CU -Sem II - Mcom -Microfinance Management

The IADB points to the existence of underutilized capacity in some banks as one of the reasons for them to enter MF: excess liquidity or underutilized branches or information systems can reduce costs and encourage banks to get into micro lending. Another reason for entering this field is the availability of free or cheap donor technical assistance. Many case studies show cooperation agreements between banks and international MF support networks, in which the latter provide training to institutions that have recently begun to operate in the field of MF. Regardless of the commercial reasons encouraging banks to enter MF, policies imposed by some governments, aimed at contributing to the development of the MF sector, have driven or even compelled the financial system to provide loans to low-income sectors. The decision of commercial banks to enter MF is also affected by external factors. In this sense, the most effective way for governments to encourage commercial banks to become involved in microfinance is to ensure an appropriate regulatory and prudential framework. The elements of an optimal non-restrictive policy context identified by literature are:  s ound macroeconomic policies and basic infrastructure to ensure a growing economy;  a growing range of financial products;  M inimal restrictions to profitable lending, particularly no interest rate caps.  e nhanced ability to establish a small commercial bank which can focus on this sector; A ppropriate prudential regulations for this market including capital adequacy ratios and asset quality indicators. Having all these elements in place will not necessarily guarantee that commercial banks will start microfinance lending. However, there certainly won’t be external constraints to start the activity. Competitive advantages for commercial banks entry into MF  E xtensive network of branches.  T echnology infrastructure: ATMs, MIS, among others. P eople with skills in areas such as information technology, marketing and legal management who 151 CU IDOL SELF LEARNING MATERIAL (SLM)

can support microfinance operations.  M arket presence and brand recognition.  A ccess to low-cost funds through deposit-taking.  L ower operating cost structure. Disadvantages for commercial banks entry into MF  H igher operating costs.  L ack of knowledge of the microfinance market.  I mplementation of credit methodologies inappropriate for the MF market. L abor-intensive nature of microenterprise credit as the antithesis of the banking sector drive toward automation.  C onservative corporate culture contrary to MF.  L ack of human resources who are comfortable working with lower-income social sectors. 14.4 SUMMARY T here is room for a variety of approaches to commercialization across the microfinance industry, and how an organization engages with this trend will depend on its own mission and objectives. At Grameen Foundation, we believe in prioritizing the mission and purpose and with profits acting in service of that mission, and that overall, this approach is a win-win scenario, creating stronger institutions that put the benefit of their clients front and center thus ensuring these institutions generate healthy social and financial returns over the long term. S o in summary, the news regarding commercialization is good. Minimum standards are being set and widely recognized that will enable investors to screen out the most unscrupulous 152 CU IDOL SELF LEARNING MATERIAL (SLM)

operations and reduce if not eliminate the likelihood of the “return of usurers” in the guise of MFIs. Commercial microfinance has matured to the point that it can accommodate and put to good use different models, which we can take advantage of in order to better align investor, management and staff objectives. M icrofinance emerged in the 1990s to become a real industry around the world, composed of a wide variety of institutions that providing financial services to people who are excluded from the traditional banking system. With the spectacular success of microfinance, a growing number of commercial banks have entered this new market, motivated on the one hand by the growing competition in the banking sector and on the other hand, by the pressure of some governments. However, if some banks choose the direct way to enter in microfinance “downscaling”, others prefer to play the card of prudence by building partnerships with microfinance institutions (MFIs). Microfinance activities can pose different risks from those related to traditional banking activities. This paper aims to explore entry strategies by commercial banks in microfinance and take the keys of success to make microfinance a profitable part of its business. I n countries where there is a minimum of confidence between the population and commercial banks, it may be considered the direct entry of banks into microfinance by developing their retail operations to achieve a “micro-level”. To do this, they create an internal microfinance unit, a specialized financial institution or a microfinance service company. None of these strategies are inherently better than another, and there is no universal recipe for penetrate the market of poor or vulnerable people. The choice of an operative mode depends on internal and external factors. Otherwise, the banks may enter in microfinance indirectly by doing partnership relations with the MFIs. The best form of partnership between the Bank and MFI depends largely on the development degree of the MFI. Thus the first form of partnership which is the institutional partnership will be more indicate for an MFI “start-up” because it has the advantage of giving the MFI from the know-how of banks that may intervene as an initiator, member of the steering committee of the project or even supervisor. T he second form of partnership which is the technical partnership seems more appropriate in the next phase of the MFI development. To continue growing in a balanced and sustainable manner, the MFI can indeed make the economy of a capacity building and of a requirement of professionalization of its activities. It is in this framework that the technical partnership can be beneficial to the MFI. T his one might strengthen its human resources through training including banking techniques 153 CU IDOL SELF LEARNING MATERIAL (SLM)

provided by the partner bank. The IMF will also benefit from the know-how of the bank’s implementation of control procedures and internal and external audits. The third form of partnership which is financial partnership will help the MFI to get its autonomy. I ndeed, services such as securing surplus liquidity or refinancing possibilities of the MFI that can offer the partner bank in this partnership seem to be essential to the functioning of the MFI towards the road to maturity. In this partnership the bank appears to be indispensable to the proper functioning of the IMF to the road to maturity. F inally, this analysis reveals that the different strategies of commercial banks entry in microfinance are certainly evolving. Choosing the strategy that fits both the bank and the circumstances at the outset is an important factor in future success. Each approach has its particular rationale, risk profile, success factors, and costs. Once microfinance operations are under way, banks must constantly balance three pillars to achieve the expected success: i. H igh volume of operations, which is achieved by reaching thousands of clients, each with numerous, small and short-term transactions. ii. H igh quality client service, which is delivered to meet the socio-economic needs of clients often living in the informal economy and traditionally marginalized from formal financial institutions. iii. R isk management systems managed by trained people and customized to the high volume of operations and informal nature of the clients. 14.5 KEYWORDS  Microcredit: - A part of the field of microfinance, microcredit is the provision of credit services to low-income entrepreneurs. Microcredit can also refer to the actual microloan.  Microenterprise: - Impact of credit/enterprise interventions on specific microenterprises regarding productivity, use of technology, sustainability, success rates, income levels, sale.  Microentrepreneur: - Owner/ proprietor of a microenterprise. 14.6 LEARNING ACTIVITY 1. Write short note on MFI Commercialization 154 CU IDOL SELF LEARNING MATERIAL (SLM)

_________________________________________________________________________________ _________________________________________________________________________________ 2. Explain the relation of commercial banks & MFI _________________________________________________________________________________ _________________________________________________________________________________ 14.7 UNIT END QUESTIONS A. Descriptive Questions 1. Describe the positive effects of MFIs Commercializing. Discuss Analyse 2. State the the negative effects of MFIs Commercializing. Evaluate 3. net impact of commercial banks entering the Microfinance market. 4. competitive advantages for commercial banks entry into MF. 5. the disadvantages for commercial banks entry into MF. B. Multiple Choice Questions (MCQs) 1. RBI has recently opened a separate category of non-banking financial companies for micro finance institutions, namely, NBFC-MFI under its control to remove the ambiguity over regulation of MFIs. Under the guidelines issued on 2 Dec 2011, an NBFC-MFI should have minimum net owned funds of a. Rs. 3 crore b. Rs. 4 crore c. Rs. 5 crore d. Rs. 6 crore 2. As per the guidelines issued by RBI, all NBFC-MFIs should maintain an aggregate 155 margin cap of not more than a. 8 per cent b. 8 per cent c. 10 per cent d. 12 per cent CU IDOL SELF LEARNING MATERIAL (SLM)

3. The tenure of the loan issued by NBFC-MFI to the borrower should not be less than 24 months for loan amount in excess of a. Rs. 15,000 b. Rs. 20,000 c. Rs. 25,000 d. Rs. 30,000 4. What is the role of MUDRA under PMMY Loans? a. MUDRA is a direct lending Institution and lends to small /micro units entrepreneurs directly for PMMY b. Acts as a Refinance Agency and refinances to all banks, NBFCs, MFIs for onward lending to customers under different categories of PMMY loans, as per need of the customer c. MUDRA is regulator of banks d. None of these 5. What are the Interest rates of the PMMY loans extended by banks, NBFCs, MFIs to the borrowers? a. Reasonable rates decided by lending banks, NBFCs, MFIs that should fall within the overall RBI Guidelines b. The rates as prescribed by MUDRA c. Uniform rates as stipulated by the RBI d. None of these Answer 1. c 2. d 3.a 4. b 5. a 14.8 SUGGESTED READINGS  Branch, Brian & Janette Klaehn. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. Washington: PACT Publications.  Dowla, Asif & Dipal Barua. (2006). The Poor Always Pay Back: The Grameen II Story. Bloomfield, Connecticut: Kumarian Press Inc. 156 CU IDOL SELF LEARNING MATERIAL (SLM)

 Hirschland, Madeline. (2005). Savings Services for the Poor: An Operational Guide. Bloomfield CT: Kumarian Press Inc.  Sapovadia, Vrajlal K., (2006). Micro Finance: The Pillars of a Tool to Socio-Economic Development. New Delhi: Prentice Hall of India.  Ledgerwood, Joanna and Victoria (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006.  Rutherford, Stuart. (2000). The Poor and Their Money. New Delhi: Oxford University Press. 157 CU IDOL SELF LEARNING MATERIAL (SLM)