A report On

MICRO FINANCE (ITS LIMITATIONS AN OPPORTUNITIES)

BY NISHANT BALI INTERFACE BROKERAGE AND RESEARCH LIMITED ENROLLMENT NO :( 08BS0000711)

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A report On

MICRO FINANCE (ITS LIMITATIONS AN OPPORTUNITIES)

COMPANY GUIDE: NAME: MR. HIMAL PARIKH (DIRECTOR) INTERFACE BROKERAGE AND RESEARCH LTD

FACULTY GUIDE: NAME: MR. SUNIL ARORA (FACULTY OF FINANCE) ICFAI BUSINESS SCHOOL, AHMEDABAD

NISHANT BALI ICFAI BUSINESS SCHOOL, AHMEDABAD ENROLLMENT NO.: 08BS0000711 Email ID: nishantbali86@yahoo.co.in CONTACT NO. 9898399031.

The report is submitted as partial fulfillment of the Requirement of MBA Program of IBS

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Acknowledgements

“No good work flows without the help from Faculty Members Industrial Professionals, Colleagues, Organization and Friends”

First of all I would like to thank Mr. Himal Parikh (M.D. , Director, Interface Brokerage and Research Ltd.) for providing me an opportunity to work in their team as summer trainee. I would also like to thank Mr. Hitesh Patel, Mr. Darshan Panchal and Ms. Jamini; employees of the company working in research department for their invaluable guidance, Cooperation and encouragement which helped me lot in my Summer Training. I am also thankful to my faculty in-charge Pof. Sunil Arora for his guidance and valuable input and advice during my project. I am also thankful to Mr. Sanjiv Rohilla (Asst. General Manager) NABARD, Mr. Arvind Parmar (Operation Manager) SAKHI, and Mr. Mukesh Gandhi (Director) Mass Financing, for their invaluable guidance and helped me in understanding my topic in depth. At the last, I would like to thank each individual who some or other way helped me to complete my project.

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 ABSTRACT of the Project:

Micro-Finance refers to ―small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards‖. The main aim of Micro-Finance is too provide loan to the poor people or to below poverty line, who are not able borrow from other sources and to make their living standard better.

Micro- finance‘s concept was first given by the Nobel laureate Prof. Mohammad Yunus in 1976 and started Grameen Bank in that year and from then many countries has followed Grameen Bank Model. It is not possible to cover each and every aspect of Micro Finance in this short duration of time. But I have tried to cover main and the basics of Micro Finance. Through this report any person who doesn‘t anything about Micro Finance can easily understands and makes decision on his own.

In this report I have tried to cover each and every important part related to the Micro Finance Sector i.e. Business Model of Grameen Bank, SHG‘s and how they formed, role of Micro Finance in the current economy, study about their interest rates, role of women in the economy, how the product is design, interview of NABARD executive and understand the Business Model of NABARD, and many important things related to Micro Finance.

After successfully completion of my project, I understood many areas of Micro Finance. Like how a company decides their interest rate, practically how SHGs formed, how the excess of government intervention can create disaster for the MFIs, practically felt, how a Micro loan can change the life of the individuals. Practical learning of Micro Finance industry by personal visits the institutions and prepared the business model of the same. Now I can confidently say that, with zero percentage o to 70 percentage knowledge in the field of Micro finance in just three months, it‘s like Achievement for me and I will add this moment in my Achievements lists. What I feel that, in this short period of time its difficult to understand the 100 percentage of the above mentioned subject. But at last I am satisfied with my performance.

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TABLE OF CONTENTS

ACKWOLEDGEMENT ………………………………………………………………………. 3

ABSTRACT …………………………………………………………………………………………………….. 4

Overview of the Microfinance Sector …………………………………………………………… 10

Top 50 Microfinance Institutions ………………………………………………………………… 12 Legal and Regulatory Framework for the (MFI’s) in India ………………………… 15 Societies Registration Act, 1860 …………………………………………………………… 15 Indian Trusts Act, 1882 ………………………………………………………………………. 15 Not-For-Profit Companies Registered Under Section 25 Of Companies Act, 1956………………………………………………………………………………………………….. 15 Ratio Analysis............................................................................................................... 16 Micro credit model ………………………………………………………………………………………… 20

Business Model of GRAMEEN Bank …………………………………………………………….. 21

About GRAMEEN Bank ………………………………………………………………………. 21 Working model of Grameen bank ………………………………………………………… 22 16 Decisions ……………………………………………………………………………………….. 24 The Repayment Mechanism …………………………………………………………………. 25 Criticism of Grameen Bank ……………………………………………………………………25 Self Help Group (SHG’s) ……………………………………………………………………….…,……26

Concept of SHGs ………………………………………………………………………….….…. 26 Need of SHG‘s ……………………………………………………………………………….…… 26 5

Structure of SHGs ………………………………………………………………………………. 27 Joint Liability Groups (JLGs)......................................................................31 Difference between SHGs and JLGs ……………………………………………………… 31 How JLGs formed ……………………………………………………………………………. …32 JLG features ……………………………………………………………………………………… .32 NABARD Initiative in Micro Finance ……..…………………………………………………….. 33

Introduction ………………………………………………………………………………………. 33 Role of NABARD …………………………………………………………………………………. 33 Organization Structure …………………………………………………………………………34 NABARD‘s OFFICES all over INDIA ………………………………………………………34 Financial Santa Clause NABARD ……………………………………………………………35 How NABARD helps Banks and MFI‘s in augmenting? …………………………….35 How NABARD manages their repayment ratio ………………………………………. 36 How NABARD gives loan to the Institutions? ………………………………………….36 Business Model of SAKHI ………………………………………………………………………………. 37 Introduction ……………………………………………………………………………………….. 37 Organization Structure …………………………………………………………………….…. 38 How SAKHI disburse the Loans? ………………………………………………………..…. 39 How they charges interest? ………………………………………………………………..…. 40 How SAKHI raise capital? …………………………………………………………………..… 40 Why SAKHI charges such a high rate of interest (18% p.a)? …………………..... 40 Is government waiver plan effected there Institution? ………………………….… 41

Business Model of MAS Finance ……………………………………………………………………. 43 Introduction …………………………………………………………………………………….… 43 Role and Function ………………………………………………………………………………. 43 Organization Structure ……………………………………………………………………… 44 How MAS FINANCE raise capital? ………………………………………………………..45 How MAS FINANCE manages their repayment structure ………………………. 45 MAS FINANCE has strange way of providing loan? ……………………………….. 45 Why MAS FINANCE charges such a high rate of interest (25-26%% p.a)? … 45 Any default case regarding to repayment of the loan? ……………………………..45

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Credit institutions as a Political tool: Debt relief in India ………………………. .46

Product Design ……………………………………………………………………………………………. .48

How MFI’s manage their repayment and Risk management …………………. ….49

What is Risk Management? ………………………………………………………………….49 Benefit of Risk Management ………………………………………………………………..49 Financial Risks ……………………………………………………………………………………51 Liquidity risk …………………………………………………………………………………. …..52 Operational Risks ………………………………………………………………………………..53 Strategic Risks …………………………………………………………………………………….53

Why micro finance provides loan to the women only ………………………………… 55

Why MFI‘s being critized for providing loans to the women only? …………….55

How the recent slowdown affects the MFI’s …………………………………………………..57 How the MFI‘s find opportunities within the crisis ………………………………..…58

MFI’s being criticized because of high interest rate …………………………………...59

Why Microcredit Rates are so high? ………………………………………………….…..59 Inappropriate comparison …………………………………………………………………...60 Rate Ceilings: Not the Answer ……………………………………………………………. ..61

SWOT Analysis of micro finance ……………………………………………………………….… 64

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SKS Case study………………………………………………………………………………...66 Development of Organization ……………………………………………………………. 66 Sources of Capital ……………………………………………………………………..……… 66 Organization & Management Analysis ………………………………………………… 68 Interview of end users …………………………………………………………………………….……70

Future of Micro Finance……………………………………………………………….……72

Recommendations and Suggestions ……………………………………………….… 74

Conclusion ………………………………………………………………………………….…..75

References …………………………………………………………………………………………….…......76

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List of Illustration (Figures)
Top fifty MFIs (Micro Finance Institutions) ………………………………………………….….12 Comparison among the Companies ……………………………………………………………….…18 Comparative Analysis of Microfinance Services Offered To the Poor …………………..28 Year wise increase of SHG‘s and their finance …………………………………………….…....29 Growth of linked SHG's in 13 Priority States ……………………………………………………..30 Organizational structure of NABARD …………………………………………………………….…34 NABARD‘s offices all over India ………………………………………………………………….…...34 Organization Structure of SAKHI ………………………………………………………………….…38 Business plan projection of SAKHI ……………………………………………………….………….41 Projected balance sheet of SAKHI ………………………………………………………….…….....42 Organization Structure of MAS Finance ……………………………………………………………44 The Corposol/Finansol Crisis …………………………………………………………….….………..50 Major Risks to Microfinance Institutions ………………………………………………………….51 General Impact of Ceilings on Microcredit Interest Rates …………………………………..62 Operation and Financial function of SKS………………………………………………………… …67

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Overview of the Microfinance Sector
Micro-finance refers to ―small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards‖. India‘s population is more than 1000 million, and it‘s the second largest in term of population after China. India's GDP ranks among the top 15 economies of the world. However, around 300 million people or about 80 million households, are living below the poverty line, i.e. less than $2 per day according to the World Bank and the poorest are which earns $1 per day . It is further estimated that of these households, only about 20% have access to credit from the formal sector. Out of these 80 million house hold, 80% takes credit from the informal sources i.e. local Zamidars, Chit Funds etc. With about 80 million households below poverty line and 80% out of this is access from informal sector, so it‘s obvious to solve this problem and this gave birth to Micro Finance Institutions (MFI‘s). MFIs include nongovernmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even a few commercial banks. India has about 153,000 retail outlets of the formal banking infrastructure—commercial banks…There are about 33,000 banks in rural areas, and also have special category of banks called regional rural banks, in the abbreviated form, RRBs. There are about 14,500 branches and the cooperatives…The cooperatives—about 100,000 retail outlets…the population for the regional outlet comes down to as low as 4,700. Annual credit demand by the poor in the country is estimated to be about Rs 60,000 crores. In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. Women constitute a vast majority of users of micro-credit and savings services. In short, Micro Finance means providing very poor families with very small loans to help them engage in productive activities or grow their very small businesses. It is firstly (and this is essential) a tool in the fight against poverty. It is not for poor people in general but for poor people who are considered to be economically active, in other words, those who carry out activities which generate revenues which in turn allow them to cover their needs and those of their families, even if these revenues are low and precarious. Microfinance offers to help them get started by giving them access to financial services from which they are generally excluded (including savings and credit facilities, insurance and fund transfers), and in ways that are suited to their economic and management skills. Ultimately, the goal of microfinance is to give low income people an opportunity to become selfsufficient by providing a means of saving money, borrowing money and insurance.

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Micro financing is not a new concept. Small microcredit operations have existed since the mid 1700s. Although most modern microfinance institutions operate in developing countries, the rate of payment default for loans is surprisingly low - more than 90% of loans are repaid. It is not just a financing system, but a tool for social change, specially for women - it does not spring from market forces alone - it is potentially welfare enhancing - there is a public interest in promoting the growth of micro finance - this is what makes it acceptable as a valid goal for public policy.

Microcredit, Microfinance and Micro plus?
Microcredit refers specifically to loans and the credit needs of clients, while Microfinance covers a broader range of financial services that create a wider range of opportunities for success. Examples of these additional financial services include savings, insurance, housing loans and remittance transfers. The local MFI might also offer Microfinance plus activities such as entrepreneurial and life skills training, and advice on topics such as health and nutrition, sanitation, improving living conditions, and the importance of educating children

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Top 50 MICROFINANCE INSTITUTIONS :( as on 20/3/09)
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 23 24 25 26 27 Name ASA Bandhan (Society and NBFC) Banco do Nordeste Fundación Mundial de la Mujer Bucaramanga FONDEP Micro-Crédit Amhara Credit and Savings Institution Banco Compartamos, S.A., Institución de Banca Múltiple Association Al Amana for the Promotion of Micro-Enterprises Morocco Fundación Mundo Mujer Popayán Fundación WWB Colombia - Cali Consumer Credit Union 'Economic Partnership' Fondation Banque Populaire pour le Micro-Credit Microcredit Foundation of India EKI Saadhana Microfin Society Jagorani Chakra Foundation Grameen Bank Partner Grameen Koota Caja Municipal de Ahorro y Crédito de Cusco Bangladesh Rural Advancement Committee AgroInvest Caja Municipal de Ahorro y Crédito de Trujillo Sharada's Women's Association for Weaker Section MIKROFIN Banja Luka Khan Bank (Agricultural Bank of Mongolia LLP) INECO Bank Fondation Zakoura Country Bangladesh India Brazil Colombia Morocco Ethiopia Mexico Morocco Colombia Colombia Russia Morocco India Bosnia and Herzegovina India Bangladesh Bangladesh Bosnia and Herzegovina India Peru Bangladesh Serbia Peru India Bosnia and Herzegovina Mongolia Armenia Morocco Risk 56 42 213 193 196 118 295 133 141 155 19 219 7 242 73 128 100 230 156 222 126 222 220 55 205 280 202 194 Returns 40 1 25 1 1 42 11 1 1 4 1 1 185 1 1 1 62 1 1 119 205 1 101 13 1 59 39 1

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Dakahlya Businessmen's Association for Community Development Asmitha Microfin Ltd. Credi Fe Desarrollo Microempresarial S.A. Dedebit Credit and Savings Institution MI-BOSPO Tuzla Fundacion Para La Promocion y el Desarrollo Kashf Foundation Shakti Foundation for Disadvantaged Women enda inter-arabe Kazakhstan Loan Fund Integrated Development Foundation Microcredit Organization Sunrise FINCA - ECU Caja Municipal de Ahorro y Crédito de Arequipa Crédito con Educación Rural BESA Fund SKS Microfinance Private Limited Development and Employment Fund Programas para la Mujer - Peru Kreditimi Rural i Kosoves LLC (formerly Rural Finance Project of Kosovo) BURO, formerly BURO Tangail Opportunity Bank A.D. Podgorica Sanasa Development Bank

Egypt

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29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

India Ecuador Ethiopia Bosnia and Herzegovina Nicaragua Pakistan Bangladesh Tunisia Kazakhstan Bangladesh Bosnia and Herzegovina Ecuador Peru Bolivia Albania India Jordan Peru Kosovo

73 206 80 283 171 219 151 257 320 140 341 264 220 298 345 141 135 242 247

111 34 154 1 100 1 1 1 1 1 17 54 215 1 1 1 1 1 1

48 49 50

Bangladesh Serbia Sri Lanka

186 319 93

91 23 241

Sources: forbes magazine.com

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*Risk, which looks at the quality of their loan portfolios, measured as the percent of the portfolio at risk greater than 30 days; and return, which is measured as a combination of return on equity and return on assets.

From this above table we can notice that the Risk of companies is measured as the percentage of Portfolio at Risk (PAR) which means and return is measured as a combination of ROA and ROE. ROA = Net Operating Income-Taxes Average Assets Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its profitability. The ratio includes not only the return on the portfolio, but also all other revenue generated from investments and other operating activities. From the above list we can notice that, there are seven companies of India in top 50 companies in the world. There is a huge potential for India to grow in this sector, because out of total 500 million poor people from all over the world, who is getting beneficial from the micro finance institutions, 80 to 90 million are from India only. So there is still a huge market and opportunities in this segment. The total loan that the MFI‘s had provided to the poor people in India crosses Rs 24 billion till October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see the new face of India.

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Legal and Regulatory Framework for the Microfinance Institutions in India:
1. SOCIETIES REGISTRATION ACT, 1860:
NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities were established as voluntary, not-for-profit development organizations, their microfinance activities were also established under the same legal umbrella. This act is applicable to the NGO‘s and the main purpose is: Relief of poverty Advancement of education Advancement of religion Purposes beneficial to the community or a section of the community.

2. INDIAN TRUSTS ACT, 1882:
Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or as private, determinable trusts with specified beneficiaries/members.

3. NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF COMPANIES ACT, 1956:
An organization given a license under Section 25 of the Companies Act 1956 is allowed to be registered as a company with limited liability without the addition of the words ‗Limited‘ or ‗Private Limited‘ to its name. It is also eligible for exemption from some of the provisions of the Companies Act, 1956. For companies that are already registered under the Companies Act, 1956, if the central government is satisfied that the objects of that company are restricted to the promotion of commerce, science, art, religion, charity or any other useful purpose; and the constitution of such company provides for the application of funds or other income in promoting these objects and prohibits payment of any dividend to its members, then it may allow such a company to register under Section 25 of the Companies Act.

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RATIO ANALYSIS:
Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms.

List Of MFI’s and their key Ratios:

Liquidity Ratios
These ratios actually show the relationship of a firm‘s cash and other current assets to its current liabilities. Two ratios are discussed under Liquidity ratios. They are: 1. Current ratio 2. Quick/ Acid Test ratio. 1. Current ratio: This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses (principally wages). Current Ratio=Current Assets/Current Liabilities
S.no 1. 2. 3. 4. 5. 6. Companies As on 31.3.08(%) As on 31.3.07(%) Percentage changed

Asmitha Microfinance Basix Microfinance Ujjivan Microfinance Cashpro Microfinance Trident microfinance Samridhi Microfinance

18.0 5.65 42 17.88% 3.33 16.81

6.81 5.74 98 15.91 4.47 19.36%

195% 1.56% 57%

25.6%

Sources :- companies balance sheet

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Explanation:Here we can notice that the current ratio of all the MFI‘s. There is a mixed picture i.e.few company‘s ratio has dipped down and few went up, now we will see, why this so? Asmitha Microfinance‘s ratio went up by whopping 195% in 2008 compared to 2007. This was because of the high micro loan to the poor women and high cash and bank balance. So we can came out of the conclusion that the Asmitha Microfinance has more current assets then there liabilities to meet there short term obligations. Basix Microfinance‘s ratio dipped down by mere 1.56% , reason for that there loans to the poor went up by 61%, but there current liability ( other provision )but went up by 69%. Ujjivan Microfinance‘s ratio went down by 57%, its cash balance went up by 605 but its current liabilities went up by 247%. Cashpro Microfinance‘s has showed the highest percentage change from the previous year i.e. 205%. Its loan to the women went up by 121% and cash and bank balance by 52% and the current liability went down by 35%. Trident Microfinance‘s current ratio went down by 26%, because of the high current liabilities and other provision.

Capital Adequacy ratio:
Capital adequacy ratio is the ratio which determines the capacity of a bank in terms of meeting the time liabilities and other risk such as credit risk, market risk, operational risk, and others. It is a measure of how much capital is used to support the banks' risk assets. In short this ratio used to protect depositors and promote the stability and efficiency. Under this 2 main ratio is there:

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Comparison among the Companies

(07-08)

Criteria Capital
Capital To Assets ratio Debts to Assets Ratio

Asmitha Basix Trident SKS Microfinance Microfinance microfinance

106.54% 89.79%

12.63% 85.11%

44.77% 35.79%

19.52 -

Earnings
ROA

1.24% 30.83% 111.09%

1.97% 18.46% 114.4%

-1.92% -5.24% 108.54% 23.47% 121%

ROE

Operating selfsufficiency ratio

Social Impact
% borrowers below poverty line % women

60% 98% 59% 27%

57% 97% 61% 45%

69% 98% 62% 32%

65% 94% 53% 29%

% landless

First time borrowers

Sources: www.scribd.com

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Explanation:
Calculating the debt ratio, we came to see that Asmitha microfinance institution is having the highest debt ratio, i.e. 96.39%. That this company is highly leveraged one. The reason behind such is better understandable form the balance sheet. In 2007-08, the company has issued long-term loan, of Rs 3,030,818,584 and this was increased by more than 50 % from the previous year. From the above table we can notice that the, the Operating Self Sufficiency (OSS) ratio of the SKS Micro Finance was the highest, this shows that how well the company is managing their loan distribution amount or repayment amount to meet the operating expenses. By comparing this ratio with others, we can predict the future of the organization. Now if we notice social impact ratio‘s like % borrowers below poverty line, % of woman etc. are very important for the economic development and the companies‘ contribution in reducing the poverty.

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The micro-credits model

• • • • • • • •

The model is fairly straightforward and simple. Focus on jump-starting self-employment, providing the capital for poor women to use their innate "survival skills" to pull themselves out of poverty. Lend to women in small groups (credit circles), say of five or seven. Make loans of small amounts to two out of five. The three who have not received loans will be eligible only when this first round of loans has been repaid. Draw up a weekly or bi-weekly repayment schedule. In case any member defaults the entire circle is denied access to credit. Banks have been given freedom to formulate their own lending norms keeping in view ground realities. They have been asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc.

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Business model of GRAMEEN bank:
ABOUT GRAMEEN BANK
The Grameen Bank is a Microfinance Organization and community development bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh that makes small loans (known as microcredit) to the weaker sections, without requiring collateral or any deposit. The word "Grameen", derived from the word "gram" or "village", means "of the village. In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation. Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703 people serving 7.34 million borrowers from 80,257 villages. Grameen‘s methods are applied in 58 countries — including the United States. Grameen Bank borrowers own 94% of the Bank. The remaining 6% are owned by the government.

In October 1983 Yunus formed the Grameen (―village‖) Bank, based on principles of trust and solidarity. There is no legal instrument (no written contract) between Grameen Bank and its borrowers, the system works based on trust. In a country in which few women may take out loans from large commercial banks, Grameen has focused on women borrowers as 97% of its members are women.[ Because women (far more than men) could be counted on to invest the loans in business and repay them on schedule, they became the overwhelming participants in Grameen Bank, where they receive 97 percent of all credit. Grameen bank follows the one principle that ―the more you have, the more you can get. In other words, if you have little or nothing, you get nothing.

According to a World Bank study of Grameen, 5 percent of Grameen borrowers get out of poverty every year., according to Grameen‘s figures, nearly two-thirds [64 percent] of borrowers who have been with Grameen for five years are now out of poverty. And Grameen‘s indicators of poverty are much more stringent than those of the World Bank, which defines poverty as earning less than a dollar per day. Grameen‘s definition of poverty alleviate is not only based on financially sound of the family, but they notice the 10 indicators and all must be met before they say that family is no longer poor.. Indicators include such things as housing quality, adequate nutrition, and access to safe water, school attendance by children, certain minimal savings, etc.

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Working model of Grameen bank:
The manager first makes a round to the appointed area to introduce Grameen policies and programs. When one approaches with genuine interests Bank manager asks her to gather 4 more members to form a group. Every group has 5 members, one as its head. Only two members can obtain loan at first. After 6 weeks of successful repayment another two can apply for loan. The leader can only receive loan at last. 8 groups make a Center. And a center elects its leader for one year, after one term the leader resigns and never be elected again. Each borrower must belong to a five-member group. These groups do not provide any guarantee for a loan to one of their members; repayment responsibility solely rests on the individual borrower. However if one member of a group defaults, that group will never receive a loan from Grameen. So it‘s a kind of social pressure exerted by the group members. Grameen enjoys very high payback rates—over 98 percent. Grameen bank is not only a Micro financing institution but it is Micro financing plus, which means they not only provide credit to the borrowers this type of MFI believes that the poor need more than just money to transform their lives. Typical services to supplement the credit include discounted health care services, preventative health care education, literacy courses, vocational training courses, technology courses, youth programs for children of borrowers, life/disability insurance, and savings programs. Grameen Bank is owned by the borrowers themselves — it is owned by the poor women who rely on the microcredit loans for income generation. It is therefore tied to local money; each branch has to be self-sustaining. Local branches get no money from outside — there is no borrowing from the head office. The profit all goes back to the borrowers. Grameen bank has 21,000 students with student loans, studying in medical schools and elsewhere. They have also provided some 30,000 scholarships to the children of our borrowers each year. They even give loans to beggars — poor people who go door-todoor, who we call ―struggling members‖ — so they can stop begging and generate income through selling such things as food, toys, or household items. They currently have 100,000 ―struggling members‖ in the program.

Loan Insurance

How loan insurance would be beneficiary for the borrowers? Borrowers always worry what will happen to their debt if they die. Will the family members pay off their debt? They believe that if their debt remains un repaid after their death

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The insurance program is very simple. Once a year, on the last day of the year, the borrower is required to put in a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She. If a borrower dies any time during the next year, her entire outstanding amount is paid up by the insurance fund which is created by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account. Borrowers find it unbelievably generous. If the outstanding amount remains the same on two successive year-ends, the borrower does not have to put in any extra money in the loan insurance savings account in the second year. Only if the balance is more she has to put in money for the extra amount. Even if the outstanding amount happens to be several times more at the time of her death than what it was on the preceding year-end, under the rules of this program, the entire amount will still be paid off from the insurance fund.

All the borrowers of Grameen bank have to pledge the ―16 Decisions‖. Of course, many of the women cannot read or write, so they have to listen to others recite the 16 Decisions, and then have to memorize them. This has become an extremely important part of our microcredit program. The ―16 Decisions‖ are mentioned under:

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16 Decisions
1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courage and Hard work – in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines. 10. We shall drink water from tube wells. If it is not available, we shall boil water or use alum. 11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at our daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so. 13. We shall collectively undertake bigger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her. 15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline. 16. We shall take part in all social activities collectively

Sources: www.Grameen-info.org

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The Repayment Mechanism
Following method is followed by Grameen for loan and repayment. One year loan Equal weekly installments Repayment starts one week after the loan Interest rate of 20% Repayment amounts to 2% per week for fifty weeks Interest payment amounts to 2 taka per week for a 1000 taka loan

Criticism of Grameen Bank:
As the Grameen model was ‗exported‘ overseas during the 1990‘s, the Bank continued to grow in Bangladesh. Client numbers grew steadily, but the portfolio grew more quickly as clients took bigger loans and new types of loans (especially housing). Those of working in Bangladesh increasingly heard that repayment rates were falling, but that branch managers were massaging their performance figures by issuing new loans to defaulters. These were immediately used to pay off the outstanding loan and hide the problem of non-repayment. There were also criticisms of the gender achievements of the Bank: did it merely get women to take loans that they gave straight to their husbands? Then, there were criticisms of the idea by Yunus that, of every Grameen Bank loan being used for microenterprise, and every microenterprise being successful. Independent fieldwork showed that Grameen Bank clients used their loans for many different purposes – business, food consumption, health, education and even dowry. Grameen Bank clients paid the kisti (weekly repayments) on their loans not from a single microenterprise, but from patching together earnings from casual employment, selfemployment, remittances and a variety of loans from other sources. But, as clients stayed with Grameen Bank, they were under pressure to take bigger, ordinary loans alongside new housing loans. As a result, they took on levels of debt they could not service from their income. To stop them from defaulting, they were issued with larger loans by Grameen branch managers to repay earlier loans.

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Self help group (shg)
“A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having
homogenous social and economic background voluntarily, coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis:” In short, SHG is a small group of rural poor, who have voluntarily come forward to form a group for improvement of the social and economic status of the members.

Concept of SHGs:
It can be formal (registered) or informal. The concept underlines the principle of, Credit and Self Help. Members of SHG agree to save regularly and contribute to a common fund. The members agree to use this common fund and such other funds (like grants and loans from banks), which they may receive as a group, to give small loans to needy members as per the decision of the group. The group members use wisdom and peer pressure use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals.

Need of SHG’s:
The rural poor are incapacitated due to various reasons, such as; most of them are socially backward, illiterate, with low motivation and poor economic base. Individually, a poor is not only weak in socio-economic term but also lacks access to the knowledge and information, which are the most important components of today‘s development process. However, in a group, they are empowered to overcome many of these weaknesses. Hence, there are needs for SHGs, which in specific terms are as under:To mobilize the resources of the individual members for their collective economic development. To uplift the living conditions of the poor. To create a habit of savings. Utilization of local resources. To mobilize individual skills for group‘s interest. To create awareness about rights. To assist the members financially at the time of need. To identify problems, analyzing and finding solutions in the group. To act as a media for socio-economic development of the village. To develop linkages with institutions of NGOs. To organize training for skill development. To help in recovery of loans. 26

To gain mutual understanding, develop trust and self-confidence. To build up teamwork. To develop leadership qualities.

Structure of SHGs:
Size of SHG The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number is that, members cannot actively participate. Also, legally it is required that an informal group should not be of more than 20 people. The group need not be registered. Condition required for membership for SHG’s Members should be between the age group of 21-60 years. From one family, only one person can become a member of an SHG. (More families can join SHGs this way). The group normally consists of either only men or only women. Because mixed group it would hindered or obstruct free and frank discussions, or opening of the personal problem. Women‘s groups are generally found to perform better. (They are better in savings and they usually ensure better end use of loans). Members should be homogenous i.e. should have the same social and financial background. (Advantage: This makes it easier for the members to interact freely with each other, if members are both from rich as well as poor class, the poor may hardly get an opportunity to express themselves). Members should be rural poor (By poor one should be guided by the living conditions).

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Comparative Analysis of Microfinance Services Offered To The Poor
PARAMETER Ease of Access Lead time for loans Repayment terms Interest Rates Money Lenders Commercial banks Govt.Sponsored Programs Financial Program of MFIS’

High Low Very Short Fixed Rigid None

Low Very high Extreme Long

Low Very High Extreme Long Fixed and easy None

High Low-Medium Short Flexible

and Fixed and easy None

Incentives
Repeat Borrowing Loan Access Procedure Collateral and Demand Promissory Note

Possible Very quick Mandatory

Repeat and larger loan Possible but Possible but likely Stream credit is likely assured Extreme time Extreme time Simple and quick consuming consuming Required but Not required Not required social hypothecation although a charge collateral is used of asset may on the assets for physical suffice become collateral automatic

Sources: www.scibd.com

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Year wise increase of SHG’s and their finance:
Year No. of SHGs financed during the year (in lakh) 1.98 2.56 3.62 5.39 6.20 6.87 7.94 Cumulative no. of SHGs financed (in lakh)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

4.61 7.17 10.79 16.18 22.38 29.25 37.67

Sources: www.inblogs.com

Initially there was a slow progress in the programme up to 1999 as only 32,995 groups were credit linked during the period 1992 to 1999. Since then the programme has been growing rapidly and the number of SHGs financed increased from 81,780 in 1999-2000 to more than 6.20 lakh in 2005-06, 6.87 lakh in 2006-07 and 7.94 lakh in 2007-2008.

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Growth of linked SHG's in 13 Priority States State
Assam Bihar Chhattisgarh Gujarat Himachal Pradesh Jharkhand Maharashtra Madhya Pradesh Orissa Rajasthan Uttar Pradesh Uttaranchal West Bengal Total Percent increase

2003
3,477 8,161 6,763 13,875 8,875 7,765 28,065 15,271 42,272 22,742 53,696 5,853 32,647 2,49,462

2004
10,706 16,246 9,796 15,974 13,228 12,647 38,535 27,095 77,588 33,846 79,210 10,908 51,685 3,97,464 59

2005
31,234 28,015 18,569 24,712 17,798 21,531 71,146 45,105 1,23,256 60,006 1,19,648 14,043 92,698 6,67,761 68

2006
56,449 46,221 31,291 34,160 22,920 30,819 1,31,470 57,125 1,80,896 98,171 1,61,911 17,588 1,36,251 1,005,272 51

2007
81,454 72,339 41703 43,572 27,799 37,317 2,25,856 70,912 2,34,451 1,37,837 1,98,587 21,527 1,81,563 1,374,917 37

2008
92,343 83,776 49,887 51,340 34,087 41,889 2,49,541 80,136 2,60,656 1,58,690 2,14,578 23,089 210,689 1,550,701 13

Sources: research paper by Prabhu Ghate

Explanation:
From the above figure we can notice the growth of SHG‘s in top 13 states. From 07 to 08 no of SHG‘s i.e. one group of SHG consists 10 to 15 members. We can noticed that the highest percentage increased during the year between 04 -05.Over 90 percent of them women, and the total number of SHG members who have ever benefited from the programme to about 51 million. Since some households have more than one member in the programme, the number of families benefited is slightly smaller than these numbers imply. About half of them are below the poverty line.

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Joint liability group (jlg)
“Joint Liability Group (JLG) is a group of individuals coming together to borrow from the financial institution. They share responsibility and stand as guarantee for each other.” The individual wanting loans will have to form into a group where each member will be providing cross guarantee for each other.

Difference between SHGs and JLGs

SHGs (Self Help Groups)

JLGs (Joint Liability Groups)

Minimum 10 members and maximum 20. For SHGs meeting is compulsory.

Minimum 3 members and maximum 5. There is no necessary of compulsory meeting for JLGs.

For SHGs the bank loan is available. SHG gets the benefit of the entire government scheme, which is viable for them.

For JLGs, they get the loan only from MFIs. There is no benefit of any government schemes for JLGs.

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How JLGs formed
The JLG has to be formed by the FCO-JLG: Field Credit Officer-Joint Liability Group. After the formation, FCO has to carry out at least three meetings with the group member in order to explain about SAKHI, its product, process and procedure. After the meetings the group should have clear understanding of the following:     SAKHI branch office and Head Office address and contact numbers. Name of the JLG-FCO and the Branch Manager of the concerned branch. Clear understanding of Group Liability and role of the Leader. Product details such as repayment term, daily repayment methodology, membership fee and interest rate.

After the JLG FCO has completed the process of group formation he/she has to invite his/her Branch Manager who has to verify the group. Loan process for any particular group can start only after the group verification has been done and group has been approved by the Branch Manager. In case the group is not approved by the Brach Manager further meetings have to be held by the Field Credit Officer with the JLG verification has to be redone. Brach Manager has to verify these documents.

JLG features:
JLG haves 3-5 members group. The group should be either all male or female only in exception cases can there be a mixed group. Members within a group should have similar turnover/profit and group should be economically homogeneous. The group member should be well known to each other. The group member should have their own business. The groups have shop/ business in the same locality. Lending may start from group size of not less than three members.

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NABARD Initiative in Micro Finance Introduction
National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, through an Act of Parliament, to provide refinance for agriculture, allied activities, small scale industries, cottage and village industries, rural artisans and crafts in an integrated manner. Earlier, RBI and GOI managed the loans and credits for the poor but, these bodies wanted some other body which fully managed this activities i.e. distribution of loans and credits to the poor people. It was set up with an initial capital of Rs 100 crore, which was enhanced to Rs 2,000 crore, fully subscribed by the Government of India and the RBI. The bank's vision is "to facilitate sustained access to financial services for the unreached poor in rural areas through various microfinance innovations in a cost effective and sustainable manner."

Role of NABARD
Providing refinance to lending institutions in rural areas. Bringing about or promoting institutional development. Evaluating, monitoring and inspecting the client banks. Besides this pivotal role, NABARD also: NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas. It is an apex Refinancing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas It prepares, on annual basis, rural credit plans for all districts in the country; these plans form the base for annual credit plans of all rural financial institutions. It undertakes monitoring and evaluation of projects refinanced by it. It promotes research in the fields of rural banking, agriculture and rural development.

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Organizational structure

Sources: www.nabard.org

From the above chart we can see the organizational structure of NABARD. In that there are Board of Directors and the Current Chairperson (Ranjana Kumar) and four Executive Directors (V S Das, Prakash Office Bakshi, S K Mitra and). There are 24 Head Office Dept., 8 Training Establishment and 28 Regional Offices and Regional Offices there are Sub Office and 391 District Offices

NABARD’s offices all over India

Sources: www.managementparadise.com

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Financial Santa Clause (NABARD)
National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, with the initial capital of Rs 14000 crore, which was provided by the Government of India (GOI) and Reserve bank of India (RBI). And till March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs 1400 crores. NABARD gets fund from the GOI, RBI, Swiss Bank, big NGO‘s etc. NABARD‘s financial position is very robust. Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and Bank balance and Investment increased by 40.16% and 15.5%. So this shows that how well NABARD is managing their funds and how year and year it blossomed.

How NABARD helps Banks and MFI’s in augmenting?
Earlier Banks and MFI‘s both were having different approached to work. If one was moving in right direction then other was in left. So NABARD played a very crucial role to bring them both in the way. Big commercial banks were focused on only large and medium class people where the poor were neglected because of less savings and borrowing capacity. And the on the other hand MFI‘s were focusing on poor women. As there are more Banks then the MFI‘s, so the large chunk of population gets neglected. So the NABARD came into the picture and try to bridge the gap between the two. What are the techniques that NABARD use for the Banks and MFI‘s:-

For banks: Provide Refinance to the banks. Conduct the workshop where the executive of the NABARD meet the executive and employees of different banks and help them to understand the need and importance of microcredit to the poor people. NABARD helps the banks to interface or try to convene the NGO‘s and other institutions with the banks which earlier they were avoiding to meet. NABARD‘s is having rule for the banks that they have to keep aside a certain amount of loan for the people of Below Poverty Line. For MFI’s: NABARD gives loans to the MFI‘s after analyzing there rating and balance sheet. Conduct the workshop where the executive of the NABARD meet the executive and employees of different Banks and MFI‘s and bring them together on the same podium. NABARD gives the refinance to the MFI‘s also.

35

How NABARD manage their Repayment ratio?
It‘s very interesting o know the repayment structure of the NABARD. NABARD provides the loan to the MFI‘s, Banks, Agriculture loan, other microcredit loan etc. at a very nominal rate of interest and without any deposit of collateral. But their Repayment ratio is more than 95%, let‘s see what are the reasons and how it manage such a high repayment ratio: Before providing loan to the institutions NABARD see the credit rating of that institute given by the rating agency. If they find that sufficient they grant according to that. NABARD analyze the balance sheet and profit and loss statement of the borrowing institutes. They (NABARD) sees the past record of the borrowing institutes i.e. there repayment ratio, there schemes, there management and the executives who are working in that institutes.

How NABARD gives loan to the Institutions?
While I was doing survey what I found out that, NABARD follows the very strange way of providing the loans. They give loans to the every ODD number people or institutes i.e.3, 5, 7, 9…. Because there are so many borrowers every day that its difficult to provide to each and every one. So in this way they try to eliminate the overcrowding problem.

36

Business Model of SAKHI
Introduction
SAKHI (An Organization for Women) is a woman friendly non-government development organization established in the year 2002 by a group of professional to address the issue of poverty- stricken people. Since its inception SAKHI has endeavored to deal with critical issues like illiteracy, health, poverty, assets less status of the poor women and to achieve the goal of gender mainstreaming and thus linking it to the broader aim of sustainable development. In 2006 SAKHI realized the importance of economic empowerment which can have a cascading effect on the overall development and women in particular. With this realization SAKHI shifted its focus from other activity towards economic empowerment of woman and took up Micro Finance as its major area of activity.

MISSION
―To provide financial services to the economically weak and disadvantaged groups for their livelihood enhancement.‖

VISION ―To emerge as a successful NBFC with an annual disbursement of Rs 40 crore and a client base of 40,000 by 2012.‖

OBJECTIVE
1. Women Empowerment: SAKHI Believes that ―Women participation is the most effective instrument in bringing about change in their way of life both economic well-being and adaption of new practices in changing the socio-economic environment:. In order to bring about women participation and their decision making and negotiating power about their rights in all walks in life. 2. Women Health: Health leads to prosperity. Low endowments, production possibilities, and exchange option for women from disadvantage section in rural marginalized the women; this marginalization often results in neglecting the health issues of women and children.

37

3. Women Economic Development: Our objective is to strengthen women‘s economic capacity as entrepreneurs/producers, off farm economy and traditional activities. SAKHI is committed to address factors leading to feminization of poverty and gender inequality.

4. Women and natural resources: Our observation is that women are most effective by degradation of natural resources. We are promoting environment awareness and natural resources conservation activities through women‘s participation at village level.

Organization Structure

SAKHI had developed a systematic organizational structure for itself. The organogram below reflects the organization‘s structure. The aim to have clear staff structure with clearly defined role and responsibilities. Board of Trustees

CEO

HR Manager

Operation Mgr

Finance Mngr

Audit Manager

Admin Manager

Area Mngr

Audit Team

Branch Mgr FCO‘s

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Brach structure Branch Manager

A/C MIS Officer

FCO-JLG

FCO

FCO-GRLN

FCO-GRLN

FCO-JLG: Field Credit Officer-Joint Liability Group FCO-GR-LN: Field Credit Officer Group Loan

How SAKHI disburse the Loans?
Loan Size: • • Cycle –I Cycle –II Rs 3000-Rs 5000 Upto Rs 8000 Upto Rs 12,000 • Cycle- IV Upto Rs 15,000 12 Duration in months Minimum Loan size Maximum Loan size Repayment Frequency Rate of interest (P.a) Upfront loan proceeding fees Security Rs 3000 Rs 15,000 Monthly 18% 2% Group guarantee followed by centre guarantee

Sources:-SAKHI survey

39

Loans are to given in multiples of thousands only, it can be noted that monthly repayment installments for each loan has kept at 10% of the loan amount for the convenience of transaction. The balance amount is to be adjusted in the 12 th installment. Repayment installment chart for each size loan is available with the office

How they charges interest?
Suppose they have given loan of Rs 5,000 to an individual in a group. So he gives Rs 500 per month i.e. 425 capital and Rs 75 interest which is 1.5% of 5,000. So at the end of the year an individual pays Rs 6,000. If we look from other angle, 18% of 5,000 comes to 900 and Rs 100 processing fees. If we go little deep, then their monthly capital is 416.66 +8.33 (transaction fees) + 75 (1.5% of 900) = Rs 500 per month.

How SAKHI raise capital?
Sakhi raises capital from 2 institutes: Friends of Women World Bank.(FWWB) Indian Bank. From these above routes SAKHI raises fund. The rate charges by the FWWB are 13.5% p.a and Indian Bank charges 13.75% p.a. and from NABARD they get Grant.

Why SAKHI charges such a high rate of interest (18% p.a)?
The answer which I got on this question was that, SAKHI receive loan from the above institute and that loan is not disbursed immediately. Suppose SAKHI borrowed 10 lakhs loan, but that amount is not disbursed immediately. But the rate of interest is start charging from the first date of borrowing by the SAKHI. One more answer that I got was, that they (SAKHI) has to charge the same rate of interest to all there borrowers even if the above mentioned two capital institution hikes the loan rate of interest, So apart from high transaction and operating cost, this two reasons also there why the rates are higher.

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Is government waiver plan effected there Institution?
As government waive was only for the government institutions and SAKHI is a private institution, so there was not any big effect on the SAKHI. But as that rule was only for government institution, Pvt. Institution also not remained isolated, they got effected by the high rate charges from the government institution and there borrowers also requested them to waive their loan amount.

Business plan projection
SAKHI has prepared detailed financial projection for its Micro Finance operations. The assumptions for the Business plan as well as detailed projected financial statement are presented below.

Parameter
New Clients AVERAGE LOAN SIZES (RS.) Group Loans JLG Daily Loan NUMBER OF LOANS Group loans JLG Loans INTEREST RATE ON LOANS Group loans JLG loans Loan product 3 UP-FRONT FEE ON LOAN Group loans JLG loans Loan product 3 Loan loss reserve Client per batch Client per field staff Rate of interest on
Sources: SAKHI paper

Fy2007
3000

Fy2008 Fy2009
9000 11000

Fy2010
14000

Fy2011
14000

5000 10,000

6500 11000

8450 11,550

10985 12,128

13182 12,734

1855 1855

5033 1855

9339 14,008

14790 22,184

201896 30,278

17% 32% 0%

17% 32% 0%

16% 30% 0%

14% 29% 0%

14% 28% 0%

2% 0% 0% 1% 928 180 14%

2% 0% 0% 1% 1398 250 14%

2% 0% 0% 1% 1459 300 14%

2% 0% 0% 1% 1541 400 14%

2% 0% 0% 1% 1802 450 14%

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Projected balance sheet

FY 06-07 ASSETS Net Cash Balance Loan outstanding Less: loan loss Net loan investments Net fixed assets 2573207 80000 168301 3544078 722570
2573207

FY 07-08

FY 08-09

FY 09-10

FY10-11

FY 11-12

938892
19176514

2463607
42443039

5427910
90509226

13231540
166763111

15525148
256575806

191765 18984749 1680000 398301 22001942

424430 42018608 6240000 2193451 52915666

905092 89604134 15040000 3835789 113907833

1667631 165095480 31840000 5298095 215465114

2565758 254010048 55840000 7157123 332532319

LIABILITIES
Borrowings Other liabilities SHAREHOLDERS Donated equity General reserve Equity Retained earnings Profit 129750 (379379) 260413 Total liability & assets 3544078 (249529) (928803) 831611 22001942 (1178332) 32940 2878668 52915666 509943 2009943 4009943 14117 6009943 287767 10000000 (1145392) 638516 15790835 113907833 6009943 1354952 15000000 (506867) 2490097 24348116 215465114 6009943 3175113 20000000 1983222 4247043 35415321 332532319 3066666 216998 20453333 716998 48820000 1216998 96400000 1716998 188400000 2716998 293400000 3716998

Sources: SAKHI paper

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Business Model of Mas Finance
INTRODUCTION
MAS Finance is basically a NBFC (Non Banking Financial Company). They provide minimum loan of 10,000 and maximum 40,000. MAS Finance is one of the blooming private MFI in the current era. They are having a sufficient amount of capital with them for their future growth.

Role and Function Helping in eradication of poverty. Providing finance for the upliftment of the individuals. Helps the borrower in establishing their business.

OBJECTIVE
1. Women Empowerment. 2. Women Economic Development. 3. Building better India.

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Organization Structure

Board of Directors

Managing Director Director finance Director Legal

Vice President Finance Treasury & Planning Team

COO

Recovery Manager Mnager Recovery Offcr Executive & Agency Legal Team

Product Head Micro Loan

Product Head CV

Product Head Two Wheeler

Product Head Lap

Product Head Insurance

Product Head Used Car

Sources: - MAS Finance Papers

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How MAS FINANCE raise capital?
Their main source of income is through banks. They have relation with 10-12 banks who are willing to fund them. The rate charges by the banks is between 12-13%.

How MAS Finance manages their repayment structure
Loans provided by the MAS FINACE are relatively bigger in size, starting from Rs.10,000. They give loan at the maximum tenure of 36 months and collect installments on monthly basis. They help borrowers in opening a bank accounts if they do not have and to maintain the security they collect the post dated cheques from them for repayment.

MAS Finance has strange way of providing loan?
MAS FINANCE has a unique way of providing loan. Till now I have studied, all the MFIs provide the loan in the groups. But MAS FINANCE provides the loan individually. They don‘t lend in groups. When I asked the reason, they said that it‘s their old way of providing the loan and they follow it.

Why MAS Finance charges such a high rate of interest (25-26%% p.a)?
Again the same question, why the rates are high, and same reply. Because of the high transaction cost and not disbursement of loan immediately to the end users.

Any default case regarding to repayment of the loan?
As MAS FINANCE provides loan individual to individual, there are high changes of default in the loan. Company has also faced few default cases in the past. Their repayment ratio is 94%, which is less compares to other MFIs. Even after providing individual loan, how they can manage such a high repayment ratio? The answer is. Before providing the they asked the borrower for the post dated cheque. So if in future if the borrowers defaults then they can settled with that post dated cheque.

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Credit institutions as a Political tool: Debt relief in India
Rural financial institutions that are associated with governments often become the target of politicians. Indian Government appointed Agricultural Credit Review Committee in 1989. During the election years, and even at other times, there is a considerable propaganda from political platforms for postponement of loan recovery or pressure on the credit institutions to grant extension or waive of the loans. The ―willful‖ defaulters are, in general, socially and politically important people who example others are likely to follow. The waiver of farm loans by the government of India has resulted in increased defaulters. Paying back the loan is a cultural concept. People borrowing money should feel the strong moral urge to pay the loan back. Loan waivers instead make them feel that if the things go really, really bad, government will step in and cancel the interest payable and even principle also. This will increase the defaulters list because even the decent borrowers default on their loan. In addition to know lacuna in the operating system for microfinance, the most serious against the success of Microfinance, emerges from political intervention. For example: around the year 1995, at the behest of Mr. Devilal the government of India waived the repayment of agriculture loans, in which the outstanding debit amount was less than Rs 10,000 per loan account. It was noticed in the RBI inspection of some of the District Central Co0perative Banks (DCCBs) during the latter years that hundreds in thousands of defaulters with outstanding Dr Balance in excess of Rs 10,000 were also accommodated by some accounting jugglery. Be whatever it may, such declaration from the government obviously prompts the emergence of willful defaulters In other words the farmers, where otherwise having financial means to repay choose the easier path of non repayment. Ultimately it is resulted into mounting NPAs in the balance sheet of the co-operative banks and more seriously dreadful challenge to the functioning of Microfinance. This sad experience is recently repeated when an enormous package of Rs 60,000 crore is declared by Shri P.Chitambaram and further package of Rs 40,000 crore is also declared by Mr. Rahul Gandhi. This proves that the politicians were in powered have no respect to create and solitude a noble and viable financial system, such as Microfinance. Such a culture will seriously impact the MFI‘s operating in the rural areas. The farmer, whose agriculture loan from the state owned bank was waived, will have a wife which is the ideal candidate for taking loan from MFI‘s. Now would be her attitude to paying the loan back, when her husband‘s loan get waived by the Government itself? Because of this attitude many MFI‘s reluctant to enter into this sector (Farm loan sector). As long as Government persists, privately funded MFI‘s should never lend any money to the farmers.

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Indeed the recent waiver packages are declared by the ruling party to enrich the balance their Vote bank account in view of the general elections.

Loan waiving policy has any positive impact on distressed farmers who have moneylender debt?
This loan waiver does not directly address moneylender debt, and I saw somewhere that three quarters of the farmers committing suicides owed money to moneylenders. There are about 70% of the poor who still takes the loan from the money lenders and the loan waiving was not for that people who has taken loan from the moneylenders, so there would be not any relief for such farmers, and still the suicides will continue. “I am confused, where is my Microfinance Lost”

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Product Design
The starting point is: how do MFIs decide what products to offer? The actual loan products need to be designed according to the demand of the target market. Besides the important question of what risks to cover, organizations also have to decide whether they want to bundle many different benefits into one basket policy, or whether it is more appropriate to keep the product simple. For marketing purposes, MFI‘s sometimes prefer the basket cover, since it can make the policies sound comprehensive, but is that the right approach for the low-income market? After picking products, one must also understand how they are priced. What assumptions do the organizations make with regard to operating costs, risk premiums, and reinsurance, and how did they come to those conclusions? Would their clients be willing to pay more for greater benefits? From price, the logical next set of questions involves efficiency. Indeed, given the relative high costs of delivering large volumes of small policies, maximizing efficiency is a critical strategy to ensuring that the products are affordable to the low-income market. One way is to make the products mandatory, which increases volumes, reduces transaction costs and minimizes adverse selection. What does an organization lose by offering mandatory insurance, and how does it overcome the disadvantages? MFI‘s can combine a mandatory product with some voluntary features to make the service more customer-oriented while.

Techniques of Product Design
To design a loan product to meet borrower needs it is important to understand the cash pattern of the borrowers. cash pattern is important so far as they effect the debt capacity of the borrowers. Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments when they are due\ Efficiency depends less on the delivery model than on the simplicity of the product or product menu. Simple products work best because they are easier to administer and easier for clients to understand. Another efficiency strategy is to use technology to reduce paperwork, manual processing and errors. MFIs need to conduct a costing analysis to determine how much they need to earn in commission to cover their administrative expenses.

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how mfi’s manage their repayment and risk management?
Risk is an integral part of financial services. When financial institutions issue loans, there is a risk of borrower default. When banks collect deposits and on-lend them to other clients (i.e. conduct financial intermediation), they put clients‘ savings at risk. Most MFIS‘s provides the loans without or with smaller portion of deposit or, so for them repayment of interest or principal is very risky. All MFI‘s face risks that they must manage efficiently and effectively to be successful. When poorly managed risks begin to result in financial losses, donors, investors, lenders, borrowers and savers tend to lose confidence in the organization and funds begin to dry up. When funds dry up, an MFI is not able to meet its social objective of providing services to the poor and quickly goes out of business.

What is Risk Management?
Risk management is a discipline for dealing with the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk management may be as uncomplicated as asking and answering three basic questions: What can go wrong? What will we do (both to prevent the harm from occurring and in the aftermath of an "incident")? If something happens, how will we pay for it?

Benefit of Risk Management:
Early warning system for potential problems: A systematic process for evaluating and measuring risk identifies problems early on, before they become larger problems or drain management time and resources. Less time fixing problems means more time for production and growth. Better information on potential consequences, both positive and negative. A proactive and forward-thinking organizational culture will help managers identify and assess new market opportunities, foster continuous improvement of existing operations, and more effectively performance incentives with the organization‘s strategic goals. Encourages cost-effective decision-making and more efficient use of resources;

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The Corposol/Finansol Crisis
In 1996, Finansol, a regulated financial intermediary in Columbia, suffered from severe deterioration of its loan portfolio. While a lack of transparent and separate accounting from its parent NGO, Corposol, added to the problem, the MFI‘s rapid growth and poor risk management were initial culprits. In 1995, Finansol‘s microfinance portfolio grew from $11 million to $35 million. Many of the credit officers who delivered this growth were new and not well trained, and were simultaneously responsible for promoting three new untested microfinance products for Corposol. There was no mechanism to prevent clients from receiving multiple loans from the MFI; in fact, many clients had two to three loans outstanding. The new products were mostly unsuccessful and the management information system had difficulty managing the diversity of products. As a temporary measure to reduce the negative impact on the income statement resulting from provisioning, Finansol refinanced loans on a wide scale and extended loan terms. This further concealed Finansol‘s deteriorating asset quality. Under pressure to generate revenue for Corposol, whose operating revenues were heavily dependent on training fees from new clients, loan officers continued to expand their loan portfolios by adding new clients without much regard for credit risk. To circumvent a government policy that limited the asset growth of regulated financial institutions to 2.2 percent per month, Corposol retained a significant portion of Finansol‘s loan portfolio on its balance sheet, which further distorted Finansol‘s financial statements. It wasn‘t until July 1995, when ACCION International conducted a formal evaluation of the entire microfinance operation that the problem came to light. A recapitalization plan called for an end to the relationship between Corposol and Finansol and the recruitment of new investors to raise the level of capital high enough to meet the Superintendence‘s requirements and to fuel future growth. With the assistance of private and nonprofit sectors, the recovery plan successfully saw Finansol through its institutional metamorphosis into what is now FINAMERICA, S.A. FINAMERICA began operations in 1997, and as of year-end 1998, it had achieved financial solvency with 9,800 active clients and a loan portfolio of $13.4 million. This crisis demonstrates the need to integrate risk management in all an MFI’s activities.
Sources: research paper Deutsche Gesellschaft für

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Major Risks to Microfinance Institutions: Financial Risks
Credit Risk Transaction risk Portfolio risk Liquidity Risk Market Risk Interest rate risk Foreign exchange risk Investment portfolio risk

Operational Risks
Transaction Risk Human resources risk Information & technology Risk Fraud (Integrity) Risk Legal & Compliance Risk

Strategic Risk
Governance Risk Ineffective oversight Poor governance structure Reputation Risk External Business Risks Event risk

Sources: - www. Scribd.com

This are the most significant risks (with the most potentially damaging consequences for the MFI), how they interact, and current challenges faced by MFIs.

Financial Risks:
Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks. Mentioned under are the risks which are very critical for the MFI‘s. Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or capital due to borrowers‘ late and non-payment of loan obligations. Credit risk encompasses both the loss of income resulting from the MFI‘s inability to collect anticipated interest earnings as well as the loss of principle resulting from loan defaults. Credit risk includes both transaction risk and portfolio risk. Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigate transaction risk through borrower screening techniques, underwriting criteria, and quality procedure for loan disbursement, monitoring, and collection. 51

Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the overall loan portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures lessen the portfolio risk.

Liquidity risk:
Liquidity risk is the ―risk that an MFI cannot meet its obligations on a timely basis‖. Liquidity risk usually arises from management‘s inability to adequately anticipate and plan for changes in funding sources and cash needs. Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to meet client withdrawals, disburse loans and fund unexpected cash shortages) while also investing as many funds as possible to maximize earnings. Liquidity management is an ongoing effort to strike a balance between having too much cash and too little cash. Interest rate risk: Interest rate risk is the risk of financial loss from changes in market interest rates. The greatest interest rate risk occurs when the cost of funds goes up faster than the financial institution can or is willing to adjust its lending rates. How to manage interest rate risk? To reduce the mismatch between short-term variable rate liabilities and long-term fixed rate loans, managers may refinance some of the short-term borrowings with long-term fixed rate borrowings. This might include offering one and two-year term deposits as a product and borrowing five to 10 year funds from other sources. Such a step reduces interest rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those funding sources. To boost profitability, MFIs may purposely ―mismatch‖ assets and liabilities in anticipation of changes in interest rates. If the asset liability managers think interest rates will fall in the near future, they may decide to make more long-term loans at existing fixed rates, and shorten the term of the MFI‘s liabilities. By lending long and borrowing short, the MFI can take advantage of the cheaper funding in the future, while locking in the higher interest rates on the asset side. In this case, the MFI has increased the interest rate risk in the hope of improving the profitability of the bank.

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Operational Risks:
Operational risk arises from human or computer error within daily service or product delivery. This risk includes the potential that inadequate technology and information systems, operational problems, insufficient human resources, or breaches of integrity (i.e. fraud) will result in unexpected losses.

Two types of operational risk: transaction risk and fraud risk:
Transaction risk: Transaction risk is particularly high for MFIs that handle a high volume of small transactions daily. Since MFIs make many small, short-term loans, this same degree of cross-checking is not cost-effective, so there are more opportunities for error and fraud. As more MFIs offer additional financial products, including savings and insurance, the risks multiply and should be carefully analyzed as MFIs expand those activities Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional deception by an employee or client. The most common type of fraud in an MFI is the direct theft of funds by loan officers or other branch staff. Other forms of fraudulent activities include the creation of misleading financial statements, bribes etc. How to minimize fraud risk? Introduced an education campaign to encourage clients to speak out against corrupt staff and group leaders. Standardized all loan policies and procedures so that the staff cannot make any decision outside the regulations. Established an inspection unit that performs random operational checks.

Strategic Risks:
Strategic risks include internal risks like those from adverse business decisions or improper implementation of those decisions, poor leadership, or ineffective governance and oversight, as well as external risks, such as changes in the business or competitive environment. This section focuses on two critical strategic risks: Governance Risk, Business Environment Risk.

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Governance risk: Governance risk is the risk of having an inadequate structure or body to make effective decisions. The Corposol/Finansol crisis, described above illustrates the dangers of poor governance that nearly resulted in the failure of that institution.

External business environment risk: Business environment risk refers to the inherent risks of the MFI‘s business activity and the external business environment. To minimize business risk, the microfinance institution must react to changes in the external business environment to take advantage of opportunities, to respond to competition, and to maintain a good public reputation

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Why micro finance provides loan to the women only?
A majority of microfinance programs generally target women—often more financially responsible at repaying than men—as clients, providing them with direct control over resources.

Why MFIs typically targeted women. These factors included:
Repayment rates are higher than men, so lending to women is a better Investment. Women are on average poorer than men, so focusing on women can help achieve poverty targets. Women‘s activities contribute to a community‘s economic growth, so lending to women is more efficient. The members in a group are selected so as to be in the same age group and residing in the same locality being friends but not from family. In case of problems in recovery from even one of the members, the system of joint liability ensures recovery of the dues from all the members within a group. Women are better borrowers because they repay their loans more faithfully than men repay and tend to spend money on improving the standard of living of their family. It has been proved that women are those who are the most able to manage the money of the household. Experience has shown that women are a good credit risk, and that women invest their income surround the well being of their families. Women have proven to be the best poverty fighters. Experience and studies have shown that they use the profits from their businesses to send their children to school, improve their families‘ living conditions and nutrition, and expand their businesses. By providing access to financial services only through women—making women responsible for loans, ensuring repayment through women, maintaining savings accounts for women, providing insurance coverage through women—microfinance programs send a strong message to households as well as to communities.

Why MFI’s being criticized for providing loans to the women only?
It was found that while women were getting the loans, a "significant portion" of those loans are directly invested by male relatives (although women bear the liability for repayment) Only 37% of the cases had women retained full or significant control over the businesses that were in their names. Repayment tensions in other microfinance programmes as well. In India in 2008 in the state of Andhra Pradesh, media reports linked to 70 suicide deaths to repayment issues in Grameen type programmes. The same reports also documented techniques forcing credit circle members to stand in the sun until recalcitrant members paid up, verbal abuse etc. One more reason why MFI‘s critized for giving loans to the women only because, women‘s are weak compared to men‘s and by coerce them the MFI‘s can easily repayment their loans. 55

Another reason might be that the women not often change their whereabouts, because they have the many responsibilities like children etc. and they easily found at home also.

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how the recent slowdown affects the mfi’s:
Microfinance institutions have weathered the global financial storm remarkably well, but in 2009 the credit crunch and global recession could hit the sector hard. The micro finance sector is not fully integrated into mainstream banking and so MFIs are partially insulated from financial markets contagion. From the very early of beginnings, the sector has expanded into a global community of over 3000 MFIs serving 125 to 150 million customers in developing countries with 25 to 30 billion dollars in loans. The industry has consequently attracted mainstream banks like Citigroup, Standard Chartered, and BNP Paribas. SKS Microfinance, India's largest MFI, recently raised about 75 million dollars from private equity sources. The most immediate worry is that the global credit crunch will affect the cost and availability of funding. The most vulnerable MFIs will be those that get their money from foreign banks. Credit is now tighter, slower, and more costly. As financial institutions are struggling with their liquidity, they have less money to lend to microfinance institutions, which in turn means less to lend to the poor, and lending happens then at the higher rate. Current slowdown also increases the rate of interest on borrowed sum, this further increases the funding loan of the MFI‘s and the poor people who takes loan from the MFI‘s, would find it difficult to borrow and this further increases the more people Below Poverty Line (BPL) Microfinance institutions generate capital from three main sources: debt, deposits, and equity. And during the recession all this sources of finance gets expensive. We will see one by one. Deposits: Many MFI‘s main source of capital is from deposits, and this is the easiest source of capital but during the recession, local currencies in developing countries lose value, clients will find it increasingly difficult to maintain savings levels. Deposits may decline and non-performing loans may increase as clients require additional capital to cover basic needs. Debt –based MFI’s: MFIs that depend upon this source of capital at greatest risk during the financial crisis. In today‘s economy debt financing is offered at a high rate of interest and during slow down the demand from the investors get reduced and the MFI‘s have the fixed obligation to pay interest. So this creates the difficulty for the MFI‘s and for borrowers during the time of slowdown. Equity based financing: This source of finance is not very popular in India. Because this needs a huge capital and many MFI‘s in India are not 57

Many microfinance banks are not disturbed by the global happenings due to, the fact that they all have high savings- and deposit this leads to less dependence on government, bank and external funding. But even savings-led institutions are not immune to a global economic crisis. MFI managers now report that high prices for food and fuel, a lack of demand for microenterprise products and decrease in the incomes of the earning members are hurting their clients. More and more clients withdraw their savings or have trouble repaying their loans.

How the MFI’s find opportunities within the crisis:
MFIs could also find opportunities within the crisis. Microfinance‘s relatively reliable business model could attract investors looking to spread risks and diversify their portfolios. The downturn could also force MFIs to grow less aggressively and focus on consumer protection, transparency, and governance. More commercialization by the MFI‘s can also create situation of subprime style crisis. So the slowdown would slow down the commercialization and helpful for the local borrowers. One more solution to solve the money problem of MFI‘s might be, to turn MFI‘s into bank, this can solve their liquidity problem by taking deposits and lending money.

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mfi’s being criticized because of high interest rate:
Most MFI‘s financially sustainable by charging interest rates that are high enough to cover all their costs. The problem is that the administrative costs are inevitably higher for tiny micro lending than for normal bank lending. Lending out a million dollars in 100,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan for the total amount. As a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans. Four key factors determine these rates: 1. the cost of funds, 2. the MFI's operating expenses, 3. loan losses, 4. and profits needed to expand their capital base and fund expected future growth. There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10 percent, and it experiences defaults of 1 percent of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11percent of the loan amount thus covers both these costs for either loan. The third type of cost, transaction costs, is not proportional to the amount lent. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16 percent. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36 percent. Formula to decide the interest rate is: R = AE + LL + CF + K - II 1 – LL Where AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired capitalization rate and II is investment income.

Why Microcredit Rates are so high?
An MFI's main objective is to provide poor and low-income households with an affordable source of financial services. Interest charged on loans is the main source of income for these institutions and, because they incur huge costs, the rates are correspondingly high. Many policy makers question why microfinance interest rates remain high even when MFIs receive concessional funds to finance lending. Donors provide concessional funds for a 59

particular usage only for a limited period, as do some governments. However, concessional funds cannot be considered a permanent source of funds for MFIs, and provision must be made through interest rates to sustain the lenders' operations.

The problem is that the administrative costs are inevitably higher for tiny microlending than for normal bank lending. Lending out a million dollars in 100,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan for the total amount. As a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans. Inflation adds to the cost of microfinance funds by eroding micro lenders' equity. Thus, higher inflation rates contribute to higher nominal microcredit interest rates through their effect on the real value of equity. Most of the Micro lenders face two kinds of operating costs: personnel and administrative. Because micro lending is still a labor-intensive operation, personnel costs are high. Administrative costs consist mainly of rent, utility charges, transport, office supplies, and depreciation of fixed assets. Making and recovering small loans is costly on a per unit basis. Often loan recovery is executed by staffs who visit clients, increasing costs in time taken and transportation used. Poor physical infrastructure—inadequate road networks, transportation, and telecommunication systems— in many countries in which micro lenders operate also increases administrative costs and adds significantly to the cost of microfinance operations. In many countries in the region, the majority of microcredit is provided by a few leading institutions, and competition among them is mostly on non-price terms. Large-scale commercial banks with access to low-cost funds, low operating costs, extensive branch networks, and vast human and other resources to provide financial services efficiently are presently not significantly involved in microcredit. The lack of participation of such conventional financial institutions in the microcredit market also limits potential competition.

This does not mean that all high interest charges by MFIs are justifiable. Sometimes MFIs are not aggressive enough in containing transaction costs. The result is that they pass on unnecessarily high transaction costs to their borrowers. Sustainability should be pursued by cutting costs as much as possible, not just by raising interest rates to whatever the market will bear.

Inappropriate Comparisons
Microcredit interest rates are often compared with those charged by both commercial banks and excessively subsidized lending organizations. Such comparisons are inappropriate. Commercial 60

banks most often deal with large loans, and their transaction costs are lower than those of MFIs on a per unit basis. Thus, commercial banks are able to charge lower interest rates than MFIs. A financial institution receiving large subsidies may charge lower interest rates than other MFIs. In Bangladesh, the Grameen Bank charges an annual interest rate of 20% (on a reducingbalance basis) on its main credit product. Because this rate was below cost recovery levels, the Grameen Bank incurred losses for many years, and these losses were underwritten by the big subsidies it received. Thus, Grameen Bank's interest rates should not be compared with those of an MFI that has not received similar subsidies. Other inappropriate comparisons of MFI interest rates include those charged by governmentowned MFIs or government-sponsored microfinance programs that are often compelled to charge lower-than-cost-recovery interest rates based on political considerations. These comparisons also overlook that most of these programs and institutions in general are unlikely to survive in the long term to serve the poor. Moreover, the poor have to incur unusually high transaction costs to access credit from these sources due to credit rationing systems and rentseeking practices adopted by their employees.

Rate Ceilings: Not the Answer
Lower microcredit interest rates will help increase of availability of affordable finance for poor households."Policymaker concern over high interest rates has led many to suggest capping interest rate by setting rate ceilings. Yet that this is not an appropriate solution, explaining "Rate ceilings will diminishing the growth of the MFI industry and result in reducing the supply of microcredit and other financial services, harming rather than helping poor and low income households." If rates are set to a level less than that required to cover costs, lenders will incur losses. Not only will this hurt MFIs‘ ability to expand operations, but it will also reduce their creditworthiness and ability to borrow. If a rate ceiling is imposed on a state-owned institution, government will have to provide funds to cover the resulting losses. If the lenders mobilize deposit, microcredit interest rate ceilings may decrease the saving with MFI‘s, because ceilings depress the profitability and viability of MFIs, savers may be reluctant to place deposits in them. This further increases the funding problem while curtailing a valuable service in demand from poor and needy clients.

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General Impact of Ceilings on Microcredit Interest Rates
The Supply Side Short-Term • Lenders compelled to reduce their Lending Rates. • Excess demand creates incentives for Rent-seeking among lending staff. • lending to the poor Reduced. • Lenders' profits on loans to the poor Reduced. The Side The DemandDemand Side Short-Term Short-Term • Demand for loans increases at the ceiling rate. • Some new potential clients seek loans at the new rates. • An excess demand for loans created at the ceiling rate. • Price of credit to some of those who actually get loans reduced.

• Incentives make by the MFI‘s on loans to the poor Reduced. • Some borrowers pay higher transaction costs than before. • Incentives to increase investments to expand loans to the poor reduced. • Policy risk on lending to the poor increased (threat of new ceilings). •A negative signal sent to potential Investors. • Risk of lending to micro lenders Increased. • Incentives to commercial banks to enter the microcredit market reduced.

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The Supply Side Medium- to Long-Term

The Demand Side Medium- to Long-Term

• Microlenders' creditworthiness declines; • Some borrowers shift to informal Price at which microlenders can commercial markets. borrow in the market increases. • Many former borrowers become • Microlenders' profit declines. worse off by the decline in supply. • Supply of funds from some donors Declines. • Some lenders leave the market. • Supply of loans to the poor decline. • Interest rates paid on deposits reduced by affected micro lenders. • Micro lenders increase transaction costs of small deposits. • Supply of micro lenders' other financial services to the poor also declines. Short-Term • Defaults increase.

Sources: research paper by East Asia Department

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SWOT Analysis of micro finance
SWOT stands for Strength, Weakness, Opportunity, and Threat.

Strength

Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the individuals who are below the poverty line and cannot able to access from the commercial banks. As we know that Indian, more than 350 million people in India are below the poverty and for them the Micro Finance is more than the life. By providing small loans to this people Micro finance helps in reducing the poverty. Huge networking available: For MFIs and for borrower, both the huge network is there. In India there are many more than 350 million who are below the poverty line, so for MFIs there is a huge demand and network of people. And for borrower there are many small and medium size MFIs are available in even remote areas.

Weakness • Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated properly. In the absent of the rules and regulation there would be high case of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can function properly and efficiently. High number of people access to informal sources: According to the World Bank report 80% of the Indian poor can‘t access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p.a. Concentrating on few people only: India is considered as the second fastest developing country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few people. India‘s 70% of the population lives in rural area, and that portion is not fully touched.

Opportunity • Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and issuers. In India around 350 million of the people are poor and only few MFIs there to serving them. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower.( April 09)

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Employment Opportunity: Micro Finance helps the poor people by not only providing them with loan but also helps them in their business, educate them and their children etc. So in this Micro Finance helping in increase the employment opportunity for them and for the society. Huge Untapped Market: India‘s total population is more than 1000 million and out of 350 million is living below poverty line. So there is a huge opportunity for the MFIs to meet the demand of that unserved customers and Micro Finance should not leave any stones unturned to grab the untapped market. Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment.

Threat • High Competition: This is a serious threat for the Micro Finance industry, because as the more players will come in the market, their competition will rise , and we know that the MFIs has the high transaction cost and after entrant of the new players there transaction cost will rise further, so this would be serious threat. Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by informal sources. But the formal source of finance through Micro Finance is novice, and the rules are also not properly placed for it. Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because the excess of anything is injurious, so in the same way the excess involvement of Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans, make new rules for their personal benefit etc.

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Sks Case study
Development of Organization
Swayam Krishi Sangam (SKS) employs the Grameen bank lending methodology. SKS is a young MFI, which recently transformed into an NBFC and was established as an NGO in 1997 by Vikram Akula, a social entrepreneur and graduate of both Yale & Tufts Universities.72 The mission of SKS is, ―To empower the poorest of the poor to become economically self-reliant by providing financial services to poor women, through groups at the village level, in a self sufficient manner.‖ Its goal going forward is to raise money in order to scale up and reach 15 million customers by 2012. Since its founding, SKS has delivered over US $ 1.3 Billion (6,640 Crore) and has maintained loans outstanding of US$ 451 Million (Rs 2,284 Crore) in loans to 3,953,324 women members in poor regions of India. Thus we are interested in how it has fared as an NGO and what has driven it to transform. It then completes the picture of the various approaches to becoming an NBFC that an MFI can take and therefore, allows us to see a wider and richer array of benefits and costs.

Sources of Capital
SKS transformed from and NGO into an NBFC in January 2005 order to improve financial sustainability and access commercial funds in order to scale up outreach to 1,000,000 clients by 2010. SKS cited the benefits that it now enjoys as an NBFC as: • • • Greater access to funds as commercial lenders have greater comfort lending to a regulated company with transparent ownership. A diverse funding source because as an NBFC, SKS can raise equity and offer financial returns, enabling it to access commercial investors and international capital markets. Greater Outreach Potential due to increased access to funds.

SKS has historically sourced most of its capital from donors and loans. In 2008, SKS indicated that 40% of the company is owned by its clients with 15% of it owned by employees and the rest by a group of institutional and individual investors.

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Operation and Financial function

04-Mar

05-Mar

06-Mar

07-Mar

08-Mar

Total Branches

10

26

80

275

771

Total Sangams (Centers)

928

2,518

6,050

20,479

63,142

Total Clients

30,763

86,869

201,943

603,933

1,879,258

Total Loan Clients

24,800

73,635

172,970

513,108

1,629,474

Total Loans Outstanding( Rs) Average Loan Outstanding per Loan Client Total Savings

117,167,760 4,725

332,561,200 4,516

920,691,434 5,323

2,756,961,650 5,373

10,506,707,499 6,448

1,384,598

0

N/A

N/A

N/A

Average Savings per Client

174,884,069

N/A

N/A

N/A

Total Assets

102.30%

290,344,862

1,000,281,244

3,349,090,496

10,887,447,659

Total Networth Operating Self-Sufficiency (OSS) Administrative Efficiency

17.50% 223
17.50%

3,433,420 103%

143,815,712 110%

716,750,911 111%

2,125,358,001 121%

12.34%

13.40%

11.98%

12.80%

Clients per Field Staff

223

390

435

386

436

Sources: www.sksindia.com

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Organization & Management Analysis
Strategic Vision

The strategy of SKS to achieve its mission is to help poor people access small, low interest loans during times of crisis, so that they can avoid falling into debt traps. SKS endeavors to offer the poor alternatives from Banks that require collateral and bureaucratic procedures as well as moneylenders that charge exorbitant interest rates. The company does so by delivering collateral-free microfinance in the form of small loans and savings facilities to the doorstep of the poor. SKS seems to have a strong strategic mission but there is some uncertainty about its ability to balance that mission while attempting to transform into a more financially sustainable and commercially oriented institution. The rapid growth of the organization shows its commitment to outreach and scale in the service of the mandate of microfinance. Our main concern surrounds its ability to balance its ambitious mission to serve the ―poorest of the poor‖ in a financially viable manner.

Management & Governance

SKS has a board of directors composed of seven members about which not much was said in the 2008 annual report. Thus, the diversity and strength of SKS‘s board is somewhat unclear. However, the members of SKS‘s Foundation, its fundraising arm, are a diverse group of professionals and academics from India and the U.S. SKS‘s management also appears to be quite strong based simply upon ranges of experience in business and development and education

Transparency

The transparency of SKS seems rather good in that its financial statements arereadily available and up to date, however not all information was outlined as clearly asthat of BASIX or in some instances SHARE. Information detailing governance, human resource management, and poverty impact analysis as well as poverty outreach strategy was hard to extract and not readily available. Again, this may simply be a factor of the size of the company and its length of time in operation.

Loan Methodology

Village selection Before entering a village, SKS staff members conduct a comprehensive survey to evaluate the local conditions and potential for operations. Some of the key factors include total population, poverty level, road accessibility, political stability and safety. After a village has been selected, SKS conducts a Projection Meeting with the entire village to introduce SKS, its mission, methodology and services. After the projection meeting, SKS holds a Mini-Projection Meeting to 68

further explain SKS to interested parties and appeal directly to those who may not have attended the meeting because of religious, class, caste or gender barriers. Upon completion of the miniprojection meeting, Sangam (Center) Formation begins. Sangam (centre) formation Before entering a village, SKS staff members conduct a comprehensive survey to evaluate the local conditions and potential for operations. Some of the key factors include total population, poverty level, road accessibility, political stability and safety. After a village has been selected, SKS conducts a Projection Meeting with the entire village to introduce SKS, its mission, methodology and services. After the projection meeting, SKS holds a Mini-Projection Meeting to further explain SKS to interested parties and appeal directly to those who may not have attended the meeting because of religious, class, caste or gender barriers. Upon completion of the miniprojection meeting, Sangam (Center) Formation begins. As additional groups are formed within a single village, a Sangam (Center) emerges. During Sangam Formation, groups are combined to form a center of 4 to 12 groups or 20 to 60 clients. The Sangam is responsible for the repayment of all groups, creating a dual joint liability system. If one group defaults the rest of the Sangam must repay. Once a Sangam is formed As additional groups are formed within a single village, a Sangam (Center) emerges. During Sangam Formation, groups are combined to form a center of 4 to 12 groups or 20 to 60 clients. The Sangam is responsible for the repayment of all groups, creating a dual joint liability system. If one group defaults the rest of the Sangam must repay. Once a Sangam is formed

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Interview of end users
During my personal visit to MFIs I asked view questions from the end users (customers) of Microfinance institute. I have taken interview of 25 people and I asked few questions to them. Which are mentioned under:Q.1 Are you regular or new customer? Q.2 If you are a Regular customer, then can you please tell me your experience? Q.3 What‘s your opinion on interest rates? Q.4 What you do with that loan amount? Q.5 Does the Microfinance Institutions provide you any type of other benefits other than just loan? Q.6 According to you which is better, loan from local Zamidars or with MFIs? Q.7 Have you ever faced any violation on you, if you could not able to repay the loan amount?

The common replies are mentioned under: Ans.1 Many of the customers are regular and take loan frequently. Ans. 2 This was the best part and I enjoyed and felt good after hearing their answers. I was amazed that, how can a mere amount of loan can change the life of the people. I got many answers on experiences but the best experience I want to share in this report. There was a woman; her name was Chandrika Ben Jadwa. I asked her to share her experience before and after the loan taken from MFIs. She was widow, with 2 daughters. After her husband‘s death she had taken mere Rs 3000 loan from the MFI and purchased Sewing machine, at that time her daughter was 13 years old. And now her daughters‘ age is 23. She came with her daughter, her name was Jaya and when I asked Jaya that what she is doing. I was perplexed by her reply. She replied me in English, and told that she worked in Baroda at call centre. She was so confident, that I couldn‘t believe that time. Her mother told that she educated Jaya till 11th at Village schools and after that she sent her at Baroda for further studies and due to Micro loans, she could able to pay her tuition fees. From that point I realized that what is the power of Micro loans and how it can change the life of the individuals. Other experience like increase the living standard of the poor, improve in health condition etc.

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Ans. 3 When I asked them about the interest rate. Then I got the mixed answer. Some said that rates are high and some said that it is nominal. But one common answer that I found out that the repayment terms is fair and one can easily understand. Most of the MFIs charges weekly interest rate, so they said that it is easy to repay them on weekly basis. Ans.4 Most of the Micro credit borrower uses there loan amount: Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc. When I got this type of reply I thought that the villagers and poor people can also manage the funds as compared to an urban people. Ans.5 Interviewer answered, that apart from loan amount MFIs helped them many ways like: health facility, student education, teach them, help them in their business, take care of their cattle health, sanitation etc. Ans.6 When I asked this question, 22 people were voted for MFIs and remaining 3 for local Zamidars. I further asked to that 3 person that why they opted for Zamidars. They replied that there terms and conditions are much flexible compared to MFIs i.e. they can give interest on any date. That is after 1 month, 2 month like that, there is not any uniformity in repayment. Other answer that I got from them that because of the good relation with the Zamidars they preferred to borrow from them. And the Zamidars charges low rate of interest compared to MFIs. But many borrowers opted for MFIs because of less rigorous repayment terms and method. Many additional benefits are given like education, health advice etc. to the borrowers apart from loan amount. Ans. 7 There are some cases of violation on the borrowers for not repayment of the interest and loan amount. One incident discussed with me by the villagers that, there was woman, her name was Sukhi Devi . She took loan of Rs.10,000 from one of the MFI on a condition of repay 20% annually, but she defaulted and was not able to repay. Actually that loan amount was taken by her husband, and he died. So she was not able to repay. And the MFI adopted forceful way to regain their loan amount, and they forced her so much that after sometime she committed suicide. So according to them (end users) there was only one case where MFI used this forceful way to regain their amount.

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Future of Micro Finance
Microfinance expansion over the next decade can be expected to be an extension of what has been achieved so far while overcoming the hurdles that have been posing difficulty in effective microfinance operation and its expansion. There may be several participants in this process and their participation may be seen in the following forms. Existing microfinance institutions can expand their operations to areas where there are no microfinance programs. More NGOs can incorporate microfinance as one of their programs. In places where there are less micro finance institutions, the government channels at the grassroots level may be used to serve the poor with microfinance. Postal savings banks may participate more not only in mobilizing deposits but also in providing loans to the poor and on lending funds to the MFIs. More commercial banks may participate both in microfinance wholesale and retailing. They many have separate staff and windows to serve the poor without collateral. International NGOs and agencies may develop or may help develop microfinance programs in areas or countries where micro financing is not a very familiar concept in reducing poverty. 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. It is estimated that 90 million farm holdings, 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and does not seem an unreasonable estimate. 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. Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector because of its very low NPAs and high repayment rate of more than 95% in spite of offering loans without any collateral security. 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

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Development of Small-Scale Enterprises through microfinance will not only increase the outreach but will also help the generation of more employment and income for the poor. It is expected that in the following years there will be considerable deepening of microfinance in this direction along with simultaneous drives to reach and serve the poorest of the poor. But the crux of the discussion is that, if the over excess involvement of the government would be there in the Micro Finance sector, than the growth of the Micro Finance won‘t much possible. The Govt. involvement should limited to the important decisions only, but not to interfere in each and every matter of the management.

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Recommendations and suggestions
Under mention are the few recommendations and suggestions, which I felt during my project on Micro Finance are:1. The concept of Micro Finance is still new in India. Not many people are aware the Micro Finance Industry. So apart from Government programmes, we the people should stand and create the awareness about the Micro Finance. 2. There are many people who are still below the poverty line, so there is a huge demand for MFIs in India with proper rules and regulations.

3. There is huge demand and supply gap, in money demand by the poor and supply by the MFIs. So there need to be an activate participation by the Pvt. Sector in this Industry.

4. One strict recommendation is that there should not over involvement of the Government in MFIs. Because it will stymie the growth and prevent the others MFIs to enter. 5. According to me the Micro Loan should be given to the women only. Because by this only, MFIs can maintain their repayment ratio high, without any collaterals.

6. Many people say that the interest rate charge by the MFIs is very high and there should be compelled cap on it. But what I felt during my personal survey, that the high rates are justifiable. Now by this example we will get agree. Suppose a big commercial bank gives Rs 1 million to an individual and in the same way a MFI gives Rs 100 to 10.000 customers. So its obvious that man power cost and operating cost are higher for the MFIs. So according to me rates are justifiable. But with limitations.

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Conclusion
At the end I would conclude that, Micro Finance Industry has the huge potential to grow in future, if this industry grows then one day we‘ll all see the new face of India, both in term of high living standard and happiness. One solution by which we all can help the poor people, i.e. in a whole year a medium and a rich class people spends more than Rs 10,000 on them without any good reason. Instead of that, by keeping just mereRs, 3000 aside and donate that amount to the MFIs, then at the end of the year the total amount in the hands of poor would be ( average 500 million people *Rs 3000)=Rs 1,500,000,000,000 . Just imagine where would be India in next 10 years. At last I am concluding by project with a very famous saying:

“Don’t wait; the time will never be just right. Start where you stand and work with whatever tolls you may have at your commands and the better tolls will be found as you go a long”
William Surds

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References:
Mr. Sanjiv Rohilla Asst. General Manager NABARD Anand. Ph No. 9427109121 Mr. Arvind Parmar Operation Manager, SAKHI Umreth Ph No.9925153226

Mr. Mukesh Gandhi Director MAS Finance Ahemedabad Ph No. 9825009793

Websites: www.ifmr.ac.in www.google.com www.microfinanceinsight.com www.investopedia.com www.books.google.com www.seepnetwork.org www.forbes.com www.nationmaster.com www.thaindian.com www.authorstream.com www.knowledge.allianz.com www.familiesinbusiness.net www.indiamicrofinance.com www.gdrc.org www.accion.org Research paper by Prabhu Ghate Research paper by Vishal Sehgal Presentation by N. Srinivasan

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