PAPER PRESENTATION ON

EMERGENCE AND FLOURISHMENT OF MICROFINANCE IN INDIA

PRESENTED BY

MRS.B.Ramya HariGanesan., M.F.C., M.PHIL.

RESEARCH SCHOLAR

19/83, Vakkil street,

RaNiPeT,

Vellore Dt.623401

IN

NATIONAL CONFERENCE ON

TRENDS IN BANKING & FINANCE

HELD ON

MARCH 26, 2012

BY

DEPARTMENT OF MANAGEMENT STUDIES

IN

SNS COLLEGE OF TECHNOLOGY

(AN NBA ACCREDITED AND ISO9001-2008CERTIFIED INSTITUTION)

(APP. AICTEAND AFFILIATED TO ANNA UNIVERSITY OF TECHNOLOGY, COIMBATORE)

SATHY MAIN ROAD, VAZHIYAMPALAYAMPIRUVU,

COIMBATORE-35.

EMERGENCE AND FLOURISHMENT OF MICROFINANCE IN INDIA

Introduction:

As our father of Nation Mahatma Gandhi’s wordings says,” AS YOU ARE UPLIFTING THE

POOR THEN YOU ARE UPLIFTING THE NATION”, Micro finance is a tool to attack poverty all

over the world.

Micro finance could be defined 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”

As we see poor people need finance to meet their day to day needs, but have very

low accessibility to approved finance sources. They meet their needs through exchanging

different forms of non-cash value typically include livestock, grains, jewelry, and precious

metals.

Micro finance is a best tool identified to finance low income households and it is

achieving its goal of alleviating poverty in India. This is illustrated below,

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Deposits (sum) — — — 0 4.23 0.00 4.07 20.12 34.10 52.68Borrower retention rate — — — — — — — — — 76.13%Assets (sum) 27.47 50.05 74.31 138.98 213.88 377.75 596.16 486.92 938.74 966.59

Source:www.mixmarket.org/crossmarket-analysis

20012002

20032004

20052006

20072008

20092010

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

Assets (sum)

YEAR

ASSE

TS V

ALUE

INR

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

1000000

2000000

3000000

4000000

5000000

6000000

Deposits (sum)

Axis Title

DEPO

SITS

VAL

UE I

NR

Origin and Development of Microfinance in India:

Evolution of Microfinance in India:

In 1904, Microfinance has been in practice for ages (though informally).Legal framework

for establishing the co-operative movement set up.

In 1934, Reserve Bank of India Act provided for the establishment of the Agricultural

Credit Department.

In 1969, Nationalisation of banks.

In 1975, Regional Rural Banks created.

In 1976,Grameen Bank, Yunus

In 1982, NABARD established as an apex agency for rural finance.

In 1995, Passing of Mutually Aided Co-op. Act in AP.

On 12th July 2002, Prime Minister Atal Behari Vajpayee outlined an eight point agenda

to push the economy on a growth path of eight percent during the 10th plan. Mr. Vajpayee

assured that it would be government’s Endeavour to ensure that “the poor and the

unorganized sector have access to savings, credit and insurance services”. This statement itself

is a great boost to the microfinance sector, as one can see the changing perception of the

people influencing the policies, toward it. However, it is still a beginning and to make the

sector vibrant, the efforts have to be still on.

So the birth of microfinance movement in India can be traced to 70's.The main aim of

the movement was to alleviate poverty by delivering financial services to the poor. The basic

idea was to enable poor to access the financial services so that poor can have an asset base

and initiate income generation activities.

The movement was initiated in India by the joint efforts of NGOs and CBOs. Self

Employed Women Association (SEWA) is considered one of the pioneers of the microfinance

movement in India. Over the years, the efforts of these organizations have proved that poor

are bankable.

Further, in the last two decades microfinance movement has gained a lot of

prominence all over the world as well as in India. We can divide microfinance movements in

India into two distinct phases. Phase I: from 1970's to 1991 and Phase II: from 1991 to the

present time. In the Phase II, formal financial sector in India also joined the microfinance

movement.

The MFIs operate under various legal forms.

NGO MFIs – Registered under Societies Registration Act 1860 and / or Indian Trust Act

1880

Co-operative MFIs – Registered under State Co-operative Societies Act or Mutually Aided

Co-operative Societies Act (MACS) or Multi-State Co-op. Societies Act, 2002

NBFC MFIs under Section 25 of Companies Act, 1956 (Not for profit).NBFC MFIs

incorporated under Companies Act,1956 & registered with RBI

NABARD has taken various initiatives to support Micro Finance Institutions (MFIs) to

strengthen them as given below

1. Rating of Micro Finance Institutions (MFIs)

In order to identify, classify and rate Micro Finance Institutions (MFIs) and empower

them to function as intermediaries between the lending banks and the clients, NABARD had

introduced a scheme for providing financial assistance by way of grant to Commercial Banks,

Regional Rural Banks and Co-operative Banks to avail of the services of accredited rating

agencies for rating of MFIs.

Banks can avail the services of credit rating agencies viz. CRISIL, M-CRIL, ICRA, CARE

and Planet Finance for rating of MFIs.

2. Revolving Fund Assistance (RFA) to MFIs.

NABARD provides loan funds in the form of Revolving Fund Assistance (RFA), on a

very selective basis to MFIs. The RFA provided to these agencies is necessarily to be used for

on-lending to SHGs or individuals and the amount is to be repaid along with the service

charge within a stipulated period of 5 to 6 years.

3. Capital / Equity Support to Micro Finance Institutions (MFIs)

In view of the announcements made by the Hon’ble Finance Minister in his Union

Budget 2005-06, a scheme called “Capital / Equity Support to MFIs from Micro Finance

Development and Equity Fund (MFDEF)” was announced under which capital/ equity support to

various types of MFIs would be provided by NABARD to enable them to leverage capital / equity

for accessing commercial and other funds from banks.

As an added advantage for this scheme in the Union Budget 2011-12 submitted on

28th Feb. of 2011, Honorable Finance Minister proposed to create in the course of the year,

‘India Microfinance Equity Fund’ of Rs 100 crore with SIDBI.

Top five MFIs in Outreach:

Micro finance

Institutions

In India

Clients (Million)

Growth rate %

Loans (billion) Growth rate %

2008 2009 2008 2009

SKS 1.88 3.52 87 7.81 24.6 214

Spandana 1.19 2.43 104 5.95 18.7 214

Share 1.29 1.50 16 7.28 12.2 67

Bandhan 0.76 1.45 91 2.78 5.3 91

Asmita 0.70 0.88 26 3.36 7.1 111

Source: CRISIL report 2010

About SKS:

SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC), regulated by

the Reserve Bank of India. SKS claims its mission is to eradicate poverty by providing financial

services to the poor. The company operates across these 19 states of India: Andhra

Pradesh,Karnataka, Maharashtra, Orissa, Madhya Pradesh, Bihar, Uttar

Pradesh, Rajasthan,Uttaranchal, Himachal Pradesh, Haryana, West

Bengal, Jharkhand, Chhattisgarh, Gujarat,Kerala, Tamil Nadu, Punjab and Delhi.

According to a CRISIL Report on Top 50 Indian Microfinance Institutions (MFIs), SKS

Microfinance is the largest MFI in India in terms of number of borrowers, number of branches

and total loans.

About Spandana:

Spandana Foundation was started in 2005[1] as charitable trust to make a difference in

education, health care and better living of poor and needy. This trust has made significant

impact in these areas for the past five years. Spandana have helped lot of meritorious students,

supported for expensive surgeries for people with poor economic background. Spandana also

organized health camps and served thousands of rural Indians. The trust had developed action

plans to adopt government schools (Vidyalaya), Adopt poor students(Pratibha), Help the

homeless (Aashraya) and support poor people financially for health care(Cheyutha) thereby

making a difference in others lives.

About Share:

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

(NBFC) providing financial and support services to the marginalized 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.

About Bandhan:

Bandhan was set up to address the dual objective of poverty alleviation and women

empowerment. The micro finance 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 RBI.That apart,Bandhan is also engaged in

development work through its not for profit entity.They work to bring the forsaken hope in the

lives of the unprivileged section of the community .

About Asmita:

The Asmita Resource Centre for Women is an Indian NGO based in Andhra Pradesh. It

works to better the socio-economic status of women and communities in India as it strives to

"build a cadre of young women who are capable, efficient and feminist in perspective and who

can oppose violence and corruption with visions of an alternative". Through outreach programs,

research, publications, and media campaigns, the center creates a safe space in which women,

men, and youth can engage in critical dialog on and analysis of feminist issues and other critical

issues that the collective identifies.

BREAK UP OF INDIAN MICROFINANCE INSTITUTIONS

Source-CRISIL Ratings India MFI Institutions 2010

Growth in Micro Finance Top Five Institutions up to 2010:

Expansion of Consumer Base in Millions:

According to the CRISIL report up to 2010 the top Five micro finance institutions has a rapid growth from March 2005 to March2010 which is reached from 1 million consumers to 6 million consumers on march 2010 which is 6 times growth. This is portrait in the below chart,

Comparative growth in Loans in Top Five MFI’s:

According to the CRISIL report up to 2010 the top Five micro finance institutions has a rapid growth in giving loans to clients from March 2005 to March2010 which is reached from 100 million US dollars to 1000 million US dollars on march 2010 which is 10 times growth. This is portrait in the below chart,

Growth Expected in Indian Micro Finance:

From the above reports from CRISIL there is a tremendous growth among micro finance institutions for the past 5 years and according to a source Intellcap of projecting micro finance portfolio growth up to 2012 saying that it will reach up to 3,50,000 million in Indian rupees. This is illustrated in the below chart of projection from the real values on 2008 to projected values in 2012.

The Indian micro finance industry (MFI) would cross 11 crore borrowers and Rs.1, 35,000 crore ($30 billion) in loan portfolio by 2014 and will require a huge capital inflow both in debt and equity. The report said that the growth is expected to come from underserved states that are witnessing a flurry of activity, and also from a range of new financial and non-financial products that are being introduced in the sector.

Indian microfinance institutions have grown at a spectacular rate between 2004 and 2009, with an average size portfolio increasing 107 per cent on a year on year basis, while number of clients increasing 91 per cent. As of 2009, the industry had a client base of about two crore and gross loan portfolio of Rs 11,734 crore.

Introduction of the bill is expected to create a definite regulatory framework for microfinance institution

Micro finance Sector development and Regulation Bill, 2007

Introduced on 20th March 2007 Bill No.:41 of 2007.

A Bill to provide for promotion, development and orderly growth of the micro finance sector in rural and urban areas for providing an enabling environment for ensuring universal access to integrated financial services, especially to w omen and certain disadvantaged sections of the people, and thereby securing prosperity of such areas and regulation of the micro finance organisations not being regulated by any law for the time being in force and for matters connected therewith or incidental thereto.

The salient features of the Bill are as follows:

Entrust the function of development and regulation of the micro financial sector to the National Bank for Agriculture and Rural Development(National Bank);

Define various entities engaged in the activity of micro finance such as cooperative societies, mutual benefit societies or mutually aided societies registered under any State enactments or multi-State Cooperative societies registered under the Multi-State Cooperative Societies Act 2002, societies registered under the Societies Registration Act 1860 or any other State enactments governing such societies and a trust created under the Indian Trust Act 1882 or public trust registered under any State enactments. that will be governed by the regulatory framework proposed to be set up;

Define various categories of beneficiaries of micro financial services as eligible clients including Self Help Groups (SHGs) or joint liability groups of such eligible clients.

Provide for extending micro financial services to eligible clients by w ay of financial assistance subject to ceilings to be prescribed and such other financial services as may be specified by the National Bank;

Provide for acceptance of thrift, i.e., savings eligible clients other than in the form of current account or demand deposit account by micro financial organisations registered by the National Bank, subject to such terms and conditions as may prescribed;

Provide for constitution of Micro Finance Development Council to advise the National Bank on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the micro finance sector;

Provide for registration of Micro Finance Organisations to be permitted to collect thrift from individual member of SHGs or through a group mechanism;

Provide for creating of a reserve fund and maintenance of accounts and periodical returns to be submitted by micro financial organisations;

Provide for functions and powers of the National Bank in relation to thrift services and micro financial services;

Provide for constitution of Micro Finance Development and Equity Fund to be utilized for the development of micro finance sector;

Empower the National Bank to frame a scheme for appointment of one or more Micro Finance Ombudsman for settlement of disputes between eligible clients and micro finance organisations;

To provide for offences and penalties for non-compliance with the regulatory requirements of the Bill;

To empower the Central Government to prescribe Rules for carrying out the purpose of the Bill;

To empower the National Bank to make regulations with the previous approval of the Central Government for carrying out the purposes of the bill.

In continuation of the above Bill, Our honorable Finance Minister Mr.Pranab

Mukarjee in his 2012-13 Union Budget Proposes to move various bills in the Budget Session

of the Parliament related to Micro Finance, National Housing Bank, SIDBI, NABARD, Regional

Rural Banks, Indian Stamp etc. This attempts to roll forward the process of financial sector

legislative reforms.

Why there is a need for regulation?

All NBFCs currently regulated by RBI under Chapters III-B, III-C and V.

No separate category created for NBFCs operating in Microfinance Sector

Separate category of NBFCs for MFIs such as NBFC-MFI needs to be setup.

Why Separate category of NBFCs needed?

Borrowers in MFI sector represent a particularly vulnerable section of society NBFCs not

only compete among themselves they also compete with the SHG- Bank linkage

Programme.

Credit to the MFI sector is an important plank in the scheme for financial inclusion

Over 75% of the finance obtained by NBFCs operating in this sector is provided by Banks

& financial institutions like SIDBI.

Foreign direct investment and its impact on MFIs:

Indian MFIs can get foreign funds in the following ways:

1. Acceptance of Foreign Contribution:

Acceptance of foreign contribution by MFIs registered under the Societies Registration

Act 1860 is regulated by the Foreign Contribution (Regulation) Act 1976 (FCRA)

2. Foreign Direct Investment:

It is Applicable only to Section 25 companies and NBFCs which are allowed to

obtain FDI as equity.

3. NBFCs can obtain foreign capital in the form of equity subject to approval by the Foreign

Investment Promotion Board (FIPB)

Present foreign Investment in Micro finance:

Private Equity(PE) Group Legatum and Aavishkaar Goodwell have invested $25 million

capital in “Share” which is a MFI

Sequoia and Unitus, the Seattle-based company that invests in MFIs, have ploughed

$11.5 million into SKS Microfinance

Morgan Stanley and Switzerland-based Blue Orchard raised $108 million from the issue

of a securitized bond backed by MFI loans. The money will be invested in 21 MFIs in

more than 10 countries including India.

Effects of Foreign Investment in Micro Finance:

Positive Impact:

Private Equity (PE) funding from foreign players has provided the much needed ease of

funding for the MFI sector.

Help Indian MFIs to improve upon their delivery system with the adaptation of good

management practices brought about by foreign players

MFIs like SKS Microfinance have successfully come up with their IPO in the Capital

market rising $350 Million.

Negative Impact:

Too aggressive on giving out loans to the poor with proper due diligence.Y V Reddy,

former Governor, RBI has compared this to the Sub Prime crisis lending of 2007-08 in the

US.

Pressure of repayment on individuals leading to suicide cases in Andhra Pradesh, the

state having the largest number of MFIs

Risk of Foreign Investors moving out with the slum in the MFI sector in 2010-11.

Impact of Micro finance in GDP growth of our country:

The data furnished below gives the factors that affect the GDP percentage of our country.In this as we see Investment rate and Domestic savings rate is expected to increase on 2011-12 by 0.3% and 0.2% respectively which is an evidence for the impact of Micro finance in Investemnt and savings by the poor people.

Agriculture grew at 6.6% in 2010-11. This year’s monsoon is projected to be in the range of

90 to 96 per cent, based on which Agriculture sector is pegged to grow at 3.0% in 2011-12!

Industry grew at 7.9% in 2010-11. Projected to grow at 7.1% in 2011-12

Services grew at 9.4% in 2009-10. Projected to grow at 10.0% in 2011-12

Investment rate projected at 36.4% in 2010-11 and 36.7% in 2011-12

Domestic savings rate as ratio of GDP projected at 33.8% in 2010-11 & 34.0% in 2011-12

Current Account deficit is $44.3 billion (2.6% of GDP) in 2010-11 and projected at $54.0

billion (2.7% of GDP) in 2011-12

Merchandise trade deficit is $ 130.5 billion or 7.59% of the GDP in 2010-11 and projected at

$154.0 billion or 7.7% of GDP in 2011-12

Invisibles trade surplus is $ 86.2 billion or 5.0% of the GDP in 2010-11 and projected at

$100.0 billion or 5.0% in 2011-12

Capital flows at $61.9 billion in 2010-11 and projected at $72.0 billion in 2011-12

FDI inflows projected at $35 billion in 2011/12 against the level of $23.4 billion in 2010-11

FII inflows projected to be $14 billion which is less than half that of the last year i.e $30.3

billion

Accretion to reserves was $15.2 billion in 2010-11. Projected at $18.0 billion in 2011-12

Source: Economic Outlook 2011-12

Challenges of Micro Finance in India:

The future role MFIs might play in serving the poor is not clear, particularly with regard

to microfinance NGOs.

It is difficult for NGOs to charge the same low interest rates as banks, yet it was pointed

out that NGOs might be better placed to disburse loans quickly and to do doorstep

lending, which reduces transaction costs for borrowers.

Cap on Interest pricing to further limit the profitability of the sector

Increase in defaults on loan will hamper the MFI sector in India.

To the above it is highly disappointing that in this 2012-13 Union Budget no extra

provision for IMEF Announced by our finance minister

Conclusion:

"Microfinance is going to put poverty into the museum“

– Muhammad Yunus, Nobel Prize Winner & Founder of Grameen Bank

The whole point is that MFIs is not just an institution which is providing credit. It's an

institution, which is providing one microfinance services which basically should be that they are

supposed to do some training. They are supposed to handhold these things.

They are supposed to form a group, which has a joint liability. That's a sort of model

which is being used and today the major problem is of over borrowing of multiple lending and

so on and this becomes very difficult to control if you give a loan to an individual.

The whole concept of microfinance is that women are given money to set up some

income generating activity, so that they have a surplus which can supplement their household

income. It is not really money lending in another form.

Thus as we discussed above Micro finance has crossed many miles from its birth and

it is about to go many miles to achieve its goal of alleviating poverty not only in India but also all

over the world. It can achieve its goal only when the way it goes through is bed of roses that is

with proper legal framework let the announcement in Union Budget 2012-13 gives Micro

finance Institutions a way with bed of roses for miles to go.

Annexure I:

ABBREVIATIONS:

NABARD:National Bank for Agriculture and Rural Development .

SEWA:Self Employed Women Association.

MFI: Micro Finance Institutions.

NGO:Non Government Organisation.

NBFC:Non Banking Financial Companies.

CRISIL:Credit Rating and Information Services of India Ltd.

M-CRIL:Micro Credit Rating International Ltd.

ICRA:Internet Content Rating Association.

Annexure II

BIBILIOGRAPHY:

RBI's Malegam Committee Report on Microfinance

The Income Tax Act (1961), Section 11-4A and 12A

Sa-Dhan Report on Existing Legal & Regulatory framework for Microfinance in India,

2006

BBC Podcast on India's Microcredit Meltdown, Jan 2011

Doug Johnson, The Geographic Distribution Of Microfinance Services In India 2007

CRISIL Ratings India MFI Institutions 2010

Microfinance In India State of the Sector Report 2009

M-CRIL (2005). “A Study of the Regulatory Environment and its Implications for

Choice of Legal Form by Microfinance Institutions in India”. Published by Sa-dhan.

Websites:

www.mixmarket.org

www.en.wikipedia.org/wiki/ Microfinance

www. microfinance gateway.com

www. microfinance focus.com

www.india microfinance .com

www. microfinance india.org

Magazines:

Economic Times

Hindu Business Line

Business Standard