SUMMER INTERNSHIP PROGRAM

A REPORT ON

Microfinance in India with special reference to Canara Bank

Canara Bank Head Office

Bangalore

BYSWATI BHARDWAJ

ITM2009-11/53

ITM BANGALORE

Canara Bank Head Office Bangalore

“MICROFINANCE IN INDIA WITH SPECIAL REFERENCE TO CANARA BANK”

A Dissertation Submitted to Institute for Technology and Management, Bangalore

For the Partial Fulfillment of the PGDM Program

By

SWATI BHARDWAJ

Reg. No: PGDM 2009-11/53

Under the Guidance of:Industry Guide- Mr. B. S. Umesh Rao

Senior Manager-Microfinance DivisionFaculty Guide- Prof Madhavi Jayanthi

Lecturer Finance

Institute for Technology and ManagementBangalore-560076

2009-11

DECLARATION

I hereby declare that this project entitled study on ‘Microfinance in India-with special

reference to Canara Bank’ conducted at Canara Bank Head Office Bangalore, is a record of

independent work carried out by me during the academic year 2009-11 under the guidance of my

faculty guide Prof. Madhavi Jayanthi of ITM Bangalore and my company guide Mr. B. S.

Umesh Rao, Senior Manager-Microfinance Division and Mr. Ashwani Kumar, Manager, Agri-

Business, Marketing unit, Priority Credit Wing, Canara Bank H.O., Bangalore.

I also declare that this project is the result of my effort and

has not been submitted to any other university or institution for the award of any degree or

personal favor whatsoever. All the details and analysis provided in the report hold true to the best

of my knowledge.

SWATI BHARDWAJ

Place: Bangalore

Date:

ACKNOWLEDGEMENTWorking on this project has been a great learning experience for me. I would like to take this

opportunity to express my gratitude to the people who have helped me to bring out this project.

I take this opportunity to express my profound gratitude and deep regards to my guide Mr. B. S.

Umesh Rao, Senior Manager-Microfinance Division, Canara Bank H.O., Bangalore for his

guidance, monitoring and constant encouragement throughout the course of this project.

I would also like to thank Prof.Latha Ramesh and Prof Madhavi

Jayanthi for his guidance and support.I am also grateful to Mr. Ashwani Kumar, Manager,

Agri-Business, Marketing unit, Priority Credit Wing, Canara Bank H.O. who gave me the

opportunity to do this project. His timely guidance, valuable knowledge and experience helped a

lot.

SWATI BHARDWAJ

Management Trainee

ITM, Bangalore

1

INDEX

Chapter Particulars Page No

1 Statement of Problem 06

2 Objectives of the Study 06

3 Methodology 06

4 Limitations of the Study 06

Part AChapter Particulars Page No

1 Industry Profile 8-9

2 Company Profile 10-24

2.1 Background of the Company 10-11

2.2 Nature of the Business carried 12

2.3 Vision, Mission and Quality Policy 12

2.4 Products/ Services Profile 13-17

2.5 Area of Operation 18

2.6 Ownership Pattern 18-20

2.7 Competitors Information 21

2.8 Infrastructural Facilities 22

2.9 Work Flow Model 22

2.10 Achievement/ Award 23-24

2.11 Future Growth and Prospect 24

3 McKinsey’s 7S Frame Work 25-28

4 SWOT Analysis 29-30

5 Analysis of Financial Statement 31-33

2

Part BChapter Particulars Page No

1 Executive summary 35

2 Microfinance Introduction 36

3 Microfinance definitions 37-38

4 Activities/Products/Services in microfinance 39

5 History/Origin of Microfinance 40

6 Demand for Microfinance services 41-43

7 Supply for Microfinance services 44

8 Legal and Regulatory Framework 45-47

9 Major players 48

10 Growth of Microfinance 49-51

11 Microfinance delivery methodologies 52-54

12 Present situation 55-60

13 Success factors of Microfinance in India 61-63

14 Indian Microfinance at Global context 64

15 Impact of Microfinance 65

16 Issues of Microfinance 66-68

17 Microfinance at Canara Bank 69-82

18 Future of Microfinance 83-84

19 Conclusion 85

20 Suggestion 86

21 Learning experience 87

22 Bibliography 88-89

23 Abbreviations 90

3

LIST OF TABLES

Table

no.

Particulars Page no.

1 Product and services of Canara Bank 13

2 Personal Banking 14-15

3 Corporate Banking 15

4 NRI Services 16

5 Priority credit finance 17

6 Ownership Pattern of Canara Bank 19

7 Financial Statement Analysis 31

8 Growth of Microfinance 49

9 Classification of MFIs in India 50

10 Characteristics of Microfinance delivery models in India 51

11 Growth in Indian Microfinance Sector 56

12 Biggest MFIs in India 58

13 SHG-Bank linkage model 59

14 MFIs Bank Linkage model 60

15 Coverage of Women SHGs 60

16 Comparative analysis of Micro financial services offers to the poor 63

17 Coverage under DIR scheme 74

18 Coverage under Debt Swapping Scheme 75

19 Coverage under Krishi Mitra Card 78

20 Coverage under SHG Credit linkage 79

21 Performance of Group 80

22 Coverage under JLG/TFG 82

4

LIST OF FIGURES AND GRAPHS

1 Ownership pattern of Canara Bank 19

2 Work Flow Model 22

3 McKINSEY’s Framework 25

4 Development Process through Microfinance 46

5 Micro finance intervention through Different organization 47

6 Outstanding portfolio of Microfinance 57

7 Portfolio of Borrowers 57

8 Microfinance portfolio of Canara Bank on 31/03/09 70

9 Microfinance portfolio of Canara Bank on 31/03/10 71

10 Canara Bank lending to priority sector 72

11 Cansaral Saving Account and GCC 73

12 Coverage under DIR scheme 74

13 Coverage under Debt swapping scheme 75

14 Coverage under Krishi Mitra Card scheme 78

15 Coverage under SHG Credit linkage 79

16 Performance of group during the year 80

17 Coverage under JLG &TFG 82

5

1) STATEMENT OF THE PROBLEM“The study of Microfinance in India with special reference to Canara Bank”.

India is one of the highly populated countries in the world currently. Reason being unawareness,

illiteracy, avoidance or disinterest; in turn leading to economic downfall and almost 30-35% of

the people are under the Below Poverty Line (BPL). These people are not even able to meet their

consumption need. Therefore there is a need of a tool that not only serves them but also make

them self capable, Microfinance is such an approach that would result in the better standard of

living for them.

2) OBJECTIVE OF THE STUDY The objective of this study is to get an overview of Microfinance Industry in India, finding out

the need of microfinance by poor, different types of micro financial products available to the

poor their supply and demand and to know the initiatives taken by Canara Bank for meeting the

financial need of poor as well as to find out where they are lagging in fulfilling their need and

how to overcome this.

3) METHODOLOGYSecondary data collection: The study is purely theoretical; no primary data collection was

required for the project. All the data collected for the study was based on different sources, like

company reports, websites, details provided by the guide, case studies related to financial

inclusion, RBI guidelines, Canara bank reports and initiatives etc

4) LIMITATIONS OF THE STUDY The study holds good only for the time period the project was undertaken.

Study was focused mostly on Canara Bank, Head Office

The data recorded is presumed to be authentic and information collected mainly

from secondary sources.

Lack of comprehensive data about the future plans.

Lack of information which is confidential in nature prevented an in-depth study of

the positive and negative effects of microfinance.

6

PART A

7

1) INDUSTRY PROFILE

Banking Industry in IndiaThe world economy today is driven by the way the banks in the world perform. The economical

position of the country is also driven by the performance of banks. Banks, by extending their

services to areas hitherto untouched and making themselves accessible to the common man, have

become a part of our lives. The banking institutions in the past performed very limited functions

such as receiving deposits against bank notes and then issuing notes in the country, as the time

advanced and with the progress of commerce and industry, the scope of banking also expanded.

Modern banking institution is a large corporate giant with large resources and a vast field of

activity. Since the nationalization of some big commercial banks in India in the year 1969, there

has been a great surge of banking industry throughout the world with the growing number of

banking offices. The banking business today has become highly critical and competitive between

various classes of banks in offering a greater variety of services nationally and internationally.

With globalization setting in, banks are also modernizing operations with a view to satisfying

modern customers with an aim to improve bank operations with a view to maintain high standard

banking system that involves applications of better management techniques. In India, class

banking has given way to mass banking, bringing in its fold very large number of customers.

Banks are now looked upon as development agents instead of purveyors of credit to the large

industries and big business companies. Apart from providing credit to trade, industry and

agriculture it is also involved in offering pension for retired employees, government servants and

collection of utility bills.

The Indian banking system can be classified into nationalized, private and specialized banking

institutions. The industry is highly fragmented with 30 banking units contributing to almost 50%

of deposits and 60% of advances. The Reserve Bank of India is the foremost monitoring body in

the Indian Financial sector. It is a centralized body that monitors discrepancies and shortcomings

in the system. Industry estimates indicate that out of 274 commercial banks operating in the

country, 223 banks are in the public sector and 51 are in the private sector. These private sector

banks include 24 foreign banks that have begun their operations here. The specialized banking

institutions that include cooperatives, rural banks, etc. form a part of the nationalized banks

category.

8

The Indian banking system is financially stable and resilient to the shocks that may arise due to

higher non-performing assets (NPAs) and the global economic crisis, according to a stress test

done by the Reserve Bank of India (RBI). Significantly, the RBI has the tenth largest gold

reserves in the world after spending US$ 6.7 billion for the purchase of 200 metric tonnes of gold

from the International Monetary Fund (IMF). The purchase has increased RBI’s share of gold

holdings from approximately 4% to 6%. In the annual international ranking conducted by UK-

based Brand Finance Plc, 20 Indian banks have been included in the Brand Finance® Global

Banking 500. The State Bank of India has become the first Indian bank to be ranked among the

Top 50 banks in the world, capturing the 36th rank, as per the Brand Finance study. The brand

value of SBI increased from US$ 1.5 billion in 2009 to US$ 4.6 billion in 2010. ICICI Bank also

made it to the Top 100 list with a brand value of US$ 2.2 billion. The total brand value of the 20

Indian banks featured in the list stood at US$ 13 billion.

Following the recent financial crisis, new deposits have gravitated towards the public sector

banks. According to RBI's 'Quarterly Statistics on Deposits and Credits of Scheduled

Commercial Banks: December 2009', nationalized banks, as a group, accounted for 50.9% of the

aggregate deposits, while State Bank of India and its associates accounted for 23.4%. The share

of other scheduled commercial banks, foreign banks and regional rural banks in aggregate

deposits were 17.1%, 5.5% and 3% respectively. With respect to gross bank credit, nationalized

banks hold the highest share of 50.6% in the total bank credit, with SBI and its associates at

23.8% and other scheduled commercial banks at 17.8%. Foreign banks and regional rural banks

had a share of 5.3% and 2.5% respectively in the total bank credit.

The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI

deposits have increased by nearly US$ 47.8 billion on March 2010, as per the RBI’s June 2010

bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and

Non-resident External Rupee Accounts. Foreign exchange reserves were up by US$ 1.69 billion

to US$ 272.8 trillion, for the week ending June 11, on account of revaluation gains. June 21,

2010.

9

2) COMPANY PROFILE

Canara Bank: “A good bank is not only the financial heart of the community, but also one

with an obligation of helping in every possible manner to improve the economic conditions of

the common people”

2.1) BACKGROUND AND INCEPTION OF THE COMPANYCanara Bank was founded by Shri Ammembal Subba Rao Pai, a great visionary and

philanthropist, in July 1906, at Mangalore, then a small port in Karnataka. It was started as

'Canara Bank Hindu Permanent Fund' in 1906. This small seed blossomed into a limited

company as 'Canara Bank Ltd.' in 1910 with its head office in Bangalore. The Bank has gone

through the various phases of its growth trajectory over the hundred years of its existence. In

1958, the Reserve Bank of India (RBI) ordered Canara Bank to acquire G. Raghumathmul Bank,

in Hyderabad. This bank had been established in 1870, and had converted to a limited company

in 1925. At the time of the acquisition the bank had five branches. The growth of Canara Bank

was phenomenal, especially after nationalization by the Government of India along with 13 other

major banks in the country in the year 1969. It has attained the status of a national level player in

terms of geographical reach and clientele segments. In 1976, Canara Bank inaugurated its 1000th

branch.

Eighties was characterized by business diversification for the Bank. In the year 1985 Canara

Bank opened its first overseas office in London and also established a subsidiary in Hong Kong,

Indo Hong Kong International Finance Ltd and opened its third foreign branch, this one in

Shanghai. It has established in the areas of mutual funds, venture capital and factoring. It is the

First Bank to be conferred with ISO 9002 certification for one of its branches in Bangalore and is

the maiden bank to start Initial Public Offering (IPO). It has launched internet and mobile

banking services.

In June 2006, the Bank completed a century of operation in the Indian banking industry. This

eventful journey of the Bank has been characterized by several memorable milestones. Today,

Canara Bank occupies a premier position in the comity of Indian banks. With an unbroken record

of profits since its inception, Canara Bank has several firsts to its credit. These include:

Launching of Inter-City ATM Network

Obtaining ISO Certification for a Branch

10

Articulation of ‘Good Banking’ – Bank’s Citizen Charter

Commissioning of Exclusive Mahila Banking Branch

Launching of Exclusive Subsidiary for IT Consultancy

Issuing credit card for farmers

Providing Agricultural Consultancy Services

Over the years, the Bank has been scaling up its market position to emerge as a major 'Financial

Conglomerate' with as many as nine subsidiaries/sponsored institutions/joint ventures in India

and abroad.

Canfin Homes Limited

Canbank Factors Limited

Canbank Venture Capital Fund Limited

Canbank Computer Services Limited

Gilt Securities Trading Limited

Canara Robeco Asset Management Company Limited

Canbank Financial Services Limited

Canara HSBC Oriental Life Insurance Company Limited

As at March 2010, the Bank has further expanded its domestic presence, with 3043 branches

spread across all geographical segments. Keeping customer convenience at the forefront, the

Bank provides a wide array of alternative delivery channels that include over 2000 ATMs- one

of the highest among nationalized banks- covering 728 centers, 1959 branches providing Internet

and Mobile Banking (IMB) services and 2091 branches offering 'Anywhere Banking' services.

Canara bank made a partnership with UNEP to initiate a successful solar loan programme. It was

a four-year $7.6 million effort, launched in April 2003 to help accelerate the market for financing

solar home systems in southern India.

Canara Bank had a major IT initiative to network all branches and move them to a single

software platform. Canara Bank chose Flex cube from I-flex solutions as the application. The

Bank entered into an agreement with IBM for rolling out flex cube to over 1000 branches as part

of Phase I. The all India network of Canara Bank boasts of multiple branches in all the major

cities like Chennai, Pune, Bangalore, Mumbai, New Delhi, Gurgaon, Kolkata, Lucknow and

Hyderabad. The Canara Bank official site gives us an ATM and branch locator that can give you

the exact location and address of your nearest Canara Bank branches and ATM's.

11

2.2) NATURE OF THE BUSINESS CARRIEDCanara Bank is a Public Sector Company undertaking which is running under the Administrative

Control of Govt of India. The total share capital is Rs 410 crores of which government capital is

300 crores, others Rs 110 crores and, the total business of the Bank reached 403,986 crore.

Canara Bank was ranked at 1299 in the Forbes Global 2000 list.

Canara bank offers its services to the industry, NRI’s and all the classes of people such as

Personal Banking, Corporate Banking, NRI banking, Priority credit and other services etc. It has

come to the forefront of the commercial and financial services and established a leadership in the

financial services. The Bank has also carved a distinctive mark, in various corporate social

responsibilities, namely, serving national priorities, promoting rural development, enhancing

rural self-employment through several training institutes and spearheading financial inclusion

objective.

2.31) VISION“To emerge as a ‘Best Practices Bank’ by pursuing global benchmarks in profitability,

operational efficiency, asset quality, risk management and expanding the global reach.”

2.32) MISSION“To provide quality banking services with enhanced customer orientation, higher value creation

for stakeholders and to continue as a responsive corporate social citizen by effectively blending

commercial pursuits with social banking”.

2.33) QUALITY POLICY To remove Superstition and ignorance.

To spread education among all to sub-serve the first principle.

To inculcate the habit of thrift and savings.

To transform the financial institution not only as the financial heart of the

community but the social heart as well.

To assist the needy.

To work with sense of service and dedication.

To develop a concern for fellow human being and sensitivity to the surroundings

with a view to make changes/remove hardships and sufferings.

12

2.4) PRODUCTS AND SERVICES OF CANARA BANK (table 1)

Personal Banking Corporate Banking NRI Banking Priority and SME Credit

Savings &

Deposits

Account and Deposits Deposit Products Schemes

Loan Products Cash Management

Services

Loans and

Advances

SME Business

Technology

Products

Loans & Advances Remittance

Facilities

RRB Divison

Mutual Funds Syndication Services Consultancy

Services

Agri-Marketing

Insurance Business IPO Monitoring

Activity

Other Services Agri-Consultancy

International

Services

Merchant Banking

Services

Rural Development

Card Services TUF Schemes Social Banking

Consultancy

Services

Canara e-Tax CED for Women

Depository

services

One time settlement for

M& SE

Ancillary Services

13

Personal Banking (table 2)

1.Savings & Deposits 2.Loan Products 3.Credit services 4.Consultancy

Services

Current Accounts Housing loan Cash credit for

working capital

Tax Assistance

services

Fixed Deposits Home improvement

loan

Bill Discounting Trustee services –

private and

charitable

Recurring Deposits Canara Cash

(Shares)

Bank Guarantee Debenture

Trusteeship

Kamdhenu Deposits Canara Mobile

(Vehicle)

Loan for SME’s

Security

Trusteeship

Savings Bank Account Canara Site loan Finance to SSI’s Attorney ship

Saving Gold Scheme Teacher’s loan Agricultural loans Estate & Will

Service

Canara Champ Deposit Scheme Canara Budget

Canara Saral Savings Account Canara Pension

Canara Tax Saver Scheme Canara Rent

Ashraya Deposit scheme Canara Jeevan

Canara Auto Renewal Deposit Canara Mortgage

Canara Super Savings Salary

Account Scheme

Doctors Choice

Education loan

Swarna loan

14

5.Card Services 6.Mutual Funds 7.Ancillary

Services

8.Other Services

Canara Visa classic Canara Robeco MF

products

Safe Deposit

Lockers

Insurance (Life &

General)

Canara Global Gold Card HDFC MF products Safe Custody

Services

Technology

Products (ATMs)

Canara Corporate card 7 day Banking Depository

Services

DD Shoppe

Extended Banking

hrs

Corporate Banking (table 3)

Accounts & Deposits Cash Management

Services

Loans & Advances Other services

Current deposits Super Fast Service Term loans Canara e-Tax

Fixed Deposits Bulk Collection

Service

Gold Card Scheme for

Exporters

TUF Scheme

Kamdhenu Deposits Fast Track Service Infrastructural

financing

Merchant Banking

services

Recurring Deposits Working capital

Finance

IPO Monitoring

Activity

Export Finance Syndication Services

15

NRI Services (table 4)

Deposits

Products

Loans and

Advances

Remittance

Facilities

Consultancy

services

Other services

NRE(Non Resident

External Rupee)

Account

Housing Loan Canbank Remit

money scheme

NRI

Consultancy

Safe custody

NRO(Non Resident

Ordinary) Accounts

Home

Improvement

loan

Bank Western Union

Remittance scheme Safe Deposit Locker

FCNR (Foreign

Currency Non

Resident) Accounts

Can Jewel Swift Nomination Facility

CanCash

(Shares)

Rupee Drawing

Arrangement

Investments

CanMortgage Attorney ship

services

CanMobile

(Vehicle

NRI Service Centre

CanSite Facilities For

Returning Indians

Loan Against

Deposits

Priority credit finance (table 5)

Agriculture & Rural Education loan & RRB Divison Rural Others

16

Credit Scheme other Priority

sector loan

Development

schemes

Kisan Credit Card Loan For Students Pragiti Grameen

bank

Rural Clinic

service

Govt.sponsered Scheme

(SJSRY & SGSY)

Loan for Agri-Clinics Laghu Udyami

Credit Card

Scheme

South Malabar

Gramin Bank

Rural Service

Volunteer scheme

Lead Bank Initiative 26

dist

Minor Irrigation Loan Loan for Retail

Traders

Shreyas Gramin

Bank

Jalyoga Scheme SME Business Unit

Farm Development

loan

Loan for solar

Water Heating

System

Harikalyana Yojna SME Marketing Unit

Gold Loan For

Agricultural Purpose

Direct Financing

to SHGs

Rural Resource

Development

Agri-Business

Marketing unit

Kisan Tatkal Lending To MCGs Mobile Sales Van

(for helping

Women

entrepreneur in

marketing.)

Agri Consultancy

services

Krishi Mitra Card

Scheme

Finance to

NGO/MFI for on-

Lending to SHG

CED for Women

General Credit Card Social Banking

2.5) AREAS OF OPERATIONOver the years, Canara Bank has a reputation as a top quality service provider to its customers

and it believes in the centricity of its customers. Canara Bank of India has a network of 3046

branches, spread over 25 States/4 Union Territories of the country. It has its Head office in

17

Bangalore along with 34 circle offices and 1 international division. The bank also has

international presence in several centers, including London, Hong Kong, Moscow, Shanghai,

Doha, and Dubai. In terms of business it is one of the largest nationalized commercial banks in

India. Canara Bank has international division which supervises the functioning of its various

foreign departments to give the required thrust to foreign exchange business especially exports

and to meet the requirements of NRIs.

2.6) OWNERSHIP PATTERNSThe board consists of a whole time Chairman and Managing Director and two executives

director and one director representing Govt. of India and one representing Reserve bank of India

and four part times Non-official Director. Canara bank is a public sector undertaking (PSU),

73.17% of its share his held by Govt. of India and mutual fund/other institutions 5.75% private

corporate bodies 3.33% and public ownership is 17.75%. The bank is listed NSE, BSE and

Bangalore Stock Exchange.

Ownership Pattern of Canara Bank (table 6)

Category Number of

shares

% of

equity

18

Promoters

Central govt./state govt 300000000 73.17

Institutional Investors

Mutual funds/UTI 8070610 1.96

Financial institutions 420940 0.10

Insurance companies 31064973 7.58

Foreign Institutional Investors 47581514 11.61

Non institutions

Bodies corporate 1983985 0.48

Individuals -

Individual shareholders holding nominal share capital up

to Rs. 1 lakh.

20056041 4.89

Individual shareholders holding nominal

Share capital in excess of Rs. 1 lakh.

489984 0.12

Trusts 5560 0.00

Clearing Members 74085 0.02

Non-resident India 252308 0.06

Total 410000000 100

19

central/state Govt.73%

mu-tual fund

s/UTIs2%

fi-nancial in-

stn./In-

surance cos8%

Foreign In-

stnl. In-

vestors

12%

Bodies corporate0%

Indian public5%

NRI/OCB0%Trusts

0%

ownership pattern of Canara Bank

central/state Govt.mutual funds/UTIsfinancial instn./Insurance cosForeign Instnl. InvestorsBodies corporateIndian publicNRI/OCBTrusts

Figure 1

20

2.7) COMPETTIORS INFORMATION 1) State Bank of India:

The State Bank Group, with over 16000 branches, has the largest branch network in India

and the bank has 141 overseas offices spread over 32 countries. State Bank of India is

one of the Big Four Banks of India with ICICI Bank, Axis Bank and HDFC Bank. The

State bank of India is 29th most reputable company in the world according to Forbes. The

products of the bank are Loans Credit Cards, Savings, Investment, vehicles, SBI Life

Insurance etc.

2) ICICI Bank:

It is India's largest private sector bank by market capitalization and second largest overall

in terms of assets. The Bank also has a network of 1,640 branches and about 4,816 ATMs

in India and presence in 18 countries, as well as some 24 million customers. ICICI Bank

offers a wide range of banking products and financial services to corporate and retail

customers through a variety of delivery channels. ICICI Bank is also the largest issuer of

credit cards in India.

3) Bank of India:

It was established on 7 September 1906 is with its headquarters in Mumbai.

Government-owned since nationalization in 1969, It is one of India's leading banks, with

about 3101 branches including 27 branches outside India. Bank of India is a founder

member of SWIFT (Society for Worldwide Inter Bank Financial Telecommunications) in

India which facilitates provision of cost-effective financial processing and

communication services.

21

2.8) INFRASTRUCTURAL FACILITY Canara bank is located in the centre of the city where the bank has multi-floor building

where it has separate partition for all the departments.

The bank is fully computerized and well furnished with air condition facility to the

employees

The bank provides medical facilities to its employees

It also provides educational facility to the employees and their children.

The bank also provides vehicle faculty or traveling allowances to their employees

The bank also has provided with quarters facilities to its employees (officers).

The bank has established its own training centre to develop the employees’

knowledge, skill & attitude.

2.9) WORK FLOW MODEL

Figure 2 the loan sanction processThe bank has a two way approach in its work flow pattern. Let’s consider a loan sanction model,

the person who requires the loan needs to fill an application and submit it to the respective

branch authority. Each branch has certain limitations regarding the loan amount; bank needs to

check the authentication of the details and information produced by the party. Loan can be

sanctioned only if the securities pledged are valid and are free from legal considerations.

The loan is sanctioned by the bank authorities if the requirements are fulfilled; else if the loan

amount is exceeding the limits of the branch, the request is forwarded to the circle office or the

22

head office. The circle or the head office verifies and approves or rejects the proposal. The order

(approved/rejected) is sent back to the respective branch, and hence sent to the person. The

figure above provides a clear understanding of the same.

2.10) AWARDS/ACHIEVEMENTS

First National Award, instituted by the Ministry of Micro, Small & Medium Enterprises,

Govt. of India for 'Excellence in Micro & Small Enterprises (MSE) Lending' for 2006-07.

'Golden Peacock Award for Corporate Social Responsibility' for the year 2007. Canara

Bank is the first PSB to receive the award since its institution in the year 1991.

‘Golden Peacock National Training Award-2007’, instituted by the Institute of Directors,

New Delhi, a pioneer in Quality Revolution.

Conferred the Business Super brands Status for 2008.

'The Organization of the Year Award- for PR Excellence', instituted by Public Relations

Council of India.

Excellence in the field of Khadi & Village Industries in South Zone for the year 2006-07,

instituted by Khadi & Village Industries Commission, Ministry of Micro, Small & Medium

Enterprises, Government of India.

Received during 2008-09Conferred 'First Rank' in India's Best Banks awards under the

category 'Strength and Soundness' for 2006-07 by a survey conducted by Ernst & Young.

Best Performing Bank under Rural Employment Generation Programme, (REGP) of

Khadi and Village Industries Commission (KVIC), in South Zone for the year 2007-08,

instituted by the Ministry of MSME, Government of India.

Golden Peacock National Training Award 2008 for excellence in training.

Global HR excellence in Training, an award conferred by the Asia Pacific HR Congress,

the largest rendezvous of HR Professionals, at its Employer Branding Talent Management

Congress held on 22nd and 23rd August 2008, Delhi.

Best Corporate Social Responsibility Practice Award, instituted by BSE, NASSCOM and

Times Foundation.

23

The Bank won two Silver Corporate Collateral Awards for Best Corporate Ad in the Print

Media and Best Corporate Film on Corporate Social Responsibility at the Public

Relations Council of India Awards 2009.

Best Bank in South Zone Award for the year 2008-09 in respect of lending under KVIC and

PMEGP Schemes. The award was handed over by Dr.Manmohan Singh, Hon’ble Prime

Minister of India

The Bank received the Credit Guarantee Approval Certificate issued by CGTMSE from

Shri Pranab Mukherjee, Hon’ble Finance Minister of India.

2.11) FUTURE GROWTH AND PROSPECT

The Bank aims to reach an aggregate business figure of Rs.5 lakh crore, comprising total

deposits of Rs.285000 crore and advances of Rs.215000 crore.

The Bank will continue to focus on core business, with the objective of augmenting

profits and profitability.

Expanding global footprints, the Bank is likely to open a Representative Office at Sharjah

shortly in addition to RBI approval already obtained in 9 international centres.

Targets to achieve 100% CBS coverage by June 2010

The Bank has plans to open over 200 new branches during FY2011.

24

3) McKINSEY’S 7s FRAMEWORKThe Mckinsey’s 7s plays a vital role for the success of any organization. There are hard and soft

components. The figure below shows the framework.

Fig. 3: Mckinsey’s Framework

Figure 3

3.1) StructureThe design of organizational structure is a downward communication of information in the bank.

The information flows top down, i.e. from top-level management to lower levels. The chairman

and managing director have the sole authority in the organization. They give instructions to the

executive director and the general manager who in turn give instructions to the lower level

managers. The middle level management consists of general manager and company secretary.

Among these departments the General Manager division is very large. It consists of many

sections and sub sections. All sectional heads will communicate or report their sectional

performance or activities regularly to the general manager.

3.2) Skills The important software for the success any organization is the skills of the

employees & of the management. The Canara bank is having highly skilled employees. The

skills of the organization are:

25

Credit Skills: They face the challenges in improving the asset quality suitable training programs

for upgrading the appraisal & credit monitoring skills, pre-sanction & post-sanction supervision,

including monitoring of stocks, financial statements, etc., will be provided. The rigor of NPA

discipline & provisioning will only increase in the days to come & they have to equip themselves

for this task.

Technology Skills: Canara bank is having a very good brand equity & loyalty of customers.

Bank has already introduced product like, Tele-Banking, credit cards, ATMs etc., cross selling of

other financial services like insurance, mutual funds, government securities. Increasing non-fund

income, personal segment advances & trades finance in order to improve the profitability & to

make growth in business volumes more sustainable. Importance has also been given to areas like

low cost deposits, NPAs/AUCs recovery & reduction in operating expenses to improve

efficiency of their operations.

Operating Skills: Bank has to increasing non-fund income, personal segment advances & trades

finance in order to improve the profitability & to make growth in business volumes more

sustainable. Importance has also been given to area like low cost deposits, reduction in operating

expenses taken sufficient measures to identify measure, monitor & manage various risks

associated with the Banking business in the areas of credit, interest rate & liquidity.

3.3) StyleThe style of an organization according to the Mckinsey framework becomes evident through the

pattern of actions taken by members of top management team over a period of time.

Leadership Style in Canara Bank

It has been observed in the Canara bank that the behavior of superior towards the subordinate is

pleasant. They motivate fresher who are working under them. The superior tells subordinates

what exactly he has to do. The object of the work is clearly defined to them. Otherwise the

superior councils the subordinate, superiors who act as leaders conduct meetings, discussions,

presentation etc, on regular basis and take suggestions and ideas given by subordinates. The

leader takes the final decisions only. This style of leadership is called conservative leadership.

26

3.4) Strategy

Strategy indicates a specific program of action for achieving the organization objectives by

efficiently employing the firms’ resources. It involves preparing oneself for meeting unforeseen

factors. It is also concerned with meeting the challenges posed by the policies and actions of

other competitors in the market.

3.5) SystemsTraining System : The Bank under various categories were imparted training in diverse

functional areas such as assets liability management, consumer credit, housing finance, retail

finance Recovery, trade finance. The Bank adopts its own training system with the help of their

training centers. Training mainly helps with updating skills, knowledge improvement etc.

Technology System: The bank has initiated business process re-engineering with an effort to

stay at the top in the competition. It has enabled Core-Banking Service, has its own Cheque

Processing unit, and has initiated installation of ATM’s in all the areas.

The Bank has taken necessary steps to implement structured financial messaging system

(SFMS) a modularized software solution for financial message communication in a highly

secured environment.

Recruitment & Selection System: The sources of recruitment at the organization in the form of

both external & internal. The Bank follows the recruitment & selection processes that are

commonly followed by public sector Banks.

Systems and Procedures: Many systems and procedures in the Bank were received re-oriented

and simplified during the year without diluting any controls. Noteworthy among the initiatives

were revision/updating of all ten credit manuals, rationalization of entire applications in retail

lending schemes, simplification of documentation against valuable securities, rationalization of

printing supply and usage of forms, pilot implementation of single window system at select

branches revision of DD payment procedures & streamlining of procedures or scanning of

signature at branches.

27

3.6) StaffThe bank is motivated to harness the unique assets of the human resources for growth of the

institution and to imbibe team spirit for self and mutual development among bank’s staff. The

bank has made inroads towards establishment of quality circle concept among its employees.

Training & Development

Canara bank has been a fore runner in establishment of its own training college at Bangalore,

supported by 13 regional training centers spread over length & breadth of the country. These

centers take care of knowledge, skill & attitudinal development of the employees.

3.7) Shared values Improve market share on rural & semi-urban markets.

Increase number of performing branches and eliminate below performing branches.

To develop competent and vibrant human work force.

To develop the competencies and skills of the employees through training (Internal &

external) and other HRD measures.

To improve the work environment in the bank through welfare measures and healthy

Industrial relations.

To encourage employees to share knowledge and information about the various activities

in the bank through the House Magazine and other publications.

To encourage employees for implementation of office language in their day to day work.

The wing will continually improve all the processes involved during the performance of

the above functions for “Total satisfaction of customer” ( Internal) by implementing

quality management system requirements of all personal of the Bank as per IS/ISO

9001:2000

28

4) SWOT ANALYSISThe bank had envisioned to not only offer financial services but also fulfill social causes such as

removal of superstitions and ignorance, promotion of habit of saving, providing assistance to the

people in need and develop a sense of humanity among the people.

Strengths It is the first bank in India to have launched Inter-City ATM network

It is the first bank to have been awarded ISO Certification for providing credit card for

farmers for the first time in India along with offering Agricultural Consultancy Services

It has established 3046 branches across the nation as of March of 2010.

It has the maximum number of ATM installations among all the nationalized banks

summing up to more than 2000 of them at 698 centers

1959 branches of the bank provide Internet and Mobile Banking (IMB) services

‘Anywhere Banking’ services are being provided at 2091 of its branches

All the branches of Canara Bank are enabled with Real Time Gross Settlement (RTGS)

and National Electronic Fund Transfer (NEFT) transaction facilities

Bank also offers Personal Banking Services, Corporate Banking Services, NRI Banking

Services and Priority & SME Credit Services.

Weakness Still sticks to most of the traditional banking systems

Requires training program due to introduction of many new schemes & technologies

Weak research team

Staff take time to get adjusted to the new inventions

Stands 4th position in the nationalized banks ratings

29

Opportunities To improvise on mutual funds, to lead the banks into MF transactions

To adapt to the new technological inventions, to stay at the top in the competitive market

To provide enough training facilities to the staff, to deliver efficient & effective services

To provide extra privileges to the customers to maintain & retain customers

To attract customers with good loan offers at very impressive rates, against the

competitors.

To be aware of the changes in the market, & provide space for instantaneous changes

Threats Establishment of private banks, increasing the competition

Introduction of new technologies in the new banks with high infrastructure

Innovative interest rates & attractive customer care services

Adoption of many technologies & banking systems from abroad

Very efficient research team, who are always tracking the new inventions in the market

Most of the private banks provide 24hrs facility

30

5) FINANCIAL STATEMENT ANALYSIS

Ratio Analysis of the Balance Sheet (table 7)

 Mar’

10

Mar '

09

Mar '

08

Mar '

07

Mar '

06

Mar '

05

Per share ratios

 

 

 

 

 

 

 

 

 

 

Reported EPS (Rs) 73.69 50.55 38.17 34.65 32.76 27.06

8 8 7 6.6 5.5Dividend per share 10

Operating profit per share (Rs) 73.99 47.02 33.29 33.15 27.6 26.7

Profitability ratios          

Net profit margin (%) 13.77 10.89 9.61 11.6 13.82 12.81

Leverage ratios

         

         

Total debt/equity 18.71 18.62 18.57 17.55 16.64 16.17

Fixed assets turnover ratio 4.65 4.08 3.65 2.85 5.29 5.26

Liquidity ratios

         

         

Current ratio .01 0.3 0.19 0.25 0.32 0.34

Quick ratio 26.98 11.29 9.17 9.49 10.19 9.46

Payout ratios

         

         

Dividend payout ratio (net profit) 15.88 18.51 24.53 23.63 22.97 23.08

Earning retention ratio 84.10 81.48 75.45 76.36 77.02 76.91

31

Interpretation of the above ratios:It is a very powerful tool useful for measuring performance of an organization. Below are some

of the ratios considered to analyze the performance of Canara Bank over the last 6 years. Firstly,

let’s consider market based/ per share ratios.

1) Earnings Per Share: (Net profit after tax and preference dividend/No. equity shares). This

ratio checks the economic performance of the entity; it has a major affect on decision of dividend

policy. The values consolidated in the above table provide a clear view that the net profit has

been increasing by the year and it has shown an increase of 172.3% over the last six years.

2) Dividend per share: Dividends are the share of profit distributed among the share holders per

share. The value has been increasing from Rs. 5-10. It has shown an increase of 81.18% over the

last 6 years.

3) Net Profit Margin: (Net Profit before Interest and Tax/Sales)*100. The non operating

incomes and expenses are ignored for computation of profit before tax, depreciation and interest.

The value has reduced by the years, mostly because costs debited to the P&L account are fixed in

nature and increase in sales declines the per unit cost. There has been an increase of 7.4% over

the year

4) Debt-Equity Ratio: (Total Debt/Shareholders Funds). It indicates the relationship between

loan funds and net worth of the entity. Generally 2:1 is the norm accepted for financing projects,

higher ratio of 3:1 may be permitted for capital intensive industries. It has a high impact on the

returns to the share holders. The values show a declining trend over the years and it’s considered

to be a positive sign, increasing the cash accrual and debt repayment.

6) Fixed Asset Turn Over Ratio: (Sales/Fixed Assets). It’s a difficult ratio to be analyzed

because the asset values are based on historic costs. There are variations in the values which may

be due to replacement of an asset at an increased price or purchase of an additional asset to

increase production.

32

7) Current Ratio: (Current Assets, Loans & Advances/Current Liabilities & Provisions). The

banks consider 1.33:1 as the minimum acceptable level for providing working Capital Finance.

This determines the solvency of the company. The values show that the ratio has been decreasing

giving a positive sign, but there has been an increase in the year March 2009 which may be due

to high cash balance, bank accounts without proper investments etc.

8) Quick Ratio: (Current Assets, Loans & Advances-Inventories/Current Liabilities &

Provisions-Bank Overdraft). It’s a supplement to current ratio to determine solvency or liquidity

of the company. It also measures the company’s ability to meet its customer’s obligations.

9) Dividend Pay Out Ratio: (Dividend per Share/Earning Per Share). Bank has a considerable

liberal policy, as the values are high in the past years. There has been a little decrease in the ratio,

mostly due to low profits or changes in the earnings ratio.

10) Earnings Retention Ratio: this ratio provides the margin distributed to the share holders

and the percentage retained. The amount retained may be due to further expansion plans of the

company or the investment decisions.

33

PART B

34

1) EXECUTIVE SUMMARYMicro-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 as the global financial system buckles,

microfinance institutions continue to grow on the back of their record for low risk and solid

returns.

In this paper I tried to cover all the aspects of Microfinance industry in India, starting from

defining microfinance, knowing the need of poor, products of microfinance their demand and

supply, evolution and growth of microfinance industry, reach to clients, major players regulatory

body, present situation, Impact on poverty alleviation, issues, challenges, future potential etc.

with a focus on Canara Bank initiatives. I have explained Canara Bank’s portfolio on

microfinance and the entire scheme that are adopted by Bank for Financial Inclusion, whether

it’s no frill account or KCC scheme ,GCC scheme etc.

35

2) MICROFINANCE INTRODUCTIONThe financially weaker section, like the rest of society, need financial products and services to

build assets, stabilize consumption and protect themselves against risks. MF serves as the last-

mile bridge to the low-income population excluded from the traditional financial services system

and seeks to fill this gap and alleviate poverty.

Microfinance loans serve the low-income population in multiple ways by:

(1) Providing working capital to build businesses;

(2) Infusing credit to smooth cash flows and mitigate irregularity in accessing food, clothing,

shelter, or education; and

(3) Cushioning the economic impact of shocks such as illness, theft, or natural disasters.

Moreover, by providing an alternative to the loans offered by the local moneylender priced at

60% to 100% annual interest, microfinance prevents the borrower from remaining trapped in a

debt trap which exacerbates poverty.

MF loans in India range in size from $100 to $500 per loan with interest rates typically between

25% and 35% annually by MFIs and much below by banks i.e. 18 to 25 %.The MF model is

designed specifically to help the low income population overcome typical challenges such as

illiteracy, lack of financial knowledge and deficiency of collateralizable assets. At the same

time, the model takes advantage of existing community support systems and networks to

encourage financial discipline and ensure high repayment rates with an aim of creating social

value. The creation of social value includes poverty alleviation and the broader impact of

improving livelihood opportunities through the provision of capital for microenterprise, and

insurance and savings for risk mitigation and consumption smoothing.

A large variety of actors provide MF in India, using a range of MF delivery methods.

Governments have piloted national programs, NGOs have undertaken the activity of raising

donor funds for on-lending, and some banks have partnered with public organizations or made

small inroads themselves in providing such services.

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 in the creation of social value.

36

3) MICROFINANCE DEFINITIONS. 

According to Robinson, Marguerite.

“Microfinance refers to small-scale financial services for both credits and deposits — that are

provided to people who farm or fish or herd; operate small or microenterprises where goods are

produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain

income from renting out small amounts of land, vehicles, draft animals, or machinery and tools;

and to other individuals and local groups in developing countries, in both rural and urban

areas”

According to International Labor Organization (ILO),

“Microfinance is an economic development approach that involves providing financial services

through institutions to low income clients”.

The Task Force on Supportive Policy and Regulatory Framework for Microfinance has

suggested a working definition of microfinance 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".

While exclusively covering the poor, it lays emphasis on graduating borrowers from pre-mE

stage to post mE stage. This graduation is done through financial and non-financial services. The

emphasis of support under mF is on the poor in 'pre-microenterprise' stage for building up their

capacities to handle larger resources. No specific limit for 'small' amount of financial services is

envisaged.

37

"Microfinance institutions (MFIs) are those which provide thrift, credit and other financial

services and products of very small amounts mainly to the poor in rural, semi-urban or urban

areas for enabling them to raise their income levels and improve living standards".

 MFIs have emerged broadly under three categories:

i). Not-for-Profit MFIs

Societies registered under Societies Registration Act, 1860 or similar State Acts

Public Trusts registered under the Indian Trust Act, 1882

Non-profit Companies registered under Section 25 of the Companies Act, 1956

ii). Mutual Benefit MFIs

State credit cooperatives

National credit cooperatives

Mutually Aided Cooperative Societies (MACS)

iii). For-Profit MFIs

Non Banking Financial Companies (NBFCs) registered under the Companies Act, 1956

Banks which provide MF along with their other usual banking services could be termed as mF

service providers.

Asian Development Bank’s Microfinance development strategy defines

“Microfinance is the provision of a broad range of financial services such as deposits, loans,

payment services, money transfers, and insurance to poor and low-income households and, their

microenterprises”.

Microfinance services are provided by three types of sources:

formal institutions, such as rural banks and cooperatives;

semiformal institutions, such as nongovernment organizations; and

Informal sources such as money lenders and shopkeepers.

Institutional microfinance is defined to include microfinance services provided by both formal

and semiformal institutions.

38

4) ACTIVITIES/ PRODUCTS/SERVICES IN MICROFINANCE

Micro credit:

It is a small amount of money loaned to a client by a bank or other institution. Micro credit can

be offered, often without collateral, to an individual or through group lending. E.g. through JLG,

SHG, MCG etc

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. E.g. Cansaral accounts

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. E.g. insurance for

crop, machinery, equipment, animals etc

Remittances:

These are transfer of funds from people in one place to people in another, usually across borders

to family and friends. Compared with other sources of capital that can fluctuate depending on the

political or economic climate, remittances are a relatively steady source of funds.

39

5) HISTORY/ORIGIN OF MICROFINANCE

There are 3 main factors that count to the bringing up of Microfinance as a Policy in India

1. The first of these pivotal events was Indira Gandhi’s bank nationalization drive launched in

1969 which required commercial banks to open rural branches resulting in 15.2% increase in

rural bank branches in India between 1973 and 1985.

2. The second national policy that has had a significant impact on the evolution of India’s

banking and financial system is the Integrated Rural Development Program (IRDP) introduced in

1978 and designed to be ‘a direct instrument for attacking India’s rural poverty.’

3. The last major event which impacted the financial and banking system in India was the

liberalization of India’s financial system in the 1990s characterized by a series of structural

adjustments and financial policy reforms initiated by the Reserve Bank of India (RBI).

The systems and procedures of banking institutions was emphasizing on complicated qualifying

requirements, tangible collateral, margin, etc., that resulted in a large section of the rural poor

shying away from the formal banking sector. The banks too experienced that the rapid expansion

of branch network was not contributing to an increasing volume of business to meet high

transaction costs and risk provisioning, which even threatened the viability of banking

institutions and sustainability of their operations. At the same time, it was not possible for them

to allow a population of close to 300 million - even if poor - to remain outside the fold of its

business. The search for an alternative mechanism for catering to the financial service needs of

the poor was thus becoming imperative.

The evolution of modern microfinance can be stated with the origin of Grameen bank in the year

1976 and get the independent status of bank 1983 in Government legislations. Dr.Muhammed

Yunus was known as the pioneer of this, he is the father of modern microfinance. Later on his

model was spread all over the world.

40

6) DEMAND FOR MICROFINANCE SERVICES Due to its large size and population of around 1000 million, India's GDP ranks among the top 15

economies of the world. However, around 300 million people or about 60 million households,

are living below the poverty line. It is further estimated that of these households, only about 20%

have access to credit from the formal sector and rest 80% unable to access credit at reasonable

rate. Additionally, the segment of the rural population above the poverty line but not rich enough

to be of interest to the formal financial institutions also does not have good access to the formal

financial intermediary services, including savings services.

It was found that poor and low income households, irrespective of rural/urban status have 3 kinds

of needs:

1) Life cycle needs: marriage, other family events, birth, death, education, house construction,

old age, widowhood, festivals, etc.

2) Emergency needs: medical emergencies, natural calamities, theft, accidents etc

3) Investments needs: asset purchase, small business

They have effective demand for a range of Microfinance services including:

1) Safe and convenient deposit services — so they can save for emergencies, investment,

consumption, social obligations, and the education of their children

2) Credit services — for consumption smoothing, and to finance livelihood activities and large

expenses for education, housing improvements, migration, etc.

3) Other financial services — such as insurance and funds transfer services.

41

Demand for CreditIn terms of demand for micro-credit, there are three segments:

1)At the very bottom in terms of income and assets, and most numerous, are those who are

landless and are engaged in agricultural work on a seasonal basis, and manual labourers in

forestry, mini 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 as illness. They also need credit

for acquiring small productive assets, such as livestock, using which they can generate additional

income.

2) The next market segment is small and marginal farmers and rural artisans, weavers and 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 (crop production), a small

part of which also serves consumption needs. The segment also needs term credit for acquiring

additional productive assets, such as irrigation pump sets, bore wells and livestock in case of

farmers, and equipment (looms, machinery) and work sheds in case of non-farm workers. This

market segment also largely comprises the poor but not the poorest.

3) The third market segment is of small and medium farmers who have gone in for commercial

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.

Technically the second and third segments indicated above are eligible for loans from the banks,

but in reality they have been not covered by the Banking System. The first segment is the present

focus of NGO oriented microfinance institutions. Women are also one of the important segment

for microfinance services.

42

Demand for Saving ServicesThe demand for savings services is ever higher than for credit. Studies of rural households in

various states in India show that the poor, particularly women, are looking for a way to save

small amounts whenever they can. The irregularity of cash flows and the small amounts

available for savings at one time, deter them from using formal channels such as banks.

In urban areas also this is true, in spite of better banking facilities, as shown by the experience of

the SEWA Bank, Ahmadabad. The poor want to save for various reasons – as a cushion against

contingencies like illness, calamities, death in the family, etc; as a source of equity or margin to

take loans; and finally, as a liquid asset. The safety of savings is of higher concern than interest

rate .

Demand for Insurance Services

The demand for insurance services, though not very well articulated, is also substantial. This

comes from the fact that not only incomes of microfinance customers low, but are also highly

variable. Insurance by the poor is needed for assets such as livestock and pump sets, for shelter.

Crop insurance could be very useful to the rural poor. Finally, insurance against illness, disability

and death would also reduce the shocks caused by such contingencies, which lead the poor into

taking loans at such times at high interest.

43

7) SUPPLY FOR MICROFINANCE SERVICES

Supply of Microcredit Whereas there are some estimates of demand for micro credit in India, the estimates on the

projected microfinance supply and the arising financial requirement for future growth of

microfinance in India are limited. In 2006 Sa-Dhan has made a detailed study and brought out a

report on ‘financial requirement for future growth of microfinance in India. In this study an

estimate of reaching Rs28, 000 crore microfinance portfolio (out of which Rs. 12804 crore from

MFI channel alone) by 2010 was made another projection made by the research and consultancy

firm Intellecap for MFI portfolio under three scenarios (low, most likely and high) ranges from

Rs. 21404- 29974 crore by 2012. RBI data shows that informal sources provide a significant part

of the total credit needs of the rural population.

Supply of Saving ServicesIn the case of savings services, again while banks have provided access to a large number of

small depositors, the demand is nowhere near being met, particularly for small, frequent

"recurring" deposits. Hence the poor turn to other means such as chits, bishis and savings

mobilization companies like Peerless and Sahara.

Many such companies are fly-by night and as a result, the poor lose their money. The RBI has

tightened up deposit taking activity since 1997, but this has, perversely, also led to legitimate

MFIs being not allowed to take deposits and thus provide savings services to the poor.

Transaction costs of savings in formal institutions were high for the rural poor.

Supply of Insurance ServicesThe supply of insurance services to the poor has been increased substantially over the 1990s, and

there are a large number of low premium schemes covering them against death, accidents,

natural calamities, and loss of assets due to fire, theft, etc. However, the usage is limited by low

awareness among the poor. Crop and livestock insurance, however, are quite expensive and their

reach to the poor is negligible. Livestock and asset insurance was extended to the poor along

with the IRDP subsidized loans, and thus remained scheme driven, with little awareness among

the customers.

44

8) LEGAL AND REGULATORY FRAMEWORK

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

Cooperative Societies 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

RBI essentially 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.

45

Development process through Microfinancefig 4

46

Farm related

Consumption need

Microenterprises

Individual

Donors and Banks

Non farm related

Production need

Microenterprise

Individual

Government Banks

Implementing

organizations

Awareness/ promotional

work

Consolidation of SHGs

Savings

Credit Delivery

Recovery

Follow up monitoring

Income generation (sustainable

and growth oriented )

Self sustainability of SHG

Economic empowerment through use of

microcredit as an entry point for overall

empowerment

Microfinance

Micro finance intervention through different organization

v

V

Fig 5

47

NATIONAL

FINANCIAL

INSTITUTIONS

IMPLEMENTING

ORGANISATIONS

DIRECTLY

INVOLVE IN

MICROFINANCE

RESOURCE

SUPPORT

ORGANISATIONS

SHGS

BANKS DONORS

/BILATERAL

PROJECTS

INDIVIDUALS

MEMBERS

INDIRECTLY

INVOLVE IN

MICROFINANCE

GOVT. FUNDED

PROGRAMME

9) MAJOR PLAYERSThe major players which were instrumental in the growth of microfinance industry in India

includes NABARD, SIDBI, Rashtriya Mahila Kosh, FWWB and SHARE Microfin Limited etc.

NABARD

NABARD was established in 1982 to provide credit to the rural sector. NABARD was a pioneer

in microfinance programs in India. The bank’s vision is “to facilitate sustained access to

financial services for the unreached poor in rural areas through various microfinance innovations

in a cost effective and in sustainable manner.” By 2005 NABARD SHG Bank linkage

programme had emerged as one of the largest microfinance programs in the world. NABARD

has also collaborated with NGOs, MFIs, banks and governmental agencies in order to use other

models of rural credit like the Grameen Model and the Individual Banking Model.

SIDBI

SIDBI Foundation for Micro Credit (SFMC) was launched by the Bank in January 1999 for

channelizing funds to the poor in line with the success of pilot phase of Micro Credit Scheme.

SFMC's mission is to create a national network of strong, viable and sustainable Micro Finance

Institutions (MFIs) from the informal and formal financial sector to provide micro finance

services to the poor, especially women. 

RASHTRIYA MAHILA KOSH

In 1993, the Ministry of Human Resource Development, Government of India set up the

Rashtriya Mahila Kosh (RMK) with initial funding of Rs.310 million to act as a provider of

wholesale funds for the sector and to develop the sector through capacity building and advocacy.

48

10) GROWTH OF MICROFINACE

(table 8)

Phase 1

Social banking

Phase 2

Financial system approach

Phase 3

Financial inclusion

Nationalization of

private commercial

banks.

Expansion of rural

branch network.

Extension of

subsidized credit.

Establishment of

RRB.

Establishment of apex

institutions like

NABARD, SIDBI etc

Peer pressure

SHG Bank Linkage

Establishments of

Microfinance Institutions

especially of Nonprofit

origins.

NGO-MFIs SHGs are

gaining more legitimacy.

MFIs emerging as

strategic partners to

diverse entities interested

in the low income

segment.

Consumers finance

emerged as high growth

area.

Increased policy

regulation.

Increasing

commercialization.

49

1960s – 1980s 1990s 2000

Classification of MFIs in India as at the beginning of FY 2010 (table 9)

Tier 1 Tier 2 Tier 3 New age MFIs

Description

5-6 large NBFC

MFIs that have

been in operation

as NBFC for 6-10

years and

previously as an

NGO for several

years

10-15 mid-

sized MFIs

that have

recently

transformed

into NBFCs

500-800 NGO

MFIs that have

been growing

steadily and face

difficulty in

borrowing from

banks

5- 10 MFIs promoted recently by

professionals who are convinced

of the opportunity at the ‘bottom

of the pyramid’. Most of them are

for-profit NBFCs

Total

OutreachNearly 10 million 2-5 million < 1 million < 0.5 million

Typical

Portfolio> RS 100 crore

~= RS 50-

100 crore

~= RS 30-50

crore< 30 crore

Source of

equity

Most have

availed of

commercial

equity capital

Have availed

or are

looking for

commercial

equity capital

Dependent on

donated equity

and ‘social’

investors

Promoters equity and commercial

equity capital

Source of

debt funds

Institutional loans

+ buyout

Institutional

loans +

buyout

Institutional

loans, soft loans,

grants

Institutional loans + buyout

Leverage Moderate Moderate High Low

50

Characteristics of Microfinance Delivery Models in India (table 10)

Financial

Characteristic

Description Service

Credit Loan amount Determined by the longevity of the client’s association with the MFI. Not

often directly related to the credit needs of the borrower.

Loan term Usually 12 months, occasionally less, sometimes greater

Repayment Monthly or weekly Installment – usually fixed, equal amounts

Interest charges Range: 24-36%, usually levied as a flat charge, partly to simplify calculations

for both the MFI and the client. Some MFIs charge lower rates but suffer from

poor sustainability as a result.

Collateral No physical collateral but often linked to some compulsory savings component

which acts as financial collateral. Reinforced by joint liability (Grameen) with

other clients or peer pressure arising from membership of a community group

revolving its own as well as borrowed funds (SHGs, cooperatives). Some MFIs

also create reserve funds to cover the risk of default

Savings Amount

deposited

Grameen: Compulsory – usually a fixed proportion of the repayment

installment SHG: Compulsory – fixed amounts per (weekly or monthly)

meeting to be deposited as part of the group fund; occasionally also voluntary

Some MFIs now offer long term fixed deposits.

Withdrawals Compulsory savings cannot be withdrawn except when the client leaves the

group. Voluntary savings often require some notice of withdrawal

Interest paid Most programmes pay 4-6% interest (not consistent)

Insurance Life Some MFIs are starting to offer life insurance covering client loan repayments

plus a small payment to the family in case of the death of the client. A reserve

fund is created for the purpose or insurance is bought from the organized sector

on behalf of the client

Animal Usually linked with a formal insurance company which obtains bulk business

from the MFI while the latter provides the service of premium collection;

assists in the verification of claims

51

11) MICROFINANCE DELIVERY METHODOLOGIESThe sheer geographical size of the country, a wide range of social and cultural groups, the large

spectrum of economic classes and a variety of NGOs movement has contributed towards the

diversity of microfinance models in India.

Some of the common models used in India are

1) Self help group model

2) Grameena model

3) Cooperative/mutually aided cooperative model

4) Non banking company finance model

5) Bank using other agencies for distribution of microfinance

1) Models of SHGs in IndiaSHGs are small (membership of 10-20 persons) informal groups that have socially and

economically homogeneous membership of poor people drawn from the same hamlet or from

nearby hamlets. The composition of membership is mainly exclusively male or exclusively

female (as of now in India more than 90% of the SHG members are female only). The members

are self selected. With the liberty to chose their group depending on their level of affinity with

other potential members. Thus the basic designs of SHG are robust and make it easy for the

NGO facilitator to build it into a strong social and financial institution. Once the basic group is

identified, the NGO facilitator builds system that makes the SHG a viable, sustainable institution.

The NGO meets regularly, mostly weekly at an appointed time and places to carries out its

financial transaction of savings and credits. The group mobilizes savings among members and

meets the need based loan of members out of the pool of fund created.

Thus while SHG provides members with financial services, the NGO provides them with

support services, training, systems setting and development linkages.

52

2) The Grameen bank modelThe Grameen bank methodology has been a case of exceptional success. Though the Grameen

Bank evolved in methodology in Bangladesh, many organizations in India like SHARE Microfin

Ltd., Activist for social Alternative (ASA) and CASPHOR Financial and Technical services Ltd

have adopted methodology with slight variations.

Some of the salient features of Grameeen Bank model are mentioned below:

Homogeneous affinity group of five members are formed at village level

The field worker facilitates the process of group forming

All the group member undergo a compulsory training

Some group members undergo a Group Recognition Test (GRT)

Eight joint liability group are affiliate together to form a centre

The centre meets every week, meetings are very structured and a bank assistant

attends this meeting

Some of the significant elements of this model are

Low transaction cost

No collateral- peer pressure

All kinds of loans- productive and consumption

Repayment in small, regular and short intervals

Quick loan sanctions-minimal formalities and paper work

The most remarkable aspect of Grameen Bank is its loan recovery rate, in the range of 98% and

above. This has contributed to the bank to have low cost credit and attracting low cost of funds

from the Govt. and International donors.

53

3) The cooperative /mutually aided cooperative modelThe organization that has been the most successful in using cooperative forum in rural micro

finance in India has been the Cooperative Development Forum (CDF), Hyderabad. This

approach has realized on a credit union model involving a ‘savings first’ strategy. It has built up

a network of financial cooperatives based upon women’s and men’s thrift groups.

The main features of CDF system are as follows:

The primary entities are the women’s/men’s thrift cooperative which consists of

300 members usually from the same village.

It has started off by promoting much smaller units, but over time it encourage

these small units to merge into larger units as it felt that smaller units are not

viable

Each group has a leader, who convenes the group meetings, collect group savings,

and monitor repayment of loans.

All the members of the primary cooperative constitute the General Body with a 12

member board of directors who are elected for a three year term and adopt a

uniform set of bylaws.

A set of geographically contiguous cooperative federate to form an association

of women’s/men’s thrift cooperatives.

4) Non banking Financing CompaniesIt has emerged as a nearest substitute to being a fully fledged bank for those MFIs who want to

go for profit route. Since registered as a bank is costly and local area bank (LAB) idea has not

been pursued beyond the initial level approval, the NBFC route have been chosen by MFIs

operating for profit.

One of the best examples is BASIX, a new generation NBFC that has been promoted for

promoting tailor made financial services for the poor.

54

12) PRESENT SITUATIONIndia’s Microfinance institutions reached 76.6 million clients against last year’s 59 million,

according to the “State of the Sector Report” September 2009.MFI’s have recorded about 8.5

million clients during the year 2008-09, a growth of 60% over the previous year. More than 50

percent of low income households are covered by some form of microfinance product. The total

outstanding microfinance loans posted a growth rate of 30% or 359.39 billion over the last year’s

level of Rs 229.54 billion.. The SHG loan outstanding has increased by Rs. 71.5 billion with an

addition of 6.9 million clients. MFIs so far reached 234 of the 331 poorest districts identified by

the government. The MF penetration index shows especially in Bihar, Madhya Pradesh,

Rajasthan and Uttar Pradesh compared to extraordinary levels reached in Andhra Pradesh,

Karnataka and Tamilnadu. While last year’s report focused on the increased risk in the sector,

this years’ report takes stock of the uninterrupted growth rate of the sector despite several

internal and external adversities. Today 25 million Indians have taken so called microfinance

loans, often without adequate documentation or collateral, according to Micro-Credit Ratings

International Ltd. In rural India, people are being lent to at 150 percent of the value of their

enterprises.

India is considered as the World’s Largest Market, Most microfinance loans in India range from

5,000 rupees to 20,000 rupees. The country, where more than 600 million people live on less

than $1.50 a day, is the world’s largest microfinance market, Interest rates range from 18 percent

to 35 percent .The Largest 5 MFIs grew at 71.7% in 2008-09 (compared to 59.6% earlier), while

the Next10 MFIs slowed down substantially (down from 71.6% per annum in 2006-08 to just

29.3% growth in 2008-09).This has resulted from competitive pressures and aggressive growth

of the largest MFIs together with a slowdown in the availability of funds from commercial

banks to all but the largest MFIs. Distribution of MFIs is heavily concentrated in South India but

the share of the East is growing. MFIs in the North and the West have become less important but, the larger institutions in the south and east have started to expand North and West. MFIs

have increasingly shifted towards Grameen-type programmes at the expense of SHG-based

programmes (SHG).

55

MFI loan portfolios grew by a factor of nearly 35 between 2002 and March 2009 reaching a

figure of around Rs 8,000 crore or over $1.5 billion. The share of the Top10 MFIs increased

from 43% in 2002 to over 72% in 2009. Average outstanding loan balances have increased from

Rs 3,300 ($72) in 2002 to Rs 5,300 ($104) with average disbursements of Rs 8,500 ($173) in

2009. Indian microfinance continues to be the most efficient in the world, the operating

efficiency of Indian MFIs measured by the average operating expense ratio declined further,

from 15-16% in the mid-2000s to 11.5% in 2008-09. This compares with a median OER of

15.0% for Asia and 18.1% globally. The Top10 MFIs, however, have not improved their

efficiency over the past few years. The increase in OER for the Top10 MFIs from 10.8% in

2004 to 12-13% in recent years is a result of the fast growth of these organizations. Yet, despite

the improvement in OER over the past few years, the yield on portfolio of Indian MFIs has risen

significantly. This means that Indian microfinance borrowers are now paying a relatively high

cost for their microfinance loans, higher than the global median – a reversal of the earlier

situation when Indian MFI clients paid the lowest cost in the world – just 25% in 2006. This is

caused mainly by the increase in yields of the largest MFIs; the Top10 average yield has risen to

33.6% by March 2009 - the extent of the widening margin is apparent from the figures below.

Analyzing this issue by MFI organizational form shows that it is the NBFCs, as a group that is

charging the highest rates.

(table 11)

GROWTH IN INDIAN MICROFINANCE SECTOR

Year ending march 31 2004 2005 2006 2007 2008 2009

Outstanding portfolio($

millions)

$80 $252 $496 $824 $1535 $2346

Growth rate 215% 96.80% 66.10

%

86.30% 52.80%

Borrowers (million) 1 2.3 4.9 7.9 14.2 22.6

Growth rate 130% 113% 61.20

%

79.80% 59.20%

Source: Microfinance India State of the Sector Report 2009

56

2004 2005 2006 2007 2008 2009$0

$500

$1,000

$1,500

$2,000

$2,500

$80 $252

$496

$824

$1,535

$2,346

outstanding portfolio(in millions)

outstanding portfolio(in mil-lions)

Figure 6

2004 2005 2006 2007 2008 20090

5

10

15

20

25

12.3

4.9

7.9

14.2

22.6

borrowers (million)

borrowers (million)

Figure 7Analysis:

It can be analyzed that the outstanding portfolio for loan has been increased by 96.58% from

2004-09 and number of borrowers has increased by 95.57%. This shows the increase business of

microfinance .

57

THE BIGGEST MFI IN INDIA Source: M-Cril ratings 2009 (table 12)

Name of MFIs Headquarter Legal

status

Lending

model

No. of

branches

Loan

outstanding

(Rs mn)

Borrower

no

Net worth

(Rs mn)

1)SKS

Microfinance

Ltd

Secundrabad

A.P.

NBFC JLG 1413 18227 2590950 2395

2)Share

Microfin Ltd

Hyderabad

A.P.

NBFC JLG

individual

696 11987 1668807 1225

3)Spandana

Sphoorty

Financial Ltd

Hyderabad

A.P.

NBFC JLG

individual

666 8568 12351556 1448

4) Asmitha

Microfin.

Ltd.

Hyderabad

A.P.

NBFC JLG 363 4944 694350 475

5)SKDRDP Dharmasthala

Karnataka

trust SHG 22 4060 612482 157

6)Bhartiya

Samrudhi

Financial Ltd

Hyderabad

A.P.

NBFC Diversifie

d

87 3882 457668 317

7)Bandhan Kolkata

W.B.

Society JLG 385 3389 851713 435

8)Casphor

Microcredit

(CMC)

Varanasi

U.P.

Sec 25

compan

y

JLG 247 1431 303935 93

9)Grama

Vidyal

Microfinance

Pvt.Ltd.

Tiruchirapallli

Tamilnadu

NBFC JLG 126 1316 288311 231

10)Grameen

service

Pvt.Ltd.

Bangalore

Karnataka

NBFC JLG 62 1287 153453 127

58

Overall Progress under Microfinance during the last two years

A) SHG –BANK LINKAGE MODEL

1) NABARD-Bank -SHG Model- Bank directly finance the SHG without the intervention/ facilitation by any NGO.

2) NABARD-Bank-SHG Model- Bank directly financing SHGs with NGOs acting as facilitator (most popular model)

3) NABARD-Bank-NGO-SHG Model- Bank financing indirectly to SHG, consists of smaller group compared to SHGs. The NGO accepts the contractual responsibility for repayment to the Bank. (table 13)

Particulars No. of SHGs

Amt (crore)

No. of SHGs

Amt (crore)

No. of SHGs

Amt

2007-08 2007-08 2008-09 2008-09 %Growth %GrowthSavings of SHGs with bank as on 31 March

Total SHGs

5009794 3785.39 6121147 5545.62 22.5 46.5

Out of which SGSY

1203070 809.51 1505581 1563.38 25.1 93.1

Bank loan disbursed to SHGs within the year

Total SHGs

1227770 8849.46 1609586 12253.31 31.3 38.5

Out of which SGSY

246649 1857.74 264653 2015.22 7.3 8.5

Bank loan outstanding with SHGs as on 31 March

Total SHGs

3625941 16999.91

4224338 22679.84 16.5 33.4

O/t of which SGSY

916978 4816.87 978887 5861.72 6.5 21.7

59

B) MFI- BANK LINKAGE MODELMFI uses two models

1) INDIVIDUAL MODEL -for financing individuals and

2) GROUP MODEL-SHG/MCG/JLG

( table 14 )

Particulars No. of SHG

(2007-08)

Amt (2007-

08) (crore)

No. of

SHG

(2008-09)

Amt

(2008-09)

(crore)

% growth

(No. of

SHG)

% growth

(amt)

Bank loan disbursed to

MFIs during the year

518 1970.15 581 3732.33 12.2 89.4

Bank loans outstanding

with MFIs as on 31

March

1109 2748.84 1915 5009.09 72.7 82.2

C) Coverage of Women SHGs

The details of total number of women SHGs saving linked, credit linked and loans outstanding

for the last two years are given in table , as under;

(table 15)

Particulars Year Total SHGs Exclusive women

SHGs

%of women SHGs to total SHGs

No. Amt.

(crore)

No. Amt.

(crore)

No. Amt. (crore)

Saving

linked

SHGs

2007-08 5009794 3785.39 3986093 3108.65 79.57 82.12

2008-09 6121147 5545.62 4863921 4434.03 79.46 79.96

Loans

disbursed

2007-08 1227770 8849.26 1040996 7474.26 84.79 84.46

2008-09 1609586 12253.51 1374579 10527.38 88.39 85.91

Loans

outstanding

31.03.08 3625941 16999.91 2917259 13335.61 80.46 78.45

31.03.09 4224338 22679.84 3277355 18583.54 77.58 81.93

60

13) SUCCESS FACTORS OF MICROFINANCE IN INDIAOver the last ten years, successful experiences in providing finance to small entrepreneur and

producers demonstrate that poor people, when given access to responsive and timely

financial services at market rates, repay their loans and use the proceeds to increase their

income and assets. Community banks, NGOs and grass root savings and credit groups around

the world have shown that these microenterprise loans can be profitable for borrowers and

for the lenders, making microfinance one of the most effective poverty reducing strategies.

A. For NGOs:

1) The resources required of microfinance is small, entry and exit are easy, tasks are (perceived

to be) simple and people’s acceptance is high, field itself requires new ideas and NGOs more

readily adopt new ideas especially in the above situation mentioned.

2) Supply push ; that is microfinance is canvassed by various factors, including the NABARD,

SIDBI, FWWB, RMK, CAPART, RGVN, various donor funded programmes especially by

the IFAD, UNDP, World Bank and Department for International Development, UK, and

lately commercial banks, has greatly added. Induced by the worldwide focus on microfinance,

donor NGOs too have been funding microfinance projects.

3) The concrete results and sustained interest, quick and high ‘customer satisfaction among

beneficiaries of microfinance has attracted most of NGOs to this trade.

4) The idea of implementing microfinance appears simple. The most common route followed by

NGOs is promotion of SHGs. It is implicitly assumed that no ‘technical skill’ is involved.

Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs

that have access to revolving funds from donors do not have to worry about financial

performance any way.

5) Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the

medium-to-large NGOs that are able to access bulk funds for on-lending, for example from

SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain,

highly competitive and increasingly difficult-to-raise donor funding.

61

B. For Financial Institutions and banks:

Banks have several advantages over nonbank, micro lending institutions

1) They offer loans, deposits, and other financial products that are, in principle, attractive to a

microfinance clientele.

2) The process helps the banks to meets its priority sector targets.

3) Comparison to other rural lending by banks, MF has much more favorable terms.

4) They are regulated institutions fulfilling the conditions of ownership, financial disclosure, and

capital adequacy that help ensure prudent management.

5) Bank-groups are motivated by a number of cross-selling opportunities in the market, for

deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering

all these services now through their group companies, it becomes imperative for them to

expand their distribution channels as far and deep as possible, in the hope of capturing

the entire financial services business of a household.

6) Many have physical infrastructure, including a large network of branches, from which to

expand and reach out to a substantial number of microfinance clients.

7) They have well-established internal controls and administrative and accounting systems to

keep track of a large number of transactions.

8) Their ownership structures of private capital tend to encourage sound governance structures,

Cost-effectiveness, and profitability, all of which lead to sustainability.

9) Because they have their own sources of funds (deposits and equity capital), they do not have

to depend on scarce and volatile donor resources (as do NGOs).

62

COMPARITIVE ANALYSIS OF MICROFINANCIAL SERVICES OFFERED TO THE

POOR (table 16)

Parameter Money lender Commercial

bank

Govt sponsored

bank

Financial

products of

MFIs

Ease of access High low low High

Transaction

cost of access

low Very high Very high High-medium

Lead time for

loan

Very short Extremely long Extremely long Short

Repayment

terms

Fixed and rigid Fixed and easy Fixed and easy Flexible

Interest rates Exorbitantly high Low and very

affordable

Low , affordable

and subsidized

Reasonable and

affordable

Repeat

borrowings

possible Possible but not

likely

Possible but not

likely

Stream of credit is

assured

Loan access

procedures

Very quick Extremely time

consuming and

complicated

Extremely time

consuming and

complicated

Simple and quick

Loan

application

procedure

Informal but

exploitive

Exhaustive and

complex

Exhaustive and

complex

Simple and

informal

Collateral and

demand

promissory

notes

mandatory Required but

hypothecation of

asset may suffice

Not required

although a charge

on the asset

becomes automatic

Not required social

collateral is used

for physical

collateral

incentives none none None Repeat and larger

loans, interest

rebates

63

14) INDIAN MICROFINANCE AT GLOBAL CONTEXT

Indian microfinance with one of the highest growth rates globally since 2002, has emerged as

one of the most socially conscious, commercially viable, and financially sustainable. According

to a MIX market study, India has one of the lowest average loan sizes of around $150 as well as

the lowest yield on portfolio of 21.2%. The small loan size combined with the low interest rates

testify to the social inclination of Indian MFIs, which seek to genuinely foster financial inclusion

among the poor and alleviate poverty. In conjunction with this goal, Indian MFIs have succeeded

not only in comfortably covering costs, but also returning healthy profits and Return on Assets

(ROA). This highlights Indian MFIs’ operational efficiency and ability to function on tight

budgets. MFIs in other countries such as Brazil and Mexico have higher profit margins, but they

offer significantly larger loans with interest rates typically between 40-65%.

The inherent efficiency and resiliency of the Indian microfinance industry proved critical during

the recent financial meltdown during which growth continued unabated despite a slowdown in

the flow of funds which negatively affected growth in microfinance in other markets around the

world. This demonstrated self-sustainability is prognostic of the long term viability and potential

of the sector. Moreover, the Indian financial system as a whole has demonstrated its long-term

confidence in the industry through its own investment choices. Whereas the global average of

domestic investment in microfinance hovers around 65%, over 90% of the funding in India

comes through domestic channels, highlighting confidence in the underlying business model and

expectations of high future growth and returns.

64

15) IMPACT OF MICROFINANCE

1) Microfinance Enhances Choices Available to the Poor

Microfinance has enhanced the opportunity to save and to acquire a productive asset, reduced

dependency on moneylenders, and reduced the interest burden on total borrowings.

2) Microfinance can Help Clients in Coping with Vulnerable Situations

Building of assets, new livelihoods and accumulated savings help the coping strategies of the

poor. Nevertheless, It is the most vulnerable (those with irregular income sources, women

headed households, existing indebtedness) who are the least creditworthy. Such very poor

households may struggle as MFI clients and their vulnerability can lead to dropout.

3) Microfinance can be an Empowering Opportunity for Women Clients

Targeting women for financial services is a good start on the road to women’s empowerment,

enhancing opportunities for their individual growth, economic activity, decision-making in the

household and the community.

4) Microfinance Helps in Reducing Client’s Dependence on Money Lenders (though use of

this source continues)

In comparison with non-clients, fewer client households are borrowing small loans from high

cost informal sources. Nevertheless, one-third of ‘old’ client households borrows from

moneylenders especially for larger amounts (for example, needed to meet marriage obligations)

or for amounts needed urgently (for example, needed for medical costs). Microfinance, so far,

has not reduced either the business or the terms of moneylenders. There is some evidence for the

reverse, that microfinance may in fact increase informal money lending, if clients need to 'top up'

micro-loans, or borrow to repay according to the installment schedule.

5) Impact on poverty

These are clear effects of microfinance, but whether they are sufficient to move households out

of poverty is unclear. But it has helped in reducing poverty for some clients, but not for all.

65

16) ISSUES RELATED TO MICROFINANCESome of the main issues are discussed below:

1) Borrower Unfriendly Products and Procedures

With a majority of the customers being illiterate, and a majority of them needing consumption

loan and a majority of them requiring high documentation and collateral security, the products

are not reaching the rural poor.

2) Inflexibility and Delay

The rigid systems and procedures result in lot of time delay for the borrowers and de-motivate

them to take further loans.

3) High Transaction Costs, both Legitimate and Illegal

Although the interest rate offered to the borrowers is regulated, the transaction costs in terms of

the number of trips to be made, the documents to be furnished etc. plus the illegal charges to be

paid result in increasing the cost of borrowing, thus making it less attractive to the borrowers.

4) Social Obligation and not a Business Opportunity

Micro-finance has historically been seen as a social obligation rather than a potential business

opportunity.

5) Legal and Regulatory Framework

The policymakers feel that farmers and poor people need low interest and subsidized credit.

They believe that poor cannot save, they are unwilling to repay the loans, and the administrative

costs of servicing them are high. Also small loans have been used as a tool for disbursing

political patronage, undermining the norm that loans must be repaid. Thus the mainstream

institutions feel that these loans are risky, difficult to serve and have a low or negative net

spread. The RRB Act does not permit any private share holding in any RRBs, and the

Cooperative Act of all states do not permit district level co-operative banks to be set up except

by the state government. The result of these two laws together is that rural credit has been a

monopoly of state owned institutions.

66

6) Problems for Alternative Micro-Finance Institutions

The main aim with which the alternative MFIs have come up is to bridge the increasing gap

between the demand and supply. A vast majority of them set up as NGOs for getting access to

funds as, the existing practices of mainstream financing institutions such as SIDBI and

NABARD and even of the institutions specially funding alternatives, such RMK and FWWB, is

to fund only NGOs, or NGO promoted SHGs. As a result, the largest incentive to enter such

services remains through the nonprofit route. The main problems faced by these institutions are:

6.1) Inappropriate Legal Forms

NGOs invented micro-finance but NGOs are not the best type of agencies to carry out

microfinance on a long-term sustainable basis. If an MFI opts to become an NGO, it has the

problems of funding that are very limited; they don’t have the appropriate financial structure for

carrying out micro finance activities. They don’t have equity capital and If the NGOs earn a

substantial part of their income from lending activity, they violate section 11 (4) of the Income

Tax Act and can lose their charitable status under Section-12. Then the cooperatives are

politicized in most of the states thus not an appropriate form of incorporation for an MFI. That

leaves an MFI with the choice to be incorporated as a company and then become an NBFC or a

Bank. The latter requires a license and a minimum start up equity of Rs100 crores, which is very

difficult for an MFI to mobilize. If an MFI opts to become an NBFC, it has the problems of

minimum entry-level capital requirement i.e.Rs 2 Crores, wef April 1999. It is difficult to

mobilize any borrowings from Indian Financial Institutions due to the negative image of NBFCs

in general. The MFI taking loan in foreign currency loans are subject to exchange risks.

6.2) Lack of Commercial Orientation

Driving to make the customer’s credit available at low cost with subsidies and grants, most of the

ternate MFIs achieve a lot of success in their programs in the initial period, but they fail to

maintain the same record in the long run because of lack of commercial orientation thus making

it unsustainable.

67

6.3) Lack of Proper Governance and Accountability

Governance and accountability are limited in case of non-profits and need to be improved. Their

boards must be made aware of their financial liabilities in case of failure. The lenders should be

more stringent and insist on nominating a few directors.

6.4) Isolated and Scattered

Alternate MFIs are isolated and scattered. There is no proper coordination among them and also

there is lack of information dissemination.

68

17) MICROFINANCE AT CANARA BANK

Financial Sector has made substantial progress since Nationalization and particularly at a rapid

pace since the beginning of the financial sector reforms. However, even today a vast segment of

the society remains vulnerable and excluded from the opportunities & services provided by the

financial sector. As a responsible corporate entity Canara Bank realize and share the concern that

continuous exclusion is bound to have social ramifications besides lopsided and inequitable

economic prosperity. There should be a process of bringing the disadvantaged, underserved and

those generally from the weaker sections of the society into the fold and the efforts on inclusion

shall be across all segments of the society and regions but shall have a focus on underserved

regions and underserved communities.

The delivery of simple and key Financial Services, namely access to payments and remittance

facilities, savings, loans and Insurance services at affordable costs to those who tend to be

excluded was the main concern for bank. Financial inclusion shall graduate the excluded to

economic freedom through capacity building and as entrepreneurs of economic activities and

enabling factor in the country's goal of an inclusive growth.

Canara Bank has grown into a veritable giant in the Banking firmament with well over 3046

branches and a business of over Rs. 4, 00,000 Crores. The Bank that had chosen as its path to

serve the social cause, serve the common man, and has never wavered all through its journey of a

Century of years and more .The Bank set up an Education fund in 1952 to help deserving poor to

pursue studies in Medicine, Law, and Engineering etc. Launched the Housing Loan Scheme for

Lower income families in 1956.Financing Agriculture had been taken up as a mainstream

activity since early 1960s.One of the first Public Sector Banks to introduce Education loan

Scheme in 1978 that Pioneering efforts in Self Help Group Credit linkage in 1990s and has credit

linked more than One and a half lakh Self Help Groups until now Specific financial products

developed to the focus groups like marginal & Tenant farmers, Artisans, Self- employed women

entrepreneurs .Now, the CANSARAL savings accounts (No Frills account) Scheme and General

Credit card Scheme.

69

Canara Bank's Initiatives Micro Finance portfolio of Canara Bank- as on 31.03.2009

Direct lending: 95490 A/cs - 62655 Lakhs.

Through’ NGO Facilitation: 28720 A/cs 20861 Lakhs.

Through’ MFI: 167 MFIs: 11544 Lakhs.

Total 95060 Lakhs

direct lending; 62655; 66%

through NGO facili-tation; 20861; 22%

through MFIs; 11544; 12%

Microfinance portfolio of Canara Bank (fig in lakhs)

direct lendingthrough NGO facilitationthrough MFIs

Figure 8

70

Micro Finance portfolio of Canara Bank- as on 31.03.2010

Direct lending: 95290 A/cs – 68435 Lakhs.

Through’ NGO Facilitation: 28638 A/cs – 21093 Lakhs.

Through’ MFI: 101 MFIs: 13894 Lakhs.

Total 103422 Lakhs

Direct lending; 68435; 66%

Through’ NGO Facilitation; 21093; 20%

Through’ MFI; 13894; 13%

Micro Finance portfolio of Canara Bank- as on 31.03.2010

Direct lendingThrough’ NGO FacilitationThrough’ MFI

Figure 9

Analysis:

It can be seen clearly that the Canara Bank’s share in financial year 2009 is more through direct

lending.i.e. 44% more through NGO facilitation and 54% more through MFIs. Similarly in the

year 2010 the share through direct lending is 46% more through NGO facilitation and 52% more

than MFIs.

71

Canara Bank lending to priority sector

advanced to priority sector

agricultural credit advanced to SHGs SMEs advances0

10000

20000

30000

40000

50000

60000

70000

43203

17996

526

18600

48763

20144

786

23823

59310

25052

926

31074 year 2007-08year 2008-09year 2009-10

Figure 10

Analysis:From the above graph it can be easily analyzed that the advanced to priority sector has been

increasing year by year and this growth is 37.28% from 2007-08 to 2009-10, in same way there

focus is on agricultural credit also and that has shown an increase of 39.20 % as well advanced to

SHGs has been increased 76.04% from year 2007-08 to 2009-10 and also to SME advances has

shown an increase of 67.06% from 2007-08 to 2009-10 in the microfinance portfolio.

The products and the scheme launched by the Bank recently and the existing products aiming

financial inclusion are

1) Cansaral Savings Account/ No-Frill AccountThese are a kind of savings account that can be maintained with zero balance, and can be opened

with an initial balance of Rs 25; rate of interest is same as that of saving bank accounts. They are

provided with free ATM cum Debit card facility, free internet and mobile banking, cheque book

facility etc. the account holder can’t keep more than Rs 50,000 and the total credit in the year is

not expected to exceed by Rs 1,00,000.

72

Amt in crore

2) General Credit Card SchemeIt is to provide a hassle free credit to rural/semi urban households without insistence on security

purpose or end use of the credit. It can be sanctioned for any general purpose including

consumption. In this the loan quantum should be 50% of that of the net income of the entire

household subject to a maximum of Rs 25,000

Cansaral GCCS0

500000

1000000

1500000

2000000

2500000

450267

64030

1729416

124732

2179683

188762

no of a/c during the year 2009-10cumulative no.of a/c till Mar 2009cumulative no of a/c till Mar 2010

Figure 11

Analysis:

The cumulative number of Cansaral accounts has shown a 384% increase from the financial year

2008-09 to 2009-10 and the number of GCC accounts has been increased 194.8% from the

financial year 2008-09 to 2009-10. The reason for this growth was aggressive marketing by bank

and coverage of more and more people under the scheme.

3) Scheme for Prepayment of Debts of Urban poor from Non-institutional

Sources This is for the distressed urban poors who have in the past raised loans from non-institutional

sources and the loan quantum is 150% of the gross income subject to a maximum of Rs 50,000

and repayment term is monthly in 5yrs with interest.

73

4) Differential Rate of Interest (DIR) Scheme

Loans can be considered both working capital and term loan for any Agricultural/Allied activity

as per various schemes under Agriculture. This is the only scheme in bank which provides loan

at 4% simple interest. This scheme provides loan for an amount of Rs 15,000 except housing

loans and housing loan to an extent of Rs 20,000 to the members of SC/ST who fulfill the DRI

norms. For getting this loan the family income should be Rs 18,000 or less in rural areas and Rs

24,000 in urban and semi urban areas.

DIR scheme (table 17)

outstanding Mar’07 Mar’08 Mar’09 Mar’10

No.of

a/cs

Amt

(crore)

No.of

a/cs

Amt

(crore)

No.of a/cs Amt

(crore)

No.of

a/cs

Amt

(crore)

DIR 13308 65 15974 40 17333 48 27188 50

Mar’07 Mar’08 Mar’09 Mar’100

5000

10000

15000

20000

25000

30000

13308

1597417333

27188

6500

4000 4800 5000

No.of a/csamt (in lakh)

Figure 12

Analysis:

74

The number of accounts under DIR scheme has shown an increased by 104.2% by Mar’07 to

Mar’10 more people are covered under the scheme by doing aggressive marketing and creating

awareness among the people.

5) Scheme for Redemption of Debts of Farmers from Non-institutional

sourcesIts main purpose is to prepay the debt availed by the farmers from non institutional sources so as

to relieve the farmer from debt burden from non-institutional sources and the loan quantum

maximum of is Rs 50,000 subject to 150 % of the gross annual income, subject to repayment

within 5yrs in quarterly/half yearly/yearly installments.

Debt Swapping Scheme

(table 18)

outstanding Mar’09 Mar’10

No of a/c Amt (in crore) No.of a/c Amt (in crore)

Debt swapping

Scheme

10447 47.61 10446 41.33

Mar’09 Mar’100

2000

4000

6000

8000

10000

12000

10447 10446

47614133

No of a/cAmt (in lakh)

Figure 13

Analysis:

75

The number of accounts from Mar’09 to Mar’10 is almost same. There has not been any

significant change but the amt has shown a slight decrease of 13.19% from the financial year

ending Mar’09 to Mar ’10.

6) Canara Grameena Vikash Vahini

Bank has provided Canara Grameena Vikas Vahini Vehicles in 50 potential districts across the

country. The objective of the vehicle is to create awareness about Bank's products and Banking

facilities among the rural households and enable the Bank branches to design programmes based

on feedback on the Bank's schemes and requirements of villagers. The vehicle is provided with

pamphlets covering the schemes of the Bank, Application forms for opening "No frill" accounts

and other accounts. Trained agriculture extension officers of the Bank and other staff who are

well conversant with the schemes of the Bank and needs of the rural households are

accompanying the vehicles to disseminate the information and create awareness.

7) Financially Literacy BooksBank has come out with two booklets, for financial literacy and education, in English and

Kannada. The booklets are named as 'Money' and 'Savings'. The Booklets are made available

to the rural people through their Lead banks, Branches and farmers' clubs.

8) Financial Inclusion and Credit Counseling Centre Bank has started financial Literacy and Credit Counseling Centres (FLCCs) in three Lead

Districts, namely Chitradurga, Kolar and Chikkaballapura in Karnataka state.

9) Smart Card Technology Bank has piloted Smart card Technology in two villages near Bangalore for financial inclusion.

10) Bank has signed MOU with Govt. of Karnataka for implementing Smart Cards

for disbursement of Government Benefits, like NREGS wages payment and Social Security

Pension in three districts namely, Bellary, Gulbarga and Chitradurga.

11) Bio metric Voice enabled ATMs

76

The Bank has installed Bio Metric Voice Enabled ATMs in nine rural/Semi urban locations, to

enable even the illiterate persons to have access and operate their account. Bio metric ATM

card holders and Smart card holders can operate their account through the Bio metric ATMs.

12) Bio metric Voice enabled Mobile ATMAs a marketing initiative, Bank has also taken steps to bring the ATM facility to the doorsteps of

the customer. Bank has launched a Mobile VAN with Biometric ATM facility. This mobile

ATM is specially designed for providing ATM facility to the rural folk as well as other

customers. This VAN shall move in and around Bangalore city at the pre-determined places.

These ATMs are accessible to Biometric card holders also. Apart from the ATM facility, this

mobile Van is having customer lobby where the Bank personnel are available to market/educate

the various products of the Bank.

13) Canara Bank Training Institute for Micro finance, Sonnahallipura

Training It was set up in 1993, is a unique institute.  It is engaged in training SHGs and promoting the

micro finance concept.  The institute has so are trained 10472 candidates.

14) Farmers training CellsWith an objective to strengthen the Knowledge base of farming community with necessary

technical and marketing skills, Canara Bank has set up Farmers Training Cells (FTCs) through

its Canara Bank Centenary Rural Development Trust, which has established eight Self

Employment Training Institutes across the country. The Farmers Training Cells plan, design and

conduct demand driven specific training programmes in the field of agriculture and allied

activities, like, technology transfer programmes, field exposure visits to progressive farmers'

units, demonstrations, farmers' meets ,farmers' clubs, agri-seminars etc. The twin objectives of

FTCs are Credit counseling and credit linkage to trained farmers.

15) Canara Nayee Disha

Bank has launched a New scheme called "Canara Nayee Disha “by bringing all the existing

eligible credit schemes under one umbrella, for financial deepening under the second phase of

77

financial inclusion. As per the scheme, the Bank has targeted 20% of the households which were

brought to the Banking fold, during total financial inclusion process, for providing necessary

credit individually or through group mechanism. It is the endeavor of the Bank to provide credit

facility to 3.50 lakh households to the extent of Rs.750 crore, under the new scheme.

16) Krishi Mitra Card scheme It has an objective to provide easy credit to individual tenant farmers, oral lessees, share croppers

etc for cultivation of crops, maintenance of farm and machinery, replacement of machinery and

animals etc for which loan quantum is maximum of Rs. 50,000 subject to value of the produce.

Coverage under Krishi Mitra Card (table 19)

outstanding Mar’07 Mar’08 Mar’09 Mar’10

No.of

a/cs

Amt

(crores)

No.of

a/cs

Amt

(crores)

No.of

a/cs

Amt

(crores)

No.of

a/cs

Amt

(crores)

Krishi Mitra

Card

772 2.88 1516 3.94 2223 7.28 1917 14.48

Mar'07 Mar'08 Mar'09 Mar'100

500

1000

1500

2000

2500

772

1516

2223

1917

288394

728

1448

no. of a/csamt in lakh

Figure 14

Analysis:

The number of accounts under Krishi Mitra Card has been increased from the financial year

ending Mar’07 to Mar’10 by 148% and the amount have been increased by 402% from Mar’07

78

to Mar’10 that shows the aggressive marketing by canara bank after the inception of separate

microfinance branch since 2006.

17) Scheme for Self Help Group (SHG) finance/ SHG Credit LinkageIt is a very popular and widely accepted group lending scheme. Unlike JLGs/MCGs it is a

savings linked scheme. The scheme provides for Opening of SB account with the bank, group

meetings, internal lending and recovery, maintenance of books and registers, minimum period of

six months existence for availing bank loan. Bank loan is sanctioned basing on the corpus of the

group which includes the savings of the group, cash in hand, amount lent to the members out of

own sources, donations received and interest earned by SHG. The limit permitted is 1:4 of the

owned funds. ( Table 20 ) (a/c in actual)

Cumulative Performance Mar'07 Mar'08 Mar'09 Mar'10

Groups formed 150278 210441 275100 319990

Groups Credit linked 120165 172290 224647 275349

Loan sanctioned (Rs. In

crores)* 649.67 990.37 1365.29 1844.07

Mar'07 Mar'08 Mar'09 Mar'100

50000

100000

150000

200000

250000

300000

350000

150278

210441

275100

319990

120165

172290

224647

275349

649.67 990.37 1365.69 1844.07

Groups formedGroups credit linkedLoan sanctioned (Rs. In crores)

Figure 15

Analysis:

The above graph shows a progressive trend in the SHG group formed that has been an increment

of 112.9% from the FY ending Mar’07 to Mar’10 and in also the Credit linked group has been

increased as well as in terms of loan sanctioned increased by 64.76 % in compare of financial

79

year ending march 07 and march 2010, this is because microfinance sector is considered as

profitable and bank started aggressive marketing.

Performance during the year (table 21)

Performance During the

Year Mar'07 Mar'08 Mar'09 Mar'10

Groups formed 37507 60363 64659 44890

Groups Credit linked 36814 52125 52358 50701

groups formed groups credit linked0

10000

20000

30000

40000

50000

60000

70000

37507 36814

60363

52125

64659

52358

44890

50701

Mar'07Mar'08Mar'09Mar'10

Figure 16Analysis:

The number of groups formed has been increased by 19.6% from year ending Mar’07 to Mar’10

where as it has shown a decrease of 30.57% from year ending Mar’09 to Mar’10.

In case of groups credit linked also there has been an increase of 37.72% from year ending

Mar’07 to Mar’10.

19) Micro Credit Groups (MCG) linkages

MCG is also a group lending scheme like SHG where maximum number of members is limited

to 10 and the loan is sanctioned for starting /improving and expanding any income generating

80

activity. The scheme also covers debt redemption of the members to a maximum of Rs.25000/-

out of the total limit permitted per borrower. Unlike SHG it is a credit linked scheme. The limit

permitted per borrower is Rs.50000/- and Rs.500000/- per group. Maximum repayment

permitted is 60 months.

20) Government sponsored schemesLoans can also be sanctioned under various government schemes sponsored by departments

like women and child development (CDPO), Minorities Development Corporation, SC

development corporation, ST development corporation, Municipalities/ City Corporations, Block

development offices etc

21) Other products like Kisan Credit Card, Kisan Suvidha, Artisan Credit Card, Swarojgar

Credit Card, Cantools etc can also encourage financial inclusion.

22) Total Financial Inclusion Campaigns-Multi Pronged ApproachThe Bank has taken up the Financial Inclusion in a multi-pronged approach under which the

Bank has brought 1639 villages under Total Financial Inclusion named as Village wise campaign

The Bank has piloted a project on 'Financial Inclusion Campaign' in the first phase to cover a

village by each of its rural and semi urban branches cite to ensure that every family in these

villages are brought into Banking services by opening Savings Bank Accounts and Cansaral (No

Frill Accounts) for families hitherto outside the ambit of Banking Services.

Till date the bank has brought 1639 villages across the country under Total

Financial inclusion under one village under one Rural/Semi urban branch-

programme.

Opened 1.74 Lakhs no frill Accounts during the current financial year.

Covered 19.04 lakhs persons under Financial inclusion

Achieved Total Financial inclusion in all Twenty six lead districts, spread over

five states, namely Karnataka, Kerala, Tamil Nadu, Bihar and Uttar Pradesh.

Bank is the SLBC convener of Kerala State. The State has been declared as Total

Financially included on 24.12.2007.

Bank has issued 1.49 lakhs General Credit Cards since inception.

81

Bank has so far formed 2.89 lakh SHGs and credit linked 2.43 lakh SHGs since

inception.

Bank has so far formed 1085 farmers clubs.

23) Coverage under Joint Liability Group / Tenant Farmers Group (table 22)

outstanding Mar’07 Mar’08 Mar’09 Mar’10

No. of

a/cs

Amt

(in

crores)

No. of

a/cs

Amt (in

crores)

No. of

a/cs

Amt (in

crores)

No. of

a/cs

Amt (in

crores)

TFG/JLG 765 8.54 2638 14.2 821 14.7 997 42.08

year ending Mar'07

Year ending Mar'08

year ending Mar'09

Year ending Mar'10

0

500

1000

1500

2000

2500

3000

3500

4000

4500

765

2638

821997

854

1420 1470

4208

no of a/camt in lakh

Figure 17

Analysis:

82

The amount for JLG and TFG lending has shown an increasing trend. Number of accounts under

this has increased by 30.32% from year ending Mar’07 to Mar’10 and the amount has also been

increased by 392.7%.

18) THE FUTURE OF MICROFINANCE

Microfinance has gradually developed to be a worldwide movement, no longer being a subject

matter of microfinance practitioners alone. Governments, donors, development agencies, banks,

foundations, corporations, business communities, civil societies, researchers, universities,

consultants, philanthropists and others are taking an increasing interest in it. The concept was

born in Bangladesh almost three decades ago; microfinance has proved its value, in many

countries, as a weapon against poverty and hunger. It really can change people’s lives for the

better, especially the lives of those who need it most. It has been evidenced worldwide that

microfinance helps the poor to overcome poverty, and not through charity. It is a financial

system that serves the poor with financial services in a most effective and productive way.

Microfinance expansion over the next decade can be expected to be an extension of what has

been achieved so far while overcoming the hurdles that have been posing difficulty in effective

microfinance operation and its expansion. Who will take the lead and where, are the two

questions that need to be addressed first without any bias. Given their experience and expertise,

it is expected that the current providers of financial services to the poor will take the lead in the

expansion of microfinance.

There may be several participants in this process and they will expand their services by existing

microfinance institutions expansions of their operations to areas where there are no microfinance

programs and cooperatives/credit unions may be more active in providing financial services to

the poor, more NGOs can incorporate microfinance as one of their programs. In places where

there are no microfinance institutions, the government channels at the grassroots level may be

used to serve the poor with microfinance.

83

Postal savings banks may participate more not only in mobilizing deposits but also in providing

loans to the poor and on lending funds to the MFIs. More commercial banks may participate both

in microfinance wholesale and retailing. They many have separate staff and windows to serve the

poor without collateral. International NGOs and agencies may develop or may help microfinance

programs in areas or countries where microfinance is not a very familiar concept in reducing

poverty. Community based organizations may get involved in microfinance services.

In the case of NGOs, which have more focus on poverty lending, funding is a very critical issue

for both start-up and scaling-up projects. Unless the funding problem is taken care of, it will be

difficult for microfinance programs to start and expand their operation and increase their

outreach. The situation may be different for regulated MFIs who can mobilize savings and use it

for on lending purposes and who have access to commercial sources. All the possible financial

services can be tapped and all the actors committed to poverty alleviation whether in urban or

rural areas can get involved in increasing the microfinance outreach.

In addition to the focus on bottom poor, attention may also be given to the ‘‘missing middle’’.

Development of Small-Scale Enterprises through microfinance will not only increase the

outreach but will also help the generation of more employment and income for the poor. It is

expected that in the following years there will be considerable deepening of microfinance in this

direction along with simultaneous drives to reach and serve the poorest of the poor. The role of

the government, the donors, the networks and the media will remain as important as before in

creating an enabling environment, in providing/channeling funds and creating awareness for the

rapid expansion of microfinance.

84

19) CONCLUSION

Microcredit and microfinance have received extensive recognition as a strategy for poverty

reduction and for economic empowerment. Microfinance is a way for fighting poverty,

particularly in rural areas, where most of the world's poorest people live. Accessing small

amounts of credit at reasonable interest rates give poor people an opportunity to set up their own

small business. Many studies show that poor people are trustable, with higher repayment rates

than conventional borrowers.

When poor people have access to financial services, they can earn more, build their assets, and

cushion themselves against external shocks. Poor households use microfinance to move from

everyday survival to planning for the future: they invest in better nutrition, housing, health, and

education.

Most poor people cannot get good financial services that meet their needs because there are not

enough strong institutions that provide such services. Strong institutions need to charge enough

to cover their costs. Cost recovery is not an end in itself. Rather, it is the only way to reach scale

and impact beyond the limited levels that donors can fund. A financially sustainable

institution can continue and expand its services over the long term. Achieving sustainability

means lowering transaction costs, offering services that are more useful to the clients, and

finding new ways to provide banking services to the poor. At the end it should be mentioned that

Poor people with no income or means of repayment need other kinds of support before they can

make good use of loans. In many cases, other tools will alleviate poverty better—for instance,

small grants, employment and training programs, or infrastructure improvements. Where

possible, such services should be coupled with building savings.

85

20) SUGGESTION Canara bank should help in formation as well as maintenance of SHGs that offer financial

guidance and credit, promote savings, free members from unfair debt burdens, and create

collective action opportunities that minimize exploitation of women and other

marginalized groups.

Offer skills training and capacity-building workshops to increase economic

independence, empowerment, and local employability of women and other underserved

groups.

Develop small businesses that produce saleable goods, such as traditional handicrafts.

Consult start-up microfinance programs that struggle with operational, financial, or

institutional sustainability.

Provide entrepreneurial skills training to conduct feasibility studies, perform cost/benefit

analyses, write business plans, acquire financing, and initiate start-ups.

Research and analyze numerous topics that include local economic conditions, migration

patterns, obstructions to economic growth, and efficacy of microfinance programs.

Canara bank should expand and increase exposure of microfinance programs to outlying

villages.

Canara bank should also help in marketing, distribution, pricing, and management

training to local microenterprises.

86

21) LEARNING EXPERIENCE The project provided introduction to one of the emerging issue-Microfinance. The study

gives details about the active participation of different microfinance institutions,

NABARD facilitation, NGO’s, different banks-private, government, nationalized,

commercial etc. with a focus on Canara Bank achievements.

The purpose of the study is to gain in depth knowledge about Microfinance- a tool for

poverty eradication.

The study gives details about the demand and supply of microfinance services.

It provided insight about various schemes and initiatives adopted by the RBI,

NABARD,SIDBI etc

It helped me to understand in detail all the schemes of Canara Bank for Financial

inclusion.

The study provided exposure to the benefits and impact of Microfinance and financial

inclusion.

The study gave details about the RBI guidelines and targets.

The study shows the quantitative impact of each scheme and tool.

The study also provides information about the extent of financial inclusion

It has also details regarding 100% inclusion achievement.

87

22) BIBLIOGRAPHY:Books

1) Debadutta kumar Panda , Understanding Microfinance

2) Microfinance perspectives and operation by Macmillan publication for Indian institute of

banking and finance

Reports

Director’s Report of Canara Bank 2007-08

Director’s Report of Canara Bank 2008-09

Director’s Report of Canara Bank 2009-10

A report on Dhaka Starting Microfinance in India – Vijay Mahajan, Bharti Gupta Ramola and

Mathew Titus , Basix

Research paper by Prabhu Ghate Research paper by Vishal Sehgal Presentation by N. Srinivasan

Websites

http://www.canarabank.com/English/scripts/PCCentreEDFWomen.aspx

http://www.canarabank.com/English/scripts/PersonalBanking.aspx

http://www.canarabank.com/English/scripts/CorporateBanking.aspx

http://www.canarabank.com/English/scripts/NRIBanking.aspx

http://www.canarabank.com/English/scripts/prioritycredit.aspx

http://www.canarabank.com/English/scripts/VissionandMission.aspx

http://www.canarabank.com/English/scripts/ShareholderInformation.aspx

http://www.canarabank.com/English/scripts/AwardsandAch.aspx

http://www.canarabank.com/English/scripts/Subsidiaries.aspx

file:///C:/Documents%20and%20Settings/User/Desktop/micro%20finance/CANARA%20BANK

%20-%20PRIORITY%20CREDIT.htm

file:///C:/Documents%20and%20Settings/User/Desktop/micro%20finance/Microfinance%20-

%20Wikipedia,%20the%20free%20encyclopedia.htm

88

file:///C:/Documents%20and%20Settings/User/Desktop/micro%20finance/Reserve%20Bank

%20of%20India.htm

file:///C:/Documents%20and%20Settings/User/Desktop/micro%20finance/Reserve%20Bank

%20of%20India3.htm

file:///C:/Documents%20and%20Settings/User/Desktop/micro%20finance/Small%20customers,

%20big%20market%20...%20-%20Google%20Books.htm#v=onepage&q&f=false

file:///C:/Documents%20and%20Settings/User/Desktop/micro%20finance/Dead%20Presidents!

%20-%20India%20Equity%20Research%20%20Canara%20Bank%20-%20Annual%20Report

%20-%202008-2009.htm

89

23) ABBREVIATIONS IRDP-Integrated Rural Development Programme

IFAD- International Fund for Agricultural Development

JLG-Joint Liability Group

MFIs- Micro Finance Institutions

ME-Microenterprises

MACS-Mutually aided co-operative society

MCG-Micro Credit Group

NBFC-Non Banking Financial Corporation

NGO-Non Govt. Organization

OER-Operating Efficiency Ratio

SHG-Self Help Group

SFMC-SIDBI Foundation for Microcredit

SGSY-Swarna Jayanti Gram Swarojgar Yojna

UNDP-United Nations Development Programme

90