An analysis of the role of microfinance in promoting financial inclusion in india

AN ANALYSIS OF THE ROLE OF MICROFINANCE PROGRAMS IN PROMOTING FINANCIAL INCLUSION IN INDIA SAVITA SHANKAR NATIONAL UNIVERSITY OF SINGAPORE 2011 AN ANALYSIS OF THE ROLE OF MICROFINANCE PROGRAMS IN PROMOTING FINANCIAL INCLUSION IN INDIA1 SAVITA SHANKAR (M.B.A., Faculty of Management Studies, Delhi University) A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY LEE KUAN YEW SCHOOL OF PUBLIC POLICY NATIONAL UNIVERSITY OF SINGAPORE 2011 The rupee exchange rate is approximately Rs 45.50 to a US Dollar (February 14, 2011) Acknowledgments I have been fortunate in receiving generous help and support from various quarters throughout the course of researching for the thesis At the outset, I would like to express my gratitude to the Lee Kuan Yew School of Public Policy (LKYSPP) for providing me an opportunity to pursue my PhD at the school The excellent facilities and stimulating academic environment at the School helped me immensely I am also thankful for the research scholarship provided by the School I am grateful to my thesis supervisor, Professor Mukul Asher for his patience, support and guidance throughout the course of my PhD study His contribution was indeed far more than required of him as the thesis supervisor He has been a source of great encouragement and has been instrumental in improving my thesis through his insightful suggestions I would like to express my gratitude to Professor Charles Adams, member of the thesis committee, for his analytical insights which were invaluable in enabling me to develop my research framework He was kind enough to read and comment on various drafts of the thesis Professor Dodo J.Thampapillai, member of the thesis committee, also kindly reviewed various drafts of the thesis and provided many useful suggestions I take this opportunity to thank my teachers at LKYSPP, Professor Wu Xun, Professor M Ramesh and Professor Scott Fritzen who through their excellent courses helped in developing my thinking on the research topic In addition, I very much appreciate the contribution of Professor Bhanoji Rao for providing guidance on broader aspects relating to economic development I would like to thank Professor Darryl Jarvis for his comments on an early draft of the research proposal which were very helpful I would also like to acknowledge the contribution of Ms Ruth Choe, Associate Director and PhD Coordinator at the LKYSPP for her excellent support throughout the PhD i course I am also thankful to my colleagues in the PhD program, especially Alex, Michael, Seck, Allen, Ching and Bali, who made my PhD experience a very pleasant one I am grateful to Grama Vidiyal Microfinance Limited (GVMFL) for permitting me to carry out interviews of field workers and microfinance members of GVMFL Ms D Shirley, Director, Mr Arjun Muralidharan, Chief Executive and other employees were generous in sharing their knowledge and sparing their time for the study I very much appreciate that the GVMFL officials recognized the need to undertake the study in the manner which rigorous empirical research required I would like to acknowledge the help of Ms Kalpana Sankar, Managing Trustee, Mr N.Jeyaseelan, Chief Operating Officer of Hand in Hand (HIH) India for permitting me to interview HIH microfinance member They too recognized the requirements of rigorous empirical research I wish to mention here the invaluable contribution of the microfinance members who participated in the study, enriching it beyond measure I was touched by their willingness to share their experiences in a forthright manner and their determination to improve their lot despite their constraints I would like to acknowledge the support of my parents who have always encouraged me to achieve whatever I wanted My husband, Shankar, has been very supportive and helpful in enabling me to focus on my research My daughters, Vibha and Varsha, deserve a special "thank you" for their understanding regarding my preoccupation with my studies, their interest in tracking the “word count” progress of my thesis and the innumerable good luck charms they showered me with While all the above have contributed to the thesis, the usual caveat that I am responsible for errors, applies here too Savita Shankar February 16, 2011 ii Table of Contents Page Number THESIS ABSTRACT vii LIST OF TABLES ix LIST OF FIGURES x LIST OF BOXES xi LIST OF CHAPTER APPENDICES xii LIST OF ANNEXURES xiii LIST OF ABBREVIATIONS xiv CHAPTER 1 INTRODUCTION 1.1 Motivation for the Thesis 1.2 Financial Inclusion 1.3 Measures of Financial Inclusion 10 1.4 Barriers to Financial Inclusion 13 1.5 Policies to promote Financial Inclusion: An International Overview 18 1.6 Research Questions 27 1.7 Organization of the thesis 28 CHAPTER 2.1 A REVIEW OF THE MICROFINANCE LITERATURE Challenges in providing credit to low income groups 32 33 iii 2.2 The Microfinance Sector Growth: Three Waves 39 2.3 Features of microcredit 43 2.4 Main Debates in the Microfinance Literature 57 2.5 Evaluation of MFIs 64 2.6 Graduation of Microfinance group members to 76 Individual financial services 2.7 The Microfinance Sector: Regulatory Issues and Practices 83 2.8 Concluding Remarks 86 CHAPTER RESEARCH FRAMEWORK AND METHODOLOGY 91 3.1 Framework for analyzing financial inclusion 91 3.2 Research Questions 96 3.3 Research Design and Method 99 3.4 Data Sources and Collection 102 3.5 Cases at Microfinance Provider Level 108 3.6 Cases at Microfinance Member level 113 3.7 Research Details 115 3.8 Data Analysis 118 3.9 Limitations of the Study 120 3.10 Concluding Remarks 120 iv CHAPTER SECTOR LEVEL ENQUIRY: MICROFINANCE 131 SECTOR IN INDIA 4.1 The Self Help Group Bank Linkage Program (SBLP) Model 132 4.2 The MFI Model 141 4.3 Differences between the SBLP Model and MFI Model 154 4.4 Microfinance in Tamil Nadu 156 4.5 Sector Level Enquiry: Barriers to Financial Inclusion 161 4.6 Sector Level Enquiry: Outcomes of Financial Inclusion 174 4.7 Sector Level Enquiry: Graduation to Individual Financial Services 198 4.8 Concluding Remarks 200 CHAPTER MICROFINANCE PROVIDER AND MEMBER LEVEL 225 ENQUIRIES: AN ANALYSIS OF RESULTS OF EMPIRICAL STUDY 5.1 Profile of Respondents 225 5.2 Barriers to Financial Inclusion 228 5.3 Outcomes of Financial Inclusion 238 5.4 Graduation to individual financial services 256 5.5 Analysis of cases at Microfinance Provider Level 262 5.6 Analysis of cases at the member level 265 5.7 Building a framework for financial inclusion through microfinance 267 v 5.8 Concluding Remarks CHAPTER A SUGGESTED FRAMEWORK FOR MICROFINANCE 269 291 REGULATION 6.1 Present Arrangements for Microfinance Regulation in India 293 6.2 Unique challenges of microfinance regulation 300 6.3 Current regulatory structure in India 305 6.4 Proposed Model for Microfinance Regulation in India 312 6.5 Concluding Remarks 316 CHAPTER SUMMARY, POLICY IMPLICATIONS AND DIRECTIONS 329 FOR FUTURE RESEARCH REFERENCES 344 ANNEXURES 362 vi Thesis Abstract The thesis defines financial inclusion as ongoing access to a range of financial services in an affordable and convenient manner As low income groups are often among those lacking such access, microfinance programmes providing financial services to them have emerged as a public policy instrument to promote financial inclusion This thesis evaluates the contribution of microfinance programs in promotion of financial inclusion in India The research framework and research questions in the thesis were informed by the relevant literature, particularly relating to microfinance, financial inclusion and their links with broader development goals The research questions relate to how the two major microfinance models in India, the self help group bank linkage program (the SBLP) and the microfinance institution (MFI) model, address barriers to financial inclusion, and facilitate expected outcomes To sustain financial inclusion, group microfinance members should graduate to individual financial services The thesis therefore also explores the environment in which such graduation could take place A research design based on case studies and qualitative research methods was adopted The lines of enquiry followed were at the sector level, at the microfinance provider level and at the microfinance member level For the provider and member levels, primary data were collected in the State of Tamil Nadu At the provider level, one organization associated with each model was studied, including interviews of senior officials and 103 MFI field staff At the member level, 34 low income women vii were interviewed The enquiry enabled the development of an explanatory framework for financial inclusion through microfinance The research at the sector level led to understanding of the following: factors influencing microfinance penetration; requirement for improving availability of financial services other than microcredit; need for creating a sector wide credit bureau; benefits of unique identification numbers for residents to facilitate development of credit histories for microfinance members; and the importance of a systematic approach to graduation of group members to individual financial services The findings from provider and member level research included barriers to microfinance membership; the requirement for a wider range of financial services particularly savings services; and the need for enhanced financial literacy and financial management skills among members Distinct categories of MFI and SBLP members also emerged “Effective utilizers” who build up individual repayment capability during group membership, enabling them to graduate to individual loans later, were common to both models In addition, in MFIs, there were “ineffective utilizers” who fail to adequately build up repayment capacity In the SBLP, there were “cashflow smoothers” and “consistent savers” While the first not receive adequate finance in order to invest substantially in their enterprises, the second group uses the SBLP primarily to save 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Q3 What mechanisms are required to provide access to these segments? Q4 Are there any financial services that you feel you should offer but are not doing so right now? If so, what are the constraints preventing the launch of these products? Q5.What you envision as the future of group micro finance members? Do you think they should be graduated out of groups? What are the reasons? Q6 Is the financial training they receive at the time of joining sufficient to enable them handle individual loans in future? Q7 If a member wants to stop borrowing but would like to avail other financial services such as insurance for example, is it possible? If no, why not? If yes, how many such members you have so far? 362 Q8.Do members build up individual credit histories when they avail of loans from your organization? How is it recorded? Can they take advantage of it to avail financial services from elsewhere in future? 363 Annexure 2: Sample Questionnaire for MFP Field Personnel Name of Respondent: Name of Organization: Name of Branch: Number of borrowers handled: Tick Appropriate Answer Nature of Branch: Urban Semi-Urban Rural Q1 Have you come across a situation where a financially excluded member could not access group microcredit ? Yes No Q2 If yes, approximately how frequently you come across such cases? Everyday Once a week Once a month Once a year Q3 What are the main reasons? Please rank Inability to form a group No address proof/ documents Cannot attend meetings/ Does not want to Does not have any economic activity Is not able to pass test after receiving training Q4 Are there any financial products which are currently not being offered but which members ask that you should offer? 364 Q5 In your experience, have group micro credit members expressed a desire to move out of groups into individual financial services? Yes No How many of your borrowers have asked you about this aspect: Fewer than 10 10-50 More than 50 More than 100 Q6 In your opinion you think, group micro finance members can handle individual financial services? Yes No Why? Q7 What are the main reasons why members drop out of groups? 365 Annexure 3: Sample Questions for Discussion with MFP Member (In-depth interview) Name of Respondent: Name of Organization: Name of Branch: Tick Appropriate Answer Nature of Branch: Urban Semi-Urban Rural Demographic Information: Age: Education: Number of members in family: Occupation: Q1 What are the sources of your family income and how much does each source contribute? Are there any fluctuations in the income during the year? What were the sources when you joined the MFP years ago? What were the fluctuations then? Q2 Financial decisions a Savings Where are you saving your money and why? 366 Jewelry/ safe/ bank / others Reason for saving b Loans Trace out the history of the different loans availed in the last three years and the utilization by your family What is the interest rate on the different loans? How many times have you had to borrow from the money lender in the last years, when and why? What is the interest rate you paid? If another MFP were to offer you a loan, how would you decide if you should take the loan from them or from your existing MFP? Are you able to repay installments of the loans comfortably? If no,why? If yes, how you manage? c Other financial services What other financial services have you availed and why? (ask about specific financial services not used at present) Q3 At any stage did you think you needed any financial products which you could not access? If so, details? Q4 Do you know which other MFPs operate in this area? Do you know what terms they offer? How many MFPs have you dealt with? Are you happy with the services you got? Q5 Financial Planning What are 367 a Your costs to produce/ work per week? b The expenses of your family per month c The incomes of your family per month d Your capacity to save money? e Are there any major expenses for your family in the next few years? How you plan to meet them? f How you plan your day to day finances? Has there been any difference in the way you plan them after becoming an MFI member? Q6 What you envision for your self going forward? Q7 Have you planned what to with your next loan? How long you plan to keep borrowing? Q8 Do you want to avail individual financial services in future? What are the reasons? General Question: Q9 Have you come across a situation where a financially excluded individual could not access group microcredit? If yes, what are the reasons? Q10 What are your suggestions for the MFP? 368 ... Distribution of Microfinance of Microfinance and Banking 173 Services across states in India Figure 5.1 Explanatory framework for financial inclusion through 267 Microfinance x LIST OF BOXES Box 1.1: India. .. microfinance in financial inclusion in the thesis (I) How the two major microfinance models in India, the SBLP and the MFI models, address financial inclusion? (II) Why are there gaps and how... which microfinance has many of the pieces”10 With the rapid growth of the microfinance sector in India, there were 70 million microfinance accounts by 2009, indicating an annual growth rate of 25