Submitted in partial fulfillment of Post Graduate Diploma in Management program 09/11

Sherwood Business School

Submitted To : :

Submitted By






I Parmarth Varun, hereby declare that the Project entitled “Microfinance In India” submitted to the Sherwood Business School in partial fulfillment for the award of the Degree of POST GRADUATE DIPLOMA IN MANAGEMENT and that the Project has not previously formed the basis for the award of any other degree, Diploma, Associate ship, Fellowship or other title.

Place: Date: |Page Signature of the Candidates. 3

I am greatly indebted to their help. I would like to thank my family and friends for their constant support and encouragement throughout our project. whose constant guidance and encouragement crowned out effort with success. ---------|Page 4 . I take this opportunity to express our deep sense of gratitude and respect to Miss SANA MOID. SHERWOOD BUSINESS SCHOOL for providing us with essential facilities for completing and presenting this project. RAMAN KUMAR (Faculty Members of FINANCE) for the valuable guidance.ACKNOWLEDGEMENT The satisfaction and euphoria that accompanied the successful completion of any task would be incomplete without the mention of the people who made it possible. Mr. MANISH AWASTHI and Mr. which has been of immense value and has played a major role in bringing this to a successful completion.

6 7 9 13 14 16 17 20 22 29 37 46 49 52 54 63 64 67 70 71 75 76 77 78 |Page 5 . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Introduction The History Of Modern Microfinance Overview Government’s Role Supporting Microfinance Microfinance Social Aspects The Need In India Micro-financing Regulation In India Co-ordinating Microfinance Efforts In India Microfinance Management Critical Analysis Microfinance Accounting And Management Information System Capital Requirements Development Fund NABARD’s Support To Microfinance Institution (MFIs) Business Model Of KDS MFI Success Factors Of Microfinance In India Future Of Microfinance Top 50 Microfinance Institutions In India Questionnaire Findings Recommendation and Suggestions Acronym Conclusion Bibliography CHAPTER NAME PAGE NO. No.TABLE OF CONETENTS S.

|Page 6 . savings. it is also recognized that is not always the appropriate method. and some banks have partnered with public organizations or made small inroads themselves in providing such services. the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. Whatever the form of activity however. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise. gain income from renting out small amounts of land. and poor individuals which fall below that poverty line. recycled. Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. work for wages or commissions. with the goal of creating social value.that are provided to people who farm or fish or herd. individual lending. operate small or micro enterprise where goods are produced. repaired. and agricultural business development services. and insurance and savings for risk mitigation and consumption smoothing. using a range of microfinance delivery methods. About Microfinance: Microfinance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services. or traded. Since the ICICI Bank in India. and insurance to low income individuals which fall just above the nationally defined poverty line. and that it should never be seen as the only tool for ending poverty. Microfinance is defined as any activity that includes the provision of financial services such as credit. NGOs have undertaken the activity of raising donor funds for on-lending. ‘Microfinance refers to small scale financial services for both credits and deposits. 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. A large variety of actors provide microfinance in India. the provision of savings and insurance.CHAPTER 1 Introduction A. provide services. Governments also have piloted national programs. While some studies indicate that microfinance can play a role in the battle against poverty. various actors have endeavored to provide access to financial services to the poor in creative ways. capacity building.

many formal saving and credit institutions have been working for a long time throughout the world. This kind of micro credit was given on the basis of solidarity group lending. These institutions were named Credit Unions. In the early 1970s. each and every member of that group guaranteed the repayment of the loan of all the members. for example. A. Many credit groups have been operating in many countries for several years.vehicles. microfinance have a long history from the beginning of the 20th century we will concentrate mainly on the period after 1960. CHAPTER 2 The History of Modern Microfinance ABSTRACT: In the late 1970s the concept of microfinance had evolved. or machinery and tools. tontines" (West Africa). and to other individuals and local groups in developing countries in both rural and urban areas’. draft animals. Besides. During the early and mid 1990s various credit institutions had been formed in Europe by some organized poor people from both the rural and urban areas. The poor people had been given some small loans to invest in micro-business. ACCION International: |Page 7 . The main aim of these institutions was to provide easy access to credit to the poor people who were neglected by the big financial institutions and banks. Robinson. that is. few experimental programs had started in Bangladesh. Brazil and some other countries. People's Bank etc. the "chit funds" (India). Marguerite S. "susus" (Ghana). Many banks and financial institutions have been pioneering the microfinance program after 1970. Although. These are listed below. "pasanaku" (Bolivia) etc.

in 2008. BRAC and PROSHIKA . named as Mahila SEWA Cooperative Bank. This bank is now serving almost 400. B. it is one of the most important microfinance institutions of the world. Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. 0000 poor people of Bangladesh. who began experimenting with lending to poor women in the village of Jobra. Today.000. However. Grameen Bank (Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in 1983. C. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Price in 2006.This institution had been established by a law student of Latin America to help the poor people residing in the rural and urban areas of the Latin American countries. |Page 8 . to access certain financial services easily. but also the success of Grameen Bank has stimulated the formation of other several microfinance institutions like. the pioneering of modern microfinance is often credited to Dr. GRAMEEN Bank: Credit unions and lending cooperatives have been around hundreds of years. the Self Employed Women's Association (SEWA) of Gujarat (in India) formed a bank. innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Not only that. Its network of lending partner comprises not only Latin America but also US and Africa. SEWA Bank: In 1973. ASA. Since then. Mohammad Yunus. the World Bank estimates that about 160 million people in developing countries are served by microfinance. Almost 4 thousand women contributed their share capital to form the bank. Today the number of the SEWA Bank's active client is more than 30. Today.

CHAPTER 3 Overview |Page 9 .

Moreover. "However widely used. domestic animals. They may set aside corn from their harvest to sell at a later date. They address their need for financial services through a variety of financial relationships. or month.small loans. Perhaps most importantly. not because they are lazy but because they have no access to capital. fire. etc. "The poor stay poor. In India. although mostly in informal ways. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe. "Poor people save all the time. In-kind savings are subject to fluctuations in commodity prices. the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions. thieves. It is not possible. destruction by insects. and other basic financial services to the poor. Microfinance has been defined by “The National Microfinance Taskforce. building materials. but when you think about it they are using these services already. and things that can be easily exchanged for cash. "Microfinance is the supply of loans. to cut a leg off a goat when the family suddenly needs a small amount of cash. Some of these groups allow members to borrow from the pot as well. “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients”. informal savings mechanisms have serious limitations." |Page 10 .A. small savings. They participate in informal savings groups where everyone contributes a small amount of cash each day. jewelry. and is successively awarded the pot on a rotating basis. these groups often require rigid amounts of money at set intervals and do not react to changes in their members' ability to save. although they might look a little different. Informal rotating savings groups tend to be small and rotate limited amounts of money. 1999” as “provision of thrift. mostly informal. Microfinance Definition: According to International Labor Organization (ILO).the term "microfinance" helps to differentiate these services from those which formal banks provide It's easy to imagine poor people don't need financial services." As these financial services usually involve small amounts of money . “Poor rarely access services through the formal financial sector. week. 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”. savings. They invest in assets such as gold. or illness (in the case of livestock). for example. They bury cash in the garden or stash it under the mattress. .

lumpy cash needs like education fees. However. D. money transfers. |Page 11 . micro loans may not predominantly be used to start or finance micro enterprises. The level of impact relates to the length of time clients have had access to financial services. By supporting women’s economic participation. medical expenses. including stabilizing consumption and spreading out large. 3. consumer credit provided to salaried workers based on automated credit scoring is usually not included in the definition of micro credit. Scattered research suggests that only half or less of loan proceeds are used for business purposes.B. 2. although this may change. savings. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. thereby promoting genderequity and improving household well being. provided by legally registered institutions. or lifecycle events such as weddings and funerals. Microfinance helps poor households meet basic needs and protects them against risks. alleviating poverty and unleashing human creativity and endeavor of the poor people. Microfinance typically refers to micro credit. The remainder supports a wide range of household cash management needs. Currently. insurance. Role of Microfinance: The micro credit of microfinance prename was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral . Borrowers: Most micro credit borrowers have micro enterprises—unsalaried. 4. informal income-generating activities. microfinance empowers women. Difference between micro credit and microfinance: Micro credit refers to very small loans for unsalaried borrowers with little or no collateral. and other financial products targeted at poor and low-income people. Microfinance impact studies have demonstrated that 1. C.

given the relative high costs of delivering large volumes of small policies. reduces transaction costs and minimizes adverse selection. Compared with other sources of capital that can fluctuate depending on the political or economic climate. such as business development or health services. one must also understand how they are priced. and reinsurance. What assumptions do the organizations make with regard to operating costs. What does an organization lose by offering mandatory insurance. and how did they come to those conclusions? Would their clients be willing to pay more for greater benefits? From price. MFI‘s sometimes prefer the basket cover. Remittances: These are transfer of funds from people in one place to people in another. risk premiums. E. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property. since it can make the policies sound comprehensive. 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. Product Design: The starting point is: how do MFIs decide what product s to offer? The actual loan products need to be designed according to the demand of the target market. the logical next set of questions involves efficiency. One way is to make the products mandatory. Micro credit can be offered. to an individual or through group lending. maximizing efficiency is a critical strategy to ensuring that the products are affordable to the low-income market. remittances are a relatively steady source of funds. usually across borders to family and friends. even though only a portion of their assets may be committed to financial services to the poor. For marketing purposes. Besides the important question of what risks to cover. Commercial and government-owned banks that offer microfinance services are frequently referred to as MFIs. Indeed. which increases volumes. and how does it overcome the disadvantages? MFI‘s can combine a mandatory product with some voluntary features to make the service more us to mar-oriented while. Micro savings: These are deposit services that allow one to save small amounts of money for future use. organizations also have to decide whether they want to bundle many different benefits into one basket policy. Often without minimum balance requirements. or whether it is more appropriate to keep the product simple. businesses and other organizations make a payment to share risk. |Page 12 .Some MFIs provide non-financial products. but is that the right approach for the low-income market? After picking products. health or the ability to work. Activities in Microfinance: Micro credit: It is a small amount of money loaned to a client by a bank or other institution. often without collateral.

manual processing and errors. Credit Services-i Small Credit. Cash pattern is important so far as they affect the debt capacity of the borrowers. Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments when they are due efficiency depends less on the delivery model than on the simplicity of the product or product menu. 2.Techniques of Product Design: To design a loan product to meet borrower needs it is important to understand the cash pattern of the borrowers. MFI’s Products and its Management: Product & services of Microfinance Financial Services 1. MFIs need to conduct a costing analysis to determine how much they need to earn in commission to cover their administrative expenses. Other Financial Services Micro-insurance. Non Financial Services Family Health and Sanitation Education. Loan for Housing. Simple products work best because they are easier to administer and easier for clients to understand. Deposit Services .Voluntari Savings Services. Manda tory Savings. F. Small Business Credit. Life Insurance . Health Insurance . Health. Education. Micro-entrepreneur Training. CHAPTER 4 |Page 13 . Financial Education. Another efficiency strategy is to use technology to reduce paperwork.

Avoiding interest rate ceilings . • Support autonomous. Encourage a range of regulated and unregulated institutions that meet performance standards. However. sustainable microfinance. but are more likely to choke off the supply of credit. RBI data shows that informal sources provide a significant part of the total credit needs of the rural population. wholesale structures. capacity building and innovation to lower costs and interest rates in microfinance.Government’s role supporting microfinance Government’s most important role is not provision of retail credit services. Create policies. which shows that the share of the Non-institutional agencies (informal sector) in the outstanding cash dues of the rural households were 36 percent. • • Adjusting bank regulation to facilitate deposit taking by solid MFIs. once the country has experience with sustainable microfinance delivery. Creating government wholesale funds to support retail MFIs if funds can be insulated from politics.7 percent in 1961 to 36 percent in 1991. and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs.when governments set interest rate limits. and as vital part of the financial system. The magnitude of the dependence of the rural poor on informal sources of credit can be observed from the findings of the All India Debt and Investment Survey. political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costs— such as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor. the dependence of rural households on such informal sources had reduced of their total outstanding dues steadily from 83. Encourage competition. CHAPTER 5 Microfinance Social Aspects |Page 14 . for reasons mentioned in Government can contribute most effectively by: • • Setting sound macroeconomic policy that provides stability and low inflation. 1992. regulations and legal structures that encourage responsive. • • • • Promote microfinance as a key vehicle in tackling poverty.

). They may tuck cash under the mattress.help groups (SHGs) play today a major role in poverty alleviation in rural India. and neighbors can run off. MFIs that offer good savings services usually attract far more savers than borrowers.Micro financing institutions significantly contributed to gender equality and women’s empowerment as well as poor development and civil society strengthening. The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital. Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the 1990s. buy animals or jewelry that can be sold off later. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation. Women’s indicators of empowerment through microfinance: • Ability to save and access loans 15 |Page .. increased well being of women and their families and wider social and political empowerment. albeit in very small amounts. child care and nutrition. Self Help Groups (SHGs): Self. etc. These savings methods tend to be risky—cash can be stolen. Contribution to women’s ability to earn an income led to their economic empowerment. Often they are illiquid as well – one cannot sell just the cow’s leg when one needs a small amount of cash. Poor people want secure. convenient deposit services that allow for small balances and easy access to funds. Savings services help poor people: Savings has been called the “forgotten half of microfinance. 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. 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. literacy. animals can get sick. or stockpile inventory or building materials.” Most poor people now use informal mechanisms to save because they lack access to good formal deposit services. natural resources management.

banking transactions Skills for income generation Decision making within the household Group mobilization in support of individual clients. MFI procedures.• • • • • • Opportunity to undertake an economic activity Mobility-Opportunity to visit nearby towns Awareness.action on. CHAPTER 6 The Need in India |Page 16 .local issues.

Three out of four of India’s poor live in rural areas of the country. in a war zone or after a natural disaster. (4) Microfinance can also be distinguished from charity. About two thirds of India’s more than 1billion people live in rural areas and almost 170 million of them are poor. official estimates range from 26 to 50 percent of the more than one billion population. (5) While India is one of the fastest growing economies in the world.(1) India is said to be the home of one third of the world’s poor. It is better to provide grants to families who are destitute. the supply is less than $2. Due to the sheer size of the population living in poverty. or so poor they are unlikely to be able to generate the cash flow required to repay a loan.Banks linkage program for over a decade now.2 billion combined by all involved in the sector. poverty is a chronic condition. (3) The demand for micro credit has been estimated at up to $30 billion. This was tried by routing financial. (6) For more than 21 percent of them. poverty runs deep throughout country. This situation can occur for example. Poverty is deepest among scheduled castes and tribes in the country’s rural areas. (7) The micro-finance scene in India is dominated by Self Help Groups (SHGs) . (8) Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities that—left unaddressed—could negatively impact the long-term future of the industry. CHAPTER 7 |Page 17 . 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. As the formal banking system already has a vast branch network in rural areas. (2) About 87 percent of the poorest households do not have access to credit. it was perhaps wise to find ways and means to improve the access of rural poor to the existing banking network.

000 micro finance clients. the number of MFIs is estimated to be around 800. not more than 10 MFIs are reported to have an outreach of 100. Promoters systemic stability and thereby sustains public confidence in the banks/MFIs. A. non-compliance to the norms of behavior. strong and sound banking/MF system and effective banking/MF policy and Promotes and enhances orderly economic growth and development.18 at present. misconducts. The Committee feels that RBI may consider bringing all regulatory aspects of microfinance under a single. Provides sufficient information about the true risks faced by the banks/MFIs. mechanism. Legal forms of MFIs in India: MFIs and Legal Forms: With the current phase of expansion of the SHG – Bank linkage programmed and other MF initiatives in the country. Put in place prudential norms. standards and practices.Micro-Financing Regulation in India Advantage of Regulation: Following are the advantages and benefits of regulation and supervision of /MFIs: • • • Protects the interest of the depositors. while the Rural Planning and Credit Department (RPCD) in RBI looks after Rural lending. Further. While there is no published data on private MFIs operating in the country. supervision Of MF-NBFCs could be delegated to NABARD by RBI. Unified Regulation System: 8. • • • • • • Promoters safe. Penalizes the violations. For example. The MFIs in India can be broadly sub-divided into three categories of organizational forms as given in Table 1. Prevents a bank’s/MFI’s failure/potential dangers through timely interventions. all the regulatory aspects of microfinance are not centralized. B. the informal micro finance sector in India is now beginning to evolve. However. The geographical distribution of MFIs is very much lopsided with concentration in the southern |Page 18 . MF-NBFCs are under the control of the Department of Non-Banking Supervision (DNBS) and External Commercial Borrowings are looked after by the Foreign Exchange Department. An overwhelming majority of MFIs are operating on a smaller scale with clients ranging Between 500 to 1500 per MFI. Provides invaluable advisory inputs for problem-solving and overall improvement of the banks/MFIs.

1956 *NBFC governed by RBI act. 1860 or similar Provincial Acts Indian Trust Act. *Not for profit MFIs governed by societies registration act. Legal Forms of MFIs in India: Types of MFIs 1. 1934.800 6 Indian Companies Act.MFIs b.) Non-profit Companies 2.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. 1882 Section 25 of the Companies Act. 19 |Page . 1860 or Indian trusts act 1882 *Non profit companies governed by section 25 of the companies act.) Non-Banking Financial Companies (NBFCs) Total 700 . which are actually undertaking lending activity. 1956 Reserve Bank of India Act. Recommendation by RBI Micro Credit Institutions: • Company Law Board to allow SHGs to be members of Section 25 of the companies act. For Profit MFIs a. It is estimated that the share of MFIs in the total micro credit portfolio of formal & informal institutions is about 8 per cent.) NGO . C. 1956 *For profit MFIs regulated by Indian companies act. Mutual Benefit MFIs a. 1934 10 200 to 250 Estimated Number* 400 to 500 Societies Registration Act. 1956 Mutually Aided Cooperative Societies Act enacted by State Government Legal Acts under which Registered * The estimated number includes only those MFIs.India where the rural branch network of formal banks is excellent. *Cooperative societies by cooperative societies act enacted by state government. Not for Profit MFIs a.

Complete income tax exemption for Section 25 companies purveying micro credit (to the donor and to the receiver).per member of the SHG. CHAPTER 8 |Page 20 . expand the depth and breadth of products and services offered. The industry needs to move past a single-minded focus on scale. since there is no mandatory capital requirement. minimum standards need not be considered. donors to be exempted from income tax under Section 11C of the IT Act. As regards capital adequacy. to provide credit not exceeding Rs. as the main purpose of the organization is to empower the poor. Government to consider complete exemption from IT for income earned. • • • • As regards capital.• There will be no ceiling in respect of loan amount extended by Section 25 companies to SHGs. and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry. however SHGs. 50000/. Savings of SHGs promoted by Section 25 companies be maintained with permitted organizations. Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities that—left unaddressed—could negatively impact the long-term future of the industry. to encourage more flow of donations/ contributions. RBI may consider issuing revised instructions.

C. The duration of training programme can vary between 3 to 13 days. A. location specific programmers on skill up gradation / development for setting up sustainable micro-enterprises by matured SHG members. and to enable MFIs to achieve sustainability in their credit operations over a period of 3-5 years.000/-/-. etc for experience sharing. The financial assistance by way of grant for meeting the cost of rating of MFIs would be met by NABARD to the extent of 100% of the total professional fees subject to a maximum of Rs. potential mapping and ultimately fine tuning skills and entrepreneurship to manage the enterprise. for providing financial services at an affordable cost to the poor. This involves organizing short duration. Scheme for Capital/ Equity Support to Micro-Finance Institutions (MFIs) from MFDEF: The scheme attempts to provide capital/equity support to Micro Finance Institutions (MFIs) so as to enable them to leverage capital/equity for accessing commercial and other funds from banks. classify and rate such institutions and empower them to intermediate between the lending banks and the clients. a separate. CARE and Planet Finance in addition to CRISIL for rating of MFIs.Dissemination of best practices in SHG / microfinance. Organizing National and State level Meets of Bankers and NGOs etc .Coordinating Microfinance Efforts in India NABARD coordinates the microfinance activities in India at international/ national/ state / district levels. Seminars. specific and focused skill-building programme ‘Micro Enterprise Development Programmed (MEDP)’ has been formulated.00. |Page 21 . These include organizing international/national Workshops. Other Initiatives: Micro enterprise Development Programmer (MEDP) for Matured SHGs The progression of SHG members to take up micro enterprise involves intensive training and hand holding on various aspects including understanding market. The training may be conducted by agencies that have background and professional competency in the field of micro enterprise Development with an expertise in skill development. Hence.3. NABARD has decided to extend financial assistance to Commercial Banks and Regional Rural Banks by way of grant. The remaining cost would be borne by the concerned MFI. B. The banks can avail the services of credit rating agencies. M-CRIL. Scheme for financial assistance to banks/ MFIs for rating of Micro Finance Institutions (MFIs): In order to identify MFIs. depending upon the objective and nature of training. ICRA.

D.5% for all regions and all eligible purposes. Interest rate on refinance to Commercial Banks and Regional Rural Banks on their loans to MFIs for on lending to clients will be at 3% less than that charged by banks subject to minimum interest rate of 7. would also be borne by the MFI. Refinance support to banks for financing MFIs: The scheme is to provide 100% refinance to banks for financing MFIs.1.00 lakh (Rupees fifty lakh only) and maximum of Rs 10 crore (Rupees Ten crore only) would be considered for rating and support under the scheme. The revised rate of interest is applicable to refinance disbursed on or after 01 March 2010. MFIs availing Capital Support and/or Revolving Fund Assistance from NABARD are also eligible for reimbursement of 50% of the cost of professional fee charged by Credit Rating Agency for second rating subject to a maximum of Rs. as a part of the rating exercise.3 lakh).50 lakh (i.e 50% of Rs. Financial assistance by way of grant would be available only for the first rating of the MFI. Source: NABARD website |Page 22 . Those MFIs which have a minimum loan outstanding of more than Rs. This will be in addition to the re-imbursement of professional fee for first rating of the MFI. 50.The cost of local hospitality (including boarding and lodging) towards field visit of the team from the credit rating Agency.

and operational issues involved in developing effective and successful microfinance interventions. 10. B. Decentralized branch structure. 4. 5. 8. 2. 7. Simple standard loan register along with ledger and cash book abandoning the bookkeeper/cashier. Simple product. Strong monitoring from mid and head office. Staff recruitment in no conventional manner. On the job training (each one teaches one). 12. Reducing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly. Specialized operation. |Page 23 . Branch level financial planning. 11.CHAPTER 9 Microfinance Management A. The essences of innovative management are as follows: 1. Written Manual. Innovative Methodologies: Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. 9. fixture and collective use of facilities in the office. Documentation of essential information only. simple loan application and verification process. 6. conceptual. Absence of grant guarantee. Objectives: The programmer aims at enabling the participants to gain a clear understanding of various policies. 3. Standard furniture. Cost reduction is also an essential element in microfinance operation.

C. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds. conditional cash transfers or health care can be effective ways to reduce child labor. However. for example. Conditional loans. 85% of the poorest clients served by microfinance are women. Current Challenging Issues: 1. who are poaching staff from MFIs and MFIs are unable to retain them for other job opportunities. Long distances and long hours away from the family are difficult for women to accommodate and for their families to understand. Cost reduction is also an essential element in microfinance operation. 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. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. 3. linkages with social partners and NGOs as well as the provision of micro insurance. 4. Access to micro credit or other financial services can help improve the decent work status. 2. incentives like interest rate rebates. it becomes unacceptable. Many mainstream commercial banks are now entering microfinance. |Page 24 . HR Issues: Recruitment and retention is the major challenge faced by MFIs as they strive to reach more clients and expand their geographical scope. Microfinance Working Environment: How can microfinance institutions (MFIs) help improve working conditions? How can they contribute to job creation? And how can MFIs help reduce child labor? Should MFIs have an interest in addressing these and other decent work issues? These are some of the questions that the ILO intends to address through an experimental global action research programmer (2008-2011) in partnership with microfinance Institutions interested in promoting decent work. decrease vulnerabilities. as a prerequisite. D. E. raise awareness and create incentives to improve working conditions. financial and institutional sustainability. and fill even fewer of the senior management roles. credit with education. but as soon as they marry and certainly once they start having children. a mindset that fits with the organization’s mission. women make up less than half of all microfinance staff members. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to achieve operational. Reducing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly. The challenge in most countries stems from cultural notions of women’s roles. Attracting the right talent proves difficult because candidates must have.

Start up organisation. Infusion of own equity . Huge Potential Market. 5. Clear and well defined HR policy. Transparency at all levels. Shared ownership. 2. 2. Attracting/Holding on to the staff till the time we become established players. G. 3. 4. Process innovation. 8. 3. |Page 25 . Experienced senior management Team. Financial crunch is helping organisation to be cost conscious and effective. 4. Good Governance. 3. Limited resources. Refine the processes for growth.F. Robust IT system. WEAKNESSES 1. 7. Human Resource Planning and Development. 5. 3. Plans for value added and livelihood support services (LDS). Microfinance Training Methodology and How to Build Efficient Workforce? 2. Micro managing. 6. Clarity and good understanding of vision. yet to institutionalise the standard processes. therefore. Staff Motivation & Built in Cost effective Training Component. Microfinance Training & Capacity Building Methods: 1. 9.commitment from promoters. Scope of introducing livelihood related services. OPPORTUNITIES 1. 4. 2. SWOT MATRIX for Microfinance Management: STRENGTHS 1. 4. IT systems.

to enable them to expand their operations. optionally convertible debt and optionally convertible Subordinate debt for new generation MFIs which are generally in the pre-breakeven stage requiring special dispensation for capital support by way of a mix of Tier I and Tier II capital. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging requirement of the micro finance sector in India. 2. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to achieve operational. high operational and administrative costs for delivering credit to the poor. SFMC has introduced a special short term loan scheme. Increasing competition. financial and institutional sustainability. optionally convertible Preference share capital. Moreover.THREATS 1. Political instability. Liquidity Management: In view of the fact that liquidity is a major concern of many of the middle level MFIs and a small working capital support can go a long way in their better liquidity management and thus pave way for faster growth. infrastructure and MIS are prevalent.2009) provided need based capacity building support to the partner MFIs. SIDBI provides equity capital to eligible institutions not only to enable them to meet the capital adequacy requirements but also to help them leverage debt funds. The MFIs are generally constrained in reaching a break-even level and finally achieving sustainability. lack of technical manpower. Increasing competition. Most MFIs are currently operating below operational viability and use grant funds from donors for financing up-front costs of establishing new groups and covering initial losses incurred until the lending volume builds up to a break-even level. Liquidity Management Support (LMS) for the long term partners. and their inability to mobilize requisite resources. 5. administrative and operational costs besides helping them achieve self-sufficiency in due course. SFMC has in the past under the DFID collaboration (which has since come to an end on March 31. 4. cover their managerial. Poor banking infrastructure. Financial crisis. the bank has also introduced quasi-equity products viz.. In view of the above. operational systems. Keeping in tune with the sect oral requirements. 3. H. |Page 26 . 2. In this background. The constraints and challenges vary with the different types and development stage of MFIs. a special effort is required for capacity building of the Micro Finance Institutions. to scale up micro-finance initiatives at a faster pace. Microfinance Operation management: 1. in the initial years. 3. primarily due to a narrow client and product base.

Program Operational Policies and Procedures. Being quasi-equity in nature. Savings and Credit Management. 5. Transformation Loan: The Transformation Loan (TL) product is envisaged as a quasi-equity type support to partner MFIs that are in the process of transforming themselves / their existing structure into a more formal and regulated set-up for exclusively handling micro finance operations in a focused manner.a. transparency in operations and well laid-out systems besides qualified/ trained manpower. Micro finance Indian Lending Methodology. The product has the feature of conversion into equity after a specified period of time subject to the MFI attaining certain structural. f. and having professional expertise and capability to handle on-lending transactions shall be eligible under the dispensation. The institutions would be selected based on their relevant experience. Financial Planning & Analysais. Micro Enterprise Loans: In order to build and strengthen new set of intermediaries for Micro Enterprise Loans. Microfinance Operations: a. Institutions/ MFIs with minimum fund requirement of Rs. Marketing Strategy and Microfinance Clients Targeting Methodology. 7. Services and Lending Procedures. Lending to be based strictly on an intensive in-house appraisal supplemented with the credit rating by an independent professional agency. d. TL helps the MFIs not only in enhancing their equity base but also in leveraging loan funds and expanding their micro credit operations on a sustainable basis. the Bank has also undertaken fee based syndication arrangement where loan requirement is comparatively higher. Loan Syndication: Keeping in view the increased fund requirement of major partner MFIs. |Page 27 . c. b. professional management. operational and financial benchmarks. Institutional Business Planning for Microfinance Program6. This non-interest bearing support facilitates the young but well performing MFIs to make long term institutional investments and acts as a constant incentive to transform themselves into formal and regulated entities. Microfinance Products.4. Microfinance Lending Methodology: Individual and Group Lending. 6. 25 lakh p. and having considerable experience in financial intermediation/ facilitating or setting up of enterprises/ providing escort services to SSI/ tiny units/ networking or active interface with SSIs etc. potential to expand. Relaxed security norms more or less on line with micro credit dispensation to be adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements. the Bank has formulated new scheme for Micro Enterprise Loans. g. e.

often household-based entrepreneurs. l. In rural areas. j. n. Auditing for Microfinance Operation. Transparent and Reasonable Pricing: The pricing. In urban areas. they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. etc. k. Similarly. Detection of Fraud and Internal Control. Management Information System. providers will take adequate care that noncredit. insurance premiums. i. such as insurance. Avoidance of Over-Indebtedness: Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness.h. etc. Delinquencies and its Management. Clients of micro finance: The typical micro finance clients are low-income persons that do not have access to formal financial institutions. all fees. Branch Manager Leadership Training: Managing. Controlling. and Reporting Tools. artisans.) are transparent and will be adequately disclosed in a form understandable to clients. Appropriate Collections Practices: Debt collection practices of providers will not be abusive or coercive. terms and conditions of financial products (including interest charges. I. 2. 3. The six principles of client protection are: 1. street vendors. financial products. m. micro finance activities are more diverse and include shopkeepers. service providers. Accounting and Record Keeping. a. |Page 28 . Micro finance clients are poor and vulnerable non-poor who have a relatively unstable source of income. provided to low-income clients are appropriate. Monitoring and Supervision System. Micro finance clients are typically self-employed.

and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories). Privacy of Client Data: The privacy of individual client data will be respected.4. Social performance measurement: The Social Performance Task Force defines social performance as: "The effective translation of an institution's social mission into practice in line with accepted social values that relate to serving larger numbers of poor and excluded people. J. Social indicators are often less straightforward to measure. or at least co-equal with it. improving the quality and appropriateness of financial services. Today’s increasing use of social measures reflects an awareness that good financial performance by an MFI does not automatically guarantee client interests are being appropriately advanced. creating benefits for clients. 6. and improving social responsibility of an MFI. Ethical Staff Behavior: Staff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients. and less commonly used than financial indicators that have been developed over centuries.”Most MFIs have a social mission that they see as more basic than their financial objective. |Page 29 . There is a great deal of truth in the adage that institutions manage what they measure. 5. Mechanisms for Redress of Grievances: Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients. Social performance measurement helps MFIs and their stakeholders focus on their social goals and judge how well they are meeting them.

As you know. Lack of Capital: The second area of concern for MFIs. As a result they have high debt equity ratios. This is partly explained by the fact that while the cost of supervision of credit is high.CHAPTER 10 Critical Analysis A. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. necessary for MFIs to develop strategies for increasing the range and volume of their financial services. MFIs Critical Issues: MFIs can play a vital role in bridging the gap between demand & supply of financial services if the critical challenges confronting them are addressed. |Page 30 . Borrowings: In comparison with earlier years. An analysis of 36 leading MFIs2 by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. the Micro Finance Development Fund (MFDF). This fund is expected to play a vital role in meeting the equity needs of MFIs. 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. there is no reliable mechanism in the country for meeting the equity requirements of MFIs. This is a critical constraint in their being able to scale up. Presently. which are on the growth path. is that they face a paucity of owned funds. Jindal & Sharma. has been augmented and re-designated as the Micro Finance Development Equity Fund (MFDEF). therefore. Private sector banks have since designed innovative products such as the Bank Partnership Model to fund. MFIs are now finding it relatively easier to raise loan funds from banks. Sustainability: The first challenge relates to sustainability. set up with NABARD. the loan volumes and loan size is low. This change came after the year 2000. It has been reported in literature that the MFI model is comparatively costlier in terms of delivery of financial services. when RBI allowed banks to lend to MFIs and treat such lending as part of their priority sector-funding obligations. Source: Issues in Sustainability of MFIs. It is.

such RMK and FWWB.Top 14 Microfinance Institutions in India by Growth of Number of active Borrowers. As a result. B. A vast majority of them set up as NGOs for getting access to funds as. is to fund only NGOs. the existing practices of mainstream financing institutions such as SIDBI and NABARD and even of the institutions specially funding alternatives. the largest incentive to enter such services remains through the nonprofit |Page 31 . Problems for Alternative Micro-Finance Institutions: The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. or NGO promoted SHGs.

There is a positive relationship between Return on Assets and the Portfolio to Assets ratio discussed in the next section. The ratio does not evaluate the source of the asset base – whether through debt or equity. Return on Assets = Net Operating Income – Taxes____ Average Assets Trend: An increasing Return on Assets is positive. The ratio includes not only the return on the portfolio. From this above table we can notice that the Risk of companies is measured as the percentage of Portfolio at Risk (PAR) which means and returns is measured as a combination of ROA and ROE. |Page 32 . C. but also all other revenue generated from investments and other operating activities. A return on assets should be positive. 3. And return. Risk: This looks at the quality of their loan portfolio measured as the percent of the portfolio at risk greater than 30 days. but simply the return of the portfolio and other revenue generated from investments and operations. Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its profitability. Lack of commercial orientation. Financial problems leading to setting up of inappropriate legal structures. There are many reasons for this: 1. • Return on Assets (ROA): A Return on Assets is an indication of how well an MFI is managing its asset base to maximize its profits. 4. Isolated and scattered. Lack of proper governance and accountability. The alternative finance institutions also have not been fully successful in reaching the needy. provided the loan portfolio performs well and other costs are also controlled. and generate higher returns on their assets. which is measured as a combination of return on equity and return on assets. MFIs that maintain most of their assets in the loan portfolio tend to break even sooner. 2.route.

If this turns into 100%. particularly in comparison with other institutions. 80 to 90 million are from India only. It provides strategies. is very interested in this ratio. and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. And this is only 40% of the total poor.From the above list we can notice that. then we will see the new face of India. Risk Management: Risk management is a discipline for dealing with the possibility that some future event will cause harm. The total loan that the MFI‘s had provided to the poor people in India crosses Rs 24 billion till October 08. Major Risks to Microfinance Institutions: Financial Risk |Page Operational Risks Strategic Risk 33 . As markets mature and competition increases. Increasing equity also strengthens the MFI’s capital structure and its ability to leverage debt financing. There is a huge potential for India to grow in this sector. techniques. So there is still a huge market and opportunities in this segment. The shareholders of a for-profit MFI or bank. Return on Equity = Net Operating Income – Taxes____ Average Equity Trend: An increasing Return on Equity is positive. and its ability to pay dividends. • Return on Equity: A Return on Equity is probably one of the most important profitability indicators for commercial banks and MFIs. who is getting beneficial from the micro finance institutions. as it is a measure of their investment choice. Return on Equity may level off and maintain a positive position without increasing dramatically or at all. there are seven companies of India in top 50 companies in the world. The return is measured only in relation to what the MFI has built from operating surpluses. C. or what it has generated through donations or other contributed sources. because out of total 500 million poor people from all over the world.

Transaction risk: Transaction risk refers to the risk within individual loans. underwriting criteria. and loan structures lessen the portfolio risk. Credit risk encompasses both the loss of income resulting from the MFI‘s inability to collect anticipated interest earnings as well as the loss of principle resulting from loan defaults.com This are the most significant risks (with the most potentially damaging consequences for the MFI). the most frequently addressed risk for MFIs.www. and quality procedure for loan disbursement. maximum loan size. Scribd. liquidity. Financial Risks: Most MFIs focus on financial risks. including credit. and current challenges faced by MFIs. and investment risks. types of loans. Credit risk includes both transaction risk and portfolio risk. monitoring. Policies on diversification. and collection.Credit Risk Transaction risk Portfolio risk Liquidity Risk Market Risk Interest rate risk Foreign exchange risk Investment portfolio risk Transaction Risk Human resources Risk Information & technology Risk Fraud (Integrity) Risk Legal & Compliance Risk Governance Risk Ineffective oversight Poor governance structure Reputation Risk External Business Risks Event risk Sources: . a. |Page 34 . Interest rate. MFIs mitigate transaction risk through borrower screening techniques. Credit risk: Credit risk. Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the overall loan portfolio. is the risk to earnings or capital due to borrowers’ late and non-payment of loan obligations. Mentioned under are the risks which are very critical for the MFI‘s. how they interact. b. I. c.

Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional deception by an employee or client. insufficient human resources. Since MFIs make many small. Other forms of fraudulent activities include the creation of misleading financial statements. Two types of operational risk: transaction risk and fraud risk: a. e. Interest rate risk: Interest rate risk is the risk of financial loss from changes in market interest rates. operational problems. This standardized all loan policies and procedures so that the staff cannot make any decision outside the regulations. so there are more opportunities for error and fraud. Operational Risks: Operational risk arises from human or computer error within daily service or product delivery.d. Liquidity management is an ongoing effort to strike a balance between having too much cash and too little cash. Liquidity risk: Liquidity risk is the ―risk that an MFI cannot meet its obligations on a timely basis Liquidity risk usually arises from management‘s inability to adequately anticipate and plan for changes in funding sources and cash needs. |Page 35 . disburse loans and fund unexpected cash shortages) while also investing as many funds as possible to maximize earnings. This risk includes the potential that inadequate technology and information systems. or breaches of integrity (i. As more MFIs offer additional financial products. fraud) will result in unexpected losses. this same degree of cross-checking is not cost-effective. To Established an inspection unit that performs random operational checks. Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to meet client withdrawals. Minimize fraud risk: To introduced an education campaign to encourage clients to speak out against corrupt staff and group leaders.e. the risks multiply and should be carefully analyzed as MFIs expand those activities b. short-term loans. The most common type of fraud in an MFI is the direct theft of funds by loan officers or other branch staff. II. bribes etc. Transaction risk: Transaction risk is particularly high for MFIs that handle a high volume of small transactions daily. The greatest interest rate risk occurs when the cost of funds goes up faster than the financial institution can or is willing to adjust its lending rates. including savings and insurance.

• Huge networking available: For MFIs and for borrower. such as changes in the business or competitive environment. Weakness • Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated properly. To minimize business risk. Business Environment Risk. SWOT Analysis: SWOT stands for Strength. a. In the shed of the proper rules and regulation the Micro finance can function properly and efficiently. the microfinance institution must react to changes in the external business environment to take advantage of opportunities. so for MFIs there is a huge demand and network of people. Weakness. External business environment risk: Business environment risk refers to the inherent risks of the MFI‘s business activity and the external business environment. b. In India there are many more than 350 million who are below the poverty line. described above illustrates the dangers of poor governance that nearly resulted in the failure of that institution. and to maintain a good public reputation. Strategic Risks: Strategic risks include internal risks like those from adverse business decisions or improper implementation of those decisions. or ineffective governance and oversight. As we know that Indian.III. And for borrower there are many small and medium size MFIs are available in even remote areas. By providing small loans to this people Micro finance helps in reducing the poverty. Opportunity. Governance risk: Governance risk is the risk of having an inadequate structure or body to make effective decisions. In the absent of the rules and regulation there would be high case of credit risk and defaults. both the huge network is there. as well as external risks. more than 350 million people in India are below the poverty and for them the Micro Finance is more than the life. Strength • Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the individuals who are below the poverty line and cannot able to access from the commercial banks. poor leadership. to respond to competition. This section focuses on two critical strategic risks: Governance Risk. |Page 36 . The Financial crisis. and Threat.

educate them and their children etc. make new rules for their personal benefit etc. Banks are shying away from to serve the people are unable to access big loans. But this all interesting figures are just because of few people.a. The annual demand of Micro loans is nearly Rs 60. and the rules are also not properly placed for it. Opportunity • Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and issuers. their competition will rise . so this would be serious threat. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. is a serious threat for the MFIs.5% from the past 5 years. but the door open for the Pvt. and that portion is not fully touched. because as the more players will come in the market. • Concentrating on few people only: India is considered as the second fastest developing country after China.000 crore and only 5456 crore are disbursed to the borrower. with GDP over 8. and we know that the MFIs has the high transaction cost and after entrant of the new players there transaction cost will rise further. Banks are attracting towards this segment. • Opportunity for Pvt. Players to get entry and with flexible rules Pvt. because of the high intervention of the Govt. Threat • High Competition: This is a serious threat for the Micro Finance industry. Because the excess of anything is injurious. • Neophyte Industry: Basically Micro Finance is not a new concept in India.( April 09) Employment Opportunity: Micro Finance helps the poor people by not only providing them with loan but also helps them in their business. But the formal source of finance through Micro Finance is novice. |Page 37 . Banks: Many Pvt. • Huge Untapped Market: India‘s total population is more than 1000 million and out of 350 million is living below poverty line. So in this Micro Finance helping in increase the employment opportunity for them and for the society. Excess involvement definition is like waive of loans. so in the same way the excess involvement of Govt.: This is the biggest that threat that many MFIs are facing. So there is a huge opportunity for the MFIs to meet the demand of that unsaved customers and Micro Finance should not leave any stones unturned to grab the untapped market. • Over involvement of Govt. but that was all by informal sources.• High number of people access to informal sources: According to the World Bank report 80% of the Indian poor can‘t access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p. In India around 350 million of the people are poor and only few MFIs there to serving them. India‘s 70% of the population lives in rural area.

cross-totaled and posted to the general ledger. Some loan tracking systems are manual. and regardless of its legal structure or registration. Solidarity Groups.CHAPTER 11 Micro-Finance Accounting and Management Information Systems The basic components of an accounting system are fairly universal and applicable to all org Source documents form the basis of all transactions. Most MFIs choose computerized. It accumulates the totals posted from the journals to provide monthly and annual revenue and expenses for reporting periods. whether its clients are individuals. One of the most distinctive aspects of the accounting system for microfinance institutions is that financial and operational activity must be tracked by Branch. or Joint Liability Groups. The journals cash journals. but it is a huge challenge to handle a |Page 38 . Client transactions must be entered into both systems. but can be summarized in the accounting general ledger. Loan information should also be tracked by Credit Officer. The general ledger holds a record for each account in the Chart of Accounts. It accumulates all the accounts of the Balance Sheet. These accounting records and processes form the basis of all accounting systems. Another distinctive aspect of accounting for MFIs is that the loan tracking system for client transactions acts as a subsidiary ledger. Self Help Groups. The following diagram illustrates a “generic” financial management information system in a microfinance institution. or bank journals record each and every transactions or adjustment. The accounting system follows the usual flow from transaction to the parathion of financial statements. A Chart of Accounts is a numbered system that is structured to Classify and organize transactions by account. general journals. They are summarized monthly. This is critical for internal management & monitoring. by product and by area if needed.

produce reports &age loans with great efficiency in a manual system. particularly loan tracking systems that are integrated with.large number of clients. Most MFIs prefer automated systems. and linked to a general ledger. The following diagram shows the connection between the two systems: Accounting System and Client Portfolio System (MIS) Microfinance |Page 39 .

some of the ratio components take the average of Balance Sheet numbers. the second component of the ratio must also reflect a period of activity. Therefore. Performance ratios cover four general areas of MFI operations: sustainability or profitability. There are four distinct areas that guide & govern a well-managed & effective financial system. a. Basic Financial Management and Ratio Analysis for MFIs: MFI stakeholders expect MFI senior managers to ensure that strong and adequate financial systems are in place in the MFI. The Basic Financial Management and Ratio Analysis for MFIs offer a practical training in basic financial management and ratio analysis for MFIs. A. This is done through supporting documents. and exercises. the Income Statement. The training helps develop skills to analyze these statements and calculate different ratios which will give the correct picture on the financial health of the organization. Asset and Liability Management Yield = Cash Received from Interest. *14 MFI in India Growth of Gross Loan Portfolio B. the relation between them. diagrammatic representations. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. asset and liability management. It provides an overview of the key aspects of accounting in microfinance institutions describes the primary financial statements and portfolio reports of MFIs and describes the commonly accepted financial ratios used for monitoring. Remember to note these distinctions in the ratio calculations. Its helps develop clarity on the need of the different financial statements. List of MFI’s and their key Ratios: |Page 40 . Therefore. Financial ratios are useful indicators of a firm's performance and financial situation. and some numbers from the Portfolio Report)? Is the number reflective of information from a point in time – as from the Balance Sheet? When Income Statement numbers or any number reflecting a period of activity is used to calculate a ratio. reporting and measuring MFI performance. Portfolio Report: Is it a number reflecting a period of time (e. b.g. it is essential that MFI managers have a solid understanding and appreciation of the financial and accounting systems. portfolio quality and productivity and efficiency. Fees and Commissions on Loan Portfolio___ Average Gross Loan Portfolio Trend: An increasing yield is positive although it will level off as it nears the effective interest rate.The MFI financial management systems illustrated dose not operates in a vacuum.

Current liabilities consist of accounts payable.Liquidity Ratios These ratios actually show the relationship of a firm‘s cash and other current assets to its current liabilities. They are: 1. short-term notes payable. Debt to Equity Debt/Equity = Liabilities____ Equity Trend: An increasing debt/equity ratio indicates the MFI’s capacity to attract debt funding based on its capital strength of its own equity. the ratio will show the actual financial cost of funds needed to fund or capitalize the MFI. When Financial Expenses are adjusted to include free or subsidized funding. Current ratio: This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current Ratio=Current Assets/Current Liabilities. A decreasing Cost of Funds ratio is generally positive. accrued taxes. and other accrued expenses (principally wages). Two ratios are discussed under Liquidity ratios. marketable securities. Current ratio 2. and inventories. Too low a ratio might indicate that the MFI is not maximizing its equity base. Cost of Funds Ratio Cost of Funds = Financial Expense on Funding Liabilities (Average Deposits + Average Borrowings) Trend: The Cost of Funds may indicate a level of maturity of the MFI. accounts receivables. Quick/ Acid Test ratio. current maturities of long-term debt. 1. and may spell cash flow challenges during difficult times Liquid Ratio Liquid Ratio = Cash + Trade Investments_____ |Page 41 . Current assets normally include cash. Too high a factor may be risky for investors.

Here. Sudden changes usually indicate a deterioration or improvement in portfolio quality or an excess or shortage in the Allowance for Loan Losses account. 1. Bank Partnership Model: |Page 42 . Since the sustainability of MFIs and their clients complement each other. stable ratio is desired. client responsive and innovative microfinance services to the poor. Risk Coverage Ratio Risk Coverage Ratio = ______Allowance for Loan Losses______ Portfolio at Risk over 30 days Trend: A fairly constant. c.(Demand Deposits + short-term Time Deposits + Short-term Borrowings + Interest Payable on Funding Liabilities + Accounts Payable And other Short-term Liabilities) Trend: No single ratio or trend provides the “correct” or “adequate” means to monitor cash levels... Managers must have clear policies in place to ensure that cash is available when needed for all MFI operations and activities Banking requirements and risk tolerance will affect the ratio. it follows that building up the capacities of the MFIs and their primary stakeholders are pre-conditions for the successful delivery of flexible. innovations are important both of social intermediation. and the re-engineering of the financial products offered by them as in the case of the Bank Partnership model. Capacity of MFIs: It is now recognized that widening and deepening the outreach of the poor through MFIs has both social and commercial dimensions. strategic linkages and new approaches centered on the livelihood issues surrounding the poor.

and then works hand in hand with that MFI to extend loans and other services. Under this model. the Service Company Model developed by ACCION and used in some of the Latin American Countries is interesting.This model is an innovative way of financing MFIs. The model may hold significant interest for state owned banks and private banks with large branch networks. the model is similar to the partnership model: the MFI originates. It remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse. the bank forms its own MFI.e. Currently. as an NBFC. Banking Correspondents: The proposal of “banking correspondents” could take this model a step further extending it to savings.products. Such refinancing through securitization enables the MFI enlarged funding access. 2.variation of this model is where the MFI. On paper. 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. the MFI acts as an agent and takes care of all relationships with the client. deposit . A sub . It would allow MFIs to collect savings deposits from the poor on behalf of the bank. 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. perhaps as an NBFC. In other words. 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. 43 |Page . from first contact to final repayment. If the MFI fulfils the “true sale” criteria. RBI regulations do not allow banks to employ agents for liability . 3. holds the individual loans on its books for a while before securitizing them and selling them to the bank.i. Service Company Model: In this context. supervision and recovery. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring.

While there is no published data on private MFIs operating in the country. societies. Many NGOs have also helped SHGs to organize themselves into federations and these federations are registered as Trusts or Societies. remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance. SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage. commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. such as individual loans for SHG graduates. In the partnership model. promote new groups. only a handful of NGOs were “into” financial intermediation using a variety of delivery methods. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK). it also allows rapid scale up. On paper. MFIs are an extremely heterogeneous group comprising NBFCs. the bank forms its own MFI. Since 2000. But in fact. perhaps as an NBFC. Though initially. MFI Model: Under this model.4. their numbers have increased considerably today. This allows the client to be reached at lower cost than in the case of a stand–alone MFI. Many of these federations are performing non-financial and financial functions like social and capacity building activities. In case of banks which have large branch networks. In the service company model. and some of these federations are engaged in financial |Page 44 . trusts and cooperatives. 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. 5. and then works hand in hand with that MFI to extend loans and other services. the number of MFIs is estimated to be around 800. undertake internal audit. MFIs may contract with many banks in an arms length relationship. 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. facilitate training of SHGs. For NGOs Model: There are a large number of NGOs that have undertaken the task of financial intermediation. the model is similar to the partnership model: the MFI originates the loans and the bank books them. Majority of these NGOs are registered as Trust or Society. (b) The Partnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth.

(4) Creating Awareness about environment protection. The NGO MFI varies significantly in their size. as the byelaws of these institutions are generally restrictive in allowing any commercial operations. Therefore these NGOs are structurally not the right type of institutions for undertaking financial intermediation activities. Basically. In terms of Reserve Bank of India’s Notification dated 13 January 2000. The MFI is prohibited from paying any dividend to its members. nurturing an environment of gender equality. the MFIs in India are of three categories: (i) Not for profit MFI. The NGO MFIs. the NGOs engage in: (1) Providing Basic Education. These activities are the rudiments of sustained economic development. These are the institutions for which policy and regulatory framework would need to be established. which are large in number. (5)Most important. Further. which include the Non-Banking Financial Companies (NBFC)? 6. relevant provisions of RBI Act. philosophy and approach. These organizations by their charter are non-profit organizations and as a result face several problems in borrowing funds from higher financial institutions. 1934 as applicable to NBFCs will not apply for NBFCs . which include the NGOs? (ii) Mutual Benefit MFIs. It was felt that a financial institution including a company set up for this purpose better does banking function. it has to function as a distinct institution so that cross subsidization can be avoided. Along with developing saving and credit facilities. Non-Profit Companies as MFIs: Many NGOs felt that combining financial intermediation with their core competency activity of social intermediation is not the right path. if MFIs are to demonstrate that banking with the poor is indeed profitable and sustainable. NGO MFIs are of late setting up a separate Non-Profit Companies for their micro finance operations. On account of these factors.intermediation. are still outside the purview of any financial regulation. which include mutually-aided co-operative credit. (2) Developing a sense of Health and Hygiene. (iii) For Profit MFIs. |Page 45 . (3) Encourage family planning.

50. 25.000 ($1112) for a business enterprise and Rs. non-profit companies’ MFIs. A. only two NBFCs are reported to have been able to raise the foreign |Page 46 . and. prudential norms etc. not accepting public deposits CHAPTER 12 Capital Requirements NGO-MFIs. 1. and mutual benefit MFIs are regulated by the specific act in which they are registered and not by the Reserve Bank of India. As regards prudential norms. NBFCs are required to achieve capital adequacy of 12% and to maintain liquid assets of 15% on public deposits. In view of the minimum level of investment.(i) (ii) (iii) licensed under Section 25 of Companies Act. providing credit not exceeding Rs. 20 million ($ 0. Foreign Investment: Foreign investment by way of equity is permitted in NBFC MFIs subject to a minimum investment of $500.5 million).000 ($2778) for meeting the cost of a dwelling unit to any poor person. NGO MFIs to become NBFCs are required to have a minimum entry capital requirement of Rs. 1956.000. These are therefore not subjected to minimum capital requirements.

The high interest rate collected by the MFIs from their poor clients is perceived as exploitative. a large number of NGOs in the development . It is argued that raising interest rates too high could |Page 47 .40. foreign donors have facilitated the entry of NGOs into micro finance operations through their grant assistance. the comparatively higher interest rate (12 to 24 per cent per annum) charged by the MFIs has become a contentious issue. 000 million ($ 889 million) every year flows into India to NGOs for a whole range of activities including microfinance. Rashtiya Mahila Kosh. by the Reserve Bank of India.investment. In the context of softening of interest rates in the formal banking sector. However. Banks have been given operational freedom to prescribe their own lending norms keeping in view the ground realities. over Rs. B. C. The quantum of deposits that could be raised is linked to their net owned funds. Both public and private banks in the commercial sector have extended sizeable loans to MFIs at interest rate ranging from 8 to 11 per cent per annum. In regard to external commercial borrowings (ECB) by MFIs. allows only corporate registered under the Companies Act to access ECB for permitted end use in order to enable them to become globally competitive players. In order to widen the range of lending institutions to MFIs. Borrowings: Initially. Only rated NBFC MFIs rated by approved credit rating agencies are permitted to accept deposits. bulk of the funds required by MFIs for on lending to their clients was met by apex institutions like National Bank for Agriculture and Rural Development. Mutual benefit MFIs can accept savings from their members. The intention is to augment flow of micro credit through the conduit of MFIs. D. Deposit Mobilization: Not for profit MFIs are barred. In a way. Small Industries Development Bank Of India. the Reserve Bank of India has roped in Commercial Banks and Regional Rural Banks to extend credit facilities to MFIs since February 2000. The current policy effective from 31 January 2004.empowerment are receiving foreign fund by way of grants. from mobilizing any type of savings. Interest Rates: The interest rates are deregulated not only for private MFIs but also for formal baking sector. not-for-profit MFIs are not permitted to raise ECB. and. At present.

(Kindly see publications Section for a complete report Working Group (constituted by Government of India) on Legal & Regulation of MFIs. Regulation & Supervision: India has a large number of MFIs varying significantly in size. Presently. 1999. outreach and credit delivery methodologies. procedures and standards. the MFI sector as a whole is still in evolving phase as is reflected in wide debates ranging around (i) desirability of NGOs taking up financial intermediation (ii) unproven financial and organizational sustainability of the model |Page 48 . Because the sector is unregulated. The credit policy guidelines of the RBI allow even the formal banks not to insist on any type of collateral and margin requirement for loans up to Rs 50. MFIs are not required to follow standard rule and it has allowed many MFIs to be innovative in its approach particularly in designing new products and processes.undermine the social and economic impact on poor clients. not much is known about their internal health. Following Committees have examined the road map for regulation and supervision of MFIs: Task Force (appointed by NABARD) Report on Regulatory and Supervision Framework for MFIs. But the flip side is that the management and governance of MFIs generally remains weak.000 ($1100). The Committee observed that while a few of the MFIs have reached significant scales of outreach. Since most MFIs have lower business volumes. The high cost structure of MFIs would affect their sustainability in the long run. as there is no compulsion to adopt widely accepted systems. there is no regulatory mechanism in place for MFIs except for those that are registered as NBFCs. their transaction costs are far higher than that of the formal banking channels. E. As a result. 2003 Advisory Committee (appointed by RBI) on flow of credit to agriculture and related activities from the Banking System. Funding Regulations and Capacity Building. Collateral requirements: All the legal forms of MFIs have the freedom to waive physical collateral requirements from their clients. 2002 Informal Groups (appointed by RBI) on Micro Finance which studied issues relating to : • • • • Structure &Sustainability. 2004.

while the NGO-MFIs can continue to extend micro credit services to their clients. the Committee felt that. stage two . Stage one to make the MFIs appreciate the need for certain common performance standards.to encourage development of network of MFIs which could function as quasi Self-Regulatory Organizations (SROs) at a later date or identifying a suitable organization to handle the regulatory arrangements. As regards allowing NGO-MFIs to access deposits from public / clients. Such experimentation needs to be encouraged in areas where banks are still not meeting adequate credit demand of the rural poor. the Committee considers that in view of the need to protect the interests of depositors.(iii)high transaction costs leading to higher rates of interest being charged to the poor clients (iv) absence of commonly agreed performance. The Committee recommended that while the MFIs may continue to work as wholesalers of microcredit by entering into tie-ups with banks and apex development institutions. more experimentation have to be done to satisfy about the sustainability of the MFI model. they may not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank of India. As no depositors' interest is involved where they do not accept public deposits. In regard to offering thrift products. The additional amount of Rs 100 crore will be contributed by Reserve Bank of India. The current debate on development of a regulatory system for the MFIs focuses on three stages. they could play an important role in facilitating access of their clients to savings services from the regulated banks. NABARD and the commercial banks in the same proportion as earlier (40:40:20). including equity and the start up costs. |Page 49 . Government of India has decided to redesign ate the existing MFDF as microfinance Development and Equity Fund (MFDEF). CHAPTER 13 Development Fund A.making it mandatory for the MFIs to get registered with identified or designated institutions and stage three . the Reserve Bank of India need not regulate MFIs. Micro Finance Development and Equity Fund (MFDEF) – Structure and Guidelines: During 2005-06. accounting and governance standards (v) heavy expectations of low cost funds. etc. It has also been decided to enhance the fund size from the existing Rs100 crore to Rs 200 crore.

Meeting on a selective basis the operational deficit of financial intermediary NGOs/MFIs at the start up stage. inter alia. Rating of MFIs and self regulation. Supporting systems management in regard to MIS. 5. 4. 3. internal controls. Capacity building of staff of institutions involved in microfinance promotion such as Banks. Recommending regulatory and supervisory framework based on an on-going review. Contributing equity/other forms of capital support to MFIs. skill up gradation and micro enterprise development. Regulatory & Supervisory Framework. |Page 50 . 2. service providers. Capacity building of MFIs. 2. b. Capacity Building: i) ii) iii) Training of SHGs and other groups for livelihood. government departments. C. etc. Funding Support: 1. NGOs. Activities to be supported from out of the MFDEF: The Fund will be utilized to support interventions to eligible institutions and stakeholders. The components of assistance will include. the following purposes: a. accounting. Objectives: The objective of the redesignated Fund is to facilitate and support the orderly growth of the microfinance sector through diverse modalities for enlarging the flow of financial services to the poor particularly for women and vulnerable sections of society consistent with sustainability. etc. Supporting Self Help Promotion initiatives of banks and other SHPIs. 3. MIS: 1. NABARD. c. Building an appropriate data base and supporting development thereof. Providing financial support for start-up and on-lending for microfinance activities.B. audits and impact assessment.

d. 3. Promoting seminars. MFIs. Advisory Body to MFDEF: |Page 51 . MFIs. MFIs. NABARD. NGOs/VAs. conferences and other mechanisms for discussion and dissemination. Academic institutions and Universities. MFIs. 6. relating to the sector. 4. Training Establishments. Any other activities recommended by the Advisory Board to Fund. consultancies. Funding support: NGOs/VAs. 5. Any other organization as may be decided by the Advisory Board from time to time. would be eligible for support from the Fund: 1. 2. CBOs. Eligible Institutions: Following types of structures. networks. Training: SHGs. service providers. NABARD. * Revolving Fund Assistance (RFA) to NGOs/ MFIs. Documentation. NABARD. evaluation studies. 2. * Loans and advances including soft loans. MIS: SHGs. Studies & Publications: 1. SROs. f. Studies and Publications: Banks. 3. etc. NABARD. * Administering Charges. Mode of Assistance: Mode of assistance from the Fund will include the following: * Promotional support for training and other promotional measures. e. action research. 4. g. Commissioning studies. NGOs/VAs. CBOs. Publication and dissemination of MF literature. NGOs /VAs / MFI Networks. MFIs. and Banks. * Administrative subsidies and grants. Banks. Banks. community based organizations and institutions. Regulatory and Supervisory Framework: Banks. 5. Training and Research Organizations. * Equity and quasi equity support to MFIs. Granting support for research.

for examination of various issues. The advisory board will meet at such intervals as deemed necessary but in any case once in a quarter to review the status and progress of outflow and to render policy advice in respect of orderly growth and development of the sector. The Board may determine its own procedures for day-to-day working including constitution of committees. Some of the concerns that necessitated NABARD to commence this support in 1993 were: 1) the need to provide timely credit to the poor in under banked regions and 52 |Page .The Advisory Board shall guide and render advice on the various aspects relating to the micro finance sector. CHAPTER 14 NABARD's Support to microfinance Institutions (MFIs) Realizing the importance of MFIs in the delivery of financial services to the poor and their potential for expansion of services in remote and lesser-banked areas. task forces etc. NABARD has been extending technical and fund support to this sector.

grant assistance for partly meeting the salary of field level staff. NABARD also provides technical support in the form of capacity building of staff of MFIs and also bankers in appraisal of MFIs for providing wholesale resource support. NABARD's support is being provided to various forms of microfinance institutions covering MFIs.98 crore (Rs 269.58 crore (Rs 5. 1) Friends of World Women Banking. on a case-to-case basis. NGO-MFIs. in association with reputed resource NGOs & training establishments. Grameen bank replicators.2) to further improve the outreach of rural credit delivery system through alternate credit delivery mechanisms. Lucknow. as at the end of June 2004. infrastructure development and operational deficits during the initial years.8 million) has been sanctioned as grant to various NGOs. 84 million was sanctioned to two agencies viz. second tier MF lending institutions. |Page 53 . These training programmes are intended to equip the stakeholders to appreciate the nuances in financing NGO-MFIs and also enhance the flow of loan able funds from mainstream financial Institutions like banks. Specially designed capacity building programmes are also being organized for Chief Executives & other staff of NGOs on promotion as well as managing of self help groups on a regular basis through our regional offices. loan support of Rs. Since 2002. The amount excludes Rs 3. During the year 2003-04. the agencies are also sanctioned. The RFA is generally provided for a period of 5 to 6 years and is necessarily to be used for on lending to mF clients (SHGs or individuals). training programmes on "Appraisal of MFIs" are being conducted through Bankers Institute of Rural Development (BIRD). Cumulatively. 0. In addition.4 million sanctioned under SHG Post Office linkage programme in Tamilnadu. 74 million) for on-lending to small NGOs & 2) Kalanjiam Development Financial Services-a section 25 company promoted by DHAN Foundation (Rs 10 million) for on lending to SHGs. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA) to NGO-MFIs on a very selective basis. Rs 26. India (Rs.80 million) has been sanctioned as RFA to 31 NGO-MFIs and Rs. SHG Federations etc.

K.CHAPTER 15 Business Model of KDS MFI A) Introduction: Kotalipara Development Society (KDS) is basically a NBFC (Non Banking Financial Company). |Page 54 . is a Non-govt. Social Service Organization working in the field of Rural Development for the poor people.S. They are having a sufficient amount of capital with them for their future growth.D. Community development and also poverty alleviation is the main focus of this Organization. Kotalipara Development Society registered as a Society (NGO) under West Bengal Society Registration Act 1961 came into being in 1989 and was in 1991. MAS Finance is one of the blooming private MFI in the current era.000. They provide minimum loan of 1000 and maximum 40.

is basically based on the main principle of causing socialeconomic empowerment of the poor.K. women empowerment & egalitarian Society free from exploitation and every body in this global life with humanity and prosperity. education. |Page 55 . F) Role and Function: *Helping in eradication of poverty. Child right. B) KDS Vision: KDS' vision is to poverty alleviation. water harvesting environment conservation and Micro. D) Legal Status: Registered under Society Registration Act. We are promoting environment awareness and natural resources conservation activities through women‘s participation at village level. off farm economy and traditional activities. C) KDS Mission: KDS envision itself as a financially self sustainable Micro-finance Institution with a wide base of ownership.S.credit. this marginalization often results in neglecting the health issues of women and children. Control of Blindness. mother & child health care. Women Health: Health leads to prosperity. Although K. Vocational training. 4. *Helps the borrower in establishing their business. Women Economic Development: Our objective is to strengthen women‘s economic capacity as entrepreneurs/producers.D. E) Objective: 1. KDS is committed to address factors leading to feminization of poverty and gender inequality. production possibilities. 2. Low endowments. It is committed to strengthening the Socio-Economic status of the poor women in rural and urban areas by providing technical and financial services on continued basis for establishing their identity and selfimage. Women and natural resources: Our observation is that women are most effective by degradation of natural resources. of 1961.S. In order to bring about women participation and their decision making and negotiating power about their rights in all walks in life.D. *Providing finance for the enlistment of the individuals. is a multi service NGO having under taken interventions in the field of primary health care. and exchange option for women from disadvantage section in rural marginalized the women. Women Empowerment: KDS Believes that ―Women participation is the most effective instrument in bringing about change in their way of life both economic well-being and adoption of new practices in changing the socio-economic environment. It constantly endeavors by cost-effective Methods creating a culture of competence and excellence. 3.

Kolkata—124 Dist-North 24 Parganas West Bengal. 7. 7066789740 E-mail: baidyan@solid.Branch. KDS has been established in the year 1991. India 3) Japan Office: P. Asset less. Kolkata--124 West Bengal. 5. JAPAN TEL + FAX: (0081)493-252557 Tel: (0081)8035220930 5037728489. HIGASHI MATSUYAMA-SHI.2500/. Security Deposit KDS received 10% Security against Loan. 2. KDS provide small capital to medium entrepreneurs for expansion their business.jp H) Micro-Finance Program: 1.org 2) Reg.ocn.G) ADDRESS: 1) Head Office Santa Nir. Bangladesh. 6.KDS provides financial Sustainable Development Empowerment”.O-355-0076 SHIMOKARAKO 1906. Monthly family income not more than INR Rs. Office: Pioneer Park (Mat) Barasat Dist-North 24 Parganas.3500 in urban. 8. Division.in rural INR Rs.ne. Approach for “Poverty Alleviation & Women I) KDS Field Operation: Operations: -The organization has a three tier system at the field. India Mobile : +91 033 32965569 Email Id : info@kdsmfi. Financial Services to the poor women. Directly started implementing Micro-finance since 1997. Regions. SAITAMA-KEN. |Page 56 . 3. Noapara. Arabinda Pally Barasat. personnel associated with each tier are based at the Field. 4. SHG Model is largely based on ASA. landless. 100% women and possesses not more than 50 decimal of land.

The Regional Manager regularly monitors the activities of a branch at least twice in a month. Although Operation Manager is located at the head office. Audit is also conducted in the Logistics Department at the head office once a year.Thirteen Regional Manager looks after all regions.A. BMs hold regular meetings with their FOs for efficient branch operation. the auditors may be given instructions to conduct follow up audits. |Page 57 . J) KDS Microfinance Rules: 1) Rules of Loan: * Loans disburse 8 weeks after formation of the SHG. Each region consists of 6-7 branches. Once the CED goes through the report. The Manager Internal Audit coordinates and supervised the activates of the Internal Auditors (I. Around 15-20 branches are audited each month is KDS in certain cases. The Regional Office is situated at the centre branch at a region. he plays a vital role in field operations. * 1st installment after 7 days in equal weekly installment. The Regional Manager does not have any separate office and staff to conduct his/her work. Each division consists of 4-5 regions. he visits 12 branches in a month. Branch Manager visits the borrower’s house regularly. In fact. Internal Audit: KDS has a team of 8 people (inclusive of the Manager Internal Audit) working under the internal audit section. The branch serves as a residence for field staff (FO/BM) and an office unit from where activities of branch originate and are managed.). submit their report to the Manager Internal Audit who is turn compiles/ consolidates the some and finally places it before the Chief Executive Directors. He is endowed with specific power and is capable of taking decision independently. Division: There are 3 divisions. The Manager Internal Audit is directly accountable to the Chief Executive Director (CED).Branch: A Branch in the field is the centre of all actions. The Branch Managers supervise the activities of the FOs and also administer branch operation. The Divisional Manager (DM) looks after a division. Out of these 8 people.A. the instructs the Implement Officer and the Operation Manager to take necessary steps it required. As a part of his monitoring process. The I. Besides these there is one Operation Manager at the head for the smooth functioning of the field. His monitoring contains varied facts viz. supervision of Regional Manager work. it is Mandatory for the Operation Manager to spend 2 weeks a month in the field. Region: All the branches are distributed under 13 regions. fund plan and utilization and the like. * 90 % attendance in weekly meeting. As a part of their regular monitoring. 2 of them are based at the head office and the rest 6 are based in the field each branch is audited every five six months. study of Branch growth.

4. 4) Products: a) KDS has 4 loan Products Loan term –IGA (SHG) Education loan Festival loan(Term) |Page 46 weeks 45 weeks 12 weeks 58 . The SHG model is largely based on ASA Bangladesh. 2. 1. SHG member take all the decision in the meeting. place and time. Every member is required to attend the meeting. * Loan sanction by the BM. Secretary & Cashier are responsible for collection. (ii) 90% attendance in weekly meeting. 3) Credit Rule: (i) Loan disburses 8 weeks after formation of the SHG. 2) Group Formation Rule: KDS start with formation of SHG through identifying of target poor women eligible for membership through informal village survey. (v) Loan sanction by the BM. 3. (iii) 1st installment after 7 days in equal weekly installment. Each of the group organizes weekly meeting in a fixed day.* Last 3 installments can be repaid at a time. Each of the group has three group leader President. 10-25 poor women are formed a self-half Group and their age 18-55 years. (iv) Last 3 installment can be repaid at a time. 5. security deposit and loan repayments during the group meeting.

50 % b) Insurance Product 1.0000000 84458 Rs. KDS tie up with Life Insurance Company for Borrower insurance. 457065 Rs.Other Activities 5.0000000 2837 140 Rs. 457065 L) KDS Area Operation: SL No.Repayment Charge Processing fees Insurance fees Interest Rate Education loan(Interest) Weekly 1. Health Insurance 4. 6. In case of untimely demise of Clients the successor of the expired Borrower will get the benefit of the Borrower insurance and the loan is exempted from repayment.50 % 15 % 12. 24. Name of the Districts Number Of Block Number Of Branches Number Of Members 59 |Page . 3. of Active Borrowers Amount of Loan Outstanding Average Loan Size Borrower per Loan Officer Loan Amount Per Loan Officer Repayment Rate Rs. Risk Fund K) Business Process: Loan Portfolio Security Deposit Cumulative no of loan Disbursed Amount of Loan Disbursed No. 2731415 143505 Rs.00 % 1. 52. 2.

West Bengal Minority Development Finance Corporation.W. Friends of Women’s World Banking India (F. 2. United Bank of India 3. Small Industries Development Bank of India 5.1.B. (Department of Women and Child Development. Axis Bank 2. 8. of India). NADIA HOOGLY NORTH 24 PARGANAS SOUTH 24 PARGANAS BURDWAN HOWRAH MURSHIDABAD KOLKATA MALDA 9 16 19 12 4 3 8 4 1 30 12 33 6 6 1 1 1 1 17313 5577 36055 4146 3187 346 1902 540 424 M) Operation Highlight Past 5 Years Activities: N) KDS Lenders: 1. 6. 9. 4. West Bengal Backward Class Development Finance Corporation 6. 3. 5. 7. 8. |Page 60 . ICICI Bank.W. 7. Rashtriya Mahila Kosh.) 4. govt.

1. Loan Cycle 1st 2nd 3rd 4th Loan Amount 7000 8000 9000 12000 Monthly Income 1800 3000 – 4000 4000 – 4500 4500 – 75000 j) DIRECTOR’S Report To the members of KDS Micro credit Services private limited your Directors have pleasure in presenting Second Annual Report of your Company together with the Audited Statement of Accounts for the financial year ended 31st March 2009. 8000 (Eight thousand) while they got more profit. for her development of business and her conjugal life.D. Both her husband and she herself did the same in order to enlarge their business and got the best profit. 2. As a result they are passing the life in a peace with their children and keep up the social culture properly.(seven thousand) to develop her tools for the same.G.03. 1) Financial Activities Sl.D. to enlarge her Pottery business.C.S. and Duttapukur Branch office of K. they got another loan of Rs. There she was inspired by field organizer of K. Particulars Total Income Total Year ended 31.00 Year ended 31.B. Mr. 7000/. She admires the K.S. No. So she got a loan of Rs.08 617137. After 40 weeks. She became please and interested to provide more fund from K.D.03.D. Haripada Paul is also landless labour working in his self profession Pottery.00 197296. Geeta and her husband lived on very heard life with their three children out of which two are school going. to her business. in her won village.S.00 540150. community who lives in the hamlet of 24 pgs (N) in West Bengal with her husband.09 204681.00 61 |Page .“Success Story” Geeta Paul Geeta Paul is a landless woman belonging to O.S.H. Geeta Paul herself found out the S.

8. Sl. amount of loan outstanding CHAPTER 16 Success Factors of Micro-Finance in India Over the last ten years. 3. successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people.00 1750435. Borrowers Total amount of loan disbursed Total No. 48567. 1. when given access to responsive and timely financial services at market rates.00 5.08 547 450 5088000.00 7385.07 599 324 2130000. |Page 62 .00 34654.03. 2.03. 4.00 Total No.00 2660.00 1645526.00 3364. 6. Particulars Year ended 31.00 Year ended 31. of Member Total No.00- 2) Business Activities Presently your company operates in one district in Kolkata in the state of West Bengal. The main activities of the company during the year were Micro Loans.00 7385. Profit before Interest Depreciation & Tax Depreciation Profit Before Tax Profit after Tax 76987.00 76987. The other relevant business parameters were as follows. No .Expenditure 3.

*Isolated and scattered. Problems for Alternative Micro-Finance Institutions The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. or NGO promoted SHGs. where politicians have ordered borrowers not to repay their debts. A vast majority of them set up as NGOs for getting access to funds as. The alternative finance institutions also have not been fully successful in reaching the needy. 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. *Lack of proper governance and accountability. There are many reasons for this: *Financial problems leading to setting up of inappropriate legal structures. making microfinance one of the most effective poverty reducing strategies. the existing practices of mainstream financing institutions such as SIDBI and NABARD and even of the institutions specially funding alternatives. is to fund only NGOs. *Lack of commercial orientation. the heart of the industry. a. CHAPTER 17 Future of Micro Finance Microfinance in India is in crisis because of the backlash against lenders in the southern state of Andhra Pradesh. As a result. such RMK and FWWB. 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. Community banks. The industry also faces an uncertain regulatory future with the state introducing new restrictions on lenders and |Page 63 .repay their loans and use the proceeds to increase their income and assets. the largest incentive to enter such services remains through the nonprofit route.

A) The Future: Microfinance expansion over the next decade can be expected to be an extension of what has been achieved so far while overcoming the hurdles that have been posing difficulty in effective microfinance operation and its expansion. but a restructuring of the microfinance industry is in strong demand. These agents contact several borrowers. and the way that lenders are going about collecting payments is wrong. 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. In order for a peaceful. While these deaths are tragic. ICICI Bank plans to provide farmers credit from sugar companies. and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry. Taking the FSC initiative further. The problem lies in the way that MFI’s are going about their business. because of very low NPAs. 65% of the poor people will have excess to MFIs. restrictions are not necessary. It will only be until microfinance policy is solidified and agreed upon by the local and national legislatures that MFI’s regain the trust and reputation they once held as an institution of progress. Thus.Finance Minister Pranab Mukherjee saying last week he would formulate new rules to govern the industry once he receives a report from a committee of the Reserve Bank of India. micro-credit institutions and food processing industries. The industry needs to move past a single-minded focus on scale. and but what must occur is a restricting of the employee base. seed companies. Another plan to increase the reach in rural areas is to launch mobile ATM services. expand the depth and breadth of products and services offered. Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities that—left unaddressed—could negatively impact the long-term future of the industry. |Page 64 . NGOs.(World Bank report). Estimated that 5 % of the number of people below the poverty line will get reduced in the next 5 years. If such abuse continues to persist. dairy companies. Many Pvt. thus expanding the reach of ICICI Bank at a low cost. There may be several participants in this process and their participation may be seen in the following forms. MFI’s must strictly enforce their lender policies. ICICI Bank branded trucks have started carrying ATMs through a number of villages. Banks and Foreign Banks would enter this business segment. making sure to eliminate agent threats as mentioned in the WSJ. progressive future. The system itself is sound. the root of the problem is not microfinance and not the interest rates. not abuse. Estimated that in next five years. there will not be a future for microfinance.

Existing microfinance institutions can expand their operations to areas where there are no microfinance programs. More NGOs can incorporate microfinance as one of their programs. In places where there are less micro finance institutions, the government channels at the grassroots level may be used to serve the poor with microfinance. Postal savings banks may participate more not only in mobilizing deposits but also in providing loans to the poor and on lending funds to the MFIs. More commercial banks may participate both in microfinance wholesale and retailing. They many have separate staff and windows to serve the poor without collateral.International NGOs and agencies may develop or may help develop microfinance programs in areas or countries where micro financing is not a very familiar concept in reducing poverty. Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of customers to be reached, and the variety and quantum of services to be rovided are really large. It is estimated that 90 million farm holdings, 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and does not seem an unreasonable estimate. However, 80% of the financial sector is still controlled by public sector institutions. Competition, consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains. Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector because of its very low NPAs and high repayment rate of more than 95% in spite of offering loans without any collateral security.

Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital and technology to address these challenges however now exist in India, although they are not yet fully aligned. With a more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery of financial services to poor people in India Development of Small-Scale Enterprises through microfinance will not only increase the outreach but will also help the generation of more employment and income for the poor. It is expected that in the following years there will be considerable deepening of microfinance in this direction along with simultaneous drives to reach and serve the poorest of the poor.



But the crux of the discussion is that, if the over excess involvement of the government would be there in the Micro Finance sector, than the growth of the Micro Finance won‘t much possible. The Govt. involvement should limited to the important decisions only, but not to interfere in each and every matter of the management.


Top 50 Microfinance Institutions in India

The above report includes detailed profiles and ratings of India’s top Microfinance Institutions: CRISIL List: Top 50 Microfinance Institutions in India by Loan Amount Outstanding for 2010. |Page 66

1. SKS Microfinance Ltd (SKSMPL). 2. Spandana Sphoorty Financial Ltd (SSFL). 3. Share Micro fin Limited (SML)4. Asmitha Micro fin Ltd (AML). 5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP). 6. Bhartiya Samruddhi Finance Limited (BSFL). 7. Bandhan Society. 8. Cashpor Micro Credit (CMC). 9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL). 10. Grameen FinancialServices Pvt Ltd (GFSPL). 11. Madura Micro Finance Ltd (MMFL). 12. BSS Microfinance Bangalore Pvt Ltd (BMPL). 13. Equitas Micro Finance India P Ltd (Equitas). 14. Bandhan Financial Services Pvt Ltd (BFSPL). 15. Sarvodaya Nano Finance Ltd (SNFL). 16. BWDA Finance Limited (BFL). 17. Ujjivan FinancialServices Pvt Ltd (UFSPL). 18. Future Financial Services Chittoor Ltd (FFSL). 19. ESAF Microfinance & Investments Pvt. Ltd (EMFIL). 20. S.M.I.L.E Microfinance Limited. 21. SWAWS Credit Corporation India Pvt Ltd (SCCI). 22. Sanghamithra Rural Financial Services (SRFS). 23. Saadhana Micro fin. 24. Gram Utthan Kendrapara. 25. Rashtriya Seva Samithi (RASS). |Page 67

Sonata Finance Pvt Ltd (Sonata). Sahara Utsarga Welfare Society (SUWS). 27. 28. 33 Payakaraopeta Women’s Mutually Aided Co-operative Thrift and Credit Society (PWMACTS) 34 Aadarsha Welfare Society(AWS) 35 Adhikar 36 Village Financial Services Pvt Ltd (VFSPL) 37 Sahara Uttarayan 38 RORES Micro Entrepreneur Development Trust(RMEDT) 39 Centre for Rural Social Action (CReSA) 40 Indur Intideepam Federation Ltd (IIMF). Janalakshmi Financial Services Pvt Ltd (JFSPL).26. 29. Foundation (IDF) 46 Gandhi Smaraka Grama Seva Kendram (GSGSK) 47 Swayamshree Micro Credit Services (SMCS) 48 ASOMI 49 Janodaya Trust |Page 68 . 30. 31. Rashtriya Gramin Vikas Nidhi. Annapurna Financial Services Pvt Ltd. Arohan Financial Services Ltd (AFSL). Hand in Hand (HiH). 41 Welfare Organization for MultipurposeMass Awareness Network (WOMAN) 42 Pragathi Mutually Aided Cooperative Credit and Marketing Federation Ltd(PMACS) 43 Indian Association for Savings and Credit(IASC) 44 Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd (Sewa) 45 Initiatives for Development Bangalore. 32.

unique as it is. with a global audience. has established itself as an international conference dedicated to Indian microfinance. the Microfinance India Summit. It has become the single most important platform for sharing the Indian experience. At the same 69 |Page . organized by ACCESS Development Services.50 Community Development Centre (CDC) CHAPTER 19 Microfinance India Summit 2010 Over the last six years.

it also provides an avenue to learn about international trends and best practices for adaptation by the Indian community of practitioners. social performance.Need to Reflect and Reaffirm". New Delhi. "The Poor First" (2008) and "Doing good and doing well. practitioners.the challenges of depth and breadth" (2007). Policy makers. transparency.time. the Summit themes have helped in focusing on key issues including "Inclusion. In the past. researchers and thought leaders share their experiences on various panels. "Urban Microfinance" (2006). "Formal Financial Institutions . The microfinance India Summit 2010 will be held on November 15-16. The Summit sessions will focus on current trends and issues relating to sustainability.The need for balance" (2009). Do you think interest rate charged by Microfinance Institution’s (MFI’s) is appropriate? • Ye s • No 2. Questionnaire 1. promoters. The over-arching theme for this year's Summit is "Mission of Microfinance . commercialization of the sector. client protection. academics. Do you think banks have good scope through Microfinance? • Yes • No |Page 70 . among others. and about 1000 delegates from both within and outside the country participate in the Summit. It bridges the unnecessary hiatus between models and methodologies and helps to build consensus on the critical challenges and issues. Innovation and Impact" (2005). 2010 at Hotel Ashok.

Would you prefer to take loan from banks or MFI’s? • • 4. • • • • Banks MFIs According to you which factors are more crucial for rapid growth of MFI’s? Low interest rate Availability Processing & sanctioning of loan Installment Factor 5. Do you think interest rate charged by Microfinance Institution’s (MFI’s) is appropriate? • • Ye s No |Page 71 . Do you think is there any future of Microfinance? • • YES NO Findings 1.3. Do you think Microfinance is a tool to eradicate poverty? • • Ye s No 8. Do you think Microfinance has helped in Rural India? • • 6. • • Yes No Microfinance Institutions can help unemployed urban youth? Yes No 7.

Do you think banks have good scope through Microfinance? • • Yes No 31% YES NO 69% 3.41% 59% YES NO 2. Would you prefer to take loan from banks or MFI’s? • • Banks MFIs |Page 72 .

Do you think Microfinance has helped in Rural India? • • Yes No |Page 73 .70% 60% 50% 40% 30% 20% 10% 0% BANKS MFIs 4. According to you which factors are more crucial for rapid growth of MFI’s? • • • • Low interest rate Availability Processing & sanctioning of loan Installment Factor 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% LowIntersest Rate Availability Processing& Sanctioning Of Loan Installm Factor ent 5.

18% YES NO 82% 6. Do you think Microfinance is a tool to eradicate poverty? • • Ye s No |Page 74 . Microfinance Institutions can help unemployed urban youth? • • Yes No 33% YES NO 67% 7.

Do you think is there any future of Microfinance? • • YES NO YES NO 28% 72% Recommendations and Suggestions |Page 75 .81% YES NO 19% 8.

ACRONYM |Page 76 . So it’s obvious that man power cost and operating cost are higher for the MFIs. which I felt during my project on Micro Finance is:1) The concept of Micro Finance is still new in India.Under mention are the few recommendations and suggestions.000 customers. 3) There is huge demand and supply gap. So there need to be an activate participation by the Pvt. Not many people are aware the Micro Finance Industry. because it will stymie the growth and prevent the others MFIs to enter. So according to me rates are justifiable. so there is a huge demand for MFIs in India with proper rules and regulations. 2) There are many people who are still below the poverty line. But what I felt during my personal survey. 5) Many people say that the interest rate charge by the MFIs is very high and there should be compelled cap on it. Now by this example we will get agree. we the people should stand and create the awareness about the Micro Finance. 4) One strict recommendation is that there should not over involvement of the Government in MFIs. in money demand by the poor and supply by the MFIs. Sector in this Industry. So apart from Government programmers. Suppose a big commercial bank gives Rs 1 million to an individual and in the same way a MFI gives Rs 100 to 10. that the high rates are justifiable. But with limitations.

Operation Manager Chief Executive Director Head Office Human Resource Development Micro finance Micro finance Institute Management Information System Non Banking Financial Company Non Government Organization Conclusion |Page 77 .KDS MSPL OM CED H/O HRD MF MFI MIS NBFC NGO - KDS Micro credit services Private Limited.

and players will continue to reinforce the microfinance movement and increase its expansion. Just imagine where would be India in next 10 years. Private MFIs in India. Their outreach is uneven in terms of geographical spread. Given the experiences of large and fast growing the last decade has witnessed an impressive growth of microfinance. New instruments are being used to solve the problem of funding. One solution by which we all can help the poor people. At the end I would conclude that.000 on them without any good reason. Governments are taking an increasing interest in it. Instead of that. there are lessons for others who want to increase their outreach and operate on a sustainable basis. The last decade has witnessed an impressive growth of microfinance. are still fledgling efforts and are therefore unregulated. cost saving devices. Many players have committed themselves to its promotion. There should. They serve micro finance clients with varying quality and using different operating models. there is an increasing awareness about the power of microfinance.500.000 . in a whole year a medium and a rich class people spends more than Rs 10. NGO-MFI partnerships are on the increase. innovations. Bibliography |Page 78 . impact. both in term of high living standard and happiness. The task of building a povertyfree world is yet to be finished. More banks. it is encouraging that the situation is changing.2 billion people living in extreme poverty on this planet. Regulatory framework should be considered only after the sustainability of MFI model as a banking enterprise for the poor is clearly established. 3000 aside and donate that amount to the MFIs. They are not living in one country or region but spread all over the world. Given the experiences of large and fast growing Microfinance. it is encouraging that the situation is changing. be no room for complacency. and poverty fighting capacity. Micro Finance Industry has the huge potential to grow in future.Microfinance has a long way despite doubts expressed and criticism launched about its viability. then at the end of the year the total amount in the hands of poor would be ( average 500 million people *Rs 3000)=Rs 1. however. both national and international are coming forward with different support packages. However.000. i. and the need to support its growth. if this industry grows then one day we‘ll all see the new face of India. Fortunately. However. lack of funding is still considered a major obstacle in the way of its growth. barring a few exceptions. There are still over 1.e. by keeping just mere Rs.000. lack of funding is still considered a major obstacle in the way of its growth. It is expected that in the coming years more ideas.

gdrc.google.microfinanceindia.elyserowe.org • |Page 79 .net www.in.org www.authorstream.com www.• • • • • • • • • • • • • • • • • www.com www.com www.books.com www.com www.google.knowledge.com www.indiamicrofinance.com www.allianz.ac.google.kdsmfi.com www.com www.org www.nationmaster.scribd.ifmr.familiesinbusiness.com www.forbes.com www.www.org www.com www.microfinanceinsight.investopedia.seepnetwork.com www.thaindian.

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