A

PROJECT REPORT
ON

MICRO FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA

SUBMITTED BY
AMIET RAJENDRA DEORE

SUBMITTED TO
SAVITRIBAI PHULE PUNE UNIVERSITY

UNDER THE GUIDANCE OF

PROF. VAISHALI NIKAM

IN THE PARTIAL FULFILLMENT OF

MASTER OF BUSINESS ADMINISTRATION

JSPM'S
JAYWANTRAO SAWANT INSTITUTE OF MANAGEMENT & RESEARCH, HADAPSAR,
PUNE
MBA DEPARTMENT
2016-2018

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 CERTIFICATE

This is to certify that AMIET RAJENDRA DEORE has carried out dissertation work
entitled “ MICRO FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
at JSPM’s JSIMR in the MBA- IV Semester of academic year 2017-18 and has been
successfully submitted to Savirtbai Phule Pune University.

Director Name & Signature of Project Guide

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 DECLARATION
I, AMIET RAJENDRA DEORE, hereby declare that the project work entitled “MICRO
FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”, carried out in JAYAWANTRAO
SAWANT INSTITUTE OF MANAGEMENT & RESEARCH, which has been submitted to
Savirtbai Phule Pune University, is an original work of the undersigned and has not been
reproduced from any other source. Whenever reference has been made to the previous work of
others, it has been clearly indicated as such and included in the bibliography.

Certified by:
_______________________ ______________________
Project Guide : Signature of Candidate
VAISHALI NIKAM AMIET RAJENDRA DEORE

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 ACKNOWLEDGEMENT

“It is not possible to prepare a project report without the assistance &
encouragement of other people. This one is certainly no exception.”

On the very outset of this report, I would like to extend my sincere & heartfelt
obligation towards all the personages who have helped me in this endeavor.
Without their active guidance, help, cooperation & encouragement, I would not
have made headway in the project.

I am ineffably indebted to PROF. VAISHALI NIKAM for conscientious guidance and

encouragement to accomplish this assignment.

I extend my gratitude to JAYAWANTRAO SAWANT INSTITUTE OF MANGEMENT &

RESEARCH for giving me this opportunity.

Any omission in this brief acknowledgement does not mean lack of gratitude.

Thanking You

AMIET RAJENDRA DEORE

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Index:
Sr. No. Title Page No.
1. Declaration 3
2. Acknowledgement 4
3. Executive Summary 7
4. Introduction 10
5. The History Of Modern Microfinance 11
6. Overview Chapter 12.
7. Role of Microfinance 13.
8. The Micro credits Model 15
9. Microfinance Social Aspects 16
10. Women’s indicators of empowerment through microfinance 17
11. Microfinance regulation in India 18
12. Recommendation by RBI to micro credit institutions 19
13. Microfinance models 20
14. Coordinating microfinance efforts in India 22
15. Microfinance Strategy 23
16. Microfinance management 29
17. Microfinance operation management 31
18. Critical analysis 34
19. Major risks to microfinance institutions 37
20. Microfinance accounting and Management Information 43
System
21. Regulation and supervision of Microfinance Institutions 52
22. Development Fund 53
23. NABARD’s support to microfinance institutions 56
24. Business model of KDS microfinance institution 57
25. Microfinance operation structure 60
26. Success factors of Microfinance in India 67
27. Future of microfinance 68

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 28. Top 50 microfinance institutions in India 69
29. Microfinance India Summit 2015 71
30. Recommendations and Suggestions 72
31. Conclusions 73
32. References 74

Index of tables:
Table No. Title of the table Page No.
1. Legal forms of MFIs in India 19
2. Major Risks to MFI 37
3. KDS operational data 61
4. KDs loan system 63
5. KDS loan portfolio 64
6. KDS area operation 64
7. KDS 5 year’s activities 65
8. KDS financial activities 66
9. KDS business activities 67

Index of graphs and images:

Graph No. Title of the graph Page No.
1. BCG growth share matrix 25
2. Top 14 MFIs in India by growth of number of active 35
borrowers
3. Accounting system and client portfolio system 44
4. MFI in India – Growth of gross loan portfolio 45
5. MFI operation structure 60
6. KDS loan product 63

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 EXECUTIVE SUMMARY

Learning from the project

* The History of Modern Microfinance. I learnt in detail the process of Micro Finance, 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.

Learning from the Company

* Microfinance Regulation in India.

* Micro Finance Model.
* Microfinance Management, Critical Analysis.
* Practical learning of Equity, Future & Options market by terminal trading.
* Various strategies of Market.
* Apart from Micro Finance, Nine mine projects, which helped to relate to the
present Market conditions.
* Business Model.

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Abbreviations:
Sr. No. Abbreviation Full form
1. RBI Reserve Bank of India
2. MFI Microfinance Institution
3. NABARD National Bank for Agriculture And Rural
Development
4. SHG Self Help Group
5. NGO Non Government Organization
6 NBFC Non Banking Financial Company
7. KDS Kotalipara Development Society
8. OM Operation Manager
9. CED Chief Executive Director
10. H/O Head Office
11. HRD Human Resource Department
12. MF Microfinance
13. MIS Management Information System
14. KDS MSPL KDS Micro Services Private Limited

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A PROJECT REPORT ON:-

“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”

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Introduction

A. 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.
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 on-lending, and some banks have partnered
with public organizations or made small inroads themselves in providing such services. This has
resulted in a rather broad definition of microfinance as any activity that targets poor and low-
income individuals for the provision of financial services. The range of activities undertaken in
microfinance include group lending, individual lending, the provision of savings and insurance,
capacity building, and agricultural business development services. Whatever the form of activity
however, the overarching goal that unifies all actors in the provision of microfinance is the
creation of social value.
‘Microfinance refers to small scale financial services for both credits and deposits- that are
provided to people who farm or fish or herd; operate small or micro enterprise where goods are
produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain
income from renting out small amounts of land, vehicles, draft animals, or machinery and tools;
and to other individuals and local groups in developing countries in both rural and urban areas’.
- Marguerite S. Robinson.

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The History of Modern Microfinance

A. ABSTRACT:
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.

B. 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.

C. 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.

D. GRAMEEN Bank:

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 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.

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 .

1. Overview

A. Microfinance Definition:

According to International Labor Organization (ILO), “Microfinance is an economic development

approach that involves providing financial services through institutions to low income clients”.
In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as
“provision of thrift, credit and other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards”.
The poor stay poor, not because they are lazy but because they have no access to capital.
"Microfinance is the supply of loans, savings, and other basic financial services to the poor."
As these financial services usually involve small amounts of money - small loans, small
savings, etc. - the term "microfinance" helps to differentiate these services from those which
formal banks provide
It's easy to imagine poor people don't need financial services, but when you think about it they
are using these services already, although they might look a little different.
Poor people save all the time, although mostly in informal ways. They invest in assets such as
gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for
cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the
garden or stash it under the mattress. They participate in informal savings groups where

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 everyone contributes a small amount of cash each day, week, or month, and is successively
awarded the pot on a rotating basis. Some of these groups allow members to borrow from the
pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to
keep it safe.
“Poor rarely access services through the formal financial sector. They address their need for
financial services through a variety of financial relationships, mostly informal."
B. 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 women’s 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.

C. 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.

D. Borrowers:
Most micro credit borrowers have micro enterprises—unsalaried, 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.
E. Activities in Microfinance:

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Micro credit: It is a small amount of money loaned to a client by a bank or other institution.
Micro credit it 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: 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, MFI‘s sometimes prefer the basket cover, since it
can make the policies sound comprehensive, but is that the right approach for the low-income
market? After picking products, one must also understand how they are priced. What
assumptions do the organizations make with regard to operating costs, risk premiums, and
reinsurance, and how did they come to those conclusions? Would their clients be willing to pay
more for greater benefits? From price, the logical next set of questions involves efficiency.

Techniques of Product Design: To design a loan product to meet borrower needs it is

important to understand the cash pattern of the borrowers. Cash pattern is important so far as
they affect the debt capacity of the borrowers. Lenders must ensure that borrowers have
sufficient cash inflow to cover loan payments when they are due efficiency depends less on the
delivery model than on the simplicity of the product or product menu. Simple products work best
because they are easier to administer and easier for clients to understand. Another efficiency
strategy is to use technology to reduce paperwork, manual processing and errors.

MFIs need to conduct a costing analysis to determine how much they need to earn in
commission to cover their administrative expenses.
F. MFI’s Products and its Management:

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 Product & services of Microfinance
Financial Services
1. Credit Services-i Small
Credit, Small Business
Credit.
2. Deposit Services -
Voluntari Savings
Services, Manda tory
Savings.
Other Financial Non Financial Services
Services
Micro-insurance, Life Family Health and
Insurance , Health Sanitation Education,
Insurance , Loan for Financial Education,
Housing, Education, Micro-entrepreneur
Health. Training.

G. 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.

2. Government’s role supporting microfinance

Government’s 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 costs—such 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.

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 *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.

RBI data shows that informal sources provide a significant part of the total credit needs of the
rural population. The magnitude of the dependence of the rural poor on informal sources of
credit can be observed from the findings of the All India Debt and Investment Survey, 1992,
which shows that the share of the Non-institutional agencies (informal sector) in the outstanding
cash dues of the rural households were 36 percent. However, the dependence of rural
households on such informal sources had reduced of their total outstanding dues steadily from
83.7 percent in 1961 to 36 percent in 1991.
3. Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and women’s

empowerment as well as poor development and civil society strengthening. Contribution to
women’s ability to earn an income led to their economic empowerment, increased well being of
women and their families and wider social and political empowerment.
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.
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.

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 These savings methods tend to be risky—cash can be stolen, animals can get sick, and
neighbors can run off. Often they are illiquid as well – one cannot sell just the cow’s leg when
one needs a small amount of cash.
Women’s 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
*De cis ion ma king within the hous e hold
* Group mobilization in support of individual clients- action on.

4. The Need in India

India is said to be the home of one third of the world’s 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 micro credit has been estimated at up to $30 billion; the supply is less than
$2.2 billion combined by all involved in the sector. Due to the sheer size of the population living
in poverty, India is strategically significant in the global efforts to alleviate poverty and to achieve
the Millennium Development Goal of halving the world’s poverty by 2015.
Microfinance can also be distinguished from charity. It is better to provide grants to families who
are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay
a loan. This situation can occur for example, in a war zone or after a natural disaster.
While India is one of the fastest growing economies in the world, poverty runs deep
throughout country. About two thirds of India’s more than 1billion people live in rural
areas and almost 170 million of them are poor.
For more than 21 percent of them, poverty is a chronic condition. Three out of four of
India’s poor live in rural areas of the country. Poverty is deepest among scheduled castes
and tribes in the country’s rural areas.
The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks
linkage program for over a decade now. As the formal banking system already has a vast
branch network in rural areas, it was perhaps wise to find ways and means to improve the
access of rural poor to the existing banking network. This was tried by routing financial.

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5 . Micro-Financing Regulation in India

Advantage of Regulation:

Following are the advantages and benefits of regulation and supervision of /MFIs:

i. Protects the interest of the depositors;

ii. Put in place prudential norms, standards and practices;
iii. Provides sufficient information about the true risks faced by the banks/MFIs;
iv. Promoters systemic stability and thereby sustains public confidence in the banks/MFIs;
v. Prevents a bank’s/MFI’s failure/potential dangers through timely interventions;
vi. Penalizes the violations, misconducts, non-compliance to the norms of behavior;
vii. Provides invaluable advisory inputs for problem-solving and overall improvement of
the banks/MFIs;

A. Unified Regulation System: 8.18 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.

B. 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 micro finance 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 1. 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. 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.

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 *Cooperative societies by cooperative societies act enacted by state government.
Legal Forms of MFIs in India:
Types of MFIs Estimated Legal Acts under which
Number* Registered
1. Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or
similar Provincial Acts
a.) NGO - MFIs Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act,
1956
2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative
a.) Mutually Aided Societies Act enacted by State
Cooperative Societies Government
(MACS) and similarly set
up institutions
3. For Profit MFIs 6 Indian Companies Act, 1956

a.) Non-Banking Financial Reserve Bank of India Act, 1934

Companies (NBFCs)
Total 700 - 800
* The estimated number includes only those MFIs, which are actually undertaking lending
activity.

C. Recommendation by RBI Micro Credit Institutions:

• Company Law Board to allow SHGs to be members of Section 25 of the companies act.
• There will be no ceiling in respect of loan amount extended by Section 25 companies to
SHGs; however SHGs, to provide credit not exceeding Rs. 50000/- per member of the
SHG. RBI may consider issuing revised instructions.
• As regards capital, to encourage more flow of donations/ contributions, donors to be
exempted from income tax under Section 11C of the IT Act.
• As regards capital adequacy, since there is no mandatory capital requirement, minimum
standards need not be considered.
• Savings of SHGs promoted by Section 25 companies be maintained with permitted
organizations.
• Complete income tax exemption for Section 25 companies purveying micro credit (to the
donor and to the receiver).

Government to consider complete exemption from IT for income earned, as the main
purpose of the organization is to empower the poor.

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 Indian microfinance is poised for continued growth and high valuation but faces pressing
challenges and opportunities that—left unaddressed—could negatively impact the long-term
future of the industry.

6. Micro Finance Models

A. Microfinance Providers:

a. Microfinance Institutions: A microfinance institution (MFI) is an organization that provides

microfinance services.
MFIs range 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 semi-urban 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 various aspects relating to emergence of private micro finance industry in the context
of prevailing legal and regulatory environment for private sector rural and micro finance
operators.
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex institutions
including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD
and employ a variety of ways for credit delivery.

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 b. 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 people’s 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
Women’s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of
People’s 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.
C. 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.

7. 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

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 sharing, Organizing National and State level Meets of Bankers and NGOs etc .Dissemination of
best practices in SHG / microfinance.

A. 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

Scheme for Capital/ Equity Support to Micro-Finance 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
sustainability in their credit operations over a period of 3-5 years.

B. 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 a maximum of Rs.3,00,000/-/-. The remaining cost would be borne
by the concerned MFI.

The cost of local hospitality (including boarding and lodging) towards field visit of the team from
the credit rating Agency, as a part of the rating exercise, would also be borne by the MFI. Those
MFIs which have a minimum loan outstanding of more than Rs. 50.00 lakh (Rupees fifty lakh
only) and maximum of Rs 10 crore (Rupees Ten crore only) would be considered for rating and

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 support under the scheme. Financial assistance by way of grant would be available only for the
first rating of the MFI.

C. 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.

Source: NABARD website

8. 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 opinions about future strategies. The report draws from their
responses, and states that:

• Future strategy is about being strong on processes and being overtly client-centric;
• Success is a prudential combination of three factors, namely, culture, beliefs and aspirations;
• Culture is about the degree of trust rather than the rate of interest;
• Risk management systems of economically weaker families are built on their beliefs about
dependability and access;
• Micro credit stories have revealed ingenious ways that clients have used their loans for
purposes that satisfied their aspirations.

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.

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 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.
A. Product-market matrix:

A market penetration strategy is a business-as-usual strategy, where the MFI focuses on

achieving growth by selling existing products in existing markets. This can be done through
more competitive pricing strategies, increased promotional activities, and more liberal terms and
conditions.
For example, the MFI may develop strategic alliances to begin

*Adapted from Ansoff 1957.

B. The BCG Growth-Share Matrix:

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce

Henderson of the Boston Consulting Group in the early 1970's. It is based on the
observation that a company's business units can be classified into four categories based on
combinations of market growth and market share relative to the largest competitor, hence
the name "growth-share". Market growth serves as a proxy for industry attractiveness, and
relative market share serves as a proxy for competitive advantage. The growth-share
matrix thus maps the business unit positions within these two important determinants of
profitability.
BCG Growth-Share Matrix

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This framework assumes that an increase in relative market share will result in an increase
in the generation of cash. This assumption often is true because of the experience curve;
increased relative market share implies that the firm is moving forward on the experience
curve relative to its competitors, thus developing a cost advantage. A second assumption is
that a growing market requires investment in assets to increase capacity and therefore
results in the consumption of cash. Thus the position of a business on the growth-share
matrix provides an indication of its cash generation and its cash consumption.
Henderson reasoned that the cash required by rapidly growing business units could be
obtained from the firm's other business units that were at a more mature stage and
generating significant cash. By investing to become the market share leader in a rapidly
growing market, the business unit could move along the experience curve and develop a
cost advantage.
From this reasoning, the BCG Growth-Share Matrix was born.

The four categories are:

Dogs - Dogs have low market share and a low growth rate and thus neither generate nor
consume a large amount of cash. However, dogs are cash traps because of the money tied
up in a business that has little potential. Such businesses are candidates for divestiture.

Question marks - Question marks are growing rapidly and thus consume large amounts of
cash, but because they have low market shares they do not generate much cash. The
result is large net cash consumption. A question mark (also known as a "problem child")
has the potential to gain market share and become a star, and eventually a cash cow when
the market growth slows. If the question mark does not succeed in becoming the market

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leader, then after perhaps years of cash consumption it will degenerate into a dog when the
market growth declines. Question marks must be analyzed carefully in order to determine
whether they are worth the investment required to grow market share.

Stars - Stars generate large amounts of cash because of their strong relative market share,
but also consume large amounts of cash because of their high growth rate; therefore the
cash in each direction approximately nets out.
If a star can maintain its large market share, it will become a cash cow when the market
growth rate declines. The portfolio of a diversified company always should have stars that
will become the next cash cows and ensure future cash generation.

Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is
greater than the market growth rate, and thus generate more cash than they consume.
Such business units should be "milked", extracting the profits and investing as little cash as
possible. Cash cows provide the cash required to turn question marks into market leaders,
to cover the administrative costs of the company, to fund research and development, to
service the corporate debt, and to pay dividends to shareholders. Because the cash cow
generates a relatively stable cash flow, its value can be determined with reasonable
accuracy by calculating the present value of its cash stream using a discounted cash flow
analysis.
Under the growth-share matrix model, as an industry matures and its growth rate declines,
a business unit will become either a cash cow or a dog, determined solely by whether it had
become the market leader during the period of high growth.
While originally developed as a model for resource allocation among the microfinance
business units in a corporation, the growth-share matrix also can be used for resource
allocation among products within a single business unit. Its simplicity is its strength - the
relative positions of the firm's entire business portfolio can be displayed in a single
diagram.

Limitations

The growth-share matrix once was used widely, but has since faded from popularity as
more comprehensive models have been developed. Some of its weaknesses are:

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Market growth rate is only one factor in industry attractiveness, and relative market share is
only one factor in competitive advantage. The growth-share matrix overlooks many other
factors in these two important determinants of profitability. The framework assumes that
each business unit is independent of the others. In some cases, Microfinance business unit
that is a "dog" may be helping other business units gain a competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market. A business
unit may dominate its small niche, but have very low market share in the overall industry. In
such a case, the definition of the market can make the difference between a dog and a
cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool or
viewing a corporation's business portfolio at a glance, and may serve as a starting point for
discussing resource allocation among strategic business units.

C. Overall Strategy:

*Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of the
poor has today emerged as a potent tool for human development.

This process enables the poor, especially the women from the poor households, to collectively
identify and analyses the problems they face in the perspective of their social and economic
environment. It helps them to pool their meager resources, human and financial, and priorities
their use for solving their own problems.

D. SHG-Bank Linkage Programmer:

A Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage
Programmer has proved to be the major supplementary credit delivery system with wide
acceptance by banks, NGOs and various government departments.

E. Capacity Building:

Capacity building must be tailored to meet the differing needs of the nascent/emerging MFIs
and of the expanding/mature MFIs. There is a pressing need to develop comprehensive,
relevant and integrated training modules on a wide range of topics to professionalize Indian
microfinance – thus building the much sought-after second tier management in MFIs. The

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 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).

9. Microfinance Management:

A. Objectives: The programmer aims at enabling the participants to gain a clear understanding of
various policies, conceptual, and operational issues involved in developing effective and
successful microfinance interventions.
B. Innovative Methodologies: Tiny amount of loan to large number of borrowers at their doorstep
is a costly operation compared to revenue income. Cost reduction is also an essential element
in microfinance operation. Reducing cost can be possible either offering larger loan size or by
innovating no conventional Management which is less costly.
The essences of innovative management are as follows:
1. Specialized operation.
2. Documentation of essential information only.
3. Simple product, simple loan application and verification process.
4. Absence of grant guarantee.
5. Staff recruitment in no conventional manner.
6. On the job training (each one teaches one).
7. 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.
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

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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.
Enabling Environment:
Favorable environment for microfinance in different manners are prevailing in most developing
countries. Favorable environment is not only among Government but also among general
public, civil society, media and various institutions within the country needed for favorable
growth of microfinance for poverty reduction. Though Government is favorable in general to
microfinance in many countries but specific modalities of NGOs/ MFIs determine the nature of
favorable.
D. Current Challenging Issues:
1. Capacity Building: 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.
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
organization’s 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 women’s roles, for example, while women are
single there might be a greater willingness on the part of women’s families to let them work as
front line staff, but as soon as they marry and certainly once they start having children, it
becomes unacceptable. Long distances and long hours away from the family are difficult for
women to accommodate and for their families to understand.
F. Microfinance Training & Capacity Building Methods:

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 1. Microfinance Training Methodology and How to Build Efficient Workforce?
2. Staff Motivation & Built in Cost effective Training Component.
3. Human Resource Planning and Development.
4. Good Governance.
G. SWOT MATRIX for Microfinance Management:

STRENGTHS

1. Experienced senior management Team.

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

WEAKNESSES

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

OPPORTUNITIES

1. Huge Potential Market.

2. Scope of introducing livelihood related services.
3. Financial crunch is helping organisation to be cost conscious and effective.
4. IT systems.

THREATS

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

H. Microfinance Operation management:

1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being
able to achieve operational, financial and institutional sustainability. The constraints and
challenges vary with the different types and development stage of MFIs. Most MFIs are
currently operating below operational viability and use grant funds from donors for financing up-
front costs of establishing new groups and covering initial losses incurred until the lending
volume builds up to a break-even level. The MFIs are generally constrained in reaching a break-
even level and finally achieving sustainability, primarily due to a narrow client and product base,
high operational and administrative costs for delivering credit to the poor, and their inability to
mobilize requisite resources.

2. Liquidity Management: In view of the fact that liquidity is a major concern of many of the
middle level MFIs and a small working capital support can go a long way in their better liquidity
management and thus pave way for faster growth, SFMC has introduced a special short term
loan scheme, Liquidity Management Support (LMS) for the long term partners.

3. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging

requirement of the micro finance sector in India. SIDBI provides equity capital to eligible
institutions not only to enable them to meet the capital adequacy requirements but also to help
them leverage debt funds. 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 micro finance
operations in a focused manner.

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 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.
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.
6. Loan Syndication: Keeping in view the increased fund requirement of major partner MFIs,
the Bank has also undertaken fee based syndication arrangement where loan requirement is
comparatively higher.
7. Microfinance Operations:
a. Marketing Strategy and Microfinance Clients Targeting Methodology.
b. Microfinance Products, Services and Lending Procedures.
c. Microfinance Lending Methodology: Individual and Group Lending.
d. Micro finance Indian Lending Methodology.
e. Institutional Business Planning for Microfinance Program6. Financial Planning & Analysais.
f. Savings and Credit Management.
g. Program Operational Policies and Procedures.
h. Accounting and Record Keeping.
i. Auditing for Microfinance Operation.
j. Management Information System.
k. Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools.
l. Detection of Fraud and Internal Control.
m. Monitoring and Supervision System.
n. Delinquencies and its Management.

I. Clients of micro finance:

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 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.

a. 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.
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.
5. Mechanisms 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).

J. Social performance measurement:

The Social Performance Task Force defines social performance as: "The effective translation of
an institution's social mission into practice in line with accepted social values that relate to
serving larger numbers of poor and excluded people; improving the quality and appropriateness
of financial services; creating benefits for clients; and improving social responsibility of an
MFI.”Most MFIs have a social mission that they see as more basic than their financial objective,
or at least co-equal with it. There is a great deal of truth in the adage that institutions manage
what they measure.

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 Social performance measurement helps MFIs and their stakeholders focus on their social goals
and judge how well they are meeting them. Social indicators are often less straightforward to
measure, and less commonly used than financial indicators that have been developed over
centuries. Today’s increasing use of social measures reflects an awareness that good financial
performance by an MFI does not automatically guarantee client interests are being appropriately
advanced.
12. 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 Micro Finance
Development Fund (MFDF), set up with NABARD, has been augmented and re-designated as
the Micro Finance 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.
Source: Issues in Sustainability of MFIs, Jindal & Sharma.
Top 14 Microfinance Institutions in India by Growth of Number of active Borrowers.

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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.
C. 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.

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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 a combination of ROA and
ROE.
Return on Assets (ROA): A Return on Assets is an indication of how well an MFI is managing
its asset base to maximize its profits. The ratio does not evaluate the source of the asset base –
whether through debt or equity, but simply the return of the portfolio and other revenue
generated from investments and operations. A return on assets should be positive. There is a
positive relationship between Return on Assets and the Portfolio to Assets ratio discussed in the
next section. MFIs that maintain most of their assets in the loan portfolio tend to break even
sooner, and generate higher returns on their assets; provided the loan portfolio performs well
and other costs are also controlled.

Return on Assets = Net Operating Income – Taxes____

Average Assets

Trend: An increasing Return on Assets is positive.

Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its
profitability. The ratio includes not only the return on the portfolio, but also all other revenue
generated from investments and other operating activities.

From the above list we can notice that, there are seven companies of India in top 50 companies
in the world. There is a huge potential for India to grow in this sector, because out of total 500
million poor people from all over the world, who is getting beneficial from the micro finance
institutions, 80 to 90 million are from India only. So there is still a huge market and
opportunities in this segment.

The total loan that the MFI‘s had provided to the poor people in India crosses Rs 24 billion till
October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see the
new face of India.

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 Return on Equity: A Return on Equity is probably one of the most important profitability
indicators for commercial banks and MFIs, particularly in comparison with other institutions. The
return is measured only in relation to what the MFI has built from operating surpluses, or what it
has generated through donations or other contributed sources. The shareholders of a for-profit
MFI or bank, is very interested in this ratio, as it is a measure of their investment choice, and its
ability to pay dividends. Increasing equity also strengthens the MFI’s capital structure and its
ability to leverage debt financing. As markets mature and competition increases, Return on
Equity may level off and maintain a positive position without increasing dramatically or at all.

Return on Equity = Net Operating Income – Taxes____

Average Equity

Trend: An increasing Return on Equity is positive.

H. Risk Management: Risk management is a discipline for dealing with the possibility that
some future event will cause harm. It provides strategies, techniques, and an approach to
recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk
management may be as uncomplicated as asking and answering three basic questions:

Major Risks to Microfinance Institutions:

Financial Risks Operational Risks Strategic Risk

Credit Risk Transaction Risk Governance Risk

Transaction risk
Portfolio risk Human resources Risk Ineffective oversight
Liquidity Risk Information & technology Poor governance
Market Risk Risk structure

Interest rate risk Fraud (Integrity) Risk Reputation Risk

Foreign exchange risk Legal & Compliance External Business
Investment portfolio risk Risk Risks
Event risk

Sources: - www. Scribd.com

This are the most significant risks (with the most potentially damaging consequences for the
MFI), how they interact, and current challenges faced by MFIs.

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a) 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 MFI‘s.
1. 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 MFI‘s 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.

2. 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.

3. 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.
4. Liquidity risk: Liquidity risk is the ―risk that an MFI cannot meet its obligations on a
timely basis Liquidity risk usually arises from management‘s inability to adequately
anticipate and plan for changes in funding sources and cash needs.
Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to
meet client withdrawals, disburse loans and fund unexpected cash shortages) while also
investing as many funds as possible to maximize earnings. Liquidity management is an
ongoing effort to strike a balance between having too much cash and too little cash.
5. Interest rate risk: Interest rate risk is the risk of financial loss from changes in market
interest rates. The greatest interest rate risk occurs when the cost of funds goes up
faster than the financial institution can or is willing to adjust its lending rates.
Manage interest rate risk: To reduce the mismatch between short-term variable rate liabilities
and long-term fixed rate loans, managers may refinance some of the short-term borrowings with
long-term fixed rate borrowings. This might include offering one and two-year term deposits as a
product and borrowing five to 10 year funds from other sources. Such a step reduces interest
rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those funding sources.
To boost profitability, MFIs may purposely ―mismatch assets and liabilities in anticipation of
changes in interest rates.

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b) 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.
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.

Minimize fraud risk: To introduced an education campaign to encourage clients to

speak out against corrupt staff and group leaders. This standardized all loan policies and
procedures so that the staff cannot make any decision outside the regulations. To
Established an inspection unit that performs random operational checks.

c) 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: Governance Risk, Business Environment
Risk.

a) 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.
b) External business environment risk: Business environment risk refers to the inherent risks of
the MFI‘s 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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c) MFI manage their repayment and risk management: Risk is an integral part of financial
services. When financial institutions issue loans, there is a risk of borrower default. When banks
collect deposits and on-lend them to other clients (i.e. conduct financial intermediation), they put
clients’ savings at risk. Most MFIS‘s provides the loans without or with smaller portion of deposit
or, so for them repayment of interest or principal is very risky. All MFI‘s face risks that they must
manage efficiently and effectively to be successful.

d) 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 forward-thinking organizational culture will help managers identify and
assess new market opportunities, foster continuous improvement of existing operations, and
more effectively performance incentives with the organization‘s strategic goals. Encourages
cost-effective decision-making and more efficient use of resources.

e) Interest Rates: Most MFI’s 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.

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 The interest rates are deregulated not only for private MFIs but also for formal baking sector. In
the context of softening of interest rates in the formal banking sector, the comparatively higher
interest rate (12 to 24 per cent per annum) charged by the MFIs has become a contentious
issue.

MFI being criticized because of high interest rate:Most MFI‘s financially sustainable by
charging interest rates that are high enough to cover all their costs. The problem is that the
administrative costs are inevitably higher for tiny micro lending than for normal bank lending. As
a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher
than the rates charged on normal bank loans.
Four key factors determine these rates:

1. The cost of funds,

2. the MFI's operating expenses,
3. Loan losses,
4. And profits needed to expand their capital base and fund expected future growth.
Formula to decide the interest rate is:
R = AE + LL + CF + K - II
1– LL
Where AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired
Capitalization rate and II is investment income.

Example:

Suppose that the transaction cost is Rs 15 per loan and that the loans are for one year. To
break even on the Rs 500 loan, the MFI would need to collect interest of Rs 50 + Rs 5 + Rs 15
= Rs 70, which represents an annual interest rate of 13 percent. To break even on the Rs 100
loan, the MFI would need to collect interest of Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an interest
rate of 26 percent.

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

Strength

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• Helped in reducing the poverty: The main aim of Micro Finance 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 Micro Finance is more than the life. By providing
small loans to this people Micro finance 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.

Weakness

• Not properly regulated: In India the Rules and Regulation of Micro Finance 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 Micro finance can
function properly and efficiently.
• High number of people access to informal sources: According to the World Bank report
80% of the Indian poor can‘t 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. India‘s 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 09) Employment Opportunity:
Micro Finance helps the poor people by not only providing them with loan but also helps them in
their business; educate them and their children etc.

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 So in this Micro Finance helping in increase the employment opportunity for them and for the
society.
• Huge Untapped Market: India‘s 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 Micro Finance should not leave any stones unturned to
grab the untapped market.

Threat
High Competition: This is a serious threat for the Micro Finance 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 Micro Finance is not a new concept in India, but that was all
by informal sources. But the formal source of finance through Micro Finance is novice, and the
rules are also not properly placed for it.
• Over involvement of Govt.: This is the biggest that 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.

13. Micro-Finance Accounting and Management Information Systems

The basic components of an accounting system are fairly universal and applicable to all org
Source documents form the basis of all transactions. A Chart of Accounts is a numbered system
that is structured to Classify and organize transactions by account. The journals cash journals,
general journals, or bank journals record each and every transactions or adjustment. They are
summarized monthly, cross-totaled and posted to the general ledger. The general ledger holds
a record for each account in the Chart of Accounts. It accumulates the totals posted from the
journals to provide monthly and annual revenue and expenses for reporting periods. It
accumulates all the accounts of the Balance Sheet.

These accounting records and processes form the basis of all accounting systems. Most MFIs
choose computerized. The following diagram illustrates a “generic” financial management
information system in a microfinance institution, whether its clients are individuals, Self Help
Groups, Solidarity Groups, or Joint Liability Groups, and regardless of its legal structure or

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 registration. The accounting system follows the usual flow from transaction to the parathion of
financial statements. One of the most distinctive aspects of the accounting system for
microfinance institutions is that financial and operational activity must be tracked by Branch.

Accounting System and Client Portfolio System (MIS) Microfinance

The MFI financial management systems illustrated dose not operates in a vacuum. There are
four distinct areas that guide & govern a well-managed & effective financial system.

A. Portfolio Report: Is it a number reflecting a period of time (e.g. the Income Statement, and
some numbers from the Portfolio Report)? Is the number reflective of information from a point in
time – as from the Balance Sheet? When Income Statement numbers or any number reflecting

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 a period of activity is used to calculate a ratio, the second component of the ratio must also
reflect a period of activity
B. *14. MFI in India Growth of Gross Loan Portfolio

B. Asset and Liability Management

Yield = Cash Received from Interest, Fees and Commissions on Loan Portfolio___
Average Gross Loan Portfolio

Trend: An increasing yield is positive although it will level off as it nears the effective interest
rate.

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 a. Basic Financial Management and Ratio Analysis for MFIs:

MFI stakeholders expect MFI senior managers to ensure that strong and adequate financial
systems are in place in the MFI. Therefore, it is essential that MFI managers have a solid
understanding and appreciation of the financial and accounting systems.

The Basic Financial Management and Ratio Analysis for MFIs offer a practical training in basic
financial management and ratio analysis for MFIs. It provides an overview of the key aspects of
accounting in microfinance institutions describes the primary financial statements and portfolio
reports of MFIs and describes the commonly accepted financial ratios used for monitoring,
reporting and measuring MFI performance. Performance ratios cover four general areas of MFI
operations: sustainability or profitability, asset and liability management, portfolio quality and
productivity and efficiency.

b. List of MFI’s and their key Ratios:

Liquidity Ratios

These ratios actually show the relationship of a firm‘s cash and other current assets to its
current liabilities. Two ratios are discussed under Liquidity ratios. They are:

1. Current ratio

2. Quick/ Acid Test ratio.

1. Current ratio: This ratio indicates the extent to which current liabilities are covered by
those assets expected to be converted to cash in the near future. Current assets normally
include
cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of
accounts payable, short-term notes payable, current maturities of long-term debt, accrued
taxes,
and other accrued expenses (principally wages).

Current Ratio=Current Assets/Current Liabilities.

Cost of Funds Ratio

Cost of Funds = Financial Expense on Funding Liabilities

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 (Average Deposits + Average Borrowings)

Trend: The Cost of Funds may indicate a level of maturity of the MFI. A decreasing Cost of
Funds ratio is generally positive. When Financial Expenses are adjusted to include free or
subsidized funding, the ratio will show the actual financial cost of funds needed to fund or
capitalize the MFI.

Debt to Equity

Debt/Equity = Liabilities____
Equity

Trend: An increasing debt/equity ratio indicates the MFI’s capacity to attract debt funding based
on its capital strength of its own equity. Too low a ratio might indicate that the MFI is not
maximizing its equity base. Too high a factor may be risky for investors, and may spell cash flow
challenges during difficult times

Liquid Ratio

Liquid Ratio = Cash + Trade Investments_____

(Demand Deposits + short-term Time Deposits + Short-term
Borrowings + Interest Payable on Funding Liabilities + Accounts Payable
And other Short-term Liabilities)

Trend: No single ratio or trend provides the “correct” or “adequate” means to monitor cash
levels. Managers must have clear policies in place to ensure that cash is available when needed
for all MFI operations and activities Banking requirements and risk tolerance will affect the
ratio...

Risk Coverage Ratio

Risk Coverage Ratio = ______Allowance for Loan Losses______

Portfolio at Risk over 30 days

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 Trend: A fairly constant, stable ratio is desired. Sudden changes usually indicate a deterioration
or improvement in portfolio quality or an excess or shortage in the Allowance for Loan Losses
account.

c. Capacity of MFIs:

It is now recognized that widening and deepening the outreach of the poor through MFIs has
both social and commercial dimensions. Since the sustainability of MFIs and their clients
complement each other, it follows that building up the capacities of the MFIs and their primary
stakeholders are pre-conditions for the successful delivery of flexible, client responsive and
innovative microfinance services to the poor. Here, innovations are important both of social
intermediation, strategic linkages and new approaches centered on the livelihood issues
surrounding the poor, and the re-engineering of the financial products offered by them as in the
case of the Bank Partnership model.
1. Bank Partnership Model:

This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as
an agent for handling items of work relating to credit monitoring, supervision and recovery. In
other words, the MFI acts as an agent and takes care of all relationships with the client, from
first contact to final repayment.
The model has the potential to significantly increase the amount of funding that MFIs can
leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its
books for a while before securitizing them and selling them to the bank.
Banking Correspondents:
The proposal of “banking correspondents” could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It
would use the ability of the MFI to get close to poor clients while relying on the financial strength
of the bank to safeguard the deposits. Currently, RBI regulations do not allow banks to employ
agents for liability - i.e. deposit - products. This regulation evolved at a time when there were
genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people
have confidence could mobilize savings of gullible public and then vanish with them.

3. Service Company Model:

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 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.

4. MFI Model:
Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank books them. But in fact, this model
has two very different and interesting operational features:
(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a stand–alone MFI. In case of banks which
have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may
contract with many banks in an arms length relationship. In the service company model, the MFI
works specifically for the bank and develops an intensive operational cooperation between them
to their mutual advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The Service Company Model has the potential to take the
burden of overseeing microfinance operations off the management of the bank and put it in the
hands of MFI managers who are focused on microfinance to introduce additional products, such
as individual loans for SHG graduates, remittances and so on without disrupting bank
operations and provide a more advantageous cost structure for microfinance.
5. For NGOs Model:

There are a large number of NGOs that have undertaken the task of financial intermediation.
Majority of these NGOs are registered as Trust or Society. Many NGOs have also helped SHGs
to organize themselves into federations and these federations are registered as Trusts or
Societies. Many of these federations are performing non-financial and financial functions like
social and capacity building activities, facilitate training of SHGs, undertake internal audit,
promote new groups, and some of these federations are engaged in financial intermediation.
The NGO MFI varies significantly in their size, philosophy and approach. Therefore these NGOs
are structurally not the right type of institutions for undertaking financial intermediation activities,
as the byelaws of these institutions are generally restrictive in allowing any commercial

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 operations. These organizations by their charter are non-profit organizations and as a result
face several problems in borrowing funds from higher financial institutions.
Along with developing saving and credit facilities, the NGOs engage in:
(1) Providing Basic Education.
(2) Developing a sense of Health and Hygiene.
(3) Encourage family planning.
(4) Creating Awareness about environment protection.
(5)Most important, nurturing an environment of gender equality. These activities are the
rudiments of sustained economic development.
Basically, the MFIs in India are of three categories:
(i) Not for profit MFI, which include the NGOs?
(ii) Mutual Benefit MFIs, which include mutually-aided co-operative credit.
(iii) For Profit MFIs, which include the Non-Banking Financial Companies (NBFC)?

6. Non-Profit Companies as MFIs:

Many NGOs felt that combining financial intermediation with their core competency activity of
social intermediation is not the right path. It was felt that a financial institution including a
company set up for this purpose better does banking function. Further, if MFIs are to
demonstrate that banking with the poor is indeed profitable and sustainable, it has to function as
a distinct institution so that cross subsidization can be avoided. On account of these factors,
NGO MFIs are of late setting up a separate Non-Profit Companies for their micro finance
operations. The MFI is prohibited from paying any dividend to its members. In terms of Reserve
Bank of India’s Notification dated 13 January 2000, relevant provisions of RBI Act, 1934 as
applicable to NBFCs will not apply for NBFCs .

(i) licensed under Section 25 of Companies Act, 1956,

(ii) providing credit not exceeding Rs. 50,000 ($1112) for a business enterprise and Rs. 1,
25,000 ($2778) for meeting the cost of a dwelling unit to any poor person, and,
(iii) not accepting public deposits

7. Mutual Benefit MFIs: The State Cooperative Acts did not provide for an enabling framework for
emergence of business enterprises owned, managed and controlled by the members for their
own development. Several State Governments therefore enacted the Mutually Aided Co-
operative Societies (MACS) Act for enabling promotion of self-reliant and vibrant co-operative

50 | P a g e
 Societies based on thrift and self-help. MACS enjoy the advantages of operational freedom and
virtually no interference from government because of the provision in the Act that societies
under the Act cannot accept share capital or loan from the State Government.

14. For Profit MFIs:Non Banking Financial Companies (NBFC) are companies registered under
Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were not regulated
by RBI but in 1997 it was made obligatory for NBFCs to apply to RBI for a certificate of registration
and for this certificate NBFCs were to have minimum Net Owned funds of Rs 25 lakhs and this
amount has been gradually increased. RBI introduced a new regulatory framework for those NBFCs
who want to accept public deposits.

15. Capital Requirements : NGO-MFIs, non-profit companies’ MFIs, and mutual benefit MFIs
are regulated by the specific act in which they are registered and not by the Reserve Bank of India.
These are therefore not subjected to minimum capital requirements, prudential norms etc. NGO
MFIs to become NBFCs are required to have a minimum entry capital requirement of Rs. 20 million
($ 0.5 million).

A. Foreign Investment:

Foreign investment by way of equity is permitted in NBFC MFIs subject to a minimum

investment of $500,000. In view of the minimum level of investment, only two NBFCs are
reported to have been able to raise the foreign investment. However, a large number of NGOs
in the development - empowerment are receiving foreign fund by way of grants.
At present, over Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a
whole range of activities including microfinance

B. Deposit Mobilization:

Not for profit MFIs are barred, by the Reserve Bank of India, from mobilizing any type of
savings. Mutual benefit MFIs can accept savings from their members. Only rated NBFC MFIs
rated by approved credit rating agencies are permitted to accept deposits. The quantum of
deposits that could be raised is linked to their net owned funds.

C. Borrowings:

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 Initially, bulk of the funds required by MFIs for on lending to their clients was met by apex
institutions like National Bank for Agriculture and Rural Development, Small Industries
Development Bank Of India, and, Rashtiya Mahila Kosh. In order to widen the range of lending
institutions to MFIs, the Reserve Bank of India has roped in Commercial Banks and Regional
Rural Banks to extend credit facilities to MFIs since February 2000. Both public and private
banks in the commercial sector have extended sizeable loans to MFIs at interest rate ranging
from 8 to 11 per cent per annum.

D. Interest Rates:

The interest rates are deregulated not only for private MFIs but also for formal baking sector. In
the context of softening of interest rates in the formal banking sector, the comparatively higher
interest rate (12 to 24 per cent per annum) charged by the MFIs has become a contentious
issue. The high interest rate collected by the MFIs from their poor clients is perceived as
exploitative. It is argued that raising interest rates too high could undermine the social and
economic impact on poor clients. Since most MFIs have lower business volumes, their
transaction costs are far higher than that of the formal banking channels. The high cost structure
of MFIs would affect their sustainability in the long run.

E. Collateral requirements:

All the legal forms of MFIs have the freedom to waive physical collateral requirements from their
clients. The credit policy guidelines of the RBI allow even the formal banks not to insist on any
type of collateral and margin requirement for loans up to Rs 50,000 ($1100).

Regulation & Supervision: India has a large number of MFIs varying significantly in size,
outreach and credit delivery methodologies. Presently, there is no regulatory mechanism in
place for MFIs except for those that are registered as NBFCs. As a result, MFIs are not required
to follow standard rule and it has allowed many MFIs to be innovative in its approach particularly
in designing new products and processes. But the flip side is that the management and
governance of MFIs generally remains weak, as there is no compulsion to adopt widely
accepted systems, procedures and standards.

Following Committees have examined the road map for regulation and supervision of
MFIs:

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 Task Force (appointed by NABARD) Report on Regulatory and Supervision Framework for
MFIs, 1999. (Kindly see publications Section for a complete report Working Group (constituted
by Government of India) on Legal & Regulation of MFIs, 2002 Informal Groups (appointed by
RBI) on Micro Finance which studied issues relating to
(i) Structure &Sustainability,
(ii) Funding
(iii) Regulations and
(iv) Capacity Building, 2003
Advisory Committee (appointed by RBI) on flow of credit to agriculture and related activities
from the Banking System, 2004.
The Committee observed that while a few of the MFIs have reached significant scales of
outreach, the MFI sector as a whole is still in evolving phase as is reflected in wide debates
ranging around (i) desirability of NGOs taking up financial intermediation, (ii) unproven financial
and organizational sustainability of the model, (iii) high transaction costs leading to higher rates
of interest being charged to the poor clients, (iv) absence of commonly agreed performance,
accounting and governance standards, (v) heavy expectations of low cost funds, including
equity and the start up costs, etc.
The current debate on development of a regulatory system for the MFIs focuses on three
stages. Stage one - to make the MFIs appreciate the need for certain common performance
standards, stage two - making it mandatory for the MFIs to get registered with identified or
designated institutions and stage three - to encourage development of network of MFIs which
could function as quasi Self-Regulatory Organizations (SROs) at a later date or identifying a
suitable organization to handle the regulatory arrangements.
The Committee recommended that while the MFIs may continue to work as wholesalers of
microcredit by entering into tie-ups with banks and apex development institutions, more
experimentation have to be done to satisfy about the sustainability of the MFI model. Such
experimentation needs to be encouraged in areas where banks are still not meeting adequate
credit demand of the rural poor.

16. Development Fund

A. Micro Finance Development and Equity Fund (MFDEF) – Structure and Guidelines:

During 2005-06, Government of India has decided to redesign ate the existing MFDF as
microfinance Development and Equity Fund (MFDEF). It has also been decided to enhance the

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 fund size from the existing Rs100 crore to Rs 200 crore. The additional amount of Rs 100 crore
will be contributed by Reserve Bank of India, NABARD and the commercial banks in the same
proportion as earlier (40:40:20).

B. Objectives:

The objective of the redesignated Fund is to facilitate and support the orderly growth of the
microfinance sector through diverse modalities for enlarging the flow of financial services to the
poor particularly for women and vulnerable sections of society consistent with sustainability.

C. Activities to be supported from out of the MFDEF:

The Fund will be utilized to support interventions to eligible institutions and stakeholders. The
components of assistance will include, inter alia, the following purposes:

a. Capacity Building:

i) Training of SHGs and other groups for livelihood, skill up gradation and micro enterprise
development.
ii) Capacity building of staff of institutions involved in microfinance promotion such as
Banks, NGOs, government departments, NABARD, etc.
iii) Capacity building of MFIs.

b. Funding Support:

1. Contributing equity/other forms of capital support to MFIs, service providers, etc.

2. Providing financial support for start-up and on-lending for microfinance activities.

3. Supporting Self Help Promotion initiatives of banks and other SHPIs.

4. Meeting on a selective basis the operational deficit of financial intermediary NGOs/MFIs at

the start up stage.

5. Rating of MFIs and self regulation.

c. MIS:

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 1. Supporting systems management in regard to MIS, accounting, internal controls, audits and
impact assessment.
2. Building an appropriate data base and supporting development thereof. Regulatory &
Supervisory Framework.
3. Recommending regulatory and supervisory framework based on an on-going review.

d. Studies & Publications:

1. Commissioning studies, consultancies, action research, evaluation studies, etc, relating to the
sector.
2. Promoting seminars, conferences and other mechanisms for discussion and dissemination.
3. Granting support for research.
4. Documentation, Publication and dissemination of MF literature.
5. Any other activities recommended by the Advisory Board to Fund.

e. Eligible Institutions:

Following types of structures, community based organizations and institutions, would be eligible
for support from the Fund:

1. Training: SHGs, CBOs, NGOs/VAs, Banks, MFIs, NABARD, Training Establishments,

networks, service providers.
2. Funding support: NGOs/VAs, CBOs, MFIs, and Banks.
3. MIS: SHGs, NGOs/VAs, Banks, MFIs, NABARD.
4. Regulatory and Supervisory Framework: Banks, MFIs, SROs, NGOs /VAs / MFI Networks,
NABARD.
5. Studies and Publications: Banks, MFIs, NABARD, Training and Research Organizations,
Academic institutions and Universities.

f. Mode of Assistance:

Mode of assistance from the Fund will include the following:

* Promotional support for training and other promotional measures.

* Loans and advances including soft loans.

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 * Revolving Fund Assistance (RFA) to NGOs/ MFIs.

* Equity and quasi equity support to MFIs.

* Administrative subsidies and grants.

g. Advisory Body to MFDEF:

The Advisory Board shall guide and render advice on the various aspects relating to the micro
finance sector. The Board may determine its own procedures for day-to-day working including
constitution of committees, task forces etc, for examination of various issues. The advisory board
will meet at such intervals as deemed necessary but in any case once in a quarter to review the
status and progress of outflow and to render policy advice in respect of orderly growth and
development of the sector.

17. NABARD's Support to microfinance Institutions (MFIs):

Realizing the importance of MFIs in the delivery of financial services to the poor and their
potential for expansion of services in remote and lesser-banked areas, NABARD has been
extending technical and fund support to this sector. Some of the concerns that necessitated
NABARD to commence this support in 1993 were: 1) the need to provide timely credit to the
poor in under banked regions and ii) to further improve the outreach of rural credit delivery
system through alternate credit delivery mechanisms.

NABARD's support is being provided to various forms of microfinance institutions covering

MFIs, second tier MF lending institutions, Grameen bank replicators, NGO-MFIs, SHG
Federations etc. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA)
to NGO-MFIs on a very selective basis. The RFA is generally provided for a period of 5 to 6
years and is necessarily to be used for on lending to mF clients (SHGs or individuals). In
addition, the agencies are also sanctioned, on a case-to-case basis, grant assistance for partly
meeting the salary of field level staff, infrastructure development and operational deficits during
the initial years.

During the year 2003-04, loan support of Rs. 84 million was sanctioned to two agencies viz.

1) Friends of World Women Banking, India (Rs. 74 million) for on-lending to small NGOs &

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2) Kalanjiam Development Financial Services-a section 25 company promoted by DHAN
Foundation (Rs 10 million) for on lending to SHGs.

Business Model of KDS MFI

A) Introduction: Kotalipara Development Society (KDS) is basically a NBFC (Non Banking
Financial Company). They provide minimum loan of 1000 and maximum 40,000. MAS Finance
is one of the blooming private MFI in the current era. They are having a sufficient amount of
capital with them for their future growth. Kotalipara Development Society registered as a Society
(NGO) under West Bengal Society Registration Act 1961 came into being in 1989 and was in
1991, K.D.S. is a Non-govt. Social Service Organization working in the field of Rural
Development for the poor people. Community development and also poverty alleviation is the
main focus of this Organization.

B) KDS Vision: KDS' vision is to poverty alleviation, women empowerment & egalitarian
Society free from exploitation and every body in this global life with humanity and prosperity.

C) KDS Mission: KDS envision itself as a financially self sustainable Micro-finance Institution
with a wide base of ownership. It is committed to strengthening the Socio-Economic status of
the poor women in rural and urban areas by providing technical and financial services on
continued basis for establishing their identity and self-image. It constantly endeavors by cost-
effective Methods creating a culture of competence and excellence.
D) Legal Status: Registered under Society Registration Act, of 1961.
E) Objective:
1. Women Empowerment: KDS Believes that ―Women participation is the most effective
instrument in bringing about change in their way of life both economic well-being and adoption
of new practices in changing the socio-economic environment. In order to bring about women
participation and their decision making and negotiating power about their rights in all walks in
life.
2. Women Health: Health leads to prosperity. Low endowments, production possibilities, and
exchange option for women from disadvantage section in rural marginalized the women; this
marginalization often results in neglecting the health issues of women and children.

3. Women Economic Development: Our objective is to strengthen women‘s economic capacity

as entrepreneurs/producers, off farm economy and traditional activities. KDS is committed to
address factors leading to feminization of poverty and gender inequality.

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F) Role and Function:
*Helping in eradication of poverty.

*Providing finance for the enlistment of the individuals.

*Helps the borrower in establishing their business.

G) ADDRESS:
1) Head Office 2) Reg. Office: Pioneer Park (Mat) Barasat
Santa Nir, Dist-North 24 Parganas, Kolkata--124
Noapara, Arabinda Pally West Bengal, India
Barasat, Kolkata—124
Dist-North 24 Parganas 3) Japan Office: P.O-355-0076
West Bengal, India SHIMOKARAKO 1906,
Mobile : +91 033 32965569 HIGASHI MATSUYAMA-SHI,
Email Id : info@kdsmfi.org SAITAMA-KEN,
JAPAN
TEL + FAX: (0081)493-252557
Tel: (0081)8035220930 5037728489,
7066789740
E-mail: baidyan@solid.ocn.ne.jp
H) Micro-Finance Program:
1. KDS has been established in the year 1991.
2. Directly started implementing Micro-finance since 1997.
3. KDS provides financial Sustainable Development Approach for “Poverty Alleviation & Women
Empowerment”.
4. Financial Services to the poor women, landless, Asset less.
5. Monthly family income not more than INR Rs.2500/- in rural INR Rs.3500 in urban.
6. 100% women and possesses not more than 50 decimal of land.
7. SHG Model is largely based on ASA, Bangladesh.

b) KDS Field Operation:

Operations: -The organization has a three tier system at the field- Branch, Regions, Division;
personnel associated with each tier are based at the Field.

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Branch: A Branch in the field is the centre of all actions. The branch serves as a residence for
field staff (FO/BM) and an office unit from where activities of branch originate and are managed.
The Branch Managers supervise the activities of the FOs and also administer branch operation.
BMs hold regular meetings with their FOs for efficient branch operation. As a part of their
regular monitoring. Branch Manager visits the borrower’s house regularly.
Region: All the branches are distributed under 13 regions. Each region consists of 6-7
branches.Thirteen Regional Manager looks after all regions. The Regional Manager does not
have any separate office and staff to conduct his/her work. The Regional Office is situated at the
centre branch at a region. The Regional Manager regularly monitors the activities of a branch at
least twice in a month.
Division: There are 3 divisions. Each division consists of 4-5 regions. The Divisional Manager
(DM) looks after a division. As a part of his monitoring process, he visits 12 branches in a
month. His monitoring contains varied facts viz. supervision of Regional Manager work, study of
Branch growth, fund plan and utilization and the like. Besides these there is one Operation
Manager at the head for the smooth functioning of the field. Although Operation Manager is
located at the head office, he plays a vital role in field operations. In fact, it is Mandatory for the
Operation Manager to spend 2 weeks a month in the field. He is endowed with specific power
and is capable of taking decision independently.
Internal Audit: KDS has a team of 8 people (inclusive of the Manager Internal Audit) working
under the internal audit section. Out of these 8 people, 2 of them are based at the head office
and the rest 6 are based in the field each branch is audited every five six months.
The Manager Internal Audit coordinates and supervised the activates of the Internal Auditors
(I.A.). The I.A. submit their report to the Manager Internal Audit who is turn compiles/
consolidates the some and finally places it before the Chief Executive Directors. The Manager
Internal Audit is directly accountable to the Chief Executive Director (CED). Once the CED goes
through the report, the instructs the Implement Officer and the Operation Manager to take
necessary steps it required.
Around 15-20 branches are audited each month is KDS in certain cases, the auditors may be
given instructions to conduct follow up audits. Audit is also conducted in the Logistics
Department at the head office once a year.

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a) Microfinance Operation Structure:

d) MFI Port-Folio Status Report:

Program
Associate
NBFC

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 For the month ended 30th July- 2017
No of branches 88
No of village
2,383
covered
No of active groups 6,349
No of members 97,111
No of active
72,742
borrower
Amount of lone
247,372,293
outstanding (in Rs.)
Cumulative no of
299,512
lone disburse
Cumulative amount
of lone disburse (in 1,585,585,529
Rs.)
d) Methodology:
Credit Delivery Methodology:
Client/Borrower:
*1% women, mostly land less & asset less.
* SH. KDS follows ASA Modify Model.
* 100G – 10-20 Members in a group.
KDS developed and tested a sustainable credit model in West Bengal. The model is largely
based on ASA, Bangladesh approach organizing the people of focused into groups, under the
territory of particular branch of KDS. There are generally 10-20 members in a group, based in
village. With an average number of 20 in each group. Each SHG members meets once in a
week, at a fixed day, place and time. All the members are required to attend the weekly meeting
and repay their installments. They are required to deposit their security and repay their loan
installment.
The SHG members take all decision regarding the number of the loaner and amount of loan to
be given to any borrower in that SHG meeting. KDS provides collateral free loans to its
members, Group liability is absent from KDS's credit program. It is not the group but the
individual who is held responsible for delinquency.

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The Micro-credit services of KDS assist the group members to become economically self-
sufficient Loan proposal are screened and approved by the SHG during their weekly meeting
participation and group responsibility are the essential elements of the loan process.
After approval the loan proposal is submitted to the branch office through field staff. The loan
disburses to the borrower in cash in the branch office.
The Micro-credit services of KDS assist the group members to become economically self-
sufficient, Loan proposal are screened and approved by the SHG during their weekly meeting
participation and group responsibility are the essential elements of the loan process.

e) KDS Microfinance Rules:

1) Rules of Loan:
*Loans disburse 8 weeks after formation of the SHG.
*90 % attendance in weekly meeting.
* 1st installment after 7 days in equal weekly installment.
* Last 3 installments can be repaid at a time.
* Loan sanction by the BM.
2) Group Formation Rule: KDS start with formation of SHG through identifying of target poor
women eligible for membership through informal village survey, 10-25 poor women are formed a
self-half Group and their age 18-55 years.
1. Each of the group has three group leader President, Secretary & Cashier are responsible for
collection, security deposit and loan repayments during the group meeting.
2. The SHG model is largely based on ASA Bangladesh.
3. Each of the group organizes weekly meeting in a fixed day, place and time.
3) Credit Rule:
(i) Loan disburses 8 weeks after formation of the SHG.
(ii) 90% attendance in weekly meeting.
(iii) 1st installment after 7 days in equal weekly installment.
(iv) Last 3 installment can be repaid at a time.

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4) Products:1) KDS has 4 loan Products

Loan term –IGA (SHG) 46 weeks

Education loan 45 weeks

Festival loan(Term) 12 weeks

Repayment Charge Weekly

Processing fees 1.00 %

Insurance fees 1.50 %

Interest Rate 15 %

Education loan(Interest) 12.50 %

2) Insurance Product
1. KDS tie up with Life Insurance Company for Borrower insurance.
2. In case of untimely demise of Clients the successor of the expired Borrower will get the
benefit of the Borrower insurance and the loan is exempted from repayment.
3. Health Insurance
4.Other Activities

Loan Classified-purpose wise%

Non farm enterprises loan - 52%
Transport ----------------------- 26%
Cottage Industry-------------- 10%
Animal Husbandry-------------- 6%
Agriculture -----------------------6%

e) Business Process:

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 Loan Portfolio
Security Deposit Rs. 6, 2731415
Cumulative no of loan Disbursed 143505

Amount of Loan Disbursed Rs. 52,0000000

No. of Active Borrowers 84458

Amount of Loan Outstanding Rs. 24,0000000

Average Loan Size 2837

Borrower per Loan Officer 140

Loan Amount Per Loan Officer Rs. 457065

Repayment Rate Rs. 457065

f) KDS Area Operation:

SL No. Name of the Districts Number Of Block Number Of Branches Number Of Members
1. NADIA 9 30 17313
2. HOOGLY 16 12 5577
3. NORTH 24 PARGANAS 19 33 36055
4. SOUTH 24 PARGANAS 12 6 4146
5. BURDWAN 4 6 3187
6. HOWRAH 3 1 346
7. MURSHIDABAD 8 1 1902
8. KOLKATA 4 1 540
9. MALDA 1 1 424

g) Operation Highlight

Past 5 Years Activities:

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 Sl. No 2010 – 11 2011 – 12 2012 – 13 2013 – 14 2014 – 15 2015 - 16
No of Branch 6 42 90 88 90 89
District Covered 3 4 9 9 9 9
No of Block
Covered 14 33 162 162 192 162
No of Staff 38 200 432 370 390 453
No of Group
Formed 800 2600 7074 5661 5782 6227
No of Members 12300 35700 114740 89797 90978 95135
1.36 Crore
(13.6 5.20 Crore 3.37 Crore 4.30 Crore
Security 0.19 Crore (1.9 Million (52 Million (33.7 (43 Million
Balance Million INR) INR) INR) Million INR) INR) 5.9E+07
11.0 Crore 52 Crore 94.51
(110 (520 73.42 Crore Crores
No of Loan 2.0 Crore (20 Million Million (734.2 (945.1
Disbursed MIllion INR) INR) INR) Million INR) Million INR) 278390
No of Active
Borrower 3990 2300 84084 50677 65650 70021
23.0 Crore
7.0 Crore (230 13.32 Crore 14.02 Crore
Amount of Loan 1.10 Crore (11 (70 Million Million (133.2 (140.2
Outstanding Million INR) INR) INR) Million INR) Million INR) 230527723
On time
Repayment Rate 99.93% 98.62% 99.70% 98.72% 98.83% 98.84
h) KDS Lenders:
1. Axis Bank
2. United Bank of India
3. Friends of Women’s World Banking India (F.W.W.B.)
4. Small Industries Development Bank of India

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5. West Bengal Backward Class Development Finance Corporation
6. West Bengal Minority Development Finance Corporation.
7. Rashtriya Mahila Kosh, (Department of Women and Child Development, govt. of
India).

i) “Success Story”
Geeta Paul
Geeta Paul is a landless woman belonging to O.B.C. community who lives in the hamlet of 24
pgs (N) in West Bengal with her husband, Mr. Haripada Paul is also landless labour working in
his self profession Pottery. Geeta and her husband lived on very heard life with their three
children out of which two are school going.

Geeta Paul herself found out the S.H.G. and Duttapukur Branch office of K.D.S. in her own
village. There she was inspired by field organizer of K.D.S. to enlarge her Pottery business. She
became please and interested to provide more fund from K.D.S. to her business. So she got a
loan of Rs. 7000/- (seven thousand) to develop her tools for the same. Both her husband and
she herself did the same in order to enlarge their business and got the best profit. After 40
weeks, they got another loan of Rs. 8000 (Eight thousand) while they got more profit. As a result
they are passing the life in a peace with their children and keep up the social culture properly.
She admires the K.D.S. for her development of business and her conjugal life.

Loan Cycle Loan Amount Monthly Income

1st 7000 1800 -- 3000
2nd 8000 3000 – 4000
3rd 9000 4000 – 4500
th
4 12000 4500 -- 75000

j) DIRECTOR’S Report
To the members of KDS Micro credit Services private limited your Directors have pleasure in
presenting Second Annual Report of your Company together with the Audited Statement of
Accounts for the financial year ended 31st March 2009.
1) Financial Activities
Particulars Year ended 31.03.17 Year ended 31.03.18
Total Income 617137.00 204681.00

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 Total Expenditure 540150.00 197296.00
Profit before Interest 76987.00 7385.00
Depreciation & Tax
Depreciation 48567.00 3364.00
Profit Before Tax 76987.00 7385.00
Profit after Tax 34654.00 2660.00-

2) Business Activities
Presently your company operates in one district in Kolkata in the state of West Bengal. The
main activities of the company during the year were Micro Loans. The other relevant business
parameters were as follows.
Particulars Year ended 31.03.17 Year ended 31.03.18
Total No. of Member 547 599
Total No. Borrowers 450 324
Total amount of loan disbursed 5088000.00 2130000.00
Total No. amount of loan 1645526.00 1750435.00
outstanding

23. 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.
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.
There are many reasons for this:

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 *Financial problems leading to setting up of inappropriate legal structures.
*Lack of commercial orientation.
*Lack of proper governance and accountability.
*Isolated and scattered.

24. Future of Micro Finance :

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 and Finance Minister Pranab Mukherjee saying last
week he would formulate new rules to govern the industry once he receives a report from a
committee of the Reserve Bank of India.

Indian microfinance is poised for continued growth and high valuation but faces pressing
challenges and opportunities that—left unaddressed—could negatively impact the long-term
future of the industry.

The industry needs to move past a single-minded focus on scale, expand the depth and breadth
of products and services offered, and focus on the double bottom line and over indebtedness to
effectively address the risks facing the industry.

Estimated that in next five years, 65% of the poor people will have excess to MFIs. Many Pvt.
Banks and Foreign Banks would enter this business segment, because of very low NPAs.

Estimated that 5 % of the number of people below the poverty line will get reduced in the next 5
years.(World Bank report).
These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low cost.
Taking the FSC initiative further, ICICI Bank plans to provide farmers credit from sugar
companies, seed companies, dairy companies, NGOs, micro-credit institutions and food
processing industries.
SIG has been involved in a project in the southern state of Tamil Nadu to find out how wireless
technology can be applied in the development of low cost models of banking. Another plan to
increase the reach in rural areas is to launch mobile ATM services. ICICI Bank branded trucks
have started carrying ATMs through a number of villages.

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 A) The Future: Microfinance expansion over the next decade can be expected to be an
extension of what has been achieved so far while overcoming the hurdles that have been
posing difficulty in effective microfinance operation and its expansion.
There may be several participants in this process and their participation may be seen in the
following forms.

Existing microfinance institutions can expand their operations to areas where there are no
microfinance programs.
More NGOs can incorporate microfinance as one of their programs. In places where there are
less micro finance 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.
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 rovided 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.

25. Top 50 Microfinance Institutions in India:

The above report includes detailed profiles and ratings of India’s top Microfinance
Institutions: CRISIL List: Top 50 Microfinance Institutions in India by Loan Amount
Outstanding for 2010.

1. SKS Microfinance Ltd (SKSMPL).

2. Spandana Sphoorty Financial Ltd (SSFL).
3. Share Micro fin Limited (SML)4. Asmitha Micro fin Ltd (AML).
5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP).

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6. Bhartiya Samruddhi Finance Limited (BSFL).
7. Bandhan Society.
8. Cashpor Micro Credit (CMC).
9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL).
10. Grameen FinancialServices Pvt 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 Women’s 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)

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 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)

26. Microfinance India Summit 2015:

The Inclusive Finance India Summit'15 took place from 8th December to 9th December 2015 at
the Hotel Ashok in New Delhi, India. The summit was inaugurated by Shri S.S. Mundra , Deputy
Governor of Reserve Bank of India (RBI). Shri Vipin Sharma, CEO, ACCESS Development
Services welcomed the gathering with is opening speech and the opening ceremony also
marked the launch of the Inclusive Finance India Report 2015 and Responsible Finance India
Report 2015. The reports track the progress of financial inclusion initiatives across institutional
structures and delivery models, including the main microfinance channels. The reports review
policy development on inclusive finance and highlight key challenges and opportunities for
diverse stakeholders. The year 2015, in some manner has been a watershed year for financial
inclusion in India. In this year, since the PMJDY was launched, 190 million bank accounts have
been added to the program, several of these accounts have shown increased transactions, and
there is a serious pursuit to make the program a success. In this year two types of specialized
banks were launched and 10 in principle licenses have been awarded for Small Finance and 11
for Payment banks. The Microfinance Organisation of the year is an award which seeks to
recognize pioneering thought, product leadership and best practices followed by an institution.
Grameen Koota Financial Services was awarded MFO of the year 2015 under large category
and Rashtriya Grameen Vikas Nidhi was awarded in the Small and Medium category. Several
other awards followed which recognized the best of the best from the industry.

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 *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 collaterals.

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 it’s obvious that man power cost and operating
cost are higher for the MFIs. So according to me rates are justifiable, But with limitations.

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 Conclusion:

Microfinance has a long way despite doubts expressed and criticism launched about its
viability, impact, and poverty fighting capacity. There should, however, be no room for
complacency. The task of building a poverty-free world is yet to be finished. There are
still over 1.2 billion people living in extreme poverty on this planet. They are not living in
one country or region but spread all over the world. The last decade has witnessed an
impressive growth of microfinance; lack of funding is still considered a major obstacle in
the way of its growth. However, it is encouraging that the situation is changing. Given the
experiences of large and fast growing the last decade has witnessed an impressive
growth of microfinance; lack of funding is still considered a major obstacle in the way of
its growth. However, it is encouraging that the situation is changing. Given the
experiences of large and 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, Micro Finance Industry has the huge potential to grow
in future, if this industry grows then one day we‘ll all see the new face of India, both in
term of high living standard and happiness.
One solution by which we all can help the poor people, i.e. in a whole year a medium and
a rich class people spends more than Rs 10,000 on them without any good reason.
Instead of that, by keeping just mere Rs, 3000 aside and donate that amount to the MFIs,
then at the end of the year the total amount in the hands of poor would be ( average 500
million people *Rs 3000)=Rs 1,500,000,000,000 . Just imagine where would be India in
next 10 years.
Private MFIs in India, barring a few exceptions, are still fledgling efforts and are therefore
unregulated. Their outreach is uneven in terms of geographical spread. They serve micro
finance clients with varying quality and using different operating models. Regulatory
framework should be considered only after the sustainability of MFI model as a banking
enterprise for the poor is clearly established. Experimentation of MFI model needs to be
encouraged especially in areas where formal banks are still not meeting adequate credit
demand of the rural poor.

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 *References:

 Faculty Guide: Prof.Vaishali Nikam, (Faculty of Finance) Jayawantro Sawant Institute of

Management & Research.
 PTU: Approved by Joint Committee of UGC-DEC- AICTE, Ministry Of HRD, Govt: Of India.
 de Aghion, Beatriz Armendáriz & Jonathan Morduch. The Economics of Microfinance,
The MIT Press, Cambridge, Massachusetts, 2010.
 Dichter, Thomas and Malcolm Harper (eds). What’s Wrong with Microfinance? Practical
Action, 2007.
 Ledgerwood, Joanna and Victoria White. Transforming Microfinance Institutions:
Providing Full Financial Services to the Poor. World Bank, 2010.
 Yunus, Muhammad. Creating a World Without Poverty: Social Business and the Future of
Capitalism. Public Affairs, New York, 2008.
 The Future of microfinance in India: By Sukhwinder Singh Arora, Financial Sector Team,
Policy Division, DFID.
 Strategies for poverty alleviation through dovetailing the potential of microfinance
Practices with non-timber forest products from dipterocarps: Lessons from India by
B.P.Pethiya.
 India microfinance Investment Environment Profile by Slavea Chankova,
NathanaelGoldberg, Genevieve Melford, Hind Tazi and Shane Tomlonson.
 Anil K Khandelwal, “Microfinance Development Strategy for India”, Economic and
Political Weekly, March 31, 2007.
• Raven Smith, “The Changing Face of Microfinance in India-The costs and benefits of
transforming from an NGO to a NBFC”, 2010.
• R Srinivasan and M S Sriram, “Microfinance in India- Discussion”
• Piyush Tiwari and S M Fahad, HDFC, “Concept paper-Microfinance Institutions in India”.
• Shri Y S P Thorat, Managing Director, NABARD, “Innovation in Product Design, Credit
Delivery and Technology to reach small farmers”, November, 2010.
• Shri Y S P Thorat, Managing Director, NABARD, “Microfinance in India: Sect oral Issues
and Challenges”, May, 2005
• Dr. C Rangarajan, Chairman, Economic Advisory Council to the Prime Minister,
“Microfinance and its Future Directions”, May, 2005.
• Report, “Status of Microfinance in India 2009-2010”, NABARD.
• Bindu Ananth and Soju Annie George, Micro financial Services Team of Social Initiatives
Group, ICICI Bank, “Scaling up Micro financial Services: An overview of challenges and
Opportunities”, August, 2009.
• Annie Duflo, Research Co-coordinator, Centre for Micro Finance Research, “ICICI Banks
the poor in India”, Page 13, Microfinance Matters.
• *Websites:
www.google.com, www.scribd.com, www.microfinanceindia.org,
www.ifmr.ac.in,www.google.com
www.microfinanceinsight.com, www.investopedia.com, www.books.google.com
www.seepnetwork.org, 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.accion.org, www.elyserowe.com, www.kdsmfi.org

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