A PROJECT REPORT ON

DECLARATION
We, Lovely Ganeriwal and Upasana Modi, students of PGDBM OF SOM-LALIT INSTITUTE OF BUSINESS MANAGEMENT, hereby declare that the project entitled Study of Microfinance is an original work and the same has not been submitted to any other institute for award of any other degree. The feasible suggestions have been duly incorporated in consultation with the supervisor.

Date: _______________ Place: ______________

Signature of the candidate,

Lovely Ganeriwal_______________

Upasana Modi_______________

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Preface
Microfinance is one of the most important sectors in India. It not only falls in the development sector but also forms an important part of the formal financial system of India. Now, Microfinance is not only the job of development donors but also the greatest concern for financial investors and the government. Seeing its importance, premier business schools have started microfinance and rural finance services in their programs. Microfinance deals with the basic fundamental and its starts with the history of microfinance in India including different phrases like social banking, financial systems approach and financial inclusion. The key principles of microfinance are also described. It broadly focuses on microfinance credit lending models. Here, the microfinance credit lending models which are not only used in India but are also used crossed the world is briefly discussed. Microfinance business is very much associated with risk factor. Microfinance is not only social and rural development but also for business and profit making, based on the organisational mission. Anyways, for the organisational substantiability, outreach and development of cost effective affordable financial products, there must be a systematic marketing process. The role of microfinance and microfinance institutions in women empowerment, education, health, entrepreneurship and business development are discussed. We have undergone my summer training at CORPORATION BANK, Ahmedabad. It is one of the leading public sector bank across the country. We feel great pleasure to present this report work after our training at CORPORATION BANK that produced to be golden opportunity for us by enriching our knowledge by comparing our theoretical knowledge with the managerial skill and application. Simple language has been used throughout the report. Report is illustrated with figure, charts and diagrams as and when required. Finally we hope that this report will be able to give current scenario of microfinance to the readers.

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ACKNOWLEDGEMENT
We are satisfied with the motivational task of project work provided us. This has proved to be the first step towards globalize world along with healthy management skills. The project has been throughout a great learning about the microfinance.

We take this opportunity to express our heart-felt gratitude towards all those who generously helped us colour the mosaic of this project with the tiles of their knowledge, expertise and experience.

We are greatly indebted to Prof. J.P.JOSHIPURA, Director of Som-Lalit Institute of Management Studies who gave the valuable opportunity of involving ourselves into such lively project assignment. We also extend our profound thanks to Prof. Nirali Parikh who
through her intellect helped us in successfully completing this project. They provided us with

valuable insight into the topic and were a constant source of inspiration for us.

We are thankful to H.C.WADHWA (ASSISTANT GENERAL MANAGER) and Mr. SWAMINATHAN (CHIEF GENERAL MANAGER) OF CORPORATION BANK ZONAL OFFICE AHMEDABAD, for giving their full co-operation to us and giving valuable

information required for our project work.

We are also thankful to Friends of women’s world banking (FWWB), Vardan Trust and VIkas Development Centre (NGO) for giving us valuable information and necessary material for our study.

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EXECUTIVE SUMMARY
As the global financial system buckles, microfinance institutions continue to grow on the back of their record for low risk and solid returns Microfinance gives small-scale financial services such as loans, savings, insurance and money transfer to poor customers who would otherwise not have access to banking services. Asia accounts for 70% of the global market for microfinance, with India having the largest number of clients followed by Bangladesh, according to Micro Banking Bulletin, a non-profit organisation that tracks microfinance institutions. This report consists of study of microfinance in different countries like Latin America, Bangladesh, Pakistan, Europe, Indonesia, Brazil and India. In India, microfinance institutions have government-facilitated access to finance from banks. Domestic banks are required to set aside 40% of investible funds for the priority sector, which includes microcredit organisations. The target for foreign banks operating in India is at 32%. In India, ICICI bank has wide range of microfinance and its products are innovative. It provides loans to many MFIs and even NGOs. AT present, ICICI bank is on the top for microfinance activities. But, not only ICICI bank is providing microfinance but other commercial banks like Oriental bank, Andhra bank, Yes bank, Corporation bank and many more have started microfinance activities for the beneficial of the rural people. Corporation bank offers a wide range of finance schemes to the farming community. For farmers, Kisan Credit Card provides facility for withdrawal of cash from their account at CorpBank ATMs and ATMs displaying VISA logo, round the clock. The bank has also been focusing on micro finance and thus empowering Self Help Groups to enable them take up gainful Self Employment. The bank lends farmers against warehouse receipts covering agriculture produce of warehouses approved by the Multi Commodity Exchange Ltd.

Yet corporation bank is just at its initial stage and had to do a lot to expand its microfinance activities. Looking at other banks and other countries, it has also now started with new
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schemes and products for the rural people like providing loan to Dabbawalas, servants, hawkers etc. And now it also branding its microfinance activities as “GRAMEEN VIKAS KHENDRA”. Corporation bank aims at leveraging its position as financial institutions that combines a rich heritage with a futuristic outlook. Its activities will continue to assist corporate in their business, even as it helps the common man realize his dreams. And its presence shall continue to spread deeper into rural India, even as it reaches out further across the globe.

TABLE OF CONTENTS TOPIC Objective
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PAGE NO.

Company profile Study Line Chapter 1-Introduction of Microfinance 1.1 Microfinance Definition 1.2 Strategic Policy Initiatives 1.3 Activities in Microfinance 1.4 Legal Regulations Chapter 2-Micro-Finance in India 2.1 Distribution of Indebted Rural Households: Agency wise 2.2 Relative share of Borrowing of Cultivator Households 2.3 Distribution based on Asset size of Rural Households 2.4 Banking Expansion 2.5 Microfinance Social Aspects Chapter 3- Self Help Groups 3.1 How self-help groups work 3.2 Sources of capital and links between SHGs and Banks 3.3 How SHGs save 3.4 SHGs-Bank Linkage Model 3.5 Life insurances for self-help group members Chapter 4- Joint Liability Group Chapter 5- Microfinance Model Chapter 6- Microfinance at corporation bank Chapter 7- microfinance at international level 7.1 Brazil 7.2 Latin America 7.3 Indonesia 7.4 Pakistan 7.5 Europe
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7.6 Bangladesh Chapter 8- Role, Functions and Working Mechanism of Financial Institutions 8.1 ICICI Bank 8.2 YES Bank 8.3 Grameen Bank 8.4 Oriental Bank of Commerce 8.5 Andhra Bank 8.6 Friends of Women’s World Banking (FWWB) (MFI) 8.7 Vardhan Trust 8.8 Vikas Development Center (NGOs) Chapter 9- Marketing of Microfinance Products Chapter 10- Success Factors of Microfinance in India Chapter 11- Issues related to Microfinance in India Chapter 12- Recommendation & Conclusion Chapter 13- Bibliography

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OBJECTIVE

“To study different aspects of microfinance in India as well as International level for expansion of microfinance activities at corporation bank.”

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COMPANY PROFILE
CORPORATION BANK:
Corporation Bank, founded in 1906 in Udupi, Karnataka state, India, is one of the Indian banks in Public Sector Undertaking. The bank was founded with an initial capital of Rs. 5000 (USD 100), and first day’s canvassed resources of less than one USD 1, has currently (31 March 2004) 11,325 full time employees, and operates from several branches in India. The Bank is a Public Sector Unit with 57.17% of Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37.87% of Share Capital is presently held by the Public and Financial Institutions. The Bank’s Net Worth stood at Rs.3,054.92 crores as on 31 March 2005.

History
Corporation Bank, the oldest banking institution in the erstwhile undivided Dakshina Kannada District of Karnataka and one of the oldest banks in India, was founded in 1906 in the Temple Town of Udupi, by a small group of philanthropists led by Khan Bahadur Haji Abdulla Haji Kasim Saheb Bahadur. The need to start this bank was felt because there was no such facility at Udupi, an important trading centre next to Mangalore in D.K. District. The indigenous banking was largely in the hands of a few rich private individuals and something had to be done to provide relief to the common man from the clutches of the money lenders who held full sway. The first branch of a modern bank established in the district was the Bank of Madras, one of the three Presidency Banks, which set up its office in Mangalore in 1868 largely to cater to the business needs of a few British firms dealing in export of plantation products. Its agent used to visit Udupi once a fortnight or so, to do banking. Money remittances had to be made only through postal medium.
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To overcome these drawbacks and also to provide banking facilities for Udupi in particular and the district in general, a cosmopolitan group of philanthropists led by Haji Abdulla Saheb made a bold venture to start this institution. What inspired the founding fathers was the fervour of Swadeshism. For promoting the Bank , the Founder President made an appeal saying , " The primary object in forming the ‘Corporation' is not only to cultivate habits of thrift amongst all classes of people , without distinction of caste or creed, but also habits of co-operation amongst all classes. This is ‘swadeshism', pure and simple and every lover of the country is expected to come forward and co-operate in achieving the end in view. " They rightly defined Swadeshism as institution-building to aid economic activity through co-operation of all, shorn of distinction of caste and creed "The Canara Banking Corporation (Udupi) Ltd.", as the institution was called then, started functioning as a ‘Nidhi' with a humble beginning. The initial capital was Rs.5000/- and at the end of the first day, its resources stood at 38 Rupees - 13 Annas and 2 Pies. The setting up of the Canara Banking Corporation Ltd. seems to have given a fillip to cooperative Banking and also to regular banking elsewhere in the district. Between 1909 and 1917, six co-operative banks came into being and during the decade immediately after the First World War (1914-18) South Kanara gave birth to as many as eight banks. It is to the credit of this Bank that despite two world wars, economic depression and stiff competition, the Bank not only quite survived, but also made satisfactory progress. Having been started at Udupi, the Bank first branched out by opening a branch at Kundapur in 1923. The second branch of the Bank was opened in Mangalore at Car Street in 1926. The Bank stepped into Kodagu District in 1934 by opening its seventh branch in Madikeri. In 1937, the Bank was included in the second schedule of Reserve Bank of India Act, 1934. In 1939, the Bank's name changed from "Canara Banking Corporation (Udupi) Ltd." to "Canara Banking Corporation Ltd." The Bank graduated into a Regional Bank in 1945 when the total number of its branches stood at 28. In the year 1961, it took over ‘Bank of Citizens, Belgaum.' In the same year, the Bank's Administration Office shifted from Udupi to Mangalore. The second change in the name of the Bank occurred in 1972, from ‘Canara Banking Corporation Ltd'. to ‘Corporation Bank Limited.' The Bank was nationalised in 1980 along with 5 other private sector banks. After nationalisation, the pace of growth of the Bank accelerated and it made all-round progress. Started as a common man's bank, it changed with the times to meet the aspirations of the people but never swerved from its motto- "Sarve Janah Sukhino Bhavantu" meaning Prosperity for All. It endeavoured and succeeded in striking a right balance between traditional values and innovative approach, personalised service and professional outlook and commercial considerations and public concern. One of the unique achievements of the Bank is that it has been paying dividend continuously for the last 98 years since its inception. Today, with the most modern technology-driven products and services and nationwide branches & ATMs, Corporation Bank stands tall among the Public Sector Banks in the country and is hailed as one among the well-managed Public Sector Banks with excellent track record in all the key parameters of banking. The Bank has the second largest ATM network in the public sector.

Completes a 100yrs of banking:
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Corporation Bank completed 100 years of existence on 12 March 2006. The Centenary celebrations were launched by Shri V. Leeladhar, Deputy Governor, Reserve Bank of India with the Bank's Foundation Day lecture on 12 March 2005. As a part of the Bank's centenary celebrations, a number of programmes and projects were planned and executed. As a first step, the Bank has launched the Corp Kissan Card - debit card tied up with VISA international,, to enable the farmers make timely purchases for agricultural operation at Yeshwantpur-Malur in Kolar District on 13 March 2005. A modern public library was dedicated to the citizens of Mangalore in DK District, the birth place of the Bank by Shri P. Chidambaram, Hon'ble Union Finance Minister on 2 March 2006. The library building also houses a Numismatic Museum and a multipurpose hall for intellectual activities. The Bank has also set up libraries in 25 villages and given away scholarship to 100 meritorious students of such villages for the pursuit of their higher education. Such libraries will be set up in 75 more villages in a phased manner. Corporation Bank - A Corporate Journey, the history of the Bank and Haji Abdullah Saheb a biography of the Bank's Founder President have been published on the occasion of the valedictory function of the Bank's Centenary Celebrations. Ratings:
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CRISIL has re-affirmed the following programmes of Corporation Bank: Rs.2 billion Bond issue AAA Certificate of Deposits Programme P1+ Fixed Deposit Programme FAAA National Award for Assistance to Exporters from the President of India (1976-77) Gem & Jewellery Export Promotion Council Award successively for 5 years from 1981 to 1985 Shiromani Award 1992 for Banking from Union Minister for Commerce Best Bank Award for Excellence in Banking Technology from Institute for Development and Research in Banking Technology (IDRBT), Hyderabad (2001) Best Bank Award for Innovative Usage and Application on INFINET (Indian Financial Network) from Institute for Development and Research in Banking Technology (IDRBT), Hyderabad(2002) Best Bank Award for Delivery Channels from Institute for Development and Research in Banking Technology (IDRBT), Hyderabad (2003)

• •

Awards won: •
• • •

Runner-up Awards in the “Best Online and Multi-channel Banking Team” and “Outstanding achiever of the year-corporate” categories in recognition of outstanding
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achievement in Banking Technology for 2004, instituted under the aegis of Indian Banks Association and Trade Fairs & Conferences International. CURRENT SCENARIO: Presently, the Bank has a network of 1054 Branches, 15 Extension Counters and 19 Currency Chests covering 24 states and 2 union territories of the country. The Bank has 1032 online interconnected ATMs spread across the country. The Bank has opened its Representative Offices at Dubai and Hong Kong for its overseas operations. The Bank has its presence in 98 centres out of 100 top centres in the country. It has a specialised Branch Network of 157 Branches, which are designed to cater exclusively to the banking needs of different segments like Personal Segment, Trade and Commercial Segment, Small Scale Industry, Large and Medium Industrial Units, Non-Resident Indians, Housing Sector and Export & Import Segment.

STUDY LINE
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Primary data In order to know the working of MFIs and NGOS, we visited MFI - Friends Of Women’s World Banking (FWWB)- Ahmedabad branch NGO- Vikas Development Centre- Ahmedabad branch Trust- Vardan Trust- Dahod Besides this, we access Corporation bank files given by bank. Secondary data Internet We browse different websites in order to collect information related to different countries microfinance. Books and Magazines We read different books on microfinance which contains current scenario of India. Other materials It includes Files, annual report and documents of corporation bank.

CHAPTER 1
Introduction of Microfinance
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Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have endeavoured to provide access to financial services to the poor in creative ways. Governments also have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value.

1.1 Microfinance Definition According to International Labor Organization (ILO), “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients”. In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”. "The poor stay poor, not because they are lazy but because they have no access to capital." The dictionary meaning of ‘finance’ is management of money. The management of money denotes acquiring & using money. Micro Finance is buzzing word, used when financing for micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class of society, women, and poor, downtrodden by natural reasons or men made; caste, creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality, equity and mutual self-help. At the heart of these principles are the concept of human development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their children. Traditionally micro finance was focused on providing a very standardized credit product. The poor, just like anyone else, (in fact need like thirst) need a diverse range of financial
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instruments to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening of the concept of micro finance--- our current challenge is to find efficient and reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but extending credit to those who require most for their and family’s survival. It cannot be measured in term of quantity, but due weight age to quality measurement. How credit availed is used to survive and grow with limited means. Who are the clients of micro finance? The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Micro finance clients are typically self-employed, often household-

based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, micro finance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients are poor and vulnerable nonpoor who have a relatively unstable source of income. Access to conventional formal financial institutions, for many reasons, is inversely related to income: the poorer you are the less likely that you have access. On the other hand, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal arrangements may not suitably meet certain financial

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service needs or may exclude you anyway. Individuals in this excluded and underserved market segment are the clients of micro finance. As we broaden the notion of the types of services micro finance encompasses, the potential market of micro finance clients also expands. It depends on local conditions and political climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro credit might have a far more limited market scope than say a more diversified range of financial services, which includes various types of savings products, payment and remittance services, and various insurance products. For example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. Central government in India has established a strong & extensive link between NABARD (National Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture & Marketing Societies at national, state, district and village level. The Need in India • India is said to be the home of one third of the world’s poor; official estimates range from 26 to 50 percent of the more than one billion population. • About 87 percent of the poorest households do not have access to credit. • The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector. Due to the sheer size of the population living in poverty, India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world’s poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last five years, the microfinance industry has achieved significant growth in part due to the participation of commercial banks. Despite this growth, the poverty situation in India continues to be challenging. Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004: • Poor people need not just loans but also savings, insurance and money transfer services. • Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. • “Microfinance can pay for itself.” Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. • Microfinance means building permanent local institutions.
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• Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system. • “The job of government is to enable financial services, not to provide them.” • “Donor funds should complement private capital, not compete with it.” • “The key bottleneck is the shortage of strong institutions and managers.” Donors should focus on capacity building. • Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. • Microfinance institutions should measure and disclose their performance – both financially and socially. Microfinance can also be distinguished from charity. It is better to provide grants to families who are needy, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This situation can occur for example, in a war zone or after a natural disaster.

Financial needs and financial services In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy.

In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of needs: • Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. • Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. • Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. • Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc. Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewellery and precious metals.
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As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that “microfinance could provide large-scale outreach profitably,” and in the 1990s, “microfinance began to develop as an industry”. In the 2000s, the microfinance industry’s objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a viable, commercial microfinance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial microfinance industry include: • Inappropriate donor subsidies • Poor regulation and supervision of deposit-taking MFIs • Few MFIs that mobilize savings • Limited management capacity in MFIs • Institutional inefficiencies • Need for more dissemination and adoption of rural, agricultural microfinance methodologies

Role of Microfinance: The micro credit of microfinance programme was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral , alleviating poverty and unleashing human creativity and endeavour of the poor people. Microfinance impact studies have demonstrated that  Microfinance helps poor households meet basic needs and protects them against risks.  The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth.
 By supporting women economic participation, microfinance empowers women,

thereby promoting gender-equity and improving household well being.  The level of impact relates to the length of time clients have had access to financial services.

The Origin of Microfinance Although neither of the terms microcredit or microfinance were used in the academic literature nor by development aid practitioners before the 1980s or 1990s, respectively, the concept of providing financial services to low income people is much older.
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The main objectives of these cooperatives “should be to control the use made of money for economic improvements, and to improve the moral and physical values of people and also, their will to act by themselves.”In the 1880s the British controlled government of Madras in South India, tried to use the German experience to address poverty which resulted in more than nine million poor Indians belonging to credit cooperatives by 1946. Microfinance Today In the 1970s a paradigm shift started to take place. The failure of subsidized government or donor driven institutions to meet the demand for financial services in developing countries let to several new approaches. Some of the most prominent ones are presented below. Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia without any subsidies and is now “well-known as the earliest bank to institute commercial microfinance”. While this is not true with regard to the achievements made in Europe during the 19th century, it still can be seen as a turning point with an ever increasing impact on the view of politicians and development aid practitioners throughout the world. In 1973 ACCION International, a United States of America (USA) based non governmental organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus started what later became known as the Grameen Bank by lending a total of $27 to 42 people in Bangladesh. One year later the Self-Employed Women’s Association started to provide loans of about $1.5 to poor women in India. Although the latter examples still were subsidized projects, they used a more business oriented approach and showed the world that poor people can be good credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than that of traditional banks. Another milestone was the transformation of BRI starting in 1984. Once a loss making institution channelling government subsidized credits to inhabitants of rural Indonesia it is now the largest MFI in the world, being profitable even during the Asian financial crisis of 1997 – 1998.

1.2 Strategic Policy Initiatives Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are:
 Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 21

 The National Microfinance Taskforce, 1999  Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002  Microfinance Development and Equity Fund, NABARD, 2005  Working group on Financing NBFCs by Banks- RBI

1.3 Activities in Microfinance Microcredit: It is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending. Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses. Micro insurance: It is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work. Remittances: These are transfer of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds. 1.4 Legal Regulations Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts of the respective state governments for cooperative banks. NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There is no specific law catering to NGOs although they can be registered under the Societies Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also borrow. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory organizations. In January 2000, the RBI essentially created a new legal form for providing microfinance services for NBFCs
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registered under the Companies Act so that they are not subject to any capital or

liquidity requirements if they do not go into the deposit taking business. Absence of liquidity requirements is concern to the safety of the sector.

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CHAPTER 2
Microfinance in India:
At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores in the Indian banks’ credit outstanding. As against this, according to even the most conservative estimates, the total demand for credit requirements for this part of Indian society is somewhere around Rs 2,00,000 crores.

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Microfinance changing the face of poor India Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme, aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'. In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. Research across the globe has shown that, over time, microfinance clients increase their income and assets, increase the number of years of schooling their children receive, and improve the health and nutrition of their families. A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined delivery of financial services along with technical assistance, and agricultural business development services. When compared to the wider SHG bank linkage movement in India, private MFIs have had limited outreach. However, we have seen a recent trend of larger microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This changing face of microfinance in India appears to be positive in terms of the ability of microfinance to attract more funds and therefore increase outreach. In terms of demand for micro-credit or micro-finance, there are three segments, which demand funds. They are: • At the very bottom in terms of income and assets, are those who are landless and engaged in agricultural work on a seasonal basis, and manual labourers in forestry, mining, household industries, construction and transport. This segment requires, first and foremost, consumption credit during those months when they do not get labour work, and for contingencies such as illness. They also need credit for acquiring small productive assets, such as livestock, using which they can generate additional income. • The next market segment is small and marginal farmers and rural artisans, weavers and those self-employed in the urban informal sector as hawkers, vendors, and workers in household micro-enterprises. This segment mainly needs credit for working capital, a small part of which also serves consumption needs. This segment also needs term credit for acquiring additional productive assets, such as irrigation pumpsets, borewells and livestock in case of farmers, and equipment (looms, machinery) and worksheds in case of non-farm workers. • The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and slums, engaged in processing or manufacturing activity, running provision stores, repair workshops, tea shops, and various service enterprises. These persons are not always poor, though they live barely above the poverty line and also suffer from inadequate access to formal credit.

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Well these are the people who require money and with Microfinance it is possible. Right now the problem is that, it is SHGs' which are doing this and efforts should be made so that the big financial institutions also turn up and start supplying funds to these people. This will lead to a better India and will definitely fulfil the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e. Poverty. One of the statements is really appropriate here, which is as: “Money, says the proverb makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.” Adams Smith. Today India is facing major problem in reducing poverty. About 25 million people in India are under below poverty line. With low per capita income, heavy population pressure, prevalence of massive unemployment and under employment, low rate of capital formation, misdistribution of wealth and assets, prevalence of low technology and poor economics organization and instability of output of agriculture production and related sectors have made India one of the poor countries of the world.

Present Scenario of India: India falls under low income class according to World Bank. It is second populated country in the world and around 70 % of its population lives in rural area. 60% of people depend on agriculture, as a result there is chronic underemployment and per capita income is only $3262. This is not enough to provide food to more than one individual. The obvious result is abject poverty, low rate of education, low sex ratio, and exploitation. The major factor account for high incidence of rural poverty is the low asset base. According to Reserve Bank of India, about 51 % of people house possess only 10% of the total asset of India .This has resulted low production capacity both in agriculture (which contribute around 22-25% of GDP) and Manufacturing sector. Rural people have very low access to institutionalized credit (from commercial bank). Poverty alleviation programmes and conceptualisation of Microfinance: There has been a continuous effort of planners of India in addressing the poverty. They have come up with development programmes like Integrated Rural Development programme (IRDP), National Rural Employment Programme (NREP), Rural Labour Employment Guarantee Programme (RLEGP) etc. But these programmes have not been able to create massive impact in poverty alleviation. The production oriented approach of planning without altering the mode of production could not but result of the gains of development by owners of instrument of production. The mode of production does remain same as the owner of the instrument has low access to credit which is the major factor of production. Thus in Nineties National bank for agriculture and rural development (NABARD) launches pilot projects of Microfinance to bridge the gap between demand and supply of funds in the lower rungs of rural economy. Microfinance the buzzing word of this decade was meant to cure the illness of rural economy. With this concept of Self Reliance, Self Sufficiency and Self Help gained
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momentum. The Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks. Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on informal financing intermediaries like money lenders, family members, friends etc.

2.1 Distribution of Indebted Rural Households: Agency wise

Seeing the figures from the above table, it is evident that the share of institutional credit is much more now. The above survey result shows, institutional credit accounted for around two-thirds of the credit requirement of rural households. This shows a comparatively better penetration of the banking and financial institutions in rural India.

Percentage distribution of debt among indebted Rural Labor Households by source of debt

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The table above reveals that most of the rural labour households prefer to raise loan from the non-institutional sources. About 64% of the total debt requirement of these households was met by the non-institutional sources. Money lenders alone provided debt (Rs.1918) to the tune of 32% of the total debt of these households as against 28% during the survey. Relatives and friends and shopkeepers have been two other sources which together accounted for about 22% of the total debt at all-India level. The institutional sources could meet only 36% of the total credit requirement of the rural labour households with only one percent increase over the previous survey in 1993-94. Among the institutional sources of debt, the banks continued to be the single largest source of debt meeting about 17 percent of the total debt requirement of these households. In comparison to the previous enquiry, the dependence on co-operative societies has increased considerably. 13% of the debt was raised from this source as against 8%. However, in the case of the banks and the government agencies it decreased marginally from 18.88% and 8.27% to 17.19% and 5.37% respectively during the survey.

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2.2 Relative share of Borrowing of Cultivator Households (in per cent)

Table shows the increasing influence of moneylenders in the last decade. The share of moneylenders in the total non institutional credit was declining till 1981, started picking up from the 1990s and reached 27 per cent in 2001. At the same time the share of commercial banks in institutional credit has come down by almost the same percentage points during this period. Though, the share of cooperative societies is increasing continuously, the growth has flattened during the last three decades. 2.3 Distribution based on Asset size of Rural Households (in per cent)

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The households with a lower asset size were unable to find financing options from formal credit disbursement sources. This was due to the requirement of physical collateral by banking and financial institutions for disbursing credit. For households with less than Rs 20,000 worth of physical assets, the most convenient source of credit was non institutional agencies like landlords, moneylenders, relatives, friends, etc. Looking at the findings of the study commissioned by Asia technical Department of the World Bank (1995), the purpose or the reason behind taking credit by the rural poor was consumption credit, savings, production credit and insurance. Consumption credit constituted two-thirds of the credit usage within which almost threefourths of the demand was for short periods to meeting emergent needs such as illness and household expenses during the lean season. Almost entire demand for the consumption credit was met by informal sources at high to exploitive interest rates that varied from 30 to 90 per cent per annum. Almost 75 per cent of the production credit (which accounted for about one-third of the total credit availed of by the rural masses) was met by the formal sector, mainly banks and cooperatives.

2.4 Banking Expansion Starting in the late 1960s, India was the home to one of the largest state interventions in the rural credit market. This phase is known as the “Social Banking” phase. It witnessed the nationalization of existing private commercial banks, massive expansion of branch network in rural areas, mandatory directed credit to priority sectors of the economy, subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the district level and a specialized apex bank for agriculture and rural development (NABARD) at the national level. The Net State Domestic Product (NSDP) is a measure of the economic activity in the state and comparing it with the utilization of bank credit or bank deposits indicates how much economic activity is being financed by the banks and whether there exists untapped potential for increasing deposits in that state. E.g. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at around 75%-80% in Bihar and Jharkhand or these states are not as under banked as thought to be.

2.5 Microfinance Social Aspects
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Micro financing institutions significantly contributed to gender equality and women’s empowerment as well as poor development and civil society strengthening. Contribution to women’s ability to earn an income led to their economic empowerment, increased well being of women and their families and wider social and political empowerment. Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to poverty reduction and women’s higher credit repayment rates led to a general consensus on the desirability of targeting women.

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CHAPTER 3
Self Help Groups (SHGs):
Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation. 3.1 How self-help groups work NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural poor, voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per the group members' decision".

Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of government and non- governmental agencies, they now make up 90% of all SHGs. The rules and regulations of SHGs vary according to the preferences of the members and those facilitating their formation. A common characteristic of the groups is that they meet regularly (typically once per week or once per fortnight) to collect the savings from members, decide to which member to give a loan, discuss joint activities (such as training, running of a communal business, etc.), and to mitigate any conflicts that might arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and sometimes other office holders.
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Most SHGs start without any external financial capital by saving regular contributions by the members. These contributions can be very small (e.g. 10 Rs per week). After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small internal loans for micro enterprise activities and consumption. Only those SHGs that have utilized their own funds well are assisted with external funds through linkages with banks and other financial intermediaries. However, it is generally accepted that SHGs often do not include the poorest of the poor, for reasons such as: (a) Social factors (the poorest are often those who are socially marginalized because of caste affiliation and those who are most skeptical of the potential benefits of collective action). (b) Economic factors (the poorest often do not have the financial resources to contribute to the savings and pay membership fees; they are often the ones who migrate during the lean season, thus making group membership difficult). (c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the most difficult to reach and motivate, implementing agencies tend to leave them out, preferring to focus on the next wealth category).

3.2 Sources of capital and links between SHGs and Bank SHGs can only fulfil a role in the rural economy if group members have access to financial capital and markets for their products and services. While the groups initially generate their own savings through thrift (whereby thrift implies savings created by postponing almost necessary consumption, while savings imply the existence of surplus wealth), their aim is often to link up with financial institutions in order to obtain further loans for investments in rural enterprises. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the loan amount is proportionate to the group's savings) or as fixed amounts, depending on the group's record of repayment, recommendations by group facilitators, collaterals provided, etc.

3.3 How SHGs save? Self-help groups mobilize savings from their members, and may then on-lend these funds to one another, usually at apparently high rates of interest which reflect the members’
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understanding of the high returns they can earn on the small sums invested in their micro-enterprises, and the even higher cost of funds from money lenders. If they do not wish to use the money, they may deposit it in a bank. If the members’ need for funds exceeds the group’s accumulated savings, they may borrow from a bank or other organization, such as a micro-finance non-government organization, to augment their own fund. The system is very flexible. The group aggregates the small individual saving and borrowing requirements of its members, and the bank needs only to maintain one account for the group as a single entity. The banker must assess the competence and integrity of the group as a micro-bank, but once he has done this he need not concern himself with the individual loans made by the group to its members, or the uses to which these loans are put. He can treat the group as a single customer, whose total business and transactions are probably similar in amount to the average for his normal customers, because they represent the combined banking business of some twenty ‘micro-customers’. Any bank branch can have a small or a large number of such accounts, without having to change its methods of operation. Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village women are sometimes better bankers than some with more professional qualifications. They know that rapid access to funds is more important than their cost, and they also know, even though they might not be able to calculate the figures, that the typical micro-enterprise earns well over 500% return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus charge themselves high rates of interest; they are happy to take advantage of the generous spread that the NABARD subsidized bank lending rate of 12% allows them, but they are also willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from ‘new generation’ institutions such as Basic Finance at 18.5% or 21%.

3.4 SHGs-Bank Linkage Model NABARD is presently operating three models of linkage of banks with SHGs and NGOs: Model – 1: In this model, the bank itself acts as a Self Help Group Promoting Institution (SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. About 16% of SHGs and 13% of loan amounts are using this model (as of March 2002).

Model – 2: In this model, groups are formed by NGOs (in most of the cases) or by government agencies. The groups are nurtured and trained by these agencies. The bank then provides credit directly to the SHGs, after observing their operations and maturity to absorb credit. While the bank
35

provides loans to the groups directly, the facilitating agencies continue their interactions with the SHGs. Most linkage experiences begin with this model with NGOs playing a major role. This model has also been popular and more acceptable to banks, as some of the difficult functions of social dynamics are externalized. About 75% of SHGs and 78% of loan amounts are using this model. Model – 3: Due to various reasons, banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and micro- finance intermediaries. First, they promote the groups, nurture and train them and then approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs and 13% of loan amounts are using this model.

Comparative Analysis of Micro-finance Services offered to the poor

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3.5 Life insurances for self-help group members

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The United India Insurance Company has designed two PLLIs (personal line life insurances) for women in rural areas. The company will be targeting self-help groups, of which there are around 200,000 in the country, with 15-20 women in a group. The two policies are (1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman in the event of accidental death of her husband and to support her minor children in the event of her death, and (2) The Unimicro Health Scheme, giving personal accident and hospitalization covers besides cover for damage to dwelling due to fire and allied perils.

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CHAPTER 4
Joint Liability Group:

Under this model, a banking unit is a set up with field manager, few field assistant and the number of banking personnel. This banking unit covers an area of about 1520 villages, and sometimes it goes up to 25 villages. In the first stages, the field manager and the field assistants develop acquaintance in the working area by paying few preliminarily visits to the targeted village ort area, built rapport with the villagers, analyse the socio-economic conditions and various issues of the villagers, and therefore identify prospective clients. In the second stage, the field manger and field assistants revealed the purpose, functions, and operational modes of the bank/MFIs to the local people. In the third stage, five to seven prospective borrowers/clients are identified and organised into a group which is called a Joint Liability Group (JLG). In the fourth stage, the banking activities are started with the provision of loans.

• •

The loan methodology of JLG model: At first the only 2 members of the group are eligible for the loan and hence receive the loan. After successful repayment of the principal and with the interests by the first two members within a stipulated repayment period, the other members are eligible for the loans. However the repayment period varies from 6 to 15 weeks, based on the MFI using this model. This model does not required any collateral against the loan rather it creates a substantial peer pressure among all the members of the group, and this peer pressure serves as collateral on the loan. This peer pressure develops collective responsibility among the members thereby reducing the possibility of loan loss.

CHAPTER 5
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Micro Finance Models:
1. Micro Finance Institutions (MFIs):

MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. Since 2000, commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were “into” financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. Legal Forms of MFIs in India

2. Bank Partnership Model This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. In other words, the MFI acts as an agent and takes care of all relationships with the
40

client, from first contact to final repayment. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its books for a while before securitizing them and selling them to the bank. Such refinancing through securitization enables the MFI enlarged funding access. If the MFI fulfils the “true sale” criteria, the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure. 3. Banking Correspondents The proposal of “banking correspondents” could take this model a step further extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It would use the ability of the MFI to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits. This regulation evolved at a time when there were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people have confidence could mobilize savings of gullible public and then vanish with them. It remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse. 4. Service Company Model Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in hand with that MFI to extend loans and other services. On paper, the model is similar to the partnership model: the MFI originates the loans and the bank books them. But in fact, this model has two very different and interesting operational features:
(a) The MFI uses the branch network of the bank as its outlets to reach clients. This

allows the client to be reached at lower cost than in the case of a stand–alone MFI. In case of banks which have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may contract with many banks in an arms length relationship. In the service company model, the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the

bank to create lower cost and faster growth. The Service Company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products, such as individual loans for SHG
41

graduates, remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance.

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CHAPTER 6
Micro Finance at Corporation bank:
Corporation Bank to focus on rural development: IMPLEMENTATION of rural development programmes and introduction of `innovative technology-driven' products are high on the agenda of Corporation Bank during the centenary year. The bank is also introducing `Corp Kisan Card', a debit card, for farmers. Corporation Bank is also planning to set up a `high-tech' public library in Mangalore. This library will house a research-cum-study centre, a yoga centre, and a numismatic museum. The total business of the bank stood at Rs 40,540 crore as on December 31. The aggregate deposits and net advances stood at Rs 24,174.59 crore and Rs 16,366.35 crore respectively during the period. The bank's net worth improved to Rs 3,063 crore and capital adequacy ratio stood at 20.27 per cent. The net NPA, which came down by 20 basis points in the last one year, stood at 1.49 per cent. The bank has 1,655 service outlets, including 773 branches. 361 branches have been brought under core banking solution network. The bank has been paying dividend continuously for the past 98 years. Agriculture finance Corporation bank offers a wide range of finance schemes to the farming community. For farmers, Kisan Credit Card provides facility for withdrawal of cash from their account at CorpBank ATMs and ATMs displaying VISA logo, round the clock. The bank has also been focusing on micro finance and thus empowering Self Help Groups to enable them take up gainful Self Employment. The bank lends farmers against warehouse receipts covering agriculture produce of warehouses approved by the Multi Commodity Exchange Ltd. Corporation Bank to centralise processing of agricultural loans: The Reserve Bank of India (RBI) had permitted the bank to introduce the centralised processing system. Corporation Bank was the first to introduce centralised processing for agriculture loans. It was being started mainly at the village level. The bank had three major strengths in the form of strong capital, low intermediation cost and strong technology. As for future plans, the bank wanted to get into investment banking, insurance products, and retail banking.

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It also wanted to get into depository participant services. The bank would focus more on corporate social responsibility in accordance with their business goal. The bank was training its manpower for investment banking activities.

Corporation Bank model for rural areas working well: Branchless Banking: In 2006, when Corporation Bank introduced `branchless banking' model it catered to the needs of rural masses that did not have access to banking service. A steady growth in the number of transactions with more number of small amounts being transacted shows that Corporation Bank’s branchless banking model is gaining acceptance among people in these hitherto unbanked areas. Corporation Bank, “Branchless banking is by the villagers and for the villagers.” In this model, the bank appoints a business correspondent in an unbanked area who uses modern biometric smart cards and voice-guided systems to provide secure banking operation for rural people without any barrier on timings. The bank has implemented branchless banking model at 33 places. One of the reasons was that even small deposits (as little as Rs 10) were accepted. During March, the branchless banking model conducted more than 1,400 transactions, involving more than Rs 5.95 lakh. Of this, deposits were over Rs 3 lakh. More than 700 unique customers availed themselves of this facility. Earlier, people did not bother to save small amounts either due to lack of a bank branch in their village or the amount spent on travelling to the nearest branch. Mr Sambamurthy said he observed customers saving these tiny amounts of money for their children’s education. “Nearly 80 per cent of the people who come to operate are women. That means there is empowerment of women in villages.
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Corporation Bank is now planning to brand the branchless banking model. For the customer, there should be a brand. “We are planning to give a name like ‘Corp Bank Gramin Vikas Kendra’. At present, the branchless banking model offers products such as savings bank, general credit card to its customers. Loan and remittance products are offered in some units. The smart card in branchless banking offers as many facilities as possible.

Corporation Bank appointed business correspondents and provided them a simple handheld secure terminal. The customers in un-banked villages are provided with smart cards or RFID (radio frequency identification) cards. These cards include their name, photograph, address, and their fingerprints. The voice-guidance system from business correspondent's device confirms the authentication of the transaction to both the customer and the business correspondent. Customers carry out basic banking transactions from the comfort of their village and at any time of the day irrespective of the banking hours. The business correspondent uploads the daily transactions to the bank branch through the telecommunication network. The year 2008 saw the operating model of branchless banking units witnessing changes both in size and appearance. When the bank implemented the branchless banking activity on a pilot basis in two villages of Dakshina Kannada district in Karnataka in August 2007, the size of the unit was almost equal to that of an A4 paper. Now, the size is almost half of that with additional features. The need for the business correspondents to go in for a separate handset for mobile and land phones has been eliminated in some of the new units as they come with GSM chips in them. During the year, Corporation Bank went in for branding of its branchless banking units. Now, the bank calls them as `Corp Bank Gramin Vikas Kendras'. During 2008, the number of branchless banking units of Corporation Bank increased to 202 as against hardly a handful in the previous year. While the first branchless banking unit was opened in Calangute in Goa in 2006, the latest one (202nd) was opened at Sarathi in Dharwad district by the end of 2008.
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Some of the areas where the branchless banking functioned into include dairy farmers, farmers' shandy, self-help group (SHG) sector, among others. In the branchless banking model adopted for Chittoor dairy farmers, who are associated with National Dairy Development Board, the payment for the milk poured in a dairy gets directly credited to the account of the farmer concerned, which he/she can transact at the time suitable for him/her. In `uzhavar santhai', farmers come to the shandy by 5 a.m. for selling the commodities and go back to the villages by 10 a.m. But money for daily turnover is the main requirement for them, and moneylenders are the main source for them. Considering the need for an overdraft facility, the bank introduced the `branchless banking' model in `uzhavar santhai' in Sivaganga on a pilot basis. One of the farmers, who is a business correspondent, sets up a terminal in the shandy and meets the overdraft requirements of the farmers there. For marginal farmers having small land holdings, the overdraft is given at 4 per cent interest . By the time the bank branch opens for public, the business correspondent remits the money at the bank. SHGs: Branchless banking also made inroads into the SHG segment during the year. In this, two cards (of the authorised members) need to be authorised at the business correspondent's terminal at the time of carrying out the transactions. This saves the time of SHG members who otherwise would have to travel to the branch. It also reduces crowding at the branch as the SHG members carry out the transactions in their villages. The model was also customized to provide payments in social security pension and NREG schemes. TRANSACTIONS: The number of transactions and the amount transacted also witnessed growth during the period. The bank, which transacted around 1,000 transactions worth Rs 2.5 lakh in December 2007 (RPT December 2007), saw more than seven-fold jump in transactions and nearly 10fold jump in amount during November 2008. Branchless banking units carried out nearly 7,700 transactions worth Rs 19.39 lakh till November 2008. Most of the customers of the branchless banking are women, constituting more than 65 per cent of the total transactions, indicating the women empowerment. The bank does not see this merely as a regulatory requirement but also as a viable business model to increase its clientele base and to provide basic banking services at affordable cost to those communities who were hitherto deprived of such facilities.

Corporation Bank to promote organic farming:

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Corporation Bank signed a memorandum of understanding (MoU) with the Karnataka State Organic Farming Mission (KSOFM) for the promotion of organic farming in the state. According to the agreement, Corporation Bank will be nominated as the preferred bank by KSOFM for financing farmers and their entities in taking up organic farming activities.

The bank will also assist the mission in undertaking various developmental activities for promoting organic farming by setting up seed banks, marketing outlets, computer training centres, libraries, goshalas among others in all 176 talukas in the state. Corporation Bank had been focusing on extending loans to priority sector and 40 per cent of its total agriculture loans were extended to farmers in Karnataka last year. The bank proposes to open more branches in the state to increase their share of farm loans. “Promotion of organic farming will result in better earning for the farmers and it is good for the environment. The bank is identifying the cause of organic farming as one of its prime areas of concern and is associating itself with promotion of such causes supported by the State Level Empowered Committee on Organic Farming in the state The state government has increased allocation to organic farming from Rs 43 crore in 200809 to Rs 100 crore in 2009-10 to extend the organic farming across the state. He expressed confidence that with the help of Corporation Bank joining hands with the state government, the organic farming movement will gather further momentum in the state. Organic agriculture has been gaining acceptance in India in the recent years. Many state governments have been promoting the conversion of chemical farming to organic. Prominent among them are Madhya Pradesh, Maharashtra, Orissa, Uttaranchal, Karnataka and Kerala. The total area under organic cultivation is estimated at 865,000 hectares in the country. Incidentally, Karnataka is the first state in the country to announce a separate policy on organic agriculture. According to latest information, the organic products market in India is estimated at Rs 100 crore and the exports from India were Rs 350 crore last year. As the operation of the mission extends to the whole of Karnataka, the units of the Mission will use the bank for maintaining their current/savings accounts, for remittances of funds, issuance of at par cheques, DDs among others. The bank will offer those services on a very preferential basis with no charges. The bank will also make special efforts to propagate the concept of organic farming through the various forums available under the Lead Bank Scheme, in association with the mission

CHAPTER 7
Micro Finance at International Level:
7.1 BRAZIL:
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INTRODUCTION: • The microfinance sector in Brazil is defined by seemingly paradoxical characteristics. Despite being the birthplace of Latin America’s first microfinance institution (MFI) in 1973, microfinance in Brazil has experienced levels of growth inferior to those of Latin American countries. While the late 1990’s have seen an increase in activity as demonstrated by the 220% jump in total portfolio growth of Brazilian MFIs between 1999 and 2001, this indicator must be understood within the larger market context. An analysis of active client numbers in the seven largest MFIs in Brazil shows that while growth rates reached 40%-60% in 1998, there has been a marked slow-down in this rhythm since 2001. The roughly 100 MFIs in the country account for about 110.000 clients, which represents less than 1% of the potential market of the estimated 15.7 million micro entrepreneurs in Brazil. In Brazil, the microfinance sector is dominated by one product: productive credit for micro entrepreneurs. This very limited form of microfinance consists of working capital loans of R$ 500 – R$ 5000 with eight to twelve month terms. It is important to note, however, that the low-income families who constitute the potential market for microfinance.

• • •

OBJECTIVE: •

Determine how credit and savings are perceived among low-income populations. Examine the behaviours, strategies and mechanisms poor people use to manage their financial resources. Identify the events and circumstances that create the need to borrow money or use savings. Identify the social dynamics behind the relationship between low-income populations and financial service providers. Propose concepts that may be used as a basis for further product development research.

• • •

Financial needs and mechanisms used : Very low income Low income Medium income
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low

Emergencies

Illness health care Family/friends sale Relative employer Relative bank cost of household goods sale of household credit line, cash goods, advance from credit card, post-dated consumer-lending cheques agenda Collection from family/friends neighbours financing plan from family/friends funeral home, financing plan from funeral insurance funeral home family/friends financing plan from funeral home, cash advance from credit card, bank credit line Savings family/friends Payment plan, bank loan Other celebrations Saving credit borrowed Saving plan payment Saving plan payment

Life events

cycle Funeral cost

Wedding

Savings

Savings family/friends

Opportunities

Home improvement Education Start up business

Salary advance, Salary advance, Bank loan borrowed credit bank loan Use not identified Use not identified Family/friends Indemnities previous employment Family/ friends, bank loans from Indemnities previous employment from

Expand business

Use not identified

Payment plan, Payment plan, credit card cheques, credit card cheques, MFIs loan MFIs loan Payment plan Payment plan, postdated cheques, overdraft facility, credit card, bank credit line.

Seasonal

End of the year

Borrowed credit

Carnival and sao Family/ friends Joao Income tax Use not identified

Payment plan Credit card, postfamily/friends dated cheques Use not identified Instalments
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School expenses

related Family/friends

Payment plan, post- Payment plan, postdated cheques dated cheques, credit card.

Microfinance Instruments:

LESSON LEARNED: ⇒ ⇒ ⇒ ⇒ Current products meet only one of the many financial needs of potential clients. MFIs are targeting too high. The ambiguities of having a marred credit record Cultural perceptions of credit and financial institutions impact the willingness to take loans. ⇒ MFIs are relatively unknown. ⇒ MFIs lack a distinctive competitive position in the market.
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NEW PRODUCT CONCEPTS: 1. Insurance for prescribed medicine and laboratory tests. Public health services do not cover the costs of prescribed medicine and laboratory tests, creating a serious financial burden for low-income populations. An insurance product to cover these costs would help decrease considerably the impact an illness can have on household budgets. 2. Funeral Insurance. There is a recognized and partially met demand for funeral insurance among low and medium-low income groups, but the demand still appears great. The product would involve the payment of very small monthly installments for a few years, making the client eligible for a pre-determined sum to be spent on funeral costs. The benefits would be transferable to selfdefined family members, named in the initial contract. 3. Professional Training Loan. There appears to be demand for a loan available to salaried workers, the unemployed or micro entrepreneurs to pursue secondary, university or professional training. To help clients gain confidence in their ability to repay, the loan could initially be offered with a grace period and involve repayment in very small installments. 4. A loan to rehabilitate one’s credit record. A considerable number of people in the medium and low-income segments are excluded from the financial market due to being on the blacklists of the credit protection agencies. Many end up on these lists as a result of adverse circumstances and not deliberate negligence of their obligations. These people are often eager to rehabilitate their names and fulfill their obligations but cannot do so because they do not have sufficient resources to pay the debt that has invariably increased due to interests, fines and fees. 5. Home improvement loan. Demand for home improvement loans among the low-income population is strong, and although the Caixa Econômica Federal offers products to meet this demand, the truly lowincome segments do not appear to use them.

6. Community credit card. Credit cards that allow payment in up to 30-40 days without interest are greatly appreciated due to the convenience by the and security they offer. The high acceptance of credit cards in low-income populations could be exploited MFIs to not only increase their client base but to contribute to growth in local economies. 7. Registration of third-person payment plans. Using “borrowed” checks and credit cards and the common practice of purchasing items in the name of someone else point to a largely hidden potential market for MFIs. Institutions working in the microfinance sector could harness this potential through an optional registration process that would formalize the informal.
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8. Micro-leasing. As a way to avoid the use of a co-signer, MFIs could introduce micro-leasing, aimed at micro entrepreneurs wishing to purchase equipment, in which the good acquired would serve as a guarantee. Similar to a traditional leasing plan, the micro entrepreneur would pay a monthly installment. The maximum payment would be equivalent to the maximum amount of credit. 9. Contractual savings for education. This product could consist of the payment of fixed installments for a period of time (5,10 or 15 years), to be determined by the client according to his capacity. At the end of the term, the accumulated amount would be used for payment of educational expenses or professional training. 10. “Incentivized” savings Populations studied almost universally recognize the usefulness of saving but find current incentives unattractive. The low interest rates and vague chances to win the monthly drawing that many banks propose do not appear to motivate clients to place the little money that is left over in a savings account: purchasing a good is perceived as more satisfying.

7.2 LATIN AMERICA: INTRODUCTION: Latin America is home to some of the most experienced, diverse and developed microfinance institutions (MFIs) in the world. The goal is not to identify regional leader institutions or create performance targets.

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At the global level, Latin American MFIs have more assets, leverage more equity and attract more commercial investment than MFIs in other regions. They also reach fewer clients and achieve marginal returns. Some characteristics of a more commercial market may already be visible in the aggregate. Latin American loan portfolios are increasingly funded through commercial financing (especially through savings) and operating expenses are decreasing as many, but not all, MFIs become more efficient. Perhaps the higher portfolio at risk signals the emergence of a more competitive market in a small number of countries.

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1. Scale and outreach: LATIN AMERICA MFIs: • • • • Have achieved greater financial scale than other regions, Carry larger average balances per borrower. Latin America's average Gross Loan Portfolio is almost 75% larger than the average for Asian MFIs, who rank a distant second. The aggregate indicator hides an important trend in Latin American microfinance: the diversity of MFIs in terms of mission, size, legal status, or target market creates results that span the spectrum of MFI outreach globally, and even defines its outer limits.

2. Institutional structure: LATIN AMERICA MFIs: • lAre more leveraged than MFIs in other regions • Access more commercial financing • Mobilize greater savings volume but, • Reach fewer savers than Asian and African MFIs. • Latin American MFIs are more successful at leveraging their equity and accessing commercial capital than MFIs in other regions. Debt accounts for 2.7 times the equity of the average Latin American MFI. • Regions in terms of attracting commercial funds. In total, commercially priced liabilities represent over 70% of the average Latin American Gross Loan Portfolio compared to an average of 44.1% for all MFIs.
3. Profitability and sustainability:

LATIN AMERICA MFIs: • • • • • Are more commercial but less profitable as a group than all regions except Africa Barely reach Financial Self-Sufficiency Represent some of the most and least profitable MFIs across all regions. Adjustments for inflation, loan loss provisioning, subsidies and in-kind donations create a basis for comparability of returns and sustainability in an industry where diverse accounting policies, inflation and subsidy can distort performance. Before adjustments, Latin American MFIs, on average, recover 110%. After adjustments, the Financial Self-Sufficiency (a measure of cost recovery) of the average Latin American institution is 102%.

4. Revenue: LATIN AMERICA MFIs: • Earn more revenue as a percentage of total assets than all other regions • Have some of the highest yields on the portfolio.
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Latin American MFIs earn more revenue but keep less of it than regions with positive returns.

5. Expense: LATIN AMERICA MFIs: • Pay the highest average cost for financing as percentage of total assets Achieve mixed operational expense ratios. • Latin American institutions are more costly to run, on average, because of the high cost of financing coupled with widely varying operational expense ratios. The high cost of financing for all Latin peer groups is not surprising; Latin American institutions, on average, are more likely to access larger amounts of debt at commercial rates than other regions.

6. Efficiency and productivity: LATIN AMERICA MFIs: • Serve borrowers more efficiently than all regions except Asia • Employ the most productive loan officers of all regions except Africa, but • Have fewer front line staff than all MFIs worldwide. • Latin American MFIs appear efficient when operational expenses are divided by the loan portfolio. • The impressive productivity of Latin American loan officers is diminished at the institutional level, where productivity is consistent with the average for all MBB participants. Loan officers account for merely 41% of all Latin American MFI staff compared to an average of 48.3% for all MFIs worldwide. 7. Portfolio: LATIN AMERICA MFIs: • Have the highest portfolio at risk • Earn the highest loan loss provisioning expenses because the Gross Loan Portfolio accounts for such a large percentage of total assets. • The average Portfolio at Risk (PAR) > 30 days for Latin America is almost twice as high as any other region. • The Gross Loan Portfolio accounts for such a large majority of the assets of Latin American MFIs, that provisioning expenses become even larger as a percentage of total assets. High portfolio at risk also increases the risk profile of Latin American MFIs to funding sources.

CONCLUSION: The Latin American microfinance market is older, more developed and more diverse than other regions yet there remain large geographical inequalities of access to financial services
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at the national and regional scales. A minority of markets is already competitive although increasing access through expanding the client base is still a principal challenge of Latin American microfinance. Nowhere is this truer than in larger countries, secondary cities and rural areas. While there are some clear regional trends, the performance of Latin American MFIs is more diverse than in any other region. In Latin America there is a true multiplicity of institutional types, sizes, missions, and performance levels. Although there are examples of smaller Latin American institutions that are very profitable, there seems to be a positive relationship, in the aggregate, between size and Financial Self-Sufficiency.

7.3 INDONESIA:
Introduction: BRI's ancestor, the Priyayi Bank of Purwokerto, was created in 1895 by Raden Wiriamaadya, a Javanese government official. Intended for the Indonesian elite in its first years, the Dutch administration reorganised it as a cooperative bank in 1897, following the example of those that appeared in Europe after 1850. In 1946, it changed its name to Bank Rakyat Indonesia and became a state-owned commercial bank in 1950. At the beginning of the 1970s, 3,600 BRI Unit Desas (village banks) were created as part of a government program, BIMAS, whose aim was to provide inputs for the rice-green revolution. They were then used as channelling agents for different subsidized government lending programs but all of them failed to reach sustainability. In 1984, the Unit Desas were completely restructured: each became an individual profit centre and adopted a commercial approach to microfinance (no subsidies, sustainable interest rates, efficient management, and efforts to mobilize savings) that led them to financial profitability from 1985 onwards. Today, BRI's microfinance system is the world's largest and most profitable microfinance network in the world. In 1992, BRI became a limited liability corporation and a public company in 2003. Methodology: BRI is divided into four Strategic Business Units: Micro Banking, Retail Banking, Corporate Banking and Investment Banking. Its microfinance services are provided through the Micro Banking Unit, also known as BRI Unit. The main saving products available are:

SIMPEDES, or Simpanan Pedesaan (Village Savings), a deposit instrument allowing an unlimited number of transactions and therefore favoured by low-income households that need full liquidity. There are no fees to open an account, and except for the smallest balances (less than $10), it has a positive real interest rate. Aimed at attracting new customers, lotteries are organized every six months with prizes in kind. 75.7% of BRI micro-banking accounts are SIMPEDES.
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• •

SIMASKOT, is the equivalent of SIMPEDES for urban areas with an emphasis on security. TABANAS BRI, a government saving program, offers similar features than SIMPEDES but is not as popular. It can be explained by the fact that until a few years ago, no more than two withdrawals per month were allowed and, moreover, its lottery offers prizes in cash whereas most depositors favour prizes in kind.

BRI has only one micro-loan product, KUPEDES, designed for working capital or investment purposes. Carefully selected, the borrowers are given loans whose amount depends on the borrower's current income flow and always require some form of collateral (a SIMPEDES account, land, furniture, motorcycle, etc.). The minimum amount is Rp.25,000 (US$3), and the maximum is Rp.50,000,000 (US$5,000). The minimum loan term period is one month and the maximum is 24 months for working capital loans or 36 months for investment loans. Loans can be repaid in monthly, quarterly or bi-annually instalments. The interest rate increased by 0.5% if the repayment is not made on time. The repayment rate is very high: 98.34%. Innovations: BRI needs to keep a strong focus on micro and small banking activities to remain successful. Another challenge is the dependency of the Micro banking division on BRI overall policy on the use of units' profits and investments decisions. Instead of being allocated to loss-making corporate activities, units' profits could be used to lower interest rates on credit, increase deposit rates or invest in renovating and/or expanding the unit network. Other challenges for BRI are: extending further its outreach in rural areas, bringing ICT to microfinance and building linkages between large companies and small enterprises.

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7.4 PAKISTAN:
Introduction: The Pakistan Microfinance Network finds it origins in 1995 as an informal association based on the exchange of thoughts and experiences between microfinance providers operating in Pakistan.

In 1999 this loose collaboration, the Microfinance Group Pakistan, sought and received financial support from the Aga Khan Foundation and the Asia Foundation. Through its expanding and more formalized operations it continued to build confidence and trust amongst donors, government and microfinance institutions. In 2001 it moved successfully to become a separate legal entity under the name of the Pakistani Microfinance Network (PMN). Type of Microfinance Products: Credit + Saving + Insurance Lending Methodology: Community based + Individual Saving Methodology: Mobilization + Intermediation Insurance Products: Life + Health Cost per Client: Globally competitive
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Cumulative Recovery Rate: 96.4% Total No. Of MFPs: 40 5 MFPs have 82% Market share

OBJECTIVE: PMN pursues three objectives: 1. Enhancing the capacity of retail MFIs: Through training courses, the network seeks to build up technical expertise and disseminate operational best practices. During training events, members are also encouraged to present historical overviews of their organisations, illustrate key issues in their current operations and divulge financial information on their organisations. In the past, PMN has organised training courses in market research, credit methodologies, management skills, business planning and financial modelling and others. For 2004, it proposes nine training courses, run by Pakistan practitioners and international trainers in gender, financial management, credit operations, and business development services. 2. Developing and disseminating the use of performance measures and promoting financial transparency in retail MFIs: PMN started in 1999 to promote transparency among its members, asking them to selfreport their performance indicators, which are then aggregated, analysed and published bi-annually as a nation-wide report, the Performance Indicators Report. It is widely acknowledged that PMN is one of the leading national networks in the world in managing and producing performance indicators for the microfinance industry. 3. Helping to create an enabling environment for retail MFIs: PMN organises policy seminars on regulatory issues as well as nation-wide conferences, and has representation on the Consultative Group for Microfinance run by State Bank of Pakistan. In addition, PMN publishes position papers on issues reflecting a consensus among its members. Growth level:

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Annual Growth level in Pakistan is almost 40% Microfinance providers in Pakistan: NGOs      Sungi SAFWCO TF Damen AKRSP     RSPs NRSP SRSP PRSP TRDP     MFIs OPP Akhuwati Asasah Kashf MICROFINANCE BANK      KB First MFB NetworkMFB Rozgar MFB P-O MFB

 Tameer MFB

PMN gathers 12 microfinance providers, including most of the largest and better-established microfinance institutions in the country, representing a regional balance and approximately 90% of the outreach in Pakistan. PMN members:
• • • • • • • • • • •

First MicroFinanceBank Ltd. (FMBL) Development Action for Mobilization and Emancipation (DAMEN) Kashf Foundation National Rural Support Programme (NRSP) Orangi Pilot Project (OPP) Sarhad Rural Support Programme (SRSP) Sindh Agricultural & Forestry Workers’ Cooperative Organization (SAFWCO) Sungi Development Foundation Taraqee Foundation (TF) Thardeep Rural Development Programme (TRDP) Punjab Rural Support Programme (PRSP)

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Some Innovative Products of Microfinance: Product Smart Card Action plan for working Network Infrastructure Facilities for clients Cards as a source of virtual account

MFP Identification POS Terminal Number, Transaction Confirmation code

Bank application must be stored on SIM, as over the air SIM embedded with service cannot be Urdu based SMS can bank account toolkit used due to illiteracy be used Phone + particular SIM for clients factor.

Smart Card with POS Terminal:  Disbursement Scenario  Loan repayment or Savings Deposit Scenario

SMS based Transactions:  Disbursement or Withdrawal (Cash-out)  Loan repayment or Savings Deposit (Cash-in)

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7.5 EUROPE:
Introduction: Microcredit came to prominence in the 1980s as a tool to alleviate poverty in Asia, Latin America and Africa. In Western Europe, a handful of organisations pioneered microcredit schemes in the 1990s. The majority active today began lending in the present decade, however. In this period, persistent unemployment and pressure on the welfare state focused attention on microcredit as a tool to foster self-employment for financially and socially excluded persons. Most funds receive public sector subsidies and many micro lenders focus on promoting social and financial inclusion. In Eastern Europe, microfinance began in the 1990s after the economic transition from centrally planned to market economies, which led to large numbers of unemployed urban and rural workers. Microfinance institutions were created with significant donor support. Their purpose was to provide services to people not reached by formal financial institutions due to the collapse of the financial sector. The priority was to create viable and sustainable financial institutions that could reach large numbers of unemployed and poor workers.

Four different forms of microfinance business models existing in Europe: • NGOs with a microfinance driven approach: NGOs with a microfinance driven approach focus on serving clients with mainly financial services. Some of these also have a very clear social mission. • NGOs with a target group driven approach: NGOs serve specific target groups (women, unemployed, ethnic minorities, micro entrepreneurs, migrants, youth) with a range of services usually related to employment. These NGOs include financial services in their overall programme. Examples include institutions such as the microloan fund of the city of Hamburg (Germany), Weetu (UK), IQ/Enterprise (Germany), Hordaland Network Credit (Norway). • Support programmes initiated in existing institutions and development banks: It refers to existing institutions and development banks that have integrated support programmes for micro and small enterprises in their regular portfolio. These organisations have established special microcredit windows. Examples are the micro and small enterprise programmes of Finnvera (Finland), KfW Bankengruppe (Germany), BDPMEOséo (France) and ICO (Spain).

Specialised units of banks:
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Here specialised units within banks disburse microloans directly or through partner organisations. The model is prevalent in Spain, where savings banks such as La Caixa, Caixa de Catalunya, BBK or Caja Grenada have played a leading role in developing the sector.

Multi Dimensional Analysis:  Identification of three typologies of MFI: Financial Institutions (FIs) Co-operative societies (COOP) NGOs, Associations, Foundations (NAF)

 Dimensions of analysis: - SUSTAINABILITY (proxies): interest rate, repayment rate, n° of clients handled by a staff member - OUTREACH (proxies): n° clients, n° products, longevity MF program; depth of outreach (av. loan size/average per-head GDP)  Cross-analysis with the two dimensions and the three types of MFIs
 Interpretation of the cross analysis findings through the introduction of some

complementary variables those are:
 There is a Focus on clients  There is an organized system of information collection on risky clients  There is a marketing strategy  There are types of collateral securities requested to collateralise the loans

granted

APPROCHES TO MICROFINANCE:
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AIM:
FINANCIAL SELF SUFFICIENCY

INSTITUTIONAL MINIMALIST APPROACH TYPE: BANK

AIM:
TO REACH A SPECIFIC TARGET OF CLIENTS (poverty alleviation paradigm)
Brief Summary:  56% of the MFIs offer financial services only  44% of the MFIs offer credit and non financial services

INSTITUTIONAL MAXIMALIST APPROACH TYPE: ASSOCIATIONS FOUNDATIONS AND NGO

 7% are Banks; 43% NGOs, Foundations and Associations; 50% Non-bank Financial institutions and co-operatives  Average loan amount is about 13.000 €
 53% of the loans are lower than 10.000 €

 Average interest rate: 5.5%  Average repayment rate: 89.7 %  Average longevity of programs: 95 months

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7.6 BANGLADESH:
INTRODUCTION: Mufiya Khatoon—a poor, illiterate young woman in rural Bangladesh—used to spend her days begging for a few ounces of rice to feed her children. She desperately wanted a livelihood, but lacked the funds to start a small business, and there was nowhere she could borrow on terms she could afford. That is, until she discovered Grameen Bank, one of the first microfinance institutions (MFIs), which set up shop in rural Bangladesh in the wake of the 1976 famine. In 1979, Grameen made Mufiya a one-year loan of 500 taka (about $22), enough to start a bamboo business. To qualify, she had to form a group with four others in similar circumstances. She paid an interest rate of 20 percent, with repayments of 2 percent of the loan each week. Stiff terms perhaps, but better than the 150 percent interest rate a local money lender would have demanded. Mufiya was able to start her bamboo products business and, one year later, she repaid her loan.

Microfinance gave Mufiya—as it did to millions of other poor people with no credit history, collateral, or steady income—access to basic financial services. Most mainstream banks have considered the poor high-risk and hard to serve because they often live scattered across remote areas and because the small loans they need are costly to make and maintain. But microfinance, which specializes in providing small loans and other financial, services even to the world’s most destitute, challenges those traditional assumptions. OBJECTIVE:
• •

Microfinance has mushroomed from Grameen's tiny non-profit experiment in Bangladesh to a global industry. They believe that microfinance is an important tool in the effort to end world poverty.

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CURRENT SCENARIO:

Today, microfinance players at Bangladesh include governments, philanthropists, social investors, and commercial banks, such as Citicorp and ING, that are attracted by the potential for profit and corporate social responsibility. Customers can still go to a Grameen-type bank, but they can also go to microfinance credit unions, public sector and commercial banks, and, relatively recently, Islamic banks (which apply Islamic financial principles, such as risk sharing). Besides tiny business loans, MFIs offer deposit, savings, pension, and insurance products. Micro insurance is growing because borrowers need to insure assets such as farming equipment that they purchase with microcredit. Microfinance customers live in both rural and urban areas—the rural poor borrow for cattle fattening, dairy farming, bamboo making, or weaving, whereas the urban poor borrow to become street vendors, rickshaw drivers, or seamstresses. The number of MFIs operating today is estimated to range anywhere from 300 to 25,000, depending on the definition. The Microfinance Information eXchange (MIX), known as the "Bloomberg" of microfinance, reports on nearly 1,000 microfinance institutions worldwide, nearly half of which are self-sustainable. The number of borrowers is hard to pin down, with estimates ranging from 30 to 500 million.

• •

METHODOLOGY:
 APPROACHES: They have adopted two basic approaches:

1. Group lending.

Grameen Bank is considered the pioneer of the group lending model, which has now been adopted in many countries. Individual borrowers are required to form a group and take responsibility for each other's loans. Grameen Bank depends primarily on peer pressure to guarantee repayment. Moreover, it limits risk by targeting female borrowers, who are considered more reliable because of family-based community ties. In early 2008, Grameen Bank reported almost 7 million borrowers—96 percent of them poor, illiterate women from remote villages. And since 1976, it says, $6 billion has been lent, with a repayment rate of 98 percent.

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2. Individual lending:

Typical borrowers are not the very poor seeking to start businesses, but the self-employed poor who are skilled business people. In some cases, the borrower has a small amount of collateral. Incentives such as the possibility of borrowing progressively larger amounts and the opportunity to get business and vocational training encourage repayment.

 SCALE AND FINANICAL INSTRUMENTS:
• Commercial players are using point-of-sale devices and mobile phones to

connect with the rural poor, licensing local merchants and shop owners to make cash transactions on their behalf.
• Technology will likely reduce transaction costs, allowing MFIs to grow and

reach more customers.
• The interest rates on microloans range from 20 percent to 35 percent (even

after adjusting for inflation). MFIs are subject to significantly higher costs than commercial banks, because of lending and administrative costs (for example, identifying and screening clients).

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CHAPTER 8
Role, Functions and Working Mechanism of Financial Institutions:
8.1 ICICI Bank:
“ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity” - Haruhiko Kuroda, President, Asian Development Bank. ICICI’s microfinance portfolio has been increasing at an impressive speed. From 10,000 microfinance clients in 2001, ICICI Bank is now (2007-08) lending to 1.8 million clients through its partner microfinance institutions, and its outstanding portfolio has increased from Rs. 0.20 billion (US$4.5 million) to Rs. 9.98 billion (US$227 million). A few years ago, these clients had never been served by a formal lending institution. There is an increasing shift in the microfinance sector from grant-giving to investment in the form of debt or equity, and ICICI believes grant money should be limited to the creation of facilitative infrastructure. “We need to stop sending government and funding agencies the signal that microfinance is not a commercially viable system”, says Nachiket Mor, Executive Director of ICICI Bank. As a result of banks entering the game, the sector has changed rapidly. “There is no dearth of funds today, as banks are looking into MFIs favourably, unlike a few years ago”, says Padmaja Reddy, the CEO of one of ICICI Bank’s major MFI partners, Spandana. The Future:

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These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low cost. Taking the FSC(Farmer Service Centers) initiative further, ICICI Bank plans to provide farmers credit from sugar companies, seed companies, dairy companies, NGOs, micro-credit institutions and food processing industries. SIG has been involved in a project in the southern state of Tamil Nadu to find out how wireless technology can be applied in the development of low cost models of banking. Another plan to increase the reach in rural areas is to launch mobile ATM services. ICICI Bank branded trucks have started carrying ATMs through a number of villages

MODELS USED BY ICICI BANK: • Bank Led Model: The bank led model was derived from the SHG-Bank linkage program of NABARD. Through this program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies. ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. However, rather than spending time in developing rural infrastructure of its own, in 2000, ICICI Bank announced merger of Bank of Madura (BOM), which had significant presence in the rural areas of South India, especially Tamil Nadu, with a customer base of 1.9 million and 87 branches. Bank of Madura's SHG development program was initiated in 1995. Through this program, it had formed, trained and initiated small groups of women to undertake financial activities like banking, saving and lending. By 2000, it had created around 1200 SHGs across Tamil Nadu and provided credit to them.

Partnership Models: A model of microfinance has emerged in recent years in which a microfinance institution (MFI) borrows from banks and on-lends to clients; few MFIs have been able to grow beyond a certain point. Under this model, MFIs are unable to provide risk capital in large quantities, which limits the advances from banks. In addition, the risk is being entirely borne by the MFI, which limits its risk-taking.

This model aimed at synergizing the comparative advantages and financial strength of the bank with social intermediation, mobilization power and infrastructure of MFIs and NGOs. Through this model, ICICI Bank could save on the initial costs of
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developing rural infrastructure and micro credit distribution channels and could take advantage of the expertise of these institutions in rural areas. Initially, ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary financial support to their activities. Later, ICICI Bank came up with a plan where the NGO/MFI continued to promote their microfinance schemes, while the bank met the financial requirements of the borrowers.

Other Microfinance Initiatives As a part of microfinance initiatives in the agriculture sector, ICICI Bank developed Farmer Service Centres (FSC). An FSC was managed by an agricultural input supply company which supplied inputs like seeds and technical knowhow to the farmers. FSCs were also managed by an extension service organization which provided inputs, credit and technology or by an NGO that provided all the services that farmers needed for their agricultural needs. Working in close association with farmers, FSCs provided them with services like advice on seeds, sowing techniques, pest control, weed control, usage and dosage of herbicides, pesticides and fertilizers and other services associated with agriculture.

The FSCs also provided crop-related information and services to farmers, apart from facilitating the sale of agricultural produce. The FSCs arranged to procure the produce through agents and sold it in organized agricultural markets thus getting better realization. INNOVATIONS: 1. ICICI Bank to offer micro-finance to sex-workers: • In a novel way to help sex-workers to live more meaningfully, country's largest private sector bank, ICICI Bank is planning to offer financial assistance to them though the micro-finance route. For starters, the bank plans to launch the programme in Kolkata by entering into a tieup with Durbar Mahila Samwanaya Samitee, an NGO working for the welfare of around 65,000 sex-workers in and around the city.

2. ICICI Bank launches new initiative in micro-finance: • ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and Operations Private Ltd (FINO)

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• •

FINO would provide technological solutions as well as services to finance providers to reach the underserved in the country. ICICI Bank is the lead facilitator. ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2007. At present, the bank has tie-ups with more than 100 MFIs. FINO is an initiative in the micro-finance sector. It would target 300-400 million people who do not have access to basic financial services. The company has an authorised capital of Rs 50 crore. MFIs, NBFCs, RRBs, co-operative banks, etc would directly or indirectly tie up with FINO to use its services. FINO would charge Rs 25-30 per account every year. Core banking products: FINO has partnered with IBM and i-flex to offer core banking products. It would also provide credit bureau services, which includes individual customer credit rating and analytics based on transaction history. It also launched biometric cards for customers, which would be a proof of identity and give collateral to them. The card would also offer multiple products including savings, loans, insurance, recurring deposits, fixed deposits and remittances. The company would also build-up customer database, thus bringing them into mainstream banking. The company expects to reach 25 million customers in five years and two million customers by the end of 2007.

3. ICICI Bank's thrust on micro-finance: • ICICI Bank has entered into partnerships with various microfinance institutions (MFI) and non-Government organisations (NGOs) to scale up its micro lending business. The partnership model would provide assured source of funding to NGOs and MFIs. The bank had extended advances to the tune of Rs. 150 crores. The bank had acquired a network of self-help groups (SHGs) developed by the erstwhile Bank of Madura after its merger with ICICI Bank. Since then the SHG programme had grown substantially and 10,175 groups had been promoted reaching out to 2.03 lakhs women spread across 2,398 villages. ICICI Bank has entered into a memorandum of understanding with Microcredit Foundation to outsource SHG development, maintenance of groups, credit linkage and recovery of loans.

CHARACTERISTICS: • The MFI as Collection Agent:
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ICICI Bank initiated a partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary. This model is unique in that it combines debt as mezzanine finance to the MFI (Mezzanine finance combines debt and equity financing: it is debt that can be converted by the lender into equity in the event of a default. This source of financing is advantageous for MFIs because it is treated like equity in the balance-sheet and enables it to raise money without additional equity, which is an expensive financing source.) The loans are contracted directly between the bank and the borrower, so that the risk for the MFI is separated from the risk inherent in the portfolio. This model is therefore likely to have very high leveraging capacity, as the MFI has an assured source of funds for expanding and deepening credit. ICICI chose this model because it expands the retail operations of the bank by leveraging comparative advantages of MFIs, while avoiding costs associated with entering the market directly. • Securitization: Another way to enter into partnership with MFIs is to securitize microfinance portfolios. In 2004, the largest ever securitization deal in microfinance was signed between ICICI Bank and SHARE Microfinance Ltd, a large MFI operating in rural areas of the state of Andra Pradesh. Technical assistance and the collateral deposit of US$325,000 (93% of the guarantee required by ICICI) were supplied by Grameen Foundation USA. Under this agreement, ICICI purchased a part of SHARE’s microfinance portfolio against a consideration calculated by computing the Net Present Value of receivables amounting to Rs. 215 million (US$4.9 million) at an agreed discount rate. The interest paid by SHARE is almost 4% less than the rate paid in commercial loans. Partial credit provision was provided by SHARE in the form of a guarantee amounting to 8% of the receivables under the portfolio, by way of a lien on fixed deposit. This deal frees up equity capital, allowing SHARE to scale up its lending. On the other hand, it allows ICICI Bank to reach new markets. And by trading this high quality asset in capital markets, the bank can hedge its own risks. • Beyond Microcredit: Microfinance does not only mean microcredit, and ICICI does not limit itself to lending. ICICI’s Social Initiative Group, along with the World Bank and ICICI Lombard, the insurance company set up by ICICI and Canada Lombard, have developed India’s first index-based insurance product. This insurance policy compensates the insured against the likelihood of diminished agricultural output/yield resulting from a shortfall in the anticipated normal rainfall within the district, subject to a maximum of the sum insured. The insurance policy is linked to a rainfall index. • Technology:
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One of the main challenges to the growth of the microfinance sector is accessibility. The Indian context, in which 70% of the population lives in rural areas, requires new, inventive channels of delivery. The use of technologies such as kiosks and smart cards will considerably reduce transaction costs while improving access. The ICICI Bank technology team is developing a series of innovative products that can help reduce transaction costs considerably. For example, it is piloting the usage of smart cards with SEWA Bank in Ahmedabad. To maximize the benefits of these innovations, the development of a high quality shared banking technology platform which can be used by MFIs as well as by cooperatives banks and regional rural banks is needed. ICICI is strongly encouraging such an effort to take place. Wipro and Infosys, I-Flex, 3iInfotech, some of the best Indian information technology companies specialized in financial services, and others, are in the process of developing exactly such a platform. At a recent technology workshop at the Institute for Financial Management Research in Chennai, the ICICI Bank Alternate Channels Team presented the benefits of investing in a common technology platform similar to those used in mainstream banking to some of the most promising MFIs.

The Centre for Microfinance Research: ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute for Financial Management Research (IFMR) in Chennai. Through research, researchbased advocacy, high level training and strategy building, it aims to systematically establish the links between increased access to financial services and the participation of poor people in the larger economy. The CMFR Research Unit supports initiatives aimed at understanding and analyzing the following issues: impact of access to financial services; contract and product designs; constraints to household productivity; combination of microfinance and other development interventions; evidence of credit constraints; costs and profitability of microfinance organizations; impact of MFI policies and strategies; people’s behaviour and psychology with respect to financial services; economics of micro-enterprises; and the effect of regulations. Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of poor households, there are other missing markets and constraints facing households, such as healthcare, infrastructure, and gaps in knowledge. These have implications in terms of the scale and profitability of client enterprises and efficiency of household budget allocation, which in turn impacts household well-being. The CMFR Microfinance Strategy Unit will address these issues through a series of workshops which will bring together MFI practitioners and sectoral experts (in energy, water, roads, health, etc). The latter will bring to the table knowledge of best practices in their specific areas, and each consultation workshop will result in long-term collaboration between with MFIs for implementing specific pilots.
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8.2 YES Bank
Innovative Partnership Models to Access Rural Markets:  Enabling Financial Inclusion: An Inclusive Financial sector is one that helps people help themselves to increase incomes, acquire capital, manage risk and work their way out of poverty through: o Safe savings o Appropriately designed loans for poor and low-income households and micro, small and medium enterprises o Appropriate insurance and payment services

 Tools for Inclusion – Microfinance

Globally, many traditional commercial banks have restructured policy and practice to serve the Bottom of Pyramid (BOP) market through Microfinance Banks have successfully used direct intervention in ‘downscaling’ to reach lowincome populations by restructuring organizational frameworks to leverage existing infrastructure, human resources and relationships

 Tools for Inclusion – Contract Farming: 74

Typical Contract Farming - Risks/Short Comings  Crop Failure/Crop damage  Complex Insurance schemes  Crop Diversion  Market price more than contracted price  Willful  Problems with/without the input supplier  Push sales at the expense of the farmers  Loans may not be used for agri purposes Solution as per YES BANK’s Model for Contract Farming:  Risk sharing by the output buyer  Output buyer to supply the inputs as well  Price offered to be contracted price or the market price whichever is higher  Stringent law enforcement for willful defaults  Output buyer should look at contract farming as a source of good quality raw material not as source of cheap raw material.
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1. Financial inclusion:- Challenges Challenges of Delivery:  Under utilization of Physical & Banking Infrastructure:  High delivery costs, legacy systems, inflexible procedures  Information Asymmetry:  No credit history, willful defaulting, unclear Government policies

Challenges of Product Design:  Lack of Collateralizable Assets:  No ownership documents, illiquid assets, inaccurate valuation 2. Financial inclusion:- Solution  Leverage Existing Banking Infrastructure  Mindless investment in branch network without optimal utilization will not help solve the problem of financial exclusion  There is a need to:  ‘Sweat’ existing branch infrastructure  Extend outreach  Evolve customized products tailored to meet the requirements of low-income clients  Microfinance is an efficient tool Inclusive Growth  Leverage Partnerships
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 Leverage Technology

YES MICROFINANCE INDIA

Innovative Solutions: For extending Deposit Products •        Challenges: Dispersed client based with poor access Limited electricity supply and access Limited telecom/broadband connectivity ATMs may not be viable and maintainable in erratic power situations Cash collection points – customers like to deposit at a fixed location Banking service – delivery of information , statements, etc Access to account in nearby cities, towns villages

• Mitigation:  Mobile Branches covering select geographies
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 Self generated - Diesel , Solar, Battery  Online/Offline and Pseudo online data capture and updating systems. Leverage Mobile networks  Cash dispensing partners e.g. Post offices who can deliver cash like money orders  Cash can be deposited at partners like Post offices/Mobile Branches  Information dissemination through partners, Internet kiosk enabled, Toll Free Call centre in local language  ATM cards for such customers Innovative Solutions: for extending Loan Products • Challenges:  Loan delivery - Cash is preferred form at Village Level  Loan servicing- Payments collection to suit every form of repayment from daily, to weekly to seasonal  Loan Management and updation of information of payments and collections and sharing update with every borrower at village level • Mitigation:  Loan can be delivered on Card; customer can avail cash from nearest partner - Post office/ATM/ Cash advance terminal like POS  Enlisting partners like Post offices and Roaming agents who can use offline/ online handheld devices to update loan repayments on the field  Deliver the loan history on a smart chip card. Information on the same can be read off and printed off handheld readers

8.3 GRAMEEN BANK:
The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen Bank is perhaps the most well known, admired and practised model in the world. The model involves the following elements. • Homogeneous affinity group of five • Eight groups form a Centre • Centre meets every week • Regular savings by all members • Loan proposals approved at Centre meeting • Loan disbursed directly to individuals
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• All loans repaid in 50 instalments The Grameen model follows a fairly regimented routine. It is very cost intensive as it involves building capacity of the groups and the customers passing a test before the lending could start. The group members tend to be selected or at least strongly vetted by the bank. One of the reasons for the high cost is that staff members can conduct only two meetings a day and thus are occupied for only a few hours, usually early morning or late in the evening. They were used additionally for accounting work, but that can now be done more cost effectively using computers. The model is also rather meeting intensive which is fine as long as the members have no alternative use for their time but can be a problem as members go up the income ladder. The greatness of the Grameen model is in the simplicity of design of products and delivery. The process of delivery is scalable and the model could be replicated widely. The focus on the poorest, which is a value attribute of Grameen, has also made the model a favourite among the donor community. However, the Grameen model works only under certain assumptions. As all the loans are only for enterprise promotion, it assumes that all the poor want to be self-employed. The repayment of loans starts the week after the loan is disbursed – the inherent assumption being that the borrowers can service their loan from the ex-ante income.

8.4 OBC (ORIENTAL BANK OF COMMERCE):
OBC has disbursed about 6930.05 crores for agricultural lending by March 2008. In the year 2007-2008, it had provided agricultural credit of 1794.94 crores by adding 66,255 new loans through 316 semi-urban and 273 rural branches. OBC had started various schemes for agricultural and rural sector lending. The important schemes are: • Oriental Green Card (OGC) under KCC: This scheme is launched to benefit farmer by the provision of loans for crop production, working capital requirement for allied activity and consumption purposes. In 2007-2008, OBC had issued 54,634 OGCs. The total credit disbursed in this scheme in 2007-2008 is Rs. 662.99 crores. By March, it had disbursed a total of 4, 95,275 OGCs. • Oriental Kishan Gold Cards (OKGCs)

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This scheme is launched to meet the credit need of farmers for working capital and investments. By March 2008, OBC had disbursed 4771 OKGCs. The credit disbursement through OKGCs in 2007-2008 was Rs. 28.20 crores. • Agriclinic and Agribusiness Centres: OBC had provided credits to agriculture students for setting of Agriclinic and Agribusiness Centres. By March 2008, 54 Agriclinic and Agribusiness were established under the finance of OBC which was Rs. 673.14 lakh. • Hi-Tech Dairy: For increasing the self-employment of the rural youth, OBC had started this scheme in the state of Punjab as a pilot project in collorabation with Punjab State Dairy Development Board. By March 2008, OBC had disbursed Rs. 37.56 crores to 349 dairy units. • Oriental Saur Urja Dohan Scheme: OBC in collorabation with an NGO, Bhartiya Vikas Trust, started financing the implementation of solar water heating and lighting system; and disbursed Rs. 16.15 lakh to benefit 153 units. • Oriental Bank Grameen Project OBC had formed 3864 SHGs in 356 villages, and advanced Rs. 26.67 crores to these groups by March 2008. Also, it mobilized savings from these groups to the tune of Rs. 6.00 crores by the same period. • Advances to weaker sections: In 2007-2008. OBC had advanced Rs. 2337 crores to the poor and marginalized consisting of SCs, STs, Landless labourers, small and marginal farmers, rural artisans under government- sponsored PMRY scheme. Under the same scheme, it had disbursed Rs. 1695 crores in 2006-2007. • Differential Rate of Interest schemes: OBC had provided credit to poor families (having annual income of Rs 6500) at the rate of interest of 4% per annum. At the end of March 2008, it had disbursed Rs. 123.24 crores under this scheme. • Loan to SCs and STs: OBC had sanctioned Rs.452.40 crores in 2007-2008 and Rs. 437.62 crores in 20062007 to SCs and STs. • Prime Minister Rozgar Yojana (PMRY):
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To enchance self-employment opportunities for urban poor, OBC had channelized Rs. 7.60 crores in 2007-2008 benefiting 2192 persons. • Swarna Jyanti Gram Swrojgar Yojana: Under this government scheme, OBC had provided financial assistance to 1511 individuals and 351 SHGs by financing Rs. 5.55 crores and Rs. 5.84 crores respectively.

8.5 ANDHRA BANK IN MICROFINANCE:
Andhra Bank has number of schemes under the microfinance and agriculture lending. The schemes are: 1. AB Mahila Soubhagya: Under this scheme, the bank finance Women SHGs with 10% interest per annum without any collateral and margin (for Rs. 5 lakhs per SHG). The repayment period is years in monthly installments. 2. AB Kisan Rakshak: The objective of this scheme is to finance farmers to repay the loan which they have taken from non-institutional financial sources like money lenders. 3. AB Kishan Vikas Card: This scheme is launched to provide short term crop production credits to farmers. 4. AB Pattabhi Agricard:
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Under this scheme, the card holder can draw cash for purchasing of agricultural inputs against the card.Also the card holder is covered with “Accident Insurance Benefit” of Rs. 1, 00,000 which is governed by Andhra Bank’s insured Current Product Scheme. However, this insurance is optional to the borrowers. Again, all the farmer borrowers are covered under Personal Accident Insurance Scheme (PAIS) 5. AB Kishan Chakra: This scheme finance farmer for purchase of two-wheeler motor bikes or four wheeler motor cars. 6. AB Rural Go downs: Under this scheme, farmers and individuals are financed to construct go downs for storing and marketing of agricultural commodities. 7. AB Kishan Sampathi: This scheme provides credit to farmers against distress sale of crops (paddy, groundnut, rape seed, mustard Bengal gram, arhar, turmeric, dry chilies, maize, black gram and jaggery). 8. AB Kishan Bandhu: Andhra bank finances farmers for the purchase of tractors.

9. AB SHG-Bank Linkage Programme:

Under this scheme, Andhra Bank provides credit to SHGs and allows them to open their saving account in the bank. Apart from these schemes, Andhra Bank also has many other schemes (AB Bank Kisan green card, AB surya Sakthi, AB solar cookers, AB finance purchase of land for Agri purpose, AB for financing dairy Agents etc) for women and marginalized.

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8.6 FRIENDS OF WOMEN’s WORLD BANKING (FWWB) (MFIs):
Introduction: The 1975 International Women’s Conference in Mexico City which brought together likeminded women leaders from across the world culminated into formation of Women’s World Banking (WWB) in 1980. The FWWB was created to address the hitherto unmet needs of economically active but poor women’s access to financial services thereby enabling them to engage in productive economic activities. In 1982 Friends of Women’s World Banking, India (FWWB-I) was created as one of the first few affiliates of Women’s World Banking. For the first seven years of its operations from 1982 to 1989 FWWB’s activities were limited to providing loan guarantees for poor women in the state of Gujarat. Around this time, the initial efforts started off in 1970s to provide financial access to poor women especially those in
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unorganized sector were transformed into the women focused and savings-led Micro Finance Movement.

During this decade different delivery models of financial services-Self Help Groups, Cooperatives (including Banks) were established and they clearly showed that poor women were bankable. Therefore in 1989, FWWB India’s bye-laws were modified to enable it to become a National private apex institution to extend and expand informal credit supports and networks within India to link them to a global movement. Vision A society based on equity and social justice where women are active partners in holistic development. Mission Providing financial and capacity building services to organizations promoting livelihoods and self-reliance of poor women. Working of FWWB • Wholesale MF Lending – Through revolving loan fund (RLF), FWWB provides bulk loans to partner NGO/MFIs to reach out to their women members for their sustainable income generation activities. • Capacity Building – Institutional development of partner NGO/MFIs is taken care through whole gamut of Capacity Building inputs such as formal technical trainings on topics related to managing micro-finance program, exposure visits to bestpractice organizations, Technical Assistance provided by the team. • Institutional Support – FWWB’s comparative niche lies in identifying and nurturing nascent organizations by providing them loan and grant funds and at the same time building the capacities to become financially sustainable organizations. Towards this end FWWB supports operational deficit , infrastructure support and establishment of system • Research & Documentation – Impact/Assessment studies, research on sectoral issues are regularly undertaken by FWWB. Documentation of these research paper/studies is done with a view of disseminating the final outcome to the community at large. • Livelihood & Enterprise Development (LEAD)- In its continuous endeavor to provide quality financial services to the poor women clients throughout the country, FWWB has launched LEAD (Livelihood & Enterprise Development) program. Under this program we support organizations working in micro-enterprise activities with the economically disadvantaged women entrepreneurs.
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• Networking and Referral Services – FWWB periodically organizes consultations, workshops & seminars which provides enabling environment for partners to interact and exchange views with various stakeholders of microfinance sector and also with government bodies & funding agencies. Being FWWB’s partner provides credibility and enables partners to access funds from other sources. • Social Security Initiatives - Over the year’s MF has been able to provide financial service such as credit & savings to women of low income households but it is yet to provide the safety net to these women and their families who are otherwise vulnerable to various risk factors. FWWB firmly believes that this safety net can be spread through various micro-insurance schemes and pension plans for which it encourages and facilitates linkages of insurance providers with its partner organizations.

Training and Workshops FWWB’s Capacity building focuses on two major areas,

Trainings conducted by FWWB (SHG Training): To strengthen self-governance of poor women and to enhance the capacity of the SHG’s to help them function effectively.

Training for FWWB’s Partner Micro Finance Institutions (MFIs) by FWWB (Credit Management Training): To build the capacity of MFI’s to reach selfsustainable level which can help them in managing their micro finance activities in an effective way and reach to a larger number of poor women more effectively. Here the MFIs who are intermediaries are trained in efficient management of financial services to the poor.

Workshops: Workshops also form an important part of the capacity building programme where not only the partner organisations but also sometimes the women at the grass root level get a much wider platform to understand and interact and share their experiences and learn from each other. They can discuss and debate on issues related to the sector and this also helps in exploring the potential in the sector.

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NEW INITIATIVE: WEATHER INSURANCE: FWWB has extended agriculture loans to Maharashtra Partner Organisations since last two years. The 3 main POs i.e. Asmita Institute of Development, Priyadarshini Mahila Mandal and Navchetana are operating in Yavatmal District i.e. Vidarbha region which is a drought prone area. In total all three organisations have a membership base of 9000 women. Looking to the nature of the loans FWWB initiated the talks for Weather Insurance Product cover to these MFIs. Accordingly, details were called for from the POs regarding the types of crops harvested by their members, average land holding and their feedback on what parameters to be covered under the Weather Insurance Product. An orientation workshop was organized wherein Cardinal Edge, a private company having experience in designing and implementing Weather Insurance products was specially called as a resource person. Subsequently, FWWB started the talks with Cardinal Edge Services to develop such a product for the above mentioned 3 POs. At present, Cardinal Edge has initiated talks with AIC to provide Insurance cover. However, the market survey. Market sizing and clients feedback needs to be carried out in order to underwrite the Weather Insurance Product. The talks are on verge of finalization. As scheduled, the field survey and clients feedback data has been collected and analyzed. The product is on verge of completion and the test check of the product shall be carried out in the next agriculture season.

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8.7 VARDAN TRUST:

The Company: VARDAN is a 'fast-track' Grameen Banktype micro finance institution exclusively for lower income households, designed to breakeven financially within 2 years by providing at least 1,00,000 poor, urban & rural community with efficient financial services, while at the same time creating a professionally managed, sustainable microfinance institution.

VARDAN is structured as a Trust on February 23rd, 1998 under Mumbai Public Trust Act, 1950 and initially focused on women’s empowerment, child development and natural resource management in the state of Gujarat in India. Recognizing that 62 percent of Gujarat’s population does not have access to financial services, Vardan Trust began offering microfinance in 2003, and today the institution is focused entirely on microfinance. Vardan Trust offers basic income-generating loans to more than 10,000 customers, including farmers, small shop owners, artisans, vegetable vendors, and those engaged in animal husbandry. Currently operating in northeast Gujarat, Vardan Trust has plans to expand throughout Gujarat and to other states in India in the future. Presently, VARDAN is working in Dahod and Panchmahal District of Gujarat state of India. Vardan have 11 branches.
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Vision: To provide financial services to lower income households in a sustainable manner. Mission by 2006-10: • To provide financial services to 2,20,000 lower income households • To work as a gender and caste neutral organization in urban and rural areas.

Core Values: •• • Transparency in operation •• •• • • Participation of community Commitment for social welfare

PRODUCTS & SERVICES: • Agriculture Loan : Agriculture plays significant role in rural livelihood. Vardan Micro Finance has developed agriculture loans, agriculture support loan and agriculture improvement loan. • • Seasonal loan : Rural livelihood is get affected by season variations. To support their livelihood and economic status Vardan Micro finance has seasonal loan for its clients. • Subsistence loan : Lower income household's economy is cyclic. To provide assistance to support their economic status Vardan is providing subsistence loan to them. This loan helps them to reduce migration and assets creation. • Animal Purchase Loan : Animal supports the economic and social status of lower income household. Vardan is providing loan to its clients for animal purchase and fodder supports etc. • Migration support loan :
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Vardan is working in tribal dominated backward area. Tribal population migrated to different areas in search of livelihood. This migration affects their livelihood and culture. Vardan Micro Finance is providing migration support loan to the emigrant families to stabilize their household income and choose the suitable profession. • Equipment purchase loan : Traditional skills labours face problem of credit to purchase equipments to increase income. Sometimes to purchase equipments put them in debt trap. Vadan Micro Finance provides credit support to purchase equipments or to repay their debt. Debt repayment Loan : Rural lower income household sometimes comes under debt trap Due to non access to formal credit system needy people take loans from money lenders. Vardan Micro Finance provide loan to repay those debts and come under the micro finance programme. • Working capital loan : Small entrepreneurs require working capital to increase their income and business activity. Vardan Micro Finance provide working capital loan to needy entrepreneurs who do not have access to formal credit system

General Loan : Some time lower income households require credit to fulfill their general demands. This will directly and indirectly affects their social and economic status. Vardan Micro Finance provide general loan to lower income households.

OUT RECAH & NETWORK: Vardan trust is working in TWO districts with 11 branches and one head office:

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Sr. Particular General 1 2 3 4 5 6 7 8 9 Name of chief functionary Legal Status & Year of establishment Regd. No. /FCRA No. /PAN No. Year of commencement of mf program Year of association with FWWB Methodology (SHG/Grameen/MACS) Other product/services Other focus areas, if any Major funding agencies

Figures / Information Mahesh Vara Trust Reg No. 1197PAN No. AAATV94E 2003 2003 Grameen/JLG/SHG No No FWWB, ICICI, HDFC, HSBC 5 Outreach 11 branches, 2 districts, 1 state 1,535 9,574 8,285 94 75,030,246 34,781,592 12520842/= 34781592/= 5,912,871 18% F.R. 4,198 Financial Performance

10 Board membership & composition

1 2 3 4 5 6 7 8 9

No. of branches/ districts/ & state Total SHGs/JLGs/MACs Total membership Total no. Borrowers Total staff in MF programme Cumulative disbursals Portfolio outstanding FWWB outstanding Outstanding borrowings

10 Outstanding savings 11 Interest charged to borrowers 12 Avg. loan size

1 2 3 4 5 6

Net Worth Repayment Rate Portfolio at Risk (> 30 days; > 60 days) Yield (Income from operations/Avg. Portfolio Outstanding Operating Cost Ratio Operational Self Sufficiency

1,136,192/= 98.71 0.01 28.50 5.6 48.47
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8.8 VIKAS DEVELOPMENT CENTER (NGOs):
Introduction: VIKAS established in the year 1978 to address the issues of poverty through education and economic development. In order to translate the vision VIKAS has setup Saline area Vitalization Enterprise Ltd. (SAVE) a techno – marketing support organisation and programme on micro credit within VIKAS called Lok Vikas Nidhi (LVN).N). They are presently forming in the Urban Areas – Ahmedabad, Surat Baroda, Kheda, Anand , Mehsana and Gandhinagar. Gujarat is one of the highest urban states of India (38% urban). It attracts people from rural areas who come in search of employment. These migrants unable to find suitable place to live in the city centre have to make do in hutments, shanties
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or even pavements. With recent efforts to strengthen urban infrastructure and re-organise urban development slum dwellers are being shifted to locations far away from their work places. Visioning the future for Vikas Development Centre ⇒ ⇒ ⇒ ⇒ ⇒ Internal organization. Resource constraints Partnership formation Protection of trade and occupation Introduction of income generating activities.

MICRO-CREDIT MODEL They follow a self help group model which operates through decentralized organisation structure. The central team of two persons, supported by an accountant is located at Head office of VIKAS at Ahmedabad. Each city has a team of one or two persons, depending on the scale of operations. LVN works with about 8,000 members (all women) through 517 SHGs covering seven cities located along the so-called Golden corridor of Gujarat. Name of city Ahmedabad Vadodara Surat Anand Kheda Mehsana Gandhinagar Total No. of group 136 139 152 15 9 11 7 469 No. of members 2284 2052 3247 173 135 270 140 8307 Loan outstanding (Rs.) 59,65,551 49,14,533 62,98,138 2,04,830 55,822 1,10,983 18,275 1,75,68,182

Recently they have shifted to JLG model because they faced some problems in SHG model like:

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1. Training problems 2. No one was ready to become a leader 3. No actual circulation of transactions 4. Lack of attendance during the meetings 5. Difficulty in book- keeping

In JLG model of Vikas Development Center they form a group of 5 members, No Leader and No Book-keeping. The members are given 5 days training before given them a membership. This training consists: 1. About the Trust 2. About the Loan 3. House verification 4. Checking the reliability of the person 5. How money can be used effectively and other formalities of the loan. Functions of Vikas Development Center: The central team: • plans & monitor the operations, • mobilizes resource, • scrutinize and approves loan applications, • disburses loan and; • Maintain accounts of each SHGs as well as the programme as a whole. The city based team: • Formation of SHGs, • Establishing linkages with nationalized banks, • Training and capacity building of groups and office bearers
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• Support in writing of accounts • Attend meetings of SHGs as per the requirements. SHGs: • Savings rotation within group • Approach LVN for loan • Collect the approved loan amount from LVN city office • Disburse loan to members • Collect installments and interest from the members and deposit the same with LVN • Reconciliation of books of accounts of the SHGs. Socio economic characteristics: All their members are women. They come from various communities 30% are engaged as home based workers and the rest who work are employed in factories, in hospitals, or as vendors. They live in one room houses or slum quarters.

Challenges faced: Competition- The main challenge faced by Vikas development centre ids competition of Nationalized Banks, Other NGO’s and Private players As such Vikas development centre is a small NGO and can’t reach most client which banks can do.

Emerging issues for the development of microfinance: 1. Housing amenities 2. Education of children 3. Transportation 4. Healthcare facilities 5. Limited no of jobs.
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CHAPTER 9
Marketing of Microfinance Products:
1. Contract Farming and Credit Bundling: Banks and financial institutions have been partners in contract farming schemes, set up to enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided – and only, provided – the price setting mechanism for the farmer is appropriate and fair. 2. Agri Service Centre – Rabo India: Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. The services provided are similar to those in contract farming, but with additional flexibility and a wider range of products including inventory finance. Besides providing storage facilities, each centre rents out farm machinery, provides agricultural inputs and information to farmers, arranges credit, sells other services and provides a forum for farmers to market their products.
3. Non Traditional Markets:

Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in Bangalore. The operations and maintenance of the market is done by NDDB. The project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with 50,000 grower members for wholesale marketing. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates.
4. Apni Mandi:

Another innovation is that of The Punjab Mandi Board, which has experimented with a ‘farmers’ market’ to provide small farmers located in proximity to urban areas, direct access to consumers by elimination of middlemen. This experiment known as "Apni Mandi" belongs to both farmers and consumers, who mutually help each other. Under this
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arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm level, extension services of different agencies are pooled in. These include inputs subsidies, better quality seeds and loans from Banks. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce.

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CHAPTER 10
Success Factors of Micro-Finance in India:
Over the last ten years, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies. A. For NGOs: 1. The field of development itself expands and shifts emphasis with the pull of ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are (perceived to be) simple and people’s acceptance is high – all characteristics (real or presumed) of microfinance. 2. Canvassing by various actors, including the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of Women’s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of People’s Action and Rural Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP), World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been funding microfinance projects. One might call it the supply push. 3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women, for whom access to small loans to meet dire emergencies is a valued outcome. Thus, quick and high ‘customer satisfaction’ is the USP that has attracted NGOs to this trade. 4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It is implicitly assumed that no ‘technical skill’ is involved. Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy.

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5. For many NGOs the idea of ‘organising’ – forming a samuha – has inherent appeal. Groups connote empowerment and organising women is a double bonus. 6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding.

B. For Financial Institutions and banks: Microfinance has been attractive to the lending agencies because of demonstrated sustainability and of low costs of operation. Institutions like SIDBI and NABARD are hard nosed bankers and would not work with the idea if they did not see a long term engagement – which only comes out of sustainability (that is economic attractiveness). On the supply side, it is also true that it has all the trappings of a business enterprise, its output is tangible and it is easily understood by the mainstream. This also seems to sound nice to the government, which in the post liberalisation era is trying to explain the logic of every rupee spent. That is the reason why microfinance has attracted mainstream institutions like no other developmental project. Perhaps the most important factor that got banks involved is what one might call the policy push. Given that most of our banks are in the public sector, public policy does have some influence on what they will or will not do. In this case, policy was followed by diligent, if meandering, promotional work by NABARD. The policy change about a decade ago by RBI to allow banks to lend to SHGs was initially followed by a seven-page memo by NABARD to all bank chairmen, and later by sensitisation and training programmes for bank staff across the country. Several hundred such programmes were conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by NABARD. The policy push was sweetened by the NABARD refinance scheme that offers much more favourable terms (100% refinance, wider spread) than for other rural lending by banks. NABARD also did some system setting work and banks lately have been given targets. The canvassing, training, refinance and close follow up by NABARD has resulted in widespread bank involvement. Moreover, for banks the operating cost of microfinance is perhaps much less than for pure MFIs. The banks already have a vast network of branches. To the extent that an NGO has already promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the entire) portfolio, microfinance via SHGs in the worst case would represent marginal addition to cost and would often reduce marginal cost through better capacity utilisation. In the process the bank also earns brownie points with policy makers and meets its priority sector targets.

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It does not take much analysis to figure out that the market for financial services for the 50-60 million poor households of India, coupled with about the same number who are technically above the poverty line but are severely under-served by the financial sector, and is a very large one. Moreover, as in any emerging market, though the perceived risks are higher, the spreads are much greater. The traditional commercial markets of corporate, business, trade, and now even housing and consumer finance are being sought by all the banks, leading to price competition and wafer thin spreads. Further, bank-groups are motivated by a number of cross-selling opportunities in the market, for deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering all these services now through their group companies, it becomes imperative for them to expand their distribution channels as far and deep as possible, in the hope of capturing the entire financial services business of a household. Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer goods (FMCG) companies such as Hindustan Levers, and consumer durable companies such as Philips have realised the potential of this big market and are actively using SHGs as entry points. Some amount of free-riding is taking place here by companies, for they are using channels which were built at a significant cost to NGOs, funding agencies and/or the government. On the whole, the economic attractiveness of microfinance as a business is getting established and this is a sure step towards mainstreaming. We know that mainstreaming is a mixed blessing, and one tends to exchange scale at the cost of objectives. So it needs to be watched carefully.

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CHAPTER 11
Issues in Microfinance:
1. Sustainability:

The first challenge relates to sustainability. MFI model is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. It has also been commented that MFIs pass on the higher cost of credit to their clients who are ‘interest insensitive’ for small loans but may not be so as loan sizes increase. It is, therefore, necessary for MFIs to develop strategies for increasing the range and volume of their financial services.
2. Lack of Capital:

The second area of concern for MFIs, which are on the growth path, is that they face a paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism in the country for meeting the equity requirements of MFIs. The IPO issue by Mexico based ‘Comparators’ was not accepted by purists as they thought it defied the mission of an MFI. The IPO also brought forth the issue of valuation of an MFI. The book value multiple is currently the dominant valuation methodology in microfinance investments. In the case of start up MFIs, using a book value multiple does not do justice to the underlying value of the business. Typically, start ups are loss making and hence the book value continually reduces over time until they hit break even point. A book value multiplier to value start ups would decrease the value as the organization uses up capital to build its business, thus accentuating the negative rather than the positive.
3. Financial service delivery:

Another challenge faced by MFIs is the inability to access supply chain. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. The latter players who bring with them an understanding of similar client segments, ability to create microenterprise opportunities and willingness to nurture them, would be keen on directing microfinance to such opportunities. This enables MFIs to increase their client base at no additional costs.

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Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation. Such businesses may find complementarities between an MFI’s skills in management of credit processes and their own strengths in supply chain management. ITC Limited, with its strong supply chain logistics, rural presence and an innovative transaction platform, the e-choupal, has started exploring synergies with financial service providers including MFIs through pilots with vegetable vendors and farmers. Similarly, large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer. ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a microfinance organization in Hyderabad). Under this pilot, it works with twenty women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of Rs.10,000/- , capacity building and business development support to the women. ITC provides support through supply chain innovations by: 1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets). The women are able to replenish the stock from the stores as many times in the day as required. This has positive implications for quality of the produce sold to the end consumer. 2. Continuously experimenting to increase efficiency, augmenting incomes and reducing energy usage across the value chain. For instance, it has forged a partnership with National Institute of Design (NID), a pioneer in the field of design education and research, to design user-friendly pushcarts that can reduce the physical burden. 3. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. The model augments the incomes of the vendors from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental point of view, push carts are much more energy efficient as opposed to fixed format retail outlets
4. HR Issues:

Recruitment and retention is the major challenge faced by MFIs as they strive to reach more clients and expand their geographical scope. Attracting the right talent proves difficult because candidates must have, as a prerequisite, a mindset that fits with the organization’s mission. Many mainstream commercial banks are now entering microfinance, who are poaching staff from MFIs and MFIs are unable to retain them for other job opportunities. 85% of the poorest clients served by microfinance are women. However, women make up less than half of all microfinance staff members, and fill even fewer of the senior management roles. The challenge in most countries stems from cultural notions of women’s
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roles, for example, while women are single there might be a greater willingness on the part of women’s families to let them work as front line staff, but as soon as they marry and certainly once they start having children, it becomes unacceptable. Long distances and long hours away from the family are difficult for women to accommodate and for their families to understand.
5. Micro insurance:

First big issue in the micro insurance sector is developing products that really respond to the needs of clients and in a way that is commercially viable. Secondly, there is strong need to enhance delivery channels. These delivery channels have been relatively weak so far. Micro insurance companies offer minimal products and do not want to go forward and offer complex products that may respond better. Micro insurance needs a delivery channel that has easy access to the low-income market, and preferably one that has been engaged in financial transactions so that they have controls for managing cash and the ability to track different individuals. Thirdly, there is a need for market education. People either have no information about micro insurance or they have a negative attitude towards it. We have to counter that. We have to somehow get people - without having to sit down at a table - to understand what insurance is, and why it benefits them. That will help to demystify micro insurance so that when agents come, people are willing to engage with them.

6. Adverse selection and moral hazard:

The joint liability mechanism has been relied upon to overcome the twin issues of adverse selection and moral hazard. The group lending models are contingent on the availability of skilled resources for group promotion and entail a gestation period of six months to one year. However, there is not sufficient understanding of the drivers of default and credit risk at the level of the individual. This has constrained the development of individual models of micro finance. The group model was an innovation to overcome the specific issue of the quality of the portfolio, given the inability of the poor to offer collateral. However, from the perspective of scaling up micro financial services, it is important to proactively discover models that will enable direct finance to individuals.

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CHAPTER 12
RECOMMENDATION & CONCLUSION:
RECOMMENDATION:
As such if we look microfinance at corporation bank, it is just at the initial stage. They are providing loans to FWWB and Vardan trust. They have launched Kisan credit card so farmers so that they can easily access bank. And some other activities like Loans to dabawalas, hawkers etc… Following are the recommendations how they can expand their microfinance activities: 1. They should provide loans to the NGOs like Vikas Development centre. If they directly provide loan to small NGOs then rate of interest can be low for NGOs so it will be benefial for the NGOs as well as Bank 2. They can directly contact village people to open an a/c for free of charge and organized some kind of lottery system so that new customers can be attracted. 3. In order for easy access to the branch, they should launch satellite branches (banking in the van) in villages so that it can reduce the overall cost. 4. They can also go for SIM embedded with bank account toolkit for urban people. This will reduce the transaction cost for the bank. 5. some small innovative products that can be accepted in India are a. Insurance for prescribed medicine and laboratory tests. b. Funeral Insurance c. A loan to rehabilitate one’s credit record d. “Incentivized” savings e. Contractual savings for education. 6. It can also adopt Contract farming which is successfully done by yes bank and it’s a popular service among farmers.

7. Loan can be delivered on Card; customer can avail cash from nearest partner - Post office/ATM/ Cash advance terminal like POS 8. Enlisting partners like Post offices and Roaming agents who can use offline/ online handheld devices to update loan repayments on the field 9. Deliver the loan history on a smart chip card. Information on the same can be read off and printed off handheld readers

CONCLUSION
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Microcredit and microfinance have received extensive recognition as a strategy for poverty reduction and for economic empowerment. Microfinance is a way for fighting poverty, particularly in rural areas, where most of the world's poorest people live. Accessing small amounts of credit at reasonable interest rates give poor people an opportunity to set up their own small business. Many studies show that poor people are trustable, with higher repayment rates than conventional borrowers. When poor people have access to financial services, they can earn more, build their assets, and cushion themselves against external shocks. Poor households use microfinance to move from everyday survival to planning for the future: they invest in better nutrition, housing, health, and education. Most poor people cannot get good financial services that meet their needs because there are not enough strong institutions that provide such services. Strong institutions need to charge enough to cover their costs. Cost recovery is not an end in itself. Rather, it is the only way to reach scale and impact beyond the limited levels that donors can fund. A financially sustainable institution can continue and expand its services over the long term. Achieving sustainability means lowering transaction costs, offering services that are more useful to the clients, and finding new ways to provide banking services to the poor. At the end it should be mentioned that Poor people with no income or means of repayment need other kinds of support before they can make good use of loans. In many cases, other tools will alleviate poverty better—for instance, small grants, employment and training programs, or infrastructure improvements. Where possible, such services should be coupled with building savings.

CHAPTER 13
BIBLIOGRAPHY:
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1. A book of Understanding Microfinance by Debadutta kumar Panda

2. Website www.mixmarket.org www.nabard.com www.corpbank.org www.fwwbindia.net www.scribd.com www.hindibusinesstimes.com www.vardanmfi.com www.rbi.com 3. Annual report and other materials given by the corporation bank

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