Final Micro Finance 2003

8/2/2019 Final Micro Finance 2003

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EXECUTIVE SUMMARY

The imagination, with which microfinance was put into practice, has been turning into a reality

in India. The unparalleled growth of microfinance institutions, to cover a vast majority of

unbanked population in need of financial services, is just a step towards achieving the goals ofdevelopment for building an equitable society. Microfinance initiatives have been accepted at

different levels viz. the policy makers, the regulators and the implementers, as an effective way

to address the financial needs of the poor. The crucial role of microfinance in alleviating

poverty and need for an enabling regulation for microfinance sector has been acknowledged by

various high-level government committees.

In India too the formal financial institutions have not been able to reach the poor households,

and particularly women, in the unorganised sector. Structural rigidities and overheads lead to

high cost of making small loans. Organisational philosophy has not been oriented towards

recognising the poor as credit worthy. The problem has been compounded by low level of

influence of the poor, either about their credit worthiness or their demand for savings services.

Micro-finance programmes have often been implemented by large banks at government behest.

Low levels of recovery have been further eroded due to loan waiver programmes leading to

institutional disenchantment with lending to small borrowers.

All this gave rise to the concept of micro-credit for the poorest segment along with a new set of

credit delivery techniques. With the support of NGOs an informal sector comprising small Self

Help Groups (SHGs) started mobilizing savings of their members and lending these resources

among the members on a micro scale. The potential of these SHGs to develop as local financial

intermediaries to reach the poor has gained recognition due to their community based

participatory approach and sustainability - recovery rates have been significantly higher than

those achieved by commercial banks inspite of loans going to poor, unorganised individuals

without security or collateral.

Microfinance has proven to be a very effective development tool because it provides

empowerment instead of charity. Typically, microfinance clients are self-employed household

entrepreneurs who lack the resources to invest in their business and their future and thus cannot

escape the grips of extreme poverty. MFIs could play a significant role in facilitating inclusion,

as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a

limited geographical area, have a greater understanding of the issues specific to the rural poor,


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enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a

level of comfort to their clientele.

The main idea behind microfinance is that poor people, who can provide no collateral, should

have access to some sort of financial services. Microfinance began with microcredit: the

provision of small loans to very poor families to help them engage in productive and self-

sustaining activities. Since the successful initiation of formalised microcredit in the 1980s a

number of other complementary services have popped up around the globe, including micro

savings, micro insurance etc.

Microfinance is not a solution to all the worlds problems, but seems to be effective in

encouraging entrepreneurship, increasing the income of the poorest and helping them to build

viable businesses. The sector is booming and there has never been so much attention given to

this sector. Furthermore, there seems to be a great deal of opportunity for young

professionals


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OBJECTIVE OF THE STUDY

OBJECTIVE OF STUDY

To understand the concept of Microfinance. To analyse the functioning of microfinance in India.Understand opportunities and challenges faced by microfinance in IndiaAnalyze the recent case of SKS Microfinance and study in depth about the hurdles

faced by these institutions.

Analyze in depth the recommendations made by the RBI appointed MalegamCommittee.


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INTRODUCTION

Microfinance is defined as any activity that includes the provision of financial services such as

credit, savings, and insurance to low income individuals which fall just above the nationally

defined poverty line, and poor individuals which fall below that poverty line, with the goal ofcreating social value. The creation of social value includes poverty alleviation and the broader

impact of improving livelihood opportunities through the provision of capital for micro

enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large

variety of actors provide microfinance in India, using a range of microfinance delivery methods.

Since the ICICI Bank in India, various actors have endeavoured to provide access to financial

services to the poor in creative ways. Governments also have piloted national programs, NGOs

have undertaken the activity of raising donor funds for on-lending, and some banks havepartnered with public organizations or made small inroads themselves in providing such

services. This has resulted in a rather broad definition of microfinance as any activity that

targets poor and low-income individuals for the provision of financial services. The range of

activities undertaken in microfinance include group lending, individual lending, the provision

of savings and insurance, capacity building, and agricultural business development services.

Whatever the form of activity however, the overarching goal that unifies all actors in the

provision of microfinance is the creation of social value.

1.1 Microfinance DefinitionAccording to International Labour Organization (ILO), Microfinance is an economic

development approach that involves providing financial services through institutions to low

income clients.

In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as

provision of thrift, credit and other financial services and products of very small amounts to

the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and

improve living standards.

"The poor stay poor, not because they are lazy but because they have no access to capital."

The dictionary meaning of finance is management of money. The management of money

denotes acquiring & using money. Microfinance is buzzing word, used when financing for

micro entrepreneurs. Concept of microfinance has emerged in order to meet the special goal of


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empowering under-privileged class of society, women, and poor, downtrodden by natural

reasons or manmade; caste, creed, religion or otherwise. The principles of Microfinance are

founded on the philosophy of cooperation and its central values of equality, equity and mutual

self-help. At the heart of these principles are the concept of human development and the

brotherhood of man expressed through people working together to achieve a better life forthemselves and their children.

Traditionally microfinance was focused on providing a very standardized credit product. The

poor, just like anyone else need a diverse range of financial instruments to be able to build

assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening

of the concept of microfinance--- our current challenge is to find efficient and reliable ways of

providing a richer menu of microfinance products. Microfinance is not merely extending credit,

but extending credit to those who require most for themselves and theirs familys survival.

Who are the clients of microfinance?

The typical microfinance clients are low-income persons that do not have access to formal

financial institutions. Microfinance clients are typically self-employed, often household-based

entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in

small income-generating activities such as food processing and petty trade. In urban areas,microfinance activities are more diverse and include shopkeepers, service providers, artisans,

street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a

relatively unstable source of income.

Access to conventional formal financial institutions, for many reasons, is inversely related to

income: the poorer you are the less likely that you have access. On the other hand, the chances

are that, the poorer you are, the more expensive or onerous informal financial arrangements.

Moreover, informal arrangements may not suitably meet certain financial service needs or may

exclude you anyway. Individuals in this excluded and under-served market segment are the

clients of microfinance.

As we broaden the notion of the types of services microfinance encompasses, the potential

market of microfinance clients also expands. It depends on local conditions and political

climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro

credit might have a far more limited market scope than say a more diversified range of financial

services, which includes various types of savings products, payment and remittance services,

and various insurance products. For example, many very poor farmers may not really wish to

borrow, but rather, would like a safer place to save the proceeds from their harvest as these are


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consumed over several months by the requirements of daily living. Central government in India

has established a strong & extensive link between NABARD (National Bank for Agriculture &

Rural Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture

& Marketing Societies at national, state, district and village level.

The Need for Microfinance in India

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

About 87 percent of the poorest households do not have access to credit. The demand for microcredit has been estimated at up to $30 billion; the supply is less

than $2.2 billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in the

global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving

the worlds poverty by 2015. Microfinance has been present in India in one form or another

since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over

the last five years, the microfinance industry has achieved significant growth in part due to the

participation of commercial banks. Despite this growth, the poverty situation in India continues

to be challenging.

Some principles that summarize a century and a half of development practice were

encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the

Group of Eight leaders at the G8 Summit on June 10, 2004:

Poor people need not just loans but also savings, insurance and money transferservices.

Microfinance must be useful to poor households: helping them raise income, buildup assets and/or cushion themselves against external shocks.

Microfinance can pay for itself.Subsidies from donors and government are scarceand uncertain, and so to reach large numbers of poor people, microfinance must pay

for itself.

Microfinance means building permanent local institutions. Microfinance also means integrating the financial needs of poor people into a

countrys mainstream financial system. The job of government is to enable financial services, not to provide them.


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Donor funds should complement private capital, not compete with it. The key bottleneck is the shortage of strong institutions and managers. Donors

should focus on capacity building.

Interest rate ceilings hurt poor people by preventing microfinance institutions fromcovering their costs, which chokes off the supply of credit.

Microfinance institutions should measure and disclose their performance bothfinancially and socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families

who are destitute, or so poor they are unlikely to be able to generate the cash flow required to

repay a loan. This situation can occur for example, in a war zone or after a natural disaster.

Financial needs and financial services

In developing economies and particularly in the rural areas, many activities that would be

classified in the developed world as financial are not monetized: that is, money is not used to

carry them out. Almost by definition, poor people have very little money. But circumstances

often arise in their lives in which they need money or the things money can buy.

In Stuart Rutherfords recent bookThe Poor and Their Money, he cites several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,widowhood, old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment ordeath.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozingof dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improvinghousing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through

creating and exchanging different forms of non-cash value. Common substitutes for cash vary

from country to country but typically include livestock, grains, jewellery and precious metals.

As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated

that microfinance could provide large-scale outreach profitably, and in the 1990s,

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


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objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing

poverty. While much progress has been made in developing a viable, commercial microfinance

sector in the last few decades, several issues remain that need to be addressed before the

industry will be able to satisfy massive worldwide demand.

The obstacles or challenges to building a sound commercial microfinance industry include:

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

methodologies

Role of Microfinance:

The micro credit of microfinance programme was first initiated in the year 1976 in Bangladesh

with promise of providing credit to the poor without collateral, alleviating poverty and

unleashing human creativity and endeavor of the poor people. Microfinance impact studies

have demonstrated that

Microfinance helps poor households meet basic needs and protects them against risks.

The use of financial services by low-income households leads to improvements in household

economic welfare and enterprise stability and growth.

By supporting womens economic participation, microfinance empowers women, thereby

promoting gender-equity and improving household well being.

The level of impact relates to the length of time clients have had access to financial services.

The Origin of Microfinance


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Although neither of the terms microcredit or microfinance were used in the academic literature

nor by development aid practitioners before the 1980s or 1990s, respectively, the concept of

providing financial services to low income people is much older.

While the emergence of informal financial institutions in Nigeria dates back to the 15th

century,they were first established in Europe during the 18th century as a response to the enormous

increase in poverty since the end of the extended European wars (1618 1648). In 1720 the

first loan fund targeting poor people was founded in Ireland by the author Jonathan Swift. After

a special law was passed in 1823, which allowed charity institutions to become formal financial

intermediaries a loan fund board was established in 1836 and a big boom was initiated. Their

outreach peaked just before the government introduced a cap on interest rates in 1843. At this

time, they provided financial services to almost 20% of Irish households. The creditcooperatives created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million

people by 1910. He stated that the main objectives of these cooperatives should be to control

the use made of money for economic improvements, and to improve the moral and physical

values of people and also, their will to act by themselves.

In the 1880s the British controlled government of Madras in South India, tried to use the

German experience to address poverty which resulted in more than nine million poor Indians

belonging to credit cooperatives by 1946. During this same time the Dutch colonial

administrators constructed a cooperative rural banking system in Indonesia based on the

Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI), now known as the

largest MFI in the world.

Microfinance Today

In the 1970s a paradigm shift started to take place. The failure of subsidized government or

donor driven institutions to meet the demand for financial services in developing countries let

to several new approaches. Some of the most prominent ones are presented below.

Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in

Indonesia without any subsidies and is now well-known as the earliest bank to institute

commercial microfinance. While this is not true with regard to the achievements made in

Europe during the 19th century, it still can be seen as a turning point with an ever increasing

impact on the view of politicians and development aid practitioners throughout the world. In

1973 ACCION International, a United States of America (USA) based nongovernmental

organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus


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started what later became known as the Grameen Bank by lending a total of $27 to 42 people in

Bangladesh. One year later the Self-Employed Womens Association started to provide loans

of about $1.5 to poor women in India. Although the latter examples still were subsidized

projects, they used a more business oriented approach and showed the world that poor people

can be good credit risks with repayment rates exceeding 95%, even if the interest rate chargedis higher than that of traditional banks. Another milestone was the transformation of BRI

starting in 1984. Once a loss making institution channelling government subsidized credits to

inhabitants of rural Indonesia it is now the largest MFI in the world, being profitable even

during the Asian financial crisis of 19971998.

In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives

of various educational institutions and donor agencies from 137 different countries gathered in

Washington D.C. for the first Micro Credit Summit. This was the start of a nine year longcampaign to reach 100 million of the world poorest households with credit for self employment

by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been

reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the

poorest before they took their first loan. Since the campaign started the average annual growth

rate in reaching clients has been almost 40 percent. If it has continued at that speed more than

100 million people will have access to microcredit by now and by the end of 2005 the goal of

the microcredit summit campaign would be reached. As the president of the World Bank James

Wolfensohn has pointed out, providing financial services to 100 million of the poorest

households means helping as many as 500600 million poor people.

Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken by the

government and regulatory bodies in India are:

Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 The National Microfinance Taskforce, 1999 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 Microfinance Development and Equity Fund, NABARD, 2005 Working group on Financing NBFCs by Banks- RBI

Activities in Microfinance


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Microcredit: It is a small amount of money loaned to a client by a bank or other institution.

Microcredit can be offered, often without collateral, to an individual or through group lending.

Micro savings: These are deposit services that allow one to save small amounts of money for

future use. Often without minimum balance requirements, these savings accounts allow

households to save in order to meet unexpected expenses and plan for future expenses.

Micro insurance: It is a system by which people, businesses and other organizations make a

payment to share risk. Access to insurance enables entrepreneurs to concentrate more on

developing their businesses while mitigating other risks affecting property, health or the ability

to work.

Remittances: These are transfer of funds from people in one place to people in another, usuallyacross 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.

Legal Regulations

Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI

Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the CooperativeSocieties Acts of the respective state governments for cooperative banks.

NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act.

There is no specific law catering to NGOs although they can be registered under the Societies

Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a

strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing

deposits from clients who also borrow. This tendency is a concern due to enforcement

problems that tend to arise with self-regulatory organizations. In January 2000, the RBIessentially created a new legal form for providing microfinance services for NBFCs registered

under the Companies Act so that they are not subject to any capital or liquidity requirements if

they do not go into the deposit taking business. Absence of liquidity requirements is concern to

the safety of the sector.


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Legislation Affecting Institutions Engaged in Micro-Finance (Directly or indirectly)

The Legal formats of MFIs that are provided by Indian law can be classified by the profit

motive:

Not-For-Profit Entities are trusts, societies and section 25 companies.

For-Profit enterprises are Non-Banking Financial Companies (NBFCs).

The following legislations regulate the functioning of MFIs in India

(i) Reserve Bank of India Act, 1934

The Reserve Bank of India Act 1934 establishes the central bank (Banking RegulatoryAuthority of India). It is of interest to the question of the regulation of micro-finance in that

under a 1977 Amendment it contains provisions for the establishment and operations of non-

bank finance companies (Chapter 3-B, Sections 45-I). The non-banking institutions can be a

company, a corporation or a cooperative society. A non-bank financial company (NBFC) is a

non-banking institution company and takes deposits. NBFCs are registered under this Act

(Second Schedule).

(ii) Banking Regulation Act 1949

The Banking Regulation Act 1949 covers banking companies. It does not apply to primary

agriculture credit societies, cooperative land mortgage banks and any other cooperative society.

It is not directly relevant to micro-finance, other than the fact that it coves local area banks and

commercial banks, which are involved in linkage operations. The Banking Regulation Act

provides the basis for the licensing of local area banks and mutual benefit societies.

(iii) Companies Act 1956

The companies Act 1952 provides the basis for the incorporation of Local Area Banks, Non-

Bank Finance Companies, non-for- profit Section 25 Companies and Nidhis under Section

620.

Certain revisions have been proposed in the Companies Act which would allow cooperatives in

the form of companies and could offer micro-finance services


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Co-operative Societies Act of 1904; Mutually Aided Co-operative Societies Act in 1995

(Andhra Pradesh) Societies Registration Act of 1860 and Indian Trusts Act -1882.

The term cooperative covers a range of institutions, both formal (stated -owned cooperatives

banks) and semi-formal (cooperative societies), which are regulated and/or unregulated.

Enterprises registered under the Societies registration or Indian Trusts Acts are semi-formal

institutions engaged in micro-finance. The Acts do not provide a basis for any of regulation so

far. There is a tax problem in that societies and trusts cannot engage in for-profit activities,

including financial services.

Co-operative Societies Act of 1904 covers cooperative, SEWA Bank is registered as a co-

operative society, under this act but is regulated by the RBI from which it obtained a bankinglicense.

With the post liberalization era, market-oriented approach to rural finance advocated a new

form of co-operative societies act. Andhra Pradesh enacted the mutually Aided Co-operative

Societies Act in 1995, allowing the formation of cooperatives largely immune from

government intervention. Three other States subsequently enacted similar legislation (Bihar,

Madhya Pradesh and Jammu & Kashmir). The Multi-State Co-operatives Societies Bill Act

2002 is operative currently and it replaces the MCS Act, 1984.


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STRUCTURE OF MICROFINANCE INSTITUTION IN INDIA


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MICROFINANCE IN INDIA

Microfinance changing the face of poor India

Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new

economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks

linkage Programme, aimed at providing a cost effective mechanism for providing financial

services to the 'unreached poor'. In the Indian context terms like "small and marginal farmers",

" rural artisans" and "economically weaker sections" have been used to broadly define micro-

finance customers. Research across the globe has shown that, over time, microfinance clients

increase their income and assets, increase the number of years of schooling their children

receive, and improve the health and nutrition of their families.

A more refined model of micro-credit delivery has evolved lately, which emphasizes the

combined delivery of financial services along with technical assistance, and agricultural

business development services. When compared to the wider SHG bank linkage movement in

India, private MFIs have had limited outreach. However, we have seen a recent trend of larger

microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This

changing face of microfinance in India appears to be positive in terms of the ability of

microfinance to attract more funds and therefore increase outreach.

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

funds. They are:

At the very bottom in terms of income and assets, are those who are landless andengaged in agricultural work on a seasonal basis, and manual labourers in forestry,

mining, household industries, construction and transport. This segment requires,

first and foremost, consumption credit during those months when they do not get labour

work, and for contingencies such as illness. They also need credit for acquiring small

productive assets, such as livestock, using which they can generate additional income.

The next market segment is small and marginal farmers and rural artisans, weaversand those self-employed in the urban informal sector as hawkers, vendors, and

workers in household micro-enterprises. This segment mainly needs credit for

working capital, a small part of which also serves consumption needs. This segment

also needs term credit for acquiring additional productive assets, such as irrigation


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pump sets, bore wells and livestock in case of farmers, and equipment (looms,

machinery) and work sheds in case of non-farm workers.

The third market segment is of small and medium farmers who have gone in forcommercial crops such as surplus paddy and wheat, cotton, groundnut, and others

engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment

includes those in villages and slums, engaged in processing or manufacturing activity,

running provision stores, repair workshops, tea shops, and various service enterprises.

These persons are not always poor, though they live barely above the poverty line and

also suffer from inadequate access to formal credit.

Well these are the people who require money and with Microfinance it is possible. Right now

the problem is that, it is SHGs' which are doing this and efforts should be made so that the big

financial institutions also turn up and start supplying funds to these people. This will lead to a

better India and will definitely fulfil the dream of our late Prime Minister, Mrs. Indira

Gandhi, i.e. Poverty.

One of the statements is really appropriate here, which is as:

Money, says the proverb makes money. When you have got a little, it is often easy to get

more. The great difficulty is to get that little.Adams Smith.

Today India is facing major problem in reducing poverty. About 25 million people in India are

under below poverty line. With low per capita income, heavy population pressure, prevalence

of massive unemployment and underemployment, low rate of capital formation, misdistribution

of wealth and assets, prevalence of low technology and poor economics organization and

instability of output of agriculture production and related sectors have made India one of the

poor countries of the world.

Present Scenario of India:

India falls under low income class according to World Bank. It is second populated country in

the world and around 70 % of its population lives in rural area. 60% of people depend on

agriculture, as a result there is chronic underemployment and per capita income is only $ 3262.

This is not enough to provide food to more than one individual. The obvious result is abject

poverty, low rate of education, low sex ratio, and exploitation. The major factor account forhigh incidence of rural poverty is the low asset base. According to Reserve Bank of India,


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about 51 % of people house possess only 10% of the total asset of India .This has resulted low

production capacity both in agriculture (which contribute around 22-25% of GDP) and

Manufacturing sector. Rural people have very low access to institutionalized credit (from

commercial bank).

Poverty alleviation programmes and conceptualization of Microfinance:

There have been continuous efforts of planners of India in addressing the poverty. They have

come up with development programmes like Integrated Rural Development progamme (IRDP),

National Rural Employment Programme (NREP), Rural Labour Employment Guarantee

Programme (RLEGP) etc. But these progamme have not been able to create massive impact in

poverty alleviation. The production oriented approach of planning without altering the mode of

production could not but result of the gains of development by owners of instrument of

production. The mode of production does remain same as the owner of the instrument have low

access to credit which is the major factor of production. Thus in Nineties National bank for

agriculture and rural development (NABARD) launches pilot projects of Microfinance to

bridge the gap between demand and supply of funds in the lower rungs of rural economy.

Microfinance. The buzzing word of this decade was meant to cure the illness of rural economy.

With this concept of Self Reliance, Self Sufficiency and Self Help gained momentum. The

Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks.

Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying

on informal financing intermediaries like money lenders, family members, friends etc.

Banking Expansion

Starting in the late 1960s, India was the home to one of the largest state interventions in the

rural credit market. This phase is known as the Social Banking phase.

It witnessed the nationalization of existing private commercial banks, massive expansion of

branch network in rural areas, mandatory directed credit to priority sectors of the economy,

subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the

district level and a specialized apex bank for agriculture and rural development (NABARD) at

the national level.

The Net State Domestic Product (NSDP) is a measure of the economic activity in the state andcomparing it with the utilization of bank credit or bank deposits indicates how much economic


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activity is being financed by the banks and whether there exists untapped potential for

increasing deposits in that state.

Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and womens

empowerment as well as poor development and civil society strengthening. Contribution to

womens ability to earn an income led to their economic empowerment, increased well being of

women and their families and wider social and political empowerment.

Microfinance programs targeting women became a major plank of poverty alleviation and

gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to

poverty reduction and womens higher credit repayment rates led to a general consensus on thedesirability of targeting women.

Self Help Groups (SHGs)

Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A

growing number of poor people (mostly women) in various parts of India are members of

SHGs and actively engage in savings and credit (S/C), as well as in other activities (income

generation, natural resources management, literacy, child care and nutrition, etc.). The S/Cfocus in the SHG is the most prominent element and offers a chance to create some control

over capital, albeit in very small amounts. The SHG system has proven to be very relevant and

effective in offering women the possibility to break gradually away from exploitation and

isolation.

How self-help groups work

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural

poor, voluntarily formed to save and mutually contribute to a common fund to be lent to its

members as per the group members' decision".

Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or

only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide

range of government and nongovernmental agencies, they now make up 90% of all SHGs.

The rules and regulations of SHGs vary according to the preferences of the members and those

facilitating their formation. A common characteristic of the groups is that they meet regularly

(typically once per week or once per fortnight) to collect the savings from members, decide to


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which member to give a loan, discuss joint activities (such as training, running of a communal

business, etc.), and to mitigate any conflicts that might arise. Most SHGs have an elected

chairperson, a deputy, a treasurer, and sometimes other office holders.

Most SHGs start without any external financial capital by saving regular contributions by the

members. These contributions can be very small (e.g. 10 Rs per week). After a period of

consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the

form of small internal loans for micro enterprise activities and consumption. Only those SHGs

that have utilized their own funds well are assisted with external funds through linkages with

banks and other financial intermediaries.

However, it is generally accepted that SHGs often do not include the poorest of the poor, for

reasons such as:

(a) Social factors (the poorest are often those who are socially marginalized because of caste

affiliation and those who are most sceptical of the potential benefits of collective action).

(b) Economic factors (the poorest often do not have the financial resources to contribute to the

savings and pay membership fees; they are often the ones who migrate during the lean season,

thus making group membership difficult).

(c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the

most difficult to reach and motivate, implementing agencies tend to leave them out, preferring

to focus on the next wealth category).

Sources of capital and links between SHGs and Banks

SHGs can only fulfil a role in the rural economy if group members have access to financial

capital and markets for their products and services. While the groups initially generate their

own savings through thrift (whereby thrift implies savings created by postponing almostnecessary consumption, while savings imply the existence of surplus wealth), their aim is often

to link up with financial institutions in order to obtain further loans for investments in rural

enterprises. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the

loan amount is proportionate to the group's savings) or as fixed amounts, depending on the

group's record of repayment, recommendations by group facilitators, collaterals provided, etc.


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How SHGs save

Self-help groups mobilize savings from their members, and may then on-lend these funds to

one another, usually at apparently high rates of interest which reflect the members

understanding of the high returns they can earn on the small sums invested in their micro-

enterprises, and the even higher cost of funds from money lenders. If they do not wish to use

the money, they may deposit it in a bank. If the members need for funds exceeds the groups

accumulated savings, they may borrow from a bank or other organization, such as a micro-

finance non-government organization, to augment their own fund.

The system is very flexible. The group aggregates the small individual saving and borrowing

requirements of its members, and the bank needs only to maintain one account for the group as

a single entity. The banker must assess the competence and integrity of the group as a micro-

bank, but once he has done this he need not concern himself with the individual loans made by

the group to its members, or the uses to which these loans are put. He can treat the group as a

single customer, whose total business and transactions are probably similar in amount to the

average for his normal customers, because they represent the combined banking business of

some twenty micro-customers. Any bank branch can have a small or a large number of such

accounts, without having to change its methods of operation.

Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village women are

sometimes better bankers than some with more professional qualifications. They know that

rapid access to funds is more important than their cost, and they also know, even though they

might not be able to calculate the figures, that the typical micro-enterprise earns well over

500% return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus charge

themselves high rates of interest; they are happy to take advantage of the generous spread that

the NABARD subsidized bank lending rate of 12% allows them, but they are also willing to

borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from new generationinstitutions such as Basix Finance at 18.5% or 21%.

SHGs-Bank Linkage Model

NABARD is presently operating three models of linkage of banks with SHGs and NGOs:

Model 1: In this model, the bank itself acts as a Self Help Group Promoting Institution

(SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then

provides credit to them after satisfying itself about their maturity to absorb credit. About 16%

of SHGs and 13% of loan amounts are using this model (as of March 2002).


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Model2: In this model, groups are formed by NGOs (in most of the cases) or by government

agencies. The groups are nurtured and trained by these agencies. The bank then provides credit

directly to the SHGs, after observing their operations and maturity to absorb credit. While the

bank provides loans to the groups directly, the facilitating agencies continue their interactions

with the SHGs. Most linkage experiences begin with this model with NGOs playing a majorrole. This model has also been popular and more acceptable to banks, as some of the difficult

functions of social dynamics are externalized. About 75% of SHGs and 78% of loan amounts

are using this model.

Model 3: Due to various reasons, banks in some areas are not in a position to even finance

SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both

facilitators and microfinance intermediaries. First, they promote the groups, nurture and train

them and then approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs

and 13% of loan amounts are using this model.

Life insurances for self-help group members

The United India Insurance Company has designed two PLLIs (personal line life insurances)

for women in rural areas. The company will be targeting self-help groups, of which there are

around 200,000 in the country, with 15-20 women in a group. The two policies are

(1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman in the

event of accidental death of her husband and to support her minor children in the event of her

death, and

(2) The Unimicro Health Scheme, giving personal accident and hospitalization covers besides

cover for damage to dwelling due to fire and allied perils.

Microfinance Models

1. Microfinance Institutions (MFIs):MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and

cooperatives. They are provided financial support from external donors and apex institutions

including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and

NABARD and employ a variety of ways for credit delivery.

Since 2000, commercial banks including Regional Rural Banks have been providing funds to

MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into


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financial intermediation using a variety of delivery methods, their numbers have increased

considerably today. While there is no published data on private MFIs operating in the country,

the number of MFIs is estimated to be around 800.

Legal Forms of MFIs in India

Types of MFIs Estimated

Number*

Legal Acts under which Registered

1. Not for Profit MFIs

a.) NGO - MFIs

400 to 500 Societies Registration Act, 1860 or

similar Provincial Acts

Indian Trust Act, 1882

b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956

2. Mutual Benefit MFIs

a.) Mutually Aided Cooperative

Societies (MACS) and similarly

set up institutions

200 to 250 Mutually Aided Cooperative Societies

Act enacted by State Government

3. For Profit MFIs

a.) Non-Banking Financial

Companies (NBFCs)

6 Indian Companies Act, 1956

Reserve Bank of India Act, 1934

Total 700 - 800

2. Bank Partnership ModelThis model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as

an agent for handling items of work relating to credit monitoring, supervision and recovery. In

other words, the MFI acts as an agent and takes care of all relationships with the client, from

first contact to final repayment. The model has the potential to significantly increase the

amount of funding that MFIs can leverage on a relatively small equity base.

A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its

books for a while before securitizing them and selling them to the bank. Such refinancingthrough securitization enables the MFI enlarged funding access. If the MFI fulfils the true


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sale criteria, the exposure of the bank is treated as being to the individual borrower and the

prudential exposure norms do not then inhibit such funding of MFIs by commercial banks

through the securitization structure.

3. Banking CorrespondentsThe proposal ofbanking correspondents could take this model a step further extending it to

savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It

would use the ability of the MFI to get close to poor clients while relying on the financial

strength of the bank to safeguard the deposits. This regulation evolved at a time when there

were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the

people have confidence could mobilize savings of gullible public and then vanish with them. It

remains to be seen whether the mechanics of such relationships can be worked out in a way that

minimizes the risk of misuse.

4. Service Company ModelUnder this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in

hand with that MFI to extend loans and other services. On paper, the model is similar to the

partnership model: the MFI originates the loans and the bank books them. But in fact, this

model has two very different and interesting operational features:

(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the

client to be reached at lower cost than in the case of a standalone MFI. In case of banks which

have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may

contract with many banks in an arms length relationship. In the service company model, the

MFI works specifically for the bank and develops an intensive operational cooperation between

them to their mutual advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the bank to

create lower cost and faster growth. The Service Company Model has the potential to take the

burden of overseeing microfinance operations off the management of the bank and put it in the

hands of MFI managers who are focused on microfinance to introduce additional products,

such as individual loans for SHG graduates, remittances and so on without disrupting bank

operations and provide a more advantageous cost structure for microfinance.


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THE LIST OF MICRO-FINANCE INSTITUTIONS IN INDIA

AsmithaProvides 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 set-off

small start up business, which soon translates into adequate nutrition, medical aid andeducation. With increased businesses, these low-income women become economic agents

intrinsic to development rather than simply homemakers

Bandhan MF- 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 (RBI).That apart,

Bandhan is also engaged in development work through its not for profit entity.

Basix BASIX is a livelihood promotion institution established in 1996, working with over a

3.5 million customers, over 90% being rural poor households and about 10% urban slum

dwellers. BASIX operates in 17 states - Andhra Pradesh, Karnataka, Orissa, Jharkhand,

Maharashtra, Madhya Pradesh, Tamil nadu, Rajasthan, Bihar, Chhattisgarh, West Bengal,

Delhi, Uttarakhand, Sikkim, Meghalaya, Assam and Gujarat, 223 districts and over 39,251

villages. It has a staff of over 10,000 of which 80 percent are based in small towns and villages.

BASIX mission is to promote a large number of sustainable livelihoods, including for the rural

poor and women, through the provision of financial services and technical assistance in an

integrated manner. BASIX strategy is to provide a comprehensive set of livelihood promotion

services which include Financial Inclusion Services (FINS), Agricultural / Business

Development Services (Ag/BDS) and Institutional Development Services (IDS) to rural poor

households under one umbrella.

Cashpor IndiaOur mission is to identify and motivate poor women in the rural areas and to

deliver financial services to them in an honest, timely and efficient manner so that our Vision is

realized and CASHPOR itself becomes a financially sustainable microfinance institution for the

poor.

Grameen Foundation Works in 6 key areas: Connecting microfinance institutions with

capital markets, strengthening organizations by building people practices, harnessing the power
http://asmithamicrofin.com/home.htmlhttp://asmithamicrofin.com/home.htmlhttp://www.bandhanmf.com/http://www.bandhanmf.com/http://www.cashporindia.in/http://www.cashporindia.in/http://www.grameenfoundation.org/http://www.grameenfoundation.org/http://www.grameenfoundation.org/http://www.cashporindia.in/http://www.bandhanmf.com/http://asmithamicrofin.com/home.html


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of technology, helping track peoples movement out of poverty, sharing knowledge widely for

broader impact and Social Business

Grameen Koota Grameen Koota recognises the future competition and challenge of

retaining exclusivity of clients. Instead of targeting a high market share in high competition

areas we will focus on increasing the mind share amongst client and becoming a preferred

microfinance provider. We will leverage our existing goodwill with the community and have a

strong focus on orienting our field staff towards this objective.

Hand in Hand is a development organisation whose objective is to eliminate poverty by

creating enterprises and jobs. Focusing on help to self-help, we take 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 labour elimination, health and

sanitation, a sustainable local environment and information technology access. With currently

more than 450,000 members in Tamil Nadu, Karnataka and Madhya Pradesh, who have

collectively started more than 250,000 micro-enterprises, our goal is to create 1.3 million jobs

by 2013. Supported by international offices in the UK and Sweden, we are now taking our

model to South Africa, Afghanistan and Latin America.

Micro Credit India Microcredit Foundation of India (MFI) is a not-for-profit Section 25

Company in Tamil Nadu dedicated to promoting entrepreneurship and community level action

in rural areas as a means to sustainable economic prosperity. Today MFI works primarily with

women. Through its field staff, MFI helps them form Self Help Groups (SHGs), trains them in

good financial practice, facilitates access to microcredit loans, equips them with business skills

and facilitates access to new markets for their products.

MYRADA MYRADA is a Non Governmental Organisation managing rural development

programmes in 3 States of South India and providing on-going support including deputations of

staff to programmes in 6 other States. It also promotes the Self Help Affinity strategy in

Cambodia, Myanmar and Bangladesh

New LifeNew Life designs projects based on survey of the socioeconomic problems of the

project area and support the poor, abused and abandoned children and women by executing the

projects with a defined goals/objectives. The current projects of New Life includes orphanages

for children of incarcerated parents, Save children from Child Labour, Ensuring primary

education for the rural children in India, Early learning centres for children of vulnerable
http://www.grameenkoota.org/http://www.grameenkoota.org/http://www.hihseed.org/http://www.hihseed.org/http://www.microcreditindia.org/http://www.microcreditindia.org/http://www.myrada.org/http://www.newlifemfi.org/http://www.newlifemfi.org/http://www.newlifemfi.org/http://www.myrada.org/http://www.microcreditindia.org/http://www.hihseed.org/http://www.grameenkoota.org/


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community groups, Read to Lead Project, Taking care of the medical needs of Physically

handicapped and Mentally retarded children.

RangDeRang Des mission is to make microcredit accessible to every low income household

by lowering loan interest rates through innovative means. Rang De is committed to enabling

individuals to become social investors through a transparent platform. While strive to improve

Rangde.org as an interface, we work extensively with our field partners to ensure that we do

not compromise on our visionmaking credit available at affordable rates.

SaadhanaSAADHANA is a nonprofit organization established in the year 2001 to reach

out to the urban and rural poor women with the specific mandate to catalyze the Endeavour of

the Poor for Self-Sufficiency.

Samrudhi SAMRUDHIs mission is to empower the poor and underprivileged to become

economically self-reliant by providing cost effective and need based financial services in a

financially sustainable manner.

SHARE Micro fin Limited - (SHARE) is a regulated Non-Banking Financial Company

(NBFC) providing financial and support services to the marginalised sections in society,

particularly to poor rural and urban women across India. Through its income generating loans

and business development services, SHARE reaches out to help these women build productive

microenterprises, thereby contributing to the development of sustainable communities.

SKS IndiaLaunched in 1998, SKS Microfinance is one of the fastest growing microfinance

organizations in the world, having provided over US $ 1.8 Billion (9,129 Crore) and has

maintained loans outstanding of US $ 605 Million (Rs.2937 Crore) in loans to 5,013,219

women members in poor regions of India. Borrowers take loans for a range of income-

generating activities, including livestock, agriculture, trade (such as vegetable vending),production (from basket weaving to pottery) and new age businesses (Beauty Parlour to

photography). SKS also offers interest-free loans for emergencies as well as life insurance to its

members. Its NGO wing SKS foundation runs the Ultra Poor Program. SKS currently has

microfinance branches in 19 states across India. SKS aims to reach members 15 million by

2012. In the last year alone, SKS Microfinance has achieved nearly 170 % growth, with 99%

on-time repayment rate.
http://rangde.org/http://www.saadhana.org/http://www.saadhana.org/http://www.samrudhi-india.org/index.htmhttp://www.samrudhi-india.org/index.htmhttp://www.sksindia.com/http://www.sksindia.com/http://www.sksindia.com/http://www.samrudhi-india.org/index.htmhttp://www.saadhana.org/http://rangde.org/


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UnitusUnitus, an international nonprofit organization, fights global poverty by accelerating

the growth of microfinancesmall loans and other financial tools for self-empowerment

where it is needed most.

Whole Planet Foundation Whole Planet Foundation, a private, nonprofit organization

established by Whole Foods Market, provides grants to microfinance institutions in Latin

America, Africa and Asia who in turn develop and offer microenterprise loan programs,

training and other financial services to the self-employed poor.
http://www.unitus.com/about-us/missionhttp://www.unitus.com/about-us/missionhttp://www.wholeplanetfoundation.org/about/http://www.wholeplanetfoundation.org/about/http://www.wholeplanetfoundation.org/about/http://www.unitus.com/about-us/mission


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OPPORTUNITIES FOR MICROFINNACING

The Government has indicated its willingness to speed up the pace of structural reforms to meet

the major challenges of

o REDUCING POVERTY:The basic motto of the government to eliminate the poverty and bring prosperity in the

country. MFI providing small loans and other credit facilities to the poor and low-income

groups; which are beginning positive changing like their standard of living group and earning

have increased

o IMPROVING SOCIAL INDICATORS:Inadequate access to productive resources and social services has resulted low social

indicators and low employment opportunities. This situation is compounded in rural areas;

where access is more difficult. So, by providing small loans and credit facilities they can

over come this issue and can improve social indicators.

o IMPROVING THE FISCAL AND BALANCE OF PAYMENTS POSITIONS:Pakistan is a poor country whose balance of payment always in deficit, because of low

productivity, lack of resources and lack of productive mens power. If MIF provide loans

new business can be established. And export of Pakistan can be improved which create

balance of payments.

o RESTORING INVESTOR CONFIEDENCE:Due to poor economy of Pakistan investors are hesitating to invest their money in

Pakistan but MFIs can boost up. Because provide loans to local people new business will

stable. Economy will go up and this situation may motivate to them for investing their

funds.

o ACHIEVING HIGHER GROWTH ON A SUSTAINABLE BASISAnother objective of MFI is that to achieve high development and bring innovation in

the economy, which improve GDP of the country and give sustained to the economy.


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SKS MICROFINANCE

About the company


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Microfinance is an effective tool that can help reduce poverty and spread economic opportunity

by giving poor people access to financial services, such as credit and insurance. SKS distributes

small loans that begin at Rs. 2,000 to Rs. 12,000 (about $44-$260) to poor women so they can

start and expand simple businesses and increase their incomes. Their micro-enterprises range

from raising cows and goats in order to sell their milk; to opening a village tea stall.SKS usesthe group lending model where poor women guarantee each others loans. Borrowers undergo

financial literacy training and must pass a test before they are allowed to take out loans.

Weekly meetings with borrowers follow a highly disciplined approach. Re-payment rates on

our collateral-free loans are more than 99% because of this systematic process. SKS also offers

micro-insurance to the poor as well as financing for other goods and services that can help them

combat poverty.

Operational Information for FY 10

Total no. of Branches - 2029

Total no. of Districts - 341

Total no. of Staff - 21,154

Total No. of Members (in '000) - 6,780

Amount Disbursed for the period (INR crores) - 7,618

Portfolio outstanding (INR crores) - 4,321

SKS APPROACH

SKS believes that access to basic financial services can significantly augment economic

opportunities for poor families and in turn help improve their lives. SKS is committed to

creating a distribution network across underserved sections of society in order to provide easy

access to the full portfolio of microfinance products and services. It also looks at using this

network to add value to the lives of its members by providing quality goods and services that

our members need at less than market rates.


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WORKING MODEL

SKS Microfinance follows the Joint Liability group Model. The methodology involves lending

to individual women, utilising five member groups where groups serve as the ultimate

guarantor for each member.

Our approach is to provide financial services at the doorstep of members in villages and urban

colonies. This allows the poor convenience and savings in terms of cost and time associated

with travelling to mainstream banks and enables SKS staff to promptly and fully collect

repayments.

Our loans are designed for convenience with small weekly repayments corresponding to cash

flows. Small first loans inculcate credit discipline and collective responsibility. Interest andloan repayments are simplified for easy comprehension.

From village selection to loan disbursal, SKS follows a clear process in its operations. Details

of our operational methodology are captured below:

Village Selection: Before starting operations, our staff conducts village surveys to evaluate

local conditions like population, poverty level, road accessibility, political stability and means

of livelihood.

Projection Meeting: After a village is selected, SKS staff introduces the community to its

mission, methodology and services.

Mini-Projection Meeting: Follow-up with interested women, and direct appeal to those who

may not have attended earlier because of religious, class, caste or gender barriers.

Group Formation: Women form self-selected five-member groups to serve as guarantors foreach other. Experience has shown that a five-member group is small enough to effectively

enforce group peer pressure and, if necessary, large enough to cover repayments in case a

member needs assistance.

Compulsory Group Training: CGT is a four-day process consisting of hour-long sessions

designed to educate clients on SKS processes and procedures and to also build a culture of

credit discipline. Using innovative visual and participatory teaching methods, SKS staff

introduces clients to our financial products and delivery methods. CGT also teaches clients the


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importance of collective responsibility, how to elect group leaders, how to affix signatures, and

a pledge that serves as a verbal contract between SKS and its members. During this training

period, SKS staff collects quantitative data on each client to ensure qualification requirements

are met, as well as to record base-line information for future analysis. On the fourth day, clients

take a Group Recognition Test conducted by a different staff member than the one whotrained them. If they pass, they are officially accepted as SKS members.

Centre Meeting: As additional groups are formed within a single village, a Centre (sangam)

emerges. During Centre Formation, groups are combined to form a centre of 3 to 10 groups or

15 to 50 members. Weekly Centre meetings serve as a time to conduct financial transactions.

Meetings are held early in the morning, so as to not interfere with clients daily activities.A

leader and deputy leader are selected to facilitate meetings and ensure compliance with SKS

procedures. In addition to financial transactions, members use the weekly meetings to discuss

new loan applications and community issues. Centre meetings are conducted with rigid

discipline in order to sustain the environment of credit discipline created during CGT.

PRODUCTS OFFERED:

Product Features Benefits

Income

Generation

Loans (IGL) -

Aarambh

Loans range from Rs. 4,000 to Rs. 10,000

for the first loan; subsequent loan amounts

determined by past credit history and

increased each in set increments up to a

maximum of Rs. 26,000

Term of the loan is 50 weeks with

principal and interest payments due on a

weekly basis

12.5% flat interest rate / 24.55% annual

effective interest rate

Provides self-employed women

financial assistance to support

their business enterprises, such as

raising livestock, running local

retail shops called kirana stores,

providing tailoring and other

assorted trades and services

Mid-Term

Loan (MTL) -

Loan amounts range from Rs. 2,000 to Rs.

14,000 in each annual cycle.

Provides self-employed women

financial assistance to support


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Vriddhi

Available any time after the completion of

20 weeks & before 40 weeks of an IGL

cycle

Term of the loan is 50 weeks with

principal and interest payments due on a

weekly basis12.5% flat interest rate /

24.55% annual effective interest rate

their business enterprises, such as

raising livestock, running local

retail shops called kirana stores,

providing tailoring and other

assorted trades and services

Emergency

Loans andAdvances -

Raksha

Interest free emergency loans range from

Rs. 500 to Rs. 2,000

Term of the loan is 20 weeks with a bullet

repayment

Interest free funeral advances of Rs. 1,000

adjusted out of the claim settlement of loan

cover insurance

Designed to meet the unforeseen

emergency requirements ofmembers

Disbursed within 24 hours of

request

Funeral advance paid to a

members family upon the death

of the member or her spouse

Life Insurance

Loans

Interest free loans of Rs. 500

Term of 25 weeks with principal repaid

weekly

Issued to members to pay their life

insurance premiums during the

initial 25 week period

Helps to promote habit of savings

and reduction of vulnerability

among members

Mobile Loans Financing of mobile phones and telephone

services

Loan amounts range from Rs. 1,500 to Rs.

3,000

26.14% annual effective interest rate and

Provides financing for mobile

phones and telephone services to

our members


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loan processing fee of 1%

Term of 25 weeks

Sangam Store

Loans

Working capital loans ranging from Rs.

1,000 to Rs. 12,500

Interest free

Term of the loan is 14 days

Provides a working capital loan to

fund the needs of our members

who own and operate kirana stores

The program allows these

members to purchase their

inventory of consumer goods and

groceries from a national

wholesaler at wholesale pricesHousing

Loans

Loans range from Rs. 50,000 to Rs.

150,000

Members must have completed at least 3

IGL cycles to qualify or one ILP to be

completed

Term of loan is 3 to 5 years with principal

and interest payments due on a monthly

basis

11.9% flat interest rate, 21% annual

effective interest rate. In addition, loan

processing fee of 2% collected upfront

Provides financial access to

women for construction of new

houses or improvement &

extension of existing houses

As Per RBI circular DNBS. 204/CGM (ASR)-2009 dated January 2, 2009, SKSs Board of

Directors has discussed and formally adopted an interest model based on cost of funds,

operational costs, and risks involved for each product.


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Product Features Benefits

Life

Insurance

Weekly payment of

Rs. 20 for the term

of five years

Upon death, we disburse to the beneficiary the full

sum assured of Rs. 5,000 plus the account value,

which is equal to the aggregate of the premiums paid

plus interest accrued, if any, less any charges for the

administration of the policy

In the event the death is deemed an accidental death,

the beneficiary receives Rs. 10,000 plus the account

value

Upon maturity in five years where no death hasoccurred, we disburse to the policyholder the account

value.


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NEW INITIATIVE

Sangam Store Loans :

The Sangam Stores project is aimed at providing working capital finance to SKS members who

own small kirana stores. With credit supplied by SKS, shopkeepers can buy consumer goodsand groceries through a dedicated third-party vendor. This relationship gives access to quality

products at competitive prices that are delivered straight to their shops. Our members save time

and transport costs normally spent on buying goods from local markets. SKS is partnering with

Metro, the German wholesaler, which supplies member kiranas from a special inventory of 250

SKUs. Under this project, SKS generates and aggregates demand from kirana store owners, in

addition to supplying credit to them. This pilot is the first step towards creating a vibrant

distribution network across sections of society currently not serviced by manufacturers.

Housing:

Many SKS members have asked for larger loans to make improvements on their homes or build

new ones. SKS has launched a housing loan pilot for members who have been with SKS for a

minimum of three years. Members can repair their houses, such as changing a thatched or

asbestos roof to RCC, or make improvements such as building a latrine or adding an extra room.

The loan has a repayment period of three to five years as per the repayment capacity of the

members. SKS is currently carrying out a pilot programme in rural markets with support from

HDFC and hopes to roll out housing loans more widely in the next financial year.

Water Purifier:

SKS has partnered with Hindustan Unilever to provide Pureit water filter devices to our

members. SKS provides the loan to make the water filter affordable and HUL provides the

distribution, installation, and servicing that ensures our members have access to clean water.

SKS is currently assessing the learning from our pilot branches and will determine a rollout

plan to reach our members pan-India in the coming months.

Solar Lamp:

Most of our members live in areas that have erratic power supply forcing business and normal

lifestyle to come to a halt with sunset. Solar-powered lighting gives our members the

opportunity to be independent from unreliable, low-voltage electricity grids or to light their

homes if theirs are currently un-electrified. After completing a successful pilot SKS is currently

evaluating the learnings from the project.


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ISSUES WITH MICROFINANCE INDUSTRY RELATED TO SKS MICROFINANCE

CASE STUDY

Andhra Pradesh, one of Indias most populous states, cracked down heavily on private

microfinance institutions (PMFIs), banning many of their activities and telling borrowers they

did not need to repay their loans. State authorities said they were prompted to take decisive

action by a spate of suicides by borrowers who were unable to pay their debts. Roughly 80

clients were reported to have taken their own lives last year an alarming figure, though tiny

relative to the 26.7 million active borrowers from PMFIs in India.

Andhra Pradesh officials charged that PMFIs, which had lent around 80 billion rupees (nearly

$2 billion) in the state, levy usurious interest rates (24-30% per year) to sustain their

promoters extravagant salaries and profits. In addition, too many borrowers had taken multiple

loans from different sources and were unable to repay them. Aggressive agents were marketing

the loans with no heed to borrowers capacity to repay. It was alleged, too, that coercion was

being used to exact repayment, leaving victims with no way out but to end their own lives.

One institution that received unwelcome attention was SKS Microfinance, once a poster child

for the PMFIs, which had done so well and grown so large that its initial public offering last

year was oversubscribed 13-fold and raised $350 million. The salaries paid to its top executives

as a reward, essentially, for lending successfully to the poorest of the poorwere excoriated

by leaders across Indias political spectrum. SKS Chairman, Vikram Akula, reportedly made

$13 million by selling some of his shares last year. Is it moral, critics asked, to profit so much

from providing services that alleviate poverty?


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ANDHRA PRADESH ORDINANCE

The Andhra Pradesh Microfinance Institutions Ordinance 2010 was issued by the Andhra

Pradesh government in the wake of a series of suicide cases in the state that were blamed upon

the MFIs who are charging high interest rates and using coercive recovery methods. It wasreported that the deaths have kicked up a furore with opposition parties and the State Human

Rights Commission demanding action from the government.

The ordinance talks about following main items:

Registration of MFIs Register of MFIs Member of SHG not to be member of more than one SHG MFIs not to seek security for loan Display of interest rates charged by MFIs Maximum amount of interest recoverable on loans discharged Prior approval for grant of further loans to SHGs or their members Duty of MFIs to maintain accounts and furnish copies Submission of monthly statements by MFIs

Power to require production of records or documents and power of entry, inspection andseizure

Complaints Settlement of disputes procedure Penalty for coercive actions by MFIs

Under the ordinance, all MFIs operating within the states have to apply for registration with the

registering authority of the district within 30 days of issue of ordinance thereby giving details

like the purpose of operating, the interest rate charged, system of conducting due diligence and

effecting recovery and the list of persons authorized for lending or recovery of money.

Registering authorities include Project Director District Rural Development Agency for the

rural areas and Project Director MEPMA (Mission for Elimination of Poverty in Municipal

Areas) for urban areas.

Microfinance institutions are further barred from granting or recovering loans without

obtaining registration under this ordinance. The registering authority can anytime cancel theregistration of an MFI after assigning sufficient reasons for such cancellation.


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The Ordinance prohibits members of SHG from holding memberships of more than one SHG.

For those who already have more than one membership, the option of retaining the membership

of one SHG and terminating membership in other SHGs is given. The member has to issue a

notice about her termination and settle the amount payable to such MFIs.

With the ordinance in place, no MFI can recover from the borrower an interest which is in

excess of the principal amount and all loans for which an MFI has realized from the borrower

an amount equal to twice the amount of the principal shall be discharged. The borrowers shall

be entitled to obtain refund form the MFI.

The ordinance also made it mandatory for MFIs to make public the rates of interest charged by

them. Moreover, MFIs are now barred from extending further loans to an SHG or to its

members which already has an outstanding loan from a Bank unless the MFIs obtain prior

approvals from the registering authority.

For putting a check on the increasing use of coercive methods by MFIs for recovering

repayments, the ordinance says that MFIs shall not deploy any agents for recovery nor shall use

any coercive action for recovering money from the borrowers. It empowers the registering

authority to suspend or cancel the license of MFIs found engaged in coercive methods.

Further, the registering authority has also been given the power to require production of records,

inspection and seizure for examination and legal actions. MFIs are also required to submit

monthly statements to the registering authority.

The ordinance also empowers SHGs and their members to file a complaint regarding violation

of the stated provisions by an MFI before the registering authority. The State government will

also be establishing fast-track courts for settlings disputes of MFIs and SHGs.

It is also reported that SHGs were expected to get further relief as the soft loans being arranged

to them from banks under debt swap scheme, to clear the MFI loans, would be charged only 3

per cent. The government would bear 10% out of the 13% interest charged by the banks on

these loans.


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MALEGAM COMMITTEE RECOMMENDATIONS

In a bid to revive the sagging prospects of the microfinance industry, Malegam committeeset

up by Reserve Bank of India has recommended earmarking a maximum interest rate of 24%

on small loans to individuals with a tagged ceiling of Rs.25000 to a single borrower.

The sub-committee has recommended creation of a separate category of NBFC, to be classified

as NBFC-MFI a lender which will provide financial services predominantly to low-income

borrowers and holds no less than 90% of its total assets in the form of qualifying assets.

Further, any bank lending to such NBFCs for the microfinance sector will be entitled to

priority lending status.

The panel provides that no less than 75% of the loans by an MFI should be for income-

generating purposes. The committee has taken a strict cognizance of the fact that a number of

individuals have taken multiple loans from various lenders of micro-credit loans. For such

cases, it has marked a cap on individuals in allowing them to borrow money from not more

than 2 MFIs.

The best part of the Malegam committee report being NBFC-MFIs should be exempted from

state Money Lending Acts. This essentially means that MFIs would be freed from the clutches

of draconian the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending)

Act, 2010, which has already reduced interest rate to 24% for the industry.

Highlights of Malegam Committee Report:

Categorizing MFIs under NBFC-MFIs Ceiling on loans to a single borrower of Rs.25000

Not more than 2 MFIs can lend to a single borrower A borrower can be a member of Self-Help Group. NBFC-MFIs to be exempted from state Money Lending Acts. BFC-MFIs to will be entitled to priority lending status.

However, the above recommendation is yet only in the public domain. It needs to be accepted

before being regularized. Some sector analysts are of the opinion that the new

recommendations might not go down too well with the smaller MFIs on account of margin

squeeze. But, overall the panel report is positive and a first step towards right direction which

soothes investor concerns with respect to the sector prospects.


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CHALLENGES FOR MICROFINANCE PROVIDERS

Although the importance of microfinance in the process of poverty eradication is realized, it

faces multiple problems. This is because offering credit to the poor is a complicated process

and the sector is still in its experimental stage.

Weve divided all problems into two sets; challenges faced by MFIs and challenges faced by

micro entrepreneurs

Microfinance Challenge 1: Perceived High Risk of Micro Entrepreneurship and Small

Businesses

Micro entrepreneurs usually have no collateral to offer to microfinance providers against loans,they usually lack an alternate source of income, and have little, if any, formal education or

training in the area of their business. As a result, commercial banks attribute a high credit risk

to micro entrepreneurs and steer clear of this sector.

Microfinance institutes (MFIs) are compelled to compensate for this risk by charging interest

rates on loans. Fortunately, the challenge can be resolved through the idea of group lending

(social collateral against loans) which ensures good repayment rates.

Microfinance Challenge 2: High Costs Involved in Small Transactions/Micro lending

The small size of micro enterprises increases the transaction cost for MFIs because they cannot

process loans in bulk (unless good management information systems are in place). This denies

MFIs the benefit of economies of scale; hence, they are forced to cover their costs through high

interest rates on loans (read 4 ways to control high interest rates).

According to a study conducted by Asian Development Bank, microfinance providers in the

Asia-Pacific region charge interest rates on micro-sized loans ranging from 30 to 70% a year,

which is much higher than rates offered by commercial banks (Fernando, 2006). However,

there are instances where the interest rates charged were too low for the MFIs sustainability.

There is, however, possible solutions to this problem by improving the technology model

used by microfinance institutes, their operational costs can be significantly lowered and

efficiencies may be gained during automated loan processing.
http://microfinance.cgap.org/2010/06/17/the-other-side-of-the-interest-rate-argument/trackback/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinance.cgap.org/2010/06/17/the-other-side-of-the-interest-rate-argument/trackback/


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Microfinance Challenge 3: Lack of Debt and Equity Funds for MFIs to Pass on to the

Poor

Capital availability for microfinance is hardly a problem owing to the rapid growth in the

microfinance sector, which has been fuelled by attention from the media and development

agencies. Even though there are plenty of financing options available for MFIs, there is an

emerging shortage of money because of the current financial crisis across the globe. Another

reason for this shortfall is the lack of awareness of funding sources by MFI managers.

Microfinance Challenge 4: Difficulty in Measuring the Social Performance of MFIs

Microfinance is delivering the economic returns its proponents promised, but there are only a

handful oftools available that measure the social return of loan programs for the poor. To addto the problem, the tools use proxies to estimate the amount of poverty and social change

surrounding micro entrepreneurs. This makes the gathering of funds a challenge because

donors may question the actual impact made my microfinance.

Microfinance Challenge 5: Mixing Charity with Business

Since credit without strict discipline is nothing but charity (Professor Yunus), if microfinance

providers fail to protect themselves against loan delinquency, the

Final Micro Finance 2003

Documents

Transcript of Final Micro Finance 2003