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A PROJECT REPORT ON:-

MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA

With Organi ati!n R"#"r"n$"%:-

&DS MFI

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A'STRACT OF T(E PROJECT

L"arning #r!) th" *r!+"$t

, Th" (i%t!r- !# M!."rn Mi$r!#inan$"/ I 0"arnt in ."tai0 th" *r!$"%% !# Mi$r! Finan$"1 #r!) it% n"". at th" gra%% r!!t 0"2"0/ ,F3n$ti!ning !# 2ari!3% G!2t:1 S")i G!2t: & 2ari!3% !th"r ."0i2"r- $hann"0%/ ,Pra$ti$a0 0"arning !# h!4 S(G% ar" #!r)"./ ,Pra$ti$a0 0"arning !# h!4 th" MFI% 4!r5/ ,M!%t i)*!rtant 0"arning1 h!4 it $an $hang" th" 0i#" !# th" E$!n!)i$ .i%a.2antag". *"!*0"/

L"arning #r!) th" C!)*an-

, Mi$r!#inan$" R"g30ati!n in In.ia/ ,Mi$r! Finan$" M!."0/ ,Mi$r!#inan$" Manag")"nt1 Criti$a0 Ana0-%i%/ ,Pra$ti$a0 0"arning !# E63it-1 F3t3r" & O*ti!n% )ar5"t 7- t"r)ina0 tra.ing/ ,8ari!3% %trat"gi"% !# Mar5"t/ ,A*art #r!) Mi$r! Finan$"1 Nin" )in" *r!+"$t%1 4hi$h h"0*". t! r"0at" t! th" Pr"%"nt Mar5"t $!n.iti!n%/ ,'3%in"%% M!."0/

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TABLE OF CONTENTS PAGE ,DECLARATION ,AC&NOWLEDGEMENT ,A'STRACT OF T(E PROJECT 9 : ;

Cha*t"r <- Intr!.3$ti!n = >- Th" (i%t!r- !# M!."rn Mi$r!#inan$" = ?- O2"r2i"4 Cha*t"r 9- G!2"rn)"ntA% r!0" %3**!rting )i$r!#inan$" :- Mi$r!#inan$" S!$ia0 A%*"$t% ;- Th" N"". in In.ia B- Mi$r!-Finan$ing R"g30ati!n in In.ia =- Mi$r! Finan$" M!."0% @- C!!r.inating Mi$r!#inan$" E##!rt% in In.ia <C- Mi$r!#inan$" Strat"gi$ <<- Mi$r!#inan$" Manag")"nt <>- Criti$a0 Ana0-%i% <?- Mi$r!-Finan$" A$$!3nting an. Manag")"nt In#!r)ati!n S-%t")% <9- Ca*ita0 R"63ir")"nt% <:- D"2"0!*)"nt F3n. <;- NA'ARDD% S3**!rt t! )i$r!#inan$" In%tit3ti!n% EMFI%F <B- '3%in"%% M!."0 !# &DS MFI <@- S3$$"%% Fa$t!r% !# Mi$r!-Finan$" in In.ia >C- F3t3r" !# Mi$r! Finan$" ><- T!* :C Mi$r!#inan$" In%tit3ti!n% in In.ia >>- Mi$r!#inan$" In.ia S3))it >C<C @ <> <? <9 <9 <; <= <@ >> >B ?9 9< 9? 9: 9; :; :B :@ ;<

R"$!))"n.ati!n% an. %3gg"%ti!n%


ACRONOMY

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C!n$03%i!n
R"#"r"n$"%

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</ Intr!.3$ti!n
A/ A7!3t Mi$r!#inan$": Microfinance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services. Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that is not always the appropriate method, and that it should never be seen as the only tool for ending poverty. Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. large variety of actors provide microfinance in !ndia, using a range of microfinance delivery methods. "ince the !#!#! $ank in !ndia, various actors have endeavored to provide access to financial services to the poor in creative ways. %overnments also have piloted national programs, &%'s have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. (Microfinance refers to small scale financial services for both credits and deposits- that are provided to people who farm or fish or herd) operate small or micro enterprise where goods are produced, recycled, repaired, or traded) provide services) work for wages or commissions) gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools) and to other individuals and local groups in developing countries in both rural and urban areas*. Marguerite ". +obinson.

>/ Th" (i%t!r- !# M!."rn Mi$r!#inan$" A/ A'STRACT: !n the late ,-./s the concept of microfinance had evolved. lthough, microfinance have a long history from the beginning of the 0/th century we will concentrate mainly on the period after ,-1/. Many credit groups have been operating in many countries for several years, for e2ample, the 3chit funds3 4!ndia5, tontines3 4West frica5, 3susus3 4%hana5, 3pasanaku3 4$olivia5 etc. $esides, many formal saving and credit institutions have been working for a long time throughout the world. 6uring the early and mid ,--/s various credit institutions had been formed in 7urope by some organized poor people from both the rural and urban areas. These institutions were named
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#redit 8nions, 9eople:s $ank etc. The main aim of these institutions was to provide easy access to credit to the poor people who were neglected by the big financial institutions and banks. !n the early ,-./s, few e2perimental programs had started in $angladesh, $razil and some other countries. The poor people had been given some small loans to invest in micro-business. This kind of micro credit was given on the basis of solidarity group lending, that is, each and every member of that group guaranteed the repayment of the loan of all the members. Many banks and financial institutions have been pioneering the microfinance program after ,-./. These are listed below. '/ ACCION Int"rnati!na0: This institution had been established by a law student of ;atin merica to help the poor people residing in the rural and urban areas of the ;atin merican countries. Today, in 0//<, it is one of the most important microfinance institutions of the world. !ts network of lending partner comprises not only ;atin merica but also 8" and frica. C/ SEWA 'an5: !n ,-.=, the "elf 7mployed Women:s ssociation 4"7W 5 of %ujarat 4in !ndia5 formed a bank, named as Mahila "7W #ooperative $ank, to access certain financial services easily. lmost > thousand women contributed their share capital to form the bank. Today the number of the "7W $ank:s active client is more than =/,///. D/ GRAMEEN 'an5: #redit unions and lending cooperatives have been around hundreds of years. ?owever, the pioneering of modern microfinance is often credited to 6r. Mohammad @unus, who began e2perimenting with lending to poor women in the village of Aobra, $angladesh during his tenure as a professor of economics at #hittagong 8niversity in the ,-./s. ?e would go on to found %rameen $ank in ,-<= and win the &obel 9eace 9rice in 0//1. "ince then, innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Today, the World $ank estimates that about ,1/ million people in developing countries are served by microfinance. %rameen $ank 4$angladesh5 was formed by the &obel 9eace 9rize 40//15 winner 6r Muhammad @ounus in ,-<=. This bank is now serving almost >//, //// poor people of $angladesh. &ot only that, but also the success of %rameen $ank has stimulated the formation of other several microfinance institutions like, " , $+ # and 9+'"?!B . ?/ O2"r2i"4 . Mi$r!#inan$" D"#initi!n:
ccording to !nternational ;abor 'rganization 4!;'5, CMicrofinance is an economic development approach that involves providing financial services through institutions to low income clientsD. !n !ndia, Microfinance has been defined by CThe &ational Microfinance Taskforce, ,---D as Cprovision 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 standardsD. |Page 5

3The poor stay poor, not because they are lazy but because they have no access to capital. 3Microfinance is the supply of loans, savings, and other basic financial services to the poor.3 s these financial services usually involve small amounts of money - small loans, small savings, etc. - the term 3microfinance3 helps to differentiate these services from those which formal banks provide !t:s easy to imagine poor people don:t need financial services, but when you think about it they are using these services already, although they might look a little different. 39oor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily e2changed for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. "ome of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe. 3?owever widely used, informal savings mechanisms have serious limitations. !t is not possible, for e2ample, to cut a leg off a goat when the family suddenly needs a small amount of cash. !n-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness 4in the case of livestock5. !nformal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often reEuire rigid amounts of money at set intervals and do not react to changes in their members: ability to save. 9erhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions. C9oor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal.3

$. R!0" !# Mi$r!#inan$":
The micro credit of microfinance prename was first initiated in the year ,-.1 in $angladesh with promise of providing credit to the poor without collateral , alleviating poverty and unleashing human creativity and endeavor of the poor people. Microfinance impact studies have demonstrated that ,. Microfinance helps poor households meet basic needs and protects them against risks. 0. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. =. $y supporting women*s economic participation, microfinance empowers women, thereby promoting gendereEuity and improving household well being. >. The level of impact relates to the length of time clients have had access to financial services. #. Di##"r"n$" 7"t4""n )i$r! $r".it an. )i$r!#inan$": Micro credit refers to very small loans for unsalaried borrowers with little or no collateral, provided by legally registered institutions. #urrently, consumer credit provided to salaried workers based on automated credit scoring is usually not included in the definition of micro credit, although this may change. Microfinance typically refers to micro credit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people. 6 |Page

6. '!rr!4"r%:
Most micro credit borrowers have micro enterprisesFunsalaried, informal income-generating activities. ?owever, micro loans may not predominantly be used to start or finance micro enterprises. "cattered research suggests that only half or less of loan proceeds are used for business purposes. The remainder supports a wide range of household cash management needs, including stabilizing consumption and spreading out large, lumpy cash needs like education fees, medical e2penses, or lifecycle events such as weddings and funerals. "ome MG!s provide non-financial products, such as business development or health services. #ommercial and government-owned banks that offer microfinance services are freEuently referred to as MG!s, even though only a portion of their assets may be committed to financial services to the poor.

7. A$ti2iti"% in Mi$r!#inan$":
Mi$r! $r".it: !t is a small amount of money loaned to a client by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending. Mi$r! %a2ing%: These are deposit services that allow one to save small amounts of money for future use. 'ften without minimum balance reEuirements, these savings accounts allow households to save in order to meet une2pected e2penses and plan for future e2penses Micro insuranceH !t is a system by which people, businesses and other organizations make a payment to share risk. ccess to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work. R")ittan$"%: These are transfer of funds from people in one place to people in another, usually across borders to family and friends. #ompared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds. Pr!.3$t D"%ign: The starting point isH how do MG!s decide what product s to offerI The actual loan products need to be designed according to the demand of the target market. $esides the important Euestion of what risks to cover, organizations also have to decide whether they want to bundle many different benefits into one basket policy, or whether it is more appropriate to keep the product simple. Gor marketing purposes, MG!(s sometimes prefer the basket cover, since it can make the policies sound comprehensive, but is that the right approach for the low-income marketI fter picking products, one must also understand how they are priced. What assumptions do the organizations make with regard to operating costs, risk premiums, and reinsurance, and how did they come to those conclusionsI Would their clients be willing to pay more for greater benefitsI Grom price, the logical ne2t set of Euestions involves efficiency. !ndeed, given the relative high costs of delivering large volumes of small policies, ma2imizing efficiency is a critical strategy to ensuring that the products are affordable to the low-income market. 'ne way is to make the products mandatory, which increases volumes, reduces transaction costs and minimizes adverse selection. What does an organization lose by offering mandatory insurance, and how does it overcome the disadvantagesI MG!(s can combine a mandatory product with some voluntary features to make the service more us to mar-oriented while. T"$hni63"% !# Pr!.3$t D"%ign: To design a loan product to meet borrower needs it is important to understand the cash pattern of the borrowers. #ash pattern is important so far as they affect the debt capacity of the borrowers. ;enders must ensure that borrowers have sufficient cash inflow to cover loan payments when they are due efficiency depends less on the delivery model than on the simplicity of the product or product menu. "imple products work best because they are easier to administer and easier for clients to understand. nother efficiency strategy is to use technology to reduce paperwork, manual processing and errors. |Page 7

MG!s need to conduct a costing analysis to determine how much they need to earn in commission to cover their administrative e2penses.

G. MFIA% Pr!.3$t% an. it% Manag")"nt:


Pr!.3$t & %"r2i$"% !# Mi$r!#inan$" Finan$ia0 S"r2i$"% ,. #redit "ervices-i "mall #redit, "mall $usiness #redit. 0. 6eposit "ervices - Joluntari "avings "ervices, Manda tory "avings. Oth"r Finan$ia0 S"r2i$"% Micro-insurance, ;ife !nsurance , ?ealth !nsurance , ;oan for ?ousing, 7ducation, ?ealth. N!n Finan$ia0 S"r2i$"% Gamily ?ealth and "anitation 7ducation, Ginancial 7ducation, Micro-entrepreneur Training.

%. Th" )i$r!-$r".it% )!."0:


KThe model is fairly straightforward and simple. KGocus on jump-starting self-employment, providing the capital for poor women to use their innate 3survival skills3 to pull themselves out of poverty. K;end to women in small groups 4credit circles5, say of five or seven. K Make loans of small amounts to two out of five. K The three who have not received loans will be eligible only when this first round of loans has been repaid. K 6raw up a weekly or bi-weekly repayment schedule. K !n case any member defaults the entire circle is denied access to credit. K $anks have been given freedom to formulate their own lending norms keeping in view ground realities. They have been asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc.

4. G!2"rn)"ntA% r!0" %3**!rting )i$r!#inan$"


G!2"rn)"ntA% most important role is not provision of retail credit services, for reasons mentioned in %overnment can contribute most effectively byH K"etting sound macroeconomic policy that provides stability and low inflation. K voiding interest rate ceilings - when governments set interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costsFsuch as tiny loans for poor people. "uch ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit. K djusting bank regulation to facilitate deposit taking by solid MG!s, once the country has e2perience with sustainable microfinance delivery. K#reating government wholesale funds to support retail MG!s if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MG!s. K9romote microfinance as a key vehicle in tackling poverty, and as vital part of the financial system. |Page 8

K#reate policies, regulations and legal structures that Kencourage responsive, sustainable microfinance. K7ncourage a range of regulated and unregulated institutions that meet performance standards. K7ncourage competition, capacity building and innovation to lower costs and interest rates in microfinance.
,"upport autonomous, wholesale structures.

R'I data shows that informal sources provide a significant part of the total credit needs of the rural population. The magnitude of the dependence of the rural poor on informal sources of credit can be observed from the findings of the ll !ndia 6ebt and !nvestment "urvey, ,--0, which shows that the share of the &on-institutional agencies 4informal sector5 in the outstanding cash dues of the rural households were =1 percent. ?owever, the dependence of rural households on such informal sources had reduced of their total outstanding dues steadily from <=.. percent in ,-1, to =1 percent in ,--,.

:/ Mi$r!#inan$" S!$ia0 A%*"$t%


Micro financing institutions significantly contributed to gender eEuality and women*s empowerment as well as poor development and civil society strengthening. #ontribution to women*s ability to earn an income led to their economic empowerment, increased well being of women and their families and wider social and political empowerment. Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the ,--/s. !ncreasing evidence of the centrality of gender eEuality to poverty reduction and women*s higher credit repayment rates led to a general consensus on the desirability of targeting women. S"0# ("0* Gr!3*% ES(G%F: "elf- help groups 4"?%s5 play today a major role in poverty alleviation in rural !ndia. growing number of poor people 4mostly women5 in various parts of !ndia are members of "?%s and actively engage in savings and credit 4"L#5, as well as in other activities 4income generation, natural resources management, literacy, child care and nutrition, etc.5. The "L# focus in the "?% is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts. The "?% system has proven to be very relevant and effective in offering women the possibility to break gradually away from e2ploitation and isolation. Sa2ing% %"r2i$"% h"0* *!!r *"!*0": "avings has been called the Cforgotten half of microfinance.D Most poor people now use informal mechanisms to save because they lack access to good formal deposit services,. They may tuck cash under the mattress) buy animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be riskyFcash can be stolen, animals can get sick, and neighbors can run off. 'ften they are illiEuid as well M one cannot sell just the cow*s leg when one needs a small amount of cash. 9oor people want secure, convenient deposit services that allow for small balances and easy access to funds. MG!s that offer good savings services usually attract far more savers than borrowers. W!)"nA% in.i$at!r% !# ")*!4"r)"nt thr!3gh )i$r!#inan$": K bility to save and access loans K'pportunity to undertake an economic activity NKMobility-'pportunity to visit nearby towns |Page 9

K wareness- local issues, MG! procedures, banking transactions K"kills for income generation NK6ecision making within the household K %roup mobilization in support of individual clients- action on.

;/ Th" N"". in In.ia


!ndia is said to be the home of one third of the world*s poor) official estimates range from 01 to O/ percent of the more than one billion population. P bout <. percent of the poorest households do not have access to credit. P The demand for micro credit has been estimated at up to Q=/ billion) the supply is less than Q0.0 billion combined by all involved in the sector. 6ue to the sheer size of the population living in poverty, !ndia is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium 6evelopment %oal of halving the world*s poverty by 0/,O. Microfinance can also be distinguished from charity. !t is better to provide grants to families who are destitute, or so poor they are unlikely to be able to generate the cash flow reEuired to repay a loan. This situation can occur for e2ample, in a war zone or after a natural disaster. While !ndia is one of the fastest growing economies in the world, poverty runs deep throughout country. bout two thirds of !ndia*s more than ,billion people live in rural areas and almost ,./ million of them are poor. Gor more than 0, percent of them, poverty is a chronic condition. Three out of four of !ndia*s poor live in rural areas of the country. 9overty is deepest among scheduled castes and tribes in the country*s rural areas. The micro-finance scene in !ndia is dominated by "elf ?elp %roups 4"?%s5 - $anks linkage program for over a decade now. s the formal banking system already has a vast branch network in rural areas, it was perhaps wise to find ways and means to improve the access of rural poor to the e2isting banking network. This was tried by routing financial. !ndian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities thatFleft unaddressedFcould negatively impact the long-term future of the industry. The industry needs to move past a single-minded focus on scale, e2pand the depth and breadth of products and services offered, and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry. B/ Mi$r!-Finan$ing R"g30ati!n in In.ia

A.2antag" !# R"g30ati!n: Gollowing are the advantages and benefits of regulation and supervision of LMG!sH
i. 9rotects the interest of the depositors) ii. 9ut in place prudential norms, standards and practices) iii. 9rovides sufficient information about the true risks faced by the banksLMG!s) iv. 9romoters systemic stability and thereby sustains public confidence in the banksLMG!s) |Page 10

v. 9revents a bank*sLMG!*s failureLpotential dangers through timely interventions) vi. 9enalizes the violations, misconducts, non-compliance to the norms of behavior) vii. 9rovides invaluable advisory inputs for problem-solving and overall improvement of the banksLMG!s) viii. 9romoters safe, strong and sound bankingLMG system and effective bankingLMG policy and i2. 9romotes and enhances orderly economic growth and development. A/ Gni#i". R"g30ati!n S-%t"): <.,< at present, all the regulatory aspects of microfinance are not centralized. Gor e2ample, while the +ural 9lanning and #redit 6epartment 4+9#65 in +$! looks after +ural lending, MG-&$G#s are under the control of the 6epartment of &on-$anking "upervision 46&$"5 and 72ternal #ommercial $orrowings are looked after by the Goreign 72change 6epartment. The #ommittee feels that +$! may consider bringing all regulatory aspects of microfinance under a single, mechanism. Gurther, supervision 'f MG-&$G#s could be delegated to & $ +6 by +$!. '/ L"ga0 #!r)% !# MFI% in In.ia: MFI% an. L"ga0 F!r)%: With the current phase of e2pansion of the "?% M $ank linkage programmed and other MG initiatives in the country, the informal micro finance sector in !ndia is now beginning to evolve. The MG!s in !ndia can be broadly sub-divided into three categories of organizational forms as given in Table ,. While there is no published data on private MG!s operating in the country, the number of MG!s is estimated to be around <//. ?owever, not more than ,/ MG!s are reported to have an outreach of ,//,/// micro finance clients. n overwhelming majority of MG!s are operating on a smaller scale with clients ranging $etween O// to ,O// per MG!. The geographical distribution of MG!s is very much lopsided with concentration in the southern !ndia where the rural branch network of formal banks is e2cellent. !t is estimated that the share of MG!s in the total micro credit portfolio of formal R informal institutions is about < per cent. K&ot for profit MG!s governed by societies registration act, ,<1/ or !ndian trusts act ,<<0 K&on profit companies governed by section 0O of the companies act, ,-O1 KGor profit MG!s regulated by !ndian companies act, ,-O1 K&$G# governed by +$! act, ,-=>. K#ooperative societies by cooperative societies act enacted by state government. L"ga0 F!r)% !# MFI% in In.ia:

T-*"% !# MFI% ,. N!t #!r Pr!#it MFI%

E%ti)at". N3)7"r, >// to O//

L"ga0 A$t% 3n."r 4hi$h R"gi%t"r".

a.5 &%' - MG!s

"ocieties +egistration ct, ,<1/ or similar 9rovincial cts !ndian Trust ct, ,<<0 "ection 0O of the #ompanies ct, ,-O1 Mutually ided #ooperative "ocieties ct enacted by "tate %overnment

b.5 &on-profit #ompanies

,/

0. M3t3a0 '"n"#it MFI% 0// to 0O/ a.5 Mutually ided #ooperative "ocieties 4M #"5 and similarly set up institutions =. F!r Pr!#it MFI% 1 a.5 &on-$anking Ginancial #ompanies 4&$G#s5 |Page

!ndian #ompanies ct, ,-O1 +eserve $ank of !ndia ct, ,-=> 11

Total

.// - <//

K The estimated number includes only those MG!s, which are actually undertaking lending activity.

C/ R"$!))"n.ati!n 7- R'I Mi$r! Cr".it In%tit3ti!n%: P #ompany ;aw $oard to allow "?%s to be members of "ection 0O of the companies act. P There will be no ceiling in respect of loan amount e2tended by "ection 0O companies to "?%s) however "?%s, to provide credit not e2ceeding +s. O////L- per member of the "?%. +$! may consider issuing revised instructions. P s regards capital, to encourage more flow of donationsL contributions, donors to be e2empted from income ta2 under "ection ,,# of the !T ct. P s regards capital adeEuacy, since there is no mandatory capital reEuirement, minimum standards need not be considered. P "avings of "?%s promoted by "ection 0O companies be maintained with permitted organizations. P #omplete income ta2 e2emption for "ection 0O companies purveying micro credit 4to the donor and to the receiver5. %overnment to consider complete e2emption from !T for income earned, as the main purpose of the organization is to empower the poor. !ndian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities thatFleft unaddressedFcould negatively impact the long-term future of the industry. The industry needs to move past a single-minded focus on scale, e2pand the depth and breadth of products and services offered, and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry.

=/ Mi$r! Finan$" M!."0% A/ Mi$r!#inan$" Pr!2i."r%: a/ Mi$r!#inan$" In%tit3ti!n%: microfinance institution 4MG!5 is an organization that provides microfinance services. MG!s range from small non-profit organizations to large commercial banks. Most MG!s started as notfor-profit organizations like &%'s 4non-governmental organizations5, credit unions and other financial cooperatives, and state-owned development and postal savings banks. n increasing number of MG!s are now organized as for-profit entities, often because it is a reEuirement to obtaining a license from banking authorities to offer savings services. Gor-profit MG!s may be organized as &on-$anking Ginancial #ompanies 4&$G#s5, commercial banks that specialize in microfinance, or microfinance departments of full-service banks.
The micro finance service providers include ape2 institutions like &ational $ank for griculture and +ural 6evelopment 4& $ +65, "mall !ndustries 6evelopment $ank of !ndia 4"!6$!5, and, +ashtriya Mahila Bosh 4+MB5. t the retail level, #ommercial $anks, +egional +ural $anks, and, #ooperative banks provide micro finance services. Today, there are about 1/,/// retail credit outlets of the formal banking sector in the rural areas comprising ,0,/// branches of district level cooperative banks, over ,>,/// branches of the +egional +ural $anks 4++$s5 and over =/,/// rural and semi-urban branches of commercial banks besides almost -/,/// cooperatives credit societies at the village level. 'n an average, there is at least one retail credit outlet for about O,/// rural people. This physical reaching out to the far-flung areas of the country to provide savings, |Page 12

credit and other banking services to the rural society is an unparalleled achievement of the !ndian banking system. !n the this paper an attempt is made to deal with various aspects relating to emergence of private micro finance industry in the conte2t of prevailing legal and regulatory environment for private sector rural and micro finance operators. MG!s are an e2tremely heterogeneous group comprising &$G#s, societies, trusts and cooperatives. They are provided financial support from e2ternal donors and ape2 institutions including the +ashtriya Mahila Bosh 4+MB5, "!6$! Goundation for micro-credit and & $ +6 and employ a variety of ways for credit delivery. "ince 0///, commercial banks including +egional +ural $anks have been providing funds to MG!s for on lending to poor clients. Though initially, only a handful of &%'s were CintoD financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MG!s operating in the country, the number of MG!s is estimated to be around <//. MG!s are an e2tremely heterogeneous group comprising &$G#s, societies, trusts and cooperatives. They are provided financial support from e2ternal donors and ape2 institutions including the +ashtriya Mahila Bosh 4+MB5, "!6$! Goundation for micro-credit and & $ +6 and employ a variety of ways for credit delivery. "ince 0///, commercial banks including +egional +ural $anks have been providing funds to MG!s for on lending to poor clients. Though initially, only a handful of &%'s were CintoD financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MG!s operating in the country, the number of MG!s is estimated to be around <//. 7/ F!r NGO%:,. The field of development itself e2pands and shifts emphasis with the pull of ideas, and &%'s perhaps more readily adopt new ideas, especially if the resources reEuired are small, entry and e2it are easy, tasks are 4perceived to be5 simple and people*s acceptance is high M all characteristics 4real or presumed5 of microfinance. 0. #anvassing by various actors, including the &ational $ank for griculture and +ural 6evelopment 4& $ +65, "mall !ndustries 6evelopment $ank of !ndia 4"!6$!5, Griends of Women*s World $anking 4GWW$5, +ashtriya Mahila Bosh 4+MB5, #ouncil for dvancement of 9eople*s ction and +ural Technologies 4# 9 +T5, +ashtriya %ramin Jikas &idhi 4+%J&5, various donor funded programmes especially by the !nternational Gund for gricultural 6evelopment 4!G 65, 8nited &ations 6evelopment 9rogramme 48&695, World $ank and 6epartment for !nternational 6evelopment, 8B 46G!65S, and lately commercial banks, has greatly added to the idea pull. !nduced by the worldwide focus on microfinance, donor &%'s too have been funding microfinance projects. 'ne might call it the supply push. =. ll kinds of things from khadi spinning to &adep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most &%'-led microfinance is with poor women, for whom access to small loans to meet dire emergencies is a valued outcome. Thus, Euick and high (customer satisfaction* is the 8"9 that has attracted &%'s to this trade. >. The idea appears simple to implement. The most common route followed by &%'s is promotion of "?%s. !t is implicitly assumed that no (technical skill* is involved. $esides, e2ternal resources are not needed as "?%s begin with their own savings. Those &%'s that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy. O. Gor many &%'s the idea of (organizing* M forming a samuha M has inherent appeal. %roups connote empowerment and organizing women is a double bonus. |Page 13

1. Ginally, to many &%'s, microfinance is a way to financial sustainability. 7specially for the medium-to-large &%'s that are able to access bulk funds for on-lending, for e2ample from "!6$!, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding. C/ S"r2i$" C!)*an- M!."0: !n this conte2t, the "ervice #ompany Model developed by ##!'& and used in some of the ;atin merican #ountries is interesting. The model may hold significant interest for state owned banks and private banks with large branch networks. 8nder this model, the bank forms its own MG!, perhaps as an &$G#, and then works hand in hand with that MG! to e2tend loans and other services. 'n paper, the model is similar to the partnership modelH the MG! originates.

9. C!!r.inating Mi$r!#inan$" E##!rt% in In.ia


& $ +6 coordinates the microfinance activities in !ndia at internationalL nationalL state L district levels. These include organizing internationalLnational Workshops, "eminars, etc for e2perience sharing, 'rganizing &ational and "tate level Meets of $ankers and &%'s etc .6issemination of best practices in "?% L microfinance.

A. Oth"r Initiati2"%: Micro enterprise 6evelopment 9rogrammer 4M7695 for Matured "?%s
The progression of "?% members to take up micro enterprise involves intensive training and hand holding on various aspects including understanding market, potential mapping and ultimately fine tuning skills and entrepreneurship to manage the enterprise. ?ence, a separate, specific and focused skill-building programme (Micro 7nterprise 6evelopment 9rogrammed 4M7695* has been formulated. This involves organizing short duration, location specific programmers on skill up gradation L development for setting up sustainable micro-enterprises by matured "?% members. The duration of training programme can vary between = to ,= days, depending upon the objective and nature of training. The training may be conducted by agencies that have background and professional competency in the field of micro enterprise 6evelopment with an e2pertise in skill development. '/ S$h")" #!r Ca*ita0H E63it- S3**!rt t! Mi$r!-Finan$" In%tit3ti!n% EMFI%F #r!) MFDEF: The scheme attempts to provide capitalLeEuity support to Micro Ginance !nstitutions 4MG!s5 so as to enable them to leverage capitalLeEuity for accessing commercial and other funds from banks, for providing financial services at an affordable cost to the poor, and to enable MG!s to achieve sustainability in their credit operations over a period of =-O years. C/ S$h")" #!r #inan$ia0 a%%i%tan$" t! 7an5%H MFI% #!r rating !# Mi$r! Finan$" In%tit3ti!n% EMFI%F: !n

order to identify MG!s, classify and rate such institutions and empower them to intermediate between the lending banks and the clients, & $ +6 has decided to e2tend financial assistance to #ommercial $anks and +egional +ural $anks by way of grant. The banks can avail the services of credit rating agencies, M-#+!;, !#+ , # +7 and 9lanet Ginance in addition to #+!"!; for rating of MG!s. The financial assistance by way of grant for meeting the cost of rating of MG!s would be met by & $ +6 to the e2tent of ,//T of the total professional fees subject to a ma2imum of +s.=,//,///L-L-. The remaining cost would be borne by the concerned MG!. The cost of local hospitality 4including boarding and lodging5 towards field visit of the team from the credit rating gency, as a part of the rating e2ercise, would also be borne by the MG!. Those MG!s which have a minimum loan outstanding of more than +s. O/.// lakh 4+upees fifty lakh only5 and ma2imum of +s ,/ crore 4+upees Ten crore only5 would be considered for rating and support under the scheme. Ginancial assistance by way of grant would be available only for the first rating of the MG!.
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MG!s availing #apital "upport andLor +evolving Gund ssistance from & $ +6 are also eligible for reimbursement of O/T of the cost of professional fee charged by #redit +ating gency for second rating subject to a ma2imum of +s.,.O/ lakh 4i.e O/T of +s.= lakh5. This will be in addition to the re-imbursement of professional fee for first rating of the MG!.

D. R"#inan$" %3**!rt t! 7an5% #!r #inan$ing MFI%: The scheme is to provide ,//T refinance to banks
for financing MG!s. !nterest rate on refinance to #ommercial $anks and +egional +ural $anks on their loans to MG!s for on lending to clients will be at =T less than that charged by banks subject to minimum interest rate of ..OT for all regions and all eligible purposes. The revised rate of interest is applicable to refinance disbursed on or after /, March 0/,/. "ourceH & $ +6 website

<C/ Mi$r!#inan$" Strat"gi$


Strat"gi$ Manag")"nt: "trategic management is a field that deals with the major intended and emergent initiatives taken by general manager on behalf of owners, involving utilization of resources, to enhance the performance of rams in their e2ternal environments. !t entails. Gn."r%tan.ing )i$r!#inan$" %trat"gi"%: This report e2plores strategic issues shaping the future of the MG! sector in !ndia. The study approached #7's of select MG!s with a set of issues ranging from concerns to competition and sought their opinions about future strategies. The report draws from their responses, and states thatH

Guture strategy is about being strong on processes and being overtly client-centric) "uccess is a prudential combination of three factors, namely, culture, beliefs and aspirations) #ulture is about the degree of trust rather than the rate of interest) +isk management systems of economically weaker families are built on their beliefs about dependability and access) Micro credit stories have revealed ingenious ways that clients have used their loans for purposes that satisfied their aspirations.

Ginally, the sector, at about +s. ,>,/// crore 4appro2imately 8"Q= bn5 looks large, but is small by any business scale. #ompetition and unhealthy practices are overshadowing the good work and reputation earned over many years. MG!s in !ndia need to overcome these challenges in the future. Strat"gi$ P!0i$- Initiati2"%: "ome of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in !ndia areH Working group on credit to the poor through "?%s, &%'s, & $ +6, ,--O. The &ational Microfinance Taskforce, ,---.Working %roup on Ginancial Glows to the !nformal "ector 4set up by 9M'5, 0//0.Microfinance 6evelopment and 7Euity Gund, & $ +6, 0//O.Working group on Ginancing &$G#s by $anks- +$!.
A/ Pr!.3$t-)ar5"t )atriI:

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market penetration strategy is a business-as-usual strategy, where the MG! focuses on achieving growth by selling e2isting products in e2isting markets. This can be done through more competitive pricing strategies, increased promotional activities, and more liberal terms and conditions.

Gor e2ample, the MG! may develop strategic alliances to begin

K dapted from nsoff ,-O.. '/ Th" 'CG Gr!4th-Shar" MatriI: The $#% %rowth-"hare Matri2 is a portfolio planning model developed by $ruce ?enderson of the $oston #onsulting %roup in the early ,-./:s. !t is based on the observation that a company:s business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name 3growth-share3. Market growth serves as a pro2y for industry attractiveness, and relative market share serves as a pro2y for competitive advantage. The growth-share matri2 thus maps the business unit positions within these two important determinants of profitability. 'CG Gr!4th-Shar" MatriI

This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption often is true because of the e2perience curve ) increased relative market share implies that the firm is moving forward on the e2perience curve relative to its competitors, thus developing a cost advantage. second assumption is that a growing market reEuires investment in |Page 16

assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matri2 provides an indication of its cash generation and its cash consumption. ?enderson reasoned that the cash reEuired by rapidly growing business units could be obtained from the firm:s other business units that were at a more mature stage and generating significant cash. $y investing to become the market share leader in a rapidly growing market, the business unit could move along the e2perience curve and develop a cost advantage. Grom this reasoning, the $#% %rowth-"hare Matri2 was born. Th" #!3r $at"g!ri"% ar": D!g% - 6ogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. ?owever, dogs are cash traps because of the money tied up in a business that has little potential. "uch businesses are candidates for divestiture. J3"%ti!n )ar5% - Uuestion marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is large net cash consumption. Euestion mark 4also known as a 3problem child35 has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. !f the Euestion mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Uuestion marks must be analyzed carefully in order to determine whether they are worth the investment reEuired to grow market share. Star% - "tars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate) therefore the cash in each direction appro2imately nets out. !f a star can maintain its large market share, it will become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the ne2t cash cows and ensure future cash generation. Ca%h $!4% - s leaders in a mature market, cash cows e2hibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. "uch business units should be 3milked3, e2tracting the profits and investing as little cash as possible. #ash cows provide the cash reEuired to turn Euestion marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders. $ecause the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis. 8nder the growth-share matri2 model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined solely by whether it had become the market leader during the period of high growth. While originally developed as a model for resource allocation among the microfinance business units in a corporation, the growth-share matri2 also can be used for resource allocation among products within a single business unit. !ts simplicity is its strength - the relative positions of the firm:s entire business portfolio can be displayed in a single diagram. Li)itati!n% The growth-share matri2 once was used widely, but has since faded from popularity as more comprehensive models have been developed. "ome of its weaknesses areH Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matri2 overlooks many other factors in these two important determinants of profitability. The framework assumes that each business unit is independent of |Page 17

the others. !n some cases, Microfinance business unit that is a 3dog3 may be helping other business units gain a competitive advantage. The matri2 depends heavily upon the breadth of the definition of the market. business unit may dominate its small niche, but have very low market share in the overall industry. !n such a case, the definition of the market can make the difference between a dog and a cash cow. While its importance has diminished, the $#% matri2 still can serve as a simple tool or viewing a corporation:s business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units. C/ O2"ra00 Strat"g-: KGorming and nurturing small, homogeneous and participatory self-help groups 4"?%s5 of the poor has today emerged as a potent tool for human development. This process enables the poor, especially the women from the poor households, to collectively identify and analyses the problems they face in the perspective of their social and economic environment. !t helps them to pool their meager resources, human and financial, and priorities their use for solving their own problems. KThe emphasis on regular thrift collection and its use to solve immediate problems of consumption and production not only helps to meet their most urgent needs, but also trains them to handle larger financial resources more skillfully, prudently and with a more lasting impact. K7ncourage "?%s to become a forum for many social sector interventions. D/ S(G-'an5 Lin5ag" Pr!gra))"r: Gacilitating "?%s to access credit from formal banking channels. "?%-$ank ;inkage 9rogrammer has proved to be the major supplementary credit delivery system with wide acceptance by banks, &%'s and various government departments. E/ Ca*a$it- '3i0.ing:

#apacity building must be tailored to meet the differing needs of the nascentLemerging MG!s and of the e2pandingLmature MG!s. There is a pressing need to develop comprehensive, relevant and integrated training modules on a wide range of topics to professionalize !ndian microfinance M thus building the much sought-after second tier management in MG!s. The industry continues to grow, and so does the demand for competent middle management. #urrently, these are typically sourced by MG!s from the rural institutes of management. $ut these rural institutes are using curricula largely based on the one developed by "!6$! nearly a decade ago M and it is high time to revisit this curriculum, to update it both in terms of content 4to reflect the new realities in !ndia microfinance5 and in terms of its delivery 4to use multi-mediaLpractical e2amples, and thus bring the courses to life with video clips, case studies and field-based e2ercises that take the students out into the field5.
<</ Mi$r!#inan$" Manag")"nt: A/ O7+"$ti2"%: The programmer aims at enabling the participants to gain a clear understanding of various policies, conceptual, and operational issues involved in developing effective and successful microfinance interventions. '/ Inn!2ati2" M"th!.!0!gi"%: Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. #ost reduction is also an essential element in |Page 18

microfinance operation. +educing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly. Th" "%%"n$"% !# inn!2ati2" )anag")"nt ar" a% #!00!4%: ,. "pecialized operation. 0. 6ocumentation of essential information only. =. "imple product, simple loan application and verification process. >. bsence of grant guarantee. O. "taff recruitment in no conventional manner. 1. 'n the job training 4each one teaches one5. .. "imple standard loan register along with ledger and cash book abandoning the bookkeeperLcashier. <. "tandard furniture, fi2ture and collective use of facilities in the office. -. 6ecentralized branch structure. ,/. $ranch level financial planning. ,,. "trong monitoring from mid and head office. ,0. Written Manual. C/ Mi$r!#inan$" W!r5ing En2ir!n)"nt: ?ow can microfinance institutions 4MG!s5 help improve working conditionsI ?ow can they contribute to job creationI nd how can MG!s help reduce child laborI "hould MG!s have an interest in addressing these and other decent work issuesI These are some of the Euestions that the !;' intends to address through an e2perimental global action research programmer 40//<-0/,,5 in partnership with microfinance !nstitutions interested in promoting decent work. ccess to micro credit or other financial services can help improve the decent work status. #onditional loans, credit with education, incentives like interest rate rebates, linkages with social partners and &%'s as well as the provision of micro insurance, conditional cash transfers or health care can be effective ways to reduce child labor, decrease vulnerabilities, raise awareness and create incentives to improve working conditions. Ena70ing En2ir!n)"nt: Gavorable environment for microfinance in different manners are prevailing in most developing countries. Gavorable environment is not only among %overnment but also among general public, civil society, media and various institutions within the country needed for favorable growth of microfinance for poverty reduction. Though %overnment is favorable in general to microfinance in many countries but specific modalities of &%'sL MG!s determine the nature of favorable. D/ Current Challenging Issues: ,. #apacity $uildingH The long-term future of the micro-finance sector depends on MG!s being able to achieve operational, financial and institutional sustainability.

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0. !nnovationH Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. #ost reduction is also an essential element in microfinance operation. +educing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly. =. GundingH >. 'utreachH substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds. substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds.

E/ (R I%%3"%: +ecruitment and retention is the major challenge faced by MG!s as they strive to reach more clients and e2pand their geographical scope. ttracting the right talent proves difficult because candidates must have, as a prereEuisite, a mindset that fits with the organization*s mission. Many mainstream commercial banks are now entering microfinance, who are poaching staff from MG!s and MG!s are unable to retain them for other job opportunities. <OT of the poorest clients served by microfinance are women. ?owever, women make up less than half of all microfinance staff members, and fill even fewer of the senior management roles. The challenge in most countries stems from cultural notions of women*s roles, for e2ample, while women are single there might be a greater willingness on the part of women*s families to let them work as front line staff, but as soon as they marry and certainly once they start having children, it becomes unacceptable. ;ong distances and long hours away from the family are difficult for women to accommodate and for their families to understand. F/ Mi$r!#inan$" Training & Ca*a$it- '3i0.ing M"th!.%: ,. Microfinance Training Methodology and ?ow to $uild 7fficient WorkforceI 0. "taff Motivation R $uilt in #ost effective Training #omponent. =. ?uman +esource 9lanning and 6evelopment. >. %ood %overnance. G/ SWOT MATRIK #!r Mi$r!#inan$" Manag")"nt: STRENGT(S </ EI*"ri"n$". %"ni!r )anag")"nt T"a)/ >/ R!73%t IT %-%t")/ ?/ C0"ar an. 4"00 ."#in". (R *!0i$-/ 9/ In#3%i!n !# !4n "63it- - $!))it)"nt #r!) *r!)!t"r%/ :/ Pr!$"%% inn!2ati!n/ ;/ C0arit- an. g!!. 3n."r%tan.ing !# 2i%i!n/ B/ Tran%*ar"n$- at a00 0"2"0%/ =/ P0an% #!r 2a03" a..". an. 0i2"0ih!!. %3**!rt %"r2i$"% ELDSF/ |Page 20

@/ Shar". !4n"r%hi*/ WEA&NESSES </ Li)it". r"%!3r$"%/ >/ Mi$r! )anaging/ ?/ Start 3* !rgani%ati!nL th"r"#!r"1 -"t t! in%tit3ti!na0i%" th" %tan.ar. *r!$"%%"%/ 9/ Attra$tingH(!0.ing !n t! th" %ta## ti00 th" ti)" 4" 7"$!)" "%ta70i%h". *0a-"r%/ :/ R"#in" th" *r!$"%%"% #!r gr!4th/ OPPORTGNITIES </ (3g" P!t"ntia0 Mar5"t/ >/ S$!*" !# intr!.3$ing 0i2"0ih!!. r"0at". %"r2i$"%/ ?/ Finan$ia0 $r3n$h i% h"0*ing !rgani%ati!n t! 7" $!%t $!n%$i!3% an. "##"$ti2"/ 9/ IT %-%t")%/ T(REATS </ Finan$ia0 $ri%i%/ >/ In$r"a%ing $!)*"titi!n/ ?/ In$r"a%ing $!)*"titi!n/ 9/ P!!r 7an5ing in#ra%tr3$t3r"/ :/ P!0iti$a0 in%ta7i0it-/ (/ Mi$r!#inan$" O*"rati!n )anag")"nt: ,. Ca*a$it- '3i0.ing: The long-term future of the micro-finance sector depends on MG!s being able to achieve operational, financial and institutional sustainability. The constraints and challenges vary with the different types and development stage of MG!s. Most MG!s are currently operating below operational viability and use grant funds from donors for financing up-front costs of establishing new groups and covering initial losses incurred until the lending volume builds up to a break-even level. The MG!s are generally constrained in reaching a break-even level and finally achieving sustainability, primarily due to a narrow client and product base, high operational and administrative costs for delivering credit to the poor, and their inability to mobilize reEuisite resources. Moreover, lack of technical manpower, operational systems, infrastructure and M!" are prevalent. !n view of the above, to scale up micro-finance initiatives at a faster pace, a special effort is reEuired for capacity building of the Micro Ginance !nstitutions. !n this background, "GM# has in the past under the 6G!6 collaboration 4which has since come to an end on March =,,0//-5 provided need based capacity building support to the partner MG!s, in the initial years, to enable them to e2pand their operations, cover their managerial, administrative and operational costs besides helping them achieve self-sufficiency in due course. >/ Li63i.it- Manag")"nt: !n view of the fact that liEuidity is a major concern of many of the middle level MG!s and a small working capital support can go a long way in their better liEuidity management and thus pave way 21 |Page

for faster growth, "GM# has introduced a special short term loan scheme, ;iEuidity Management "upport 4;M"5 for the long term partners. ?/ E63it-: 9rovision of eEuity capital to the &$G#-MG!s is perceived as an emerging reEuirement of the micro finance sector in !ndia. "!6$! provides eEuity capital to eligible institutions not only to enable them to meet the capital adeEuacy reEuirements but also to help them leverage debt funds. Beeping in tune with the sect oral reEuirements, the bank has also introduced Euasi-eEuity products viz., optionally convertible 9reference share capital) optionally convertible debt and optionally convertible "ubordinate debt for new generation MG!s which are generally in the pre-breakeven stage reEuiring special dispensation for capital support by way of a mi2 of Tier ! and Tier !! capital. 9/ Tran%#!r)ati!n L!an:The Transformation ;oan 4T;5 product is envisaged as a Euasi-eEuity type support to partner MG!s that are in the process of transforming themselves L their e2isting structure into a more formal and regulated set-up for e2clusively handling micro finance operations in a focused manner. $eing Euasi-eEuity in nature, T; helps the MG!s not only in enhancing their eEuity base but also in leveraging loan funds and e2panding their micro credit operations on a sustainable basis. The product has the feature of conversion into eEuity after a specified period of time subject to the MG! attaining certain structural, operational and financial benchmarks. This non-interest bearing support facilitates the young but well performing MG!s to make long term institutional investments and acts as a constant incentive to transform themselves into formal and regulated entities. :/ Mi$r! Ent"r*ri%" L!an%: !n order to build and strengthen new set of intermediaries for Micro 7nterprise ;oans, the $ank has formulated new scheme for Micro 7nterprise ;oans. !nstitutionsL MG!s with minimum fund reEuirement of +s. 0O lakh p.a. and having considerable e2perience in financial intermediationL facilitating or setting up of enterprisesL providing escort services to ""!L tiny unitsL networking or active interface with ""!s etc. and having professional e2pertise and capability to handle on-lending transactions shall be eligible under the dispensation. The institutions would be selected based on their relevant e2perience, potential to e2pand, professional management, transparency in operations and well laid-out systems besides EualifiedL trained manpower. ;ending to be based strictly on an intensive in-house appraisal supplemented with the credit rating by an independent professional agency. +ela2ed security norms more or less on line with micro credit dispensation to be adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements. ;/ L!an S-n.i$ati!n: Beeping in view the increased fund reEuirement of major partner MG!s, the $ank has also undertaken fee based syndication arrangement where loan reEuirement is comparatively higher. B/ Mi$r!#inan$" O*"rati!n%: a. Marketing "trategy and Microfinance #lients Targeting Methodology. b. Microfinance 9roducts, "ervices and ;ending 9rocedures. c. Microfinance ;ending MethodologyH !ndividual and %roup ;ending. d. Micro finance !ndian ;ending Methodology. e. !nstitutional $usiness 9lanning for Microfinance 9rogram1. Ginancial 9lanning R nalysais. f. "avings and #redit Management. |Page 22

g. 9rogram 'perational 9olicies and 9rocedures. h. ccounting and +ecord Beeping.

i. uditing for Microfinance 'peration. j. Management !nformation "ystem. k. $ranch Manager ;eadership TrainingH Managing, #ontrolling, and +eporting Tools. l. 6etection of Graud and !nternal #ontrol. m. Monitoring and "upervision "ystem. n. 6elinEuencies and its Management.

I/ C0i"nt% !# )i$r! #inan$": The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs. !n rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. !n urban areas, micro finance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a relatively unstable source of income. a/ Th" %iI *rin$i*0"% !# $0i"nt *r!t"$ti!n ar": 1. A2!i.an$" !# O2"r-In."7t".n"%%H 9roviders will take reasonable steps to ensure that credit will be
e2tended only if borrowers have demonstrated an adeEuate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness. "imilarly, providers will take adeEuate care that noncredit, financial products, such as insurance, provided to low-income clients are appropriate. >/ Tran%*ar"nt an. R"a%!na70" Pri$ingH The pricing, terms and conditions of financial products 4including interest charges, insurance premiums, all fees, etc.5 are transparent and will be adeEuately disclosed in a form understandable to clients. ?/ A**r!*riat" C!00"$ti!n% Pra$ti$"%: 6ebt collection practices of providers will not be abusive or coercive. 9/ Ethi$a0 Sta## '"ha2i!r: "taff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adeEuate safeguards are in place to detect and correct corruption or mistreatment of clients. :/ M"$hani%)% #!r R".r"%% !# Gri"2an$"%H 9roviders will have in place timely and responsive mechanisms for complaints and problem resolution for their clients. ;/ Pri2a$- !# C0i"nt DataH The privacy of individual client data will be respected, and such data cannot be used for other purposes without the e2press permission of the client 4while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories5. J/ S!$ia0 *"r#!r)an$" )"a%3r")"nt: |Page 23

The "ocial 9erformance Task Gorce defines social performance asH 3The effective translation of an institution:s social mission into practice in line with accepted social values that relate to serving larger numbers of poor and e2cluded people) improving the Euality and appropriateness of financial services) creating benefits for clients) and improving social responsibility of an MG!.DMost MG!s have a social mission that they see as more basic than their financial objective, or at least co-eEual with it. There is a great deal of truth in the adage that institutions manage what they measure. "ocial performance measurement helps MG!s and their stakeholders focus on their social goals and judge how well they are meeting them. "ocial indicators are often less straightforward to measure, and less commonly used than financial indicators that have been developed over centuries. Today*s increasing use of social measures reflects an awareness that good financial performance by an MG! does not automatically guarantee client interests are being appropriately advanced. <>/ Criti$a0 Ana0-%i% . MFI% Criti$a0 I%%3"%: MG!s can play a vital role in bridging the gap between demand R supply of financial services if the critical challenges confronting them are addressed. S3%taina7i0it-: The first challenge relates to sustainability. !t has been reported in literature that the MG! model is comparatively costlier in terms of delivery of financial services. n analysis of =1 leading MG!s0 by Aindal R "harma shows that <-T MG!s sample were subsidy dependent and only - were able to cover more than </T of their costs. This is partly e2plained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. !t has also been commented that MG!s pass on the higher cost of credit to their clients who are (interest insensitive* for small loans but may not be so as loan sizes increase. !t is, therefore, necessary for MG!s to develop strategies for increasing the range and volume of their financial services. La$5 !# Ca*ita0: The second area of concern for MG!s, which are on the growth path, is that they face a paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MG!s are socially oriented institutions and do not have adeEuate access to financial capital. s a result they have high debt eEuity ratios. 9resently, there is no reliable mechanism in the country for meeting the eEuity reEuirements of MG!s. s you know, the Micro Ginance 6evelopment Gund 4MG6G5, set up with & $ +6, has been augmented and re-designated as the Micro Ginance 6evelopment 7Euity Gund 4MG67G5. This fund is e2pected to play a vital role in meeting the eEuity needs of MG!s. '!rr!4ing%: !n comparison with earlier years, MG!s are now finding it relatively easier to raise loan funds from banks. This change came after the year 0///, when +$! allowed banks to lend to MG!s and treat such lending as part of their priority sector-funding obligations. 9rivate sector banks have since designed innovative products such as the $ank 9artnership Model to fund. "ourceH !ssues in "ustainability of MG!s, Aindal R "harma. T!* <9 Mi$r!#inan$" In%tit3ti!n% in In.ia 7- Gr!4th !# N3)7"r !# a$ti2" '!rr!4"r%/

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$. Pr!70")% #!r A0t"rnati2" Mi$r!-Finan$" In%tit3ti!n%: The main aim with which the alternative MG!s have come up is to bridge the increasing gap between the demand and supply. vast majority of them set up as &%'s for getting access to funds as, the e2isting practices of mainstream financing institutions such as "!6$! and & $ +6 and even of the institutions specially funding alternatives, such +MB and GWW$, is to fund only &%'s, or &%' promoted "?%s. s a result, the largest incentive to enter such services remains through the nonprofit route. The alternative finance institutions also have not been fully successful in reaching the needy. Th"r" ar" )an- r"a%!n% #!r thi%: </ Ginancial problems leading to setting up of inappropriate legal structures. >/ ;ack of commercial orientation. ?/ ;ack of proper governance and accountability. 9/ !solated and scattered.

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#. Ri%5: This looks at the Euality of their loan portfolio measured as the percent of the portfolio at risk greater than =/ days. nd return, which is measured as a combination of return on eEuity and return on assets. Grom this above table we can notice that the +isk of companies is measured as the percentage of 9ortfolio at +isk 49 +5 which means and returns is measured as a combination of +' and +'7. R"t3rn !n A%%"t% EROAF: +eturn on ssets is an indication of how well an MG! is managing its asset base to ma2imize its profits. The ratio does not evaluate the source of the asset base M whether through debt or eEuity, but simply the return of the portfolio and other revenue generated from investments and operations. return on assets should be positive. There is a positive relationship between +eturn on ssets and the 9ortfolio to ssets ratio discussed in the ne2t section. MG!s that maintain most of their assets in the loan portfolio tend to break even sooner, and generate higher returns on their assets) provided the loan portfolio performs well and other costs are also controlled. R"t3rn !n A%%"t% V &et 'perating !ncome M Ta2esWWWW verage ssets Trend: An increasing Return on Assets is positive. +eturn on ssets 4+' 5 indicates how well an MG! is managing its assets to optimize its profitability. The ratio includes not only the return on the portfolio, but also all other revenue generated from investments and other operating activities. Grom the above list we can notice that, there are seven companies of !ndia in top O/ companies in the world. There is a huge potential for !ndia to grow in this sector, because out of total O// million poor people from all over the world, who is getting beneficial from the micro finance institutions, </ to -/ million are from !ndia only. "o there is still a huge market and opportunities in this segment. The total loan that the MG!(s had provided to the poor people in !ndia crosses +s 0> billion till 'ctober /<. nd this is only >/T of the total poor. !f this turns into ,//T, then we will see the new face of !ndia. R"t3rn !n E63it-: +eturn on 7Euity is probably one of the most important profitability indicators for commercial banks and MG!s, particularly in comparison with other institutions. The return is measured only in relation to what the MG! has built from operating surpluses, or what it has generated through donations or other contributed sources. The shareholders of a for-profit MG! or bank, is very interested in this ratio, as it is a measure of their investment choice, and its ability to pay dividends. !ncreasing eEuity also strengthens the MG!*s capital structure and its ability to leverage debt financing. s markets mature and competition increases, +eturn on 7Euity may level off and maintain a positive position without increasing dramatically or at all. R"t3rn !n E63it- V &et 'perating !ncome M Ta2esWWWW verage 7Euity Trend: An increasing Return on Equity is positive. ?. Ri%5 Manag")"nt: +isk management is a discipline for dealing with the possibility that some

future event will cause harm. !t provides strategies, techniEues, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. +isk management may be as uncomplicated as asking and answering three basic EuestionsH
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Ma+!r Ri%5% t! Mi$r!#inan$" In%tit3ti!n%:


Finan$ia0 Ri%5% Cr".it Ri%5 Transaction risk 9ortfolio risk Li63i.it- Ri%5 Mar5"t Ri%5 !nterest rate risk Goreign e2change risk !nvestment portfolio risk O*"rati!na0 Ri%5% Tran%a$ti!n Ri%5 ?uman resources +isk !nformation R technology +isk Fra3. EInt"grit-F Ri%5 L"ga0 & C!)*0ian$" Ri%5 Strat"gi$ Ri%5 G!2"rnan$" Ri%5 !neffective oversight 9oor governance structure R"*3tati!n Ri%5 EIt"rna0 '3%in"%% Ri%5% 7vent risk

"ourcesH - www. "cribd.com This are the most significant risks 4with the most potentially damaging conseEuences for the MG!5, how they interact, and current challenges faced by MG!s. a/ Finan$ia0 Ri%5%: Most MG!s focus on financial risks, including credit, liEuidity, !nterest rate, and investment risks. Mentioned under are the risks which are very critical for the MG!(s. ,. Cr".it ri%5: #redit risk, the most freEuently addressed risk for MG!s, is the risk to earnings or capital due to borrowers* late and non-payment of loan obligations. #redit risk encompasses both the loss of income resulting from the MG!(s inability to collect anticipated interest earnings as well as the loss of principle resulting from loan defaults. #redit risk includes both transaction risk and portfolio risk. 0. Tran%a$ti!n ri%5: Transaction risk refers to the risk within individual loans. MG!s mitigate transaction risk through borrower screening techniEues, underwriting criteria, and Euality procedure for loan disbursement, monitoring, and collection. =. P!rt#!0i! ri%5: 9ortfolio risk refers to the risk inherent in the composition of the overall loan portfolio. 9olicies on diversification, ma2imum loan size, types of loans, and loan structures lessen the portfolio risk. >. ;iEuidity riskH ;iEuidity risk is the Xrisk that an MG! cannot meet its obligations on a timely basis ;iEuidity risk usually arises from management(s inability to adeEuately anticipate and plan for changes in funding sources and cash needs. 7fficient ;iEuidity Management reEuires maintaining sufficient cash reserves on hand 4to meet client withdrawals, disburse loans and fund une2pected cash shortages5 while also investing as many funds as possible to ma2imize earnings. ;iEuidity management is an ongoing effort to strike a balance between having too much cash and too little cash. O. !nterest rate riskH !nterest rate risk is the risk of financial loss from changes in market interest rates. The greatest interest rate risk occurs when the cost of funds goes up faster than the financial institution can or is willing to adjust its lending rates. Manag" int"r"%t rat" ri%5: To reduce the mismatch between short-term variable rate liabilities and long-term fi2ed rate loans, managers may refinance some of the short-term borrowings with long-term fi2ed rate borrowings. This might include offering one and two-year term deposits as a product and borrowing five to ,/ |Page 27

year funds from other sources. "uch a step reduces interest rate risk and liEuidity risk, even if the MG! pays a slightly higher rate on those funding sources. To boost profitability, MG!s may purposely Xmismatch assets and liabilities in anticipation of changes in interest rates. !f the asset liability managers think interest rates will fall in the near future, they may decide to make more long-term loans at e2isting fi2ed rates, and shorten the term of the MG!(s liabilities. $y lending long and borrowing short, the MG! can take advantage of the cheaper funding in the future, while locking in the higher interest rates on the asset side. !n this case, the MG! has increased the interest rate risk in the hope of improving the profitability of the bank. 7/ O*"rati!na0 Ri%5%: 'perational risk arises from human or computer error within daily service or product delivery. This risk includes the potential that inadeEuate technology and information systems, operational problems, insufficient human resources, or breaches of integrity 4i.e. fraud5 will result in une2pected losses. Two types of operational riskH transaction risk and fraud riskH ,. Tran%a$ti!n ri%5: Transaction risk is particularly high for MG!s that handle a high volume of small transactions daily. "ince MG!s make many small, short-term loans, this same degree of cross-checking is not cost-effective, so there are more opportunities for error and fraud. s more MG!s offer additional financial products, including savings and insurance, the risks multiply and should be carefully analyzed as MG!s e2pand those activities 0. Fra3. ri%5: Graud risk is the risk of loss of earnings or capital as a result of intentional deception by an employee or client. The most common type of fraud in an MG! is the direct theft of funds by loan officers or other branch staff. 'ther forms of fraudulent activities include the creation of misleading financial statements, bribes etc. Mini)i " #ra3. ri%5: To introduced an education campaign to encourage clients to speak out against corrupt staff and group leaders. This standardized all loan policies and procedures so that the staff cannot make any decision outside the regulations. To 7stablished an inspection unit that performs random operational checks. $/ Strat"gi$ Ri%5%: "trategic risks include internal risks like those from adverse business decisions or improper implementation of those decisions, poor leadership, or ineffective governance and oversight, as well as e2ternal risks, such as changes in the business or competitive environment. This section focuses on two critical strategic risksH %overnance +isk, $usiness 7nvironment +isk. </ G!2"rnan$" ri%5: %overnance risk is the risk of having an inadeEuate structure or body to make effective decisions. The Ginancial crisis, described above illustrates the dangers of poor governance that nearly resulted in the failure of that institution. >/ EIt"rna0 73%in"%% "n2ir!n)"nt ri%5: $usiness environment risk refers to the inherent risks of the MG!(s business activity and the e2ternal business environment. To minimize business risk, the microfinance institution must react to changes in the e2ternal business environment to take advantage of opportunities, to respond to competition, and to maintain a good public reputation. MFI )anag" th"ir r"*a-)"nt an. ri%5 )anag")"nt: +isk is an integral part of financial services. When financial institutions issue loans, there is a risk of borrower default. When banks collect deposits and on-lend them to other clients 4i.e. conduct financial intermediation5, they put clients* savings at risk. Most MG!"(s provides the loans without or with smaller portion of deposit or, so for them repayment of interest or principal is very risky. ll MG!(s face risks that they must manage efficiently and effectively to be successful. When poorly managed risks begin to result in financial losses, donors, investors, lenders, borrowers and savers tend to lose confidence in the organization and funds begin to dry up. When funds dry up, an MG! is not able to meet its social objective of providing services to the poor and Euickly goes out of business.

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./ '"n"#it !# Ri%5 Manag")"nt: 7arly warning system for potential problemsH systematic process for evaluating and measuring risk identifies problems early on, before they become larger problems or drain management time and resources. ;ess time fi2ing problems means more time for production and growth. $etter information on potential conseEuences, both positive and negative. proactive and forward-thinking organizational culture will help managers identify and assess new market opportunities, foster continuous improvement of e2isting operations, and more effectively performance incentives with the organization(s strategic goals. 7ncourages cost-effective decisionmaking and more efficient use of resources. e. Int"r"%t Rat"%: Most MG!*s financially sustainable by charging interest rates that are high enough to cover all their costs. F!3r 5"- #a$t!r% ."t"r)in" th"%" rat"%: PThe cost of funds. PThe MG!:s operating e2penses. P;oan losses. P nd profits needed to e2pand their capital base and fund e2pected future growth. Th"r" ar" thr"" 5in.% !# $!%t% th" MFI ha% t! $!2"r 4h"n it )a5"% )i$r! 0!an%: PThe cost of the money that it lends. PThe cost of loan defaults. PTransaction and 'perating cost. Gor instance, MG! lends is ,/ percent, and it e2periences defaults of , percent of the amount lent, then total +s ,, for a loan of +s ,//, and +s OO for a loan of +s O//. nd the third cost i.e. transaction cost. The interest rates are deregulated not only for private MG!s but also for formal baking sector. !n the conte2t of softening of interest rates in the formal banking sector, the comparatively higher interest rate 4,0 to 0> per cent per annum5 charged by the MG!s has become a contentious issue. The high interest rate collected by the MG!s from their poor clients is perceived as e2ploitative. !t is argued that raising interest rates too high could undermine the social and economic impact on poor clients. "ince most MG!s have lower business volumes, their transaction costs are far higher than that of the formal banking channels. The high cost structure of MG!s would affect their sustainability in the long run. MFI 7"ing $riti$i ". 7"$a3%" !# high int"r"%t rat":Most MG!(s financially sustainable by charging interest rates that are high enough to cover all their costs. The problem is that the administrative costs are inevitably higher for tiny micro lending than for normal bank lending. s a result, interest rates in sustainable microfinance institutions 4MG!s5 are substantially higher than the rates charged on normal bank loans. F!3r 5"- #a$t!r% ."t"r)in" th"%" rat"%: ,. The cost of funds, 0. the MG!:s operating e2penses, =. ;oan losses, >. nd profits needed to e2pand their capital base and fund e2pected future growth. Gormula to decide the interest rate isH + V 7 Y ;; Y #G Y B - !! ,M ;; Where 7 is administrative e2penses, ;; is loan losses, #G is the cost of funds, B is the desired #apitalization rate and !! is investment income. EIa)*0": "uppose that the transaction cost is +s ,O per loan and that the loans are for one year. To break even on the +s O// loan, the MG! would need to collect interest of +s O/ Y +s O Y +s ,O V +s ./, which represents an annual interest rate of ,= percent. To break even on the +s ,// loan, the MG! would need to collect interest of +s ,/ Y+s , Y +s ,O V +s 01, which is an interest rate of 01 percent. |Page 29

#/ SWOT Ana0-%i%: "W'T stands for "trength, Weakness, 'pportunity, and Threat. Str"ngth P ?elped in reducing the povertyH The main aim of Micro Ginance is to provide the loan to the individuals who are below the poverty line and cannot able to access from the commercial banks. s we know that !ndian, more than =O/ million people in !ndia are below the poverty and for them the Micro Ginance is more than the life. $y providing small loans to this people Micro finance helps in reducing the poverty. P ?uge networking availableH Gor MG!s and for borrower, both the huge network is there. !n !ndia there are many more than =O/ million who are below the poverty line, so for MG!s there is a huge demand and network of people. nd for borrower there are many small and medium size MG!s are available in even remote areas. W"a5n"%% P &ot properly regulatedH !n !ndia the +ules and +egulation of Micro Ginance !nstitutions are not regulated properly. !n the absent of the rules and regulation there would be high case of credit risk and defaults. !n the shed of the proper rules and regulation the Micro finance can function properly and efficiently. P ?igh number of people access to informal sourcesH ccording to the World $ank report </T of the !ndian poor can(t access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges >/ to ,0/T p.a. P #oncentrating on few people onlyH !ndia is considered as the second fastest developing country after #hina, with %69 over <.OT from the past O years. $ut this all interesting figures are just because of few people. !ndia(s ./T of the population lives in rural area, and that portion is not fully touched. O**!rt3nitP ?uge demand and supply gapH There is a huge demand and supply gap among the borrowers and issuers. !n !ndia around =O/ million of the people are poor and only few MG!s there to serving them. There is huge opportunity for the MG!s to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly +s 1/,/// crore and only O>O1 crore are disbursed to the borrower.4 pril /-5 7mployment 'pportunityH Micro Ginance helps the poor people by not only providing them with loan but also helps them in their business) educate them and their children etc. "o in this Micro Ginance helping in increase the employment opportunity for them and for the society. P ?uge 8ntapped MarketH !ndia(s total population is more than ,/// million and out of =O/ million is living below poverty line. "o there is a huge opportunity for the MG!s to meet the demand of that unsaved customers and Micro Ginance should not leave any stones unturned to grab the untapped market. P 'pportunity for 9vt. $anksH Many 9vt. $anks are shying away from to serve the people are unable to access big loans, because of the high intervention of the %ovt. but the door open for the 9vt. 9layers to get entry and with fle2ible rules 9vt. $anks are attracting towards this segment. Thr"at P ?igh #ompetitionH This is a serious threat for the Micro Ginance industry, because as the more players will come in the market, their competition will rise , and we know that the MG!s has the high transaction cost and after entrant of the new players there transaction cost will rise further, so this would be serious threat. P &eophyte !ndustryH $asically Micro Ginance is not a new concept in !ndia, but that was all by informal sources. $ut the formal source of finance through Micro Ginance is novice, and the rules are also not properly placed for it. |Page 30

P 'ver involvement of %ovt.H This is the biggest that threat that many MG!s are facing. $ecause the e2cess of anything is injurious, so in the same way the e2cess involvement of %ovt. is a serious threat for the MG!s. 72cess involvement definition is like waive of loans, make new rules for their personal benefit etc. <?/ Mi$r!-Finan$" A$$!3nting an. Manag")"nt In#!r)ati!n S-%t")% The basic components of an accounting system are fairly universal and applicable to all org "ource documents form the basis of all transactions. #hart of ccounts is a numbered system that is structured to #lassify and organize transactions by account. The journals cash journals, general journals, or bank journals record each and every transactions or adjustment. They are summarized monthly, cross-totaled and posted to the general ledger. The general ledger holds a record for each account in the #hart of ccounts. !t accumulates the totals posted from the journals to provide monthly and annual revenue and e2penses for reporting periods. !t accumulates all the accounts of the $alance "heet. These accounting records and processes form the basis of all accounting systems. Most MG!s choose computerized. The following diagram illustrates a CgenericD financial management information system in a microfinance institution, whether its clients are individuals, "elf ?elp %roups, "olidarity %roups, or Aoint ;iability %roups, and regardless of its legal structure or registration. The accounting system follows the usual flow from transaction to the parathion of financial statements. 'ne of the most distinctive aspects of the accounting system for microfinance institutions is that financial and operational activity must be tracked by $ranch. ;oan information should also be tracked by #redit 'fficer, by product and by area if needed. This is critical for internal management R monitoring. nother distinctive aspect of accounting for MG!s is that the loan tracking system for client transactions acts as a subsidiary ledger. #lient transactions must be entered into both systems, but can be summarized in the accounting general ledger. "ome loan tracking systems are manual, but it is a huge challenge to handle a large number of clients, produce reports Rage loans with great efficiency in a manual system. Most MG!s prefer automated systems, particularly loan tracking systems that are integrated with, and linked to a general ledger. The following diagram shows the connection between the two systems.

A$$!3nting S-%t") an. C0i"nt P!rt#!0i! S-%t") EMISF Mi$r!#inan$"

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The MG! financial management systems illustrated dose not operates in a vacuum. There are four distinct areas that guide R govern a well-managed R effective financial system.
. P!rt#!0i! R"*!rt: !s it a number reflecting a period of time 4e.g. the !ncome "tatement, and some numbers from the 9ortfolio +eport5I !s the number reflective of information from a point in time M as from the $alance "heetI When !ncome "tatement numbers or any number reflecting a period of activity is used to calculate a ratio, the second component of the ratio must also reflect a period of activity. Therefore, some of the ratio components take the average of $alance "heet numbers. +emember to note these distinctions in the ratio calculations.

,<9 MFI in In.ia Gr!4th !# Gr!%% L!an P!rt#!0i! $. A%%"t an. Lia7i0it- Manag")"nt Yi"0. V #ash +eceived from !nterest, Gees and #ommissions on ;oan 9ortfolioWWW verage %ross ;oan 9ortfolio TrendH n increasing yield is positive although it will level off as it nears the effective interest rate. a/ 'a%i$ Finan$ia0 Manag")"nt an. Rati! Ana0-%i% #!r MFI%: MG! stakeholders e2pect MG! senior managers to ensure that strong and adeEuate financial systems are in place in the MG!. Therefore, it is essential that MG! managers have a solid understanding and appreciation of the financial and accounting systems. The $asic Ginancial Management and +atio nalysis for MG!s offer a practical training in basic financial management and ratio analysis for MG!s. !t provides an overview of the key aspects of accounting in microfinance institutions describes the primary financial statements and portfolio reports of MG!s and describes the commonly accepted financial ratios used for monitoring, reporting and measuring MG! performance. |Page 32

9erformance ratios cover four general areas of MG! operationsH sustainability or profitability, asset and liability management, portfolio Euality and productivity and efficiency. !ts helps develop clarity on the need of the different financial statements, the relation between them. The training helps develop skills to analyze these statements and calculate different ratios which will give the correct picture on the financial health of the organization. This is done through supporting documents, diagrammatic representations, and e2ercises. Ginancial ratios are useful indicators of a firm:s performance and financial situation. Ginancial ratios can be used to analyze trends and to compare the firm:s financials to those of other firms. 7/ Li%t !# MFIA% an. th"ir 5"- Rati!%: Li63i.it- Rati!% These ratios actually show the relationship of a firm(s cash and other current assets to its current liabilities. Two ratios are discussed under ;iEuidity ratios. They areH ,. #urrent ratio 0. UuickL cid Test ratio. ,. #urrent ratioH This ratio indicates the e2tent to which current liabilities are covered by those assets e2pected to be converted to cash in the near future. #urrent assets normally include cash, marketable securities, accounts receivables, and inventories. #urrent liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued ta2es, and other accrued e2penses 4principally wages5. #urrent +atioV#urrent ssetsL#urrent ;iabilities.

C!%t !# F3n.% Rati! C!%t !# F3n.% V Ginancial 72pense on Gunding ;iabilities 4 verage 6eposits Y verage $orrowings5 Trend: The Cost of Funds may indicate a level of maturity of the MFI. A decreasing Cost of Funds ratio is generally positive. hen Financial E!penses are ad"usted to include free or su#sidi$ed funding% the ratio &ill sho& the actual financial cost of funds needed to fund or capitali$e the MFI. D"7t t! E63itD"7tHE63it- V ;iabilitiesWWWW 7Euity Trend: An increasing de#t'equity ratio indicates the MFI(s capacity to attract de#t funding #ased on its capital strength of its o&n equity. Too lo& a ratio might indicate that the MFI is not ma!imi$ing its equity #ase. Too high a factor may #e ris)y for investors% and may spell cash flo& challenges during difficult times |Page 33

Li63i. Rati! Li63i. Rati! V #ash Y Trade !nvestmentsWWWWW 46emand 6eposits Y short-term Time 6eposits Y "hort-term $orrowings Y !nterest 9ayable on Gunding ;iabilities Y ccounts 9ayable nd other "hort-term ;iabilities5 Trend: *o single ratio or trend provides the +correct, or +adequate, means to monitor cash levels. Managers must have clear policies in place to ensure that cash is availa#le &hen needed for all MFI operations and activities -an)ing requirements and ris) tolerance &ill affect the ratio... Ri%5 C!2"rag" Rati! Ri%5 C!2"rag" Rati! V WWWWWW llowance for ;oan ;ossesWWWWWW 9ortfolio at +isk over =/ days Trend: A fairly constant% sta#le ratio is desired. .udden changes usually indicate a deterioration or improvement in portfolio quality or an e!cess or shortage in the Allo&ance for /oan /osses account. $/ Ca*a$it- !# MFI%: !t is now recognized that widening and deepening the outreach of the poor through MG!s has both social and commercial dimensions. "ince the sustainability of MG!s and their clients complement each other, it follows that building up the capacities of the MG!s and their primary stakeholders are pre-conditions for the successful delivery of fle2ible, client responsive and innovative microfinance services to the poor. ?ere, innovations are important both of social intermediation, strategic linkages and new approaches centered on the livelihood issues surrounding the poor, and the re-engineering of the financial products offered by them as in the case of the $ank 9artnership model. </ 'an5 Partn"r%hi* M!."0: This model is an innovative way of financing MG!s. The bank is the lender and the MG! acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. !n other words, the MG! acts as an agent and takes care of all relationships with the client, from first contact to final repayment. The model has the potential to significantly increase the amount of funding that MG!s can leverage on a relatively small eEuity base. sub - variation of this model is where the MG!, as an &$G#, holds the individual loans on its books for a while before securitizing them and selling them to the bank. "uch refinancing through securitization enables the MG! enlarged funding access. !f the MG! fulfils the Ctrue saleD criteria, the e2posure of the bank is treated as being to the individual borrower and the prudential e2posure norms do not then inhibit such funding of MG!s by commercial banks through the securitization structure. >/ 'an5ing C!rr"%*!n."nt%: The proposal of Cbanking correspondentsD could take this model a step further e2tending it to savings. !t would allow MG!s to collect savings deposits from the poor on behalf of the bank. !t would use the ability of the MG! to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits. #urrently, +$! regulations do not allow banks to employ agents for liability - i.e. deposit - products. 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. !t |Page 34

remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse. ?/ S"r2i$" C!)*an- M!."0: !n this conte2t, the "ervice #ompany Model developed by ##!'& and used in some of the ;atin merican #ountries is interesting. The model may hold significant interest for state owned banks and private banks with large branch networks. 8nder this model, the bank forms its own MG!, perhaps as an &$G#, and then works hand in hand with that MG! to e2tend loans and other services. 'n paper, the model is similar to the partnership modelH the MG! originates. 4. MFI M!."0: 8nder this model, the bank forms its own MG!, perhaps as an &$G#, and then works hand in hand with that MG! to e2tend loans and other services. 'n paper, the model is similar to the partnership modelH the MG! originates the loans and the bank books them. $ut in fact, this model has two very different and interesting operational featuresH 4a5 The MG! uses the branch network of the bank as its outlets to reach clients. This allows the client to be reached at lower cost than in the case of a standMalone MG!. !n case of banks which have large branch networks, it also allows rapid scale up. !n the partnership model, MG!s may contract with many banks in an arms length relationship. !n the service company model, the MG! works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage. 4b5 The 9artnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth. The "ervice #ompany Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MG! managers who are focused on microfinance to introduce additional products, such as individual loans for "?% graduates, remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance. MG!s are an e2tremely heterogeneous group comprising &$G#s, societies, trusts and cooperatives. They are provided financial support from e2ternal donors and ape2 institutions including the +ashtriya Mahila Bosh 4+MB5, "!6$! Goundation for micro-credit and & $ +6 and employ a variety of ways for credit delivery. "ince 0///, commercial banks including +egional +ural $anks have been providing funds to MG!s for on lending to poor clients. Though initially, only a handful of &%'s were CintoD financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MG!s operating in the country, the number of MG!s is estimated to be around <//.

:/ F!r NGO% M!."0: There are a large number of &%'s that have undertaken the task of financial intermediation. Majority of these &%'s are registered as Trust or "ociety. Many &%'s have also helped "?%s to organize themselves into federations and these federations are registered as Trusts or "ocieties. Many of these federations are performing non-financial and financial functions like social and capacity building activities, facilitate training of "?%s, undertake internal audit, promote new groups, and some of these federations are engaged in financial intermediation. The &%' MG! varies significantly in their size, philosophy and approach. Therefore these &%'s are structurally not the right type of institutions for undertaking financial intermediation activities, as the byelaws of these institutions are generally
|Page 35

restrictive in allowing any commercial operations. These organizations by their charter are non-profit organizations and as a result face several problems in borrowing funds from higher financial institutions. The &%' MG!s, which are large in number, are still outside the purview of any financial regulation. These are the institutions for which policy and regulatory framework would need to be established.
A0!ng 4ith ."2"0!*ing %a2ing an. $r".it #a$i0iti"%1 th" NGO% "ngag" in: E,5 9roviding $asic 7ducation. 405 6eveloping a sense of ?ealth and ?ygiene. 4=5 7ncourage family planning. 4>5 #reating wareness about environment protection. 4O5Most important, nurturing an environment of gender eEuality. These activities are the rudiments of sustained economic development. 'a%i$a00-1 th" MFI% in In.ia ar" !# thr"" $at"g!ri"%: 4i5 &ot for profit MG!, which include the &%'sI 4ii5 Mutual $enefit MG!s, which include mutually-aided co-operative credit. 4iii5 Gor 9rofit MG!s, which include the &on-$anking Ginancial #ompanies 4&$G#5I

6. N!n-Pr!#it C!)*ani"% a% MFI%:


Many &%'s felt that combining financial intermediation with their core competency activity of social intermediation is not the right path. !t was felt that a financial institution including a company set up for this purpose better does banking function. Gurther, if MG!s are to demonstrate that banking with the poor is indeed profitable and sustainable, it has to function as a distinct institution so that cross subsidization can be avoided. 'n account of these factors, &%' MG!s are of late setting up a separate &on-9rofit #ompanies for their micro finance operations. The MG! is prohibited from paying any dividend to its members. !n terms of +eserve $ank of !ndia*s &otification dated ,= Aanuary 0///, relevant provisions of +$! ct, ,-=> as applicable to &$G#s will not apply for &$G#s . 4i5 4ii5 4iii5 licensed under "ection 0O of #ompanies ct, ,-O1, providing credit not e2ceeding +s. O/,/// 4Q,,,05 for a business enterprise and +s. ,, 0O,/// 4Q0..<5 for meeting the cost of a dwelling unit to any poor person, and, not accepting public deposits

7. M3t3a0 '"n"#it MFI%H The "tate #ooperative cts did not provide for an enabling framework for
emergence of business enterprises owned, managed and controlled by the members for their own development. "everal "tate %overnments therefore enacted the Mutually ided #ooperative "ocieties 4M #"5 ct for enabling promotion of self-reliant and vibrant co-operative "ocieties based on thrift and self-help. M #" enjoy the advantages of operational freedom and virtually no interference from government because of the provision in the ct that societies under the ct cannot accept share capital or loan from the "tate %overnment. Many of the "?% federations, promoted by &%'s and development agencies of the "tate %overnment, have |Page 36

been registered as M #". +eserve $ank of !ndia, even though they may be providing financial service to its members, does not regulate M #".

8. F!r Pr!#it MFI%:&on $anking Ginancial #ompanies 4&$G#5 are companies registered under #ompanies ct, ,-O1 and regulated by +eserve $ank of !ndia. 7arlier, &$G#s were not regulated by +$! but in ,--. it was made obligatory for &$G#s to apply to +$! for a certificate of registration and for this certificate &$G#s were to have minimum &et 'wned funds of +s 0O lakhs and this amount has been gradually increased. +$! introduced a new regulatory framework for those &$G#s who want to accept public deposits. ll the &$G#s accepting public deposits are subjected to capital adeEuacy reEuirements and prudential norms. There are only a few MG!s in the country that are registered as &$G#s. Many MG!s view &$G#s more preferred legal form and are aspiring to be &$G#s but they are finding it difficult to meet the reEuirements stipulated by +$!. The number of &$G#s having e2clusive focus on MG is negligible. 14. Ca*ita0 R"63ir")"nt%
&%'-MG!s, non-profit companies* MG!s, and mutual benefit MG!s are regulated by the specific act in which they are registered and not by the +eserve $ank of !ndia. These are therefore not subjected to minimum capital reEuirements, prudential norms etc. &%' MG!s to become &$G#s are reEuired to have a minimum entry capital reEuirement of +s. 0/ million 4Q /.O million5. s regards prudential norms, &$G#s are reEuired to achieve capital adeEuacy of ,0T and to maintain liEuid assets of ,OT on public deposits.

A. F!r"ign In2"%t)"nt: Goreign investment by way of eEuity is permitted in &$G# MG!s subject to a minimum investment of QO//,///. !n view of the minimum level of investment, only two &$G#s are reported to have been able to raise the foreign investment. ?owever, a large number of &%'s in the development empowerment are receiving foreign fund by way of grants. t present, over +s.>/, /// million 4Q <<- million5 every year flows into !ndia to &%'s for a whole range of activities including microfinance. !n a way, foreign donors have facilitated the entry of &%'s into micro finance operations through their grant assistance. B. D"*!%it M!7i0i ati!n:
&ot for profit MG!s are barred, by the +eserve $ank of !ndia, from mobilizing any type of savings. Mutual benefit MG!s can accept savings from their members. 'nly rated &$G# MG!s rated by approved credit rating agencies are permitted to accept deposits. The Euantum of deposits that could be raised is linked to their net owned funds.

C. '!rr!4ing%:
!nitially, bulk of the funds reEuired by MG!s for on lending to their clients was met by ape2 institutions like &ational $ank for griculture and +ural 6evelopment, "mall !ndustries 6evelopment $ank 'f !ndia, and, +ashtiya Mahila Bosh. !n order to widen the range of lending institutions to MG!s, the +eserve $ank of !ndia has roped in #ommercial $anks and +egional +ural $anks to e2tend credit facilities to MG!s since Gebruary 0///. $oth public and private banks in the commercial sector have e2tended sizeable loans to MG!s at interest rate ranging from < to ,, per cent per annum. $anks have been given operational freedom to prescribe their own lending norms keeping in view the ground realities. The intention is to augment flow of micro credit through the conduit of MG!s. !n regard to e2ternal commercial borrowings 47#$5 by MG!s, not-for-profit MG!s |Page 37

are not permitted to raise 7#$. The current policy effective from =, Aanuary 0//>, allows only corporate registered under the #ompanies ct to access 7#$ for permitted end use in order to enable them to become globally competitive players.

D. Int"r"%t Rat"%:
The interest rates are deregulated not only for private MG!s but also for formal baking sector. !n the conte2t of softening of interest rates in the formal banking sector, the comparatively higher interest rate 4,0 to 0> per cent per annum5 charged by the MG!s has become a contentious issue. The high interest rate collected by the MG!s from their poor clients is perceived as e2ploitative. !t is argued that raising interest rates too high could undermine the social and economic impact on poor clients. "ince most MG!s have lower business volumes, their transaction costs are far higher than that of the formal banking channels. The high cost structure of MG!s would affect their sustainability in the long run.

E. C!00at"ra0 r"63ir")"nt%:
ll the legal forms of MG!s have the freedom to waive physical collateral reEuirements from their clients. The credit policy guidelines of the +$! allow even the formal banks not to insist on any type of collateral and margin reEuirement for loans up to +s O/,/// 4Q,,//5. R"g30ati!n & S3*"r2i%i!n: !ndia has a large number of MG!s varying significantly in size, outreach and credit delivery methodologies. 9resently, there is no regulatory mechanism in place for MG!s e2cept for those that are registered as &$G#s. s a result, MG!s are not reEuired to follow standard rule and it has allowed many MG!s to be innovative in its approach particularly in designing new products and processes. $ut the flip side is that the management and governance of MG!s generally remains weak, as there is no compulsion to adopt widely accepted systems, procedures and standards. $ecause the sector is unregulated, not much is known about their internal health. F!00!4ing C!))itt""% ha2" "Ia)in". th" r!a. )a* #!r r"g30ati!n an. %3*"r2i%i!n !# MFI%: Task Gorce 4appointed by & $ +65 +eport on +egulatory and "upervision Gramework for MG!s, ,---. 4Bindly see publications "ection for a complete report Working %roup 4constituted by %overnment of !ndia5 on ;egal R +egulation of MG!s, 0//0 !nformal %roups 4appointed by +$!5 on Micro Ginance which studied issues relating to 4i5 4ii5 4iii5 4iv5 "tructure R"ustainability, Gunding +egulations and #apacity $uilding, 0//=

dvisory #ommittee 4appointed by +$!5 on flow of credit to agriculture and related activities from the $anking "ystem, 0//>. The #ommittee observed that while a few of the MG!s have reached significant scales of outreach, the MG! sector as a whole is still in evolving phase as is reflected in wide debates ranging around 4i5 desirability of &%'s taking up financial intermediation, 4ii5 unproven financial and organizational sustainability of the model, 4iii5 high transaction costs leading to higher rates of interest being charged to the poor clients, 4iv5 absence of commonly agreed performance, accounting and governance standards, 4v5 heavy e2pectations of low cost funds, including eEuity and the start up costs, etc. |Page 38

The current debate on development of a regulatory system for the MG!s focuses on three stages. "tage one to make the MG!s appreciate the need for certain common performance standards, stage two - making it mandatory for the MG!s to get registered with identified or designated institutions and stage three - to encourage development of network of MG!s which could function as Euasi "elf-+egulatory 'rganizations 4"+'s5 at a later date or identifying a suitable organization to handle the regulatory arrangements. The #ommittee recommended that while the MG!s may continue to work as wholesalers of microcredit by entering into tie-ups with banks and ape2 development institutions, more e2perimentation have to be done to satisfy about the sustainability of the MG! model. "uch e2perimentation needs to be encouraged in areas where banks are still not meeting adeEuate credit demand of the rural poor. !n regard to offering thrift products, the #ommittee felt that, while the &%'-MG!s can continue to e2tend micro credit services to their clients, they could play an important role in facilitating access of their clients to savings services from the regulated banks. s regards allowing &%'-MG!s to access deposits from public L clients, the #ommittee considers that in view of the need to protect the interests of depositors, they may not be permitted to accept public deposits unless they comply with the e2tant regulatory framework of the +eserve $ank of !ndia. s no depositors: interest is involved where they do not accept public deposits, the +eserve $ank of !ndia need not regulate MG!s. s regards the high interest rates being charged by the MG!s, the #ommittee felt that the lenders to MG!s may ensure that these institutions adopt a (cost-plus- reasonable-margin* approach in determining the rates of interest on loans to clients.

15. D"2"0!*)"nt F3n. A. Mi$r! Finan$" D"2"0!*)"nt an. E63it- F3n. EMFDEFF M Str3$t3r" an. G3i."0in"%: 6uring 0//O-/1, %overnment of !ndia has decided to redesign ate the e2isting MG6G as microfinance 6evelopment and 7Euity Gund 4MG67G5. !t has also been decided to enhance the fund size from the e2isting +s,// crore to +s 0// crore. The additional amount of +s ,// crore will be contributed by +eserve $ank of !ndia, & $ +6 and the commercial banks in the same proportion as earlier 4>/H>/H0/5. B. O7+"$ti2"%: The objective of the redesignated Gund is to facilitate and support the orderly growth of the microfinance sector through diverse modalities for enlarging the flow of financial services to the poor particularly for women and vulnerable sections of society consistent with sustainability. C. A$ti2iti"% t! 7" %3**!rt". #r!) !3t !# th" MFDEF: The Gund will be utilized to support interventions to eligible institutions and stakeholders. The components of assistance will include, inter alia, the following purposesH a. Ca*a$it- '3i0.ing: i5 Training of "?%s and other groups for livelihood, skill up gradation and micro enterprise development.
39

|Page

ii5 iii5

#apacity building of staff of institutions involved in microfinance promotion such as $anks, &%'s, government departments, & $ +6, etc. #apacity building of MG!s.

b. F3n.ing S3**!rt: ,. #ontributing eEuityLother forms of capital support to MG!s, service providers, etc. 0. 9roviding financial support for start-up and on-lending for microfinance activities. =. "upporting "elf ?elp 9romotion initiatives of banks and other "?9!s. >. Meeting on a selective basis the operational deficit of financial intermediary &%'sLMG!s at the start up stage. O. +ating of MG!s and self regulation. c. MIS: ,. "upporting systems management in regard to M!", accounting, internal controls, audits and impact assessment. 0. $uilding an appropriate data base and supporting development thereof. +egulatory R "upervisory Gramework. =. =. +ecommending regulatory and supervisory framework based on an on-going review. d. St3.i"% & P370i$ati!n%: 1. #ommissioning studies, consultancies, action research, evaluation studies, etc, relating to the sector. 2. 9romoting seminars, conferences and other mechanisms for discussion and dissemination.

3. %ranting support for research. 4. 6ocumentation, 9ublication and dissemination of MG literature. 5. ny other activities recommended by the dvisory $oard to Gund.

e. E0igi70" In%tit3ti!n%: Gollowing types of structures, community based organizations and institutions, would be eligible for support from the GundH ,. TrainingH "?%s, #$'s, &%'sLJ s, $anks, MG!s, & $ +6, Training 7stablishments, networks, service providers. 0. Gunding supportH &%'sLJ s, #$'s, MG!s, and $anks.
|Page 40

=. M!"H "?%s, &%'sLJ s, $anks, MG!s, & $ +6. >. +egulatory and "upervisory GrameworkH $anks, MG!s, "+'s, &%'s LJ s L MG! &etworks, & $ +6. O. "tudies and 9ublicationsH $anks, MG!s, & $ +6, Training and +esearch 'rganizations, cademic institutions and 8niversities. 1. ny other organization as may be decided by the dvisory $oard from time to time.

f. M!." !# A%%i%tan$": Mode of assistance from the Gund will include the followingH K 9romotional support for training and other promotional measures. K ;oans and advances including soft loans. K +evolving Gund ssistance 4+G 5 to &%'sL MG!s. K 7Euity and Euasi eEuity support to MG!s. K dministrative subsidies and grants. K dministering #harges. g. A.2i%!r- '!.- t! MFDEF: The dvisory $oard shall guide and render advice on the various aspects relating to the micro finance sector. The $oard may determine its own procedures for day-to-day working including constitution of committees, task forces etc, for e2amination of various issues. The advisory board will meet at such intervals as deemed necessary but in any case once in a Euarter to review the status and progress of outflow and to render policy advice in respect of orderly growth and development of the sector. 16. NA'ARDD% S3**!rt t! )i$r!#inan$" In%tit3ti!n% EMFI%F
+ealizing the importance of MG!s in the delivery of financial services to the poor and their potential for e2pansion of services in remote and lesser-banked areas, & $ +6 has been e2tending technical and fund support to this sector. "ome of the concerns that necessitated & $ +6 to commence this support in ,--= wereH ,5 the need to provide timely credit to the poor in under banked regions and ii5 to further improve the outreach of rural credit delivery system through alternate credit delivery mechanisms. & $ +6:s support is being provided to various forms of microfinance institutions covering MG!s, second tier MG lending institutions, %rameen bank replicators, &%'-MG!s, "?% Gederations etc. & $ +6 provides loan funds in the form of Revolving Fund Assistance 0RFA1 to &%'-MG!s on a very selective basis. The +G is generally provided for a period of O to 1 years and is necessarily to be used for on lending to mG clients 4"?%s or individuals5. !n addition, the agencies are also sanctioned, on a case-to-case basis, grant assistance for partly meeting the salary of field level staff, infrastructure development and operational deficits during the initial years. |Page 41

#umulatively, as at the end of Aune 0//>, +s 01.-< crore 4+s 01-.</ million5 has been sanctioned as +G to =, &%'-MG!s and +s. /.O< crore 4+s O.< million5 has been sanctioned as grant to various &%'s. The amount e2cludes +s =.> million sanctioned under "?% 9ost 'ffice linkage programme in Tamilnadu. 6uring the year 0//=-/>, loan support of +s. <> million was sanctioned to two agencies viz. ,5 Griends of World Women $anking, !ndia 4+s. .> million5 for on-lending to small &%'s R 05 Balanjiam 6evelopment Ginancial "ervices-a section 0O company promoted by 6? & Goundation 4+s ,/ million5 for on lending to "?%s. & $ +6 also provides technical support in the form of capacity building of staff of MG!s and also bankers in appraisal of MG!s for providing wholesale resource support. "ince 0//0, training programmes on 2Appraisal of MFIs2 are being conducted through $ankers !nstitute of +ural 6evelopment 4$!+65, ;ucknow. These training programmes are intended to eEuip the stakeholders to appreciate the nuances in financing &%'-MG!s and also enhance the flow of loan able funds from mainstream financial !nstitutions like banks. "pecially designed capacity building programmes are also being organized for #hief 72ecutives R other staff of &%'s on promotion as well as managing of self help groups on a regular basis through our regional offices, in association with reputed resource &%'s R training establishments. >>/ '3%in"%% M!."0 !# &DS MFI AF Intr!.3$ti!n: Botalipara 6evelopment "ociety 4B6"5 is basically a &$G# 4&on $anking Ginancial #ompany5. They provide minimum loan of ,/// and ma2imum >/,///. M " Ginance is one of the blooming private MG! in the current era. They are having a sufficient amount of capital with them for their future growth. Botalipara 6evelopment "ociety registered as a "ociety 4&%'5 under West $engal "ociety +egistration ct ,-1, came into being in ,-<- and was in ,--,, B.6.". is a &on-govt. "ocial "ervice 'rganization working in the field of +ural 6evelopment for the poor people. #ommunity development and also poverty alleviation is the main focus of this 'rganization. B.6.". is a multi service &%' having under taken interventions in the field of primary health care, education, #hild right, mother R child health care, #ontrol of $lindness, Jocational training, water harvesting environment conservation and Micro- credit. lthough B.6.". is basically based on the main principle of causing socialeconomic empowerment of the poor. 'F &DS 8i%i!n: B6": vision is to poverty alleviation, women empowerment R egalitarian "ociety free from e2ploitation and every body in this global life with humanity and prosperity. CF &DS Mi%%i!n: B6" envision itself as a financially self sustainable Micro-finance !nstitution with a wide base of ownership. !t is committed to strengthening the "ocio-7conomic status of the poor women in rural and urban areas by providing technical and financial services on continued basis for establishing their identity and selfimage. !t constantly endeavors by cost-effective Methods creating a culture of competence and e2cellence. DF L"ga0 Stat3%: +egistered under "ociety +egistration ct, of ,-1,. EF O7+"$ti2"H ,. Women 7mpowermentH B6" $elieves that XWomen participation is the most effective instrument in bringing about change in their way of life both economic well-being and adoption of new practices in changing the socio-economic environment. !n order to bring about women participation and their decision making and negotiating power about their rights in all walks in life. |Page 42

0. Women ?ealthH ?ealth leads to prosperity. ;ow endowments, production possibilities, and e2change option for women from disadvantage section in rural marginalized the women) this marginalization often results in neglecting the health issues of women and children. =. Women 7conomic 6evelopmentH 'ur objective is to strengthen women(s economic capacity as entrepreneursLproducers, off farm economy and traditional activities. B6" is committed to address factors leading to feminization of poverty and gender ineEuality. >. Women and natural resourcesH 'ur observation is that women are most effective by degradation of natural resources. We are promoting environment awareness and natural resources conservation activities through women(s participation at village level. FF R!0" an. F3n$ti!n: K?elping in eradication of poverty. K9roviding finance for the enlistment of the individuals. K?elps the borrower in establishing their business. GF ADDRESS: <F ("a. O##i$" "anta &ir, &oapara, rabinda 9ally $arasat, BolkataF,0> 6ist-&orth 0> 9arganas West $engal, !ndia Mobile H Y-, /== =0-1OO17mail !d H in#!N5.%)#i/!rg >F R"g/ O##i$": 9ioneer 9ark 4Mat5 $arasat 6ist-&orth 0> 9arganas, Bolkata--,0> West $engal, !ndia ?F Ja*an O##i$": 9.'-=OO-//.1 "?!M'B + B' ,-/1, ?!% "?! M T"8@ M -"?!, " !T M -B7&, A 9 & T7; Y G ZH 4//<,5>-=-0O0OO. TelH 4//<,5</=O00/-=/ O/=..0<><-, ./11.<-.>/ 7-mailH baidyan[solid.ocn.ne.jp

(F Mi$r!-Finan$" Pr!gra): ,. B6" has been established in the year ,--,. 0. 6irectly started implementing Micro-finance since ,--.. =. B6" provides financial "ustainable 6evelopment pproach for C9overty lleviation R Women 7mpowermentD. >. Ginancial "ervices to the poor women, landless, sset less. O. Monthly family income not more than !&+ +s.0O//L- in rural !&+ +s.=O// in urban. 1. ,//T women and possesses not more than O/ decimal of land. .. "?% Model is largely based on " , $angladesh. <. B6" provide small capital to medium entrepreneurs for e2pansion their business. "ecurity 6eposit B6" received ,/T "ecurity against ;oan. |Page 43

7F &DS Fi"0. O*"rati!n: O*"rati!n%: -The organization has a three tier system at the field- $ranch, +egions, 6ivision) personnel associated with each tier are based at the Gield. 'ran$h: $ranch in the field is the centre of all actions. The branch serves as a residence for field staff 4G'L$M5 and an office unit from where activities of branch originate and are managed. The $ranch Managers supervise the activities of the G's and also administer branch operation. $Ms hold regular meetings with their G's for efficient branch operation. s a part of their regular monitoring. $ranch Manager visits the borrower*s house regularly. R"gi!n: ll the branches are distributed under ,= regions. 7ach region consists of 1-. branches.Thirteen +egional Manager looks after all regions. The +egional Manager does not have any separate office and staff to conduct hisLher work. The +egional 'ffice is situated at the centre branch at a region. The +egional Manager regularly monitors the activities of a branch at least twice in a month. Di2i%i!n: There are = divisions. 7ach division consists of >-O regions. The 6ivisional Manager 46M5 looks after a division. s a part of his monitoring process, he visits ,0 branches in a month. ?is monitoring contains varied facts viz. supervision of +egional Manager work, study of $ranch growth, fund plan and utilization and the like. $esides these there is one 'peration Manager at the head for the smooth functioning of the field. lthough 'peration Manager is located at the head office, he plays a vital role in field operations. !n fact, it is Mandatory for the 'peration Manager to spend 0 weeks a month in the field. ?e is endowed with specific power and is capable of taking decision independently. Int"rna0 A3.it: B6" has a team of < people 4inclusive of the Manager !nternal udit5 working under the internal audit section. 'ut of these < people, 0 of them are based at the head office and the rest 1 are based in the field each branch is audited every five si2 months. The Manager !nternal udit coordinates and supervised the activates of the !nternal uditors 4!. .5. The !. . submit their report to the Manager !nternal udit who is turn compilesL consolidates the some and finally places it before the #hief 72ecutive 6irectors. The Manager !nternal udit is directly accountable to the #hief 72ecutive 6irector 4#765. 'nce the #76 goes through the report, the instructs the !mplement 'fficer and the 'peration Manager to take necessary steps it reEuired. round ,O-0/ branches are audited each month is B6" in certain cases, the auditors may be given instructions to conduct follow up audits. udit is also conducted in the ;ogistics 6epartment at the head office once a year.

aF Mi$r!#inan$" O*"rati!n Str3$t3r": |Page 9rogram ssociate &$G#

44

$F MFI P!rt-F!0i! Stat3% R"*!rt: |Page 45

F!r th" )!nth "n.". ?Cth J30-- >C<C N! !# 7ran$h"% N! !# 2i00ag" $!2"r". N! !# a$ti2" gr!3*% N! !# )")7"r% N! !# a$ti2" 7!rr!4"r A)!3nt !# 0!n" !3t%tan.ing Ein R%/F C3)30ati2" n! !# 0!n" .i%73r%" C3)30ati2" a)!3nt !# 0!n" .i%73r%" Ein R%/F .F M"th!.!0!g-: Cr".it D"0i2"r- M"th!.!0!g-: C0i"ntH'!rr!4"r: K,T women, mostly land less R asset less. K "?. B6" follows " Modify Model. K ,//% M ,/-0/ Members in a group. B6" developed and tested a sustainable credit model in West $engal. The model is largely based on " , $angladesh approach organizing the people of focused into groups, under the territory of particular branch of B6". There are generally ,/-0/ members in a group, based in village. With an average number of 0/ in each group. 7ach "?% members meets once in a week, at a fi2ed day, place and time. ll the members are reEuired to attend the weekly meeting and repay their installments. They are reEuired to deposit their security and repay their loan installment. The "?% members take all decision regarding the number of the loaner and amount of loan to be given to any borrower in that "?% meeting. B6" provides collateral free loans to its members, %roup liability is absent from B6":s credit program. !t is not the group but the individual who is held responsible for delinEuency. The Micro-credit services of B6" assist the group members to become economically self-sufficient ;oan proposal are screened and approved by the "?% during their weekly meeting participation and group responsibility are the essential elements of the loan process. fter approval the loan proposal is submitted to the branch office through field staff. The loan disburses to the borrower in cash in the branch office. The Micro-credit services of B6" assist the group members to become economically self-sufficient, ;oan proposal are screened and approved by the "?% during their weekly meeting participation and group responsibility are the essential elements of the loan process. == >1?=? ;1?9@ @B1<<< B>1B9> >9B1?B>1>@? >@@1:<> <1:=:1:=:1:>@

|Page

46

fter approval the loan proposal is submitted to the branch office through field staff. The loan disburses to the borrower in cash in the branch office. Members have to wait only < weeks after their registration to get the ,st loan. The installment process is followed for repayment and the first installment is deposited with service charge is calculated flat on the principal of the loan. There is different size of small loan. !t may be generally from +s. 0/// to ,O///L-. The duration of this loan is one year and >1 eEual installments cover its repayment. "F &DS Mi$r!#inan$" R30"%: <F R30"% !# L!an: K;oans disburse < weeks after formation of the "?%. K-/ T attendance in weekly meeting. K ,st installment after . days in eEual weekly installment. K ;ast = installments can be repaid at a time. K ;oan sanction by the $M. >F Gr!3* F!r)ati!n R30": B6" start with formation of "?% through identifying of target poor women eligible for membership through informal village survey, ,/-0O poor women are formed a self-half %roup and their age ,<-OO years. ,. 7ach of the group has three group leader 9resident, "ecretary R #ashier are responsible for collection, security deposit and loan repayments during the group meeting. 0. The "?% model is largely based on " $angladesh. =. 7ach of the group organizes weekly meeting in a fi2ed day, place and time. >. 7very member is reEuired to attend the meeting. O. "?% member take all the decision in the meeting. ?F Cr".it R30": 4i5 ;oan disburses < weeks after formation of the "?%. 4ii5 -/T attendance in weekly meeting. 4iii5 ,st installment after . days in eEual weekly installment. 4iv5 ;ast = installment can be repaid at a time. 4v5 ;oan sanction by the $M.

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47

9F Pr!.3$t%:,5 B6" has > loan 9roducts

;oan term M!% 4"?%5 7ducation loan Gestival loan4Term5 +epayment #harge 9rocessing fees !nsurance fees !nterest +ate 7ducation loan4!nterest5 05 !nsurance 9roduct

>1 weeks >O weeks ,0 weeks Weekly ,.// T ,.O/ T ,O T ,0.O/ T

,. B6" tie up with ;ife !nsurance #ompany for $orrower insurance. 0. !n case of untimely demise of #lients the successor of the e2pired $orrower will get the benefit of the $orrower insurance and the loan is e2empted from repayment. =. ?ealth !nsurance >.'ther ctivities O. +isk Gund 1.B6" receives ,Tprocessing fees before loan disbursement. !n case the #lient*s husband e2pired in that case the client will get the benefit from the risk fund and the out standing loan is e2empted from repayment. L!an C0a%%i#i".-*3r*!%" 4i%"O &on farm enterprises loan - O0T Transport ----------------------- 01T #ottage !ndustry-------------- ,/T nimal ?usbandry-------------- 1T griculture -----------------------1T

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48

"F '3%in"%% Pr!$"%%: L!an P!rt#!0i! "ecurity 6eposit #umulative no of loan 6isbursed mount of ;oan 6isbursed &o. of ctive $orrowers mount of ;oan 'utstanding verage ;oan "ize $orrower per ;oan 'fficer ;oan mount 9er ;oan 'fficer +epayment +ate +s. 1, 0.=,>,O ,>=O/O +s. O0,/////// <>>O< +s. 0>,/////// 0<=. ,>/ +s. >O./1O +s. >O./1O

#F &DS Ar"a O*"rati!n: "; &o. ,. 0. =. >. O. 1. .. <. -. &ame of the 6istricts & 6! ?''%;@ &'+T? 0> 9 +% & " "'8T? 0> 9 +% & " $8+6W & ?'W+ ? M8+"?!6 $ 6 B';B T M ;6 &umber 'f $lock ,1 ,,0 > = < > , &umber 'f $ranches =/ ,0 == 1 1 , , , , &umber 'f Members ,.=,= OO.. =1/OO >,>1 =,<. =>1 ,-/0 O>/ >0>

West $engal

gF O*"rati!n (igh0ight
Pa%t : Y"ar% A$ti2iti"%: |Page 49

S0/ N! N! !# 'ran$h Di%tri$t C!2"r". N! !# '0!$5 C!2"r". N! !# Sta## N! !# Gr!3* F!r)". N! !# M")7"r%

>CC9 M C: ; ? <9 ?= =CC <>?CC C/<@ Cr!r" E</@ Mi00i!n INRF

>CC: M C; 9> 9 ?? >CC >;CC ?:BCC </?; Cr!r" E<?/; Mi00i!n INRF <</C Cr!r" E<<C Mi00i!n INRF >?CC

>CC; M CB @C @ <;> 9?> BCB9 <<9B9C :/>C Cr!r" E:> Mi00i!n INRF :> Cr!r" E:>C Mi00i!n INRF =9C=9 >?/C Cr!r" E>?C Mi00i!n INRF

>CCB M C= == @ <;> ?BC :;;< =@B@B ?/?B Cr!r" E??/B Mi00i!n INRF B?/9> Cr!r" EB?9/> Mi00i!n INRF :C;BB <?/?> Cr!r" E<??/> Mi00i!n INRF

>CC= M C@ @C @ <@> ?@C :B=> @C@B= 9/?C Cr!r" E9? Mi00i!n INRF @9/:< Cr!r"% E@9:/< Mi00i!n INRF ;:;:C <9/C> Cr!r" E<9C/> Mi00i!n INRF

>CC@ - <C =@ @ <;> 9:? ;>>B @:<?:

S"$3rit- 'a0an$"

:/@EPCB

N! !# L!an Di%73r%". N! !# A$ti2" '!rr!4"r

>/C Cr!r" E>C MI00i!n INRF ?@@C

>B=?@C BCC><

A)!3nt !# L!an O3t%tan.ing On ti)" R"*a-)"nt Rat"

</<C Cr!r" E<< Mi00i!n INRF

B/C Cr!r" EBC Mi00i!n INRF

>?C:>BB>? @=/=9

@@/@?O

@=/;>O

@@/BCO

@=/B>O

@=/=?O

hF &DS L"n."r%:

1.

2is $ank

2. 8nited $ank of !ndia


|Page 50

3. Griends of Women*s World $anking !ndia 4G.W.W.$.5 4. "mall !ndustries 6evelopment $ank of !ndia 5. West $engal $ackward #lass 6evelopment Ginance #orporation 6. West $engal Minority 6evelopment Ginance #orporation. 7. +ashtriya Mahila Bosh, 46epartment of Women and #hild 6evelopment, govt. of !ndia5. 8. !#!#! $ank.
iF S3$$"%% St!r- G""ta Pa30 %eeta 9aul is a landless woman belonging to '.$.#. community who lives in the hamlet of 0> pgs 4&5 in West $engal with her husband, Mr. ?aripada 9aul is also landless labour working in his self profession 9ottery. %eeta and her husband lived on very heard life with their three children out of which two are school going. %eeta 9aul herself found out the ".?.%. and 6uttapukur $ranch office of B.6.". in her won village. There she was inspired by field organizer of B.6.". to enlarge her 9ottery business. "he became please and interested to provide more fund from B.6.". to her business. "o she got a loan of +s. .///L- 4seven thousand5 to develop her tools for the same. $oth her husband and she herself did the same in order to enlarge their business and got the best profit. fter >/ weeks, they got another loan of +s. </// 47ight thousand5 while they got more profit. s a result they are passing the life in a peace with their children and keep up the social culture properly. "he admires the B.6.". for her development of business and her conjugal life. L!an C-$0" <%t >n. ?r. 9th L!an A)!3nt BCCC =CCC @CCC <>CCC M!nth0- In$!)" <=CC ?CCC M 9CCC 9CCC M 9:CC 9:CC - B:CCC

+F DIRECTORAS R"*!rt To the members of B6" Micro credit "ervices private limited your 6irectors have pleasure in presenting "econd nnual +eport of your #ompany together with the udited "tatement of ccounts for the financial year ended =,st March 0//-. <F Finan$ia0 A$ti2iti"% "l. &o. 9articulars @ear ended =,./=./< @ear ended =,./=./51

|Page

,. 0. =.

Total !ncome Total 72penditure 9rofit before !nterest 6epreciation R Ta2 6epreciation 9rofit $efore Ta2 9rofit after Ta2

1,.,=..// O>/,O/.// .1-<..//

0/>1<,.// ,-.0-1.// .=<O.//

O. 1. <.

><O1..// .1-<..// =>1O>.//

==1>.// .=<O.// 011/.//-

>F '3%in"%% A$ti2iti"% 9resently your company operates in one district in Bolkata in the state of West $engal. The main activities of the company during the year were Micro ;oans. The other relevant business parameters were as follows. "l. &o . ,. 0. =. >. 9articulars @ear ended =,./=./< O>. >O/ O/<<///.// ,1>OO01.// @ear ended =,./=./. O-=0> 0,=////.// ,.O/>=O.//

Total &o. of Member Total &o. $orrowers Total amount of loan disbursed Total &o. amount of loan outstanding

>?/ S3$$"%% Fa$t!r% !# Mi$r!-Finan$" in In.ia: 'ver the last ten years, successful e2periences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. #ommunity banks, &%'s and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies.
a/ Pr!70")% #!r A0t"rnati2" Mi$r!-Finan$" In%tit3ti!n% 52

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The main aim with which the alternative MG!s have come up is to bridge the increasing gap between the demand and supply. vast majority of them set up as &%'s for getting access to funds as, the e2isting practices of mainstream financing institutions such as "!6$! and & $ +6 and even of the institutions specially funding alternatives, such +MB and GWW$, is to fund only &%'s, or &%' promoted "?%s. s a result, the largest incentive to enter such services remains through the nonprofit route. The alternative finance institutions also have not been fully successful in reaching the needy. Th"r" ar" )an- r"a%!n% #!r thi%: KGinancial problems leading to setting up of inappropriate legal structures. K;ack of commercial orientation. K;ack of proper governance and accountability. K!solated and scattered.

>9/ F3t3r" !# Mi$r! Finan$" :


Microfinance in !ndia is in crisis because of the backlash against lenders in the southern state of ndhra 9radesh, the heart of the industry, where politicians have ordered borrowers not to repay their debts. The industry also faces an uncertain regulatory future with the state introducing new restrictions on lenders and Ginance Minister 9ranab Mukherjee saying last week he would formulate new rules to govern the industry once he receives a report from a committee of the +eserve $ank of !ndia. !ndian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities thatFleft unaddressedFcould negatively impact the long-term future of the industry. The industry needs to move past a single-minded focus on scale, e2pand the depth and breadth of products and services offered, and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry. 7stimated that in ne2t five years, 1OT of the poor people will have e2cess to MG!s. Many 9vt. $anks and Goreign $anks would enter this business segment, because of very low &9 s. 7stimated that O T of the number of people below the poverty line will get reduced in the ne2t O years.4World $ank report5. These agents contact several borrowers, thus e2panding the reach of !#!#! $ank at a low cost. Taking the G"# initiative further, !#!#! $ank plans to provide farmers credit from sugar companies, seed companies, dairy companies, &%'s, micro-credit institutions and food processing industries. "!% has been involved in a project in the southern state of Tamil &adu to find out how wireless technology can be applied in the development of low cost models of banking. nother plan to increase the reach in rural areas is to launch mobile TM services. !#!#! $ank branded trucks have started carrying TMs through a number of villages. While these deaths are tragic, and the way that lenders are going about collecting payments is wrong, the root of the problem is not microfinance and not the interest rates. The problem lies in the way that MG!*s are going about their business. The system itself is sound, and but what must occur is a restricting of the employee base. 53

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!f such abuse continues to persist, there will not be a future for microfinance. !n order for a peaceful, progressive future, MG!*s must strictly enforce their lender policies, making sure to eliminate agent threats as mentioned in the W"A. Thus, restrictions are not necessary, but a restructuring of the microfinance industry is in strong demand. !t will only be until microfinance policy is solidified and agreed upon by the local and national legislatures that MG!*s regain the trust and reputation they once held as an institution of progress, not abuse. AF Th" F3t3r": Microfinance e2pansion over the ne2t decade can be e2pected to be an e2tension of what has been achieved so far while overcoming the hurdles that have been posing difficulty in effective microfinance operation and its e2pansion. There may be several participants in this process and their participation may be seen in the following forms. 72isting microfinance institutions can e2pand their operations to areas where there are no microfinance programs. More &%'s can incorporate microfinance as one of their programs. !n places where there are less micro finance institutions, the government channels at the grassroots level may be used to serve the poor with microfinance. 9ostal savings banks may participate more not only in mobilizing deposits but also in providing loans to the poor and on lending funds to the MG!s. More commercial banks may participate both in microfinance wholesale and retailing. They many have separate staff and windows to serve the poor without collateral. !nternational &%'s and agencies may develop or may help develop microfinance programs in areas or countries where micro financing is not a very familiar concept in reducing poverty. #onsidering that the majority of the =1/ million poor households 4urban and rural5 lack access to formal financial services, the numbers of customers to be reached, and the variety and Euantum of services to be rovided are really large. !t is estimated that -/ million farm holdings, =/ million non-agricultural enterprises and O/ million landless households in !ndia collectively need appro2 8"Q=/ billion credit annually. This is about OT of !ndia:s %69 and does not seem an unreasonable estimate. ?owever, </T of the financial sector is still controlled by public sector institutions. #ompetition, consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains. Many private and foreign banks have unveiled their plans to enter the !ndian microfinance sector because of its very low &9 s and high repayment rate of more than -OT in spite of offering loans without any collateral security. Microfinance is not yet at the centre stage of the !ndian financial sector. The knowledge, capital and technology to address these challenges however now e2ist in !ndia, although they are not yet fully aligned. With a more enabling environment and surge in economic growth, the ne2t few years promise to be e2citing for the delivery of financial services to poor people in !ndia |Page 54

6evelopment of "mall-"cale 7nterprises through microfinance will not only increase the outreach but will also help the generation of more employment and income for the poor. !t is e2pected that in the following years there will be considerable deepening of microfinance in this direction along with simultaneous drives to reach and serve the poorest of the poor. $ut the cru2 of the discussion is that, if the over e2cess involvement of the government would be there in the Micro Ginance sector, than the growth of the Micro Ginance won(t much possible. The %ovt. involvement should limited to the important decisions only, but not to interfere in each and every matter of the management.

>:/ T!* :C Mi$r!#inan$" In%tit3ti!n% in In.ia:


Th" a7!2" r"*!rt in$03."% ."tai0". *r!#i0"% an. rating% !# In.iaA% t!* Mi$r!#inan$" In%tit3ti!n%: CRISIL Li%t: T!* :C Mi$r!#inan$" In%tit3ti!n% in In.ia 7- L!an A)!3nt O3t%tan.ing #!r >C<C/ ,. "B" Microfinance ;td 4"B"M9;5. 0. "pandana "phoorty Ginancial ;td 4""G;5. =. "hare Micro fin ;imited 4"M;5>. smitha Micro fin ;td 4 M;5.

O. "hri Bshetra 6harmasthala +ural 6evelopment 9roject 4"B6+695. 1. $hartiya "amruddhi Ginance ;imited 4$"G;5. .. $andhan "ociety. <. #ashpor Micro #redit 4#M#5. -. %rama Jidiyal Micro Ginance 9vt ;td 4%JMG;5. ,/. %rameen Ginancial"ervices 9vt ;td 4%G"9;5. ,,. Madura Micro Ginance ;td 4MMG;5. ,0. $"" Microfinance $angalore 9vt ;td 4$M9;5. ,=. 7Euitas Micro Ginance !ndia 9 ;td 47Euitas5. ,>. $andhan Ginancial "ervices 9vt ;td 4$G"9;5. ,O. "arvodaya &ano Ginance ;td 4"&G;5. ,1. $W6 Ginance ;imited 4$G;5. ,.. 8jjivan Ginancial"ervices 9vt ;td 48G"9;5. ,<. Guture Ginancial "ervices #hittoor ;td 4GG";5. ,-. 7" G Microfinance R !nvestments 9vt. ;td 47MG!;5. 0/. ".M.!.;.7 Microfinance ;imited. |Page 55

0,. "W W" #redit #orporation !ndia 9vt ;td 4"##!5. 00. "anghamithra +ural Ginancial "ervices 4"+G"5. 0=. "aadhana Micro fin. 0>. %ram 8tthan Bendrapara. 0O. +ashtriya "eva "amithi 4+ ""5. 01. "ahara 8tsarga Welfare "ociety 4"8W"5. 0.. "onata Ginance 9vt ;td 4"onata5. 0<. +ashtriya %ramin Jikas &idhi. 0-. rohan Ginancial "ervices ;td 4 G";5.

=/. Aanalakshmi Ginancial "ervices 9vt ;td 4AG"9;5. =,. nnapurna Ginancial "ervices 9vt ;td.

=0. ?and in ?and 4?i?5. == 9ayakaraopeta Women*s Mutually ided #o-operative Thrift and #redit "ociety 49WM #T"5 => =O adarsha Welfare "ociety4 W"5 dhikar

=1 Jillage Ginancial "ervices 9vt ;td 4JG"9;5 =. "ahara 8ttarayan =< +'+7" Micro 7ntrepreneur 6evelopment Trust4+M76T5 =- #entre for +ural "ocial ction 4#+e" 5 >/ !ndur !ntideepam Gederation ;td 4!!MG5. >, Welfare 'rganization for MultipurposeMass wareness &etwork 4W'M &5 >0 9ragathi Mutually ided #ooperative #redit and Marketing Gederation ;td49M #"5 >= !ndian ssociation for "avings and #redit4! "#5 >> "ewa Mutually ided #ooperative Thrift "ocieties Gederation ;td 4"ewa5 >O !nitiatives for 6evelopment $angalore, Goundation 4!6G5 >1 %andhi "maraka %rama "eva Bendram 4%"%"B5 >. "wayamshree Micro #redit "ervices 4"M#"5 >< "'M! 56

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>- Aanodaya Trust O/ #ommunity 6evelopment #entre 4#6#5

>;/ Mi$r!#inan$" In.ia S3))it >C<C: 'ver the last si2 years, the Microfinance !ndia "ummit, organized by ##7"" 6evelopment "ervices, has established itself as an international conference dedicated to !ndian microfinance. !t has become the single most important platform for sharing the !ndian e2perience, uniEue as it is, with a global audience. t the same time, it also provides an avenue to learn about international trends and best practices for adaptation by the !ndian community of practitioners. 9olicy makers, practitioners, promoters, academics, researchers and thought leaders share their e2periences on various panels, and about ,/// delegates from both within and outside the country participate in the "ummit. !t bridges the unnecessary hiatus between models and methodologies and helps to build consensus on the critical challenges and issues. !n the past, the "ummit themes have helped in focusing on key issues including QIn$03%i!n1 Inn!2ati!n an. I)*a$tQ 40//O5, QGr7an Mi$r!#inan$"Q 40//15, QF!r)a0 Finan$ia0 In%tit3ti!n% - th" $ha00"ng"% !# ."*th an. 7r"a.thQ 40//.5, QTh" P!!r Fir%tQ 40//<5 and QD!ing g!!. an. .!ing 4"00- Th" n"". #!r 7a0an$"Q 40//-5. The microfinance !ndia "ummit 0/,/ will be held on N!2")7"r <:-<;1 >C<C at (!t"0 A%h!51 N"4 D"0hi. The over-arching theme for this year:s "ummit is QMi%%i!n !# Mi$r!#inan$" - N"". t! R"#0"$t an. R"a##ir)Q. The "ummit sessions will focus on current trends and issues relating to sustainability, transparency, social performance, commercialization of the sector, client protection, among others.

*Recommendations and suggestions:


Gn."r )"nti!n ar" th" #"4 r"$!))"n.ati!n% an. %3gg"%ti!n%1 4hi$h I #"0t .3ring )- *r!+"$t !n Mi$r! Finan$" i%:|Page 57

</ Th" $!n$"*t !# Mi$r! Finan$" i% %ti00 n"4 in In.ia/ N!t )an- *"!*0" ar" a4ar" th" Mi$r! Finan$" In.3%tr-/ S! a*art #r!) G!2"rn)"nt *r!gra))"r%1 4" th" *"!*0" %h!30. %tan. an. $r"at" th" a4ar"n"%% a7!3t th" Mi$r! Finan$"/ >/ Th"r" ar" )an- *"!*0" 4h! ar" %ti00 7"0!4 th" *!2"rt- 0in"1 %! th"r" i% a h3g" .")an. #!r MFI% in In.ia 4ith *r!*"r r30"% an. r"g30ati!n%/ ?/ Th"r" i% h3g" .")an. an. %3**0- ga*1 in )!n"- .")an. 7- th" *!!r an. %3**0- 7- th" MFI%/ S! th"r" n"". t! 7" an a$ti2at" *arti$i*ati!n 7- th" P2t/ S"$t!r in thi% In.3%tr-/ 9/ On" %tri$t r"$!))"n.ati!n i% that th"r" %h!30. n!t !2"r in2!02")"nt !# th" G!2"rn)"nt in MFI%1 7"$a3%" it 4i00 %t-)i" th" gr!4th an. *r"2"nt th" !th"r% MFI% t! "nt"r/ :/ A$$!r.ing t! )" th" Mi$r! L!an %h!30. 7" gi2"n t! th" 4!)"n !n0-1 '"$a3%" 7- thi% !n0-1 MFI% $an )aintain th"ir r"*a-)"nt rati! high1 4ith!3t an- $!00at"ra0%/ ;/ Man- *"!*0" %a- that th" int"r"%t rat" $harg" 7- th" MFI% i% 2"r- high an. th"r" %h!30. 7" $!)*"00". $a* !n it/ '3t 4hat I #"0t .3ring )- *"r%!na0 %3r2"-1 that th" high rat"% ar" +3%ti#ia70"/ N!4 7- thi% "Ia)*0" 4" 4i00 g"t agr""/ S3**!%" a 7ig $!))"r$ia0 7an5 gi2"% R% < )i00i!n t! an in.i2i.3a0 an. in th" %a)" 4a- a MFI gi2"% R% <CC t! <C/CCC $3%t!)"r%/ S! itA% !72i!3% that )an *!4"r $!%t an. !*"rating $!%t ar" high"r #!r th" MFI%/ S! a$$!r.ing t! )" rat"% ar" +3%ti#ia70"1 '3t 4ith 0i)itati!n%/

ACRONOM :

&DS MSPL OM CED (HO (RD MF MFI MIS N'FC NGO

&DS Mi$r! $r".it %"r2i$"% Pri2at" Li)it"./ O*"rati!n Manag"r Chi"# EI"$3ti2" Dir"$t!r ("a. O##i$" (3)an R"%!3r$" D"2"0!*)"nt Mi$r! #inan$" Mi$r! #inan$" In%tit3t" Manag")"nt In#!r)ati!n S-%t") N!n 'an5ing Finan$ia0 C!)*anN!n G!2"rn)"nt Organi ati!n

Conclusion:

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58

Mi$r!#inan$" ha% a 0!ng 4a- ."%*it" .!37t% "I*r"%%". an. $riti$i%) 0a3n$h". a7!3t it% 2ia7i0it-1 i)*a$t1 an. *!2"rt- #ighting $a*a$it-/ Th"r" %h!30.1 h!4"2"r1 7" n! r!!) #!r $!)*0a$"n$-/ Th" ta%5 !# 73i0.ing a *!2"rt--#r"" 4!r0. i% -"t t! 7" #ini%h"./ Th"r" ar" %ti00 !2"r </> 7i00i!n *"!*0" 0i2ing in "Itr")" *!2"rt- !n thi% *0an"t/ Th"- ar" n!t 0i2ing in !n" $!3ntr- !r r"gi!n 73t %*r"a. a00 !2"r th" 4!r0./ Th" 0a%t ."$a." ha% 4itn"%%". an i)*r"%%i2" gr!4th !# )i$r!#inan$"L 0a$5 !# #3n.ing i% %ti00 $!n%i."r". a )a+!r !7%ta$0" in th" 4a- !# it% gr!4th/ (!4"2"r1 it i% "n$!3raging that th" %it3ati!n i% $hanging/ Gi2"n th" "I*"ri"n$"% !# 0arg" an. #a%t gr!4ing th" 0a%t ."$a." ha% 4itn"%%". an i)*r"%%i2" gr!4th !# )i$r!#inan$"L 0a$5 !# #3n.ing i% %ti00 $!n%i."r". a )a+!r !7%ta$0" in th" 4a- !# it% gr!4th/ (!4"2"r1 it i% "n$!3raging that th" %it3ati!n i% $hanging/ Gi2"n th" "I*"ri"n$"% !# 0arg" an. #a%t gr!4ing Mi$r!#inan$"1 th"r" ar" 0"%%!n% #!r !th"r% 4h! 4ant t! in$r"a%" th"ir !3tr"a$h an. !*"rat" !n a %3%taina70" 7a%i%/ F!rt3nat"0-1 th"r" i% an in$r"a%ing a4ar"n"%% a7!3t th" *!4"r !# )i$r!#inan$"1 an. th" n"". t! %3**!rt it% gr!4th/ Man- *0a-"r% ha2" $!))itt". th")%"02"% t! it% *r!)!ti!n/ G!2"rn)"nt% ar" ta5ing an in$r"a%ing int"r"%t in it/ M!r" 7an5%1 7!th nati!na0 an. int"rnati!na0 ar" $!)ing #!r4ar. 4ith .i##"r"nt %3**!rt *a$5ag"%/ NGO-MFI *artn"r%hi*% ar" !n th" in$r"a%"/ N"4 in%tr3)"nt% ar" 7"ing 3%". t! %!02" th" *r!70") !# #3n.ing/ It i% "I*"$t". that in th" $!)ing -"ar% )!r" i."a%1 inn!2ati!n%1 $!%t %a2ing ."2i$"%1 an. *0a-"r% 4i00 $!ntin3" t! r"in#!r$" th" )i$r!#inan$" )!2")"nt an. in$r"a%" it% "I*an%i!n/ At th" "n. I 4!30. $!n$03." that1 Mi$r! Finan$" In.3%tr- ha% th" h3g" *!t"ntia0 t! gr!4 in #3t3r"1 i# thi% in.3%tr- gr!4% th"n !n" .a- 4"R00 a00 %"" th" n"4 #a$" !# In.ia1 7!th in t"r) !# high 0i2ing %tan.ar. an. ha**in"%%/ On" %!03ti!n 7- 4hi$h 4" a00 $an h"0* th" *!!r *"!*0"1 i/"/ in a 4h!0" -"ar a )".i3) an. a ri$h $0a%% *"!*0" %*"n.% )!r" than R% <C1CCC !n th") 4ith!3t an- g!!. r"a%!n/ In%t"a. !# that1 7- 5""*ing +3%t )"r" R%1 ?CCC a%i." an. .!nat" that a)!3nt t! th" MFI%1 th"n at th" "n. !# th" -"ar th" t!ta0 a)!3nt in th" han.% !# *!!r 4!30. 7" E a2"rag" :CC )i00i!n *"!*0" ,R% ?CCCFSR% <1:CC1CCC1CCC1CCC / J3%t i)agin" 4h"r" 4!30. 7" In.ia in n"It <C -"ar%/ Pri2at" MFI% in In.ia1 7arring a #"4 "I$"*ti!n%1 ar" %ti00 #0".g0ing "##!rt% an. ar" th"r"#!r" 3nr"g30at"./ Th"ir !3tr"a$h i% 3n"2"n in t"r)% !# g"!gra*hi$a0 %*r"a./ Th"- %"r2" )i$r! #inan$" $0i"nt% 4ith 2ar-ing 63a0it- an. 3%ing .i##"r"nt !*"rating )!."0%/ R"g30at!r- #ra)"4!r5 %h!30. 7" $!n%i."r". !n0a#t"r th" %3%taina7i0it- !# MFI )!."0 a% a 7an5ing "nt"r*ri%" #!r th" *!!r i% $0"ar0- "%ta70i%h"./ EI*"ri)"ntati!n !# MFI )!."0 n"".% t! 7" "n$!3rag". "%*"$ia00- in ar"a% 4h"r" #!r)a0 7an5% ar" %ti00 n!t )""ting a."63at" $r".it .")an. !# th" r3ra0 *!!r/

*Re!erences:
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Dr/ Ra+ G!*a0 S"n/ Pr!#"%%!r & Int"rna0 A3.it O# & Fa$30t- M")7"r !# EM'M & COMMERCE DEPARTMENTFCa0$3tta Gni2"r%it-/EG3"%t Fa$30t- #r!) 'RAINWARE 'GSINESS SC(OOLF/

Fa$30t- G3i.": 'arna%r"" Chan.ra1 EFa$30t- !# Finan$"F 'RAINWARE 'GSINESS SC(OOL/ PTG: A**r!2". 7- J!int C!))itt"" !# GGC-DEC- AICTE1 Mini%tr- O# (RD1 G!2t:
O# In.ia/ ." Aghi!n1 '"atri Ar)"n.Tri & J!nathan M!r.3$h/ Th" E$!n!)i$% !# Mi$r!#inan$"1 Th" MIT Pr"%%1 Ca)7ri.g"1 Ma%%a$h3%"tt%1 >C<C/ Di$ht"r1 Th!)a% an. Ma0$!0) (ar*"r E".%F/ WhatA% Wr!ng 4ith Mi$r!#inan$"U Pra$ti$a0 A$ti!n1 >CCB/ L".g"r4!!.1 J!anna an. 8i$t!ria Whit"/ Tran%#!r)ing Mi$r!#inan$" In%tit3ti!n%: Pr!2i.ing F300 Finan$ia0 S"r2i$"% t! th" P!!r/ W!r0. 'an51 >C<C/ Y3n3%1 M3ha))a./ Cr"ating a W!r0. With!3t P!2"rt-: S!$ia0 '3%in"%% an. th" F3t3r" !# Ca*ita0i%)/ P370i$ A##air%1 N"4 Y!r51 >CC=/ Th" F3t3r" !# )i$r!#inan$" in In.ia: '- S35h4in."r Singh Ar!ra1 Finan$ia0 S"$t!r T"a)1 P!0i$- Di2i%i!n1 DFID/ Strat"gi"% #!r *!2"rt- a00"2iati!n thr!3gh .!2"tai0ing th" *!t"ntia0 !# )i$r!#inan$" Pra$ti$"% 4ith n!n-ti)7"r #!r"%t *r!.3$t% #r!) .i*t"r!$ar*%: L"%%!n% #r!) In.ia 7- '/P/P"thi-a/ In.ia )i$r!#inan$" In2"%t)"nt En2ir!n)"nt Pr!#i0" 7- S0a2"a Chan5!2a1 Nathana"0G!0.7"rg1 G"n"2i"2" M"0#!r.1 (in. Ta i an. Shan" T!)0!n%!n/ Ani0 & &han."04a01 Mi$r!#inan$" D"2"0!*)"nt Strat"g- #!r In.ia1 E$!n!)i$ an. P!0iti$a0 W""50-1 Mar$h ?<1 >CCB/

Ra2"n S)ith1 Th" Changing Fa$" !# Mi$r!#inan$" in In.ia-Th" $!%t% an. 7"n"#it% !# tran%#!r)ing #r!) an NGO t! a N'FC1 >C<C/ R Srini2a%an an. M S Srira)1 Mi$r!#inan$" in In.ia- Di%$3%%i!n Pi-3%h Ti4ari an. S M Faha.1 (DFC1 C!n$"*t *a*"r-Mi$r!#inan$" In%tit3ti!n% in In.ia/ Shri Y S P Th!rat1 Managing Dir"$t!r1 NA'ARD1 Inn!2ati!n in Pr!.3$t D"%ign1 Cr".it D"0i2"ran. T"$hn!0!g- t! r"a$h %)a00 #ar)"r%1 N!2")7"r1 >C<C/ Shri Y S P Th!rat1 Managing Dir"$t!r1 NA'ARD1 Mi$r!#inan$" in In.ia: S"$t !ra0 I%%3"% an. Cha00"ng"%1 Ma-1 >CC: Dr/ C Rangara+an1 Chair)an1 E$!n!)i$ A.2i%!r- C!3n$i0 t! th" Pri)" Mini%t"r1 Mi$r!#inan$" an. it% F3t3r" Dir"$ti!n%1 Ma-1 >CC:/ 60

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R"*!rt1 Stat3% !# Mi$r!#inan$" in In.ia >CC@->C<C1 NA'ARD/ 'in.3 Ananth an. S!+3 Anni" G"!rg"1 Mi$r! #inan$ia0 S"r2i$"% T"a) !# S!$ia0 Initiati2"% Gr!3*1 ICICI 'an51 S$a0ing 3* Mi$r! #inan$ia0 S"r2i$"%: An !2"r2i"4 !# $ha00"ng"% an. O**!rt3niti"%1 A3g3%t1 >CC@/ Anni" D3#0!1 R"%"ar$h C!-$!!r.inat!r1 C"ntr" #!r Mi$r! Finan$" R"%"ar$h1 ICICI 'an5% th" *!!r in In.ia1 Pag" <?1 Mi$r!#inan$" Matt"r%/ Mi$r!#inan$" in In.ia: A $riti63" 7- Ra+ar%hi gh!%h/ >?/ R"%"ar$h *a*"r 7- Pra7h3 Ghat"/ >9/ R"%"ar$h *a*"r 7- 8i%ha0 S"hga01 Pr"%"ntati!n 7- N/ Srini2a%an/

*"e#sites: 444/g!!g0"/$!)1 444/%$ri7./$!)1 444/)i$r!#inan$"in.ia/!rg1 444/i#)r/a$/in1444/g!!g0"/$!) 444/)i$r!#inan$"in%ight/$!)1 444/in2"%t!*".ia/$!)1 444/7!!5%/g!!g0"/$!) 444/%""*n"t4!r5/!rg1 444/#!r7"%/$!)1444/nati!n)a%t"r/$!) 444/thain.ian/$!)1444/a3th!r%tr"a)/$!)1444/5n!40".g"/a00ian /$!) 444/#a)i0i"%in73%in"%%/n"t1 444/in.ia)i$r!#inan$"/$!)1444/g.r$/!rg 444/a$$i!n/!rg1 444/"0-%"r!4"/$!)1 444/5.%)#i/!rg

En.

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61