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A project on

Legal and Regulatory aspects of Microfinance activities and its role


in achieving inclusive economic growth in our country

Subject: Financial Regulations

Group Members

Name Roll No.


Shweta Belchada 58
Niyati Jain 64
Riya Jain 66
Vishal Janjani 70
Aditi Kadam 75
Chirag Khandelwal 82
Harshal Kothari 89
Soha Kulkarni 92

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Index

Sr.No. Title Page No.


1 Introduction 3
2 Need and Purpose 4
3 Learning Objectives 5
4 Key Terms 6
5 Introduction to Microfinance 9
6 Andhra Pradesh Crisis, 2010 18
7 RBI Guidelines for Microfinance 23
8 NABARD and its initiatives 28
9 MFI lending models in India 31
10 MSME (Micro Small and Medium Enterprises) 42
11 Challenges faced by microfinance sector 46
11 Mahalaxmi Saras – A Government Initiative 48
12 Lijjat – Case study on Women Entrepreneurship 50
13 AMUL – Case study on Cooperative movement 53
14 Bharat Financial Inclusion Limited 55
15 Microfinance in Brazil 61
16 Conclusion and Recommendations 64
17 Bibliography 68

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Introduction

The recent developments in banking technology have transformed banks from traditional brick
and mortar infrastructure to a system supplemented by other channels like Automated Teller
Machines (ATM), credit/debit cards, internet banking, online money transfer, etc. The drawback,
however, is that access to such technology is restricted to certain segments of the society. Indeed,
some trends, such as sophisticated customer segmentation methods, allow more accurate
targeting of particular sections of the market, have led to restricted access of financial services to
some groups. This has led to a growing divide, with an increased range of financial services
being targeted towards middle and upper middle income groups and a significantly large section
of the population who lack access to even the most basic banking services. This is termed as
‘Financial Exclusion’.

Financial inclusion, on the other hand, is the delivery of financial services to all the people in a
fair, transparent and equitable manner at affordable cost. It has the potential to improve the
standard of living of the poor, as financial services help the poor to save and invest in a better
manner.

Deliberations on the subject of financial inclusion contributed to a consensus that merely having
a bank account may not be a good indicator of financial inclusion. The ideal definition should
look at people who want to access financial services but are denied the same. If there are
customers who wish to have access to financial services but are being denied, then that is a case
of financial exclusion. But there is a reason why these groups of customers are not being catered
to. If we look at the situation from the point of view of commercial banks, then it raises the
issues of credit worthiness of these groups since they are unable to provide collateral or bank
guarantees.

This created the need to re-engineer the existing products to make them more in tune with the
requirements of unbanked public.

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Need and purpose

Micro finance, as a concept, emerged against this backdrop. Before the birth of microfinance
people from lower income groups, especially in the rural area, would borrow from moneylenders
who charge exceptionally high rates of interest. However, microfinance changed this scenario.
The pioneering of microfinance is credited to Dr Mohammad Yunus who began experimenting
with lending to poor women in a small village in Bangladesh with the aim of providing them
with credit to start their own enterprises. Microfinance is mostly recognized for its ability to
stimulate self-employment through the establishment of microenterprises that reduce reliance on
informal, low wage jobs, and stimulate employment opportunities. It also leads to more women
joining the workforce while developing prospects to contribute to poverty alleviation. As per a
report by Asian Development Bank, about 21% of Grameen Bank borrowers and 11% of
borrowers of Bangladesh rural Advancement Committee, microfinance NGO, managed to lift
their families out of poverty within 4 years of their participation. These services also had an
impact on the depth of poverty. Extreme poverty declined from 33% to 10% among Grameen
Bank participants.

With a large portion of the world’s poor, India has a huge potential demand for microfinance.
For this reason, it makes sense to understand the nuances of microfinance and various models of
operation to understand the microfinance industry as a whole.

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Learning Objectives

 To acquaint ourselves with the concept of microfinance and Micro Finance Institutions:
This study is to learn how microfinance works, by using group lending methodology for
reducing poverty and how it affects the living standard (income, saving access to health
and education, etc.) of the poor people in the rural areas. To provide financial services to
the unbanked population a special category of institutions called Micro finance
institutions have developed and are gaining momentum. India is the country where a
collaborative model between banks, NGOs, MFI and women organization has advanced
somewhat. Earlier, most of the Micro finance institutions were in the form of Not-for-
profit organizations. But with advancement of the sector some have converted to ‘For
profit’ organizations and are on the lookout for people with m
anagement skills. Roles like Project manager, Branch manager, Head- lending
have opened up for management students. Therefore, it becomes imperative to study the
concept.

 To understand existing scenario in micro finance industry:


By understanding and studying the different lending models that MFIs use, crisis that
affected the industry as whole, initiatives by NABARD for promotion of microfinance
we will be better equipped to work in the industry. Also, the technical knowledge,
acquired by studying the RBI guidelines for the microfinance industry, will give us a
greater understanding of the industry.

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Key Terms

1. National Bank for Agriculture and Rural Development (NABARD)


It is an apex development financial institution responsible for planning and overlooking
the operations in the field of credit for agriculture and economic activities in rural India.
It looks after the development of industries like cottage industries, small scale village
industries and other rural industries.

2. Regional Rural Banks (RRBs)


RRBs are scheduled government banks operating at regional level with a view to serve
the rural areas with basic banking and financial services. Along with basic banking they
also provide facilities like locker, debit/credit cards. They are also responsible for
carrying out government operations like disbursement of wages of MGNREGA workers,
distribution of pension, etc.

3. Qualifying assets
A “qualifying asset” shall mean a loan which satisfies the following criteria:
(i) The loan is given to a borrower with a rural household annual income not exceeding Rs.
1,00,000 or urban and semi-urban household income not exceeding Rs. 1,60,000
(ii) The amount of the loan does not exceed Rs. 60,000 and the total outstanding
indebtedness of the borrower including this loan also does not exceed Rs. 1,00,000;
(iii) The tenure of the loan is not less than 24 months for a loan amount more than Rs. 30,000

(iv) The loan is without collateral;


(v) The aggregate amount of loans given for income generation purposes is not less than 50%
of the total loans given by the MFIs;
(vi) The loan is repayable by weekly, fortnightly or monthly instalments at the choice of the
borrower.

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4. NBFC-MFI
A company which provides financial services pre-dominantly to low-income borrowers
with loans of small amounts, for short-terms, on unsecured basis, mainly for income-
generating activities, with repayment schedules which are more frequent than those
normally stipulated by commercial banks.

5. Self-Regulatory Organization
It is an organization that has the power to create and enforce industry regulations and
standards. The priority is to protect investors by establishing rules that promote ethics and
equality. The regulatory influence of such organizations could replace government
regulation or be an addition to it.

6. Self Help Groups (SHG)


These are voluntary groups of people who are from similar economic and social
backgrounds, example from the same village, who come together to start a small business
by saving on a regular basis.

7. Self Help Promotion Institution (SHPI)


These are institutions that take the initiative of promoting, training and nurturing Self
Help Groups.

8. Joint Liability Groups (JLG)


It is an informal group of people from the same industry who come together to avail loan
from Microfinance institutions against mutual guarantees.

9. Tier I capital
Tier 1 capital is the core measure of the financial strength of a bank because it is
composed of core capital. Core capital is composed primarily of disclosed reserves (also
known as retained earnings) and common stock.

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10. Tier II capital
Tier 2 capital is the secondary component of bank capita that makes up a bank's required
reserves. It includes revaluation reserve, general provisions, hybrid capital instruments
like preferred stock and subordinated term debt.

11. Risk weighted assets


It is a bank’s assets weighted according to the risk. Each type of asset has a risk factor
assigned to it by RBI which has to be multiplied by the value of the asset. If we do this
for all the assets of a bank and sum it up we arrive at Risk Weighted Assets.

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Introduction to Microfinance
Microfinance is an economic development tool whose objective is to assist the poor to work their
way out of poverty. It covers a range of services which include, in addition to the provision of
credit, many other services such as savings, insurance, money transfers, counseling, etc.

NABARD has defined microfinance as "provision of thrift, credit and other financial services
and products of very small amounts to the poor in rural, semi-urban and urban provided to
customers to meet their financial needs; with only qualification that
(1) Transactions value is small and
(2) Customers are poor."

Microfinance, in India, has evolved due to committed efforts of individuals and financial
agencies that work towards alleviating poverty and provide self-employment to the poor. It has
led to rural development, women empowerment and wealth generation by providing small scale
savings, credit, insurance and other financial services to poor and low-income households that
too without collateral. Microfinance is, thus, a tool developed to aid in economic development
by empowering poor.

Evolution of Microfinance in India


The evolution of Indian Microfinance sector can be broadly divided into four distinct phases:

Phase 1: The Cooperative Movement (1900-1960)


During this phase, credit cooperatives were vehicles to extend subsidized credit to villages under
government sponsorship.

Phase 2: Subsidized Social Banking (1960s - 1990)


With failure of cooperatives, the government focused on measures such as nationalization of
Banks, expansion of rural branch networks, establishment of Regional Rural Banks (RRBs) and
the setting up of apex institutions such as the National Bank for Agriculture and Rural
Development (NABARD) and the Small-Scale Industries Development Bank of India (SIDBI),
including initiation of a government sponsored Integrated Rural Development Programme

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(IRDP). While these steps led to reaching a large population, the period was characterized by
large-scale misuse of credit, creating a negative perception about the credibility of micro
borrowers among bankers, thus further hindering access to banking services for the low-income
people.

Phase 3: SHG-Bank Linkage Program and Growth of NGO-MFIs (1990 - 2000)


The failure of subsidized social banking triggered a paradigm shift in delivery of rural credit with
NABARD initiating the Self-Help Group (SHG) Bank Linkage Programme (SBLP), aiming to
link informal women's groups to formal banks. `The program helped increase banking system
outreach to otherwise unreached people and initiate a change in the bank's outlook towards low-
income families from 'beneficiaries' to customers. This period was thus marked by the extension
of credit at market rates. The model generated a lot of interest among newly emerging
Microfinance Institutions (MFIs), largely of non-profit origin, to collaborate with NABARD
under this program. The macroeconomic crisis in the early 1990s that led to introduction of the
Economic Reforms of 1991 resulted in greater autonomy to the financial sector. This also led to
emergence of new generation private sector banks that would become important players in the
microfinance sector a decade later.
Phase 4: Commercialization of Microfinance
The First Decade of the New Millennium Post reforms, rural markets emerged as the new growth
drivers for MFIs and banks, the latter taking interest in the sector not only as part of their
corporate social responsibility but also as a new business line. On the demand side, NGO-MFIs
increasingly began transforming themselves into more regulated legal entities such as Non-
Banking Finance Companies (NBFCs) to attract commercial investment. The microfinance
sector as it exists today essentially consists of two predominant delivery models the SBLP and
MFIs. Four out of five microfinance clients in India are women.

Important Features of Microfinance


1. A tool for the empowerment of poor women
2. Provision of very small loans
3. A concept for the poor rural and urban households
4. Credit under microfinance mobilizes savings and lends the same

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5. Low transaction cost due to group lending
6. Transparencies in operation
7. Short repayment period
8. Simple procedure for reviewing, processing and approving loan applications and delivery
credit
9. Chances of misutilization are rare and there is assured repayment

Functions and Objectives of Microfinance

1. Provide credit to the rural


Poor, usually rural sector depends on non-institutional agencies for their financial
requirements. Micro financing has been successful in taking institutionalized credit to the
door step of poor and have made them economically and socially sound.
For example, Spandana, a public limited company registered with Reserve Bank of India as
an NBFC MFI, provides unique loan called ABHILASHA, which is designed especially for
low income households who aspire to improve their financial well-being. The primary
objective of this loan is to empower women in setting up and expanding income generating
activities, smoothen household cash flows and acquire productive assets. The loan size
ranges from Rs. 6,000 to Rs. 60,000 with tenure of 26-78 Bi Weeks.

2. Alleviate poverty
Due to micro finance poor people get employment. It also helps them to improve their
entrepreneurial skills and encourage them to exploit business opportunities. Employment
increases income level which in turn reduces poverty.
For example, Bandhan was set up to address the dual objective of poverty alleviation and
women empowerment. The microfinance activities are carried on by Bandhan Financial
Services Pvt. Ltd. (BFSPL), incorporated under the companies Act, 1956 and also registered
as a Non-Banking Financial Company (NBFC) with the Reserve Bank of India. It offers
development activities in crucial fields of education, health, unemployment and livelihood
through its non-profit entity.

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3. Empower and mainstream women
Normally more than 50% of SHGs are formed by women. Now they have greater access to
financial and economic resources. It is a step towards greater security for women. Thus,
microfinance empowers poor women economically and socially.
For example, Asmitha Microfin Ltd. is a NBFC-MFI, that provides rural poor women
access to financial resources in the form of collateral free small loans for income generation
and livelihood promotion. This enables them to start small businesses, which soon translates
into adequate nutrition, medical aid and education. With increased businesses, these low-
income women become economic agents intrinsic to development rather than simply
homemakers.

4. Ensure economic growth of country


Finance plays a key role in stimulating sustainable economic growth. Due to microfinance,
production of goods and services increases which increases GDP and contributes to
economic growth of the country. MSMEs play a key role in economic development of a
country by generating employment opportunities for skilled and unskilled rural population.
Microfinance aids such MSMEs through its services of micro loans.
For example, Hand-in-Hand India, is a development organization whose objective is to
eliminate poverty by creating enterprises and jobs. Focusing on help self-help, it takes a
holistic approach that combines microfinance and support for women to start enterprises with
work in four other areas that matter most to poor communities: education and child labor
elimination, health and sanitation, a sustainable local environment and information
technology access. With currently more than 4,50,000 members in Tamil Nadu, Karnataka
and Madhya Pradesh, who have collectively started more than 2,50,000 micro enterprises,
our goal is to create 5 million jobs by 2020.

5. Mobilize savings
Microfinance develops saving habits among people. Now poor people with meagre income
can also save and are bankable. The financial resources generated through savings make feel
people self-sufficient and empowered. Thus, microfinance helps in mobilization of savings.

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For example, a case study provided by KBS Bank (Krishna Bhima Samruddhi Local Area
Bank), whose business model has been built on Financial Inclusion as its core objective and
Micro Finance as its delivery model.
Mrs. Laxmidevi, a house wife resident of Nadigama village of Mahabubnagar district, came
to Mahabubnagar seven years back along with her husband and children (as they found
agriculture is not remunerative), with an intention to start some business in Mahabubnagar
and to give good education to their children. Her husband started a small stall of bakery
items. The income was not sufficient to fulfill their family needs hence she purchased a
sewing machine and started taking stitching orders from nearby households. After two years
she found the demand was more, hence, she purchased two more machines and started
training the other women in sewing and started to take orders and pay the other two women
workers on piece work basis. Then she has taken on rent a front side shop attached to her
house. As the customer base increased, she started diversifying the activity, slowly turned
into sales of falls, blouse, material, saris, etc. She borrowed some money for buying the
machinery and after paying back her credit, she again borrowed and bought cloth material.
After hearing about the KBS banks new product of daily deposit, she found it simple and felt
happy and started saving Rs. 20 per day. She also encouraged other workers in the shop to
start saving. When she was informed that her savings were 1500/-, she felt very happy and
told that it was appearing like she had just started saving the day before. Presently her two
daughters are studying in ten plus two standard and the younger son in 6th standard.

6. Develop skills in the rural


Micro financing has been a boon to potential rural entrepreneurs. SHGs encourage its
members to set up business units jointly or individually. They receive training from
supporting institutions and learn leadership qualities. Thus, micro finance is indirectly
responsible for development of skills.
For example, the Skills Development and Technology Centre (SD&TC) of Hand-in Hand
India works towards following areas:
a) Skill Program - to target beneficiaries to acquire new skills.
b) Up-Skilling Program – to enable target beneficiaries to enhance their existing skills.

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c) Youth Skilling Program – to enhance employability among youth to match, market
requirements.

7. Promote concept of mutual help and co-operation for achieving sustainable agriculture
and ecologically sound management of natural resources
Microfinance promotes mutual help and co-operation among members. The collective efforts
of group promote economic interest and helps in achieving the said transition.
For example, MYRADA, an NGO, works along with the rural residents on activities that
include watershed management, non-farm livelihoods, environmental sanitation, ground
water/roof water harvesting, restoration of traditional water bodies, promotion of organic and
low external input farming, renewable energy sources.

8. Promote programs for disabled for their economic and social welfare.
Most people with disabilities turn to self-employment because of a lack of opportunities in
the job market. Although many would prefer to have a job with a regular income, self-
employment is often the only option available. To be successful, self-employed people need,
among other things, access to financial services, in particular microcredit. Microfinance,
through its various models, provide the microcredit services to such people.
For example, The Leprosy Mission (TLM) Trust India carries out CBR (Community
Based Rehabilitation) programs in 11 states across India. Facilitating access to mainstream
resources and networking with likeminded NGOs, to ensure that people affected by leprosy
and persons with non-leprosy disabilities receive the support they need within the ordinary
structures of education, health, employment and social services, is central in its strategy.
Clients get together into self-help groups (SHGs), mixed (male/female) groups of disabled
persons (and family members) with a maximum size of 20 persons. The SHGs develop a
responsive microfinance system, with saving and credit to serve the members. Members have
to save for a period of 6 months before the groups are entitled to receive external loans, from
TLM or banks. The group members among themselves decide on the amounts of the savings.
Within the SHGs, loans can be distributed from the own internal capital fund. Loans from the

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internal funds can be drawn on for social as well as economic purposes: to pay for medicines
or school expenses, but also for agricultural production.

Comparison of Micro Finance and Formal Banking

Characteristics Micro-finance Formal Banking


Size of loan Small/tiny size of credit Medium/large credit
Duration of loan Short duration Medium/large duration
Emphasis on thrift as well as
Thrift Focus on loan only
loan
Group formation and informal
Formal procedures
Enforcement of methods
repayment Peer pressure and weekly Collateral and legal pressure for
repayment repayment
Nature of organization Social organization form Commercial organization form
Motivation Self-help motivated Profit motivated
Access to poor without
Outreach Access limited
collateral (all members)

Micro finance institutions (MFIs)


According to the Micro Finance Institutions (Regulation of Money Lending) Bill, 2016,
'Micro Finance Institution' means any person, partnership firm, group of persons, including a
Company registered under the provisions of the Companies Act, 2013, a Non-Banking Financial
Company, a society registered under the Societies Registration Act, 1860, a trust created under
the Indian Trust Act, 1882, a Co-operative Society registered under the Co-operative Societies
Act, 1912 in whichever manner formed and by whatever name called, whose principal or
incidental activity is to lend money or offer financial support of whatsoever nature to the low
income population.

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Different modes of services provided by MFIs
Microfinance sector has covered a long journey from micro-savings to micro-credit and then the
field of micro-insurance, micro-remittance and micro-pension.

1. 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.

2. Micro-credit: Microcredit is the extension of micro loans to the unemployed, to poor


entrepreneurs and to other living in poverty that is not considered bankable. Microcredit can
be offered often without collateral, to an individual or through group lending.
Micro credit and Micro finance are the terms which are often used interchangeably. Yet,
these two terms differ distinctively in the following manner:

Microcredit Microfinance
Microcredit is the small loan facility provided Microfinance refers to the number of financial
to the people with less earning, to motivate services provided to the small entrepreneurs
them to become self-employed. and enterprises who cannot take shelter
of banks for banking and other services.
Microcredit alludes to a small loan provided, Microfinance means the broad spectrum of
at a low-interest rate, to the persons of below financial services such as loans, insurance,
poverty line to make them self-employed, i.e., savings, etc. provided to the people of low-
to help the small entrepreneurs start their own income groups.
business.
Micro-credit includes credit activities Micro-finance includes credit activities and
non-credit activities like savings, pension,
insurance, etc.
Microcredits are small size loans with shorter Microfinance services help to low-income
repayment periods. They are granted for individuals and start-up in developing
small-scale activities which direct to serve countries to start running a small business,

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local needs. increase assets, diminish risk, raise
productivity, increase return on investments,
increase incomes, improve access to
education and eventually increase the welfare.

3. Micro-insurance: It is system by which people, business and other organizations make a


payment to share risk; micro insurance products are mainly targeted at low income groups in
the unorganized sector, farmers and craftsmen. The amount of premium in these schemes
ranges between Rs. 20.00 to Rs. 500.00. 'Aam Admi Bima Yojana' to extend death and
disability insurance and 'Rashtriya Swasthya Bima Yojana' a health insurance schemes for
below poverty line families are examples of micro insurance.

4. Micro-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.

5. Micro pension: A micro-pension provision builds up assets for the old age retirement
income of poor people. It is typically designed as a defined contribution scheme. A micro-
pension is basically a long term voluntary savings product accumulated over a long period, in
order to yield returns at a later date. Savings are managed and invested in financial or capital
markets by professional fund manager at low costs, accessible to poor customers. At the pre-
agreed withdrawal age (usually 58-60 years), the accumulated balance may be withdrawn in
a lump-sum, annuity or some combination of these methods.
Invest India Micro Pension Services (IIMPS) exclusively encourages and enables low
income informal sector workers to accumulate micro-savings for their old age. IIMPS was
promoted in late 2006 with initial seed capital from SEWA Bank, UTI AMC, Jayashreeben
Vyas, Renana Jhabvala, Gautam Bhardwaj, Vijay Mahajan, Vijayalakshmi Das and Ashish
Aggarwal.

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Andhra Pradesh Crisis (2010)

In 2005–2006 one of Andhra Pradesh’s 23 administrative districts experienced a crisis when the
district government closed 50 branches of four MFIs following allegations of unethical
collections, illegal operational practices (such as taking savings), poor governance, high interest
rates, and profiteering. On that occasion, the dispute was calmed by the MFIs agreeing to abide
by a Code of Conduct alongside support from the national government and the Reserve Bank of
India (RBI), which recognized the useful role MFIs played in providing credit for low-income
households. But a rivalry between competing MFI and SHG models for serving the poor, often
reaching into the same villages, had been simmering ever since. The SKS initial public offering
(IPO) earlier that year highlighted both the enormous scale potential of the MFI model and the
considerable opportunity it provided to improve financial inclusion, while at the same time
highlighting potential high profits and lavish executive compensation. The press picked up on the
SKS IPO, with different media outlets taking different angles on the story. Further reports over
the summer cited links between MFI practices and some suicides in Andhra Pradesh. The
situation came to a head in early October when Andhra Pradesh’s chief minister passed “An
Ordinance to protect the women Self Help Groups from exploitation by the Micro Finance
Institutions in the State of Andhra Pradesh,” which sought to place a range of new conditions on
MFIs, including district-by-district registration, requirements to make collections near local
government premises, a shift to monthly repayment schedules, and other measures that affect
how MFIs operate.

The ordinance passed by the AP government had effectively stopped collections on old loans and
prohibited any new micro-lending business in the state of Andhra Pradesh. The intervention of
the government through the ordinance encouraged default from the borrowers. For some of the
MFIs, there was a significant increase in the default probabilities in their portfolio, with the rise
in defaults being largely restricted to AP. What was unexpected was the reaction of the banking
sector in completely cutting of liquidity to the MFIs across the country. This was irrespective of
whether the MFI portfolio had any AP credit-exposure, or whether there were any observed
changes in the credit quality of the non-AP exposure. This full-blown liquidity crisis for the
MFIs has had far more damaging effects than the AP intervention itself.

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Malegam Sub-Committee

As part of the response to prevent several MFIs shutting down from the lack of liquidity, as well
as an effort to prevent other state governments from taking the same steps as AP, the crisis
demand for intervention towards standardization of regulations in the microfinance sector. The
Board of Directors of the Reserve Bank of India (RBI) constituted a Sub-Committee to study the
issues and concerns on the microfinance sector. This Sub-Committee of the Board was formed
on October 15, 2010, under the chairmanship of Mr Y.H. Malegam. The Committee submitted
its report in January 2011. The report contains suggestions to regulate the microfinance sector,
pricing of interest, increasing transparency, and reducing the problems of multiple lending
and over borrowing.

The major recommendation suggested by the above-mentioned committee was creation of a


separate category for NBFCs operating in the Microfinance sector, such NBFCs being
designated as NBFC-MFI.

The Sub-Committee recommended that a NBFC-MFI may be defined as

“A company (other than a company licensed as ‘Not For Profit organization’ under Companies
Act, 2013) which provides financial services pre-dominantly to low-income borrowers with
loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating
activities, with repayment schedules which are more frequent than those normally stipulated by
commercial banks and which further conforms to the regulations specified in that behalf”.

A NBFC classified as a NBFC-MFI should satisfy the following conditions:

(i) Minimum net owned fund of Rs. 50 million (for NBFC-MFIs registered in the north-eastern
region of India, the minimum net owned fund requirement shall stand at Rs. 20 million);

(ii) Not less than 85% of its net assets are in the nature of “qualifying assets”;

(iii) The income an NBFC-MFI derives from the remaining 15 percent of assets shall be in
accordance with the regulations specified in that behalf.

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As per the NBFC-MFI Directions, “net assets” are the total assets other than cash and bank
balances and money market instruments. Also, a NBFC which does not qualify as a NBFC-MFI
should not be permitted to give loans to the microfinance sector, which in the aggregate exceed
10% of its total assets.

Other recommendations were suggested considering the following areas of concern:

a) Unjustified high rates of interest


b) Lack of transparency in interest rates and other charges.
c) Multiple lending
d) Upfront collection of security deposits
e) Over-borrowing
f) Ghost borrowers
g) Coercive methods of recovery

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The table below shows the timelines and amendments of guidelines by RBI for the microfinance
sector:

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MFIN

Over time, NBFC-MFIs had at a pan-India level, succeeded in reaching out to over 23 million
low income clients with total lending in excess of Rs. 1800 Crores. As the NBFC-MFI industry
grew, so did its need for transparency and better governance. It was against this backdrop that the
industry felt the need for an organization that would establish a framework for fair practices and
client protection for NBFC-MFIs and promote the development of a robust Microfinance
industry in India.

MFIN was established in October 2009 as a Society under the Andhra Pradesh Societies
Registration Act 2001. As per MFIN Bye-Laws, all NBFCs registered with the RBI as NBFC-
MFIs are eligible for membership of the Society. MFIN is to a large extent member funded. Its
Governing Board comprises of Members elected from amongst the leadership of member MFIs.
One third of the Board comprises independent Members.

The Reserve Bank of India (RBI) vide its letter dated 16th June, 2014 accorded recognition to
MFIN as Self-Regulatory Organization (SRO) of NBFC-MFIs.

MFIN works closely with regulators and other key stakeholders and plays an active part in the
larger financial inclusions dialogue through the medium of microfinance.

MFIN is organized into four verticals namely, Self-Regulatory Organization, Advocacy and
Development, Communications and Marketing and State Initiatives to be able to focus on the
priorities of the sector in an optimum manner. While previously policy advocacy was the
primary focus and continues to be so, with the evolution of the sector there are various new
functions that have become part of the framework. The Self-Regulatory function was part of
RBI’s remit to MFIN to help supervise compliance at a more granular level on behalf of the
Regulator. With the sector coming back into its own over the last five years, there was a felt need
for greater engagement with external stakeholders and a strong communication strategy was
thought to be the way ahead. With the industry growing steadily ground level issues are often
key indicators of sectoral good health. With this, in view, the State Initiative team keeps
continuously engaging with industry issues at a field level to ensure smooth functioning.

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RBI Guidelines for Microfinance

In May 2011, the RBI accepted the recommendations of the Malegam Committee Report and
subsequently issued the NBFC-MFI Directions on December 2, 2011 creating and recognizing a
separate category of NBFCs, namely, NBFC-MFIs. These NBFC-MFI Directions apply to all
NBFCs-MFIs. An NBFC-MFI would have to comply with the following regulatory stipulations
set out in the NBFC-MFI Directions:

Capital Adequacy Requirements

All new NBFC-MFIs are required to maintain a capital adequacy ratio (“CAR”) consisting of
Tier I and Tier II capital which should not be less than 15% of its aggregate risk weighted assets.
The total of Tier II Capital at any point of time, should not exceed 100% of Tier I capital.

Asset Classification and Provisioning Norms

With effect from April 1, 2013, NBFC-MFIs are required to comply with the following asset
classification and provisioning norms:

Asset Classification:

(i) A “standard asset” means the asset in respect of which no default in repayment of principal or
payment of interest is perceived and which does not disclose any problem nor carry more than
normal risk attached to the business;

(ii) A “non-performing asset” means an asset for which interest or principal payment has
remained overdue for a period of 90 days or more.

Provisioning Requirements:

In view of the problems being faced by MFIs in Andhra Pradesh, many of them have had to
provide sizeable amounts towards the non-performing assets in the state. To reflect the true and
fair picture of the financials of the NBFC-MFI in its balance sheet, the provisioning made
towards the Andhra Pradesh portfolio should be as per the current provisioning norms under the

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NBFC-ND Prudential Norms. Provisioning for the non-Andhra Pradesh portfolio is required as
per the NBFC-MFI Directions, which is as given below, with effect from April 1, 2013.

The aggregate loan provision to be maintained by NBFC-MFIs at any point of time is required to
be not less than the higher of:

(i) 1% of their outstanding loan portfolio; or

(ii) 50% of their aggregate loan instalments which are overdue for more than 90 days and less
than 180 days and 100% of the aggregate loan instalments which are overdue for 180 days or
more.

Pricing of Credit

The NBFC-MFI Directions require NBFC-MFIs to comply with the following pricing
stipulations in relation to the ceiling on margins, interest rates, processing fee, administrative
charges, penalties and insurance premium.

With effect from April 1, 2014, the interest rates charged by an NBFC-MFI to its borrowers will
be the lower of

1) The cost of funds plus a margin of 10% (for large MFIs – loans portfolio exceeding ` 10
million) or 12% for other MFIs, as the case may be,
2) The average base rate of the five largest commercial banks by assets multiplied by 2.75.

Processing charges are not permitted to be more than one per cent of gross loan amount and are
not to be included in the margin cap or interest cap; and

Transparency in Interest Rates

(a) There are only three permitted components in the pricing of loans viz., the interest charge, the
processing charge and the insurance premium (which includes the administrative charges in
respect thereof);

(b) No penalty can be charged on delayed payments;

(c) NBFC-MFIs are not permitted to collect any security deposit/margin from their borrowers;

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(d) There should be a standard form of the loan agreement; and

(e) Every borrower is required to be provided by the NBFC-MFIs with a loan card with entries in
vernacular language reflecting:

(i) The effective rate of interest charged;

(ii) All other terms and conditions attached to the loan;

(iii) Information which adequately identifies the borrower; and

(iv) Acknowledgements by the NBFC-MFI of all repayments including instalments received and
the final discharge.

(f) The effective rate of interest charged by the NBFC-MFI should be prominently displayed in
all its offices and in the literature issued by it and on its website.

Recovery Methods

All NBFC-MFIs are required to ensure that they have a code of conduct in place for recruitment,
training and supervision of their field staff. Further, recovery should normally be made only at a
central designated place. Field staffs are allowed to make recovery at the place of residence or
work of the borrower only if the borrower fails to appear at the central designated place on two
or more successive occasions.

Corporate Governance

In order to enable NBFCs to adopt best practices and greater transparency in their operations, the
RBI introduced corporate governance guidelines on May 8, 2007. The corporate governance
compliance requirements include constitution of the following committees (a) audit committee;
(b) nomination committee; (c) asset liability management committee; and (d) risk management
committee. Further, NBFCs are required to frame their internal guidelines on corporate
governance, enhancing the scope of the guidelines which shall be published on the company’s
website for the information of various stakeholders.

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The Micro Finance Institutions (Development and Regulation) Bill, 2012

 The Micro Finance Institutions (Development and Regulation) Bill, 2012 was introduced
in the Lok Sabha on May 22, 2012. The Bill aims to provide for the development and
regulation of micro finance institutions.
 A micro finance institution (MFI) is defined as an organisation, other than a bank,
providing micro finance services. These services are defined as micro credit facilities not
exceeding Rs 5 lakh in aggregate, or with the Reserve Bank’s (RBI) specification Rs 10
lakh, to each individual. Other services like collection of thrift, pension or insurance
services and remittance of funds to individuals within India also come under micro
finance services.
 The Bill allows the central government to create a Micro Finance Development Council
with officers from different Ministries and Departments. This council will advise the
central government on policies and measures for the development of MFIs.
 In addition, the Bill allows the central government to form State Micro Finance Councils.
These councils will be responsible for coordinating the activities of District Micro
Finance Committees and reviewing the MFIs in their state.
 District Micro Finance Committees review the development of micro finance activities
within the district, monitor overindebtedness and monitor the methods of recovery used
by MFIs. These committees can be appointed by the RBI.
 The Bill requires that all MFIs to obtain a certificate of registration from the RBI. The
applicant needs to have a net owned fund of at least Rs 5 lakh. By ‘net owned fund’ the
Bill means the aggregate of paid up equity capital and free reserves on the balance sheet.
The RBI should also be satisfied with the general character or management of the
institution.
 Every MFI will have to create a reserve fund and the RBI may specify a percentage of
net profit to add to this fund. There can be no appropriation from this fund unless
specified by the RBI.
 At the end of every financial year, MFIs are required to provide an annual balance sheet
and profit and loss account for audit to the RBI. They will also have to provide a return
detailing their activities within 90 days of the Bill being passed.

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 Any change in the corporate structure of a MFI, such as a shutdown, amalgamation,
takeover or restructuring, can only take place with approval from the RBI.
 The RBI has the power to issue directions to MFIs. This could include directions on the
extent of assets deployed in providing micro finance services, ceilings on loans or raising
capital.
 The RBI has the authority to set the maximum annual percentage rate charged by MFIs
and set a maximum limit on the margin MFIs can make. Margin is defined as the
difference between the lending rate and the cost of funds (in percentage per annum).
 The RBI shall create the Micro Finance Development Fund. Sums raised by the RBI from
donors, institutions and the public along with the outstanding balance from the existing
Micro Finance Development and Equity Fund form this fund. The central government,
after due appropriation from Parliament, may grant money to this fund. The fund can
provide loans, grants and other micro credit facilities to any MFI.
 The RBI is responsible for redressal of grievances for beneficiaries of micro finance
services.
 The Bill allows the RBI to impose a monetary penalty of upto Rs 5 lakhs for any
contravention of the Bill’s provisions. No civil court will have jurisdiction against any
MFI over any penalty imposed by the RBI.
 The Bill gives the central government the authority to delegate certain RBI powers to the
National Bank of Agriculture and Rural Development or any other central government
agency.
 The central government has the power to exempt certain MFIs from the provisions of the
Bill.

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Initiatives by NABARD
NABARD has been playing a crucial developmental role for the micro finance sector in India.
NABARD has been organising/ sponsoring training programmes and exposure visits for the
benefit of bank officials, NGOs, SHGs and Government agencies to enhance their effectiveness
in the field of micro finance. The best practices and innovations with respect to the sector are
widely circulated among Government agencies, banks and NGOs. NABARD also provides
support for capacity building, exposure and awareness building of the SHGs and NGOs.
Following are some of the initiatives that NABARD has undertaken in the sector of
microfinance.

1. NABARD launched the ‘Micro-Enterprise Development Programme’ (MEDP) for skill


development in March 2006. The basic objective was to enhance the capacities of
matured SHGs to take up micro enterprises through appropriate skill upgradation. The
programme envisaged development of enterprise management skills in existing or new
livelihood activities, both in farm and non-farm sectors. The duration of training can
vary between 3 to 13 days depending upon the objective and the nature of training.
During the year 2007-08, 394 MEDPs were conducted covering 9,182 SHG members
on activities like bee-keeping, mushroom cultivation, horticulture and floriculture,
vermi-compost/ organic manure preparation and dairy. As on March 31, 2008, 674
MEDPs had been conducted covering 16,761 participants.

2. In 2005-06, a pilot project for ‘promotion of micro-enterprises’ was launched among


members of matured SHGs. This is being implemented by 14 NGOs acting as ‘micro-
enterprise promotion agency’ (MEPA) in nine districts, viz., Ajmer (Rajasthan),
Chandrapur (Maharashtra), Kangra (Himachal Pradesh), Madurai (Tamil Nadu),
Mysore (Karnataka), Panchmahal (Gujarat), 24 north Pargana (West Bengal), Puri
(Orissa) and Rae Bareli (Uttar Pradesh). The project is being implemented by each
NGO in two blocks in each of the selected district. As on March 31, 2008, 2,759 micro-
enterprises were established under the project involving bank credit of Rs.238 lakh.

3. NABARD also provides marketing support to the SHGs for exhibiting their products.
During the year 2007-08, NABARD supported three exhibitions of products prepared
by various SHGs at Bhopal, Chennai and Navi Mumbai involving grant of Rs.3.8 lakh.

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In addition, NABARD also provides promotional grant support to NGOs, RRBs,
DCCBs, farmer’s clubs and individual volunteers and assists in developing capacity
building of various partner agencies. NABARD has been making efforts to increase the
number of partner institutions as self-help promoting institutions (SHPIs).

4. NABARD launched a pilot project in December 2003 to link post-offices with the
SHGs with the objective of examining the feasibility of utilising the vast network of
post offices in rural areas for disbursement of credit to rural poor on an agency basis.

5. The SHG Federations are emerging as important players in nurturing SHG, increasing
the bargaining power of group members and livelihood promotion. The features and
functions of SHG federation models promoted in the country vary, depending on the
promoting agencies. Recognising the growing role of the SHG Federations and their
value addition to SHG functioning, NABARD, during the year 2007-08 decided to
support the Federations on a model neutral basis. Support is extended to the Federation
by way of grant assistance for training, capacity building and exposure visits of SHG
members. NABARD has also formulated the broad norms for deciding the grant of
financial assistance to SHG Federations. During the year 2007-08, grant assistance
amounting to Rs 10 lakhs was sanctioned to two federations.

6. Recognising the role played by MFIs, in extending micro finance services in the
unbanked areas, NABARD extends support to these institutions through grant and loan
based assistance. NABARD has been selectively supporting MFIs for experimenting
with various micro finance models such as replication of Grameen Model, NGO
networking (bigger NGOs supporting smaller NGOs), credit unions and SHGs
federations, among others, to meet credit requirements of the unreached
poor. NABARD provides loan funds in the form of revolving fund assistance (RFA) on
a selective basis to MFIs to be used by them for on-lending to SHGs or individuals.
This loan has to be repaid along with service charge, within a period of 5 to 6
years. During the year 2007-08, RFA amounting to Rs.8 crore was sanctioned to six
agencies taking the cumulative credit sanctioned to Rs.36 crore covering 35 agencies.

7. In order to identify, classify and rate MFIs, NABARD introduced a scheme for
commercial banks and RRBs to enable them to avail the services of accredited rating

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agencies for rating of MFIs. Banks can avail the services of credit rating agencies like
CRISIL, M-CRIL, ICRA, CARE and Planet Finance for rating of MFIs and avail
financial assistance by way of grant to the extent of 100 per cent of the total
professional fees of the credit rating agency, subject to a maximum of Rs. one lakh. The
assistance is available for the first rating of MFIs with a minimum loan outstanding of
Rs.50 lakh and maximum loan outstanding of Rs.500 lakh. During the year 2007-08,
rating support amounting to Rs 3 lakh to four agencies was provided.

8. Recognising the need for upscaling the micro finance intervention in the country, the
Union Finance Minister, in the budget for the year 2000-01, announced creation of a
Micro Finance Development Fund (MFDF). The objective of the MFDF is to facilitate
and support the orderly growth of the micro finance 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. Consequently, MFDF with
a corpus of Rs.100 crore was established in NABARD. The Reserve Bank and
NABARD contributed Rs.40 crore each to the fund, while the balance was contributed
by eleven select public sector banks.

9. As per the Union Budget announcement for the year 2005-06, the MFDF was re-
designated as ‘Micro Finance Development and Equity Fund’ (MFDEF) with an
increased corpus of Rs.200 crore. The fund is being managed by a board consisting of
representatives of NABARD, commercial banks and professionals with domain
knowledge. The Reserve Bank is a member of the Advisory Committee of the MFDEF.

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MFI Lending Models in India
There are three lending models adopted by the MFIs in India. They are as follows:

1. SHG Model
2. JLG Model
3. Grameen Bank Model

Self Help Groups (SHG)

What is SHG?

It is a savings based model. Self-help group (SHG) is a voluntary association of about 10-20 men
or women in similar economic conditions. The members of the group make small savings to a
common fund on a regular basis until they have enough capital in the group to start their own
lending process. These funds can then be utilized for lending purposes (to members or other
people). The purpose, amount and rate of interest are decided by the group itself. Usually, loans
are used for productive purposes like income generation activities like starting a business. The
members repay the money in monthly installment with interest so that the money in revolving
fund can be used continuously. Self Help Groups have well defined rules, hold regular meetings
and maintain records of financial transactions like amount saved and loans granted. The group
members use collective wisdom and peer pressure to ensure proper end-use of credit and timely
repayment because of which the need for collateral is eliminated. The primary goal of such
groups is to ensure financial security of the members by promoting savings and credit activities,
and by encouraging development of micro-enterprises.

Such groups lead to a strong and permanent improvement of member’s socio-economic


conditions in a number of ways:

 Initiation of savings and credit activities and promotion of income generating programs in
such self-help groups brings more economic development and independence to members
and their families.

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 Formation of such organized groups facilitate discussion of many issues pertaining to
their socio-economic, educational and health status thus providing a forum to initiate
many participatory activities (including training and awareness camps).
 This process also leads to increased confidence and social status, especially for women,
in their community.

Because the amount of money that SHG members of a newly formed group can save each month
is very small, it became very clear early on that there is a need for additional funding
from external sources to increase the amount of money that would be available for micro-loans.
This is where the role of external agencies like commercial banks, NBFC-MFI, NGO comes into
picture. These interveners have the experience to identify such natural groups that are linked by a
common bond like caste, community, place of origin or activity. At the grass root level, the
formation of SHG is initiated and encouraged by these external agencies. Once the basic group is
identified the facilitator builds in processes and systems that make the SHG a viable, sustainable
institution.
A number of NGOs are specializing in promoting and motivating SHGs. One such NGO is
READ which was started in 1994 and currently operated in Tamil Nadu. They support 1300
SHGs consisting of women belonging to different caste groups, from Below Poverty Line, who
are mostly landless laborers. The READ staff gives basic training to SHGs on a variety of topics
like rules of SHG, accounts training, leadership development, capacity building, and self-
employment. After the training, members are asked to start saving (at least Rs. 50 per month)
which could then be used for internal micro loans. These loans are used for income generating
activities like purchase of bullocks, poultry, and sewing machines. If the group requires more
funding they can apply to READ for a loan. The loan committee of READ verifies the
application and sanctions the loan only to eligible groups. Before sanctioning the loan, a loan
agreement is signed by the group to which the loan is being given. Most lenders; whether
commercial banks, NGOs, NBFC-MFI; prefer to give loan to SHG as a whole (who then
disburse it to applicant members) instead of directly giving loan to individual members. This
assures better oversight and high repayment rates due to peer group structure of the program. At
READ, average loan size is Rs. 10000-20000 at a rate of 18% which has to be repaid within 12-
24 months by way of monthly installments. Thus, with the training and financing provided by

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READ many SHGs in the area were able to develop group activities like soap making, cashew
nut processing, candle making, weaving, etc.

SHG bank linkage program


The concept of Self Help Group first gained momentum in India when NABARD introduced
SHG Bank linkage program in 1992 with the aim of improving rural poor’s access to formal
credit system in a cost effective and sustainable manner thus ensuring financial inclusion. The
initial target was to link 500 SHGs with the banking system. As per the report on micro finance
by NABARD for the year 2016-17, this program helps 85 lakh SHGs with deposits of about Rs.
16114 crore and annual credit offtake of Rs. 38800 crore.
Under this program, SHGs are allowed to open savings account in the group’s name with the
bank and deposit their savings in this account. This is the first step in establishing links with the
formal banking system. In times of need, SHGs are sanctioned savings linked loans by the bank.
The saving to loan ratio can vary from 1:1 to 1:4. Rate of interest charged by banks is the Prime
Lending Rate that they charge to their best of customers. Banks sanction loan only after a
thorough appraisal of the group’s activities in respect of regularity of meetings, savings, recovery
of money internally lent, income generation, maintenance of books of accounts, etc.

Benefit to banks
As per the RBI’s latest (May 2016) Priority Sector Lending norms, bank credit to members of
SHGs is eligible for priority sector advance under respective categories viz., Agriculture, Micro,
Small and Medium Enterprises, Social Infrastructure and Others.
Till the early 1990s, the feeling among the bankers was that rural people do not have ability to
save or borrow. SHG-Bank Linkage Model brought about an attitudinal change among the
banking community and they no longer look SHG Bank Linkage Model as social sector
banking. Banks while fulfilling their financial inclusion duties by extending the banking services
to the rural poor have found SHG as a platform for reducing their transaction and risk
cost. Imagine a scenario where all the members of 85 lakh SHGs to be individually linked to
banks. The cost of transacting with this huge segment would have been a big drain on banks’
human and financial resources. By adopting the group approach, banks have reduced their
transaction cost to a significant extent. Risk cost, usually associated with any type of loan

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extended by banks, is mitigated in the group approach. Mutual guarantee and peer pressure acts
as the best collateral or security while doing business through SHG model. Further, a portion of
the groups’ savings lying with the banks is a significant source of low-cost deposits available
with the banking community for profitable deployment. Another incentive to the bank is the high
recovery rate. As per NABARD’s report, average NPA under this program all over India was
6.5% in the year 2016-17.
Models under the program
1. SHGs formed and financed by banks

Banks directly provide financial support to SHGs without intervention of any SHPI. In this
model, the banks play dual role of promotion of SHGs and also provider of credit to SHGs.

2. SHGs formed by Self Help Promotion Institutions (SHPIs) and directly financed by
banks

SHGs are promoted, nurtured and trained by specialized institutions like NGOs. Banks open
saving accounts and then provide credit directly to the SHGs, while NGOs acted as facilitators.
Hence, SHPI has an important role to play in the sense that it keeps a watch and ensures
satisfactory functioning of the SHGs even after the linkage.

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3. SHGs financed by banks using SHPIs as financial intermediaries

In this model, the SHPI have taken the role of a financial intermediary between the banks and a
number of SHGs. Again, the SHPIs take up such responsibilities only in respect of the groups
promoted and nurtured by them and not for other groups. The SHPI accepts the contractual
responsibility for repayment of the loan to the bank. In this respect it is indirect linkage support
to the SHGs. Example, READ received a loan of Rs. 3 crore from HDFC Bank in the year 2007.
This loan was then disbursed to the SHGs under READ.

Joint Liability Group (JLG)- MFI model

Group-based credit is a common practice in microfinance. Rather than lending to individuals,


MFIs usually lend to small groups of people who come together to borrow money and ensure
timely repayment of the loan. More people tend to come forward and take a loan when they are
part of a group. Also, the pressure ensures that every member of the group repays. From the
lending institution's point of view, lending to groups usually proves more cost-effective, since
the cost with each loan is reduced by lending to groups.

A Joint Liability Group is usually a group of who come together to borrow from an MFI. The
members in a JLG are also from similar socioeconomic backgrounds and usually the same
village. A JLG is different from SHGs in that the members share liability, for each other. If any
of the member's default, the other members need to pool in money to repay the MFI.

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JLG’s are usually formed by Farmers Associations, Panchayat Raj Institutions (PRIs), Farmers'
Clubs, Krishi Vikas Kendras (KVKs), State Agriculture Universities (SAUs), Business
Facilitators, NGOs, Agriculture Technology Management Agency (ATMA), Bank branches,
PACS, Other Co-operatives, Government Departments, Individuals, Input dealers, MFIs / MFOs
etc.

Objectives of JLG

 To provide credit to farmers, especially small, tenant farmers, lessees, individuals taking
up farm activities.

 To serve as substitute for loans to be provided to the target group.

 To minimize the risks in the loan portfolio for the banks through group approach, cluster
approach.

Criteria for membership

 Members should belong to similar socio-economic status, background and environment


carrying out farming and Allied activities and who agree to function as a joint liability
group. This way the groups would be organized by farmers/ individuals and develop
mutual trust and respect.
 The members should be residing in the same village/ area/ neighborhood and should
know and trust each other well enough to take up joint liability for group/ individual
loans.
 Members who have defaulted to any other formal financial Institution, in the past, are
debarred from the Group Membership.
 More than one person from the same family should not be included in the same JLG.

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There are two models of borrowing by JLG

A. Financing Individuals in the Group:


This model usually applies where the size of the group is 4-10 individuals.
The group is eligible for separate individual loans from the financing bank. In such way that each
group member is jointly and severally liable for repayment of all loans taken by all individuals in
the group. A simple loan application is submitted by the JLG to the bank. The individual
members of JLG become eligible for bank loan after the bank verifies the individual member’s
credentials.

B. Financing the Group:


This model is used when the size of the group is preferably of 4 to 10 individuals but may go up
to 20. This JLG functions as one borrowing unit. It is eligible for one loan, which could be
combined requirement of all its group members. JLGs that undertake savings apart from credit
are required to maintain books of accounts. They may also be graded by banks on the basis of
performance parameters. The credit requirements for the group may be worked out based on
combined credit plan needs of individual members.

Incentive for promotion of JLGs

To facilitate the promotion and formation of JLGs by the banks NABARD provides the financial
grant assistance to the banks. For each JLG formation, NABARD provides Rs. 2000 in three
installments. In the first installment, the bank will receive Rs. 1000 after sanction of the loan by
the bank. Second and Third installment would be released on the basis of the performance of the
JLG members.

Loan limit
Since loans are granted against the mutual guarantee by the group maximum amount of loan is
usually restricted to Rs. 50,000 per individual both under both, A and B models.

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Grameen Bank Model of Bangladesh
The Grameen Bank was founded by Mohammed Yunus, a Bangladeshi economic professor.
Yunus was born in 1940 in Chittagong. He attended Chittagong University in Bangladesh and
received a Ph.D. from Vanderbilt University. During his stay in the United States in the 1960s he
was influenced and inspired by the idealism, civil rights movement, and student activism he saw
and experienced. He embraced Martin Luther King as a hero. Yunus said that his most powerful
memory from his youth was leaving South Asia to attend a Boy Scouts World Jamboree.

Yunus returned to Bangladesh in 1971 after it became independent and took a position at
Chittagong University. After the great flood and famine in Bangladesh in 1975 Yunus began
visiting villages near Chittagong.

Yunus reportedly got the Grameen idea one afternoon in 1976. He took a walk to a village a
mile or so away from Chittagong University, where was head of the department by that time, and
he ran into an old woman selling bamboo stools who said she made only two cents a day from
her business. When Yunus asked her why She made so little the woman told Yunus she needed
loans to buy materials and said the person who lent her money was the same person who bought
her final product. The buyer bought her stools at an artificially low price, keeping the woman
perpetually in debt, in a kind of village version of indentured servitude. Yunus gave the woman
and 47 other villagers’ loans of $27. All of them paid him back.

Yunus and his students did surveys in other villages and found that villagers had virtually no
capital to invest in their business and were thus easily manipulated by moneylenders and
middlemen who bought their products. Yunus initially gave out the loans in one village from a
tea stall. Over time the system evolved into micro-financing.

The Grameen Bank (GB) is based on the voluntary formation of small groups of five people
to provide mutual, morally binding group guarantees in lieu of the collateral required by
conventional banks. Women were initially given equal access to the schemes, and proved to
be not only reliable borrowers but also astute entrepreneurs as well. GB has successfully
reversed conventional banking practices by removing collateral requirements and has
developed a banking system based on mutual trust, accountability, participation and
creativity.

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According to Professor Yunus the founder of the Grameen Bank, credit is seen as a cutting
edge tool for affecting those inequalities that confine the poor to a poverty cycle and for
releasing the inherent capacities in people. Thus, it restores some sort of social power which
has been denied to the poor because they lack collateral. Professor Muhammad Yunus argued
that the conventional banking system is anti-poor, anti-women and anti-illiterate and thus, has
contributed to maintaining the statuesque between the rich and poor. Thus microcredit issued
to small groups, is purported to enable them the opportunity to purchase equipment and other
inputs and engage in micro enterprises of their choice.
Thus objectives of the Grameen Bank Project were:
 To promote financial independence among the poor
 Providing banking services to the rural poor
 Eliminating exploitation of the rural poor by moneylenders
 Facilitating self-employment projects for unemployed rural people
 Making women self-reliant by providing them opportunities through Grameen Bank
 To reverse the vicious cycle of low income, low saving & low investment, into a new
cycle of more credit, more investment, more income.

To start with, Yunus took loans from commercial banks and extended the money to 42 needy
women in Jobra village in Chittagong district. The project spread to surrounding villages
between 1976 and 1979.
 Through a special relationship with rural banks, he disbursed and recovered thousands
of loans, but the bankers refused to take over the project at the end of the pilot phase.
They feared it was too expensive and risky in spite of his success and argued that it
was initially successful because Yunus implemented it around the university campus
where he had a good reputation. In order to convince bankers about the project’s long-
term viability, Yunus took two years leave from the university and started working in
the Tangail district. The Bangladesh Central Bank provided financial support for the
Tangail project and Yunus was appointed as the Project Director. Against the advice of
banks and government, Yunus carried on giving out 'micro-loans'.
 With the successful implementation of the Grameen Bank project in the Tangail
district, it was extended to other districts in the country. By 1980, Grameen Bank had

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disbursed $1.10 million as loans to the rural poor. In 1983, formed the Grameen Bank,
meaning 'village bank' founded on principles of trust and solidarity. Initially,
government contributed around 60% of the bank’s capital and bank members held the
remaining 40%. However, by 2003, government held only 7% and members held a
93% stake in the bank.
 Initially, Grameen Bank raised funds through bonds issued to the commercial banks
and it also borrowed from Central Bank at subsidized interest rates. Grameen Bank
also got funds from international agencies like the World Bank and the Ford
Foundation. Foreign governments also provided funds for the Grameen Bank at
subsidized rates.
 In the late 1980s, Grameen Bank diversified into a number of different fields. The
banks repayment rate suffered from the economic disruption following the 1998 flood
in Bangladesh, but it recovered in the subsequent years.
 By 2002, Grameen Bank had 2.4 million borrowers (95% of them were women) and its
activities were spread across 41,000 villages with over 1,100 branches. By August
2002, it had disbursed cumulative loans of $3708.22 million and the loan repayment
rate was reported to be around 95%.
 By beginning of 2005, the bank had loaned over USD 4.7 billion and by the end of
2008, USD 7.6 billion to the poor. By 2006, Grameen bank Branches numbered over
2100.
 The Success Story of Grameen Bank The Grameen Bank model was one of the most
widely researched microfinance models all over world. Its success inspired similar
projects in more than 40 countries around the world, including a World Bank initiative
to finance Grameen – type schemes.
 More recently, Grameen has started bond sales as a source of finance. In 2013,
Bangladesh parliament passed 'Grameen Bank Act' which replaces the Grameen Bank
Ordinance, 1983, authorising the government to make rules for any aspect of the
running of the bank.
 As of 2017, the Bank had about 2,600 branches and nine million borrowers, with a
repayment rate of 99.6%. 97% of the borrowers were women. The Bank has been active
in 97% of the villages of Bangladesh. Its success has inspired similar projects in more

40
than 40 countries around the world, including a World Bank initiative to finance
Grameen-type schemes.
 Grameen Bank is now expanding into wealthy countries, as well. As of 2017, Grameen
America had 19 branches in eleven US cities. Its nearly 100,000 borrowers were all
women.

 The Bank had four tiers, the lowest level being branch office and the highest level
being the head office. The branch office supervised all the ground activities of the
bank such as organizing target groups, supervising the credit process and sanctioning
loans to members. Program officers assisted the area office to supervise the utilization
of loans and their recovery. All area offices were under the purview of a Zonal Office.
All zonal offices reported to the head office situated in Dhaka.

41
MSME (Micro- Small and Medium Enterprises)

MSME Micro, Small & Medium enterprises- is the pillar of economic growth in many
developed, and developing countries in the world. The Micro- Small and Medium Enterprises
(MSMEs) are small sized entities in terms of their size of investment. They are contributing to
output, employment, export in the economy. They perform a role in the economy by providing
employment to a large number of unskilled and semi-skilled people, contributing to exports,
raising manufacturing sector production and extending support to bigger industries by supplying
raw material, finished parts and components.

MSME has employed more than 50 million people, and contributing to the GDP-MSME sector
forms 8% of GDP.

Share of MSME in Manufacturing, Exports and Employment sectors in India:

Sector Percentage(%) share


1 Manufacturing 45
2 Exports 40
3 Employment 69

Manufacturing Enterprises
The enterprises engaged in the manufacture or production of goods pertaining to any or
employing plant and machinery in the process of value addition to the final product having a
different name. The Manufacturing Enterprises are defined in terms of investment in Plant &
Machinery.
 A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs.
25 lakh;

 A small enterprise is an enterprise where the investment in plant and machinery is more than Rs.
25 lakh but does not exceed Rs. 5 crore;

 Am edium enterprise is an enterprise where the investment in plant and machinery is more
than Rs.5 crore but does not exceed Rs.10 crore.

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Service Enterprises
The enterprises engaged in providing or rendering of services and are defined in terms of
investment in equipment.
 A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10
lakh;

 A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh
but does not exceed Rs. 2 crore

 A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore
but does not exceed Rs. 5 crore.

MSME Loan

Public sectors banks have been directed to open at least one specialized MSME branch in each
district. The banks can categorise the general branch that has 60% or more advances to MSME
sector as a specialized MSME branch. The branch must be easily accessible by the entrepreneurs
and it must have person having expertise. Those branches must focus on rendering service to the
MSME sector and it can occasionally render other services to other sectors and borrowers. Banks
like Allahabad Bank, Bank of Baroda, State Bank of India, Bank of India, IDBI Bank, Union
Bank have opened special branches for MSME lending.

Who can opt for a MSME Loan?

Micro businesses encompassing small production units and rendering services can opt for the
MSME loan. They can avail the loan either to start a new micro business or strengthen existing
business. Any entrepreneur who wants to start a small or medium enterprise is eligible for SME
loans. An entrepreneur already running a small or medium business is also eligible for SME
loans. If you are above 25 years and below 65 years of age you are eligible for a MSME Loan if
your business,

 Is profitable for three previous years

 Is stable and growing

 Is filing ITR
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MSMEs can avail a business loan amount above Rs 3 lakhs and up to Rs 50 lakhs if they can
show income and ability to repay. The loan tenure is between 12 and 36 months. For example,
you could be a small manufacturer or a service provider such as a hospital, or a small scale
manufacturer, and if you satisfy the business loan eligibility criteria as above then you can avail
the loan.

Cluster-Based Approach for MSME Funding


Clustering is an approach adopted by financial companies to design the process of making credit
accessible to the MSME’s. Clustering organizes the diverse businesses into multiple groups with
similar data points. The process is segregating businesses with similar traits into a unified group,
in order to provide the challenges and opportunities available for the same.

The cluster-based approach is increasingly gaining steam in India. Under the Scheme of Fund for
Regeneration of Traditional Industries (SFURTI), and Micro and Small Enterprises Cluster
Development Programme (MSE-CDP), the Ministry of Micro Small and Medium Enterprises has
approved a list of clusters in 121 Minority Concentration Districts. Furthermore, the United
Nations Industrial Development Organization (UNIDO) has recognized 388 industry clusters
spread over 21 states in the country.

Benefits of Funding MSMEs via Clusters


Since most of the MSMEs are operating in unstructured & unorganized way so their credit
assessment happens on the basis of cash flow analysis. NBFCs try to develop cluster lending
approach. The cluster-based approach helps financial corporations discover patterns in the
scattered group of MSMEs and make funding available.

 Adequately monitoring the funds

 Reducing the costs of providing credit

 Dealing with a large number of MSMEs by organizing them into well-defined groups.
Referencing becomes easy for lender. When their experience become good over the period of
time with a cluster, NBFCs tend to establish their own structures. This enables NBFCs to take a
call while providing funds to other businesses in the same cluster.

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Importance of MSME Sector in India

 Creates large scale employment

Since the enterprises falling in this sector require low capital to start the business, it
creates huge employment opportunities for many unemployed youths.

 Economic stability in terms of Growth


MSME is a significant growth driver in India, with it contributing to the tune of 8% to
GDP. Exports sector in India constitutes about 40% of contribution from MSME. MNCs
today are buying semi-finished, and products from small enterprises. It helps create a link
between MSME and big companies.

 Minimum Expenses

In large scale organizations, one of the key challenges is to retain the human resource
through an effective human resource management professional manager. But in case of
an MSME, the requirement of labour is less, and it does not need a highly skilled
labourer. Hence, the indirect expenses incurred by the owner are also low.

 Simple Management Structure

MSMEs do not require a huge capital to start. With limited resources available within the
control of the owner, decision-making becomes easy and efficient. A small enterprise
does not need to hire an external specialist for its management. The owner himself/herself
can manage it. Therefore, it can be run single-handedly.

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Challenges faced by microfinance sector
1. Inability to generate sufficient funds
Inability of MFIs to raise sufficient fund remains one of the important concern in the
microfinance sector. Though NBFCs are able to raise funds through private equity
investments because of the profit motive such MFIs are restricted from taking public
deposits. Not-for-profit companies which constitute a major chunk of the MFI sector have to
primarily rely on donations from Government and institutions like NABARD and SIDBI. In
absence of adequate funding from the equity market the major source of funds for MFIs are
the bank loans, which is the reason for high Debt to Equity ratio of most MFIs. After the
Andhra crisis it is reported that banks have stopped issuing fresh loans. The problem of
inadequate funds is even bigger for small MFIs as they find it very difficult to get bank loans
because of their small portfolio size and so they have to look for other costlier sources of
fund.

2. Multiple Lending and Over-Indebtedness


As per RBI guidelines, Non-banking finance companies in the space are formally not allowed
to lend more than Rs 100,000 to the same borrower. However, entities such
as banking correspondents (BCs) lend multiple times to the same person, facilitated by the
fact that regulation doesn’t count BC loans in the micro finance loan limit. MFIs are getting
affected because borrowers are failing to make payments and hence their recovery rates are
falling, while over-indebtedness is making the borrower depressed and in some cases forcing
them to commit suicide. Multiple lending is eating away the opportunity of new borrowers.

3. Cluster formation
MFIs’ drive to grab an established market and reduce their costs is resulting in formation of
clusters in some areas leaving the others out of the microfinance outreach. By getting an
established microfinance market, MFIs reduce their initial cost in group formation of clients,
educating them and creating awareness about
This cluster formation is restricting MFIs from reaching to rural areas where there is the
actual need for microfinance. People in urban and semi-urban areas are already having access

46
to microfinance through SHG-bank linkage or individual lending, but in rural areas people
don’t have access to banks Because of the initial cost involved in serving a new location,
MFIs are not willing to go to such remote locations. This is the reason most of the MFIs have
their branches in urban and semi-urban areas only resulting in a very low rural penetration of
microfinance. It seems that most of the MFIs have not taken a lesson from the Andhra
crisis.

4. Financial illiteracy:

Like all other developing and underdeveloped countries, the literacy rate in India is very low.
This makes it difficult in creating awareness of microfinance and even more difficult to serve
them as microfinance clients. There are various sources of credit information in India, but
none of these focuses on small, rural borrowers. Credit information on such borrowers is
difficult to obtain because the majority of the rural poor rely on moneylenders and other
informal lenders, and it is not in the interest of such lenders to pass on a borrower’s good
credit repayment record to other providers of finance.

5. Regional Imbalances:

There is unequal geographical growth of Microfinance institutions and SHGs in India. About
60% of the total SHG credit linkages in the country are concentrated in the Southern States.
However, in States which have a larger share of the poor, the coverage is comparatively low.
Main reason for this is the state government support, NGO concentration and public
awareness

6. Language Barrier:

Language barrier makes communication with the clients (verbal and written) an issue that creates
a problem in growth and expansion of the organization because around 54% language barrier has
been identified in MFIs

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Mahalaxmi Saras – A Government Initiative

An initiative of the Government of Maharashtra to provide a marketing platform to rural


entrepreneurs and artisans, Mahalaxmi Saras is an annual exhibition-cum-sale of handicrafts,
handlooms and food products.

Over the years, Mahalaxmi Saras has carved a niche for itself as a platform for interaction and
exchange of innovative ideas, developing skills and spreading knowledge about indigenous and
traditional products for artisans from different parts of the country.

One of the biggest rural exhibitions held in the country, Mahalaxmi Saras has introduced nearly
5000 Self Help Groups to the urban consumers in the last decade. In addition to Self Help
Groups (SHGs) from Maharashtra, SHGs from various states of India participate in this annual
extravaganza. Last year, 27 states apart from Maharashtra participated in the exhibition which
saw sales of over Rs 8 crores.

With about 20,000 people visiting Mahalaxmi Saras daily, this rural exhibition is a melting pot
of different cultures and cuisines. Services they provide include:

 Food Products
 Food Court
 Jewellery
 Decorative handicraft
 Textile

Objective
The idea of the Mahalaxmi Saras Portal was conceived by the Principal Secretary, Rural
Development Department, with a view to provide a permanent online platform for the Self Help
Groups which will help them in being in constant touch with their customers and prospective
buyers, in addition to encouraging them to showcase their products and services.
Target Group: Rural Women Self Help Groups
Geographical Reach within India: Maharashtra State, as also other states of India
Geographical Reach outside India: Globally

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Achievements of the programme/project/initiative
1. Online presence of Women Self Help Groups
2. Increased sales of Rural Artisans’ products
3. Increased IT literacy among rural women
4. Project can be replicated among other states
5. Increased number of potential buyers of the Women Self Help Groups’ products

Key challenges faced while implementing the project/programme/initiative


1. Timeframe constraints
2. Manpower during development
3. IT literacy was required to be developed before launching the project.
4. The required infrastructure was not available at many places for data entry.
5. The Portal had to be in regional (Marathi) language. Some extra time was taken for translation
of the content
Bringing out new technologies and innovation are a part of the growth the country is
experiencing. Along with this, authorities are trying their best to bring out and explore the
creativity of women which are faded in the four walls of those rural village homes. Therefore,
the officials have created a platform through exhibitions where the women of self-help groups
get an opportunity to present their items.
With the exhibition cum sale of handlooms, handicraft and food products made by women of
self-help groups in Mumbai Mahalaxmi Saras exhibition was inaugurated by the Maharashtra
Governor Vidyasagar Rao.
The function was attended by Rural Development Minister Pankaja Munde. She elaborated the
idea of the exhibition by introducing the products worth Rs 10 crore, manufactured by these
groups, were likely to be sold at the exhibition. The fest contains 511 stalls out of which 70 stalls
are occupied for selling food. Self-help groups from 28 states participate in the exhibition. Stalls
are allotted to these groups through an online system.

49
Lijjat – A case study on women empowerment

Today, Lijjat is more than just a household name for 'papad' (India's most popular crispy bread).
Started with a modest loan of Rs 80, the cooperative now has annual sales exceeding Rs 301
crore (Rs 3.1 billion). What's more stunning than its stupendous success is its striking simplicity.
And perhaps that is the most interesting lesson managers can pick up from Shri Mahila Griha
Udyog Lijjat Papad. Sticking to its core values for the past forty years, Lijjat has ensured that
every process runs smoothly, members earn a comfortable profit, agents get their due share, and
consumers get the assurance of quality at a good price, and society benefits from its donations to
various causes. How has all this been possible? Its story shows how an organisation can infuse
Gandhian simplicity in all its activities. Here we look at its distribution cycle.

Every morning a group of women go to the Lijjat branch to knead dough, which is then collected
by other women who roll it into papads. When these women come in to collect the dough, they
also give in the previous day's production, which is tested for quality. Yet another team packs the
tested papads. Every member gets her share of vanai(rolling charge) every day for the work she
does and this is possible only because the rest of the system is geared to support it. The entire
cycle starts with a simple recruitment process. Any woman who pledges to adopt the institution's
values and who has respect for quality can become a member and co-owner of the organisation.
In addition to that, those involved in the rolling of the papads also need to have a clean house and
space to dry the papads they roll every day. Those who do not have this facility can take up any
other responsibilities, like kneading dough or packaging or testing for quality. Packed papads are
sealed into a box and the production from each centre is transported to the depot for that area.
Mumbai alone has sixteen branches and six depots. Each depot stocks production from the
nearby three to four branches, roughly about 400 boxes. In some smaller towns or villages, the
branch itself serves as the depot. The depots are the storage areas as well as pick up points for
distributors. The distributors pick up the quantity of papad they require and pay cash on delivery
because Lijjat pays their bens (members are called bens, or sisters) every day. Since they have an
estimate of the quantity each distributor takes, they produce accordingly. This ensures that they
neither stock inventory nor pay heavily for storage.

50
They have about 32 distributors in Mumbai. Each distributor picks up an average of 100 boxes
per day from the depot. This is where their job ends. They are not involved in how and where a
distributor delivers as long as he stays within the area Lijjat has marked for him. Generally, each
distributor has his three-wheeler and about eight to ten salesmen to deliver to retail outlets within
his territory.

To select a distributor, Lijjat first gives an advertisement in newspapers for the areas they have
marked. Members from the marketing division personally go and check the warehouse facilities
and only on their approval are distributors appointed. A distributor pays us Rs150, 000 as
deposit. The communication with distributors is regular through monthly meetings where they
discuss their problems and also the issues that distributors may have about quality, price, reach,
etc.

The company does not have individual door-to-door salesmen or women selling from homes --
only the appointed distributor for the area. The same system is followed for all products.

Distributing profits

Lijjat has accountants in every branch and every centre to maintain daily accounts. Profit (or
loss, if any) is shared among all the members of that branch. They have a committee that decides
how the profits are to be distributed. They generally buy gold coins -- 5gm or 10 gm, depending
on the profit. Everyone gets an equal share of profit, irrespective of who does what work,
irrespective of seniority or responsibility. Even a ben, who has recently joined gets the same
share as others who have been with us longer. Each branch calculates its profit and divides it
equally among all its members.

Mumbai has 12,000 members, the rest of Maharashtra has 22,000, and Gujarat has between
5,000 and 7,000 members.

Decentralisation

In two words -- decentralisation works. Lijjat has never shied away from sharing power in all the
activities. All sister members of the institution are the owners. As mentioned earlier, all profit or

51
loss is shared. Only the members have the authority to decide the manner in which profit or loss
should be apportioned among themselves.

The main committee of members manages the affairs of the institution. There are also
Sanchalikas, or supervisors, for each centre to look after the daily affairs of a centre. But the
work of the institution is such that each and every member can take any initiative or any
decision.

At the same time, each and every member has the veto power. All decisions, major or minor, are
based on consensus among members. Any single member's objection can nullify a decision.
Another important fact about the institution is that no male can become a member and no male
employee whether working or honorary or on salary basis has voting rights.

Other than following this philosophy for the institutional set up, they have try to avoid the usual
'management nightmares.' For instance, production is carried out not in one central location but
in hundreds and thousands of individual homes.

Certain activities, however, are centralised. For one, all raw materials are purchased in Mumbai
and then distributed to the 62 branches to ensure consistent quality of Lijjat Papad. Given the
vastness of India, every region produces different quality of urad, rice, spices, et cetera. If
procured locally, the final product would never be consistent in quality and Lijjat would have no
USP (unique selling proposition) in the market.

The other centralised process is the grinding of flour. The company owns two grinding mills, one
in Vashi (Navi Mumbai) and one in Nashik (in Maharashtra). Since the raw material is purchased
in Mumbai, grinding the flour at our own mills helps reduce costs. Pricing of the products is also
done at the head office. Lijjat papads all over India cost Rs 16.25 a kg. This price factors in the
cost of raw materials, transport, taxes, distributors commission, and profit percentage and so on.

52
Amul – A case study on cooperative movement

Situation of farmers

Over five decades ago, the life of an average farmer in Kheda District was very much like that of
his/her counterpart anywhere else in India. His/her income was derived almost entirely from
seasonal crops. The income from milk buffaloes was undependable. Private traders and
middlemen controlled the marketing and distribution system for the milk. As milk is perishable,
farmers were compelled to sell it for whatever they were offered. Often, they had to sell cream
and ghee at throw-away prices. In this situation, the private trader made a killing. Gradually, the
realization dawned on the farmers that the exploitation by the trader could be checked only if
they marketed their milk themselves. Amul was the result of the realization that they could pool
up their milk and work as a cooperative.

Kaira district co-operative milk producer’s union

The Kaira District Co-operative Milk Producers' Union Limited began pasteurizing milk for the
Bombay Milk Scheme in June 1948. By the end of 1948, more than 400 farmers joined in more
Village Society, and the quantity of milk handled by one Union increased from 250 to 5,000
liters a day. The success of Amul was instrumental in launching the White Revolution that
resulted in increased milk production in India. It is officially termed as Operation Flood by
Amul. The breakthrough technology of spray-drying and processing buffalo milk, developed by
Mr. H.M. Dalaya, was one of the key factors that contributed to the Revolution.

Business model

Amul has a Co-operative form with a blend of professionalism. In the corporate form of an
organization the shareholders are non-participative members whereas in this form the members
are the participative owners of the organization. There are basically three tiers a dairy
cooperative viz., the village society- procurement unit, the union- which is the processing unit

53
and the federation which is the marketing unit all being an institution in itself. The institutions at
each tier have the bond of organic and inter-institutional linkages and obligations which provide
sense of purpose and directions in their activities. To manage these units efficiently the leaders
felt a need of the professionals. These professionals have a hierarchy similar to that of the
corporate structure with the managing director as their head. The Managing Director of all these
units is appointed by the board of directors. The board of directors comprises of the farmer’s
members who come from the respective societies. So, at each level the decision making lies in
the hands of the producers only, which give them a feeling of ownership to them.

Looking back at the path traversed by AMUL, the following features make it a pattern and model
for emulation elsewhere. Producing an appropriate blend of the policy makers, farmers board of
management and the professionals, bringing the best of the technology to rural producers,
providing a support system to the milk producers without their agro-economic system and
plugging back the profits, by prudent use of men, material and machines. Even though growing
with time and on scale, it has remained with the smallest producer members. AMUL is an
example par excellence, of an intervention for rural change.

54
Bharat Financial Inclusion Limited

Bharat Financial Inclusion Limited (formerly known as SKS Microfinance Limited) BFIL is a
non-banking finance company (NBFC), licensed by the Reserve Bank of India. It was founded in
1997 by Vikram Akula, who served as its executive chair until November 2011. The company's
mission is to provide financial services to the poor under the premise that providing financial
services to poor borrowers helps to alleviate poverty. In 2013, the company operated across 17
Indian states.

Background

BFIL was started as a non-profit NGO named Swayam Krishi Sangam (SKS Society) in 1997 by
Vikram Akula. In 2003, Akula created SKS Mutual Benefit Trusts (MBT) to change SKS
Society into a for-profit entity named as SKS Microfinance. The trusts raised INR 20 million
through donations as it was the minimum capital required to form an NBFC entity. With its
invested capital, the trusts held 99.5% stake in SKS Microfinance. SKS Microfinance secured a
Non-Banking Financial Company (NBFC) license in 2005 by the Reserve Bank of India. In
2004, Sitaram Rao was appointed as the company CEO after Akula. Akula retook the position in
2005. In 2007, SKS Microfinance raised $11.5 million through equity investments led
by Sequoia Capital. In 2008, it further raised $74.5 million through equity investments led by
Sandstone Capital. On 28 July 2010, SKS Microfinance debuted on the Bombay Stock
Exchange with an IPO that was oversubscribed 14 times. Muhammad Yunus expressed concern
that going public would put the demands of shareholders ahead of the poor. He added further, "If
they do it, I cannot stop them but I would encourage genuine Microcredit programs.” SKS
founder Vikram Akula resigned from the board on 23 November 2011. In 2015, P. H. Ravi
Kumar became the non-executive chairman.

Products

SKS Microfinance offers life assurance and a variety of financial loans – Income Generation
Loans; Mid-Term Loans; Long Term Loans; Loans for purchase of products like cook-stoves,
solar lights, water purifiers, mobile phones, bicycles and sewing machines; and loans secured on
gold jewellery. The company lists some of the social benefits of its financial product and service

55
offerings as "providing self-employed women financial assistance to support their business with
enterprises, such as raising livestock, running local retail shops called kirana stores, providing
tailoring and other assorted trade and services."

Operations

SKS Microfinance follows the Joint Liability Group (JLG) model. The methodology involves
lending to individual women, using five– member groups as the ultimate guarantor for each
member. Through group lending, situations of adverse selection and moral hazard due
to asymmetric information are better managed. "Social collateral" replaces
asset collateral (which is lacking in the poorer segments of society). Such a system works
because India is still a highly community-centric society. The concept of honor and respect
within society is deeply rooted in Indian culture and willful default invites condescending
glances, humiliation and even ostracism. In November 2015, SKS Microfinance Ltd has cut
interest rates by one percentage point to 19.75% on the loans it offers to low-income women
borrowers, making it the sole Indian micro lender to offer loans at a rate below 20%.The move
came after Reserve Bank of India (RBI) decided to double the borrower limit for microfinance
loans for less than 24 months. Lower interest rates can attract more borrowers in an increasingly
competitive market. Microfinance companies, which had started lending at around 28-34% in
2010, are now able to charge lower interest rates because of newer avenues to raise funds at
lower cost and their ability to operate more efficiently than before.

MFI Crisis in India in 2011:

In 2011, the micro finance industry (MFI) in India suffered a crisis due to the growing news of
suicides by borrowers, and SKS faced the brunt. In 2012, an independent investigation
commissioned by the company linked SKS employees to at least seven suicides of creditors
in Andhra Pradesh. A second investigation said SKS may have been involved in two other
suicide cases. In 2012, SKS Microfinance cut 1200 jobs and closed 78 branches in Andhra
Pradesh. Interviews with family members of the deceased, by BBC suggested that the reason for
these suicides appeared to be large sub-prime loans taken by the villagers, with the active
encouragement of SKS loan agents.

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More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010,
according to media reports compiled by the government of the south Indian state. The state
blamed microfinance companies--which give small loans intended to lift up the very poor--for
fueling a frenzy of over indebtedness and then pressuring borrowers so relentlessly that Some
took their own lives. However, internal documents obtained by The Associated Press, as well as
interviews with more than a dozen current and former employees, independent researchers and
videotaped testimony from the families of the dead; show top SKS officials had information
implicating company employees in some of the suicides.

An independent investigation commissioned by the company linked SKS employees to at least


seven of the deaths. A second investigation commissioned by an industry umbrella group that
probed the role of many microfinance companies did not draw conclusions but pointed to SKS
involvement in two more cases that ended in suicide. Neither study has been made public. Both
reports said SKS employees had verbally harassed over-indebted borrowers, forced them to
pawn valuable items, incited other borrowers to humiliate them and orchestrated sit-ins outside
their homes to publicly shame them. In some cases, the SKS staff physically harassed defaulters,
according to the report commissioned by the company. Only in death would the debts be
forgiven. In all these cases, the report commissioned by SKS concluded that the company's staff
was either directly or indirectly responsible. Caught in the despair of poverty, tens of thousands
of impoverished Indians kill themselves every year, often because of insurmountable debt. The
supportive structure of the microfinance companies was supposed to change that.

Originally developed as a nonprofit effort to lift society's most downtrodden, now microfinance
has increasingly become a for-profit enterprise that serves investors as well as the poor. As
India's market leader, SKS has pioneered a business model that many others hoped to emulate.
But the story of what went wrong at SKS has led current and former employees and even some
major shareholders to question that strategy and raises fundamental questions for the
multibillion-dollar global microfinance industry. ``At the end of it,'' said Alok Prasad, chief
executive of the Microfinance Institutions Network, the industry group that commissioned the
Glocal report, ``you come down to a handful of cases where some things went wrong. Is that
indicative of the model being bad or very rapid expansion leading to a loss of control?''

57
In 1997, an acolyte of Mohammad Yunus, Vikram Akula founded his own microcredit
organization, Swayam Krishi Sangam, Sanskrit for ``self-help society.'' In 2005, SKS started
operating as a for-profit company and Akula began chasing private investment to achieve the
massive scale required to dent global poverty.

In August 2010, SKS Microfinance--then India's largest micro lender--went public. Exuberant
investors oversubscribed the $350 million offering nearly 14 times. The stock surged more than
10 percent its first day. The company handed out 21,000 watches to employees in celebration.
Then media reports began to surface that over-indebted borrowers were killing themselves.
Police jailed microfinance employees, including dozens from SKS. Among the charges was
abetment to suicide, essentially driving people to kill themselves, a crime under Indian law.
Authorities investigated 76 cases in which employees from SKS and other microfinance
companies were blamed for driving borrowers to take their own lives. The state passed a law
designed to clamp down on abuses with new restrictions on loan disbursement and collection and
onerous registration requirements on the companies. Micro lending in India's largest microcredit
market was effectively shut down. Microfinance officials fought the new law and denied the
charges, accusing the state government of trying to gain traction with voters and punish
companies for capturing valuable market share from state-run lending groups. Established micro
lenders such as SKS said loan sharks operating under the guise of microfinance were behind the
excesses. SKS and other companies asked a court to stop the arrest of their employees. The court
issued a stay on new arrests. Today, no one is in jail.

A profound shift in values and incentives at SKS began in 2008.

In October, Boston-based Sandstone Capital, now SKS' largest investor, made a major
investment. It joined U.S. private equity firm Sequoia Capital, which funded Google and Apple
and is SKS' largest shareholder, on the board of directors. Mr. Akula, who had been chief
executive in the company's early days, stepped down in December 2008 but stayed on as
chairman. The company brought in new top executives from the worlds of finance and insurance.
SKS also began transferring more loans off its books, selling highly rated pools of loans to
banks, which then assumed most of the associated risk of borrower default. That freed SKS to
push out more and bigger loans. In December 2009, SKS launched a massive sales drive. The
“Incentives Galore'' program ran through February 2010--just one month before the company

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filed its IPO prospectus. Agents won prizes worth up to 10 times their average monthly salary for
signing huge numbers of new borrowers. Mr. Vautrey said he coordinated the shipment of 8,800
televisions, refrigerators, gold coins, mixers, washing machines and DVDs as rewards for more
than 3,000 districts nationwide. One loan officer signed up 273 groups in a month. Under
training protocols, the ideal number of groups formed per month is 12, the maximum is 36,
according to field agents and reports written by Mr. Akula. ``The focus is only on targets,''
Ramulu Sirgapur, who spent a decade at SKS before he left in December, told AP. ``Even if
we've given feedback, there might be recovery or repayment issues. That's OK. Just concentrate
on growth.'' The result: Management had a great set of numbers to show investors as it shopped
the IPO. In a month, SKS could add 400,000 borrowers and 100 branches, and train more than
1,000 new loan officers. SKS had 6.8 million borrowers and had disbursed $3.2 billion in loans.
India was pimpled with SKS branches, which bloomed in nearly 100,000 villages.

SKS said it was the fastest growing microfinance company in the world. But basic principles of
lending were overlooked, according to interviews with current and former employees, as well as
correspondence and internal PowerPoint presentations by Mr. Akula. Six current and former
SKS staffers with experience in the field told the AP they no longer had time to check a
borrower's assets or follow up and make sure a loan was put to productive use. They said that
they were pressured to push more debt onto people than they could handle and that the number
of days devoted to borrower training was cut in half. ``You have a borrower group, and a loan
officer goes out and trains them, educates them, then they give the loan. That's the SKS I'd seen
in 1999. That was the whole model on which microfinance is supposed to work.

In spring 2011, Mr. Akula began circulating a plan to spend $10 million to train financial
counselors who would make sure clients weren't getting into too much debt and used their loans
productively. The plan was never adopted.

Privately, Mr. Akula prepared a 55-page presentation for the board that detailed the seven
suicides that SKS' outside investigation had blamed on the company. The presentation showed
how the pre-IPO push for growth led to a systemic breakdown, and again urged core reforms to
restore training and lending discipline. Board members received copies of Akula's presentation at
a July 26, 2011, meeting, said a former employee who helped prepare the material and spoke
anonymously for fear of retribution. The minutes of the meeting, however, make no mention of

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the report. Ravikumar said the board reviewed reports from the Microfinance Institutions
Network, but none of them implicated SKS employees. Mr. Akula continued to complain to the
board that his presentation had been ignored. He summarized his concerns about the company's
direction in emails, obtained by the AP, to seven board members, including Sequoia's Sumir
Chadha, Sandstone's Paresh Patel and three independent directors: Ravikumar, Harvard's Tarun
Khanna, and Pramod Bhasin, the former chief executive of Genpact.

Finally, on Nov. 23, 2011, Mr. Akula resigned. Mr. Vautrey said he was targeted, and SKS
began termination proceedings against him on Feb. 6. Three members of his staff have been fired
and have filed wrongful termination complaints with the state. On February 6, SKS also sold
2.43 billion rupees ($49 million) in securitized loans. The stock price surged 10 percent. Top
executives have been on the road, hoping to raise 5 billion rupees ($100 million) from
international investors. Mr. Sai, the company spokesman, said SKS has hired an ombudsman, is
spending $3 million to improve its customer grievance program and has revamped training to
ensure that employees comply with current regulations and do not lend to over-indebted
borrowers. He said the company would like to reorganize incentives to maintain rapid growth
while ensuring loan quality. Those changes have yet to be implemented, he said.

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MICROFINANCE IN BRAZIL:
Considering Brazil’s indicators in terms of size, population, economy and social
development, it is possible to conclude that the country represents a significant market for
microfinance. Brazil has the world’s fourth largest land area, 8.5 million square kilometers, fifth
largest population, with 174 million inhabitants, and the eighth largest economy in terms of
Purchasing Power Parity. On the other hand, Brazil’s income inequality is among the most
pronounced in the world and the country has the largest impoverished population among Latin
American countries. Brazil has an economically active population of 77.5 million inhabitants,
which corresponds to 46% of total population, half of the economically active population works
for microenterprises with up to five employees, and one forth work in the informal sector,
accounting for 8% of the country’s total GDP. Out of the 13.9 million microenterprises, 62.7%
use their profits to finance the activities while just 4.8% had access to credit. The inequality and
poverty rates and the high incidence of microenterprises suggest the existence of a huge potential
market for microfinance in Brazil, but the demand for microfinance services outstrips the supply
by far.

DESCRIPTION OF POLICIES ADOPTED

1. Expansion of PRONAF

PRONAF, which stands for Programa de Fortalecimento da Economia Familiar (program to


strengthen the household’s economy), was created during Mr. Fernando Henrique Cardoso’s
administration, and expanded by Mr. da Silva. According to the Banco Nacional de
Desenvolvimento Econômico e Social, the objective of the program is to finance agricultural,
non-agricultural, cattle breeding activities of small farmers, generating income and employment
for them and their families. The program defines non-agricultural activities as the services
related with rural tourism, handicraft production, familiar agricultural businesses, and other rural
related services. The program is targeted at supporting the production of small farmer families,
which are divided groups.

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2. Increase of the Resources for Microcredit

The increase in resources for microcredit programs by R$ 1.9 billion through the allocation of
2% of total cash deposits to microcredit operations, which is considered a central measure
adopted to increase the access of low-income population to credit. The government identified
that one of the major flaws in the Brazilian financial system was the absence of small credit
lines, with small costs, to the lower income population. To solve the shortage of credit lines, the
government created in September 2003 the law 10,735, which demands that private banks, the
Caixa Econômica Federal (state bank), and credit cooperatives direct 2% of all cash deposits to
microcredit, if not, the financial institution must put the amount which corresponds to 2% of its
cash deposits into the Central Bank, without earning any interest on it. The law is enforced by
the Conselho Monetário Nacional (National Monetary Council). This law made the creation of a
microcredit program possible, because the funds collected from the deposits are transformed into
credit lines to the poor.

3. Increase of the Number of Local Financial Agents

The government stated that in order to increase access to financial services by the low-income
population, it was necessary not only to increase the availability of credit but also to increase the
number of locations providing the financial services in impoverished areas. The strategy adopted
was to increase the participation of state owed banks, Banco do Brasil, Banco do Nordeste,
Banco da Amazônia, and Caixa Econômica Federal, in microfinance, and to increase the number
of banking correspondents. The bank operates through its branches and mostly in points of
services, which are located in places as accessible as drugstores, supermarkets, markets, and
bakeries. These points of service are teller machines, operated by a trained professional, to offer
the same types of services that a regular branch teller offers. It is not an automated teller
machine, ATM, which the bank also offers.

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4. Creation of Financial Products and Services to the Poor

The government argues that, in order to provide financial services to the poor, it is important not
only to increase the number of financial agents, but also to create financial products according to
the needs of the poor. These products were: simplified checking and savings accounts, low cost
insurance plans, Among the low-income population, the simple act of opening a checking or a
savings account is not as easy as it sounds and as it should be. Financial institutions require a
minimum income, a minimum level of operations, and charge service fees that are expensive for
those who have so little. The client base of the programs is low-income workers from public and
private sectors and from social security, but it is exclusive to formal workers, because of the
nature of the automatic repayment. The Seguro de Vida Popular is a good initiative of the
government in increasing financial services target at the low-income population, but it is very
limited.

5. Creation of the PNMPO

The Programa Nacional de Microcrédito Produtivo Orientado (National Microcredit Program


Orient to Production; PNMPO) was created with the objective of extending the access of
entrepreneurs to production oriented credit, generating jobs and income.

6. Alteration in the Legal Framework of Cooperatives

Improvements on credit cooperatives’ legal framework to expand their outreach; the alterations
include: permission to create credit cooperatives under the principle of free entry, authorization
to receive funds from the rural savings program, exemption to three types of taxes, and creation
of the Capitalization Program for Credit Cooperatives; The government’s main objective with
credit cooperatives is to expand the access of lower income population, in this case especially
micro entrepreneurs.

BARRIERS FOR MICROFINANCE IN BRAZIL

 Lack of Macroeconomic stability

 Crowding out by public sector

 Lack of Demonstration Effect

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Conclusion
Indian Microfinance today is a dynamic space with multitude of players offering various
products and services to low income clients with different approaches. It started as an alternative
source of finance to the unserved masses comprising the bottom of socio economic pyramid and
gradually turned out to be a tool for uplifting their social standard and working their way out of
poverty. With sustainable growth and modest returns, the sector, which initially was seen as “Not
for profit” sector, has attracted several large players over the past years. Banking system along
with other legal forms such as NBFCs, cooperatives and NGO-MFIs all are approaching rural
markets. Many new forms of relationships are emerging among these entities to leverage on each
other’s strength which has led to overall growth of the sector.

In India, the MFI sector has grown remarkably during past two decades, spreading across the
country and surviving the 2010 Andhra Pradesh microfinance crisis. A report by E&Y titled
‘Evolving Landscape of Microfinance Institutions in India’ published in July 2016 reports that
till 2016, MFIs in India reached out to 32 million clients with an outstanding credit of Rs. 532
billion. We see nearly 100% increase in the loan portfolio from 2015 to 2016 primarily because
of relaxed RBI norms with respect to exposure to single borrower from Rs. 50000 to Rs. 100000.
Though MFIs provided loans for both consumption and productive purposes, a major part of the
credit flow, 95% (excluding household finance) 2016, is channelized for income generating
activities.

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There was a steady growth in the average credit outstanding per client, by 76% from Rs. 7533 in
2012 to Rs. 16394 in 2016. This can be viewed as a good sign because as customers mature and
repay their previous loans, their credit worthiness develops and financial institutions start
providing them with consumption loans and other large ticket income generating loan.

As per an article in Business Standard dated April 2018, at national level, the portfolio at risk
(PAR) — value of loans outstanding was almost 6 per cent at the end of December 2017, up
from 0.3 per cent at the end of September 2016. It had soared to 14.1 per cent at the end of
March 2017 because of the effects of demonetization. The loans sanctioned and repayment of
these loans in the microfinance sector is primarily in cash because of which we see prolonged
effect in non-repayment trend. Entities in the segment said that even 6% is a worrisome level
because people have not been fully able to resume their business and hence are not able to pay
back. But in the opinion of an expert it’s only the old demonetization period loans which are
displaying weakness; new loans show strong recoveries. The new portfolio is showing decent
repayment, back to normal levels of less than one per cent delinquency; the older portfolio needs
to be written off.

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Using these metrics, it can be inferred that microfinance has evolved as a developmental tool in
the past few years by adopting various methods to deliver financial services to the people from
the bottom of the pyramid. It also shows that MFIs have achieved some success in outreach to
the intended customers while also finding a way to make profits from the same.

Recommendations

1. Proper Regulation:
The regulation was not a major concern when the microfinance was in its nascent stage and
individual institutions were free to bring in innovative operational models. However, as the
sector completes almost two decades of age with a high growth trajectory, an enabling regulatory
environment that protects interest of stakeholders as well as promotes growth, is needed.

2. Encourage rural penetration:


It has been seen that in lieu of reducing the initial cost, MFIs are opening their branches in
places which already have a few MFIs operating. Encouraging MFIs for opening new branches
in areas of low microfinance penetration by providing financial assistance will increase the
outreach of the microfinance in the state and check multiple lending. This will also increase rural
penetration of microfinance in the state.

3. Complete range of Products:


MFIs should provide complete range of products including credit, savings, remittance, financial
advice and also non-financial services like training and support. As MFIs are acting as a

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substitute to banks in areas where people don’t have access to banks, providing a complete range
of products will enable the poor to avail all services.

4. Technology to reduce Operating Cost:


MFIs should use new technologies and IT tools & applications to reduce their operating costs.
Though most NBFCs are adopting such cost cutting measures, which is clearly evident from the
low cost per unit money lent of such institutions.

5. Alternative sources of Fund:


In absence of adequate funds the growth and the reach of MFIs become restricted and to
overcome this problem MFIs should look for other sources for funding their loan portfolio.

6. Securitization of Loans:
This refers to a transaction in which the repayments from a set of microloans from one or more
MFIs are packaged into a special purpose vehicle, from which tradable securities are issued. As
the loans from multiple MFIs can be pooled together the risk gets diversified. Though
securitization of loans and portfolio buyout are similar in many ways like first loss default
guarantee clause, limit to the amount of loans that can be sold off etc. The major difference
between the two is that securitizations require a rating from a credit rating agency and that it can
be re-sold, which makes securitized loans attract more potential buyers. Also unlike portfolio
buyout, there can be multiple buyers and sellers for each transaction in case of securitization of
loans as compared to single buyer and single seller in portfolio buyout. Through securitization,
MFIs can tap new sources of investments because fund of certain types like mutual funds, which
are barred from directly investing in MFIs, can invest through securitized loans.

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Bibliography

 ‘Status of Microfinance in India: 2016-2017’ – Report by NABARD


 ‘Evolving landscape of Microfinance Institutions in India: July 2016’ – Report by E&Y
 www.mfinindia.org: Official Website of MFIN
 www.read.in/shg.html: Official website of NGO READ
 https://m.rbi.org.in//SCRIPTS/BS_ViewMasCirculardetails.aspx?id=9827:RBI Master
circular for guidelines to NBFC-MFI
 https://www.livemint.com/Politics/fqIZ3WZ9VSkidxCgWd6spM/Microfinance-Bill-set-
to-lapse-yet-again.html
 https://www.nabard.org/
 https://msme.gov.in/faqs/q29-what-cluster-financing
 http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475
 https://indianexpress.com/article/cities/mumbai/mahalaxmi-saras-exhibition-to-be-
inaugurated-today-5027818/
 https://www.investopedia.com/ask/answers/043015/what-difference-between-tier-1-
capital-and-tier-2-capital.asp
 https://www.investopedia.com/terms/r/riskweightedassets.asp
 https://www.bankbazaar.com/personal-loan/microfinance.html?
 https://www.microfinancegateway.org/what-is-microfinance
 https://www.business-standard.com/article/economy-policy/demonetisation-effect-
microfinance-npas-remain-elevated-in-many-states-118041200039_1.html

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