS AND CREDIT)
PEACE
SOCIAL EVIL ERADICATION
SELF-HELP INITIATIVES
WATER SHED MANAGEMENTMANAGEMENTW
EDUCATION
INCOME-GENERATION
Challenges faced by MFIs in India



High rates of default
Steady access to capital
Absence of regulatory control and weak
governance
Towards new directions in rural agricultural
finance







Micro-finance Development and Equity Fund (MFDEF)
Support to partner agencies like NGOs, RRBs, individual rural
volunteers(IRVs)
Training and capacity building of stake holders including bankers, NGOs,
Government officials , SHG members and trainers
Special initiatives in backward region
 Rajiv Gandhi Mahila Vikas Pariyojana in select districts of UP
 Priyadarshini Project- the women empowerment and livelihood
programme in BIhar and UP
Scaling-up of Microfinance Programmes like financing of JLGs and
MicroEnterprise Development Programme by NABARD
Relaunching of SHG Bank Linkage Programme: SHG-2
Scheme for Promotion of Women SHGs in backward Districts of India and
Left Wing Extremism(LWE) affected Districts of India
Conclusion
The key factors that can ensure a robust institutionalised rural
credit processes system in India are flexible and efficient which
will not only ensure productivity but also target to achieve the
inclusive growth plans as envisaged by our social thinkers.
THANK YOU