Ms. Moumita Sen Sarma - Vice President, Head- Microfinance India ABN AMRO BANK.

For ABN AMRO Microfinance is a business-oriented way of helping people who would otherwise be locked out of the economy. We believe that this solution is more effective than just giving handouts, for all involved.

We call our CSR activities Sustainable Development.
Sustainable Development means to do a business in a manner today so that resources are preserved and are enhanced for tomorrow.
ABN AMRO Bank offers microfinance in India, to fulfill its mission of Sustainable Development.
For ABN AMRO, sustainable development means "to live our Corporate Values and Business Principles to meet the needs of the organisation and our stakeholders today, while protecting, sustaining and enhancing human, natural and financial capital needed in the future."

In short, we strive to balance our current and long-term financial goals with the economic, environmental and social needs of future generations. Sustainable Development is a wholesome approach whereas CSR is restricted only to philanthropic connotation. And under the broad umbrella of sustainable development falls our micro-finance activities.

The microfinance project of ABN AMRO started in Brazil three years ago. We are amongst top five banks in Brazil. The unit specialised on microfinance is called ABN AMRO Real Microcredito and was developed in partnership with Acción, a non-governmental organization. Loans may vary from USD 70 to USD 3,350. As of December 2004, around 4348 micro-entrepreneurs in Brazil have benefited from our loans.

In India we are present only in 15 cities with less than 20 branches. In the absence of an extensive branch network, ABN AMRO has adopted the wholesale route in India. We identify suitable intermediaries called Microfinance Institutions (MFIs) that fulfil our credit criteria and whose agenda fits with ours. We have 12 MFI partners as on date and with their help we have a portfolio of thirty two and a half crores and outreach of 86000 households.

Loans are then given to the MFIs, who in turn lend the money to our target borrowers, essentially rural underprivileged women. The loans are used for activities ranging from microenterprise, to creation of productive assets, to redemption of high cost debt.

Our programmes are women centric because it is proved that women centric programmes show better social impact.

How big is Micro Finance opportunity in India ?
Micro finance opportunity in India is very good. But there exists a huge gap between market size and its realization. There are not enough strong large MFIs to bridge the gap. MFIs and Banks have unique strengths. Banks can be efficient wholesalers having financial muscle and MFIs have distribution capacity. Marriage of these two strengths can make the entire network effective. Banks are waiting with money but there are not enough MFIs at the ground to make use of this opportunity.

Our strategy is to be amongst top five funders to MFI partners we engage with. We have 12 partners in our existing operations, plus we have database of potential MFI partners. Our ambition is to reach one million rural underprivileged women in five years. So based on their own growth plans, if we continue to have 1/4th share in their business, it should not be difficult to reach the figure of million.

What is your present market share ?
It depends up on what parameters are taken in to consideration. Based on 32.5 crores of portfolio and outreach of 86,000 you can calculate the market share.

Why micro-finance for women groups and not other stakeholders ?
In initial micro finance experiments with men and women, it was found that women centric programmes had much better track record in terms of repayment.

Over and above, a desirable side effect was that it had a greater social impact benefiting household, children and society at large.

They were also found better manager of credit than men. So slowly micro-finance skewed towards women.

Why the interest rates in MF are so high ?
Final customer ends up paying high interest rate because transaction costs are extremely high. Services are delivered at the doorstep of customers. Transaction cost includes group building process, group disciplining and credit collection. This entire process is very expensive.

Women who are micro-finance clients are hardly the kind who are waiting to get access to credit and starting an enterprise. Extensive group building and group disciplining processes are very important to create demand for microfinance. This is the main reason why interest rate charged to MFIs is so high.

The other reason for high interest rate is structure of MFIs. Most of them have grown from NGOs and do not have institutional status. Even though their repayment rate is very high up to 98-99%, the environment in which they operate has more risk than regular business environment. The operating cost associated is very high, so lenders perceive them as high-risk borrowers. Also there is no common regulation governing their activities.

There cannot be standard interest rate in free economy. Market forces find the level of interest rate. Interest rates are based on risk and reward principle. Reward is always commensurate with risk and vice-versa. Tamilnadu came up with this ordinance but it was stayed by the high court because it is not the right direction.

How do you select MFI partners ?
There are several criterions.

We do not apply standard financial analysis concepts like capital adequacy ratio, leverage etc because of a peculiar business nature.

We do not always support profitable MFIs, in fact many of our MFI partners are yet to breakeven.

While partnering our emphasis is on systems and procedures. We look whether systems and procedures are robust enough to carry on business in sustainable manner and in right direction.

We also assess quality of portfolio, ethical standards, promoter and their internal control.

Can you talk about mentoring programme of ABN AMRO ?
Since our outreach is dependent entirely on the growth and credit absorption capacity of these MFIs, we also offer 'mentoring programmes' to strengthen the MFIs. At present the programme is unstructured. We offer it on mutually agreed ongoing process.

For our largest MFI partner, we developed an application on a Simputer that can be used for operations. On pilot, we loaded application for field officers of MFI. They found it useful and now we are going to give them enough Simputers for the entire district operations. Simputers will help reduce transaction cost and which in turn will reduce interest rate.

We are on the Board of one of the MFIs and as board members, we are constantly in dialogue and share best practices of the mainstream finance sector.

In future, we would like to help our partner MFIs in doing systems audit because most MFIs do not have very robust financial system and are vulnerable to fraud.

We as banks have similar business line so we have expertise and resources within the bank to tackle such problems.

Our IT people also help to find out solutions to strengthen systems.

To structure our mentoring programme, at our head quarters in Netherlands, we are creating a resource pool comprising of retired bankers with specific skills. Their skills will be matched with requirements of the MFIs and their salary will be paid by the bank. At this point of time the programme is unstructured but it is evolving and is high on agenda.

We are creating awareness within the bank and by end of 2005, we'll have volunteering programme in place. But it is very difficult for regular people to take a break and devote time.

How do you measure the impact of your work ?
The bank believes microfinance is a very powerful tool that can be used effectively to address poverty, empower the socially marginalised poor and strengthen the social fabric. Microfinance has social impact on poverty reduction. It raises economic activities overall, so economy size increases. Increase in economic size will directly and indirectly increase bank's business. It is important for us to establish that it actually has impact on poverty.

Last year we carried out impact assessment survey with our largest MFI partner. We selected two hundred clients who have had access to microfinance for more than four years. This was a meticulour excercise with detailed questionnaires and other related issues and the entire process was three months long.

Findings of the survey indicated that 58% of the clients experienced significant reduction in poverty and 41% of them came out of it.

So such studies do help us in assessing impact of our work.

Is there any fundamental difference between rural and urban microfinance ?
The model of micro-finance that is prevalent in India and rest of south Asia is based on the concept of social collateral. In Group solidarity, group offers guarantee on behalf of each of the members. This can be easily created in rural area.

In cities, there is a migrant population, so it is very difficult to have homogeneity, which is a basic principal for creation of a group. This is a basic difference between urban and rural micro finance.

Spandana (MFI), working in semi urban area is now starting operations in Hydrabad. They are trying to prove that if there is an efficient recovery method then in spite of social collateral not being so strong, it is still possible to maintain high rates of recovery. It will have a demonstration effect and will later catch on. What is now experimented is whether a weak social collateral can be a substituted by strong recovery mechanism.

- Madhavi Mehta
( Mumbai )