1 MICROSAVINGS: NEED OF THE HOUR

MICROSAVINGS: NEED OF THE HOUR

CONTENTS

I. ABSTRACT……………………………………………………………………….….1.
II. INTRODUCTION OF MICRO-FINANCE…………………………………….….2.
III. HISTORY OF MICRO-FINANCE………………………………………………....2.
IV. MFIS AND PROBLEMS OF ITS SUSTAINABILITY…………………………..3.
V. EMERGENCE OF MICRO-SAVINGS FOR MFIs AND POOR PEOPLE….....5.
VI. MICRO SAVING’S IMPACT ON 3C’S…………………………………………....7.
VII. INTERNATIONAL MFI’S PERFORMANCE………………………………..7.
VIII. CONCLUSION…………………………………………………………………...9.
IX. REFERENCE………………………………………………………………………..10
.

I. ABSTRACT

In this era of global recession and collapsing banking institutions, no one has given any
thought for the poorest of the society. Micro-finance has emerged as a very important sector
which gives economic freedom to the poor people. Micro-credit fulfills the credit
requirements of under-privileged, who until recent times were not a part of formal banking
system; however, micro credit is not the ultimate solution to improve the well-being of poor
people. Nowadays, micro-finance institution focus only on credit facilities which eventually
results as debt for poor people and the rate of interest is also quite high. Indian Micro-
finance institutions(MFIs) must answer the questions of why do they focus more on
Microcredit rather than giving little more emphasis towards Micro-savings and what are the
barriers that are preventing micro-savings to emerge as a leading concept in Micro-finance?
Here in this paper the probable causes for the difficulties are being analyzed and probable
counter methods are being formulated. There has been an attempt to predict on the
impressive prospect of micro capital development through micro savings, leading to an
enhanced liquidity in the micro credit market, which results in mutual benefit for the poor
as well as MFIs .
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II. INTRODUCTION

Human civilization has always been divided into several groups on the basis of sex, religion,
nationality, caste, color and language, but these divisions can be considered as miniscule in
comparison to the two major segregations, rich and poor. We are called affluent and deprived,
instead its better to call us as gifted and cursed respectively. Every coin has two sides, head and
tail, similarly world has two sides; one side has a question how to spend and the other side
enquires why we spend. Affluent people have a disregard for home food because they have
options to eat outside on the contrary deprived have no options because they do not have
sufficient resources to fulfill their basic needs. If we discuss the current scenario,
industrialization and globalization has influenced the world in a major way. We can observe free
market, increase in GDP, emergence of new fields, growing companies, booming share market
which apparently, leads to the increment in per capita income. In reality, however, every one has
not benefited from globalization. In simple terms those who invest can get returns and money is
always in the hand of rich people so they become richer. On the other hand poor became poorer
may well be because of globalization. When god has created every one equal so why is there so
much inequality between them. This is where micro finance is making an attempt to fill the gap.
Micro-finance has emerged as an essential sector which gives economic freedom to the
underprivileged people. Micro-credit fulfills the credit requirements of neglected, who until
recent times were not a part of formal banking system. Undoubtedly, micro finance is the
essence of rural areas which eventually result in its development .The improvement is crucial for
creation of a society with social justice and equal opportunity to realize the great potential of the
destitute. However, micro credit is not the ultimate solution to improve the well-being of poor
people. Indian Micro-finance institutions have tried to focus on the issue that the poor not only
need credit, but also savings. Savings provide a safety net and help them tide over the crisis.
Mobilization of savings also provides the cost effectiveness for Micro-finance institution,
recently facing the difficulties of higher operating cost.

III. HISTORY OF MICRO-FINANCE IN INDIA:

The rural credit system in India has been on the multi – agency approach. In the past where there
were no formal banking systems available in India, the informal credit agencies such as
Zamindars, Baniyas, and Sahukars dominated the rural credit system, but slowly and steadily, it
is being replaced by the formal banking system. The proper implementation of the Rural Credit
Survey Report (1954) created a massive expansion of both short term and long term cooperative
credit system in partnership with the government. After the nationalization of the 14 commercial
banks in 1969 and establishment of RRB in 1975, the rural banking system touched a new
benchmark. Initially all banking institutions were mainly focused on the expansion of branches
but the main issue was that it is not made exclusively for rural development. The establishment
of Grameen Bank in 1976 by Dr. Mohammed Yunus, a professor in Economics at Chittagong
3 MICROSAVINGS: NEED OF THE HOUR

(Bangladesh) created a revolution in rural financing system, the unique model of group lending
system and self helping group (SHG) changed the whole concept of micro-finance. In India the
SHGs is started with the help of NABARD .The first NABARD funded program was known as
“savings and credit management of self help groups”. The surveys results were encouraging,
which had an impact on RBI‟s policies. In 1991, RBI advised commercial banks, RRBs,
cooperatives to extend credit to the SHGs under the pilot project of NABARD. Three years later
in 1994, 500 SHGs covered this pilot program. Subsequently, the development of micro-finance
institutions injected growth of credit among the underprivileged. In India, micro-finance
institutions are categorized into two, wholesalers which directly support SHGs and NGOs, and
retailers which directly support borrowers. National Bank of Agriculture and Rural Development
(NABARD), Rashtriya Mahila Kosh –New Delhi and Friends of Women‟s World Banking in
Ahmadabad . MYRAD –Banglore, Self-help Women‟s Association in Ahmadabad, PRADAN in
Tamilnadu and Bihar. ADITHI in Patna, SPARC in Mumbai ASSSEFA in Chennai, Small
Industries Development Bank of India and the Tamil Nadu Women‟s association are the
wholesalers. NGOs that are directly involved in retail credit are SHARE in Hyderabad ASA in
Trichy, RDO Loyalam Bank in Manipur, Bandhan in Kolkata, SKS Micro finance ltd, Asmitha
Micro finance ltd, Grameen Koota, SWAWS Credit Corporation India Ltd etc. There are now
150-180 NGOs / MFIs in the field of micro-finance and the number of active borrowers are more
than 13.5 million in India. Yasthish Kumar (2008)

IV. MFIS AND PROBLEMS OF ITS SUSTAINABILITY

There is no doubt that micro finance, at the present time, has turn out to be a gift for the destitute.
Micro credit is touching the life of 13.5 million people in India and is expected to reach 20
million in 2009. MFIs depend upon government funds, subsidies, and corporate funds so the
issue may arise, how long these funds will support the MFIs and along with that MFIs are facing
the predicament of high operating cost. These two problems are questioning on the future of
MFIs. Here below in TABLE 2, we have shown that how much are the operating cost and cost
per borrower of six major MFIs. TABLE 1 shows their respective savings program.

TABLE 1:

SOURCE: WWW.MIXMARKET.ORG
4 MICROSAVINGS: NEED OF THE HOUR

TABLE 2:

SOURCE: WWW.MIXMARKET.ORG

Above tables shows the performance of six major MFIs in India from 2005-08:

Increase in operating cost is the most important part of our findings. Here cost per borrower is
also quite high. If the similar pattern continues there would be an uncertainty on the future of
MFIs. There is a sharp decline in the profit margin of MFCI (micro finance corporation of India)
from 60.14 % to 20.12 compared to 2007 and for the same year the operating cost has increased
from 2.88 % to 4.13% and all the MFIs are facing same problem like high operating cost, low
margin of profit, high cost per borrower increased from 4.4 to 5.7. If we discuss another MFI
,SHARADA, it is also facing the same problem, profit margin has decreased from 13.78% to
8.82 % compared to 2007 .The cost per borrower has increased from 9.9$ to 14$ and operating
cost has increased from 7.94 % to 9.77 % . Similar kind of pattern is followed by other MFIs
except GRAMEEN KOOTA. The main reason behind the high operating cost is that there is only
one product which is sold by the MFIs i.e. loan and no subsidiary product is available.
Nowadays, MFIs face the problem of cash liquidity because of availability of a single product.
Some leading MFIs e.g. Grameen Bank in Bangladesh, have created financial modes that serve
increasing number of poor. They also lead to repayment rates positively, comparable with the
performance of many commercial banks. These approaches have helped many MFIs in achieving
a reasonable level of sustainability, and have even produced profits without government
subsidies and support from donors. Moreover, most of the MFIs do not provide deposit services
to their clients. Small savings of poor people help MFIs to reach financial self-sufficiency
through own deposits. This is where the concept of micro-savings emerges as a booming field for
MFIs.
5 MICROSAVINGS: NEED OF THE HOUR

V. EMERGENCE OF MICRO-SAVINGS FOR MFIs AND POOR PEOPLE

Of the 634,321 villages in India, only 9,000 villages have more than one bank branch. Close to
60 per cent of rural households do not have a bank account and only 21 per cent have access to
credit from a formal source. Over 70 per cent of marginal farmers have no deposit account and
87 per cent have no formal credit. Less than 2 per cent of rural households can access loans from
a financial intermediary to meet unforeseen financial expenses and the approval for such loans
takes between three and six months, and that too after bribing officials. MFIs help to overcome
from these problems but micro-credit is not enough to overcome from such kind of problems so
there is a need to change the traditional way of micro-credit system. The deprived, even if they
want to save, do not have an account to save in or a place to keep their money safely. They tend
to keep it in their small house stashed away some obscure place. Commercial banks are opening
bank accounts free of cost in rural areas but these tools are not effective unless these accounts
and financial services offered to them are used by the account holders. At present, commercial
banks do not find it viable to provide services to the poor especially in the rural areas because of
huge transaction costs, low volumes of savings in the accounts, lack of information on the part of
the account holder. On the other hand, commercial banks are also looking of these accounts from
purely credit perspective. This is where the concept of Micro-savings has suddenly become an
important area of interest for microfinance. Micro-savings is not only useful for the poor but it is
also a backbone for the MFIs which are facing the problem of sustainability. The recent interest
in Micro-savings is more as a search for solutions to overcome issues such as “costly client
turnover” and improving upon the “narrow outreach”. If we talk about savings there are different
kinds of informal savings system exist in India.

(i)Forms of savings by poor households:

(a) Informal Savings

(i) In kind – helps to barter, though illiquid and subject to shocks.

(ii) Cash at home – ready for use though unsafe (theft, relatives).
(iii) Deposit collectors – kept aside for future use though unsafe and prone to negative interest
rates.
(iv) Group based systems – safe but inflexible.
(v) Event-specific funds – safe but inflexible.

(b) Semi-formal Savings

(i) MFIs – safe but forced savings, regulations.

(ii) Village Groups – safe while it lasts.
(iii) Credit Unions – Flexible and safe but heavy infrastructure required.

(c) Formal Savings

6 MICROSAVINGS: NEED OF THE HOUR

(i) Banks – safe, but regulations.

(ii) Mutual fund – insurance policies.
SOURCE: Adapted from Sadoulet (2004).

From the following segmentation of savings in rural India, Semi-formal Savings and Formal
savings are contributing least. It is assumed that poor people need money to overcome the
problem of survival, security threats, but question is how can poor people change their savings
pattern from informal savings to formal savings and how can the MFIs successfully launch
micro-savings. MFIs should arrive with the flexible savings account where poor people save
their small savings and this petite contribution will form a huge capital or in the other words
micro savings leads to the macro capital for the organization; however, the major problem with
the MFIs is that there is no uniform savings system in rural India. Rural people save in various
forms like, they generally adopt barter system for savings and for MFIs, and it is very difficult to
arrange a saving system for poor people. So poor people must convert their wages in terms of
money and then save in MFIs. It is noted that money creates more value than other forms of
savings. MFIs must adopt the regular basis savings system because it is very helpful for poor
people and it creates a back-bone for them. It is noted that micro-savings is not only useful for
capital creation but it also creates social enhancement of poor people. On the other hand for
MFIs, micro-savings not only creates capital formation but it‟s a part of sustainable and self-
sufficient development.

VI. MICRO SAVING’S IMPACT ON 3C’S:

MFIs are facing three major problems which are commonly known as 3 C‟s. There is lack of
capital, lack of capacity and lack of cost effectiveness, which leads to instability. Now the
difficulty arises how we are going to overcome it. This is where micro savings comes into the
picture. Cost effective, secure and accessible micro savings service feed impoverished, cash-
strapped economies, and improve the lives of the underprivileged. Contrary to some beliefs, low-
income people save their money. In fact, their savings represent a higher portion of their net
assets than those of their counterparts in society‟s upper income segments. Even in the so called
poor country like India, research indicates that poor households save an average of more than
$800USD per year. With access to well-designed savings products, low-income people can
accumulate wealth. When aggregated and invested properly, these small, sometimes seemingly
insignificant amounts can add fuel to country‟s economic growth. Once savings are with MFIs
they will not depend on external sources of funds or we can say that the dependence level is
alleviated to a certain extent. If we infer on how it is going to be useful for poor people, lack of
capital leads to dependency upon external borrowing sources which leads to high interest charge
and only micro credit transaction requires a huge transaction cost. If we introduce micro savings
it leads to autonomic capital structure for MFIs and in the same transaction cost, MFIs are able to
do micro savings. This situation leads MFIs to reduce its existing transaction cost .It is noted
that if sufficient internal capital is available and alongside operating cost is going down, it leads
to low level of interest rate for poorest of the poor. This takes care of lack of capital in 3 Cs.
Once there is liquidity in the organization, they will make an attempt to expand it in to different
areas. This expansion will lead to better capacity of MFIs. Availability of internal sources will
reduce the operating cost and thus, resulting in cheaper loans for the borrowers.
7 MICROSAVINGS: NEED OF THE HOUR

In this era of downturn, corporate world is attempting everything possible to reduce its cost.
Unfortunately, they have lesser funds for social work and philanthropy, hence, lesser funds for
MFIs. Even governments around the world are trying everything possible to decrease the fiscal
deficit. In these testing times only solution possible for MFI‟s to survive is micro savings. Once
they implement micro savings in their structure underprivileged of the society are going to
benefit immensely.

VII. INTERNATIONAL MFIs PERFORMANCE:

(i). GENERAL INFORMATION OF MFIs

TABLE 3:

MFI Major product No. of active No. of active savers

borrowers (mn)
(mn)
07 06 05 07 06 05 07 06 05
Grameen LOAN LOAN LOAN 6.7 6.2 5.5 7.4 6.9 5.5
Bank SAVINGS SAVINGS SAVINGS
INSURANCE INSURANCE INSURANCE

ASA
LOAN LOAN LOAN 5.4 5.1 4.1 6.6 6.4 4.4
SAVINGS SAVINGS SAVINGS
INSURANCE INSURANCE INSURANCE

SOURCE: WWW.MIXMARKET.ORG
8 MICROSAVINGS: NEED OF THE HOUR

(ii). FINANCIAL INFORMATION OF MFIS:

TABLE 4:

MFI Operating cost(%) Cost per borrower Profit margin(%)

07 06 05 07 06 05 07 06 05
Grameen
Bank
7 6 8 10 8 10 .64 13 13

ASA
46 57 60
9 8 6 7 5 5

SOURCE: WWW.MIXMARKET.ORG

(iii). PERFORMANCE OF INTERNATIONAL MFIs:

As we can see in TABLE 3 the number of borrowers and savers is quite high in these institutes.
There product line consists of loans, savings as well as insurance which have a great effect on
their operating cost as well as cost per borrower. In table 4 we can see that operating expense of
Grameen bank is only 7% which was 6% at 2006, while their customer base increased by
500,000, which is an increase of nearly 8%. There low operating cost and cost per borrower is a
major evidence of the impact of savings from its 7.4 million savers, which is apparently more
than its borrowers.
Profit margin of ASA is quite high at 46%, as their savers are more than borrowers. There has
been a steady increase in their savers, which is now at 6.6 million. These two institutes are
realizing the importance of micro savings and hence their interest rates are cheaper. GRAPH 1
and 2 shows the wide difference between MFIs with savings and MFIs without it. Grameen
bank‟s interest rate is as low as 18%, which means that it is giving loans to more people at lower
rate. Looking at the profit margin of Grameen bank shows that they are serious regarding the
poverty alleviation program. Grameen bank and ASA together are giving credits to 12.1 million
people and at such a low interest rate they are the major contributors in an attempt to eliminate
poverty.
 9 MICROSAVINGS: NEED OF THE HOUR

(iv). Figures for 2008:

GRAPH 1:
30 28
26 26
25 24 24
20
15 13.83 Average Savings Balance per Saver (US$)

10 INTEREST RATE(%)
DEPOSITETO LOAN RATIO(%)
5
0 0 0 0 0 0
BANDHAN ASMITHA MFC SKS GRAMEEN
KOOTA

SOURCE: WWW.MIXMARKET.ORG

GRAPH 2:

60 Average Savings balance per saver

51.97
50 (US$)
INTEREST RATE(%)
40 37

30
DEPOSITE LOAN RATIO(%)
20 18.63 18
20
10
10

0
ASA GRAMEEN BANK

SOURCE: WWW.MIXMARKET.ORG

VIIICONCLUSION: The microfinance sector is currently undergoing a significant

transformation from a traditional donor-driven NGO-dominated framework, towards a greater
degree of capital market involvement. At the same time it concentrates on its original mission of
poverty alleviation and social development; however, the interest rate is sometimes appalling
which hurts poor people and does not fulfill its primary mission. This study has demonstrated
that if micro savings is applied by institutes in their product line, it increases liquidity in the
organization, which leads to cheaper loan for the poor people. As we can see, that foreign
institutes have already applied this concept and they are enjoying increased liquidity which is
proving to be highly beneficial for there respective borrowers. As our study findings state, if
Indian MFI's apply this concept in there operations it will help in eliminating poverty from our
country and help us to comply with the „Millennium development program of UN‟. This can be
seen with foreign banks like ASA and Grameen Bank of Bangladesh. It is essential to expand
micro-savings which eventually results in an enhanced liquidity in Micro credit market, at the
end of the day outcome is mutually beneficial for both deprived as well as the institutes. Mr.
Muhammad Yunus once famously quoted „one day our children would go to museum to see how
poverty was like‟. In this endeavor micro-finance can be facilitated by micro savings and then
we can make this great vision a reality.
10 MICROSAVINGS: NEED OF THE HOUR

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www.mixmarket.org
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