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this has dropped to 8% on the current balance sheets of 84 MFIs rated between January 2003 and December 2005. (MCRIL: 2006). Setting up alternative financial service providers - Till the year 2000, most MFIs were still in the fledgling state and were unable to attract commercial funds for their operations. Bilaterals like DFID, Ford Foundation and SDC played a key and complementary role in this context by both directly capitalizing and capacitating MFIs, as also building the necessary systemic support eg. a microfinance rating agency, technical support institutions etc. for them Partly also, the presence of 'alternative sources' of funding such as the National Microfinance Development and Equity Fund, which while yet to make any investments, would seem from a donor perspective to be enough to fill at least short term needs in the sector. There is also a growing belief especially among multilaterals such as the World Bank that in downstreaming funds into the sector instruments other than grants and loans -equity and quasi equity -would be more effective in the near future in terms of ensuring efficiency in the market and meeting large scale needs for funding in the sector. As such the microfinance sector in India is currently seeing a distinct change in patterns of donor funding, key trends of which are briefly captured this chapter. Growing the sector - the role of donor funding Setting up alternative financial service providers - Till the year 2000, most MFIs were still in the fledgling state and were unable to attract commercial funds for their operations. Bilaterals like DFID, Ford Foundation and SDC played a key and complementary role in this context by both directly capitalizing and capacitating MFIs, as also building the necessary systemic support eg. a microfinance rating agency 5 , technical support institutions etc. for them. Of particular relevance in this context has been the DFID funded microfinance programs including the UKL 16.5 million 6 program, the India National Microfinance Support Project, managed by the apex bank Small Industries Development Bank of India, as also the UKL 9.85 million Credit and Savings for Household Enterprise program managed by CARE India. These programs at the time of their inception (mid to late 1999) were meant to fill a critical gap in the sector for professionally managed, commercially viable microfinance Institutions. The two programs were structured similarly to impact simultaneously at three levels - i) scaling up outreach through operational and transformational 7 support to retail institutions, ii) building institutional capacity and iii) creating an enabling policy regulatory environment. However the key difference between the two programs was that while CASHE initially worked with Self Help Promoting NGOs in only three states (West Bengal, Andhra Pradesh and Orissa), SIDBI supported a model neutral national program for relatively mature and more viable MFIs. Both programs charged a near-commercial rate on loans to MFIs, and allowed MFIs to charge market rates for their onlending, as important steps towards commercializing the microfinance sector. However they did subsidise operational costs (which is a general trend with most donor funding in India). 8 The Ford Foundation's support was similarly strategic and more focused on demonstrating that the sector could both widen and deepen access through building viable, scaleable institutional models. One of the first donors to invest in the sector - Ford's funding initially went to organizations like the Cooperative Development Foundation (1991), Friends for Women's World Banking (1993) and the BASIX group of companies (1996) 9 . Support for institutions like VIMO SEWA was aimed at taking diverse financial services like insurance to poor households. Ford covered a range of objectives and brought diverse funding instruments for partner institutions at different stages of their growth. 146 True to the objective of trying to reach the very poorest more remote groups and regions, Ford's investments also went to organizations like the Ankuram Sangamam Poram - a state
Donor Participation in Indian Microfinance level apex in Andhra Pradesh with over 80 SHG federations having a largely scheduled caste membership and later to Orissa where it is supporting the growth of small SHG based microfinance retailers. Box 8.2 Two early examples of donor funding for microfinance The BASIX investments, not just by the Ford Foundation but also SDC, CGAP (Consultative Group to Assist the Poorest) and Sri Ratan Tata Trust, is a case on how subsidies can trigger sustainability. SDC 10 which has been supporting BASIX since 1996 calls the BASIX funding 'venture grants' that helped the organization realize its potential as a laboratory for the sector - supporting both product and institutional innovation. Even as the initial capital for operations came through returnable grants, a key understanding was that these would be neither replaced nor renewed thereby facilitating transition to commercial sources. The Friends for Women's World Banking investments help illustrate the complementarity in different forms and roles of subsidy in the sector. Support from Ford and SDC (Berne) largely took the form of corpus grants to enable FWWB to raise funds from commercial sources or funds for technical assistance for 'market building'. The different forms that Ford funding took in FWWB between 1993 and 2005, ranging from support for policy forums, to capacity building funds and finally loan fund capitalization, illustrates how donor funds have been used as an institution building tool. The World Bank housed Consultative Group to Assist the Poorest brought equity investments to FWWB. Capacity building support was provided by USAID. On the other hand DFID and IFAD funds played the role of catalysts as SIDBI provided on-lending support to FWWB. Agencies like the Ford Foundation, SDC and USAID have also been supporting SADHAN in its effort to build an enabling policy and regulatory framework. USAID not only supported SADHAN in its advocacy work with the Ministry of Finance, but also provided technical assistance to the insurance regulator - the Insurance Regulatory and Development Authority (IRDA) especially for health microinsurance. Mainstreaming microfinance - SHG bank linkage initiative and institutional reform projects One of the first agencies in the world to support an SHG based program (which it did first in Indonesia) GTZ provided both technical and financial support to adapt the model to the Indian context, pilot and upscale it. The objective of the program for Rural Financial System Development for which GTZ partnered with NABARD, was to improve the access for sustainable and qualitative improved financial services. Within this the SBLP aimed to address the issue of formal financial institutions being averse to lending to the poor due to high costs and risks involved in managing small credit amounts without the usual collateral. GTZ support has contributed to key structural changes in linkage banking through research, capacity building, product development and development of information systems. While the program itself focuses on designing, piloting and review - NABARD takes on the role of scaling up and dissemination. SDC worked at a broad level with NABARD, specifically supporting institutional development and innovation amongst institutions like Regional Rural Banks, which catered to largely rural Agencies like the Ford Foundation, SDC and USAID have also been supporting SADHAN in its effort to build an enabling policy and regulatory framework. USAID not only supported SADHAN in its advocacy work with the Ministry of Finance, but also provided technical assistance to the insurance regulator - the Insurance Regulatory and Development Authority (IRDA) especially for health microinsurance 147
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Microfinance in India A State of th
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List of Tables Page No Table 2.1 Gr
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Preface and Acknowledgements This r
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Abbreviations ABC ADB BC BF CAR CAG
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CHAPTER 1 Overview and Summary of M
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Overview and Summary of Main Recomm
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1 1a 1b 2 2a 2b 2c 3 3a 3b 3c 4 4a
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The Light and Shades Study A major
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highest proportion of weak records
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their profitability after accountin
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allow the programme to grow organic
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1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
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Endnotes 1 It is very hard to compa
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as cash with the groups, the true r
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linkages", 11 percent 3rd, and 5 pe
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References APMAS (AP Mahila Abhivru
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CHAPTER 3 Progress Under the MFI Mo
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Progress Under the MFI Model is fun
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Table 3.4 Comparative performance i
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Progress Under the MFI Model on lit
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Progress Under the MFI Model 4 Howe
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Progress Under the MFI Model Refere
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MFIs, and the need for MFIs to plou
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size had actually come down during
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The point at which peer group press
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The lack of contact and communicati
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Box 4.1 Continued 4. MFIs will coll
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Endnotes 1 There will be many disag
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19 The base suicide rate in AP is 1
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References APMAS, 2005, "A Report o
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(such as cattle and houses), and co
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The advantage of the provider model
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Some lessons learnt from experience
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Box 5.2 VimoSEWA: Synergies between
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86 Table 5.1 Main Feature of Health
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Endnotes 1 While the microinsurance
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16 A little less than a fifth of th
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29 The rationale for transfer progr
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Roth, James and Vijay Athreye, 2005
Page 98 and 99: Issues and priorities for action re
Page 100 and 101: Endnotes 1 See for instance CGAP (2
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Page 104 and 105: such as Chaitanya who soon became s
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Page 110 and 111: Box 6.1 Continued in experts and to
Page 112 and 113: Endnotes 1 In a sense it always was
Page 114 and 115: 16 Examples are Margdarshak in Luck
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Page 118 and 119: Table 7:1 Commercial bank exposure
Page 120 and 121: The main constraints to the expansi
Page 122 and 123: further review, RBI has modified th
Page 124 and 125: 9 Thus ICICI has sold some of its b
Page 126 and 127: B. Equity Investments by the Ventur
Page 128 and 129: Figure : The Bellwether triangle Lo
Page 130 and 131: Despite the weaknesses the public s
Page 132 and 133: Box 7.1 Continued foreign sources o
Page 134 and 135: Endnotes 1 At this point they will
Page 136 and 137: References ACCION, 2003, "The Servi
Page 138 and 139: SIDBI Foundation for Micro Credit (
Page 140 and 141: categories, depending on the amount
Page 142 and 143: The distribution of total disbursem
Page 144 and 145: Endnotes 1 It should be noted that
Page 146 and 147: B. Donor Participation in Indian Mi
Page 150 and 151: and poor populations. More directly
Page 152 and 153: and expansion of available retailer
Page 154 and 155: 11 SDC through various programs for
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Page 158 and 159: 1.1 Impact evaluation of Spandana's
Page 160 and 161: in the loan tenure of 24 months. Th
Page 162 and 163: There are two main motivations of a
Page 164 and 165: compensation structures used by Ind
Page 166 and 167: Endnotes 1 By Annie Duflo, Anvesha
Page 168 and 169: 29 The main components of direct tr
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