DR. MUKUL MITRAThe author explores the plausibility of micro finance as an effective tool for poverty alleviation“We can in a process create a society, create a community totally free from poverty. Nobody should suffer from poverty because he does not have to. It is not part of human condition, human civilization. It is simply imposed on us. It is artificial thing imposed on us and we can throw it out.” – Mohammad Yunus
Abstract
India has been shining with an average 8.8 % growth in GDP in last four years. At the same time in the other India, 200 million people are living below poverty line. The approach paper to the Eleventh Plan indicated that the absolute number of poor is estimated to be approximately 300 million in 2004-05. Despite phenomenal growth in Banking system, 58% of household does not have any bank account. To supplement Government’s intervention, a large number of NGOs, Self Help Groups (SHG), Civil Society Organizations (CSO) and micro finance institutions (MFI) are making relentless effort to bring these teeming millions in the fold of inclusive growth. Bandhan is one such organization whose success in a short span of six years is noteworthy. This case study aims to understand functioning of this micro finance institution.
Introduction
Microfinance can change the lives of the poor. There may not be a quantum jump in the income but it is possible still to ensure a reasonable rise in the income of the poor
(Rangarajan, 2005). Asian development Bank- ADB (2000) has defined microfinance as the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their micro-enterprises. Microfinance services are provided by three types of sources:
i) Formal institutions, such as rural banks and cooperatives;
ii) Semiformal institutions, such as non-government organizations; and
iii) Informal sources such as money lenders and shopkeepers.
Institutional microfinance is defined to include microfinance services provided by both formal and semiformal institutions. Microfinance institutions are defined as institutions whose major business is the provision of microfinance services. In India, RBI (2007) has defined micro credit (or finance) as the provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their living standards. Micro Credit Institutions are those, which provide these facilities.
M-CRIL’s data on the performance of Indian MFIs show that these have been expanding at about 30–50% per year in terms of clients and 50–60% per year in terms of portfolio. As a result, India now has a microfinance outreach that is as high as that in Bangladesh - perhaps over 18 million in July 2007. Contrary to the usual experience of microfinance sectors in other countries, however, this growth has been fuelled neither by large inflows of grants nor by a particularly high level of interest charged to clients. Indian microfinance institutions have seen dramatic improvements in efficiency which has resulted in decline in effective interest rates being paid by microfinance borrowers and it is among the lowest in the world. (Sinha, 2007). Despite these efforts, the annual supply-demand gap of credit is still in the range of Rs.2,234 – Rs.4,629 billions. Further, the World Bank estimates that the Indian microfinance activity currently reaches only 4% of the poor (CMF,2006).
According to All-India Debt and Investment Survey (AIDIS), 2002 of the National Sample Survey Organization (NSSO), share of non-institutional sources of credit for the cultivator households had declined from 92.7 per cent in 1951 to 30.6 per cent in 1991. However, it had increased to 38.9 per cent in 2002, mostly due to increase in moneylenders’ share. In this situation, all the agencies including Government, banks and microfinance institutions are expected to play greater role in eradication of poverty. Bandhan is one of the large microfinance institutions in the country and in the case study, their functioning has been examined.
Background Note
Bandhan was established by Mr Chandra Shekhar Ghosh in 2001 as an NGO. In the words of Mr. Ghosh, “Over the years, we have realized that microfinance is not the last word for the development of the poor. Therefore, we took an innovative initiative to design a program for the poorest of the poor with an objective of graduating them to the mainstream microfinance program. A health-education program was also introduced and is being run in a sustainable manner. We plan to address the other pressing issues of the society as well viz. child education and the like”. Bandhan Financial Services Pvt. Ltd. (BFSPL) was set up in 2006 as an NBFC with employees are the major stakeholders. Presently Bandhan is operating under two entities – as a Society and as an NBFC with its Head Office at Salt Lake, Kolkata. The NBFC unit is concentrating more on financial services and the parent Bandhan society continues with micro finance and development activities.
Bandhan’s mission
Reduce economic and social poverty significantly through providing client focused, quality, and cost effective, sustainable financial services.
Vision
A world class financial institution serving two million clients by March 2010.
Values
Bandhan deeply believes in its values and they are manifested through the day-to-day behavior of its team members. These values “CREATE” strong principles where:-
C- Cost effective and sustainable
R- Respect for all
E- Exemplary governance
A- Accountability, professionalism and discipline
T-Transparency and integrity
E- Effective team work and commitment
Growth of Bandhan in a short span is significant. Forbes (2008) magazine’s first-ever listing of the World’s Top 50 Microfinance Institutions out of 641 microfinance institutions operating globally; it has occupied the second position just after ASA of Bangladesh and 15 positions above “Grameen Bank”. It has received the prestigious “Skotch Challenger Award” in 1998 for contribution to financial inclusion. The Government of Afghanistan and the World Bank have approached them to facilitate development of micro credit at the strife torn country (The Hindu, 2008). Like many other MFIs, Bandhan focuses on poverty alleviation through increasing family income through women which in turn gradually increases the status of the woman in the family as well as in the society and ultimately leads to women empowerment.
Table 1: Bandhan – performance highlights as on April 2009
Area of operation 11 States
No. of districts covered 51
No. of branches 720
No. of staff 4277
No. of groups 65046
No. of members 1628551
No. of borrowers 1498808
Cumulative loan disbursed (in crores) 2359.47
Loan outstanding (in crores) 734.82
On time repayment rate 99.96%
[Source : www.bandhanmf.com]
Micro Finance Products
Bandhan provides micro loans to the poor women mostly through the group-based lending model developed by Bangladesh’s Association for Social Advancement (ASA), which has been suitably modified by Bandhan to suit the local requirements. The model focuses on simplified operations, and enhanced credit approval and loan-monitoring mechanisms. First, a group of 10-20 poor women is formed and then loans are given to individual member on the recommendation of the group. However, to get a loan, a member must have to attend minimum two successive weekly group meetings. Before sanctioning of loan field staff visits applicants’ houses and makes assessment of project as well as the applicants. The loans are finally sanctioned by Branch Manager on the basis assessment of field staff.
Table 2: Products of Bandhan
Products Micro loan product Micro enterprise loan Emergency loan
Loan amount Rural:– Rs 1000 -7000
Urban – Rs 1000 -10000 Rs. 20000
Rs.50000 Rs 1000-5000
Loan duration 1 year 1 year 1 year
Interest rate (flat) 12.5% 12.5% 10 %
Repayment frequency Weekly Weekly Weekly or monthly
Membership fee Rs.10 Rs. 20 NA
Insurance fee 1% on loan amount 1% on loan amount
Security deposit 10% on the loan amount 5% on the loan amount
Bandhan usually extends credit for agriculture, zari work, embroidery, animal husbandry, agriculture, crafts work, small cottage industries, small trading, vegetable vending, fishing, poultry, rice husking, horticulture, manufacture of surgical instruments, pottery, small services, small businesses etc.
Micro loans are given to landless and asset less women belonging to a family of five members with monthly household income less than Rs. 2,500 in rural areas and Rs. 3,500 in urban areas. The loans are also granted to individuals owning less than 50 decimal (1/2acre) of land or capital of its equivalent value. Quantum of the first loan is between Rs.1,000 - 7,000 for the rural areas and between Rs.1,000 - 10,000 for the urban areas. The subsequent loan is Rs.1,000 - 5,000 more than the previous loan. Though the loans repayment period is weekly, it offers 7 weeks grace period in deserving cases.
In 2007, the MFI launched health loan scheme to address the emergency health needs of the poor and their families. The applicant, her husband and her children can avail the loan. However, the loans are granted to members who have completed two loan cycles and past record as well as behavior and relationship with other group members is satisfactory.
Finance charges
Earlier Bandhan used to charge an interest rate of 17.50%. In May 2006, consequent upon increase in revenue and reduction in cost of operation the rate has been reduced to 12.50% flat which, in fact, translates into 23.56% annualized and this includes cost of borrowings (12% annualized), operation cost (9%), margin, risk gradation etc. Bandhan also charge 1% as processing fees and 10% upfront refundable loan security deposit on the principal loan amount at the time of disbursement.
New initiatives of Bandhan: Targeting the Hardcore Poor:
According to the MFI, hardcore poor as those who lack confidence to avail and repay loans or take the risk of initiating a business of their own and their desperate condition requires more than just micro credit. “To reach out to the invisibles of mainstream society and uplift their economic condition so that they can feed themselves and graduate into mainstream microfinance program”, Bandhan has introduced Chartering into Unventured Frontiers- Targeting the Hardcore Poor (CUF-THP) programme. The process involves tracking the poorest of the poor and developing their skills appropriate to the management of a local enterprise. Once the identification is made grant is given in the form of assets. Depending upon proper utilization of assets for income generation, these people become eligible for joining mainstream microfinance programmes. The prize money that Bandhan received from Consultative Group to Assist the Poor (CGAP) for the “Pro-Poor Innovation Challenge (PPIC)” award, is being utilized for the programme.
Bandhan’s Education Programme (BEP) – Non Formal Primary Education
With the stipend being received by Shri Chandra Shekhar Ghosh, Founder & CEO, Bandhan as Senior Ashoka Fellow, education programme has been launched. The scheme is meant for drop-out children and those who are not going to school in the age group of 8-14 years and belonging to poor families. Its objective is to ‘create a low cost educational model with 100% attendance of students and no dependence on private tuition’. Presently it has established 60 schools under the programme.
Performance:
In India, Credit Rating Information Services India Limited (CRISIL) rates the MFIs in a scale of mfR1 to mfR8, the former being the highest one. It’s rating for Bandhan in 2008 was mfR3 which according to CRISIL “reflects the MFI’s proven track record in scaling and sustaining its microfinance operations, its good assets quality and experienced governing board and senior management as well as its diversified funding portfolio. The MFI is one of the top ten micro finance institutions of the country” (CRISIL, 2008). The audited financial results throw light on significant growth in performance of Bandhan in the last three years.
Table 3: Highlights of financial performance of Bandhan
(Rs.in crores)
As on March 31 2008 2007 2006
Interest income from loans 44.62 18.19 5.24
Interest on investment/ bank deposits 0.58 0.23 0.02
Total fund based income 45.20 18.42 5.26
Total fee based income 6.54 2.59 0.16
Total income 51.74 21.01 5.42
Total interest on borrowing & finance charges 17.77 6.14 1.36
Gross spread 27.43 12.28 3.89
Gross profit 33.97 14.87 4.06
Expenses – Personnel 13.73 4.22 1.42
Expenses – Administrative 6.47 2.60 1.45
Write of loan losses 0.52 1.78 0.73
Net surpluses 12.81 6.20 0.25
Net worth 21.45 8.64 2.09
Long term borrowing 283.00 100.29 28.86
Short term borrowing /deposits /security of members 45.77 20.83 8.17
Total loans and advances 278.27 126.13 37.11
Total current liabilities 54.38 26.85 9.51
Total current assets 77.07 8.92 3.06
Total assets 358.95 136.12 40.47
Operational self sufficiency 132.39% 141.33% 104.87%
[Source: CRISIL MFI rating report July 2008]
The data in Table 3 indicate that there has been substantial growth in 2008 largely because of infusion of substantial funds by way of borrowing from financial institutions. The total borrowing including both long term and short term ones, increased from Rs 37.03 crores in 2006 to Rs.328.77 crores in 2008. During the same period, loan disbursement has gone up from Rs.37.11 crores to Rs.278.27 crores and income from Rs.5.42 crores to Rs.51.74 crores. Consequently net surplus rose from 0.25 crore in 2006 to Rs 12.81 crores in 2008.
HR Practices
An effective HR practices is essential for growth. As on 31st March 2008, out of Bandhan’s total employee strength of 2415, 1776 were credit officers each handling around 428 borrowers. In the organization, the employees receive fixed pay and promotion is performance based. The recruitment process is swift and the training is on the job under the supervision of a senior. Role and responsibility and growth path for each employee is clearly laid down. The staff at the Head office and Regional offices are to visit the branches regularly so that they can understand operations at the grass root level. Effective monitoring at each level has resulted in 99 % recovery rate over the years. In 2008, the employee attrition rate was only 7.79% as compared to 5.17% and 8.13% of 2007 and 2006 respectively.
Management Information System
MIS is viewed as one of the important tools for reduction of cost of operation and for improvement of operational efficiency for MFIs. As on 2008, in Bandhan data was maintained at branch level manually which delayed the process of consolidation at the Region and Head office level. However, the MFI is presently working with Bangladesh Rural Advancement Communities (BRAC) to develop a customized software which is likely to be implemented in 2009.
Conclusion
Success of Microfinance Institutions, pioneered by Grameen Bank of Bangladesh, has proved that it is a good business proposition too as is evident from the financial statement of Bandhan. However, paucity of capital is a major hindrance for growth of MFIs. The Reserve Bank of India has brought financing of MFIs by Scheduled Commercial Banks under the purview of Priority Sector Lending norms. The Banks too are finding quite it strategically attractive because of very high rate of recovery and wide spread reach of MFIs. In view of the performance and the growing reach of Bandhan, a large number of financial institutions such as SIDBI, ICICI Bank, HDFC Bank, AXIS Bank, ABN AMRO, Standard Chartered, Citi Bank, State Bank of India, UCO Bank, UBI, Yes Bank, BNP Paribas, IDBI Bank, Indian Bank, Bank of India and LIC, have extended their financial assistance by way of loans. However, concentration risk is quite high for Bandhan as 93.85% of its total loan portfolio is in West Bengal only. A socio economic and political changes and growing competition may pose serious challenge to them. Incidentally ASA, the mentor of Bandhan has also started operation in West Bengal. Therefore, to achieve its goal of reaching out to two million poor by March 2010 and thereafter to add one million members each year, Bandhan will have to strike an appropriate balance between cost of borrowings and cost of operation. By increasing scale of operation through innovation, technology initiatives and strategic partnership may be effective in the process of its sustainability and further growth.
References:
1. ADB (2000): Finance for the poor: Micro finance development strategy, ADB,
2000
2. CMF (2006): Microfinance in India – Current trends and challenges, Centre for microfinance, Institute for Financial management and research, October, 2006
3. CRISIL (2008): Bandhan: MFI Grading report, July 2008.
4. Rangarajan (2005):“Microfinance – the road ahead” Inaugural Address, April 12, 2005, New Delhi
5. RBI (2007): Circular no. RBI/2007-08/38 RPCD. MFFI. BC.No.08 / 12.01.001 / 2007-08 July 2, 2007
6. Sinha, Sanjay (2007) : Efficiency with Growth: The Emerging Face of Indian
Microfinance, ADB Quarterly News letter, Finance for the poor, Sept.2007,
Vol 8, no.3.
7. http://www.bandhanmf.com
8. http://www.cgap.org/p/site/c/template.rc/1.26.1453
9. http://www.forbes.com/2007/12/20/microfinance-philathropy-credit-biz-cz_ms_1220microfinance_table.html
10. http://www.mospi.nic.in/nss_502_press_note_16feb06.htm _______________________________
Dr. Mukul Mitra is Professor, International School of Business & Media (ISB & M), Kolkata. He can be reached at mitra.mukul@yahoo.com ALL RIGHTS RESERVED
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