deepshikha project

8/8/2019 Deepshikha Project

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ACKNOWLEDGEMENT

A project however big or small is never an individual effort. It is a collective effort of manyindividuals whose ideas and efforts give shape to a project.

It gives me immense gratification to place on records my profound gratitude and sincere

appreciation to each and every one of those who have helped me in this endeavor.

I am ineffably indebted to Professor Partha Sarthi, my faculty guide for this Specialization

Project, for his most valuable regular guidance without which my project would not have been

completed.

Any omission in this brief acknowledgement does not mean lack of gratitude.

Date: (Signature)Place: Deepshikha Nath


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DECLARATION

This is to certify that a Specialization project on An overview of Microfinance Industry in

India is submitted by DEEPSHIKHA NATH (PGDM 2008-10) Roll no. 17018 to Siva Sivani

Institute of Management in fulfillment of the requirement for the completion of Specialization

Project after the first year ofPGDM program.

Date: (Signature)Place: Deepshikha Nath


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Table of Content

ACKNOWLEDGEMENT

DECLARATION

COLLEGE CERTIFICATE

LIST OF TABLES

CHAPTER1

INTRODUCTION

1.1 Introduction.7

1.2 Microfinance Definition...7

1.3 Clients of micro finance....8

1.4 The Need in India.9

1.5 Financial needs and financial services.101.6 Role of Microfinance11

1.7 Strategic Policy Initiatives11

1.8 Activities in Microfinance .11

1.9 Scope of study...12

1.10 Significance of study.12

1.11 Objectives of study12

1.12 Literature Review..13

CHAPTERII

INDUSTRY PROFILE2.1 Industry profile..15

2.2 Microfinance- Today.16

2.3 Top 50 Microfinance Institutions...17

2.4 Legal and Regulatory Framework ..19

CHAPTER-III

MICROFINANCE MODELS AND PRODUCT DESIGN

3.1 MICROFINANCE MODELS24

3.1.1 Microfinance Institutions (MFIs).24

3.1.2 Bank Partnership Model...24

3.1.3 Banking correspondents25

3.1.4 Service company model....25

3.1.5 Micro Credit Model..26

3.2 Product Design.27

3.2.1 Technique of product design.27


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3.2.2 MFIs managing their repayment and risk management27

3.2.3 Risk Management..28

3.2.4 Major Risks to Microfinance Institutions..28

3.2.5 Financial Risks...29

3.2.6 Operational Risk... .30

3.2.7 Strategic Risk31

CHAPTER-IV

BUSINESS MODELS

4.1 NABARD Initiative in Micro Finance..33

4.1.1 Introduction ..33

4.1.2 Role of NABARD 33

4.1.3 Organizational Structure34

4.1.4 Managing repayment ratio .36

4.1.5 Providing loan to the Institutions .364.2 Business model of Grameen Bank.37

4.2.1 Introduction37

4.2.2 Working Model..37

4.2.3 Repayment Mechanism..40

4.2.4 Criticism 40

4.3 Self Help Group .....41

4.3.1 Concepts of SHGs .41

4.3.2 Need of SHGs 41

4.3.3 Structure of SHGs ..42

4.3.4 Condition for membership.....424.3.5 Year wise growth of SHGs43

4.3.6 Growth of SHGs in 13 priority states44

4.4 Business model of SAKHI.45

4.4.1 Introduction 45

4.4.2 Objective45

4.4.3 Organizational Structure47

4.4.4 Interest rate48

4.4.5 Strategy to raise capital .48

4.4.6 Reason behind high interest rate ...48

CHAPTER- V

RECOMMENDATIONS ..50

Webliography


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CHAPTER I


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1.1 Introduction

Microfinance is defined as any activity that includes the provision of financial services such as

credit, savings, and insurance to low income individuals which fall just above the nationally

defined poverty line, and poor individuals which fall below that poverty line, with the goal of

creating social value. The creation of social value includes poverty alleviation and the broader

impact of improving livelihood opportunities through the provision of capital for micro

enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large

variety of actors provide microfinance in India, using a range of microfinance delivery methods.

Since the ICICI Bank in India, various actors have endeavored to provide access to financial

services to the poor in creative ways. Governments also have piloted national programs, NGOs

have undertaken the activity of raising donor funds for on-lending, and some banks have

partnered with public organizations or made small inroads themselves in providing such services.

This has resulted in a rather broad definition of microfinance as any activity that targets poor and

low-income individuals for the provision of financial services. The range of activities undertakenin microfinance include group lending, individual lending, the provision of savings and

insurance, capacity building, and agricultural business development services. Whatever the form

of activity however, the overarching goal that unifies all actors in the provision of microfinance

is the creation of social value.

1.2 Microfinance Definition

According to International Labor Organization (ILO), Microfinance is an economicdevelopment approach that involves providing financial services through institutions to low

income clients.

In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as

provision of thrift, credit and other financial services and products of very small amounts to the

poor in rural, semi-urban or urban areas for enabling them to raise their income levels and

improve living standards.

"The poor stay poor, not because they are lazy but because they have no access to capital."

The dictionary meaning of finance is management of money. The management of money

denotes acquiring & using money. Micro Finance is buzzing word, used when financing for

micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to

empower under-privileged class of society, women, and poor, downtrodden by natural reasons or

men made; caste, creed, religion or otherwise. The principles of Micro Finance are founded on

the philosophy of cooperation and its central values of equality, equity and mutual self-help. At


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the heart of these principles are the concept of human development and the brotherhood of man

expressed through people working together to achieve a better life for themselves and their

children.

Traditionally micro finance was focused on providing a very standardized credit product. The

poor, just like anyone else, (in fact need like thirst) need a diverse range of financial instruments

to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we

see a broadening of the concept of micro finance--- our current challenge is to find efficient and

reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely

extending credit, but extending credit to those who require most for their and familys survival. It

cannot be measured in term of quantity, but due weightage to quality measurement. How credit

availed is used to survive and grow with limited means.

1.3 Clients of micro finance:

The typical micro finance clients are low-income persons that do not have access to formal

financial institutions. Micro finance clients are typically self-employed, often household-based

entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small

income-generating activities such as food processing and petty trade. In urban areas, micro

finance activities are more diverse and include shopkeepers, service providers, artisans, street

vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a relatively

unstable source of income.

Access to conventional formal financial institutions, for many reasons, is inversely related toincome: the poorer you are, the less likely that you have access. On the other hand, the chances

are that, the poorer you are, the more expensive or onerous informal financial arrangements.

As we broaden the notion of the types of services micro finance encompasses, the potential

market of micro finance clients also expands. It depends on local conditions and political

climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro

credit might have a far more limited market scope than say a more diversified range of financial

services, which includes various types of savings products, payment and remittance services, and

various insurance products. For example, many very poor farmers may not really wish to borrow,

but rather, would like a safer place to save the proceeds from their harvest as these are consumed

over several months by the requirements of daily living. Central government in India has

established a strong & extensive link between NABARD (National Bank for Agriculture & Rural

Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture &

Marketing Societies at national, state, district and village level.


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1.4 The Need in India

India is said to be the home of one third of the worlds poor; official estimates range from

26 to 50 percent of the more than one billion population.

About 87 percent of the poorest households do not have access to credit.

The demand for microcredit has been estimated at up to $30 billion; the supply is less

than $2.2 billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in the

global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving

the worlds poverty by 2015. Microfinance has been present in India in one form or another since

the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last

five years, the microfinance industry has achieved significant growth in part due to the

participation of commercial banks. Despite this growth, the poverty situation in India continues

to be challenging.

Some principles that summarize a century and a half of development practice were encapsulated

in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight

leaders at the G8 Summit on June 10, 2004:

Poor people need not just loans but also savings, insurance and money transfer

services.

Microfinance must be useful to poor households: helping them raise income, build up

assets and/or cushion themselves against external shocks.

Microfinance can pay for itself.

Subsidies from donors and government are scarceand uncertain, and so to reach large numbers of poor people, microfinance must pay

for itself.

Microfinance means building permanent local institutions.

Microfinance also means integrating the financial needs of poor people into a

countrys mainstream financial system.

The job of government is to enable financial services, not to provide them.

Donor funds should complement private capital, not compete with it.

The key bottleneck is the shortage of strong institutions and managers. Donors

should focus on capacity building.

Interest rate ceilings hurt poor people by preventing microfinance institutions from

covering their costs, which chokes off the supply of credit.

Microfinance institutions should measure and disclose their performance both

financially and socially.


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1.5 Financial needs and Financial services

In developing economies and particularly in the rural areas, many activities that would be

classified in the developed world as financial are not monetized: that is, money is not used to

carry them out. Almost by definition, poor people have very little money. But circumstances

often arise in their lives in which they need money or the things money can buy.

In Stuart Rutherfords recent bookThe Poor and Their Money, he cites several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,

widowhood, old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or

death.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of

dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improving

housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through

creating and exchanging different forms of non-cash value. Common substitutes for cash vary

from country to country but typically include livestock, grains, jewellery and precious metals.

As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that

microfinance could provide large-scale outreach profitably, and in the 1990s, microfinance

began to develop as an industry. In the 2000s, the microfinance industrys objective is to satisfy

the unmet demand on a much larger scale, and to play a role in reducing poverty. While much

progress has been made in developing a viable, commercial microfinance sector in the last few

decades, several issues remain that need to be addressed before the industry will be able to

satisfy massive worldwide demand.

The obstacles or challenges to building a sound commercial microfinance industry include:

Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs

Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance

methodologies


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1.6 Role of Microfinance:

The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh

with promise of providing credit to the poor without collateral , alleviating poverty and

unleashing human creativity and endeavor of the poor people. Microfinance impact studies have

demonstrated that

Microfinance helps poor households meet basic needs and protects them against risks.

The use of financial services by low-income households leads to improvements in

household economic welfare and enterprise stability and growth.

By supporting womens economic participation, microfinance empowers women, thereby

promoting gender-equity and improving household well being.

The level of impact relates to the length of time clients have had access to financial

services.

1.7 Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken by the

government and regulatory bodies in India are:

Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 The National Microfinance Taskforce, 1999

Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 Microfinance Development and Equity Fund, NABARD, 2005 Working group on Financing NBFCs by Banks- RBI

1.8 Activities in Microfinance

a. Microcredit: It is a small amount of money loaned to a client by a bank or otherinstitution. Microcredit can be offered, often without collateral, to an individual or

through group lending.

b. Micro savings: These are deposit services that allow one to save small amounts ofmoney for future use. Often without minimum balance requirements, these savingsaccounts allow households to save in order to meet unexpected expenses and plan for

future expenses.

c. Micro insurance: It is a system by which people, businesses and other organizationsmake a payment to share risk. Access to insurance enables entrepreneurs to concentrate

more on developing their businesses while mitigating other risks affecting property,

health or the ability to work.


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d. Remittances: These are transfer of funds from people in one place to people in another,usually across borders to family and friends. Compared with other sources of capital that

can fluctuate depending on the political or economic climate, remittances are a relatively

steady source of funds.

1.9 Scope of the study:

The study will be confined to understand and analyze the Microfinance sector in India. It will be

focused on understanding the various segments of microfinance, regulations guiding it, the role

of Self Help Groups, NABARD and MFIs in Indian economy.

1.10 Significance of the Study:

The study will help in understanding the present Microfinance SectorThe concept of MF is over two decade old in India. In the commercial microfinance

sector in the last few decades, several issues remain that need to be addressed before the

industry which will be able to satisfy massive worldwide demand. This study will help in

highlighting few of those issues.

The study will help in understanding the role of Microfinance in current economy, the

role of women in rural India, product design, interest rate and business model of

NABARD, SHGs and MFIs.

It will help in formulating future action to deal with microcredit

The study will also help them to predict future trends in the industry.

1.11 Objectives of the study:

To understand the theoretical concept of Microfinance, its role in Indian economy and

regulations guiding its growth

To study various models of Microfinance the business model of leading MFIs,NABARD

and SHGs

To get an insight on the product designing of services by MFIs


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1.12 Literature Review:

A study was conducted by Prabhu Ghate(2006) on microfinance in India and its Progress under

the SHG Bank Linkage Programme. It was found that Of the two major models of microfinance

in India, the SHG Bank Linkage Programme (SBLP) is by far the dominant model in terms of

number of borrowers and loans outstanding. The cumulative number of SHGs linked has grown

almost tenfold in the last five years, to achieve an outreach of about 31 million families through

women's membership in about 2.2 million SHGs by March 2006. Not all SHGs are currently

"linked" in the sense of having loans outstanding to the banks or federations, and only an

estimated half of their members are poor. However, this still means about 14 million poor

households have been reached so far. Moreover the entire membership is saving regularly, and

has access to a ready source of small emergency and consumption loans in the form of loans

extended out of the group's own funds. It revealed the need to slow down and emphasize quality

rather than quantity. Global targets for the programme should be strictly eschewed, and only

indicative targets for the underserved states and regions within them, or for the share ofparticular SHPAs being encouraged, should be used for internal planning purposes. In order to

stengthen the focus on quality, and to monitor progress in increasing it, the SHG movement

needs to devise an annual or biannual sample survey, representative at the national level,

designed to assess changing (and hopefully improving) SHG quality.

Vishal Sehgal,(2008)conducted a research on the business of microfinance. Microfinance serves

as an umbrella term that describes the provision of banking services by poverty-focused financial

institutions (microfinance institutions MFIs) to poor parts of the population that are not being

served by mainstream financial services providers. The core service of microfinance is the

provision of microcredit. He observed that In contrast to commercial banks, micro-lendinginstitutions usually refrain from taking collateral. Instead they follow a model called the Self

Help Group Model or Group Lending Model. In this model an MFI lends a small loan to an

individual, who belongs to a group of 5 to 20 people. The increased demand of microfinance and

the returns that the business offers has attracted a number of players into the segment. Three

category of business has emerged. It includes government backed banks like Grameen bank,

World Bank etc. Second category includes NGOs that form SHGs and lend money to them.

Third category is of commercial banks that have become increasingly involved in microfinance

mainly in four different ways. First, some banks directly grant microloans to the poor. Second,

other banks such as Citibank or ICICI provide funding to MFIs. Third, banks distribute microfi-

nance investment vehicles, e.g. Credit Suisse offers the Responsibility Global Microfinance Fund

and Deutsche Bank distributes db Microfinance- Invest Nr. 1. Lastly, some banks such as ICICI,

Deutsche Bank or Citibank have also been active in the securitisation of MFIs loan portfolios.


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CHAPTER II


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Although most modern microfinance institutions operate in developing countries, the rate of

payment default for loans is surprisingly low - more than 90% of loans are repaid. It is not just a

financing system, but a tool for social change, specially for women - it does not spring from

market forces alone - it is potentially welfare enhancing - there is a public interest in promoting

the growth of micro finance - this is what makes it acceptable as a valid goal for public policy.

2.2 Microfinance Today

In the 1970s a paradigm shift started to take place. The failure of subsidized government or

donor driven institutions to meet the demand for financial services in developing countries let to

several new approaches. Some of the most prominent ones are presented below.

Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in

Indonesia without any subsidies and is now well-known as the earliest bank to institute

commercial microfinance. While this is not true with regard to the achievements made inEurope during the 19th century, it still can be seen as a turning point with an ever increasing

impact on the view of politicians and development aid practitioners throughout the world. In

1973 ACCION International, a United States of America (USA) based non governmental

organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus

started what later became known as the Grameen Bank by lending a total of $27 to 42 people in

Bangladesh. One year later the Self-Employed Womens Association started to provide loans of

about $1.5 to poor women in India. Although the latter examples still were subsidized projects,

they used a more business oriented approach and showed the world that poor people can be good

credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than

that of traditional banks. Another milestone was the transformation of BRI starting in 1984. Oncea loss making institution channeling government subsidized credits to inhabitants of rural

Indonesia it is now the largest MFI in the world, being profitable even during the Asian financial

crisis of 19971998.

In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives

of various educational institutions and donor agencies from 137 different countries gathered in

Washington D.C. for the first Micro Credit Summit. This was the start of a nine year long

campaign to reach 100 million of the world poorest households with credit for self employment

by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been

reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the

poorest before they took their first loan. Since the campaign started the average annual growth

rate in reaching clients has been almost 40 percent. If it has continued at that speed more than

100 million people will have access to microcredit by now and by the end of 2005 the goal of the

microcredit summit campaign would be reached. As the president of the World Bank James

Wolfensohn has pointed out, providing financial services to 100 million of the poorest

households means helping as many as 500600 million poor people.


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2.3 Top 50 Microfinance Institutions (As on 20/3/2009)


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*Risk, which looks at the quality of their loan portfolios, measured as the percent of the portfolio

at risk greater than 30 days; and return, which is measured as a combination of return on equity

and return on assets.

From this above table we can notice that the Risk of companies is measured as the percentage of

Portfolio at Risk (PAR) which means and return is measured as a combination of ROA and ROE.

ROA = Net Operating Income-Taxes

Average Assets

Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its

profitability. The ratio includes not only the return on the portfolio, but also all other revenue

generated from investments and other operating activities.

From the above list we can notice that, there are seven companies of India in top 50 companies

in the world. There is a huge potential for India to grow in this sector, because out of total 500

million poor people from all over the world, who is getting beneficial from the micro finance

institutions, 80 to 90 million are from India only. So there is still a huge market and opportunitiesin this segment.

The total loan that the MFIs had provided to the poor people in India crosses Rs 24 billion till

October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see the

new face of India.

2.4 Legal and Regulatory Framework for the Microfinance Institutions in India:

1. SOCIETIES REGISTRATION ACT, 1860:

NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities wereestablished as voluntary, not-for-profit development organizations, their microfinance activities

were also established under the same legal umbrella. This act is applicable to the NGOs and the

main purpose is:

Relief of poverty

Advancement of education

Advancement of religion

Purposes beneficial to the community or a section of the community.

2. INDIAN TRUSTS ACT, 1882:

Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or as

private, determinable trusts with specified beneficiaries/members.

3. NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF

COMPANIES ACT, 1956:


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An organization given a license under Section 25 of the Companies Act 1956 is allowed to be

registered as a company with limited liability without the addition of the words Limited or

Private Limited to its name. It is also eligible for exemption from some of the provisions of the

Companies Act, 1956. For companies that are already registered under the Companies Act, 1956,

if the central government is satisfied that the objects of that company are restricted to the

promotion of commerce, science, art, religion, charity or any other useful purpose; and the

constitution of such company provides for the application of funds or other income in promoting

these objects and prohibits payment of any dividend to its members, then it may allow such a

company to register under Section 25 of the Companies Act.


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CHAPTER III


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3.1Micro Finance Models3.1.1 Micro Finance Institutions (MFIs):

MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and

cooperatives. They are provided financial support from external donors and apex institutionsincluding the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD

and employ a variety of ways for credit delivery.

Since 2000, commercial banks including Regional Rural Banks have been providing funds to

MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into

financial intermediation using a variety of delivery methods, their numbers have increased

considerably today. While there is no published data on private MFIs operating in the country,

the number of MFIs is estimated to be around 800.

Legal Forms of MFIs in India

Types of MFIs Estimated

Number*

Legal Acts under which Registered

1. Not for Profit MFIs

a.) NGO - MFIs

400 to 500 Societies Registration Act, 1860 or

similar Provincial Acts

Indian Trust Act, 1882

b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956

2. Mutual Benefit MFIs

a.) Mutually Aided CooperativeSocieties (MACS) and similarly

set up institutions

200 to 250 Mutually Aided Cooperative Societies

Act enacted by State Government

3. For Profit MFIs

a.) Non-Banking Financial

Companies (NBFCs)

6 Indian Companies Act, 1956

Reserve Bank of India Act, 1934

Total 700800

Source: NABARD website

3.1.2 Bank Partnership ModelThis model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as

an agent for handling items of work relating to credit monitoring, supervision and recovery. In

other words, the MFI acts as an agent and takes care of all relationships with the client, from first


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contact to final repayment. The model has the potential to significantly increase the amount of

funding that MFIs can leverage on a relatively small equity base.

A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its

books for a while before securitizing them and selling them to the bank. Such refinancing

through securitization enables the MFI enlarged funding access. If the MFI fulfils the true sale

criteria, the exposure of the bank is treated as being to the individual borrower and the prudential

exposure norms do not then inhibit such funding of MFIs by commercial banks through the

securitization structure.

3.1.3 Banking CorrespondentsThe proposal of banking correspondents could take this model a step further extending it to

savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It

would use the ability of the MFI to get close to poor clients while relying on the financial

strength of the bank to safeguard the deposits. This regulation evolved at a time when there were

genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people

have confidence could mobilize savings of gullible public and then vanish with them. It remains

to be seen whether the mechanics of such relationships can be worked out in a way that

minimizes the risk of misuse.

3.1.4 Service Company ModelUnder this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in

hand with that MFI to extend loans and other services. On paper, the model is similar to the

partnership model: the MFI originates the loans and the bank books them. But in fact, this model

has two very different and interesting operational features:

(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the

client to be reached at lower cost than in the case of a standalone MFI. In case of banks which

have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may

contract with many banks in an arms length relationship. In the service company model, the MFI

works specifically for the bank and develops an intensive operational cooperation between them

to their mutual advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the bank to

create lower cost and faster growth. The Service Company Model has the potential to take the

burden of overseeing microfinance operations off the management of the bank and put it in the

hands of MFI managers who are focused on microfinance to introduce additional products, such

as individual loans for SHG graduates, remittances and so on without disrupting bank operations

and provide a more advantageous cost structure for microfinance.


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3.1.5 The micro-credits model

The model is fairly straightforward and simple.

Focus on jump-starting self-employment, providing the capital for poor women to use their

innate "survival skills" to pull themselves out of poverty.

Lend to women in small groups (credit circles), say of five or seven.

Make loans of small amounts to two out of five.

The three who have not received loans will be eligible only when this first round of loans has

been repaid.

Draw up a weekly or bi-weekly repayment schedule.

In case any member defaults the entire circle is denied access to credit.

Banks have been given freedom to formulate their own lending norms keeping in view ground

realities. They have been asked to devise appropriate loan and savings products and the related

terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period,

margins, etc.


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3.2 Product Design

The actual loan products need to be designed according to the demand of the target market.

Besides the important aspects are risks to cover, organizations also have to decide whether they

want to bundle many different benefits into one basket policy, or whether it is more appropriate

to keep the product simple. For marketing purposes, MFIs sometimes prefer the basket cover,

since it can make the policies sound comprehensive. It includes assumptions the organizations

make with regard to operating costs, risk premiums, and reinsurance, and arriving to those

conclusions. It concerns whether their clients be willing to pay more for greater benefits. From

price, the logical next set of questions involves efficiency. Indeed, given the relative high costs

of delivering large volumes of small policies, maximizing efficiency is a critical strategy to

ensuring that the products are affordable to the low-income market. One way is to make the

products mandatory, which increases volumes, reduces transaction costs and minimizes adverse

selection. MFIs can combine a mandatory product with some voluntary features to make the

service more customer-oriented.

3.2.1 Techniques of Product Design

To design a loan product to meet borrower needs it is important to understand the cash pattern of

the borrowers. Cash pattern is important so far as they effect the debt capacity of the borrowers.

Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments when

they are due. Efficiency depends less on the delivery model than on the simplicity of the product

or product menu. Simple products work best because they are easier to administer and easier forclients to understand. Another efficiency strategy is to use technology to reduce paperwork,

manual processing and errors. MFIs need to conduct a costing analysis to determine how much

they need to earn in commission to cover their administrative expenses.

3.2.2 MFIs managing their repayment and risk management:

Risk is an integral part of financial services. When financial institutions issue loans, there is a

risk of borrower default. When banks collect deposits and on-lend them to other clients (i.e.

conduct financial intermediation), they put clientssavings at risk. Most MFISs provides theloans without or with smaller portion of deposit or, so for them repayment of interest or principal

is very risky. All MFIs face risks that they must manage efficiently and effectively to be

successful. When poorly managed risks begin to result in financial losses, donors, investors,

lenders, borrowers and savers tend to lose confidence in the organization and funds begin to dry

up. When funds dry up, an MFI is not able to meet its social objective of providing services to

the poor and quickly goes out of business.


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3.2.3 Risk Management:

Risk management is a discipline for dealing with the possibility that some future event will cause

harm. It provides strategies, techniques, and an approach to recognizing and confronting any

threat faced by an organization in fulfilling its mission. Risk management may be as

uncomplicated as asking and answering three basic questions:

What can go wrong?

What will we do (both to prevent the harm from occurring and in the aftermath of an

"incident")?

If something happens, how will we pay for it?

Benefit of Risk Management:

Early warning system for potential problems: A systematic process for evaluating and

measuring risk identifies problems early on, before they become larger problems or drain

management time and resources. Less time fixing problems means more time for

production and growth.

Better information on potential consequences, both positive and negative. A proactive

and forward-thinking organizational culture will help managers identify and assess new

market opportunities, foster continuous improvement of existing operations, and more

effectively performance incentives with the organizations strategic goals.

Encourages cost-effective decision-making and more efficient use of resources

3.2.4 Major Risks to Microfinance Institutions:


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This are the most significant risks (with the most potentially damaging consequences for the

MFI), how they interact, and current challenges faced by MFIs.

3.2.5 Financial Risks:

Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks.

Mentioned under are the risks which are very critical for the MFIs.

Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or

capital due toborrowerslate and non-payment of loan obligations. Credit risk encompasses both

the loss of income resulting from the MFIs inability to collect anticipated interest earnings as

well as the loss of principle resulting from loan defaults. Credit risk includes both transaction

risk and portfolio risk.

Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigatetransaction risk through borrower screening techniques, underwriting criteria, and quality

procedure for loan disbursement, monitoring, and collection.

Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the overall loan

portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures

lessen the portfolio risk.

Liquidity risk: Liquidity risk is the risk that an MFI cannot meet its obligations on a timely

basis. Liquidity risk usually arises from managements inability to adequately anticipate and

plan for changes in funding sources and cash needs. Efficient Liquidity Managementrequires

maintaining sufficient cash reserves on hand (to meet client withdrawals, disburse loans and fund

unexpected cash shortages) while also investing as many funds as possible to maximize earnings.

Liquidity management is an ongoing effort to strike a balance between having too much cash and

too little cash.

Interest rate risk: Interest rate risk is the risk of financial loss from changes in market interest

rates. The greatest interest rate risk occurs when the cost of funds goes up faster than the

financial institution can or is willing to adjust its lending rates.

How to manage interest rate risk?

To reduce the mismatch between short-term variable rate liabilities and long-term fixed

rate loans, managers may refinance some of the short-term borrowings with long-term

fixed rate borrowings. This might include offering one and two-year term deposits as a

product and borrowing five to 10 year funds from other sources. Such a step reduces


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interest rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those

funding sources.

To boost profitability, MFIs may purposely mismatch assets and liabilities in

anticipation of changes in interest rates. If the asset liability managers think interest rates

will fall in the near future, they may decide to make more long-term loans at existing

fixed rates, and shorten the term of the MFIs liabilities. By lending long and borrowing

short, the MFI can take advantage of the cheaper funding in the future, while locking in

the higher interest rates on the asset side. In this case, the MFI has increased the interest

rate risk in the hope of improving the profitability of the bank.

3.2.6 Operational Risks:

Operational risk arises from human or computer error within daily service or product delivery.

This risk includes the potential that inadequate technology and information systems, operational

problems, insufficient human resources, or breaches of integrity (i.e. fraud) will result in

unexpected losses.

Two types of operational risk: transaction risk and fraud risk:

Transaction risk: Transaction risk is particularly high for MFIs that handle a high volume of

small transactions daily. Since MFIs make many small, short-term loans, this same degree of

cross-checking is not cost-effective, so there are more opportunities for error and fraud. As more

MFIs offer additional financial products, including savings and insurance, the risks multiply andshould be carefully analyzed as MFIs expand those activities

Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional deception

by an employee or client. The most common type of fraud in an MFI is the direct theft of funds

by loan officers or other branch staff. Other forms of fraudulent activities include the creation of

misleading financial statements, bribes etc.

How to minimize fraud risk?

Introduced an education campaign to encourage clients to speak out against corrupt staff

and group leaders.

Standardized all loan policies and procedures so that the staff cannot make any decision

outside the regulations.

Established an inspection unit that performs random operational checks.


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3.2.7 Strategic Risks:

Strategic risks include internal risks like those from adverse business decisions or improper

implementation of those decisions, poor leadership, or ineffective governance and oversight, as

well as external risks, such as changes in the business or competitive environment. This section

focuses on two critical strategic risks:

- Governance Risk, Business Environment Risk.Governance risk: Governance risk is the risk of having an inadequate structure or body to make

effective decisions. The Financial crisis, described above illustrates the dangers of poor

governance that nearly resulted in the failure of that institution.

External business environment risk: Business environment risk refers to the inherent risks of

the MFIs business activity and the external business environment. To minimize business risk,

the microfinance institution must react to changes in the external business environment to take

advantage of opportunities, to respond to competition, and to maintain a good public reputation


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CHAPTER IV


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4.1 NABARD Initiative in Micro Finance

4.1.1 Introduction

National Bank for Agriculture and Rural Development (NABARD) was established as an

apex rural development bank in the year 1982, through an Act of Parliament, to provide

refinance for agriculture, allied activities, small scale industries, cottage and village industries,

rural artisans and crafts in an integrated manner. Earlier, RBI and GOI managed the loans and

credits for the poor but, these bodies wanted some other body which fully managed this activities

i.e. distribution of loans and credits to the poor people. It was set up with an initial capital of Rs

100 crore, which was enhanced to Rs 2,000 crore, fully subscribed by the Government of India

and the RBI.

The bank's vision is "to facilitate sustained access to financial services for the unreached poor in

rural areas through various microfinance innovations in a cost effective and sustainable manner."

4.1.2 Role of NABARD

Providing refinance to lending institutions in rural areas.

Bringing about or promoting institutional development.

Evaluating, monitoring and inspecting the client banks.

Besides this pivotal role, NABARD also:

NABARD is an apex institution accredited with all matters concerning policy, planningand operations in the field of credit for agriculture and other economic activities in rural

areas.

It is an apex Refinancing agency for the institutions providing investment and production

credit for promoting the various developmental activities in rural areas

It prepares, on annual basis, rural credit plans for all districts in the country; these plans

form the base for annual credit plans of all rural financial institutions.

It undertakes monitoring and evaluation of projects refinanced by it.

It promotes research in the fields of rural banking, agriculture and rural development


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4.1.3 Organizational Structure


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Financial Santa Clause (NABARD)

National Bank for Agriculture and Rural Development (NABARD) was established as an

apex rural development bank in the year 1982, with the initial capital of Rs 14000 crore, which

was provided by the Government of India (GOI) and Reserve bank of India (RBI). And till

March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs 1400 crores. NABARD

gets fund from the GOI, RBI, Swiss Bank, big NGOs etc.

NABARDs financial position is very robust. Its Reserve and Surplus increased by 10.26% from

07 to 08, and its Cash and Bank balance and Investment increased by 40.16% and 15.5%. So this

shows that how well NABARD is managing their funds and how year and year it blossomed.

How NABARD helps Banks and MFIs in augmenting?

Earlier Banks and MFIs both were having different approached to work. If one was moving in

right direction then other was in left. So NABARD played a very crucial role to bring them both

in the way. Big commercial banks were focused on only large and medium class people where

the poor were neglected because of less savings and borrowing capacity. And the on the other

hand MFIs were focusing on poor women.

As there are more Banks then the MFIs, so the large chunk of population gets neglected. So the

NABARD came into the picture and try to bridge the gap between the two. What are the

techniques that NABARD use for the Banks and MFIs:

For banks:

Provide Refinance to the banks.

Conduct the workshop where the executive of the NABARD meet the executive and

employees of different banks and help them to understand the need and importance of

microcredit to the poor people.

NABARD helps the banks to interface or try to convene the NGOs and other institutions

with the banks which earlier they were avoiding to meet.

NABARDs is having rule for the banks that they have to keep aside a certain amount of

loan for the people of Below Poverty Line.

For MFIs:

NABARD gives loans to the MFIs after analyzing there rating and balance sheet.


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Conduct the workshop where the executive of the NABARD meet the executive and

employees of different Banks and MFIs and bring them together on the same podium.

NABARD gives the refinance to the MFIs also.

4.1.4 Managing the Repayment ratio:

Its very interesting to know the repayment structure of the NABARD. NABARD provides the

loan to the MFIs, Banks, Agriculture loan, other microcredit loan etc. at a very nominal rate of

interest and without any deposit of collateral. But their Repayment ratio is more than 95%, lets

see what are the reasons and how it manage such a high repayment ratio:

Before providing loan to the institutions NABARD see the credit rating of that institute

given by the rating agency. If they find that sufficient they grant according to that.

NABARD analyze the balance sheet and profit and loss statement of the borrowing

institutes.

They (NABARD) sees the past record of the borrowing institutes i.e. there repayment

ratio, there schemes, there management and the executives who are working in that

institutes.

4.1.5 Providing loan to the Institutions

NABARD follows the very strange way of providing the loans. They give loans to the every

ODD number people or institutes i.e.3, 5, 7, 9. Because there are so many borrowers every day

that its difficult to provide to each and every one. So in this way they try to eliminate the

overcrowding problem.


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4.2 Business model of GRAMEEN bank:

4.2.1 About Grameen Bank

The Grameen Bank is a Microfinance Organization and community development bank started in

1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh that makes small loans

(known as microcredit) to the weaker sections, without requiring collateral or any deposit. The

word "Grameen", derived from the word "gram" or "village", means "of the village. In October

1983, the Grameen Bank Project was transformed into an independent bank by government

legislation. Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703 people

serving 7.34 million borrowers from 80,257 villages. Grameens methods are applied in 58

countries including the United States. Grameen Bank borrowers own 94% of the Bank. The

remaining 6% are owned by the government.

In October 1983 Yunus formed the Grameen (village) Bank, based on principles of trust andsolidarity. There is no legal instrument (no written contract) between Grameen Bank and its

borrowers, the system works based on trust. In a country in which few women may take out

loans from large commercial banks, Grameen has focused on women borrowers as 97% of its

members are women. Because women (far more than men) could be counted on to invest the

loans in business and repay them on schedule, they became the overwhelming participants in

Grameen Bank, where they receive 97 percent of all credit. Grameen bank follows the one

principle that the more you have, the more you can get. In other words, if you have little or

nothing, you get nothing.

According to a World Bank study of Grameen, 5 percent of Grameen borrowers get out ofpoverty every year., according to Grameens figures, nearly two-thirds [64 percent] of borrowers

who have been with Grameen for five years are now out of poverty. And Grameens indicators

of poverty are much more stringent than those of the World Bank, which defines poverty as

earning less than a dollar per day. Grameens definition of poverty alleviate is not only based on

financially sound of the family, but they notice the 10 indicators and all must be met before they

say that family is no longer poor.. Indicators include such things as housing quality, adequate

nutrition, and access to safe water, school attendance by children, certain minimal savings, etc.

4.2.2 Working model of Grameen bank:

The manager first makes a round to the appointed area to introduce Grameen policies and

programs. When one approaches with genuine interests Bank manager asks her to gather

4 more members to form a group. Every group has 5 members, one as its head. Only two

members can obtain loan at first. After 6 weeks of successful repayment another two can


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apply for loan. The leader can only receive loan at last. 8 groups make a Center. And a

center elects its leader for one year, after one term the leader resigns and never be elected

again.

Each borrower must belong to a five-member group. These groups do not provide any

guarantee for a loan to one of their members; repayment responsibility solely rests on the

individual borrower. However if one member of a group defaults, that group will never

receive a loan from Grameen. So its a kind of social pressure exerted by the group

members. Grameen enjoys very high payback ratesover 98 percent.

Grameen bank is not only a Micro financing institution but it is Micro financing plus,

which means they not only provide credit to the borrowers this type of MFI believes that

the poor need more than just money to transform their lives. Typical services to

supplement the credit include discounted health care services, preventative health care

education, literacy courses, vocational training courses, technology courses, youthprograms for children of borrowers, life/disability insurance, and savings programs .

Grameen Bank is owned by the borrowers themselves it is owned by the poor women

who rely on the microcredit loans for income generation. It is therefore tied to local

money; each branch has to be self-sustaining. Local branches get no money from outside

there is no borrowing from the head office. The profit all goes back to the borrowers.

Grameen bank has 21,000 students with student loans, studying in medical schools and

elsewhere. They have also provided some 30,000 scholarships to the children of our

borrowers each year. They even give loans to beggars poor people who go door-to-

door, who we call struggling members so they can stop begging and generate

income through selling such things as food, toys, or household items. They currently have

100,000 struggling members in the program.

Loan Insurance:How loan insurance would be beneficiary for the borrowers? Borrowers

always worry what will happen to their debt if they die. Will the family members pay off

their debt? They believe that if their debt remains un repaid after their death. The

insurance program is very simple. Once a year, on the last day of the year, the borrower is

required to put in a small amount of money in a loan insurance savings account. It iscalculated on the basis of the outstanding loan and interest of the borrower on that day.

She. If a borrower dies any time during the next year, her entire outstanding amount is

paid up by the insurance fund which is created by the interest income of the loan

insurance savings account. In addition, her family receives back the amount she saved in

the loan insurance savings account. Borrowers find it unbelievably generous. If the

outstanding amount remains the same on two successive year-ends, the borrower does not


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have to put in any extra money in the loan insurance savings account in the second year.

Only if the balance is more she has to put in money for the extra amount. Even if the

outstanding amount happens to be several times more at the time of her death than what it

was on the preceding year-end, under the rules of this program, the entire amount will

still be paid off from the insurance fund.

All the borrowers of Grameen bank have to pledge the 16 Decisions. Of course, ma ny

of the women cannot read or write, so they have to listen to others recite the 16

Decisions, and then have to memorize them. This has become an extremely important

part of our microcredit program. The 16 Decisions are mentioned under:

16 Decisions of Grameen bank:

1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courageand Hard workin all walks of our lives.

2. Prosperity we shall bring to our families.

3. We shall not live in dilapidated houses. We shall repair our houses and work towards

constructing new houses at the earliest.

4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.

5. During the plantation seasons, we shall plant as many seedlings as possible.

6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look

after our health.

7. We shall educate our children and ensure that they can earn to pay for their education.

8. We shall always keep our children and the environment clean.9. We shall build and use pit-latrines.

10. We shall drink water from tube wells. If it is not available, we shall boil water or use alum.

11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at our

daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not practice

child marriage.

12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so.

13. We shall collectively undertake bigger investments for higher incomes.

14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him

15. If we come to know of any breach of discipline in any centre, we shall all go there and help

restore discipline.

16. We shall take part in all social activities collectively


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4.2.3 The Repayment Mechanism

Following method is followed by Grameen for loan and repayment.

- One year loan

- Equal weekly installments

- Repayment starts one week after the loan

- Interest rate of 20%

- Repayment amounts to 2% per week for fifty weeks

- Interest payment amounts to 2 taka per week for a 1000 taka loan

4.2.4 Criticism of Grameen Bank:

As the Grameen model was exported overseas during the 1990s, the Bank continued to

grow in Bangladesh. Client numbers grew steadily, but the portfolio grew more quickly

as clients took bigger loans and new types of loans (especially housing). Those ofworking in Bangladesh increasingly heard that repayment rates were falling, but that

branch managers were massaging their performance figures by issuing new loans to

defaulters. These were immediately used to pay off the outstanding loan and hide the

problem of non-repayment.

There were also criticisms of the gender achievements of the Bank: did it merely get

women to take loans that they gave straight to their husbands?

Then, there were criticisms of the idea by Yunus that, of every Grameen Bank loan being

used for microenterprise, and every microenterprise being successful. Independent

fieldwork showed that Grameen Bank clients used their loans for many different

purposesbusiness, food consumption, health, education and even dowry.

Grameen Bank clients paid the kisti (weekly repayments) on their loans not from a single

microenterprise, but from patching together earnings from casual employment, self-

employment, remittances and a variety of loans from other sources. But, as clients stayed

with Grameen Bank, they were under pressure to take bigger, ordinary loans alongside

new housing loans. As a result, they took on levels of debt they could not service from

their income. To stop them from defaulting, they were issued with larger loans byGrameen branch managers to repay earlier loans.


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To assist the members financially at the time of need.

To identify problems, analyzing and finding solutions in the group.

To act as a media for socio-economic development of the village.

To develop linkages with institutions of NGOs.

To organize training for skill development.

To help in recovery of loans.

To gain mutual understanding, develop trust and self-confidence.

To build up teamwork.

To develop leadership qualities.

4.3.3 Structure of SHGs:

Size of SHG

The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number

is that, members cannot actively participate. Also, legally it is required that an informal

group should not be of more than 20 people.

The group need not be registered.

4.3.4 Condition required for membership for SHGs

Members should be between the age group of 21-60 years.

From one family, only one person can become a member of an SHG. (More families can

join SHGs this way).

The group normally consists of either only men or only women. Because mixed group it

would hindered or obstruct free and frank discussions, or opening of the personal

problem.

Womens groups are generally found to perform better. (They are better in savings and

they usually ensure better end use of loans).

Members should be homogenous i.e. should have the same social and financial

background. (Advantage: This makes it easier for the members to interact freely with

each other, if members are both from rich as well as poor class, the poor may hardly get

an opportunity to express themselves).

Members should be rural poor (By poor one should be guided by the living conditions).


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4.3.5

Initially there was a slow progress in the programme up to 1999 as only 32,995 groups were

credit linked during the period 1992 to 1999. Since then the programme has been growing

rapidly and the number of SHGs financed increased from 81,780 in 1999-2000 to more than 6.20

lakh in 2005-06, 6.87 lakh in 2006-07 and 7.94 lakh in 2007-2008.


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4.3.6

Explanation:

From the above figure we can notice the growth of SHGs in top 13 states. From 07 to 08 no of

SHGs i.e. one group of SHG consists 10 to 15 members. We can noticed that the highest

percentage increased during the year between 04 -05.Over 90 percent of them women, and the

total number of SHG members who have ever benefited from the programme to about 51

million. Since some households have more than one member in the programme, the number of

families benefited is slightly smaller than these numbers imply. About half of them are below

the poverty line.


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4.4 Business Model of SAKHI

4.4.1 Introduction

SAKHI (An Organization for Women) is a woman friendly non-government development

organization established in the year 2002 by a group of professional to address the issue of

poverty- stricken people. Since its inception SAKHI has endeavored to deal with critical issues

like illiteracy, health, poverty, assets less status of the poor women and to achieve the goal of

gender mainstreaming and thus linking it to the broader aim of sustainable development.

In 2006 SAKHI realized the importance of economic empowerment which can have a cascading

effect on the overall development and women in particular. With this realization SAKHI shifted

its focus from other activity towards economic empowerment of woman and took up Micro

Finance as its major area of activity.

Mission

To provide financial services to the economically weak and disadvantaged groups for their

livelihood enhancement.

Vision

To emerge as a successful NBFC with an annual disbursement of Rs 40 crore and a client base of

40,000 by 2012.

4.4.2 Objective

1. Women Empowerment:

SAKHI Believes that Women participation is the most effective instrument in bringing about

change in their way of life both economic well-being and adaption of new practices in changing

the socio-economic environment:. In order to bring about women participation and their decision

making and negotiating power about their rights in all walks in life.

2. Women Health:

Health leads to prosperity. Low endowments, production possibilities, and exchange option for

women from disadvantage section in rural marginalized the women; this marginalization often

results in neglecting the health issues of women and children.

3. Women Economic Development:


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Our objective is to strengthen womens economic capacity as entrepreneurs/producers, off farm

economy and traditional activities. SAKHI is committed to address factors leading to

feminization of poverty and gender inequality.

4. Women and natural resources:

Our observation is that women are most effective by degradation of natural resources. We are

promoting environment awareness and natural resources conservation activities through

womens participation at village level.

4.4.3 Organization Structure

SAKHI had developed a systematic organizational structure for itself. The organogram below

reflects the organizations structure. The aim to have clear staff structure with clearly defined

role and responsibilities.


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Loans are to given in multiples of thousands only, it can be noted that monthly repayment

installments for each loan has kept at 10% of the loan amount for the convenience of transaction.

The balance amount is to be adjusted in the 12th installment. Repayment installment chart for

each size loan is available with the office


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4.4.4 How they charges interest:

Suppose they have given loan of Rs 5,000 to an individual in a group. So he gives Rs 500 per

month i.e. 425 capital and Rs 75 interest which is 1.5% of 5,000. So at the end of the year an

individual pays Rs 6,000. If we look from other angle, 18% of 5,000 comes to 900 and Rs 100

processing fees. If we go little deep, then their monthly capital is 416.66 +8.33 (transaction fees)

+ 75 (1.5% of 900) = Rs 500 per month.

4.4.5 SAKHI strategy to raise capital:

Sakhi raises capital from 2 institutes:

Friends of Women World Bank.(FWWB)

Indian Bank.

From these above routes SAKHI raises fund. The rate charges by the FWWB are 13.5% p.a andIndian Bank charges 13.75% p.a. and from NABARD they get Grant.

4.4.6 Reason for SAKHI charging such a high rate of interest (18% p.a):

SAKHI receive loan from the above institute and that loan is not disbursed immediately.

Suppose SAKHI borrowed 10 lakhs loan, but that amount is not disbursed immediately. But the

rate of interest is start charging from the first date of borrowing by the SAKHI. SAKHI has to

charge the same rate of interest to all there borrowers even if the above mentioned two capital

institution hikes the loan rate of interest. So apart from high transaction and operating cost, this

two reasons also there why the rates are higher.


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CHAPTER V


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Recommendations and suggestions

Under mention are the few recommendations and suggestions, which I felt during my project on

Micro Finance are:

1. The concept of Micro Finance is still new in India. Not many people are aware the MicroFinance Industry. So apart from Government programmes, we the people should stand

and create the awareness about the Micro Finance.

2. There are many people who are still below the poverty line, so there is a huge demand forMFIs in India with proper rules and regulations.

3. There is huge demand and supply gap, in money demand by the poor and supply by theMFIs. So there need to be an activate participation by the Pvt. Sector in this Industry.

4. One strict recommendation is that there should not over involvement of the Governmentin MFIs. Because it will stymie the growth and prevent the others MFIs to enter.

5. According to me the Micro Loan should be given to the women only. Because by thisonly, MFIs can maintain their repayment ratio high, without any collaterals.

6. Many people say that the interest rate charge by the MFIs is very high and there shouldbe compelled cap on it. But what I felt during my personal survey, that the high rates are

justifiable. Now by this example we will get agree.

Suppose a big commercial bank gives Rs 1 million to an individual and in the same way a MFI

gives Rs 100 to 10.000 customers. So its obvious that man power cost and operating cost are

higher for the MFIs. So according to me rates are justifiable. But with limitations.


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Webliography:

Websites:

www.ifmr.ac.in

www.google.com

www.microfinanceinsight.com

www.investopedia.com

www.books.google.com

www.seepnetwork.org

www.forbes.com

www.nationmaster.com

www.thaindian.com

www.authorstream.com

www.knowledge.allianz.com

www.familiesinbusiness.netwww.indiamicrofinance.com

www.gdrc.org www.accion.org

Research paper by Prabhu Ghate

Research paper by Vishal Sehgal Presentation by N. Srinivasan

deepshikha project

Documents