Inclusive Finance: for sustainable development

Kanika Basu HSMI 1.2.2012

The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.

Kofi Annan, 2003

What is inclusive financial system?

Financial Inclusion is the delivery of banking services at affordable costs to vast sections of disadvantaged and low income groups mainly those cannot provide collateral.

Are they part of the formal financial system?

Financially Excluded People

Small farmers Landless Labourers Migrants Self employed or unorganised sector enterprises Slum dwellers Socially excluded groups Women Senior citizens

Consequences of Financial Exclusion

Losing opportunities to grow ,improve and or consolidate improvements Economic Exploitation Overall retarded growth of the national economy

Benefits of Financial Inclusion

Poverty reduction Growth with equity
Credit has done more to enrich nations than all the gold

mines in the world put together. The future lies with those companies who see the poor as their customers

Financial Inclusion: RBI Initiatives

Setting up of State Bank of India Nationalisation of banks Co-operative Movement Regional Rural Banks Self Help Groups
2005 onwards financial Inclusion has been explicitly made a policy objective
Since 2006 banks are permitted to utilize the services of nongovernmental organizations (NGOs/SHGs), micro-finance institutions and other civil society organizations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent models.

Some basic indices of financial inclusion

Country No. of bank A/C (per 1000 adults) No. of Bank Domestic Branches (per credit (as % 100,000 adults) of GDP) Domestic deposit (as % of GDP

Argentina

503.3

13.7

10.3

23.2

Colombia
India

892.5
627.1

12.7
9.4

19.1
36.9

24.2
54.9

Lebanon
Malaysia Russia Thailand

539.4
1858.8 2244.8 1875.8

25.4
14.6 2.7 9.5

75.4
117.9 24.1 94.4

206.6
123.9 27.4 102.2

Sources: WDI (2006), World Bank; IFS (2006), IMF.

Extent of Financial Exclusion in India

Only 17 Credit Accounts per 100 persons with all the institutions (June 2007) Only 54 Savings Accounts per 100 persons with all the institutions (June 2007) Only 13 per cent are availing loans from the banks in the income bracket of less than Rs. 50,000 53 per cent people are taking loans from the institutional and non-institutional sources only for emergency purposes Critical Exclusion in terms of credit is manifest in 256 districts across 17 states and 1 UT (Dadra and Nagar Haveli)
Source: Dr. K.C.Chakrabarty, Deputy Governor, RBI, 2009

Why are people excluded?

Example: HOW TO GET A HOME LOAN ?

Identity Proof Address Proof Income Proof Salary Statement Income Tax Returns Bank Statement Credible Guarantors Other Tangible Collateral Clear legal titles Adequate loan Amount

HOW MANY POOR PEOPLE WOULD BE ELIGIBLE FOR A HOME LOAN FROM FORMAL BANKING SYSTEM?

Micro Finance: an effective alternative?

History
Microfinance in India can trace its origins back to the early 1970s when the Self Employed Womens Association (SEWA), Gujarat started the urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the objective of providing banking services to poor women employed in the unorganised sector in Ahmedabad City, Gujarat. The microfinance sector went on to evolve in the 1980s around the concept of SHGs, informal bodies that would provide their clients with much-needed savings and credit services. Got government support through specialized organizations like SIDBI Micro Credit Fund, NABARD, RMK Initially a public-people collaborative initiative to maximise benefits to the poor, lately micro-finance in India evolved as a business initiative with poor as clients. Today, the top five private sector MFIs reach more than 20 million clients in nearly every state in India and many Indian MFIs have been recognized as global leaders in the industry.

Microfinance in India: Various Models

1. Bank- SHG Linkage (Govt. Initiative) 2. Community based financial institutions (mostly used by social development initiatives) 3. Grameen style joint liability group banking model (mostly used by private MFIs) 4. Co-operative bank

Micro-finance Success in India

Unprecedented growth and stated impact in 90s to early 2000. Govt. programme despite well in tentions had much lesser penetration with the targeted clients compared to non-governmental outfits Commercial microfinance lenders were able to attract clients and achieve a better repayment rate, despite higher interest rates, by dint of their door-step service and frequent small-value repayments. Significant achievement of the MFIs in India included not just outreach but an efficient operating expense ratio of making then amongst the most cost-efficient in the world (and their interest rates among the lowest).

Since around 2005 large sums of private equity began to flow into the sector, and private MFIs grew rapidly, as microlending became a replicable, systematic, and profitable business. the crisis followed!

Micro finance in India: at crossroads

Krishna Crisis in 2005-06 Farmer suicides in the state of Andhra Pradesh that was connected to inhuman loan recovery measures Resulted in : Passing of Andhra Pradesh Microfinance Ordinance on the 15th of October, 2010. Malegaon Committee Recommendations: Loan limit to Rs. 25000 A cap on interest rates and margins Provisioning norms. Increased capital requirement

Future of Microfinance in India?

The current demonization of the industry is as much an oversimplification as the earlier beatification. The current situation is by no means comfortable or promising either for MFIs or end-users. The current crisis and the on-going churning can well be the turning point for the micro-finance industry in India leading to a balanced, bettergoverned and better understood financial delivery system.