Micro Finance Role of Private Sector Banks With Special Reference to Icici Bank

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CONTENTS

TOPIC

Executive summeryIntroductionOverview of Indian bankingenvironment

The challenges for growth ofmicrofinance

Research methodologies by MFagenciesRole of information system formicrofinanceRole of private sector banks

Initiatives of ICICI Bank & HDFC

BankApex Financing Institutions: Growingthe Seeds and Saplings

Donor Participation in Indian

Microfinance

A new paradigm in micro finance

Future prospectus

Bibliography

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1. EXECUTIVE SUMMARY

Micro finance plays an important role in todays banking environment. The basic objective of this

project is to understand the functioning of microfinance particularly the role of private banks. With this

objective in mind, the project has been divided into various sections, each of which examines the role of

private banks in microfinance from a different scope and perspectives. This report is an attempt to put

together a one-stop document that will help a variety of readers catch up on the latest developments, issues,

and achievements of the microfinance sector in India. The report emphasized the importance of SHG

federations, the cooperative MFI movement, the role of many of the public sector banks & private banks

including some prominent RRBs and DCCBs in supporting the SHG movement, and community based

microfinance generally, which after all constitutes the bulk of the sector

Development of microfinance

Public Private participation

Various projects of ICICI bank under ICICI Foundation

Various methodologies to implant the project

Few recommendations and conclusions which would help in improving microfinance

operations in future.

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2. Introduction

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

savings, and insurance to low income individuals which fall just above the nationally defined povertyline, and poor individuals which fall below that poverty line, with the goal 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 micro enterprise, and insurance and savings for risk

mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a

range of microfinance delivery methods. Since the ICICI Bank in India, various actors have endeavored

to provide access to financial services to the poor in creative ways. Governments also have piloted

national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some

banks have partnered with public organizations or made small inroads themselves in providing such

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

and low-income individuals for the provision of financial services. The range of activities undertaken in

microfinance include group lending, individual lending, the provision of savings and insurance, capacity

building, and agricultural business development services. Whatever the form of activity however, the

overarching goal that unifies all actors in the provision of microfinance is the creation of social value.

Microfinance Definition

According to International Labor Organization (ILO), Microfinance is an economic development

approach that involves providing financial services through institutions to low income clients.

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

of thrift, credit and other financial services and products of very small amounts to the poor in rural,

semi-urban or urban areas for enabling them to raise their income levels and improve living standards.

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

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

acquiring & using money. Micro Finance is buzzing word, used when financing for micro entrepreneurs.

Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class

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of society, women, and poor, downtrodden by natural reasons or men made; caste, creed, religion or

otherwise. The principles of Micro Finance are founded on the philosophy of cooperation and its central

values of equality, equity and mutual self-help. At the heart of these principles are the concept of human

development and the brotherhood of man expressed through people working together to achieve a better

life for themselves and their children.

Traditionally micro finance was focused on providing a very standardized credit product. The poor, just

like anyone else, (in fact need like thirst) need a diverse range of financial instruments to be able to build

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

concept of micro finance--- our current challenge is to find efficient and reliable ways of providing a

richer menu of micro finance products. Micro Finance is not merely extending credit, but extending

credit to those who require most for their and familys survival. It cannot be measured in term ofquantity, but due weightage to quality measurement. How credit availed is used to survive and grow

with limited means.

Background1

A wide network of co-operative banks traditionally provided rural finance in India post independence.

Co-operatives flourished in the 1950s60s, and focused largely on agricultural credit. The co-operativestructure broke down in the late 1970searly 1980s. This gave rise to the dilemma of how to meet the credit

needs of a large section of the rural population who had no access to institutional finance. The late 1980s

and early 1990s saw the beginnings of what was to become the self-help group bank linkage movement in

India, a movement that has been described as the largest micro-finance intervention in the world. The

National Bank for Agriculture and Rural Development (NABARD) proposed that self-help groups (SHGs),

typically groups of 10-15 women, be linked to wholesale suppliers of credit, in an effort to channel

institutional credit to the rural poor. This led to a pilot project in 1992 under which commercial banks in

India were allowed to lend to SHGs. Thus began the start of micro-finance operations in India. The SHG-

Bank linkage model grew rapidly. Initially, it offered promise as a model of public/private partnership for

the provision of micro-finance, as it was backed by regulatory policies that allowed commercial banks to

lend to unregistered groups without taking collateral. However, the model also faced a number of

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challenges. It soon transformed into a purely public model as state owned banks and other public entities

used the model to increase provision of credit, and private players gradually retreated.

The model was susceptible to political capture, as politicians looking to disburse handouts in election

times used SHGs for this purpose. It also became clear that the SHG model could not be scaled up rapidly

enough to meet the large demand for financing in rural areas. The current market for microfinance in India

is estimated to be of the order of $25 billion, and alternative channels for credit delivery in rural areas were

badly needed. This led to the growth of micro-finance institutions (MFIs) that played the role of

intermediating credit to the rural poor. MFIs in India take many forms; there are NGO MFIs, co-operative

MFIs and company MFIs. This third category includes barely 20 MFIs but accounts for over 80 percent of

the MFI.Micro-finance arrived somewhat late in India. For example, Bangladeshs NGOs were already

implementing a flourishing micro-finance business when the first operations started in India. As of March

2007, 41 million people had been linked to commercial banks via this program, and the cumulative credit

disbursed was over $4 billion. The SHG model accounts for the bulk of micro-finance lending in India.

Portfolio, Company MFIs have seen explosive growth in India, largely aided by the ability of the MFIs to

leverage funds from commercial banks. These MFIs have grown faster than the SHG-Bank linkage model in

recent years and have an outstanding loan portfolio of about $1 billion to about 10.5 million Borrowers as of

March 2007

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3. Overview of Indian rural banking environment

Micro-finance refers to small savings, credit and insurance services extended to socially and economicallydisadvantaged segments of society. 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. The

recent Task Force on Micro Finance has defined it 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". At present, a large part of micro finance activity is

confined to credit only. Women constitute a vast majority of users of micro-credit and savings services.

The Need in India :-

India is said to be the home of one third of the worlds poor; official estimates range

from 26 to 50 percent of the more than one billion population.

About 87 percent of the poorest households do not have access to credit.

The demand for microcredit has been estimated at up to $30 billion; the supply is less

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

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

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

poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is

now widely accepted as an effective poverty alleviation strategy. Over the last five years, the microfinance

industry has achieved significant growth in part due to the participation of commercial banks. Despite this

growth, the poverty situation in India continues to be challenging.

Demand of Micro Finance Services in India

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 percent have access to credit from

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

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

intermediary services, including savings services. A group of micro-finance practitioners estimated the

annualized credit usage of all poor families (rural and urban) at over Rs 45,000 crores, of which some 80

percent is met by informal sources. This figure has been extrapolated using the numbers of rural and urban

poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed

through various micro studies. Credit on reasonable terms to the poor can bring about a significant reduction

in poverty. It is with this hypothesis; micro credit assumes significance in the Indian context. With about 60

million households below or just above the austerely defined poverty line and with more than 80 percent

unable to access credit at reasonable rates, it is obvious that there are certain issues and problems, which have

prevented the reach of micro finance to the needy. With globalization and liberalization of the economy,

opportunities for the unskilled and the illiterate are not increasing fast enough, as compared to the rest of the

economy. This is leading to a lopsided growth in the economy thus increasing the gap between the haves and

have-nots. It is in this context, the institutions involved in micro finance have a significant role to play to

reduce this disparity and lead to more equitable growth.

Demand for Credit:

In terms of demand for micro-credit, there are three segments: 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 laborers in forestry, mining, household industries, construction and transport. This segment

requires, first and foremost, consumption credit during those months when they do not get labor work, and for

contingencies such as illness. They also need credit for acquiring small productive assets, such as livestock,

using which they can generate additional income. The next market segment is small and marginal farmers and

rural artisans, 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, a small part of which

also serves consumption needs. In rural areas, one of the main uses of working capital is for crop production.

This 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.

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

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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. One market segment, which is of great importance to micro-credit, is

women. The 1991 Census figures reveal that out of total 2.81 million marginal workers, 2.54 million were

women and their further break-up shows that out of a total of 2.67 million rural marginal workers, 2.44

million were females. Further, many more women were willing to work. This has been corroborated by the

results of a survey done by the National Sample Survey Organization (NSSO), 43rd round, which has

revealed that there is a vide variety of work which rural women combine with household work. In the NSSO

survey it has also been estimated that a large percentage of rural women in the age group of 15 years and

above, who are usually engaged in household work, are willing to accept work at household premises (29.3

percent), in activities such as dairy (9.5 percent), poultry (3 percent), cattle rearing, spinning and weaving (3.4

percent), tailoring (6.1 percent) and manufacturing of wood and cane products etc. Amongst the women

surveyed, 27.5 percent rural women were seeking regular full-time work, and 65.3 percent were seeking part-

time work. To start or to carry on such work, 53.6 percent women wanted initial finance on easy terms, and

22.2 percent wanted working capital facilities, as can be seen from the table below:

Demand for Savings and Insurance Services:

The demand for savings services is ever higher than for credit. Studies of rural households in various statesin 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 Assistance required (by

women marginal workers seeking or available for work at their household premises). Better banking

facilities, as shown by the experience of the SEWA Bank, Ahmedabad. 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 rates. The demand for savings services is high in rural areas as well, as can

be seen from a recent study of womens savings and credit movement in Andhra Pradesh. Almost all womens

groups in their early years begin with regular savings and their savings exceed the loans they give from their

funds. Of course, part of this lower demand for credit is the inadequate absorption capacity of women, which

comes from long years of exclusion from the economic sphere outside their homes.

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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

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4. The challenges for growth of microfinance

To enable the reach of micro finance services to the needy, the problems associated with the legal, regulatory,

organizational systems and the attitudes should be addressed to and the desired changes brought in these, to

make them more effective. The mainstream financial institutions are flush with funds and have access to

enormous amounts of low cost savings deposits. Indeed, the poorer the region, the lower the credit deposit

ratio most of the eastern UP, Bihar, Orissa and the North-East have Credit Deposit ratios of 20-30 percent.

Thus while banks are physically present in rural areas and offer concessional interest rates, rural producers are

not able to access, with the result that the rest of the deposits are finding their way into the financial sector.

Some of the main reasons for the above are:

1 Borrower Unfriendly Products and Procedures

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

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5 Financing to Alternative MFIs

NABARD Act does not permit them to refinance any private sector FI and do any direct financing

(NABARD's direct lending to micro-finance NGOs so far has been out of donor funds), similarly SIDBI Act

restricts it from extending loans to the agricultural and allied sectors, whereas many of the members of the self

help groups are engaged in such activities.

6 Legal and Regulatory Framework

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

Thereby we have regulated interest regime for the loans up to Rs 25,000 and Rs 2, 00,000/- with an interest

cap of 12 percent and 13.5 percent respectively. They believe that poor cannot save, they are unwilling torepay 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 Regional Rural Banks 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.

7. 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 alternative finance

institutions also have not been fully successful in reaching the needy. There are many reasons for this:

a) Financial problems leading to setting up of inappropriate legal structures

b) Lack of commercial orientation

c) Lack of proper governance and accountability

d) Isolated and scattered

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9. Lack of Commercial Orientation

Striving to make the customers credit available at low cost with subsidies and grants, most of the alternate

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.

10. Lacks 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.

11. Isolated and Scattered

The alternate MFIs are isolated and scattered. There is no proper coordination among them and also there is

lack of information dissemination.

The resultant shift in rural finance discourse and operational paradigm is shown in Table.

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Old Paradigm New ParadigmProblem Definition Overcome market

imperfectionsLower risks andtransaction costs

Role of Financial

Markets

Implement State plans

Help the poor

Intermediate resources

efficientlyView of users Beneficiary ClientsSubsidies Create subsidy

dependenceCreate independentinstitutions

Sustainability Largely Ignored A major concernEvaluations Credit impact on

beneficiariesPerformance of financialInstitutions

Source Adapted from Meyer & Nagarajan (1999)6

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5. Research methodologies by MF agencies

1 Impact evaluation of Spandana's micro credit programme5

Objective and methodology:

This study uses a randomized design to evaluate the impacts of Spandana's microfinance programme on

income, consumption, usage of financial services, asset ownership, scale of business and its profitability,

and intra-household decision-making among their clients in Hyderabad.

Preliminary results from the baseline surveys

With an average family size of five and an average monthly expenditure of Rs 5,000, respondents were

poor, but not ultra-poor: close to 50% of the respondents were earning under $2 a day but only 6 percent

were earning below $1 a day. Businesses were very prevalent in these slums. However, these businesses had

little specialized skills, and tended be small, with little capital, little assets and few employees. The loan

indebtedness figures indicate that about two thirds of the sample had at least one loan. Almost half of these

loans came from money lenders, while few were provided by commercial banks and almost no MFI loan

was available at the time12. Among those households who did not have a loan, more than half said that they

wanted one but could not obtain one. Loans were rarely taken for business expansion: a number of loans

were used towards health related expenses. Marriages, consumption purposes and for construction and

renovation of houses. It was also found that a third of the households had a savings account and while every

fourth household had a life insurance policy, almost none had health insurance. Yet it was found that 60

percent of the households who had a sick member had to borrow to pay for the treatment (which was on

average Rs 7,500). Where expansion opportunities appeared possible for these small businesses, they had

not been exploited. Although a loan of Rs 10,000 is probably not sufficient for expansion, microfinance

might help them expand by "forcing" them to channel additional revenues into expansion (rather than on

"wasted" expenditures).

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2 Impact evaluation of weather insurance, with SEWA, Gujarat

Objective and methodology:

A natural disaster, such as drought or excessive rain, can cause crop failure, leading to substantial hardship

manifested in reduced consumption, lower productivity, lower income, distress sales, and borrowing from

moneylenders at high rates. The objective of this study is to evaluate the impact of providing rainfall

insurance on reducing such vulnerabilities faced by poor agricultural households, and on improving their

livelihoods. Some important questions the study seeks to answer include: how effectively does a rainfall

insurance programme reduce vulnerability of poor households? How does financial literacy influence the

decision to purchase insurance? How will it affect local risk-sharing? Will policy-holders undertake moreprojects with a higher return (such as sowing more crops)? Will there be any effect on the local price of

goods, or on wage rates? CMF will assist SEWA and ICICI Lombard in developing the product, and SEWA

will offer rainfall insurance in a group of villages across three districts in Gujarat. The Centre will measure

and monitor household vulnerability, consumption and economic activity through surveys conducted at

regular intervals during the period of the project. The baseline survey of 1500 households in 100 villages

was completed before the product was marketed in May 2006.

Preliminary results:

Households that were rich, and those whose head was literate or educated, were much more likely to

purchase insurance than those who were not. In addition, financial contracts are complicated, and it can be

difficult for a farmer to understand why she should spend money now, to get an uncertain payout in the

future. Indeed, the survey in three districts of Gujarat found that SEWA members had very low levels of

financial literacy: when given a short test that included questions about risk, inflation, and interest rates,

members scored on average no higher than they would have simply by guessing. This was so despite

relatively high math skills, respondents answered, on average, two-thirds of the math questions correctly.

Members attitudes towards risk also mattered. In the baseline survey, respondents played a simple game, in

which they chose between a "safe" option (the certainty of Rs 50), and increasingly risky options that

offered a higher return. Two months after the survey, households who had picked safer choices were much

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Most MFIs have a weekly repayment schedule with weekly centre meetings to maintain low levels of

default. This tends to impose a high cost structure on the MFI. However, if infrequent repayments do not

produce an increase in default rate, or if this increase is lower than the reduction in transactions costs, it may

well be worthwhile for the MFI to examine it as a serious alternative to the weekly model. CMF uses a

randomized design to examine the impact of repayment frequency on the capacity of households to smooth

consumption, to manage cash flows and adapt their loan cycle to the business cycle, repayment rates and

organization's transaction costs. Three repayment schedules are compared. Weekly meeting-weekly

repayment, weekly meeting-monthly repayment and monthly meeting-monthly repayment.

Preliminary results:

So far there is almost zero percent default among all groups, and no difference in repayment between

weekly schedules and monthly schedules. If the completed study confirms these results, this could lead to

significant savings in terms of transaction costs. Most businesses can be categorized in two types: as

"mahajan' or piece based and market based or independent businesses. For the first type, weekly payments

seem to make more sense since they get paid piece wise. Market based clients seem to prefer monthly

payments as they sell on credit and can not always recover their payments every week. Monthly repayment

schedule could allow them to reinvest money into their business when they recover their costs. It seems

therefore that the benefits of monthly payments could vary according to activity. The rest of the study will

test these hypotheses. Regular business surveys as well as an end line survey will be administered.

5. Financial services for migrants-with Adhikar and Ajiwika

Objective and methodology

Migration could have important consequences for economic growth and poverty reduction by redistributing

the benefits of location-specific growth. Little data exists on the prevalence of these temporary labor

movements, about the conditions under which people migrate, the costs and risks, or the impact of

remittances on the household and village economy. With imperfectly functioning credit and information

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markets, individuals may fail to reap all potential benefits. This motivates the research on the provision of

financial services through the most effective channel for poor households, whose members migrate either

temporarily or permanently. CMF is undertaking a set of case studies of organizations working with migrant

workers to understand the dynamics and details of migration. This information will be used to design cost

effective remittance services in collaboration with Ajiwika in Jharkhand, and Adhikar in Orissa. The impact

of these services on migration and wage patterns, consumption and income smoothing and investment

decisions of households will then be evaluated through a randomized study.

Preliminary findings

When faced with severe shocks, households often resort to seasonal migration to take advantage of

employment opportunities in other sectors or regions. From Orissa and Jharkhand, workers often migrate to

Gujarat, where wages are higher. In some of the villages under study, more than 80 percent of the

households had at least one member who had migrated for employment. MFIs can provide innovative

financial services to migrants, such as remittances linked to loans and savings. Adhikar, in Orissa, is piloting

the provision of remittance services linked to both savings and loans for its members. In Jharkhand,

provision of remittance services is complicated by factors, such as lack of infrastructural facilities, little

faith in existing services such as demand drafts and money orders, limited information flows etc. Design of

remittance services must therefore take into consideration - costs of transferring money, time involved,

existing facilities and regional factors affecting employment and movement of people.

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6.Role of information system for microfinance

As microfinance institutions (MFIs) grow and become more business oriented, managers have foundthey gradually lose their ability to maintain personal contact with what is happening at the field level. They

realize they cannot adequately manage their portfolio and financial operations without better information.

No single information system (IS) will meet every MFIs information needs .

The IS needs of institutions differ in size and in complexity. These differences are a function of many

organizational variables, including volume of transactions, methodology, regulatory environment,

infrastructure, and overall readiness for change, as well as the resources available.

The basis of information

Any MFI has many users of information, operating at different levels. Also, various stakeholders make

decisions based on different information and require different levels of detail. A branch manager may

find a client ledger useful for making a decision on a particular loan disbursement, yet at the head office,

the financial officer is interested in simply knowing the balances outstanding on all loans given to clients

at that particular branch. Information requirements can therefore vary considerably throughout the

institution.

A full information system (IS) includes all the systems (both manual and computerized) used by an

institution to generate the information that guides managements decisions and actions.

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Core systems

Accounting: Records accounting details and provides complex tools for financial management.

Portfolio: The core business for many MFIs, manages all transactions relating to the loan

portfolio.

Deposit tracking: Manages all transactions related to savings if this product is offered.

Additional systems

Customer information: Detailed information about customers that may be used to understand

the customer base.

Human resources: As organizations grow, management of information related to staffbecomes more complex and can be automated, may consequently be linked to a performance-based

incentive scheme.

Reporting: Reports can be generated within each subsystem; it may also be necessary to extract

information across subsystems and recombine the information for more complex reporting

requirements. A key success factor for an MFI is making sure all of its systems are suitably linked to

allow timely and accurate sharing of data between the various systems. The linking of all

information systems is known as systems integration. This process can be both costly and time

consuming. Moreover, if any one of the systems is changed or upgraded at a later date, chances are

that extensive integration work will have to be done yet again.

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In designing an implementation plan, consider the following:

Hardware procurement. What hardware should buy and what are the memory, speed and

space requirements?

Infrastructure development. What type of network is required? What facilities are needed,

for instance, generator, telecommunications?

Software installation. Where should it be installed first?

Testing. How do you ensure the system works as you require it to?

Software modifications. Are any further changes required to the system?

Documentation. Are user and administrator manuals available?

System configuration. How should the system parameters be set?

Data transfer. How will transfer old data to the new system?

Staffing. Dothe staffs have adequate training and time to learn the new system?

Live date. Will the old system and the new system run at the same time during the

changeover? If so, for how long? When will the new system be considered live?

Internal controls. Are there adequate checks such as audit and access trails? What manual or

electronic confirmations are needed?

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Institutional interface. What about procedural issues that the software cannot help to

manage?

Data security. Are there measures in place to adequately protect the data? Is there a plan for

how to operate if the computers are down?

7. Role of private sector banks

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Private Sector Initiatives to Scale up Micro-finance: The Case of ICICI Bank, India

In 2000, the Reserve Bank of India, Indias central bank, allowed bank lending to MFIs to be classified

as priority sector lending. This released large amounts of commercial bank financing for MFIs andallowed them to scale up their lending operations rapidly. A number of commercial banks, especially

ICICI Bank, recognized the opportunity provided to partner with MFIs to expand outreach in rural areas.

From a virtually nonexistent portfolio in 2001, ICICIs microfinance portfolio grew to about $ 350 million

as of March 2007.

The 6 important issues related to the scaling up of microfinance with the help of the private sector.

1. The private sector is essential in this effort.

The micro-finance market in India is simply too large to be met by donor finances. Innovative

partnerships between equity and debt providers, NGOs, MFIs, government and other stakeholders hold

the key to successfully meeting the demand for micro-finance, including micro-credit. While the bulk

of private sector financing to MFIs has been provided in the form of loans, Indian MFIs are also

attracting equity capital.

2. Innovative models and delivery channels are also crucial to reach scale.

When Indian banks started lending to MFIs, they soon found that the MFIs were unable to absorb large

loans due to capital constraints. ICICI Bank pioneered the partnership model, under which banks lend

directly to clients with MFIs acting as loan originators, facilitators, collection agents etc, while the loan

is directly on the books of ICICI Bank. The MFI posts a first loss default guarantee thus sharing the riskof the portfolio with the bank up to a pre-specified limit. This model helped overcome the capital

constraint faced by most MFIs and allowed micro-finance operations to be scaled up rapidly.

3. Credit is not the only financial service that is required.

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Micro-finance clients have an equally important need for savings accounts, insurance products, and

remittance services. The private sector can play an important role in providing these services. ICICI

Banks insurance arm, ICICI Lombard has teamed up with BASIX, a microfinance company to provide

weather insurance to farmers. Similarly, there are wonderful examples of private insurance companies

providing micro insurance in partnership with NGOs and MFIs. Moreover, many banks, including ICICI

Bank is working to develop reliable remittance products for Indias vast migrant labour that

Works outside of their home states. The private sector has a unique ability to adapt cutting edge products

usually designed for prime clients to the needs of the poor and this can provide valuable gains for the

poor.

4. Financing efforts need to be coupled with capacity building efforts for

MFIs.

Incubation and training of MFI staff, good MIS technology and technological innovations such as the

use of point of sale devices for safer, faster transactions are important.

5. Similarly financing of clients need to be coupled with efforts at buildinglivelihoods.

A credit plus model is needed to ensure development of skills and market linkages.

6. Finally, impact evaluation is important and should not be neglected in

the rush to provide financing.

The microfinance movement world over has come under attack as a stopgap

solution to poverty. Reliable longitudinal studies are needed to track the impact of micro finance on

clients lives.

8. Initiative of ICICI Bank & HDFC Bank

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The traditional image of microfinance is one of a charitable activity conducted mostly by non-profit

organizations and separate from the mainstream financial system. However, this image has beenchanging in India in the last few years as commercial banks have been widely entering the sector, led by

ICICI Bank. But why would ICICI, the largest private bank in India, be interested in serving low-income

segments? Simply because it recognizes that poor people are bankable, and that microfinance provides a

new, profitable opportunity. ICICI Bank sees an opportunity to make profits in untouched markets,

while improving the lives of poor people.

Rapid Growth

ICICI's microfinance portfolio has been increasing at an impressive speed. From 10,000 microfinance

clients in 2001, ICICI Bank is now lending to 1.2 million clients through its partner microfinance

institutions, and its outstanding portfolio has increased from Rs. 0.20 billion (US$4.5 million) to Rs.

9.98 billion (US$227 million). A few years ago, these clients had never been served by a formal lending

institution. There is an increasing shift in the microfinance sector from grant-giving to investment in theform of debt or equity, and ICICI believes grant money should be limited to the creation of facilitative

infrastructure. "We need to stop sending government and funding agencies the signal that microfinance

is not a commercially viable system", says Nachiket Mor, Executive Director of ICICI Bank. As a result

of banks entering the game, the sector has changed rapidly. "There is no dearth of funds today, as banks

are looking into MFIs favorably, unlike a few years ago", says Padmaja Reddy, the CEO of one of ICICI

Bank's major MFI partners, Spandana. And with banks entering the sector, interest rates have also

dropped. "Interest rates have come down from 14% to 10%", says Reddy.

Partnership Models

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But how has ICICI Bank been able to achieve such rapid growth in such a short time? This success is

due to a series of innovative models and initiatives. While a model of microfinance has emerged in

recent years in which a microfinance institution (MFI) borrows from banks and on-lends to clients, few

MFIs have been able to grow beyond a certain point. Under this model, MFIs are unable to provide risk

capital in large quantities, which limits the advances from banks. In addition, the risk is being entirely

borne by the MFI, which limits its risk-taking.

The MFI as Collection Agent

To address these constraints, ICICI Bank initiated a partnership model in 2002 in which the MFI acts as

a collection agent instead of a financial intermediary. This model is unique in that it combines debt as

mezzanine finance to the MFI. The loans are contracted directly between the bank and the borrower, so

that the risk for the MFI is separated from the risk inherent in the portfolio. This model is therefore

likely to have very high leveraging capacity, as the MFI has an assured source of funds for expanding

and deepening credit. ICICI chose this model because it expands the retail operations of the bank by

leveraging comparative advantages of MFIs, while avoiding costs associated with entering the market

directly.

Securitization

Another way to enter into partnership with MFIs is to securitize microfinance portfolios. In 2004, the

largest ever securitisation deal in microfinance was signed between ICICI Bank and SHARE Microfin

Ltd, a large MFI operating in rural areas of the state of Andra Pradesh. Technical assistance and the

collateral deposit of US$325,000 (93% of the guarantee required by ICICI) were supplied by Grameen

Foundation USA. Under this agreement, ICICI purchased a part of SHARE's microfinance portfolio

against a consideration calculated by computing the Net Present Value of receivables amounting to Rs.

215 million (US$4.9 million) at an agreed discount rate. The interest paid by SHARE is almost 4%

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less than the rate paid in commercial loans. Partial credit provision was provided by SHARE in the

form of a guarantee amounting to 8% of the receivables under the portfolio, by way of a lien on fixed

deposit. This deal frees up equity capital, allowing SHARE to scale up its lending. On the other hand,

it allows ICICI Bank to reachnew markets. And by trading this high quality asset in capital markets,

the bank can hedge its own risks.

Training New Partners

Despite rapid growth, the lack of NGOs and MFIs operating in India remains a constraint. According

to ICICI Bank, there is a need for approximately 200 MFIs to cover the country; however there are

only 15 large players capable of scale. New players are therefore needed: ICICI believes that new

NGOs, entrepreneurs, and corporations who conduct development activities in rural areas can and

should become MFIs. ICICI Bank has put in place its Micro Finance Development Team with the

objective of identifying and training new partners. The Social Initiative Group of ICICI Bank (SIG)

aims to partner with organizations to identify and support entrepreneurs in microfinance.

Working with Venture Capitalists

Another challenge in scaling-up the microfinance sector is the lack of equity capital. In order to solve

this shortage, ICICI Bank is encouraging venture capitalists to start entering the sector. Several

venture capital funds in the country have the capability of identifying and mentoring entrepreneurs,

including Lok Capital, Aavishkar and Bell Weather. Bell Weather has made three equity commitments

for start up, and its committee has decided to increase the size of the fund from US$10 million, to

US$25 million. Lok capital mobilizes and directs private capital to fund microfinance activities and to

fund long term management and technical support for development of commercially sustainable MFIs.

Aavishkar provides micro-equity funding (Rs. 10 lacs to Rs. 50 lacs, approximately US$20,000 to

US$100,000) and operational and strategic support to commercially viable companies increasing

income in or providing goods and services to rural or semi-urban India. ICICI Bank has come to an

agreement with these three venture capitalists under which it will provide take-out financing to the

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MFI to buy out the venture after a period of three to five years, provided the MFI attains an

operational sustainability rating from Micro-Credit Ratings International Ltd (M-CRIL) and Credit

Rating Information Services of India Limited (CRISIL).

Beyond Microcredit

Microfinance does not only mean microcredit, and ICICI does not limit itself to lending. ICICI's

Social Initiative Group, along with the World Bank and ICICI Lombard, the insurance company set up

by ICICI and Canada Lombard, have developed India's first index-based insurance product. This

insurance policy compensates the insured against the likelihood of diminished agricultural output/yield

resulting from a shortfall in the anticipated normal rainfall within the district, subject to a maximum of

the sum insured. The insurance policy is linked to a rainfall index.

Technology

One of the main challenges to the growth of the microfinance sector is accessibility. The Indiancontext, in which 70% of the population lives in rural areas, requires new, inventive channels of

delivery. The use of technologies such as kiosks and smart cards will considerably reduce transaction

costs while improving access. The ICICI Bank technology team is developing a series of innovative

products that can help reduce transaction costs considerably. For example, it is piloting the usage of

smart cards with Sewa Bank in Ahmedabad. To maximize the benefits of these innovations, the

development of a high quality shared banking technology platform which can be used by MFIs as well

as by cooperatives banks and regional rural banks is needed. ICICI is strongly encouraging such an

effort to take place. Wipro and Infosys, I-Flex, 3iInfotech, some of the best Indian information

technology companies specialized in financial While the sector has been growing rapidly, and while

the focus has been largely on growing outreach, there is an urgent need to fill gaps both in practice and

understanding in order to maximize the impact of this growth. To fill these gaps, ICICI bank has

created the Centre for Microfinance Research (CMFR) at the Institute for Financial Management

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Research (IFMR) in Chennai. Through research, research-based advocacy, high level training and

strategy building, it aims to systematically establish the links between increased access to financial

services and the participation of poor people in the larger economy.

The CMFR Research Unit supports initiatives aimed at understanding and analyzing the following

issues: impact of access to financial services; contract and product designs; constraints to household

productivity; combination of microfinance and other development interventions; evidence of credit

constraints; costs and profitability of microfinance organizations; impact of MFI policies and

strategies; people's behavior and psychology with respect to financial services; economics of micro-

enterprises; and the effect of regulations.

The CMFR is involved in several studies with researchers from leading universities, including MIT,

Harvard, and Yale. For example, it is implementing an impact evaluation of Spandana's micro credit

programme in Hyderabad; as the first randomized evaluation of micro credit, it will allow estimating

the effects of the MFI's programme in an unbiased manner. Other on-going projects include the impact

evaluation of smokeless chulhas on health and productivity in Orissa, a study on the break-up of

transaction costs of MFIs and SHGs, and an analysis of Sewa Bank's loans and accounts panel data

base in Ahmedabad.

In order to bring together academics and practitioners, the CMFR also organizes regular seminars and

conducts courses for managers and researchers from NGOs, government, international organizations,

and academics. In addition to undertaking research, the CMFR directly helps MFIs in terms of strategy

building. In partnership with MicroSave, the CMFR Microfinance Strategy Unit will offer advanced

financial management training for microfinance practitioners. A training series on Building Blocks of

Banking and Finance will also be conducted, aimed at financial institutions both large and small thatwish to acquire a comprehensive and detailed set of skills to effect their transformation.

Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of poor households, there

are other missing markets and constraints facing households, such as healthcare, infrastructure, and

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gaps in knowledge. These have implications in terms of the scale and profitability of client enterprises

and efficiency of household budget allocation, which in turn impacts household well-being. The

CMFR MicrofinanceStrategy Unit will address these issues through a series of workshops which will

bring together MFI practitioners and sectoral experts (in energy, water, roads, health, etc). The latter

will bring to the table knowledge of best practices in their specific areas, and each consultation

workshop will result in long-term collaboration between with MFIs for implementing specific pilots.

While the microfinance sector is growing fast in India, challenges must be addressed in order to make

this growth both effective and sustainable. Microfinance needs to become more accessible, more

customized and more comprehensive. In order for microfinance to be a useful mechanism for poverty

alleviation, several questions need to be answered. Is microfinance the solution? ICICI Bank believesit is, if growth is properly managed and questions are correctly answered.

Credit Mechanisms Adopted by HDFC (India) for Funding the Low Income

Group Beneficiaries

HDFC has been making continuous and sustained efforts to reach the lower income groups of society,

especially the economically weaker sections, thus enabling them to realize their dreams of possessing

a house of their own.

HDFCs' response to the need for better housing and living environment for the poor, both, in the urban

and rural sectors materialized in its collaboration with Kreditanstalt fur Wiederaufbau (KfW), a

German Development bank. KfW sanctioned DM 55 million to HDFC for low cost housing projects in

India. HDFCs' approach to low-income lending has been extremely professional and developmental in

nature. Negating the concept of dependence, HDFCs' low cost housing schemes are marked by the

emphasis on peoples participation and usage of self-help approach wherein the beneficiaries contribute

both in terms of cash and labour for construction of their houses. HDFC also ensures that the newly

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constructed houses are within the affordability of the beneficiaries, and thus promotes the usage of

innovative low cost technologies and locally available materials for construction of the houses.

For the purpose of actual implementation of the low cost housing projects, HDFC collaborates with

organizations, both, Governmental and Non-Governmental. Such organizations act as co-coordinating

agencies for the projects involving a collective of individuals belonging to the Economically Weaker

Sections. The projects could be either in urban or rural areas.

The security for the loan is generally the mortgage of the property being financed. The construction

work is regularly monitored by the co-coordinating agencies and HDFC. The loans from HDFC are

disbursed depending upon the stages of construction. To date, HDFC has experienced 100% recovery

for the loans disbursed to various projects.

9. Apex Financing Institutions: Growing the Seeds and Saplings

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SIDBI Foundation for Micro Credit (SFMC)

SFMC, set up with assistance from IFAD and DFID, started operations in January 1999. Apart from

providing loans grants and equity to MFIs, SFMC's mission includes a strong capacity building

component , the development of a network of service providers, advocacy of appropriate policies and

regulations, and promoting the exchange of information across the sector. Partner institutions comprise

large and medium scale MFIs with an anticipated minimum borrowing requirement of Rs 1 million a

year, and an outreach of at least 3,000 poor members (or the prospect of reaching this scale within a

year), and a clear and credible path to operational and financial self-sufficiency. Prospective partners

are first rated by an independent rating agency. In order to encourage new NBFCs to enter the field,

the usual requirement of a minimum track record of three years can be relaxed if the partner has been

rated AA (or the equivalent). Grant support is provided as technical assistance to strengthen systems,

and also as operational support to enable MFIs to meet a part of their operational deficits during the

initial, expansion phase. The Transformation Loan is a quasi-equity product providing for conversion

into equity after a specified period of time, subject to the MFI attaining certain structural, operational

and financial benchmarks. In 2005-06 SFMC disbursed Rs 253 crores of term loans to 62 partners, Rs

4 crores of Transformation Loans to five partners, sanctioned Rs 9 crores as capacity building grants,

and made one equity investment of Rs 1 crore.

The Rashtriya Gramin Vikas Nidhi (RGVN)

RGVN, headquartered in Guwahati, was set up in the mid-1990s by a consortium of public financial

institutions to wholesale to small start-up NGOs in the Northeast and East, much as RMK does for the

whole country. As a bulk lender through its NGO Support Programme, RGVN followed a policy until

recently of not assisting its partners with revolving fund loan assistance more than twice (apart from

providing capacity building assistance and a modicum of grant funding) but seeking instead to graduate

them to other lenders. Thus it lent an average of only 2 lakh to about 100 partners in 2004-05. However it

has now decided to lend larger amounts to about 10 to 20 out of its 400 partners who have been judged on

the basis of a grading exercise to have built-up enough capacity to absorb loans of about Rs 5 lakh each

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initially. Since the bulk of its funds come from borrowings (from SIDBI, ICICI, and others) it has to

charge a higher interest rate than RMK (12 as against 8 percent) and for this reason some of its fledgling

partners could also be picked up by RMK, which has appointed two nodal agencies in Assam. RGVN

started a retail programme only for Assam, the Credit and Savings Programme, more recently, which has

grown rapidly to equal if not exceed the bulk

Friends of Women's World Banking (FWWB)

FWWB, India, is part of the SEWA family of institutions and one of about 40 global affiliates of WWB,

New York. It is headquartered in Ahmedabad, and has an office in Chennai. It continues to remain a

registered society. It has received grants and loans from a number of funding partners, and its businessmodel is to leverage its corpus by borrowing from the banks and on lending to its MFI partners. Its largest

lender in March 2006 was SIDBI (with 36 percent of total borrowings outstanding), so in a sense FWWB

is a "Tier 2" apex or wholesaler. FWWB sees its core role as institutional development (ID) and the

availability of grant funding, especially from USAID for this purpose, enables it to play a strong capacity

building role through a system of a minimum of two technical assistance visits a year by its own staff.

These entail face-to-face interactions at both the management and operations level to establish strong

systems in respect of accounting, financial management, governance and MIS. FWWB feels that it has an

advantage of being able to provide TCB assistance more effectively than TCB providers who provide it as

a stand-alone input. Partners are graded into three categories in terms of outreach and loan portfolio into

Big Partners (of which there were 6 in March 2006), Institutional Development Partners (20) who are in

turn graded into A, B, and C. In view of the increasing availability of loans from the commercial banks

FWWB follows a conscious policy of graduating partners through the three categories. Progress is

monitored and documented in the annual reports. The aim is to graduate about four or five ID partners to

Big Partner level every year and a similar number of General Partners to ID partners. About 30 out of the

current 79 partners have received loans from the banks and financial institutions such as SIDBI. The aim

is to limit the share of business in the total portfolio to 50 percent and of ID partners to 35 percent.

FWWB's lending to the non-southern states increased from 19 to 25 percent in 2005-06. Norms for

minimum membership, portfolio outstanding and accumulated savings are lower for non-Southern states,

although a minimum of two years of existence as an organization (although not necessarily doing savings

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and credit) is insisted upon for all potential partners, as evidenced by an audited balance sheet. In states

like Jharkhand and in the Northeast these norms have been relaxed further in some cases to go down to as

few as 200-500 borrowers for new partners. In fact FWWB prefers relatively fresh organizations to those

with a longer life (usually conducting non-savings and credit activities) since it feels they are more

responsive to the adoption of new micro-finance specificsystems and management practices. Likewise,

among its partners generally, it finds organizations with an exclusive focus on microfinance do better than

multi-activity partners.

Rashtriya Mahila Kosh (RMK)

RMK was set up as a bulk lender to NGOs and government intermediary organizations by the central

government in 1993, the same year FWWB commenced operations, to promote lending to women under

the SHG programme, which in those days was still in a nascent stage, and before anyone had anticipated

that linkage lending from the banks would grow to the extent it has. The RMK is a registered society

with a governing body of not more than 16 members including the ex-officio chairperson who is the

minister in charge of the Department of Women and Child Development, and the executive director,

who is usually an IAS officer on deputation. Seven members of the governing body are nominated by

the government as representatives of NGOs active in the field of micro-credit. RMK initiated its

activities on the basis of an initial corpus received from government of Rs 31 crores, which has since

grown to Rs 54 crores on the basis of surpluses generated by the lending operation, and the investment

proceeds of its reserve funds of about Rs 21 crores currently. While its Memorandum of Association

allows it to borrow from the banks, it has not felt the need to do so yet, and has been sanctioned a further

addition to its corpus of Rs 10 crores in this year's budget.

10. Donor Participation in Indian Microfinance

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Donor funds have played a critical role in growing the microfinance sector in India. They have made a

significant contribution to the predominant channel of microfinance in India the Self Help Group Bank

Linkage Program (SBLP) - in the form of promotional and capacity building grants for the massive

number of 2.2 million SHGs and their federations. Contributions for the same have come from virtually

every bilateral, multilateral agency and private foundation in the country, including agencies within the

UN system - the International Fund for Agriculture and Development (IFAD), the World Food Program,

and the United Nations Development Program (UNDP) , multilaterals outside it like the World Bank, and

government agencies such as the Department for International Development (DFID), Canadian

International Development Agency (CIDA), as also private foundations like the Ford Foundation, Sri

Ratan Tata Trust, HIVOS India etc. These projects helped scale up the linkage program and evolved many

of the current institutional models with SHGs at their base. Mention must be made in this context

especially of the UNDP SAPAP (South Asia Poverty Alleviation Program, Andhra Pradesh), IFAD

MRCP (Maharashtra Rural Credit Project) and World Bank assisted Andhra Pradesh Rural Poverty

Reduction Program (Indira Kranti Patham) programs. At the apex level, agencies such as the Swiss

Agency for Development and Cooperation (SDC) and Gesellschaft fur Technische Zusammenarbeit

(GTZ) have been key technical and financial partners for the National Bank for Agricultural and Rural

Development's (NABARD) promotional and refinancing role in the SHG

Bank Linkage program.

For MFIs, donor funds have played a strategic role in paving the way for commercial lenders and

investors. Many of the more successful MFIs in India today have their origins in organizational forms

such as societies and trusts which funded their initial microfinance programs almost entirely through

grants. Bilateral such as DFID, SDC and foundations such as Ford have played a key role in this context.

In India donor funding for microfinance has taken the form of:

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Operational grants, on lending funds, transformation funds for microfinance retail institutions (such

as NGOs, banks, credit unions, financial companies etc.) e.g. DFID, Ford Foundation, SDC for

BASIX, Cooperative Development Foundation, DHAN etc

Components of business development services programs - SDC, ILO, Ford Foundation

Technical assistance/capacity building project - DFID, Sri Ratan Tata Trust, SDC, Ford Foundation

Instruments available to support microfinance projects have been

Grants for capital

Grants for Technical Assistance

Loans for Technical Assistance

Loans for capital

Equity

Besides supporting the growth of the financial infrastructure of the sector, agencies such as DFID,

Ford Foundation, SDC and USAID have funded capacity building, microfinance ratings (through

Micro credit Ratings International Limited) and critical research for product and institutional

innovation. They also helped set up associations of Indian MFIs such as SADHAN and INAFI

(International Network of Alternative Financial Institutions) - towards an enabling policy regulatory

environment for microfinance in India. Significant research to highlight issues of access to financial

services and evaluate specific approaches to address these issues have been facilitated by donor

funding. The World Bank Rural Financial Access Survey highlighted the lack of access to finance for

poor households across the range of possible services, as also supply and demand side constraints in

two states - Andhra Pradesh and Uttar Pradesh. Critical policy and evaluation studies have beencarried out in the context of the SBLP initiated by donors like SDC, IFAD and GTZ, such as a series

of studies undertaken to provide a multi-perspective evaluation of the program to mark its ten year

anniversary.

11 A New Paradigm in micro finance

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A new paradigm that emerges is that it is very critical to link poor to formal financial system,

whatever the mechanism may be, if the goal of poverty alleviation has to be achieved. NGOs and CBOs

have been involved in community development for long and the experience shows that they have been

able to improve the quality of life of poor, if this is an indicator of development. The strengths and

weaknesses of existing NGOs/CBOs and microfinance institutions in India indicate that despite their best

of efforts they have not been able to link themselves with formal systems. It is desired that an intermediary

institution is required between formal financial markets and grassroot. The intermediary should

encompass the strengths of both formal financial systems and NGOs and CBOs and should be flexible to

the needs of end users. There are, however, certain unresolved dilemmas regarding the nature of the

intermediary institutions. There are arguments both for and against each structure. These dilemmas are

very contextual and only strengthen the argument that no unique model is applicable for all situations.

They have to be context specific.

Dilemmas:

Community Based Investor Owned

Community Managed Community (self)

financed Integrated (social &

finance) Non profit / mutual

benefit Only for poor

'Self regulated'

Professionally managed Accepting outside funds for

on-lending Minimalist (finance only) For profit For all under served clients

Externally regulated

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The four pillars of microfinance credit system are supply, demand for finance, intermediation and

regulation. Whatever may the model of the intermediary institution, the end situation is accessibility of

finance to poor. The following tables indicate the existing and desired situation for each component.

DEMAND

Existing Situation Desired Situation

fragmented Undifferentiated Addicted, corrupted by

capital & subsidies

Communities not aware ofrights and responsibilities

Organized

Differentiated (forconsumption, housing)

Dedicated from capital& subsidies

Aware of rights andresponsibilities

SUPPLY


Grant based(Foreign/GOI)

Directed Credit -unwilling and corrupt

Not linked withmainstream

Mainly focussed forcredit

Dominated

Regular fund sources(borrowings/deposits)

Demand responsive Part of mainstream

(banks/FIs) Add savings and insurance Reduce dominance of

informal, unregulatedsuppliers

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INTERMEDIATION


Non specialized Not oriented to financial

analysis Non profit capital

Not linked tomainstream FIs

Not organized

Specialized in financialservices

Thorough in financialanalysis

For profit Link up to FIs

Self regulating

REGULATION


Focussed on formalservice providers(informal not regulated)

regulating the wrongthings e.g. interest rates

Multiple and conflicting(FCRA, RBI, IT, ROC,MOF/FIPB,

ROS/Commerce)

Negatively oriented

include/informalrecognise e.g. SHGs

Regulate rules of game Coherence and

coordination acrossregulators

Enabling environment

12. Future prospects

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Most of the issues stated above are being tackled at various levels and the initiatives if successful,

could substantially remove these hurdles. Over the last few years, the Government of India has been

encouraging micro-finance as an alternative to IRDP type of poverty alleviation programs because of the

sustainability of micro-finance activities. In the last two Budget Speeches, the Finance Ministers have

talked about the need to enhance the reach of the MFIs. The RBI also made a special mention of micro-

finance in its credit policy announced in April 1999. The RBI has established a micro-credit cell;

NABARD has set up a Micro-credit Innovations Department, while HUDCO is also formulating a

similar plan. The issue of inappropriate legal form for MFIs is being addressed by a Task Force setup by

the Reserve Bank of India, which among other things is looking into the regulatory and legal issues

concerning microfinance in India. An increasing number of MFIs have begun to address the issue of

financial sustainability of their programs and have started taking effective steps towards achieving

sustainability. Many of them have increased their interest rates, at least to cover their costs. Some of

them have taken steps to convert themselves into for-profit corporations and have sought commercial

investors to invest in them. These will not only make microfinance more commercially oriented but will

also increase the quality of governance. Another welcome development in the Indian micro-finance

sector in recent years has been the establishment of networks of micro finance practitioners. These

networks not only help in creating awareness but also help in formation, experience sharing etc. These

could also develop into a Self Regulatory Organization of microfinance institutions.

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Conclusion

After the pioneering efforts of the last ten years, the microfinance scene in India has reached atakeoff point. With some effort substantial progress can be made in taking MFIs to the next orbit of

significance and sustainability. This needs innovative and forward-looking policies, based on the ground

realities of successful MFIs. This, combined with a commercial approach from the MFIs in making

microfinance financially sustainable, will make this sector vibrant and help achieve its single-minded

mission of providing financial services to the poor.

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13. Bibliography

Books:

1.Indian micro finance by Prabhu Ghate

2. Research papers of Indian institute of Management, Ahamadabad,

Websites:

www.google.com

www.mfi.org

www.icicifoundation.comwww.basixindia.com

www.cagp.org
http://www.icici.foundation/http://www.basixindia.com/http://www.icici.foundation/http://www.basixindia.com/

Micro Finance Role of Private Sector Banks With Special Reference to Icici Bank

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