A PROJECT REPORT ON

“MICRO-FINANCE IN INDIA”

Bachelor of Commerce
Financial Markets

Semester VI
(2015 – 2016)

In Partial Fulfillment of the requirements

For the Award of Degree of Bachelor of Commerce-
Financial Markets

Submitted by
SUMEETH KUMAR MADASU

SIES College of Commerce & Economics.

Plot No.71/72, Sion Matunga Estate, TV Chidambaram
Marg, Sion, Mumbai 400022.
 CERTIFICATE

This is to certify that Mr.SUMEETH KUMAR MADASU of

B.Com-Financial Markets Semester VI (2015-2016) has
successfully completed the project on “MICRO-FINANCE IN
INDIA” under the guidance of Ms.FALGUNI MATHEWS

Project Guide Principal

Internal Examiner External Examiner

 DECLARATION

I, SUMEETH KUMAR MADASU of SIES college of commerce

and economics, Sion E, hereby declare that I have completed the
project entitled “MICRO-FINANCE IN INDIA” partial
fulfillment of the required for the third year of the B.Com-
Financial Markets course for the academic year 2015-2016.
I further declare that information submitted by me is true and
original to the best of my knowledge.

_________________ ________________

Student Signature College Seal

 ACKNOWLEDGEMENT
“Knowledge is in the end based on acknowledgement.”

As any other report the success of this report is the result of active
involvement of many people, from the time of inception of an idea till the
end, many people supported me to make this exclusive and informative
report on “MICRO-FINANCE IN INDIA.”

With great pleasure and privilege I am presenting this report with my

deepest gratitude to this institute for providing me this opportunity.

I would like to acknowledge my sincere thanks, to Ms. FALGUNI

MATHEWS (Project Guide ) for his guidance throughout the Project, her
interest, enthusiasm and involvement had been greatest motivational
factor during the study.

I would also like to acknowledge to Dr. KINNARRY THAKKAR

(Principal of SIES College of Commerce And Economics) for her
guidance.

Not to forget our Parents who supported me and were a source of

inspiration.

Thanking You,

SUMEETH KUMAR MADASU

MICRO-FINANCE IN
INDIA
 CONTENTS
A PROJECT REPORT ON

SR.NO CHAPTERS Page No

“MICRO-FINANCE IN INDIA”
Chapter 1. Introduction to micro-finance in india. 3-16
Bachelor of Commerce
Chapter 2. Micro-finance in india. 17-21
Financial Markets
Chapter 3. Types of organization and composition of the 22-24
sector. Semester VI
(2015 – 2016)
Chapter Regulatory framework. 25-27
4.

In Partial Fulfillment of the requirements

Chapter 5. Incentives/Disincentives for information sharing.
28-30
For the Award of Degree of Bachelor of Commerce-
Chapter 6. Investment climate. Financial Markets 31-34

Chapter 7. Should micro-finance institution go public. 35-38

Chapter 8. MFIS need the market toSubmitted

by
do their job. 39-42
SUMEETH KUMAR MADASU
Chapter Livelihood through SHG’s. 43-50
9.
Chapter 10. Microfinance sector risk factor. 51-54

Chapter 11. The future of micro-finance in india. 55-61

SIES College of Commerce & Economics.
PlotCase
Chapter 12. No.71/72,
study Sion Matunga Estate, TV Chidambaram
62-67 Marg,
Sion, Mumbai 400022.
 EXECUTIVE SUMMARY

Since the 1950s, various governments in India have experimented with a

large number of grant and subsidy based poverty alleviation programmes.
Studies show that these mandatory and dedicated subsidised financial
programmes, implemented through banking institutions, have not been
fully successful in meeting their social and economic objectives.
According to a 1995 World Bank estimate, in most developing countries
the formal financial system reaches only the top 25% of the economically
active population - the bottom 75% have no access to financial services
apart from moneylenders.
In India also the formal financial institutions have not been able to reach
the poor households, and particularly women, in the unorganised sector.
Structural rigidities and overheads lead to high cost of making small
loans. Organisational philosophy has not been oriented towards
recognising the poor as credit worthy. The problem has been compounded
by low level of influence of the poor, either about their credit worthiness
or their demand for savings services. Micro-finance programmes have
often been implemented by large banks at government behest. Low levels
of recovery have been further eroded due to loan waiver programmes
leading to institutional disenchantment with lending to small borrowers.

All this gave rise to the concept of micro-credit for the poorest segment
along with a new set of credit delivery techniques. With the support of
NGOs an informal sector comprising small Self Help Groups (SHGs)
started mobilizing savings of their members and lending these resources
among the members on a micro scale. The potential of these SHGs to

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+++++++++++++++++++++++++++++++

develop as local financial intermediaries to reach the poor has gained

recognition due to their community based participatory approach and
sustainability - recovery rates have been significantly higher than those
achieved by commercial banks inspite of loans going to poor,
unorganised individuals without security or collateral.
Success stories in neighbouring countries, like Grameen Bank in
Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in
Phillipines, etc., gave further boost to the concept in India in the 1980s.
The poor in India define the micro-finance market. The Planning
Commission estimate of 1993-94 says 36% of the population or 320
million people live below the poverty line - there would be 140-150
million women alone living below the poverty line. Assuming that only
30% of the country‘s poor women are ready to adopt micro-finance as a
method of poverty alleviation, it is estimated that 40-45 million poor
women would need credit.

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Chapter 1 INTRODUCTION

Offer a wholesome feast to a man, he will enjoy for a day. Offer a

microcredit to a woman; she along with her children, husband and
extended family will enjoy a lifetime.‖
The majority of the world's poor live in rural areas. Yet most lack access
to the range of basic & need based financial services. Banking and
financial institutions seeking to work in rural areas primarily confront
with numerous challenges such as poor net-worth, discrete & isolate
demands, price and yield risks including constrained precinct of collateral
security. Moreover, the main products of many Microfinance Institutions
- may not be well tailored and well-matched to longer term agricultural
activities, nor the ensuing impediment in the cash flow of rural
households.
In Indian context also it is found that notwithstanding the profundity of
the Indian Financial System and the country's extensive network of rural
banks/branches, the country's underprivileged and deprived households,
who are mostly concentrated in rural areas, are deprived of their access to
formal banking and finance system.
A recent world Bank-NCAER research survey on rural access to banking
and finance (the Rural Finance Access Survey-RFAS) indicates that 70%
of the rural unfortunate populace is deprived of having a basic bank
account and 87% have no access to credit from a formal source.
Informal sector money lenders confine a strong presence in rural India,
delivering finance to the underprivileged and deprived ones.
―The RFAS finds that 48% of landless and marginal farmers borrowed
from an informal source at least once in the past 12 months, at hiking
rates averaging 48% a year.‖

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1.1 What is Microfinance?

Microfinance refers to small scale financial services for both small credits
and tiny deposits - that are provided to weaker sections who farm or fish
or herd; operate small or micro enterprises where goods are produced,
recycled, repaired, or traded; provide basic 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.
―Mull over the story of Smt. Sarita Bhaein, a solo mother who lives with
her four children in a remotest corner of a village in India. Through a loan
of Rs,5000 she bought a sewing machine within her reach. Regularly she
stitched clothes beyond her scheduled household chores, sold them for
marginal profit and repaid her principal dues plus the nominal interest
thereon. Out of the hard-earned profit, she was able to save some money
to buy books for her school going children. This is micro finance in
action‖
Microfinance is a simple but powerful tool enabler to pull the
underprivileged and deprived ones out of poverty. Universally, it involves
providing small loans to these working underprivileged ones in the
developing nations. Usually, various local organization behaving as
Microfinance Institutions offer small loans ranging between Rs 10,000 to
Rs 15,000 at a fixed rate of interest with nominal margin sharing. These
loans are being used by these poor sections of the society to establish or
expand their small livelihood business to generate additional income for
their family. This extra income is being spent by these working-poor on
buying basic food-grains, minor healthcare products, child-education,
putting aside in small-savings, thus laying the foundation for a better
tomorrow.

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Microfinance is based on the fundamental principle that human beings

are motivated to do whatever it takes to make themselves as well off as
possible. Thus it has emerged as an effective poverty alleviation tool.

1.2 History of Microfinance

The concept of microfinance is not new. Savings and credit groups that
have operated for centuries include the "susus" of Ghana, "chit funds" in
India, "tandas" in Mexico, "arisan" in Indonesia, "cheetu" in Sri Lanka,
"tontines" in West Africa, and "pasanaku" in Bolivia, as well as
numerous savings clubs and burial societies found all over the world.
Formal credit and savings institutions for the poor have also been around
for decades, providing customers who were traditionally neglected by
commercial banks a way to obtain financial services through cooperatives
and development finance institutions. One of the earlier and longer-lived
micro credit organizations providing small loans to rural poor with no
collateral was the Irish Loan Fund system, initiated in the early 1700s by
the author and nationalist Jonathan Swift. Swift's idea began slowly but
by the 1840s had become a widespread institution of about 300 funds all
over Ireland. Their principal purpose was making small loans with
interest for short periods. At their peak they were making loans to 20% of
all Irish households annually.
In the 1800s, various types of larger and more formal savings and credit
institutions began to emerge in Europe, organized primarily among the
rural and urban poor. These institutions were known as People's Banks,
Credit Unions, and Savings and Credit Co-operatives.
The concept of the credit union was developed by Friedrich Wilhelm
Raiffeisen and his supporters. Their altruistic action was motivated by
concern to assist the rural population to break out of their dependence on
moneylenders and to improve their welfare. From 1870, the unions

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expanded rapidly over a large sector of the Rhine Province and other
regions of the German States. The cooperative movement quickly spread
to other countries in Europe and North America, and eventually,
supported by the cooperative movement in developed countries and
donors, also to developing countries.
In Indonesia, the Indonesian People's Credit Banks (BPR) or The Bank
Perkreditan Rakyat opened in 1895. The BPR became the largest
microfinance system in Indonesia with close to 9,000 units.
In the early 1900s, various adaptations of these models began to appear in
parts of rural Latin America. While the goal of such rural finance
interventions was usually defined in terms of modernizing the agricultural
sector, they usually had two specific objectives: increased
commercialization of the rural sector, by mobilizing "idle" savings and
increasing investment through credit, and reducing oppressive feudal
relations that were enforced through indebtedness. In most cases, these
new banks for the poor were not owned by the poor themselves, as they
had been in Europe, but by government agencies or private banks. Over
the years, these institutions became inefficient and at times, abusive.
Between the 1950s and 1970s, governments and donors focused on
providing agricultural credit to small and marginal farmers, in hopes of
raising productivity and incomes. These efforts to expand access to
agricultural credit emphasized supply-led government interventions in the
form of targeted credit through state-owned development finance
institutions, or farmers' cooperatives in some cases, that received
concessional loans and on-lent to customers at below-market interest
rates. These subsidized schemes were rarely successful. Rural
development banks suffered massive erosion of their capital base due to
subsidized lending rates and poor repayment discipline and the funds did

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not always reach the poor, often ending up concentrated in the hands of
better-off farmers.
Meanwhile, starting in the 1970s, experimental programs in Bangladesh,
Brazil, and a few other countries extended tiny loans to groups of poor
women to invest in micro-businesses. This type of microenterprise credit
was based on solidarity group lending in which every member of a group
guaranteed the repayment of all members. These "microenterprise
lending" programs had an almost exclusive focus on credit for income
generating activities (in some cases accompanied by forced savings
schemes) targeting very poor (often women) borrowers.

• ACCION International, an early pioneer, was founded by a law

student, Joseph Blatchford, to address poverty in Latin America's cities.
Begun as a student-run volunteer effort in the shantytowns of Caracas
with $90,000 raised from private companies, ACCION today is one of the
premier microfinance organizations in the world, with a network of
lending partners that spans Latin America, the United States and Africa.

• SEWA Bank. In 1972 the Self Employed Women's Association

(SEWA) was registered as a trade union in Gujarat (India), with the main
objective of "strengthening its members' bargaining power to improve
income, employment and access to social security." In 1973, to address
their lack of access to financial services, the members of SEWA decided
to found "a bank of their own". Four thousand women contributed share
capital to establish the Mahila SEWA Co-operative Bank. Since then it
has been providing banking services to poor, illiterate, self-employed
women and has become a viable financial venture with today around
30,000 active clients.

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• Grameen Bank. In Bangladesh, Professor Muhammad Yunus

addressed the banking problem faced by the poor through a programme of
action-research. With his graduate students in Chittagong University in
1976, he designed an experimental credit programme to serve them. It
spread rapidly to hundreds of villages. Through a special relationship
with rural banks, he disbursed and recovered thousands of loans, but the
bankers refused to take over the project at the end of the pilot phase. They
feared it was too expensive and risky in spite of his success. Eventually,
through the support of donors, the Grameen Bank was founded in 1983
and now serves more than 4 million borrowers. The initial success of
Grameen Bank also stimulated the establishment of several other giant
microfinance institutions like BRAC, ASA, Proshika, etc.
Through the 1980s, the policy of targeted, subsidized rural credit came
under a slow but increasing attack as evidence mounted of the
disappointing performance of directed credit programs, especially poor
loan recovery, high administrative costs, agricultural development bank
insolvency, and accrual of a disproportionate share of the benefits of
subsidized credit to larger farmers. The basic tenets underlying the
traditional directed credit approach were debunked and supplanted by a
new school of thought called the "financial systems approach", which
viewed credit not as a productive input necessary for agricultural
development but as just one type of financial service that should be freely
priced to guarantee its permanent supply and eliminate rationing. The
financial systems school held that the emphasis on interest rate ceilings
and credit subsidies retarded the development of financial intermediaries,
discouraged intermediation between savers and investors, and benefited
larger scale producers more than small scale, low-income producers.
Meanwhile, microcredit programs throughout the world improved upon
the original methodologies and defied conventional wisdom about

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financing the poor. First, they showed that poor people, especially
women, had excellent repayment rates among the better programs, rates
that were better than the formal financial sectors of most developing
countries. Second, the poor were willing and able to pay interest rates that
allowed microfinance institutions (MFIs) to cover their costs.
1990s These two features - high repayment and cost-recovery interest
rates - permitted some MFIs to achieve long-term sustainability and reach
large numbers of clients.
Another flagship of the microfinance movement is the village banking
unit system of the Bank Rakyat Indonesia (BRI), the largest microfinance
institution in developing countries. This state-owned bank serves about
22 million microsavers with autonomously managed microbanks. The
microbanks of BRI are the product of a successful transformation by the
state of a state-owned agricultural bank during the mid-1980s.
The 1990s saw growing enthusiasm for promoting microfinance as a
strategy for poverty alleviation. The microfinance sector blossomed in
many countries, leading to multiple financial services firms serving the
needs of microentrepreneurs and poor households. These gains, however,
tended to concentrate in urban and densely populated rural areas.
It was not until the mid-1990s that the term "microcredit" began to be
replaced by a new term that included not only credit, but also savings and
other financial services. "Microfinance" emerged as the term of choice to
refer to a range of financial services to the poor, that included not only
credit, but also savings and other services such as insurance and money
transfers.
ACCION helped found BancoSol in 1992, the first commercial bank in
the world dedicated solely to microfinance. Today, BancoSol offers its
more than 70,000 clients an impressive range of financial services
including savings accounts, credit cards and housing loans - products that

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just five years ago were only accessible to Bolivia's upper classes.
BancoSol is no longer unique: more than 15 ACCION-affiliated
organizations are now regulated financial institutions.
Today, practitioners and donors are increasingly focusing on expanded
financial services to the poor in frontier markets and on the integration of
microfinance in financial systems development. The recent introduction
by some donors of the financial systems approach in microfinance -
which emphasizes favorable policy environment and institution-building -
has improved the overall effectiveness of microfinance interventions. But
numerous challenges remain, especially in rural and agricultural finance
and other frontier markets. Today, the microfinance industry and the
greater development community share the view that permanent poverty
reduction requires addressing the multiple dimensions of poverty. For the
international community, this means reaching specific Millennium
Development Goals (MDGs) in education, women's empowerment, and
health, among others. For microfinance, this means viewing microfinance
as an essential element in any country's financial system.
(www.networkers.org)

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1.3 Nobel Laureate Muhammad Yunus

Muhammad Yunus was born in 28th June,
1940 in the village of Bathua, in Hathazari,
Chittagong, the business centre of what was
then Eastern Bengal. He was the third of 14
children of whom five died in infancy. His
father was a successful goldsmith who always encouraged his sons to seek
higher education. But his biggest influence was his mother, Sufia Khatun, who
always helped any poor that knocked on their door. This inspired him to
commit himself to eradication of poverty. His early childhood years were
spent in the village. In 1947, his family moved to the city of Chittagong,
where his father had the jewelery business.

In 1974, Professor Muhammad Yunus, a Bangladeshi economist from

Chittagong University, led his students on a field trip to a poor village. They
interviewed a woman who made bamboo stools, and learnt that she had to
borrow the equivalent of 15p to buy raw bamboo for each stool made. After
repaying the middleman, sometimes at rates as high as 10% a week, she was
left with a penny profit margin. Had she been able to borrow at more
advantageous rates, she would have been able to amass an economic cushion
and raise herself above subsistence level.

Realizing that there must be something terribly wrong with the economics he
was teaching, Yunus took matters into his own hands, and from his own
pocket lent the equivalent of 17 to 42 basket-weavers. He found that it was
possible with this tiny amount not only to help them survive, but also to create
the spark of personal initiative and enterprise necessary to pull themselves out
of poverty.

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Against the advice of banks and government, Yunus carried on giving out
'micro-loans', and in 1983 formed the Grameen Bank, meaning 'village bank'
founded on principles of trust and solidarity. In Bangladesh today, Grameen
has 2,564 branches, with 19,800 staff serving 8.29 million borrowers in 81,367
villages. On any working day Grameen collects an average of $1.5 million in
weekly installments. Of the borrowers, 97% are women and over 97% of the
loans are paid back, a recovery rate higher than any other banking system.
Grameen methods are applied in projects in 58 countries, including the US,
Canada, France, The Netherlands and Norway.
(www.grameen-info.org)

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1.4 Grameen Bank

Muhammad Yunus, the bank's founder, earned a doctorate in economics from

Vanderbilt University in the United States. He was inspired during the terrible
Bangladesh famine of 1974 to make a small loan of US$27.00 to a group of 42
families so that they could create small items for sale without the burdens of
predatory lending. Yunus believed that making such loans available to a wide
population would have a positive impact on the rampant rural poverty in
Bangladesh.

The Grameen Bank (literally, "Bank of the Villages", in Bangla) is the

outgrowth of Yunus' ideas. The bank began as a research project by Yunus and
the Rural Economics Project at Bangladesh's University of Chittagong to test
his method for providing credit and banking services to the rural poor. In
1976, the village of Jobra and other villages surrounding the University of
Chittagong became the first areas eligible for service from Grameen Bank.
The Bank was immensely successful and the project, with support from the
central Bangladesh Bank, was introduced in 1979 to the Tangail District (to
the north of the capital, Dhaka). The bank's success continued and it soon
spread to various other districts of Bangladesh. By a Bangladeshi government
ordinance on October 2, 1983, the project was transformed into an
independent bank. Bankers Ron Grzywinski and Mary Houghton of
ShoreBank, a community development bank in Chicago, helped Yunus with
the official incorporation of the bank under a grant from the Ford Foundation.
The bank's repayment rate was hit following the 1998 flood of Bangladesh
before recovering again in subsequent years. By the beginning of 2005, the
bank had loaned over USD 4.7 billion and by the end of 2008, USD 7.6 billion
to the poor.

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The Bank today continues to expand across the nation and still provides small
loans to the rural poor. By 2006, Grameen Bank branches numbered over
2,100. Its success has inspired similar projects in more than 40 countries
around the world and has made World Bank to take an initiative to finance
Grameen-type schemes.
The bank gets its funding from different sources, and the main contributors
have shifted over time. In the initial years, donor agencies used to provide the
bulk of capital at very cheap rates. In the mid-1990s, the bank started to get
most of its funding from the central bank of Bangladesh. More recently,
Grameen has started bond sales as a source of finance. The bonds are
implicitly subsidised as they are guaranteed by the Government of Bangladesh
and still they are sold above the bank rate.
(www.wikipedia.org)

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1.5 Understanding Microfinance

When you understand Microfinance there is one important question one has to
understand. Prior pre-independence there were many traditional credit
organizations like banks, co-operative banks, etc in the country. Then why do
we need Microfinance Institutions in addition to them?
As per the produce of banks or reach of banks in rural area there are many
branches in rural area. Government of India and also State Government have
developed the concept of rural banks. These are the low costing banks that the
government provides. They are supposed to focus in specific region and open
their branches in town and villages and banks are working since 30-40 years
almost.
Still there is lack of credit or banking services in rural areas as we say. That
means that the institutions are there, access is there but still MFIs have to
come and intervene. Why is it required? Why Mohd. Yunus got noble price?
Or why Microfinance is called a revolution?
Basic concept is that banks provide us with various services like accepting
deposits by way of savings and lending loans and many other services but
these are two primary services provided by the banks.
Let‘s understand it with and example. There are some banks in a town which
connects some villages in a radius of 20-30kms. But still banks are not able to
cater to the poors and this is the fact. There are some reasons which are as
stated below:

 The average income per day of an individual is let‘s assume Rs.50 and
within that limit he has to manage his entire family expenditure. So he
has to go from his village to the bank and deposit Rs.50 so as to save
from that. But banking system in India is structured in such a way that
to open a bank account one needs minimum Rs.500. So opening a bank
account is one issue. 

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 It is not feasible to save Rs.50 as to go to the nearest town or bank he

has to spend Rs.20 as his travelling expenditure and his entire day is
wasted as he has to wait in a queue and bank might not accept small
amount without depositing Rs.500 to open an account. So he cannot
enjoy banking facilities. 

 Then if an individual needs a loan of Rs.3000 to Rs.5000 to open a shop
and for his business and approaches a bank for the same. The bank will
not give loan for such small amount because bank loan starts from
Rs.10,000 to Rs.15,000 or may be higher. And every bank needs
guarantee and mortgage against the loan amount. If an individual is very
poor and doesn‘t have any land or any asset to mortgage then what will
that individual give as guarantee? 

 Banks are already catering to the rich people and the process for loan of
Rs.10,000, Rs.50,000, or Rs.1lac is the same. So banks are always keen
to give higher loan amounts. 

So basically these low income houses needs savings and facilities and credit
but the way banks have structured their system and services doesn‘t consider
low income people.
(Sude, 2010)

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Chapter 2 MICROFINANCE IN INDIA

Microfinance in India started in the early 1980s with small efforts at forming
informal self-help groups (SHG) to provide access to much-needed savings
and credit services. From this small beginning, the microfinance sector has
grown significantly in the past decades. National bodies like the Small
Industries Development Bank of India (SIDBI) and the National Bank for
Agriculture and Rural Development (NABARD) are devoting significant time
and financial resources to microfinance. This points to the growing importance
of the sector. The strength of the microfinance organizations (MFOs) in India
is in the diversity of approaches and forms that have evolved over time. In
addition to the home-grown models of SHGs and mutually aided cooperative
societies (MACS), the country has learned from other microfinance
experiments across the world, particularly those in Bangladesh, Indonesia,
Thailand, and Bolivia, in terms of delivery of microfinancial services. Indian
organizations could also learn from the transformation experiences of these
microfinance initiatives.

NGOs in India perform a range of developmental activities; microfinance

usually is a sub-component. Some of these NGOs organize groups and link
them to an existing provider of financial services. In some cases NGOs have a
―revolving fund‖ that is used for lending. But in either of these cases,
microfinance is not a core activity for these NGOs. An example is the Aga
Khan Rural Support Programme India (AKRSP-I). For AKRSP-I, the
microfinance component is incidental to its work in natural resource
management.
Examples like MYRADA and the Self-Employed Women‘s Association
(SEWA) fall in the same category. However, as their microfinance portfolios
grew, both organizations decided to form separate entities for microfinance.

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MYRADA set up an MFO called Sanghamitra Rural Financial Services

(SRFS), while SEWA set up the SEWA Cooperative Bank.
At the next level, we find NGOs helping the poor in economic activities. Their
purpose is developmental. They see microfinance as an activity that feeds into
economic activities. For instance, the South Indian Federation of Fishermen‘s
Societies (SIFFS) started as a support organization for fishermen, providing
technical and marketing support. It then arranged for loans to its members
through banks. When the arrangement was not effective, it started providing
loans itself.
At the third level, we have organizations with microfinance at the core. They
have developmental roots, but are diverse in their operational details,
orientation, and form of incorporation.

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2.1 Transformation of NGOs

Here we will look in the five significant issues that trigger the transformation
of NGOs into Microfinance Organizations (MFOs).

2.1.1 Size
NGOs have multiple developmental objectives and microfinance meets a
subset of these. The microfinance activity is visible and has scope for rapid
growth. However, the incorporation of an NGO as a not-for-profit entity (trust,
public society) is not ideal for lending activities. When the activity is small, it
would be possible to work within this framework, but growth means
documentation, regulation, follow-up, and money management. To ensure that
there is a clear demarcation between the charitable and commercial activities
of an organization, it is necessary to keep microfinance as a distinct activity or
division. Growth needs the infusion of funds for microfinance operations. A
not-for-profit entity does not help scaling up borrowings or attract investments
from outsiders. Because there is no capital base in an NGO, leveraging is
difficult. If microfinance activities form the biggest chunk of the surplus
earning activities of an NGO, taxability of its operations is a concern.
Share illustrates the transformation of an NGO to a non-banking finance
company because of growth in size and focus on financial services.

2.1.2 Diversity
Although diversity is closely linked to size, it need not necessarily be so.
Apart from loans, MFOs would want to offer savings services to customers.
This is an essential service. It is also a source to help the loaning services
grow. Some MFOs also want to offer insurance and other services. For
instance, when SEWA wanted to work with poor women a few decades ago,
an important gap that they saw was that women did not have savings and

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products that addressed the needs of social security. For meeting these needs it
was necessary to open a bank. In most cases the first step in diversity is
offering savings services. Unlike microcredit which is not as closely regulated,
savings is very closely regulated and monitored. Not all forms of
organizations are permitted to offer savings products. Therefore any foray into
savings will trigger an NGO to examine options of transformation.

2.1.3 Sustainability
The trigger for sustainability could come from within or from outside. For
instance, donors may be prime movers by granting seed money. However,
they may want the activity to be ongoing without further investments. In the
case of BASIX in India, the Sir Ratan Tata Trust (SRTT) was willing to
extend a returnable grant for BASIX for a year to start pilot operations, with
an understanding that the grant would not be renewed or enhanced. BASIX
started its operations as an NGO, pilot tested some products and delivery
channels, and in the meantime got the commercial arm incorporated. The
operations, which were field tested, could be carried out in a sustainable
manner. There are donors who grant revolving funds for starting microfinance
activities. However, if the activities were to continue, a transformation would
be necessary.

2.1.4 Focus
Some NGOs have an exclusive entity to manage microfinance. NGOs may
want to continue other activities and microfinance diffuses the focus. There
are two instances of such a spin-off in the Indian context. The first is SEWA
Bank set up by SEWA. The bank focused on financial services and provided a
diverse range of financial services—savings, risk management, and credit. As
its insurance portfolio grew, the bank recognized that this was a specialized

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function. It has decided to offer risk products through a new organization,

Vimo Sewa.
Another instance is the setting up of the Sanghamithra Rural Financial
Services (SRFS) by MYRADA to address the needs of the self-help groups
promoted by it. Before SRFS, MYRADA was donning the role of a
―promoter‖ of microfinance, i.e., facilitating credit through promoting and
linking groups with banks. When it realized that the linking of the groups with
banks was not happening at the planned pace, it decided to assume the role of
a ―provider.‖ This involved specialized systems and procedures and a change
in the orientation of staff members. Besides, MYRADA also wanted to make
SRFS an example that could commercially provide financial services to the
poor. Thus, MYRADA decided to build an arm‘s length relationship between
the developmental work of promotion and the commercial work of the
provision of credit related services. It can be seen in this case that one of the
sub processes of transformation is spin-off of new organizations.

2.1.5 Taxation
When an NGO carries out commercial activities (microfinance) on a large
scale, it could lose its ―tax free‖ status, and this might jeopardize other
activities. Even grants may become taxable. This is a major concern for NGO-
MFOs. This also triggers a search for an alternative where microfinance could
be kept isolated.
(Upadhyayula)

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Chapter 3 TYPES OF ORGANIZATIONS AND

COMPOSITION OF THE SECTOR

Microfinance providers in India can be classified under three broad categories:

formal, semiformal, and informal. The formal banking sector constitutes the
first category while the semi-formal group consists of a variety of MFIs and
SHGs. Informal providers, on the other hand, are not legal entities and include
moneylenders and various social networks. Today, semi-formal and informal
lenders dominate the sector.

3.1 Formal
Despite the large size of the formal financial sector, its outreach to the poor
remains rather limited. The banking sector consists of 105 commercial banks,
196 regional rural banks (RRB), and 12,128 cooperative banks. Cooperative
banks primarily service rural areas and were the first to provide financial
services to the poor. Among the most prominent is the Self-Employed
Women‘s Association (SEWA) Bank, which primarily services urban women.
In March 1999, deposits held by cooperative banks totaled Rs. 677 billion,
while their loan portfolios stood at Rs. 708 billion. RRBs provide credit for
agriculture and micro-enterprise and generally target the poor. As of March
1999, their deposits stood at Rs. 268 billion while their advances totaled Rs.
113 billion.
Within commercial banks‘ priority lending requirements, 18 percent is for
agriculture, and 10 percent is for disadvantaged groups. Today, formal banks
are increasingly using microfinance to meet these targets.

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3.2 Semi-Formal
The majority of institutional microfinance providers in India are semi-formal
organizations broadly referred to as MFIs. Registered under a variety of legal
acts, these organizations greatly differ in philosophy, size, and capacity.
The least regulated institutions include over 500 non-government
organizations (NGOs) registered as societies, public trusts, or non-profit
companies. While NGOs play a crucial role in the formation and bank linkage
of SHGs, microfinance is often but a subset of their activities. Nonetheless,
many NGOs have emerged as successful financial intermediaries between
banks and apex institutions on the one hand, and individuals, SHGs, and other
groups of borrowers on the other.
Other semi-formal providers can be further classified under two groups,
mutual benefit and for-profit institutions, neither of which is constrained to
serving only the poor. Mutual benefit institutions include state credit
cooperatives, national credit cooperatives, and mutually aided cooperative
societies (MACS), many of which serve the poor. While MACS may not be
able to access government funds, their greater accountability and relative
freedom from government intervention has prompted a majority of state credit
cooperatives to transform into MACS, leading to a total number of 92,000.
The largest and most profitable MFIs in India are registered as non-banking
financial companies (NBFC). While the vast majority of the 37,000 NBFCs
target the rural and urban middle class, a few such as BASIX focus on
providing microfinance services to the poor. Unlike NGOs, NBFCs, with
permission from RBI, are able to mobilize savings and can thus provide a
wider array of services.

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3.3 Informal
In addition to friends and family, moneylenders, landlords, and traders
constitute the informal sector. While estimates of their importance vary
significantly, it is undeniable that they continue to play a significant role in the
financial lives of the poor. Data from the 1992 All India Debt and Investment
Survey (AIDIS) reveals that households in the lowest asset ownership
category owed 58 percent of their outstanding debt to the informal sector.
Other studies suggest that the informal sector accounts for as much as 84
percent of poor households‘ credit usage. While the informal sector charges
the highest interest rates on loans, these are increasingly being driven down by
competition from other microfinance providers.
(www.planetfinance.org)

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Chapter 4 REGULATORY FRAMEWORK

4.1 Microfinance Act

With the absence of a unified microfinance act uniting MFIs under a single
regulating authority with a standard set of guidelines, regulation of
microfinance in India is somewhat disjointed. MFIs are classified and
governed according to the legal act under which they incorporated. An
estimated 80 percent or more of the 2,000 MFIs in India are registered as
philanthropic societies and essentially unregulated. Others are categorized as
Commercial Banks, Cooperative Banks, Regional Rural Banks, Non-Banking
Financial Companies (NBFCs), Credit Cooperatives, or Mutually Aided
Cooperative Societies, and may be strictly supervised by the Reserve Bank of
India, NABARD, or state authorities, depending on the type of institution.
Indian microfinance associations (notably Sa-Dhan) are working on drafting a
microfinance act, which would combine the microfinance activities of all these
institutions under one aegis. Industry actors hope that such an act would
reduce confusion and allow for a better basis for comparison and exchange of
information among MFIs. A single regulating body could require standardized
financial disclosure based on international best practices. Ultimately this
should make well-performing MFIs more visible to potential investors or
donors.
A microfinance act would be additionally useful for forming consensus about
the freedom to set interest rates. Banks lending less than Rs. 2,000 to
individuals may not charge more than their prime rate, which is currently
around 10.5 to 11 percent, while the rate at which they lend to MFIs or at
which MFIs lend to clients is not regulated. Some in the industry support a rate
cap in the interest of consumer protection, but most prefer to allow MFIs the
ability to set rates as they see fit.

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4.2 Savings
MFIs registered under the Societies Act face virtually no financial disclosure
requirements. They are prohibited from legally collecting savings, but it is
widely acknowledged that many MFIs mobilize deposits on behalf of their
clients. In some cases this money is deposited in group accounts for clients in
a commercial bank, while in other cases the money is collected into a trust
which is invested in the MFI. This a gray area within the law which highlights
the need for the poor to access savings services to keep their money in a safe,
convenient place; and the need for MFIs to lower their cost of capital. There is
a synergy here which seems underutilized in the Indian context. Under Indian
regulations MFIs wishing to collect savings typically transform into NBFCs.
NBFCs must be at least one year old before they can collect deposits, and then
only if they have received at least an investment grade credit rating.8 There is
a limit on the terms of deposits that NBFCs can accept: the interest rate paid
on deposits cannot be more than 11 percent and no deposits for less than 12
months or more than 60 months can be accepted. However, with a minimum
capital requirement of Rs. 20 million and a lengthy application process, this is
not an easy leap to make—and even then the authorization to collect savings is
only granted by special permission from RBI. In fact most requests are denied
and RBI is thought to purposefully drag its feet on the applications so as to
limit the number of NBFCs it is required to oversee. Many in the industry
point out that India suffered a number of NBFC failures in recent years, which
explain RBI‘s reluctance to grant licenses. But they note that microfinance
institutions were not among those that collapsed, and argue that with adequate
supervision steps could be taken to protect the poor and their deposits. Others
feel that savings might be better approached through alternative models, such
as credit unions.

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4.3 Regulations on Investment

Even without the ability to collect deposits some MFIs are finding it
worthwhile to transform into NBFCs because it allows them to raise equity.
Raising equity, too, is subject to stringent regulations which many find
restrictive. Minimum foreign investment in an NBFC is set at US$500,000—
and must be matched by an equal amount of domestic equity as regulations
prohibit majority foreign investment (unless a wholly owned subsidiary is
formed, at much greater cost). It is generally agreed that raising that amount of
money in India is sufficiently difficult to effectively prohibit foreign
investment in MFIs. Given this limitation, some are searching for
modifications to Indian banking regulations that could stimulate domestic
investment. Some have suggested the implementation of the concept of the
limited liability partnership in India, protecting investors from liability to the
extent of their investment. A further step would be to allow (domestic) venture
capital funds and NGOs to invest in NBFCs. Finally, curiously, RBI in 2002
outlawed even borrowing from abroad—including from donor agencies. This
limits MFIs‘ access to capital at preferential rates, a vital source of funds, and
a potential source of quasi-equity, preventing them from leveraging more
capital. With domestic loan rates starting at over 8 percent, borrowing abroad,
even at commercial rates, can be of benefit to MFIs.
MFIs also face restrictions on the receipt of foreign donations. In order to
receive overseas grants they need permission from the Ministry of the Interior
in accordance with the Foreign Contribution Regulation Act. In general, it
takes about two to three months to get a temporary permit under this
regulation and the NGO is required to reapply for it every year for three years
until it is granted a permanent permit.
(www.rbi.org.in)

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Chapter 5 INCENTIVES / DISINCENTIVES FOR

INFORMATION SHARING

5.1 Current Attitudes to Disclosure

The lack of a single legal structure governing MFIs has hampered the level of
disclosure in the sector. MFIs are currently registered under a variety of legal
acts, all of which have different reporting standards. To further complicate
matters, microfinance is often only one part of the organization‘s activities but
there are no requirements for separate reporting. M-CRIL, the leading
microfinance ratings agency in India, cites difficulties in identifying the
microfinance component of an organization‘s operations as one of the most
difficult aspects of conducting a rating. The cost of obtaining a rating is
approx US$10,000 but to this point a subsidy from CGAP, means that the MFI
is typically only responsible for 25 % of the total cost. However, for some
smaller MFIs even the reduced cost can be a significant barrier to having a
rating conducted. Large scale MFIs that have already obtained international
investment, such as AP-based BASIX and SKS, tend to have excellent levels
of reporting which go far beyond the basic legal requirements. However, there
is little or no incentive for small MFIs to increase their level of public
disclosure because their operations are so small that they do not currently seek
access to either international capital or large quantities of domestic capital.
Medium-sized MFIs fall somewhere between these two categories and Sa-
Dhan reports that there are approximately 50-60 mid-sized MFIs that are on
the verge of being large enough to want to increase public disclosure in order
to seek outside money. It is already the case that mid-sized MFIs obtaining
loans from second-tier organizations such as CARE India‘s CASHE program
or FWWB must maintain MIS systems and provides quality financial reports.

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5.2 Potential for New Sources of Funding

At present the potential for new international sources of funding in India
appears to be quite limited. The 40 percent priority lending target that exists
for domestic Indian banks has given them a strong incentive to invest in the
microfinance sector. This has led to some of the larger banks, such as ICICI,
using MFI client portfolios to channel funds directly to borrowers. SKS, one
of the largest MFIs in India, sees this model as potentially becoming the
dominant means of providing lending to the poor. The increasing involvement
of large commercial banks in the sector is likely to enhance the levels of
disclosure as MFIs compete to offer their client portfolios to the banks.

5.3 Proposed Microfinance Reforms

Sa-Dhan and others are currently working on a proposed microfinance act
which could significantly enhance information sharing in the sector. The act
would provide a single legal structure to register microfinance organizations
with unified reporting standards. Concern has been expressed that more
stringent regulations could hurt the microfinance sector in the short-run. Under
a standardized reporting environment, many MFIs could look unattractive as
they currently run significant deficits and while donor agencies may accept
this and understand the difficulties of scaling up small businesses, commercial
lenders may not. Despite these concerns, enhanced regulations and reporting
standards will almost certainly help the sector in the long-run.

5.4 Investors’ Requirements

Investors would like to see more unified reporting and accounting standards.
At present MFIs follow many different local accounting standards, making
comparisons of different organizations very difficult. M-CRIL is working to
promote CGAP accounting guidelines but given the sheer size and diversity of

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the sector this will be a difficult process. At present an M-CRIL rating is based
on the MFI‘s performance across 50 parameters focusing on the areas of
governance, management and financial performance. The governance section
rates the composition of the board, the decision-making process and the
formulation of business plans. The management section rates the process for
conducting staff evaluations and meetings. In the financial performance
section M-CRIL attempts to convert the MFI‘s accounts to CGAP standards to
assess portfolio size and quality but, as mentioned above, this can be difficult
given the discrepancies in local accounting practices. Sa-Dhan has finalized a
set of performance indicators for MFIs which it hopes will allow them to
better meet investors‘ information requirements. These focus on measures of
administrative efficiency, operating cost ratios, client-to-staff ratios, current
repayment rates and portfolio-at-risk over 60 days. In assessing and rating
SHGs NABARD looks at factors such as the age of the SHG, the regularity
with which meetings are held, the democratic pattern of meetings and the
regularity of savings and internal lending. Many investors are interested in the
social returns to microfinance as well as the financial returns. Studies which
examine which sections of society an MFI reaches and the wider effect which
its operations have on local communities could have a significant bearing on
investment decisions. Large MFIs such as BASIX and SKS conduct studies
assessing the effect of their work on poor communities and extending such
practices to mid-sized MFIs could potentially encourage greater investment in
the sector.

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Chapter 6 INVESTMENT CLIMATE

6.1 The Demand-Supply Gap in the Provision of Microfinance Services

There is a widespread view that enough domestic capital is available in India
to cover the current demand for loans from MFIs. Government involvement in
the sector has guaranteed easy access to funds for many MFIs through
subsidized loans provided by state development finance institutions such as
NABARD and SIDBI, as well as by the commercial banking sector. The 40-
percent priority sector lending mandated by RBI has played a key role in the
involvement of banks in microfinance. The fact that about 75 percent of all
banking assets in India are state owned has also contributed in a major way to
the scale of bank lending to SHGs. Commercial loans from domestic lenders
are easily available for large MFIs with good capital-adequacy ratios.
However, only 10 to 20 percent of potential microfinance clients in India are
presently served and the consensus view in the sector seems to be that the
demand-supply gap in microfinance can not be closed by existing MFIs
because many, particularly the younger and smaller organizations, lack the
institutional capacity to expand. The current capacity-building efforts from a
large number of government agencies, local and international aid institutions,
apex financial institutions and potential banking partners, however, guarantee
that an increasing number of well-managed MFIs will be demanding financing
in the near future.

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6.2 Commercial Investment Trends

While the largest institutional investors in microfinance in India, NABARD
and SIDBI, are government agencies focusing on SHG bank linkage
programs, major private commercial banks have entered the sector with new
models of investment and are expected to become key players on the supply
side of the market.
ICICI Bank, the largest private bank in India, pioneered large-scale private
commercial bank investments in microfinance. The ICICI business model is to
utilize MFIs as bank agents in the channeling of micro loans to MFI clients.
ICICI uses such arrangements to substitute for opening branches in remote
rural areas, which is very expensive and subject to heavy regulatory obstacles.
Under this type of partnership agreement, the micro loans appear on the books
of ICICI, while MFIs receive a stable source of funds. ICICI requires partner
MFIs to deposit a cash collateral equal to up to 10 percent of the loan amount
(with the exact percentage depending mostly on the portfolio-at-risk of the
MFI). While initially the interest of commercial banks in microfinance was
stimulated by the priority sector lending requirement, with the stable
expansion of micro-lending activities over the last two decades banks are
starting to realize that microfinance is a profitable and commercially viable
business. Some of the largest domestic banks such as ICICI, HDFC, and UTI
have already made their entry into the sector, and some foreign banks
operating in India such as ABN-Amro, Citibank, and ING Vysna have
expressed interest.

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6.3 Opportunities and Issues for Investors

The potential role for foreign investment in the microfinance sector in India is
perceived by major market participants to be the provision of loan guarantees
and equity or quasi-equity. The provision of loan guarantees will ensure better
borrowing terms for MFIs because guarantees will relieve MFIs from the need
to internalize the cost of loan default through higher interest rates. Equity and
quasi-equity investments will help MFIs build up their capital base and be in a
better position to leverage large domestic commercial loans. However, as
discussed in the regulation section of this report, regulatory obstacles to
foreign equity and debt investments in MFIs in India are nearly prohibitive,
leaving loan guarantees as perhaps the most promising vehicle for foreign
investment at present. While domestic commercial capital is available, most
MFIs are not very attractive for equity investors because of their low
profitability margins and the difficulty of pulling equity out of an MFI that is
not profitable. (Though there are no legal restrictions on pulling money out of
India investors may find it difficult to find investors willing to purchase their
shares of an unprofitable MFI.) Furthermore, the lack of uniform financial
reporting by MFIs substantially increases the transaction costs to potential
investors.

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6.4 New Developments: Securitization

Most of the players in the sector therefore see international financing mostly
as a means of developing new models and products, such as loan portfolio
securitization and micro-insurance. ICICI Lombard, in cooperation with
BASIX, for example, is currently running a pilot program in providing
weather-indexed crop insurance. ICICI bank, in partnership with SHARE (a
leading MFI), pioneered the securitization of the micro loan portfolios of
MFIs. Under this type of agreement, the bank purchases an MFI‘s portfolio
and re-sells it as a packaged financial product to interested investors (such as
other banks that can register such a security as a priority-sector investment). In
a securitization deal, the MFI is still responsible for collecting the micro loans
from its clients but the risk of repayment default is not backed by any of the
MFI‘s assets. As collateral, ICICI uses a first-loss default guarantee financed
by the excess spread on the MFI portfolio (which is the difference between the
rate of return expected by the bank on the microfinance portfolio and the rate
charged by the MFI to its clients) or provided by a third party, such as the
Grameen Foundation funding of the guarantee in the SHARE deal. Micro loan
securitization benefits MFIs in several ways: it decreases their cost of funds,
provides a new source of off-balance sheet funding, and thus allows an MFI to
expand lending operations.

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Chapter 7 SHOULD MICROFINANCE INSTITUTIONS GO

PUBLIC

Having an IPO is inevitable beyond a certain size for any corporation because
when you have to raise capital say beyond Rs 300 crore – Rs 400 crore per
annum there is virtually no other source and you have to go to the capital
markets. So it is inevitable that anybody who grows will have to have an IPO.
The stock markets basically reward steady performance, good governance,
transparency and so on, you have companies like the HDFC which have for
decades raised money and have done very well for their customers and so
many others in other sectors, so as seen there is no connection between having
to reduce the service level to the customers and also being listed on stock
market.

7.1 Employee stock option plan

First thing we need to do is to understand that if somebody is working with the
poor doesn‘t necessarily make that enterprise a social enterprise. For example
as in Hero Cycles, Mr Munjal began by selling bicycles to the poor. There are
companies like Unilever where the sachet culture was created specifically
because the poor was a potential target market and they created a product that
could be appealing to the poor. So just creating products and services that can
work for the poor doesn‘t necessarily mean that those become social
businesses in fact those are pure commercial businesses and nobody has any
problems with them.
So no one is accusing Mr Munjal or Unilever or anybody else who are
targeting products for the poor of being somehow morally compromised. The
issue comes up when it is said that they are not just a pure commercial
enterprise, but that they are a social enterprise and then the behaviour seems to

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suggest that those are not consistent which means we need to ask the question
that there is more to a social business than just the profit motive and if so what
are those things and how does the enterprise actually protect and promote
those and here‘s where the issue comes. When somebody wants to set up as a
social business and harness the part of the market, there are tremendous
benefits that come from harnessing the part of market innovation, capital,
scaling the ability to recruit people and so on.
But it comes at a price and that price is that the markets are driven by money
and wealth creation and that price we need to recognize acknowledge and
somehow protect it because if the door is opened for the social enterprise then
the fear is that this double edged sword of the market can overwhelm the
social intent and that‘s where the issue comes up. So one example of this can
overcome is in the question of ESOP‘s. It‘s a very normal practice in a
commercial enterprise, there‘s nothing wrong with saying that somebody has
equity and then when you hire a new CEO you give them stock options but
imagine what happens in a social enterprise when that takes place, the CEO
gets stock options, the next rung of management says why should I come and
work every day till I get a skin in the game and pretty soon you have the entire
enterprise actually oriented towards share price and their mark to market value
and their wealth creation and it is not that this happens but the fear is that
culture can erode the social component of the enterprise not as market driven
aspects which are a good thing.

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7.2 Interest Rates

The issue of interest rate is something that micro finance institutions have to
constantly answer for and basically in a nation where 70% - 80% of the
banking assets are in the public sector and public sector banks are able to
subsidize loans at the lower end of the market. For example now in
Maharashtra framers will get 0% crop loans so compared to that even a 6%
loan would look usurious but if you are talking of realistic pricing then the
thing to look at is what MFI‘s are doing and while it is true that politicians and
even left intellectuals — kind of people keep attacking MFI‘s but when you do
the maths with them they concede. So we have got to make a choice as a
nation between perpetually subsidizing certain sectors whether it is power or
Kerosene or credit or building a robust set of enterprises which are self
sustaining and by which way they compete with each other which will bring
down even their margins. So right now what you are seeing incase of SKS is
the pioneer getting an extra-normal profit and there is a curve which will go
down over a period of time and by the time the 5th or 6th IPO happens it will
be a stable equilibrium and that‘s how all sectors get built so we think that we
are sort of exaggerating the point because this sector is suppose to take care of
working with the poor.

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7.3 Corporate Governance

The bar that needs to be placed on micro finance institutions is an extremely
high on corporate governance, there are few things that are basic tenets in any
industry but might be more applicable or more acutely focused for the micro
finance sector. First is transparency on the complete pricing, cost curves, the
total fee structure so that you get to understand the economics of this. If you
ask why are the interest rates charged so high then the answer I think is that it
gets published out into the public domain so that the public at large whether its
media, whether its regulators, whether its investors get to understand the
structure of cost of micro finance institutions. That has two benefits; one is it
helps to focus attention on one of the critical components of cost which is
operating costs, it‘s in double digits. Overtime, as scale becomes evident one
of the advantages of MFI‘s that can scale is that those operating costs go down
and that can be tracked. The other is very importantly independent members of
repute on the governing board of the micro finance institutions that‘s going to
be a critical aspect of transparency and accountability. That would be a good
signal for MFI‘s to send to the investor community as well as regulators and
media.
(CNBC-TV18, 2010)

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Chapter 8 MFIS NEED THE MARKET TO DO THEIR JOB

Listing trend isn‘t a betrayal but a natural evolution, say practitioners.

Three years ago, Compartamos Banco, the Mexican microfinance institution
(MFI) and bank, charted an unprecedented course. It went for an initial public
offer (IPO) and got listed on the Mexican stock exchange.
Today, its stock is traded, fetching good returns. And, the company continues
to do what it has been doing since its origin in 1990 — giving small loans to
low-income women to help them start enterprises and get out of poverty.
Mohammad Yunus, the celebrated parent of microfinance, had criticised the
IPO. It made little difference either to Compartamos, which continues to call
itself ‗Tu especiallista en microfinanzas‘, or to others now preparing to follow
its footsteps.
In India, SKS Microfinance has pioneered the entry of MFIs into the stock
market. The firm, which lends to the rural poor, especially women, giving Rs
2,000 at a time, raised around Rs 1,650 crore through its IPO, which was
subscribed 13.6 times.
Also in the queue are MFIs such as Share and Spandana, while Basix and
Bandhan have expressed their desire to toe the SKS line the moment their net
worth allows them to do so in a year or two. The trend has triggered fears that
MFIs in the country will set aside their pro-poor agenda and start raising
interest rates to ensure that investors reap more profits.

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8.1 Reasons
SKS has said the amount raised from the IPO will fund its expansion, as it will
now be able to open more branches and introduce new products. While
Compartamos, with just one million customers, was charging 86 per cent
interest at the time the IPO in 2007, SKS, with 60 million customers, is
charging 28 per cent.
Major MFIs in the country feel that fears about the poor being sidelined by
investors are exaggerated. The example of Compartamos itself is being cited
as an example of how IPOs do not turn MFIs into monsters.
They say MFIs in India have little alternative but to go for IPOs if they are not
to remain stunted in size and their range of products. "It is inevitable," says
Vijay Mahajan, the founder of Basix, a non-banking finance company . "If an
MFI like SKS, with Rs 4,000 crore outstanding, were to drastically reduce its
pace of growth to, say, 50 per cent, it will still need additional equity of about
Rs 2,000 crore. Is there anyone who will give the money once the equity
requirement goes beyond $100 million?" he asks.
"It is a myth that companies starts maximising profits after listing," he adds.
He says shareholders are not going to decide the company‘s agenda. "In the
case of SKS, for instance, the founder, Vikram Akula, has zero shares and
only some stock options. Others are private investors. But that does not mean
Akula has no say. Once an organisation becomes large, there are so many
stakeholders. It is then an interplay of all these.
And, one lists the company to raise capital. Out of the resources, first one pays
employees and taxes, and then you get a profit," he says.
He cites the example of HDFC. "It has been trading for three decades but it
still is a model in whatever it does."
He says Basix would also like to get listed once it achieves a net worth of
about Rs 400 crore, likely in a year.

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Brij Mohan, who has been on the board of many MFIs, says he once opposed
the idea of MFIs seeking capital from the market. However, he now feels it
may not really harm the poor clientele of MFIs.
"We should wait and watch to see if stock markets help MFIs increase profits
of investors or their poor customers. It is worth seeing if the MFI increases
rates to help investors or achieves profits through sheer scale," he says.

8.2 Study valuation

A study by CGAP, an investor in Compartamos, examines the ethical question
of the Mexican MFI‘s IPO and gives it a clean chit.
It said if it charged 86 per cent interest, it was not because it wanted more
profit but to meet costs, given its small customer base. And, if its funds
doubled at the time of going for an IPO, it was not because of anti-poor
policies but because it had started taking deposits.
It said the huge profits Compartamos made from the IPO (36 per cent) went
mainly towards its running costs. These were high due to the small customer
base and the loans.
The promoter continues to have an edge over others on share equations and the
MFI‘s goals and concerns remain unchanged, it concludes.
Similarly with SKS, which sold 16.8 million shares and raised Rs 1,650 crore,
the promoters still have an edge in the matter of ownership. And they always
will, assert Mahajan.
Chandra Shekhar Ghosh, founder of Bandhan, echoes the views of Mahajan.
He says domestic finance is too small compared to the growth of the MFI.
In fact, the biggest equity funding so far by the government was to Bandhan
by the Small Industries Development Bank of India (Sidbi), a measly Rs 50
crore. The second biggest was Rs 18 crore to Basix.
If the government were to give a Rs 10,000 crore equity fund to Nabard and

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Sidbi to pass on to MFIs, and if MFIs were allowed to take deposits, things
would be different, said Ghosh. The latter alone would cut the cost of funds by
half and bring down interest rates, he says.
Bandhan is expecting a fresh equity infusion of Rs 100 crore from a foreign
investor that will take its net worth to Rs 400 crore. "We will be in a position
to look at the market option then," he said.
SKS, which serves seven million customers across 19 states, has seen an
expansion from 80 branches in 2006 to 2,000 this year. Revenues have grown
at a compounded annual growth rate of 213 per cent from 2006 to 2010, while
profits have shot up 264 per cent.
An expert on microfinance said: "The discourse on the IPO is ignoring the
reasons which are driving MFIs to the capital market. Whether it is for good or
bad, the lack of funds that is driving MFIs in search of it should be fixed first."
(Menon, 2010)

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Chapter 9 LIVELIHOOD THROUGH SHGs

The institutionalization of self help groups (SHGs) and their recognition by the
banking system as a saving and effective credit delivery mechanism in 1990s
was an important step in financial inclusion of the relatively less banked or
unbanked rural areas. More so, because it was built on a premise that the SHG
mechanism would instill credit discipline in the members and one day
empower them to become individual clients of banks. What followed was a
proliferation of the SHG Bank Linkage Programme (SHG-BLP) to
unprecedented heights (albeit not equitable). After the pilot testing phase from
1992 to 1995, the Reserve Bank of India advised banks that lending to SHGs
should be treated as a normal banking activity in 1996. This led to the second
phase (mainstreaming) of the programme as banks started financing SHGs on
a relatively larger scale. During 1998-99, there was a quantum jump in the
number of SHGs that had availed of loans from the banking system to 18,678
from 5,719 during 1997-98. This was the beginning of the growth and
expansion phase (see graphic). As on March 31, 2009 42.24 lakh SHGs had
loans outstanding with the banking system, which included 9.77 lakh SHGs
under Swaranjayanti Gram Swarozgar Yojana (SGSY). The loan outstanding
to the banking system, of non SGSY SHGs, was Rs 16,818 crore

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9.1 Growth of SHG—Bank Linkage Programme

The growth period there was also steady rise in the quantum of loans being
received by SHGs from banks. The average loan size of SHGs had increased
from Rs 11,333 in 1992 to 76,128 in 2009 (Table 1). However this still
translated into a meager Rs 5,856 per member if we assume that the bank loan
was equally divided amongst an average of 13 members. The average loan
disbursed per SHG has hovered around Rs 70,000 for the last four years
except during 2006-07 when it was barely Rs 59,420. The SHG-BLP has
emerged as the major microfinance initiative in India and most of the SHGs
which have a loan outstanding from the banking system have come of age and
are attempting to graduate from consumption stage to micro-enterprise. But it
is obvious that the increase in bank loan over the years is not sufficient for
starting a profitable and viable micro enterprise. Assuming incremental capital
output ratio (ICOR) of 4:1, the loan amount of Rs 5,856 per member was
expected to generate income of Rs 1,450 which can be adjudged as abysmally
low.

Although such small value loans may be enough, in the initial stages, to
support small trading activities like vegetable and fruit selling. Some other

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challenges ahead in the SHG-BLP includes equitable expansion of the

programme beyond southern states, graduating from micro-credit to micro
enterprise, improving internal control systems, reducing cost to clients, use of
technology etc. Against this background an attempt has been made to look into
some of the issues relating to livelihood and micro-enterprises for SHG
members.

9.2 Concepts of microfinance and livelihood

According to Marguerite S Robinson, author of ‗The Microfinance
Revolution: Sustainable Finance for the Poor‘ microfinance refers to small-
scale financial services — primarily credit and savings—provided to people
who farm or fish or herd; operate small enterprises or micro- enterprises where
goods are produced, recycled, repaired or sold; who provide services; who
work for wages or commissions; who gain income from renting out small
amounts of land, vehicles, draft animals or machinery and tool; and to other
individuals and local groups at the local levels of developing countries, both
rural and urban.‖ Thus, the core and focus of microfinance is livelihood
creation. Vijay Mahajan, Mona Dikshit and Kaushiki Rao define Livelihood as
―a set of activities a household engages in on a regular basis in order to
generate adequate cash and non-cash income to maintain a minimum desired
standard of living, both on a day-to-day basis and over a longer period of
time‖. Therefore Concept of livelihood for SHG members could be viewed in
terms of declining share of consumption loans in total loans and resorting to
income and gainful employment generating activities.

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9.3 Issues related to livelihood

The graduation of SHG members from ―borrowing for consumption‖ stage to
borrowing for starting or supporting livelihood is a natural progression in the
credit profile of the SHG members. An impact evaluation study conducted
during 2006-07, covering 310 members from 56 matured SHGs (which were
at least three years old) in Chittoor, Nizamabad and Warangal districts of
Andhra Pradesh revealed that 70% of the members had initiated or supported
Income Generating Activities (IGA) but only 28% of them had ventured into
micro-enterprises (MEs; An ME implied an IGA by creation of an asset with
or without credit support). These enterprises were stand alone or family owned
MEs like dairy, pickle shop, flour mill, etc. Average loan amount availed by
members with MEs and IGAs was Rs.24,089 and Rs.17,171. The net income
accrued and the employment generated through the ME households were
higher by 70% and 81% respectively as compared to non- IGA households
who availed the average loan of Rs.8,210 only.
Evaluation studies on micro-entrepreneurship among SHG members in
Gujarat and Jammu & Kashmir also revealed that with the passing of time,
SHG members shifted from consumption to production loans for setting up
IGA/ME. In Gujarat, the percentage of bank loans utilised in asset creation
improved from 8% in the first linkage to 67% by the fifth linkage. The
percentage of members graduating to micro-enterprises activities included
dairy, flour mill, rickshaw, grocery shop, brick klin, mandap decoration, etc.
varied between 29% in Gujarat and 32% in Jammu & Kashmir. IGA
household undertook purchase of inputs for farm enterprises, mushroom
cultivation, etc., and the proportion of such members was 35% and 39%
members in Gujarat and Jammu & Kashmir, respectively.
In certain quarters it is viewed that access to financial services, including
credit may enable rural poor to start or expand a micro-enterprise and will

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allow them to rise above poverty. Experience shows that microfinance plus is
a necessity and in successful endeavours, back- ward-forward linkages were
made available to the group members. Graduation of SHG members into
entrepreneurs requires intensive training and handholding on various aspects
like understanding of markets, potential mapping, fine tuning of skills and
entrepreneurship management. In Gujarat and Jammu & Kashmir, absence of
rotation in leadership, declining membership of SHG over time, lack of
product diversification, use of low level technology, inadequate infrastructure,
etc., were some of the constraints identified in promotion of MEs. While in
Andhra Pradesh, absence of strong support system for supply of raw material,
technology upgradation, capacity building of entrepreneurs and marketing
arrangements were the major constraints.

9.4 NABARD’s Initiatives in Livelihood creation through SHGs

9.4.1 Pilot project on Micro-Enterprises
NABARD launched a Pilot Project for promotion of MEs among members of
mature SHGs in 2005-06 in nine districts across nine states of the country to
understand the processes which might facilitate the preparation of a blue print
for promotion of MEs among members of matured (more than three years old)
SHGs was employed by MART.

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Under the pilot project, promotion of MEs was proposed to be undertaken

through suitable identified NGOs having potential to function as Micro-
Enterprise Promotion Agency (MEPA) with the overall technical assistance
for the project from Marketing and Research Team (MART). 3M model which
was employed by MART addressed three basic needs of micro finance, micro
market and micro planning to help poor in starting economic activities for
livelihood promotion with the help of NGOs / development agencies. The
major findings of the Pilot Project were as follows :
a. 77.45% of the micro-entrepreneurs received training in farm and off farm
sector / activities.
b. Number of IGAs/ MEs started covered 64% of the members trained (7,177).
Evaluation studies of Nabard also revealed similar if not the same results.

c. 98% of the members which started IGA / Micro Enterprises were credit
linked with banks. The average amount of credit per ME across the nine States
was Rs.17,080.
d. Choice of traditional activities was encouraged in order to build on existing
capacities and capabilities. Identified SHG members undertook training for
improvement of skills and started enterprises in traditional activities which
they have been pursuing prior to the commencement of the ME Pilot Project.
These included mainly farm and off-farm activities (dairy, goatery, vegetable
cultivation etc.) which constituted approximately 77% of the micro-enterprises
promoted.
e. As compared to Farm Sector fewer Non Farm Sector Activities were taken
up as they required more sophisticated skills, markets and marketing skills.

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9.4.2 Micro Enterprise Development Programme(MEDP)

Further, during 2006, the Micro Enterprise Development Programme (MEDP)
was launched for development of sustainable livelihood for SHGs. The MEDP
are short duration (3 to 13 days), location specific programmes on skill
upgradation / development for sustainable livelihoods / venturing micro-
enterprises by matured SHG members. It is a supplemental effort to upgrade/
develop skill and preliminary business acumen of SHG members in order to
enable them to cope up with the issues in relation to successful enterprise for
income generation/ livelihood.

9.4.3 Support to SHG Federations

Along with the increase in number of SHGs, a few basic and next generation
issues related to SHGs have been posed for maintaining the quality of the
SHGs, their continued dependence on the SHG promoting institutions,
covering other financial services than thrift and credit and making a transition
from availing credit to higher levels of livelihood activities. Some of the state
governments and NGOs have resorted to promoting federations of SHGs to
address these issues through empowering the SHGs and making them more
self reliant. There are examples which have proved that SHG Federations
could play an important role in nurturing of groups, in increasing the
bargaining powers of group members and in livelihood promotion.
Considering the emerging role of the SHG Federations and their value addition
to SHG functioning, Nabard supports the Federations of SHGs on model
neutral basis and on merits of the proposal.

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9.4.4 Micro Finance Development and Equity Fund (MFDEF)

As per announcement made in Union Budget for 2010-11, Government of
India has enhanced the corpus of Micro Finance Development and Equity
Fund (MFDEF) from the existing Rs 200 crore to Rs 400 crore in the ratio of
2:2:1 by Nabard, RBI and Commercial Banks. The Fund is housed and
managed by Nabard. Nabard has planned to upscale and consolidate the SHG-
Bank Linkage Programme and microfinance interventions.
(NABARD, April-May-June 2010)

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Chapter 10 MICROFINANCE SECTOR RISK FACTORS

10.1 Political Risk

Legislative elections in April and May 2004 shifted control of India‘s
parliament to the left. Because the winning party, Congress, and its allied
parties in the United Progress Alliance, failed to gain a majority of seats, they
must court the support of the Indian Communist Party (CPI-M), which
supports greater government controls over the economy and opposes any
relaxing of the limits on foreign direct investment. This could present a risk of
greater government interference in the microfinance sector, for example by
imposing interest rate caps which could hinder the viability of MFIs facing
high transaction costs.
However, players in the microfinance industry seem to feel that the risk of such a
cap is quite low. In addition, RBI confirmed in August, 2004 that, ―The interest
rate applicable to loans given by…micro-credit organizations to Self
Help Groups / member beneficiaries would be left to their discretion.‖
The positive side of the new government is that as a populist coalition they are
believed to be quite supportive of microfinance as a poverty alleviation and
development tool, and therefore may be willing to support positive legislative
changes such as a uniform microfinance act. In general, the Indian central
government seems to pose little risk to the microfinance sector. However,
since the Indian political system is quite decentralized, the laws and
governments of the different states can greatly affect the climate for
microfinance. Some state policies have been extremely supportive of
microfinance, while others, primarily due to populist political pressures, have
undermined the sector at times. In addition, states that maintain only a weak
rule of law may present a riskier operating environment for both MFIs and
micro-enterprises.

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10.2 Economic Risk

Following several years of strong economic growth and technological
development, India‘s new government is not expected to make any radical
shifts in economic policy. However, the government is likely to increase social
spending, which some analysts believe could ―hamper India‘s ability to
service its foreign debt and pressure interest rates upward.‖10 Inflation, which
remained quite steady in the range of 3.7 to 4.7 percent per annum from 1999
through 2003, is currently forecast11 to be 6.5 percent for fiscal year 2004-
2005, and peaked at 8.3 percent in August, 2004. This is believed to be due
largely to increases in the price of fuel and manufactured goods.

10.3 Currency Risk

Although it is important for international investors to consider the costs
associated with exchange rate fluctuations, India‘s currency risk should not be
especially high. India‘s exchange rate can be characterized as a managed float
in relation to the US dollar. That is, RBI intervenes in foreign exchange
markets to keep the exchange rate stable. In addition, as it is possible to
purchase a one year forward contract on Indian currency in liquid markets, it is
possible to hedge against currency risk during this period.

10.4 Geographical Concentration

The fact that most Indian microfinance activity (in terms of number of SHGs
and MFI size and speed of growth) is concentrated in the southern states – it is
estimated that 85 percent of all Indian microfinance activity is located in the
South, with anywhere between 50 and 70 percent in Andhra Pradesh alone -
means that the risk to investors from Indian MFIs of region-specific shocks
such as natural disasters or political unrest is largely covariant. Indian lenders
to MFIs, such as ICICI bank and Friends of Women‘s World Banking, are

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explicitly trying to increase the number of non-southern MFIs in their

portfolios in order to minimize their exposure to regional concentration risk. In
addition, some MFIs have begun to encourage their clients to engage in
diverse livelihood activities and to provide micro-insurance as a way to
minimize the covariant risks that they themselves face due to geographical
concentration.

10.5 Saturation and Unhealthy Competition

The only two states in India which could be considered saturated in the
microfinance market are Tamil Nadu and particularly Andhra Pradesh. Many
in the industry do feel the level and nature of MFI competition in Andhra
Pradesh is unhealthy and could potentially lead to unsound lending and
reduced portfolio quality due to clients borrowing from more than one
institution. Some MFIs actually use the information that a potential client
already has a loan from a reputable MFI as a reason to make another loan to
them. The fact remains that given the absence of credit bureaus MFIs cannot
check on the credit status or history of a potential clients in a market where
competition may be pressuring them to lower their screening standards
anyway.

10.6 Institutional Risk

10.6.1 Governance
Most successful Indian MFIs are extremely dependent on key energetic and
effective leaders, and many do not have sound governance policies at the
board level. This presents a great risk to the future success and viability of the
organization in the absence of those original leaders. However, some large
MFIs have recognized this problem and taken active steps to improve their
governance policies.

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10.6.2 Managerial Skill

Most Indian MFIs are excellent at doing grassroots work and have a deep
understanding of the poor clients they serve. However, many organizations
and most new entrants to the field lack the financial experience and technical
ability to properly manage invested funds. Therefore, one of the key issues for
someone thinking about investing in an Indian MFI should be to look at the
financial skill level of the managerial staff, as well as the quality of the
organization‘s MIS system. It cannot be assumed that a high repayment rate
indicates that an organization is prepared to make good use of new investment
funds or has a sensible plan for expansion.

10.6.3 Accounting and Financial Reporting

Raters and financial analysts feel that the lack of common and strong
accounting and financial reporting regulation and monitoring for MFIs allows
some of them to hide poor financial performance, exacerbating the risk of the
emergence and continued operation of irresponsible MFIs. This situation
heightens the risk of institutional fraud, manipulation of portfolio-at-risk, and
underperforming assets, particularly for unregulated MFIs which have no
financial reporting requirements.

10.6.4 Volatility
It is generally agreed that repayment rates in the Indian microfinance sector
are quite high (over 90 percent)12 and fairly stable (in part because of family /
household risk-sharing over multiple sources of income which can be used for
loan repayment), and that therefore the sector presents a good opportunity for
safe investment.

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Chapter 11 THE FUTURE OF MICROFINANCE IN INDIA

However, opinions differ as to how much the health of the microfinance sector
tracks with movements in the rest of the economy. On one hand, those in the
industry generally believe that since microfinance clients and their micro-
enterprises seem to be so isolated from the mainstream economy, MFIs and
micro-enterprises are not likely to be substantially hurt by downturns in the
business cycle. One banker called the demand for the goods and services
offered by micro-enterprises virtually ―recession-proof.‖ It then seems
possible, however, that as microfinance clients and institutions become more
linked with mainstream and formal markets, which appears to be the trend,
their financial performance could become more linked with the performance
of the macro-economy in the future.
On the other hand, some argue that the fortunes of the microfinance sector and
the macro-economy are already linked, due to the belief that many
microfinance clients repay their loans at least in part with daily wages. If a
significant amount of the money clients use to repay their micro-loans does in
fact come from daily wages, then clients may default more frequently when
they face lower demand for their labor during economic downturns, and
movements in the microfinance sector could appear to be pro-cyclical.

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11.1 What is so exciting about Indian Microfinance?

A Task Force on Microfinance recognised in 1999 that microfinance is much
more than microcredit. It stated: "Provision of thrift, credit and other financial
services and products of very small amounts to the poor in rural, semi-urban
and or urban areas for enabling them to raise their income levels and improve
living standards". The Self Help Group promoters emphasise that mobilising
savings is the first building block of financial services. For many years, the
national budget and other policy documents have almost equated
microfinance with promoting SHG links to the banks.
The Central Bank notification that lending to MFIs would count towards
meeting the priority sector lending targets for banks offered the first signs of
policy flexibility towards MFIs. One could argue that MFIs are small and
insignificant, so why bother. The larger point is about policy space for
innovation and diversity of approaches to meet large unmet demand. The
insurance sector was partially opened to private and foreign investments
during 2000. Over 20 insurance companies are already active and
experimenting with new products, delivery methodologies and strategic
partnerships. Microfinance programmes have rapidly expanded in recent
years.
Membership of Sa-Dhan (a leading association) has expanded from 43 to 96
Community Development Finance Institutions during 2001-04. During the
same period, loans outstanding of these member MFIs have gone up from
US$15 million to US$101 million.
The CARE CASHE Programme took on the challenge of working with small
NGO-MFIs and community owned-managed microfinance organisations.
Outreach has expanded from 39,000 to around 300,000 women members over
2001-05. Many of the 26 CASHE partners and another 136 community
organisations, these NGO-MFIs work with, represent the next level of

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emerging MFIs and some of these are already dealing with ICICI Bank and
ABN Amro.
In addition to the dominant SHG methodology, the portfolios of ‗Grameen‘
replicators have also grown dramatically. The outreach of SHARE Microfin
Limited, for instance, grew from 1,875 to 86,905 members between 2000 and
2005 and its loan portfolio has grown from US$0.47 million to US$40
million. Since banks face substantial priority sector targets and microfinance
is beginning to be recognised as a profitable opportunity (high risk adjusted
returns), a variety of partnership models between banks and MFIs have been
tested. All varieties of banks - domestic and international, national and
regional - have become involved, and ICICI Bank has been at the forefront of
some of the following innovations:
Lending wholesale loan funds.
Assessing and buying out microfinance debt (securitisation).
Testing and rolling out specific retail products such as the Kissan (Farmer)
Credit Card.
Engaging microfinance institutions as agents, which are paid for loan
origination and recovery, with loans being held on the books of banks?
Equity investments into newly emerging MFIs.
Banks and NGOs jointly promoting MFIs.
The 2005 national budget has further strengthened this policy perspective and
the Finance Minister Mr P. Chidambaram announced "Government intends to
promote MFIs in a big way. The way forward, I believe, is to identify MFIs,
classify and rate such institutions, and empower them to intermediate
between the lending banks and the beneficiaries."
Savings services are needed by many more customers and as frequently as
access to phone services. Many poor households value access to savings
services and find new providers and arrangements, despite hearing of

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unreliable savings collectors or even occasionally falling prey to such

arrangements. Many customers are rich, literate and lucky to have banks
working for them. But many others lack access to safe, secure and accessible
savings services for the short, medium and long terms. In the past, many
banks sent collectors to gather these savings but problems with monitoring,
inability to tackle misappropriation and the rising aspiration of collectors to
become permanent staff of public sector banks killed a useful service. The
Central Bank has strictly forbidden commercial banks from using agents in
collection of savings services. This is unfortunate as: Effective microfinance
delivery is about managing transaction costs for providers and customers. A
combination of agents and technology can play a powerful role in rightly
aligning incentives for the collector and customers, while keeping transaction
costs manageable for everyone.
The banks can only open so many branches, and fixed and operating costs
are high, apart from approvals still needed from the Central Bank to open new
branches or close existing ones. The appointment of agents can keep costs
manageable and offer greater flexibility to Banks. Banking service may not
be able to defy the commercial logic pursued by most other sectors where a
variety of retailers provide services to customers, while companies focus on
customer needs, product design, quality control, branding, logistics and
distribution.
Fortunately, the 2005 Budget opened a small window in this area and the
Central Bank annual policy recently confirmed discussions on this: "As a
follow-up to the Budget proposals, modalities for allowing banks to adopt the
agency model by using the infrastructure of civil society organisations, rural
kiosks and village knowledge centres for providing credit support to rural and
farm sectors and appointment of micro-finance institutions (MFIs) as banking
correspondents are being worked out." But it may be noted that between the

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budget and the annual policy statement, "credit" has again crept in as the key
perceived need.
A World Bank study assessing access to financial institutions found that
amongst rural households in Andhra Pradesh and Uttar Pradesh, 59% lack
access to deposit account and 78% lack access to credit. Considering that the
majority of the 360 million poor households (urban and rural) lack access to
formal financial services, the numbers of customers to be reached, and the
variety and quantum of services to be provided are really large. Vijay
Mahajan, Managing Director of BASICS, estimated that 90 million farm
holdings, 30 million non-agricultural enterprises and 50 million landless
households in India collectively need approximately US$30 billion credit
annually. This is about 5% of India's GDP and does not seem an unreasonable
estimate.
A tiny segment of this US$30 billion potential market has been reached so far
and this is unlikely to be addressed by MFIs and NGOs alone. Reaching this
market requires serious capital, technology and human resources. However,
80% of the financial sector is still controlled by public sector institutions.
Competition, consolidation and convergence are all being discussed to
improve efficiency and outreach but significant opposition remains; for
example, the All India Bank Employees Association has threatened to strike
if the Government proceeds with its policy of reducing its capital in public
sector banks, merging public sector banks or even enhancing Foreign Direct
Investments in Indian private banks.
Many speakers at the Microfinance India Conference talked about the
significant and growing gap between surging growth in South India, which
contrasts with the stagnation in Eastern, Central and North Eastern India.
Microfinance on its own is unlikely to be able to address formidable
challenges of underdevelopment, poor infrastructure and governance.

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The self help group movement is beginning to focus on issues of quality and
there were some interesting discussions on embedding social performance
monitoring as a part of the regular management information systems.
At the time of the conference, a leading and responsible MFI was being
investigated by the authorities for charging "high" rates of interest. Per unit
transaction costs of small loans are high but many opinion leaders still persist
with the notion that poor people cannot be charged rates that are higher than
commercial bank rates. The reality of the high transaction costs of serving
small customers, their continuing dependence on the informal sector, the fact
that most bankers shy away from retailing to this market as a business
opportunity, and the poor quality of services currently provided does not
figure prominently in this discourse. While the Central Bank has deregulated
most interest rates, including lending to and by MFIs, interest rates
restrictions on commercial banks for retail loans below US$5,000 (all
microfinance and beyond) remain and caps on deposit rates also discourage
sharing transaction costs with customers. But most conference participants
accepted the imperatives to build sustainable institutions. There is still lot of
policy focus on what activities are and are not allowed and not enough
operational freedom as yet for banks and financial institutions to design and
deliver programmes, and be responsible for their actions. Prescriptions and
detailed circulars often limit organisational innovation and market
segmentation. As Nachiket Mor of ICICI Bank said at the conference that if
the right indicators are monitored and operational freedom and incentives are
clear, both public and private banks have the capacity to rapidly address the
remaining challenges.

‗Savings service is the neglected daughter of the family of financial

services‘. This metaphor is used because of the sustained discrimination
against and frequent disregard for savings services, despite their productive

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and reproductive role in financial services. This is evident from different

nomenclature used at both the international (UN International Year of
Microcredit, Micro Credit summit) and national levels (Priority Sector
Lending; Annual Credit Policy; Credit/ deposit ratio).
Savings services can be a useful entry point for the unbanked to build up a
history with the formal financial institutions before customers are entitled to
other financial services. With the greater spotlight on knowing the customer
and the fact that poor households do not have a salary slip, utility bills, clear
land titles or unique identity papers, a regular savings record could be the first
building block to membership of the formal financial sector. What is more,
with savings services, poor customers need to trust the financial institution
and not the other way round.
Microfinance is not yet at the centre stage of the Indian financial sector. The
knowledge, capital and technology to address these challenges however now
exist in India, although they are not yet fully aligned. With a more enabling
environment and surge in economic growth, the next few years promise to be
exciting for the delivery of financial services to poor people in India.
In this context, BISWA as an NGO- MFI is rapidly carving its identity. The
BISWA module of convergence in micro finance and social development is
being watched very keenly by all. In its convergence mode the five services,
micro finance, micro insurance, micro enterprise, micro marketing and social
development, are being delivered through a single window service system.
This unique experiment in elevating poverty is coming through a successful
module.

(Sukhwinder Singh Arora, 2010)

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Chapter 12 CASE STUDIES

12.1 Hirbaiben Lobi-An icon of women’s empowerment

Talala, in Gujarat‘s Junagadh district, is a nondescript taluka, known for its

luscious Kesar mangoes and about 15 km ahead of Sasan, the entrance to the
Gir forest. A left turn from Talala‘s central town takes one towards Madhopur
and Jambhur, two adjacent villages. For a first-timer, features of the people
enroute would arouse curiosity. It would seem one is travelling in central
Africa, or a West Indian island. The distinct Afro-features of men and women
have nothing to do with the topography of the place; it owes solely to their
origin.
Siddis were brought by the Nawab of Junagadh as workers more than 400
years ago. Now they have been resettled by the government in Jambhur village
of Talala taluka in Junagadh. And welcome, too, to the world of Hirbaiben
Ibrahim Lobi, a Siddi woman,whose vision, perseverance and leadership
qualities have made her into a beacon of enlightenment. Hirbaiben is the
essence of woman power, a true woman of substance who has transformed the
lot of the illiterate, underfed and disempowered Siddi women of her
community into a universally successful model of women‘s entrepreneurship.
Hirbaiben was just another hapless girl of her community, who lost her mother
at four, and father at 14. Illiteracy, unemployment, indebtedness and
alcoholism were rampant among the menfolk, and women foraged and sold
fuel wood from the nearby Gir forests for sustenance. Her marriage to a
landless man did not help matters much. Hirbaiben had inherited half a hectare
from her father, on which she inherited a debt of about Rs 1 lakh. Like all
others in the village, she too was under constant pressure to sell the land to
clear the debt. This was the starting point in Hirbai‘s mission to be different.

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Hirbai persuaded her husband to till the land, instead. By dint of sheer hard
work and better farming, she managed to produce enough over the years to
repay the debt and recycle for more. Today, Hirbai‘s farm stands a shining
testimony to her labour and foresight. Mango orchards, coconut trees,
vegetables and sugarcane crop adorn her land. The land boasts of a well,
too,with a pump set, sprayer and other farm implements.
Having reached a comfort zone in her private life, Hirbaiben‘s next task was to
spread education and self-help among her community.With support from an
NGO, The Aga Khan Rural Support Programme (AKRSP), and the state,
Hirbai started a day care centre for children and followed it up with a primary
school.
Cleaning the cobweb of superstition was another job she took on hand.
―Jambhur village did not have a flour mill because people believed that it will
invite the wrath of Peer Geban shah,whose mausoleum was in the village.‖

Hirbai narrated to us. (Siddis owe allegiance to Islam). It took her weeks of
persuasion and scores of meetings to dispel the myth and open a mill.
The most striking achievement of Hirbai is the promotion of the self help
groups (SHGs) among the women of her community that has led to their social
and economic empowerment. Starting with one group of women, which
addressed health and hygiene issues, Hirbai flitted from locality to locality,
village to village, like a Florence Nightingale, spreading the message of SHG.
Today, the effort has borne fruit with 95 women from six villages in the
vicinity having formed 12 such groups known as mahila vikas mandals
(MVMs).
Hirbai, for all her rustic simplicity, is no ordinary woman. Not resting on her
laurels in social awakening, she showed that in entrepreneurial skills she was
no less gifted. Hirbai knew that economic uplift was the key to social change.
In 1999, with the backing of AKRSP, Hirbai started a project to manufacture

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organic manure. Involving the women from her own SHG, the Nagarchi
MVM, Hirbaiben offered her farm precincts to make compost for the venture,
and gave a guarantee that she would buy all the 200 bags, if unsold. Mid-day
meal, tea and snacks were thrown in for the women workers. Today, the
organic manure, which has been branded as ―Panchatatva‖, is a household
name among farmers in the area, and brings in lakhs of rupees as turnover.
―Our produce is slightly costlier than our neighboring competitors‖, says
Hirbaiben, ―but since our quality is much superior, our produce sells.‖
For all her achievements, Hirbaiben remains as modest as ever and is willing
to share her experiences. She shows unbridled enthusiasm in taking visitors
around her farm and the compost production unit, sporting her trademark
toothy grin. The woman in her comes to the fore however, when she
remembers the tribulations of her childhood and adult days and tears well in
her eyes.
Hirbai today holds an iconic status in not only Junagadh but also most parts of
Gujarat. Not a single women development programme or SHG initiative in
Saurashtra takes off without her presence. A gifted orator with hands-on
experience of women empowerment, she is never short of words at public
functions. Here is a women of substance and a shining icon of success, whose
livelihood initiatives for rural women are worthy of emulation everywhere.
(NABARD, April-May-June 2010)

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12.2 A Delight in Solar Home Light

With respect to rural finance it is very important to note that rural finance is
not only agricultural, nor entire microfinance and agricultural finance is rural.
Yet, financial service providers offering rural finance (financial services
tailored for the people of all income levels in rural areas), microfinance (basic
financial services for the poor sections of the society having low-income
level), and agricultural finance (financing of agriculture-related activities,
from production to market) often having overlapping objectives and
opportunities. The clients served by microfinance are often the same clients or
households that would benefit from increased rural or agricultural finance.
It is imperative to note that the loan size is not important. This cannot be better
evidenced by the exemplary performance of Aryavart Gramin Bank (AGB) a
Regional Rural Bank sponsored by Bank of India. AGB implemented a
scheme for financing Solar Home Lights, through its branches in its
operational area spread over in Barabanki, Hardoi, Lucknow, Unnao,
Farrukhabad and Kannauj districts in Uttar Pradesh. Most of the villages in the
area are either not having grid power or do not get uninterrupted supply. The
cost of the system is less than Rs 15,000.

Lady entrepreneur seen at work at 10.00 pm in a village of Hardoi District,

UP.AGB has excelled in financing for Solar Home lights which can be
corroborated by the following :-
i) AGB has financed 28000 Solar Home Lights thereby benefitting 1,40,000
people assuming an average family size of 5.
Financing for Solar Home Lights to the villagers of Barabanki District (UP) at
the hands of Shri M Narendra,Executive Director, Bank of India at a ―Loan
Mela‖ function organised by AGB, sponsored by Bank of India.

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ii) The Bank won prestigious ―Ashden Award‖ in London, Ashden Society
acknowledged during the award presentation ceremony in June 2008 that the
Bank's initiative was not only good for the planet but it was good for business
too.

iii) The Bank was also conferred with ―India Power Award‖ for this
innovative financing in Nov., 2009.

iv) The women folk in these villages are now elated that they are able to
contribute significantly to the family income by doing embroidery, zardoji,
tailoring and such other profitable jobs in the Solar Home Lights from 7.00 am
to 11 pm & beyond which hitherto not possible because during day time they
are busy with agriculture & other allied activities including attending
household chores. The business potential existed immensely untapped but
Solar Home Lights have made all the difference.

v) The students in these villages are now able to study in better health
conditions. Hitherto, the kerosene lamps -sole illumination was not good for
the eyes and its vapour being harmful to lungs. This is equally applicable to
the housewife and their members of the family.

vi) The bank has already 9 villages with 100% solar light.
It is one of the many such initiatives taken up by Bank of India.
Financing for Solar Home Lights by Jamshedpur Zone of the Bank to the
villagers of Darisai village, Jamshedpur at the hands of Executive Director,
Shri M.Narendra, and Bank of India during a loan mela function.
What matters is the enabling and providing the infrastructure for development
of the business model which may not require a large quantum of advance, but

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will benefit large number of persons.

Most notable among these microfinance approaches is a nationwide attempt,
pioneered by non-governmental organizations, and now supported by the State
to create links between commercial banks, NGOs and informal local groups
(self-help groups or SHGs)
(NABARD, April-May-June 2010)

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Chapter 13 CONCLUSION

Let us be clear: micro finance is not the charity. It is the way to extend the
same rights and resources to low income households that are available to
everyone else. It is recognition that poor people are the solution, not the
problem. It is way to build their ideas, energy and vision. It is a way to grow
productive enterprise and to allow communities to prosper.
Fighting poverty is one of the core objectives of the Millennium Development
Goals (MDG). Micro Finance is one of the best ways to eradicate poverty and
to empower people. Micro finance is the newly emerging financial industry. It
has the target market of more than 1.8 billion people in the whole world.
Entry of new banks and corporate in microfinance of India will lead to more
standardized performance in this sector. There will be more of competition
which will make microfinance more efficient and hence the microfinance
institutions will have to grow to compete with each other.
It is must for microfinance institutions to get publically listed because its main
issue is lack of sources of funds and once it is listed it will have an ease to
access funds from public. But it should not divert from its social agenda of
serving for the better of the poor.
In future it is expected that there will be mergers and acquisitions in this
sectors which will be boon to one or the other microfinance institute.

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BIBLIOGRAPHY

www.networkers.org:
www.networkers.org/.../The%20History%20of%20Microfinance.doc

www.grameen-info.org: http://www.grameen-
info.org/index.php?option=com_content&task
=view&id=329&Itemid=363

www.wikipedia.org: http://en.wikipedia.org/wiki/Grameen_Bank

www.planetfinance.org: http://www.planetfinance.org.

www.rbi.org.in: http://www.rbi.org.in/sec14/57835.pdf

CNBC-TV18. (2010, August 9). Should microfinance institutes go public?

Menon, S. (2010). MFIs need markets to do their job.

NABARD. (April-May-June 2010). Microfinance World. The Financial

Express.

Sude, M. P. (2010, September 5). Microfinance in India. (M. R. Punmiya,

Interviewer)

Sukhwinder Singh Arora, F. S. (2010). Future of Microfinance in India.

Upadhyayula, M. S. The Transformation of Microfinance Sector in India

Experiences, Options, and Future. Journal of Microfinance.

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