Small is really big

FINANCE: Grameen Bank won its founder the Nobel Peace Prize for bringing about social welfare. But how is micro-finance faring in India?

First the good news. Over and above the nearly Rs 4,500 crore outflow last year through NABARD's SHG bank-linkage programme, micro-finance institutions (mFI) in India attracted Rs 2,300 crore in funding from commercial financial institutions (FIs) in '05-'06, as per figures with Sa-dhan, an industry association of mFIs in India.

This is a huge jump from the Rs 1,100 crore in refinance the sector got the year before. Besides the Small Industries Development Bank of India (SIDBI), those giving loans include ICICI Bank (total outstandings: Rs 1,200 crore), HDFC Bank (Rs 300 crore), foreign banks HSBC, Citi, and ABN Amro, and public-sector banks Indian Overseas Bank, Canara Bank and Bank of India.

The "partnership model" initiated by ICICI Bank in 2002, whereby the bank shoulders/shares the risk while the mFIs act as disbursment and collection agents, has been especially successful in scaling up the operations of partner-mFIs as also bringing down interest rates to end-users.

Then there were the venture capitals picking up equity in mF-start-ups, a trend that surfaced this year. The three principal players are Bellwether Microfinance Fund (allocated $6 million as of July 31, 2006, with another $15 million committed), Vinod Khosla (funds invested Rs 5 crore) and Lok Capital (fund size $10 million).

Vijay Mahajan, chairman of BASIX,says the sums coming into the sector are a factor of mainstreaming, "The banking sector is like a juggernaut. It's slow to move but difficult to stop once it starts rolling."

S V Prasad, director and fund-manager, Bellwether, reports: "There is a lot of interest among international investors looking for instruments that will deliver strong financial and social returns." Bellwether, a 15-year-long fund, expects an annualised return of 12-18 per cent.

The reasons? Some policy initiatives by the government, the need to meet priority sector lending targets, and enlightened thinking by bankers like Nachiket Mor of ICICI Bank.

But most important is the realisation, says Mathew Titus, executive director, Sa-dhan, that "repayment rates are far higher in comparison to other parts of their portfolio".

On the social welfare front too, mFIs have made significant inroads. As for March 2006, 2.24 million SHGs and 33 million households had benefited from NABARD's SHG-Bank linkage programme since 1992.

The SHG-Bank linkage model is the dominant model in India, compared to the private sector, where you have the Grameen model, the SEWA model, joint liability group model and so on.

As for private sector mFIs, Titus reports that in the last fiscal, they had 6 million clients and are growing at a healthy annualised rate of 35-40 per cent, up from 20-25 per cent around three years ago.

But as always there is a downside to the rosy picture. Despite the fast growth, mFIs in India have managed to tap just 10 per cent of the unbanked poor.

The close-down of 50 branches of two large mFIs in Krishna district of Andhra Pradesh, based on complaints of extortionary practices, points to another possible danger "" from government-subsidised poverty reduction projects.

The high penetration of mFIs within a limited geographical area also enhances the risk from natural disasters. A number of large mFIs, like SKS, have started branching out into other states but, says Titus, in the short-term it will result in stretching the management.

Also, while mFIs have expanded their services into insurance and money transfer, savings (a crucial service for the extremely poor) are still not allowed, although some mFIs have started transforming themselves into NBFCs to get around the policy constraints as also for greater ease in raising capital.

"Demand is there, and despite all the money coming in, it is still inadequate," says Shubhankar Sengupta, CEO of Arohan, an mF start-up in West Bengal. "The challenge facing mFIs in India is the paucity of high-quality professionals to handle the growth effectively."