A

SUMMER INTERNSHIP
PROJECT ON

“A WALK THROUGH
ON MICRO FINANCING
DONE ON SAI SERVICE”.
 TABLE OF CONTENT
SrNo CONTENT PAGE
. NO
1. EXECUTIVE SUMMARY 1

2. RESEARCH METHODOLOGY 2

3. INTRODUCTION 4

4. ORGANIZATIONAL PROFILE 8

5. OBJECTIVES AND SCOPE OF 9

RESEARCH
6. DATA ANALYSIS AND 12
INTERPRETATION
7. FINDINGS 29

8. CONCLUSIONS 30

9. RECOMMENDATION 31

10. BIBLIOGRAPHY 32

11. ANNEXURE 33
1. EXECUTIVE SUMMARY
Microfinance means providing very poor families with very
small loans (micro credit) to help them engage in productive
activities /small businesses. Over time, microfinance has come
to 1 include a broader range of services (credit, savings,
insurance, etc.) as we have come to realize that the poor and
the very poor who lack access to traditional formal financial
institutions require a variety of financial products.
The Eleventh Five Year Plan aims at inclusive growth and
faster reduction of poverty. Micro Finance can contribute
immensely to the financial inclusion of the poor without which
it will be difficult for them to come out of the vicious cycle of
poverty. There is a need to strengthen all the available
channel of providing credit to the poor such as SAI Service
Linkage programmes, Micro Finance Institutions, Cooperative
Banks, State financial corporations, Regional Rural Banks and
Primary Agricultural Credit Societies. The strength of the
micro finance Industry lies in its informality and flexibility
which should be protected and encouraged. Landlords, local
shopkeepers, traders, suppliers and professional money
lenders, and relatives are the informal sources of micro-credit
for the poor, both in rural and urban areas. The sector which
is still in its infancy faces shortage of experienced consultants/
manpower/experts. There is a need to have good quality
professionals, trained in best practices in governance for
effective corporate governance. A need-based capacity building
programme to meet the requirements of all categories of Micro
Finance Organisations (MFOs) is essential to bring about
sustainability in the sector.
2. RESEARCH METHODOLOGY
2.1.Research Objectives
1. Find out the issue of the micro finance
2. Comparative Analysis of Micro-finance Services offered to the poor.
3. How does the client of two main models of microfinance,
the SHG and the MFI model, differ?
4. Does the level of indebtedness to moneylenders depend on the type
of micro finance model one is client of?

2.2.Type of Research-Exploratory Research

2.3.Data sources: The research is based on

secondary data and the data is collected from various websites,
Journals, Magazines, Articles and Research Paper.

2.4.Data Analysis:

Abbreviations
NABARD- National Bank for Agriculture and
Rural Development.

MFIs- Micro Finance Institutions.

SHGs- Self Help Groups. RRB- Regional Rural Bank.

DRDA- District Rural Development Authority.

SIDBI- Small Industries Development Bank of India.

RBI- Reserve Bank of India.

NBFCs- Non-Banking Financial Corporations.

LABs-Local Area Banks.

NGOs- Non-Governmental Organisations

FLDG- First Loss Default Guarantee.

ICT- Information and Communication Technology.

SGSY- Swarnajayanti Gram Swarozgar Yojana.

MFOs- Micro Finance Organisations.

IRDP- Integrated Rural Development Programme.

JLG- Joint Liability Group.

MFDEF- Microfinance Development & Equity Fund.

PACS- Primary Agricultural Cooperative societies.

RMK- Rashtriya Mahila Kosh.

RRB- Regional Rural Bank

SBLP- SHG Bank Linkage Program.

3 INTRODUCTION
Microfinance is defined as any activity that includes the
provision of financial services such as credit, savings, and
insurance to low income individuals which fall just above the
nationally defined poverty line, and poor individuals which fall
below that poverty line, with the goal of creating social value.
The creation of social value includes poverty alleviation and
the broader impact of improving livelihood opportunities
through the provision of capital for micro enterprise, and
insurance and savings for risk mitigation and consumption
smoothing. A large variety of actors provide microfinance in
India, using a range of microfinance delivery methods. Since
the founding of the Grameen Bank in Bangladesh, various
actors have endeavoured to provide access to financial services
to the poor in creative ways. Governments have piloted
national programs, NGOs have undertaken the activity of
raising donor funds for on-lending, and some banks have
partnered with public organizations or made small inroads
themselves in providing such services. This has resulted in a
rather broad definition of microfinance as any activity that
targets poor and low-income individuals for the provision of
financial services. The range of activities undertaken in
microfinance include group lending, individual lending, the
provision of savings and insurance, capacity building, and
agricultural business development services. Whatever the form
of activity however, the overarching goal that unifies all actors
in the provision of microfinance is the creation of social value.
3.1 Microfinance Definition: According to International
Labour 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‖.

3.2 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

3.3 Activities in Microfinance Microcredit: It is a small

amount of money loaned to a client by a bank or other
institution. Microcredit 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.

Legal Regulations:
Banks in India are regulated and supervised by the Reserve
Bank of India (RBI) under the RBI Act of 1934, Banking
Regulation Act, Regional Rural Banks Act, and the
Cooperative Societies Acts of the respective state governments
for cooperative banks. NBFCs are registered under the
Companies Act, 1956 and are governed under the RBI Act.
There is no specific law catering to NGOs although they can be
registered under the Societies Registration Act, 1860, the
Indian Trust Act, 1882, or the relevant state acts. There has
been a strong reliance on self-regulation for NGO MFIs and as
this applies to NGO MFIs mobilizing deposits from clients who
also borrow. This tendency is a concern due to enforcement
problems that tend to arise with self-regulatory organizations.
In January 2000, the RBI essentially created a new legal form
for providing microfinance services for NBFCs registered
under the Companies Act so that they are not subject to any
capital or liquidity requirements if they do not go into the
deposit taking business. Absence of liquidity requirements is
concern to the safety of the sector.
INTRODUCTION TO SAI SERVICE LTD.

Sai Service Private Limited is a Private incorporated on

09 August 1985. It is classified as Non-govt company and is
registered at Registrar of Companies, Pune. Its authorized
share capital is Rs. 50,000,000 and its paid up capital is
Rs. 40,730,140. It is inolved in Other land transport.

Sai Service Private Limited's Annual General Meeting (AGM)

was last held on 07 September 2017 and as per records from
Ministry of Corporate Affairs (MCA), its balance sheet was
last filed on 31 March 2017.

Directors of Sai Service Private Limited are Yogendra

Premkrishna Trivedi, Mukesh Shamrao Kalmadi, Sadananda
Ramanna Shetty, Kushal Subbayya Hegde, Shridhar
Shamrao Kalmadi.

Sai Service Private Limited's Corporate Identification

Number is (CIN) U60210PN1985PTC037099 and
its registration number is 37099.Its Email address
is [email protected] and its registered address is
MUMBAI PUNE ROADPHUGEWADI. PUNE MH 411012.

Current status of Sai Service Private Limited is - Active.

The Sai Service Group is the largest selling Maruti Suzuki

dealership in India and has a presence in Pune, Kolhapur,
Mumbai, Goa, Telengana and Kerala.
The Sai Service Group started its journey in 1985 and has
completed 34 years in the market till now.
4. ORGANIZATIONAL PROFILE
SERVICES PROVIDED BY MICRO FINANCE BANK:
So many services provide by MFI. Providing loans;
car financing; home financing, personnel loans, taleemi loans.

PROVIDING LOANS: The important service is provided by

Mf is given loan. These loans are provided from some
productive activities like; starting new business, expansion
of business; improving life etc.

CAR FINANCING: MFI also assist those people who cannot

pay total amount at once. So, these MFI gave them car on
instalments like UBL car financing scheme is too popular and
too many people taking advantage from this scheme.

HOME FINANCING: Pakistan is a poor country. Purchasing

power of Pakistan is very low. So many people are living on
rent. They cannot have too many amounts to purchase homes.
MFI‘s provide loans be considering their job stability and take
security for it.

PERSONNEL LOANS: MFI also obtain personnel loans. Those

people who have permanent
employment and stable jobs. This credit facility depends on the
income of an individual.

TALEEMI LOANS: MFI also provide financial aid to the

students who cannot bare educational expenses but want to
study. MFI assist them in return of some security and it
would have to pay after completing the education
5. OBJECTIVES AND SCOPE OF RESEARCH
The Government has indicated its willingness to speed up
the pace of structural reforms to meet the major challenges of

REDUCING POVERTY: The basic motto of the government to

eliminate the poverty and bring prosperity in the country.
MFI providing small loans and other credit facilities to the
poor and low-income groups; which are beginning positive
changing like their standard of living group and earning
have increased
IMPROVING SOCIAL INDICATORS: Inadequate access to
productive resources and social services has resulted low
social indicators and low employment opportunities.
This situation is compounded in rural areas; where access is
more difficult. So, by providing small loans and credit facilities
they can over come this issue and can improve social
indicators.

IMPROVING THE FISCAL AND BALANCE OF PAYMENTS

POSITIONS: Pakistan is a poor country whose balance of
payment always in deficit, because of low productivity, lack
of resources and lack of productive men’s power. If MIF
provide loans new business can be established. And export
of Pakistan can be improved which create balance of
payments.

RESTORING INVESTOR CONFIEDENCE: Due to poor

economy of Pakistan investors are hesitating to invest their
money in Pakistan but MFI‘s can boost up. Because provide
loans to local people new business will stable. Economy will go
up and this situation may motivate to them for investing
their funds.
PRINCIPLES OF MICRO FINANCE:

 Poor people need a variety of financial services, not just

loans. Like everyone else, the poor need a range of financial
services that are convenient, flexible, and affordable.
Depending on circumstances, they want not only loans, but
also savings, insurance, and cash transfer services.

 Microfinance is a powerful tool to fight poverty. When poor

people have access to financial services, they can earn more,
build their assets, and cushion themselves against external
shocks. Poor households use microfinance to move from
everyday survival to planning for the future: they invest in
better nutrition, housing, health, and education.

 Microfinance is about building permanent local financial

institutions. Finance for the poor requires sound domestic
financial institutions that provide services on a permanent
basis. These institutions need to attract domestic savings,
recycle those savings into loans, and provide other services.
As local institutions and capital markets mature, there will
be less dependence on funding from donors and governments,
including government development banks.

 Micro credit is not the best tool for everyone or every

situation. Destitute and hungry people with no income or
means of repayment need other kinds of support before they
can make good use of loans. In many cases, other tools will
alleviate poverty better—for instance, small grants,
employment and training programs, or infrastructure
improvements. Where possible, such services should be
coupled with building savings
 The role of government is to enable financial services,
not to provide them directly. National governments should
set policies that stimulate financial services for poor people
at the same time as protecting deposits. Governments need
to maintain macroeconomic stability, avoid interest rate
caps, and refrain from distorting markets with subsidized,
high default loan programs that cannot be sustained.

 The key bottleneck is the shortage of strong institutions

and managers. Microfinance is a specialized field that
combines banking with social goals. Skills and systems
need to be built at all levels: managers and information
systems of microfinance institutions, central banks that
regulate microfinance, other government agencies, and
donors. Public and private investments in microfinance
should focus on building this capacity, not just moving money.

FUNCTIONS OF MICRO FIANANCE

 Small loans, typically for working capital;
 Informal appraisal of borrowers and investments;
 Access to repeat and larger loans based on debt capacity
and repayment performance;
 Secure savings products.
 To provide financing facilities, with or without collateral
Security
 To accept deposits and to encourage investments in such
cottage industries and income generating projects for poor
persons as maybe prescribed;
 To mobilize and provide financial and technical assistance
and training to micro enterprises;
 To invest in shares of anybody corporate, the objective of
which is to provide microfinance services to poor persons.
6. DATA ANALYSIS AND INTERPRETATION
 Microfinance Social Aspects: Micro financing
institutions significantly contributed to gender equality and
women‘s empowerment as well as pro 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.
India to-day has an extensive banking infrastructure
comprising over 30,000 rural and semi urban branches of
commercial banks, over 14,000 branches of Regional Rural
banks (RRBs), around 12,000 branches of District
Cooperative Credit Banks (DCCBs) and 1,12,000 Primary
Agricultural Credit Societies (PACS) at the village level
(around 66,000 PACS are stated to be functional; the
remaining are dormant). Availability of finance, moreover,
tilts the employment scenario in favour of self employment
vis-à-vis wage employment. An added dimension is the
empowerment of women with easier availability of micro-
finance to them. Going by the estimates provided earlier,
the demand for production credit in the country today is
equal to Rs.17000 crore per annum whereas the total credit
outstanding under micro-finance is merely Rs.5000 crore.
Thus, there is definitely a need to increase the flow of
credit, both for consumption and Production to the rural
sector.
 Major initiatives in Rural Credit: Government‘s
initiative to reduce poverty by improving access to financial
services to poor started since independence. India's
overwhelming majority of poor is located in rural areas and
this motivated the government to give special attention to
rural credit. Following the report of All India Rural Credit
Survey in mid 1950‘s, the State took crucial steps in
reviewing Cooperative structure including the partnership
of State in cooperatives. Also the policy initiative of ‗social
banking‘ concept described as ―the elevation of the
entitlements of previously disadvantaged groups to formal
credit even if this may entail a weakening of the
conventional banking practices‖ led to the nationalisation of
commercial banks in 1969, adoption of direct lending
programmes to rural areas and development of credit
institutions such as Regional Rural Banks (RRBs).
Government initiatives during the Fourth Plan focused on
marginal farmers and agricultural labourers bringing
individual family as the basic borrowing unit. Integrated
sustainable income generating activity was promoted
through subsidized lending under Integrated Rural
Development Programme (IRDP) and its subsequent
variations including the current self-employment
programme known as Swaranjayanti Gram Swarozgar
Yojana (SGSY)
 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.
• How self-help groups work NABARD (1997) defines SHGs
as "small, economically homogenous affinity groups of rural
poor, voluntarily formed to save and mutually contribute to
a common fund to be lent to its members as per the group
members' decision". Most SHGs in India have 10 to 25
members, who can be either only men, or only women, or
only youth, or a mix of these. As women's SHGs or sangha
have been promoted by a wide range of government and
non- governmental agencies, they now make up 90% of all
SHGs. The rules and regulations of SHGs vary according to
the preferences of the members and those facilitating their
formation. A common characteristic of the groups is that
they meet regularly (typically once per week or once per
fortnight) to collect the savings from members, decide to
which member to give a loan, discuss joint activities (such
as training, running of a communal business, etc.), and to
mitigate any conflicts that might arise. Most SHGs have an
elected chairperson, a deputy, a treasurer, and sometimes
other office holders. Most SHGs start without any external
financial capital by saving regular contributions by the
members.
However, it is generally accepted that SHGs often do not
include the poorest of the poor, for reasons such as:

(a) Social factors (the poorest are often those who are socially
marginalized because of caste affiliation and those who are
most sceptical of the potential benefits of collective action).

(b) Economic factors (the poorest often do not have the

financial resources to contribute to the savings and pay
membership fees; they are often the ones who migrate during
the lean season, thus making group membership difficult).

(c) Intrinsic biases of the implementing organizations

(as the poorest of the poor are the most difficult to reach and
motivate, implementing agencies tend to leave them out,
preferring to focus on the next wealth category).
Sources of capital and links between SHGs and Banks
SHGs can only fulfil a role in the rural economy if group
members have access to financial capital and markets for their
products and services.
While the groups initially generate their own savings through
thrift (whereby thrift implies savings created by postponing
almost necessary consumption, while savings imply the
existence of surplus wealth), their aim is often to link up with
financial institutions in order to obtain further loans for
investments in rural enterprises. NGOs and banks are giving
loans to SHGs either as "matching loans" (whereas the loan
amount is proportionate to the group's savings) or as fixed
amounts, depending on the group's record of repayment,
recommendations by group facilitators, collaterals provided,
etc.
MICRO FINANCE MODELS

12.1 Micro Finance Institutions (MFIs): MFIs are an extremely

heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from
external donors and apex 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.

12.2 Bank Partnership Model: This model is an innovative way

of financing MFIs. The bank is the lender and the MFI acts as
an agent for handling items of work relating to credit
monitoring, supervision and recovery. In other words, the MFI
acts as an agent and takes care of all relationships with the
client, from first contact to final repayment. The model has the
potential to significantly increase the amount of funding that
MFIs can leverage on a relatively small equity base. A sub -
variation of this model is where the MFI, as an NBFC, holds
the individual loans on its books for a while before securitizing
them and selling them to the bank. Such refinancing through
securitization enables the MFI enlarged funding access. If the
MFI fulfils the ―true sale‖ criteria, the exposure of the bank is
treated as being to the individual borrower and the prudential
exposure norms do not then inhibit such funding of MFIs by
commercial banks through the securitization structure
12.3 Banking Correspondents: The proposal of ―banking
correspondents‖ could take this model a step further extending
it to savings. It would allow MFIs to collect savings deposits
from the poor on behalf of the bank. It would use the ability
of the MFI to get close to poor clients while relying on the
financial strength of the bank to safeguard the deposits.
This regulation evolved at a time when there were genuine
fears that fly-by-night agents purporting to act on behalf of
banks in which the people have confidence could mobilize
savings of gullible public and then vanish with them.
It remains to be seen whether the mechanics of such
relationships can be worked out in a way that minimizes
the risk of misuse.

12.4 Service Company Model: 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 the loans and the bank books them. But in fact,
this model has two very different and interesting operational
features: (a) The MFI uses the branch network of the bank as
its outlets to reach clients. This allows the client to be reached
at lower cost than in the case of a stand–alone MFI. In case of
banks which have large branch networks, it also allows rapid
scale up. In the partnership model, MFIs may contract with
many banks in an arms length relationship. In the service
company model, the MFI works specifically for the bank and
develops an intensive operational cooperation between them to
their mutual advantage. (b) The Partnership model uses both
the financial and infrastructure strength of the bank to create
lower cost and faster growth.
12.5 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 Micro fin Ltd, a large MFI operating in
rural areas of the state of Andra 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 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$4.9million) 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.

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
12.6Technology:

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 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.

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
12.7 SKS Microfinance
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 loyal gang of over
2 million customers.
Its borrowers include agricultural labourers, 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.
12.8 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 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 hard
nosed 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 liberalisation 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 sensitisation 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 favourable 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 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 utilisation. 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 corporates, 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 realised the potential of this big market and
are actively using SHGs as entry points. Some amount of free-
riding is 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.
12.9Issues 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 requirements
of MFIs. The IPO issue by Mexico based Compart Amos‘ 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 start up MFIs, using a book value multiple does
not do justice to the underlying value of the business.
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
echoupal, has started exploring synergies with financial
service providers including MFIs through pilots with vegetable
endorse 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 Choupal 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 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.
4. 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 all microfinance staff members, and
fill even fewer of the senior management roles.
5. Micro insurance
First big issue in the micro insurance sector is developing
products that really respond to the needs of clients and in a
way that is commercially viable. Secondly, there is strong need
to enhance delivery channels. These delivery channels have
been relatively weak so far. Micro insurance companies offer
minimal products and do not want to go forward and offer
complex products that may respond better. Micro insurance
needs a delivery channel that has easy access to the low-income
market, and preferably one that has been engaged in financial
transactions so that they have controls for managing cash and
the ability to track different individuals. Thirdly, there is a
need for market education. People either have no information
about micro insurance or they have a negative attitude
towards it. We have to counter that. We have to somehow get
people - without having to sit down at a table - to understand
what insurance is, and why it benefits them. That will help to
demystify micro insurance so that when agents come, people
are willing to engage with them.

6. Adverse selection and moral hazard

The joint liability mechanism has been relied upon to overcome
the twin issues of adverse selection and moral hazard. The
group lending models are contingent on the availability of
skilled resources for group promotion and entail a gestation
period of six months to one year. However, there is not
sufficient understanding of the drivers of default and credit
risk at the level of the individual. This has constrained the
development of individual models of micro finance. The group
model was an innovation to overcome the specific issue of the
quality of the portfolio, given the inability of the poor to offer
collateral.
 7.FINDINGS
Comparison of alternative microfinance model client

In this study a modest attempt has been made to

differentiate between the client characteristics of the two
microfinance model prevalent in the study area.

Level of literacy
The head of the households interviewed were illiterate with
42 percent reporting they had never been school.

Housing
Given the rural focus of our study, it comes as no surprise
that over 95 percent of our
respondents live in the self –owned dwellings.

Landholdings and sources of income

Only 25 percent of the households were self employed among
SHG clients. An interesting fact to note is that all the MFI
clients were self employed engaged in dairy activities, owning
small tea or tailoring shops and working as street hawkers
 8. CONCLUSION
The basic idea of micro financing is simple- if poor are
provided access to financial services, including credit, they
may very well be able to start a expand a micro enterprise that
will allow them to break out of poverty.
In totality, its focus is on eradication of poverty form grass
level, women upliftment, creating small and medium
enterprises and therefore takes care of development of any
economy from within Comparing two microfinance models in
the research area reveals that the level of indebtedness to
moneylenders is higher in the case of clients of MFI model.
Such cases illustrate the difficulties MFI clients‘ face when
they have unproductive financial requirements or they are
compelled to ensure prompt and regular loan repayments
through further borrowing from even money lenders. This
makes poverty worse in the short run, and makes it harder to
escape from poverty-and indeed can be source of poverty-and
indeed can be source of poverty and inequality ―trapS.
 9. RECOMMENDATION
Access to Credit : The NABARD may consider setting up
a Committee, consisting of various private and public sector
banks, the Ministry of Rural Development, Small Industries
Development Organisation (SIDO) of Ministry of Small
Scale Industries (SSI), Rashtriya Mahila Kosh (RMK) of
The Ministry of Women and Child Development,
Department of Posts, SIDBI, MFIs and the NGOs in the
micro finance sector to evolve an effective strategy to
implement the Business Facilitators and Correspondents
Model. Such a strategy should also take into account special
target groups such as the SCs/STs and the minorities
through their respective National Finance Corporations.
The Eleventh Plan may target to extend micro-finance to at
least 80 percent of the BPL households.

Formation of Consortiums by Banks : Both public and

private sector banks have the expertise in financial
intermediation. All the banks should come together and
formulate a strategy at the national level to cover all
regions of the country and to address the needs of the
MFOs. The different banks may form ‗consortiums‘ to
leverage each other‘s advantages and work out suitable
strategies to address the needs of micro-finance at the
national level. Relevant ‗Guidelines on Micro-Finance‘ both
for the MFI model and the Bank-SHG linkage model, may
be prepared by NABARD for the field level officers. Some
incentives may also be introduced to encourage lending to
the poor. Internal monitoring may also be further
strengthened to check exploitation of the poor by
unscrupulous elements.
National Policy on Micro Finance :
At present, both Government and the private agencies
involved in micro finance have devised their own individual
strategies in furtherance of their goals. Absence of
comprehensive national level policy has hindered the orderly
growth of the sector. There is an urgent need for a concerted
effort on the part of the various agencies and the services
providers involved in the sector to come together to evolve a
coordinated strategy for a faster and smoother growth of the
sector. The proposed bill on micro finance may address some of
the issues. The regulator proposed in the Bill may have to
come out with a detailed strategy on issues like coordination
among various agencies, accounting and auditing,
transparency, good governance, consumer protection, micro
insurance, statistics & research, rate of interest, subsidies etc.,
keeping in mind the fact that the strength of the micro-finance
industry lies in its informality and flexibility.

Uneven Geographical Growth :

One of the major reasons for the uneven growth of the sector is
the absence of conducive socio-economic and political set-up.
NABARD introduced special incentives in the north, north-
eastern and western states. The Ministry of Rural
Development, Ministry of Small Scale Industries, NABARD
and SIDBI may devise further need based incentive schemes
for a faster and even growth of the sector in all parts of the
country in consultation with Ministry of Finance and RBI.
SIDBI has also taken positive steps to reach the underserved
states through the portfolio risk fund scheme of the ministry of
SSI and through its own special efforts.
Mobilisation of Savings by MFIs The absence of savings,
apart from SHGs and MFI cooperatives, has unfortunately
been one of the features of Indian Micro finance and it
prevents providing financial service to the poor. The Indian
MFIs survive on borrowed funds, unlike other countries where
savings fund a large share of lending. The regulatory
environment only allows cooperatives to collect savings. The
MFIs may be allowed to mobilise savings at least from their
members under a regulatory framework monitored by the
NABARD. The proposed Microfinance Bill is expected to
address this issue.

Role of Technology :
The network of internet enabled Information and
Communication Technology (ICT) access points termed as
Common Service Centres (CSC), 100000 in number across the
country being implemented by the Department of Information
Technology (DIT), Ministry of Communications and
Information Technology, Government of India also may be
utilized for improving the reach and spread of various Micro-
Finance and Poverty Alleviation Schemes in rural areas in the
country. Further, the DIT may coordinate with NABARD,
Ministry of Rural Development, Sa-Dhan and PRADAN to
integrate the Computer Munshi System‘ of accounting into the
ICT enabled CSCs.

Maintaining Standard Accounting System :

The guidelines/best practices for SHG-Bank linkages and
microfinance may be issued by NABARD, covering auditing
and monitoring mechanisms. RBI may conduct evaluation
studies as and when required.
Micro Insurance :
Micro insurance should be perceived as a key service in the
financial needs package of the people and in conjunction with
micro savings and micro credit could go a long way in keeping
the vulnerable segment away from the poverty trap and could
be an integral component of financial inclusion.
The Insurance Regulatory and Development Authority (IRDA)
has notified Micro Insurance Regulations in November, 2005
with focus on the direction, design and delivery of the products
including tie up with life and non life insurance players for
integration of product to address various risks, introduction of
a standalone Micro Insurance delivery channel consisting of
NGO, SHG and MFIs., enlarging the service activities
entrusted to micro insurance agent, issue of Policy documents
in simple vernacular language etc.
The IRDA may continue to give adequate priority to the micro
insurance sector with focus on removing the constraints and
further developing the sector Micro insurance is increasingly
offered by MFIs acting as agents of the insurance companies.
Life insurance is common among MFI members and some of
the members are also availing asset insurance, mainly loan
financed assets. Insurance is less widespread under the SHG
model. MFIs and other civil society organizations are
beginning to offer health insurance, which is of greatest
relevance for poverty alleviation. NABARD may consider
coordinating with various insurance companies, SIDBI,
Ministry of Rural Development, Ministry of SSI, NGOs and
their associations to bring out flexible micro insurance
schemes, covering not only loan financed assets but also life,
health, crop, animal husbandry, etc .
 10. BIBLIOGRAPHY
 Report-Status of Microfinance in India 2006-2007‖, NABARD
 Internet surfing.
 Various company sources.
 Magazines.
 Nabard website.
 Newspapers.
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