Presented by:Kumar Debvrat

B.com (H)-III YearCollege Roll no: 68

S.G.N.D Khalsa college

2012-13

Table of Contents

Introduction

Overview

Microfinance Definition

Strategic Policy Initiatives

Activities in Microfinance

Legal Regulations

Micro-Finance in India

Microfinance Social Aspects

Self Help Groups

How self-help groups work

Life insurances for self-help group members

Microfinance Models kds

Marketing of Microfinance Products

Conclusion

References

NO Chapter PAGE

1 Introduction

2 Microfinance Definition

3 Role of Microfinance

4 History

5 Difference

6 Microfinance Providers

7 Borrower

8 Micro Finance Strategic

9 Government Roll

10 Performance

11 MFI’S PROUCTS

12 Microfinance Management

13 Microfinance Working Environment

14 Microfinance Operation management

15 SWOT MATRIX

16 Critical Analysis

17 India’s top 50 Microfinance Institutions.

18 with References KDS MFI

19 Microfinance India Summit 2010

Certificate

This is to certify that the project report titled “Overview of Microfinance Industry in India” has been carried out by Kumar Debvrat , Roll No. 68, and Batch 2012-13 for the partial fulfillment of the Bachelor of Commerce (Honours).

Kumar DebvratB. Com (H) – III YearCollege Roll No.68S.G.N.D Khalsa College

Dr. G.S. SoodMentorDepartment of CommerceS.G.N.D Khalsa College

Declaration

I, Kumar Debvrat, hereby declare that the project report titled “Overview of Microfinance Industry in India” is my original piece of work and is based on my understanding of the subject. It has not been copied from any published source or website.

Kumar DebvratB. Com (H) – III Year College Roll No.68S.G.N.D Khalsa College

Acknowledgement

As a student of commerce, I have gone through a vast amount of literature and material available on the topic “Microfinance”. I feel indebted to several authors and researchers who helped me a lot in understanding various issues relating to my topic.

I owe many thanks and gratitude to Dr. G.S sood, my mentor and guide for the project. The guidelines laid down by her have been very instrumental in the successful completion of the project. I felt motivated and exceedingly encouraged under her supervision. He guided me to a wide range of resources that became a catalyst in the project development.

In addition, I sincerely thank my family and friends who provided me their support.

Kumar DebvratB. Com (H) – III Year College Roll No.68S.G.N.D Khalsa College

Index

Topic Page no.

1. Introduction 12. History of Modern Microfinance 23. Overview 3-64. Governments Role in Supporting Microfinance 75. Microfinance Social Aspects 86. Need in India 97. Micro financing Regulation India 10-118. Social Performance Measure 129. Critical Analysis 12-18 10. Capital requirement 19-2111. Development Fund 22-2412. NABARD’s Support to Microfinance Institution 2413. Succees Factors of Microfinance in India 2514. Future Of Microfinance 26-2815. Top 50 Microfinance Institution in India 28-3016. Microfinance India Summit 3017. Acronym 3118. Conclusion 3219. References 33

1. Introduction

Microfinance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services.

Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that is not always the appropriate method, and that it should never be seen as the only tool for ending poverty.

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 undertaken in 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.

‘Microfinance refers to small scale financial services for both credits and deposits- that are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas’.

Marguerite S. Robinson.

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2. The History of Modern Microfinance

A. Abstract: In the late 1970s the concept of microfinance had evolved. Although, microfinance have a long history from the beginning of the 20th century we will concentrate mainly on the period after 1960. Many credit groups have been operating in many countries for several years, for example, the "chit funds" (India), tontines" (West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides, many formal saving and credit institutions have been working for a long time throughout the world. During the early and mid 1990s various credit institutions had been formed in Europe by some organized poor people from both the rural and urban areas. These institutions were named Credit Unions, People's Bank etc. The main aim of these institutions was to provide easy access to credit to the poor people who were neglected by the big financial institutions and banks.

In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other countries. The poor people had been given some small loans to invest in micro-business. This kind of micro credit was given on the basis of solidarity group lending, that is, each and every member of that group guaranteed the repayment of the loan of all the members. Many banks and financial institutions have been pioneering the microfinance program after 1970. These are listed below.

B. ACCION International: This institution had been established by a law student of Latin America to help the poor people residing in the rural and urban areas of the Latin American countries. Today, in 2008, it is one of the most important microfinance institutions of the world. Its network of lending partner comprises not only Latin America but also US and Africa.

C. SEWA Bank:In 1973, the Self Employed Women's Association (SEWA) of Gujarat (in India) formed a bank, named as Mahila SEWA Cooperative Bank, to access certain financial services easily. Almost 4 thousand women contributed their share capital to form the bank. Today the number of the SEWA Bank's active client is more than 30,000.

D. GRAMEEN Bank: Credit unions and lending cooperatives have been around hundreds of years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Prize in 2006.Since then, innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Today, the World Bank estimates that about 160 million people in developing countries are served by microfinance. Grameen Bank (Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in 1983. This bank is now serving almost 400, 0000 poor people of Bangladesh. Not only that, but also the success

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3. Overview

Microfinance Definition:

According to International Labor Organization (ILO), “Microfinance is an economic development 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.

"Microfinance is the supply of loans, savings, and other basic financial services to the poor."

As these financial services usually involve small amounts of money - small loans, small savings, etc. - the term "microfinance" helps to differentiate these services from those which formal banks provide

It's easy to imagine poor people don't need financial services, but when you think about it they are using these services already, although they might look a little different.

"Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe.

"However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members' ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions.

“Poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal."

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Role of Microfinance:

The micro credit of microfinance prename 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

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

2. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth.

3. By supporting women’s economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well being.

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

Difference between micro credit and microfinance:

Micro credit refers to very small loans for unsalaried borrowers with little or no collateral, provided by legally registered institutions. Currently, consumer credit provided to salaried workers based on automated credit scoring is usually not included in the definition of micro credit, although this may change.Microfinance typically refers to micro credit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people.

Borrowers:

Most micro credit borrowers have micro enterprises—unsalaried, informal income-generating activities. However, micro loans may not predominantly be used to start or finance micro enterprises. Scattered research suggests that only half or less of loan proceeds are used for business purposes. The remainder supports a wide range of household cash management needs, including stabilizing consumption and spreading out large, lumpy cash needs like education fees, medical expenses, or lifecycle events such as weddings and funerals.

Some MFIs provide non-financial products, such as business development or health services. Commercial and government-owned banks that offer microfinance services are frequently referred to as MFIs, even though only a portion of their assets may be committed to financial services to the poor.

4Activities in Microfinance:

Micro credit: It is a small amount of money loaned to a client by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending.

Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses Micro insurance: It is a system by which people, businesses and other organizations make 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.

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.

Product Design: The starting point is: how do MFIs decide what product s to offer? The actual loan products need to be designed according to the demand of the target market. Besides the important question of what 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, MFI‘s sometimes prefer the basket cover, since it can make the policies sound comprehensive, but is that the right approach for the low-income market? After picking products, one must also understand how they are priced. What assumptions do the organizations make with regard to operating costs, risk premiums, and reinsurance, and how did they come to those conclusions? Would 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. What does an organization lose by offering mandatory insurance, and how does it overcome the disadvantages? MFI‘s can combine a mandatory product with some voluntary features to make the service more us to mar-oriented while.

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 affect 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 for clients 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. 5

MFI’s Products and its Management:

Product & services of Microfinance

Financial Services Other Financial Services Non Financial Services

1. Credit Services-i Small Credit, Small Business Credit.

2. Deposit Services - Voluntari Savings Services, Manda tory Savings.

Micro-insurance, Life Insurance, Health Insurance, Loan for Housing, Education, Health.

Family Health and Sanitation Education, Financial Education, Micro-entrepreneur Training.

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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4. Government’s role supporting microfinance

Government’s most important role is not provision of retail credit services, for reasons mentioned in Government can contribute most effectively by:

*Setting sound macroeconomic policy that provides stability and low inflation.

*Avoiding interest rate ceilings - when governments set interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costs—such as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit.

*Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with sustainable microfinance delivery.

*Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs.

*Promote microfinance as a key vehicle in tackling poverty, and as vital part of the financial system.

*Create policies, regulations and legal structures that *encourage responsive, sustainable microfinance.

*Encourage a range of regulated and unregulated institutions that meet performance standards.

*Encourage competition, capacity building and innovation to lower costs and interest rates in microfinance.

*Support autonomous, wholesale structures.

RBI data shows that informal sources provide a significant part of the total credit needs of the rural population. The magnitude of the dependence of the rural poor on informal sources of credit can be observed from the findings of the All India Debt and Investment Survey, 1992, which shows that the share of the Non-institutional agencies (informal sector) in the outstanding cash dues of the rural households were 36 percent. However, the dependence of rural households on such informal sources

had reduced of their total outstanding dues steadily from 83.7 percent in 1961 to 36 percent in 1991.

75. Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and women’s empowerment as well as poor development and civil society strengthening. Contribution to women’s ability to earn an income led to their economic empowerment, increased well being of women and their families and wider social and political empowerment.

Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to poverty reduction and women’s higher credit repayment rates led to a general consensus on the desirability of targeting women.

Self Help Groups (SHGs): Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts.

The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation.

Savings services help poor people: Savings has been called the “forgotten half of microfinance.” Most poor people now use informal mechanisms to save because they lack access to good formal deposit services,. They may tuck cash under the mattress; buy animals or jewelry that can be sold off later, or stockpile inventory or building materials.

These savings methods tend to be risky—cash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well – one cannot sell just the cow’s leg when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers.

Women’s indicators of empowerment through microfinance:

*Ability to save and access loans

*Opportunity to undertake an economic activity

*Mobility-Opportunity to visit nearby towns

*Awareness- local issues, MFI procedures, banking transactions 8

6.The Need in India

India is said to be the home of one third of the world’s 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 micro credit 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 world’s poverty by 2015.

Microfinance can also be distinguished from charity. It is better to provide grants to families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This situation can occur for example, in a war zone or after a natural disaster.

While India is one of the fastest growing economies in the world, poverty runs deep throughout country. About two thirds of India’s more than 1billion people live in rural areas and almost 170 million of them are poor. For more than 21 percent of them, poverty is a chronic condition. Three out of four of India’s poor live in rural areas of the country. Poverty is deepest among scheduled castes and tribes in the country’s rural areas.

The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks linkage program for over a decade now. As the formal banking system already has a vast branch network in rural areas, it was perhaps wise to find ways and means to improve the access of rural poor to the existing banking network. This was tried by routing financial.

Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities that—left unaddressed—could negatively impact the long-term future of the industry.

The industry needs to move past a single-minded focus on scale, expand the depth and breadth of products and services offered, and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry.

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7. Micro-Financing Regulation in India

Advantage of Regulation:

Following are the advantages and benefits of regulation and supervision of /MFIs:

i. Protects the interest of the depositors; ii. Put in place prudential norms, standards and practices; iii. Provides sufficient information about the true risks faced by the banks/MFIs; iv. Promoters systemic stability and thereby sustains public confidence in the banks/MFIs; v. Prevents a bank’s/MFI’s failure/potential dangers through timely interventions; vi. Penalizes the violations, misconducts, non-compliance to the norms of behavior; vii. Provides invaluable advisory inputs for problem-solving and overall improvement of the banks/MFIs; viii. Promoters safe, strong and sound banking/MF system and effective banking/MF policy and ix. Promotes and enhances orderly economic growth and development.

A. Unified Regulation System: 8.18 at present, all the regulatory aspects of microfinance are not centralized. For example, while the Rural Planning and Credit Department (RPCD) in RBI looks after Rural lending, MF-NBFCs are under the control of the Department of Non-Banking Supervision (DNBS) and External Commercial Borrowings are looked after by the Foreign Exchange Department. The Committee feels that RBI may consider bringing all regulatory aspects of microfinance under a single, mechanism. Further, supervision Of MF-NBFCs could be delegated to NABARD by RBI.

A. Legal forms of MFIs in India:MFIs and Legal Forms: With the current phase of expansion of the SHG – Bank linkage programmed and other MF initiatives in the country, the informal micro finance sector in India is now beginning to evolve. The MFIs in India can be broadly sub-divided into three categories of organizational forms as given in Table 1. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. However, not more than 10 MFIs are reported to have an outreach of 100,000 micro finance clients. An overwhelming majority of MFIs are operating on a smaller scale with clients ranging Between 500 to 1500 per MFI. The geographical distribution of MFIs is very much lopsided with concentration in the southern India where the rural branch network of formal banks is excellent. It is estimated that the share of MFIs in the total micro credit portfolio of formal & informal institutions is about 8 per cent.

*Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act 1882 *Non profit companies governed by section 25 of the companies act, 1956 *For profit MFIs regulated by Indian companies act, 1956 *NBFC governed by RBI act, 1934.

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Legal Forms of MFIs in India:

* The estimated number includes only those MFIs, which are actually undertaking lending activity.

C. Recommendation by RBI Micro Credit Institutions:

• Company Law Board to allow SHGs to be members of Section 25 of the companies act. • There will be no ceiling in respect of loan amount extended by Section 25 companies to SHGs; however SHGs, to provide credit not exceeding Rs. 50000/- per member of the SHG. RBI may consider issuing revised instructions.• As regards capital, to encourage more flow of donations/ contributions, donors to be exempted from income tax under Section 11C of the IT Act.• As regards capital adequacy, since there is no mandatory capital requirement, minimum standards need not be considered.• Savings of SHGs promoted by Section 25 companies be maintained with permitted organizations. • Complete income tax exemption for Section 25 companies purveying micro credit (to the donor and to the receiver).

Government to consider complete exemption from IT for income earned, as the main purpose of the organization is to empower the poor. Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities that—left unaddressed—could negatively impact the long-term future of the industry.

118. Social Performance measurement

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 ActsIndian Trust Act, 1882

b.) Non-profit Companies 10 Section 25 of the Companies Act, 19562. Mutual Benefit MFIsa.) Mutually Aided Cooperative Societies (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 700 – 800

The Social Performance Task Force defines social performance as: "The effective translation of an institution's social mission into practice in line with accepted social values that relate to serving larger numbers of poor and excluded people; improving the quality and appropriateness of financial services; creating benefits for clients; and improving social responsibility of an MFI.”Most MFIs have a social mission that they see as more basic than their financial objective, or at least co-equal with it. There is a great deal of truth in the adage that institutions manage what they measure.

Social performance measurement helps MFIs and their stakeholders focus on their social goals and judge how well they are meeting them. Social indicators are often less straightforward to measure, and less commonly used than financial indicators that have been developed over centuries. Today’s increasing use of social measures reflects an awareness that good financial performance by an MFI does not automatically guarantee client interests are being appropriately advanced.

9. Critical Analysis

MFIs Critical Issues: MFIs can play a vital role in bridging the gap between demand & supply of financial services if the critical challenges confronting them are addressed.

Sustainability: The first challenge relates to sustainability. It has been reported in literature that the MFI model is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs2 by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. It has also been commented that MFIs pass on the higher cost of credit to their clients who are ‘interest insensitive’ for small loans but may not be so as loan sizes increase. It is, therefore, necessary for MFIs to develop strategies for increasing the range and volume of their financial services.

Lack of Capital: The second area of concern for MFIs, which are on the growth path, is that they face a paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism in the country for meeting the equity requirements of MFIs.

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Borrowings: In comparison with earlier years, MFIs are now finding it relatively easier to raise loan funds from banks. This change came after the year 2000, when RBI allowed banks to lend to MFIs and treat such lending as part of their priority sector-funding obligations. Private sector banks have since designed innovative products such as the Bank Partnership Model to fund.

.Top 14 Microfinance Institutions in India by Growth of Number of active Borrowers.

Problems for Alternative Micro-Finance Institutions: The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. A vast majority of them set up as NGOs for getting access to funds as, the existing practices of mainstream financing institutions such as SIDBI and NABARD and even of the institutions specially funding alternatives, such RMK and FWWB, is to fund only NGOs, or NGO promoted SHGs. As a result, the largest incentive to enter such services remains through the nonprofit route. The alternative finance institutions also have not been fully successful in reaching the needy. 13

There are many reasons for this:

1. Financial problems leading to setting up of inappropriate legal structures.

2. Lack of commercial orientation.

3. Lack of proper governance and accountability.

4. Isolated and scattered.

B. Risk: This looks at the quality of their loan portfolio 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 returns is measured as a combination of ROA and ROE.

Return on Assets (ROA): A Return on Assets is an indication of how well an MFI is managing its asset base to maximize its profits. The ratio does not evaluate the source of the asset base – whether through debt or equity, but simply the return of the portfolio and other revenue generated from investments and operations. A return on assets should be positive. There is a positive relationship between Return on Assets and the Portfolio to Assets ratio discussed in the next section. MFIs that maintain most of their assets in the loan portfolio tend to break even sooner, and generate higher returns on their assets; provided the loan portfolio performs well and other costs are also controlled.

Return on Assets = Net Operating Income – Taxes Average Assets

Trend: An increasing Return on Assets is positive.

Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize itsprofitability. The ratio includes not only the return on the portfolio, but also all other revenuegenerated from investments and other operating activities.

From the above list we can notice that, there are seven companies of India in top 50 companiesin the world. There is a huge potential for India to grow in this sector, because out of total 500million poor people from all over the world, who is getting beneficial from the micro financeinstitutions, 80 to 90 million are from India only. So there is still a huge market andopportunities in this segment.

The total loan that the MFI‘s 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.

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Return on Equity: A Return on Equity is probably one of the most important profitability indicators for commercial banks and MFIs, particularly in comparison with other institutions. The return is measured only in relation to what the MFI has built from operating surpluses, or what it has generated through donations or other contributed sources. The shareholders of a for-profit MFI or bank, is very interested in this ratio, as it is a measure of their investment choice, and its ability to pay dividends. Increasing equity also strengthens the MFI’s capital structure and its ability to leverage debt financing. As markets mature and competition increases, Return on Equity may level off and maintain a positive position without increasing dramatically or at all.

Return on Equity = Net Operating Income – Taxes Average Equity

Trend: An increasing Return on Equity is positive.

A. 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:

Major Risks to Microfinance Institutions:

Financial Risks Operational Risks Strategic Risk

Credit RiskTransaction riskPortfolio riskLiquidity RiskMarket Risk

Interest rate riskForeign exchange riskInvestment portfolio risk

Transaction Risk

Human resources RiskInformation & technologyRisk

Fraud (Integrity) RiskLegal & ComplianceRisk

Governance Risk

Ineffective oversightPoor governancestructure

Reputation RiskExternal BusinessRisksEvent risk

This are the most significant risks (with the most potentially damaging consequences for the MFI), how they interact, and current challenges faced by MFIs.

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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 MFI‘s.

1. Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or capital due to borrowers’ late and non-payment of loan obligations. Credit risk encompasses both the loss of income resulting from the MFI‘s 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.

2. Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigate transaction risk through borrower screening techniques, underwriting criteria, and quality procedure for loan disbursement, monitoring, and collection.

3. 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.

4. Liquidity risk: Liquidity risk is the ―risk that an MFI cannot meet its obligations on a timely basis Liquidity risk usually arises from management‘s inability to adequately anticipate and plan for changes in funding sources and cash needs.

5. 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.

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 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 MFI‘s 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.

a. 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.

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Two types of operational risk: transaction risk and fraud risk: 1. 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 and should be carefully analyzed as MFIs expand those activities

2. 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.

Minimize fraud risk: To introduced an education campaign to encourage clients to speak out against corrupt staff and group leaders. This standardized all loan policies and procedures so that the staff cannot make any decision outside the regulations. To Established an inspection unit that performs random operational checks.

b. 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.

1. 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.

2. External business environment risk: Business environment risk refers to the inherent risks of the MFI‘s 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.

MFI manage 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 clients’ savings at risk. Most MFIS‘s provides the loans without or with smaller portion of deposit or, so for them repayment of interest or principal is very risky. All MFI‘s 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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c. 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 ordrain management time and resources. Less time fixing problems means more time forproduction 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 organization‘s strategic goals. Encourages cost-effective decision-making and more efficient use of resources.

d. Interest Rates: Most MFI’s financially sustainable by charging interest rates that are high enough to cover all their costs.

Four key factors determine these rates: •The cost of funds.•The MFI's operating expenses.•Loan losses.•And profits needed to expand their capital base and fund expected future growth. There are three kinds of costs the MFI has to cover when it makes micro loans: •The cost of the money that it lends.•The cost of loan defaults.•Transaction and Operating cost.For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount lent, then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost i.e. transaction cost.

The interest rates are deregulated not only for private MFIs but also for formal baking sector. In the context of softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 24 per cent per annum) charged by the MFIs has become a contentious issue. The high interest rate collected by the MFIs from their poor clients is perceived as exploitative. It is argued that raising interest rates too high could undermine the social and economic impact on poor clients. Since most MFIs have lower business volumes, their transaction costs are far higher than that of the formal banking channels. The high cost structure of MFIs would affect their sustainability in the long run.

MFI being criticized because of high interest rate:Most MFI‘s financially sustainable by charging interest rates that are high enough to cover all their costs. The problem is that the administrative costs are inevitably higher for tiny micro lending than for normal bank lending. As a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans

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10. Capital Requirements

NGO-MFIs, non-profit companies’ MFIs, and mutual benefit MFIs are regulated by the specific act in which they are registered and not by the Reserve Bank of India. These are therefore not subjected to minimum capital requirements, prudential norms etc. NGO MFIs to become NBFCs are required to have a minimum entry capital requirement of Rs. 20 million ($ 0.5 million). As regards prudential norms, NBFCs are required to achieve capital adequacy of 12% and to maintain liquid assets of 15% on public deposits.

A. Foreign Investment: Foreign investment by way of equity is permitted in NBFC MFIs subject to a minimum investment of $500,000. In view of the minimum level of investment, only two NBFCs are reported to have been able to raise the foreign investment. However, a large number of NGOs in the development - empowerment are receiving foreign fund by way of grants. At present, over Rs.40, 000 million ($ 889 million) every year flows in India to NGOs for a whole range of activities including microfinance. In a way, foreign donors have facilitated the entry of NGOs into micro finance operations through their grant assistance.

B. Deposit Mobilization:

Not for profit MFIs are barred, by the Reserve Bank of India, from mobilizing any type of savings. Mutual benefit MFIs can accept savings from their members. Only rated NBFC MFIs rated by approved credit rating agencies are permitted to accept deposits. The quantum of deposits that could be raised is linked to their net owned funds.

C. Borrowings:

Initially, bulk of the funds required by MFIs for on lending to their clients was met by apex institutions like National Bank for Agriculture and Rural Development, Small Industries Development Bank Of India, and, Rashtiya Mahila Kosh. In order to widen the range of lending institutions to MFIs, the Reserve Bank of India has roped in Commercial Banks and Regional Rural Banks to extend credit facilities to MFIs since February 2000. Both public and private banks in the commercial sector have extended sizeable loans to MFIs at interest rate ranging from 8 to 11 per cent per annum. Banks have been given operational freedom to prescribe their own lending norms keeping in view the ground realities. The intention is to augment flow of micro credit through the conduit of MFIs. In regard to external commercial borrowings (ECB) by MFIs, not-for-profit MFIs are not permitted to raise ECB. The current policy effective from 31 January 2004, allows only corporate registered under the Companies Act to access ECB for permitted end use in order to enable them to become globally competitive players.

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D. Interest Rates:

The interest rates are deregulated not only for private MFIs but also for formal baking sector. In the context of softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 24 per cent per annum) charged by the MFIs has become a contentious issue. The high interest rate collected by the MFIs from their poor clients is perceived as exploitative. It is argued that raising interest rates too high could undermine the social and economic impact on poor clients. Since most MFIs have lower business volumes, their transaction costs are far higher than that of the formal banking channels. The high cost structure of MFIs would affect their sustainability in the long run.

E. Collateral requirements:

All the legal forms of MFIs have the freedom to waive physical collateral requirements from their clients. The credit policy guidelines of the RBI allow even the formal banks not to insist on any type of collateral and margin requirement for loans up to Rs. 50,000 ($1100).

Regulation & Supervision: India has a large number of MFIs varying significantly in size, outreach and credit delivery methodologies. Presently, there is no regulatory mechanism in place for MFIs except for those that are registered as NBFCs. As a result, MFIs are not required to follow standard rule and it has allowed many MFIs to be innovative in its approach particularly in designing new products and processes. But the flip side is that the management and governance of MFIs generally remains weak, as there is no compulsion to adopt widely accepted systems, procedures and standards. Because the sector is unregulated, not much is known about their internal health.

Following Committees have examined the road map for regulation and supervision of MFIs:

Task Force (appointed by NABARD) Report on Regulatory and Supervision Framework for MFIs, 1999. (Kindly see publications Section for a complete report Working Group (constituted by Government of India) on Legal & Regulation of MFIs, 2002 Informal Groups (appointed by RBI) on Micro Finance which studied issues relating to

(i) Structure &Sustainability,

(ii) Funding

(iii) Regulations and

(iv) Capacity Building, 2003

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Advisory Committee (appointed by RBI) on flow of credit to agriculture and related activities from the Banking System, 2004.

The Committee observed that while a few of the MFIs have reached significant scales of outreach, the MFI sector as a whole is still in evolving phase as is reflected in wide debates ranging around (i) desirability of NGOs taking up financial intermediation, (ii) unproven financial and organizational sustainability of the model, (iii) high transaction costs leading to higher rates of interest being charged to the poor clients, (iv) absence of commonly agreed performance, accounting and governance standards, (v) heavy expectations of low cost funds, including equity and the start up costs, etc.

The current debate on development of a regulatory system for the MFIs focuses on three stages. Stage one - to make the MFIs appreciate the need for certain common performance standards, stage two - making it mandatory for the MFIs to get registered with identified or designated institutions and stage three - to encourage development of network of MFIs which could function as quasi Self-Regulatory Organizations (SROs) at a later date or identifying a suitable organization to handle the regulatory arrangements.

The Committee recommended that while the MFIs may continue to work as wholesalers of microcredit by entering into tie-ups with banks and apex development institutions, more experimentation have to be done to satisfy about the sustainability of the MFI model. Such experimentation needs to be encouraged in areas where banks are still not meeting adequate credit demand of the rural poor.

In regard to offering thrift products, the Committee felt that, while the NGO-MFIs can continue to extend micro credit services to their clients, they could play an important role in facilitating access of their clients to savings services from the regulated banks. As regards allowing NGO-MFIs to access deposits from public / clients, the Committee considers that in view of the need to protect the interests of depositors, they may not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank of India. As no depositors' interest is involved where they do not accept public deposits, the Reserve Bank of India need not regulate MFIs.

As regards the high interest rates being charged by the MFIs, the Committee felt that the lenders to MFIs may ensure that these institutions adopt a ‘cost-plus- reasonable-margin’ approach in determining the rates of interest on loans to clients.

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Program Associate NBFC

11. Development Fund

A. Micro Finance Development and Equity Fund (MFDEF) – Structure and Guidelines:

During 2005-06, Government of India has decided to redesign ate the existing MFDF as microfinance Development and Equity Fund (MFDEF). It has also been decided to enhance the fund size from the existing Rs100 crore to Rs 200 crore. The additional amount of Rs 100 crore will be contributed by Reserve Bank of India, NABARD and the commercial banks in the same proportion as earlier (40:40:20).

B. Objectives:

The objective of the redesignated Fund is to facilitate and support the orderly growth of the microfinance sector through diverse modalities for enlarging the flow of financial services to the poor particularly for women and vulnerable sections of society consistent with sustainability.

C. Activities to be supported from out of the MFDEF:

The Fund will be utilized to support interventions to eligible institutions and stakeholders. The components of assistance will include, inter alia, the following purposes:

a. Capacity Building:

i) Training of SHGs and other groups for livelihood, skill up gradation and micro enterprise development.

ii) Capacity building of staff of institutions involved in microfinance promotion such as Banks, NGOs, government departments, NABARD, etc.

iii) Capacity building of MFIs.

b. Funding Support:

1. Contributing equity/other forms of capital support to MFIs, service providers, etc.

2. Providing financial support for start-up and on-lending for microfinance activities.

3. Supporting Self Help Promotion initiatives of banks and other SHPIs.

4. Meeting on a selective basis the operational deficit of financial intermediary NGOs/MFIs at the start up stage.

5. Rating of MFIs and self regulation.

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MIS:

1. Supporting systems management in regard to MIS, accounting, internal controls, audits and impact assessment.

2. Building an appropriate data base and supporting development thereof. Regulatory & Supervisory Framework.

3. Recommending regulatory and supervisory framework based on an on-going review.

c. Studies & Publications:

1. Promoting seminars, conferences and other mechanisms for discussion and dissemination.2. Granting support for research.3. Documentation, Publication and dissemination of MF literature.4. Any other activities recommended by the Advisory Board to Fund.

d. Eligible Institutions:

Following types of structures, community based organizations and institutions, would be eligible for support from the Fund:

1. Training: SHGs, CBOs, NGOs/VAs, Banks, MFIs, NABARD, Training Establishments, networks, service providers.

2. Funding support: NGOs/VAs, CBOs, MFIs, and Banks.3. MIS: SHGs, NGOs/VAs, Banks, MFIs, NABARD.4. Regulatory and Supervisory Framework: Banks, MFIs, SROs, NGOs /VAs / MFI Networks,

NABARD.5. Studies and Publications: Banks, MFIs, NABARD, Training and Research Organizations,

Academic institutions and Universities.6. Any other organization as may be decided by the Advisory Board from time to time.

e. Mode of Assistance:

Mode of assistance from the Fund will include the following:

* Promotional support for training and other promotional measures.

* Loans and advances including soft loans.

* Revolving Fund Assistance (RFA) to NGOs/ MFIs.

* Equity and quasi equity support to MFIs.

* Administrative subsidies and grants. 23

g.Advisory Body to MFDEF:

The Advisory Board shall guide and render advice on the various aspects relating to the micro finance sector. The Board may determine its own procedures for day-to-day working including constitution of committees, task forces etc, for examination of various issues. The advisory board will meet at such intervals as deemed necessary but in any case once in a quarter to review the status and progress of outflow and to render policy advice in respect of orderly growth and development of the sector.

12.NABARD's Support to microfinance Institutions (MFIs)

Realizing the importance of MFIs in the delivery of financial services to the poor and their potential for expansion of services in remote and lesser-banked areas, NABARD has been extending technical and fund support to this sector. Some of the concerns that necessitated NABARD to commence this support in 1993 were: 1) the need to provide timely credit to the poor in under banked regions and ii) to further improve the outreach of rural credit delivery system through alternate credit delivery mechanisms.

NABARD's support is being provided to various forms of microfinance institutions covering MFIs, second tier MF lending institutions, Grameen bank replicators, NGO-MFIs, SHG Federations etc. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA) to NGO-MFIs on a very selective basis. The RFA is generally provided for a period of 5 to 6 years and is necessarily to be used for on lending to mF clients (SHGs or individuals). In addition, the agencies are also sanctioned, on a case-to-case basis, grant assistance for partly meeting the salary of field level staff, infrastructure development and operational deficits during the initial years.

Cumulatively, as at the end of June 2004, Rs 26.98 crore (Rs 269.80 million) has been sanctioned as RFA to 31 NGO-MFIs and Rs. 0.58 crore (Rs 5.8 million) has been sanctioned as grant to various NGOs. The amount excludes Rs 3.4 million sanctioned under SHG Post Office linkage programme in Tamil nadu.

During the year 2003-04, loan support of Rs. 84 million was sanctioned to two agencies viz.

1) Friends of World Women Banking, India (Rs. 74 million) for on-lending to small NGOs &

2) Kalanjiam Development Financial Services-a section 25 company promoted by DHAN Foundation (Rs 10 million) for on lending to SHGs.

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13. Success Factors of Micro-Finance in India:

Over the last ten years, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies.

a. Problems for Alternative Micro-Finance Institutions

The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. A vast majority of them set up as NGOs for getting access to funds as, the existing practices of mainstream financing institutions such as SIDBI and NABARD and even of the institutions specially funding alternatives, such RMK and FWWB, is to fund only NGOs, or NGO promoted SHGs. As a result, the largest incentive to enter such services remains through the nonprofit route. The alternative finance institutions also have not been fully successful in reaching the needy.

There are many reasons for this:

*Financial problems leading to setting up of inappropriate legal structures.

*Lack of commercial orientation.

*Lack of proper governance and accountability.

*Isolated and scattered.

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14. Future of Micro Finance:

Microfinance in India is in crisis because of the backlash against lenders in the southern state of Andhra Pradesh, the heart of the industry, where politicians have ordered borrowers not to repay their debts. The industry also faces an uncertain regulatory future with the state introducing new restrictions on lenders and Finance Minister saying last week he would formulate new rules to govern the industry once he receives a report from a committee of the Reserve Bank of India.

Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities that—left unaddressed—could negatively impact the long-term future of the industry. The industry needs to move past a single-minded focus on scale, expand the depth and breadth of products and services offered, and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry. Estimated that in next five years, 65% of the poor people will have excess to MFIs. Many Pvt. Banks and Foreign Banks would enter this business segment, because of very low NPAs. Estimated that 5 % of the number of people below the poverty line will get reduced in the next 5 years.(World Bank report).These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low cost. Taking the FSC initiative further, ICICI Bank plans to provide farmers credit from sugar companies, seed companies, dairy companies, NGOs, micro-credit institutions and food processing industries.

SIG has been involved in a project in the southern state of Tamil Nadu to find out how wireless technology can be applied in the development of low cost models of banking. Another plan to increase the reach in rural areas is to launch mobile ATM services. ICICI Bank branded trucks have started carrying ATMs through a number of villages.

While these deaths are tragic, and the way that lenders are going about collecting payments is wrong, the root of the problem is not microfinance and not the interest rates. The problem lies in the way that MFI’s are going about their business. The system itself is sound, and but what must occur is a restricting of the employee base.

If such abuse continues to persist, there will not be a future for microfinance. In order for a peaceful, progressive future, MFI’s must strictly enforce their lender policies, making sure to eliminate agent threats as mentioned in the WSJ. Thus, restrictions are not necessary, but a restructuring of the microfinance industry is in strong demand. It will only be until microfinance policy is solidified and agreed upon by the local and national legislatures that MFI’s regain the trust and reputation they once held as an institution of progress, not abuse.

Microfinance expansion over the next decade can be expected to be an extension of what has been achieved so far while overcoming the hurdles that have been posing difficulty in effective microfinance operation and its expansion. There may be several participants in this process and their participation may be seen in the following forms.

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Existing microfinance institutions can expand their operations to areas where there are no microfinance programs.More NGOs can incorporate microfinance as one of their programs. In places where there are less micro finance institutions, the government channels at the grassroots level may be used to serve the poor with microfinance.Postal savings banks may participate more not only in mobilizing deposits but also in providing loans to the poor and on lending funds to the MFIs.More commercial banks may participate both in microfinance wholesale and retailing. They many have separate staff and windows to serve the poor without collateral.International NGOs and agencies may develop or may help develop microfinance programs in areas or countries where micro financing is not a very familiar concept in reducing poverty.

Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of customers to be reached, and the variety and quantum of services to be provided are really large. It is estimated that 90 million farm holdings, 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and does not seem an unreasonable estimate.

However, 80% of the financial sector is still controlled by public sector institutions. Competition, consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains.

Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector because of its very low NPAs and high repayment rate of more than 95% in spite of offering loans without any collateral security.

Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital and technology to address these challenges however now exist in India, although they are not yet fully aligned. With a more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery of financial services to poor people in India Development of Small-Scale Enterprises through microfinance will not only increase the outreach but will also help the generation of more employment and income for the poor. It is expected that in the following years there will be considerable deepening of microfinance in this direction along with simultaneous drives to reach and serve the poorest of the poor.

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15. Top 50 Microfinance Institutions in India:

The above report includes detailed profiles and ratings of India’s top Microfinance Institutions: CRISIL List: Top 50 Microfinance Institutions in India by Loan Amount Outstanding for 2010.

1. SKS Microfinance Ltd (SKSMPL).

2. Spandana Sphoorty Financial Ltd (SSFL).

3. Share Micro fin Limited (SML)

4. Asmitha Micro fin Ltd (AML).

5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP).

6. Bhartiya Samruddhi Finance Limited (BSFL).

7. Bandhan Society.

8. Cashpor Micro Credit (CMC).

9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL).

10. Grameen FinancialServices Pvt Ltd (GFSPL).

11. Madura Micro Finance Ltd (MMFL).

12. BSS Microfinance Bangalore Pvt Ltd (BMPL).

13. Equitas Micro Finance India P Ltd (Equitas).

14. Bandhan Financial Services Pvt Ltd (BFSPL).

15. Sarvodaya Nano Finance Ltd (SNFL).

16. BWDA Finance Limited (BFL).

17. Ujjivan FinancialServices Pvt Ltd (UFSPL).

18. Future Financial Services Chittoor Ltd (FFSL).

19. ESAF Microfinance & Investments Pvt. Ltd (EMFIL).

20. S.M.I.L.E Microfinance Limited.

21. SWAWS Credit Corporation India Pvt Ltd (SCCI).

22. Sanghamithra Rural Financial Services (SRFS).

23. Saadhana Micro fin.

24. Gram Utthan Kendrapara. 28

25. Rashtriya Seva Samithi (RASS).

26. Sahara Utsarga Welfare Society (SUWS).

27. Sonata Finance Pvt Ltd (Sonata).

28. Rashtriya Gramin Vikas Nidhi.

29. Arohan Financial Services Ltd (AFSL).

30. Janalakshmi Financial Services Pvt Ltd (JFSPL).

31. Annapurna Financial Services Pvt Ltd.

32. Hand in Hand (HiH).

33 Payakaraopeta Women’s Mutually Aided Co-operative Thrift and Credit Society (PWMACTS)

34 Aadarsha Welfare Society (AWS)

35 Adhikar

36 Village Financial Services Pvt Ltd (VFSPL)

37 Sahara Uttarayan

38 RORES Micro Entrepreneur Development Trust(RMEDT)

39 Centre for Rural Social Action (CReSA)

40 Indur Intideepam Federation Ltd (IIMF).

41 Welfare Organization for MultipurposeMass Awareness Network (WOMAN)

42 Pragathi Mutually Aided Cooperative Credit and Marketing Federation Ltd(PMACS)

43 Indian Association for Savings and Credit (IASC)

44 Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd (Sewa)

45 Initiatives for Development Bangalore, Foundation (IDF)

46 Gandhi Smaraka Grama Seva Kendram (GSGSK)

47 Swayamshree Micro Credit Services (SMCS)

48 ASOMI

49 Janodaya Trust

50 Community Development Centre (CDC)

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16. Microfinance India Summit:

Over the last six years, the Microfinance India Summit, organized by ACCESS Development Services, has established itself as an international conference dedicated to Indian microfinance. It has become the single most important platform for sharing the Indian experience, unique as it is, with a global audience. At the same time, it also provides an avenue to learn about international trends and best practices for adaptation by the Indian community of practitioners. Policy makers, practitioners, promoters, academics, researchers and thought leaders share their experiences on various panels, and about 1000 delegates from both within and outside the country participate in the Summit. It bridges the unnecessary hiatus between models and methodologies and helps to build consensus on the critical challenges and issues. In the past, the Summit themes have helped in focusing on key issues including "Inclusion, Innovation and Impact" (2005), "Urban Microfinance" (2006), "Formal Financial Institutions - the challenges of depth and breadth" (2007), "The Poor First" (2008) and "Doing good and doing well- The need for balance" (2009).

The microfinance India Summit 2010 was held on November 15-16, 2010 at Hotel Ashok, New Delhi. The over-arching theme for this year's Summit is "Mission of Microfinance - Need to Reflect and Reaffirm". The Summit sessions will focus on current trends and issues relating to sustainability, transparency, social performance, commercialization of the sector, client protection, among others.

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ACROMYM :

KDS MSPL - KDS Micro credit services Private Limited.

OM - Operation Manager

CED - Chief Executive Director

H/O - Head Office

HRD - Human Resource Development

MF - Micro finance

MFI - Micro finance Institute

MIS - Management Information System

NBFC - Non Banking Financial Company

NGO - Non Government Organization

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Conclusion

Microfinance has a long way despite doubts expressed and criticism launched about its viability, impact, and poverty fighting capacity. There should, however, be no room for complacency. The task of building a poverty-free world is yet to be finished. There are still over 1.2 billion people living in extreme poverty on this planet. They are not living in one country or region but spread all over the world. The last decade has witnessed an impressive growth of microfinance; lack of funding is still considered a major obstacle in the way of its growth. However, it is encouraging that the situation is changing. Given the experiences of large and fast growing the last decade has witnessed an impressive growth of microfinance; lack of funding is still considered a major obstacle in the way of its growth. However, it is encouraging that the situation is changing. Given the experiences of large and fast growing Microfinance, there are lessons for others who want to increase their outreach and operate on a sustainable basis. Fortunately, there is an increasing awareness about the power of microfinance, and the need to support its growth. Many players have committed themselves to its promotion. Governments are taking an increasing interest in it. More banks, both national and international are coming forward with different support packages. NGO-MFI partnerships are on the increase. New instruments are being used to solve the problem of funding. It is expected that in the coming years more ideas, innovations, cost saving devices, and players will continue to reinforce the microfinance movement and increase its expansion.

At the end I would conclude that, Micro Finance Industry has the huge potential to grow in future, if this industry grows then one day we‘ll all see the new face of India, both in term of high living standard and happiness.

One solution by which we all can help the poor people, i.e. in a whole year a medium and a rich class people spends more than Rs 10,000 on them without any good reason. Instead of that, by keeping just mere Rs, 3000 aside and donate that amount to the MFIs, then at the end of the year the total amount in the hands of poor would be ( average 500 million people *Rs 3000)=Rs 1,500,000,000,000 . Just imagine where would be India in next 10 years.

Private MFIs in India, barring a few exceptions, are still fledgling efforts and are therefore unregulated. Their outreach is uneven in terms of geographical spread. . Regulatory framework should be considered only after the sustainability of MFI model as a banking enterprise for the poor is clearly established. Experimentation of MFI model needs to be encouraged especially in areas where formal banks are still not meeting adequate credit demand of the rural poor.

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References

Websites:

www.microfinanceinsight.com, www.investopedia.com, www.books.google.comwww.seepnetwork.org, www.forbes.com,www.nationmaster.comwww.thaindian.com,www.authorstream.com,www.knowledge.allianz.comwww.familiesinbusiness.net, www.indiamicrofinance.com,www.gdrc.orgwww.accion.org, www.elyserowe.com, www.kdsmfi.org

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