Section 1: INTRODUCTION:

Ever since the nationalisation of major commercial banks in July 1969 with a view to channelizing the flow of finance to the poor low-income households and the hitherto neglected sectors of the economy, the focus of discussions, debates and policies has largely revolved around meeting the financial needs of the rural population. Thus, while the structure of rural financial intermediation gained momentum over time, the attention to the financial needs of the urban poor was largely scanty and bereft of much serious discussion and policy concern. Consequently, the SHG-Bank Linkage model till date, remains predominantly a rural phenomenon (Nair 2009) and over three fourth (77 percent) of the micro credit clients are in the rural sector (Economic Development Associates 2004).

Among the urban people, the dependence on institutional sources of credit of the lower asset holding classes (AHC’s) was considerably less as compared to higher AHC’s and to the corresponding AHC’s classes in the rural sector as per the findings of the All India Debt and Investment survey (NSSO 2013). Even with the huge expansion of commercial bank both in terms of bank offices, deposits and bank credits in the urban as well as rural areas, the major benefits of bank finance in large cities and big commercial centers, have mainly gone to the relatively well-off sections of population; they have remains largely inaccessible to lower income households (Nair 2009).

It can therefore be concluded that despite strengthening of financial structure and broad basing of financial services, urban microfinance has remained largely neglected as compared to rural microfinance that has grown in its size, institutional support and outreach. However, lately with the rapidly growing rural urban migration and increasing settlement of the poor in the cities and town in search of avenues of lively hood, access to adequate and timely finance by urban poor has become an imperative need.

Urban microfinance, thus holds a promising growth potential, but it also has its own problems, hazards and difficulties. This paper aims to bring forth the issues and challenges that this sector faces in scaling up in urban areas and hence contribute to urban poverty alleviation. Following introduction, it explains some interrelationships between urbanization, poverty and microfinance as given in the literature and some of the policy initiatives. Section 3 discusses the size, profile and dynamics of urban microfinance market. Section 4 analyses the factors that may impinge upon its growth and require appropriate interventions. The last section concludes.

Section 2: Urbanisation, poverty and Microfinance in India-Some Interlinkages.

Economic development and urbanization are closely interlinked. With the growth and expansion of industries in urban and semi urban areas, people from low productive agricultural occupations are attracted to the cities and towns in search of higher productivity industrial vocations that offer better and more comfortable living to the poor. Expansion of the services sector that accompanies industrial growth in the urban areas further adds to the prospects of better income job avenues. Glamour of city life further acts as a magnet to attract people from rural to urban areas. Thus, economic development is always and invariably accompanied by rapid increase in the urbanization processes. According to Census of India 2011, India's urban population was 377 million in that year (2011) as against 286 million a decade ago (2001) representing an increase of 31 percent over this decade. Varying projections place urban population at about 590 million-600 million in 2030 (Planning Commission 2011).

2.1 Incidence of Urban Poverty in India:

Economic growth even when it is steady and high does not necessarily lead to higher income for the poor and marginalized sections due to highly skewed income distribution pattern and meager trickledown effect. And, as is being observed in many countries, including India, economic development process, may turn out to be a jobless growth process or even a job loss growth, when modern technology based increased productively adds to the GDP growth rate but makes no addition to jobs, or may even lead to job cuts. Thus, while economy may be growing rapidly, the income growth of the poor may not improve or may ever fall thereby hampering poverty elevation process or even causing a substantial increase in the number of poor persons. Rapidly increasing population further adds to the poverty dimensions of the country. Rapid rate of economic growth achieved by the Indian economy during the first decade of the current century did not have much favourable effect on urban poverty. The poverty ratio in urban areas was high at 25.7 percent in 2004-05 (Tendulkar committee Report), but declined to 20.9 percent in 2009-10. However, the number of urban poor did not show a similar declined. In 2009-10 the number of urban poor was still high at 76.5 million as against 80.8million in 2004-05. Rangarajan Committee, adopted a slightly higher income criteria of urban poverty and placed ratio of urban poor at 35.1 percent in 2009-10 and 26.4 percent in 2011-12. The absolute number of urban poor was high at 102.5 million in 2011-12 as against 128.7 million in 2009-10 as shown in the following table.

Table 1: Incidence of Urban Poverty

Year	*Urban Poverty line (Rs.)**	Urban Poverty Ratio (%)**	Number of Urban poor (millions)
Tendulkar Committee
2004-05	579	25.7	80.8
2009-10	860	20.9	76.5
2011-12 #	1000	13.7	53.1
Rangarajan Committee
2009-10	1198	35.1	128.7
2011-12	1407	26.4	102.5

Note: # Estimates based on Tendulkar Committee Methodology, * Per capita monthly expenditure, ** Ratio of urban poor to urban population

Source: Planning Commission Report, 2014.

Irrespective of the numerical differences in the number of urban poor due to differences in income criteria for defining poverty line, the fact remains that in India the absolute number of poor persons living in urban area is very large. Urban poor largely live in slums, unauthorized and unregulated settlements under insanitary conditions and devoid of any social and community support are the most vulnerable sections of urban society. Poverty, disease, malnutrition, lack of education, health and even drinking water and other essential services make their living miserable.

Pace of urbanization is now gathering momentum and as a consequence urban poverty and urban slums are also growing. The ratio of urban population has gone up from 27.8 percent in 2001, (when 285 million persons were living in cities and town) to 31.16 percent in 2011 with over 377 million people living in urban settlements. By 2030, this share of urban population in total population of India is likely to go up to 40.7 percent as per the report of United Nations Population Fund. According to TCPO (Town and country planning organization) the slum population of India is estimated to have increased from 61.8 million people in 2001 to 93 million in 2011. Since urban poverty problem has compounded with natural growth of population and continuously increasing rural urban migration, microfinance has now emerged as one of the effective tools for urban poverty alleviation.

2.2 Urban Poverty Programmes and Microfinance in India:

While many policy initiatives have been taken and a variety of programmes launched for financial inclusion of the rural poor, not much has been done to focus attention on the specific and distinct financial needs of the urban poor. Urban poverty continued to be associated largely with unchecked migration of rural poor to the urban industrial and commercial centres, and hence the problem of poverty in urban areas was just an extension of rural poverty. Till about mid 1980: financial inclusion of the urban poor was never seen as a challenge that required any serious policy discussion. As such no major anti-poverty programme that addressed the specific financial problems of the urban poor was launched, except for broadening the coverage of the Differential Rate of Interest (DRI) scheme (that was meant to offer cheaper finance to agriculture, rural poor and hitherto neglected section of population) in 1977 to include the urban poor under its ambit (Nair 2009).

Initial systematic efforts to address the problem of urban poverty included schemes like Nehru Rozgar Yojana (NRY), Urban Basic Services for the poor (UBSP), Prime Minister Integrated Urban Poverty Eradication Programme (PMIUPEP), etc. These were, though commendable attempts, but had poor outreach and impact (Microfinance India 2006).

The Swarna Jayanti Shahari Rozgar Yojana (SJSRY) launched in 1989 was the first targeted credit programmer for alleviation of urban poverty and employment generation. The scheme has two components viz The Urban Self Employment Programme (USEP) and The Urban Wage Employment Programme (UWEP) and is funded on a 75:25 cost sharing basis between the Union Govt and the state governments. The aim of this scheme is to provide self-employment as well as wage employment to the unemployed and under employed persons in urban areas, with special emphasis on the upliftment and empowerment of poor women. With the launch of Valmiki Ambdkar AwasYojana (VAMBAY) in 2001, that aims at providing housing to all urban poor slum dwellers, the schemes of urban poverty alleviation became more holistic in their approach to attack the problem of urban poverty.

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) launched in 2005-06 aimed at uplifting poverty groups through its two components, viz. (1) Basic Services to the Urban Poor (BSUP) and (II) Integrated Housing and Slum Development Programme (IHSDP). The aim of this programme is to provide housing for the urban poor as well as upgradation of slum settlements in urban areas.

JNNRUM also includes schemes for improving infrastructures services for the urban poverty groups. The State's Urban Services Programmes in West Bengal and Andhra Pradesh are other such programmes that aim at improving infrastructure and providing services to underserved urban areas (Microfinance India 2006).

A closer analysis of the various urban poverty alleviation schemes with focus on credit needs of the urban poor introduced in India since 1989 reflects lack of understanding about how the poor engaged with informal enterprises face obstacles in the way of their inclusion in formal financial system. Literature further indicates that apart from inefficiencies in administration such as poor outreach of urban targeted credit programmes, raises questions about their very relevance for the intended beneficiaries, i.e., the urban poor from the point of view of the latter's ability to borrow to start enterprises. Unfortunately, this ability is always taken for granted in all the self-employment approaches that are essentially supply oriented (Nair 2009).

A review of the poverty alleviation and employment generation programmes, thus, clearly bring out the fact that while in the earlier Government schemes the focus was on the rural poor, in recent years, the problems of the urban poor have also moved on to the centre stage of discussions and policy formulation for holistic action to tackle the menace of poverty both in rural and the urban areas. With this shift from earlier total focus on rural poverty to a balanced view that includes urban poverty as well, the role of micro finance in urban poverty alleviation has been widely acknowledged. Microfinance programmes are known to have the potential to generate income and employment and impact poverty, more particularly among the women members of the poverty groups. A number of studies conducted around the world have clearly established that microfinance does contribute to urban poverty alleviation, women empowerment, improved urban social and community environment, thereby help in achieving several Millennium development Goals.

Section 3: Urban Microfinance Market: Size, Profile and Dynamics:

3.1 Estimating Size of Urban Microfinance Demand:

In view of the large and growing urban population with its substantial proportion living below the poverty line, the need and scope of microfinance is immense and has huge potential in urban areas. Surveys of loan demand by BASIX in July 2004 based on personal interviews of people in the target groups show a substantial demand for microcredit. A study by the Indian Grameen Services in Delhi estimated the size of loan demand or microcredit at between Rs 5000 to Rs 9000 (US$ 111 to $ 200) per annum per household. Another study by Mahajan and Nagasri has put the annual credit demand at around Rs 9000 (US $200) per household. Another survey carried out prior to BASIX survey by the Paradigm Group estimated the average credit availed by the poor urban household at Rs 10071 (US $224) per annum (Sharon et al.). Based on loan range estimated by these studies, the market size of urban micro credit could be placed between Rs 9000 crores (US$2 billion) and Rs 10,000 crores (US $2.2 billion). The study by Microfinance India (2006) has placed the demand for urban microcredit in 2006 at a much higher figure of Rs 22,245 crores.

3.2 Profile of Urban Microfinance Market:

While urban microfinance holds immense growth potential, yet it has not become a very attractive market for the financial players. The context and operational characteristics of urban microfinance differs from its rural counterpart due to differences in the client’s profile, client’s expectations as well as the processes. State of the Sector Report (2008) analysis of the urban microfinance points out to the following main problems in this sphere.

1) The urban clients are far more mobile as they frequently change their residence and business location as against the more stable residence and business location of rural clients. Since most of the urban poor lives in slums and resettlement colonies which often faces demolitions and forced evacuation, people are forced to relocate themselves at other places. They may also voluntarily change places in search of better entrepreneurial avenues. These frequent changes in residence makes it difficult to comply with the know your customer (KYC) norms and client tracking and monitoring.

2) An important feature of self-help group (SHG) model is discipline required in terms of group-based decision-making, regular meetings etc. which urban clients may find difficult to comply with as time has higher opportunity cost in urban areas as compared to rural areas. Due to their tight work schedule, urban clients could ill afford to disrupt their daily livelihood activity for attending meetings just to retain financial services access.

3) MFI’s have to bear additional cost of burden of operations in urban areas due to power centres operating in urban areas. To quote State of the Sector Report (2008) “Informal centres of powers that exist in urban areas impose additional costs on microfinance operations. More often than not, the MFIs have to pay a ‘rent’ to these power centres operating in the different parts of the city. Some of the MFIs operating in certain cities have informally stated that payment of such rents are necessary to ensure that the operations of MFIs are smooth, and support is available at the time of recovery of amounts in chronic default”.

4) On average, the urban micro finance clients require a larger size loan for their enterprises. For example, clients have a wide variety of livelihood activities like tea shops, small eateries, beauty parlors, boutiques, furniture workshops, automobile mechanics, scrap dealers, rickshaw pullers, garments etc. All these enterprises and income generating activities involves financial resources that may be far more than the lending capacity or loan norms of MFI’s.

5) Also the urban attraction entices the borrowers to squander away hard-earned money on luxuries and the repayment of loans takes a back seat. In respect of savings, a diverse variety of products are required to incentivize the clients to save even the smallest of surpluses generated as the propensity to spend in urban area is high due to easy availability and huge variety of goods and services, entertainment facilities and other avenues for spending.

6) Urban areas have certain advantages over rural areas. They have high population density and better infrastructure facility and people are technology- friendly and have high adaptation skills so that MFIs outreach can be expanded at lower cost.

3.3 Types of Urban Micro Finance Institutions:

Recent decade has witnessed a huge upsurge of interest and rapid growth in literature on the subject of urban microfinance. Not only MFI’s, but the banking system too has become more sensitive to the potential and needs of urban microfinance clients and is actively engaged in extending the microfinance services in urban areas. According to the State of the Sector Report (2007), following are the broad agents contributing to the expansive of MFI’s in the urban areas.

1) Many MFI’s have been promoted by professional who have recorded success in banking and related financial fields. These includes Start-ups like Janalakshmi and Ujjivani in Bangalore, Aajivika in Delhi, Swadhar in Mumbai, Micro finance in Dehradun. Some start-ups have been set up by professionals with a background of success in rural microfinance eg. Arohan in Kolkatta, Sonata in Ahmadabad. These two set of entrants are generally known as a “generational change in India microfinance”.

2) The second sets of entrants are the Rural Converts. These MFI’s are moving from rural to urban areas. This includes MFIs like Bandhan, Basix, Spandana, SHARE, VWS, SKS, Grameen Koota, Maheseman, SWAWS (exclusively urban in Hyderabad) etc.

3) The third set comprises of number of existing NBFC’s and banks who are scaling down their operation. This includes MFIs such as Satin Creditcare in West Delhi.

4) The last set includes the pioneers of urban microfinance such as SEWA, WWF and SPMS, who seeks to pursue microfinance with renewed interest but the pioneers have stayed relatively small. Such MFI’s includes SEWA Bank which was founded in 1974 and has most of its clients in urban Ahmedabad. Working Women’s Forum (WWF) has been catering to the needs of microfinance and livelihood services to poor women in Chennai since 1978. Sri Padmavathy Mahila Abyudaya Sangh (SPMS) is country’s first SHG federation and also first among the few such federations located in an urban area.

3.4 Banks’ involvement in Urban microfinance:

There is a surge of interest and increased commercial bank’s involvement in extending micro credit to SHGs in urban areas. To name a few, Indian Bank’s Microsate branch in Chennai is one such urban bank branch which makes loans to SHG’s with the help of registered NGO’s. It has also set up another such Microsate branch in Patna and Kolkata and is planning to open many more branches all over the country, helping many SHG’s to gain employment (UNDP (2008)). State Bank of India and various NGOs have promoted SHGs in Mumbai, many of them are linked with bank. Syndicate Bank has helped open saving accounts of 800 housemaids in Mumbai. In an innovative effort, the Union Bank of India has tied up with Hawker Association of Mumbai and opened “no frills” account for many hawkers (Nair 2007). BASIX and AXIS Bank provides no-frill banking services to poor migrants workers living in eastern part of Delhi to enhance their financial inclusion. A number of banks such as SBI, Union Bank of India, Corporation Bank and private banks like HDFC, Axis Bank etc. provides smart card and mobile phone-based microfinance services. In urban centres of Uttar Pradesh and Bihar, Punjab National Bank has started a scheme of microcredit for rickshaw pullers. Other banks too have started similar projects for street hawkers and other small vendors. A.P. Grameena Vikas bank has many city branches. Its Allipuram branch’s SHG outreach programme extends to 1200 SHGs covering 20,000 women living in slums. Citibank with its MFI partner offers saving accounts to slum dwellers in Mumbai and Hyderabad using biometric ATM technology (UNDP (2008)).

3.5 Growing MFI’s clientele in Urban areas:

With substantial number of poor living in the slums and resettlement colonies and increasing rate of rural-urban migration in search of steady employment and better living, the interest in urban microfinance is also increasing. In the recent years MFI’s have expanded their operations in urban areas and share of urban clients in total clients served by MFIs has increased rapidly as shown in Table 2 below.

Table 2: MFI's Clients in urban areas

Year	Urban clients as (%) of total MFI’s clients
2008	25
2010	27
2011	38
2014	44
2016	62

Source: Bharat Microfinance Report, 2008, 2010, 2011, 2014, 2016, Sa-Dhan

The increase in the outreach to urban clients from year to year has been accompanied by proportionately decreasing rural clientele. This trend is likely to continue with the increasing rate of rural-urban migration and rapid urban growth, the proportion of urban clients is thus bound to swell further in coming years. But inspite of its growing significance and expanding coverages, urban microfinance faces several issues and challenges, that are discussed below.

Section 4: Issues and Challenges in Urban Microfinance:

The urban MFI’s are facing some unique problems and challenges. Due to inherent differences in the rural and urban micro finance requirements, the provision of financial services to the urban poor involves different approach as well as innovative and diverse financial products suitable to the needs of poor and migrant population.

(1) Need for Product diversification:

Recognizing the vulnerability of the urban poor, MFIs need to conduct careful market research and offer variety of products like insurance, remittances and housing finance apart from savings and credit. Due to inherent differences in client’s needs that vary over the life-cycle, MFIs need to evolve range of saving, credit and insurance products for unexpected shocks (death, accidents, sickness).

(a) Housing Finance:

One of the important needs of the urban clients is that of housing. For every migrant to urban area, shelter is the most essential primary requirement. Centre for microfinance (CMF) in one of its reports on housing microfinance points out, “Although consumer demand for housing remains high, the financing options available for low-income households, especially for those employed in the informal sector, are limited”. Even though MFIs provides housing finance, yet their ability to provide adequate and timely finance for housing continues to be difficult. Scarce funding, legal risks associated with informal land titles coupled with lack of collateral and insufficient knowledge about construction makes the whole task of housing finance by the urban MFIs difficult and risky (State of the Sector Report 2008). Ujjivan initiated a scheme for providing microfinance for housing for urban poor. SEWA Bank too offers housing loan product to its members. In partnership with HUDCO, SEWA Bank began offering longer term loan to its members in 1998. Though many other MFIs offer similar products, yet the supply is inadequate compared to its requirement.

(b) Insurance:

Urban settlements for the poor such as slums and unauthorized and unregulated bastis or housing clusters pose a lot of problems for migrant population and adversely affect their health and existence. Such risks impact urban vulnerable sections of population more severely than their rural counterparts. Diseases and health hazards in slums due to poor sanitary conditions involves higher expenditure on medical and health care. Health and life insurance for these urban poor is therefore an essential requirement. The GoIs provides health insurance cover to workers in unorganized sector, the NGOs and MFIs are also required to play an active role in this field. Insurance of assets of poor people in the urban areas especially insurance of their livelihood assets is a must. The insurance companies should customize their products according to the needs of urban clients and help them in mitigating their risks (State of the Sector Report 2008).

(c) Remittances:

Remittances is another area that needs more attention. Majority of rural people settled in urban areas, periodically sends money to their dependents and relatives back home. Such remittances to their homes pose a big hassle for migrant people who do not have easy access to banks in the town where they work and banking facilities in their home village. Remittances services provided by post offices are costlier and time consuming. The migrants require quicker and economically viable means of money transfers to their native places. In this sphere, banks have taken initiative through schemes like business correspondent (BC) networks. Some NGOs like Adhikar are contributing to this endeavour through their individualised efforts. But these are small-scale experiments that need to be replicated at bigger scale. “Mainstreaming of remittance facility that would run on back-bone of national payment system has to be looked at as a necessity. Delinking of payments transfer from banking services might enable other service providers such as cell phone companies to offer remittance services using simple and effective technology, such as mobile phones” (State of the Sector Report 2008).

(2) Problem of Identity Proof:

Identity proof is a major problem that micro clients face in dealing with financial institutions. The Know Your Customer (KYC) norms of the financial institutions require identity and residence proof of their clients which urban poor find difficult to provide as migrants do not possess any such paper made available to them either from the native places or from the current residences and thus, suffer from financial exclusion. The provision of necessary KYC papers must be taken as a priority issue by the relevant authorities. Such initiative has been taken by Rajasthan Mission on Livelihoods and Ajeevika Bureau and issued migrant cards. Inspired by the success of these migrant cards as identity proof, the Rajasthan government has supported its large scale replication (State of the Sector Report 2008). For financial inclusion of such excluded population, the NGOs and MFIs must take such effective steps on a wider scale.

(3) Need for User- friendly Technology:

Urban MFIs are better suited for use of modern technological process and operations than their rural counterparts. Infrastructure services such as availability of electricity, mobile networks, better transportation and connectivity and high population density in urban areas offers a vast scope for technology usage. It offers efficient and time saving interaction between clients and MFIs. The challenge, however, lies in developing and providing user friendly technologies to the illiterate poor migrants. The high cost of urban space is also enhancing the interest in technological solutions for the problems relating to urban microfinance. For example, branchless banking for providing microfinance services to the migrant workers have been offered by Zero Mass Foundation, ATOM Technologies, EKO Technologies, and FINO in India. These initiatives are largely based on smart cards, biometric cards, mobile banking, Kiosk model and ATMs etc. Money transfers through mobile banking system promises a huge chance for migrants. Providing mobile banking in unbanked areas is being taken up on a wider scale. Some MFI’s are also making use of broadband connectivity in urban areas. The usage of technology should take off in a big way as it holds the key in achieving low cost financial services and financial inclusion of poor and migrant workers in the informal sector.

(4) Choice of Processes – Self-help groups (SHG’s) or Joint liability groups (JLG’s):

Due to the diversity of occupational and employment structure, divergent economic and social backgrounds and very different nature of financial requirements of urban people, group lending becomes suboptimal in the urban context. As a delivery vehicle SHG’s are also be affected by the mobility and time scarcity related constraints of urban life. Since SHG’s have more members than JLG’s, it is difficult to find common time slots for group meetings that is convenient for all the members. The problem is further compounded due to the likelihood of one or more members member moving out of the locality due to change in their residence to different parts of the city. “However, in theory at least, SHG’s are better suited to handle urban heterogeneity since they are expressly designed to accommodate different loan amounts, and can accommodate non-borrowing or net savers members who seek to earn interest on the loans taken by others. Moreover, with their adequate accounting skills, SHGs are better equipped to accommodate heterogeneity in respect of variation in desired savings, between different members and over varying time horizon. One response to urban mobility and heterogeneity has been to do away with centre meetings, altogether and experiment with smaller sized JLG’s, more suited to accommodating the diversity of occupation, loan size requirement and time availabilities” (State of the Sector Report 2007). For MFI’s striving to attain rapid growth however, JLG’s enables them to exercise more control over loan size and frequency and a better understanding of their credit requirements and saving patterns. Doing away with center meeting is a step to economise on operational expenses, because space has high premium (rent, lease) etc. in the urban areas. So far, the experience seems to be mixed one with several successful instances of use of SHG’s and JLG’s.

(5) Growing demand for Individual loans:

Doing away with JLG’s altogether and introducing individual loans would be next logical step. In latin American countries, individual loans are an accepted norm (State of the Sector Report 2007). Individual loans are usually given to borrowers who require larger loans and who have proven track record in group borrowing. The higher risk involved in individual loans is taken care of by security by some guarantor as well as high interest charges as the risk premium. The advantage of individual loans is that they can be easily tailored to the loan size, gestation period and other cash flow requirements of specific activities chosen by the borrower. Many MFIs such as BASIX, VWS, SPANDANA etc. are providing individual loans for housing and microenterprise purposes but these loans are still a small part of their portfolio (except for SEWA Bank, an MFI which has the longest experience in the field of individual loans in India).

(6) Demand for Tailor-made Saving Products:

A large proportion of daily earners face important constraints in safe keeping their small but usually regular daily saving and thus need formal saving devices tailored to suit their cash flow pattern and nature of employment. UNDP India (2008) study on “Poverty Dimension in slums in Urban Madurai” revealed that the average income for urban households was atleast Rs. 5000 per month. However, this income was reduced to less than Rs. 1500 per month because households were spending their income on luxury items. In urban areas borrowers do not have a cash flow problem, unlike in rural areas. Thus, there is need to offer daily savings products. The successful experience of ‘Sanchayeeta (savings) daily deposit scheme’ of Cuttack Urban Cooperative Bank (CUCB), which began with the intention of tapping poor urban trader’s earnings on a daily basis is a pointer to the huge demand for such saving products.CUCB’s experience illustrates how saving schemes are successful when tailored to suit the member’s cash flow pattern and nature of employment. Dupas and Robinson (2009) conducted a field experiment to assess the impact of saving schemes designed to meet the needs of daily income earners and assess their impact on their saving habits and investment. They randomly selected poor income earners and opened their interest free saving accounts in the village banks in rural Kenya, they found that take up and usage was high and saving account had positive impact on their expenditure and productive investment levels. However, the present regulatory mechanism does not allow MFIs to offer such saving services. Pradhan Mantri Jan Dhan Yojana (PMJDY) launched by Government of India which is a mission on financial inclusion is very important step in this direction.

(7) Demand-Supply gap in Urban Credit:

Lately there has seen a huge upsurge in interest and awareness for need for and necessity of developing adequate facilities to provide finance to the urban poor. With the increased attention and focus on urban microfinance, this sector has witnessed a high growth in the last few years. To provide microfinance services to urban poor, a large number of financial companies, some urban cooperative societies and banks, and MFIs are now operating in this area. But in view of higher demand for urban microfinance, its supply inadequacy continues and consequently the level of exclusion is still very high. The outreach of urban microfinance is still very low and the demand supply gap remains gigantic. PMJDY addresses some of these aspects of financial inclusion but doesn’t have enough provision to provide access to credit to poor.

(8) Human resource management:

Retention of Staff:

Human resource management is a key challenge for this sector. It involves creating adequate incentive and facilities to retain their trained and experienced staff. The better and growing employment avenues in towns and cities make it difficult for the urban MFIs to retain their staff as they face competition from FMCG companies for their trained staff that has acquired proficiency in computer operations and other skills. Lack of adequate space needed to conduct training is another challenge for human resource management “Development of independent training institutions that may consider partnering with MFIs in order to customize the training needs is thus also a growing necessity. The services of all categories of training and technical assistance providers will likely be needed in the development of the urban microfinance sector” (Microfinance India 2006).

(9) High Cost of Urban Operations:

An important reason for high cost of urban operations is the high rental and low availability of office and workplaces in the cities as well as higher risk involved in urban operations. The cost of setting up an office in urban areas is much higher compared to rural areas due to high rental/lease charges. The high branch cost coupled with the ability to find right space is thus a major challenge in urban areas. Thus, many MFIs prefer to operate from slums and unauthorised settlement. But the challenges of slum destruction, demolition of unauthorized settlement and consequent rehabilitation causes problems for MFIs operations. New, unexplored territories, emerging market for urban microfinance and the fact that many of these MFIs are startups increases the risk profile of MFIs. Due to these high risks involved, interest rates are higher in urban portfolios as compared to the rural portfolios. “Mitigating these challenges calls for a well-coordinated effort on the part of urban microfinance institutions in the area of capacity building, knowledge sharing, and technology” (Microfinance India, 2006).

(10) Trade -off between financial and social goals:

MFIs are mandated to meet both financial and social goals and are thus required to trade off social performance and financial performance. Social goal includes poverty reduction and financial goal includes achieving financial sustainability, growth and potential future capacity. Therefore, MFIs are required to find innovative ways of reconciling the two. The MFIs have come a long way from not-for-profit organizations to assuming for profit forms and attracting huge commercial borrowings and equity investments. To this extent micro-credit has evolved from poverty-based lending to exclusively commercial lending with MFIs merely revolving money to generate an income without caring about the needs of the poor, which amounts to a mission drift (Hadia Hina et-al.) from their solely welfare driver activities. Welfarist see this 'mission drift' as a retrograde step as it undermines an organization's commitment to the very poor, who will be crowded out by less poor who are incapable of bearing the market interest rates burden of commercial loans. Financially focused MFIs are more likely to reach clients well above the poverty line, a result of lowering transaction costs in order to increase profitability and the number of clients.

(11) Regulatory framework and Policy Environment:

In India, micro finance is provided by a variety of institutions comprising banks (including commercial banks, RRBs and co-operative banks), agricultural credit societies and MFIs that include for profit NBFCs, not for profit Section-25 companies, trusts, societies and mutual benefit MFIs like cooperative societies. Among these forms of organisations, only banks and NBFCs are regulated by Reserve Bank of India, while the rest are covered, in varying degrees, under regulation of their respective State legislations requiring minimum regulatory compliance. Since there is no single regulator for this sector, the MFIs are not required to follow some standard rules. There is thus an urgent need to regulate these microfinance providers who are dealing with poor and vulnerable section of society. Apart from regulations, providing appropriate and conducive policy environment is an absolute necessity for the growth of this sector. To quote Microfinance India (2006), “To meet the demand for large equity investments in urban microfinance, a policy framework could stimulate interest by creating right incentives attracting equity investments in urban microfinance. Also breaks or concessions for microfinance institutions might help these institutions to build reserve and make them more attractive to investors. The government could consider providing capital gains tax exemptions on exits in order to attract investors and create right incentives for these early stage and patient investors”. A conducive policy environment and appropriate regulatory framework will play an important role in orderly development of the microfinance sector.

(12) Scaling up the urban microfinance sector at retail level:

A large-scale expansion in the retail capacity is needed to serve the growing demand of microfinance in urban areas. The upsurge in demand of microfinance has provided opportunity to build and expand institutions with capacity to serve a larger clientele with variety of financial instruments to suit their needs. In order to manage this growth, the financial institutions must use technological innovations and human resources in a coordinated manner (Microfinance India,2006).

Section 5: Summing Up:

Drawing inspiration from the pioneering work and appreciable success in the rural operations, the microfinance sector has now moved on to the arena of urban microfinance. The groundwork and experience in the field of rural microfinance has provided ample enthusiasm and platform for urban initiatives. Rapidly growing urban microfinance market requires support of multiple stakeholders to serve at the retail level. Suitable institutions, viable mechanisms to cater to the needs of urban clients and effective regulatory framework will decide the fate of this sector.

The urban microfinance, inspite of its huge growth potential, is not an easy market because of its diverse client profile, their expectation and variety of products and processes needed. Urban areas, especially the big cities, pose various challenges such as high real estate cost and human resource management. The fear of unscrupulous competition is a lingering danger. Technology can help in bringing down the cost in retail sectors. It requires an enabling and supportive policy and regulatory environment for the orderly growth of urban microfinance sector.

Section 6: REFERENCES:

1. Bharat Microfinance Report, 2008, 2010, 2011, 2013, 2014, 2016, Sa-Dhan.

2. Census of India 2011. Rural-Urban distribution of population, Ministry of Home Affairs, GOI

3. Draft Concept Note on National Urban Livelihoods Mission, Ministry of Housing and Urban Poverty Alleviation, 24-January, 2012.

4. Pascaline Dupas and Jonathan Robinson, 2009. "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," NBER Working Papers 14693, National Bureau of Economic Research, Inc.

5. Economic Development Associates 2004 (EDA) Rural Systems (2004), “The Maturing Indian Microfinance: A Longitudinal Study”, Gurgaon: Mimeo.

6. FMR, CMF (June 2011), “The Urban Poor and Their Money: A Study of Cycle Rickshaw Pullers in Delhi” (A shortened version of the study submitted to The Institute for Money, Technology and Financial Inclusion, University of California, Irvine, by Mani Arul Nandhi, University of Delhi, June 2011)

7. Ghate, Prabhu (2007),”Microfinance India: A State of the Sector Report 2007”, Access Report, Sage publications.

8. Hadia Hina, Geoff Lightfoot and David Harvie, Microfinance, “Sustainable Entrepreneurship and the Funding Gap”, School of Management, The University of Leicester.

9. Indian Grameen Services: www.igsindia.org.in

10. Littlefield, E.; Morduch, J. and Hashemi, S. (2003): “Is microfinance an effective strategy to reach the millennium development goals”, CGAP.

11. Ledgerwood Joana, (1999) “Sustainable Banking with the poor; the world Bank Publications; Washington;DC.

12. Malegam Committee Report, “Report of the Sub-Committee of the Central Board of Directors of Reserve Bank of India to Study Issues and Concerns in the MFI Sector, RBI, January 2011.

13. Mankar, Veena, and Lara Gidwani, 2007, "Metro Microfinance: Opportunities and Challenges in Mumbai", Intellecap 2007.

14. Microfinance India Publication, “A Promise to Pay the Bearer, An exploration of the potential for Urban Microfinance in India”, 2006.

15. Nair T.S, “Urban Microfinance in the Context of Urban Poverty”, India Urban Poverty Report,2009.

16. NSSO “All India Debt and Investment survey”2013.

17. Planning Commission “Report of the expert group to review the methodology for measurement of poverty”, June,2014.

18. Planning Commission, Steering Committee on Urbanization, report of the working group on urban poverty, slums and service delivery system, New Delhi, 3 October, 2011

19. Rangarajan, “Committee Report on Financial Inclusion Report”, NABARD, January 2008.

20. Ruthven, O, 2001, 'Money Mosaics: Financial Choice and Strategy in a West Delhi Squatter. Settlement", Paper No 32, Working Paper Series, Finance and Development Research Programme, University of Manchester, also published in Journal of International Development.

21. Srinivasan, N (2008), “Microfinance India: State of the Sector Report 2008”, Access Report, Sage publication,

22. Srinivasan, N (2011), “Microfinance India: State of the Sector Report 2011”, Access Report, Sage publication.

23. Supriti, Sharon M Barnhardt and Ramesh Ramanathan. Publisher: Ramanathan Foundation (Access to money for the urban poor)

24. Town and country planning organization, Ministry of Urban Development, GOI

25. UNDP India, “Knowledge Product of Micro Finance, A synthesis of Consolidated Replies” (2008).

Received on 08.05.2019 Modified on 14.05.2019

Res. J. Humanities and Social Sciences. 2019; 10(2): 568-576.

DOI: 10.5958/2321-5828.2019.00093.7