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compensation structures used by Indian MFIs. In the second phase of this project, the Centre will use a database of loan histories from an Indian MFI that has experimented with several remuneration schemes, to measure how responsive officers are to incentives for the number of clients, the volume of credit, and the share of delinquent loans. These estimates will be combined with estimates of the time-cost of the screening and monitoring activity, to determine how efficient the MFI operations are. Findings from phase one The most common incentives schemes are those that encourage the field officers to attract new members or form new groups and to ensure regular repayment. Prima facie there is no best incentive scheme, the pros and cons of each should be considered before implementing any scheme depending on the organization's objectives. The report describes some of these pros and cons, and the second phase will analyze in more depth the effects of different schemes Three broad categories of incentives were listed. The first aims to foster growth of client base and loan portfolio (through incentives based on the number of active borrowers). The second category aims to increase client outreach and control portfolio quality (through incentives based on number of new clients, repayment rates or delinquency rates). The third category aims to increase client outreach, portfolio volume and control portfolio quality (through incentives for new clients and recovery amounts, portfolio volume or delinquency rates). Within each of these categories, there is a range of different schemes. Prima facie there is no best incentive scheme, the pros and cons of each should be considered before implementing any scheme depending on the organization's objectives. The report describes some of these pros and cons, and the second phase will analyze in more depth the effects of different schemes. 5 Sectoral and policy issues CMF believes that recent developments in the microfinance sector warrant taking a closer look at the accompanying social environment and policy framework. MFIs often have to face misunderstanding from the public and from politicians, which could damage their reputation and their activities. As the sector grows and competition increases, over-indebtedness of clients becomes a concern. We need to find out the extent and patterns of competition, the extent of multiple borrowing, and whether this is bad or not. We need to think of ways to manage competition so that competition affects clients positively. All these issues raise the question of a credit bureau in India as such a bureau could play a vital role in disseminating information. Research projects undertaken by the Centre in this area try to explore these issues, and come up with policy recommendations to enable growth of the fledgling sector, and increase the outreach and impact of microfinance in India. 5.1 A study of Indian microfinance regulation Findings Based on extensive interviews with banks, MFIs, independent consultants and government officials, this study identified five pressing regulatory impediments to India's microcredit sector - interest rate regulation, transparency and disclosure norms, third party ratings, equity investment and minimum capital requirement for NBFC licenses. The report makes recommendations to policymakers on these issues, such as allowing the third party rating market to mature, softening majority ownership requirements for foreign equity holdings in NBFCs, and building a simple monitoring system to track interest rates across MFIs. The recommendations will be presented in Tripathi, Rati, and Daniel Radcliffe (Forthcoming). 162
Ongoing Research 5.2 Informal lending practices - Ajiwika, Jharkhand 34 Objective and methodology This qualitative study aimed to find out what role money lenders play in providing financial services to the poor, who their clients are, and how they function. The study was conducted in the district of Deogarh in Jharkhand and 9 moneylenders, 15 clients and many other agents in the rural credit markets were interviewed. Findings Informal money lending is still a major source of credit for the rural poor. Most of the lenders play dual roles as landlords, shop-owners and even doctors or lawyers. Moneylending took place in various forms and a substantial part of it was in kind. Moneylenders gave out loans either on guarantee or collateral. Interest rates varied from 60 to 120 percent per annum. Gold, jewelry and even livestock or paddy, were usually pledged as collateral. We found evidence of substantial hikes in interest rates over time. Although MFIs have reduced the informal moneylenders' share in the credit market, clients of MFIs are still going to moneylenders. This may be due to the need for more credit than the MFIs can provide, and the greater flexibility shown by money lenders. 5.3 Reputation and communication in microfinance 35 Objective and methodology MFIs are often subject to misunderstanding by the public, suspicion by local politicians, and destructive and ill-informed rumors from competing MFIs. It becomes critical to understand the reputation of MFIs among various stakeholders, to what extent this reputation is negative, and why these reputations are formed. It is also critical that MFIs improve transparency, streamline their operations and develop their communications skills to develop a sound reputation and protect themselves against defamation and misinformation. To better understand these issues, CMF conducted interviews with a wide variety of microfinance stakeholders in the state of Orissa. 36 Findings The study revealed three major challenges facing the microfinance sector in Orissa today. 1) Relations within the sector: Unhealthy competition among MFIs is becoming increasingly salient. MFIs had a tendency to point out the interest rates of their competitors, often without knowing what they were charging. This made prospects for shared collaboration difficult and exacerbated perceptions of the sector as not being transparent. 2) Relations with the government: government schemes and MFIs are increasingly competing for the same space, and latent tensions have emerged. At the state level, government officials by and large were judicious in their assessment of the sector. At the local level however, governmental relations were much more uncertain, and depended on the district administration. 3) Relations with the media: finally, most MFIs did not appear to have a strategic communications strategy in place to promote their work, address accusations, and control damage. MFIs are often subject to misunderstanding by the public, suspicion by local politicians, and destructive and ill-informed rumors from competing MFIs. It becomes critical to understand the reputation of MFIs among various stakeholders, to what extent this reputation is negative, and why these reputations are formed The broad recommendations are as follows: firstly MFIs need to develop a strategic, communications strategy to promote their organizations 37 . Secondly MFIs need to recognize that they operate in the same space as government and take steps to mitigate the potential conflict of interest. Lastly, MFIs need to come together to build an institution that represents the sector in Orissa on issues of mutual interest. CMF is developing a communication toolkit for MFIs in Orissa, which teaches MFI practitioners simple steps on how to talk to the media, develop a website, and develop an organizational message. A workshop on this issue may be organized. 163
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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
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Issues and priorities for action re
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Endnotes 1 See for instance CGAP (2
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100
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such as Chaitanya who soon became s
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money to support operational expens
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finance, and the microfinancial ski
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Box 6.1 Continued in experts and to
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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
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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
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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 166 and 167: Endnotes 1 By Annie Duflo, Anvesha
Page 168 and 169: 29 The main components of direct tr
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