A STUDY ON MICROFINANCE

A PROJECT REPORT ON
Submitted by
MANPREET KAUR
MBA 2nd semester
UNI ROLL NO. 1174126
In the partial fulfillment for the award of the
degree of
MASTERS IN BUSINESS ADMINISTRATION

INSTITUTE OF MANAGEMENT STUDIES, BHADDAL

PUNJAB TECHNICAL UNIVERSITY, JALANDHAR

DECLARATION
I am sincerely thankful to all those people who have been giving
me any kind of assistance in the making of this project report. I
express my gratitude to Ms MANPREET KAUR, who has through
her vast experience and knowledge has been able to guide me,
both ably and successfully towards the completion of the project. I
express my gratitude, IMS-BHADDAL. I would hereby, make most
of the opportunity by expressing my sincerest thanks to all my
faculties whose teachings gave me conceptual understanding and
clarity of comprehension, which ultimately made my job more
easy. Credit also goes to all my friends whose encouragement
kept me in good stead. Their continuous support has given me the
strength and confidence to complete the project without any
difficulty.

ACKNOWLEDGEMENT
I gratefully acknowledgement the guidance and encouragement
given to me by Ms MANPREET KAUR whose invaluable suggestions
and constructive criticism helped me to enhance the project work.
She deserves a special compliment for her guidance.
I thank my institute who provided me this opportunity to undergo
this project in a particular field.

Manpreet kaur
MBA 2nd semester
Uni. Roll no- 1174126

LIST OF TABLES
S.NO
1

TABLE NO.

PAGE NO

Product & services

21

of Microfinance

Distribution of

28-29

Indebted Rural
Households: Agency
3

wise
Legal Forms of MFIs

36

in India
Comparative

49

Analysis of Microfinance Services

offered to the poor

LIST OF FIGRUES
4

S.NO
1

FIG. NO
Development

PAGE NO.
23

process through
2

microfinance
Micro finance
interventions
through different
organizations

24

TABLE OF CONTENTS
S.NO
1

TITLE NAME
CHAPTER NO.1
Introduction
The History of
Modern
Microfinance
Who are the
clients of micro
finance?
Principles of
micro finance
Role of
Microfinance
Difference
between micro
credit and
microfinance
Financial needs
and Financial
services
Activities in
Microfinance
Governments
role supporting
microfinance
Microfinance
6

PAGE NO
9-29

changing the
face of poor
India
Microfinance
Social Aspects
2

CHAPTER NO.2

30-31

Objectives of
3

microfinance
CHAPTER NO.3

32-33

Research
4

methodology
CHAPTER NO.4
Data analysis and
interpretation
Legal forms of
MFIs in India
Microfinance
Providers
Service
Company
Model
Microfinance
Strategic
Strategic Policy
Initiatives
Microfinance
Management
7

34-66

 Microfinance
Working
Environment
SWOT MATRIX
Role, Functions
and Working
Mechanism of
Financial
Institutions
Marketing of
Microfinance
5

Products
CHAPTER NO.5
Recommendations,
suggestions and
conclusion

CHAPTER NO. 6
Bibliography

67-77
78-79

CHAPTER NO. 1
INTRODUCTION

Microfinance is a general term to describe financial services to

low-income
individuals or to those who do not have access to typical banking
services.
Microfinance is also the idea that low-income individuals are
capable of lifting themselves out of poverty if given access to
financial services. While some studies indicate that microfinance
can play a role in the battle against poverty, it is also recognized
that is not always the appropriate method, and that it should
never be seen as the only tool for ending poverty.
Microfinance is defined as any activity that includes the provision
of financial services such as credit, savings, and insurance to low
income individuals which fall just above the nationally defined
poverty line, and poor individuals which fall below that poverty
line, with the goal of creating social value. The creation of social
value includes poverty alleviation and the broader impact of
improving livelihood opportunities through the provision of capital
for micro enterprise, and insurance and savings for risk mitigation
and consumption smoothing. A large variety of actors provide
microfinance in India, using a range of microfinance delivery
methods. Since the ICICI Bank in India, various actors have
endeavored to provide access to financial services to the poor in
creative ways. Governments also have piloted national programs,
NGOs have undertaken the activity of raising donor funds for on10

lending, and some banks have partnered with public organizations

or made small inroads themselves in providing such services. This
has resulted in a rather broad definition of microfinance as any
activity that targets poor and low-income individuals for the
provision of financial services. The range of activities undertaken
in microfinance include group lending, individual lending, the
provision of savings and
Insurance,

capacity

building,

and

agricultural

business

development services. Whatever the form of activity however, the

overarching goal that unifies all actors in the provision of
microfinance is the creation of social
Value.
Microfinance refers to small scale financial services for both
credits and deposits-that are provided to people who farm or fish
or herd; operate small or micro enterprise where goods are
produced, recycled, repaired, or
traded; provide services; work for wages or commissions; gain
income from renting out small amounts of land, vehicles, draft
animals, or machinery and tools; and to other individuals and
local groups in developing countries in both rural and urban
areas.

Microfinance Definition

11

According to International Labor Organization (ILO), Microfinance

is an economic development approach that involves providing
financial services through institutions to low income clients.
In India, Microfinance has been defined by The National
Microfinance Taskforce, 1999 as provision of thrift, credit and
other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to
raise their income levels and improve living standards.
"The poor stay poor, not because they are lazy but because they
have no access to capital."
The dictionary meaning of finance is management of money. The
management of money denotes acquiring & using money. Micro
Finance

is

buzzing

word,

used

when

financing

for

micro

entrepreneurs. Concept of micro finance is emerged in need of

meeting special goal to empower under-privileged class of
society, women, and poor, downtrodden by natural reasons or
men made; caste, creed, religion or otherwise. The principles of
Micro Finance are founded on the philosophy of cooperation and
its central values of equality, equity and mutual self-help. At the
heart of these principles are the concept of human development
and the brotherhood of man expressed through people working
together to achieve a better life for themselves and their children.
Traditionally micro finance was focused on providing a very
standardized credit product. The poor, just like anyone else, (in
fact need like thirst) need a diverse range of financial instruments
12

to be able to build assets, stabilize consumption and protect

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

13

The History of Modern Microfinance

In the late 1970s the concept of microfinance had evolved.
Although, microfinance have a long history from the beginning of
the 20th century we will concentrate mainly on the period after
1960.
Many credit groups have been operating in many countries for
several years, for example, the "chit funds" (India), tontines"
(West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides,
many formal saving and credit institutions have been working for
a long time throughout the world.
During the early and mid 1990s various credit institutions had
been formed in Europe by some organized poor people from both
the rural and urban areas. These institutions were named Credit
Unions, People's Bank etc. The main aim of these institutions was
to provide easy access to credit to the poor people who were
neglected by the big financial institutions and
banks.
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:
14

 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. 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.

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. Mohammad 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 Price in 2006.

15

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 Younus in 1983. This bank is now serving almost
400,0000 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.

16

Who are the clients of micro finance?

The typical micro finance clients are low-income persons that do
not have access to formal financial institutions. Micro finance
clients

are

typically

self-employed,

often

household-based

entrepreneurs. In rural areas, they are usually small farmers and

others who are engaged in small income-generating activities
such as food processing and petty trade. In urban areas, micro
finance activities are more diverse and include shopkeepers,
service providers, artisans, street vendors, etc. Micro finance
clients are poor and vulnerable non-poor who have a relatively
unstable source of income. Access to conventional formal
financial institutions, for many reasons, is inversely related to
income: the poorer you are the less likely that you have access.
On the other hand, the chances are that, the poorer you are, the
more expensive or onerous informal financial arrangements.
Moreover, informal arrangements may not suitably meet certain
financial service needs or may exclude you anyway. Individuals in
this excluded and under-served market segment are the clients of
micro finance.
As we broaden the notion of the types of services micro finance
encompasses, the potential market of micro finance clients also
expands. It depends on local conditions and political climate,
activeness of cooperatives, SHG & NGOs and support mechanism.
For instance, micro

17

credit might have a far more limited market scope than say a
more diversified range of financial services, which includes
various types of savings products, payment and remittance
services, and various insurance products. For example, many very
poor farmers may not really wish to borrow, but rather, would like
a safer place to save the proceeds from their harvest as these are
consumed over several months by the requirements of daily
living. Central government in India has established a strong &
extensive link between NABARD (National Bank for Agriculture &
Rural
Development), State Cooperative Bank, District Cooperative
Banks, Primary Agriculture & Marketing Societies at national,
state, district and village level.

Principles of micro finance

Poor people need not just loans but also savings, insurance
and money transfer services.
Microfinance must be useful to poor households: helping
them

raise

income,

build

up

assets

and/or

cushion

themselves against external shocks.

Microfinance can pay for itself. Subsidies from donors and
government are scarce and uncertain, and so to reach large
numbers of poor people, microfinance must pay for itself.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of
poor people into a countrys mainstream financial system.
The job of government is to enable financial services, not to
provide them.

18

 Donor

funds

should

complement

private

capital,

not

compete with it.

The key bottleneck is the shortage of strong institutions and
managers. Donors should focus on capacity building.
Interest rate ceilings hurt poor people by preventing
microfinance institutions from covering their costs, which
chokes off the supply of credit.
Microfinance institutions should measure and disclose their
performance both financially and socially.

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.

19

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.

20

Financial needs and financial services

In developing economies and particularly in the rural areas, many
activities that would be classified in the developed world as
financial are not monetized: that is, money is not used to carry
them out. Almost by definition, poor people have very little
money. But circumstances often arise in their lives in which they
need money or the things money can buy.
In Stuart Rutherfords recent book The Poor and Their Money, he
cites several types of needs:
Lifecycle Needs: such as weddings, funerals, childbirth,
education, homebuilding, widowhood, old age.
Personal Emergencies: such as sickness,

injury,

unemployment, theft, harassment or death.

Disasters: such as fires, floods, cyclones and man-made
events like war or bulldozing of dwellings.
Investment Opportunities: expanding a business,
buying land or equipment, improving housing, securing a job
(which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet
these needs, primarily through creating and exchanging different
forms of non-cash value. Common substitutes for cash vary from
country to country but typically include livestock, grains, jewellery
and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution,
the 1980s demonstrated that microfinance could provide largescale outreach profitably, and in the 1990s, microfinance began
21

to develop as an industry. In the 2000s, the microfinance

industrys objective is to satisfy
the unmet demand on a much larger scale, and to play a role in
reducing poverty. While much progress has been made in
developing a viable, commercial microfinance sector in the last
few decades, several issues remain that need to be addressed
before the industry will be able to satisfy massive worldwide
demand. The obstacles or challenges to building a sound
commercial microfinance industry include:

Inappropriate donor subsidies

Poor regulation and supervision of deposit-taking MFIs
Few MFIs that mobilize savings
Limited management capacity in MFIs
Institutional inefficiencies
Need for more dissemination and adoption of rural,
agricultural microfinance methodologies.

Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of
Microfinance taken by the government and regulatory bodies in
India are:
Working group on credit to the poor through SHGs, NGOs,
NABARD, 1995
The National Microfinance Taskforce, 1999
Working Group on Financial Flows to the Informal Sector (set
up by PMO), 2002
Microfinance Development and Equity Fund, NABARD, 2005
Working group on Financing NBFCs by Banks- RBI
22

23

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.

Product Design
24

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?
Table no.1 Product & services of Microfinance

Financial

Other Financial

Non Financial

Services

Services

Services

Micro-insurance, Life

Family Health and

Small Credit,

Insurance, Health

Sanitation

Small Business

Insurance, Loan for

Education, Financial

Credit.

Housing, Education,

Education,

Health.

Micro-entrepreneur

1. Credit Services

Training.
2. Deposit
Services
Voluntary
Savings
25

Services,
Mandatory
Savings.

26

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.

27

 Encourage a range of regulated and unregulated

institutions that meet performance standards.
Encourage
competition,
capacity
building
innovation

to

lower

costs

microfinance.
Fig no.1

28

and

interest

rates

and
in

29

Fig no.2

30

Microfinance changing the face of poor

India
Micro-Finance is emerging as a powerful instrument for poverty
alleviation in the new economy. In India, micro-Finance scene is
dominated

by

Self

Help

Groups

(SHGs)

Banks

linkage

Programme, aimed at providing a cost effective mechanism for

providing financial services to the 'unreached poor'. In the Indian
context terms like "small and marginal farmers", "rural
artisans" and "economically weaker sections" have been used to
broadly define micro-finance customers. Research across the
globe has shown that, over time, microfinance clients increase
their income and assets, increase the number of years of
schooling their children receive, and
improve the health and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately,
which emphasizes the combined delivery of financial services
along

with

technical

assistance,

and

agricultural

business

development services. When compared to the wider SHG bank

linkage movement in India, private MFIs have had limited
outreach. However, we have seen a recent trend of larger
Microfinance institutions transforming into Non-Bank Financial
Institutions (NBFCs). This changing face of microfinance in India
appears to be positive in terms of the ability of microfinance to
attract more funds and therefore increase outreach.

31

In terms of demand for micro-credit or micro-finance, there are

three segments, which demand funds. They are:
At the very bottom in terms of income and assets, are those
who are landless and engaged in agricultural work on a
seasonal basis, and manual laborers in forestry, mining,
household

industries,

construction

and

transport.

This

segment requires, first and foremost, consumption credit

during those months when they do not get labor work, and
for contingencies such as illness. They also need credit for
acquiring small productive assets, such as livestock, using
which they can generate additional income.
The next market segment is small and marginal farmers and
rural artisans, weavers and those self-employed in the urban
informal sector as hawkers, vendors, and workers in
household micro-enterprises. This segment mainly needs
credit for working capital, a small part of which also serves
consumption needs. This segment also needs term credit for
acquiring additional productive assets, such as irrigation
pump sets, bore wells and livestock in case of farmers, and
equipment (looms, machinery) and work sheds in case of
non-farm workers.
The third market segment is of small and medium farmers
who have gone in for commercial crops such as surplus
paddy and wheat, cotton, groundnut, and others engaged in
dairying, poultry, fishery, etc. Among non-farm activities, this
segment includes those in villages and slums, engaged in
processing or manufacturing activity, running provision
32

stores, repair workshops, tea shops, and various service

enterprises. These persons are not always poor, though they
live barely above the poverty line and also suffer from
inadequate access to formal credit.

33

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)

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.

34

 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:

Ability to save and access loans

Opportunity to undertake an economic activity
Mobility-Opportunity to visit nearby towns
Awarenesslocal
issues,
MFI
procedures,

banking

transactions
Skills for income generation
Decision making within the household
Group mobilization in support of individual clients- action on.
Table no.2 Distribution of Indebted Rural Households: Agency wise

Credit Agency

Percentage of rural
households
35

Government
Cooperative societies
Commercial banks
insurance
Provident fund
Other institutional sources
All institutional agencies
landlords
Agricultural money lenders
Professional money lenders
Relatives and friends
others
All non institutional agencies
All non agencies

6.1
21.6
33.7
0.3
0.7
1.6
64.0
4.0
7.0
10.5
5.5
9.0
36.0
100.0

36

CHAPTER NO.2
OBJECTIVES OF MICRO
FINANCE

37

 To protect the interest of the depositors.

How microfinance put in place prudential norms, standards
and practices.
To provide 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.
To penalize the violations, misconducts, non-compliance to
the norms of behavior.
To 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.

38

CHAPTER NO.3
RESEARCH METHODOLOGY

39

The research methodology I will be using would be descriptive

research design. It means the topic would be described as far as
possible.

Definition
Descriptive research means to describe something such as
market characteristics or functions.
The data I would be using secondary data. The data is already
listed and I would be properly arranging it as per my research
topic.
I will be listing the following topics:
Proper descriptions of suggestions
Relevant and adequate data analysis
Data analysis method would be appropriate.
Reliability and validity of the data would be checked

40

CHAPTER NO.4
DATA ANALYSIS AND
INTERPRETATION

Legal forms of MFIs in India

41

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
micro finance sector in India is now beginning to evolve. 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 micro finance 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.

42

Table no.3 Legal Forms of MFIs in India

Types of MFIs

1. Not for Profit MFIs

a.) NGO - MFIs

Estimated

Legal Acts under

Number

which Registered

400 to 500
10

Societies

Registration Act,

b.) Non-profit

1860 or similar

Companies

Provincial Acts
Indian Trust Act, 1882
Section 25 of the
Companies Act,

2. Mutual Benefit

1956
Mutually Aided

200 to 250

MFIs

Cooperative Societies

a.) Mutually Aided

Act

Cooperative

enacted by State

Societies (MACS) and

Government

similarly set
up institutions
3. For Profit MFIs

Indian Companies Act,

a.) Non-Banking

1956

Financial

Reserve Bank of India

Companies (NBFCs)

Act, 1934

Total

700 - 800

Microfinance Providers
Microfinance Institutions
A microfinance institution (MFI) is an organization that provides
microfinance

services.

MFIs

range
43

from

small

non-profit

organizations to large commercial banks. Most MFIs started as not

for-

profit

organizations

like

NGOs

(non-governmental

organizations), credit unions and other financial cooperatives, and

state

owned

development

and

postal

savings

banks.

An

increasing number of MFIs are now organized as for-profit entities,

often because it is a requirement to obtaining a license from
banking authorities to offer savings services. For-profit MFIs may
be organized as Non-Banking Financial Companies (NBFCs),
commercial banks that specialize in microfinance, or microfinance
departments of full-service banks. 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 micro finance 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 semiurban branches of commercial banks besides almost 90,000
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
44

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. 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.

.
For NGOs:
1. 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.
2. Canvassing by various factors, including the National Bank
for Agriculture and Rural Development (NABARD), Small
45

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.
3. 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.
4. 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.
46

5. For many NGOs the idea of organizing forming a samuha

has inherent appeal. Groups connote empowerment and
organizing women is a double bonus.
6. 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.

Service Company Model

In this context, the Service Company Model developed by ACCION
and used 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.

Coordinating Microfinance Efforts in India

NABARD coordinates the microfinance activities in India at
international/ national/ state / district levels. These include
organizing international/national Workshops, Seminars, etc
for experience sharing, Organizing National and State level
Meets of Bankers and NGOs etc .Dissemination of best
practices in SHG / microfinance.

47

 Other Initiatives
Micro

enterprise

Development

Programmer

(MEDP)

for

Matured SHGs The progression of SHG members to take up

micro enterprise involves intensive training and hand holding
on various aspects including understanding market, potential
mapping

and

ultimately

fine

tuning

skills

and

entrepreneurship to manage the enterprise. Hence, a

separate, specific and focused skill-building programme
Micro Enterprise Development Programmed (MEDP) has
been formulated. This involves organizing short duration,
location specific programmers on skill up gradation /
development for setting up sustainable micro-enterprises by
matured SHG members. The duration of training programme
can vary between 3 to 13 days, depending upon the
objective and nature of training. The training may be
conducted

by

agencies

that

have

background

and

professional competency in the field of micro enterprise

Development with an expertise in skill development.

Scheme for Capital/ Equity Support to MicroFinance Institutions (MFIs) from MFDEF
The scheme attempts to provide capital/equity support to
Micro Finance Institutions (MFIs) so as to enable them to
leverage capital/equity for accessing commercial and other
funds from banks, for providing financial services at an
affordable cost to the poor, and to enable MFIs to achieve
48

sustainability in their credit operations over a period of 3-5

years.

Scheme for financial assistance to banks/ MFIs

for rating of Micro Finance Institutions (MFIs)
In order to identify MFIs, classify and rate such institutions
and empower them to intermediate between the lending
banks and the clients, NABARD has decided to extend
financial assistance to Commercial Banks and Regional Rural
Banks by way of 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

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 reimbursement of 50% of
49

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 reimbursement of professional fee for first rating of the MFI.
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.

. 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. The study approached CEOs of select
MFIs with a set of issues ranging from concerns to
competition

and

sought

their
50

opinions

about

future

strategies. The report draws from their responses, and states

that:
1. Future strategy is about being strong on processes and being
overtly client-centric;
2. Success is a prudential combination of three factors, namely,
culture, beliefs and aspirations;
3. Culture is about the degree of trust rather than the rate of
interest;
4. Risk management systems of economically weaker families
are built on their beliefs about dependability and access;
5. 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 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.Microfinance

Development

and

Equity

Fund,

2005.Working group on Financing NBFCs by Banks- RBI.

SHG-Bank Linkage Programmer

51

NABARD,

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.

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 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).

Microfinance Management:
Objectives
52

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.

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.
2. Documentation of essential information only.
3. Simple product, simple loan application and verification
4.
5.
6.
7.

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.

8. Standard furniture, fixture and collective use of facilities
in the office.
9. Decentralized branch structure.
10. Branch level financial planning
11. Strong monitoring from mid and head office.
12. Written Manual.

Microfinance Working Environment

53

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

(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 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.

Current Challenging Issues

1. Capacity Building: The long-term future of the microfinance 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.
54

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.

SWOT MATRIX for Microfinance

Management
STRENGTHS
1.
2.
3.
4.
5.
6.
7.
8.

Experienced senior management Team.

Robust IT system.
Clear and well defined HR policy.
Infusion of own equity - commitment from promoters.
Process innovation.
Clarity and good understanding of vision.
Transparency at all levels.
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.
55

3. Financial crunch is helping organization to be cost

conscious and
effective.
4. IT systems.

THREATS
1.
2.
3.
4.
5.

Financial crisis.
Increasing competition.
Increasing competition.
Poor banking infrastructure.
Political instability.

Table no.4

Comparative Analysis of Micro-finance Services offered to the

poor

56

57

Role, Functions and Working

Mechanism of Financial Institutions
1. ICICI Bank
ICICI Bank is one bank that has developed a very clear
strategy to expand the provision of financial products and
services to the poor in India as a profitable activity
ICICIs microfinance portfolio has been increasing at an
impressive speed. From 10,000 microfinance clients in 2001,
ICICI Bank is now lending to 1.8 million clients through its
partner

microfinance

institutions,

and

its

outstanding

portfolio has increased from Rs. 0.20 billion (US$4.5 million)

to Rs. 9.98 billion (US$227 million). A few years ago, these
clients

had

never

been

served

by

formal

lending

institution. There is an increasing shift in the microfinance

sector from grant-giving to investment in the form of debt or
equity, and ICICI believes grant money should be limited to
the creation of facilitative infrastructure.
ICICI Bank launches new initiative in micro-

finance
ICICI Bank has taken a stake of under 20 per cent in Financial
Information Network and Operations Private Ltd (FINO),
which was launched on Thursday, July 13, 2001. FINO would
provide technological solutions as well as services to finance
providers to reach the, underserved in the country. ICICI
Bank is the lead facilitator. According to Mr Nachiket Mor,
Deputy

Managing

Director,
58

ICICI

Bank,

FINO

is

an

independent entity. "We would reduce our stake in the

company when required," he said.
33 ICICI Bank expects to target

200

micro-finance

institutions (MFIs) by March 2007, he said, speaking on the

sidelines of the press conference to launch FINO. At present,
the bank has tie-ups with 100 MFIs. FINO is an initiative in
the micro-finance sector. It would target 300-400 million
people who do not have access to basic financial services,
said Mr Manish Khera, CEO, FINO. The company has an
authorised capital of Rs 50 crore. MFIs, NBFCs, RRBs, cooperative banks, etc would directly or indirectly tie up with
FINO to use its services, he said. FINO would charge Rs 25-30
per account every year.

Core banking products

FINO has partnered with IBM and i-flex to offer core banking
products. It would also provide credit bureau services, which
includes individual customer credit rating and analytics
based on transaction history. It also launched biometric cards
for customers, which would be a proof of identity and give
collateral to them. The card would also offer multiple
products

including

savings,

loans,

insurance,

recurring

deposits, fixed deposits and remittances. The company

would also build-up customer database, thus bringing them
into mainstream banking. "There was a need for automated
structured data system like FINO," said Mr Mor. "Essential
pieces of infrastructure are missing in India. We lack credit59

tracking mechanism; therefore there was a need for an

intervention like FINO." The company expects to reach 25
million customers in five years and two million customers by
the end of 2007.
FINO aims bringing scale to "micro" business leading to
lowering of costs for the local financial institutions (LFIs) and
act as an internal technology department for the LFIs, said
Mr

Khera.

The

company

is

working

on

providing

technological solutions in insurance, especially the health

insurance sector to the under-privileged," he said. It is
interacting with Nabard, SIDBI and other banks to give shape
to what FINO does, said Mr Khera.

ICICI Bank's thrust on micro-finance

ICICI Bank has entered into partnerships with various
microfinance

institutions

(MFI)

and

non-Government

organizations (NGOs) to scale up its micro lending business.

Addressing

presspersons

here,

today,

Nachiket

Mor,

Executive Director, ICICI Bank, said, the partnership model

would provide assured source of funding to NGOs and MFIs.
The bank had extended advances to the tune of Rs. 150
crores as on February 29, this year, under this scheme, Mr.
Mor said. The bank had acquired a network of self-help
groups (SHGs) developed by the erstwhile Bank of Madura
after its merger with ICICI Bank. Since then the SHG
programme had grown substantially and 10,175 groups had
been promoted reaching out to 2.03 lakh women spread
60

across 2,398 villages, the Executive Director said. One of the

micro finance institutions, `Microcredit Foundation of India',
established by K. M. Thiagarajan, former Chairman of Bank
of

Madura

in

2002,

had

initiated

programme

for

microcredit through self-help groups. ICICI Bank has entered

into a memorandum of understanding with Microcredit
Foundation to outsource SHG development, maintenance of
groups, credit linkage and recovery of loans.

The MFI as Collection Agent

To

address

these

constraints,

ICICI

Bank

initiated

partnership model in 2002 in which the MFI acts as a

collection agent instead of a financial intermediary. This
model is unique in that it combines debt as mezzanine
finance to the MFI (Mezzanine finance combines debt and
equity financing: it is debt that can be converted by the
lender into equity in the event of a default. This source of
financing is advantageous for MFIs because it is treated like
equity in the balance sheet and enables it to raise money
without additional equity, which is an expensive financing
source.).The loans are contracted directly between the bank
and the borrower, so that the risk for the MFI is separated
from the risk inherent in the portfolio. This model is therefore
likely to have very high leveraging capacity, as the MFI has
an assured source of funds for expanding and deepening
credit. ICICI chose this model because it expands the retail
61

operations

of

the

bank

by

leveraging

comparative

advantages of MFIs, while avoiding costs associated with

entering the market directly.

Securitization
Another way to enter into partnership with MFIs is to
securitize microfinance portfolios. In 2004, the largest ever
securitization deal in microfinance was signed between ICICI
Bank and SHARE Microfinance Ltd, a large MFI operating in
rural areas of the state of Andhra Pradesh. Technical
assistance and the collateral deposit of US$325,000 (93% of
the guarantee required by ICICI) were supplied by Grameen
Foundation USA. Under this agreement, ICICI purchased a
part

of

SHAREs

microfinance

portfolio

against

consideration calculated by computing the Net Present Value

of receivables amounting to Rs. 215 million (US$4.9 million)
at an agreed discount rate. The interest paid by SHARE is
almost 4% less than the rate paid in commercial loans.
Partial credit provision was provided by SHARE in the form of
a guarantee amounting to 8% of the receivables under the
portfolio, by way of a lien on fixed deposit. This deal frees up
equity capital, allowing SHARE to scale up its lending. On the
other hand, it allows ICICI Bank to reach new markets. And
by trading this high quality asset in capital markets, the bank
can hedge its own risks.

62

 Beyond Microcredit
Microfinance does not only mean microcredit, and ICICI does
not limit itself to lending. ICICIs Social Initiative Group, along
with the World Bank and ICICI Lombard, the insurance
company set up by ICICI and Canada Lombard, have
developed Indias first index-based insurance product. This
insurance policy compensates the insured against the
likelihood of diminished agricultural output/yield resulting
from a shortfall in the anticipated normal rainfall within the
district, subject to a maximum of the sum insured. The
insurance policy is linked to a rainfall index.

Technology
One

of

the

main

challenges

to

the

growth

of

the

microfinance sector is accessibility. The Indian context, in

which 70% of the population lives in rural areas, requires
new, inventive channels of delivery. The use of technologies
such as kiosks and smart cards will considerably reduce
transaction costs while improving access. The ICICI Bank
technology team is developing a series of innovative
products that can help reduce transaction costs considerably.
For example, it is piloting the usage of smart cards with
Sewa Bank in Ahmedabad. To maximize the benefits of these
innovations, the development of a high quality shared
banking technology platform which can be used by MFIs as
well as by cooperatives banks and regional rural banks is
needed. ICICI is strongly encouraging such an effort to take
63

place. Wipro and Infosys, I-Flex, 3iInfotech, some of the best

Indian information technology companies specialized in
financial services, and others, are in the process of
developing exactly such a platform. At a recent technology
workshop at the Institute for Financial Management Research
in

Chennai,

the

ICICI

Bank

Alternate

Channels

Team

presented the benefits of investing in a common technology

platform similar to those used in mainstream banking to
some of the most promising MFIs.

The Centre for Microfinance Research

ICICI bank has created the Centre for Microfinance Research
(CMFR) at the Institute for Financial Management Research
(IFMR)

in

Chennai.

Through

research,

research-based

advocacy, high level training and strategy building, it aims to

systematically establish the links between increased access
to financial services and the participation of poor people in
the larger economy. The CMFR Research Unit supports
initiatives

aimed

at

understanding

and

analyzing

the

following issues: impact of access to financial services;

contract and product designs; constraints to household
productivity;

combination

of

microfinance

and

other

development interventions; evidence of credit constraints;

costs and profitability of microfinance organizations; impact
of MFI policies and strategies; peoples behavior and
psychology with respect to financial services; economics of
64

micro-enterprises; and the effect of regulations. Finally, the

CMFR recognizes that while MFIs aim to meet the credit
needs of poor households, there are other missing markets
and constraints facing households, such as healthcare,
infrastructure,

and

gaps

in

knowledge.

These

have

implications in terms of the scale and profitability of client

enterprises and efficiency of household budget allocation,
which in turn impacts household well-being. The CMFR
Microfinance Strategy Unit will address these issues through
a series of workshops which will bring together MFI
practitioners and sectoral experts (in energy, water, roads,
health, etc). The latter will bring to the table knowledge of
best practices in their specific areas, and each consultation
workshop will result in long-term collaboration between with
MFIs for implementing specific pilots.

2. Bandhan
Bandhan is working towards the twin objective of poverty
alleviation and women empowerment. It started as a
Capacity Building Institution (CBI) in November 2000 under
the leadership of Mr. Chandra Shekhar Ghosh. During such
time, it was giving capacity building support to local
microfinance institutions working in West Bengal. Bandhan
opened its first microfinance branch at Bagnan in Howrah
district of West Bengal in July 2002. Bandhan started with 2
branches in the year 2002-03 only in the state of West
Bengal and today it has grown as strong as 412 branches
65

across 6 states of the country! The organization had

recorded a growth rate of 500% in the year 2003-04 and
611% in the year 2004-05. Till date, it has disbursed a total
of Rs. 587 crores among almost 7 lakh poor women. Loan
outstanding stands at Rs. 221 crores. The repayment rate is
recorded at 99.99%. Bandhan has staff strength of more
than 2130 employees.

66

Operational Methodology
Bandhan follows a group formation, individual lending approach. A
group of 10-25 members are formed. The clients have to attend
the group meetings for 2 successive weeks. 2 weeks hence, they
are entitled to receive loans. The loans are disbursed individually
and directly to the members.

Economic and Social Background of Clients

Landless and asset less women
Family of 5 members with monthly income less than Rs.
2,500 in rural and Rs.3,500 in urban
Those who do not own more than 50 decimal (1/2acre) of
land or capital of its equivalent value

Loan Size
The first loan is between Rs. 1,000 Rs. 7,000 for the rural areas
and between Rs. 1,000 Rs. 10,000 for the urban areas. After the
repayment, they are entitled to receive a subsequent loan which
is Rs 1,000 - 5,000 more than the previous loan.

Service Charge
Bandhan charges a service charge of 12.50% flat on loan amount.
Bandhan initially charged 17.50%. However from 1st July 2005, it
has slashed down its lending rate to 15.00%. Then it was further
reduced to 12.50% in May 2006. The reason is obvious. As overall
productivity increased, operational costs decreased. Bandhan,
being a nonprofit organization wanted the benefit of low costs to
ultimately trickle down to the poor.
67

Monitoring System
The various features of the monitoring system are:
A 3 tier monitoring system Region, Division and Head

Office
Easy reporting system with a prescribed checklist format
Accountability at all levels post monitoring phase
Cross- checking at all the levels
The management team of Bandhan spends 90.00% of time
at the field

Liability structure for Loans

When a member wants to join Bandhan, she at first has to get
inducted into a group. After she gets inducted into the group, the
entire group proposes her name for a loan in the Resolution Book.
Two members of the group along with the members husband
have to sign as guarantors in her loan application form. If she fails
to pay her weekly installment, the group inserts peer pressure on
her. The sole purpose of the above structure is simply to create
peer pressure.

3. Grameen Bank
The Grameen Model which was pioneered by Prof Muhammed
Yunus of Grameen Bank is perhaps the most well known, admired
and practiced model in the world. The model involves the
following elements.
Homogeneous affinity group of five
Eight groups form a Centre
68

Centre meets every week

Regular savings by all members
Loan proposals approved at Centre meeting
Loan disbursed directly to individuals
All loans repaid in 50 installments

The Grameen model follows a fairly regimented routine. It is very

cost intensive as it involves building capacity of the groups and
the customers passing a test before the lending could start. The
group members tend to be selected or at least strongly vetted by
the bank. One of the reasons for the high cost is that staff
members can conduct only two meetings a day and thus are
occupied for only a few hours, usually early morning or late in the
evening. They were used additionally for accounting work, but
that can now be done more cost effectively using computers. The
model is also rather meeting intensive which is fine as long as the
members have no alternative use for their time but can be a
problem as members go up the income ladder. The greatness of
the Grameen model is in the simplicity of design of products and
delivery. The process of delivery is scalable and the model could
be replicated widely. The focus on the poorest, which is a value
attribute of Grameen, has also made the model a favorite among
the
donor community. However, the Grameen model works only under
certain assumptions. As all the loans are only for enterprise
promotion, it assumes that all the poor want to be self-employed.
The repayment of loans starts the week after the loan is disbursed

69

 the inherent assumption being that the borrowers can service

their loan from the ex-ante income.

4.SKS Microfinance(CEO-Vikram Akula)

Many companies say they protect the interests of their
customers. Very few actually sit in dirt with them, using
stones, flowers, sticks, and chalk powder to figure out if they
will be able to repay a $20 loan at $1 a month. With this
approach, this company has created its own loyal gang of
over 2 million customers. Its borrowers include agricultural
laborers, mom-and-pop entrepreneurs, street vendors, home
based artisans, and small scale producers, each living on
less than $2 a day. It works on a model that would allow
micro-finance institutions to scale up quickly so that they
would never have to turn poor person away. Its model is
based on 3 principles-

1.Adopt a profit-oriented approach in order to

access commercial capital
Starting with the pitch that there is a high entrepreneurial
spirit amongst the poor to raise the funds, SKS converted
itself to for-profit status as soon as it got break even and got
philanthropist Ravi Reddy to be a founding investor. Then it
secured money from parties such as Unitus, a Seattle based
NGO

that

helps

promote

micro-finance;

SIDBI;

and

technology entrepreneur Vinod Khosla. Later, it was able to

70

attract multimillion dollar lines of credit from Citibank, ABN

Amro, and others.

2. Standardize

products,

training,

and

other

processes in order to boost capacity

They collect standard repayments in round numbers of 25 or
30 rupees. Internally, they have factory style training
models. They enroll about 500 loan officers every month.
They participate in theory classes on Saturdays and practice
what they have learned in the field during the week. They
have shortened the training time for a loan officer to 2
months though the average time taken by other industry
players is 4-6 months.

3. Use Technology to reduce costs and limit errors

It could not find the software that suited its requirements, so
it they built their own simple and user friendly applications
that a computer-illiterate loan officer with a 12th grade
education can easily understand. The system is also internet
enabled. Given that electricity is unreliable in many areas
they have installed car batteries or gas powered generators
as back-ups in many areas.

4.Scaling up Customer Loyalty

Instead of asking illiterate villagers to describe their
seasonal pattern of cash flows, they encourage them to use
colored chalk powder and flowers to map out the village on
the ground and tell where the poorest people lived, what
kind of financial products they needed, which areas were
lorded over by which loan sharks, etc. They set peoples tiny
weekly repayments as low as $1 per week and health and
71

whole life insurance premiums to be $10 a year and 25 cents

per

week

respectively.

They

also

offer

interest

free

emergency loans. The salaries of loan officers are not tied to

repayment rates and they journey on mopeds to borrowers
villages and schedule loan meetings as early as 7.00 A.M.
Deep customer loyalty ultimately results in a repayment rate
of 99.5%.

5.Leveraging the SKS brand

Its payoff comes from high volumes. They are growing at
200% annually, adding 50 branches and 1, 60,000 new
customers a month. They are also using their deep
distribution channels for selling soap, clothes, consumer
electronics and other packaged goods.

72

Marketing of Microfinance Products

1. Contract Farming and Credit Bundling
Banks and financial institutions have been partners in
contract farming schemes, set up to enhance credit.
Basically,

this

is

doable

model.

Under

such

an

arrangement, crop loans can be extended under tie-up

arrangements with corporate for production of high quality
produce with stable marketing arrangements provided and
only, provided the price setting mechanism for the farmer
is appropriate and fair.

2.Agri Service Centre Rabo India

Rabo India Finance Pvt Ltd. has established agri-service
centres in rural areas in cooperation with a number of agriinput and farm services companies. The services provided
are similar to those in contract farming, but with additional
flexibility and a wider range of products including inventory
finance. Besides providing storage facilities, each centre
rents out farm machinery, provides agricultural inputs and
information to farmers, arranges credit, sells other services
and provides a forum for farmers to market their products.

3.Non Traditional Markets

Similarly, Mother Dairy Foods Processing, a wholly owned

subsidiary of National Dairy Development Board (NDDB) has
established auction markets for horticulture producers in
Bangalore. The operations and maintenance of the market is
done by NDDB. The project, with an outlay of Rs.15 lakh,
73

covers 200 horticultural farmers associations with 50,000

grower members for wholesale marketing. Their produce is
planned with production and supply assurance and provides
both growers and buyers a common platform to negotiate
better rates.

4.Apni Mandi
Another innovation is that of The Punjab Mandi Board, which
has experimented with a farmers market to provide small
farmers located in proximity to urban areas, direct access to
consumers by elimination of middlemen. This experiment
known as "Apni Mandi" belongs to both farmers and
consumers, who mutually help each other. Under this
arrangement a sum of Rs. 5.2 lakh is spent for providing
plastic crates to 1000 farmers. Each farmer gets 5 crates at
a subsidized rate. At the mandi site, the Board provides basic
infrastructure facilities. At the farm level, extension services
of different agencies are pooled in. These include inputs
subsidies, better quality seeds and loans from Banks. Apni
Mandi scheme provides self-employment to producers and
has eliminated social inhibitions among them regarding the
retail sale of their produce.

Top 50 Microfinance Institutions in India:

List: Top 50 Microfinance Institutions in India by
Loan Amount Outstanding for 2010.
1. SKS Microfinance Ltd (SKSMPL).
2. Spandana Sphoorty Financial Ltd (SSFL).
74

3. Share Micro fin Limited (SML)

4. Asmitha Micro fin Ltd (AML).
5. Shri Kshetra Dharmasthala

Rural

Development

Project

(SKDRDP).
6. Bhartiya Samruddhi Finance Limited (BSFL).
7. Bandhan Society.
8. Cashpor Micro Credit (CMC).
9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL).
10.Grameen financial servicesPvt Ltd (GFSPL).
11.Madura Micro Finance Ltd (MMFL).
12. BSS Microfinance Bangalore Pvt Ltd (BMPL).
13. Equitas Micro Finance India P Ltd (Equitas).
14. Bandhan Financial Services Pvt Ltd (BFSPL).
15.Sarvodaya Nano Finance Ltd (SNFL).
16. BWDA Finance Limited (BFL).
17. Ujjivan FinancialServices Pvt Ltd (UFSPL).
18.Future Financial Services Chittoor Ltd (FFSL).
19. ESAF Microfinance & Investments Pvt. Ltd (EMFIL).
20.S.M.I.L.E Microfinance Limited.
21.SWAWS Credit Corporation India Pvt Ltd (SCCI).
22.Sanghamithra Rural Financial Services (SRFS).
23.Saadhana Micro fin.
24.Gram Utthan Kendrapara.
25. Rashtriya Seva Samithi (RASS).
26.Sahara Utsarga Welfare Society (SUWS).
27.Sonata Finance Pvt Ltd (Sonata).
28.Rashtriya Gramin Vikas Nidhi.
29. Arohan Financial Services Ltd (AFSL).
30.Janalakshmi Financial Services Pvt Ltd (JFSPL).
31.Annapurna Financial Services Pvt Ltd.
32.Hand in Hand (HiH).
33.Payakaraopeta Womens Mutually Aided Co-operative Thrift
and Credit Society (PWMACTS)
34.Aadarsha Welfare Society(AWS)
35.Adhikar
36.Village Financial Services Pvt Ltd (VFSPL)
37.Sahara Uttarayan
38.RORES Micro Entrepreneur Development Trust(RMEDT)
75

39.Centre for Rural Social Action (CReSA)

40.Indur Intideepam Federation Ltd (IIMF).
41.Welfare Organization for MultipurposeMass

Awareness

Network (WOMAN)
42.Pragathi Mutually Aided Cooperative Credit and Marketing
Federation
Ltd(PMACS)
43.Indian Association for Savings and Credit(IASC)
44.Sewa Mutually Aided Cooperative Thrift Societies Federation
Ltd (Sewa)
45.Initiatives for Development Bangalore, Foundation (IDF)
46.Gandhi Smaraka Grama Seva Kendram (GSGSK)
47.Swayamshree Micro Credit Services (SMCS)
48. ASOMI
49.Janodaya Trust
50. Community Development Centre (CDC)

76

CHAPTER NO.5
RECOMMENDATIONS,
SUGGESTIONS AND CONCLUSION

77

Success Factors of Micro-Finance in India

Over the last ten years, successful experiences in providing
finance to small entrepreneur and producers demonstrate that
poor people, when given access to responsive and timely financial
services at market rates, repay their loans and use the proceeds
to increase their income and assets. This is not surprising since
the only realistic alternative for them is to borrow from informal
market at an interest much higher than market rates. Community
banks, NGOs and grass root savings and credit groups around the
world have shown that these microenterprise loans can be
profitable for borrowers and for the lenders, making microfinance
one of the most effective poverty reducing strategies.

For NGOs
1. 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.
2. 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),
78

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.

microfinance,

Induced

donor

by

NGOs

the
too

worldwide
have

been

focus

on

funding

microfinance projects. One might call it the supply push.

3. 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.
4. 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.
5. For many NGOs the idea of organising forming a samuha
has inherent appeal. Groups connote empowerment and
organising women is a double bonus.
6. 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
79

source of revenue than an uncertain, highly competitive and

increasingly difficult-to-raise donor funding.

For Financial Institutions and banks

Microfinance has been attractive to the lending agencies
because of demonstrated sustainability and of low costs of
operation. Institutions like SIDBI and NABARD are hardnosed
bankers and would not work with the idea if they did not see a
long term engagement which only comes out of sustainability
(that is economic attractiveness). On the supply side, it is also
true that it has all the trappings of a business enterprise, its
output

is

tangible

and

it

is

easily

understood

by

the

mainstream. This also seems to sound nice to the government,

which in the post liberalization era is trying to explain the logic
of every rupee spent. That is the reason why microfinance has
attracted mainstream institutions like no other developmental
project. Perhaps the most important factor that got banks
involved is what one might call the policy push. Given that
most of our banks are in the public sector, public policy does
have some influence on what they will or will not do. In this
case,

policy

was

followed

by

diligent,

if

meandering,

promotional work by NABARD. The policy change about a

decade ago by RBI to allow banks to lend to SHGs was initially
followed by a seven-page memo by NABARD to all bank
chairmen, and later by sensitization and training programmes
80

for bank staff across the country. Several hundred such

programmes were conducted by NGOs alone, each involving 15
to 20 bank staff, all paid for by NABARD. The policy push was
sweetened by the NABARD refinance scheme that offers much
more favorable terms (100% refinance, wider spread) than for
other rural lending by banks. NABARD also did some system
setting work and banks lately have been given targets. The
canvassing, training, refinance and close follow up by NABARD
has resulted in widespread bank involvement. Moreover, for
banks the operating cost of microfinance is perhaps much less
than for pure MFIs. The banks already have a vast network of
branches. To the extent that an NGO has already promoted
SHGs and the SHG portfolio is performing better than the rest
of the rural (if not the entire) portfolio, microfinance via SHGs in
the worst case would represent marginal addition to cost and
would often reduce marginal cost through better capacity
utilization. In the process the bank also earns brownie points
with policy makers and meets its priority sector targets. It does
not take much analysis to figure out that the market for
financial services for the 50-60 million poor households of
India, coupled with about the same number who are technically
above the poverty line but are severely under-served by the
financial sector, is a very large one. Moreover, as in any
emerging market, though the perceived risks are higher, the
spreads are much greater. The traditional commercial markets
of corporate, business, trade, and now even housing and
81

consumer finance are being sought by all the banks, leading to

price competition and wafer thin spreads. Further, bank-groups
are motivated by a number of cross-selling opportunities in the
market, for deposits, insurance, remittances and eventually
mutual funds. Since the larger banks are offering all these
services now through their group companies, it becomes
imperative for them to expand their distribution channels as far
and deep as possible, in the hope of capturing the entire
financial services business of a household. Finally, both agriinput and processing companies such as EID Parry, fast-moving
consumer Goods (FMCG) companies such as Hindustan Levers
and consumer durable companies such as Philips have realized
the potential of this big market and are actively using SHGs as
entry points. Some amount of free-riding is taking place here
by companies, for they are using channels which were built at a
significant

cost

to

NGOs,

funding

agencies

and/or

the

government. On the whole, the economic attractiveness of

microfinance as a business is getting established and this is a
sure

step

towards

mainstreaming.

We

know

that

mainstreaming is a mixed blessing, and one tends to exchange

scale at the cost of objectives. So it needs to be watched
carefully.

Issues in Microfinance
1.Sustainability
The first challenge relates to sustainability. MFI model is
comparatively costlier in terms of delivery of financial
82

services. An analysis of 36 leading MFIs by Jindal & Sharma

shows that 89% MFIs sample were subsidy dependent and
only 9 were able to cover more than 80% of their costs. This
is partly explained by the fact that while the cost of
supervision of credit is high, the loan volumes and loan size
is low. It has also been commented that MFIs pass on the
higher cost of credit to their clients who are interest
insensitive for small loans but may not be so as loan sizes
increase. It is, therefore, necessary for MFIs to develop
strategies for increasing the range and volume of their
financial services.

2.Lack of Capital
The second area of concern for MFIs, which are on the
growth path, is that they face a paucity of owned funds. This
is a critical constraint in their being able to scale up. Many
of the MFIs are socially oriented institutions and do not have
adequate access to financial capital. As a result they have
high debt equity ratios. Presently, there is no reliable
mechanism

in

the

country

for

meeting

the

equity

requirements of MFIs. The IPO issue by Mexico based

Comparators was not accepted by purists as they thought
it defied the mission of an MFI. The IPO also brought forth
the issue of valuation of an MFI. The book value multiple is
currently

the

dominant

valuation

methodology

in

microfinance investments. In the case of startup MFIs, using

a book value multiple does not do justice to the underlying
value of the business. Typically, start ups are loss making
83

and hence the book value continually reduces over time

until they hit breakeven point. A book value multiplier to
value

start

ups

would

decrease

the

value

as

the

organization uses up capital to build its business, thus

accentuating the negative rather than the positive.

3.Financial service delivery

Another challenge faced by MFIs is the inability to access
supply chain. This challenge can be overcome by exploring
synergies between microfinance institutions with expertise
in

credit

delivery

and

community

mobilization

and

businesses operating with production supply chains such as

agriculture. The latter players who bring with them an
understanding of similar client segments, ability to create
microenterprise opportunities and willingness to nurture
them, would be keen on directing microfinance to such
opportunities. This enables MFIs to increase their client base
at no additional costs. Those businesses that procure from
rural India such as agriculture and dairy often identify
finance as a constraint to value creation. Such businesses
may find complementarities between an MFIs skills in
management of credit processes and their own strengths in
supply chain management. ITC Limited, with its strong
supply chain logistics, rural presence and an innovative
transaction platform, the e-choupal, has started exploring
synergies with financial service Providers including MFIs
through

pilots

with

vegetable

vendors

and

farmers.

Similarly, large FIs such as Spandana foresee a larger role

84

for themselves in the rural economy ably supported by

value creating partnerships with players such as Mahindra
and Western Union Money Transfer. ITC has initiated a pilot
project called pushcarts scheme along with BASIX (a
microfinance organization in Hyderabad). Under this pilot, it
works with twenty women head load vendors selling
vegetables of around 10- 15 kgs per day. BASIX extends
working capital loans of Rs.10, 000/- , capacity building and
business development support to the women. ITC provides
support through supply chain innovations by:
1. Making the Chou pal Fresh stores available to the vendors,
this avoids the hassle of bargaining and unreliability at the
traditional mandis (local vegetable markets). The women
are able to replenish the stock from the stores as many
times in the day as required. This has positive implications
for quality of the produce sold to the end consumer.
2.
Continuously experimenting to increase efficiency,
augmenting incomes and reducing energy usage across the
value chain. For instance, it has forged a partnership with
National Institute of Design (NID), a pioneer in the field of
design education and research, to design user-friendly
pushcarts that can reduce the physical burden.
3. Taking lessons from the pharmaceutical and telecom sector
to identify technologies that can save energy and ensure
temperature control in push carts in order to maintain
quality of the vegetables throughout the day. The model
augments the incomes of the vendors from around Rs.30-40
85

per day to an average of Rs.150 per day. From an

environmental point of view, push carts are much more
energy efficient as opposed to fixed format retail outlets.

Recommendations and suggestions

Under mention are the few recommendations and suggestions,
which I felt during my project on Micro Finance is:1. The concept of Micro Finance is still new in India. Not many
people are aware the Micro Finance Industry. So apart from
Government programmers, we the people should stand and
create the awareness about the Micro Finance.
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 Pvt. Sector in this Industry.
4. One strict recommendation is that there should not over
involvement of the Government in MFIs, because it will
stymie the growth and prevent the others MFIs to enter.
5. According to me the Micro Loan should be given to the
women only, because by this only, 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.
86

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.

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 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
87

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,
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.

88

CHAPTER NO. 6
BIBLIOGRAPHY

89

WEBSITES
www.scribd.com
www.microfinanceindia.org
www.ifmr.ac.in
www.google.com
www.forbes.com
www.nationmaster.com
www.thaindian.com
www.authorstream.com
www.knowledge.allianz.com
www.familiesinbusiness.net
www.indiamicrofinance.com
www.gdrc.org
www.slideshare.net

90