Lending to Poor

AN INTRODUCTION

Welcome

AN OVERVIEW OF THE PRESENT SYSTEM

• The Money is Lent – It is NOT Charity; It is Borrowed– It is Subject to be returned

• Principal, as well as Interest; and must also;– Earn a Return on capital;– Enable Recovery of overheads/ operating

expenses;– Earn Profits; being a business venture

‘A problem properly defined will answer itself’ – Richard Bach, “Illusions”

Problem DefinitionLending for the Poor:

Lending

Problem DefinitionLending for the Poor:

• Poor– Common definition– World Bank definition

• Can they pay back?– Therefore, risks are

involved; which are different than most other lending

Poor

Can we lend to the poor?

• Who have little capacity to save today,• And, yet;• Recover our Principal• Get a Return on capital• Recover overheads• Recover cost of risk [defaults]

Management and not elimination of risk

Poverty Line• Cost of an ‘Indian Burger’

Rs. 5/=• Cost of a Home Cooked

Meal Rs.12/=• Cost of a shared rented

house in urban India Rs. 20/=

1 US$= Rs. 50/=; 1 Euro = Rs. 70/=

Poverty Line Income of < 2 US$ [ Per Person Per Day]

Poor

•Whatever the definition;Can the poor pay back?–Yes, if: There is a

•Willingness to pay,•Capacity to pay

Willingness to Pay• Not charity and

Subject to be returned• Making this clear is the

first stage of recovery–Along with this goes

setting up a mechanism for recovery

Capacity to pay• Ensuring capacity to pay• Many poor people earn something

extra on some ‘good’ days, which they can save; and many can save a small amount every day

• A ‘habit of intermittent saving ’ demonstrates a capacity to pay back a loan

• The quantum is too small for a Bank to consider them as a clientHere, the concept of Self Help

Group comes up

Recovery Mechanism• Most loans are too

small for commercial banks to set up shop;

• And spend time and effort–To assess

repaying capacity–To set up a

recovery mechanism

Concept of a SHG• A group of

people, staying in the same neighborhood,

• Under similar circumstances.

Additional Advantages• Interest in improving each

other’s lot• Intimate knowledge of

each other’s genuine needs

• Ability to help each other in income generating activities

• Group Guarantee, Moral persuasion of the group to repay

Risks are involved; which are different than most other lending

• Risks in Lending directly to the poor:– A Bank Manager from

entirely different social background cannot really assess the person

Culture Gap• Risks in Lending

directly to the poor:– He has no hands-on,

day to day knowledge about the person and therefore cannot detect impending default

– There is no collateral in such a loan and even if there is, it is not saleable

Recovery Mechanism- th’ SHGs• Ensuring recovery

through group action• Carrying out actual

recovery through field level – house to house work of volunteers/ paid workers from the same class/ community and background

Criticism of high recovery costs in Microfinance is misplaced

Group Guarantee• Since all members

know each other, there is a level of confidence amongst themselves

• If one can’t pay due to genuine problems, others are required to make up until she can

Incremental Lending• Starts with group savings• Small loans, from within

the group savings• As confidence gets built

up, incrementally higher loans and higher tenures

• Availability of funds would help income generation activities; rentals etc thus increasing capacity to pay

Extend Loans to

Each Other

Increase Loan

Amount & Period

Group Savin

gs

Income Generation Activities requiring small loans

How Self Help Groups have been working in India

• Inception; through an informal association; usually of women;

• Either earning a small amount themselves or getting a part of spouse’s salary

• Meetings held every day / once a week

• Discuss family and local problems

• Exchange ideas about their businesses

How Self Help Groups have been working in India

• During meetings, as coherence emerges, they can start financial transactions

• Make a small deposits with the group

• Distribute surplus to the needy in the form of small loans

• This is possible since not everybody will be in financial difficulties at the same time

• Collect recoverable• Keep informal accounts

How Micro Finance Institutions lend to SHGs

• A set of SHGs are brought together by an MFI

• MFIs also promote SHGs through education, awareness

• MFIs set rules of operation and prepare documents in local languages

MFI

SHG 2

SHG….

SHG 1

How Micro Finance Institutions lend to SHGs

• A Manager is appointed by MFI• The Manager:

– Keeps formal records and documents– Educates the groups about rules set

by the MFI– Promotes the process

• Periodically distributes MFIs funds • Oversees recovery and is

held responsible for the same by the MFI

MFI

SHG 2

SHG….

SHG 1

How Commercial Banks lend to MFIs

• MFI ensures that the norms set by Commercial Banks are satisfied by SHGs– Regular meetings– Group coherence– History of successful lending and

recovery• MFI approaches Commercial

Bank• CB examines MFIs recovery

systems, balance sheets and lends to MFI

COMMERCIAL BANK

SHG

MFI

Flow of funds to the Poor

• MFIs obtain loans from Banks on the strengths of their balance sheets

• These loans are distributed to SHGs as per demands received from the SHGs

• Each SHG distributes the loans to its members based on their own assessment of the repayment capacity of the members

Flow of funds to the Poor - II

• MFIs require constant flow of funds to sustain growth

• Experience shows that there are few defaults in SHG loans and this itself constitutes a strong inflow

• CBs find MFI lending a safe avenue for lending

How Apex Bank lends to CBs• Reserve Bank of

India, our Central Bank has set up institutions like – NABARD– SIDBI– NHB etc.

• These institutes ‘refinance’ CBs

Flow of credit• Directed flow of credit

–Through set channels; as above–Tax and other concessions are

available to institutions for investing with SHGs

–Targeted towards goals• Priority Sector lending

–Target oriented approach

Extent of Operations• Asmitha Microfin and Bandhan Microfin; EACH

– Amount Lent Rs. 24 Billion or US$ 527 Million– Touched the lives of more than1 Million people in

11,000 villagesSKS Microfin

– Amount Lent Rs. 22 Billion or US$ 457 MillionAnd many more are changing lives of the poor

India’s Population 1.027 BillionIndia’s GDP Estimated at 902 US$

THANK YOU

THERE ARE SEVERAL SUCCESS STORIES AMONG THE POOR, HAVING LIFTED

THEMSELVES OUT OF POVERTY, WITH THE HELP OF MICROFINANCE