Transformation of

microFinance in India:
Experiences, Options and
Future

M S Sriram and Rajesh Upadhyayula

Indian Institute of Management Ahmedabad
 microFinance Defined

microFinance means many things - But

the contours may be:
• Piloted by the alternate sector
• Focussed on the poor
• Having roots in development
 Figure 1:
Defining the
microfinance
The Setting egg
Overall objectives of the NGO include
welfare activities, economic activities.
Example: Lupin – Health, Education,
Agriculture and Microfinance
Spin-off microfinance
units: MYRADA Spin-off: SEWA 
Sanghamithra Rural Sewa Bank –
and Urban Urban and Rural

Overall objectives of the MFO is

predominantly economic activities.
Example: SIFFS – Economic
activities for fishfolk, micro-finance
services are also provided.

Exclusive microfinance
institutions. Commercial
Funding for lending
operations

Sustainability Poverty focussed:

oriented: BASIX SHARE/CFTS

Developmental funding for

capacity building; some initial
capital for pump priming.

Other sources of funding for non-

microfinance economic activities.

Other sources of funding for

welfare activities
 What triggers transformation?

• Size
• Diversity of services
• Financial sustainability
• Focus
• Taxation
 What are the International Experiences in
Transformation?

• Bolivia and Africa: Transformation of NGOs

– To Banks
– To FFPs
• Indonesia: Transformation of mainstream
– To microFinance methods
• Bangladesh: Transformation of a project
– Grameen Bank
– Other NGOs transforming to Banks
 Challenges in the Indian context

• Size
• Growth in geographic area
• Growth in portfolio/client size

• Diversity of Services
• MFOs wanting to offer Savings
• MFOs wanting to offer Risk Products
 Challenges in the Indian context

• Financial Sustainability
– Internal growth
– Access to funds

• Focus
– Other Developmental activities V/s mF
– Degree of specialisation needed for mF
 Challenges in the Indian context

• Tax Status
– For-profit mF activity V/s not-for-profit
NGO activities
– Tax status of donor money
Options for Transformation (Spin off)

• Company (NBFC)
– Poverty School
• Share - Transformation with growth
• CFTS - Start up as NBFC
• ASA - Through MBTs (proposed)
– Sustainability School
• BASIX - Complex structuring (holding company,
borrowings and equity from developmental and
commercial sources)
Options for Transformation (Spin off)

• Examining NBFCs
+ Access to financial markets
+ Access to bank finance
+ Can Operate across the country
– Limited options for offering savings
– Re-capitalisation for growth may be tough
– Steep entry norms (Rs.20 million initial)
– Not easy to get registrations
Options for Transformation (Spin off)
• Examining Co-operatives
MACS, Urban Co-operative Banks
+Small and dispersed institutions, that could
organically grow and federate
+Involves the community in decision making
as it is member-user-governed
+Easy entry norms
+Best route for SHGs to formalise
+Can offer many services including savings
Options for Transformation (Spin off)

• Examining Co-operatives
– Geographic limitations
– Does not have a good image, attracting
outside capital will be a problem
– Recent scams in urban co-operative sector
might lead to tightening of regulation
Options for Transformation (Spin off)

• Needs to earn enough profits to show

that it is operationally self-sufficient
• It could also be financially self-
sufficient, but no pressure to plow back
profits or hit the capital market
• The concerns would be to keep costs
under control and revenues on target to
demonstrate
Options for Transformation (Spin off)

• Set up a Local Area Bank

+ Flexibility to offer diverse products
+ Cost of funds likely to be lower, so the
impact on the poor with be better
– Steep initial capital (Rs. 50 million)
– Difficulty in getting licence
– Limitation in geographic growth (3
contiguous districts)
 Implications for regulation
• Allow MFOs to grow organically
– Allow for expansion in area in case of co-
operatives and LABs, subject to minimum
performance
• Allow for NGOs to invest in for-profit
MFOs such as NBFCs and LABS
• No change in entry norms - ensure only
serious players come to the field
 Transformation options and their implication
Form Options Organisational Implication
incorporation
Not for Profit MFI – a special Cannot grow beyond a point. While
vehicle only for purposes of sustainability can be demonstrated, the
demonstration at scale (SRFS) organisation will have to be roving – withdraw
from one location and move to another, or grow
organically, and gradually.
For profit Company (NBFC) – Issue of ownership and control. Initial capital
Option 1:
Transfer clients, investments contribution can come from the communities.
Spin off mF
and portfolio independently Recapitalisation is complex. Diversification to
as a
(SHARE, CFTS) savings and risk products is not simple under
separate
the current regulation. Even when permitted,
Activity
the bouquet of products offered will be limited.
For-profit co-operative either Can grow organically, but will have geographical
under the MACS Act or as a limitations to growth. The geographic area of
Co-op Bank operation is demarcated. However, there is
flexibility to offer savings products. Initial
NGO
capitalisation requirement is not daunting.
Promote (informal) Self-Help Can grow organically. However, scaling up and
Groups, (Pradan, Myrada), infusion of large amounts of external funds are
encourage them to form not simple, as the movement is scattered across
federations., (Dhan several independent informal or legal entities.
Option 2: Foundation) Embedding in the banking system is a solution,
Promote but there are limits to growth. Chances of
independe withering away if the NGO withdraws support.
nt MFOs Promote (formal) mutually Problems are similar to SHGs mentioned above.
aided co-operatives and However, since each of these are independent
encourage them to federate. entities, dealing with banking institutions is
(CDF) likely to be simpler. Chances of withering away
are low, if the systems are established.

Transformation of microFinance in
India: A Presentation at SIDBI W
 Transformation options and their implication

Form Options Organisational Implication

incorporation
Option 1 Promote NBFCs – seek Problem in raising initial capital. Other
developmental and commercial limitations applicable to NBFCs discussed above
investments through complex also apply. It is difficult to pull off a complex
Develop mechanisms – private mutual structure of mutual benefit trusts and holding
ment benefit trusts, debt in holding company structures.
Professio company (CFTS, BASIX)
nals with Option 2 Promote LABs, find equity for A difficult proposition due to two reasons: Steep
NGO start up. initial capital requirements and complexity in
backgrou licencing procedure of RBI and limitation in
nd geographical area to three contiguous districts.
Tremendous amount of flexibility in the offer of
diverse products and services and great scope
for customisation.

Transformation of microFinance in
India: A Presentation at SIDBI W