preliminaries 1

MICROFINANCE IN INDIA

SUBMITTED TO:

UNIVERSITY OF MUMBAI

PROJECT ON:


SUBMITTED BY:

KOMAL SURESH GUPTA.

T.Y.B.Com. (Financial Markets)

2014-15

UNDER THE GUIDANCE OF:

Prof. SUCHETA PAWAR

P.T.V.A.’s

M.L.DAHANUKAR COLLEGE OF COMMERCE

VILE PARLE (EAST), MUMBAI.

1 | P a g e


2 | P a g e


CERTIFICATE

This is to certify that Miss. Komal Suresh Gupta student of T.Y.B.Com.

(Financial Markets) Semester V of M.L.Dahanukar College of Commerce has

successfully completed the project on “MICROFINANCE IN INDIA” under

the guidance of Prof.Sucheta Pawar for the academic year 2012-2013.

Course Coordinator Principal(Prof. Sucheta Pawar)

College Seal

Project Guide External (Prof Sucheta Pawar) Examiner

3 | P a g e


4 | P a g e


DECLARATION

I, Komal Suresh Gupta of T.Y.B.Com (Financial Markets) hereby declare that

I have successfully completed the project on “Microfinance in India” under the

guidance of Prof. Sucheta Pawar for the academic year 2014-2015 as a part of

the degree of Bachelor of Commerce (Financial Markets).

The information provided in the project is true and original to the best of my

knowledge.

Signature of Student

(Komal Suresh Gupta)

5 | P a g e


ACKNOWLEDGEMENT

To express my gratitude to all those I am highly grateful to is difficult

because they are so numerous and the depth is so enormous. Still I take the

opportunity to acknowledge the following as being idealistic channels and fresh

dimensions in the completion of the project.

I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.

I take this opportunity to thank our Coordinator Prof. Mrs . Sucheta

Pawar, for her moral support and guidance.

I would like to express my sincere gratitude towards my project guide

Prof. Mrs.Sucheta Pawar whose constant guidance and care made the project

successful.

I would like to thank my college library staff, for having provided

various reference books and magazines related to my project.

Lastly, I would like to express my heartfelt gratitude to my family,

especially my mother; peers and seniors whose patience and guidance made

this project possible.

6 | P a g e


EXECUTIVE SUMMARY

7 | P a g e


With India’s GDP growing at the rate of 8.5–9%, the country’s socio-economic pyramid

is turning around the story with millions of poor people scaling new heights to become

entrepreneurs in their own right. And the credit goes to the mushrooming microfinance

industry. Microfinance sector is clearly one of the fastest growing segments of the Indian

financial sector, and also one where such growth is sustainable for a very long period of time.

In spite of a large banking sector, about 40% of the Indian population does not have bank

accounts. Given that over 75% of the Indian population still earns below US$2 a day,

microfinance comes to their rescue as it enables them to raise income and improve the

standard of living. Microfinance promotes thrift savings, credit and other financial products

and services among the poor. Considering that the vast majority of the poor lives in rural

areas, microfinance is key to the financial inclusion of this section in the mainstream of the

country.

Microfinance refers to financial services, including loans, savings accounts, and

insurance products, that are designed to serve people with very low incomes. The intent of the

microfinance movement has been to build “financial systems that work for the poor majority.”

The involvement of international financial institutions enhances the access of the poor to

financial services. There is a change in the microfinance strategies of banks and financial

institutions. Their focus is shifting from South Asia to African countries, a significant

development that was rarely seen before. Large financial institutions have started increasing

their global presence and have started diversifying microfinance products.

As the birthplace of microfinance, Asia leads the world in total current borrowers. In

South Asia, the modern microfinance movement was born in Bangladesh in the 1970s as a

response to the poverty conditions among its vast rural population. This region is a world

leader in microfinance because of the highest penetration in outreach and active borrowers.

8 | P a g e


The Indian microfinance system is led by two basic models—SHG-Bank linkage model

and MFI model. The number of SHGs linked with banks increased from 22,742 in the year

2003 to 137,000 by March 2007. Even though the growth of microfinance industry is

commendable but still there are 3-4 million households in rural areas and about 1-5 million

poor households in urban areas who do not have access to financial services from formal or

semi-formal sources.

The Central bank strengthens the microfinance sector by streamlining the financial

processes and support from the mainstream financial system and acts as a catalyst to the

industry. Most of the microfinance institutions focus on women’s empowerment, and major

part of clients consists of women. SEWA of Ahmedabad and Working Women's Forum in

Chennai are some of the microfinance institutions that are exclusively for women.

Microfinance programmes have, in the recent past, become more promising ways to use

scarce development funds to achieve the objectives of poverty alleviation.

While the government’s concerted efforts to alleviate poverty have been unsuccessful

in the past, the microfinance institutions are now taking up the reins to achieve the

millennium development goal of poverty alleviation. Major microfinance institutions are

diverting their attention to urban population rather than being rural centric.

Urban microfinance promises huge opportunity for the microfinance institutions,

although it gives berth only to large MFIs because the start up and transaction costs are

high.Microfinance industry is growing at an exponential rate in India, although it exhibits

tremendous regional disparities. It shows regional inclination towards the southern region.

Although the coverage has been diverted to the eastern and western region, south has the

highest penetration in rural microfinance.

Private Banks, MFIs, public sector banks and NGOs form the major players in rural financing

to the poor people.Public sector banks, MFIs and NGOs follow different strategies to scale up

their operations in the industry.

9 | P a g e


Some of them follow partnership model, while others follow the strategy of higher

penetration through SHG. Another way of lending adopted by ICICI is that of portfolio buy-

out. The microfinance sector in India is trying to focus on micro-savings and financial literacy

among the poor. It is developing the habit and discipline of saving and has started introducing

micro-insurance, though in a relatively small way.

There is high demand for credit in the Indian economy, but the formal financial

institutions are unable to meet this demand because they have their own limitations when it

comes to lending to the poor people. This demand-supply mismatch could act as a key growth

opportunity the microfinance institutions to scale up their operations. The growth of economic

activities in the urban population will enable the microfinance sector to expand their

operations in the cities of the India. Although microfinance in India has outperformed the

expectations of formal financial institutions, it still faces the challenges in terms of regulatory

support and financial illiteracy.Moreover, the high transaction cost of the microfinance

institutions due to smaller loan size creates a challenging situation for the sector to thrive in

and sustain.

The funding gap in microfinance is very high, both at the national and global level.

Increasing involvement of private sector investors is therefore a key medium-term priority to

scale up microfinance. Fortunately, the prospect for a greater involvement of private investors

is actually good. By 2015, it is expected that the volume of private sector investments (private

institutional and individual investors) would increase to around US$20 billion.The main

growth drivers would be increasing institutional and retail investor demand, regulatory

changes and the enhanced capability of MFIs to absorb commercial funding.

Microfinance industry is expected to become an integral part of the formal financial

system once its vision of extending financial services to the low income people is

accomplished. Seeing the huge demand for rural credit, it is expected that the industry will

continue to grow at rapid pace, although the blend of the financial system and extent of

growth will vary from country to country.There will be diversification of products in the

industry, which will vary from current accounts to pension and savings products.

10 | P a g e


.TABLE OF CONTENTS

Chapter

No.

Particulars Pag

e

No.

1 OVERVIEW OF MICROFINANCE

1.1 Meaning 1

1.2 Definition 1

1.3 History 2

1.4 Role 3

1.5 Activities2 Gap and Need of Indian

Microfinance

5-9

3 Government’s Role in Supporting

Microfinance

5

4 Microfinance Social Aspects 6

2.3 7

2.4 Talking Technically: Post 1990s 7

3 Structure of Indian Debt Markets 10-

183.1 Market Segments 11

3.2 Debt Instruments 13

3.3 Participants in Debt Market 14

3.4 Regulators of Debt Market 16

3.5 Financial Services in Debt Markets 17

4 Features and Risks of Fixed Income

Securities

19-

214.1 Features 19

4.2 Risks 20

5 Research Analysis 22-

31

11 | P a g e


CHAPTER 1

OVERVIEW OF MICROFINANCE

1.1 Meaning:

Microfinance is a source of financial services for entrepreneurs and small businesses

lacking access to banking and related services. The two main mechanisms for the delivery of

financial services to such clients are: (1) relationship-based banking for individual

entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs

come together to apply for loans and other services as a group.

In some regions, for example Southern Africa, microfinance is used to describe the supply of

financial services to low-income employees, which is closer to the retail finance model

prevalent in mainstream banking.

It is the provision of financial services to low-income clients, including consumers and

the self-employed, who traditionally lack access to banking and related services. More

broadly, it is a movement whose object is "a world in which as many poor and near-poor

households as possible have permanent access to an appropriate range of high quality

financial services, including not just credit but also savings, insurance, and fund transfers."

Those who promote microfinance generally believe that such access will help poor people out

of poverty.

Microfinance in India has had a significant shift from the days when microfinance was

being discussed as the next big innovation to address the poverty issues in India to being

discussed in terms of the next big investment opportunity. The language of microfinance has

undergone a fundamental change in the two decades of its evolution.

Microfinance started with the recognition that poor people had the capability to lift

themselves out of poverty if they had access to affordable loans.

12 | P a g e

http://en.wikipedia.org/wiki/Southern_Africa

http://en.wikipedia.org/wiki/Banking

http://en.wikipedia.org/wiki/Financial_services


High repayment rates in the industry have changed the perception that the poor are not credit

worthy. With the right opportunities, the poor have proved themselves to be productive and

capable of borrowing, saving and repaying, even without collateral.

“Bibi Hanifa is a successful micro entrepreneur from Hubli, Karnataka who has set up an

incense-stick unit along with a group of women in her neighbourhood. Earlier they worked as

daily wage labor at a nearby factory and earned a meagre income. Today, thanks to the

simple system of taking loans and repaying them, these women manage a successful

enterprise and dream of a better and more prosperous tomorrow”

“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

1.2 Microfinance Definitions:

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

development approach that involves providing financial services through institutions to low

income clients”.

13 | P a g e


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 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.

Microcredit or Microfinance is the process of granting small loans to poor people,

primarily to women, who have no collateral and are marginalised. These women tend to use

their income to benefit their households and children. The process is accomplished through a

microfinance institution

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.

14 | P a g e


1.3History of Microfinance :

Microfinance in India can trace its origins back to the early 1970s when the Self Employed

Women’s Association (“SEWA”) of the state of Gujarat formed an urban cooperative bank,

called the Shri Mahila SEWA Sahakari Bank, with the objective of providing banking

services to poor women employed in the unorganized sector in Ahmadabad City, Gujarat. The

microfinance sector went on to evolve in the1980s around the concept of SHGs, informal

bodies that would provide their clients with much-needed savings and credit services. From

humble beginnings, the sector has grown significantly over the years to become a multi-

billion dollar industry, with bodies such as the Small Industries Development Bank of India

and the National Bank for Agriculture and Rural Development devoting significant financial

resources to microfinance. Today, the top five private sector MFIs reach more than 20 million

clients in nearly every state in India and many Indian MFIs have been recognized as global

leaders in the industry.

1.4Role 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 that1. 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.

1.5 Activities in Microfinance:

15 | P a g e


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.

16 | P a g e


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.

17 | P a g e


CHAPTER 2

GAPS IN FINANCIAL SYSTEM AND NEED OF

MICROFINANCE

According to the latest research done by the World Bank, India is home to almost one third

of the world’s poor (surviving on an equivalent of one dollar a day). Though many central

government and state government poverty alleviation programs are currently active in India,

microfinance plays a major contributor to financial inclusion. In the past few decades it has

helped out remarkably in eradicating poverty. Reports show that people who have taken

microfinance have been able to increase their income and hence the standard of living.

About half of the Indian population still doesn’t have a savings bank account and they

are deprived of all banking services. Poor also need financial services to fulfill their needs like

consumption, building of assets and protection against risk. Microfinance institutions serve as

a supplement to banks and in some sense a better one too. These institutions not only offer

micro credit but they also provide other financial services like savings, insurance, remittance

and non-financial services like individual counselling, training and support to start own

business and the most importantly in a convenient way. The borrower receives all these

services at her/his door step and in most cases with a repayment schedule of borrower’s

convenience. But all this comes at a cost and the interest rates charged by these institutions

are higher than commercial banks and vary widely from 10 to 30 percent. Some claim that the

interest rates charged by some of these institutions are very high while others feel that

considering the cost of capital and the cost incurred in giving the service, the high interest

rates are justified.

18 | P a g e


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 the mare 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.

19 | P a g e


CHAPTER 3

GOVERNMENTS ROLE IN SUPPORTING MICROFINANCE

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.

20 | P a g e


The Government of India and the RBI have a stated goal of promoting financial

inclusion

According to recent RBI estimates, there are over 450 million “unbanked people” in

India, most of who live in rural areas. The term “unbanked” refers to people who have no

access to formal financial services, but rather must rely on either family, or informal providers

of finance, such as the village moneylender. It is undisputed that access to finance is critical

for enabling individuals and communitie to climb out of poverty. It is also generally agreed

that relying on the limited resources of village moneylenders exposes the poor to coercive

lending practices, personal risks and high interest rates, which can be a much as 150%.

Therefore the Indian Government and the RBI have a policy of “financial inclusion”. As part

of this policy, the

government requires Indian banks to lend to “priority sectors”, one of which is the rural poor.

Until recently, banks were happy to lend money to MFIs who would then on-lend funds,

primarily to poor women across rural India. The banks have welcomed this policy because

historically they tended to charge MFIs average interest rates of 12-13% and benefited from

100% repayment rates. Thus, by lending to MFIs, banks have been able to meet their “priority

sector” lending requirements with what historically has amounted to a risk-free and very

profitable arrangement.

The goal of microfinance must include the private sector

Microfinance in India is currently being provided by three sectors: the government, the

private sector and charities. These three sectors, as large as they are, have only a small

fraction of the capital and geographic scale required to meet the overwhelming need for

finance amongst India’s rural poor.

21 | P a g e


The top 10 private sector microfinance providers in India together serve less than 5% of

the unbanked population of India – approximately 20 million clients. For4 example,

SHARE Microfin Limited (“SHARE”) and Asmitha Microfin Limited(“Asmitha”), two

of the five largest MFIs in India, have almost Rs 4,000 crore($900MM) loaned to over 5

million poor women in 18 Indian states (prior to the crisis, the combined outstanding

loan portfolio had been as high as Rs 6,750 crore($1.525BN)). Yet, despite the size of

MFIs like SHARE and Asmitha, only a fraction of the overwhelming need is being met.

Private sector MFIs have an essential role to play if the goal of financial inclusion is to

be realized, as neither the government nor charities have the capital nor business model

required to meet the insatiable demand for finance in rural India. As the public listing of

SKS Microfinance underscored, private sector institutions are able to attract

increasingly large amounts of private capital, in order to accelerate the growth of the

industry, which is essential to expanding financial inclusion as far and as fast as

practicable.

Coordinating Microfinance Efforts in India

NABARD coordinates the microfinance activities in India at international/ national/

state / district levels. These include organizing international/national Workshops,

Seminars, etc for experience sharing, Organizing National and State level Meets

of Bankers and NGOs etc .Dissemination of best practices in SHG / microfinance.

A. Other Initiatives:

Micro enterprise Development Programmer (MEDP) for Matured SHGs The

progression of SHG members to take up micro enterprise involves intensive training

and hand holding on various aspects including understanding market, potential mapping

and ultimately fine tuning skills and entrepreneurship to manage the enterprise. Hence,

a separate, specific and focused skill-building programme ‘Micro Enterprise

Development Programmed (MEDP)’ has been formulated. This involves organizing

short duration, location specific programmers on skill up gradation / development

22 | P a g e


for setting up sustainable micro-enterprises by matured SHG members. The duration of

training programme can vary between 3 to 13 days, depending upon the objective and

nature of training. The training may be conducted by agencies that have background and

professional competency in the field of micro enterprise Development with an expertise

in skill development.

B. Scheme for Capital/ Equity Support to Micro-Finance Institutions (MFIs) from

MFDEF:

The scheme attempts to provide capital/equity support to Micro Finance Institutions

(MFIs) so as to enable them to leverage capital/equity for accessing commercial

and other funds from banks, for providing financial services at an affordable cost to the

poor, and to enable MFIs to achieve sustainability in their credit operations over a

period of 3-5 years.

C. Scheme for financial assistance to banks/ MFIs for rating of Micro Finance

Institutions (MFIs):

In order to identify MFIs, classify and rate such institutions and empower them to

intermediate between the lending banks and the clients, NABARD has decided to

extend financial assistance to Commercial Banks and Regional Rural Banks by way of

grant. The banks can avail the services of credit rating agencies, M-CRIL, ICRA,

CARE and Planet Finance in addition to CRISIL for rating of MFIs. The financial

assistance by way of grant for meeting the cost of rating of MFIs would be met by

NABARD to the extent of 100% of the total professional fees subject to a maximum of

Rs.3,00,000/-/-. The remaining cost would be borne by the concerned MFI. The cost of

local hospitality (including boarding and lodging) towards field visit of the team from

the credit rating Agency, as a part of the rating exercise, would also be borne by the

MFI. Those MFIs which have a minimum loan outstanding of more than Rs. 50.00 lakh

(Rupees fifty lakh only) and maximum of Rs 10 crore (Rupees Ten crore only) would

be considered for rating and support under the scheme.

23 | P a g e


Financial assistance by way of grant would be available only for the first rating of the

MFI.MFIs availing Capital Support and/or Revolving Fund Assistance from NABARD

are also eligible for re-imbursement of 50% of the cost of professional fee charged by

Credit Rating Agency for second rating subject to a maximum of Rs.1.50 lakh (i.e 50%

of Rs.3 lakh). This will be in addition to the re-imbursement of professional fee for first

rating of the MFI.

D. Refinance support to banks for financing MFIs:

The scheme is to provide 100% refinance to banks for financing MFIs. Interest rate on

refinance to Commercial Banks and Regional Rural Banks on their loans to MFIs for on

lending to clients will be at 3% less than that charged by banks subject to minimum

interest rate of 7.5% for all regions and all eligible purposes. The revised rate of interest

is applicable to refinance disbursed on or after 01 March 2010.

24 | P a g e


CHAPTER 4

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:

25 | P a g e


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

Skills for income generation

Decision making within the household

Group mobilization in support of individual clients- action on.

|

26 | P a g e


Micro-Financing Regulation in India

Advantage of Regulation:

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

Protects the interest of the depositors

Put in place prudential norms, standards and practices

Provides sufficient information about the true risks faced by the banks/MFIs

Promoters systemic stability and thereby sustains public confidence in the banks/MFIs

Prevents a bank’s/MFI’s failure/potential dangers through timely interventions

Penalizes the violations, misconducts, non-compliance to the norms of behavior

Provides invaluable advisory inputs for problem-solving and overall improvement of the

banks/MFIs

Promoters safe, strong and sound banking/MF system and effective banking/MF policy.

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.

B. Legal forms of MFIs in India:

MFIs and Legal Forms:

27 | P a g e


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 to1500 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.

Cooperative societies by cooperative societies act enacted by state government.

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.

28 | P a g e


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.

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.

29 | P a g e


Micro Finance Models

A. Microfinance Providers:

Microfinance Institutions:

A microfinance institution (MFI) is an organization that provides microfinance

services .MFIs range from small non-profit organizations to large commercial banks. Most

MFIs started as not-for-profit organizations like NGOs (non-governmental organizations),

credit unions and other financial cooperatives, and state-owned development and postal

savings banks. An increasing number of MFIs are now organized as for-profit entities,

often because it is a requirement to obtaining a license from banking authorities to offer

savings services. For-profit MFIs may be organized as Non-Banking Financial Companies

(NBFCs), commercial banks that specialize in microfinance, or microfinance departments

of full-service banks.

The micro finance service providers include apex institutions like National Bank for

Agriculture and Rural Development (NABARD), Small Industries Development Bank of

India (SIDBI), and, Rashtriya Mahila Kosh(RMK). At the retail level, Commercial Banks,

Regional Rural Banks, and, Cooperative banks provide microfinance services. Today,

there are about 60,000 retail credit outlets of the formal banking sector in the rural areas

comprising 12,000 branches of district level cooperative banks, over 14,000 branches of

the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of

commercial banks besides almost90,000 cooperatives credit societies at the village level.

On an average, there is at least one retail credit outlet for about 5,000 rural people. This

physical reaching out to the far-flung areas of the country to provide savings ,credit and

other banking services to the rural society is an unparalleled achievement of the Indian

banking system. In the this paper an attempt is made to deal with various aspects relating

to emergence of private micro finance industry in the context of prevailing legal and

regulatory environment for private sector rural and micro finance operators .

30 | P a g e


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

cooperatives.

They are provided financial support from external donors and apex institutions including 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.MFIs are an

extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives.

They are provided financial support from external donors and apex institutions

including 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.

b. For NGOs:

The field of development itself expands and shifts emphasis with the pull of ideas, and

NGOs perhaps more readily adopt new ideas, especially if the resources required are

small, entry and exit are easy, tasks are (perceived to be) simple and people’s

acceptance is high – all characteristics (real or presumed) of microfinance.

31 | P a g e


Canvassing by various actors, including the National Bank for Agriculture and Rural

Development(NABARD), Small Industries Development Bank of India (SIDBI),

Friends of Women’s World Banking (FWWB),Rashtriya Mahila Kosh (RMK), Council

for Advancement of People’s Action and Rural Technologies(CAPART), Rashtriya

Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the

International Fund for Agricultural Development (IFAD), United Nations Development

Programme (UNDP),World Bank and Department for International Development, UK

(DFID)], and lately commercial banks, has greatly added to the idea pull. Induced by

the worldwide focus on microfinance, donor NGOs too have been funding microfinance

projects. One might call it the supply push

1. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such

concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led

microfinance is with poor women, for whom access to small loans to meet dire emergencies is

a valued outcome. Thus, quick and high ‘customer satisfaction’ is the USP that has attracted

NGOs to this trade.

2. The idea appears simple to implement. The most common route followed by NGOs is

promotion of SHGs. It is implicitly assumed that no ‘technical skill’ is involved. Besides,

external resources are not needed as SHGs begin with their own savings. Those NGOs that

have access to revolving funds from donors do not have to worry about financial performance

any way. The chickens will eventually come home to roost but in the first flush, it seems all

so easy

3. For many NGOs the idea of ‘organizing’ – forming a samuha – has inherent appeal. Groups

connote empowerment and organizing women is a double bonus.

32 | P a g e


4. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the

medium-to-large NGOs that are able to access bulk funds for on-lending, for example from

SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain,

highly competitive and increasingly difficult-to-raise donor funding.

C. Service Company Model:

In this context, the Service Company Model developed by ACCION andused in some of the

Latin American Countries is interesting. The model may hold significant interest for state

owned banks and private banks with large branch networks. Under 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.

33 | P a g e


34 | P a g e


Microfinance Strategic

Strategic Management: Strategic management is a field that deals with the major intended and

emergent initiatives taken by general manager on behalf of owners, involving utilization of

resources, to enhance the performance of rams in their external environments. It entails.

Understanding microfinance strategies: This report explores strategic issues shaping

the future of the MFI sector in India.

The study approached CEOs of select MFIs with a set of issues ranging from concerns to

competition and sought their opinions about future strategies. The report draws from

their responses, and states that:

35 | P a g e


•Future strategy is about being strong on processes and being overtly client-centric;

•Success is a prudential combination of three factors, namely, culture, beliefs and aspirations;

•Culture is about the degree of trust rather than the rate of interest;

•Risk management systems of economically weaker families are built on their beliefs about

dependability and access;

•Micro credit stories have revealed ingenious ways that clients have used their loans for

purposes that satisfied their aspirations.

Finally, the sector, at about Rs. 14,000 crore (approximately US$3 bn) looks large, but is

small by any business scale. Competition and unhealthy practices are overshadowing the good

work and reputation earned over many years. MFIs in India need to overcome these

challenges in the future.

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 byPMO), 2002.Microfinance Development and Equity Fund,

NABARD, 2005.Working group on Financing NBFCs by Banks- RBI.

A.Product-market matrix:

A market penetration strategy is a business-as-usual strategy, where the MFI focuses

36 | P a g e


on achieving growth by selling existing products in existing markets. This can be done

through more competitive pricing strategies,increased promotional activities, and more

liberal terms and conditions.For example, the MFI may develop strategic alliances to begin

Adapted from Ansoff 1957.

B. The BCG Growth-Share Matrix:

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson

of the Boston Consulting Group in the early 1970's. It is based on the observation that a

company's business units canbe classified into four categories based on combinations of

market growth and market share relative to the largest competitor, hence the name "growth-

share". Market growth serves as a proxy for industry attractiveness, and relative market share

serves as a proxy for competitive advantage. The growth-share matrix thus maps the business

unit positions within these two important determinants of profitability.

37 | P a g e


BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in an increase in

the generation of cash. This assumption often is true because of the experience curve;

increased relative market share implies that the firm is moving forward on the experience

curve relative to its competitors, thus developing a cost advantage. A second assumption is

that a growing market requires investment in assets to increase capacity and therefore results

in the consumption of cash. Thus the position of a business on the growth-share matrix

provides an indication of its cash generation and its cash consumption. Henderson reasoned

that the cash required by rapidly growing business units could be obtained from the firm's

other business units that were at a more mature stage and generating significant cash. By

investing to become the market share leader in a rapidly growing market, the business unit

could move along the experience curve and develop a cost advantage. From this reasoning,

the BCG Growth-Share Matrix was born.

38 | P a g e


The four categories are:

Dogs

Dogs have low market share and a low growth rate and thus neither generate nor consume a

large amount of cash. However, dogs are cash traps because of the money tied up in

a business that has little potential. Such businesses are candidates for divestiture.

Question marks

Question marks are growing rapidly and thus consume large amounts of cash, but because

they have low market shares they do not generate much cash. The result is large net cash

consumption. A question mark (also known as a "problem child") has the potential to gain

market share and become a star, and eventually a cash cow when the market growth slows. If

the question mark does not succeed in becoming the market leader, then after perhaps years of

cash consumption it willed generate into a dog when the market growth declines. Question

marks must be analyzed carefully in order to determine whether they are worth the investment

required to grow market share.

Stars

Stars generate large amounts of cash because of their strong relative market share, but also

consume large amounts of cash because of their high growth rate; therefore the cash in each

direction approximately nets out. If a star can maintain its large market share, it will become a

cash cow when the market growth rate declines. The portfolio of a diversified company

always should have stars that will become the next cash cows and ensure future cash

generation.

Cash cows

39 | P a g e


As leaders in a mature market, cash cows exhibit a return on assets that is greater than the

market growth rate, and thus generate more cash than they consume. Such business units

should be"milked", extracting the profits and investing as little cash as possible. Cash cows

provide the cash required to turn question marks into market leaders, to cover

the administrative costs of the company, to fund research and development, to service

the corporate debt, and to pay dividends to shareholders .Because the cash cow generates

a relatively stable cash flow, its value can be determined with reasonable accuracy by

calculating the present value of its cash stream using a discounted cash flow analysis. Under

the growth-share matrix model, as an industry matures and its growth rate declines, a business

unit will become either a cash cow or a dog, determined solely by whether it had become the

market leader during the period of high growth. While originally developed as a model for

resource allocation among the microfinance business units in a corporation, the growth-share

matrix also can be used for resource allocation among products within a single business unit.

Its simplicity is its strength - the relative positions of the firm's entire business portfolio can

be displayed in a single diagram.

Limitations

The growth-share matrix once was used widely, but has since faded from popularity as more

comprehensive models have been developed. Some of its weaknesses are: Market growth rate

is only one factor in industry attractiveness, and relative market share is only one factor in

competitive advantage. The growth-share matrix overlooks many other factors in these two

important determinants of profitability. The framework assumes that each business unit is

independent of the others. In some cases, Microfinance business unit that is a "dog" may be

helping other business units gain a competitive advantage.

The matrix depends heavily upon the breadth of the definition of the market. A business unit

may dominate its small niche, but have very low market share in the overall industry. In such

a case, the definition of the market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool or

viewing a corporation's business portfolio at a glance, and may serve as a starting point for

discussing resource allocation among strategic business units.

40 | P a g e


C. Overall Strategy:

Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of the

poor has today emerged as a potent tool for human development. This process enables the

poor, especially the women from the poor households, to collectively identify and analyses

the problems they face in the perspective of their social and economic environment. It helps

them to pool their meager resources, human and financial, and priorities their use for solving

their own problems. The emphasis on regular thrift collection and its use to solve immediate

problems of consumption and production not only helps to meet their most urgent needs, but

also trains them to handle larger financial resources more skillfully, prudently and with

a more lasting impact. Encourage SHGs to become a forum for many social sector

interventions.

D. SHG-Bank Linkage Programmer:

A Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage

Programmer has proved to be the major supplementary credit delivery system with wide

acceptance by banks, NGOs and various government departments.

E. Capacity Building:

Capacity building must be tailored to meet the differing needs of the nascent/emerging MFIs

and of the expanding/mature MFIs. There is a pressing need to develop comprehensive,

relevant and integrated training modules on a wide range of topics to professionalize Indian

microfinance – thus building the much sought-after second tier management in MFIs. The

industry continues to grow, and so does the demand for competent middle management.

Currently, these are typically sourced by MFIs from the rural institutes of management. But

these rural institutes are using curricula largely based on the one developed by SIDBI nearly a

decade ago – and it is high time to revisit this curriculum, to update it both in terms of content

(to reflect the new realities in India microfinance) and in terms of its delivery (to use multi-

media/practical examples, and thus bring the courses to life with video clips, case studies and

field-based exercises that take the students out into the field).

41 | P a g e


11.Microfinance Management:

A. Objectives:

The programmer aims at enabling the participants to gain a clear understanding of various

policies, conceptual, and operational issues involved in developing effective and successful

microfinance interventions.

B.Innovative Methodologies:

Tiny amount of loan to large number of borrowers at their doorstep is a costly operation

compared to revenue income. Cost reduction is also an essential element in microfinance

operation. Reducing cost can be possible either offering larger loan size or by innovating no

conventional Management which is less costly.

The essences of innovative management are as follows:

1. Specialized operation.

2. Documentation of essential information only.

3. Simple product, simple loan application and verification process.

4. Absence of grant guarantee.

|5. Staff recruitment in no conventional manner.

6. On the job training (each one teaches one).

42 | P a g e


7. Simple standard loan register along with ledger and cash book abandoning the

bookkeeper/cashier.

8. Standard furniture, fixture and collective use of facilities in the office.

9. Decentralized branch structure.

10. Branch level financial planning.

11. Strong monitoring from mid and head office.

12. Written Manual.

C. Microfinance Working Environment:

How can microfinance institutions (MFIs) help improve working conditions? How can they

contribute to job creation? And how can MFIs help reduce child labor? Should MFIs have an

interest in addressing these and other decent work issues? These are some of the questions

that the ILO intends to address through an experimental global action research programmer

(2008-2011) in partnership with microfinance Institutions interested in promoting decent

work. Access to micro credit or other financial services can help improve the decent work

status. Conditional loans, credit with education, incentives like interest rate rebates, linkages

with social partners and NGOs as well as the provision of micro insurance, conditional cash

transfers or health care can be effective ways to reduce child labor, decrease vulnerabilities,

raise awareness and create incentives to improve working conditions.

Enabling Environment:

Favorable environment for microfinance in different manners are prevailing in most

developing countries. Favorable environment is not only among Government but also among

general public, civil society, media and various institutions within the country needed for

favorable growth of microfinance for poverty reduction. Though Government is favorable in

43 | P a g e


general to microfinance in many countries but specific modalities of NGOs/MFIs determine

the nature of favorable.

D. Current Challenging Issues:

1.Capacity Building:

1.The long-term future of the micro-finance sector depends on MFIs being able to achieve

operational, financial and institutional sustainability.

2. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly

operation compared to revenue income. Cost reduction is also an essential element in

microfinance operation. Reducing cost can be possible either offering larger loan size or by

innovating no conventional Management which is less costly.

3. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in

leveraging funds.

4. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in

leveraging funds.

E. HR Issues:

Recruitment and retention is the major challenge faced by MFIs as they strive to reach more

clients and expand their geographical scope. Attracting the right talent proves difficult

because candidates must have, as a prerequisite, a mindset that fits with the organization’s

mission.

Many mainstream commercial banks are now entering microfinance, who are poaching staff

from MFIs and MFIs are unable to retain them for other job opportunities. 85% of the poorest

clients served by microfinance are women. However, women make up less than half of

44 | P a g e


all microfinance staff members, and fill even fewer of the senior management roles. The

challenge in most countries stems from cultural notions of women’s roles, for example, while

women are single there might be a greater willingness on the part of women’s families to let

them work as front line staff, but as soon as they marry and certainly once they start having

children, it becomes unacceptable. Long distances and long hours away from the family are

difficult for women to accommodate and for their families to understand.

F. Microfinance Training & Capacity Building Methods:

1. Microfinance Training Methodology and How to Build Efficient Workforce?

2. Staff Motivation & Built in Cost effective Training Component.

3. Human Resource Planning and Development.

4. Good Governance.

G. SWOT MATRIX for Microfinance Management:

STRENGTHS

1.Experienced senior management Team

.2.Robust IT system.

3.Clear and well defined HR policy.

4.Infusion of own equity - commitment from promoters.

5.Process innovation.

6.Clarity and good understanding of vision.

7.Transparency at all levels.

8.Plans for value added and livelihood support services (LDS).

45 | P a g e


9.Shared ownership.

WEAKNESSES

1.Limited resources.

2.Micro managing.

3.Start up organisation; therefore, yet to institutionalise the standard processes

.4.Attracting/Holding on to the staff till the time we become established players.

5.Refine the processes for growth.

OPPORTUNITIES

1.Huge Potential Market.

2.Scope of introducing livelihood related services

.3.Financial crunch is helping organisation to be cost conscious and effective.

4.IT systems.

THREATS

1.Financial crisis.

2.Increasing competition.

3.Increasing competition.

|4.Poor banking infrastructure.

5.Political instability.

H. Microfinance Operation management:

46 | P a g e


1.Capacity Building:

The long-term future of the micro-finance sector depends on MFIs being able to achieve

operational, financial and institutional sustainability. The constraints and challenges vary with

the different types and development stage of MFIs. Most MFIs are currently operating below

operational viability and use grant funds from donors for financing up-front costs of

establishing new groups and covering initial losses incurred until the lending volume builds

up to a break-even level. The MFIs are generally constrained in reaching a break-even level

and finally achieving sustainability, primarily due to a narrow client and product base, high

operational and administrative costs for delivering credit to the poor, and their inability to

mobilize requisite resources. Moreover, lack of technical manpower, operational systems,

infrastructure and MIS are prevalent. In view of the above, to scale up micro-finance

initiatives at a faster pace, a special effort is required for capacity building of the Micro

Finance Institutions. In this background, SFMC has in the past under the DFID collaboration

(which has since come to an end on March 31,2009) provided need based capacity building

support to the partner MFIs, in the initial years, to enable them to expand their operations,

cover their managerial, administrative and operational costs besides helping them achieve

self-sufficiency in due course.

2. Liquidity Management:

In view of the fact that liquidity is a major concern of many of the middle level MFIs and a

small working capital support can go a long way in their better liquidity management and thus

pave way for faster growth, SFMC has introduced a special short term loan scheme,

Liquidity Management Support(LMS) for the long term partners.

3. Equity:

Provision of equity capital to the NBFC-MFIs is perceived as an emerging requirement of the

microfinance sector in India. SIDBI provides equity capital to eligible institutions not only to

enable them to meet the capital adequacy requirements but also to help them leverage debt

funds. Keeping in tune with the sect oral requirements, the bank has also introduced quasi-

equity products viz., optionally convertible Preference share capital; optionally convertible

47 | P a g e


debt and optionally convertible Subordinate debt for new generation MFIs which are

generally in the pre-breakeven stage requiring special dispensation for capital support by way

of a mix of Tier I and Tier II capital.

4. Transformation Loan:

The Transformation Loan (TL) product is envisaged as a quasi-equity type support topartner

MFIs that are in the process of transforming themselves / their existing structure into a more

formal and regulated set-up for exclusively handling micro finance operations in a focused

manner. Being quasi-equity in nature, TL helps the MFIs not only in enhancing their equity

base but also in leveraging loan funds and expanding their micro credit operations on a

sustainable basis. The product has the feature of conversion into equity after a

specified period of time subject to the MFI attaining certain structural, operational and

financial benchmarks. This non-interest bearing support facilitates the young but

well performing MFIs to make long term institutional investments and acts as a constant

incentive to transform themselves into formal and regulated entities.

5. Micro Enterprise Loans:

In order to build and strengthen new set of intermediaries for Micro Enterprise Loans, the

Bank has formulated new scheme for Micro Enterprise Loans. Institutions/ MFIs with

minimum fund requirement of Rs. 25 lakh p.a. and having considerable experience in

financial intermediation/ facilitating or setting up of enterprises/ providing escort services to

SSI/ tiny units/ networking or active interface with SSIsetc. and having professional expertise

and capability to handle on-lending transactions shall be eligible under the dispensation. The

institutions would be selected based on their relevant experience, potential to expand,

professional management, transparency in operations and well laid-out systems besides

qualified/ trained manpower. Lending to be based strictly on an intensive in-house appraisal

supplemented with the credit rating by an independent professional agency. Relaxed security

norms more or less on line with micro credit dispensation to be adopted to reduce procedural

bottlenecks as well as to facilitate easy disbursements.

6. Loan Syndication:

48 | P a g e


Keeping in view the increased fund requirement of major partner MFIs, the Bank has also

undertaken fee based syndication arrangement where loan requirement is comparatively

higher.

7. Microfinance Operations:

a. Marketing Strategy and Microfinance Clients Targeting Methodology

.b. Microfinance Products, Services and Lending Procedures

.c. Microfinance Lending Methodology: Individual and Group Lending.

d. Micro finance Indian Lending Methodology

.e. Institutional Business Planning for Microfinance Program Financial Planning & Analysais

.f. Savings and Credit Management.

g. Program Operational Policies and Procedures

.h. Accounting and Record Keeping

.i. Auditing for Microfinance Operation

.j. Management Information System.

k. Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools

.l. Detection of Fraud and Internal Control.

m. Monitoring and Supervision System.

n. Delinquencies and its Management.

I. Clients of micro finance:

49 | P a g e


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.

a.The six principles of client protection are:

|1.Avoidance of Over-Indebtedness

: Providers will take reasonable steps to ensure that credit will be extended only if borrowers

have demonstrated an adequate ability to repay and loans will not put the borrowers at

significant risk of over-indebtedness. Similarly, providers will take adequate care that non-

credit, financial products, such as insurance, provided to low-income clients are appropriate.

2. Transparent and Reasonable Pricing

: The pricing, terms and conditions of financial products(including interest charges, insurance

premiums, all fees, etc.) are transparent and will be adequately disclosed in a form

understandable to clients.

3. Appropriate Collections Practices:

Debt collection practices of providers will not be abusive or coercive.

4. Ethical Staff Behavior:

Staff of financial service providers will comply with high ethical standards in their interaction

with microfinance clients and such providers will ensure that adequate safeguards are in place

to detect and correct corruption or mistreatment of clients.

5. Mechanisms for Redress of Grievances

50 | P a g e


: Providers will have in place timely and responsive mechanisms for complaints and problem

resolution for their clients.

6. Privacy of Client Data

: The privacy of individual client data will be respected, and such data cannot be used for

other purposes without the express permission of the client (while recognizing that providers

of financial services can play an important role in helping clients achieve the benefits

of establishing credit histories).

J. Social performance measurement:

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.

51 | P a g e


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 Pranab Mukherjee 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

52 | P a g e


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’sregain the trust and reputation they once held as an institution of progress, not abuse.

A) The Future:

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. 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 microfinance 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 berovided are really large. It is estimated that 90 million farm holdings, 30 million non-agricultural enterprises and50 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

53 | P a g e


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. But the crux of the discussion is that, if the over excess involvement of the government would be there in the Micro Finance sector, than the growth of the Micro Finance won‘t much possible. The Govt. involvement should limited to the important decisions only, but not to interfere in each and every matter of the management.

25.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).

54 | P a g e


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.

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.

55 | P a g e


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 ASOMI49 Janodaya Trust

50 Community Development Centre (CDC)

|

56 | P a g e


57 | P a g e


Inclusive Finance India Summit – A global platform to deliberate on issues related to Financial Inclusion, Financial Education and Financial Stability, and build a Financial Inclusion Vision 2020

Access to financial services plays a critical part in facilitating economic growth and reducing income inequality. Inclusive financial systems allow poor people to smoothen their consumption and insure themselves against economic vulnerabilities they face - from illness and accidents to theft and unemployment. Financial inclusion enables poor people to save and to borrow - allowing them to build their assets, to invest in education and livelihoods opportunities, and thus to improve their quality of life. Inclusive finance especially benefits disadvantaged groups such as women, youth, and rural communities. For all these reasons financial inclusion has gained prominence in recent years, across the world, in many countries as a policy objective to improve the lives of the poor. Recognizing that 2.5 billion adults worldwide are ‘unbanked’ the World Bank has put forward a vision for achieving universal financial access by 2020. More than 50 countries, including India, have made ambitious commitments to financial inclusion targets.

In addition to the intent of governments and policy support, if the private sector too responds by unleashing its resources and know-how, then universal financial access by 2020 is quite within the realms of possibility. Going forward, new technology, transformative business models and bold reforms will enable the accomplishment of this 2020 vision. Therefore, convergence of

58 | P a g e

Financial inclusion can be a powerful accelerator of economic progress, and can help achieve the goals of eliminating extreme poverty and building shared prosperity.


all the efforts and investments by the stakeholders, in strengthening the financial inclusion value chain, towards accomplishing this daunting challenge, will be a key to success.

As per the Global Findex, in India, only 35% of adults have a formal account, and 8 % a formal loan. Given the significant proportion of exclusion, the Government of India, in the last one decade, has taken several policy initiatives. While in 2006, it set up the Rangarajan Committee on Financial Inclusion; subsequently in 2008, RaghuramRajan Committee on Financial Sector Reforms also emphasized financial inclusion as a third policy objective along with growth and price stability. In 2011, the Government of India launched the Swabhiman campaign under which banks were advised to open branches in all habitations of 5000 or more population in under-banked districts. Banking facilities were provided to more than 74,194 such villages, more than 62,468 Banking Correspondent Agents (BCAs) were appointed and about 3.16 Mn FI accounts opened by end of March 2012. While there is apparent progress, almost half the No Frills Accounts remain dormant, BCs are not viable and banks are skeptical of this drive impacting their bottom line. The Government of India further has also begun passing subsidies and entitlements under the Direct Benefit Transfer programme, leveraging the AADHAR platform. Several efforts outside Swabhiman are also being tried out by private sector players’, bilateral / multilateral agencies, payment gateways, and telecom companies to advance the financial inclusion agenda. More recently, while one MFI was awarded a bank license, the Government of India established the niche BhartiyaMahila Bank to serve financial needs of women, the NachiketMor Committee has recommended for differentiated banking architecture to support financial inclusion. Given the overwhelming challenge of financial inclusion; more holistic, systemic and convergent strategies need to be designed to establish an eco-system that will understand the needs and aspirations of the unbanked, specially the poor, leverage technology, engage with private sector and deliver responsive products and processes tocreate beneficial outcomes.

59 | P a g e


60 | P a g e


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 be ingused 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. They serve micro finance clients with varying quality and using different operating models. 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.

61 | P a g e

preliminaries 1

Documents

microfinance sector

project possible

project successful

financial services

financial products

sucheta pawar p

indian financial sector

financial inclusion