Wednesday 8 April 2015

Microfinance : Capitalism for the poor.

Microfinance has been hailed as a boon to the developing world. By extending small amounts of credit to would-be entrepreneurs, the model is said to raise incomes, reduce unemployment, and empower previously marginalized groups, notably women. First tested in Bangladeshi villages in the 1970s, microfinance was embraced by the development community in the 1990s and 2000s and has held a special status as a "transformative" idea. In 2006, Muhammad Yunus won a Nobel Prize for his microfinance work along with his organization Grameen Bank.

As mainstream microfinance has matured, focus has turned to the country’s chronically underserved MSMEs. The changes are being accelerated by the government: last year, the RBI announced a new category of 'small' bank that focuses on poorer customers. On 8th April, India PM Modi launched Micro Units Development and Refinance Agency Ltd. (MUDRA) Bank. Supported by these initiatives, over time, we expect to see more players and capital flow into the space, resulting in a greater volume of lending to the under served. MFI funding will impact the growth of MSMEs. 

Bandhan Microcredit : Driver to MSME growth

Bandhan, the country’s largest microfinance company, is competing closely with Bangladesh’s Nobel Prize-winning Grameen Bank to become South Asia’s largest micro credit provider. It is already the largest non-deposit taking microfinace institution in the world.

In India, this sector has grown on the Grameen model of lending over the past two decades. Credit decisions are taken at the branch level, which facilitates disbursal of loans in about a day. At the end of October, Bandhan’s loan dues were Rs 6,804 crore ($1,091 million); Grameen Bank’s was $1,109 million (Rs 6,900 crore), according to the company’s website.

Grameen Bank, founded by Muhammad Yunus in 1976 (founder and institution were jointly given the Nobel Peace Prize in 2006), has been operating as a full-fledged bank since 1983. Bandhan is a fledgling in comparison; it started operations in 2011, almost one and a half decades after Grameen Bank was set up. Even so, it has a customer base of close to 6 million; Grameen’s is 8.6 mn.

Bandhan has 2,022 branches in 22 states. It recently tied-up with FIS, a US-based company, as technology partner for the launch of the proposed Bandhan Bank. The seven-year technology outsourcing arrangement will provide services like core banking, channel solutions, trade finance, debit card management and transaction switching. FIS will also be responsible for delivery and management of the entire information technology infrastructure, including all disaster recovery capabilities and the inter-branch network.

Bandhan is expected to start full-fledged banking operations by the end of 2015, opening nearly 600 commercial bank branches in one go. Ahead of foraying into this sector, Bandhan has stepped up its lending activity. Against an average monthly disbursement of Rs 1,000 crore in November last year, Bandhan disbursed close to Rs 1,300 crore this time.

Rupay Debit Cards

A big chunk of micro credit comes Regional Rural Banks. After the successful implementation of Pradhan Mantri Jan Dhan Yojana, India’s financial inclusion plan, all 56 rural banks have tied with RuPay. Rupay card is based on indigenous technique. 

The domestic card is designed by National Payments Corporation of India. It has been introduced with an objective to minimize the overall transaction cost of banks. Till now, the ATM cards were designed on foreign techniques of master and visa cards. All rural banks also have the facility of National Electronic Funds Transfer (NEFT) charged at nominal fee of Rs.2.


In Budget 2015-16, India’s finance minister Arun Jaitley announced the creation of MUDRA Bank with the corpus fund of Rs. 20,000 crore and credit guarantee corpus of Rs. 3,000 crore. MUDRA, to be set up through a statutory enactment, would be responsible for developing and refinancing through a Pradhan Mantri MUDRA Yojana, all Micro-finance Institutions (MFIs) which are in the business of lending to micro / small business entities engaged in manufacturing, trading and service activities. MUDRA would also partner with State/Regional level coordinators to provide finance to Last Mile Financiers of small/micro business enterprises.

The roles of MUDRA bank are :

  • Laying down policy guidelines for micro enterprise financing business
  • Registration of MFI entities
  • Accreditation /rating of MFI entities
  • Laying down responsible financing practices to ward off over indebtedness and ensure proper client protection principles and methods of recovery
  • Development of standardised set of covenants governing last mile lending to micro enterprises
  • Promoting right technology solutions for the last mile
  • Formulating and running  a Credit Guarantee scheme for providing guarantees to the loans/portfolios which are being extended to micro enterprises
  • Support development & promotional activities in the sector
  • Creating a good architecture of Last Mile Credit Delivery to micro  businesses under the scheme of PM MUDRA Yojana.

The primary product of MUDRA will be refinance for lending to micro businesses / units under the aegis of the Pradhan Mantri MUDRA Yojana. The initial products and schemes under this umbrella have already been created and the interventions have been named ‘Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage of growth / development and funding needs of the beneficiary micro unit / entrepreneur as also provide a reference point for the next phase of graduation / growth for the entrepreneur to aspire for:

  • Shishu: covering loans upto Rs. 50,000/-
  • Kishor: covering loans above Rs. 50,000/- and upto Rs. 5 lakh
  • Tarun: covering loans above Rs. 5 lakh and upto Rs. 10 lakh.

Businesses/entrepreneurs/units covered would include proprietorship/partnership firms running as small manufacturing units, shopkeepers, fruits/vegetable sellers, hair cutting saloon, beauty parlours, transporters, truck operators, hawkers, co-operatives or body of individuals, food service units, repair shops, machine operators, small industries, artisans, food processors, self help groups, professionals and service providers etc. in rural and urban areas with financing requirements upto Rs.10 lakh.

As compared to that scale, the integration of hundreds of thousands of more informed existing and new LMFs into the regulatory and refinance architecture of MUDRA bank does not seem to be a tall order at all. MUDRA, which is a practical idea, is a potential game changer for the country.

Microfinance : Catalyst for 10% growth

The Economic Census Survey of 2012 revealed the scale and magnitude of what we have been ignoring for several decades. There are 57.7 million enterprises in India, and it generates employment for 460 million people, of which 262 million people are self-employed. That this long ignored informal sector is a significant part of our economy is obvious from the following statistics. It accounts for 90 per cent of our non-agricultural workforce, 50 per cent of the gross domestic product (GDP) and 40 per cent of the non-farm GDP. This informal GDP is almost completely out of the direct tax net and lacks any formal form of access to credit or risk capital to allow it to grow and join the mainstream economy. A recent Credit Suisse report stated: "Unlike in developed economies, where informality is a deliberate choice to avoid taxation or regulations, in India it is more structural, a reflection of the lack of development and limited government reach."

Reports have concluded that Indian GDP can be raised by almost 15 per cent if the informal sector data is incorporated in the GDP series. Yet, only 4 per cent have access to institutional credit, with loans between Rs 50,000 and Rs 10 lakh almost impossible, forcing them to go to moneylenders. The non-corporate sector faces stiff competition from larger firms, and are further impeded by the lack of infrastructure and access to easy credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment or raw materials.

Microfinance involves funding the unfunded, and unlocking the potential of a new pool of entrepreneurs and future taxpayers in this country. It is encouraging for entrepreneurship across the economic strata. It is using micro finance, an economic development tool whose objective is to assist the lower income groups to develop and grow their small businesses, many of whose owners are traditionally excluded communities such as Scheduled Castes, Scheduled Tribes or other Backward Classes, who own almost 60 per cent of all enterprises in this sector. It represents a real way to make the dreams of millions in the informal sector, long neglected and ignored, a reality. This formalisation of the informal sector would expand the tax-GDP ratio and expand the number of taxpayers and, in turn, government revenues.

This government is right to see the potential of this sector to drive up jobs and taxes. It has realised the force multiplier impact on the economy and tax revenues by a successful formalisation of the informal sector. It has realised the failure of both the Reserve Bank of India and the banking system in credit-supporting this sector. This also is core to this new economic philosophy of supporting enterprise wherever there is a desire for that in our economy, while continuing with better targeted and well-conceived social security framework for the poor and needy. Bringing in the untapped informal sector into the formal one will benefit business and economy.

By - Chaitanya Kulkarni, founder, The Indian Capitalist

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