Scaling up Microfinance: What Next?: Top 10 focus areas to achieve a "Purpose Centred Growth"

By Dr. Natarajan Jeyaseelan

This book will be more useful to the professionals of NGOs, MFIs, Banks and other stakeholders in the microfinance sector as it offers various strategies on how to harness the potential and grow their microfinance business. While the microfinance sector is growing aggressively, heading for an unsustainable growth, the “Purpose Centred Grow

• Language: English
• Publisher: BUUKS
• Release date: Dec 20, 2019
• ISBN: 9789389604580

Book preview

SCALING UP MICROFINANCE: WHAT NEXT?

SCALING UP MICROFINANCE: WHAT NEXT?

Top 10 focus areas to achieve a Purpose Centred Growth

Dr. NATARAJAN JEYASEELAN

Copyright © 2019 Dr. NATARAJAN JEYASEELAN

All rights reserved. No part of this book may be reproduced, stored, or transmitted by any means-whether auditory, graphical, mechanical, or electronic-without written permission of the author. Any unauthorized reproduction of any part of this book is illegal and is punishable by law.

To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information available in this publication.

ISBN 13: 978-93-89604-58-0

ISBN 10: 93-89604-58-3

Printed in India and published by BUUKS.

TESTIMONIALS

Dr. Jeyaseelan has devoted much of his working life to microfinance, in his work with Indian Bank and Hand in Hand. In this book, he summarizes what he has learned and his suggestions will be of great value in the future development of the field, particularly as regards the importance of savings as a service for poorer people as well as a source of funds for financial institutions, and the need for reduced government interference.

Prof. Malcolm Harper

Emeritus Professor, Cranfield School of Management, UK

This is a welcome addition in the current context where we are concerned with building businesses that result in sustainable development. Dr. Jeyaseelan’s years of experience and practical solutions in rural finance have been fully utilized in this book. This is a hard, critical look at the meaning of microfinance and how to create an impact on vulnerable people’s lives through microfinance. A must-read for those who believe that business at the bottom of the pyramid can and should be a win-win for all stakeholders.

N. Srinivasan

Former CGM, NABARD

Rural Finance and Livelihoods Expert

One of the best books with important information to guide MFIs, NGOs, and banks about microfinance. The author has organized a large volume of content and research with a logical structure that provides the reader with relevant insights on microfinance.

Dr. N. Lalitha, Former HOD

Gandhigram Rural University, Gandhigram.

Dr. Jeyaseelan with his rich hands-on experience in both models of microfinance in India has brought out this timely publication. While analyzing the issues relating to scaling up, the book also offers a framework for balanced growth considering all stakeholders. The book will be valuable for practitioners, academics, and policy makers to develop insights on future drivers of the microfinance industry.

Girija Srinivasan

Development Finance Expert

Coauthor of State of India’s Livelihoods Report

This book has come at the right time. Microfinance has been scaled up significantly in India but there is a gnawing question whether the industry has forgotten the very purpose for which it came into existence—the betterment of the lives of people who become members of the microfinance industry. This book should help all practitioners to do a deep soul search and possibly come up with a 2.0 version that would retain the core of microfinance while enabling scale up too.

Vasudevan PN

Managing Director and CEO

Equitas Small Finance Bank

This book gives a very thoughtful review of microfinance and valuable suggestions for the future. Important for all NGOs working with microfinance.

Dr. Percy Barnevik

Cofounder and Honorary Chairman

Hand in Hand International, London

Built on solid experience and profound knowledge, this book elaborates on the potential of microfinance and related fields. It highlights the impact on inclusive growth and suggests a way forward, thus an essential book for everyone interested to lead a microfinance program.

Charlotte Bohman

Chairperson, Hand in Hand Sweden, Stockholm

Microfinance without client centricity is akin to worship without the heart or soul. Good microfinance should be a win-win for all stakeholders, more so for the clients. I fully endorse the Purpose Centred Growth approach prescribed by Dr. Jeyaseelan.

Brij Mohan

Former Executive Director, SIDBI

Dr. Jeyaseelan argues prudently that there is a need to assess the extent of changes resulted from the microfinance intervention to all the stakeholders—the clients (target beneficiaries), the organization, the staff, society, and the planet (COSSP) at large. This kind of assessment would facilitate ushering in an inclusive growth. This book would be useful for reference to those involved in development projects in general and the projects involving microfinance in particular.

Dr. V. Rengarajan

Senior Economist

Author of the book Mystic Inclusion: Surgical Strikes for Inclusive Inclusion

Dr. Jeyaseelan’s book Scaling Up Micro Finance: What next? Top 10 focus areas to achieve a Purpose Centred Growth traces the history of Microfinance in India and goes on to assess the potential for its growth and also suggests focus areas to achieve a Purpose Centred Growth". His simple narratives drawing on his past experiences as a Banker will be extremely useful for those who want to understand the nuances of Microfinance and provides an answer to those who are still nurturing the misconception that unsecured lending to such class of borrowers could be a risky proposition.

George Alexander Muthoot,

Managing Director, The Muthoot Group

Scaling Up Micro Finance: What next? addresses the question of how microfinance practitioners can develop a more structured approach to managing and enhancing their social impact even while remaining financially sustainable. Drawing on Dr. Jeyaseelan’s extensive and varied microfinance experience, the book suggests a five-dimensional framework that can be customized and adopted by micro finance organizations in India. With the increasing emphasis on impact measurement in micro finance, this book will be of help to practitioners.

Dr. Savita Shankar, Adjunct Professor,

Drexel University, Philadelphia, USA.

Dr. Jeyaseelan who threw away his comfortable bank job to plunge into the development focused work, brings to us the essence of his interventions for a long period in the development finance sector through this book. His conceptualization of Purpose Centred Growth is relevant in this day when we have issues of institutions neglecting the basic principle of triple bottom line and only concentrating on volumes, margins, and returns. The way forward on policies as enumerated in this book is apt and must provoke the thought processes in the policy making arena. This book is a must-read for all those who are in microfinance as well as the broader development arena.

Dr. P. Satish, Executive Director, Sa-Dhan, New Delhi.

From its humble beginning micro-finance has come a long way in helping the poor households in starting and benefiting from micro-enterprises and supporting them in meeting consumption needs that are critical in meeting at least some minimum nutritional needs in difficult times. Arguably, it has contributed even more in empowering poor rural women. Dr. Jeyaseelan has seen this phenomenon very closely and has contributed in his own way in achieving these goals. His insights, therefore, are invaluable in the context of persisting poverty and food insecurity among rural households despite significant achievements made in the last four decades.

Shyam Khadka, Former Senior Portfolio Manager International Fund for Agricultural Development, Rome.

Scaling Up Micro Finance: What next?, by Dr. Jeyaseelan is a very rare treatise on the subject. The author, has narrated in the book, his ‘Hand in Hand ‘experience in the field—first as a Rural Banker, then as an NGO Executive. He has given a pointer to the future of Micro Finance through a top ten focus areas to achieve a Purpose Centred Growth. He had the rare honor of receiving an invitation from the then President Dr. A.P.J. Abdul Kalam, as a recognition of his good work. The new practitioners in the field of SHG—the Innovation that substituted Collateral and made millions of poor women across the world credit worthy, will find the book a boon.

Dr. J. Sadakkadulla, Former Regional Director, RBI.

Dr. N. Jeyaseelan possesses an extremely inquisitive mind and is a continuous learner. The above qualities coupled with his research-based approach to finding solution to problems make him an ideal candidate to author the book on the future of Micro Finance. Much before Micro Finance gained popularity in India, Dr. Jeyaseelan was one who understood its suitability for the upliftment of the weaker sections of the society. I am sure readers will find the focus areas suggested by him in the book, extremely useful in developing a disciplined and Purpose Centred Micro Finance portfolio.

V. A. George, Director, Belstar Investment & Finance Pvt ltd., Managing Director, Thejo Engineering Ltd.

Dr. N. Jeyaseelan’s long years of experience in the banking and MF sector is well reflected in his analysis and suggestions for way forward. The Indian microfinance sector has its origin in cooperatives and SHG models, where savings preceded credit. This healthier approach gave way to credit alone micro credit model that grew aggressively over the last few years. Though successful, this model failed to provide the basket of financial services, the poor households need. The book’s emphasis on the need for purpose centred growth model is very critical and timely. The MFIs should adopt this model to have the desired impact on poverty alleviation. Along with the model the author has also suggested an assessment tool to measure the performance of this approach. I am sure that the MFIs, both for-profit and non-profit, will find this book useful and work towards adopting a purpose centred growth model. That is what originally the sector was expected to do. I do hope the policy makers will facilitate this process. I sincerely congratulate the author for bringing out the concerns many of us have about the limited impact the sector has achieved over the years on the lives of the poor. The author’s observations and suggestions through this book have come at an appropriate time.

Vijayalakshmi Das, CEO, Friends of Women’s World Banking, Ahmedabad.

As a person who saw the evolution of the Microfinance Industry in India over the last two decades, I can fully agree with Dr. Jeyaseelan’s thought-provoking views and the need for the Purpose Centred Growth. This provides very interesting reading and guidance for all the stakeholders towards facilitating a more meaningful microfinance industry in India that truly serves the bottom of the pyramid.

Dr. Gouri Sankar, Managing Director, Maanaveeya Development & Finance Private Limited.

Scaling Up Micro Finance: What Next? book is coming in the opt time where all kind of microfinance practitioners are looking for right kind of clients, institution models to succeed and benefit each other which ultimately lead to Purpose Centred Growth. This book will definitely help to a large extent the practitioners to understand the genuine needs of the sector and how to address the issues to achieve the real purpose. All practitioners should make use of the suggestions given by the author Dr. Jeyaseelan.

T. Dhanaraj, Chairman, Tamil Nadu Grama Bank.

Dr. Jeyaseelan writes this book from the perspective of one who has seen the birth, development and explosive growth of microfinance in India. He has seen the good that microfinance, implemented responsibly, can deliver and the negative consequences of focusing solely on growth. His recommendations for purpose centred growth should have the serious attention of regulators, microfinance industry leaders, social impact investors, and development activists.

Ging Ledesma, Director—Social Performance Innovation, Oikocredit International, The Netherlands.

Dr. Jeyaseelan’s (Jey’s) journey to date has been insightful and the way he has made think the most bottom of Pyramid person to have a Vision in their house painted and look at it every day was very much touching. In today’s world, the poorest people have lost hope and stop seeing the dreams but with responsible lending, it is possible to bring up the ladder which the author has been doing for last so many years. I hope many more get inspired after reading this book and we find many more Jey who can widen the MFI reach and base.

Jayesh Modi, HEAD-Inclusive Banking Unit, The Hongkong and Shanghai Banking Corporation Limited, Mumbai.

DEDICATION

To my mother, Mrs. N. Rajeswari, and my father, Mr. A. Natarajan, for encouraging me at every stage of my life.

To Mr. J. P. Bernard, my beloved mentor, who has chiseled me as a master trainer and made me a life-long learner to transform people and to make a difference in the lives of the poor.

To all the readers of this book who have taken efforts to invest in this book, I wish you a happy reading. I appeal to the readers to apply the principles shared in this book in the field to spread the benefits to all the stakeholders.

CONTENTS

Foreword

Preface

Prologue

Acknowledgments

Abbreviations

1.Genesis of Purpose Centred Growth

2.Growth of Microfinance

3.Demand for Microfinance

4.Purpose Centred Growth

5.Voices from the Field

6.Scaling Up Microfinance

7.Top Ten Focus Areas to Achieve a Purpose Centred Growth

8.Monitoring of Purpose Centred Growth

9.Lessons for the Global Community and the Best Practices

10.Role of Stakeholders

11.Emerging Challenges and the Way Forward

Appendices

References

About the Author

About Purpose and Vision Centre

FOREWORD

Microfinance as an industry rose in India in the 1990s much after our neighbor Bangladesh had made a success out of it. Since then it has run at breakneck speed outgrowing all countries in the world reaching disbursements of Rs. 2130.74 billion by 2018. The author, Dr. Jeyaseelan, points out that we have much more room to grow, as his estimates put the size of the potential market at four times. So, does that mean that we can continue to grow rapidly into the future using the same model of the past? Here is where the author offers us caution. We all still remember the two significant crisis moments in the industry, one in 2006 and then a major one in 2010, which led to a series of RBI reforms. If we have to go forward and capture the promise and potential of microfinance as a poverty-alleviation tool, the author points us in the direction of a new model called Purpose Centred Growth.

Dr. Jeyaseelan offers a practical list of structural reforms that will need to happen before the industry flourishes and provides real value for its low income and poor clients. A very thought-provoking book compiled on the back of three decades of experience of Dr. Jeyaseelan, this book is a must read for leaders who view microfinance as a poverty-alleviation tool. I remember Dr. Jeyaseelan, as one of the most thoughtful and action oriented leaders in the field. His book will benefit the readers definitely.

Prof. V. Kasturi Rangan

Harvard Business School, Boston, USA

PREFACE

Even though India’s economy is growing well and poverty levels are coming down (the poverty level in India has come down from 37.2 percent in 2004–2005 to 21.9 percent in 2011–2012), most poor people still lack access to basic services, because of which India lags behind in the human development index (HDI) ranking (130th out of 189 countries reported in the Human Development Report 2018). As banks were having problems reaching out to the poor in remote locations, microfinance emerged as an effective alternative credit delivery system to cater to the credit needs of the poor. Microfinance enabled the poor to invest the capital in their micro enterprises, smoothen their consumption expenses, increase their income and build assets, and reduce their vulnerability.

The Indian microfinance sector is characterized by two models: the self-help group (SHG) bank-linkage program and the microfinance institution (MFI) model. Under the SHG bank-linkage program, the bank loan outstanding to SHGs was Rs. 870,981.5 million to 5.07 million SHGs, out of the total 10.01 million SHGs formed as of March 2019. The MFI model, with the dominance of nonbanking finance company (NBFC) MFIs, is growing fast as the regulatory norms by RBI has improved the confidence of the stakeholders, and loan outstanding under the MFI industry as of March 2019 reached Rs. 1,785,470 million and 64.10 million clients.

The microfinance sector in India as a whole recorded a growth (in terms of the gross loan portfolio outstanding¹) rate of 40 percent as of March 2019. NBFC MFIs, which represent a lion’s share in the microfinance sector, has grown its gross loan portfolio by 49 percent. I conducted a survey through a structured questionnaire during July–August 2019, and the survey results have shown that more than two-third (71 percent) of all the lenders perceived the growth in the microfinance sector as aggressive and only less than one-sixth (15.8 percent) of all lenders have perceived the growth as balanced growth. This signifies the gravity of the situation, in terms of aggressive growth, at ground zero, which is not desirable for the sustainable growth of the microfinance sector. This aggressive growth in the sector has created a lot of problems: intense competition, nonadherence to responsible finance practices, dilution of due diligence norms, and so on, which has led to misuse of loan funds for other purposes rather than on income-generation purposes, frauds, mission drift, over indebtedness of clients, and so on. Hence, the need of the hour is to focus on the Purpose Centred Growth (PCG) approach and scale up the microfinance portfolio not only to cover the underserved and unserved regions but also to contribute to the achievement of sustainable development goals.

I have practised the PCG approach for more than twenty-five years, and I have shared my experiences through this book, to benefit the microfinance practitioners and other stakeholders in the microfinance ecosystem.

Purpose Centred Growth may be defined as a growth not only happening in terms of outreach or scale benefiting the shareholders but one that is targeted to benefit all the stakeholders and make a change in the lives of the clients, the organization, the staff, the society, and the planet. The PCG model will bring out a difference in the lives of the clients and will pave the way for prosperity to the clients, sustainable development to the organization, peak performance by the staff, progress to the society, and the protection of natural resources of the planet.

To integrate the Purpose Centred Growth approach as a strategic initiative, this book offers a blueprint to NGOs, MFIs, and banks to make a thrust on ten focus areas: governance, gender, product, nonfinancial services, process, people, planet, social or community action programs, risk management, and technology.

I have come out with the COSSP (Clients, Organization, Staff, Society, and Planet) framework, a simple tool for monitoring the Purpose Centred Growth approach. This has options for NGOs, MFIs, and banks to choose the relevant indicators to suit their context and needs so as also to match with the options indicated by their clients. Separate frameworks have been suggested for branch-level assessments and institutional-level assessments.

The role of stakeholders such as the RBI, NABARD, SIDBI, MUDRA, banks, NBFCs, the government, rating companies, credit companies, capacity-building institutions, NGOs, and so on, have also been mentioned.

Based on the field experiences and discussion with various stakeholders during the survey, I have come out with forty suggestions to various stakeholders—the RBI, NABARD, the government, MFIs, banks and so on—which will pave the way for the microfinance practitioners to overcome the challenges in the sector and to harness the potential in the microfinance sector.

I have also documented various best practices observed from the different players such as the banks, small-finance banks, NBFC-MFIs, NGOs, and development finance institutions, and so on. What the global