Professional Documents
Culture Documents
SUBMITTED TO:
UNIVERSITY OF MUMBAI
PROJECT ON:
MICROFINANCE IN INDIA
SUBMITTED BY:
P.T.V.A.s
M.L.DAHANUKAR COLLEGE OF COMMERCE
VILE PARLE (EAST), MUMBAI.
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MICROFINANCE IN INDIA
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MICROFINANCE IN INDIA
CERTIFICATE
Course Coordinator
(Prof. Sucheta Pawar)
Principal
College Seal
Project Guide
(Prof Sucheta Pawar)
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External
Examiner
MICROFINANCE IN INDIA
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MICROFINANCE IN INDIA
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DECLARATION
Signature of Student
(Komal Suresh Gupta)
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MICROFINANCE IN INDIA
ACKNOWLEDGEMENT
To express my gratitude to all those I am highly grateful to is difficult
because they are so numerous and the depth is so enormous. Still I take the
opportunity to acknowledge the following as being idealistic channels and
fresh dimensions in the completion of the project.
I take this opportunity to thank the University of Mumbai for giving
me chance to do this project.
I take this opportunity to thank our Coordinator Prof. Mrs . Sucheta
Pawar, for her moral support and guidance.
I would like to express my sincere gratitude towards my project guide
Prof.
project successful.
I would like to thank my college library staff, for having provided
various reference books and magazines related to my project.
Lastly, I would like to express my heartfelt gratitude to my family,
especially my mother; peers and seniors whose patience and guidance made
this project possible.
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MICROFINANCE IN INDIA
EXECUTIVE SUMMARY
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With Indias GDP growing at the rate of 8.59%, the countrys socio-economic
pyramid is turning around the story with millions of poor people scaling new heights to
become entrepreneurs in their own right. And the credit goes to the mushrooming
microfinance industry. Microfinance sector is clearly one of the fastest growing segments of
the Indian financial sector, and also one where such growth is sustainable for a very long
period of time. In spite of a large banking sector, about 40% of the Indian population does
not have bank accounts. Given that over 75% of the Indian population still earns below
US$2 a day, microfinance comes to their rescue as it enables them to raise income and
improve the standard of living. Microfinance promotes thrift savings, credit and other
financial products and services among the poor. Considering that the vast majority of the
poor lives in rural areas, microfinance is key to the financial inclusion of this section in the
mainstream of the country.
Microfinance refers to financial services, including loans, savings accounts, and
insurance products, that are designed to serve people with very low incomes. The intent of
the microfinance movement has been to build financial systems that work for the poor
majority. The involvement of international financial institutions enhances the access of the
poor to financial services. There is a change in the microfinance strategies of banks and
financial institutions. Their focus is shifting from South Asia to African countries, a
significant development that was rarely seen before. Large financial institutions have started
increasing their global presence and have started diversifying microfinance products.
As the birthplace of microfinance, Asia leads the world in total current borrowers. In
South Asia, the modern microfinance movement was born in Bangladesh in the 1970s as a
response to the poverty conditions among its vast rural population. This region is a world
leader in microfinance because of the highest penetration in outreach and active borrowers.
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The Indian microfinance system is led by two basic modelsSHG-Bank linkage model
and MFI model. The number of SHGs linked with banks increased from 22,742 in the year
2003 to 137,000 by March 2007. Even though the growth of microfinance industry is
commendable but still there are 3-4 million households in rural areas and about 1-5 million
poor households in urban areas who do not have access to financial services from formal or
semi-formal sources.
The Central bank strengthens the microfinance sector by streamlining the financial
processes and support from the mainstream financial system and acts as a catalyst to the
industry. Most of the microfinance institutions focus on womens empowerment, and major
part of clients consists of women. SEWA of Ahmedabad and Working Women's Forum in
Chennai are some of the microfinance institutions that are exclusively for women.
Microfinance programmes have, in the recent past, become more promising ways to use
scarce development funds to achieve the objectives of poverty alleviation.
While the governments concerted efforts to alleviate poverty have been unsuccessful
in the past, the microfinance institutions are now taking up the reins to achieve the
millennium development goal of poverty alleviation. Major microfinance institutions are
diverting their attention to urban population rather than being rural centric.
Urban microfinance promises huge opportunity for the microfinance institutions,
although it gives berth only to large MFIs because the start up and transaction costs are
high.Microfinance industry is growing at an exponential rate in India, although it exhibits
tremendous regional disparities. It shows regional inclination towards the southern region.
Although the coverage has been diverted to the eastern and western region, south has the
highest penetration in rural microfinance.
Private Banks, MFIs, public sector banks and NGOs form the major players in rural
financing to the poor people.Public sector banks, MFIs and NGOs follow different strategies
to scale up their operations in the industry.
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Some of them follow partnership model, while others follow the strategy of higher
penetration through SHG. Another way of lending adopted by ICICI is that of portfolio buyout. The microfinance sector in India is trying to focus on micro-savings and financial
literacy among the poor. It is developing the habit and discipline of saving and has started
introducing micro-insurance, though in a relatively small way.
There is high demand for credit in the Indian economy, but the formal financial
institutions are unable to meet this demand because they have their own limitations when it
comes to lending to the poor people. This demand-supply mismatch could act as a key
growth opportunity the microfinance institutions to scale up their operations. The growth of
economic activities in the urban population will enable the microfinance sector to expand
their operations in the cities of the India. Although microfinance in India has outperformed
the expectations of formal financial institutions, it still faces the challenges in terms of
regulatory support and financial illiteracy.Moreover, the high transaction cost of the
microfinance institutions due to smaller loan size creates a challenging situation for the
sector to thrive in and sustain.
The funding gap in microfinance is very high, both at the national and global level.
Increasing involvement of private sector investors is therefore a key medium-term priority
to scale up microfinance. Fortunately, the prospect for a greater involvement of private
investors is actually good. By 2015, it is expected that the volume of private sector
investments (private institutional and individual investors) would increase to around US$20
billion.The main growth drivers would be increasing institutional and retail investor
demand, regulatory changes and the enhanced capability of MFIs to absorb commercial
funding.
Microfinance industry is expected to become an integral part of the formal financial
system once its vision of extending financial services to the low income people is
accomplished. Seeing the huge demand for rural credit, it is expected that the industry will
continue to grow at rapid pace, although the blend of the financial system and extent of
growth will vary from country to country.There will be diversification of products in the
industry, which will vary from current accounts to pension and savings products.
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.TABLE
Chapter
OF CONTENTS
Particulars
No.
Pag
e
No.
1
1.1
OVERVIEW OF
Meaning
1.2
1.3
Definition
History
1
2
1.4
Role
2
3
Microfinance
Microfinance Social Aspects
2.3
2.4
6
7
7
10-
3.1
Market Segments
11
3.2
Debt Instruments
13
3.3
14
3.4
16
3.5
17
19-
4.1
Securities
Features
21
19
4.2
Risks
20
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Research Analysis
22-
CHAPTER 1
OVERVIEW OF MICROFINANCE
1.1 Meaning:
Microfinance is a source of financial services for entrepreneurs and small businesses
lacking access to banking and related services. The two main mechanisms for the delivery
of financial services to such clients are: (1) relationship-based banking for individual
entrepreneurs and small businesses; and (2) group-based models, where several
entrepreneurs come together to apply for loans and other services as a group.
In some regions, for example Southern Africa, microfinance is used to describe the supply
of financial services to low-income employees, which is closer to the retail finance model
prevalent in mainstream banking.
It is the provision of financial services to low-income clients, including consumers
and the self-employed, who traditionally lack access to banking and related services. More
broadly, it is a movement whose object is "a world in which as many poor and near-poor
households as possible have permanent access to an appropriate range of high quality
financial services, including not just credit but also savings, insurance, and fund transfers."
Those who promote microfinance generally believe that such access will help poor people
out of poverty.
Microfinance in India has had a significant shift from the days when microfinance
was being discussed as the next big innovation to address the poverty issues in India to
being discussed in terms of the next big investment opportunity. The language of
microfinance has undergone a fundamental change in the two decades of its evolution.
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Microfinance started with the recognition that poor people had the capability to lift
themselves out of poverty if they had access to affordable loans.
High repayment rates in the industry have changed the perception that the poor are not
credit worthy. With the right opportunities, the poor have proved themselves to be
productive and capable of borrowing, saving and repaying, even without collateral.
Bibi Hanifa is a successful micro entrepreneur from Hubli, Karnataka who has set up an
incense-stick unit along with a group of women in her neighbourhood. Earlier they worked
as daily wage labor at a nearby factory and earned a meagre income. Today, thanks to the
simple system of taking loans and repaying them, these women manage a successful
enterprise and dream of a better and more prosperous tomorrow
Microfinance refers to small scale financial services for both credits and deposits- that
are provided to people who farm or fish or herd; operate small or micro enterprise where
goods are produced, recycled, repaired, or traded; provide services; work for wages or
commissions; gain income from renting out small amounts of land, vehicles, draft animals,
or machinery and tools; and to other individuals and local groups in developing countries in
both rural and urban areas.Marguerite S. Robinson
1.2
Microfinance
Definitions:
According to International
Labor
Organization (ILO),
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Micro credit:
It is a small amount of money loaned to a client by a bank or other institution. Micro credit
can be offered, often without collateral, to an individual or through group lending.
Micro savings:
These are deposit services that allow one to save small amounts of money for future use.
Often without minimum balance requirements, these savings accounts allow households to
save in order to meet unexpected expenses and plan for future expenses Micro insurance: It
is a system by which people, businesses and other organizations make a payment to share
risk. Access to insurance enables entrepreneurs to concentrate more on developing their
businesses while mitigating other risks affecting property, health or the ability to work.
Remittances:
These are transfer of funds from people in one place to people in another, usually across
borders to family and friends. Compared with other sources of capital that can fluctuate
depending on the political or economic climate, remittances are a relatively steady source of
funds.
Product Design:
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The starting point is: how do MFIs decide what product s to offer? The actual loan products
need to be designed according to the demand of the target market. Besides the important
question of what risks to cover, organizations also have to decide whether they want to
bundle many different benefits into one basket policy, or whether it is more appropriate to
keep the product simple. For marketing purposes, MFIs sometimes prefer the basket cover,
since it can make the policies sound comprehensive, but is that the right approach for the
low-income market? After picking products, one must also understand how they are priced.
What assumptions do the organizations make with regard to operating costs, risk premiums,
and reinsurance, and how did they come to those conclusions? Would their clients be willing
to pay more for greater benefits? From price, the logical next set of questions involves
efficiency. Indeed, given the relative high costs of delivering large volumes of small
policies, maximizing efficiency is a critical strategy to ensuring that the products are
affordable to the low-income market. One way is to make the products mandatory, which
increases volumes, reduces transaction costs and minimizes adverse selection. What does an
organization lose by offering mandatory insurance, and how does it overcome the
disadvantages? MFIs can combine a mandatory product with some voluntary features to
make the service more us to mar-oriented while.
To design a loan product to meet borrower needs it is important to understand the cash
pattern of the borrowers. Cash pattern is important so far as they affect the debt capacity of
the borrowers. Lenders must ensure that borrowers have sufficient cash inflow to cover loan
payments when they are due efficiency depends less on the delivery model than on the
simplicity of the product or product menu. Simple products work best because they are
easier to administer and easier for clients to understand. Another efficiency strategy is to use
technology to reduce paperwork, manual processing and errors. MFIs need to conduct a
costing analysis to determine how much they need to earn in commission to cover their
administrative expenses.
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CHAPTER 2
GAPS IN FINANCIAL SYSTEM AND NEED OF
MICROFINANCE
According to the latest research done by the World Bank, India is home to almost one third
of the worlds poor (surviving on an equivalent of one dollar a day). Though many central
government and state government poverty alleviation programs are currently active in India,
microfinance plays a major contributor to financial inclusion. In the past few decades it has
helped out remarkably in eradicating poverty. Reports show that people who have taken
microfinance have been able to increase their income and hence the standard of living.
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About half of the Indian population still doesnt have a savings bank account and
they are deprived of all banking services. Poor also need financial services to fulfill their
needs like consumption, building of assets and protection against risk. Microfinance
institutions serve as a supplement to banks and in some sense a better one too. These
institutions not only offer micro credit but they also provide other financial services like
savings, insurance, remittance and non-financial services like individual counselling,
training and support to start own business and the most importantly in a convenient way.
The borrower receives all these services at her/his door step and in most cases with a
repayment schedule of borrowers convenience. But all this comes at a cost and the interest
rates charged by these institutions are higher than commercial banks and vary widely from
10 to 30 percent. Some claim that the interest rates charged by some of these institutions are
very high while others feel that considering the cost of capital and the cost incurred in
giving the service, the high interest rates are justified.
The demand for micro credit has been estimated at up to $30 billion; the supply is less
than $2.2 billion combined by all involved in the sector. Due to the sheer size of the
population living in poverty, India is strategically significant in the global efforts to alleviate
poverty and to achieve the Millennium Development Goal of halving the worlds poverty by
2015.Microfinance can also be distinguished from charity. It is better to provide grants to
families who are destitute, or so poor they are unlikely to be able to generate the cash flow
required to repay a loan. This situation can occur for example, in a war zone or after a
natural disaster. While India is one of the fastest growing economies in the world, poverty
runs deep throughout country. About two thirds of Indias more than 1billion people live in
rural areas and almost 170 million of the mare poor. For more than 21 percent of them,
poverty is a chronic condition. Three out of four of Indias poor live in rural areas of the
country. Poverty is deepest among scheduled castes and tribes in the countrys rural areas.
The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks linkage
program for over a decade now. As the formal banking system already has a vast branch
network in rural areas, it was perhaps wise to find ways and means to improve the access of
rural poor to the existing banking network. This was tried by routing financial.
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CHAPTER 3
GOVERNMENTS ROLE IN SUPPORTING MICROFINANCE
Governments role supporting microfinance Governments most important role is not
provision of retail credit services, for reasons mentioned in Government can contribute most
effectively by:
Setting sound macroeconomic policy that provides stability and low inflation.
Avoiding interest rate ceilings - when governments set interest rate limits, political
factors usually result in limits that are too low to permit sustainable delivery of credit
that involves high administrative costssuch as tiny loans for poor people. Such
ceilings often have the announced intention of protecting the poor, but are more likely
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Creating government wholesale funds to support retail MFIs if funds can be insulated
from politics, and they can hire and protect strong technical management and avoid
financial system.
Create policies, regulations and legal structures that encourage responsive, sustainable
microfinance.
Encourage a range of regulated and unregulated institutions that meet performance
standards.
Encourage competition, capacity building and innovation to lower costs and interest
rates in microfinance.
Support autonomous, wholesale structures.
The Government of India and the RBI have a stated goal of promoting financial
inclusion
According to recent RBI estimates, there are over 450 million unbanked people in
India, most of who live in rural areas. The term unbanked refers to people who have no
access to formal financial services, but rather must rely on either family, or informal
providers of finance, such as the village moneylender. It is undisputed that access to finance
is critical for enabling individuals and communitie to climb out of poverty. It is also
generally agreed that relying on the limited resources of village moneylenders exposes the
poor to coercive lending practices, personal risks and high interest rates, which can be a
much as 150%. Therefore the Indian Government and the RBI have a policy of financial
inclusion. As part of this policy, the
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government requires Indian banks to lend to priority sectors, one of which is the rural
poor. Until recently, banks were happy to lend money to MFIs who would then on-lend
funds, primarily to poor women across rural India. The banks have welcomed this policy
because historically they tended to charge MFIs average interest rates of 12-13% and
benefited from 100% repayment rates. Thus, by lending to MFIs, banks have been able to
meet their priority sector lending requirements with what historically has amounted to a
risk-free and very profitable arrangement.
The goal of microfinance must include the private sector
Private sector MFIs have an essential role to play if the goal of financial inclusion is
to be realized, as neither the government nor charities have the capital nor business
model required to meet the insatiable demand for finance in rural India. As the public
listing of SKS Microfinance underscored, private sector institutions are able to attract
increasingly large amounts of private capital, in order to accelerate the growth of the
industry, which is essential to expanding financial inclusion as far and as fast as
practicable.
MICROFINANCE IN INDIA
MICROFINANCE IN INDIA
grant. The banks can avail the services of credit rating agencies, M-CRIL, ICRA,
CARE and Planet Finance in addition to CRISIL for rating of MFIs. The financial
assistance by way of grant for meeting the cost of rating of MFIs would be met by
NABARD to the extent of 100% of the total professional fees subject to a maximum
of Rs.3,00,000/-/-. The remaining cost would be borne by the concerned MFI. The
cost of local hospitality (including boarding and lodging) towards field visit of the
team from the credit rating Agency, as a part of the rating exercise, would also be
borne by the MFI. Those MFIs which have a minimum loan outstanding of more than
Rs. 50.00 lakh (Rupees fifty lakh only) and maximum of Rs 10 crore (Rupees Ten
crore only) would be considered for rating and support under the scheme.
Financial assistance by way of grant would be available only for the first rating of the
MFI.MFIs availing Capital Support and/or Revolving Fund Assistance from
NABARD are also eligible for re-imbursement of 50% of the cost of professional fee
charged by Credit Rating Agency for second rating subject to a maximum of Rs.1.50
lakh (i.e 50% of Rs.3 lakh). This will be in addition to the re-imbursement
of professional fee for first rating of the MFI.
D. Refinance support to banks for financing MFIs:
The scheme is to provide 100% refinance to banks for financing MFIs. Interest rate on
refinance to Commercial Banks and Regional Rural Banks on their loans to MFIs for
on lending to clients will be at 3% less than that charged by banks subject to minimum
interest rate of 7.5% for all regions and all eligible purposes. The revised rate of
interest is applicable to refinance disbursed on or after 01 March 2010.
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CHAPTER 4
MICROFINANCE SOCIAL ASPECTS
Micro financing institutions significantly contributed to gender equality and womens
empowerment as well as poor development and civil society strengthening. Contribution to
womens ability to earn an income led to their economic empowerment, increased well
being of women and their families and wider social and political empowerment.
Microfinance programs targeting women became a major plank of poverty alleviation and
gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to
poverty reduction and womens higher credit repayment rates led to a general consensus on
the desirability of targeting women.
Self Help Groups (SHGs):
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Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A
growing number of poor people (mostly women) in various parts of India are members of
SHGs and actively engage in savings and credit (S/C), as well as in other activities (income
generation, natural resources management, literacy, child care and nutrition, etc.). The S/C
focus in the SHG is the most prominent element and offers a chance to create some control
over capital, albeit in very small amounts. The SHG system has proven to be very relevant
and effective in offering women the possibility to break gradually away from exploitation
and isolation.
Savings services help poor people:
Savings has been called the forgotten half of microfinance. Most poor people now use
informal mechanisms to save because they lack access to good formal deposit services,.
They may tuck cash under the mattress; buy animals or jewelry that can be sold off later, or
stockpile inventory or building materials. These savings methods tend to be riskycash can
be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well
one cannot sell just the cows leg when one needs a small amount of cash. Poor people want
secure, convenient deposit services that allow for small balances and easy access to
funds .MFIs that offer good savings services usually attract far more savers than borrowers.
Womens indicators of empowerment through microfinance:
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banks/MFIs
Promoters safe, strong and sound banking/MF system and effective banking/MF policy.
Promotes and enhances orderly economic growth and development.
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Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act 1882
Non profit companies governed by section 25 of the companies act, 1956
For profit MFIs regulated by Indian companies act, 1956
NBFC governed by RBI act, 1934.
Cooperative societies by cooperative societies act enacted by state government.
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Company Law Board to allow SHGs to be members of Section 25 of the companies act.
|There will be no ceiling in respect of loan amount extended by Section 25 companies to
SHGs;however SHGs, to provide credit not exceeding Rs. 50000/- per member of the
organizations.
Complete income tax exemption for Section 25 companies purveying micro credit (to
the donor and to the receiver).
Government to consider complete exemption from IT for income earned, as the main
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The micro finance service providers include apex institutions like National Bank for
Agriculture and Rural Development (NABARD), Small Industries Development Bank
of India (SIDBI), and, Rashtriya Mahila Kosh(RMK). At the retail level, Commercial
Banks, Regional Rural Banks, and, Cooperative banks provide microfinance services.
Today, there are about 60,000 retail credit outlets of the formal banking sector in the
rural areas comprising 12,000 branches of district level cooperative banks, over 14,000
branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban
branches of commercial banks besides almost90,000 cooperatives credit societies at the
village level. On an average, there is at least one retail credit outlet for about 5,000 rural
people. This physical reaching out to the far-flung areas of the country to provide
savings ,credit and other banking services to the rural society is an unparalleled
achievement of the Indian banking system. In the this paper an attempt is made to deal
with various aspects relating to emergence of private micro finance industry in the
context of prevailing legal and regulatory environment for private sector rural and micro
finance operators .
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives.
They are provided financial support from external donors and apex institutions including the
Rashtriya Mahila Kosh(RMK), SIDBI Foundation for micro-credit and NABARD
and employ a variety of ways for credit delivery.
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Since 2000, commercial banks including Regional Rural Banks have been providing
funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs
were into financial intermediation using a variety of delivery methods, their
numbers have increased considerably today. While there is no published data on
private MFIs operating in the country, the number of MFIs is estimated to be around
800.MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts
and cooperatives. They are provided financial support from external donors and apex
institutions including the Rashtriya Mahila Kosh(RMK), SIDBI Foundation for microcredit and NABARD and employ a variety of ways for credit delivery. Since 2000,
commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were
into financial intermediation using a variety of delivery methods, their numbers
have increased considerably today. While there is no published data on private MFIs
operating in the country, the number of MFIs is estimated to be around 800.
b. For NGOs:
The field of development itself expands and shifts emphasis with the pull of ideas, and
NGOs perhaps more readily adopt new ideas, especially if the resources required are
small, entry and exit are easy, tasks are (perceived to be) simple and peoples
acceptance is high all characteristics (real or presumed) of microfinance.
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Canvassing by various actors, including the National Bank for Agriculture and Rural
Development(NABARD), Small Industries Development Bank of India (SIDBI),
Friends of Womens World Banking (FWWB),Rashtriya Mahila Kosh (RMK),
Council for Advancement of Peoples Action and Rural Technologies(CAPART),
Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially
by the International Fund for Agricultural Development (IFAD), United
Nations Development Programme (UNDP),World Bank and Department
for International Development, UK (DFID)], and lately commercial banks, has greatly
added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs
too have been funding microfinance projects. One might call it the supply push
1. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such
concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led
microfinance is with poor women, for whom access to small loans to meet dire emergencies
is a valued outcome. Thus, quick and high customer satisfaction is the USP that has
attracted NGOs to this trade.
2. The idea appears simple to implement. The most common route followed by NGOs is
promotion of SHGs. It is implicitly assumed that no technical skill is involved. Besides,
external resources are not needed as SHGs begin with their own savings. Those NGOs that
have access to revolving funds from donors do not have to worry about financial
performance any way. The chickens will eventually come home to roost but in the first
flush, it seems all so easy
3. For many NGOs the idea of organizing forming a samuha has inherent appeal. Groups
connote empowerment and organizing women is a double bonus.
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4. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the
medium-to-large NGOs that are able to access bulk funds for on-lending, for example from
SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain,
highly competitive and increasingly difficult-to-raise donor funding.
C. Service Company Model:
In this context, the Service Company Model developed by ACCION andused in some of the
Latin American Countries is interesting. The model may hold significant interest for state
owned banks and private banks with large branch networks. Under this model, the bank
forms its own MFI, perhaps as an NBFC, and then works hand in hand with that MFI to
extend loans and other services. On paper, the model is similar to the partnership model: the
MFI originates.
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Microfinance Strategic
Strategic Management: Strategic management is a field that deals with the major intended
and emergent initiatives taken by general manager on behalf of owners, involving utilization
of resources, to enhance the performance of rams in their external environments. It entails.
Understanding microfinance strategies: This report explores strategic issues shaping
the future of the MFI sector in India.
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The study approached CEOs of select MFIs with a set of issues ranging from concerns to
competition and sought their opinions about future strategies. The report draws from
their responses, and states that:
Future strategy is about being strong on processes and being overtly client-centric;
Success is a prudential combination of three factors, namely, culture, beliefs and
aspirations;
Culture is about the degree of trust rather than the rate of interest;
Risk management systems of economically weaker families are built on their beliefs about
dependability and access;
Micro credit stories have revealed ingenious ways that clients have used their loans for
purposes that satisfied their aspirations.
Finally, the sector, at about Rs. 14,000 crore (approximately US$3 bn) looks large, but is
small by any business scale. Competition and unhealthy practices are overshadowing the
good work and reputation earned over many years. MFIs in India need to overcome these
challenges in the future.
Strategic Policy Initiatives:
Some of the most recent strategic policy initiatives in the area of Microfinance taken by the
government and regulatory bodies in India are: Working group on credit to the poor through
SHGs, NGOs, NABARD, 1995.
The National Microfinance Taskforce, 1999.Working Group on Financial Flows to the
Informal Sector (set up byPMO), 2002.Microfinance Development and Equity Fund,
NABARD, 2005.Working group on Financing NBFCs by Banks- RBI.
A.Product-market matrix:
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on achieving growth by selling existing products in existing markets. This can be done
through more competitive pricing strategies,increased promotional activities, and more
liberal terms and conditions.For example, the MFI may develop strategic alliances to begin
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thus maps the business unit positions within these two important determinants of
profitability.
This framework assumes that an increase in relative market share will result in an increase
in the generation of cash. This assumption often is true because of the experience curve;
increased relative market share implies that the firm is moving forward on the experience
curve relative to its competitors, thus developing a cost advantage. A second assumption is
that a growing market requires investment in assets to increase capacity and therefore results
in the consumption of cash. Thus the position of a business on the growth-share matrix
provides an indication of its cash generation and its cash consumption. Henderson reasoned
that the cash required by rapidly growing business units could be obtained from the firm's
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other business units that were at a more mature stage and generating significant cash. By
investing to become the market share leader in a rapidly growing market, the business unit
could move along the experience curve and develop a cost advantage. From this reasoning,
the BCG Growth-Share Matrix was born.
The four categories are:
Dogs
Dogs have low market share and a low growth rate and thus neither generate nor consume a
large amount of cash. However, dogs are cash traps because of the money tied up in
a business that has little potential. Such businesses are candidates for divestiture.
Question marks
Question marks are growing rapidly and thus consume large amounts of cash, but because
they have low market shares they do not generate much cash. The result is large net cash
consumption. A question mark (also known as a "problem child") has the potential to gain
market share and become a star, and eventually a cash cow when the market growth slows.
If the question mark does not succeed in becoming the market leader, then after perhaps
years of cash consumption it willed generate into a dog when the market growth declines.
Question marks must be analyzed carefully in order to determine whether they are worth the
investment required to grow market share.
Stars
Stars generate large amounts of cash because of their strong relative market share, but also
consume large amounts of cash because of their high growth rate; therefore the cash in each
direction approximately nets out. If a star can maintain its large market share, it will become
a cash cow when the market growth rate declines. The portfolio of a diversified company
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always should have stars that will become the next cash cows and ensure future cash
generation.
Cash cows
As leaders in a mature market, cash cows exhibit a return on assets that is greater than the
market growth rate, and thus generate more cash than they consume. Such business units
should be"milked", extracting the profits and investing as little cash as possible. Cash cows
provide the cash required to turn question marks into market leaders, to cover
the administrative costs of the company, to fund research and development, to service
the corporate debt, and to pay dividends to shareholders .Because the cash cow generates
a relatively stable cash flow, its value can be determined with reasonable accuracy by
calculating the present value of its cash stream using a discounted cash flow analysis. Under
the growth-share matrix model, as an industry matures and its growth rate declines, a
business unit will become either a cash cow or a dog, determined solely by whether it
had become the market leader during the period of high growth. While originally developed
as a model for resource allocation among the microfinance business units in a corporation,
the growth-share matrix also can be used for resource allocation among products within a
single business unit. Its simplicity is its strength - the relative positions of the firm's
entire business portfolio can be displayed in a single diagram.
Limitations
The growth-share matrix once was used widely, but has since faded from popularity as more
comprehensive models have been developed. Some of its weaknesses are: Market growth
rate is only one factor in industry attractiveness, and relative market share is only one factor
in competitive advantage. The growth-share matrix overlooks many other factors in these
two important determinants of profitability. The framework assumes that each business unit
is independent of the others. In some cases, Microfinance business unit that is a "dog" may
be helping other business units gain a competitive advantage.
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The matrix depends heavily upon the breadth of the definition of the market. A business unit
may dominate its small niche, but have very low market share in the overall industry. In
such a case, the definition of the market can make the difference between a dog and a cash
cow. While its importance has diminished, the BCG matrix still can serve as a simple tool or
viewing a corporation's business portfolio at a glance, and may serve as a starting point for
discussing resource allocation among strategic business units.
C. Overall Strategy:
Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of
the poor has today emerged as a potent tool for human development. This process enables
the poor, especially the women from the poor households, to collectively identify and
analyses the problems they face in the perspective of their social and economic
environment. It helps them to pool their meager resources, human and financial, and
priorities their use for solving their own problems. The emphasis on regular thrift collection
and its use to solve immediate problems of consumption and production not only helps to
meet their most urgent needs, but also trains them to handle larger financial resources more
skillfully, prudently and with a more lasting impact. Encourage SHGs to become a forum
for many social sector interventions.
D. SHG-Bank Linkage Programmer:
A Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage
Programmer has proved to be the major supplementary credit delivery system with wide
acceptance by banks, NGOs and various government departments.
E. Capacity Building:
Capacity building must be tailored to meet the differing needs of the nascent/emerging
MFIs and of the expanding/mature MFIs. There is a pressing need to develop
comprehensive, relevant and integrated training modules on a wide range of topics to
professionalize Indian microfinance thus building the much sought-after second tier
management in MFIs. The industry continues to grow, and so does the demand for
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competent middle management. Currently, these are typically sourced by MFIs from the
rural institutes of management. But these rural institutes are using curricula largely based on
the one developed by SIDBI nearly a decade ago and it is high time to revisit this
curriculum, to update it both in terms of content (to reflect the new realities in India
microfinance) and in terms of its delivery (to use multi-media/practical examples, and thus
bring the courses to life with video clips, case studies and field-based exercises that take the
students out into the field).
11.Microfinance Management:
A. Objectives:
The programmer aims at enabling the participants to gain a clear understanding of various
policies, conceptual, and operational issues involved in developing effective and successful
microfinance interventions.
B.Innovative Methodologies:
Tiny amount of loan to large number of borrowers at their doorstep is a costly operation
compared to revenue income. Cost reduction is also an essential element in microfinance
operation. Reducing cost can be possible either offering larger loan size or by innovating no
conventional Management which is less costly.
The essences of innovative management are as follows:
1. Specialized operation.
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contribute to job creation? And how can MFIs help reduce child labor? Should MFIs have
an interest in addressing these and other decent work issues? These are some of the
questions that the ILO intends to address through an experimental global action research
programmer (2008-2011) in partnership with microfinance Institutions interested in
promoting decent work. Access to micro credit or other financial services can help improve
the decent work status. Conditional loans, credit with education, incentives like interest rate
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rebates, linkages with social partners and NGOs as well as the provision of micro insurance,
conditional cash transfers or health care can be effective ways to reduce child labor,
decrease vulnerabilities, raise awareness and create incentives to improve working
conditions.
Enabling Environment:
Favorable environment for microfinance in different manners are prevailing in most
developing countries. Favorable environment is not only among Government but also
among general public, civil society, media and various institutions within the country
needed for favorable growth of microfinance for poverty reduction. Though Government is
favorable in general to microfinance in many countries but specific modalities of
NGOs/MFIs determine the nature of favorable.
D. Current Challenging Issues:
1.Capacity Building:
1.The long-term future of the micro-finance sector depends on MFIs being able to achieve
operational, financial and institutional sustainability.
2. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly
operation compared to revenue income. Cost reduction is also an essential element in
microfinance operation. Reducing cost can be possible either offering larger loan size or by
innovating no conventional Management which is less costly.
3. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds.
4. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds.
E. HR Issues:
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Recruitment and retention is the major challenge faced by MFIs as they strive to reach more
clients and expand their geographical scope. Attracting the right talent proves difficult
because candidates must have, as a prerequisite, a mindset that fits with the organizations
mission.
Many mainstream commercial banks are now entering microfinance, who are poaching staff
from MFIs and MFIs are unable to retain them for other job opportunities. 85% of the
poorest clients served by microfinance are women. However, women make up less than half
of all microfinance staff members, and fill even fewer of the senior management roles. The
challenge in most countries stems from cultural notions of womens roles, for example,
while women are single there might be a greater willingness on the part of womens families
to let them work as front line staff, but as soon as they marry and certainly once they start
having children, it becomes unacceptable. Long distances and long hours away from the
family are difficult for women to accommodate and for their families to understand.
F. Microfinance Training & Capacity Building Methods:
1. Microfinance Training Methodology and How to Build Efficient Workforce?
2. Staff Motivation & Built in Cost effective Training Component.
3. Human Resource Planning and Development.
4. Good Governance.
G. SWOT MATRIX for Microfinance Management:
STRENGTHS
1.Experienced senior management Team
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.2.Robust IT system.
3.Clear and well defined HR policy.
4.Infusion of own equity - commitment from promoters.
5.Process innovation.
6.Clarity and good understanding of vision.
7.Transparency at all levels.
8.Plans for value added and livelihood support services (LDS).
9.Shared ownership.
WEAKNESSES
1.Limited resources.
2.Micro managing.
3.Start up organisation; therefore, yet to institutionalise the standard processes
.4.Attracting/Holding on to the staff till the time we become established players.
5.Refine the processes for growth.
OPPORTUNITIES
1.Huge Potential Market.
2.Scope of introducing livelihood related services
.3.Financial crunch is helping organisation to be cost conscious and effective.
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4.IT systems.
THREATS
1.Financial crisis.
2.Increasing competition.
3.Increasing competition.
|4.Poor banking infrastructure.
5.Political instability.
H. Microfinance Operation management:
1.Capacity Building:
The long-term future of the micro-finance sector depends on MFIs being able to achieve
operational, financial and institutional sustainability. The constraints and challenges vary
with the different types and development stage of MFIs. Most MFIs are currently operating
below operational viability and use grant funds from donors for financing up-front costs of
establishing new groups and covering initial losses incurred until the lending volume builds
up to a break-even level. The MFIs are generally constrained in reaching a break-even level
and finally achieving sustainability, primarily due to a narrow client and product base, high
operational and administrative costs for delivering credit to the poor, and their inability to
mobilize requisite resources. Moreover, lack of technical manpower, operational systems,
infrastructure and MIS are prevalent. In view of the above, to scale up micro-finance
initiatives at a faster pace, a special effort is required for capacity building of the Micro
Finance Institutions. In this background, SFMC has in the past under the DFID
collaboration (which has since come to an end on March 31,2009) provided need based
capacity building support to the partner MFIs, in the initial years, to enable them to expand
their operations, cover their managerial, administrative and operational costs
besides helping them achieve self-sufficiency in due course.
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2. Liquidity Management:
In view of the fact that liquidity is a major concern of many of the middle level MFIs and a
small working capital support can go a long way in their better liquidity management and
thus pave way for faster growth, SFMC has introduced a special short term loan scheme,
Liquidity Management Support(LMS) for the long term partners.
3. Equity:
Provision of equity capital to the NBFC-MFIs is perceived as an emerging requirement of
the microfinance sector in India. SIDBI provides equity capital to eligible institutions not
only to enable them to meet the capital adequacy requirements but also to help them
leverage debt funds. Keeping in tune with the sect oral requirements, the bank has
also introduced quasi-equity products viz., optionally convertible Preference share capital;
optionally convertible debt and optionally convertible Subordinate debt for new generation
MFIs which are generally in the pre-breakeven stage requiring special dispensation for
capital support by way of a mix of Tier I and Tier II capital.
4. Transformation Loan:
The Transformation Loan (TL) product is envisaged as a quasi-equity type support topartner
MFIs that are in the process of transforming themselves / their existing structure into a more
formal and regulated set-up for exclusively handling micro finance operations in a focused
manner. Being quasi-equity in nature, TL helps the MFIs not only in enhancing their equity
base but also in leveraging loan funds and expanding their micro credit operations on a
sustainable basis. The product has the feature of conversion into equity after a
specified period of time subject to the MFI attaining certain structural, operational and
financial benchmarks. This non-interest bearing support facilitates the young but
well performing MFIs to make long term institutional investments and acts as a constant
incentive to transform themselves into formal and regulated entities.
5. Micro Enterprise Loans:
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In order to build and strengthen new set of intermediaries for Micro Enterprise Loans, the
Bank has formulated new scheme for Micro Enterprise Loans. Institutions/ MFIs with
minimum fund requirement of Rs. 25 lakh p.a. and having considerable experience in
financial intermediation/ facilitating or setting up of enterprises/ providing escort services to
SSI/ tiny units/ networking or active interface with SSIsetc. and having professional
expertise and capability to handle on-lending transactions shall be eligible under the
dispensation. The institutions would be selected based on their relevant experience, potential
to expand, professional management, transparency in operations and well laid-out systems
besides qualified/ trained manpower. Lending to be based strictly on an intensive in-house
appraisal supplemented with the credit rating by an independent professional agency.
Relaxed security norms more or less on line with micro credit dispensation to be adopted to
reduce procedural bottlenecks as well as to facilitate easy disbursements.
6. Loan Syndication:
Keeping in view the increased fund requirement of major partner MFIs, the Bank has also
undertaken fee based syndication arrangement where loan requirement is comparatively
higher.
7. Microfinance Operations:
a. Marketing Strategy and Microfinance Clients Targeting Methodology
.b. Microfinance Products, Services and Lending Procedures
.c. Microfinance Lending Methodology: Individual and Group Lending.
d. Micro finance Indian Lending Methodology
.e. Institutional Business Planning for Microfinance Program Financial Planning &
Analysais
.f. Savings and Credit Management.
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responsibility of an MFI.Most MFIs have a social mission that they see as more basic than
their financial objective, or at least co-equal with it. There is a great deal of truth in the
adage that institutions manage what they measure. Social performance measurement helps
MFIs and their stakeholders focus on their social goals and judge how well they are meeting
them. Social indicators are often less straightforward to measure, and less commonly used
than financial indicators that have been developed over centuries. Todays increasing use of
social measures reflects an awareness that good financial performance by an MFI does not
automatically guarantee client interests are being appropriately advanced.
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committee of the Reserve Bank of India. Indian microfinance is poised for continued growth
and high valuation but faces pressing challenges and opportunities thatleft unaddressed
could negatively impact the long-term future of the industry. The industry needs to move
past a single-minded focus on scale, expand the depth and breadth of products and services
offered, and focus on the double bottom line and over indebtedness to effectively address
the risks facing the industry. Estimated that in next five years, 65% of the poor people
will have excess to MFIs. Many Pvt. Banks and Foreign Banks would enter this business
segment, because of very low NPAs. Estimated that 5 % of the number of people below the
poverty line will get reduced in the next 5 years.(World Bank report).
These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low
cost. Taking the FSC initiative further, ICICI Bank plans to provide farmers credit from
sugar companies, seed companies, dairy companies, NGOs, micro-credit institutions and
food processing industries.
SIG has been involved in a project in the southern state of Tamil Nadu to find out how
wireless technology can be applied in the development of low cost models of banking.
Another plan to increase the reach in rural areas is to launch mobile ATM services. ICICI
Bank branded trucks have started carrying ATMs through a number of villages. While these
deaths are tragic, and the way that lenders are going about collecting payments is wrong, the
root of the problem is not microfinance and not the interest rates. The problem lies in the
way that MFIs are going about their business. The system itself is sound, and but what must
occur is a restricting of the employee base. If such abuse continues to persist, there will not
be a future for microfinance. In order for a peaceful, progressive future, MFIs must strictly
enforce their lender policies, making sure to eliminate agent threats as mentioned in the
WSJ. Thus, restrictions are not necessary, but a restructuring of the microfinance industry is
in strong demand. It will only be until microfinance policy is solidified and agreed upon by
the local and national legislatures that MFIsregain the trust and reputation they once held as
an institution of progress, not abuse.
A) The Future:
Microfinance expansion over the next decade can be expected to be an extension of what
has been achieved so far while overcoming the hurdles that have been posing difficulty in
effective microfinance operation and its expansion. There may be several participants in this
process and their participation may be seen in the following forms. Existing microfinance
institutions can expand their operations to areas where there are no microfinance programs.
More NGOs can incorporate microfinance as one of their programs. In places where there
are less microfinance institutions, the government channels at the grassroots level may be
used to serve the poor with microfinance. Postal savings banks may participate more not
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only in mobilizing deposits but also in providing loans to the poor and on lending funds to
the MFIs. More commercial banks may participate both in microfinance wholesale and
retailing. They many have separate staff and windows to serve the poor without collateral.
International NGOs and agencies may develop or may help develop microfinance programs
in areas or countries where micro financing is not a very familiar concept in reducing
poverty. Considering that the majority of the 360 million poor households (urban and rural)
lack access to formal financial services, the numbers of customers to be reached, and the
variety and quantum of services to berovided are really large. It is estimated that 90 million
farm holdings, 30 million non-agricultural enterprises and50 million landless households in
India collectively need approx US$30 billion credit annually. This is about 5%of India's
GDP and does not seem an unreasonable estimate.
However, 80% of the financial sector is still controlled by public sector institutions.
Competition, consolidation and convergence are all being discussed to improve efficiency
and outreach but significant opposition remains. Many private and foreign banks have
unveiled their plans to enter the Indian microfinance sector because of its very low NPAs
and high repayment rate of more than 95% in spite of offering loans without any collateral
security .Microfinance is not yet at the centre stage of the Indian financial sector. The
knowledge, capital and technology to address these challenges however now exist in India,
although they are not yet fully aligned. With a more enabling environment and surge in
economic growth, the next few years promise to be exciting for the delivery of financial
services to poor people in India Development of Small-Scale Enterprises through
microfinance will not only increase the outreach but will also help the generation of more
employment and income for the poor. It is expected that in the following years there will be
considerable deepening of microfinance in this direction along with simultaneous drives to
reach and serve the poorest of the poor. But the crux of the discussion is that, if the over
excess involvement of the government would be there in the Micro Finance sector, than the
growth of the Micro Finance wont much possible. The Govt. involvement should limited to
the important decisions only, but not to interfere in each and every matter of the
management.
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Financial inclusion
can be a powerful
accelerator of
economic progress,
and can help achieve
the goals of
eliminating extreme
poverty and building
shared prosperity.
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subsidies and entitlements under the Direct Benefit Transfer programme, leveraging the
AADHAR platform. Several efforts outside Swabhiman are also being tried out by private
sector players, bilateral / multilateral agencies, payment gateways, and telecom companies to
advance the financial inclusion agenda. More recently, while one MFI was awarded a bank
license, the Government of India established the niche BhartiyaMahila Bank to serve
financial needs of women, the NachiketMor Committee has recommended for differentiated
banking architecture to support financial inclusion. Given the overwhelming challenge of
financial inclusion; more holistic, systemic and convergent strategies need to be designed to
establish an eco-system that will understand the needs and aspirations of the unbanked,
specially the poor, leverage technology, engage with private sector and deliver responsive
products and processes tocreate beneficial outcomes.
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Conclusion:
Microfinance has a long way despite doubts expressed and criticism launched about its
viability,impact, and poverty fighting capacity. There should, however, be no room for
complacency. The task of building a poverty-free world is yet to be finished. There are still
over 1.2 billion people living in extreme poverty on this planet. They are not living in
one country or region but spread all over the world. The last decade has witnessed an
impressive growth of microfinance; lack of funding is still considered a major obstacle in
the way of its growth. However, it is encouraging that the situation is changing. Given the
experiences of large and fast growing the last decade has witnessed an impressive growth of
microfinance; lack of funding is still considered a major obstacle in the way of its growth.
However, it is encouraging that the situation is changing. Given the experiences of large and
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fast growing Microfinance, there are lessons for others who want to increase their outreach
and operate on a sustainable basis. Fortunately, there is an increasing awareness about the
power of microfinance, and the need to support its growth. Many players have committed
themselves to its promotion. Governments are taking an increasing interest in it. More
banks, both national and international are coming forward with different support packages.
NGO-MFI partnerships are on the increase. New instruments are be ingused to solve the
problem of funding. It is expected that in the coming years more ideas, innovations, cost
saving devices, and players will continue to reinforce the microfinance movement and
increase its expansion. At the end I would conclude that, Micro Finance Industry has the
huge potential to grow in future, if this industry grows then one day well all see the new
face of India, both in term of high living standard and happiness. One solution by which we
all can help the poor people, i.e. in a whole year a medium and a rich class people spends
more than Rs 10,000 on them without any good reason. Instead of that, by keeping just mere
Rs, 3000 aside and donate that amount to the MFIs, then at the end of the year the total
amount in the hands of poor would be ( average 500 million people *Rs 3000)=Rs
1,500,000,000,000 . Just imagine where would be India in next 10 years. Private MFIs in
India, barring a few exceptions, are still fledgling efforts and are therefore unregulated.
Their outreach is uneven in terms of geographical spread. They serve micro finance clients
with varying quality and using different operating models. Regulatory framework should
be considered only after the sustainability of MFI model as a banking enterprise for the poor
is clearly established. Experimentation of MFI model needs to be encouraged especially in
areas where formal banks are still not meeting adequate credit demand of the rural poor.
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