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MICRO FINANCE

INTRODUCTION Micro finance can be viewed as an innovative attempt of the banking sector to provide financial products and services, primarily credit, to the poor and bridge the gap that commercial banking has not been able to fulfil. However, the concept of microfinance itself is conceived with a different purpose than just providing the poor with access to capital. The main principle behind the approach of providing micro credits has been to meet the special goal of bringing innovation in the by channelizing the potential, skill and talent of underprivileged women and economically challenged people by empowering and engaging them in commercial and purposeful activities. Micro finance is generally considered as a specialized financial tool such as small loans, savings accounts and insurance policies available to poverty stricken and small businesses that do not typically have access to financial services. These services are recognized as one best way to empower individuals and an effective social innovator, especially for those who fall in the low income trap, to lift themselves out of poverty.

Definition of Microfinance and MFIs The proposed Microfinance Services Regulation Bill defines microfinance services as providing financial assistance to an individual or an eligible client, either directly or through a group mechanism for 1) An amount, not exceeding rupees fifty thousand in aggregate per individual, for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual), or 2) An amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purposes, or 3) Such other amounts, for any of the purposes mentioned at items (1) and (2) above or other purposes, as may be prescribed. A Micro Finance Institution (MFI) is an organization that provides financial services to the poor. This very broad definition includes a wide range of providers that vary in their legal structure, mission, and methodology. However, all share the common characteristic of providing financial services to clients who are poorer and more vulnerable than traditional bank clients.

The following table contains the different forms of Micro Finance Institutions (MFIs) :

Type of entity Association

Non-profit Society under Societies Registration Act 1860

Mutual benefit Cooperative which can be just a savings and credit cooperative or be further licensed as Cooperative bank. Mutual benefit trust Mutual Benefit (Sec 620A Nidhi Company)

For-profit Association of persons

Trust under Indian Trusts Act 1920 Company under Indian Companies Act, 1956

Charitable trust Section 25 Company

Investment trusts Company which is further either an NBFC or a bank

Background of Micro Finance The conventional banking system did not give access to credit for the poor because of lack of collaterals, information asymmetry and high transaction cost associated with small borrowings. Micro finance is an alternative which reaches the poor to enhance social and economic empowerment through financial intermediation. It involves provision of thrift, credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and thereby improve living standards. In operational terms, micro credit involves small loans, upto Rs. 25000 extended to the poor without any collateral for undertaking self-employment projects. Such loans are provided through Micro Finance Institution (MFIs). One of the most popular models of MFIs has been the Grameen Bank Model, developed originally in Bangladesh and replicated in various parts of the world. Under this model, NonGovernment Organisations (NGOs) form and develop Self Help Groups (SHGs) and provide credit to them. The concept that micro finance is an income producing tool rather than a consumption aid is an appropriate way of bringing social changes and transforming the society in the new and developed world. That is why microfinance and micro credit do not provide consumers with loans to simply increase their consumption instead they provide loans for the specific purpose of creating self-employment for the poor, thereby enabling the poor to build their own micro enterprises and with passage of time, they can become the owner of large business houses and can create employment opportunities for the weaker sections of the society and help them overcome poverty.

The focus of micro finance on the weaker sections of the society is one innovative approach to bridge the gap between haves and haves not. A balanced society depends upon balance pillar and micro finance is an effective tool to strengthen the weaker pillar. Some people are of the opinion that microfinance should focus on the economically active poor, or those just at or below poverty level. Others, on the other hand, suggest that micro finance institutions should try to reach the needy persons, but all have one common view that micro finance has the power to single-handedly defeat poverty. Continuous innovations in the society by gearing up activities of those who fall in lower income traps by making small loans available to them demands sustainability of those institutes which are providing micro credit loans. So, loans are designed to be offered at market rates of interest so that the Micro finance Institutions (MFIs) can recover their cost but they should not be so high that they make supernormal profits off the poor. This is an important concept because institutions that charge high interest rates can be scarcely cheaper than the moneylenders they intended to replace. Institutions which charge subsidized rates can distort markets by undercutting other lenders that are attempting to recover their costs. This implies that when clients pay less interest, the income is expected to increase.

Role of Micro Finance Micro Finance as an income generating activity Micro finance programs offer motivated poor the capital they need to initiate income generating activities that will allow them to escape from poverty. Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve the needs of low income families and women headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself. The driving force behind the act of providing micro credit and small loan was to support the real beneficiaries for generating the source of income by opening their own enterprises. But one side of the coin reflects that poor do not have access to these small funding schemes. The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between the mode of operation followed by financial institutions and the economic characteristics and financing needs of low income households. For example, commercial lending institutions require that borrowers have a stable source of income out of which principal and interest can be paid back according to the agreed terms. However, the income of many self-employed households is not stable, regardless of its size. A large number of small loans are needed to serve the poor, but lenders prefer dealing with large loans in small

numbers to minimize administration costs. They also look for collateral with a clear title-which many lowincome households do not have. In addition, bankers tend to consider low income households a bad risk imposing exceedingly high information monitoring costs on operation. However, experience of small funding to poor from last 10-15 years has given surprising facts. It has been seen that by financing to small entrepreneurs, producers and poor people and giving them easy access to responsive and timely financial services at market rates, had made them serious to repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs, grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making micro finance the most effective poverty reducing strategies. But the point is that sustainability and survival of micro finance institutes cannot be challenged at any cost. To the extent that micro finance institutions become financially viable, self-sustaining and integral to the communities in which they operate, they have the potential to attract more resources and expand services to clients. Despite the success of micro finance institutions, only about 2% of the worlds 500 million small entrepreneurs are estimated to have access to financial services. Although, there is demand for credit by poor at market rates, the volume of financial transaction of micro finance institution must reach a certain level before their financial operation becomes self-sustaining. In other words, although micro finance offers a promising institutional structure to provide access to credit to the poor, the scale problem needs to be resolved so that it can reach the vast majority of potential customers who demand access to credit at market rates. The question then is how microenterprise lending geared to provide short term capital to small businesses in the informal sector can be sustained as an integral part of the financial sector and how their financial services can be further expanded using the principles, standards and modalities that have proven to be effective. To be successful, financial intermediaries that provide services and generate domestic resources must have the capacity to meet high performance standards. They must achieve excellent repayments and provide access to clients. They must build towards operating financial self-sufficiency and expanding client reach. In order to do so, micro finance institutions need to find ways to cut down on their administrative costs and also broaden their resource base. Cost reductions can be achieved through simplified and decentralised loan application, approval and collection processes. For instance, through group loans which give borrowers responsibilities for much of the loan application process, allow the loan officers to handle many more clients and hence reduce costs. Micro Finance Institutions (MFIs) can broaden their resource base by mobilizing savings, accessing capital markets, loan funds and effective institutional development support. A logical way to tap capital

market is securitization through a corporation that purchases loans made by micro enterprise institutions with the funds raised through the bonds issuance on the capital market. Savings facilities make large scale lending operations possible. On the other hand, studies also show that the poor operating in the informal sector do save, although not in financial assets and hence value access to client-friendly saving service at least as much access to credit. Savings mobilization also makes financial institutions accountable to local shareholders. Therefore, adequate savings facilities both serve the demand for financial services by the customers and fulfil an important requirement of financial sustainability to the lenders. Micro Finance Institutions (MFIs) can either provide savings services directly through deposit taking or make arrangements with other financial institutions to provide savings facilities to tap small savings in a flexible manner. Convenience of location, positive real rate of return, liquidity and security of savings are essential ingredients of successful savings mobilization. Consequently, rational and prudential financial regulations become necessary to ensure the solvency and financial soundness of the institution on the one hand and to protect the interest of depositors on the other. However, excessive regulations that do not consider the nature of Micro Finance Institution (MFIs) and their operations can hamper their viability. In view of small loan size, Micro Finance Institutions (MFIs) should be subjected to a minimum capital requirement which is lower than that applicable to commercial banks. On the other hand, a more stringent capital adequacy rate that is the ratio between capital and risk assets should be maintained because Micro Finance Institutions (MFIs) provide uncollateralised loans. Governments should provide an enabling legal and regulatory framework which encourages the development of a range of institutions and allows them to operate as recognised financial intermediaries subject to simple supervisory and reporting requirement. Usury laws should be repelled or relaxed and Micro Finance Institutions (MFIs) should be given freedom of setting interest rates and fees in order to cover operating and finance costs from interest revenues within a reasonable amount of time. The government could also facilitate the process of transition to a sustainable level of operation by providing support to the lending institutions in their early stage of development through credit enhancement mechanisms or subsidies. Moreover, successful operation and sound functioning of the institutes providing meagre finances is demanded not only for upliftment of the financial deprived strata of the society but also for economic development of the nation. Recent work by the World Bank suggests that almost 30 percent of employment in low-income countries is generated by the informal economy, while an additional 18 percent is provided by small and medium enterprises. Together, these two groups contribute 63 percent of the Gross Domestic Product (GDP). So we find the need to stimulate the role of micro finance institutes both in formal and informal sectors. One way of expanding the successful operation of Micro Finance Institution (MFIs) in the informal sector is through

strengthen linkages with their formal sector counterparts. A mutually beneficial partnership should be based on comparative strengths of each sector. Informal sector Micro Finance Institutions (MFIs) have comparative advantage in terms of small transaction costs achieved through adaptability and flexibility of operations. They are better equipped to deal with credit assessment of the urban poor and hence to absorb the transaction cost associated with loan processing. On the other hand, formal sector institutions have access to broader resource-base and high leverage through deposit mobilisation. MICRO FINANCE AS A ROAD MAP FOR SMALL BUSINESSES Micro level investments for running small business is really a panacea for fulfilling basic needs of downtrodden in general and eradication of poverty in particular. Micro finance not only empowers and employs the economically challenged people and also engages them in performing purposeful activities and all these things are required for bringing social changes. Social transformation does not demand big miracles but meagre attempts to help poor for initiating small ventures can bring great results. There are different ways to fulfil this objective, but the role of the institutes engaged in providing micro credit facilities to poor is inevitable. For example, Micro finance empowers depositors to lift up from the bottom to the middle of the economic pyramid as poor can satisfy their different sets of needs in the need hierarchy when they will start earning through their own enterprises. Moreover, the institutes providing loan facilities for opening new ventures also educates clients about how to start business and trains them for bringing desired results. Micro finance also helps individuals to utilise their skills and potentials which otherwise remain hidden because of non-availability of finance. Above all, micro finance creates employment by facilitating small businesses and engages clients in activities for earning and for lifting their social status as well as economic level which helps to reduce the gap between two strata of people with high and low income levels.

Performance of Micro Finance in India Progress of Micro Finance Programmes

Number 2008-09 Loans disbursed by the bank during the year Loans outstanding with banks Savings with banks 1,915 1,531 581 691 2009-10

Amount ( Rs.) (In Crores) 2008-09 2009-10

3,732

8,063

5,009

10,148

Source: Reserve Bank of India, Report on Trend and Progress of banking in India, 2009-10 (Mumbai, 2010), Table 4.35 Page no.3.94 In 2009-10, 691 Micro Finance Institutions (MFIs) were provided loans by banks to the tune of Rs.8,063 Crores. As per some estimates, the credit support for poor households has assessed at about Rs.4,50,000 crores. Some of the micro level studies indicate that the poor still continue to depend on informal sources of credit, accounting for 40-60% of the household demand. The current model to micro finance has strayed away from the poor, focusing only on the income opportunities for the MFIs with least consideration on the welfare of the poor to save and prosper. The controversies surrounding interest rates, over leverage clients and strong arm recovery tactics employed by some MFIs in Andhra Pradesh has set the stage for a demand to cleanse the sector of the unhealthy practices observed by some of the practitioners.

RECENT TRENDS OF MICRO FINANCE SERVICES TO POOR Micro Finance Institutions have adopted innovative ways of providing credit and savings services to the entrepreneurial poor. The different organisations in this field can be classified as Mainstream and Alternative Micro Finance Institutions. Some of the mainstream financial institutions involved in extending micro finance are National Bank for Agriculture and Rural Development (NABARD), Small industries Development Bank of India (SIDBI), Housing Development Finance Corporation (HDFC), Commercial Banks, Regional Rural Banks (RRBs) and credit co-operative societies etc. Alternative Micro Financial Institutions are the institutions which have come up to fill the gap between the demand and supply for micro finance. These institutes have been structured with the main aim of providing thrift, credit and other financial services and products of very small amounts mainly to the poor, in rural, semiurban or urban areas for enabling them to raise their income level and improve living standards.

FEW RECENT SCHEMES OF GOVERNMENT OF INDIA The Government of India has initiated many schemes for improving the life of poor in India. One of them is Micro Credit Programs by National Bank for Agriculture and Rural Development (NABARD) in the field of agriculture and Small Industries Development Bank of India (SIDBI) in the field of industry, service and business. NABARD has been working as a catalyst in promoting and linking more and more Self Help Groups (SHGs) to the banking system. Actually, it was visualised that such groups, when mobilised the surpluses generated by members of the group and finance the investments for the needy members, can gear up economic condition of the people and help them to come out of the vicious circle of poverty. SIDBI has stepped up flow of credit to the units in small scale sector through direct and indirect financing and ensures speedy disbursement of funds.

SALIENT FEATURES OF MICRO FINANCE PROGRAMME OF THE GOVERNMENT OF INDIA Arranging Fixed Deposits for MFIs/ NGOs: Under this scheme, the Government of India arranges money for MFIs /NGOs like SIDBI for micro credit to poor. Training and studies on Micro finance programme: Government of India would help SIDBI in meeting the training needs of NGOs, SHGs, intermediaries and entrepreneurs and also in enhancing awareness about the programme. The Government of India would help in institution building through identification

and development of intermediary organizations which would help the NGOs/SHGs in identification of product, preparation of project report, working out forward and backward linkages and in fixing marketing/ technology tie ups. Budgetary provision for the scheme during the 10th plan: There was a budgetary provision in the 10th five year plan. Administrative arrangement: A committee has been formed to control and monitor the administrative arrangement of MFIs/NGOs.

CREDIT MECHANISMS ADOPTED BY OTHER BANKS HDFC Bank: HDFC has been making continuous and sustained efforts to reach the lower income groups of the society, especially the economically weaker sections, thus enabling them to realize their dreams of possessing a house of their own. For the purpose of actual implementation of the low cost housing projects, HDFC collaborates with organizations, both Governmental and Non-Governmental. Such organizations act as co-ordinating agencies for the projects involving a collective of individuals belonging to the economically weaker sections. The projects could be either in urban or rural areas. IRCI Bank: The Government of India had set up Industrial Reconstruction Corporation in April 1971, with a main aim to provide reconstruction and rehabilitation assistance mainly to sick units. Other reason behind the formulation of this bank was to provide assistance for strengthening the commercial activities in the country and energize the livelihood of the sufferers. It grants loans and advances to weak and closed units. The Kisan Credit Card A recent approach to providing credit to the agriculture sector, including small farmers, is the Kisan Credit Card (KCC), offered by commercial banks, RRBs and cooperative banks. Since their introduction in 1998-99, some 31.6 million KCCs had been issued by March 31, 2003. Though these are not truly credit cards, the KCCs present a number of advantages for the borrowers and lenders. Borrowers appear to have found this scheme quite useful because of the ease with which they can access credit and renew loans on a yearly basis, once the initial screening has been done, the reduction in number of visits required to branches, the choice/freedom of purchase of inputs and operation of accounts at the designated branches. KCCs have substantially reduced the paperwork and delays associated with renewal of crop loans. Branch staff also appear to have found the scheme helpful, as it has reduced transactions costs. On the lines of KCC, banks have launched entrepreneurs. the Laghu Udhami Credit Cards for small

However, one concern is the uneven growth in the distribution of the KCC scheme. For instance, in our sample of households from AP and UP, only 6% of households report having a KCC (RFAS, 2003), and access to a KCC appears to be higher for the larger farmers: while some 20% of large farmers report having a KCC, the corresponding figure for marginal farmers I is just 2%. The reasons for this appear to include the following: (i) instructions from controlling offices sometimes reduce the flexibility of branch staff; (ii) some farmers have been unable to avail of the facility due to lack of title to the land that they till; (iii) many farmers possess land under oral lease arrangements, which are not recognized; (iv) some farmers have not yet availed of the scheme because they are unaware of its benefits. The success of the KCC, and other similar facilities that could be introduced in the future, would depend critically on the following factors: (i) extending the facility to rural non-farm activities; (ii) efforts to update land records in a timely manner; (iii) a relaxation by the RBI in the rules so as to accommodate for oral lessees and sharecroppers; (iv) greater flexibility to branch managers to be innovative in the use of the KCC facility to meet the totality of the credit requirements of farm households;(v) greater flexibility to cardholders to make deposits and withdrawals; (vi) uniformity in service charges interest rates among various banks; (vii) a reduction in documentation charges; and (viii) efforts to better publicize the scheme. Financial Inclusion Financial inclusion is the availability of banking services at an affordable cost to disadvantaged and lowincome groups. In India the basic concept of financial inclusion is having a saving or current account with any bank. In reality it includes loans, insurance services and much more. The first-ever Index of Financial Inclusion to find out the extent of reach of banking services among 100 countries, India has been ranked 50. Only 34% of Indian individuals have access to or receive banking services. In order to increase this number the Reserve Bank of India had the Government of India take innovative steps. One of the reasons for opening new branches of Regional Rural Banks was to make sure that the banking service is accessible to the poor. With the directive from RBI, our banks are now offering No Frill Accounts to low income groups. These accounts either have a low minimum or nil balance with some restriction in transactions. The individual bank has the authority to decide whether the account should have zero or minimum balance. With the combined effort of financial institutions, six million new No Frill accounts were opened in the period between March 2006-2007. Banks are now considering Financial Inclusion as a business opportunity in an overall environment that facilitates growth. Financial inclusion mainly focuses on the poor who do not have formal financial institutional support and getting them out of the clutches of local money lenders. As a first step towards this, some of our banks have now come forward with general purpose credit cards and artisan credit cards which offer collateral-

free small loans. The RBI has simplified the KYC (Know your customer) norms for opening a No frill account. This will help the low income individual to open a No Frill account without identity proof and address proof. The main reason for financial exclusion is the lack of a regular or substantial income. In most of the cases people with low income do not qualify for a loan. The proximity of the financial service is another fact. The loss is not only the transportation cost but also the loss of daily wages for a low income individual. Most of the excluded consumers are not aware of the banks products, which are beneficial for them. Getting money for their financial requirements from a local money lender is easier than getting a loan from the bank. Most of the banks need collateral for their loans. It is very difficult for a low income individual to find collateral for a bank loan. Moreover, banks give more importance to meeting their financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit. Self Help Groups are playing a very important role in the process of financial inclusion. SHGs are usually groups of women who get together and pool money from their savings and lend money among them. Usually they are working with the support of an NGO. The SHG is given loans against the group members guarantee. Peer pressure within the group helps in improving recoveries. Through SHGs nearly 40 million households are linking with the banks. Financial inclusion is a great step to alleviate poverty in India. But to achieve this, the government should provide a less perspective environment in which banks are free to pursue the innovations necessary to reach low income consumers and still make a profit. Financial service providers should learn more about the consumers and new business models to reach them. SEWA Self Employed Women's Association SEWA is a trade union registered in 1972. It is an organisation of poor, self-employed women workers. These are women who earn a living through their own labour or small businesses. They do not obtain regular salaried employment with welfare benefits like workers in the organised sector. They are the unprotected labour force of our country. Constituting 93% of the labour force, these are workers of the unorganised sector. Of the female labour force in India, more than 94% are in the unorganised sector. SEWAs main goals are to organise women workers for full employment. Full employment means employment whereby workers obtain work security, income security, food security and social security (at least health care, child care and shelter). SEWA organises women to ensure that every family obtains full employment. By self-reliance we mean that women should be autonomous and self-reliant, individually and collectively, both economically and in terms of their decision-making ability.

Swashrayi Mahila Sewa Sahakari Bank is SEWA members' largest cooperative, the first of its kind in india. The bank is owned by the self-employed women as share holders; policies are formulated by their own elected Board of women workers. The Bank is professionally run by qualified managers accountable to the Board.

SEWA Bank was established in 1974 with 4000 members each contributed Rs.10 as share capital. Today there are 93,000 active depositers. In 1999, SEWA Bank celebrated 25 years of providing financial services to poor, self-employed women. Always in debt, our members initially raised the issue of their need for credit so as to free them from the clutches of money-lenders and traders, to enhance their businesses, build up assets in their own name, for children's education, for the several emergencies including illness that they face and many other purposes. SEWA Bank is one example of how an NGO promoted a cooperative bank to offer an array of services. SEWA Bank is increasingly being recognized as one of the oldest MFOs in Indiahaving been in existence for over 25 years. While there have been several urban cooperative banks across the country, none is recognized as an MFI. SEWA Bank did not go through the pains of transformation,because the moment its parent, SEWA, decided that the poor women of Ahmedabad needed a financial service institution of their own, SEWA lost no time in promoting a womens bank independent of the NGO. SEWA proves the point that if the client group and geographical focus exist, there is no need to go through the painful process of starting as an NGO and moving towards mainstream. Recommendations The Reserve Bank of India (RBI) panel was set up in October 2010 to go into complaints of corporate misgovernance, over lending and forceful collections by some MFIs. RBI board sub-committee was headed by Y.H.Malegam. The industry came under pressure after suicides amongst micro finance borrowers were reported in Andhra Pradesh prompting the State Government to pass an ordinance that made it very hard for MFIs to lend or collect money. The State Government came up with the Andhra Pradesh Micro Finance Institutions (Regulation of money lending) ordinance 2010, that tightly restricts the freedom of operations of the MFIs in the state. The ordinance requires MFIs to register themselves and prevents lending in cases where loans are already outstanding. It allows for only monthly repayments and demands the display of interest rates charged by the MFIs. The MFIs have been facing a sharp drop in repayments-nearly 15-20% across the state. The Malegam Commitees recommendations are as follows:

1) Creation of separate category of NBFCs-MFIs: Individual loans should not exceed Rs.25,000 and the borrowing households annual income must not be more than Rs.50,000. The loan tenure should be less than 10 months for amounts less than Rs.15,00 and 24 months for others. 2) Interest rates and margin caps for NBFCs-MFIs: The interest cap is 24% for all personal loans, the margin cap for Rs.100 crore or more is 10% and below that 12%. 3) The cost of loans will have only three components: The processing fee (less than 1% of the loan amount), Interest and Insurance premium. 4) NBFCs-MFIs should maintain a capital adequacy ratio of 15% (up from the current norm of 12%) and a minimum provisioning of 1% of the outstanding loan portfolio against loan losses. The recommendations seem to be more like a band aid strategy to thwart an immediate prices without really hurting the interest of large NBFCs with substantial stakes in the sector. Mr. R. Devprakash has suggested a different Micro Finance Model which can help the much needed sustainability of the model. He is currently working as a project in CARE India giving technical lead to the livelihoods and micro finance programs in South India. According to him, a client centered business model is the need of the hour.

Dimension Nature of business

Conventional Business Model Market driven business model

Recommended Business Model Legitimate, more sustainable business model with social objectives

Target market Core products

Micro enterprises Working capital loans and business credit

Low income households Full scale financial productssavings, loans for productive ventures, remittance, pension and insurance products, loans for health needs and educational loans

Delivery channels

Conventional branch based banking through MFI branches

Business correspondents, smart cards, post office savings

Governance Structure

Representative of corporate to protect corporate interest as investors, venture capitalists in the governance structure

Representative of client to protect the clients interest

Risk management Type of business plan

Zero tolerance to delinquency Credit based business plan

Risk based pricing Financial services based business plan

Sustainability

Sustainability of institution is the key driver

Sustainability of clients is the key driver Production based credit needs

Credit prioritisation

Consumption based credit needs

Relationship management Credit appraisal

Paid loan officers

Promoters

Willingness to take loans by clients

Repayment capacity of the client

Loan pricing

Pricing based on market rates and profit margin

Pricing confirmed to the repayment capacity of clients Member trained staff to a major extent

Staff composition

Professional financial specialist

Prime consideration

Access to finance is a primary consideration

Financial literacy will precede the access to finance Focus on social cause of financial inclusion with equal focus on micro profit for the clients

Purpose of institution

Profit focus

Key drivers for portfolio expansion

Aggressive portfolio expansion encouraging multiple loans to clients

Balanced portfolio expansion with sensitivity to loan load per client Self help group based aggregation

Format for aggregation Joint liability group based aggregation

Transparency in operation Model

Interest rates and other charges are not transparent Credit first model

Interest rate and other charges are transparent Savings first model

Private equity interest dominates

Member equity interest dominates

Only 3-4% of MFI staff are women

Women being major stakeholders, majority of the staff need to be women

Ownership

Institution owns more

Members ownership stake is high

Basic Approach

Institution based

Client based

Sources: Mr. R.Devaprakash Re-engineering micro finance business model, The Indian Banker Volume-6 No.4 April 2011.

CONCLUSION Today, micro finance is a global industry. In order to further broaden its horizons and bring maximum benefits to the people in general and country in particular, there is still need to have more drainage of funds to the dry destination of the society. No country can afford to ignore substantial population

suffering from poverty as it can be costly for growth of any economy. So rational approach in this regard is to identify the strengths vested in such poor lot and attempts should be made to channelize their energy for productive purposes. In India, the need is to have more dissemination and adoption of rural agricultural micro finance methodologies as majority of population belongs to the rural areas. It is a widely recognised fact that access to financial services can play a critical role in helping poor people to widen their economic opportunities, increase their asset base and diminish their vulnerability to external shocks. Moreover, socio-economic developments as well as macroeconomic and financial sector stability are important components in ensuring and enabling environment for continued growth of the overall economy as a whole and the micro finance industry in specific. Empirical indications are that the poorest can benefit from micro finance from both an economic and social well being point of view and this can be done without jeopardizing the financial sustainability of the Micro Finance Institutions (MFIs). While there are many biases presented in the literature against extending micro finance to the poorest, there is little empirical evidence to support this position. However, if micro finance is to be used, specific targeting of the poorest will be necessary. Without this, Micro Finance Institutions (MFIs) are unlikely to create programs suitable for and focused on that group.