Bank MFI – Bulk lending model

Bank MFI – Partnership model

Ashutosh Ranjan
A35904616008
 Bank MFI – Partnership Model
Why Partnership Makes Sense for Banks ?

Banks can realize tremendous advantages by partnering with MFIs to act as business
correspondents. Business correspondents carry out transactions on behalf of a bank, and are paid
commissions for the services rendered. The Business Correspondent model is one way to reach
larger numbers of poor clients and connect them to banking services.

Because MFIs operate in areas where banks do not have branches, partnership allows banks to
cost-effectively reach unbanked clients in far-flung areas without investing in brick-and-mortar
branches. The model also allows banks to expand their offerings, as MFIs are geared towards the
provision of low-ticket size financial products that have traditionally been a challenge for banks.

Crucially, the model also helps banks to meet the priority sector lending targets set by the Reserve
Bank of India to ensure access to financing for development activities. These regulations specify
that 40 percent of a bank’s loan portfolio should target sectors such as education, low-income
housing, small farms, and micro-enterprises.
The bank, therefore, pioneered a partnership model that attempted to separate MFI risk from
portfolio risk, provide a mechanism for banks to incentivize partner MFIs and deal with the inability
of MFIs to provide risk capital in large amounts.

The model has the following key characteristics:

Loan contracts directly between bank and borrower;

Alignment of incentives with a first-loss guarantee structure;
Transfer of implicit capital from the bank to the MFI through an overdraft facility.

The partnership model may prove critical in unleashing wholesale funds of Indian banks. It
combines debt and mezzanine finance, enabling the MFI to increase outreach rapidly, while
unlocking large amounts of wholesale funds available in the commercial banking sector in India.
 Bank MFI – Partnership Model
This category of MFIs belong to MFI Bulk Lending (Equity Participation) model whereby
they can access funds in the form of cheaper loans, subordinated debts, equity or quasi-
equity from agencies, such as, the Rashtriya Mahila Kosh, the SIDBI Foundation for Micro-
Credit (SFMC), the Micro-Finance Development and Equity Fund (under the
chairmanship of NABARD) as well as the FWWB.

This allow MFI to :-

1. Lower the cost of operation
2. Provide cheaper loans
3. Larger Market is captured
Refrences:

1. https://www.researchgate.net/
2. https://grameenfoundation.org
3. https://rbiindia.org