“Microfinance
Institutions- Role,
Contribution, Potential
and Challenges in
Financial Inclusion”
A presentation to the
Ministry of Finance,
Government of India,
New Delhi
10th August 2009
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Sa-Dhan in Financial Inclusion
On Financial Inclusion, Sa-Dhan members’
- ensure access to financial services
- provide timely and adequate credit
- to vulnerable groups such as weaker sections and low income
groups
-at an affordable cost”
Dr. Rangarajan’s Committee on “Financial Inclusion”
“MFIs could play a significant role in facilitating inclusion, as they are
uniquely positioned in reaching out to the rural poor. Many of them
operate in a limited geographical area, have a greater understanding of the
issues specific to the rural poor, enjoy greater acceptability amongst the
rural poor and have flexibility in operations providing a level of comfort to
their clientele”.
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Services Provided by MFIs
Though the scope are wide but till now
generally the MFIs are providing the
services like• Micro Savings
• Micro Credit
• Micro Insurance
• Micro Remittance
• Micro Pension
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MFIs REACH A CRITICAL MASS
•
•
•
•
MFI now serve 22.6 million clients
Loan Portfolio touches INR 12000 cr
93% of MFIs clients are women
MFIs serve about 50 lakhs SC/ST borrowers and 29
lakhs of minority background
• MFIs have reached to the 71% of the poorest districts,
defined by NREGP 1st and 2nd phase
• MF sector have generated direct employment of more
than 62000 professionally skilled personnel
First mile connectivity for the poor &last mile
for FFIs
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Performance and Growth
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Still to achieve
• 80% of the poor household are out of full fledged
financial services
• Many no-frills accounts are reported to be nonfunctional
• No access to savings products
• 95.5% of MSME excluded from formal banking
• Only 14% of lowest income quartile have life
insurance
• Less than 1% of population appears to have medical
insurance
• Major source of credit for most Indians is still the
moneylender
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Issues and Concerns:
• Issues related to provision of composite
financial services
• Problems faced by CBOs
• Related to not-for-profit MFIs
• Related to NBFC-MFIs
• Addressing Regional Skewedness
• Other important issues
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Issues related to provision of
composite financial services
• REMITTANCE – Small Ticket size, Door to Door Service
– Not recognised by RBI as a financial product
– MFIs should be allowed to do remittance operations
• MICRO INSURANCE
– Slow progress – main hindrance is the current claim settlement process
– move towards a community based process
– Adequate marketing channels for Micro Insurance
– Need for awareness creation - no support available as Development
Cost.
– Waive Service Tax to make micro insurance affordable
– Increase priority sector targets for micro insurance
• MICRO PENSION - Promotion and development needs policy attention
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Potential of CBOs to Promote Financial
Inclusion
• CBOs ( SHGs, Federations and New Generation
Cooperatives) reach out to the poorest of the poor not
covered by other financial institutions
• 32 lakh SHGs and 69,000 Federations exist in the country
according to NABARD
• Financial intermediation role of CBOs, Federations and
Cooperatives enables timely accessibility of financial
services
• CBOs / Federations are both an empowering and
equitable tool for the poor.
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Problems faced by CBOs
• Lack of Investment in Capacity Building of SHGs,
Federations and Cooperatives
– Training
– HR
– Financial Literacy
– Access to Technology
• Lack of clarity on the legal and operational
structure of CBOs hampers their ability to
effectively play the role of financial intermediary.
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Not- for- Profit MFIs:
Recommendations
• Recognition to such institutions in Financial
Inclusion
• Source of funds- Setting up Refinance
Institutions, allow savings mobilisation, equity
• Reduce Cost of funds
• Exemption from Taxation
• Develop appropriate legal structures
• Special allocation for unreached areas eg. North
East and other backward areas.
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NBFC - MFIs ARE WELL REGULATED ON PAR
WITH THE BANKS
• Registered with RBI
• Follow Prudential Norms stipulated by RBI
• Follow KYC Norms applicable in the case of
rural borrowers
• Adopt Code of Conduct and Fair Business
Practices
• File regular Returns and subjected to on-site
and off –site Inspection by RBI
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NON-REVENUE MEASURES
Representation
NBFC - MFIs
Pooling of
Resources
 Classify NBFC – MFIs as a separate  Precedence – NBFC AFCs
category
 Reduce risk weightage to 25-50% on
loans to MFIs
 Mobile Banking & Correspondent
banking to be allowed for MFI- NBFCs
Allow MFIs to issue Prepaid cards
with ATM access.
ECBs
 MFIs
to
access
External
Commercial Borrowings (ECBs)
MFIs to access
Savings
 Allow MFIs to accept “Demand
Deposit” from members.
Long term
Funding
requirement
Rationale
Allow ADB / IFC to issue Long
Term guarantee to MFIs.
 Capital allocation of 19% Vs
Basel II stipulation of 9% &
impeccable asset
quality
 Amalgam of the ‘funding
capability’ of banks & ‘credit
delivery skills’ of NBFCs.
 End use Vs structure
 ‘Credit – Saving – Insurance’ Triangle
 MFIs need Long Tem money
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Control Structure for MFI NBFCs
• Dispensations only to MFIs registered as NBFC with
RBI.
• Other stipulations
• Ticket size not to exceed Rs 50,000
• Deposit accepted not to exceed loan exposure at
the enterprise level
• Bank ‘s equity holding in NBFC- MFIs to be capped
at 10%
• 75% of net interest earning from Micro lending
• Dispensation to be linked to supervisory rating
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REVENUE MEASURES
Recommendation
Service Tax
 Exempt Service Tax on all
Micro
Finance
Products
including Micro Insurance.
Dr.Rangarajan
Committee Report
 40% tax exemption to
MFIs under sec 36 (i)(vii) of
the IT Act
Provisioning on Nonperforming Assets
 Provisioning by MFIs on
their Non-performing assets
be treated as tax deductible
expenditure.
Stamp Duty
 Waive Stamp Duty on all
Debt issuance of MFI – NBFCs.
Rationale
 The poor is unlikely to avail tax
exemptions
on
insurance
premium or interest paid on
housing loans, etc.
To
compensate, waive service tax.
 Level playing field with HFCs,
DFIs, etc.
 Level playing field with
Banks.
 Reduce cost of delivery of
financial services to the Poor.
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Addressing Regional Skewedness
• Lack of Financial infrastructure and technical support in the
underserved regions –Credit Guarantee Fund, Capacity
Building and promotional funds
• Lack of funding support for institution building, systems
and innovations, awareness and financial literacy
• Lack of professional and well managed a adequate number
of service providers
• Lack of Region specific rating tools and its recognition
• Lack of interest from mainstream FIs in lending local and
indigenous institutions
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Other important issues
• Cost of fund is high resulting in higher pricing
• Application of State Money Lenders Act and sporadic
problems associated with local administration
• Lack of Credit information Bureau and information sharing
• Credit Guarantee Fund to promote growth of the sector
• Exemption from stamp duty on the loan documentation for
the MFIs
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THANKS FOR THE
PATIENT HEARING
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