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Decoding microfinance

Microfinance means providing small loans to very poor families that have no access to mainstream financial institutions. Read on to know more about the field.

education Updated: Jul 14, 2010 10:48 IST
Pranab Ghosh

He would have been a hardcore banker had he not branched out to microfinance. And that was because “it is a business with a social mission offering double bottom line satisfaction to all stakeholders”. Reykam Jayasurya, an MBA and LLM, started his career in 1982 in the State Bank of India before moving to the Small Industries Development Bank of India (SIDBI) in 1991. In 2003 he became a microfinance expert and consultant and is at present the CEO of Asmitha Microfin Limited, a leading microfinance institution, drawing a pay package, which in his own words is “competitive and comparable to the banking industry”.

“Microfinance,” to Jayasurya “means provision of financial services to the low income group which lacks access to such services.” “It offers small loans for various purposes, predominantly income-generation activities, as well as other financial services such as savings, insurance, remittances etc.” The loan amounts are repaid over one year, in small weekly, fortnightly or monthly installments.

The evolution of micro finance in India can be broadly divided into four distinct phases: The cooperative movement (1900-1960), subsidised social banking (1960-1990), self help group (SHG) - bank linkage programme and growth of NGO-MFIs (1990-2000) and commercialisation of microfinance.

During the first phase, credit cooperatives were the vehicles to extend subsidised credit to villagers under various government-sponsored programmes. In the second phase the government focused on measures such as nationalisation of banks, expansion of rural branch networks, establishment of Regional Rural Banks (RRBs) and the setting up of apex institutions such as the National Bank for Agriculture and Rural Development (NABARD). But the banks, points out Jayasurya, were not forthcoming when it came to offering loans to low-income borrowers with little or no cash income.

The failure of subsidised social banking triggered a paradigm shift in delivery of rural credit with NABARD initiating the SHG - Bank Linkage Programme (SBLP), aiming to link informal women’s groups to formal banks. During the same period another apex level institution, SIDBI, formed in 1990, initiated the Mahila Udyam Nidhi, a project to empower women with access to micro credit through NGOs. These initiatives generated a lot of interest among newly emerging microfinance institutions (MFIs), largely of non-profit origin, to collaborate with NABARD and SIDBI.

In the current phase where the banks are taking increasing interest in the rural sector the “NGO-MFIs have begun to transform themselves into more regulated legal entities such as NBFCs to attract commercial investment to meet the huge demand for microfinance services,” points out Jayasurya.

The potential of the Indian microfinance sector is enormous. “On a conservative estimate, 100 million households need micro-credit and other financial services which are not available to them,” says Udaia Kumar, MD Share Microfin Limited, an MFI. “In the last two decades, the MFIs have grown phenomenally but they could hardly reach around 15 per cent of potential clients,” he says. Therefore, there is enough scope for this sector in India to grow horizontally and vertically. Agrees Atul Takle, executive vice president, corporate communications, SKS Microfinance Ltd. “The microfinance sector is in its initial stage and is growing rapidly. Thus, it has immense job and career opportunities.” The sector, Kumar says, needs personnel from various educational and experience backgrounds to serve in an organisation at various levels such as operations, finance, human resources, internal audit, and corporate communications.

What's it about?
Microfinance means providing small loans to very poor families that have no access to mainstream financial institutions. These small loans help them engage in productive and income-generating activities, leading to reduction in poverty and improvement in living standards. Today microfinance offers a variety of products and services such as credit, savings, insurance and money transfer. This is because the poor have also realised the need for a diverse range of financial products to be able to build assets, stabilise consumption and protect themselves against possible risks

Clock Work
A day in the life of a field credit agent (FCA):
7 am: Centre meeting with prospective clients, mainly rural women. The day of an FCA begins at the same time as that of his/her clients. They conduct
four to five such meetings per day.
10 am to 12 pm: Collect repayments from members
2 pm to 4 pm: Collect loan applications from members
4.30 pm onwards: Oversee the formation of new groups, conduct group training, do loan-utilisation checks post disbursement
6 pm: Report to branch managers

The Payoff
The field staff is provided a target-oriented compensation (inclusive of incentives/bonuses) of around Rs 10,000 per month.
Area managers as freshers earn a CTC of Rs 6 lakh per annum
The top management is paid at par with the mainstream industry

. Have experience of social, economic and cultural conditions of a place
. Have general understanding of microfinance
. Have the drive to increase growth and outreach
. Have a general understanding of the regulatory role of the RBI
. Good communication skills

How do i get there?
Minimum qualification required to be a field staff is 10 + 2 pass. However graduates are preferred. For a higher management position you need to be an MBA.
One can begin work as a field credit assistant, the front-end representation of an MFI and move up the ladder as senior field credit assistant, manager, area manager, deputy divisional manager, divisional manager, and vice president

Institutes & urls
Currently there is no institute/university offering specialist programmes (bachelor/masters) only on micro finance. However, some institutes have incorporated courses in micro finance in their syllabus. Some of the institutes imparting coaching on microfinance are:

. Institute of Rural Management Anand
. Tata Institute of Social Sciences, Mumbai
. Xavier Institute of Management Bhubaneswar
. Indian Institute of Rural Management, Jaipur
. CSREM – Orissa
. MANAGE – Hyderabad

Pros & cons

Positive impact on the lives of the poor gives you immense satisfaction


Profession is part of the process of being a change manager


Continuous expansion strategies to reach out to the underprivileged keep MFI operational costs high, hence you will always be under pressure to perform

Untouched by the slow down

A senior practitioner gives a ringside view of the profession

Why has microfinance been so talked about and practised of late? How can it shape the future of a nation?
Initially the scope of micro finance was simple and charitable. The programme was started by donor-driven organisations, with ‘not-for-profit status’, and a mission to eliminate poverty and give out very small business loans to help the poor. Banks did not approve the loans to the have-nots. It was also difficult to expand the operations due to lack of funds. It was at this point of time that the MFIs slowly got transformed to NBFCs and attained for-profit status and the banks have since then started financing larger amounts to the NBFCs.

Today, after three decades of rapid growth, the microfinance industry has become more exposed and governments and regulators have realised the importance of scaling up microfinance operations across the country. As per Sa-Dhan’s quick report, there are about 1200 micro finance institutions operating in India with different legal structures, and the sector is growing over 50 per cent a year.

Public and private commercial banks realised the need for microfinance at the bottom of the pyramid and are now entering microfinance markets that were once solely the territory of philanthropists. Commercial investors are also seeing attractive returns on investments that have encouraged some more PE investors to invest money in the sector.

However, microfinance is not yet at the centrestage of the Indian financial sector. The knowledge, capital and technology to address related challenges however now exist in India, though they are not yet fully aligned. With a more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery of financial services to the poor people in India.

Has microfinance any special significance especially when the world faces an economic crisis? What have been the major developments in the field of micro finance that have had a positive impact on the world?
Microfinance has been able to withstand the impact of global recession by way of ensuring continuous fund flow, increasing access to financial services, increasing credit-worthiness, customer-friendly services and flexibility of the products. As per MIX market / Sa-Dhan data, the portfolio growth has been substantial in the recent years because of the systems and processes, professional approach, timely guidance from the top management, good corporate governance, induction of new professionals into the sector and regular monitoring mechanisms.

Some of the major developments in the sector have been considerable poverty reduction, wider acceptance of microfinance, improved funding, flexibility, and resistance to unexpected negative developments such as recession.

Who are the leading employers (of a microfinance professional), in India and globally?
ASA and Grameen Bank in Bangladesh, Banco Compartamos in Mexico, SKS, Spandana and SHARE Microfin in India, and Banco do Nordeste in Brazil.

Udaia Kumar, MD Share Microfin Limited Interviewed by Pranab Ghosh