Project Report on A critical analysis of Micro finance in India

SUBMITTED BY: ARVIND KUMAR PANDEY Master of Business Administration (Finance) S !"ine Business Sc#oo" $ur%aon &'())')**+,

Ta le of !ontents !"apter #$Introd%ction&&&&&&&&&&&&&&&&&&&&&&&'''''''''''''''''''''( )-) Microfinance Definition..........................., )-/ Strate%ic Po"ic! Initiati0es..........................-1 )-, Acti0ities in Microfinance..........................-1 )-1 2e%a" Re%u"ations.............................--+ !"apter )$Micro$*inance in India'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''+ /-) Distri3ution of Inde3ted Rura" 4ouse#o"ds5 A%enc! 6ise..............* /-/ Re"ati0e s#are of Borro6in% of 7u"ti0ator 4ouse#o"ds...............-( /-, Distri3ution 3ased on Asset si8e of Rura" 4ouse#o"ds...............--' /-1 Ban in% E9:ansion............................--)& /-+ Microfinance Socia" As:ects..............-------------------------------------------)) !"apter ($ Self ,elp -ro%ps.........................--)/ ,-) 4o6 se"f;#e": %rou:s 6or .........................-)/ ,-/ Sources of ca:ita" and "in s 3et6een S4$s and Ban s..............---), ,-, 4o6 S4$s sa0e.............................---), ,-1 S4$s;Ban 2in a%e Mode".........................-)1 ,-+ 2ife insurances for se"f;#e": %rou: mem3ers..................--)* !"apter .$Microfinance Models........................-)< !"apter /$ Role0 *%nctions and 1or2in3 Mec"anis4 of *inancial Instit%tions....---/& +-) I7I7I Ban ...............................---/& +-/ Band#an................................---/1 +-, $rameen Ban ..............................-/* +-1 SKS Microfinance............................./< !"apter +$ Mar2etin3 of Microfinance Prod%cts.................-/'
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!"apter 5$ S%ccess *actors of Microfinance in India...............---,) !"apter 6$ Iss%es related to Microfinance in India................--,+ References.................................-,'

!"apter #: Introd%ction
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Microfinance is defined as an! acti0it! t#at inc"udes t#e :ro0ision of financia" ser0ices suc# as credit= sa0in%s= and insurance to "o6 income indi0idua"s 6#ic# fa"" >ust a3o0e t#e nationa""! defined :o0ert! "ine= and :oor indi0idua"s 6#ic# fa"" 3e"o6 t#at :o0ert! "ine= 6it# t#e %oa" of creatin% socia" 0a"ue- ?#e creation of socia" 0a"ue inc"udes :o0ert! a""e0iation and t#e 3roader im:act of im:ro0in% "i0e"i#ood o::ortunities t#rou%# t#e :ro0ision of ca:ita" for micro enter:rise= and insurance and sa0in%s for ris miti%ation and consum:tion smoot#in%- A "ar%e 0ariet! of actors :ro0ide microfinance in India= usin% a ran%e of microfinance de"i0er! met#odsSince t#e I7I7I Ban in India= 0arious actors #a0e endea0ored to :ro0ide access to financia" ser0ices to t#e :oor in creati0e 6a!s- $o0ernments a"so #a0e :i"oted nationa" :ro%rams= N$@s #a0e underta en t#e acti0it! of raisin% donor funds for on;"endin%= and some 3an s #a0e :artnered 6it# :u3"ic or%ani8ations or made sma"" inroads t#emse"0es in :ro0idin% suc# ser0ices?#is #as resu"ted in a rat#er 3road definition of microfinance as an! acti0it! t#at tar%ets :oor and "o6;income indi0idua"s for t#e :ro0ision of financia" ser0ices- ?#e ran%e of acti0ities underta en in microfinance inc"ude %rou: "endin%= indi0idua" "endin%= t#e :ro0ision of sa0in%s and insurance= ca:acit! 3ui"din%= and a%ricu"tura" 3usiness de0e"o:ment ser0ices- A#ate0er t#e form of acti0it! #o6e0er= t#e o0erarc#in% %oa" t#at unifies a"" actors in t#e :ro0ision of microfinance is t#e creation of socia" 0a"ue#'# Microfinance Definition Accordin% to Internationa" 2a3or @r%ani8ation (I2@)= BMicrofinance is an economic development approach that involves providing financial services through institutions to low income clientsCIn India= Microfinance #as 3een defined 3! B?#e Nationa" Microfinance ?as force= )'''C as Bprovision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standardsCD?#e :oor sta! :oor= not 3ecause t#e! are "a8! 3ut 3ecause t#e! #a0e no access to ca:ita"-D ?#e dictionar! meanin% of EfinanceF is mana%ement of mone!- ?#e mana%ement of mone! denotes acGuirin% H usin% mone!- Micro Finance is 3u88in% 6ord= used 6#en financin% for
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micro entre:reneurs- 7once:t of micro finance is emer%ed in need of meetin% s:ecia" %oa" to em:o6er under;:ri0i"e%ed c"ass of societ!= 6omen= and :oor= do6ntrodden 3! natura" reasons or men madeI caste= creed= re"i%ion or ot#er6ise- ?#e :rinci:"es of Micro Finance are founded on t#e :#i"oso:#! of coo:eration and its centra" 0a"ues of eGua"it!= eGuit! and mutua" se"f;#e":- At t#e #eart of t#ese :rinci:"es are t#e conce:t of #uman de0e"o:ment and t#e 3rot#er#ood of man e9:ressed t#rou%# :eo:"e 6or in% to%et#er to ac#ie0e a 3etter "ife for t#emse"0es and t#eir c#i"dren?raditiona""! micro finance 6as focused on :ro0idin% a 0er! standardi8ed credit :roduct- ?#e :oor= >ust "i e an!one e"se= (in fact need "i e t#irst) need a di0erse ran%e of financia" instruments to 3e a3"e to 3ui"d assets= sta3i"i8e consum:tion and :rotect t#emse"0es a%ainst ris s- ?#us= 6e see a 3roadenin% of t#e conce:t of micro finance;;; our current c#a""en%e is to find efficient and re"ia3"e 6a!s of :ro0idin% a ric#er menu of micro finance :roducts- Micro Finance is not mere"! e9tendin% credit= 3ut e9tendin% credit to t#ose 6#o reGuire most for t#eir and fami"!Fs sur0i0a"- It cannot 3e measured in term of Guantit!= 3ut due 6ei%#ta%e to Gua"it! measurement- 4o6 credit a0ai"ed is used to sur0i0e and %ro6 6it# "imited means-

1"o are t"e clients of 4icro finance7 ?#e t!:ica" micro finance c"ients are "o6;income :ersons t#at do not #a0e access to forma" financia" institutions- Micro finance c"ients are t!:ica""! se"f;em:"o!ed= often #ouse#o"d;3ased entre:reneurs- In rura" areas= t#e! are usua""! sma"" farmers and ot#ers 6#o are en%a%ed in sma"" income;%eneratin% acti0ities suc# as food :rocessin% and :ett! trade- In ur3an areas= micro finance acti0ities are more di0erse and inc"ude s#o: ee:ers= ser0ice :ro0iders= artisans= street 0endors= etc- Micro finance c"ients are :oor and 0u"nera3"e non;:oor 6#o #a0e a re"ati0e"! unsta3"e source of incomeAccess to con0entiona" forma" financia" institutions= for man! reasons= is in0erse"! re"ated to income5 t#e :oorer !ou are= t#e "ess "i e"! t#at !ou #a0e access- @n t#e ot#er #and= t#e c#ances are t#at= t#e :oorer !ou are= t#e more e9:ensi0e or onerous informa" financia" arran%ementsMoreo0er= informa" arran%ements ma! not suita3"! meet certain financia" ser0ice needs or ma!

e9c"ude !ou an!6a!- Indi0idua"s in t#is e9c"uded and under;ser0ed mar et se%ment are t#e c"ients of micro financeAs 6e 3roaden t#e notion of t#e t!:es of ser0ices micro finance encom:asses= t#e :otentia" mar et of micro finance c"ients a"so e9:ands- It de:ends on "oca" conditions and :o"itica" c"imate= acti0eness of coo:erati0es= S4$ H N$@s and su::ort mec#anism- For instance= micro credit mi%#t #a0e a far more "imited mar et sco:e t#an sa! a more di0ersified ran%e of financia" ser0ices= 6#ic# inc"udes 0arious t!:es of sa0in%s :roducts= :a!ment and remittance ser0ices= and 0arious insurance :roducts- For e9am:"e= man! 0er! :oor farmers ma! not rea""! 6is# to 3orro6= 3ut rat#er= 6ou"d "i e a safer :"ace to sa0e t#e :roceeds from t#eir #ar0est as t#ese are consumed o0er se0era" mont#s 3! t#e reGuirements of dai"! "i0in%- 7entra" %o0ernment in India #as esta3"is#ed a stron% H e9tensi0e "in 3et6een NABARD (Nationa" Ban for A%ricu"ture H Rura" De0e"o:ment)= State 7oo:erati0e Ban = District 7oo:erati0e Ban s= Primar! A%ricu"ture H Mar etin% Societies at nationa"= state= district and 0i""a%e "e0e"T"e 8eed in India

India is said to 3e t#e #ome of one t#ird of t#e 6or"dFs :oorI officia" estimates ran%e from /* to +& :ercent of t#e more t#an one 3i""ion :o:u"ationA3out (< :ercent of t#e :oorest #ouse#o"ds do not #a0e access to credit?#e demand for microcredit #as 3een estimated at u: to J,& 3i""ionI t#e su::"! is "ess t#an J/-/ 3i""ion com3ined 3! a"" in0o"0ed in t#e sector-

Due to t#e s#eer si8e of t#e :o:u"ation "i0in% in :o0ert!= India is strate%ica""! si%nificant in t#e %"o3a" efforts to a""e0iate :o0ert! and to ac#ie0e t#e Mi""ennium De0e"o:ment $oa" of #a"0in% t#e 6or"dFs :o0ert! 3! /&)+- Microfinance #as 3een :resent in India in one form or anot#er since t#e )'<&s and is no6 6ide"! acce:ted as an effecti0e :o0ert! a""e0iation strate%!- @0er t#e "ast fi0e !ears= t#e microfinance industr! #as ac#ie0ed si%nificant %ro6t# in :art due to t#e :artici:ation of commercia" 3an s- Des:ite t#is %ro6t#= t#e :o0ert! situation in India continues to 3e c#a""en%in%-

Some :rinci:"es t#at summari8e a centur! and a #a"f of de0e"o:ment :ractice 6ere enca:su"ated in /&&1 3! 7onsu"tati0e $rou: to Assist t#e Poor (7$AP) and endorsed 3! t#e $rou: of Ei%#t "eaders at t#e $( Summit on Kune )&= /&&15 Poor :eo:"e need not >ust "oans 3ut a"so sa0in%s= insurance and mone! transfer ser0icesMicrofinance must 3e usefu" to :oor #ouse#o"ds5 #e":in% t#em raise income= 3ui"d u: assets andLor cus#ion t#emse"0es a%ainst e9terna" s#oc s BMicrofinance can :a! for itse"f-C Su3sidies from donors and %o0ernment are scarce and uncertain= and so to reac# "ar%e num3ers of :oor :eo:"e= microfinance must :a! for itse"f Microfinance means 3ui"din% :ermanent "oca" institutionsMicrofinance a"so means inte%ratin% t#e financia" needs of :oor :eo:"e into a countr!Fs mainstream financia" s!stem B?#e >o3 of %o0ernment is to ena3"e financia" ser0ices= not to :ro0ide t#em-C BDonor funds s#ou"d com:"ement :ri0ate ca:ita"= not com:ete 6it# it-C B?#e e! 3ott"enec is t#e s#orta%e of stron% institutions and mana%ers-C Donors s#ou"d focus on ca:acit! 3ui"din% Interest rate cei"in%s #urt :oor :eo:"e 3! :re0entin% microfinance institutions from co0erin% t#eir costs= 6#ic# c#o es off t#e su::"! of credit Microfinance institutions s#ou"d measure and disc"ose t#eir :erformance M 3ot# financia""! and socia""!Microfinance can a"so 3e distin%uis#ed from c#arit!- It is 3etter to :ro0ide %rants to fami"ies 6#o are destitute= or so :oor t#e! are un"i e"! to 3e a3"e to %enerate t#e cas# f"o6 reGuired to re:a! a "oan- ?#is situation can occur for e9am:"e= in a 6ar 8one or after a natura" disaster7

*inancial needs and *inancial ser9ices In de0e"o:in% economies and :articu"ar"! in t#e rura" areas= man! acti0ities t#at 6ou"d 3e c"assified in t#e de0e"o:ed 6or"d as financia" are not moneti8ed5 t#at is= mone! is not used to carr! t#em out- A"most 3! definition= :oor :eo:"e #a0e 0er! "itt"e mone!- But circumstances often arise in t#eir "i0es in 6#ic# t#e! need mone! or t#e t#in%s mone! can 3u!In Stuart Rut#erfordFs recent 3oo The Poor and Their Money= #e cites se0era" t!:es of needs5

Lifecycle Needs5 suc# as 6eddin%s= funera"s= c#i"d3irt#= education= #ome3ui"din%= 6ido6#ood= o"d a%ePersonal Emergencies5 suc# as sic ness= in>ur!= unem:"o!ment= t#eft= #arassment or deat#-

Disasters5 suc# as fires= f"oods= c!c"ones and man;made e0ents "i e 6ar or 3u""do8in% of d6e""in%s-

nvestment !pportunities5 e9:andin% a 3usiness= 3u!in% "and or eGui:ment= im:ro0in% #ousin%= securin% a >o3 (6#ic# often reGuires :a!in% a "ar%e 3ri3e)= etc-

Poor :eo:"e find creati0e and often co""a3orati0e 6a!s to meet t#ese needs= :rimari"! t#rou%# creatin% and e9c#an%in% different forms of non;cas# 0a"ue- 7ommon su3stitutes for cas# 0ar! from countr! to countr! 3ut t!:ica""! inc"ude "i0estoc = %rains= >e6e""er! and :recious meta"sAs Mar%uerite Ro3inson descri3es in ?#e Microfinance Re0o"ution= t#e )'(&s demonstrated t#at Bmicrofinance cou"d :ro0ide "ar%e;sca"e outreac# :rofita3"!=C and in t#e )''&s= Bmicrofinance 3e%an to de0e"o: as an industr!C- In t#e /&&&s= t#e microfinance industr!Fs o3>ecti0e is to satisf! t#e unmet demand on a muc# "ar%er sca"e= and to :"a! a ro"e in reducin% :o0ert!- A#i"e muc# :ro%ress #as 3een made in de0e"o:in% a 0ia3"e= commercia" microfinance sector in t#e "ast fe6 decades= se0era" issues remain t#at need to 3e addressed 3efore t#e industr! 6i"" 3e a3"e to satisf! massi0e 6or"d6ide demand?#e o3stac"es or c#a""en%es to 3ui"din% a sound commercia" microfinance industr! inc"ude5

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Ina::ro:riate donor su3sidies Poor re%u"ation and su:er0ision of de:osit;ta in% MFIs Fe6 MFIs t#at mo3i"i8e sa0in%s 2imited mana%ement ca:acit! in MFIs Institutiona" inefficiencies Need for more dissemination and ado:tion of rura"= a%ricu"tura" microfinance met#odo"o%ies

Role of Microfinance: ?#e micro credit of microfinance :ro%amme 6as first initiated in t#e !ear )'<* in Ban%"ades# 6it# :romise of :ro0idin% credit to t#e :oor 6it#out co""atera" = a""e0iatin% :o0ert! and un"eas#in% #uman creati0it! and endea0or of t#e :oor :eo:"e- Microfinance im:act studies #a0e demonstrated t#at O Microfinance #e":s :oor #ouse#o"ds meet 3asic needs and :rotects t#em a%ainst ris sO ?#e use of financia" ser0ices 3! "o6;income #ouse#o"ds "eads to im:ro0ements in #ouse#o"d economic 6e"fare and enter:rise sta3i"it! and %ro6t#O B! su::ortin% 6omens economic :artici:ation= microfinance em:o6ers 6omen= t#ere3! :romotin% %ender;eGuit! and im:ro0in% #ouse#o"d 6e"" 3ein%O ?#e "e0e" of im:act re"ates to t#e "en%t# of time c"ients #a0e #ad access to financia" ser0icesT"e :ri3in of Microfinance A"t#ou%# neit#er of t#e terms microcredit or microfinance 6ere used in t#e academic "iterature nor 3! de0e"o:ment aid :ractitioners 3efore t#e )'(&s or )''&s= res:ecti0e"!= t#e conce:t of :ro0idin% financia" ser0ices to "o6 income :eo:"e is muc# o"derA#i"e t#e emer%ence of informa" financia" institutions in Ni%eria dates 3ac to t#e )+ t# centur!= t#e! 6ere first esta3"is#ed in Euro:e durin% t#e )(t# centur! as a res:onse to t#e enormous
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increase in :o0ert! since t#e end of t#e e9tended Euro:ean 6ars ()*)( M )*1()- In )</& t#e first "oan fund tar%etin% :oor :eo:"e 6as founded in Ire"and 3! t#e aut#or Konat#an S6ift- After a s:ecia" "a6 6as :assed in )(/,= 6#ic# a""o6ed c#arit! institutions to 3ecome forma" financia" intermediaries a "oan fund 3oard 6as esta3"is#ed in )(,* and a 3i% 3oom 6as initiated- ?#eir outreac# :ea ed >ust 3efore t#e %o0ernment introduced a ca: on interest rates in )(1,- At t#is time= t#e! :ro0ided financia" ser0ices to a"most /&P of Iris# #ouse#o"ds- ?#e credit coo:erati0es created in $erman! in )(1< 3! Friedric# Ai"#e"m Raiffeisen ser0ed )-1 mi""ion :eo:"e 3! )')&4e stated t#at t#e main o3>ecti0es of t#ese coo:erati0es Bs#ou"d 3e to contro" t#e use made of mone! for economic im:ro0ements= and to im:ro0e t#e mora" and :#!sica" 0a"ues of :eo:"e and a"so= t#eir 6i"" to act 3! t#emse"0es-C In t#e )((&s t#e Britis# contro""ed %o0ernment of Madras in Sout# India= tried to use t#e $erman e9:erience to address :o0ert! 6#ic# resu"ted in more t#an nine mi""ion :oor Indians 3e"on%in% to credit coo:erati0es 3! )'1*- Durin% t#is same time t#e Dutc# co"onia" administrators constructed a coo:erati0e rura" 3an in% s!stem in Indonesia 3ased on t#e Raiffeisen mode" 6#ic# e0entua""! 3ecame Ban Ra !at Indonesia (BRI)= no6 no6n as t#e "ar%est MFI in t#e 6or"dMicrofinance Today In t#e )'<&s a :aradi%m s#ift started to ta e :"ace- ?#e fai"ure of su3sidi8ed %o0ernment or donor dri0en institutions to meet t#e demand for financia" ser0ices in de0e"o:in% countries "et to se0era" ne6 a::roac#es- Some of t#e most :rominent ones are :resented 3e"o6Ban Da%an Ba"i (BDB) 6as esta3"is#ed in Se:tem3er )'<& to ser0e "o6 income :eo:"e in Indonesia 6it#out an! su3sidies and is no6 B6e""; no6n as t#e ear"iest 3an to institute commercia" microfinanceC- A#i"e t#is is not true 6it# re%ard to t#e ac#ie0ements made in Euro:e durin% t#e )'t# centur!= it sti"" can 3e seen as a turnin% :oint 6it# an e0er increasin% im:act on t#e 0ie6 of :o"iticians and de0e"o:ment aid :ractitioners t#rou%#out t#e 6or"d- In )'<, A77I@N Internationa"= a United States of America (USA) 3ased non %o0ernmenta" or%ani8ation (N$@) dis3ursed its first "oan in Bra8i" and in )'<1 Professor Mu#ammad Yunus started 6#at "ater 3ecame no6n as t#e $rameen Ban 3! "endin% a tota" of J/< to 1/ :eo:"e in Ban%"ades#- @ne !ear "ater t#e Se"f;Em:"o!ed AomenFs Association started to :ro0ide "oans of a3out J)-+ to :oor 6omen in India- A"t#ou%# t#e "atter e9am:"es sti"" 6ere su3sidi8ed :ro>ects= t#e! used a more 3usiness oriented a::roac# and s#o6ed t#e 6or"d t#at :oor :eo:"e can 3e %ood credit ris s 6it# re:a!ment rates e9ceedin% '+P= e0en if t#e interest rate c#ar%ed is #i%#er t#an
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t#at of traditiona" 3an s- Anot#er mi"estone 6as t#e transformation of BRI startin% in )'(1- @nce a "oss ma in% institution c#anne"in% %o0ernment su3sidi8ed credits to in#a3itants of rura" Indonesia it is no6 t#e "ar%est MFI in t#e 6or"d= 3ein% :rofita3"e e0en durin% t#e Asian financia" crisis of )''< M )''(In Fe3ruar! )''< more t#an /='&& :o"ic!ma ers= microfinance :ractitioners and re:resentati0es of 0arious educationa" institutions and donor a%encies from ),< different countries %at#ered in Aas#in%ton D-7- for t#e first Micro 7redit Summit- ?#is 6as t#e start of a nine !ear "on% cam:ai%n to reac# )&& mi""ion of t#e 6or"d :oorest #ouse#o"ds 6it# credit for se"f em:"o!ment 3! /&&+- Accordin% to t#e Microcredit Summit 7am:ai%n Re:ort *<=*&*=&(& c"ients #a0e 3een reac#ed t#rou%# /+/< MFIs 3! t#e end of /&&/= 6it# 1)=+'1=<<( of t#em 3ein% amon%st t#e :oorest 3efore t#e! too t#eir first "oan- Since t#e cam:ai%n started t#e a0era%e annua" %ro6t# rate in reac#in% c"ients #as 3een a"most 1& :ercent- If it #as continued at t#at s:eed more t#an )&& mi""ion :eo:"e 6i"" #a0e access to microcredit 3! no6 and 3! t#e end of /&&+ t#e %oa" of t#e microcredit summit cam:ai%n 6ou"d 3e reac#ed- As t#e :resident of t#e Aor"d Ban Kames Ao"fenso#n #as :ointed out= :ro0idin% financia" ser0ices to )&& mi""ion of t#e :oorest #ouse#o"ds means #e":in% as man! as +&& M *&& mi""ion :oor :eo:"e-

#') Strate3ic Policy Initiati9es Some of t#e most recent strate%ic :o"ic! initiati0es in t#e area of Microfinance ta en 3! t#e %o0ernment and re%u"ator! 3odies in India are5 Aor in% %rou: on credit to t#e :oor t#rou%# S4$s= N$@s= NABARD= )''+ ?#e Nationa" Microfinance ?as force= )''' Aor in% $rou: on Financia" F"o6s to t#e Informa" Sector (set u: 3! PM@)= /&&/ Microfinance De0e"o:ment and EGuit! Fund= NABARD= /&&+ Aor in% %rou: on Financin% NBF7s 3! Ban s; RBI

#'( Acti9ities in Microfinance

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Microcredit: It is a sma"" amount of mone! "oaned to a c"ient 3! a 3an or ot#er institutionMicrocredit can 3e offered= often 6it#out co""atera"= to an indi0idua" or t#rou%# %rou: "endin%Micro sa9in3s: ?#ese are de:osit ser0ices t#at a""o6 one to sa0e sma"" amounts of mone! for future use- @ften 6it#out minimum 3a"ance reGuirements= t#ese sa0in%s accounts a""o6 #ouse#o"ds to sa0e in order to meet une9:ected e9:enses and :"an for future e9:ensesMicro ins%rance: It is a s!stem 3! 6#ic# :eo:"e= 3usinesses and ot#er or%ani8ations ma e a :a!ment to s#are ris - Access to insurance ena3"es entre:reneurs to concentrate more on de0e"o:in% t#eir 3usinesses 6#i"e miti%atin% ot#er ris s affectin% :ro:ert!= #ea"t# or t#e a3i"it! to 6or Re4ittances: ?#ese are transfer of funds from :eo:"e in one :"ace to :eo:"e in anot#er= usua""! across 3orders to fami"! and friends- 7om:ared 6it# ot#er sources of ca:ita" t#at can f"uctuate de:endin% on t#e :o"itica" or economic c"imate= remittances are a re"ati0e"! stead! source of funds-

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#'. ;e3al Re3%lations Ban s in India are re%u"ated and su:er0ised 3! t#e Reser0e Ban of India (RBI) under t#e RBI Act of )',1= Ban in% Re%u"ation Act= Re%iona" Rura" Ban s Act= and t#e 7oo:erati0e Societies Acts of t#e res:ecti0e state %o0ernments for coo:erati0e 3an sNBF7s are re%istered under t#e 7om:anies Act= )'+* and are %o0erned under t#e RBI Act?#ere is no s:ecific "a6 caterin% to N$@s a"t#ou%# t#e! can 3e re%istered under t#e Societies Re%istration Act= )(*&= t#e Indian ?rust Act= )((/= or t#e re"e0ant state acts- ?#ere #as 3een a stron% re"iance on se"f;re%u"ation for N$@ MFIs and as t#is a::"ies to N$@ MFIs mo3i"i8in% de:osits from c"ients 6#o a"so 3orro6- ?#is tendenc! is a concern due to enforcement :ro3"ems t#at tend to arise 6it# se"f;re%u"ator! or%ani8ations- In Kanuar! /&&&= t#e RBI essentia""! created a ne6 "e%a" form for :ro0idin% microfinance ser0ices for NBF7s re%istered under t#e 7om:anies Act so t#at t#e! are not su3>ect to an! ca:ita" or "iGuidit! reGuirements if t#e! do not %o into t#e de:osit ta in% 3usiness- A3sence of "iGuidit! reGuirements is concern to t#e safet! of t#e sector-

13

14

15

!"apter ): Microfinance in India At :resent "endin% to t#e economica""! acti0e :oor 3ot# rura" and ur3an is :e%%ed at around Rs <&&& crores in t#e Indian 3an sF credit outstandin%- As a%ainst t#is= accordin% to e0en t#e most conser0ati0e estimates= t#e tota" demand for credit reGuirements for t#is :art of Indian societ! is some6#ere around Rs /=&&=&&& croresMicrofinance c"an3in3 t"e face of poor India Micro;Finance is emer%in% as a :o6erfu" instrument for :o0ert! a""e0iation in t#e ne6 econom!In India= micro;Finance scene is dominated 3! Se"f 4e": $rou:s (S4$s) ; Ban s "in a%e Pro%ramme= aimed at :ro0idin% a cost effecti0e mec#anism for :ro0idin% financia" ser0ices to t#e Qunreac#ed :oorQ- In t#e Indian conte9t terms "i e Dsma"" and mar%ina" farmersD= D rura" artisansD and Deconomica""! 6ea er sectionsD #a0e 3een used to 3road"! define micro;finance customers- Researc# across t#e %"o3e #as s#o6n t#at= o0er time= microfinance c"ients increase t#eir income and assets= increase t#e num3er of !ears of sc#oo"in% t#eir c#i"dren recei0e= and im:ro0e t#e #ea"t# and nutrition of t#eir fami"iesA more refined mode" of micro;credit de"i0er! #as e0o"0ed "ate"!= 6#ic# em:#asi8es t#e com3ined de"i0er! of financia" ser0ices a"on% 6it# tec#nica" assistance= and a%ricu"tura" 3usiness de0e"o:ment ser0ices- A#en com:ared to t#e 6ider S4$ 3an "in a%e mo0ement in India= :ri0ate MFIs #a0e #ad "imited outreac#- 4o6e0er= 6e #a0e seen a recent trend of "ar%er microfinance institutions transformin% into Non;Ban Financia" Institutions (NBF7s)- ?#is c#an%in% face of microfinance in India a::ears to 3e :ositi0e in terms of t#e a3i"it! of microfinance to attract more funds and t#erefore increase outreac#In terms of demand for micro;credit or micro;finance= t#ere are t#ree se%ments= 6#ic# demand funds- ?#e! are5

At t#e 0er! 3ottom in terms of income and assets= are t#ose 6#o are landless and en3a3ed in a3ric%lt%ral <or2 on a seasonal asis0 and 4an%al la o%rers in forestry0

16

4inin30 "o%se"old ind%stries0 constr%ction and transport' ?#is se%ment reGuires= first and foremost= consum:tion credit durin% t#ose mont#s 6#en t#e! do not %et "a3our 6or = and for contin%encies suc# as i""ness- ?#e! a"so need credit for acGuirin% sma"" :roducti0e assets= suc# as "i0estoc = usin% 6#ic# t#e! can %enerate additiona" income

?#e ne9t mar et se%ment is s4all and 4ar3inal far4ers and r%ral artisans0 <ea9ers and t"ose self$e4ployed in t"e %r an infor4al sector as "a<2ers0 9endors0 and <or2ers in "o%se"old 4icro$enterprises' ?#is se%ment main"! needs credit for 6or in% ca:ita"= a sma"" :art of 6#ic# a"so ser0es consum:tion needs- ?#is se%ment a"so needs term credit for acGuirin% additiona" :roducti0e assets= suc# as irri%ation :um:sets= 3ore6e""s and "i0estoc in case of farmers= and eGui:ment ("ooms= mac#iner!) and 6or s#eds in case of non;farm 6or ers-

?#e t#ird mar et se%ment is of s4all and 4edi%4 far4ers <"o "a9e 3one in for co44ercial crops suc# as sur:"us :add! and 6#eat= cotton= %roundnut= and ot#ers en%a%ed in dair!in%= :ou"tr!= fis#er!= etc- Amon% non;farm acti0ities= t#is se%ment inc"udes t#ose in 0i""a%es and s"ums= en%a%ed in :rocessin% or manufacturin% acti0it!= runnin% :ro0ision stores= re:air 6or s#o:s= tea s#o:s= and 0arious ser0ice enter:rises?#ese :ersons are not a"6a!s :oor= t#ou%# t#e! "i0e 3are"! a3o0e t#e :o0ert! "ine and a"so suffer from inadeGuate access to forma" credit-

Ae"" t#ese are t#e :eo:"e 6#o reGuire mone! and 6it# Microfinance it is :ossi3"e- Ri%#t no6 t#e :ro3"em is t#at= it is S4$sQ 6#ic# are doin% t#is and efforts s#ou"d 3e made so t#at t#e 3i% financia" institutions a"so turn u: and start su::"!in% funds to t#ese :eo:"e- ?#is 6i"" "ead to a 3etter India and 6i"" definite"! fu"fi"" t#e dream of our "ate Pri4e Minister0 Mrs' Indira -and"i0 i'e' Po9erty' @ne of t#e statement is rea""! a::ro:riate #ere= 6#ic# is as5 Money0 says t"e pro9er 4a2es 4oney' 1"en yo% "a9e 3ot a little0 it is often easy to 3et 4ore' T"e 3reat diffic%lty is to 3et t"at little'Adams Smith.

17

?oda! India is facin% ma>or :ro3"em in reducin% :o0ert!- A3out /+ mi""ion :eo:"e in India are under 3e"o6 :o0ert! "ine- Ait# "o6 :er ca:ita income= #ea0! :o:u"ation :ressure= :re0a"ence of massi0e unem:"o!ment and underem:"o!ment = "o6 rate of ca:ita" formation = misdistri3ution of 6ea"t# and assets = :re0a"ence of "o6 tec#no"o%! and :oor economics or%ani8ation and insta3i"it! of out:ut of a%ricu"ture :roduction and re"ated sectors #a0e made India one of t#e :oor countries of t#e 6or"dPresent Scenario of India: India fa""s under "o6 income c"ass accordin% to Aor"d Ban - It is second :o:u"ated countr! in t#e 6or"d and around <& P of its :o:u"ation "i0es in rura" area- *&P of :eo:"e de:end on a%ricu"ture= as a resu"t t#ere is c#ronic underem:"o!ment and :er ca:ita income is on"! J ,/*/?#is is not enou%# to :ro0ide food to more t#an one indi0idua" - ?#e o30ious resu"t is a3>ect :o0ert! = "o6 rate of education= "o6 se9 ratio= e9:"oitation- ?#e ma>or factor account for #i%# incidence of rura" :o0ert! is t#e "o6 asset 3ase- Accordin% to Reser0e Ban of India= a3out +) P of :eo:"e #ouse :ossess on"! )&P of t#e tota" asset of India -?#is #as resu"ted "o6 :roduction ca:acit! 3ot# in a%ricu"ture (6#ic# contri3ute around //;/+P of $DP ) and Manufacturin% sector- Rura" :eo:"e #a0e 0er! "o6 access to institutiona"i8ed credit( from commercia" 3an )Po9erty alle9iation pro3ra44es and concep%alisation of Microfinance: ?#ere #as 3een continuous efforts of :"anners of India in addressin% t#e :o0ert! - ?#e! 4a0e come u: 6it# de0e"o:ment :ro%rammes "i e Inte%rated Rura" De0e"o:ment :ro%amme (IRDP)= Nationa" Rura" Em:"o!ment Pro%ramme (NREP) = Rura" 2a3our Em:"o!ment $uarantee Pro%ramme (R2E$P) etc- But t#ese :ro%amme #a0e not 3een a3"e to create massi0e im:act in :o0ert! a""e0iation- ?#e :roduction oriented a::roac# of :"annin% 6it#out a"terin% t#e mode of :roduction cou"d not 3ut resu"t of t#e %ains of de0e"o:ment 3! o6ners of instrument of :roduction- ?#e mode of :roduction does remain same as t#e o6ner of t#e instrument #a0e "o6 access to credit 6#ic# is t#e ma>or factor of :roduction- ?#us in Nineties Nationa" 3an for a%ricu"ture and rura" de0e"o:ment(NABARD) "aunc#es :i"ot :ro>ects of Microfinance to 3rid%e t#e %a: 3et6een demand and su::"! of funds in t#e "o6er run%s of rura" econom!Microfinance - t#e 3u88in% 6ord of t#is decade 6as meant to cure t#e i""ness of rura" econom!18

Ait# t#is conce:t of Se"f Re"iance= Se"f Sufficienc! and Se"f 4e": %ained momentum- ?#e Indian microfinance is dominated 3! Se"f 4e": $rou:s (S4$s) and t#eir "in a%e to Ban sDe:ri0ed of t#e 3asic 3an in% faci"ities= t#e rura" and semi ur3an Indian masses are sti"" re"!in% on informa" financin% intermediaries "i e mone! "enders= fami"! mem3ers= friends etc)'# Distri %tion of Inde ted R%ral ,o%se"olds: A3ency <ise !redit A3ency -o9ern4ent !ooperati9e Societies !o44ercial an2s and RRBs Ins%rance Pro9ident *%nd :t"er Instit%tional So%rces All Instit%tional A3encies ;andlord A3ric%lt%ral Moneylenders Professional Moneylenders Relati9es and *riends :t"ers All 8on Instit%tional A3encies All A3encies Percenta3e of R%ral ,o%se"olds +'# )#'+ (('5 ='( ='5 #'+ +.'= .'= 5'= #='/ /'/ >'= (+'= #=='=

So%rce: De t and In9est4ent S%r9ey0 -oI #>>) Seein% t#e fi%ures from t#e a3o0e ta3"e= it is e0ident t#at t#e s#are of institutiona" credit is muc# more no6?#e a3o0e sur0e! resu"t s#o6s t#at ti"" )'')= institutiona" credit accounted for around t6o;t#irds of t#e credit reGuirement of rura" #ouse#o"ds- ?#is s#o6s a com:arati0e"! 3etter :enetration of t#e 3an in% and financia" institutions in rura" IndiaPercenta3e distri %tion of de t a4on3 inde ted R%ral ;a or ,o%se"olds y so%rce of de t Sr' 8o' So%rce of de t ,o%se"olds Ait# cu"ti0ated "and
19

Ait#out cu"ti0ated "and

A""

# ) ( . / + 5 6

$o0ernment 7o;o:erati0e Societies Ban s Em:"o!ers Mone! "enders S#o:; ee:ers Re"ati0esLFriends @t#er Sources ?ota" Ro%nd of 8'S'S'A #>>>$)===

1-'' )*-<( )'-') +-,+ /(-)/ *-<* )1-+( ,-+) )&&-&&

+-<* '-1* )1-++ (-,, ,+-/, <-1< )+-*( ,-+/ )&&-&&

+-,< ),-&' )<-)' *-(* ,)-<& <-), )+-)1 ,-+/ )&&-&&

So%rce: R%ral la or en?%iry report on inde tedness a4on3 r%ral la or "o%se"olds @// t"

?#e ta3"e a3o0e re0ea"s t#at most of t#e rura" "a3our #ouse#o"ds :refer to raise "oan from t#e non;institutiona" sources- A3out *1P of t#e tota" de3t reGuirement of t#ese #ouse#o"ds 6as met 3! t#e non;institutiona" sources durin% )''';/&&&- Mone! "enders a"one :ro0ided de3t (Rs-)')() to t#e tune of ,/P of t#e tota" de3t of t#ese #ouse#o"ds as a%ainst /(P durin% )'',; '1- Re"ati0es and friends and s#o: ee:ers #a0e 3een t6o ot#er sources 6#ic# to%et#er accounted for a3out //P of t#e tota" de3t at a"";India "e0e"?#e institutiona" sources cou"d meet on"! ,*P of t#e tota" credit reGuirement of t#e rura" "a3our #ouse#o"ds durin% )''';/&&& 6it# on"! one :ercent increase o0er t#e :re0ious sur0e! in )'',;'1- Amon% t#e institutiona" sources of de3t= t#e 3an s continued to 3e t#e sin%"e "ar%est source of de3t meetin% a3out )< :ercent of t#e tota" de3t reGuirement of t#ese #ouse#o"ds- In com:arison to t#e :re0ious enGuir!= t#e de:endence on co;o:erati0e societies #as increased considera3"! in )''';/&&&- Durin% )''';/&&& as muc# as ),P of t#e de3t 6as raised from t#is source as a%ainst (P in )'',;'1- 4o6e0er= in t#e case of t#e 3an s and t#e %o0ernment a%encies it decreased mar%ina""! from )(-((P and (-/<P to )<-)'P and +-,<P res:ecti0e"! durin% )''';/&&& sur0e!)') Relati9e s"are of Borro<in3 of !%lti9ator ,o%se"olds (in :er cent) So%rces of !redit 8on Instit%tional Of which: Moneylenders Instit%tional Of which:
20

#>/# '/-< *'-< <-,

#>+# ()-, 1'-/ )(-<

#>5# *(-, ,*-) ,)-<

#>6# ,*-( )*-) *,-/

#>># ,&-* )<-+ **-,

)==)B ,(-' /*-( *)-)

!ooperati9e Societies0etc !o44ercial an2s Unspecified Total

,-, &-' ; )&&-&

/-* &-* ; )&&-&

//-& /-1 ; )&&-&

/'-( /(-( ; )&&-&

,&-& ,+-/ ,-) )&&-&

,&-/ /*-, ; )&&-&

B All India De t and In9est4ent S%r9ey0 8SS:0 />t" ro%nd0 )==( So%rce: All India De t and In9est4ent S%r9eys ?a3"e s#o6s t#e increasin% inf"uence of mone!"enders in t#e "ast decade- ?#e s#are of mone!"enders in t#e tota" non institutiona" credit 6as dec"inin% ti"" )'()= started :ic in% u: from t#e )''&s and reac#ed /< :er cent in /&&)At t#e same time t#e s#are of commercia" 3an s in institutiona" credit #as come do6n 3! a"most t#e same :ercenta%e :oints durin% t#is :eriod- ?#ou%#= t#e s#are of coo:erati0e societies is increasin% continuous"!= t#e %ro6t# #as f"attened durin% t#e "ast t#ree decades-

)'( Distri %tion ased on Asset siCe of R%ral ,o%se"olds (in :er cent) ,o%se"old Assets @Rs D===A ;ess t"an / /$#= #=$)= )=$(= (=$/= /=$5= 5=$#== #==$#/= #/=$)/= )/= and a o9e All classes Instit%tional A3ency 1/ 1< 11 *( ++ +, *) *) *( () ** 8on$Instit%tional A3ency +( +, +* ,/ 1+ 1< ,' ,' ,/ )' ,1 All )&& )&& )&& )&& )&& )&& )&& )&& )&& )&& )&&

So%rce: De t and In9est4ent S%r9ey0 -oI0 #>>)

21

?#e #ouse#o"ds 6it# a "o6er asset si8e 6ere una3"e to find financin% o:tions from forma" credit dis3ursement sources- ?#is 6as due to t#e reGuirement of :#!sica" co""atera" 3! 3an in% and financia" institutions for dis3ursin% credit- For #ouse#o"ds 6it# "ess t#an Rs /&=&&& 6ort# of :#!sica" assets= t#e most con0enient source of credit 6as non institutiona" a%encies "i e "and"ords= mone!"enders= re"ati0es= friends= etc2oo in% at t#e findin%s of t#e stud! commissioned 3! Asia tec#nica" De:artment of t#e Aor"d Ban ()''+)= t#e :ur:ose or t#e reason 3e#ind ta in% credit 3! t#e rura" :oor 6as consum:tion credit= sa0in%s= :roduction credit and insurance7onsum:tion credit constituted t6o;t#irds of t#e credit usa%e 6it#in 6#ic# a"most t#ree;fourt#s of t#e demand 6as for s#ort :eriods to meetin% emer%ent needs suc# as i""ness and #ouse#o"d e9:enses durin% t#e "ean season- A"most entire demand for t#e consum:tion credit 6as met 3! informa" sources at #i%# to e9:"oiti0e interest rates t#at 0aried from ,& to '& :er cent :er annumA"most <+ :er cent of t#e :roduction credit (6#ic# accounted for a3out one;t#ird of t#e tota" credit a0ai"ed of 3! t#e rura" masses) 6as met 3! t#e forma" sector= main"! 3an s and coo:erati0es)'. Ban2in3 EEpansion Startin% in t#e "ate )'*&s= India 6as t#e #ome to one of t#e "ar%est state inter0entions in t#e rura" credit mar et- ?#is :#ase is no6n as t#e BSocia" Ban in%C :#aseIt 6itnessed t#e nationa"i8ation of e9istin% :ri0ate commercia" 3an s= massi0e e9:ansion of 3ranc# net6or in rura" areas= mandator! directed credit to :riorit! sectors of t#e econom!= su3sidi8ed rates of interest and creation of a ne6 set of re%iona" rura" 3an s (RRBs) at t#e district "e0e" and a s:ecia"i8ed a:e9 3an for a%ricu"ture and rura" de0e"o:ment (NABARD) at t#e nationa" "e0e"?#e Net State Domestic Product (NSDP) is a measure of t#e economic acti0it! in t#e state and com:arin% it 6it# t#e uti"i8ation of 3an credit or 3an de:osits indicates #o6 muc# economic

22

acti0it! is 3ein% financed 3! t#e 3an s and 6#et#er t#ere e9ists unta::ed :otentia" for increasin% de:osits in t#at stateE.g. In the year 2003-2004 the percentage of ban deposits to !S"# is pretty high at aro$nd %&'-(0' in )ihar and *har hand or these states are not as $nder ban ed as tho$ght to be. )'/ Microfinance Social Aspects Micro financin% institutions si%nificant"! contri3uted to %ender eGua"it! and 6omenFs em:o6erment as 6e"" as :oor de0e"o:ment and ci0i" societ! stren%t#enin%- 7ontri3ution to 6omenFs a3i"it! to earn an income "ed to t#eir economic em:o6erment= increased 6e"" 3ein% of 6omen and t#eir fami"ies and 6ider socia" and :o"itica" em:o6ermentMicrofinance :ro%rams tar%etin% 6omen 3ecame a ma>or :"an of :o0ert! a""e0iation and %ender strate%ies in t#e )''&s- Increasin% e0idence of t#e centra"it! of %ender eGua"it! to :o0ert! reduction and 6omenFs #i%#er credit re:a!ment rates "ed to a %enera" consensus on t#e desira3i"it! of tar%etin% 6omen!"apter (: Self ,elp -ro%ps @S,-sA Se"f; #e": %rou:s (S4$s) :"a! toda! a ma>or ro"e in :o0ert! a""e0iation in rura" India- A %ro6in% num3er of :oor :eo:"e (most"! 6omen) in 0arious :arts of India are mem3ers of S4$s and acti0e"! en%a%e in sa0in%s and credit (SL7)= as 6e"" as in ot#er acti0ities (income %eneration= natura" resources mana%ement= "iterac!= c#i"d care and nutrition= etc-)- ?#e SL7 focus in t#e S4$ is t#e most :rominent e"ement and offers a c#ance to create some contro" o0er ca:ita"= a"3eit in 0er! sma"" amounts- ?#e S4$ s!stem #as :ro0en to 3e 0er! re"e0ant and effecti0e in offerin% 6omen t#e :ossi3i"it! to 3rea %radua""! a6a! from e9:"oitation and iso"ation('# ,o< self$"elp 3ro%ps <or2 NABARD ()''<) defines S4$s as Dsma""= economica""! #omo%enous affinit! %rou:s of rura" :oor= 0o"untari"! formed to sa0e and mutua""! contri3ute to a common fund to 3e "ent to its mem3ers as :er t#e %rou: mem3ersQ decisionD-

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Most S4$s in India #a0e )& to /+ mem3ers= 6#o can 3e eit#er on"! men= or on"! 6omen= or on"! !out#= or a mi9 of t#ese- As 6omenQs S4$s or san%#a #a0e 3een :romoted 3! a 6ide ran%e of %o0ernment and non; %o0ernmenta" a%encies= t#e! no6 ma e u: '&P of a"" S4$s?#e ru"es and re%u"ations of S4$s 0ar! accordin% to t#e :references of t#e mem3ers and t#ose faci"itatin% t#eir formation- A common c#aracteristic of t#e %rou:s is t#at t#e! meet re%u"ar"! (t!:ica""! once :er 6ee or once :er fortni%#t) to co""ect t#e sa0in%s from mem3ers= decide to 6#ic# mem3er to %i0e a "oan= discuss >oint acti0ities (suc# as trainin%= runnin% of a communa" 3usiness= etc-)= and to miti%ate an! conf"icts t#at mi%#t arise- Most S4$s #a0e an e"ected c#air:erson= a de:ut!= a treasurer= and sometimes ot#er office #o"dersMost S4$s start 6it#out an! e9terna" financia" ca:ita" 3! sa0in% re%u"ar contri3utions 3! t#e mem3ers- ?#ese contri3utions can 3e 0er! sma"" (e-%- )& Rs :er 6ee )- After a :eriod of consistent sa0in%s (e-%- * mont#s to one !ear) t#e S4$s start to %i0e "oans from sa0in%s in t#e form of sma"" interna" "oans for micro enter:rise acti0ities and consum:tion- @n"! t#ose S4$s t#at #a0e uti"i8ed t#eir o6n funds 6e"" are assisted 6it# e9terna" funds t#rou%# "in a%es 6it# 3an s and ot#er financia" intermediaries4o6e0er= it is %enera""! acce:ted t#at S4$s often do not inc"ude t#e :oorest of t#e :oor= for reasons suc# as5 @aA Social factors (t#e :oorest are often t#ose 6#o are socia""! mar%ina"i8ed 3ecause of caste affi"iation and t#ose 6#o are most s e:tica" of t#e :otentia" 3enefits of co""ecti0e action)@ A Econo4ic factors (t#e :oorest often do not #a0e t#e financia" resources to contri3ute to t#e sa0in%s and :a! mem3ers#i: feesI t#e! are often t#e ones 6#o mi%rate durin% t#e "ean season= t#us ma in% %rou: mem3ers#i: difficu"t)@cA Intrinsic iases of t"e i4ple4entin3 or3aniCations (as t#e :oorest of t#e :oor are t#e most difficu"t to reac# and moti0ate= im:"ementin% a%encies tend to "ea0e t#em out= :referrin% to focus on t#e ne9t 6ea"t# cate%or!)(') So%rces of capital and lin2s et<een S,-s and Ban2s

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S4$s can on"! fu"fi"" a ro"e in t#e rura" econom! if %rou: mem3ers #a0e access to financia" ca:ita" and mar ets for t#eir :roducts and ser0ices- A#i"e t#e %rou:s initia""! %enerate t#eir o6n sa0in%s t#rou%# t#rift (6#ere3! t#rift im:"ies sa0in%s created 3! :ost:onin% a"most necessar! consum:tion= 6#i"e sa0in%s im:"! t#e e9istence of sur:"us 6ea"t#)= t#eir aim is often to "in u: 6it# financia" institutions in order to o3tain furt#er "oans for in0estments in rura" enter:risesN$@s and 3an s are %i0in% "oans to S4$s eit#er as Dmatc#in% "oansD (6#ereas t#e "oan amount is :ro:ortionate to t#e %rou:Qs sa0in%s) or as fi9ed amounts= de:endin% on t#e %rou:Qs record of re:a!ment= recommendations 3! %rou: faci"itators= co""atera"s :ro0ided= etc('( ,o< S,-s sa9e Se"f;#e": %rou:s mo3i"i8e sa0in%s from t#eir mem3ers= and ma! t#en on;"end t#ese funds to one anot#er= usua""! at a::arent"! #i%# rates of interest 6#ic# ref"ect t#e mem3ersF understandin% of t#e #i%# returns t#e! can earn on t#e sma"" sums in0ested in t#eir micro;enter:rises= and t#e e0en #i%#er cost of funds from mone! "enders- If t#e! do not 6is# to use t#e mone!= t#e! ma! de:osit it in a 3an - If t#e mem3ersF need for funds e9ceeds t#e %rou:Fs accumu"ated sa0in%s= t#e! ma! 3orro6 from a 3an or ot#er or%ani8ation= suc# as a micro;finance non;%o0ernment or%ani8ation= to au%ment t#eir o6n fund?#e s!stem is 0er! f"e9i3"e- ?#e %rou: a%%re%ates t#e sma"" indi0idua" sa0in% and 3orro6in% reGuirements of its mem3ers= and t#e 3an needs on"! to maintain one account for t#e %rou: as a sin%"e entit!- ?#e 3an er must assess t#e com:etence and inte%rit! of t#e %rou: as a micro;3an = 3ut once #e #as done t#is #e need not concern #imse"f 6it# t#e indi0idua" "oans made 3! t#e %rou: to its mem3ers= or t#e uses to 6#ic# t#ese "oans are :ut- 4e can treat t#e %rou: as a sin%"e customer= 6#ose tota" 3usiness and transactions are :ro3a3"! simi"ar in amount to t#e a0era%e for #is norma" customers= 3ecause t#e! re:resent t#e com3ined 3an in% 3usiness of some t6ent! Emicro;customersF- An! 3an 3ranc# can #a0e a sma"" or a "ar%e num3er of suc# accounts= 6it#out #a0in% to c#an%e its met#ods of o:erationUn"i e man! customers= demand from S4$s is not :rice;sensiti0e- I""iterate 0i""a%e 6omen are sometimes 3etter 3an ers t#an some 6it# more :rofessiona" Gua"ifications- ?#e! no6 t#at ra:id access to funds is more im:ortant t#an t#eir cost= and t#e! a"so no6= e0en t#ou%# t#e! mi%#t not 3e a3"e to ca"cu"ate t#e fi%ures= t#at t#e t!:ica" micro;enter:rise earns 6e"" o0er +&&P return
25

on t#e sma"" sum in0ested in it (4ar:er= M= )''<= :- )+)- ?#e %rou:s t#us c#ar%e t#emse"0es #i%# rates of interestI t#e! are #a::! to ta e ad0anta%e of t#e %enerous s:read t#at t#e NABARD su3sidi8ed 3an "endin% rate of )/P a""o6s t#em= 3ut t#e! are a"so 6i""in% to 3orro6 from N$@LMFIs 6#ic# on;"end funds from SIDBI at )+P= or from Ene6 %enerationF institutions suc# as Basi9 Finance at )(-+P or /)P('. S,-s$Ban2 ;in2a3e Model NABARD is :resent"! o:eratin% t#ree mode"s of "in a%e of 3an s 6it# S4$s and N$@s5 Model F #: In t#is mode"= t#e 3an itse"f acts as a Se"f 4e": $rou: Promotin% Institution (S4PI)It ta es initiati0es in formin% t#e %rou:s= nurtures t#em o0er a :eriod of time and t#en :ro0ides credit to t#em after satisf!in% itse"f a3out t#eir maturit! to a3sor3 credit- A3out )*P of S4$s and ),P of "oan amounts are usin% t#is mode" (as of Marc# /&&/)Model F ): In t#is mode"= %rou:s are formed 3! N$@s (in most of t#e cases) or 3! %o0ernment a%encies- ?#e %rou:s are nurtured and trained 3! t#ese a%encies- ?#e 3an t#en :ro0ides credit direct"! to t#e S4$s= after o3ser0in% t#eir o:erations and maturit! to a3sor3 credit- A#i"e t#e 3an :ro0ides "oans to t#e %rou:s direct"!= t#e faci"itatin% a%encies continue t#eir interactions 6it# t#e S4$s- Most "in a%e e9:eriences 3e%in 6it# t#is mode" 6it# N$@s :"a!in% a ma>or ro"e?#is mode" #as a"so 3een :o:u"ar and more acce:ta3"e to 3an s= as some of t#e difficu"t functions of socia" d!namics are e9terna"i8ed- A3out <+P of S4$s and <(P of "oan amounts are usin% t#is mode"Model F (: Due to 0arious reasons= 3an s in some areas are not in a :osition to e0en finance S4$s :romoted and nurtured 3! ot#er a%encies- In suc# cases= t#e N$@s act as 3ot# faci"itators and micro; finance intermediaries- First= t#e! :romote t#e %rou:s= nurture and train t#em and t#en a::roac# 3an s for 3u" "oans for on;"endin% to t#e S4$s- A3out 'P of S4$s and ),P of "oan amounts are usin% t#is mode"!o4parati9e Analysis of Micro$finance Ser9ices offered to t"e poor

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Source5 R- Arunac#a"am ; A"ternati0e ?ec#no"o%ies in t#e Indian Micro; finance Industr! ('/ ;ife ins%rances for self$"elp 3ro%p 4e4 ers ?#e United India Insurance 7om:an! #as desi%ned t6o P22Is (:ersona" "ine "ife insurances) for 6omen in rura" areas- ?#e com:an! 6i"" 3e tar%etin% se"f;#e": %rou:s= of 6#ic# t#ere are around /&&=&&& in t#e countr!= 6it# )+;/& 6omen in a %rou:- ?#e t6o :o"icies are ()) t#e Mot#er ?eresa Aomen H 7#i"dren Po"ic!= 6it# t#e aim of %i0in% to t#e 6oman in t#e e0ent of accidenta" deat# of #er #us3and and to su::ort #er minor c#i"dren in t#e e0ent of #er deat#= and (/) ?#e Unimicro 4ea"t# Sc#eme= %i0in% :ersona" accident and #os:ita"i8ation co0ers 3esides co0er for dama%e to d6e""in% due to fire and a""ied :eri"s!"apter .: Micro *inance Models
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#' Micro *inance Instit%tions @M*IsA: MFIs are an e9treme"! #etero%eneous %rou: com:risin% NBF7s= societies= trusts and coo:erati0es- ?#e! are :ro0ided financia" su::ort from e9terna" donors and a:e9 institutions inc"udin% t#e Ras#tri!a Ma#i"a Kos# (RMK)= SIDBI Foundation for micro;credit and NABARD and em:"o! a 0ariet! of 6a!s for credit de"i0er!Since /&&&= commercia" 3an s inc"udin% Re%iona" Rura" Ban s #a0e 3een :ro0idin% funds to MFIs for on "endin% to :oor c"ients- ?#ou%# initia""!= on"! a #andfu" of N$@s 6ere BintoC financia" intermediation usin% a 0ariet! of de"i0er! met#ods= t#eir num3ers #a0e increased considera3"! toda!- A#i"e t#ere is no :u3"is#ed data on :ri0ate MFIs o:eratin% in t#e countr!= t#e num3er of MFIs is estimated to 3e around (&&;e3al *or4s of M*Is in India Types of M*Is )- 8ot for Profit M*Is a-) N$@ ; MFIs 3-) Non;:rofit 7om:anies /- M%t%al Benefit a-) Mutua""! Aided 7oo:erati0e Societies (MA7S) and simi"ar"! set u: institutions ,- *or Profit M*Is a-) ?ota" Non;Ban in% Financia" <&& ; (&& * Indian 7om:anies Act= )'+* Reser0e Ban of India Act= )',1 )& Esti4ated ;e3al Acts %nder <"ic" Re3istered 8%4 erB 1&& to +&& Societies Re%istration Act= )(*& or simi"ar Pro0incia" Acts Indian ?rust Act= )((/ Section /+ of t#e 7om:anies Act= )'+* Act enacted 3! State $o0ernment M*Is /&& to /+& Mutua""! Aided 7oo:erati0e Societies

7om:anies (NBF7s)

Source5 NABARD 6e3site

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)' Ban2 Partners"ip Model ?#is mode" is an inno0ati0e 6a! of financin% MFIs- ?#e 3an is t#e "ender and t#e MFI acts as an a%ent for #and"in% items of 6or re"atin% to credit monitorin%= su:er0ision and reco0er!- In ot#er 6ords= t#e MFI acts as an a%ent and ta es care of a"" re"ations#i:s 6it# t#e c"ient= from first contact to fina" re:a!ment- ?#e mode" #as t#e :otentia" to si%nificant"! increase t#e amount of fundin% t#at MFIs can "e0era%e on a re"ati0e"! sma"" eGuit! 3aseA su3 ; 0ariation of t#is mode" is 6#ere t#e MFI= as an NBF7= #o"ds t#e indi0idua" "oans on its 3oo s for a 6#i"e 3efore securiti8in% t#em and se""in% t#em to t#e 3an - Suc# refinancin% t#rou%# securiti8ation ena3"es t#e MFI en"ar%ed fundin% access- If t#e MFI fu"fi"s t#e Btrue sa"eC criteria= t#e e9:osure of t#e 3an is treated as 3ein% to t#e indi0idua" 3orro6er and t#e :rudentia" e9:osure norms do not t#en in#i3it suc# fundin% of MFIs 3! commercia" 3an s t#rou%# t#e securiti8ation structure-

(' Ban2in3 !orrespondents ?#e :ro:osa" of B3an in% corres:ondentsC cou"d ta e t#is mode" a ste: furt#er e9tendin% it to sa0in%s- It 6ou"d a""o6 MFIs to co""ect sa0in%s de:osits from t#e :oor on 3e#a"f of t#e 3an - It 6ou"d use t#e a3i"it! of t#e MFI to %et c"ose to :oor c"ients 6#i"e re"!in% on t#e financia" stren%t# of t#e 3an to safe%uard t#e de:osits- ?#is re%u"ation e0o"0ed at a time 6#en t#ere 6ere %enuine fears t#at f"!;3!;ni%#t a%ents :ur:ortin% to act on 3e#a"f of 3an s in 6#ic# t#e :eo:"e #a0e confidence cou"d mo3i"i8e sa0in%s of %u""i3"e :u3"ic and t#en 0anis# 6it# t#em- It remains to 3e seen 6#et#er t#e mec#anics of suc# re"ations#i:s can 3e 6or ed out in a 6a! t#at minimi8es t#e ris of misuse-

.' Ser9ice !o4pany Model Under t#is mode"= t#e 3an forms its o6n MFI= :er#a:s as an NBF7= and t#en 6or s #and in #and 6it# t#at MFI to e9tend "oans and ot#er ser0ices- @n :a:er= t#e mode" is simi"ar to t#e :artners#i: mode"5 t#e MFI ori%inates t#e "oans and t#e 3an 3oo s t#em- But in fact= t#is mode" #as t6o 0er! different and interestin% o:erationa" features5
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@aA ?#e MFI uses t#e 3ranc# net6or of t#e 3an as its out"ets to reac# c"ients- ?#is a""o6s t#e c"ient to 3e reac#ed at "o6er cost t#an in t#e case of a standMa"one MFI- In case of 3an s 6#ic# #a0e "ar%e 3ranc# net6or s= it a"so a""o6s ra:id sca"e u:- In t#e :artners#i: mode"= MFIs ma! contract 6it# man! 3an s in an arms "en%t# re"ations#i:- In t#e ser0ice com:an! mode"= t#e MFI 6or s s:ecifica""! for t#e 3an and de0e"o:s an intensi0e o:erationa" coo:eration 3et6een t#em to t#eir mutua" ad0anta%e@ A T"e Partners"ip 4odel uses 3ot# t#e financia" and infrastructure stren%t# of t#e 3an to create "o6er cost and faster %ro6t#- ?#e Ser0ice 7om:an! Mode" #as t#e :otentia" to ta e t#e 3urden of o0erseein% microfinance o:erations off t#e mana%ement of t#e 3an and :ut it in t#e #ands of MFI mana%ers 6#o are focused on microfinance to introduce additiona" :roducts= suc# as indi0idua" "oans for S4$ %raduates= remittances and so on 6it#out disru:tin% 3an o:erations and :ro0ide a more ad0anta%eous cost structure for microfinance-

!"apter / Role0 *%nctions and 1or2in3 Mec"anis4 of *inancial Instit%tions /'# I!I!I Ban2 " # # $an% is one ban% that has developed a very clear strategy to e&pand the provision of financial products and services to the poor in ndia as a profitable activity' $ ,ar%"i2o G%roda0 President0 Asian De9elop4ent Ban2'
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I7I7IFs microfinance :ortfo"io #as 3een increasin% at an im:ressi0e s:eed- From )&=&&& microfinance c"ients in /&&)= I7I7I Ban is no6 (/&&<) "endin% to )-( mi""ion c"ients t#rou%# its :artner microfinance institutions= and its outstandin% :ortfo"io #as increased from Rs- &-/& 3i""ion (USJ1-+ mi""ion) to Rs- '-'( 3i""ion (USJ//< mi""ion)- A fe6 !ears a%o= t#ese c"ients #ad ne0er 3een ser0ed 3! a forma" "endin% institution?#ere is an increasin% s#ift in t#e microfinance sector from %rant;%i0in% to in0estment in t#e form of de3t or eGuit!= and I7I7I 3e"ie0es %rant mone! s#ou"d 3e "imited to t#e creation of faci"itati0e infrastructure- BAe need to sto: sendin% %o0ernment and fundin% a%encies t#e si%na" t#at microfinance is not a commercia""! 0ia3"e s!stemC= sa!s 8ac"i2et Mor0 EEec%ti9e Director of I!I!I Ban2' As a resu"t of 3an s enterin% t#e %ame= t#e sector #as c#an%ed ra:id"!- B?#ere is no deart# of funds toda!= as 3an s are "oo in% into MFIs fa0ora3"!= un"i e a fe6 !ears a%oC= sa!s Pad4aja Reddy0 t"e !E: of one of I!I!I Ban2Hs 4ajor M*I partners0 SpandanaBan2 ;ed Model ?#e 3an "ed mode" 6as deri0ed from t#e S4$;Ban "in a%e :ro%ram of NABARD- ?#rou%# t#is :ro%ram= 3an s financed Se"f 4e": $rou:s (S4$s) 6#ic# #ad 3een :romoted 3! N$@s and %o0ernment a%enciesI7I7I Ban dre6 u: a%%ressi0e :"ans to :enetrate rura" areas t#rou%# its S4$ :ro%ram4o6e0er= rat#er t#an s:endin% time in de0e"o:in% rura" infrastructure of its o6n= in /&&&= I7I7I Ban announced mer%er of Ban of Madura (BoM)= 6#ic# #ad si%nificant :resence in t#e rura" areas of Sout# India= es:ecia""! ?ami" Nadu= 6it# a customer 3ase of )-' mi""ion and (< 3ranc#esBan of MaduraQs S4$ de0e"o:ment :ro%ram 6as initiated in )''+- ?#rou%# t#is :ro%ram= it #ad formed= trained and initiated sma"" %rou:s of 6omen to underta e financia" acti0ities "i e 3an in%= sa0in% and "endin%- B! /&&&= it #ad created around )/&& S4$s across ?ami" Nadu and :ro0ided credit to t#em-

31

Partners"ip Models A mode" of microfinance #as emer%ed in recent !ears in 6#ic# a microfinance institution (MFI) 3orro6s from 3an s and on;"ends to c"ientsI fe6 MFIs #a0e 3een a3"e to %ro6 3e!ond a certain :oint- Under t#is mode"= MFIs are una3"e to :ro0ide ris ca:ita" in "ar%e Guantities= 6#ic# "imits t#e ad0ances from 3an s- In addition= t#e ris is 3ein% entire"! 3orne 3! t#e MFI= 6#ic# "imits its ris ;ta in%?#is mode" aimed at s!ner%i8in% t#e com:arati0e ad0anta%es and financia" stren%t# of t#e 3an 6it# socia" intermediation= mo3i"i8ation :o6er and infrastructure of MFIs and N$@s- ?#rou%# t#is mode"= I7I7I Ban cou"d sa0e on t#e initia" costs of de0e"o:in% rura" infrastructure and micro credit distri3ution c#anne"s and cou"d ta e ad0anta%e of t#e e9:ertise of t#ese institutions in rura" areas- Initia""!= I7I7I Ban started off 3! "endin% to MFIs and N$@s in order to :ro0ide t#e necessar! financia" su::ort to t#eir acti0ities- 2ater= I7I7I Ban came u: 6it# a :"an 6#ere t#e N$@LMFI continued to :romote t#eir microfinance sc#emes= 6#i"e t#e 3an financia" reGuirements of t#e 3orro6ers:t"er Microfinance Initiati9es As a :art of microfinance initiati0es in t#e a%ricu"ture sector= I7I7I Ban de0e"o:ed Farmer Ser0ice 7enters (FS7)- An FS7 6as mana%ed 3! an a%ricu"tura" in:ut su::"! com:an! 6#ic# su::"ied in:uts "i e seeds and tec#nica" no6#o6 to t#e farmersFS7s 6ere a"so mana%ed 3! an e9tension ser0ice or%ani8ation 6#ic# :ro0ided in:uts= credit and tec#no"o%! or 3! an N$@ t#at :ro0ided a"" t#e ser0ices t#at farmers needed for t#eir a%ricu"tura" needs- Aor in% in c"ose association 6it# farmers= FS7s :ro0ided t#em 6it# ser0ices "i e ad0ice on seeds= so6in% tec#niGues= :est contro"= 6eed contro"= usa%e and dosa%e of #er3icides= :esticides and ferti"i8ers and ot#er ser0ices associated 6it# a%ricu"ture- ?#e FS7s a"so :ro0ided cro:;re"ated information and ser0ices to farmers= a:art from faci"itatin% t#e sa"e of a%ricu"tura" :roduce- ?#e FS7s arran%ed to :rocure t#e :roduce t#rou%# a%ents and so"d it in or%ani8ed a%ricu"tura" mar ets t#us %ettin% 3etter rea"i8ationT"e *%t%re
32

met t#e

?#ese a%ents contact se0era" 3orro6ers= t#us e9:andin% t#e reac# of I7I7I Ban at a "o6 cost?a in% t#e FS7 initiati0e furt#er= I7I7I Ban :rocessin% industriesSI$ #as 3een in0o"0ed in a :ro>ect in t#e sout#ern state of ?ami" Nadu to find out #o6 6ire"ess tec#no"o%! can 3e a::"ied in t#e de0e"o:ment of "o6 cost mode"s of 3an in%- Anot#er :"an to increase t#e reac# in rura" areas is to "aunc# mo3i"e A?M ser0ices- I7I7I Ban 3randed truc s #a0e started carr!in% A?Ms t#rou%# a num3er of 0i""a%es So4e Articles of 8e<s Paper: #' I!I!I Ban2 to offer 4icro$finance to seE$<or2ers M%4 ai0 Marc" #.: In a no0e" 6a! to #e": se9;6or ers to "i0e more meanin%fu""!= countr!Qs "ar%est :ri0ate sector 3an = I7I7I Ban is :"annin% to offer financia" assistance to t#em t#ou%# t#e micro;finance routeFor starters= t#e 3an :"ans to "aunc# t#e :ro%ramme in Ko" ata 3! enterin% into a tie;u: 6it# Dur3ar Ma#i"a Sam6ana!a Samitee= an N$@ 6or in% for t#e 6e"fare of around *+=&&& se9; 6or ers in and around t#e cit!Source5 (Press ?rust of India) Posted on"ine5 Aednesda!= Marc# )1= /&&< at /&5+1 #ours IS? )' I!I!I Ban2 la%nc"es ne< initiati9e in 4icro$finance I7I7I Ban #as ta en a sta e of under /& :er cent in Financia" Information Net6or and @:erations Pri0ate 2td (FIN@)= 6#ic# 6as "aunc#ed on ?#ursda!= Ku"! ),= /&&)FIN@ 6ou"d :ro0ide tec#no"o%ica" so"utions as 6e"" as ser0ices to finance :ro0iders to reac# t#e underser0ed in t#e countr!- I7I7I Ban is t#e "ead faci"itatorAccordin% to Mr 8ac"i2et Mor= De:ut! Mana%in% Director= I7I7I Ban = FIN@ is an inde:endent entit!- DAe 6ou"d reduce our sta e in t#e com:an! 6#en reGuired=D #e said:"ans to :ro0ide farmers credit from su%ar com:anies= seed com:anies= dair! com:anies= N$@s= micro;credit institutions and food

33

I7I7I Ban e9:ects to tar%et /&& micro;finance institutions (MFIs) 3! Marc# /&&<= #e said= s:ea in% on t#e side"ines of t#e :ress conference to "aunc# FIN@- At :resent= t#e 3an #as tie; u:s 6it# )&& MFIsFIN@ is an initiati0e in t#e micro;finance sector- It 6ou"d tar%et ,&&;1&& mi""ion :eo:"e 6#o do not #a0e access to 3asic financia" ser0ices= said Mr Manis# K#era= 7E@= FIN@- ?#e com:an! #as an aut#orised ca:ita" of Rs +& crore- MFIs= NBF7s= RRBs= co;o:erati0e 3an s= etc 6ou"d direct"! or indirect"! tie u: 6it# FIN@ to use its ser0ices= #e said- FIN@ 6ou"d c#ar%e Rs /+;,& :er account e0er! !ear!ore an2in3 prod%cts FIN@ #as :artnered 6it# IBM and i;f"e9 to offer core 3an in% :roducts- It 6ou"d a"so :ro0ide credit 3ureau ser0ices= 6#ic# inc"udes indi0idua" customer credit ratin% and ana"!tics 3ased on transaction #istor!- It a"so "aunc#ed 3iometric cards for customers= 6#ic# 6ou"d 3e a :roof of identit! and %i0e co""atera" to t#em- ?#e card 6ou"d a"so offer mu"ti:"e :roducts inc"udin% sa0in%s= "oans= insurance= recurrin% de:osits= fi9ed de:osits and remittances- ?#e com:an! 6ou"d a"so 3ui"d;u: customer data3ase= t#us 3rin%in% t#em into mainstream 3an in%D?#ere 6as a need for automated structured data s!stem "i e FIN@=D said Mr Mor- DEssentia" :ieces of infrastructure are missin% in India- Ae "ac credit;trac in% mec#anismI t#erefore t#ere 6as a need for an inter0ention "i e FIN@-D ?#e com:an! e9:ects to reac# /+ mi""ion customers in fi0e !ears and t6o mi""ion customers 3! t#e end of /&&<FIN@ aims 3rin%in% sca"e to DmicroD 3usiness "eadin% to "o6erin% of costs for t#e "oca" financia" institutions (2FIs) and act as an interna" tec#no"o%! de:artment for t#e 2FIs= said Mr G"era?#e com:an! is 6or in% on :ro0idin% tec#no"o%ica" so"utions in insurance= es:ecia""! t#e #ea"t# insurance sector to t#e under;:ri0i"e%ed=D #e said- It is interactin% 6it# Na3ard= SIDBI and ot#er 3an s to %i0e s#a:e to 6#at FIN@ does= said Mr K#era(' I!I!I Ban2Is t"r%st on 4icro$finance
34

74ENNAI= MAR74 '- I7I7I Ban #as entered into :artners#i:s 6it# 0arious microfinance institutions (MFI) and non;$o0ernment or%anisations (N$@s) to sca"e u: its micro "endin% 3usiness- Addressin% :ress:ersons #ere= toda!= Nac#i et Mor= E9ecuti0e Director= I7I7I Ban = said= t#e :artners#i: mode" 6ou"d :ro0ide assured source of fundin% to N$@s and MFIs- ?#e 3an #ad e9tended ad0ances to t#e tune of Rs- )+& crores as on Fe3ruar! /'= t#is !ear= under t#is sc#eme= Mr' Mor said?#e 3an #ad acGuired a net6or of se"f;#e": %rou:s (S4$s) de0e"o:ed 3! t#e erst6#i"e Ban of Madura after its mer%er 6it# I7I7I Ban - Since t#en t#e S4$ :ro%ramme #ad %ro6n su3stantia""! and )&=)<+ %rou:s #ad 3een :romoted reac#in% out to /-&, "a # 6omen s:read across /=,'( 0i""a%es= t#e E9ecuti0e Director said@ne of t#e micro finance institutions= RMicrocredit Foundation of IndiaQ= esta3"is#ed 3! K- M?#ia%ara>an= former 7#airman of Ban of Madura in /&&/= #ad initiated a :ro%ramme for microcredit t#rou%# se"f;#e": %rou:sI7I7I Ban #as entered into a memorandum of understandin% 6it# Microcredit Foundation to outsource S4$ de0e"o:ment= maintenance of %rou:s= credit "in a%e and reco0er! of "oans-

T"e M*I as !ollection A3ent ?o address t#ese constraints= I7I7I Ban initiated a :artners#i: mode" in /&&/ in 6#ic# t#e MFI acts as a co""ection a%ent instead of a financia" intermediar!- ?#is mode" is uniGue in t#at it com3ines de3t as me88anine finance to t#e MFI (Me88anine finance com3ines de3t and eGuit! financin%5 it is de3t t#at can 3e con0erted 3! t#e "ender into eGuit! in t#e e0ent of a defau"t?#is source of financin% is ad0anta%eous for MFIs 3ecause it is treated "i e eGuit! in t#e 3a"ance; s#eet and ena3"es it to raise mone! 6it#out additiona" eGuit!= 6#ic# is an e9:ensi0e financin% source-)-?#e "oans are contracted direct"! 3et6een t#e 3an and t#e 3orro6er= so t#at t#e ris for t#e MFI is se:arated from t#e ris in#erent in t#e :ortfo"io- ?#is mode" is t#erefore "i e"! to #a0e 0er! #i%# "e0era%in% ca:acit!= as t#e MFI #as an assured source of funds for e9:andin% and
35

dee:enin% credit- I7I7I c#ose t#is mode" 3ecause it e9:ands t#e retai" o:erations of t#e 3an 3! "e0era%in% com:arati0e ad0anta%es of MFIs= 6#i"e a0oidin% costs associated 6it# enterin% t#e mar et direct"!Sec%ritiCation Anot#er 6a! to enter into :artners#i: 6it# MFIs is to securiti8e microfinance :ortfo"ios- In /&&1= t#e "ar%est e0er securiti8ation dea" in microfinance 6as si%ned 3et6een I7I7I Ban and S4ARE Microfinance 2td= a "ar%e MFI o:eratin% in rura" areas of t#e state of Andra Prades#- ?ec#nica" assistance and t#e co""atera" de:osit of USJ,/+=&&& (',P of t#e %uarantee reGuired 3! I7I7I) 6ere su::"ied 3! $rameen Foundation USA- Under t#is a%reement= I7I7I :urc#ased a :art of S4AREFs microfinance :ortfo"io a%ainst a consideration ca"cu"ated 3! com:utin% t#e Net Present Va"ue of recei0a3"es amountin% to Rs- /)+ mi""ion (USJ1-' mi""ion) at an a%reed discount rate- ?#e interest :aid 3! S4ARE is a"most 1P "ess t#an t#e rate :aid in commercia" "oans- Partia" credit :ro0ision 6as :ro0ided 3! S4ARE in t#e form of a %uarantee amountin% to (P of t#e recei0a3"es under t#e :ortfo"io= 3! 6a! of a "ien on fi9ed de:osit- ?#is dea" frees u: eGuit! ca:ita"= a""o6in% S4ARE to sca"e u: its "endin%- @n t#e ot#er #and= it a""o6s I7I7I Ban to reac# ne6 mar ets- And 3! tradin% t#is #i%# Gua"it! asset in ca:ita" mar ets= t#e 3an can #ed%e its o6n ris s-

Beyond Microcredit Microfinance does not on"! mean microcredit= and I7I7I does not "imit itse"f to "endin%- I7I7IFs Socia" Initiati0e $rou:= a"on% 6it# t#e Aor"d Ban and I7I7I 2om3ard= t#e insurance com:an! set u: 3! I7I7I and 7anada 2om3ard= #a0e de0e"o:ed IndiaFs first inde9;3ased insurance :roduct- ?#is insurance :o"ic! com:ensates t#e insured a%ainst t#e "i e"i#ood of diminis#ed a%ricu"tura" out:utL!ie"d resu"tin% from a s#ortfa"" in t#e antici:ated norma" rainfa"" 6it#in t#e district= su3>ect to a ma9imum of t#e sum insured- ?#e insurance :o"ic! is "in ed to a rainfa"" inde9Tec"nolo3y

36

@ne of t#e main c#a""en%es to t#e %ro6t# of t#e microfinance sector is accessi3i"it!- ?#e Indian conte9t= in 6#ic# <&P of t#e :o:u"ation "i0es in rura" areas= reGuires ne6= in0enti0e c#anne"s of de"i0er!- ?#e use of tec#no"o%ies suc# as ios s and smart cards 6i"" considera3"! reduce transaction costs 6#i"e im:ro0in% access- ?#e I7I7I Ban tec#no"o%! team is de0e"o:in% a series of inno0ati0e :roducts t#at can #e": reduce transaction costs considera3"!- For e9am:"e= it is :i"otin% t#e usa%e of smart cards 6it# Se6a Ban in A#meda3ad- ?o ma9imi8e t#e 3enefits of t#ese inno0ations= t#e de0e"o:ment of a #i%# Gua"it! s#ared 3an in% tec#no"o%! :"atform 6#ic# can 3e used 3! MFIs as 6e"" as 3! coo:erati0es 3an s and re%iona" rura" 3an s is needed- I7I7I is stron%"! encoura%in% suc# an effort to ta e :"ace- Ai:ro and Infos!s= I;F"e9= ,iInfotec#= some of t#e 3est Indian information tec#no"o%! com:anies s:ecia"i8ed in financia" ser0ices= and ot#ers= are in t#e :rocess of de0e"o:in% e9act"! suc# a :"atform- At a recent tec#no"o%! 6or s#o: at t#e Institute for Financia" Mana%ement Researc# in 7#ennai= t#e I7I7I Ban A"ternate 7#anne"s ?eam :resented t#e 3enefits of in0estin% in a common tec#no"o%! :"atform simi"ar to t#ose used in mainstream 3an in% to some of t#e most :romisin% MFIsT"e !entre for Microfinance Researc" I7I7I 3an #as created t#e 7entre for Microfinance Researc# (7MFR) at t#e Institute for Financia" Mana%ement Researc# (IFMR) in 7#ennai- ?#rou%# researc#= researc#;3ased ad0ocac!= #i%# "e0e" trainin% and strate%! 3ui"din%= it aims to s!stematica""! esta3"is# t#e "in s 3et6een increased access to financia" ser0ices and t#e :artici:ation of :oor :eo:"e in t#e "ar%er econom!- ?#e 7MFR Researc# Unit su::orts initiati0es aimed at understandin% and ana"!8in% t#e fo""o6in% issues5 im:act of access to financia" ser0icesI contract and :roduct desi%nsI constraints to #ouse#o"d :roducti0it!I com3ination of microfinance and ot#er de0e"o:ment inter0entionsI e0idence of credit constraintsI costs and :rofita3i"it! of microfinance or%ani8ationsI im:act of MFI :o"icies and strate%iesI :eo:"eFs 3e#a0ior and :s!c#o"o%! 6it# res:ect to financia" ser0icesI economics of micro;enter:risesI and t#e effect of re%u"ationsFina""!= t#e 7MFR reco%ni8es t#at 6#i"e MFIs aim to meet t#e credit needs of :oor #ouse#o"ds= t#ere are ot#er missin% mar ets and constraints facin% #ouse#o"ds= suc# as #ea"t#care= infrastructure= and %a:s in no6"ed%e- ?#ese #a0e im:"ications in terms of t#e sca"e and :rofita3i"it! of c"ient enter:rises and efficienc! of #ouse#o"d 3ud%et a""ocation= 6#ic# in turn
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im:acts #ouse#o"d 6e"";3ein%- ?#e 7MFR Microfinance Strate%! Unit 6i"" address t#ese issues t#rou%# a series of 6or s#o:s 6#ic# 6i"" 3rin% to%et#er MFI :ractitioners and sectora" e9:erts (in ener%!= 6ater= roads= #ea"t#= etc)- ?#e "atter 6i"" 3rin% to t#e ta3"e co""a3oration 3et6een 6it# MFIs for im:"ementin% s:ecific :i"otsno6"ed%e of 3est :ractices in t#eir s:ecific areas= and eac# consu"tation 6or s#o: 6i"" resu"t in "on%;term

/') Band"an @Ran2ed )nd y *or es Ma3aCine in Dece4 er )==5A Band#an is 6or in% to6ards t#e t6in o3>ecti0e of :o0ert! a""e0iation and 6omen em:o6ermentIt started as a 7a:acit! Bui"din% Institution (7BI) in No0em3er /&&& under t#e "eaders#i: of Mr7#andra S#e #ar $#os#- Durin% suc# time= it 6as %i0in% ca:acit! 3ui"din% su::ort to "oca" microfinance institutions 6or in% in Aest Ben%a"Band#an o:ened its first microfinance 3ranc# at Ba%nan in 4o6ra# district of Aest Ben%a" in Ku"! /&&/- Band#an started 6it# / 3ranc#es in t#e !ear /&&/;&, on"! in t#e state of Aest Ben%a" and toda! it #as %ro6n as stron% as 1)/ 3ranc#es across * states of t#e countr!S ?#e or%ani8ation #ad recorded a %ro6t# rate of +&&P in t#e !ear /&&,;&1 and *))P in t#e !ear /&&1;&+- ?i"" date= it #as dis3ursed a tota" of Rs- +(< crores amon% a"most < "a # :oor 6omen- 2oan outstandin% stands at Rs- //) crores- ?#e re:a!ment rate is recorded at ''-''P- Band#an #as staff stren%t# of more t#an /),& em:"o!ees38

As on J%ly )==6
Column1 Column2

No- of states No- of 3ranc#es No- of mem3ers No- of staff 7umu"ati0e "oan dis3ursed 2oan outstandin% :perational Met"odolo3y

5( 5 +/( 5 )=)(/=<1) 5 ,=)') 5 Rs-)=/1' crores 5 Rs- 1)< crores

Band#an fo""o6s a %rou: formation= indi0idua" "endin% a::roac#- A %rou: of )&;/+ mem3ers are formed- ?#e c"ients #a0e to attend t#e %rou: meetin%s for / successi0e 6ee s- / 6ee s #ence= t#e! are entit"ed to recei0e "oans- ?#e "oans are dis3ursed indi0idua""! and direct"! to t#e mem3ers-

Econo4ic and Social Bac23ro%nd of !lients

2and"ess and asset "ess 6omen Fami"! of + mem3ers 6it# mont#"! income "ess t#an Rs- /=+&& in rura" and Rs,=+&& in ur3an ?#ose 6#o do not o6n more t#an +& decima" ()L/acre) of "and or ca:ita" of its eGui0a"ent 0a"ue

;oan SiCe ?#e first "oan is 3et6een Rs- )=&&& M Rs- <=&&& for t#e rura" areas and 3et6een Rs- )=&&& M Rs)&=&&& for t#e ur3an areas- After t#e re:a!ment= t#e! are entit"ed to recei0e a su3seGuent "oan 6#ic# is Rs )=&&& ; +=&&& more t#an t#e :re0ious "oanSer9ice !"ar3e Band#an c#ar%es a ser0ice c#ar%e of )/-+&P f"at on "oan amount- Band#an initia""! c#ar%ed )<-+&P- 4o6e0er from )st Ku"! /&&+= it #as s"as#ed do6n its "endin% rate to )+-&&P- ?#en it
39

6as furt#er reduced to )/-+&P in Ma! /&&*- ?#e reason is o30ious- As o0era"" :roducti0it! increased= o:erationa" costs decreased- Band#an= 3ein% a non :rofit or%ani8ation 6anted t#e 3enefit of "o6 costs to u"timate"! tric "e do6n to t#e :oorMonitorin3 Syste4 ?#e 0arious features of t#e monitorin% s!stem are5

A , tier monitorin% s!stem M Re%ion= Di0ision and 4ead @ffice Eas! re:ortin% s!stem 6it# a :rescri3ed c#ec "ist format Accounta3i"it! at a"" "e0e"s :ost monitorin% :#ase 7ross; c#ec in% at a"" t#e "e0e"s ?#e mana%ement team of Band#an s:ends '&-&&P of time at t#e fie"d

;ia ility str%ct%re for ;oans A#en a mem3er 6ants to >oin Band#an= s#e at first #as to %et inducted into a %rou:- After s#e %ets inducted into t#e %rou:= t#e entire %rou: :ro:oses #er name for a "oan in t#e Reso"ution Boo - ?6o mem3ers of t#e %rou: a"on% 6it# t#e mem3erFs #us3and #a0e to si%n as %uarantors in #er "oan a::"ication form- If s#e fai"s to :a! #er 6ee "! insta""ment= t#e %rou: inserts :eer :ressure on #er- ?#e so"e :ur:ose of t#e a3o0e structure is sim:"! to create :eer :ressure/'( -ra4een Ban2 ?#e $rameen Mode" 6#ic# 6as :ioneered 3! Prof Mu#ammed Yunus of $rameen Ban is :er#a:s t#e most 6e"" no6n= admired and :ractised mode" in t#e 6or"d- ?#e mode" in0o"0es t#e fo""o6in% e"ements
40

4omo%eneous affinit! %rou: of fi0e Ei%#t %rou:s form a 7entre 7entre meets e0er! 6ee Re%u"ar sa0in%s 3! a"" mem3ers

2oan :ro:osa"s a::ro0ed at 7entre meetin% 2oan dis3ursed direct"! to indi0idua"s A"" "oans re:aid in +& insta"ments

?#e $rameen mode" fo""o6s a fair"! re%imented routine- It is 0er! cost intensi0e as it in0o"0es 3ui"din% ca:acit! of t#e %rou:s and t#e customers :assin% a test 3efore t#e "endin% cou"d start?#e %rou: mem3ers tend to 3e se"ected or at "east stron%"! 0etted 3! t#e 3an - @ne of t#e reasons for t#e #i%# cost is t#at staff mem3ers can conduct on"! t6o meetin%s a da! and t#us are occu:ied for on"! a fe6 #ours= usua""! ear"! mornin% or "ate in t#e e0enin%- ?#e! 6ere used additiona""! for accountin% 6or = 3ut t#at can no6 3e done more cost effecti0e"! usin% com:uters- ?#e mode" is a"so rat#er meetin% intensi0e 6#ic# is fine as "on% as t#e mem3ers #a0e no a"ternati0e use for t#eir time 3ut can 3e a :ro3"em as mem3ers %o u: t#e income "adder?#e %reatness of t#e $rameen mode" is in t#e sim:"icit! of desi%n of :roducts and de"i0er!- ?#e :rocess of de"i0er! is sca"a3"e and t#e mode" cou"d 3e re:"icated 6ide"!- ?#e focus on t#e :oorest= 6#ic# is a 0a"ue attri3ute of $rameen= #as a"so made t#e mode" a fa0ourite amon% t#e donor communit!4o6e0er= t#e $rameen mode" 6or s on"! under certain assum:tions- As a"" t#e "oans are on"! for enter:rise :romotion= it assumes t#at a"" t#e :oor 6ant to 3e se"f;em:"o!ed- ?#e re:a!ment of "oans starts t#e 6ee after t#e "oan is dis3ursed M t#e in#erent assum:tion 3ein% t#at t#e 3orro6ers can ser0ice t#eir "oan from t#e e9;ante income/'. SGS Microfinance @!E:$Ki2ra4 A2%laA Man! com:anies sa! t#e! :rotect t#e interests of t#eir customers- Ver! fe6 actua""! sit in dirt 6it# t#em= usin% stones= f"o6ers= stic s= and c#a" :o6der to fi%ure out if t#e! 6i"" 3e a3"e to re:a! a J/& "oan at J) a mont#- Ait# t#is a::roac#= t#is com:an! #as created its o6n "o!a" %an% of o0er / mi""ion customersIts 3orro6ers inc"ude a%ricu"tura" "a3orers= mom;and;:o: entre:reneurs= street 0endors= #ome 3ased artisans= and sma"" sca"e :roducers= eac# "i0in% on "ess t#an J/ a da!- It 6or s on a mode"
41

t#at 6ou"d a""o6 micro;finance institutions to sca"e u: Guic "! so t#at t#e! 6ou"d ne0er #a0e to turn :oor :erson a6a!Its mode" is 3ased on , :rinci:"es; )- Adopt a profit$oriented approac" in order to access co44ercial capital$ Startin% 6it# t#e :itc# t#at t#ere is a #i%# entre:reneuria" s:irit amon%st t#e :oor to raise t#e funds= SKS con0erted itse"f to for;:rofit status as soon as it %ot 3rea e0en and %ot :#i"ant#ro:ist Ra0i Redd! to 3e a foundin% in0estor- ?#en it secured mone! from :arties suc# as Unitus= a Seatt"e 3ased N$@ t#at #e":s :romote micro;financeI SIDBII and tec#no"o%! entre:reneur Vinod K#os"a- 2ater= it 6as a3"e to attract mu"timi""ion do""ar "ines of credit from 7iti3an = ABN Amro= and ot#ers/- StandardiCe prod%cts0 trainin30 and ot"er processes in order to oost capacity$ ?#e! co""ect standard re:a!ments in round num3ers of /+ or ,& ru:ees- Interna""!= t#e! #a0e factor! st!"e trainin% mode"s- ?#e! enro"" a3out +&& "oan officers e0er! mont#- ?#e! :artici:ate in t#eor! c"asses on Saturda!s and :ractice 6#at t#e! #a0e "earned in t#e fie"d durin% t#e 6ee - ?#e! #a0e s#ortened t#e trainin% time for a "oan officer to / mont#s t#ou%# t#e a0era%e time ta en 3! ot#er industr! :"a!ers is 1;* mont#s,- Use Tec"nolo3y to red%ce costs and li4it errors$ It cou"d not find t#e soft6are t#at suited its reGuirements= so it t#e! 3ui"t t#eir o6n sim:"e and user friend"! a::"ications t#at a com:uter;i""iterate "oan officer 6it# a )/ t# %rade education can easi"! understand?#e s!stem is a"so internet ena3"ed- $i0en t#at e"ectricit! is unre"ia3"e in man! areas t#e! #a0e insta""ed car 3atteries or %as :o6ered %enerators as 3ac ;u:s in man! areasScalin3 %p !%sto4er ;oyalty Instead of as in% i""iterate 0i""a%ers to descri3e t#eir seasona" :attern of cas# f"o6s= t#e! encoura%e t#em to use co"ored c#a" :o6der and f"o6ers to ma: out t#e 0i""a%e on t#e %round and te"" 6#ere t#e :oorest :eo:"e "i0ed= 6#at ind of financia" :roducts t#e! needed= 6#ic# areas 6ere "orded o0er 3! 6#ic# "oan s#ar s= etc- ?#e! set :eo:"eFs tin! 6ee "! re:a!ments as "o6 as J) :er 6ee and #ea"t# and 6#o"e "ife insurance :remiums to 3e J)& a !ear and /+ cents :er 6ee res:ecti0e"!- ?#e! a"so offer interest free emer%enc! "oans- ?#e
42

sa"aries of "oan officers are not tied to re:a!ment rates and t#e! >ourne! on mo:eds to 3orro6ersF 0i""a%es and sc#edu"e "oan meetin%s as ear"! as <-&& A-M- Dee: customer "o!a"t! u"timate"! resu"ts in a re:a!ment rate of ''-+P;e9era3in3 t"e SGS rand Its :a!off comes from #i%# 0o"umes- ?#e! are %ro6in% at /&&P annua""!= addin% +& 3ranc#es and )=*&=&&& ne6 customers a mont#- ?#e! are a"so usin% t#eir dee: distri3ution c#anne"s for se""in% soa:= c"ot#es= consumer e"ectronics and ot#er :ac a%ed %oods-

!"apter + Mar2etin3 of Microfinance Prod%cts #' !ontract *ar4in3 and !redit B%ndlin3 Ban s and financia" institutions #a0e 3een :artners in contract farmin% sc#emes= set u: to en#ance credit- Basica""!= t#is is a doa3"e mode"- Under suc# an arran%ement= cro: "oans can 3e e9tended under tie;u: arran%ements 6it# cor:orate for :roduction of #i%# Gua"it! :roduce 6it# sta3"e mar etin% arran%ements :ro0ided M and on"!= :ro0ided M t#e :rice settin% mec#anism for t#e farmer is a::ro:riate and fair)' A3ri Ser9ice !entre F Ra o India Ra3o India Finance P0t 2td- #as esta3"is#ed a%ri;ser0ice centres in rura" areas in coo:eration 6it# a num3er of a%ri;in:ut and farm ser0ices com:anies- ?#e ser0ices :ro0ided are simi"ar to t#ose in contract farmin%= 3ut 6it# additiona" f"e9i3i"it! and a 6ider ran%e of :roducts inc"udin% in0entor! finance- Besides :ro0idin% stora%e faci"ities= eac# centre rents out farm mac#iner!= :ro0ides a%ricu"tura" in:uts and information to farmers= arran%es credit= se""s ot#er ser0ices and :ro0ides a forum for farmers to mar et t#eir :roducts(' 8on Traditional Mar2ets Simi"ar"!= Mot#er Dair! Foods Processin%= a 6#o""! o6ned su3sidiar! of Nationa" Dair! De0e"o:ment Board (NDDB) #as esta3"is#ed auction mar ets for #orticu"ture :roducers in
43

Ban%a"ore- ?#e o:erations and maintenance of t#e mar et is done 3! NDDB- ?#e :ro>ect= 6it# an out"a! of Rs-)+ "a #= co0ers /&& #orticu"tura" farmers associations 6it# +&=&&& %ro6er mem3ers for 6#o"esa"e mar etin%- ?#eir :roduce is :"anned 6it# :roduction and su::"! assurance and :ro0ides 3ot# %ro6ers and 3u!ers a common :"atform to ne%otiate 3etter rates-

.' Apni Mandi Anot#er inno0ation is t#at of ?#e Pun>a3 Mandi Board= 6#ic# #as e9:erimented 6it# a EfarmersF mar etF to :ro0ide sma"" farmers "ocated in :ro9imit! to ur3an areas= direct access to consumers 3! e"imination of midd"emen- ?#is e9:eriment no6n as DA:ni MandiD 3e"on%s to 3ot# farmers and consumers= 6#o mutua""! #e": eac# ot#er- Under t#is arran%ement a sum of Rs- +-/ "a # is s:ent for :ro0idin% :"astic crates to )&&& farmers- Eac# farmer %ets + crates at a su3sidi8ed rateAt t#e mandi site= t#e Board :ro0ides 3asic infrastructure faci"ities- At t#e farm "e0e"= e9tension ser0ices of different a%encies are :oo"ed in- ?#ese inc"ude in:uts su3sidies= 3etter Gua"it! seeds and "oans from Ban s- A:ni Mandi sc#eme :ro0ides se"f;em:"o!ment to :roducers and #as e"iminated socia" in#i3itions amon% t#em re%ardin% t#e retai" sa"e of t#eir :roduce-

44

!"apter 5 S%ccess *actors of Micro$*inance in India @0er t#e "ast ten !ears= successfu" e9:eriences in :ro0idin% finance to sma"" entre:reneur and :roducers demonstrate t#at :oor :eo:"e= 6#en %i0en access to res:onsi0e and time"! financia" ser0ices at mar et rates= re:a! t#eir "oans and use t#e :roceeds to increase t#eir income and assets- ?#is is not sur:risin% since t#e on"! rea"istic a"ternati0e for t#em is to 3orro6 from informa" mar et at an interest muc# #i%#er t#an mar et rates- 7ommunit! 3an s= N$@s and %rass root sa0in%s and credit %rou:s around t#e 6or"d #a0e s#o6n t#at t#ese microenter:rise "oans can 3e :rofita3"e for 3orro6ers and for t#e "enders= ma in% microfinance one of t#e most effecti0e :o0ert! reducin% strate%iesA' *or 8-:s )- ?#e fie"d of de0e"o:ment itse"f e9:ands and s#ifts em:#asis 6it# t#e :u"" of ideas= and N$@s :er#a:s more readi"! ado:t ne6 ideas= es:ecia""! if t#e resources reGuired are sma""= entr! and e9it are eas!= tas s are (:ercei0ed to 3e) sim:"e and :eo:"eFs acce:tance is #i%# M a"" c#aracteristics (rea" or :resumed) of microfinance/- 7an0assin% 3! 0arious actors= inc"udin% t#e Nationa" Ban for A%ricu"ture and Rura" De0e"o:ment (NABARD)= Sma"" Industries De0e"o:ment Ban of India (SIDBI)= Friends of AomenFs Aor"d Ban in% (FAAB)= Ras#tri!a Ma#i"a Kos# (RMK)= 7ounci" for Ad0ancement of Peo:"eFs Action and Rura" ?ec#no"o%ies (7APAR?)= Ras#tri!a $ramin Vi as Nid#i (R$VN)= 0arious donor funded :ro%rammes es:ecia""! 3! t#e Internationa"
45

Fund for A%ricu"tura" De0e"o:ment (IFAD)= United Nations De0e"o:ment Pro%ramme (UNDP)= Aor"d Ban and De:artment for Internationa" De0e"o:ment= UK (DFID)T= and "ate"! commercia" 3an s= #as %reat"! added to t#e idea :u""- Induced 3! t#e 6or"d6ide focus on microfinance= donor N$@s too #a0e 3een fundin% microfinance :ro>ects- @ne mi%#t ca"" it t#e su::"! :us#-

,- A"" inds of t#in%s from #adi s:innin% to Nade: com:ost to 3a"6adis do not :roduce suc# concrete resu"ts and sustained interest amon% 3eneficiaries as microfinance- Most N$@;"ed microfinance is 6it# :oor 6omen= for 6#om access to sma"" "oans to meet dire emer%encies is a 0a"ued outcome- ?#us= Guic and #i%# Ecustomer satisfactionF is t#e USP t#at #as attracted N$@s to t#is trade-

1- ?#e idea a::ears sim:"e to im:"ement- ?#e most common route fo""o6ed 3! N$@s is :romotion of S4$s- It is im:"icit"! assumed t#at no Etec#nica" s i""F is in0o"0ed- Besides= e9terna" resources are not needed as S4$s 3e%in 6it# t#eir o6n sa0in%s- ?#ose N$@s t#at #a0e access to re0o"0in% funds from donors do not #a0e to 6orr! a3out financia" :erformance an! 6a!- ?#e c#ic ens 6i"" e0entua""! come #ome to roost 3ut in t#e first f"us#= it seems a"" so eas!-

+- For man! N$@s t#e idea of Eor%anisin%F M formin% a samu#a M #as in#erent a::ea"$rou:s connote em:o6erment and or%anisin% 6omen is a dou3"e 3onus-

*- Fina""!= to man! N$@s= microfinance is a 6a! to financia" sustaina3i"it!- Es:ecia""! for t#e medium;to;"ar%e N$@s t#at are a3"e to access 3u" funds for on;"endin%= for e9am:"e from SIDBI= t#e interest rate s:read cou"d 3e an attracti0e source of re0enue t#an an uncertain= #i%#"! com:etiti0e and increasin%"! difficu"t;to;raise donor fundin%-

B' *or *inancial Instit%tions and an2s

46

Microfinance #as 3een attracti0e to t#e "endin% a%encies 3ecause of demonstrated sustaina3i"it! and of "o6 costs of o:eration- Institutions "i e SIDBI and NABARD are #ard nosed 3an ers and 6ou"d not 6or 6it# t#e idea if t#e! did not see a "on% term en%a%ement M 6#ic# on"! comes out of sustaina3i"it! (t#at is economic attracti0eness)@n t#e su::"! side= it is a"so true t#at it #as a"" t#e tra::in%s of a 3usiness enter:rise= its out:ut is tan%i3"e and it is easi"! understood 3! t#e mainstream- ?#is a"so seems to sound nice to t#e %o0ernment= 6#ic# in t#e :ost "i3era"isation era is tr!in% to e9:"ain t#e "o%ic of e0er! ru:ee s:ent- ?#at is t#e reason 6#! microfinance #as attracted mainstream institutions "i e no ot#er de0e"o:menta" :ro>ectPer#a:s t#e most im:ortant factor t#at %ot 3an s in0o"0ed is 6#at one mi%#t ca"" t#e :o"ic! :us#$i0en t#at most of our 3an s are in t#e :u3"ic sector= :u3"ic :o"ic! does #a0e some inf"uence on 6#at t#e! 6i"" or 6i"" not do- In t#is case= :o"ic! 6as fo""o6ed 3! di"i%ent= if meanderin%= :romotiona" 6or 3! NABARD- ?#e :o"ic! c#an%e a3out a decade a%o 3! RBI to a""o6 3an s to "end to S4$s 6as initia""! fo""o6ed 3! a se0en;:a%e memo 3! NABARD to a"" 3an c#airmen= and "ater 3! sensitisation and trainin% :ro%rammes for 3an staff across t#e countr!- Se0era" #undred suc# :ro%rammes 6ere conducted 3! N$@s a"one= eac# in0o"0in% )+ to /& 3an staff= a"" :aid for 3! NABARD- ?#e :o"ic! :us# 6as s6eetened 3! t#e NABARD refinance sc#eme t#at offers muc# more fa0oura3"e terms ()&&P refinance= 6ider s:read) t#an for ot#er rura" "endin% 3! 3an s- NABARD a"so did some s!stem settin% 6or and 3an s "ate"! #a0e 3een %i0en tar%ets- ?#e can0assin%= trainin%= refinance and c"ose fo""o6 u: 3! NABARD #as resu"ted in 6ides:read 3an in0o"0ementMoreo0er= for 3an s t#e o:eratin% cost of microfinance is :er#a:s muc# "ess t#an for :ure MFIs?#e 3an s a"read! #a0e a 0ast net6or of 3ranc#es- ?o t#e e9tent t#at an N$@ #as a"read! :romoted S4$s and t#e S4$ :ortfo"io is :erformin% 3etter t#an t#e rest of t#e rura" (if not t#e entire) :ortfo"io= microfinance 0ia S4$s in t#e 6orst case 6ou"d re:resent mar%ina" addition to cost and 6ou"d often reduce mar%ina" cost t#rou%# 3etter ca:acit! uti"isation- In t#e :rocess t#e 3an a"so earns 3ro6nie :oints 6it# :o"ic! ma ers and meets its :riorit! sector tar%ets47

It does not ta e muc# ana"!sis to fi%ure out t#at t#e mar et for financia" ser0ices for t#e +&;*& mi""ion :oor #ouse#o"ds of India= cou:"ed 6it# a3out t#e same num3er 6#o are tec#nica""! a3o0e t#e :o0ert! "ine 3ut are se0ere"! under;ser0ed 3! t#e financia" sector= is a 0er! "ar%e oneMoreo0er= as in an! emer%in% mar et= t#ou%# t#e :ercei0ed ris s are #i%#er= t#e s:reads are muc# %reater- ?#e traditiona" commercia" mar ets of cor:orates= 3usiness= trade= and no6 e0en #ousin% and consumer finance are 3ein% sou%#t 3! a"" t#e 3an s= "eadin% to :rice com:etition and 6afer t#in s:readsFurt#er= 3an ;%rou:s are moti0ated 3! a num3er of cross;se""in% o::ortunities in t#e mar et= for de:osits= insurance= remittances and e0entua""! mutua" funds- Since t#e "ar%er 3an s are offerin% a"" t#ese ser0ices no6 t#rou%# t#eir %rou: com:anies= it 3ecomes im:erati0e for t#em to e9:and t#eir distri3ution c#anne"s as far and dee: as :ossi3"e= in t#e #o:e of ca:turin% t#e entire financia" ser0ices 3usiness of a #ouse#o"dFina""!= 3ot# a%ri;in:ut and :rocessin% com:anies suc# as EID Parr!= fast;mo0in% consumer %oods (FM7$) com:anies suc# as 4industan 2e0ers= and consumer dura3"e com:anies suc# as P#i"i:s #a0e rea"ised t#e :otentia" of t#is 3i% mar et and are acti0e"! usin% S4$s as entr! :ointsSome amount of free;ridin% is ta in% :"ace #ere 3! com:anies= for t#e! are usin% c#anne"s 6#ic# 6ere 3ui"t at a si%nificant cost to N$@s= fundin% a%encies andLor t#e %o0ernment@n t#e 6#o"e= t#e economic attracti0eness of microfinance as a 3usiness is %ettin% esta3"is#ed and t#is is a sure ste: to6ards mainstreamin%- Ae no6 t#at mainstreamin% is a mi9ed 3"essin%= and one tends to e9c#an%e sca"e at t#e cost of o3>ecti0es- So it needs to 3e 6atc#ed carefu""!-

A real life EEa4ples : 2a s#mi= a //;!ear;o"d sc#oo" dro:out= "i0ed in a remote 0i""a%e of ?ami" Nadu- Instead of %ettin% married and startin% a fami"! "i e an! ot#er 0i""a%e %ir" of #er a%e in India= s#e 6anted to set u: on #er o6n 3usiness2a s#mi started an Internet ios in #er 0i""a%e= offerin% ser0ices "i e e;mai"= Internet c#at and
48

ti:s on #ea"t# and education- ?#e ios 6as :artia""! financed 3! I7I7I Ban and 6as set u: in association 6it# n;2o%ue 7ommunications- 2at#a= a /';!ear;o"d married 6oman 6it# t#ree c#i"dren 3orro6ed Rs-)(=&&& to set u: a sma"" :ro0ision store in Kot#ai:a""i= a sma"" 0i""a%e= in t#e nort# of And#ra Prades#- Ait#in a !ear= s#e started earnin% Rs-,+&& a mont# from t#e storeAit# t#is mone!= s#e 6as a3"e to :ro0ide #er c#i"dren a %ood education at a "oca" :ri0ate sc#oo"S#e 6as a :art of a se"f #e": %rou: in And#ra Prades# 6#ic# recei0ed financia" assistance from I7I7I Ban - ?#ese are rea";"ife e9am:"es to i""ustrate #o6 t#e micro;"endin% initiati0es of I7I7I Ban affected t#e "i0es of :oor 6omen in IndiaB! 3ecomin% a :art of se"f;#e": %rou:s= se0era" rura" 6omen 6ere a3"e to mo0e out of :o0ert!A:art from financia" 3enefits= t#e initiati0es #e":ed t#e 6omen to de0e"o: se"f confidence= im:ro0e t#eir communication s i""s and raise t#eir :osition in societ!B! 3ecomin% a :art of se"f;#e": %rou:s= se0era" rura" 6omen 6ere a3"e to mo0e out of :o0ert!A:art from financia" 3enefits= t#e initiati0es #e":ed t#e 6omen to de0e"o: se"f confidence= im:ro0e t#eir communication s i""s and raise t#eir :osition in societ!-

49

!"apter 6 Iss%es in Microfinance

#' S%staina ility ?#e first c#a""en%e re"ates to sustaina3i"it!- MFI mode" is com:arati0e"! cost"ier in terms of de"i0er! of financia" ser0ices- An ana"!sis of ,* "eadin% MFIs 3! Kinda" H S#arma s#o6s t#at ('P MFIs sam:"e 6ere su3sid! de:endent and on"! ' 6ere a3"e to co0er more t#an (&P of t#eir costs- ?#is is :art"! e9:"ained 3! t#e fact t#at 6#i"e t#e cost of su:er0ision of credit is #i%#= t#e "oan 0o"umes and "oan si8e is "o6- It #as a"so 3een commented t#at MFIs :ass on t#e #i%#er cost of credit to t#eir c"ients 6#o are Einterest insensiti0eF for sma"" "oans 3ut ma! not 3e so as "oan si8es increase- It is= t#erefore= necessar! for MFIs to de0e"o: strate%ies for increasin% t#e ran%e and 0o"ume of t#eir financia" ser0ices)' ;ac2 of !apital ?#e second area of concern for MFIs= 6#ic# are on t#e %ro6t# :at#= is t#at t#e! face a :aucit! of o6ned funds- ?#is is a critica" constraint in t#eir 3ein% a3"e to sca"e u:- Man! of t#e MFIs are socia""! oriented institutions and do not #a0e adeGuate access to financia" ca:ita"- As a resu"t t#e! #a0e #i%# de3t eGuit! ratios- Present"!= t#ere is no re"ia3"e mec#anism in t#e countr! for meetin% t#e eGuit! reGuirements of MFIs?#e IP@ issue 3! Me9ico 3ased E7om:artamosF 6as not acce:ted 3! :urists as t#e! t#ou%#t it defied t#e mission of an MFI- ?#e IP@ a"so 3rou%#t fort# t#e issue of 0a"uation of an MFI?#e 3oo 0a"ue mu"ti:"e is current"! t#e dominant 0a"uation met#odo"o%! in microfinance in0estments- In t#e case of start u: MFIs= usin% a 3oo 0a"ue mu"ti:"e does not do >ustice to t#e under"!in% 0a"ue of t#e 3usiness- ?!:ica""!= start u:s are "oss ma in% and #ence t#e 3oo 0a"ue continua""! reduces o0er time unti" t#e! #it 3rea e0en :oint- A 3oo 0a"ue mu"ti:"ier
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to 0a"ue start u:s 6ou"d decrease t#e 0a"ue as t#e or%ani8ation uses u: ca:ita" to 3ui"d its 3usiness= t#us accentuatin% t#e ne%ati0e rat#er t#an t#e :ositi0e(' *inancial ser9ice deli9ery Anot#er c#a""en%e faced 3! MFIs is t#e ina3i"it! to access su::"! c#ain- ?#is c#a""en%e can 3e o0ercome 3! e9:"orin% s!ner%ies 3et6een microfinance institutions 6it# e9:ertise in credit de"i0er! and communit! mo3i"i8ation and 3usinesses o:eratin% 6it# :roduction su::"! c#ains suc# as a%ricu"ture- ?#e "atter :"a!ers 6#o 3rin% 6it# t#em an understandin% of simi"ar c"ient se%ments= a3i"it! to create microenter:rise o::ortunities and 6i""in%ness to nurture t#em= 6ou"d 3e een on directin% microfinance to suc# o::ortunities- ?#is ena3"es MFIs to increase t#eir c"ient 3ase at no additiona" costs?#ose 3usinesses t#at :rocure from rura" India suc# as a%ricu"ture and dair! often identif! finance as a constraint to 0a"ue creation- Suc# 3usinesses ma! find com:"ementarities 3et6een an MFIFs s i""s in mana%ement of credit :rocesses and t#eir o6n stren%t#s in su::"! c#ain mana%ementI?7 2imited= 6it# its stron% su::"! c#ain "o%istics= rura" :resence and an inno0ati0e transaction :"atform= t#e e;c#ou:a"= #as started e9:"orin% s!ner%ies 6it# financia" ser0ice :ro0iders inc"udin% MFIs t#rou%# :i"ots 6it# 0e%eta3"e 0endors and farmers- Simi"ar"!= "ar%e FIs suc# as S:andana foresee a "ar%er ro"e for t#emse"0es in t#e rura" econom! a3"! su::orted 3! 0a"ue creatin% :artners#i:s 6it# :"a!ers suc# as Ma#indra and Aestern Union Mone! ?ransferI?7 #as initiated a :i"ot :ro>ect ca""ed E:us#carts sc#emeF a"on% 6it# BASIU (a microfinance or%ani8ation in 4!dera3ad)- Under t#is :i"ot= it 6or s 6it# t6ent! 6omen #ead "oad 0endors se""in% 0e%eta3"es of around )&; )+ %s :er da!- BASIU e9tends 6or in% ca:ita" "oans of Rs-)&=&&&L; = ca:acit! 3ui"din% and 3usiness de0e"o:ment su::ort to t#e 6omen- I?7 :ro0ides su::ort t#rou%# su::"! c#ain inno0ations 3!5 )- Ma in% t#e 7#ou:a" Fres# stores a0ai"a3"e to t#e 0endors= t#is a0oids t#e #ass"e of 3ar%ainin% and unre"ia3i"it! at t#e traditiona" mandis ("oca" 0e%eta3"e mar ets)- ?#e 6omen are a3"e to re:"enis# t#e stoc from t#e stores as man! times in t#e da! as
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reGuired- ?#is #as :ositi0e im:"ications for Gua"it! of t#e :roduce so"d to t#e end consumer/- 7ontinuous"! e9:erimentin% to increase efficienc!= au%mentin% incomes and reducin% ener%! usa%e across t#e 0a"ue c#ain- For instance= it #as for%ed a :artners#i: 6it# Nationa" Institute of Desi%n (NID)= a :ioneer in t#e fie"d of desi%n education and researc#= to desi%n user;friend"! :us#carts t#at can reduce t#e :#!sica" 3urden,- ?a in% "essons from t#e :#armaceutica" and te"ecom sector to identif! tec#no"o%ies t#at can sa0e ener%! and ensure tem:erature contro" in :us# carts in order to maintain Gua"it! of t#e 0e%eta3"es t#rou%#out t#e da!- ?#e mode" au%ments t#e incomes of t#e 0endors from around Rs-,&;1& :er da! to an a0era%e of Rs-)+& :er da!- From an en0ironmenta" :oint of 0ie6= :us# carts are muc# more ener%! efficient as o::osed to fi9ed format retai" out"ets.' ,R Iss%es Recruitment and retention is t#e ma>or c#a""en%e faced 3! MFIs as t#e! stri0e to reac# more c"ients and e9:and t#eir %eo%ra:#ica" sco:e- Attractin% t#e ri%#t ta"ent :ro0es difficu"t 3ecause candidates must #a0e= as a :rereGuisite= a mindset t#at fits 6it# t#e or%ani8ationFs missionMan! mainstream commercia" 3an s are no6 enterin% microfinance= 6#o are :oac#in% staff from MFIs and MFIs are una3"e to retain t#em for ot#er >o3 o::ortunities(+P of t#e :oorest c"ients ser0ed 3! microfinance are 6omen- 4o6e0er= 6omen ma e u: "ess t#an #a"f of a"" microfinance staff mem3ers= and fi"" e0en fe6er of t#e senior mana%ement ro"es- ?#e c#a""en%e in most countries stems from cu"tura" notions of 6omenFs ro"es= for e9am:"e= 6#i"e 6omen are sin%"e t#ere mi%#t 3e a %reater 6i""in%ness on t#e :art of 6omenFs fami"ies to "et t#em 6or as front "ine staff= 3ut as soon as t#e! marr! and certain"! once t#e! start #a0in% c#i"dren= it 3ecomes unacce:ta3"e- 2on% distances and "on% #ours a6a! from t#e fami"! are difficu"t for 6omen to accommodate and for t#eir fami"ies to understand-

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/' Microins%rance First 3i% issue in t#e microinsurance sector is de0e"o:in% :roducts t#at rea""! res:ond to t#e needs of c"ients and in a 6a! t#at is commercia""! 0ia3"eSecond"!= t#ere is stron% need to en#ance de"i0er! c#anne"s- ?#ese de"i0er! c#anne"s #a0e 3een re"ati0e"! 6ea so far- Microinsurance com:anies offer minima" :roducts and do not 6ant to %o for6ard and offer com:"e9 :roducts t#at ma! res:ond 3etter- Microinsurance needs a de"i0er! c#anne" t#at #as eas! access to t#e "o6;income mar et= and :refera3"! one t#at #as 3een en%a%ed in financia" transactions so t#at t#e! #a0e contro"s for mana%in% cas# and t#e a3i"it! to trac different indi0idua"s?#ird"!= t#ere is a need for mar et education- Peo:"e eit#er #a0e no information a3out microinsurance or t#e! #a0e a ne%ati0e attitude to6ards it- Ae #a0e to counter t#at- Ae #a0e to some#o6 %et :eo:"e ; 6it#out #a0in% to sit do6n at a ta3"e ; to understand 6#at insurance is= and 6#! it 3enefits t#em- ?#at 6i"" #e": to dem!stif! microinsurance so t#at 6#en a%ents come= :eo:"e are 6i""in% to en%a%e 6it# t#em+' Ad9erse selection and 4oral "aCard ?#e >oint "ia3i"it! mec#anism #as 3een re"ied u:on to o0ercome t#e t6in issues of ad0erse se"ection and mora" #a8ard- ?#e %rou: "endin% mode"s are contin%ent on t#e a0ai"a3i"it! of s i""ed resources for %rou: :romotion and entai" a %estation :eriod of si9 mont#s to one !ear4o6e0er= t#ere is not sufficient understandin% of t#e dri0ers of defau"t and credit ris at t#e "e0e" of t#e indi0idua"- ?#is #as constrained t#e de0e"o:ment of indi0idua" mode"s of micro finance- ?#e %rou: mode" 6as an inno0ation to o0ercome t#e s:ecific issue of t#e Gua"it! of t#e :ortfo"io= %i0en t#e ina3i"it! of t#e :oor to offer co""atera"- 4o6e0er= from t#e :ers:ecti0e of sca"in% u: micro financia" ser0ices= it is im:ortant to :roacti0e"! disco0er mode"s t#at 6i"" ena3"e direct finance to indi0idua"s-

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References )- de A%#ion= Beatri8 ArmendVri8 H Konat#an Morduc#- The Economics of ?#e MI? Press= 7am3rid%e= Massac#usetts= /&&+/- Dic#ter= ?#omas and Ma"co"m 4ar:er (eds)- (hat)s (rong with Microfinance* Practica" Action= /&&<,- 2ed%er6ood= Koanna and Victoria A#ite- Transforming Microfinance Providing ,ull ,inancial -ervices to the Poor. Aor"d Ban = /&&*1- Mas= I%nacio and Ka3ir Kumar- $an%ing on mobiles+ why, how and for whom* 7$AP Focus Note W1(= Ku"!= /&&(+- Yunus= Mu#ammad- #reating a (orld (ithout Poverty+ -ocial $usiness and the ,uture of #apitalism. Pu3"ic Affairs= Ne6 Yor = /&&(*- 7#urc#i""= 7rai%- Fort#comin% )''(- ndividual Micro lending #ase -tudies- ?oronto5 7a"meado67. 7onne""= Martin- )''(- BPri0ate EGuit! 7a:ita" in t#e microfinance Industr!-C In 7rai%

Microfinance =

nstitutions+

7#urc#i""= ed-= Moving microfinance ,orward+ !wnership, #ompetition and #ontrol of microfinance nstitutions- Aas#in%ton D75 microfinance Net6or 8. @tero= Maria- )''(- B?!:es of @6ners for microfinance Institutions-C In 7rai% 7#urc#i""=

ed-= Moving microfinance ,orward+ !wnership, #ompetition and #ontrol of microfinance nstitutions- Aas#in%ton D75 microfinance Net6or 9. ?#e Future of microfinance in India5 $y -u%hwinder -ingh /rora, ,inancial -ector

Team, Policy Division, D, D.

10. Strate%ies for :o0ert! a""e0iation t#rou%# do0etai"in% t#e :otentia" of microfinance

:ractices 6it# non;tim3er forest :roducts from di:terocar:s5 2essons from India 3! B-PPet#i!a))- India microfinance In0estment En0ironment Profi"e 3! S"a0ea 7#an o0a= Nat#anae" $o"d3er%= $ene0ie0e Me"ford= 4ind ?a8i and S#ane ?om"onson)/- Ani" K K#ande"6a"= BMicrofinance De0e"o:ment Strate%! for IndiaC= Economic and Po"itica" Aee "!= Marc# ,)= /&&< ),- Nac#i et Mor= Bindu Anant#= BInc"usi0e Financia" S!stems; Some Desi%n Princi:"es and a case stud!C= Economic and Po"itica" Aee "!= Marc# ,)= /&&<
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)1- Vi ram A u"a= BBusiness Basics at t#e Base of t#e P!ramidC= 4ar0ard Business Re0ie6= Kune= /&&( )+- EDA Rura" S!atems P0t 2td in association 6it# APMAS= BSe"f 4e": $rou:s in India; A Stud! of t#e 2i%#t and S#adesC )*- Ra0en Smit#= B ?#e 7#an%in% Face of Microfinance in India; ?#e costs and 3enefits of transformin% from an N$@ to a NBF7C= /&&* )<- R Srini0asan and M S Sriram= BMicrofinance in India; DiscussionC )(- Pi!us# ?i6ari and S M Fa#ad= 4DF7= B7once:t :a:er; Microfinance Institutions in IndiaC )'- Bar3ara Ado":#=DFID= BRura" Non Farm Econom!5 Access FactorsC= Fe3ruar!= /&&, /&- S#ri Y S P ?#orat= Mana%in% Director= NABARD= BInno0ation in Product Desi%n= 7redit De"i0er! and ?ec#no"o%! to reac# sma"" farmersC= No0em3er= /&&+ /)- S#ri Y S P ?#orat= Mana%in% Director= NABARD= BMicrofinance in India5 Sectora" Issues and 7#a""en%esC= Ma!= /&&+ //- Dr- 7 Ran%ara>an= 7#airman= Economic Ad0isor! 7ounci" to t#e Prime Minister= BMicrofinance and its Future DirectionsC= Ma!= /&&+ /,- Re:ort= BStatus of Microfinance in India /&&*;/&&<C= NABARD /1- Bindu Anant# and So>u Annie $eor%e= Microfinancia" Ser0ices ?eam of Socia" Initiati0es $rou:= I7I7I Ban = BSca"in% u: Microfinancia" Ser0ices5 An o0er0ie6 of c#a""en%es and @::ortunitiesC= Au%ust= /&&, /+- Annie Duf"o= Researc# 7o;ordinator= 7entre for Micro Finance Researc#= BI7I7I Ban s t#e :oor in IndiaC= Pa%e ),= Microfinance Matters= Issue )<= @cto3er /&&+

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