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care, SMILE and Arohan came up during this period.
But microfinance still remained a predominantly rural
phenomenon and did not attract much attention from
banks and investors. The image of urban settlements as
inorganic communities—both socially heterogeneous
and transient—unsuitable to the application of group
lending methodology held back meaningful investments
in urban prgrammes. The situation has changed dramati-
cally over the past 5 to 6 years. It may be noted that the
rapid pace of urbanization and urban expansion coupled
with the peculiar demographic transition in favour of the
youth (demographic dividend) has brought the ‘urban’
to the core of development debate in the 2000s. A study
done by the McKinsey Global Institute estimated that
by the year 2030 cities could generate 70 per cent of the
net new jobs created in India and account for 70 per cent
of the country’s GDP and increase per capita income
by about four times (MGI, 2010). In 2011 for the first
time since Independence, urban population registered an
absolute increase greater than that in rural population.
The urban population in the country increased by 91
million (from 286 million to 377 million) and the level
of urbanization rose from 28 per cent to 31 per cent over
the decade 2001–11 (Census of India 2011). The num-
ber of slum blocks stood at 108,227 in 2011 with 137.49
lakh households.
This is the setting in which several MFIs have gradu-
ally shifted their business priorities to include more of
urban clients. It is estimated that over a period of just
5 years the urban microfinance market has cornered one-
third of the gross loan portfolio of MFIs. In another three
years the ratio is expected to change to 50:50.
21
About
half of the top 10 MFIs have substantial share of urban
portfolio. They have introduced many innovations to
replicate the retail banking model to micro lending. The
growth in the urban portfolio has been more than the
rural portfolio even in the case of Bandhan, the largest
rural-based MFI, which is in the process transforming
to a bank by early 2015. This experience has informed
the MFI's proposed strategy. Reportedly it is planning to
establish branches in both rural and urban areas to tap
the growth potential in urban markets.
22
According to Ramesh Ramanathan, Founder and
Chairman of Janalakshmi Financial Services urban finan-
cial exclusion has peculiar characteristics. The urban live-
lihoods are substantially informal and invisible. But they
are richer and more vibrant compared to the rural liveli-
hoods. Also barriers to entry into livelihood activities are
relatively low in the urban informal economy. One could
migrate to the city to work in construction, acquire skills
and start a petty business over 3 to 5 years. These petty
entrepreneurs need access to a range of financial services
at good price. They need information with choice. They
need to save and want insurance. However, since they
live in the penumbra of urban formal economy and are
unseen, they get excluded by formal financial institu-
tions. MFIs do have a role to play in ‘including’ these
entrepreneurs in the financial sector.
The informal entrepreneurs do not form a monolithic
group. There is a pyramid at the bottom of the pyramid,
at the bottom of which are located the ultra-poor who
face distinct challenges. At the top are flourishing micro
entrepreneurs who either have service-based or manufac-
turing enterprises. They do well and want to grow. But
they have no access to the right kind of financial services.
For one, these different categories need a new typology
(pre-, nano-, micro-, tiny, for instance) to describe them.
Secondly, and more importantly, the needs of each of
these categories are vastly different. At the pre-enterprise
level, for instance, there is fungibility between personal
and economic finances. At some point in the evolution
the separation may happen. There may emerge a threshold
of separation where the entrepreneur starts thinking seri-
ously about ‘enterprise’. The threshold of formalization
follows, where she starts acquiring signals of formalization
(PAN card, IT returns, chartered accountant). Beyond
this threshold, formal financial institutions might step in
with support. However, more than 90 per cent of the
enterprises in India are below the threshold of formaliza-
tion and are spread across the multiple layers of enter-
prises. Their demands are bypassed by the mainstream
players with stringent and inflexible norms of what is
‘bankable’.
The two issues that Janalakshmi considers critical while
discussing financial inclusion are the importance of urban
livelihoods and the segmentation of urban clientele. It
has realized that serving the financial needs of a highly
segmented set of clients in systematic and sustainable
ways is a complex innovation challenge, which can be
undertaken only by a full-fledged financial institution,
ideally a bank. Given the regulatory constraints to
forming banks, the MFI has tried to partner with banks.
