Indian microfinance sector is expected to grow nearly ten times by 2011 to a size of about Rs250 billion from the

current market size of Rs27 billion, at a compounded annual growth rate of 76%. Microfinance in India started evolving in the early 1980s with the formation of informal Self Help Group (SHG) for providing access to financial services to the needy people who are deprived of credit facilities. National Bank for Agriculture and Rural Development, the regulator for microfinance sector, and Small Industries Development Bank of India are devoting their financial resources and time towards the development of microfinance. Microfinance has enormous growth potential as half the worlds population earns less than US$2 per day, which is insufficient to meet their basic needs. One of the fastest growing sectors of India, microfinance is spearheading intense competition among the largest players. By the end of March 2007, microfinance institutions expanded their outreach to 50 million households and about 36.8 million borrowers. These institutions are organised under three models: SHG, Grameen model/Joint liability groups and Individual banking groups as in cooperatives. As of March 2007, both SHG bank linkage and MFIs have collectively disbursed US$3.7 billion to the poor. In view of this scenario, Cygnus is launching a report titled Microfinance in India. Comprising five chapters, the report covers the overview of microfinance industry in India along with global market and trends with a special reference to South Asia. It also discusses the growth drivers, issues and challenges, profiles of major players and their services and estimates of the future market. The report will be useful for industry analysts, banks and other non-banking financial companies, various NGOs and private equity firms. Key Findings & Highlights - One of the fastest growing sectors of India, microfinance is spearheading intense competition among the largest players. - Microfinance institutions at present serve an estimated 120 million clients in the world. - By the end of March 2007, microfinance institutions expanded their outreach to 50 million households and about 36.8 million borrowers. - The microfinance institutions are organised under three models: SHG, Grameen model/Joint liability groups and Individual banking groups as in cooperatives. - Indian microfinance market is dominated by SHG bank linkage and MFI model.

Summary With Indias GDP growing at the rate of 8.59%, the countrys socio-economic pyramid is turning around the story with millions of poor people scaling new heights to become entrepreneurs in their own right. And the credit goes to the mushrooming microfinance industry. Microfinance sector is clearly one of the fastest growing segments of the Indian financial sector, and also one where such growth is sustainable for a very long period of time. In spite of a large banking sector, about 40% of the Indian population does not have bank accounts. Given that over 75% of the Indian population still earns below US$2 a day,

microfinance comes to their rescue as it enables them to raise income and improve the standard of living. Microfinance promotes thrift savings, credit and other financial products and services among the poor. Considering that the vast majority of the poor lives in rural areas, microfinance is key to the financial inclusion of this section in the mainstream of the country. Microfinance refers to financial services, including loans, savings accounts, and insurance products, that are designed to serve people with very low incomes. The intent of the microfinance movement has been to build financial systems that work for the poor majority. The involvement of international financial institutions enhances the access of the poor to financial services. There is a change in the microfinance strategies of banks and financial institutions. Their focus is shifting from South Asia to African countries, a significant development that was rarely seen before. Large financial institutions have started increasing their global presence and have started diversifying microfinance products. As the birthplace of microfinance, Asia leads the world in total current borrowers. In South Asia, the modern microfinance movement was born in Bangladesh in the 1970s as a response to the poverty conditions among its vast rural population. This region is a world leader in microfinance because of the highest penetration in outreach and active borrowers. In South Asia, Sri Lanka and Bangladesh show an impressive coverage, with microfinance reaching more than 60% of the poor. The Indian microfinance system is led by two basic modelsSHG-Bank linkage model and MFI model. The number of SHGs linked with banks increased from 22,742 in the year 2003 to 137,000 by March 2007. Even though the growth of microfinance industry is commendable but still there are 3-4 million households in rural areas and about 1-5 million poor households in urban areas who do not have access to financial services from formal or semi-formal sources. The Central bank strengthens the microfinance sector by streamlining the financial processes and support from the mainstream financial system and acts as a catalyst to the industry. Most of the microfinance institutions focus on womens empowerment, and major part of clients consists of women. SEWA of Ahmedabad and Working Women's Forum in Chennai are some of the microfinance institutions that are exclusively for women. Microfinance programmes have, in the recent past, become more promising ways to use scarce development funds to achieve the objectives of poverty alleviation. While the governments concerted efforts to alleviate poverty have been unsuccessful in the past, the microfinance institutions are now taking up the reins to achieve the millennium development goal of poverty alleviation. Major microfinance institutions are diverting their attention to urban population rather than being rural centric. Urban microfinance promises huge opportunity for the microfinance institutions, although it gives berth only to large MFIs because the start up and transaction costs are high. Microfinance industry is growing at an exponential rate in India, although it exhibits tremendous regional disparities. It shows regional inclination towards the southern region. Although the coverage has been diverted to the eastern and western region, south has the highest penetration in rural microfinance. Private Banks, MFIs, public sector banks and NGOs form the major players in rural financing to the poor people. Public sector banks, MFIs and NGOs follow different strategies to scale up their operations in the industry. Some of them follow partnership model, while others follow the

strategy of higher penetration through SHG. Another way of lending adopted by ICICI is that of portfolio buy-out. The microfinance sector in India is trying to focus on micro-savings and financial literacy among the poor. It is developing the habit and discipline of saving and has started introducing micro-insurance, though in a relatively small way. There is high demand for credit in the Indian economy, but the formal financial institutions are unable to meet this demand because they have their own limitations when it comes to lending to the poor people. This demand-supply mismatch could act as a key growth opportunity the microfinance institutions to scale up their operations. The growth of economic activities in the urban population will enable the microfinance sector to expand their operations in the cities of the India. Although microfinance in India has outperformed the expectations of formal financial institutions, it still faces the challenges in terms of regulatory support and financial illiteracy. Moreover, the high transaction cost of the microfinance institutions due to smaller loan size creates a challenging situation for the sector to thrive in and sustain. The funding gap in microfinance is very high, both at the national and global level. Increasing involvement of private sector investors is therefore a key medium-term priority to scale up microfinance. Fortunately, the prospect for a greater involvement of private investors is actually good. By 2015, it is expected that the volume of private sector investments (private institutional and individual investors) would increase to around US$20 billion. The main growth drivers would be increasing institutional and retail investor demand, regulatory changes and the enhanced capability of MFIs to absorb commercial funding. Microfinance industry is expected to become an integral part of the formal financial system once its vision of extending financial services to the low income people is accomplished. Seeing the huge demand for rural credit, it is expected that the industry will continue to grow at rapid pace, although the blend of the financial system and extent of growth will vary from country to country. There will be diversification of products in the industry, which will vary from current accounts to pension and savings products. Risk management systems, use of technology and regulatory issues will continue to be the key challenges for the sector.

Dnuisdhf Microfinance is moving from the margins of the global financial services industry to occupy centre stage. Originally conceived as a not for profit movement centred in the Asian sub-continent and dedicated to improving the lives of the poor through the extension of tiny loans, it now has captured the public imagination, attracted the attention of global banking players and its impact is increasing worldwide.

Central to the increased visibility and commercial credibility of microfinance has been the growing acceptance that a for profit business model allows the microfinance sector the opportunity to extend its outreach massively. The result has been an increasing number of not for profit microfinance institutions (MFIs), many with their roots in non governmental organizations (NGOs), becoming progressively independent of their original donors. Surpluses are being ploughed back into the business while some MFIs have widened their remit to encompass deposit-taking and the most progressive have gone as far as a stock exchange listing. The success of these institutions has attracted the interest of many mainstream and substantial commercial banks. For some of these banks, their involvement in microfinance is a natural extension to their corporate social responsibility programmes but for many the microfinance sector is increasingly a commercial proposition in its own right, whether through direct involvement or, more widely, the provision of microfinance investment funds. As the global banking industry takes stock of its more recent practices, microfinance offers not just a potentially attractive business line but a reminder of the power of traditional retail banking. Microfinance for Profit charts the course of microfinance to its present position within the financial services industry, profiles some of the key operators, examines the appetite of commercial banks and the investment community for microfinance and offers telling conclusions on the likely development of the sector.

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Microfinance, a concept popularized by Muhammad Yunus, has grown tremendously in India. The growing understanding of achieving self sustainability among the rural and urban poor has led to the acceptance and implementation of this idea across India. The report begins with an introduction to the microfinance sector covering different types of financial institutions, formal and informal, providing financial services to the rural and urban poor in India. The report provides an overview of the current state of microfinance in India covering extensively the two primary facilitators of microfinance - microfinance institutions (MFIs) and SHGs bank linkage programme (SBLP). The report highlights the governments initiatives towards encouraging microfinance institutions in India. The report identifies key trends and characteristics in the sector including low penetration levels of microfinance, large scale PE/VC activity, high interest rate and repayment issues, lack of interest from formal financial institutions and opportunity in the urban sector. The report profiles the major players in

the sector including brief business overview, client outreach, financials and future outlook for each player.