DR.

GHANSHYAM SINGH SNATHKOTTAR

MAHAVIDHYALAYA
Soyepur, Lalpur Azamgarh Rd, Varanasi

Survey Research Project

Report On
IMPACT OF MICROFINANCE IN THE
SMES SECTOR

SUPERVISOR: SUBMITTED BY:

Vertika Sinha Poonam Giri
Assistant Professor M.Com 1 Semester
Roll No. :- 12323685025
Enrollment No. KA2K23/123685025

(Affiliated to Mahatma Gandhi Kashi Vidyapith University)

1|Pag
 BONAFIDE CERTIFICATE

This is to certify that the project titled “IMPACT OF MICROFINANCE IN THE SMES

SECTOR ” is an original work of the Student and is being submitted in partial fulfillment

for the award of the “MASTER OF COMMERCE”. This report has not been submitted

earlier either to this DR.GHANSHYAM SINGH SNATHKOTTAR MAHAVIDHYALAYA,

SOYEPUR, LALPUR AZAMGARH RD, VARANASI, for the

fulfillment of the requirement of a course of study.

SIGNATURE OF SUPERVISOR SIGNATURE OF STUDENT

Place: Place:

Date : : / / Date : : / /

2|Pag
 ACKNOWLEDGEMENT

It gives me pleasure to present this project report which is an outcome of the study role
of cash flow in financial analysis and it's implications. completing a task is never a one
man afforts. I wise to my sincere gratitude a large number of individual have
contributed directly and indirectly in this project report.
Firstly I would like to acknowledge my sincere thanks to principal professor
Vertika Sinha head department of commerce DR.GHANSHYAM SINGH
SNATHKOTTAR MAHAVIDHYALAYA, SOYEPUR, LALPUR AZAMGARH RD,
VARANASI.

(POONAM GIRI)

(12323685025)

3|Pag
 DECLARATION

I hereby declare that this project work titled “IMPACT OF MICROFINANCE IN THE SMES

SECTOR” is my original work and no part of it has been submitted for any other degree purposeor

published in any other from till date.

The empirical findings in this project are based on the data collected by myself whilepreparing this

report.

This project is completed as a part of curriculum & all that information collected iscorrect to the

best of my knowledge.

(POONAM

GIRI)

(12323685025)

4|Pag
5
 LIST OF TABLES

S.NO TABLE NO. PAGE NO

1 Product & services of 21

Microfinance

2 Distribution of Indebted 28-29

Rural Households:
Agency wise

3 Legal Forms of MFIs in 36

India

4 Comparative Analysis 49
of Micro-finance
Services offered to the
poor

6
 LIST OF FIGRUES

S.NO FIG. NO PAGE NO.

1 Development process 23
through microfinance
2 Micro finance 24
interventions through
different organizations

7
 TABLE OF CONTENTS

S.NO TITLE NAME PAGE NO

1 CHAPTER NO.1 9-29
Introduction
 The History of
Modern
Microfinance
 Who are the
clients of micro
finance?
 Principles of
micro finance
 Role of
Microfinance
 Difference
between micro
credit and
microfinance
 Financial needs
and Financial
services
 Activities in
Microfinance
 Government’s

8
 role supporting
microfinance
 Microfinance
changing the face
of poor India
 Microfinance
Social Aspects

2 CHAPTER NO.2 30-31

Objectives of
microfinance
3 CHAPTER NO.3 32-33
Research methodology
4 CHAPTER NO.4 34-66
Data analysis and
interpretation
 Legal forms of
MFIs in India
 Microfinance
Providers
 Service Company
Model
 Microfinance
Strategic
 Strategic Policy
Initiatives

9
  Microfinance
Management
 Microfinance
Working
Environment
 SWOT MATRIX
 Role, Functions
and Working
Mechanism of
Financial
Institutions
 Marketing of
Microfinance
Products
5 CHAPTER NO.5
Recommendations,
suggestions and
conclusion
67-77
6 CHAPTER NO. 6 78-79
Bibliography

10
CHAPTER NO. 1
INTRODUCTION

11
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

12
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’.

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."
The dictionary meaning of ‘finance’ is management of money. The
management of money denotes acquiring & using money. Micro Finance is
13
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.
Traditionally micro finance was focused on providing a very standardized
credit product. The poor, just like anyone else, (in fact need like thirst) need
a diverse range of financial instruments to be able to build assets, stabilize
consumption and protect themselves against risks. Thus, we see a
broadening of the concept of micro finance our current challenge is to find
efficient and reliable ways of providing a richer menu of micro finance
products. Micro Finance is not merely extending credit, but extending credit
to those who require most for their and family’s survival. It cannot be
measured in term of quantity, but due weight age to quality measurement.
How credit availed is used to survive and grow with limited means.

14
The History of Modern Microfinance

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:

 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. It is one of the most important microfinance institutions
15
of the world. Its network of lending partner comprises not only Latin
America but also US and Africa.

 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.

 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 Price 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 of Grameen Bank has stimulated the formation of other
several microfinance institutions like, ASA, BRAC and PROSHIKA.

16
Who are the clients of micro finance?
The typical micro finance clients are low-income persons that do not have
access to formal financial institutions. Micro finance clients are typically
self-employed, often household-based entrepreneurs. In rural areas, they
are usually small farmers and others who are engaged in small income-
generating activities such as food processing and petty trade. In urban
areas, micro finance activities are more diverse and include shopkeepers,
service providers, artisans, street vendors, etc. Micro finance clients are
poor and vulnerable non-poor who have a relatively unstable source of
income. Access to conventional formal financial institutions, for many
reasons, is inversely related to income: the poorer you are the less likely
that you have access. On the other hand, the chances are that, the poorer
you are, the more expensive or onerous informal financial arrangements.
Moreover, informal arrangements may not suitably meet certain financial
service needs or may exclude you anyway. Individuals in this excluded and
under-served market segment are the clients of micro finance.

As we broaden the notion of the types of services micro finance

encompasses, the potential market of micro finance clients also expands. It
depends on local conditions and political climate, activeness of
cooperatives, SHG & NGOs and support mechanism. For instance, micro
credit might have a far more limited market scope than say a more
diversified range of financial services, which includes various types of
savings products, payment and remittance services, and various insurance
products. For example, many very poor farmers may not really wish to
borrow, but rather, would like a safer place to save the proceeds from their
harvest as these are consumed over several months by the requirements of
17
daily living. Central government in India has established a strong &
extensive link between NABARD (National Bank for Agriculture & Rural
Development), State Cooperative Bank, District Cooperative Banks,
Primary Agriculture & Marketing Societies at national, state, district and
village level.
Principles of micro finance
 Poor people need not just loans but also savings, insurance and
money transfer services.
 Microfinance must be useful to poor households: helping them raise
income, build up assets and/or cushion themselves against external
shocks.
 “Microfinance can pay for itself.” Subsidies from donors and
government are scarce and uncertain, and so to reach large numbers
of poor people, microfinance must pay for itself.
 Microfinance means building permanent local institutions.
 Microfinance also means integrating the financial needs of poor
people into a country’s mainstream financial system.
 “The job of government is to enable financial services, not to provide
them.”
 “Donor funds should complement private capital, not compete with it.”
 “The key bottleneck is the shortage of strong institutions and
managers.” Donors should focus on capacity building.
 Interest rate ceilings hurt poor people by preventing microfinance
institutions from covering their costs, which chokes off the supply of
credit.
 Microfinance institutions should measure and disclose their
performance – both financially and socially.

18
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.

19
Financial needs and financial services
In developing economies and particularly in the rural areas, many activities
that would be classified in the developed world as financial are not
monetized: that is, money is not used to carry them out. Almost by
definition, poor people have very little money. But circumstances often arise
in their lives in which they need money or the things money can buy.
In Stuart Rutherford’s recent book The Poor and Their Money, he cites
several types of needs:
 Lifecycle Needs: such as weddings, funerals, childbirth, education,
homebuilding, widowhood, old age.
 Personal Emergencies: such as sickness, injury, unemployment,
theft, harassment or death.
 Disasters: such as fires, floods, cyclones and man-made events like
war or bulldozing of dwellings.
 Investment Opportunities: expanding a business, buying land or
equipment, improving housing, securing a job (which often requires
paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these
needs, primarily through creating and exchanging different forms of non-
cash value. Common substitutes for cash vary from country to country but
typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the
1980s demonstrated that “microfinance could provide large-scale outreach
profitably,” and in the 1990s, “microfinance began to develop as an
industry”. In the 2000s, the microfinance industry’s objective is to satisfy

20
the unmet demand on a much larger scale, and to play a role in reducing
poverty. While much progress has been made in developing a viable,
commercial microfinance sector in the last few decades, several issues
remain that need to be addressed before the industry will be able to satisfy
massive worldwide demand. The obstacles or challenges to building a
sound commercial microfinance industry include:
 Inappropriate donor subsidies
 Poor regulation and supervision of deposit-taking MFIs
 Few MFIs that mobilize savings
 Limited management capacity in MFIs
 Institutional inefficiencies
 Need for more dissemination and adoption of rural, agricultural
microfinance methodologies.

Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of
Microfinance taken by the government and regulatory bodies in India are:
 Working group on credit to the poor through SHGs, NGOs, NABARD,
1995
 The National Microfinance Taskforce, 1999
 Working Group on Financial Flows to the Informal Sector (set up by
PMO), 2002
 Microfinance Development and Equity Fund, NABARD, 2005
 Working group on Financing NBFCs by Banks- RBI

21
Activities 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,

22
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?

Table no.1 Product & services of Microfinance

Financial Services Other Financial Non Financial

Services Services

1. Credit Services Micro-insurance, Life Family Health and

Small Credit, Insurance, Health Sanitation Education,
Small Business Insurance, Loan for Financial Education,
Credit. Housing, Education, Micro-entrepreneur
Health. Training.
2. Deposit Services
Voluntary
Savings Services,
Mandatory
Savings.

23
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.

24
Fig no.1

25
Fig no.2

26
Microfinance changing the face of poor India
Micro-Finance is emerging as a powerful instrument for poverty alleviation
in the new economy. In India, micro-Finance scene is dominated by Self
Help Groups (SHGs) - Banks linkage Programme, aimed at providing a cost
effective mechanism for providing financial services to the 'unreached
poor'. In the Indian context terms like "small and marginal farmers", "rural
artisans" and "economically weaker sections" have been used to broadly
define micro-finance customers. Research across the globe has shown
that, over time, microfinance clients increase their income and assets,
increase the number of years of schooling their children receive, and
improve the health and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately, which
emphasizes the combined delivery of financial services along with technical
assistance, and agricultural business development services. When
compared to the wider SHG bank linkage movement in India, private MFIs
have had limited outreach. However, we have seen a recent trend of larger
Microfinance institutions transforming into Non-Bank Financial Institutions
(NBFCs). This changing face of microfinance in India appears to be positive
in terms of the ability of microfinance to attract more funds and therefore
increase outreach.

In terms of demand for micro-credit or micro-finance, there are three

segments, which demand funds. They are:
 At the very bottom in terms of income and assets, are those who are
landless and engaged in agricultural work on a seasonal basis, and
manual laborers in forestry, mining, household industries,
construction and transport. This segment requires, first and foremost,
27
 consumption credit during those months when they do not get labor
work, and for contingencies such as illness. They also need credit for
acquiring small productive assets, such as livestock, using which they
can generate additional income.
 The next market segment is small and marginal farmers and rural
artisans, weavers and those self-employed in the urban informal
sector as hawkers, vendors, and workers in household micro-
enterprises. This segment mainly needs credit for working capital, a
small part of which also serves consumption needs. This segment
also needs term credit for acquiring additional productive assets, such
as irrigation pump sets, bore wells and livestock in case of farmers,
and equipment (looms, machinery) and work sheds in case of non-
farm workers.
 The third market segment is of small and medium farmers who have
gone in for commercial crops such as surplus paddy and wheat,
cotton, groundnut, and others engaged in dairying, poultry, fishery,
etc. Among non-farm activities, this segment includes those in
villages and slums, engaged in processing or manufacturing activity,
running provision stores, repair workshops, tea shops, and various
service enterprises. These persons are not always poor, though they
live barely above the poverty line and also suffer from inadequate
access to formal credit.

28
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

29
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.

Table no.2 Distribution of Indebted Rural Households: Agency wise

Credit Agency Percentage of rural households

Government 6.1
Cooperative societies 21.6
Commercial banks 33.7
insurance 0.3
Provident fund 0.7
Other institutional sources 1.6
All institutional agencies 64.0

30
 landlords 4.0
Agricultural money lenders 7.0
Professional money lenders 10.5
Relatives and friends 5.5
others 9.0
All non institutional agencies 36.0
All non agencies 100.0

31
 CHAPTER NO.2
OBJECTIVES OF MICRO FINANCE

32
 To protect the interest of the depositors.

 How microfinance put in place prudential norms, standards and

practices.
 To provide 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.
 To penalize the violations, misconducts, non-compliance to the norms
of behavior.
 To 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 and
 Promotes and enhances orderly economic growth and development.

33
 CHAPTER NO.3
RESEARCH METHODOLOGY

34
The research methodology I will be using would be descriptive research
design. It means the topic would be described as far as possible.

Definition
Descriptive research means to describe something such as market
characteristics or functions.
The data I would be using secondary data. The data is already listed and I
would be properly arranging it as per my research topic.
I will be listing the following topics:
 Proper descriptions of suggestions
 Relevant and adequate data analysis
 Data analysis method would be appropriate.
 Reliability and validity of the data would be checked

35
 CHAPTER NO.4
DATA ANALYSIS AND
INTERPRETATION

36
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. 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.
 Cooperative societies by cooperative societies act enacted by state
government.

37
Table no.3 Legal Forms of MFIs in India

Types of MFIs Estimated Legal Acts under which

Number Registered

1. Not for Profit MFIs 400 to 500  Societies Registration

a.) NGO - MFIs 10 Act, 1860 or similar
b.) Non-profit Companies Provincial Acts
Indian Trust Act, 1882
 Section 25 of the
Companies Act, 1956
2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative
a.) Mutually Aided Societies Act
Cooperative enacted by State Government
Societies (MACS) and
similarly set
up institutions

3. For Profit MFIs 6 Indian Companies Act, 1956

a.) Non-Banking Financial Reserve Bank of India Act,
Companies (NBFCs) 1934

Total 700 - 800

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

38
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 micro finance 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 almost 90,000
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. 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

39
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.
.
 For NGOs:
1. 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.
2. Canvassing by various factors, 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.

40
 3. 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.
4. 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.
5. For many NGOs the idea of ‘organizing’ – forming a samuha – has
inherent appeal. Groups connote empowerment and organizing
women is a double bonus.
6. 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.

Service Company Model

In this context, the Service Company Model developed by ACCION and
used in some of the Latin American Countries is interesting. The model
may hold significant interest for state owned banks and private banks with

41
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.
 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.

 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 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.
42
 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.

 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

43
 lakh only) and maximum of Rs 10 crore (Rupees Ten crore only)
would be considered for rating and support under the scheme.
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 reimbursement 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.

 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.
. 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.

44
  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:
1. Future strategy is about being strong on processes and being overtly
client-centric;
2. Success is a prudential combination of three factors, namely, culture,
beliefs and aspirations;
3. Culture is about the degree of trust rather than the rate of interest;
4. Risk management systems of economically weaker families are built
on their beliefs about dependability and access;
5. 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 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.Microfinance Development and
Equity Fund, NABARD, 2005.Working group on Financing NBFCs by
Banks- RBI.

45
 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.
 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).

Microfinance Management:
 Objectives
The programmer aims at enabling the participants to gain a clear
understanding of various policies, conceptual, and operational issues

46
 involved in developing effective and successful microfinance
interventions.
 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).
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.
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

47
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.

Current Challenging Issues

1. Capacity Building: 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.

48
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).
9. Shared ownership.
 WEAKNESSES
1. Limited resources.
2. Micro managing.
3. Start up organization; therefore, yet to institutionalize 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 organization to be cost conscious and
effective.

49
 4. IT systems.

 THREATS
1. Financial crisis.
2. Increasing competition.
3. Increasing competition.
4. Poor banking infrastructure.
5. Political instability.

50
Table no.4

Comparative Analysis of Micro-finance Services offered to the poor

51
 Role, Functions and Working Mechanism of
Financial Institutions
1. ICICI Bank
“ICICI Bank is one bank that has developed a very clear strategy to
expand the provision of financial products and services to the poor in
India as a profitable activity”
ICICI’s microfinance portfolio has been increasing at an impressive
speed. From 10,000 microfinance clients in 2001, ICICI Bank is now
lending to 1.8 million clients through its partner microfinance
institutions, and its outstanding portfolio has increased from Rs. 0.20
billion (US$4.5 million) to Rs. 9.98 billion (US$227 million). A few
years ago, these clients had never been served by a formal lending
institution. There is an increasing shift in the microfinance sector from
grant-giving to investment in the form of debt or equity, and ICICI
believes grant money should be limited to the creation of facilitative
infrastructure.

 ICICI Bank launches new initiative in micro-finance

ICICI Bank has taken a stake of under 20 per cent in Financial
Information Network and Operations Private Ltd (FINO), which was
launched on Thursday, July 13, 2001. FINO would provide
technological solutions as well as services to finance providers to
reach the, underserved in the country. ICICI Bank is the lead
facilitator. According to Mr Nachiket Mor, Deputy Managing Director,
ICICI Bank, FINO is an independent entity. "We would reduce our
stake in the company when required," he said.

52
 33 ICICI Bank expects to target 200 micro-finance institutions (MFIs)
by March 2007, he said, speaking on the sidelines of the press
conference to launch FINO. At present, the bank has tie-ups with 100
MFIs. FINO is an initiative in the micro-finance sector. It would target
300-400 million people who do not have access to basic financial
services, said Mr Manish Khera, CEO, FINO. The company has an
authorised capital of Rs 50 crore. MFIs, NBFCs, RRBs, co-operative
banks, etc would directly or indirectly tie up with FINO to use its
services, he said. FINO would charge Rs 25-30 per account every
year.

 Core banking products

FINO has partnered with IBM and i-flex to offer core banking
products. It would also provide credit bureau services, which includes
individual customer credit rating and analytics based on transaction
history. It also launched biometric cards for customers, which would
be a proof of identity and give collateral to them. The card would also
offer multiple products including savings, loans, insurance, recurring
deposits, fixed deposits and remittances. The company would also
build-up customer database, thus bringing them into mainstream
banking. "There was a need for automated structured data system
like FINO," said Mr Mor. "Essential pieces of infrastructure are
missing in India. We lack credit-tracking mechanism; therefore there
was a need for an intervention like FINO." The company expects to
reach 25 million customers in five years and two million customers by
the end of 2007.

53
 FINO aims bringing scale to "micro" business leading to lowering of
costs for the local financial institutions (LFIs) and act as an internal
technology department for the LFIs, said Mr Khera. The company is
working on providing technological solutions in insurance, especially
the health insurance sector to the under-privileged," he said. It is
interacting with Nabard, SIDBI and other banks to give shape to what
FINO does, said Mr Khera.

 ICICI Bank's thrust on micro-finance

ICICI Bank has entered into partnerships with various microfinance
institutions (MFI) and non-Government organizations (NGOs) to scale
up its micro lending business. Addressing presspersons here, today,
Nachiket Mor, Executive Director, ICICI Bank, said, the partnership
model would provide assured source of funding to NGOs and MFIs.
The bank had extended advances to the tune of Rs. 150 crores as on
February 29, this year, under this scheme, Mr. Mor said. The bank
had acquired a network of self-help groups (SHGs) developed by the
erstwhile Bank of Madura after its merger with ICICI Bank. Since then
the SHG programme had grown substantially and 10,175 groups had
been promoted reaching out to 2.03 lakh women spread across 2,398
villages, the Executive Director said. One of the micro finance
institutions, `Microcredit Foundation of India', established by K. M.
Thiagarajan, former Chairman of Bank of Madura in 2002, had
initiated a programme for microcredit through self-help groups. ICICI
Bank has entered into a memorandum of understanding with
Microcredit Foundation to outsource SHG development, maintenance
of groups, credit linkage and recovery of loans.

54
 The MFI as Collection Agent
To address these constraints, ICICI Bank initiated a partnership
model in 2002 in which the MFI acts as a collection agent instead of a
financial intermediary. This model is unique in that it combines debt
as mezzanine finance to the MFI (Mezzanine finance combines debt
and equity financing: it is debt that can be converted by the lender
into equity in the event of a default. This source of financing is
advantageous for MFIs because it is treated like equity in the balance
sheet and enables it to raise money without additional equity, which is
an expensive financing source.).The loans are contracted directly
between the bank and the borrower, so that the risk for the MFI is
separated from the risk inherent in the portfolio. This model is
therefore likely to have very high leveraging capacity, as the MFI has
an assured source of funds for expanding and deepening credit. ICICI
chose this model because it expands the retail operations of the bank
by leveraging comparative advantages of MFIs, while avoiding costs
associated with entering the market directly.

 Securitization
Another way to enter into partnership with MFIs is to securitize
microfinance portfolios. In 2004, the largest ever securitization deal in
microfinance was signed between ICICI Bank and SHARE
Microfinance Ltd, a large MFI operating in rural areas of the state of
Andhra Pradesh. Technical assistance and the collateral deposit of
US$325,000 (93% of the guarantee required by ICICI) were supplied
by Grameen Foundation USA. Under this agreement, ICICI
55
 purchased a part of SHARE’s microfinance portfolio against a
consideration calculated by computing the Net Present Value of
receivables amounting to Rs. 215 million (US$4.9 million) at an
agreed discount rate. The interest paid by SHARE is almost 4% less
than the rate paid in commercial loans. Partial credit provision was
provided by SHARE in the form of a guarantee amounting to 8% of
the receivables under the portfolio, by way of a lien on fixed deposit.
This deal frees up equity capital, allowing SHARE to scale up its
lending. On the other hand, it allows ICICI Bank to reach new
markets. And by trading this high quality asset in capital markets, the
bank can hedge its own risks.

 Beyond Microcredit
Microfinance does not only mean microcredit, and ICICI does not limit
itself to lending. ICICI’s Social Initiative Group, along with the World
Bank and ICICI Lombard, the insurance company set up by ICICI and
Canada Lombard, have developed India’s first index-based insurance
product. This insurance policy compensates the insured against the
likelihood of diminished agricultural output/yield resulting from a
shortfall in the anticipated normal rainfall within the district, subject to
a maximum of the sum insured. The insurance policy is linked to a
rainfall index.

 Technology
One of the main challenges to the growth of the microfinance sector is
accessibility. The Indian context, in which 70% of the population lives
in rural areas, requires new, inventive channels of delivery. The use
56
 of technologies such as kiosks and smart cards will considerably
reduce transaction costs while improving access. The ICICI Bank
technology team is developing a series of innovative products that
can help reduce transaction costs considerably. For example, it is
piloting the usage of smart cards with Sewa Bank in Ahmedabad. To
maximize the benefits of these innovations, the development of a high
quality shared banking technology platform which can be used by
MFIs as well as by cooperatives banks and regional rural banks is
needed. ICICI is strongly encouraging such an effort to take place.
Wipro and Infosys, I-Flex, 3iInfotech, some of the best Indian
information technology companies specialized in financial services,
and others, are in the process of developing exactly such a platform.
At a recent technology workshop at the Institute for Financial
Management Research in Chennai, the ICICI Bank Alternate
Channels Team presented the benefits of investing in a common
technology platform similar to those used in mainstream banking to
some of the most promising MFIs.

 The Centre for Microfinance Research

ICICI bank has created the Centre for Microfinance Research
(CMFR) at the Institute for Financial Management Research (IFMR)
in Chennai. Through research, research-based advocacy, high level
training and strategy building, it aims to systematically establish the
links between increased access to financial services and the
participation of poor people in the larger economy. The CMFR
Research Unit supports initiatives aimed at understanding and
analyzing the following issues: impact of access to financial services;

57
 contract and product designs; constraints to household productivity;
combination of microfinance and other development interventions;
evidence of credit constraints; costs and profitability of microfinance
organizations; impact of MFI policies and strategies; people’s
behavior and psychology with respect to financial services;
economics of micro-enterprises; and the effect of regulations. Finally,
the CMFR recognizes that while MFIs aim to meet the credit needs of
poor households, there are other missing markets and constraints
facing households, such as healthcare, infrastructure, and gaps in
knowledge. These have implications in terms of the scale and
profitability of client enterprises and efficiency of household budget
allocation, which in turn impacts household well-being. The CMFR
Microfinance Strategy Unit will address these issues through a series
of workshops which will bring together MFI practitioners and sectoral
experts (in energy, water, roads, health, etc). The latter will bring to
the table knowledge of best practices in their specific areas, and each
consultation workshop will result in long-term collaboration between
with MFIs for implementing specific pilots.

2. Bandhan
Bandhan is working towards the twin objective of poverty alleviation
and women empowerment. It started as a Capacity Building
Institution (CBI) in November 2000 under the leadership of Mr.
Chandra Shekhar Ghosh. During such time, it was giving capacity
building support to local microfinance institutions working in West
Bengal. Bandhan opened its first microfinance branch at Bagnan in
Howrah district of West Bengal in July 2002. Bandhan started with 2

58
branches in the year 2002-03 only in the state of West Bengal and
today it has grown as strong as 412 branches across 6 states of the
country! The organization had recorded a growth rate of 500% in the
year 2003-04 and 611% in the year 2004-05. Till date, it has
disbursed a total of Rs. 587 crores among almost 7 lakh poor women.
Loan outstanding stands at Rs. 221 crores. The repayment rate is
recorded at 99.99%. Bandhan has staff strength of more than 2130
employees.

59
Operational Methodology
Bandhan follows a group formation, individual lending approach. A group of
10-25 members are formed. The clients have to attend the group meetings
for 2 successive weeks. 2 weeks hence, they are entitled to receive loans.
The loans are disbursed individually and directly to the members.

Economic and Social Background of Clients

 Landless and asset less women
 Family of 5 members with monthly income less than Rs. 2,500 in
rural and Rs.3,500 in urban
 Those who do not own more than 50 decimal (1/2acre) of land or
capital of its equivalent value
Loan Size
The first loan is between Rs. 1,000 – Rs. 7,000 for the rural areas and
between Rs. 1,000 – Rs. 10,000 for the urban areas. After the repayment,
they are entitled to receive a subsequent loan which is Rs 1,000 - 5,000
more than the previous loan.
Service Charge
Bandhan charges a service charge of 12.50% flat on loan amount.
Bandhan initially charged 17.50%. However from 1st July 2005, it has
slashed down its lending rate to 15.00%. Then it was further reduced to
12.50% in May 2006. The reason is obvious. As overall productivity
increased, operational costs decreased. Bandhan, being a nonprofit
organization wanted the benefit of low costs to ultimately trickle down to the
poor.

60
Monitoring System
The various features of the monitoring system are:
 A 3 tier monitoring system – Region, Division and Head Office
 Easy reporting system with a prescribed checklist format
 Accountability at all levels post monitoring phase
 Cross- checking at all the levels
 The management team of Bandhan spends 90.00% of time at the
field
Liability structure for Loans
When a member wants to join Bandhan, she at first has to get inducted into
a group. After she gets inducted into the group, the entire group proposes
her name for a loan in the Resolution Book. Two members of the group
along with the member’s husband have to sign as guarantors in her loan
application form. If she fails to pay her weekly installment, the group inserts
peer pressure on her. The sole purpose of the above structure is simply to
create peer pressure.

3. Grameen Bank
The Grameen Model which was pioneered by Prof Muhammed Yunus of
Grameen Bank is perhaps the most well known, admired and practiced
model in the world. The model involves the following elements.
 Homogeneous affinity group of five
 Eight groups form a Centre
 Centre meets every week
 Regular savings by all members
 Loan proposals approved at Centre meeting

61
  Loan disbursed directly to individuals
 All loans repaid in 50 installments
The Grameen model follows a fairly regimented routine. It is very cost
intensive as it involves building capacity of the groups and the customers
passing a test before the lending could start. The group members tend to
be selected or at least strongly vetted by the bank. One of the reasons for
the high cost is that staff members can conduct only two meetings a day
and thus are occupied for only a few hours, usually early morning or late in
the evening. They were used additionally for accounting work, but that can
now be done more cost effectively using computers. The model is also
rather meeting intensive which is fine as long as the members have no
alternative use for their time but can be a problem as members go up the
income ladder. The greatness of the Grameen model is in the simplicity of
design of products and delivery. The process of delivery is scalable and the
model could be replicated widely. The focus on the poorest, which is a
value attribute of Grameen, has also made the model a favorite among the
donor community. However, the Grameen model works only under certain
assumptions. As all the loans are only for enterprise promotion, it assumes
that all the poor want to be self-employed. The repayment of loans starts
the week after the loan is disbursed – the inherent assumption being that
the borrowers can service their loan from the ex-ante income.

4. SKS Microfinance(CEO-Vikram Akula)

Many companies say they protect the interests of their customers.
Very few actually sit in dirt with them, using stones, flowers, sticks,
and chalk powder to figure out if they will be able to repay a $20 loan
at $1 a month. With this approach, this company has created its own

62
 loyal gang of over 2 million customers. Its borrowers include
agricultural laborers, mom-and-pop entrepreneurs, street vendors,
home based artisans, and small scale producers, each living on less
than $2 a day. It works on a model that would allow micro-finance
institutions to scale up quickly so that they would never have to turn
poor person away. Its model is based on 3 principles-

1. Adopt a profit-oriented approach in order to access

commercial capital
Starting with the pitch that there is a high entrepreneurial spirit
amongst the poor to raise the funds, SKS converted itself to for-profit
status as soon as it got break even and got philanthropist Ravi Reddy
to be a founding investor. Then it secured money from parties such as
Unitus, a Seattle based NGO that helps promote micro-finance;
SIDBI; and technology entrepreneur Vinod Khosla. Later, it was able
to attract multimillion dollar lines of credit from Citibank, ABN Amro,
and others.
2. Standardize products, training, and other processes in order
to boost capacity
They collect standard repayments in round numbers of 25 or 30
rupees. Internally, they have factory style training models. They enroll
about 500 loan officers every month. They participate in theory
classes on Saturdays and practice what they have learned in the field
during the week. They have shortened the training time for a loan
officer to 2 months though the average time taken by other industry
players is 4-6 months.

63
3. Use Technology to reduce costs and limit errors
It could not find the software that suited its requirements, so it they
built their own simple and user friendly applications that a computer-
illiterate loan officer with a 12th grade education can easily
understand. The system is also internet enabled. Given that electricity
is unreliable in many areas they have installed car batteries or gas
powered generators as back-ups in many areas.
4. Scaling up Customer Loyalty
Instead of asking illiterate villagers to describe their seasonal pattern
of cash flows, they encourage them to use colored chalk powder and
flowers to map out the village on the ground and tell where the
poorest people lived, what kind of financial products they needed,
which areas were lorded over by which loan sharks, etc. They set
people’s tiny weekly repayments as low as $1 per week and health
and whole life insurance premiums to be $10 a year and 25 cents per
week respectively. They also offer interest free emergency loans. The
salaries of loan officers are not tied to repayment rates and they
journey on mopeds to borrowers’ villages and schedule loan meetings
as early as 7.00 A.M. Deep customer loyalty ultimately results in a
repayment rate of 99.5%.
5. Leveraging the SKS brand
Its payoff comes from high volumes. They are growing at 200%
annually, adding 50 branches and 1, 60,000 new customers a month.
They are also using their deep distribution channels for selling soap,
clothes, consumer electronics and other packaged goods.

64
Marketing of Microfinance Products

1. Contract Farming and Credit Bundling

Banks and financial institutions have been partners in contract
farming schemes, set up to enhance credit. Basically, this is a doable
model. Under such an arrangement, crop loans can be extended
under tie-up arrangements with corporate for production of high
quality produce with stable marketing arrangements provided – and
only, provided – the price setting mechanism for the farmer is
appropriate and fair.
2. Agri Service Centre – Rabo India
Rabo India Finance Pvt Ltd. has established agri-service centres in
rural areas in cooperation with a number of agri-input and farm
services companies. The services provided are similar to those in
contract farming, but with additional flexibility and a wider range of
products including inventory finance. Besides providing storage
facilities, each centre rents out farm machinery, provides agricultural
inputs and information to farmers, arranges credit, sells other services
and provides a forum for farmers to market their products.
3. Non Traditional Markets
Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary
of National Dairy Development Board (NDDB) has established
auction markets for horticulture producers in Bangalore. The
operations and maintenance of the market is done by NDDB. The
project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers
associations with 50,000 grower members for wholesale marketing.

65
 Their produce is planned with production and supply assurance and
provides both growers and buyers a common platform to negotiate
better rates.
4. Apni Mandi
Another innovation is that of The Punjab Mandi Board, which has
experimented with a ‘farmers’ market’ to provide small farmers
located in proximity to urban areas, direct access to consumers by
elimination of middlemen. This experiment known as "Apni Mandi"
belongs to both farmers and consumers, who mutually help each
other. Under this arrangement a sum of Rs. 5.2 lakh is spent for
providing plastic crates to 1000 farmers. Each farmer gets 5 crates at
a subsidized rate. At the mandi site, the Board provides basic
infrastructure facilities. At the farm level, extension services of
different agencies are pooled in. These include inputs subsidies,
better quality seeds and loans from Banks. Apni Mandi scheme
provides self-employment to producers and has eliminated social
inhibitions among them regarding the retail sale of their produce.

Top 50 Microfinance Institutions in India:

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).
66
7. Bandhan Society.
8. Cashpor Micro Credit (CMC).
9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL).
10. Grameen financial servicesPvt 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.
32. Hand in Hand (HiH).

67
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)

68
 CHAPTER NO.5
RECOMMENDATIONS,
SUGGESTIONS AND CONCLUSION

69
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.
 For NGOs
1. 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.
2. 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
70
 idea pull. Induced by the worldwide focus on microfinance, donor
NGOs too have been funding microfinance projects. One might call it
the supply push.
3. 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.
4. 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.
5. For many NGOs the idea of ‘organising’ – forming a samuha – has
inherent appeal. Groups connote empowerment and organising
women is a double bonus.
6. 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.

71
 For Financial Institutions and banks
Microfinance has been attractive to the lending agencies because of
demonstrated sustainability and of low costs of operation. Institutions
like SIDBI and NABARD are hardnosed bankers and would not work
with the idea if they did not see a long term engagement – which only
comes out of sustainability (that is economic attractiveness). On the
supply side, it is also true that it has all the trappings of a business
enterprise, its output is tangible and it is easily understood by the
mainstream. This also seems to sound nice to the government, which in
the post liberalization era is trying to explain the logic of every rupee
spent. That is the reason why microfinance has attracted mainstream
institutions like no other developmental project. Perhaps the most
important factor that got banks involved is what one might call the policy
push. Given that most of our banks are in the public sector, public policy
does have some influence on what they will or will not do. In this case,
policy was followed by diligent, if meandering, promotional work by
NABARD. The policy change about a decade ago by RBI to allow banks
to lend to SHGs was initially followed by a seven-page memo by
NABARD to all bank chairmen, and later by sensitization and training
programmes for bank staff across the country. Several hundred such
programmes were conducted by NGOs alone, each involving 15 to 20
bank staff, all paid for by NABARD. The policy push was sweetened by
the NABARD refinance scheme that offers much more favorable terms
(100% refinance, wider spread) than for other rural lending by banks.
NABARD also did some system setting work and banks lately have been
given targets. The canvassing, training, refinance and close follow up by
NABARD has resulted in widespread bank involvement. Moreover, for

72
banks the operating cost of microfinance is perhaps much less than for
pure MFIs. The banks already have a vast network of branches. To the
extent that an NGO has already promoted SHGs and the SHG portfolio
is performing better than the rest of the rural (if not the entire) portfolio,
microfinance via SHGs in the worst case would represent marginal
addition to cost and would often reduce marginal cost through better
capacity utilization. In the process the bank also earns brownie points
with policy makers and meets its priority sector targets. It does not take
much analysis to figure out that the market for financial services for the
50-60 million poor households of India, coupled with about the same
number who are technically above the poverty line but are severely
under-served by the financial sector, is a very large one. Moreover, as in
any emerging market, though the perceived risks are higher, the spreads
are much greater. The traditional commercial markets of corporate,
business, trade, and now even housing and consumer finance are being
sought by all the banks, leading to price competition and wafer thin
spreads. Further, bank-groups are motivated by a number of cross-
selling opportunities in the market, for deposits, insurance, remittances
and eventually mutual funds. Since the larger banks are offering all
these services now through their group companies, it becomes
imperative for them to expand their distribution channels as far and deep
as possible, in the hope of capturing the entire financial services
business of a household. Finally, both agri-input and processing
companies such as EID Parry, fast-moving consumer Goods (FMCG)
companies such as Hindustan Levers and consumer durable companies
such as Philips have realized the potential of this big market and are
actively using SHGs as entry points. Some amount of free-riding is

73
 taking place here by companies, for they are using channels which were
built at a significant cost to NGOs, funding agencies and/or the
government. On the whole, the economic attractiveness of microfinance
as a business is getting established and this is a sure step towards
mainstreaming. We know that mainstreaming is a mixed blessing, and
one tends to exchange scale at the cost of objectives. So it needs to be
watched carefully.
Issues in Microfinance
1. Sustainability
The first challenge relates to sustainability. MFI model is
comparatively costlier in terms of delivery of financial services. An
analysis of 36 leading MFIs 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.
2. 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
74
 requirements of MFIs. The IPO issue by Mexico based ‘Comparators’
was not accepted by purists as they thought it defied the mission of
an MFI. The IPO also brought forth the issue of valuation of an MFI.
The book value multiple is currently the dominant valuation
methodology in microfinance investments. In the case of startup
MFIs, using a book value multiple does not do justice to the
underlying value of the business. Typically, start ups are loss making
and hence the book value continually reduces over time until they hit
breakeven point. A book value multiplier to value start ups would
decrease the value as the organization uses up capital to build its
business, thus accentuating the negative rather than the positive.
3. Financial service delivery
Another challenge faced by MFIs is the inability to access supply
chain. This challenge can be overcome by exploring synergies
between microfinance institutions with expertise in credit delivery
and community mobilization and businesses operating with
production supply chains such as agriculture. The latter players who
bring with them an understanding of similar client segments, ability to
create microenterprise opportunities and willingness to nurture them,
would be keen on directing microfinance to such opportunities. This
enables MFIs to increase their client base at no additional costs.
Those businesses that procure from rural India such as agriculture
and dairy often identify finance as a constraint to value creation.
Such businesses may find complementarities between an MFI’s
skills in management of credit processes and their own strengths in
supply chain management. ITC Limited, with its strong supply chain
logistics, rural presence and an innovative transaction platform, the

75
 e-choupal, has started exploring synergies with financial service
Providers including MFIs through pilots with vegetable vendors and
farmers. Similarly, large FIs such as Spandana foresee a larger role
for themselves in the rural economy ably supported by value creating
partnerships with players such as Mahindra and Western Union
Money Transfer. ITC has initiated a pilot project called ‘pushcarts
scheme’ along with BASIX (a microfinance organization in
Hyderabad). Under this pilot, it works with twenty women head load
vendors selling vegetables of around 10- 15 kgs per day. BASIX
extends working capital loans of Rs.10, 000/- , capacity building and
business development support to the women. ITC provides support
through supply chain innovations by:
1. Making the Chou pal Fresh stores available to the vendors, this
avoids the hassle of bargaining and unreliability at the traditional
mandis (local vegetable markets). The women are able to replenish
the stock from the stores as many times in the day as required. This
has positive implications for quality of the produce sold to the end
consumer.
2. Continuously experimenting to increase efficiency, augmenting
incomes and reducing energy usage across the value chain. For
instance, it has forged a partnership with National Institute of Design
(NID), a pioneer in the field of design education and research, to
design user-friendly pushcarts that can reduce the physical burden.
3. Taking lessons from the pharmaceutical and telecom sector to
identify technologies that can save energy and ensure temperature
control in push carts in order to maintain quality of the vegetables
throughout the day. The model augments the incomes of the vendors

76
 from around Rs.30-40 per day to an average of Rs.150 per day.
From an environmental point of view, push carts are much more
energy efficient as opposed to fixed format retail outlets.

Recommendations and suggestions

Under mention are the few recommendations and suggestions, which I felt
during my project on Micro Finance is:-
1. The concept of Micro Finance is still new in India. Not many people
are aware the Micro Finance Industry. So apart from Government
programmers, we the people should stand and create the awareness
about the Micro Finance.
2. There are many people who are still below the poverty line, so there
is a huge demand for MFIs in India with proper rules and regulations.
3. There is huge demand and supply gap, in money demand by the poor
and supply by the MFIs. So there need to be an activate participation
by the Pvt. Sector in this Industry.
4. One strict recommendation is that there should not over involvement
of the Government in MFIs, because it will stymie the growth and
prevent the others MFIs to enter.
5. According to me the Micro Loan should be given to the women only,
because by this only, MFIs can maintain their repayment ratio high,
without any collateral.
6. Many people say that the interest rate charge by the MFIs is very high
and there should be compelled cap on it. But what I felt during my
personal survey, that the high rates are justifiable. Now by this
example we will get agree.

77
Suppose a big commercial bank gives Rs 1 million to an individual and in
the same way a MFI gives Rs 100 to 10.000 customers. So it’s obvious that
man power cost and operating cost are higher for the MFIs. So according to
me rates are justifiable, But with limitations.

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,

78
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.

79
CHAPTER NO. 6
BIBLIOGRAPHY

80
WEBSITES
www.scribd.com
www.microfinanceindia.org
www.ifmr.ac.in
www.google.com
www.forbes.com
www.nationmaster.com
www.thaindian.com
www.authorstream.com
www.knowledge.allianz.com
www.familiesinbusiness.net
www.indiamicrofinance.com
www.gdrc.org
www.slideshare.net

81