Even as the microfinance movement sneaked up on non-government organisations (NGOs) and re-wrote a number of rules regarding ‘help’ to the poorest of the poor, corporate involvement in this area is slowly, but surely, making a mark and will substantially change financial equations with scores of people deprived of access to formal banking.
From microcredit to insurance and product support services, the NGO-bank partnerships are everywhere. The marriage of formal and informal sector banking is at the honeymoon stage today but whether the relationship will strengthen or will further deepen the debt of the poor, only time will tell.
For the moment, everyone’s smiling at the interest and involvement of big banks in microfinance. The impressive roll-call of corporate involvement in either funding self-help groups directly, or entering into partnerships to provide support to NGOs involved in microfinance, providing insurance and allied services or extending credit, includes ICICI, Citibank, ABN Amro, Hindustan Lever Ltd., HDFC, Max New York Life Insurance, etc.
While NGOs obtain a satisfactory monetary cushion for their efforts, the bank gains an entry into hitherto inaccessible territory and establishes its toehold into a nascent market. For the moment, it is still a toehold. But, all the players in the field believe that it’s a market set to grown phenomenally,
“The interest shown by corporates is now definitely visible and definitely indicates the maturity of the industry,” said Prabhat Labh, associated with CARE India’s CASHE – Credit and Savings for Household Enterprise Programme. CARE itself, works in partnership with twenty five microfinance institutions (MFIs), covering about 250,000 women in the states of Andhra Pradesh, Orissa and West Bengal and facilitates credit linkages to the extent of Rs 25 crores.
There’s a huge potential no doubt. If current credit flows are in the range of Rs 5,000 crore, they can easily touch Rs 50,000 crore, he maintains. Other bankers also echo this belief, surmising that 80 million poor households, instead of the present 11 to 12 million households, can be covered by microcredit.
But what has made corporate financial institutions sit up and take note is the astonishing payback rate for loans taken. Almost all the NGOs report a cent per cent payback. Social networks, that they are part of, are strong pressure groups to ensure recovery of dues. Unlike the urban market, people in rural areas do not have access to so many financial services and corporates have now begun moving into services like insurance and social security.
The need to look at allied services, most notably insurance, is governed by the pragmatic desire to reduce risks and ensure the financial health of the customer. ICICI Bank has aggressively moved into microfinance over the last three years and tried two models of involvement and intervention. The first was the setting up of a network of self-help groups in Tamil Nadu. At least 14,000 groups are in operation today, covering 2.8 lakh households where all the beneficiaries are the women of the household.
Officials at ICICI disclosed that at least Rs 240 crore credit has been extended to these groups and now, a local NGO (formed by ex-employees of ICICI) is being pressed into service to maintain the network.
The other model, followed in states like Kerala, Andhra Pradesh, Karnataka, Orissa, West Bengal, Jharkhand, Uttar Pradesh and Rajasthan, works in partnership with local NGOs to set up SHGs. The NGOs are paid a transaction support service-provider fee and if they manage to better maintain portfolio quality, they are given a risk margin to help them earn more! At least 40 NGOs are in partnership with ICICI, the only criterion being the NGO’s strength and credibility with its members.
For ICICI, as also with other corporate finance institutions interested in microfinance, it makes sound business sense to work with NGOs. The latter have a far better contact with the rural market and ensure better ability to organise payback of loans. In fact, NGOs are crucial to the success of the movement. If some NGOs give loans at 18 to 25 per cent interest, others can manage rates of ten to 12 per cent. The crux is the 100 per cent recovery and even if defaulters crop up, the corporate big brother is paid back by the NGO while the latter organises a recovery in due time.
According to the ICICI official, the bank’s audit on the scheme showed that collections were voluntary and not forced, the regularity of collections (once in 15 days or once a month) and the small amounts to be collected, ensured that recovery was total. According to the bank’s analysis, defaulters fell into two broad categories – the wilful defaulters and those who could not pay back due to health, weather conditions, etc. The latter is clearly seen as being beyond the control of the borrower. And that’s where accident and life insurance becomes the next logical step.
BASIX, a premier microfinance institution started in 1996, provides livelihood finance, agricultural and business development services to help reduce risks, institutional development services and has a market linkage network in rural areas. It operates in seven states covering around 80,000 customers in credit services and 140,000 customers in non-credit services.
Till 2002, BASIX concentrated on facilitating microcredit, but moved into other services after 2003. “We have to move beyond the minimalist Grameen Bank model and provide financial services too, said D Sattaiah of BASIX.
While Labh believes that increasing corporate involvement will serve to professionalise the sector and help move away from the charity approach, Citibank, the premier foreign bank operating in India, has a strongly defined ‘philanthropic and social responsibility’ approach to MF.
“We are clearly of the view that economic empowerment as well as economic development is the route for us, ” says Madhulika Gupta, Citigroup’s vice president and director corporate affairs for India, Sri Lanka and Bangladesh,” However, Citigroup is still staying away from direct lending, preferring to support NGOs that already possess a very strong microfinance program. “We stress capacity building and found that the NGOs need funding for training, finance education, etc.” Citigroup India’s Community Support Program was launched in June 1997 provides grants for six NGOs in India, including SPARC (Mumbai), Friends of Women’s World Banking (Ahmedabad), Working Women’s Forum (Chennai), Sasha (Kolkata), Sahasee (New Delhi) and Share MicroFin Ltd. (Hyderabad).
In November 2001, it provided substantial capacity building grants to SEWA Bank and Share MicroFin in Hyderabad. A financial literacy programme in partnership with SEWA Bank was followed by a $3.5 million dollar grant to set up the Indian School of Microfinance for Women, spearheaded by SEWA Bank, Friends of Women’s World Banking (FWWB), Ahmedabad along with Coady International Institute, Canada.
Last year, Citigroup initiated the MicroEntrepreneur Awards for 12 people, half of them women, who further microenterprise in their region. They will be given their cash awards of Rs 100,000 in 2005, designated by the UN as the International Year of Microcredit.
However, if in 1997, Citigroup looked at microfinance purely as a tool for social responsibility, it is clear that it is also beginning to explore more active corporate involvement in areas of lending. Rajesh Jogi, who heads Citigroup’s microfinance initiative in India, said that the potential of MF to grow was indeed immense. However, the customers, such as they were, represented the weakest borrowers; average loan size was small and staggered over a long period of time.
In such a situation, the cost of recovery was high and the task of managing the quantum of loans was immense. Apart from working with NGOs and providing training and support services, Citigroup has also provided back loans to NGOs like SHARE and Swayam Krishi Sangam. At the moment, the amount is small (barely Rs 10 to 12 crores). But Jogi is optimistic about the potential for growth. And, while the NGOs build up stronger portfolios and grow and strengthen, the bank benefits too.

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