EXECUTIVE SUMMARY

This project is primarily aimed to gain an insight in the everyday working of MICROFINANCE
industry. The internship carried out in the CT CHITS PVT LTD helped a lot in achieving this.
CT CHITS PVT LTD is a Non-Governmental Organization incorporated in the year 2007,
located at Nanded (MS). The Board comprises of two active Directors namely Gopalsingh
Harisingh Chauhan and Vishalsingh Laxmansingh Tehra.
The concept of Microfinance is still new in India. Not many people are aware of the
Microfinance Industry. So apart from Government programmers, we the people should stand and
create the awareness about the Microfinance. There is huge demand and supply gap, in money
demand by the poor and supply by the MFI .So there needs to be an activate participation by the
Private Sector in this Industry.
The last decade has witnessed an impressive growth of Microfinance; lack of funding is still
considered a major obstacle in the way of its growth. However, it is encouraging that the
situation is changing. Given the experiences of large and fast growing Microfinance, there are
lessons for others who want to increase their outreach and operate on a sustainable basis.
Fortunately, there is an increasing awareness about the power of Microfinance, and the need to
support its growth. Many players have committed themselves to its promotion. Governments are
taking an increasing interest in it. More banks, both national and international are coming
forward with different support packages. NGO-MFI partnerships are on the increase. New
instruments are being used to solve the problem of funding. It is expected that in the coming
years more ideas, innovations, cost saving devices, and players will continue to reinforce the
Microfinance movement and increase its expansion.

Microfinance is not yet at the center 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.
In India the Rules and Regulation of Microfinance Institutions are not regulated properly. In the
absent of the rules and regulation there would be high case of credit risk and defaults. In the shed
of the proper rules and regulation the Microfinance can function properly and efficiently.
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.

OBJECTIVES
The main motive behind this project is to gather the knowledge about MICROFINANCE. In this
report I tried to depict the subtle and major aspects of Microfinance in India with respect to the
current scenario. Sources of collection of information are Internet, Books, journals and
Magazines. This report has been written in a very fair, simple and lucid language.

LEARNING FROM THE PROJECT

The History of Modern Microfinance. The process of Microfinance, from its need at the
grass root level.

Functioning of various Govt, Semi Govt & various other delivery channels.

Practical learning of how SHGs are formed.

Practical learning of how the MFIs work.

Most important learning, how it can change the life of the Economic disadvantaged
people.

BUSINESS ENVIRONMENT
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 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.
Who are the clients of Microfinance?
The typical Microfinance clients are low-income persons that do not have access to formal
financial institutions. Microfinance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban areas,
Microfinance activities are more diverse and include shopkeepers, service providers, artisans,
street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively
unstable source of income. Access to conventional formal financial institutions, for many
reasons, is inversely related to income: the poorer you are the less likely that you have access.
On the other hand, the chances are that, the poorer you are, the more expensive or onerous
informal financial arrangements. Moreover, informal arrangements may not suitably meet certain
financial service needs or may exclude you anyway. Individuals in this excluded and underserved market segment are the clients of Microfinance. As we broaden the notion of the types of
services Microfinance encompasses, the potential market of Microfinance clients also expands. It
depends on local conditions and political climate, activeness of cooperatives, SHG & NGOs and
support mechanism. For instance, micro credit might have a far more limited market scope than
say a more diversified range of financial services, which includes various types of savings
products, payment and remittance services, and various insurance products. For example, many
very poor farmers may not really wish to borrow, but rather, would like a safer place to save the

proceeds from their harvest as these are consumed over several months by the requirements of
daily living.

The Need in India

India is said to be the home of one third of the worlds poor; official estimates range
from 26 to 50 percent of the more than one billion population.

About 87 percent of the poorest households do not have access to credit.

The demand for microcredit 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 has been present in India in one form or another since
the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last
five years, the Microfinance industry has achieved significant growth in part due to the
participation of commercial banks. Despite this growth, the poverty situation in India continues
to be challenging.

SWOT MATRIX FOR MICROFINANCE MANAGEMENT:

STRENGTHS
1. Experienced senior management Team.
2. Robust IT system.
3. Clear and well defined HR policy.
4. Infusion of own equity - commitment from promoters.
5. Process innovation.
6. Clarity and good understanding of vision.
7. Transparency at all levels.
8. Plans for value added and livelihood support services (LDS).
9. Shared ownership.

WEAKNESSES
1. Limited resources.
2. Micro managing.
3. Start up organization; therefore, yet to institutionalize the standard processes.
4. Attracting/Holding on to the staff till the time we become established players.
5. Refine the processes for growth.

 OPPORTUNITIES
1. Huge Potential Market.
2. Scope of introducing livelihood related services.
3. Financial crunch is helping organization to be cost conscious and effective.
4. IT systems.

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

SWOT Analysis:
SWOT stands for Strength, Weakness, Opportunity, and Threat.

Strength
Helped in reducing the poverty: The main aim of Microfinance is to provide the loan to the
individuals who are below the poverty line and cannot able to access from the commercial banks.
As we know that Indian, more than 350 million people in India are below the poverty and for
them the Microfinance is more than the life. By providing small loans to this people
Microfinance helps in reducing the poverty.
Huge networking available: For MFIs and for borrower, both the huge network is there. In
India there are many more than 350 million who are below the poverty line, so for MFIs there is
a huge demand and network of people. And for borrower there are many small and medium size
MFIs are available in even remote areas.

Weakness
Not properly regulated: In India the Rules and Regulation of Microfinance Institutions are not
regulated properly. In the absent of the rules and regulation there would be high case of credit
risk and defaults. In the shed of the proper rules and regulation the Microfinance can function
properly and efficiently.
High number of people access to informal sources: According to the World Bank report 80%
of the Indian poor cant access to formal source and therefore they depend on the informal
sources for their borrowing and that informal charges 40 to 120% p.a.
Concentrating on few people only: India is considered as the second fastest developing
country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures
are just because of few people. Indias 70% of the population lives in rural area, and that portion
is not fully touched.

Opportunity
Huge demand and supply gap: There is a huge demand and supply gap among the borrowers
and issuers. In India around 350 million of the people are poor and only few MFIs there to
serving them. There is huge opportunity for the MFIs to serve the poor people and increase their
living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456
crore are disbursed to the borrower. (April 12)
Employment Opportunity: Microfinance helps the poor people by not only providing them
with loan but also helps them in their business; educate them and their children etc. So by this
Microfinance is helping in increase the employment opportunity for them and for the society.
Huge Untapped Market: Indias total population is more than 1000 million and out of 350
million is living below poverty line. So there is a huge opportunity for the MFIs to meet the
demand of that unsaved customers and Microfinance should not leave any stones unturned to
grab the untapped market.
Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are
unable to access big loans, because of the high intervention of the Govt. but the door open for the
Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment.

Threat
High Competition: This is a serious threat for the Microfinance industry, because as the more
players will come in the market, their competition will rise , and we know that the MFIs has the
high transaction cost and after entrant of the new players there transaction cost will rise further,
so this would be serious threat.
Neophyte Industry: Basically Microfinance is not a new concept in India, but that was all by
informal sources. But the formal source of finance through Microfinance is novice, and the rules
are also not properly placed for it.

 Over involvement of Govt.: This is the biggest threat that many MFIs are facing. Because the
excess of anything is injurious, so in the same way the excess involvement of Govt. is a serious
threat for the MFIs.
Excess involvement definition is like waive of loans, make new rules for their personal benefit
etc.

10

ORGANIZATION PROFILE
About Ct Chits Private Limited
Ct Chits Private Limited was registered on 13 April, 2007. Ct Chits Private Limited's Corporate
Identification Number (CIN) is U65992MH2007PTC169977, Registration Number is 169977.
Ct Chits Private Limited is a Non Government Company limited by shares.
Their registered address on file is Rukhmai Complex V.I.P. Road opposite Petrol Pump, Nanded
- 431601, Maharashtra, India.
Active Directors
Director Name:
Gopalsingh Harisingh Chauhan
(http://corporatedir.com/officer/02335747)
Vishalsingh Laxmansingh Tehra
(http://corporatedir.com/officer/02335762)
Apart from these there is hierarchy of office ranks, each assigned with specific responsibility and
duties.
The company primarily deals with the business of Chit Funds.
It has its presence in various other cities of Maharashtra like Latur, Aurangabad and Jalna etc.

11

TASK UNDERTAKEN
The Task undertaken while performing this project was to
Gain Practical learning of:

How Microfinance Institutions work?

What are Microfinance Models?

About Microfinance Management?

What are Microfinance Regulations?

How are SHGs formed?

Need and Importance of MFIs.

12

DATA ANALYSIS
About Microfinance:
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.
The History of Modern Microfinance
In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other
countries. The poor people had been given some small loans to invest in micro-business. This
kind of micro credit was given on the basis of solidarity group lending, that is, each and every
member of that group guaranteed the repayment of the loan of all the members.
Many banks and financial institutions have been pioneering the Microfinance program after
1970.
These are listed below.
ACCION International:
This institution had been established by a law student of Latin America to help the poor people
residing in the rural and urban areas of the Latin American countries. Today, in 2008, it is one of
the most important Microfinance institutions of the world. Its network of lending partner
comprises not only Latin America but also US and Africa.

13

SEWA Bank:
In 1973, the Self Employed Women's Association (SEWA) of Gujarat (in India) formed a bank,
named as Mahila SEWA Cooperative Bank, to access certain financial services easily. Almost 4
thousand women contributed their share capital to form the bank. Today the number of the
SEWA Bank's active client is more than 30,000.
GRAMEEN Bank:
Credit unions and lending cooperatives have been around hundreds of years. However, the
pioneering of modern Microfinance is often credited to Dr.Muhammad Yunus, who began
experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure
as a professor of economics at Chittagong University in the 1970s. He would go on to found
Grameen Bank in 1983 and win the Nobel Peace Prize in 2006.
Since then, innovation in Microfinance has continued and providers of financial services to the
poor continue to evolve. Today, the World Bank estimates that about 160 million people in
developing countries are served by Microfinance. Grameen Bank (Bangladesh) was formed by
the Nobel Peace Prize (2006) winner Dr.Muhammad Yunus in 1983. This bank is now serving
almost 40,00,000 poor people of Bangladesh. Not only that, but also the success of Grameen
Bank has stimulated the formation of other several Microfinance institutions like ASA, BRAC
and PROSHIKA.

14

Role of Microfinance:
The micro credit of Microfinance prename was first initiated in the year 1976 in Bangladesh with
promise of providing credit to the poor without collateral , alleviating poverty and unleashing
human creativity and endeavor of the poor people. Microfinance impact studies have
demonstrated that
1. Microfinance helps poor households meet basic needs and protects them against risks.
2. The use of financial services by low-income households leads to improvements in household
economic welfare and enterprise stability and growth.
3. By supporting womens economic participation, Microfinance empowers women, thereby
promoting gender equity and improving household well-being.
4. The level of impact relates to the length of time clients have had access to financial services.
Difference between Micro credit and Microfinance:
Micro credit refers to very small loans for unsalaried borrowers with little or no collateral,
provided by legally registered institutions. Currently, consumer credit provided to salaried
workers based on automated credit scoring is usually not included in the definition of micro
credit, although this may change.
Microfinance typically refers to micro credit, savings, insurance, money transfers, and other
financial products targeted at poor and low-income people.

15

Borrowers:
Most micro credit borrowers have micro enterprisesunsalaried, informal income generating
activities.
However, micro loans may not predominantly be used to start or finance micro enterprises.
Scattered 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 expenses, or
lifecycle events such as weddings and funerals.
Some MFIs provide non-financial products, such as business development or health services.
Commercial and government-owned banks that offer Microfinance services are frequently
referred to as MFIs, even though only a portion of their assets may be committed to financial
services to the poor.

Activities in Microfinance:
Micro credit: It is a small amount of money loaned to a client by a bank or other institution.
Micro credit can be offered, often without collateral, to an individual or through group lending.
Micro savings: These are deposit services that allow one to save small amounts of money for
future use.
Often without minimum balance requirements, these savings accounts allow households to save
in order to meet unexpected expenses and plan for future expenses Micro insurance: It is a
system by which people, businesses and other organizations make a payment to share risk.
Access to insurance enables entrepreneurs to concentrate more on developing their businesses
while mitigating other risks affecting property, health or the ability to work.
Remittances: These are transfer of funds from people in one place to people in another, usually
across borders to family and friends. Compared with other sources of capital that can fluctuate
depending on the political or economic climate, remittances are a relatively steady source of
funds.

16

The Micro-Credits Model:

The model is fairly straightforward and simple.

Focus on jump-starting self-employment, providing the capital for poor women to use
their innate "survival skills" to pull themselves out of poverty.

Lend to women in small groups (credit circles), say of five or seven.

Make loans of small amounts to two out of five.

The three who have not received loans will be eligible only when this first round of
loans has been repaid.

Draw up a weekly or bi-weekly repayment schedule.

In case any member defaults the entire circle is denied access to credit.

Banks 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.

17

Introduction to Microfinance
Microfinance is the provision of financial services to low-income clients or solidarity lending
groups including consumers and the self-employed, who traditionally lack access to banking and
related services.
Microfinance is not just about giving micro credit to the poor rather it is an economic
development tool whose objective is to assist poor to work their way out of poverty. It covers a
wide range of services like credit, savings, insurance, remittance and also non-financial services
like training, counseling etc.
Salient features of Microfinance:

Borrowers are from the low income group

Loans are of small amount micro loans

Short duration loans

Loans are offered without collaterals

High frequency of repayment

Loans are generally taken for income generation purpose

Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad
Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen
Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of
business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies
or trusts), Section 25 companies and Non- Banking Financial Companies (NBFCs). Commercial
Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played
an important role in providing refinance facility to MFIs. Banks have also leveraged the SelfHelp Group (SHGs) channel to provide direct credit to group borrowers.
With financial inclusion emerging as a major policy objective in the country, Microfinance has
occupied center stage as a promising conduit for extending financial services to unbanked
sections of population. At the same time, practices followed by certain lenders have subjected
the sector to greater scrutiny and need for stricter regulation.

18

Although the Microfinance sector is having a healthy growth rate, there have been a number of
concerns related to the sector, like grey areas in regulation, transparent pricing, low financial
literacy etc. In addition to these concerns there are a few emerging concerns like cluster
formation, insufficient funds, multiple lending and over-indebtedness which are arising because
of the increasing competition among the MFIs. On a national level there has been a spate of
actions taken to strengthen the regulation of MF sector including, enactment of Microfinance
regulation bill by the Government of Andhra Pradesh, implementation of sector specific
regulation by Reserve Bank of India and most recently, release of Draft Microfinance Institutions
(development and regulation) Bill, 2011 for comments.

Based on the research work, a few major recommendations made in the report include field
supervision of MFIs to check ground realities and the operational efficiency of such institutions.
Offer incentives to MFIs for opening branches in unbanked villages, so as to increase rural
penetration. Also MFIs be encouraged to offer complete range of products to their clients.
Transparent pricing and technology implementation to maintain uniformity and efficiency are
among the others which these institutions should adopt.

Inability of MFIs in getting sufficient funds is a major hindrance in the Microfinance growth and
so these institutions should look for alternative sources of funds. Some of the alternative fund
sources include outside equity investment, portfolio buyouts and securitization of loans which
only a few large MFIs are currently availing.

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.
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.
19

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 counseling, 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.

20

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 to
choke off the supply of credit.

Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country
has experience with sustainable Microfinance delivery.

Creating government wholesale funds to support retail MFIs if funds can be insulated
from politics, and they can hire and protect strong technical management and avoid
disbursement pressure that force fund to support unpromising MFIs.

Promote Microfinance as a key vehicle in tackling poverty, and as vital part of the
financial system.

Create policies, regulations and legal structures that encourage responsive, sustainable
Microfinance.

Encourage a range of regulated and unregulated institutions that meet performance

standards.

Encourage competition, capacity building and innovation to lower costs and interest
rates in Microfinance.

Support autonomous, wholesale structures.

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Micro-Financing Regulation in India

Advantage of Regulation:
Following are the advantages and benefits of regulation and supervision of MFIs:

Protects the interest of the depositors;

Put in place prudential norms, standards and practices;

Provides sufficient information about the true risks faced by the banks/MFIs;

Promoters systemic stability and thereby sustains public confidence in the

Banks/MFIs;

Prevents a banks/MFIs failure/potential dangers through timely interventions;

Penalizes the violations, misconducts, non-compliance to the norms of behavior;

Provides invaluable advisory inputs for problem-solving and overall improvement of

the banks/MFIs;

Promoters safe, strong and sound banking/MF system and effective Banking/MF
policy and

Promotes and enhances orderly economic growth and development.

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Unified Regulation System:

At present, all the regulatory aspects of Microfinance are not centralized. For example, while the
Rural Planning and Credit Department (RPCD) in RBI looks after rural lending, MF-NBFCs are
under the control of the Department of Non-Banking Supervision (DNBS) and External
Commercial Borrowings are looked after by the Foreign Exchange Department.
The Committee feels that RBI may consider bringing all regulatory aspects of Microfinance
under a single, mechanism. Further, supervision Of MF-NBFCs could be delegated to NABARD
by RBI.
Legal forms of MFIs in India:
MFIs and Legal Forms: With the current phase of expansion of the SHG Bank linkage
programmed and other MF initiatives in the country, the informal Microfinance sector in India is
now beginning to evolve.
The MFIs in India can be broadly sub-divided into three categories of organizational forms as
given in Table. While there is no published data on private MFIs operating in the country, the
number of MFIs is estimated to be around 800. However, not more than 10 MFIs are reported to
have an outreach of 100,000 Microfinance clients. An overwhelming majority of MFIs are
operating on a smaller scale with clients ranging Between 500 to 1500 per MFI. The
geographical distribution of MFIs is very much lopsided with concentration in the southern India
where the rural branch network of formal banks is excellent. It is estimated that the share of
MFIs in the total micro credit portfolio of formal & informal institutions is about 8 per cent.

Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act 1882.

Non-profit companies governed by section 25 of the companies act, 1956.

For profit MFIs regulated by Indian companies act, 1956.

NBFC governed by RBI act, 1934.

Cooperative societies by cooperative societies act enacted by state government.

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Types of MFIs

Estimated

Legal

Acts

Number*

Registered

under

which

Not for Profit MFIs

NGO MFIs

400 to 500

Societies

Registration

Act,

1860 or similar
Provincial Acts.

Indian Trust Act, 1882

Non-profit Companies

20

Section 25 of the Companies

Act, 1956

Mutual Benefit MFIs

Mutually Aided Cooperative
Societies

(MACS)

200 to 250

and

Mutually Aided Cooperative

Societies Act enacted by State

similarly set up institutions

Government

For Profit MFIs

Non-Banking Financial

45

Companies (NBFCs)

Indian Companies Act, 1956

Reserve Bank of India Act,
1934

* The estimated number includes only those MFIs, which are actually undertaking lending
activity.

24

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.
Womens indicators of empowerment through Microfinance:

Ability to save and access loans.

Opportunity to undertake an economic activity.

Mobility-Opportunity to visit nearby towns.

Awareness- local issues, MFI procedures, banking transactions.

Skills for income generation.

Decision making within the household.

Group mobilization in support of individual clients- action on.

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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.

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Gaps in Financial system and Need for 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.
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 nonfinancial services like individual counseling, 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.

27

Channels of Microfinance:
In India Microfinance operates through two channels:
1. SHG Bank Linkage Programme (SBLP)
2. Microfinance Institutions (MFIs)

SHG Bank Linkage Programme

This is the bank-led Microfinance channel which was initiated by NABARD in 1992. Under the
SHG model the members, usually women in villages are encouraged to form groups of around
10-15. The members contribute their savings in the group periodically and from these savings
small loans are provided to the members. In the later period these SHGs are provided with bank
loans generally for income generation purpose. The groups members meet periodically when the
new savings come in, recovery of past loans are made from the members and also new loans are
disbursed. This model has been very much successful in the past and with time it is becoming
more popular. The SHGs are self-sustaining and once the group becomes stable it starts working
on its own with some support from NGOs and institutions like NABARD and SIDBI.

Microfinance Institutions
Those institutions which have Microfinance as their main operation are known as Microfinance
institutions. A number of organizations with varied size and legal forms offer Microfinance
service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an
informal group comprising of 5 to 10 individual members who come together for the purpose of
availing bank loans either individually or through the group mechanism against a mutual
guarantee.

28

The reason for existence of separate institutions i.e. MFIs for offering Microfinance are as
follows:

High transaction cost generally micro credits fall below the break-even point of
providing loans by banks.

Absence of collaterals the poor usually are not in a state to offer collaterals to secure
the credit.

Loans are generally taken for very short duration periods.

Higher frequency of repayment of installments and higher rate of default.

Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25 companies,

Societies and Trusts, all such institutions operating in Microfinance sector constitute MFIs and
together they account for about 42 percent of the Microfinance sector in terms of loan portfolio.
The MFI channel is dominated by NBFCs which cover more than 80 percent of the total loan
portfolio through the MFI channel.

29

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 new conventional Management which is less costly.
The essences of innovative management are as follows:

Specialized operation.

Documentation of essential information only.

Simple product, simple loan application and verification process.

Absence of grant guarantee.

Staff recruitment in no conventional manner.

On the job training (each one teaches one).

Simple standard loan register along with ledger and cash book abandoning the
bookkeeper/cashier.

Standard furniture, fixture and collective use of facilities in the office.

Decentralized branch structure.

Branch level financial planning.

Strong monitoring from mid and head office.

Written Manual.

30

C. Microfinance Working Environment:

How can Microfinance institutions (MFIs) help improve working conditions? How can they
contribute to job creation? And how can MFIs help reduce 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 (20082011) in partnership with Microfinance Institutions interested in promoting decent work. Access
to micro credit or other financial services can help improve the decent work status. Conditional
loans, credit with education, incentives like interest rate rebates, linkages with social partners and
NGOs as well as the provision of micro insurance, conditional cash transfers or health care can
be effective ways to reduce child labor, decrease vulnerabilities, raise awareness and create
incentives to improve working conditions.
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.

31

D. Current Challenging Issues:

1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being
able to achieve operational, financial and institutional sustainability.
2. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly
operation compared to revenue income. Cost reduction is also an essential element in
Microfinance operation. Reducing cost can be possible either offering larger loan size or by
innovating no conventional Management which is less costly.
3. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds.
4. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds.
E. HR Issues:
Recruitment and retention is the major challenge faced by MFIs as they strive to reach more
clients and expand their geographical scope. Attracting the right talent proves difficult because
candidates must have, as a prerequisite, a mindset that fits with the 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.

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F. Microfinance Training & Capacity Building Methods:

Microfinance Training Methodology and How to Build Efficient Workforce?

Staff Motivation & Built in Cost effective Training Component.

Human Resource Planning and Development.

Good Governance.

G. 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 upfront 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 breakeven 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 Microfinance Institutions.
In this background, SFMC has in the past under the DFID collaboration (which has since come
to an end on March 31,2012) 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.
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.

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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 to partner MFIs that are in the process of transforming themselves / their existing
structure into a more formal and regulated set-up for exclusively handling Microfinance
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: In order to build and strengthen new set of intermediaries for Micro
Enterprise Loans, the Bank has formulated new scheme for Micro Enterprise Loans. Institutions/
MFIs with minimum fund requirement of Rs. 25 lakh p.a. and having considerable experience in
financial intermediation/ facilitating or setting up of enterprises/ providing escort services to SSI/
tiny units/ networking or active interface with SSIs etc. and having professional expertise and
capability to handle on-lending transactions shall be eligible under the dispensation. The
institutions would be selected based on their relevant experience, potential to expand,
professional management, transparency in operations and well laid-out systems besides
qualified/ trained manpower.

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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:

Marketing Strategy and Microfinance Clients Targeting Methodology.

Microfinance Products, Services and Lending Procedures.

Microfinance Lending Methodology: Individual and Group Lending.

Microfinance Indian Lending Methodology.

Institutional Business Planning for Microfinance Program. Financial Planning &

Analysis.

Savings and Credit Management.

Program Operational Policies and Procedures.

Accounting and Record Keeping.

Auditing for Microfinance Operation.

Management Information System.

Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools.

Detection of Fraud and Internal Control.

Monitoring and Supervision System.

Delinquencies and its Management.

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H. Clients of Microfinance:
The typical Microfinance clients are low-income persons that do not have access to formal
financial institutions. Microfinance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban areas,
Microfinance activities are more diverse and include shopkeepers, service providers, artisans,
street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively
unstable source of income.
The six principles of client protection are:
1. Avoidance of Over-Indebtedness:
Providers will take reasonable steps to ensure that credit will be extended only if borrowers have
demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk
of over-indebtedness. Similarly, providers will take adequate care that noncredit, financial
products, such as insurance, provided to low-income clients are appropriate.
2. Transparent and Reasonable Pricing:
The pricing, terms and conditions of financial products (including interest charges, insurance
premiums, all fees, etc.) are transparent and will be adequately disclosed in a form
understandable to clients.
3. Appropriate Collections Practices:
Debt collection practices of providers will not be abusive or coercive.
4. Ethical Staff Behavior:
Staff of financial service providers will comply with high ethical standards in their interaction
with Microfinance clients and such providers will ensure that adequate safeguards are in place to
detect and correct corruption or mistreatment of clients.

36

5. Mechanism for Redress of Grievances:

Providers will have in place timely and responsive mechanisms for complaints and problem
resolution for their clients.
6. Privacy of Client Data:
The privacy of individual client data will be respected, and such data cannot be used for other
purposes without the express permission of the client (while recognizing that providers of
financial services can play an important role in helping clients achieve the benefits of
establishing credit histories).

37

Critical Analysis
A. MFIs Critical Issues: MFIs can play a vital role in bridging the gap between demand &
supply of financial services if the critical challenges confronting them are addressed.
Sustainability: The first challenge relates to sustainability. It has been reported in literature that
the MFI model is comparatively costlier in terms of delivery of financial services. An analysis of
36 leading MFIs2 by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and
only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that
while the cost of supervision of credit is high, the loan volumes and loan size is low. It has also
been commented that MFIs pass on the higher cost of credit to their clients who are interest
insensitive for small loans but may not be so as loan sizes increase. It is, therefore, necessary for
MFIs to develop strategies for increasing the range and volume of their financial services.
Lack of Capital: The second area of concern for MFIs, which are on the growth path, is that
they face a paucity of owned funds. This is a critical constraint in their being able to scale up.
Many of the MFIs are socially oriented institutions and do not have adequate access to financial
capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism in
the country for meeting the equity requirements of MFIs. As you know, the Microfinance
Development Fund (MFDF), set up with NABARD, has been augmented and re-designated as
the Microfinance Development Equity Fund (MFDEF). This fund is expected to play a vital role
in meeting the equity needs of MFIs.
Borrowings: In comparison with earlier years, MFIs are now finding it relatively easier to raise
loan funds from banks. This change came after the year 2000, when RBI allowed banks to lend
to MFIs and treat such lending as part of their priority sector-funding obligations. Private sector
banks have since designed innovative products such as the Bank Partnership Model to fund.

38

B. Problems for Alternative Micro-Finance Institutions:

The main aim with which the alternative MFIs have come up is to bridge the increasing gap
between the demand and supply. A vast majority of them set up as NGOs for getting access to
funds as, the existing practices of mainstream financing institutions such as SIDBI and
NABARD and even of the institutions specially funding alternatives, such RMK and FWWB, is
to fund only NGOs, or NGO promoted SHGs. As 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.
There are many reasons for this:
1. Financial problems leading to setting up of inappropriate legal structures.
2. Lack of commercial orientation.
3. Lack of proper governance and accountability.
4. Isolated and scattered.
C. Risk:
This looks at the quality of their loan portfolio measured as the percent of the Portfolio at risk
greater than 30 days. And return, which is measured as a combination of return on equity and
return on assets. From this above table we can notice that the Risk of companies is measured as
the percentage of Portfolio at Risk (PAR) which means and returns is measured as combination
of ROA and ROE.

39

Major Risks to Microfinance Institutions:

Financial Risks

Operational Risks

Strategic Risk

Credit Risk

Transaction Risk

Governance Risk

Transaction risk

Human resources Risk

Ineffective oversight

Portfolio risk

Information & technology

Poor governance

Liquidity Risk

Risk

structure

Market Risk

Fraud (Integrity) Risk

Reputation Risk

Interest rate risk

Legal & Compliance

External Business

Foreign exchange risk

Risk

Risks

Investment portfolio risk

Event risk

Financial Risks:
Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks.
Mentioned under are the risks which are very critical for the MFIs.
Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or
capital due to borrowers late and non-payment of loan obligations. Credit risk encompasses both
the loss of income resulting from the MFIs inability to collect anticipated interest earnings as
well as the loss of principle resulting from loan defaults. Credit risk includes both transaction
risk and portfolio risk.
Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigate
transaction risk through borrower screening techniques, underwriting criteria, and quality
procedure for loan disbursement, monitoring, and collection.
Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the overall loan
portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures
lessen the portfolio risk.

40

Liquidity risk: Liquidity risk is the risk that an MFI cannot meet its obligations on a timely
basis. Liquidity risk usually arises from managements inability to adequately anticipate and plan
for changes in funding sources and cash needs.
Interest rate risk: Interest rate risk is the risk of financial loss from change 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.

Operational Risks:
Operational risk arises from human or computer error within daily service or product delivery.
This risk includes the potential that inadequate technology and information systems, operational
problems, insufficient human resources, or breaches of integrity (i.e. fraud) will result in
unexpected losses.
Two types of operational risk: transaction risk and fraud risk:
1. Transaction risk:
Transaction risk is particularly high for MFIs that handle a high volume of small transactions
daily. Since MFIs 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. As more MFIs offer additional
financial products, including savings and insurance, the risks multiply and should be carefully
analyzed as MFIs expand those activities
2. Fraud risk:
Fraud 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 MFI is the direct theft of funds by loan
officers or other branch staff. Other forms of fraudulent activities include the creation of
misleading financial statements, bribes etc.

41

Strategic Risks:
Strategic 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 external risks, such as changes in the business or competitive environment.
This section focuses on two critical strategic risks:
1. Governance Risk,
2. Business Environment Risk.
1. Governance risk:
Governance risk is the risk of having an inadequate structure or body to make effective
decisions. The Financial crisis, described above illustrates the dangers of poor governance that
nearly resulted in the failure of that institution.
2. External business environment risk:
Business environment risk refers to the inherent risks of the MFIs business activity and the
external business environment. To minimize business risk, the Microfinance institution must
react to changes in the external business environment to take advantage of opportunities, to
respond to competition, and to maintain a good public reputation.

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Benefit of Risk Management:

Early warning system for potential problems: A systematic process for evaluating and measuring
risk identifies problems early on, before they become larger problems or drain management time
and resources. Less time fixing problems means more time for production and growth. Better
information on potential consequences, both positive and negative. A proactive and forwardthinking organizational culture will help managers identify and assess new market opportunities,
foster continuous improvement of existing operations, and more effectively performance
incentives with the organizations strategic goals. Encourages cost-effective decision-making and
more efficient use of resources.

Interest Rates:
Most MFIs financially sustainable by charging interest rates that are high enough to cover all
their costs.
Four key factors determine these rates:
The cost of funds.
The MFI's operating expenses.
Loan losses.
And profits needed to expand their capital base and fund expected future growth.
There are three kinds of costs the MFI has to cover when it makes micro loans:
The cost of the money that it lends.
The cost of loan defaults.
Transaction and Operating cost.
For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount lent,
then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost i.e.
transaction cost.

43

Microfinance Institutions in India by Growth of Number of active Borrowers.

44

Success Factors of Micro-Finance in India:

Over the last ten years, successful experiences in providing finance to small entrepreneur and
producers demonstrate that poor people, when given access to responsive and timely financial
services at market rates, repay their loans and use the proceeds to increase their income and
assets. This is not surprising since the only realistic alternative for them is to borrow from
informal market at an interest much higher than market rates.
Community banks, NGOs and grass root savings and credit groups around the world have shown
that these microenterprise loans can be profitable for borrowers and for the lenders, making
Microfinance one of the most effective poverty reducing strategies.
a. Problems for Alternative Micro-Finance Institutions
The main aim with which the alternative MFIs have come up is to bridge the increasing gap
between the demand and supply. A vast majority of them set up as NGOs for getting access to
funds as, the existing practices of mainstream financing institutions such as SIDBI and
NABARD and even of the institutions specially funding alternatives, such RMK and FWWB, is
to fund only NGOs, or NGO promoted SHGs. As 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.
There are many reasons for this:

Financial problems leading to setting up of inappropriate legal structures.

Lack of commercial orientation.

Lack of proper governance and accountability.

Isolated and scattered.

45

INDIAS Microfinance sector was once touted as a savior of the poor and a good bet for
investors. The high point for the industry came when SKSthen Indias biggest Microfinance
Company with a $1.2 billion loan book, a third of it in the southern state of Andhra Pradesh
went public in July 2010. The $350m offering was more than 13 times oversubscribed.
Things went downhill fast. Many in the industry admit that runaway growth spurred reckless
lending to poor Indians. Just months after the SKS listing, Andhra Pradeshs state government
accused the industry of strong-arm collection tactics that drove some farmers to suicide. It issued
suffocating rules; almost all loans in the state were written off; business ground to a halt. But the
industry is starting to revive, with regulators in a far more central role.
Micro lenders are attracting capital again. Grameen Capital India, a social-investment bank, says
$144m of equity has been injected into Microfinance groups in the past 12 months, more than
double the amount in the preceding year. The International Finance Corporation, a multilateral
lender, invested $18m in Equitas, a mid-sized group in the southern state of Tamil Nadu. SKS,
whose loan book is now worth just $325m, raised $47.5m by issuing shares last year.
Outside Andhra Pradesh micro lenders loan books rose in value by 33% year on year in the third
quarter of 2012, according to the Microfinance Institutions Network (MFIN), an industry body.
Southern states and the eastern state of West Bengal are new hotspots. Bandhan, a no-frills
company based in West Bengal, now has over 4m borrowers and the largest Microfinance loan
book in the country. Analysts say the sectors outstanding loans are now worth $2 billion-3
billion, compared with a peak of around $5 billion during the boom. Indias central bank is
behind the renewed confidence. It released national guidelines for micro lenders at the end of
2011 and has set up a licensing system. Although a bill officially appointing the central bank as
the industrys regulator is languishing in parliament, these moves have helped stem what M.R.
Raod, the boss of SKS, calls a fear of contagion, the worry that other states will copy Andhra
Pradesh and suddenly draw up new rules.

46

Future of Microfinance:
Microfinance in India is in crisis because of the backlash against lenders in the southern state of
Andhra Pradesh, 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.
Indian Microfinance is poised for continued growth and high valuation but faces pressing
challenges and opportunities thatleft unaddressedcould 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. It is estimated that 5 % of people below the
poverty line will get reduced in the next 5 years. (World Bank report).
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 only in
mobilizing deposits but also in providing loans to the poor and on lending funds to the MFIs.

47

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 be provided are really large. It is estimated that 90 million farm holdings, 30
million non-agricultural enterprises and 50 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 center 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 Microfinance sector, than the growth of the Microfinance 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.

48

Microfinance India Summit:

Over the last six years, the Microfinance India Summit, organized by ACCESS Development
Services, has established itself as an international conference dedicated to Indian Microfinance.
It has become the single most important platform for sharing the Indian experience, unique as it
is, with a global audience. At the same time, it also provides an avenue to learn about
international trends and best practices for adaptation by the Indian community of practitioners.
Policy makers, practitioners, promoters, academics, researchers and thought leaders share their
experiences on various panels, and about 1000 delegates from both within and outside the
country participate in the Summit. It bridges the unnecessary hiatus between models and
methodologies and helps to build consensus on the critical challenges and issues. In the past, the
Summit themes have helped in focusing on key issues including "Inclusion, Innovation and
Impact" (2005), "Urban Microfinance" (2006), "Formal Financial Institutions - the challenges of
depth and breadth" (2007), "The Poor First" (2008) and "Doing good and doing well- The need
for balance" (2009) etc.

49

FINDINGS
Under mentioned are the few Findings which I encountered during my project on Microfinance:-

1. The concept of Microfinance is still new in India. Not many people are aware of the
Microfinance Industry. So apart from Government programmers, we the people should stand and
create the awareness about the Microfinance.

2. There are many people who are still below the poverty line, so there is a huge demand for
MFIs in India with proper rules and regulations.

3. There is huge demand and supply gap, in money demand by the poor and supply by the MFIs.
So there need to be an activate participation by the Private Sector in this Industry.

4. One strict recommendation is that there should not be over involvement of the Government in
MFIs, because it will hamper the growth and prevent the others MFIs to enter.

5. According to me the Micro Loan should be given to the women on priority basis, because by
this, MFIs can maintain their repayment ratio high, without any collateral.

6. Many people say that the interest rate charge by the MFIs is very high and there should be
compelled cap on it. But what I felt during my personal survey, that the high rates are justifiable.
Now by this example we will get agree.

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

50

RECOMMENDATIONS
1. Proper Regulation: The regulation was not a major concern when the Microfinance was in its
nascent stage and individual institutions were free to bring in innovative operational models.
However, as the sector completes almost two decades of age with a high growth trajectory, an
enabling regulatory environment that protects interest of stakeholders as well as promotes
growth, is needed.
2. Field Supervision: In addition to proper regulation of the Microfinance sector, field visits can
be adopted as a medium for monitoring the conditions on ground and initiating corrective action
if needed. This will keep a check on the performance of ground staff of various MFIs and their
recovery practices. This will also encourage MFIs to abide by proper code of conduct and work
more efficiently. However, the problem of feasibility and cost involved in physical monitoring of
this vast sector remains an issue in this regard.
3. Encourage rural penetration: It has been seen that in lieu of reducing the initial cost, MFIs
are opening their branches in places which already have a few MFIs operating. Encouraging
MFIs for opening new branches in areas of low Microfinance penetration by providing financial
assistance will increase the outreach of the Microfinance in the state and check multiple lending.
This will also increase rural penetration of Microfinance in the state.
4. Complete range of Products: MFIs should provide complete range of products including
credit, savings, remittance, financial advice and also non-financial services like training and
support. As MFIs are acting as a substitute to banks in areas where people dont have access to
banks, providing a complete range of products will enable the poor to avail all services.
5. Transparency of Interest rates: As it has been observed that, MFIs are employing different
patterns of charging interest rates and a few are also charging additional charges and interest free
deposits (a part of the loan amount is kept as deposit on which no interest is paid).
All this make the pricing very confusing and hence the borrower feels incompetent in terms of
bargaining power. So a common practice for charging interest should be followed by all MFI so
that it makes the sector more competitive and the beneficiary gets the freedom to compare
different financial products before buying.
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6. Technology to reduce Operating Cost: MFIs should use new technologies and IT tools &
applications to reduce their operating costs. Though most NBFCs are adopting such cost cutting
measures, which is clearly evident from the low cost per unit money lent (9%-10%) of such
institutions. NGOs and Section 25 companies are having a very high value of cost per unit
money lent i.e. 15-35 percent and hence such institutions should be encouraged to adopt costcutting measures to reduce their operating costs. Also initiatives like development of common
MIS and other software for all MFIs can be taken to make the operation more transparent and
efficient.

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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 Microfinance,
there are lessons for others who want to increase their outreach and operate on a sustainable
basis.
Fortunately, there is an increasing awareness about the power of Microfinance, and the need to
support its growth. Many players have committed themselves to its promotion. Governments are
taking an increasing interest in it. More banks, both national and international are coming
forward with different support packages. NGO-MFI partnerships are on the increase. New
instruments are being used to solve the problem of funding. It is expected that in the coming
years more ideas, innovations, cost saving devices, and players will continue to reinforce the
Microfinance movement and increase its expansion.
At the end I would conclude that, Microfinance 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.
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 Microfinance
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.

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BIBLIOGRAPHY
1. Yunus Muhammad. Creating a World without Poverty: Social Business and the Future of
Capitalism. Public Affairs, New York, 2008.
2. Report, Status of Microfinance in India 2009-2010, NABARD.
3. Piyush Tiwari and S M Fahad, HDFC, Concept paper-Microfinance Institutions in India.
4. R Srinivasan and M S Sriram, Microfinance in India- Discussion.
Websites:
1. www.microfinanceindia.org, www.ifmr.ac.in
2. www.microfinanceinsight.com, www.investopedia.com, www.books.google.com
3. www.forbes.com,www.nationmaster.com
4. www.indiamicrofinance.com

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