A REPORT ON FORMAL AND INFORMAL MODELS OF MICROFINACE IN INDIA RECOMMENDING EXPORT TRADING GROUP - HOW TO ENABLE IT AS A RURAL BANK

By Ronak Dangi 12BSP1034

Export Trading Group, India

A REPORT ON FORMAL AND INFORMAL MODELS OF MICROFINACE IN INDIA RECOMMENDING EXPORT TRADING GROUP - HOW TO ENABLE IT AS A RURAL BANK

By Ronak Dangi 12BSP1034

Export Trading Group, India A report submitted in partial fulfillment of the requirements of PGPM Program of IBS Mumbai

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DECLARTION

I hereby declare that this research project report entitled " Study on Formal and Informal Models of Microfinancing in India submitted by me for the partial fulfillment of the degree of Post Graduate Program in Management, submitted to ICFAI Business School, Mumbai is an original work done by me. I also hereby declare that this project report has not been submitted at any time to any other university or institute for the award of any Degree or Diploma.

(Ronak Dangi) Batch 2012-14 12BSP1034

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CERTIFICATE
This is to certify that Mr. Ronak Dangi has completed the project on the entitled "Formal and Informal Models of Microfinance" which is based on data collected by researcher. This report is completed under my supervision .It is for only academic purpose and is a bonafide work done by research.

DATE:

Signature of the Supervisor

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ACKNOWLEDGEMENT

I would like to express my gratitude to all those who gave me the possibility to complete this project. I want to thank IBS Mumbai for giving me permission to commence this project in the first instance, to do the necessary research work and to use the available data. I am deeply indebted to my supervisors Prof. S.S. Desai (faculty-incharge) and Mr. Ashish Shah (company guide) for their help, stimulating suggestions and encouragement in all the time of internship. I would also like to thank Mr. Vijay Sharma, (director of Satat Seva Samiti, Udaipur), Mr. Dinesh Chaudhary(Manager of Bank of Baroda Branch, Udaipur), and Mr. Anil Sharma(AGM- SIDBI, Mumbai) for their unconditional support throughout the project. Especially, I would like to give my special thanks to my parents and friends for their patient love and help in internship.

Ronak Dangi

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Table of Content
i. ii. 1. 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 2. 2.1 2.1.1 2.1.2 2.2 2.3 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.4 2.4.1 2.4.2 Acknowledgement..................................................................................................05 Executive Summary...............................................................................................07 Introduction Microfinance Definition...........................................................................................10 Concept and features of Microfinance......................................................................11 Clients of Microfinance............................................................................................12 Role of Microfinance............................................ ..................................................12 Financial Inclusion...................................................................................................13 Strategic Policy Initiatives.......................................................................................14 Activities in Microfinance........................................................................................14 Legal Regulations.....................................................................................................15 Types of Organization..............................................................................................17 Indian Context of Institutional Arrangements.........................................................18 Microfinance Models...............................................................................................23 Role of RBI, SIDBI and NABARD Role of RBI..............................................................................................................27 MFIN.......................................................................................................................27 Sa-Dhan...................................................................................................................27 Microfinance Laws..................................................................................................28 SIDBI......................................................................................................................29 Objectives................................................................................................................29 Functions.................................................................................................................29 Channels Of Assistance...........................................................................................30 Initiatives by SIDBI................................................................................................31 Subsidiaries.............................................................................................................35 NABARD Organizational Structure.........................................................................................36 Role and Functions.................................................................................................36
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2.4.3 Schemes of NABARD.............................................................................................39 2.4.4. Subsidiaries...............................................................................................................43 3. 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4. 4.1 4.2 4.3 5. 5.1 5.2 5.3 5.4 5.5 6. 7. Models of Microfinancing Introduction..............................................................................................................49 Bank of Baroda and Rural Banking..........................................................................50 Self Help Groups and Model of Satat Seva Samiti...................................................56 Joint Liability Groups...............................................................................................58 Grameen Bank Model of Microfinancing.................................................................60 SKS Model of Microfinancing..................................................................................64 Milaap Model of Microfinancing..............................................................................69 Product Development, Design and Risk Management Product Development...............................................................................................74 Product Design.........................................................................................................75 Risk Management.....................................................................................................78 Objectives, Methodology, Learning and Limitations Objectives.................................................................................................................86 Methodology............................................................................................................86 Learning....................................................................................................................87 Limitations................................................................................................................88 Conclusion................................................................................................................89 Appendix.................................................................................................................90 References...............................................................................................................91

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Executive Summary
As of early 2012, the microfinance industry in India, one of the largest in the world, is facing a moment of reckoning. The research aims at gaining knowledge about formal and informal models prevailing in micro finance industry in India. The research paper also focuses on various entities involved in micro financing, the working for various entities, and the structure of Micro Finance Industry in India. It gives a in-depth study of role of Govt. of India and the Central Bank (Reserve Bank of India) with the apex bodies working towards creating an sustainable environment and organizing the Microfinance industry in India. The report with give a fair idea about the working of NABARD and SIDBI(two apex Banks) working towards flourishing the Microfinancing Industry by providing all kinds of support and services through their state of art policies and procedures pioneered by them. The research paper also throws some light on the functioning of banks in rural India. The policies and procedures followed by them, and the products of the banks are also examined in the study. The study focuses on functioning of a NGO (Satat Seva Samiti), encouraging micro financing through self helped groups in the rural areas of Rajasthan, India. The report also talks about the functioning of Joint Liability Group (another model prevailing in Micro financing industry), its structure, functioning, etc. The study also aimed to understand the working of Grameen Bank, SKS Microfinance and Milaap. The study shows how the products are designed, and the various types of risks faced by Microfinancing Institutions and how they manage their risks. The methodology used in the project is descriptive research, with the help of primary and secondary sources of data. It is final report submitted in the lieu of partial fulfilment of the Summer Internship Program in PGPM Program (2012-14) for IBS Mumbai.

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Chapter 1
INTRODUCTION

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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 sectors provide microfinance in India, using a range of microfinance delivery methods. Governments also have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value.

1.1

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 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
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able to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening of the concept of micro finance--- our current challenge is to find efficient and reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but extending credit to those who require most for their and familys survival. It cannot be measured in term of quantity, but due weightage is given to quality measurement. How credit availed is used to survive and grow with limited means.

1.2

Concept and Features of Micro-finance:

1. It is a tool for empowerment of the poorest. 2. Delivery is normally through Self Help Groups (SHGs). 3. It is essentially for promoting self-employment, generally used for: (a) Direct income generation (b) Rearrangement of assets and liabilities for the household to participate in future opportunities and (c) Consumption smoothing. 4. It is not just a financing system, but a tool for social change, specially for women. 5. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic the informal lenders rather than the formal sector lending. It has to: (a) Provide for seasonality (b) Allow repayment flexibility (c) Fix a ceiling on loan sizes. Microfinance approach is based on certain proven truths which are not always recognized. These are: That the poor are bankable; successful initiatives in micro finance demonstrate that there need not be a tradeoff between reaching the poor and profitability - micro finance constitutes a statement that the borrowers are not weaker sections in need of charity, but can be treated as responsible people on business terms for mutual profit . That almost all poor households need to save, have the inherent capacity to save small amounts regularly and are willing to save provided they are motivated and facilitated to do so. That easy access to credit is more important than cheap subsidized credit which involves lengthy bureaucratic procedures - (some institutions in India are already lending to groups or SHGs at higher rates - this may prevent the groups from enjoying a sufficient margin and rapidly accumulating their own funds, but members continue to borrow at these high rates, even those who can borrow individually from banks). 'Peer pressure' in groups helps in improving recoveries.

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1.3 Who are the clients of micro finance?

The typical micro finance clients are low-income people 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 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.

1.4 Role of Microfinance:The micro credit of microfinance programme 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 endeavour of the poor people. Microfinance impact studies have demonstrated that Microfinance helps poor households meet basic needs and protects them against risks. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth.

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 By supporting womens economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well-being. The level of impact relates to the length of time clients have had access to financial services. 1.5 Financial Inclusion - Defined By financial inclusion, we mean delivery of banking services and credit at an affordable cost to the vast sections of disadvantaged and low income groups. The various financial services include savings, loans, insurance, payments, remittance facilities and financial counselling / advisory services by the formal financial system. An open and efficient society is always characterized by the unrestrained access to public goods and services. As banking services are in the nature of public goods, financial inclusion should therefore be viewed as availability of banking and payment services to the entire population without discrimination of any type. Figure 1

However, the term financial inclusion is perceived in different ways under different contexts. There is a view that only access to credit is treated as financial inclusion whereas the other view includes all the services extended by the financial institutions. That apart, financial inclusion by banks and other institutions must target, apart from personal / private investment requirements of individuals and groups, the universal public investment
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requirements necessary for development of infrastructure, social sector services, public utilities and productive forces / capacity building efforts, etc.

1.6 Strategic Policy Initiatives

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

1.7 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.

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1.8 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.

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Development Process through Micro Finance

Donors and Banks Micro-Finance Government and Banks

Implementing Organizations

Individual

Awareness/Promotional Work

Individual

Promotion and Formation of SHGs

Micro Enterprise

Consolidation of SHGs

Micro Enterprise

Savings

Consumption Needs

Credit Delivery

Production Needs

Recovery

Follow-up Monitoring

Farm Related

Income Generation (Sustainable & Growth Oriented)

Non-Farm Related

Self-Sustainability of SHGs

Economic Empowerment through use of Micro-Credit as Figure 2 an entry point for overall Empowerment

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1.9 TYPES OF ORGANIZATION

These organizations are classified in the following categories to indicate the functional aspects covered by them within the micro finance framework. The aim, however, is not to "typecast" an organization, as these have many other activities within their scope: Microfinance providers in India can be classified under three broad categories: formal, semiformal, and informal. Formal Sector The formal sector comprises of the banks such as NABARD, SIDBI and other regional rural banks (RRBs). They primarily provide credit for assistance in agriculture and microenterprise development and primarily target the poor. Their deposit at around Rs.350 billion and of that, around Rs.250 billion has been given as advances. They charge an interest of 12-13.5% but if we include the transaction costs (number of visits to banks, compulsory savings and costs incurred for payments to animators/staff/local leaders etc.) they come out to be as high as 21-24%.

Semi - formal Sector The majority of institutional microfinance providers in India are semi-formal organizations broadly referred to as MFIs. Registered under a variety of legal acts, these organizations greatly differ in philosophy, size, and capacity. There are over 500 non-government organizations (NGOs) registered as societies, public trusts, or non-profit companies. Organizations implementing micro-finance activities can be categorized into three basic groups. I. II. III. Organizations which directly lend to specific target groups and are carrying out all related activities like recovery, monitoring, follow-up etc. Organizations who only promote and provide linkages to SHGs and are not directly involved in micro lending operations. Organizations which are dealing with SHGs and plan to start micro-finance related activities.

Informal Sector In addition to friends and family, moneylenders, landlords, and traders constitute the informal sector. While estimates of their importance vary significantly, it is undeniable that
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they continue to play a significant role in the financial lives of the poor. These are the organizations that provide support to implementing organizations. The support may be in terms of resources or training for capacity building, counseling, networking, etc. They operate at state/regional or national level. They may or may not be directly involved in micro-finance activities adopted by the associations/collectives to support implementing Organizations.

1.10 Institutional Arrangement and Disbursement of Microfinance in India

In India, there is a wide variety of institutions in public as well as private sector which provide microfinance to the poor. These institutions can be broadly divided into two types. First type is the traditional formal financial institutions, while the second type is Microfinance Institutions (MFIs). The traditional financial institutions comprise of commercial banks, regional rural banks and co-operative banks. They provide microfinance services in addition to their general banking activities and are referred to as microfinance service providers. On the other hand MFIs are different types of financial institutions whose main financial activity is providing microfinance only. Many of these institutions are NGOs, Mutually Aided Co-operative Societies (MACS) and Non-Banking Financial Companies (NBFCs). In case of traditional financial institutions both private and public ownership are found but the MFIs are mainly in the private sector. These financial institutions use a hierarchical network starting from the apex wholesale level to the retail level financial institutes. The retail level banks and MFIs borrow funds from apex financial institutions and use their branch network to provide microfinance at the doorstep of poor people. Some of these apex and retail level financial institutions have been discussed below: 1.10.1 Apex Financial Institutions The formal microfinance service providers include a number of apex financial institutions. Some of them are like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Rashtriya Mahila Kosh (RMK), Friends of Women World Banking (FWWB), Housing Development Finance Corporation (HDFC), Housing and Urban Development Corporation Limited (HUDCO), and Rashtriya Gramin Vikas Nidhi (RGVN). They provide bulk amount of funds to retail level banks and MFIs for on-lending to the poor. There are different terms and conditions associated with each apex financial institute. The features of some of these institutions have been highlighted in Table 1. In addition to these apex financial institutions, many MFIs get funds from investors, lenders and donors also.

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Apex and Wholesale Financial Institutions in India

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Table 1

1.10.2 Retail Level Banks At the retail level Commercial Banks, Regional Rural Banks, Co-operative Banks, and different types of MFIs provide microfinance services. In India, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 20,571 rural and 12,283 semi-urban branches of commercial banks, 14,142 branches of the Regional Rural Banks and 12,128 branches of district level co-operative banks. Besides this, there are almost 92,000 co-operative credit societies at the village level. On an average, there is at least one retail credit outlet for about 4,700 rural people. These banks used to provide loans directly to SHGs. The commercial banks and regional rural banks also provide their credit facilities to MFIs for its on-lending to groups. This is helpful in widening the range of lending institutions. The Summary of Legal Framework Institutions is attached in Annexure 6. Table 2 -The Indian Micro Financial Framework

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1.10.3 Microfinance Institutions Microfinance institutions (MFIs) are the organisations or associations of individuals that provide financial services to the poor. In India, there is a wide range of such organisations with diverse legal forms, varying significantly in size, outreach, mission and credit delivery methodologies. Figure 1 represents the hierarchy of financial institutions for the microfinance disbursement.

Figure 2: Institutional Arrangement for Microfinance Disbursement in India

Following the guidelines of RBI all scheduled commercial banks including RRBs give bulk loans (classified as a priority sector) to MFIs for on-lending to groups and other small borrowers. At present, both public and private banks are extending considerable loans to MFIs at interest rate ranging from 8 to 11 per cent per annum.

Legal Forms of MFIs The MFIs are an extremely heterogeneous group registered as Non-Banking Financial Companies (NBFCs), societies, trusts and co-operatives. On the basis of their legal forms, the MFIs in India
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can be broadly subdivided into three categories: Nonprofit making, Mutual benefit making and profit making MFIs. (i) Non-profit Making MFIs The non-profit making MFIs include NGOs and non-profit making companies. The table provides that a large number of NGOs have undertaken the task of financial intermediation without any profit. Majority of these are registered as trusts or societies. These NGOs are not formally regulated and they are prohibited by RBI from taking collected savings of their clients or deposits from the public. The bye-laws of these institutions are generally restrictive in allowing any commercial operations. The companies registered under Section-25 of the Companies Act are also non-profit companies. The activities of these companies are restricted to charity or other social purposes. Section-25 companies are formally recognised and regulated by the RBI. These companies, being non-profit in character, can not take group savings of their clients. (ii) Mutual Benefit MFIs The mutual benefit MFIs are the Mutually Aided Co-operative Societies (MACS). These are registered under the State Co-operative Societies Act and are not regulated by RBI. (iii) For Profit MFIs For profit MFIs include Non-Banking Financial Companies (NBFCs). The MFIs in India which are larger in size belong to this category. These companies are registered under the Companies Act, 1956; and are regulated by RBI. These companies can deposit the savings of their clients with them. NBFCs, along with Section-25 companies, account for about 80 per cent of microfinance outreach in India, both in terms of clients served as well as loan portfolios. Some of the large NBFCs in the field of microfinance are: Sanghamitra, BASIX, SHARE Microfin Ltd., Indian Association for Savings and Credit (IASC), Cashpor, etc.

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1.11

Micro Finance Models

1.11.1 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 fulfills 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. 1.11.2 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.

1.11.3

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: The MFI uses the branch network of the bank as its outlets to reach clients. This allows the client to be reached at lower cost than in the case of a standalone MFI. In case of
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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. The Partnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth. The Service Company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products, such as individual loans for SHG graduates, remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance.

1.11.4 Bank Led Model The bank led model was derived from the SHG-Bank linkage program of NABARD. Through this program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies. A very example of it is shown by Bank of Baroda, it drew up aggressive plans to penetrate rural areas through its SHG program, which had significant presence in the rural areas of South India, especially Tamil Nadu, with a customer base of 1.9 million and 87 branches. Bank of Madura's SHG development program was initiated in 1995. Through this program, it had formed, trained and initiated small groups of women to undertake financial activities like banking, saving and lending. By 2000, it had created around 1200 SHGs across India and provided credit to them.

1.11.5 Partnership Models A model of microfinance has emerged in recent years in which a microfinance institution (MFI) borrows from banks and on-lends to clients; few MFIs have been able to grow beyond a certain point. Under this model, MFIs are unable to provide risk capital in large quantities, which limits the advances from banks. In addition, the risk is being entirely borne by the MFI, which limits its risk-taking. This model aimed at synergizing the comparative advantages and financial strength of the bank with social intermediation, mobilization power and infrastructure of MFIs and NGOs. Through this model, ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit distribution channels and could take advantage of the expertise of these institutions in rural areas. Initially, ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary financial support to their activities. Later,

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ICICI Bank came up with a plan where the NGO/MFI continued to promote their microfinance schemes, while the bank met the financial requirements of the borrowers.

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Chapter 2

Reserve Bank Of India (RBI) Small Industries Development Bank of India (SIDBI) National Bank for Agricultural and Rural Bank

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2.1 RBI (Reserve Bank of India) and its role

The Reserve Bank of India (RBI), Indias central bank, through its board, undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. Some of the initiatives undertaken by RBI include: Restructuring of the system of bank inspections; Introduction of off-site surveillance; Strengthening the role of statutory auditors; and Strengthening the internal defenses of supervised institutions. Appendix 1 consist of latest guidelines issued by RBI on Fair Practices Code for NBFC's Within the microfinance sector, there are 2 main apex bodies which set the standards for microfinance institutions in India Microfinance Institutions Network (MFIN) and SaDhan.

2.1.1 MFIN is the self-regulatory organization (SRO) for the Indian Microfinance industry. It was established in October 2009 with the sole purpose of promoting the key objectives of Microfinance in India and establishing guidelines for responsible lending and client protection in the Microfinance industry. MFIN seeks to work closely with regulators and other key stakeholders to achieve larger financial inclusions goals through microfinance. Currently MFIN member organizations consist of 46 of the leading NBFC/MFIs whose combined business constitutes over 80% of the Indian microfinance sector. As a step towards more stringent self-regulation, MFIN has defined a code of conduct for its members, which focus on fair practices with borrowers and among member organizations. The MFIN code of conduct establishes limits on overall lending at the client level, establishes guidelines for fair collection practices promoting transparency and standardized recruitment and training practices for member MFIs.

2.1.2 Sa-Dhan was established in 1998 to provide a common collaboration platform for MFIs, NGOs, community development financial institutions and government agencies like NABARD and serves as a forum and advisory body for organizations and individuals engaged in the field of community development and financial inclusion. The key strategies that Sa-Dhan works on are as follows:

Encourage existing and new MFIs through financing and capacity building as well as a supportive regulatory framework Incentivize existing mainstream financial institutions to provide microfinance Building a strong demand system through community based development financial institutions (CFDI) In order to successfully execute its strategy, Sa-Dhan is working in the following three thematic areas:
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Policy interventions - It looks at providing an enabling environment for the enhancement of microfinance activities. Setting standards - Its main function is to facilitate the adoption of best practices within the sector Capacity building - It aims to build sectoral capacity in microfinance.

2.2

Microfinance Laws
In the area of microfinance, the Microfinance Institutions (Development and Regulations) Bill, 2011 is a major step towards the centralization of microfinance policies in India under the supervisory umbrella of the central bank, Reserve Bank of India (RBI). This will facilitate many of the already developed consumer protection policies within the banking system to be applied to the microfinance sector. Under the new Bill, RBI is designated as the umbrella authority that will regulate microfinance institutions. The Bill details the powers exercisable by RBI over the various types of institutions currently carrying on microfinance activity (which include non-banking finance companies and cooperatives). More importantly, the draft legislation seeks to do away with the fragmentation that currently exists in regulating the sector. As for regulation of the sector itself, the scope of the Bill largely covers the role of RBI in overseeing the sector in terms of its supervisory powers over various institutions carrying on microfinance activity. All institutions will be required to register with the RBI. Some of the key provisions of the bill are as follows a) Registration for MFIs: every institution in microfinance should register with the regulator, transform into a company when they attain a significant size, be subject to a variety of prudential and operational guidelines that are introduced by the regulator provide periodic information to the regulator and face penal action for violation of law or any rules framed. b) National and state level supervision: Proposal for regulation and supervision of MFIs at a state level in addition to the national level. Setup of state councils is proposed which would involve state governments and would be linked to the central government council. State councils would monitor lending activities undertaken by MFIs to check for over-indebtedness and defaults, recovery practices adopted by MFIs, appropriate grievance redressal mechanisms in place and overall assessment of impact of measures for financial literacy and inclusion. c) Pricing and interest rates: The RBI will have the authority to set interest rates and margin caps for pricing of loans. d) Penalties: The bill proposes penalties for MFIs of a maximum of Rs 500,000 for not following the rules set forth by the governing councils and facilitates the RBI to delegate powers and enforcement to NABARD.

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2.3 Small Industries Development Bank of India (SIDBI)

The Small Industries Development Bank of India (SIDBI) was set up in 1990 under an Act of Parliament- the SIDBI Act, 1989. The charter establishing SIDBI envisaged SIDBI to be the principal financial institution for the promotion, financing and development and development of industries in the small scale sector and to coordinate the functions of other institutions engaged in similar activities. SIDB I commenced its operations on April 2, 1990, by taking over the outstanding portfolio and activities of IDBI pertaining to the small-scale sector. In pursuance of the SIDBI (Amendment) Act, 2000, and as approved by the Government of India, 51.1 per cent equity shares of SIDBI held by IDBI have been transferred to public sectors banks, LIC, GIC, and other institutions owned and controlled by the central government. Presently SIDBI has 35 banks, insurance companies, investment and financial institutions as its shareholders in addition to IDBI, which continues to hold 49 per cent share in SIDBI.

2.3.1 Objectives of SIDBI In the setting up of SIDBI, the main purpose of the government was to ensure larger flow of assistance to the small-scale units. To meet this objective, the immediate thrust of the SIDBI was on the following measures: Initiating steps for technological upgradation and modernisation of existing units; Expanding the channels for marketing the products of the small scale sector; and Promotion of employment-oriented industries, especially in semi- urban areas to create more employment opportunities and thereby checking migration of population to urban areas.

2.3.2 Functions of SIDBI SIDBI provides assistance to the small-scale industries sector in the country through the existing banking and other financial institutions, such as, State Financial Corporations, State Industrial Development Corporations, commercial banks, cooperative banks and RRBs. etc. The major functions of SIDBI are given below: (i) It refinances loans and advances provided by the existing lending institutions to the small-scale units. It discounts and rediscounts bills arising from sale of machinery to and manufactured by small-scale industrial units.
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(ii)

(iii)

It extends seed capital/soft loan assistance under National Equity Fund, Mahila Udyam Nidhi and Mahila Vikas Nidhi and seed capital schemes. It grants direct assistance and refinance loans extended by primary lending institutions for financing exports of products manufactured by small-scale units. It provides services like factoring, leasing, etc. to small units. It extends financial support to State Small Industries Corporations for providing scarce raw materials to and marketing the products of the small-scale units. It provides financial support to National Small Industries Corporation for providing; leasing, hire purchase and marketing help to the small-scale units.

(iv)

(v) (vi)

(vii)

2.3.3 Channels of Assistance SIDBI's assistance to the small-scale sector is channelized through 3 routes, viz. Indirect Assistance - By way of providing refinance to and rediscounting of bills of Primary Lending Institutions (PLIs) including banks and State level institutions which together have about 65,000 outlets in the country. In respect of some institutions, Line of Credit (LoC) is granted in lieu of refinance. To commercial banks and co-operative banks, Financial Support (Short Term Loan) a refinance product, also is provided against their non-refinanced outstanding portfolio relating to SSI sector. The number of eligible PLIs for refinance is 894. Direct Assistance - Dispensed through SIDBI's own branches numbering 38, through several tailor-made schemes targeting specific groups or activities benefiting SSIs. Development and Support Services - Loans, grants and corpus support are provided to NonGovernment Organizations, technology institutions, management institutions, etc. to act as implementing agencies of the programmers of SIDBI. SIDBI has Memoranda of Understanding with research and development institutions, governmental organizations, international agencies and industry associations to foster such programmers.

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2.3.4 In.itiatives by SIDBI

On-lending: In keeping with its mission, SIDBI Foundation identifies, nurtures and develops select potential MFIs as long term partners and provides credit support for their micro credit initiatives. The eligible partner institutions of SIDBI Foundation, therefore, comprise large and medium scale MFIs having minimum fund requirement of Rs. 10 lakh per annum. In all, around 100-125 MFIs are planned to be developed as long term partners over the next 4 years. Large and medium scales MFIs having considerable experience in managing micro credit programmes, high growth potential, good track record, and professional expertise and committed to viability are provided financial assistance for on lending. Under the present dispensation, annual need based assistance is provided to enable MFIs to expand their scale of operations and achieve self-sufficiency at the earliest. Lending is based strictly on an intensive in-house appraisal supplemented with the capacity assessment rating by an independent professional agency. Relaxed security norms have also been adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to achieve operational, financial and institutional sustainability. The constraints and challenges vary with the different types and development stage of MFIs. Most MFIs are currently operating below operational viability and use grant funds from donors for financing up-front costs of establishing new groups and covering initial losses incurred until the lending volume builds up to a breakeven level. The MFIs are generally constrained in reaching a break-even level and finally achieving sustainability primarily due to a narrow client and product base, high operational and administrative costs for delivering credit to the poor, and their inability to mobilise requisite resources. Moreover lack of technical manpower, operational systems, infrastructure and MIS are prevalent. In view of
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above, to scale up micro-finance initiatives at a fast pace, a special effort is required for capacity building of the micro finance institutions. In this background, SFMC has decided that need-based capacity building support in the form of grant be provided to the partner MFIs, in the initial years, to enable them to expand their operations, cover their managerial, administrative and operational costs and provide technical support besides helping them achieve self-sufficiency in due course. The grant support is being provided both as technical assistance as well as operational support. The technical assistance component is directed at helping the MFIs to strengthen their micro finance programmes through inputs such as human resource development, MIS development, effective financial and general management, training, efficient monitoring and control systems etc, whereas operational support is provided to the MFIs to meet a part of their operational deficit arising due to expansion of their programme. Liquidity Management: In view of the fact that liquidity is a major concern of many of the middle level MFIs and a small working capital support can go a long way in their better liquidity management and thus pave way for faster growth, SFMC has introduced a special short term loan scheme, Liquidity Management Support (LMS) for the long term partners. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging requirement of the micro finance sector in India. SIDBI provides equity capital to eligible institutions not only to enable them to meet the capital adequacy requirements but also to help them leverage debt funds. Quasi equity: The Transformation Loan (TL) product is envisaged as a quasi-equity type support to partner MFIs that are in the process of transforming themselves their existing structure into a more formal and regulated set-up for exclusively handling micro finance operations in a focused manner. Being quasi-equity in nature, TL helps the MFIs not only in enhancing their equity base but also in leveraging loan funds and expanding their micro credit operations on a sustainable basis. The product has the feature of conversion into equity after a specified period of time subject to the MFI attaining certain structural, operational and financial benchmarks. This non-interest bearing support facilitates young but well performing MFIs to make long term institutional investments and acts as a constant incentive to transform themselves into formal and regulated entities . Direct Credit to clients / members of MFIs: SFMC would be providing direct credit to SHGs/ solidarity groups/ individual clients of the select MFIs. However, these borrowers would be supported/ supervised by the MFI. The scheme is targeted on larger MFIs, which have strong credit and recovery mechanism, MIS and internal control. Under the arrangement, SFMC would assess the MFIs ability to manage the projected micro credit portfolio and extend credit to the borrowers of MFI. There would be no restriction on
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the MFIs as regards their methodology for credit dispensation. The MFIs may pass the assistance directly to SHGs / individuals or route it through their partner NGOs and MFIs. They may also adopt any other channel so as to effectively reach financial assistance to poor clients. Micro Enterprise Loans: In order to build and strengthen new set of intermediaries for Micro Enterprise Loans, the Bank has formulated new scheme for Micro Enterprise Loans. Institutions/ MFIs with minimum fund requirement of Rs. 25 lakh p.a. and having considerable experience in financial intermediation/ facilitating or setting up of enterprises/ providing escort services to SSI/ tiny units/ networking or active interface with SSIs etc. and having professional expertise and capability to handle on-lending transactions shall be eligible under the dispensation. The institutions would be selected based on their relevant experience, potential to expand, professional management, transparency in operations and well laid-out systems besides qualified/-trained manpower. Lending to be based strictly on an intensive in-house appraisal supplemented with the credit rating by an independent professional agency. Relaxed security norms more or less on line with micro credit dispensation to be adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements.

2.3.5 Subsidiaries:To facilitate the creation of an environment for self-sustaining and growing SSI units and to provide a complete range of services, SIDBI has set up : (1) Credit Guarantee Fund Trust for Small Industries. (2) SIDBI Venture Capital Limited. (3) Technology Bureau for Small Industries. (4) SIDBI Foundation for Micro Credit. The Credit Guarantee Fund Trust for Small Industries (CGTSI) All new or existing Micro and Small Enterprises (Manufacturing Sector and Service Sector) to which credit facility has been provided by the Bank without any collateral security and/or third party guarantees. Loan Amount The maximum loan granted under the Scheme will be Rs. 100 lakh per MSE unit for fund based and non-fund based facilities. The additional credit facilities sanctioned upto Rs. 100 lakh per borrower, subsequently without any collateral security and/or third party guarantees to such MSE unit for fund based and non fund based facilities. Guarantee Fee and Annual Service Fee The guarantee cover is available on payment of "one time guarantee fee" @1.50% of the credit facilities sanctioned and the"annual service fee" @0.75% of the credit facility extended by the MLIs.( Guarantee Fee is 0.75% for the loans to borrower in North Eastern Region including Sikkim). For loans upto Rs. 5.00 lakh sanctioned by the MLIs, guarantee fee is 1.00% and annual
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service fee is 0.50%. Annual Service Fee of 0.25% is recovered from the following borrowers and the balance i.e. in excess of 0.25% out of 0.50% or 0.75% as applicable to the borrowers shall be borne by the Bank in respect of guarantee cover: (a) All loans upto Rs. 2.00 lakh, (b) All eligible women Enterpreneurs, (c) All eligible borrowers located in the North Eastern Region( including Sikkim) For loans upto Rs. 5.00 lakh sanctioned by the Bank, guarantee fee @ 1.00% and annual service fee @ 0.50%. shall be borne by the Bank. SIDBIs Venture Capital Limited Provides venture funds for various activities such as software services and education, product development, internet services, and so on. The Technology Bureau for Small Enterprises has been set up in association with United Nations, and Asia Pacific Centre For Transfer of Technology (APCTT). The Technology Bureau for Small Enterprises assists small enterprises in accessing the latest technologies in diverse industrial fields, both from within and outside India. SIDBI Foundation for Micro Credit (SFMC) is creating a national network of strong, viable, and sustainable micro-finance institutions from the informal financial sectors to provide micro-finance services to the poor, especially women, for setting up micro enterprises. Besides these, SIDBI is the co-promoter of IDBI Bank Ltd., North-Eastern Development Financial Institutions (NEDFIs), SBI Factors, and Canbank factors. Consequent upon amendments to the State Financial Corporations (SFCs) Act, State Financial Corporations have been brought under the ambit of SIDBI.

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2.4 National Bank for Rural and Agricultural Development- NABARD

NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with 1. 2. 3. Providing refinance to lending institutions in rural areas Bringing about or promoting institutional development and Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also: Acts as a coordinator in the operations of rural credit institutions

Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development Acts as regulator for cooperative banks and RRBs

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2.4.1 NABARDs Organizational Structure

Figure 3 Source : nabard.org

2.4.2 Role and Functions of NABARD NABARD performs wide range of function to develop the financial market for the rural and agricultural development of the country directly or indirectly. The main functions of NABARD can be classified into following:
Role and Functions of NABARD

NABARD

Credit Functions

Training & Development

Supervisory Functions

Figure 4
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2.4.2.1 Credit Function of NABARD NABARD's credit functions cover planning, dispensation and monitoring of credit. This activity involves: Framing policy and guidelines for rural financial institutions Providing credit facilities to issuing organizations Preparation of potential-linked credit plans annually for all districts for identification of credit potential Monitoring the flow of ground level rural credit.

2.4.2.2 Development and Promotional Functions Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological upgradation. Hence, strengthening of rural financial institutions, which deliver credit to the sector, has been identified by NABARD as a thrust area. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks, so that adequate and timely credit is made available to the needy. In order to reinforce the credit functions and to make credit more productive, NABARD has been undertaking a number of developmental and promotional activities such as: Help cooperative banks and Regional Rural Banks to prepare development action plans for themselves. Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated time frame. Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated time frame. Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs. Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells.

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Provide organization development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD), Lucknowwww.birdlucknow.in, National Bank Staff College, Lucknow www.nbsc.in and College of Agriculture Banking, Pune, etc.

Provide financial support for the training institutes of cooperative bank. Provide training for senior and middle level executives of commercial banks, Regional Rural Banks and cooperative banks. Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmers clubs. Provide financial assistance to cooperative banks for building improved management information system, computerization of operations and development of human resources.

2.4.2.3 Supervisory Functions of NABARD As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs). As part of these functions, it Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949. Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis Undertakes portfolio inspections, systems study, besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs) Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative Banks, opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs) Administering Credit Monitoring Arrangements (CMA) in SCBs and CCBs.

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2.4.3 Schemes of NABARD Refinance: NABARDs mission is accelerated capital formation to promote sustainable and equitable agriculture and rural prosperity with refinance as lever. The institutions eligible for refinance is state cooperative agricultural and rural development banks (SCARBs), regional rural banks (RRBs), state cooperative banks (SCBs), commercial banks (CBs) state agricultural development finance companies (SADFCs) and primary urban cooperative banks. NABARD extends refinance for both farm and non-farm sector. Long term investment for farm sector includes investment on agriculture and allied activities such as minor irrigation, farm mechanization, land development soil conversation, diary, sheep rearing, poultry, piggery, plantation/horticulture, forestry, fishery, storage and market yards, biogas and other alternate sources of energy and so. Non-farm sector includes investment activities of artisans, small scale industries tiny sector, village and cottage industries, handicrafts, handlooms, and other. NABARD extends automatic refinance facility for refinance limit upto Rs 20 lakh. NABARDs special focus is on the removal of regional/sectorial imbalance and hence gives preference to the needs of north-eastern states in terms of allocation of resources, quantity of refinances, and so on. Besides this, its focus is on hi-tech and export-oriented projects. It has issued guidelines for formation of hi-tech and export-oriented projects in farm and non-farm sectors. It also undertakes consultancy work for projects. It has set up ADFCs in Andhra Pradesh, Tamil Nadu and Karnataka for financing hi-tech/commercial ventures. NABARD is the chief promoter of these ADFC with a holding of 26 per cent equity. NABARD provides short-term refinance for various types of production/ marketing/ procurement activities. NABARD provides refinance facilities to: (1) SCBs and RRBs for financing seasonal agricultural operations (SAOs), which include plugging and preparing land for sowing and weeding, and labour for all operations in the fields for raising and harvesting the crops. (2) SCBs/CBs for financing the requirements of Primary Weavers Cooperative Societies (PWCS), Apex Regional Weavers Societies, and State Handloom Development Corporations (SHDCs) to benefit the weavers outside the cooperative fold. (3) RRBs for financing artisans and village/cottage/tiny sector industries as also for financing persons, belonging to the weaker sections and engaged in trade/ business/ service. (4) SCBs on behalf of District Central Cooperative Banks (DCCBs) for (a) Financing farmers to hold on to their produce till they get remuneration price of their production.
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(b) Procurement stocking, and wholesale distribution by apex societies and retail distribution of fertilizers to farmers. Other refinance facilities include conversion assistance in case of natural calamity long-term loans to state governments financing of state handicrafts development corporations financing of industrial cooperative societies and forest labour cooperative societies, and medium-term credit limits to SCBs and RRBs. Types of Refinancing Provided By NABARD Agency Commercial banks Credit Facilities Long-term credit for investment purposes Financing the working capital requirements of Weavers Cooperative Societies (WCS) and State Handloom Development Corporations. Short-term (crop and other loans) Medium-term (conversion) loans Term loans for investments purposes Financing WCS for production and marketing purposes Financing State Handloom Development Corporations for working capital by State Cooperative Banks. Term Loans for investments purposes

Short-term Cooperative Structure (State Cooperative banks. District Central Cooperative Banks. Primary Agricultural Credit Societies)

Long-term Cooperative Structure (State Cooperative Agriculture and Rural Development Banks, Primary Cooperative Agriculture and Rural Development Banks) Regional Rural Banks (RRBs)

State Governments

Non-Governmental Organisations (NGOs) Informal Credit Delivery System

Short-term (crop and other loans) Term loans for equity participation in cooperation. Long-term loans for equity participation in cooperatives. Rural Infrastructure Development Fund (RIDF) loans for infrastructure projects. Revolving Fund Assistance for various micro-credit delivery innovations and promotional projects under Credit and Financial Services Fund (CFSF) and Rural Promotion Corpus Fund (RPCF),
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respectively.

Rural Infrastructure Development Fund: The development of a strong rural infrastructure is a prerequisite for increasing productivity of lands, capital and labour, improving the quality of life, and reducing vulnerability of rural power. Rural infrastructure includes irrigation structures, rural lands, bridges, water supply, sanitation, rural energy, rural market yards, and education health communication and information technology. Investment in rural infrastructure creates new economic opportunities and activities, generates additional employment and income, and facilitates and improves delivery of other rural services. Investment in rural infrastructure declined in the eighth five-year plan period. The state governments failed to develop and maintain rural infrastructure due to resource crunch. Moreover, the commercial banks which were to channelize at least 18 per cent of their totalling lending to agriculture were unable to fulfil their commitment. To provide loans to state governments for the creation of rural infrastructure at reasonable rates, RIDF was set up in 1995-96 under the initiative of the Central Government. The scheme is operational by NABARD, Under the scheme, the central government through budgetary outlays, contributes to the corpus fund of RIDF. RIDF was set up with an initial amount of Rs 2,000 crore. (RIDFI). The Tranche-I was made up of contributions by way of deposits from scheduled commercial banks operating in India to extend of shortfall in their agriculture lending subject to a maximum of 1.5 per cent of the net bank credit. In the years 1996-97 and 1997-98, the Union Budgets allocated Rs 2,500.

Kisan Credit Card (KCC) Scheme: - This scheme was started in 1998-99 to grant credit to farmers. During the year 2001-02, 83.82 lakh cards were issued by cooperative banks, RRBs and CBs. Since inception up to the end of March 2012, 2.32 crore KCCs have been issued of which RRBs and cooperative banks issued 1.65 crore KCCs involving a credit limit of Rs 33,994 crore. Loans disbursed under KCCs have been brought under Rashtriya Krishi Bima Yojna of the General Insurance Corporation. KCC holders are also being provided personal accident insurance cover of Rs 50,000 for death and Rs 25,000 for disability. Watershed development fund: -This fund was created in NABARD in 1999-2000 with a corpus of Rs 200 crore contributed equally by the Government of India and NABARD for implementing watershed projects in 100-priority district of 14 states. This programme includes the improvement of productivity of land, groundwater recharge, and conservation of soil and moisture. As on March 31, 2002, 119 Capacity Building Phase Projects have been sanctioned in 9 states. During the year 2001-02 106 new projects involving a grant support of Rs. 5.44 crore were approved.

Scheme for setting up of agriclinic and agriculture centers: - During the year 2001-02, NABARD formulated a scheme for financing agriculture graduates for setting up agriclinics and agribusiness centers. Scheme for financing farmers for purchase of land for agricultural purposes.
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Scheme for ex-serviceman taking up self-employment activities under SEMFEX II. In 1998, the GOI in collaboration with NABARD launched a central sector capital subsidy scheme (Investment Promotion Scheme) for development of privately owned non-forest wastelands in the country. Refinance scheme for financing farmers service centers set up in collaboration with Mahindra Shubhlabh Services Limited (MSSL) for providing various extension services to farmers, including supply of agri inputs. Micro Finance Development fund: - NABARD has set up a Micro- Finance Development Fund with an amount of Rs 100 crore, in pursuance of the proposal contained in the Union Budget 200001. The Fund has received an initial contribution of Rs 100 crore contributed by the RBI, NABARD and two Public Sector Commercial Banks. NABARD has further contributed Rs 6 crore from its surpluses to the fund. This fund helps in furthering the cause of banking with the poor. Over 7.9 million poor households have gained access to the formal banking system through 458 thousand. Self-help groups (SHGs). More than 90 per cent SHGs have exclusively women members. SHG Bank linkage programme covered 488 districts in 30 states and union territories (UTs). During the year 2001-02 Rs 5,454,.59 million disbursed by banks as loans to SHGs. Cumulatively as on March 31, 2002 banks have disbursed more than Rs 1,000 crore as loans to about 4.6 lakh SHGs and availed of Rs 794 crore as refinance from NABARD. On-time repayment of bank loans was above 95 per cent from SHG members. NABARD has provided upto March 31, 2002, Revolving Fund Assistance (RFA) of Rs 104 million to 26 NGOs, SHG Federations, and credit unions for on-lending to SHGs and to build their financial intermediation capacities.

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2.4.4. NABARD and its Subsidiaries

NABARD

NABCONS

NABFINS
Figure 5

2.4.4.1 NABCONS- NABARD Consultancy Services: NABARD Consultancy Services (Nabcons) is a wholly owned subsidiary promoted by National Bank for Agriculture and Rural Development (NABARD) and is engaged in providing consultancy in all spheres of agriculture, rural development and allied areas. Nabcons leverages on the core competence of the NABARD in the areas of agricultural and rural development, especially multidisciplinary projects, banking, institutional development, infrastructure, training, etc., internalized for more than two decades. The Company is registered under the Company's Act, 1956, with an authorized capital of Rs 250 million (US $5.75 million) and paid up capital of Rs 50 million (US $1.15 million). In tune with NABARD's mission to bring about rural prosperity, Nabcons has more than just commercial interest in the assignments it undertakes. Services offered by NABARD Consultancy Services Techno-economic feasibility studies and potential surveys Detailed project formulation Techno-economic appraisal of projects for bank financing, Debt restructuring Micro-developmental planning, Investment surveys Turn around strategy for banks and restructuring of developmental institutions
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Conceptualization, design and implementation of developmental programmes / projects Monitoring and Evaluation of the developmental projects and investments International Visitors' Programme/ International Exposure Visits Capacity building and human resource development Conduct Sectoral studies and identification of potentials and perspective plans. Legislative drafting, model laws, documentation of agreements / contracts in development banking and service matters etc.

2.4.4.2 NABFINS- NABARD Financial Services Pvt. Ltd. NABFINS is a subsidiary of National Bank for Agriculture and Rural Development (NABARD) with equity participation from NABARD, Government of Karnataka, Canara Bank, Union Bank of India, Dhanalakshmi Bank and Federal Bank. It is a non-deposit taking NBFC registered with the Reserve Bank of India and shall operate throughout India. The main objectives of the Company are to provide financial services in two broad areas of agriculture and microfinance. NABFINS provides credit and other facilities for promotion, expansion, commercialization and modernization of agriculture and allied activities. NABFINS shall engage in the business of providing micro finance services (with or without thrift) and other facilities to needy and disadvantageous sections of the society for securing their prosperity in both rural and urban areas. NABFINS business plan which is taking shape endeavors to cover all costs of maintenance and growth without raking in excessive profits. It will invest in under banked areas even if it means higher transaction costs. It will provide competition to reduce the interest rates of moneylenders and financial institutions, which are not affordable by the poor. To reduce the clients risk, it will respect the diversity of several livelihood activities, which comprise a poor familys livelihood strategy and not reduce this strategy to a single large so-called viable activity (which the family finds it cannot manage) or to a standardized product to fit into pre-designed software. It will endeavor to develop delivery systems and an organisational structure in order to meet its transaction costs that do not require it to charge 25% on a loan taken by a poor women to purchase a goat, when the manager of the financial institution pays 8% on a loan to buy a flat. Appreciating the increase and diversity of risks to NABFINS in its efforts to cope with these features of its business model which has so far identified four verticals (which will be described later), it has given risk management priority. Business Model of NABFINS: The business model of NABINS has four verticals. Each one incorporates different delivery systems, different risks at various points of the process and different types of partnerships with peoples institutions. These four verticals are:

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i) Loans directly to Self Help Affinity groups using the Business Correspondent Model. This is the first vertical. The target group here is the poor. Briefly in this BC (Business Correspondents) model, NABFINS staff and the NGO/Federation assess the SHG together. If found to be suitable for investment, NABFINS directly lends one loan to the SHG which then decides on the size and purpose of individual loans to members in keeping with the SHG-Bank Linkage model . The BC collects the recoveries and credits them to NABFINS account. For this service it receives a commission. The BC also can access grants from NABFINS to form new SHGs which NABARD has provided. However if it is found that existing SHGs are not moving ahead to invest in livelihood activities, additional grants can be mobilized for training and exposure. ii) Loans to Second level institutions like Companies and Cooperatives largely for working capital. This is the second vertical. These institutions aggregate, add value and provide market linkages for commodities agriculture, fisheries, handicrafts, etc. Most of these institutions are supported by SHGs at the base and rely on an NGO for handholding. NABFINS has extended loans to two institutions one a Company aggregating, grading and marketing agricultural commodities, charcoal and medicinal plants and the other adding value and scale to handlooms. NABFINS staff deals directly with these two institutions and not through the BC model. The major reason why NABFINS gives this vertical priority is that these second level institutions are starved of funds for infrastructure and working capital. Unless they are supported both by grants and long term low cost credit, the SHG members will not be able to increase/diversify their livelihood base and income. iii) Loans to Joint Liability groups. This is the third vertical. The clients under this vertical are small farmers and livestock owners. They are not poor, but are marginalized since they cannot access credit from formal financial institutions because they are far from Bank Branches, do not possess proper land records, have no acceptable physical collateral and are therefore considered high risk by institutions. They have to take loans from money lenders at high interest rates and hence cannot build capital or expand their occupations. These are the reasons why NABFINS intends to target this sector. Features of this vertical were agreed to: a. JLGs will be restricted to small farmers and livestock owners; b. The size of the JLG is 5-10 members; c. The JLG should meet at least 5-10 times over 2-3 months to decide on its responsibilities, functions etc.; d. During this period some relevant modules of Institutional Capacity Building from the SHG training manual should be given including one on joint liability; e. A group account should be opened and regular savings should be started which are credited to the group account;

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f. The sizes of loans to individual members depends on the different sizes of land holding, crops and livestock numbers; g. Only one loan will be given by NABFINS to the group; h. The loans to individuals, the size of which was decided in advance would be credited by the JLG to the personal account of each member; i. The JLG members will decide on the management of repayments.

iv) Loans for basic skills training for youth and to set up small units. This is the fourth vertical. Trainings envisaged comprise technical skills, basic medical care etc. NABFINS intends to partner with programs like NRLM, Government and NGOs providing basic marketable skills through their own informal/formal technical training institutions. Preparatory work to develop systems to identify and mentor youth and to reduce risk to the client and NABFINS has started; loans in this vertical started in 2011. Products of NABFINS The activities of NABFINS focus predominantly on improving the lives of the disadvantaged and poorer sections of the society. NABFINS' main aim is to support sustainable livelihoods of rural and urban poor in both agriculture and non-farm sectors. NABFINS extends loans to farmers, artisans & individuals; SHGs, JLGs & small and marginal producers groups; micro and small enterprises; SHG Federations, Producers' Companies (particularly those of the small and marginal segment); Mutually Aided, Souharda & other Cooperative Societies, Trusts, Societies or other Organisations that support production/aggregation/marketing in sectors like agriculture, sericulture, handlooms, handicrafts; Companies/corporate bodies/partnerships engaged in agriculture, non-farm activities mainly with focus on poor / disadvantaged sections of the population, remote geographies etc. Loans are extended either directly through Branches/Financial Service Officers or through agents, known as Business Correspondents (who handle cash) / Business Facilitators (who do not handle cash) engaged on commission basis for services rendered. Current Focus Presently NABFINS is focussing on lending to SHGs in Karnataka and a few districts in Tamil Nadu and Andhra Pradesh. We are also looking at second level institutions that support livelihoods in these districts.

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Interest rates on loans w.e.f 1st April 2012 Borrower Category SHG/JLG/ Other groups Loan Amount Upto Rs. 2 lakh Loans > Rs. 2 lakh and upto Rs. 5 lakh Loans > Rs. 5 lakh Interest rate (%) 14.00% 15.50% 1% of sanctioned amount subject to a ceiling of Rs. 2.5 lakh 1% of sanctioned amount subject to ceiling of Rs. 2.5 lakh 12.36% of processing fee Processing fees Service Tax

16.75%

Individuals/ Institutions

Upto Rs.20 lakh Loans>Rs. 20 lakh and upto Rs. 50 lakh Loans > Rs. 50 lakh Table 3

12% 13%

12.36% of processing fee

13.5%

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Chapter 3

Regional Rural Banks Bank of Baroda Rural Banking Grameen Bank Model Self Help Groups Satat Seva Samiti Model of SKS Microfinance Model of Milaap

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3.1

Introduction
Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural labourers and rural artisans. The area of operation of RRBs is limited to the area as notified by GoI covering one or more districts in the State. RRBs are jointly owned by GoI, the concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State Cooperative Bank); the issued capital of a RRB is shared by the owners in the proportion of 50%, 15% and 35% respectively.

a. Guidelines for Commercial Banks

NABARD, in consultation with RBI, may prepare detailed guidelines based on consultations with commercial banks and technology service providers for operationalizing the Commercial Banks. Simplifying Mortgage Requirements Saral Documentation for Agricultural Loans- NABARD, in cooperation with a core group of bankers, has prepared a one page document for agricultural loans up to Rs.1 lakh. This document has been circulated among the scheduled commercial banks (including RRBs) with the approval of the Indian Banks Association. The Committee recommends that this simplified document be adopted by all banks with a view to deepening credit outreach among the disadvantaged sections of the rural poor. Nodal Branches - Taking cognizance of the fact that the marginal and sub-marginal farmers require credit plus services in the form of extension services, in all districts identified as having the largest number of excluded people, it was being recommended that one branch of the lead bank or the bank having the largest presence at the block / taluka level may be identified as the nodal branch to address the issue of exclusion. Lead banks or banks having the largest presence may strengthen these nodal branches with technical staff to provide agricultural / business development services in the farm and non-farm sectors respectively, comprising of technical inputs and extension services to the banks / farmers. These could either be provided by regular officers of the bank or local consultants / practitioners / agri-business clinics on a retainer basis. As the services of the nodal branch would be available to all other branches in the vicinity, an appropriate cost sharing arrangement may be worked out between various banks. Business Facilitators / Business Correspondents (BF/BC) Business Facilitators: Under the BF Model, banks may use intermediaries such as NGOs, farmers' clubs, cooperatives, community based organisations, IT-enabled
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rural outlets of corporate entities, post offices, insurance agents, well-functioning Panchayats, village knowledge centres, agri-clinics / agri-business centres, Krishi Vigyan Kendras and KVIC / KVIB units for providing facilitation services. It has been clarified that such services may include : Identification of borrowers and fitment of activities, Collection and preliminary processing of loan applications, Creation of awareness about savings and other products, education and advise on managing money and debt counselling, Processing and submission of application to banks, Promotion and nurturing of SHGs / JLGs, Post sanction monitoring, Monitoring and hand holding of SHGs / JLGs / credit groups / others, and Follow-up for recovery. Business Correspondents: Under the BC Model, NGOs / MFIs set up under the Societies / Trust Act, Societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States, Section 25 Companies, Registered NBFCs not accepting public deposits and post offices may act as BCs. Banks have been advised to conduct due diligence on such entities and ensure that they are well established, enjoy good reputation and have the confidence of local people. In addition to the activities listed under the BF Model, the scope and activities to be undertaken by BCs will include Disbursal of small value credit, Recovery of principal / collection of interest, Collection of small value deposits, Sale of micro-insurance / mutual fund products / pension products / other third party products, and Receipt and delivery of small value remittances / other payment instruments. Bank of Baroda & Rural Banking

3.2

Bank of Baroda is an Indian state-owned banking and financial services company headquartered in Vadodara. It offers a range of banking products and financial services to corporate and retail customers through its branches and through its specialized subsidiaries and affiliates in the areas of retail banking, investment banking, credit cards and asset management. Its total global business was 7,003 billion as of 30 Sep 2012. In addition to its headquarters in its home state of Gujarat it has a corporate headquarter in the Bandra Kurla Complex in Mumbai. Based on 2012 data it is ranked 715 on Forbes Global 2000 list. BoB has total assets in excess of 3.58 trillion (short scale), 3,583 billion (long scale), a network of 4280 branches (out of which 4168 branches are in India) and offices, and over 2000 ATMs.

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The rural banking in Bank of Baroda includes: Deposits Loans and Advances (Priority Sector Advances)

The products of Bank of Baroda can be classified broadly into:

Agriculture

Baroda General Criedit Card Scheme

Priority Sector Lending

MSME

Govt. Sponsered Schemes

Figure 6 Agricultural Finance Schemes Agriculture being the backbone of the Indian Economy, Bank of Baroda, is contributing significantly in accelerating the pace of rural development by providing finance to farmers by way of following agriculture products. 1. Baroda Kisan Credit Card (BKCC) - Empowering the farmer: The BKCC facility designed exclusively for the benefit of the farmers aims to provide them the opportunity to manage and utilise their funds in the manner they deem fit. BKCC provide adequate and timely support to farmers for their production needs e.g. purchase of quality inputs, investment requirements like purchase of agriculture implements/tractor etc, farming expenses towards farm maintenance, unforeseen family expenses (consumption) and maintenance of non-farm activities. 2. Purchase of agricultural implements including indigenous improved ones being utilised for field operations including harvesting/sorting/grading, for not only to farmers, but also for land-less labourers.

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3. Purchase of heavy agricultural machinery like tractors, power-tillers, etc. either by farmers having larger holdings with irrigation facilities or group of farmers with irrigation facilities. 4. Purchase of second hand tractors to provide opportunity to those interested farmers in dry land farming or having a small land holding who cannot afford to purchase new tractors. 5. Production credit for raising various crops from the point of preparatory tillage till harvesting, for land owners or permanent tenants or lease holders or share croppers. 6. Farm produce marketing loan / Financing against warehouse receipt against pledge of receipt of warehouse/ cold storages to the farmers. 7. Development of irrigation facilities, covering sinking of wells/bore wells, lifting of water by installation of pump sets, transporting of water through field channels, water saving system like drip irrigation/sprinkler irrigation etc. for farmers .Energising of pump sets through Non-conventional Energy Resources like wind mill, solar energy etc. or installation of generation sets is also covered. 8. Extending working capital needs to dealers of dealers/ distributors/traders of agricultural inputs like seeds, fertilisers etc. live stock inputs like cattle feed, medicine etc. and supply of agriculture machinery/ irrigation system. 9. Extending Custom services to farmers by way of machinery like tractor thresher etc. Equipment on rental basis and maintenance of cold storage /godowns for hiring, by individuals, institutions / organisations. 10. Providing employment to the unemployed technical personnel through Agro service Centre. 11. Setting up of Agri clinic and Agribusiness centre by agriculture graduates. 12. Construction farm building/structures like cattle shed, tractor shed, thrashing yards, fencing etc. by individual farmer or firms engaged in agricultural activity and is of long term nature. 13. Construction/Expansion/modernisation/Renovation of Rural Godown/Cold storage. 14. Development of horticulture including production, processing and marketing of various fruits, vegetables, plantation and flowers, which cover from nursery to the point of market, by individual farmers, firms, organisation like co-operative societies etc. and which covers both long term and short term requirement. 15. Development of land like bunding, terracing, levelling etc. and reclamation of saline, alkaline, ravine soils by farmer or organisation like co-operative societies etc. 16. Development of allied activities to agriculture like dairy, poultry , fisheries, sericulture, mushrooms, apiculture etc. by production , processing and marketing by farmer, land less labourers, firms, organisations, like co-operative societies etc .finance by way of long term nature and short term nature is being extended. 17. Financing Scheduled Caste & Scheduled tribe, who have been provided/allotted land by the State Govt, can be financed for purchase of farm implements irrigation pair of bullocks etc.

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Terms and Conditions: MARGIN Short Term Loans Upto Credit Limit Rs 100000/Above Credit Limit Rs 100000/Term Loans Upto Credit Limit Rs 100000/Above Credit Limit Rs 100000/- Tractors & Heavy Agriculture Machinery - Other Loans Agri Clinic Agri Business Upto Rs 5 Lacs Above Rs 5 Lacs Table 4 For small/marginal farmers, agriculture labourer and other specified categories no margin money required by borrowers where subsidy is available under special development programme. Where subsidy is not available, 5% margin by borrower is required. SECURITY Crop Loan/short Term Loans D.P. Note & Hypothecation of crop for credit limit upto Rs 100000/D.P. Note & Hypothecation of crop and mortgage of land or third party guarantee for limit above Rs.100, 000/Investment Loans wherever moveable assets are created D.P. Note & Hypothecation of moveable assets to be purchased out of loan upto cost of economic unit or Rs 1 lakhs whichever is lower. D.P. Note, Hypothecation of moveable assets & charge/mortgage of land or third party guarantee for credit limit above Rs 1 lakhs. For Agri. Clinic-agri. business D.P. Note & Hypothecations of assets for credit limit upto Rs 5 lacs. Margin Nil 15% Margin Nil Margin - 10% - 15% Margin Nil 15%

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D.P. Note, Hypothecations of assets & Mortgage of land/3rd party guarantee for credit limit above Rs 5 lakhs Investment Loans wherever moveable assets are not created Where moveable assets are not created, mortgage of land is required for limit above Rs.10,000/-.

Government Sponsored Schemes SRMS- Self Employment Scheme for Rehabilitation of Manual Scavengers' To rehabilitate manual scavengers. Key Benefits

Provides self-employment to scavengers.

Subsidy

Subsidy 50% of project cost for projects costing upto Rs.25,000/Projects costing more than Rs.25,000/- @ 25% of the Project Cost; with a minimum of Rs.12,500/- and maximum of Rs.20,000/-.

Terms & Conditions

Scavengers and their dependants both SC and non-SC sponsored by National Safai Karmacharis Finance & Development Corporation (NSKFDC) Maximum Limit Rs. 5.00 lacs (Micro Financing upto a maximum of Rs.25, 000/-). The tenure period ranges from 3 5 years. ROI Project cost upto Rs.25,000/- @ 4% p.a. for women beneficiaries, for others @ 5% p.a. and for project cost above Rs.25,000/- @ 6% p.a.

Swarna Jayanti Shahari Rozgar Yojana (SJSRY)To provide gainful employment to the urban poor living below the poverty line. Key Benefits

Provides self-employment to urban poor. Subsidy 15% of project cost maximum Rs.7,500/-

Terms & Conditions

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All urban and semi-urban poor sponsored by urban local bodies are eligible. Maximum benefit Rs. 50,000/The tenure period = 9 years No collateral security

Swarna Jayanti Gram Swarozgar Yojana (SGSY)To bring every assisted poor family (Swarojgari) above poverty line in 3 years. Key Benefits

Provides provide income generating assets through a mix of bank credit and Govt. Subsidy Rs.7,500/- to Rs.10,000/-. SHGs maximum Rs. 1.25 lakhs.

Terms & Conditions

Individuals or groups below poverty line sponsored by DRDA Reserve quota for SC/ST 50%, Women 40% & Disabled - 3%. Maximum Benefit (as per Project Cost). The tenure period ranges from 5 9 years. No collateral security upto a loan limit of Rs. 1.00 lac for individuals and Rs. 10 lacs for Groups (Assets created out of the bank loan would be hypothecated to the Bank as Primary Security). Loans exceeding the above limit collateral/s like third party guarantee/assignment of LIC policy required.

Khadi and Village Industries Commission (KVIC) To provide for rural industrialisation and employment generation. Key Benefits

Provides provide self-employment and subsidy.

Terms & Conditions

Rural artisans/entrepreneurs. Project cost = 10-25 lakhs. Repayment schedule will be based on cash accruals. Margin money subsidy will be 25% depending on project cost.
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Margin contribution by borrower will range from 5-10 % The tenure period = 9 years No collateral security

Documentation: Documentation Plays a very important role in record keeping and operations. Annexure 2 - 5 consist of the application for loan, demand promissory note, and General form of guarantee used by Bank of Baroda.

3.3

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. These contributions can be very small (e.g. Rs.10 per week). After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small internal loans for micro enterprise activities and

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consumption. Only those SHGs that have utilized their own funds well are assisted external funds through linkages with banks and other financial intermediaries.

with

Model of Satat Seva Samiti Satat Seva Samiti (SSS) is a friendly non-government development organization established in the year 2008 by a group of professional to address the issue of poverty- stricken people. Since its inception SSS has endeavored to deal with critical issues like illiteracy, health, poverty, assets less status of the poor and to achieve the goal of gender mainstreaming and thus linking it to the broader aim of sustainable development. A major part of the NGO now, is working towards the encouraging Self Help Groups through Micro Financing. In 2008 SSS realized the importance of economic empowerment which can have a cascading effect on the overall development. With this SSS shifted its focus towards economic empowerment of people and took up Micro Finance as its major area of activity. Currently SSS is providing support to more the 10 SHGs and able to influence more than 200 families to achieve economic sustainability. Mission 'To provide financial services to the economically weak and disadvantaged groups for their livelihood enhancement.

Organization Structure
President

Vice President

Secretary Joint Secretary

Cashier

Members

Members

Figure 7

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Working of Satat Seva Samiti: The meetings of the SHGs under SSS are held between 11th and 14th of every month. All the members are informed about the meeting one or two days prior to meeting. The applications for the loan are entertained throughout the month, however the allocation of the loans are done in the meeting. Appointed Secretary of the SHG receives the applications from the members and documentation is done accordingly. All the documentation of the SHG is being handled by Secretary only. The cashier take cares of accounting and maintenance of the funds. A minimum of 15% of the total saving from the members is kept as a reserve from the corpus for catering urgent requirement from the members. The remaining amount received in terms of deposits from the members and repayment of installments is being distributed amongst the applicants of the loan. The priority and the rate of interest are being decided by the president. The Vice president helps the president in prioritizing the loan disbursement and sanctioning of the loan amount. Basic guidelines for disbursement of loans are as follows: A member can avail loan facility upto 3 times of saving at any given point of time under normal circumstances. For personal requirements which are critical in nature (for eg. Health issues, accidents etc.), the loan can be extended to 10 times of the savings. Normal interest rate charged against the loan varies from 12% to 20% p.a. depending on the purpose of the loan and the savings of the member (who is availing the loan facility). For promoting entrepreneurship amongst the members, they can avail loan upto 10 times of their saving at the minimum rate. The interest rates for the personal purposes are charged on progressive basis, i.e. more the amount of loan higher the interest rates. Tenure of the loan is flexible to the members. A processing fee of Rs. 100-500 is charged on every loan. Accidental insurance of Rs. 100000 is provided to every member. Documentation of SSS in embedded in annexure 8.

3.4

Joint Liability Group

A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to 10 individuals but can be upto 20 members, coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. The JLG members would offer a joint undertaking to the bank that enables them to avail loans. The JLG members
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are expected to engage in similar type of economic activities like crop production. The management of the JLG is to be kept simple with little or no financial administration within the group. JLGs can be formed primarily consisting of tenant farmers and small farmers cultivating land without possessing proper title of their land / rural entrepreneurs engaged in non-farm activities. A basic requirement for joint-liability security for Bank loans is that the farmers concerned, form themselves into groups of people who know and trust each other. These groups may vary in size from a minimum of 4 to a maximum of 10 farmers depending on the need and circumstances; Each year the group members who want to borrow for seasonal production costs sign a contract in which they accept liability not only for their own individual loans, but also for the loans borrowed by other members of their group. The loans are made by the bank to individual farmers or to the group collectively. The amounts borrowed by each person depend on his or her individual needs, subject to a maximum of certain prescribed amount in the policy (say Rs. 50,000) which can be borrowed with this form of security. The JLGs should necessarily comprise the farmers or entrepreneurs (undertaking production of the same crops or group of crops or undertaking non-farm activities to ensure cohesive functioning and facilitate procurement of inputs, processing, marketing, etc.) All the members of the JLG should be residing in the same village / compact area and not drawn from different / distant places. Size of the JLG The group should be formed preferably with 4 to 10 members (upto 20 members) to enable the group members to offer mutual guarantee. Formation of JLGs Banks may initially form JLGs by using their own staff wherever feasible. Banks may also engage business facilitators like NGOs and other individual rural volunteers to assist banks in promoting the concept and formation of groups. State Government Departments like Agriculture Department also could form JLGs of tenant farmers and small farmers not having clear land title. The JLGs of such eligible farmers can also serve as a conduit for technology transfer, facilitating common access to market information; for training and technology dissemination in activities like soil testing, training, health camps and assessing input requirements.

JLG Models Banks can

finance

JLG

by

adopting

any

of

the

two

models.

Model A Financing Individuals in the Group: Model B Financing the Group:

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Credit Assessment The JLG would prepare a credit plan for its individual members and an aggregate of that is submitted to the banks. Banks may evolve simple loan application for this purpose. The individual members of JLG would be eligible for bank loan after the bank verifies the individual members credentials. Purposes of credit The finance to JLG is expected to be a flexible credit product addressing the credit requirements of its members including crop production, consumption, marketing and other productive purposes. Banks may consider cash credit, short-term loan or long term loan depending upon the purpose of loan.

3.5

Grameen Bank

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. 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 Loan disbursed directly to individuals All loans repaid in 50 installments

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Grameen Bank Concept A. Idea of Microcredit Micro-credit is a small amount of loan given to the poor to develop their standard of living. This small amount of loan can help people to come out the cycle of poverty by generating income. Defining micro-credit, it is a - Financial service where small amounts of money (usually around $50-$150) are loaned to poor people for use as a capital to start or expand small businesses It is amazing how does the little amount of money gives strength to the poor to start a business and helping to break out the vicious cycle of poverty. This small amount of loan or financial supports to the needy people helps to encourage setting up free-businesses. In other way, it is a financial innovation system that comes from Grameen banking system or procedure which is based on trust and collateral-free and opposite to conventional banking system. In order to get loan people go to the conventional bank but Grameen Bank approaches rootless or landless peoples door steps. It is incredible that, without guarantee any bank can allocate or sanction loan to the rootless or vulnerable people. This loan giving approach placed Grameen Bank in a unique position in microfinance and approaches beyond the boundaries. Micro-credit summit was held at Washington DC on 2-4 February 1997, adopted microcredit that, Microcredit (mI- [*]Kro'kre-dit); noun; programs extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families - Microcredit Summit. So, micro-credit is an extension of extremely tiny loan given to the rural poor villagers to assist them to be identical human beings, so that they can operate small-scale business and can afford shelter, food, education as well as treatment to their families. B. General Features of Microcredit Grameen Bank allocates credits to the poor and uneducated women in rural places and created trouble-free loan method with easiest re-payment system without imposing any terms and condition because its main concern is to build social assets in order to achieve prosperity. C. Structure and Institutional Framework Figure 8 shows the structures of micro-credit. First step is to create motivation that everybody has a potentiality to do and receive. Second step is to build up the society and arranging training program. Third step is to give credit proposal then distribute fund for personal investment. Gradually comes rest of the work such as; fund collection, returns, operations and credit cost. Though interest is 20% but repayment is 98%. Interest rest is high because of Grameen giving door to door services and provides exclusive training program for the borrowers and all activities are handled by the Grameen field workers.

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Figure 8 Gameen Bank Loan System Grameen bank adopted unique loan systems that are 1. Voluntary formation where people create groups. Each and every group is consisting of five in numbers. Only two members are allowed to take a loan at first time. 2. If the performances are reaching at the satisfactory level then next two borrowers can apply for loans. 3. Finally, fifth member can be selected for loan. 4. After approving loan Grameen Bank arranges a training program. Training program comes after the loan is because Grameen Bank assumes that if it starts first most of the borrower will be scared with the system and they will lose their interest to get loans. Consequently, it will not work. Below Figure 9, indicates how they distribute loans among the borrowers step by step. After getting loans people are engaged different types of business such as pottery, weaving, paddy husking, garment sewing, storage and marketing for self-development.

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Figure 9: Loan Distribution System of Grameen Bank at ground Level Organizational hierarchy of Grameen Bank Grameen Bank finance project which is working with a strong chain. There are eight groups where each group is consisting with five members. Branch office is controlling fifty centres where five centres consisting of 2000 members. Area office is looking after five branch offices and zonal office is handling five area offices and finally general office is going to look after all these matters related to the loan giving and repayment process.

Figure 10 Micro-credit ascends over the time only for innovation and implementation of highly designed structure.

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3.6

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 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 principles1. 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. 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. 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 peoples 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%.
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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. 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. 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.
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Products of SKS Microfinance

Figure 11 Product Income Generation Loans (IGL) Aarambh Features Loans range from Rs. 2,000 to Rs. 12,000 for the first loan; subsequent loan amounts determined by past credit history and increased each in set increments upto a maximum of Rs. 14,000 Term of the loan is 50 weeks with principal and interest payments due on a weekly basis 12.5% flat interest rate / 24.55% annual effective interest rate and processing fee of 1% Loan amounts range from Rs. 2,000 to Rs. 10,000 in each annual cycle; subsequent loan amounts determined by past credit history and increased Benefits Provides self-employed women financial assistance to support their business enterprises, such as raising livestock, running local retail shops called kirana stores, providing tailoring and other assorted trades and services

Mid-Term Loan (MTL) Vriddhi

Provides self-employed women financial assistance to support their business enterprises, such as raising livestock, running local retail shops called kiranastores,
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each in set increments upto a maximum of Rs. 14,000

providing tailoring and other assorted trades and services

Available any time after the completion of 20 weeks & before 40 weeks of an IGL cycle Term of the loan is 50 weeks with principal and interest payments due on a weekly basis 12.5% flat interest rate / 24.55% annual effective interest rate and processing fee of 1% Financing of mobile phones and telephone services Loan amounts range from Rs. 1,800 to Rs. 3,000 26.0% annual effective interest rate and loan processing fee of 1% Sangam Store Loans Interest free The program allows these members to purchase their inventory of consumer goods and groceries from a national wholesaler at wholesale prices Provides financial access to women for construction of new houses or improvement & extension of existing houses

Mobile Loans

Provides financing for mobile phones and telephone services to our members

Housing Loans

Term of the loan is 7 days Loans range from Rs. 50,000 to Rs. 150,000 Members must have completed at least 3 IGL cycles to qualify or one ILP to be completed Term of loan is 3 to 5 years with principal and interest payments due on a monthly basis

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11.9% flat interest rate, 21% annual effective interest rate In addition, loan processing fee of 2% collected upfront "A funeral assistance of Rs.1000 is applicable only for members who have paid insurance premium, and is provided to family of the member if information is received within 14 days death. This amount is adjusted in the final payout of the principal amount." Loans range from Rs. 2,000/- to Rs. Provides personal or business loans to our 100,000/members and non -members secured by gold jewelry to meet their short term liquidity Nature of loan can be either Bullet or requirements. EMI and tenure can be opted upto 12 months Annual effective interest rate ranges from 12% to 30%, depending on the % of disbursement opted to net weight of gold jewelry. Membership fee of 0.5% on the first loan disbursed to non members SKS MICROFINANCE GOLD LOAN SCHEME CHART Scheme Rate of Loan Name Interest eligibility per (per gram of gold Annum) value 50%(Scheme available for one month A 12 only) B 18 60% C 21 70%
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Funeral Assistance

Gold Loan

D 24 80% E 27 82.50% F 30 85% *Interest rate are in proportion to loan to value provided to the customer for the gold pledged Source: sksindia.org Table 5- Products of SKS Microfinance Distributor Product Life InsuranceFeatures- Weekly payment of Rs. 20 for the term of five years Upon death, we disburse to the beneficiary the full sum assured of Rs. 5,000 plus the account value, which is equal to the aggregate of the premiums paid plus interest accrued, if any, less any charges for the administration of the policy. In the event the death is deemed an accidental death, the beneficiary receives Rs. 10,000 plus the account value. Upon maturity in five years where no death has occurred, we disburse to the policyholder the account value.

3.7

Milaap Model

Milaap is an online platform that enables you to lend to India's working poor so they can get access to education, clean water, energy and more. Its a loan, not a donation. This means you get your full loan amount back once your borrower repays it. Milaap takes zero-percent interest loans from online users, puts them to work, and acts as an intermediary. The capital Milaap raises is fed into a network of field partners who underwrite the risk of repayment and lend to the borrower. Milaap says it provides the capital at a cost less than half of the current financing costs of its field partners, most of whom cannot even access capital from traditional sources. Thanks to this ecosystem, Milaap can track capital all the way through the value chain. Characteristics of Milaap's model Milaap takes special care to design loan products that meet its clients' needs. It focuses on microfranchise organizations with emerging business models, specifically those between the post pilot and commercial funding phases of development. Milaap prefers to work with organizations that have built good relationships with their borrower base and are exploring ways to lower their capital costs, eventually to pass on the benefits to the end borrowers.

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Working of Milaap model Following are the steps followed into Milaap's methodology. It starts with identifying what we call a 'dignified life challenge' - one that recognizes the lack of basic needs for any Indian citizen or community. After identifying the challenge, Milaap design customized programs and raise capital for the loans. Then, the loans are disbursed, monitored and any support required is provided. Once the borrower begins to repay the loan, the lender gets credited with Milaap credits. The seventh and final step is what gives your loans momentum - the recycle step. The lender can decide to re-lend the money and thus make the same amount help multiple families over time.
Identify Recycle Design

Repay

Facilitate

Support

Disburse

Figure 12 - Steps of Financing 1. Identify the Challenge: Milaap partners with established organizations that have a strong presence at the grass roots and a deep understanding of the audience to identify key challenges and communities that face these challenges. 2. Design Customized Credit Programs: Milaap and its field partners design customized loan programs, not only for income generation but also for access to basic facilities, taking into consideration: The borrower's ability to pay - to ascertain the interest rates on a loan; from 12 to 18%, which is half the existing interest rate offered. The regularity in cash flow - to develop the monthly repayment schedule that can spread from 12 to 24 months, depending on the need. The access to market links - to provide borrowers with the connections and safety nets essential for effectiveness.

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3. Facilitate: Milaap Shares Loan Requests and Raises Capital at Milaap.org shares requirements, backgrounds and photos of all borrowers for 30 days in the following five areas of focus: Energy Education & Vocational Training Healthcare Sustainable Farming Water & Sanitation This online listing of borrower profiles enables the lender, to select the cause and the borrower of their choice and give a loan of minimum USD 50 or Rs 1000 or the amount required to complete a loan. 4. Field Partners Disburse Loans: Every month, Milaap sends the total loan collected to its various field partners who are responsible for the relevant loans. The field partners then check the loans pledged to a borrower and disburse the respective loan amount. At times when a borrower has an immediate need, the loans are funded in advance by the field partner. They are then reimbursed once the borrower's loan receives support on Milaap. 5. Field Partners and Milaap Monitor and Support Loan Usage: Throughout the loan cycle, field partners regularly monitor the progress of the borrowers. This monitoring enables to ensure effective use of the loan amount. It also helps us intervene with additional support if required and where possible. Field partners also conduct social impact assessments to study if the loans provided help borrowers rise above the poverty index and to understand ways in which we can improve the quality of the outcome. The data gathered allows them to keep the lenders informed about the use and success of the loans, thereby involving lenders at all stages of the loan cycle. 6. Field Partners Collect Repayments and Milaap Returns the Loans: The field partners collect repayments, including interest from the borrowers every month. The interest of 12 to 18% is charged to cover operational costs for Milaap and our field partners. Milaap makes monthly deposits of the repaid loan installments into your (the lender's) Milaap account. At the end of the loan cycle you can choose to withdraw the repaid loan amount or decide to relend it to another borrower on Milaap. 7. Recycle: If the lender want to re-loan the amount, they can do it with the help of the portal and the whole cycle continues to get multiplied. Milaap has launched a high-potential hybrid social enterprise model. The web platform development, marketing, communications, and fundraising are managed through a forprofit arm to ensure operational efficiency. A nonprofit arm provides capacity-building to field partners, assisting with tasks like social impact assessments and other field issues that at times are best managed with the double bottom-line in mind.
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Chapter 4

Product Development Product Design Risk Management

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4.1

Product Development

The product development process is designed as a funnel into which an institution enters, starting broadly with a range of potential product opportunities and successively narrowing the new product choices as project feasibility is researched and analyzed through the various stages of development. Below figure shows the Product development cycle or how new product can get develop in market.

Figure 13: Approach towards New Product Development The design and development phase, deals with designing and developing a prototype (a representation of all or parts of a product) to be pilot tested. This phase requires two major steps: 1. Internal setup-. This process involves mobilizing the interdepartmental collaboration necessary to undertake the development of the new product including identifying a product champion (its main proponent), staffing the cross-functional team, and building institutional buy-in, or full acceptance, of extending the product line. 2. Market research- Once the desired product mix has been defined, the MFI undergoes a process of segmenting the market and forecasting demand through different methods of market research. Sources of information and approaches for gathering data can be pulled

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from both inside the organization and external sources, including valuable customer feedback. Market research would be helpful in Segmentation of the current market, identification of the target customers and finally positioning the MFI into the market. 3. Pilot testing-The pilot test phase, which involves the introduction of the prototype into the market on a limited scale to provide a reality check on the research and to refine the product. The process involves: Selecting test sites, which includes the size of test group, location of test, and target market; Setting landmarks during the pilot test to pause for analysis and product refinement; Establishing test duration by comparing the benefits of thorough field research with the costs involved, including direct cash outlays and the opportunity cost of time and market share; and Analyzing the results of the pilot test by considering the financial, competitive, methodological, and institutional issues of adopting the new product. 4. Product launch- Product scale-up, or rolling out the product to the entire market, starts with the four Ps of marketingproduct (design), price, promotion, and positioning (including both physical distribution and market positioning vis--vis competing products). Implementation of a new product also requires building up the institutional capacity of the organization in terms of staff training, incentives, and information systems.

4.2

Product Design

The product development team must translate the research into a product that will meet customer needs. It should include the following: Product Product design takes into account the component parts of the product: Core Product. At a minimum, a product must offer the main benefits the customer expects from the product or fulfill a need. For loan products, the core is financing that matches the fluctuating cash flow needs of the microenterprise. For savings products, the core involves security, liquidity, and returns. For insurance, the core is a financial cushion during difficult times. Although these points seem obvious, many MFIs offer loans without flexible terms to match seasonality; savings products that offer only limited withdrawals or paltry returns; and insurance products with such cumbersome claims procedures that financing arrives after the crisis has passed. It is critical that the product fundamentals are in line prior to packaging or augmenting it with related services. Actual Product. The actual product includes the specific terms, interest rates, eligibility requirements, packaging, and other features that directly meet customer needs. In

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microfinance, packaging includes the length and clarity of the loan application as well as the color of the savings passbookand clients typically have strong preferences. Augmented Product. The augmented product includes such ancillary services as the application turnaround time, hours of operation, and waiting room facilities, which determine the accessibility of the product. How the customer receives the product, including how it is delivered and serviced, is critical to ensure market acceptance. Loan turnaround time can be a competitive advantage, Simplicity in documentation can be another driving factor. The total product must balance customer preferences with an MFIs financial, physical, and cultural capacity. For example, a customers need for financial return or liquidity must be balanced with an institutions desire to achieve self-sufficiency or manage risk.

Price The main components for pricing are

Pricing

Cost Recovery

Competetive Consideration

Cost of Capital

Cost of Product Delivery

Fixed Cost

Figure 14: Pricing Of a Product Cost Recovery: When pricing a product to recover costs, an MFI should take into consideration all related expenses, over and above the cost of capital, incurred to deliver a product. For example, savings mobilization introduces new costs including stepped-up security at the branch level, lotteries, which are a common form of promotion, and regulatory compliance. Credit products with more flexible repayment schedules may require system upgrades to track activity. All new product introductions will involve training costs, which not only include direct costs (such as instructor salary and class materials) but also the opportunity costs of not having loan officers deployed while
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in class. Generally, if the MFI is striving for financial self-sufficiency, it must cover its most significant cost: salaries to loan officers and other MFI staff. Break Even Point Analysis plays a important role in deciding the price of the product. The BEP analysis consider following to get the Break Even Sales volume which helps in determining feasibility of the new product: Fixed Costs - Includes all the expenses incurred in marketing the product. salaries are one of the highest expenses in microfinance. Delinquency Cost - Delinquency Cost refers to Debtors related cost i.e. to recover money, making phone calls, sending reminders to them or any other cost incurred on account of interaction with them to recall as to account balance. Thus, Follow-up debtors cost is called Delinquency Cost. Spread: the difference between the price of its product and the cost of capital Average Loan size: It is an estimate which a MFI has out of experience of self or competitor or through market share. The break-even point determines the volume of sales a product must generate to cover the fixed costs of delivering a product, once estimates of the delinquency costs and the average loan size have been made. Any sale over the break-even volume is profit. The break-even formula, a very basic version of which is provided below, also shows how changes in price impact the MFIs ability to recover its costs. Break Even Sales Volume = Competitive Consideration Price communicates messages to both customers and competitors regarding an MFIs marketing and positioning strategy. High prices are often associated with better quality, superior customer service, and professionalism. A transforming MFI may decide to price its products in the higher ranges to give the impression that it is a sophisticated financial institution. Place place refers both to the physical location (or distribution) of the product, and to its positioning in the market, relative to competing products. Distribution: The physical distribution system for most MFIs is its branch network, which may need to be upgraded to incorporate new products. Based on costs and risk, it may be prudent for an MFI to enter into a partnership with an existing organization to provide access for its new product. Position: The other aspect of product placement is its competitive position in the market. The MFI must decide if it will position itself as a full service intermediary where clients can have the convenience of one-stop shopping or the efficient provider of an undifferentiated product line. This decision goes beyond the design of
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the specific product to include how the institution wants to define itself. For example, some MFIs define themselves by the breadth of their reach, preferring to reach many clients with one or two products rather than fewer people with a variety of products. Financial Measures for Calculating Financial Risk The measures analyze the business health, the net worth of the business, the strengths and weaknesses of the business. The main instruments used for analyzing financials of a MFI are: Return on Investment Free Cash Flow Time Value for Money a). Net Present Value b). Internal Rate of Return Annexure 7 shows the calculation of these ratios.

4.3

Risk Management

Microfinance institutions (MFIs) essentially act as financial intermediaries, bridging the gap between mainstream financial institutions and low-income households for a specific type of credit need that is short-term and unsecured. The concept of risk lies at the heart of any such financial intermediation. Systematic Risks Systematic risks that face the entire sector, such as rainfall failure, impact the livelihoods of a large numbers of clients simultaneously and cannot be eliminated, but can be mitigated by purchasing insurance at a portfolio level, or diversifying across regions. However, a significant systematic risk that has emerged in recent times and which has impacted MFIs severely is political risk. As MFIs deal with low-income households, their operations are subject to scrutiny by State governments and local powers, in addition to formal regulators. Recent experiences of political interference bring out the vulnerability of MFIs to these risks: In 2006, 50 branches of two major MFIs were closed by authorities in Krishna district of Andhra Pradesh; in 2009, repayments almost came to a grinding halt in Karnatakas Kolar district; and in 2010, the Andhra Pradesh Government introduced a law that reduced MFI repayments dramatically. Clarity on regulatory framework, and jurisdiction of State governments vis--vis non-bank financial institutions is critical in mitigating political risk. At the institutional level, this can be managed by building a closer connect between the institution and customer groups so that there is resistance to local political interference that constrains the business activities of MFIs.

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Idiosyncratic Risks Idiosyncratic risks are internal to an entity and comprise primarily operations and credit risk. In microfinance, these two are deeply intertwined and are potentially among the primary reasons why MFIs fail. In the Joint Liability Group (JLG) model, typically followed by MFIs to disburse credit, as credit decisions are taken by the group on the basis of its access to private information about each member, the quality and robustness of the group formation process becomes crucial in credit risk management. The mechanism of group cross-guarantee, if implemented as per the rules that govern group formation, will result in positive selection of members. It is important, however, that the under-writing process be undertaken by the group and not by the MFI. Dilution of group formation and meeting norms are early warning signs of process deterioration that should trigger concerns about credit quality. Outstanding MFIs pay a great deal of attention to factors such as length of the group formation process, regularity of group meetings and attendance rates.

Operational Risks Microfinance is an operations-intensive model and weak processes affect internal control and manifest as fraud and other operational failures. Detailed mapping of the processes and subprocesses will help MFIs identify risks, as also the weak links that pose a greater threat of fraud. To detect fraud early and take action, MFIs should have a risk-scoring model, giving each branch a risk score. Taking a holistic view, the model should be based on diverse parameters. Branches with history of fraud should be penalized in the risk-scoring model and the frequency of audit linked to the risk score. This helps understand two key questions: Which branch has poor portfolio quality? Is the branch witnessing fraud? Cash movement As all MFI disbursements and collections are cash-based, the institutions face high risk due to movement of cash. This is exacerbated for institutions operating in remote geographies. If movement of cash is not tracked and checked against demand and collections, it can result in fraud. Such fraud can be mitigated by MFIs setting cash retention limits for branches, with deviations approved and recorded. Reconciliation of cash through MIS in the branches bank accounts is important in scrutinizing float and idle cash at each level. Risks such as burglary during cash movement can be mitigated through insurance for cash-in-transit; cash-in-safe and branch; and fidelity insurance. Interest rate volatility Interest rate volatility is among the key risks MFIs face today. Changes in interest rates at which they borrow impact spreads, especially in the short term. Most MFIs do not explicitly manage interest rate risk. Increase in cost of funds severely squeezes margins, impacting profitability and operational self-sufficiency.
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With increased competition and pressure to cut interest rates, MFIs are also not in a position to pass on interest rate increases to clients. With proposed regulations on capping margins, interest rate risk will continue to be one of the key threats for MFIs. Long-term borrowing, with hedging and diversification of funding sources, will enable MFIs to mitigate interest rate risk. Given that MFIs typically have positive duration of equity (liabilities are longer dated than assets), their asset-liability management strategies have also to take into account scenarios arising from interest rate movements that impact profitability. As with any other financial institution, risk management is critical to the success of MFIs. The unique context of MFI operations that involve under-writing by client groups and dealing in large amounts of cash outside branch locations create specific risk management needs. MFI boards, lenders and investors should be cognizant of these features. Development of a Risk Management System To prepare for unexpected events and their costs, an MFI can identify and prepare for the most common and expensive risks. All financial institutionslarge or small, regulated or unregulated should design a risk management system that is based on the institutions particular needs, clients, products, legal status, and internal capacity. Effective Risk Management Classic risk management requires an organization to take four key steps: 1. Identify the risks facing the institution and assess their severity (either frequency or potential negative consequences) 2. Measure the risks appropriately and evaluate the acceptable limits for that risk; 3. Monitor the risks on a routine basis, ensuring that the right people receive accurate and relevant information; and

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4. Manage the risks through close oversight and evaluation of performance is profitable and whether costs are adequately covered.

Table 7: Steps in Risk Management Successful MFIs incorporate risk management into their organizational design, lending methodologies, savings services, and operational procedures. Identify, assess, and prioritize risks The first step in risk assessment is to identify risks. To identify risks, the MFI reviews its activities, function by function, and asks several questions. Access Probability-The second step involved in risk assessment is to determine the probability of risks occurring and their potential severity. To assess the probability and severity of risks, a risk management chart or matrix, such as the one presented in Table 8, can be useful. Prioritize Risks- A risk management matrix helps the risk managers assign ratings to different risks and prioritize those areas that need additional attention. For each risk, the matrix assigns a rating of four different factors: (1) The quantity or severity of the risk, based on the potential severity and probability of occurrence (e.g. Low, Moderate, or High); (2) The quality of existing risk management, or how well management currently measures, controls, and monitors the risk (e.g. Strong, Acceptable, Weak); (3) The aggregate risk profile for that risk, combining the first two measures (e.g. High, Moderate, Low); and (4) The trend or direction of that risk (e.g. Stable, Increasing, or Decreasing).
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Business Risk or Activity Credit policy and underwriting Disbursement/ Funding Approvals Portfolio monitoring, Collections Cash and program Reconciliation Member/Borrower Training

Quality of Quantity of Risk Risk Management Group Lending Moderate Moderate Moderate Moderate Low Acceptable Acceptable Strong Acceptable Acceptable

Aggregate Risk Profile

Direction/ Trend

Moderate Moderate Moderate Moderate Low

Stable Stable Stable Stable Stable

Individual Lending Credit policy and underwriting Disbursement/ Funding Approvals Portfolio monitoring, Collections Cash and program Reconciliation Loss Reserve Policies, Procedure High Moderate Moderate Low Moderate Acceptable Strong Week Acceptable Acceptable Savings Deposit & withdrawal Policies Reporting and record Keeping Liquidity and Branch Funding Cash and program Reconciliation Moderate Moderate High Acceptable Weak Strong Moderate Moderate Moderate Stable Stable Stable Stable High Moderate High Low Moderate Decreasing Stable Stable Stable

Low Acceptable Low Table 8: Sample Risk Management Matrix

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Develop strategies to measure risk After the board and management define priorities, they can develop strategies that guide the organizations management of those risks. The board typically develops policies and sets the outer parameters for the business activities of an organization. Within those broad policies, management then develops guidelines and procedures for day-to-day operations. Table 9 lists some sample policies that cover major risks to an MFI.

Risk Category

Policies By the Board Permitted lending activities Portfolio diversification (e.g. % of capital to one product, maximum exposure to any borrower, etc.) Reserve requirements and reserve ratios

Management Responsibility Detailed underwriting guidelines or procedures Portfolio monitoring and reporting on asset quality Operational procedures designed to mitigate transaction and credit risk Investment management guidelines and procedures

Credit Policies

% in cash or cash-equivalents Risk parameters for portfolio (e.g. % in treasury bills, equities, bonds, credit risk of individual instruments) Maximum currency exposures Maximum asset and liability mismatch (usually as % of capital) Minimum cash reserves equal to a certain percentage of deposits (for client cash withdrawals) Maintain cash balances or lines of credit equal to cover new loan demand and potential cash losses from delinquency

Test the portfolios sensitivity to interest rate changes Balance Risk of Principal with income

Liquidity Policies

Choose how cash management will be centralized or decentralized among Branch Offices

Choose short-term investment instruments (treasury bills, staggering terms, etc)

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Maintain operating reserves equal to 2-3 months operating expenses Capital allocation to support risk of different business activities Minimum capital adequacy ratio (sufficient cushion if the loss occurs) Choose short-term investment instruments (treasury bills, staggering terms, etc)

Capital Adequacy

Design operational policies and procedures to mitigate risk In most cases, an MFI lives with certain risks and designs a lending methodology and system of controls and monitoring tools to ensure that a) risk does not exceed acceptable levels, and b) there is sufficient capital or liquidity to absorb the loss if it occurs. These controls might include: Policies and procedures at the branch level to minimize the frequency and scale of the risk (e.g. dual signatures required on loans or disbursements of savings). Technology to reduce human error, speed data analysis and processing. Management information systems that provide accurate, timely and relevant data so managers can track outputs and detect minor changes easily. Separate lines of information flow and reconciliation of portfolio management information and cash accounting in the field to identify discrepancies quickly. Implement into operations and assign responsibility The next step is for management to integrate those policies, procedures and controls into operations and assign managers to oversee them. In the implementation process, management should seek input from operational staff on the appropriateness of the selected policies, procedures and controls. Operational staff can offer insight into the potential implications of the controls in their specific areas of operation. If it is possible that the control measure will have an impact on clients, then management should speak with line staff to understand the potential repercussions. In addition, MFIs can use client surveys or interviews to understand clients reactions to a new operational procedure or internal control measure. Test effectiveness and evaluate results Management must regularly check the operating results to ensure that risk management strategies are indeed minimizing the risks as desired. The MFI evaluates whether the operational systems are working appropriately and having the intended outcomes. The MFI assesses whether it is managing risks in the most efficient and cost-effective manner. By linking the internal audit
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function to risk management, the MFI can systematically address these questions. To fully verify the accuracy of the MFIs accounts and reduce uncontrolled fraud and credit risks, the MFI should incorporate client visits into the audit processes.

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Chapter 5

Objectives of the Research Methodology Learning Limitations

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INTRODUCTION This chapter focuses on the methodology & the techniques used for the collection, classification & tabulation of data. It light on the research problem, the objective of study & its limitations.

5.1

OBJECTIVES OF THE STUDY:

Understanding various entities involved in micro financing (both in formal and informal channels), and their working. Understanding the Role of government agencies in promoting and controlling the micro financing industry. Understanding the risks involved in various models and its management. Understanding the policies and procedures followed in the Industry. Recommending ETG on the best practices that can be implied in the Rural Bank of ETG.

5.2

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the problem. It is a game plan for conducting research. In this we describe various steps that are taken by the researcher. All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to inquiry and inquiry leads to invention. Research in a common parlance is a search for knowledge. Research is an art of scientific and systematic investigation. Thus research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data, making deductions and reaching conclusions. Research methodology is the arrangement of condition for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research Methodology is the conceptual structure within which research is conducted. It constitutes the blueprint for the collection measurement and analysis of the data. Research methodology is a framework for the study and is used as a guide in collecting and analyzing the data. It is a strategy specifying which approach will be used for gathering and analyzing the data. it also includes time and cost budget since most studies are done under these
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two constraints. The research methodology includes overall research design, the sampling procedure, the data collection method and analysis procedure. TYPE OF RESEARCH USED:Descriptive Research In the study descriptive research design has been used. As descriptive research design is the description of state of affairs, as it exists at present. In this type of research the researcher has no control over the variables; he can only report what has happened or what is happening Descriptive research designs are those design which are concerned with describing the characteristics of particular individual or of the group. In descriptive and diagnostic study the researcher must be able to define clearly what he wants to measure and must find adequate method for measuring it. In this study data have been taken from various secondary sources like: Internet Books Magazines Newspapers Journals

5.3

Learning
Financial inclusion in Microfinancing industry plays a great role in developing the rural market and one of the main factors helps in making the business sustainable and productive. The products has to be tailor made, as the local demand for finance to the people can vary drastically even at the shorter change in distance. The demand and trends can change amongst the communities. As the target group generally doesn't have high educational level, the policies and procedures needs to be simple to facilitate and encourage the products. The ground level executives plays a great role in success of the organization, a constant feedback and monitoring is one of the key factors in the development of the brand in the rural market. There is a huge scope of diversification once a proper distribution channel is in the place.
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In an unorganized market with less legal framework, there is a huge political and economical risk, for example in India, as in absence of a law, microfinance companies had faced obstacles from state governments to expand their businesses. NABARD and SIDBI are acting as backbone of microfinance industry. These bodies are acting as pioneers in the industry. The MFI providing products at a cheaper rate are experiencing a loyal customer base and less nonperforming assets as compare to industry average.

5.4

Limitations
Time Constrain - Shortage of time was a very big constraint due to which some area of micro finance has been included in the study. Resource Constrain - Availability of data was a constraint due to which only secondary data is considered, which is available, and also there are some MFIs whose data was not available.

Secondary Data - All the information available was from secondary sources and data was very vast to analyze properly & accurately. Wide Area to Study - Study being conducted was very wide & analysis require expertise knowledge & skills which was lacking.

Indirect Sources of data Collection are also used - The information is collected from indirect sources also, therefore authenticity cannot be justified in some cases.

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5.5

Conclusion

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. From Business perspective there is still a huge scope to expand the wing and earn economic profit in the Industry. The main concentration of market players in Microfinance industry should be in bringing efficiency and effectiveness in the operations and optimally use the available resources while considering the needs of the customer base which are dynamic in nature. A good ground level staff can make a huge difference in creating or breaking an organization.

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ANNEXTURE

Annexure 1 bob\Revised Fair Practice Grievance Redressal New Guide Line18012013.pdf Guidelines from RBI Annexure 2 bob\BOB.pdf Agreement for Agriculture Finance with Bank of Baroda Annexure 3 bob\canara bank microfinance.pdf Application Form for loans to Micro and Small Enterprises Annexure 4 bob\DP note_BOB.pdf DP Note for Bank of Baroda clients(Borrowers) Annexure 5 bob\Gar_BOB.pdf General Form of Guarantee (Bank of Baroda) Annexure 6 bob\Summary Legal Framework for Institutions.docx Summary of Legal Framework Annexure 7 bob\CALCULATION OF FINANCIAL MEASURES.docx Financial Measures Annexure 8 Annexures\ANNEXTURE 8 Documentation process of Satat Seva Samiti.docx Documentation of Satat Seva Samiti

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REFERENCES
http://www.rbi.org.in/home.aspx http://sidbi.in/?q=growth-capital-equity-assistance http://www.nabard.org/ http://www.nabcons.com/ http://www.nabfins.org/ http://smallb.in/ http://www.sidbiventure.co.in/ http://mfinindia.org/ http://www.sa-dhan.net/ http://www.milaap.org/ http://www.sksindia.com/ http://www.bankofbaroda.com/ http://www.scribd.com/doc/15792568/Full-and-Final-Micro-Finance http://mabs4finalreport.wordpress.com/chapters/chapter-3-the-mabs-approach/

wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2010/04/15/000333038_ 20100415005707/Rendered/PDF/187710PUB0REPL10Box345634B01PUBLIC1.pdf
http://www.nextbillion.net/blogpost.aspx?blogid=2056

http://www.microfinancegateway.org/gm/document1.9.34364/CGAP%20Product%20Development%20Course.pdf
http://www.ngoanddev.com/2012/06/factors-to-be-considered-while.html http://www.smeworld.org/story/money/does-rbi-have-capacity.php

http://kb.trilincanalytics.com/upload/f5/f546502afcea3e5.pdf http://www.jointokyo.org/mfdl/readings/NewProd2.pdf http://www.ifad.org/ruralfinance/pub/risks.pdf https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&ved=0 CGMQFjAE&url=http%3A%2F%2Fwww.microfin.com%2Ffiles%2FUWash%2FDesignin g%2520microloan%2520products.doc&ei=kEemUfvYGMLmrAeHqoHwDw&usg=AFQjCNEOKCGSH 5xSmZhwlNTYTC2ZLRy_UQ&sig2=-xk_GVgayEWu-XCAoJ1jA&bvm=bv.47008514,d.bmk http://www.microfinancegateway.org/gm/document1.9.34364/CGAP%20Product%20Development%20Course.pdf

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