PROJECT REPORT ON (ROLES OF NABARAD AND MICRO FINANCE IN INDIA) FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD OF Masters in Business Administration UNDER THE GUIDANCE OF: Mr.CMA Ritesh Agarawal SUBMITTED BY: RACHIT DIXIT M.B.A. 4th SEM. Roll No. 1114270028

MBA2012-13 KHANDELWAL COLLEGE OF MANAGEMENT AND TECHNOLOGY, APPROVED BY AICTE, MINISTRY Of, GOVT. (OF INDIA) Address of the College. (U.P.)

ACKNOWLEDGEM ENT

Acknowledgement
I am extremely thankful to the KCMT institute of business administration for providing me the opportunity to undergo M.B.A course during the academic year 2011-2013. I would like to express my deep sense of gratitude and sincere thanks to my faculty guide Mr. Ritesh Agrawal (HEAD OF B.B.A. DEPARTMENT) for giving me valuable suggestion, guidance and encouragement. I would also like to express my sincere thanks to our HEAD OF M.B.A DEPARTMENT Mrs. Richa S. Prasad for giving us good guidance and suggestion. I would like to express my sincere thanks to all those who have helped me at for allowing me to do this project. Last but not least i would like to thanks to my parents and all my friends for their cooperation in helping me to complete this project work.

Declaration

I hereby declare that this internship work entitled ROLE OF NABARAD AND MICRO FINANCE IN INDIA. submitted for the Degree of Master of Business Administration is my original work and that is not done for the award of any degree, diploma or any similar title.

Date: Place: Bareilly RACHIT DIXIT

Preface
Life is full of surprises. Some better some sweet. With the much uncertainty that we are faced in life, we would want to secure it by preparing for unexpected.

I was able to understand the relevance of this fact in the most educative period . This project is an attempt to bring under one cover the entire hard work and dedication put by me during the tenure of this project. I got an opportunity to do my summer internship, in ROLE OF NABARAD AND MICRO FINANCE IN
INDIA .

Executive Summary
The project is about the study of brand awareness of ROLE OF NABARAD & MICRO FINANCE IN INDIA. NABARD is an apex institution, accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India. The project contains information about the agricultural finance operations of NABARD.NABARD for the smooth running of the organization has developed many committees and departments of inspection, which enables for the efficient and effective running of the organization. NABARD plays various roles and functions in various fields related to agricultural and rural promotion and development .Credit financing one of the major functions of NABARD is further subdivided into different types of refinance facilities, lower interest rates, production credit, investment credit, and farm sector schemes .The second major function is promotional under which NABARD has come up with the Kisan Credit Card and other promotional schemes which is of great convenience to farmers and banks. They have also developed are search and development fund with the objective of acquiring new in sights into the problem of agriculture and rural development. Their fourth major function development deals with credit planning, which is of great significance. The Watershed Development Fund development by NABARD is a great achievement by NABARD as it has become very successful. Other than this NABARD has undertaken various special projects such as Adivasi Development Programme etc. Last but not the least under the supervisory role NABARD has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks(DCCBs)and Regional Rural Banks(RRBs) under the provision of the Banking Regulation Act, 1949.

CONTENTS

List of Content
CONTENTS PAGE NO.
NABARAD 10-11 Objective & Mission 12 Functions of NABARAD 13 17 Features of NABARAD 18 Organizations Structure 19 Financials & Past Performance 20-26 Types of Refinance Facilities 27-32 Microfinance in India 33 Challenges and Opportunities 34
8

 Channels of Micro Finance 35 39 Marketing of Micro Finance Products 40-42 Issues in Microfinance 43-45 Recommendations 46-47 Suggestion 48 Conclusion 49 Reference 50

INTRODUCT ION

10

NABARAD
The National Bank for Agriculture and Rural Development (NABARD) was set up in July, 1982 following after the recommendations of the "Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development". All major issues related to rural credit until then dealt with by the RBI and the Agricultural Refinance and Development Corporation moved under the control of NABARD. NABARD thus emerged as the apex institution to play a pivotal role in the sphere of policy planning and providing refinance facilities to rural financial institutions. NABARD also administers the Rural Infrastructure Development Fund (RIDF), which was set up in 1995-96. NABARD has also been playing a catalytic role in micro-credit through the channel of Self-Help Groups (SHGs). NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development. The mandate also covers supporting all other allied economic activities in rural areas, promoting sustainable rural development and ushering in prosperity in the rural areas. With a capital base of Rs 2,000 crore provided by the Government of India and Reserve Bank of India , it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts. It is an apex institution handling matters concerning policy, planning and operations in the field of credit for agriculture and for other economic and developmental activities in rural areas. Essentially, it is a refinancing agency for financial institutions offering production credit and investment credit for promoting agriculture and developmental activities in rural areas.

11

NABARD today

Initiates measures toward institution-building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India , State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation Prepares, on annual basis, rural credit plans for all the districts in the country. These plans form the base for annual credit plans of all rural financial institutions Undertakes monitoring and evaluation of projects refinanced by it Promotes research in the fields of rural banking, agriculture and rural development Functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks

12

Objectives
NABARD was established in terms of the Preamble to the Act, "for providing credit for the promotion of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting IRDP and securing prosperity of rural areas and for matters connected therewith in incidental thereto".

The main objectives of the NABARD as stated in the statement of objectives while placing the bill before the Lok Sabha were categorized as under :

1. The National Bank will be an apex organisation in respect of all matters relating to policy, planning operational aspects in the field of credit for promotion of Agriculture, Small Scale Industries, Cottage and Village Industries, Handicrafts and other rural crafts and other allied economic activities in rural areas.

2. The Bank will serve as a refinancing institution for institutional credit such as long-term, short-term for the promotion of activities in the rural areas.

3. The Bank will also provide direct lending to any institution as may approved by the Central Government.

4. The Bank will have organic links with the Reserve Bank and maintain a close link with in.

Mission
Promoting sustainable and equitable
13

agriculture

and

rural

development through effective credit support, related services, institution building and other innovative initiatives.

Functions of NABARD
NABARD was set up essentially as a development bank for promoting agriculture and rural
14

development. Its main function is to provide refinance for rural credit disbursed by the State Co-operative Banks, the Regional Rural Banks and other financial institutions as may be approved by the RBI. 1. Integrated Rural Development Programme :- IRDP is a scheme devised by Government of India for generating self-employment opportunities in the rural sector and for the economic development of rural areas. Banks are advised to extend cheap credit facilities to the people/ group selected under this programme. NABARD then provides refinance to banks. NABARD has accorded high priority to projects envisaged under IRDP. The refinance provided for IRDP accounts for highest share for the support provided for poverty alleviation programmes. Some specific steps taken to augment the flow of credit under IRDP programme are given below: (i) Including the activities under IRDP in the service area plan, backward and forward linkage and infrastructural support. (ii) Treating the family as a unit for providing assistance and determining the size and number of activities in relation to the income gap to be bridged for lifting the family above the poverty line. (iii) Among alternative activities, promoting the less costly ones for securing optimum utilization of the available resources. (iv) Diversifying the IRDP by encouraging secondary and tertiary sectors. (v) Facilitating provision of infrastructural support including backing support and marketing linkages and supervision by adopting a cluster approach in the selection of beneficiaries. A total sum of Rs. 735 crore has been disbursed by banks under the scheme during the year 1998-99. The RRBs and commercial banks are the major participating banks in the programme. Most of the funds under the scheme go to states like Uttar Pradesh, Bihar, Assam, Orissa, and Madhya Pradesh where poverty level is high. The IRDP and other special schemes are now merged into a single scheme by Government of India and announced the details of the scheme in August 1999. The new scheme, SGSY is explained below. In the past years there were many self employment schemes were in operation for the upliftment of rural poor. Effective from April, 1999 Government of India has merged all such
15

Self Employment Schemes into one and launched the new SGSY scheme. Under this scheme rural individual poor and group of individuals like the self-help group may obtain credit facilities to undertake any economic activity which will generate regular income for the borrowers. The main objective of the scheme is to lift those who are living below poverty line and enable them to get income of at least Rs. 2,000 per month. Presently, poverty line differs from state to state between Rs. 13,000 and Rs. 19650 per year. The scheme envisages lifting the poor families above the poverty line within 3 years of assistance. The selection of families or SHG for assistance under the scheme will be chosen by a team of officials like BDO, Bank Branch Manager, Gram Panchayat officials on annual basis. The credit facilities will be provided by banks. However, funding for the programme will be done by Central Government and State Government in the ratio 75:25. It is proposed that the SGSY Scheme will mainly focus to help rural poor particularly SC/ST population, Women and disabled persons. In case of beneficiaries under the scheme being Self-Help Group, each SHG may consist of 10 to 20 persons. The Scheme does not prescribe any maximum loan amount. It depends upon the project cost. Rate of interest and other conditions may be ascertained from banks. Commercial Banks, Cooperative Banks and RRBs will be asked to provide credit under this scheme. Repayment of loan needed to be made only after 5 years in installments. It is a treated as a medium-term loan. NABARD will provide refinance to banks sanctioning loans under the Programme. 2.Development of Women and Children in Rural Areas NABARD prepared guidelines for promoting group activities under the programme and provided 100% refinance support. 3. Training-cum-production Centre for Women NABARD provides grant? To voluntary/development agencies for setting up of centres which aim at providing vocational/entrepreneurship training centres for women exclusively. Some provide marketing-oriented skill to women for upgrading technical and designing skill.

16

4. Self-Help Group NABARD has been making efforts to establish linkages between Self-help Group organized by some voluntary agencies for poor people in rural areas and official credit agencies. This would augment the flow of credit for production purposes and reduce their dependence on informal credit sources. Provision of credit extended under the SHG scheme during the recent past. Under the scheme so far 46 lacs SHG from more than 178 lacs poor families. During the year 2 lacs new SHG have been extended bank loans amounting to Rs. 545 crore as against Rs. 288 crore disbursed during the year 2000-01. The total bank loan provided to all the 4.6 lacs SHGs till March 2012 aggregated to Rs. 1026 crore. It should be remembered that NABARD provides refinance at special interest rate of banks. Andhra Pradesh and Tamil Nadu are the leading states which account for large portion of new linkages under the scheme. It is noteworthy to mention here that 90% of new SHGs were formed exclusively by women. 5. NABARD also provides refinance to full extent for project taken under National Watershed Development Programme and National Mission of Wasteland Development. 6. Scheme of Monitoring Evaluation and Research Activities NABARD conducts studies of on-going schemes and completed studies to obtain feedback on performance of these projects. The NABARD has system of District Oriented Monitoring studies in which a cross section of schemes sanctioned in a district to various banks is studied to ascertain the performance of the schemes and to identify constraints in implementation and for initiating appropriate action to remedy them. Annually about 100 such studies are conducted. NABARD also provides support to research studies by academic and technical institutions on matters having bearing on its developmental role. For this purpose, it has Research and Development Fund. 7. Vikas Volunteer Vahini Programme
17

NABARD has been organizing farmers club in association with voluntary agencies in rural areas particularly in tribal areas, which have proved very helpful for credit institutions in extending credit to poor farmers. These clubs, besides creating awareness among weaker sections about the proper utilization of assets and importing modern method of farm technology, are involved in educating the tribal people.

8. External Aid Project NABARD has been implementing various foreign aided projects. The projects are assisted by World Bank Group, Organisation of Petroleum Exporting Countries Fund for International Development, etc., NABARD actively participates in formulation and implementation of such projects. It is also required to monitor the projects and submit final report to aid agencies. 9. Inspection and Supervision of Co-operative Banks and Regional Rural Banks NABAD has been entrusted with the responsibility of supervision of Co-operative and Regional Rural Banks. For this purpose, it conducts inspections of Co-operative Banks and Regional Rural Banks. These banks are also to submit periodical information to NABARD for monitoring purposes. NABARD gives its recommendations to RBI with the matter relating to licensing of Cooperative Banks and Regional Rural Banks. The nominees of NABARD on the boards of Cooperative Banks and Regional Rural Banks monitor the working of banks. 10. Human Resource Development (HRD) NABARD provides assistance and support for the training of staff of other credit institutions engaged in credit dispensation for agriculture and rural development. Training facilities are extended at its two training institutions Bankers Institute for Rural Development (BIRD), and Regional Training Centres (RTCs). Some funding of the courses conducted at the College of Agricultural Banking of RBI and junior Level Training Centres of SLDBs are also provided. Apart from these, NABARD conducts seminars/programmes on Non-farm-Centre Business Development, inspections of banks, etc.

18

Other miscellaneous functions of NABARD are as follows:

Conduct inspections of the RRBs and the co-operative societies, without any prejudice to the authority of the RBI. All the applications for opening a branch by RRBs or co-operative societies should be forwarded to the RBI through the NABARD. Copies of all returns submitted by the RRBs and co-operative societies to the RBI should also be furnished to the NABARD. NABARD is also empowered to obtain any information or statement from the RRBs and the co-operative societies. NABARD should undertake research and training programs. These comprehensive training programs should be targeted towards NABARD's own staff and the staff of SCBs and RRBs as well. The R&D department of NABARD should take the lead in promoting research concerning problems associated with India's agriculture and rural development and also other allied aspects. For this purpose the NABARD has been authorised to maintain and R&D fund out of profits earned by it every year. NABARD is responsible for coordinating with the Government of India, the Planning Commission, State Governments and other agencies concerned with the development of rural industrialization. It is also responsible for ensuring the implementation of various policies and programs meant for providing finance to the rural industries.

19

NABARD- Unique Features: Facilitates credit flow for agriculture and rural development Strengthens rural credit delivery system through institutional development measures Supervises rural financial institutions (rural cooperative banks and RRBs) Promotes and supports policies, practices and innovations conducive to agriculture and rural development Mobilizes resources from urban areas to facilitate credit flow for rural development. Promotes financial inclusion through the largest microfinance movement of the world. Providing consultancy services to banks, government and private enterprise.
20

 Laying special emphasis on development of tribal people. Mobilizes resources from urban areas to facilitate credit flow for rural development Promotes financial inclusion through the largest microfinance movement of the world Providing consultancy services to banks, government and private enterprise. Laying special emphasis on development of tribal people

Organization Structure

21

22

FINANACIALS:NABARD at a Glance
(Rs. Crore)

Sources of 2012 Fund Capital 3,000

2011 2,000

Net Accretio Uses of Funds n 1,000 Cash and Bank Balances Collateralised Borrowing and Lending Obligation

2012 8,313 231

2011

Net Utilisatio n

10538 (-)2,225 228 3

Reserves & 13,408 11,863 1,545 Surplus NRC(LTO) 14,479 14,468 11 Fund NRC (Stabilisatio 1,579 n) Fund

Investments in a) GOI Securities b) ADFC Equity c) AFC Equity 2,147 36 1 48 60 34 5 0 26 58 1,037 375 2,548 19 1 48 60 18 5 390 10 0 1,862 225 (-)401 17 0 0 0 16 0 (-)390 16 58 (-)825 150

1,577

d) SIDBI Equity e) AICI Ltd.

Deposits

291

277

14

f) NCDEX Ltd. & MCX Ltd. g) Nabcons

Bonds and 38,584 26,788 11,796 Debentures Borrowings 85 from GoI Borrowings JNN 33 Solar Mission

h) Mutual Fund/VCF i) Biotech Venture Fund

124

(-)39

j) Treasury Bills k) Commercial Paper

33

l) Non Convertible Bonds m) Equity Shares of Other Institution

Foreign Currency Loan

503

503

n) Debentures in Nature of Advance

12,344 13,461 (-)1,117

23

o) Certificate of Deposits Certificate 1,281 of Deposits 137

2,038

680

1,358

Loans and Advances a) Production & Marketing Credit 48,338 33,885 14,453 193 (-)64

Commercia 2,245 l Paper Term Money 182 Borrowings RIDF Deposits STCRC Fund Other Liabilities

6,448 110

(-)4,203 72

b) Conversion of Production 129 Credit into MT Loans c) MT & LT Project Loans d) Interim finance

30,762 25,432 5,327 2 140 2,323 0 167 182 2 (-)27 2,141

75,107 67,878 7,229 20,000 14,622 5,378 6,345 5,546 799

e) LT Non Project Loans f) Other Loans g) RIDF Loans h) Co-finance (Net of Provision)

70,860 66,078 4,782 72 225 2,470 88 230 2,520 (-)16 (-)5 (-)50

Other Funds

4,953

6,171

(-)1218

Fixed Assets Others Assets

Total

1,82,07 1,58,87 23,203 5 2

Total

1,82,07 1,58,87 23,203 5 2

24

NABARD's Past Performance (Prior to 2005):

During 1983-84 NABARD mobilised net resources amounting to Rs. 774 crores, which however fell to Rs.541 crores during the year 1984-85. During this year NABARD sanctioned Rs. 1233 crores to SCBs for financial seasonal agricultural operations. It also provided medium-term and long term credit facilities for the benefit of the agricultural sector. During 1984-85, its total outstanding amounted to Rs. 1018 crores and limits sanctioned amounted to Rs.1688 crores. NABARD also assisted the development and promotion of agricultural investments in the less developed and/or underbanked states. For this purpose during the year 1984-85, it disbursed Rs.455 crores. For the year 1986-87 NABARD could mobilize Rs.887 crores towards its aggregate net resources for providing rural credit. During 1986-87, NABARD completed the inspection of 178 CCBs, 86 RRBs, 7 SLOBs and 30 other institutions. It also approved and assisted during the year, 5 research proposals, 17 seminars and several conferences from its R&D fund, and incurred an expenditure of Rs.3.41 lakhs on this account. During the year 1987, NABARD also introduced a 10 point action programme for rehabilitation of weak primary land development banks and branches of state land development banks. The action program was with regard to: (i) investigation of overdues; (ii) strengthening of organization and management; (iii) review of loan policies and procedures; and (iv) Strengthening of the resources of the LOBs. For the year 1989-90, the short term credit limits sanctioned by NABARD for financing seasonal agricultural operations aggregated to Rs.2807 crores. During this period NABARD provided refinance assistance to the tune of Rs.549 crores. During 1995-96, the total amount of refinance disbursements by NABARD increased by less than 2% to Rs.3064 crore from that of the previous year. During this period a Rural Infrastructural Development Fund (RIDF) was created within NABARD for facilitating rural infrastructure projects.

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During 1996-97 NABARD's resources increased to Rs.2963 crores against rs.1617 crore in the previous year.

NABARD current performance (After 2005) NABARD saw its refinance to commercial banks increase by over 50% year on year, for the fiscal ended March 31, 2006. For 2005-06, the refinance was Rs.4028 crore against Rs.2569 crore in 2004-05. As on February 2006, commercial banks, regional banks and co-operatives disbursed an aggregate of Rs.1,46,668 crores by way of farm credit. This is against Rs.1,25,000 crore in 2004-05. Purpose wise Disbursements under investment Credit during 2007-08 Sector/Purpose/Activity Agriculture Minor irrigation Land development Farm Mechanisation Plantation & Horticulture SGSY Farm Sector SC/ST -AP-Farm Sector Other Agriculture Allied to Agriculture Fishries Dairy Development Poultry Storage/Market Yard Wasteland Development NFS SGSY Non Farm Sector SC/ST -AP-Non Farm Sector Non Farm Sector 12616 404 274795 287815 1.39% 0.04% 30.38% 31.82% 2545 60587 21629 13628 639 99028 0.28% 6.70% 2.39% 1.51% 0.07% 10.95% 40368 46214 174765 34182 13242 1648 45717 356136 4.46% 5.11% 19.32% 3.78% 1.46% 0.18% 5.05% 39.37% Amount (Rs. In Lakh) % to Total Disb.

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Others Non conventional energy Self Help Group TOTAL DISBURSEMENT 98 161550 161648 904627 0.01% 17.86% 17.87% 100.00%

The purpose wise disbursement for the year 2007-08 shows that total of Rs.9,04,627 was disbursed for various purposes like agriculture and allied activities, non farm sector etc. and maximum 32% is allotted to agriculture sector.
Purpose wise Disbursements under RIDF during 2007-08 Purpose Irrigation Rural Roads Amount (Rs. In Lakh) 286955 257338 % Share 35.71% 32.03%

27

Drinking Water Supply Bridges Primary/Secondary School Power Sector Watershed Development Flood Protection Soil Conservation Forest Management Drainage Improvements Storage/Market Yard Others TOTAL DISBURSEMENT

64688 58159 49227 19294 17980 13225 8827 8030 5931 3467 10371 803492

8.05% 7.24% 6.13% 2.40% 2.24% 1.65% 1.10% 1.00% 0.74% 0.43% 1.29% 100.00%

28

The data shows that under Rural Infrastructural Development Fund (RIDF) maximum disbursement is provided to irrigation i.e. 35.71% , 32.03 % to rural roads and rest approximate 32% to all the other activities like drinking water, drainage improvements etc.

Financial Results Balance sheet size increased from Rs.81220 crore to Rs.98706 crore & profit after tax from Rs.856 crore to Rs.1226 crore. Loans and advances outstanding
o o

Refinance for Production & Marketing credit increased from Rs.14651 crore to Rs.17381 crore. Refinance for Investment credit operations increased from Rs.31682 crore to Rs.32401 crore. Loans out of RIDF increased from Rs.20005 crore to Rs.30649 crore. Cofinance loans increased from Rs.42 crore to Rs.66 crore.

Loans and advances disbursed

o o

Refinance for ST-SAO- Rs.16443 crore (SCBs - Rs.13748 crore & RRBs - Rs.2695 crore) Refinance for ST-Others- Rs.183 crore (SCBs - Rs.109 crore & RRBs - Rs.74 crore)

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Refinance for MT Liquidity Support Scheme- Rs.326 crore (SCBs - Rs.165 crore & RRBs - Rs.161 crore) Refinance for Investment Credit- Rs.9046 crore [ NFS(30%), FM(19%), SHG(18%) & Dairy(7%) ] Loans out of RIDF- Rs.8035 crore [ Roads & Bridges(39%), Irrigation(36%), Drinking water supply(8%) & Schools(6%) ]

Developmental Activities Cooperative Revival & Reforms

o o

MoUs signed in 20 States covering 95% of PACS and 93% of CCBs in the country Special Audit completed- 59294 PACS of 12 states and the CCBs in 3 states Release of Capitalisation Funds to PACS- Rs.3325 crore as GOI share in seven states

Rural Non-Farm Sector

o o

Assistance out of Rural Innovation Fund- Total sanctions Rs.26.14 crore & Disbursements Rs.21.69 crore Rural Entrepreneurship Dev. Program- No. of progs 787; Sanctions Rs.5.03 crore; Releases Rs.2.66 crore Skill Development Programs & TPCs- No. of progs 685; Sanctions Rs.2.69 crore; Releases Rs.1.96 crore Innovative Projects- No. of projects 29; Sanctions Rs.7.78 crore; Releases Rs.2.56 crore Capacity Building of Partner Agencies- No. of progs 13; Sanctions Rs.1.30 crore; Releases Rs.1.35 crore Women Development Programs- No. of progs 169; Sanctions Rs.1.45 crore; Releases Rs.0.31 crore Marketing & Technology support- No. of progs 349; Sanctions Rs.1.97 crore; Releases Rs.1.40 crore

Promotion of Farmers' Clubs

30

o o

Launching of 5277 new clubs (cumulative 28226 clubs) Financial support - New & existing clubs 5386; Sanctions Rs.3.14 crore; Releases Rs.3.39 crore(out of RIF). Future support to be provided from Farmers Technology Transfer Fund set up in NABARD with corpus of Rs.25 crore.

Types of Refinance Facilities offered Agency Commercial Banks Credit Facilities Long-term credit for investment purposes
Financing the working capital requirements of Weavers' Co-operative Societies (WCS) &
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State Handloom Development Corporations Short-term Co-operative Structure (State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies) Short-term (crop and other loans) Medium-term (conversion) loans Term loans for investment purposes Financing WCS for production and marketing purposes Financing State Handloom Development Corporations for working capital by State Co-operative Banks Long-term Co-operative Structure (State Co-operative Agriculture and Rural Development Banks, Primary Co-operative Agriculture and Rural Development Banks) Regional Rural Banks (RRBs) Short-term (crop and other loans) Term loans for investment purposes State Governments Long-term loans for equity participation in co-operatives Rural Infrastructure Development Fund (RIDF) loans for infrastructure projects Term loans for investment purposes

32

Non-Governmental Organisations (NGOs) - Informal Credit Delivery System

Revolving microcredit promotional

Fund

Assistance

for

various and

delivery

innovations

projects under 'Credit and Financial Services Fund' (CFSF) and 'Rural Promotion Corpus Fund' (RPCF) respectively

NABARD also offers various credit facilities like: Short-term/ Medium term/ Long-term refinance for various types of

production/marketing/ procurement activities at attractive interest rates to various organizations, societies, Govts etc. Investment Credit (Medium and Long Term) Refinance with a mission of Accelerating Private Capital Formation to Promote Sustainable and Equitable Agriculture and Rural Prosperity with Refinance as Lever. Rural Infrastructure Development Fund (RIDF) is a fund to promote the investment in infrastructure for agriculture. State Governments as well as Panchayat Raj Institutions (PRIs), Non-Governmental Organisations, Self-Help Groups, etc. are eligible to borrow out of RIDF for their schemes like ongoing Irrigation, Flood Protection, Watershed Management projects, rural Road & Bridge projects, Primary and Secondary Schools, Primary Health Centers, Village Haats, Joint Forest Management, Terminal and Rural Market/Godowns, Rain Water Harvesting, Watershed development, flood protection, drainage, Cold Storage, Riverine Fisheries, Fishing Harbour & Jetties, Mini/Small Hydel Projects in Power Sector, Rural Drinking Water Supply Schemes, Citizen Information Centres, Modern abottoir, Seed/Agri./Hori. Farms, etc.

Refinance for Rural Housing Facilities scheme provides Credit to the Individuals, Cooperative Housing Societies, Public Bodies, Housing Boards/ Housing Development
33

Authorities/ Improvement, Trusts, Local Bodies, Voluntary agencies and NGOs, Housing Finance Companies registered, with NHB for finance extended by them to housing projects in the 'rural' areas only. The finance is provides for Construction of New Houses as well as Repairs/Renovation of existing houses in rural areas/ Rainwater Harvesting Structures/ Sanitary Latrines, etc. Under the Micro Credit Innovation scheme, NABARD facilitates sustained access to financial services for the unreached poor in rural areas through various micro Finance innovations in a cost effective and sustainable manner. NABARD has been designated the Implementing Agency for implementing the Revival Package in all the states. The Department for Cooperative Revival and Reforms (DCRR) has been constituted in NABARD for this purpose. NABARD is providing dedicated manpower at the national, state and district levels for implementing the Package. Loans to State Governments for funding equity of Co-operative Credit Institutions. NABARD has formulated a Model scheme for issue of Kisan Credit Cards to farmers, on the basis of their land holdings, for uniform adoption by banks, so that the farmers may use them to readily purchase agricultural inputs such as seeds, fertilisers, pesticides, etc. and also draw cash for their production needs. Farmers have to get in touch with Authorised banks to use this facility A Research and Development Fund has been established by the bank with the objective of acquiring new insights into the problems of agricultural and rural development through in-depth studies and applied research and trying out innovative approaches backed up by technical and economic studies. It includes facilities for training, dissemination of information and promotion of research by undertaking studies techno-economic and other surveys in the fields of agriculture, rural banking and rural development. The eligible Institutes for the fund are Approved research institutions, organisations and other agencies which are engaged in action-oriented, applied research, Individuals or groups of individuals would also be extended assistance provided they are sponsored by suitable organisations which would certify the proper use and accounting of funds, Private and commercial organisations are not normally eligible for assistance under the this fund.
34

SWAROJGAR CREDIT CARD SCHEME aims at providing adequate and timely credit ie. working capital or block capital or both to small artisans, handloom weavers, service sector, fishermen, self employed persons, rickshaw owners, other micro-entrepreneures, SHGs, etc from the banking system in a flexible, hassle free and cost effective manner. Borrowers in urban areas can be covered under SCC Scheme. Small business covered under priority sector is also eligible under SCC Scheme. Any scheme/project that are income generating/ employment generating may be covered under the scheme. The facility may also include a reasonable component for consumption needs. Farm sector activities like fisheries, dairy, etc. can also be covered under the scheme. Generally such of the self-employment activities which have regular turn over/income stream on short-interval basis can be covered under SCC scheme. SCC is a credit delivery mode and not a purpose. Coverage of SCC will not make a unit ineligible for subsidy. Banks can issue SCCs to target borrowers of SCC scheme for disbursing credit under any schemes whether they are covered under subsidy or not.

Farmers' Club Programme is a grassroot level informal forum. Such Clubs are organised by rural branches of banks with the support and financial assistance of NABARD for the mutual benefit of the banks concerned and rural people. The broad functions being to coordinate with banks to ensure credit flow among its members and forge better bank borrower relationship, interface with subject matter specialists in the various fields of agriculture and allied activities etc., extension personnel of Agriculture Universities, Development Departments and other related agencies for technical know how upgradation. Liaison with Corporate input suppliers to purchase bulk inputs on behalf of members, organise/facilitate joint activities like value addition, processing, collective farm produce marketing, etc.; for the benefit of members. They can also sponsor / organise SHGs, undertake socio-economic developmental activities like community works, education, health, environment and natural resource management etc. NABARD Consultancy Services (Nabcons) is engaged in providing consultancy in all spheres of agriculture, rural development and allied areas. Nabcons leverages on the core
35

competence of the NABARD in the areas of agricultural and rural development, especially multidisciplinary projects, banking, institutional development, infrastructure, training, etc., internalized for more than two decades.

Crafts Mart scheme was initiated with the objective of providing the rural artisans and entrepreneurs access to urban and upcountry markets, products of few artisans supported by NABARD under its various promotional programmes are displayed along with the contact addresses Rural Innovation Fund (RIF) is a fund designed to support innovative, risk friendly, unconventional experiments in Farm, Non-Farm and micro-Finance sectors that would have the potential to promote livelihood opportunities and employment in rural areas. The following areas/sectors are as thrust areas for support from the Fund. Dry land / Rain fed farming, Rainwater harvesting, Energy from biomass, Crop residues and non-crop bio mass, Distribution and use of water and energy, Storage devices for agricultural and rural products, Managing common property resources, Roads, Sanitation and Waste disposal, micro-Finance, Entrepreneurship/Skill development, micro-Enterprises, Marketing, Housing, Service sector, Health care and Hygiene. Water Harvesting Scheme is for the SC / ST Farmers with main objective of the scheme is to cover SC/ST farmers in providing irrigation facilities to their homesteads / farmlands. In order to augment the income generating capacity of these SC/ST farmers suitable local water-harvesting structures are proposed along with provision for small lifting devices on a nationwide scale. Freshwater aquaculture wherever feasible can also be taken up as per the choice of farmers.

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Microfinance India
Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers. With financial inclusion emerging as a major policy objective in the country, Microfinance has occupied centre stage as a promising conduit for extending financial services to unbanked sections of population. At the same time, practices followed by certain lenders have subjected the sector to greater scrutiny and need for stricter regulation. Although the microfinance sector is having a healthy growth rate, there have been a number of concerns related to the sector, like grey areas in regulation, transparent pricing, low financial literacy etc. In addition to these concerns there are a few emerging concerns like cluster formation, insufficient funds, multiple lending and over-indebtedness which are arising because of the increasing competition among the MFIs. On a national level there has been a spate of actions taken to strengthen the regulation of MF sector including,
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enactment of microfinance regulation bill by the Government of Andhra Pradesh, implementation of sector-specific regulation by Reserve Bank of India and most recently, release of Draft Microfinance Institutions (development and regulation) Bill, 2011 for comments.

Challenges and Opportunities:Microfinance is gathering momentum to become a significant force in India. The selfhelp group (SHG) model with bank lending to groups of (often) poor women without collateral has become an accepted part of rural finance. The paper discusses the state of SHG-based microfinance in India and the opportunity untapped because of the huge existing demand-supply gap. With traditionally loss-making rural banks shifting their portfolio away from the rural poor in the post-reform period, SHG-based microfinance, nurtured and aided by NGOs, have become an important alternative to traditional lending in terms of reaching the poor without incurring a fortune in operating and monitoring costs. The government and NABARD have recognized this and have emphasized the SHG approach and working along with NGOs in its initiatives. In spite of the impressive figures, the supply side of microfinance in India is still presently grossly inadequate to fill the gap between demand and supply but it holds the promise to act as a great opportunity for the financial sector and the economy as a whole.

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NABARD as Facilitator of microFinance

Besides, conceiving the SHG-Bank Linkage Programme two decades back, NABARD had assigned to itself the role of a facilitator and a mentor of the initiative. The focus was on bringing in various stakeholders on a common platform, building capacity among the stakeholders to take the movement forward while extending 100% refinance to all banks participating in the programme. A large number of seminars, workshops and training programmes were organised to create awareness about the microFinance programme among all the stakeholders the bankers, the Government agencies, the NGO partners and more importantly the SHG members. The NGO sector who played the key role of organising and nurturing the SHGs as the Self Help Promoting Institutions later joined by many others including the rural financial institutions, Farmers Clubs, etc. were encouraged by way of promotional grant assistance by NABARD for taking up such work. The
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phenomenal growth of SHG-Bank linkage programme during the last 20 years owe a great deal to these promotional efforts actively supported by NABARD and participated by the stakeholders. The rapid growth of the SHG linkage programme and its success in taking financial services to the poor, led to its recognition as the most important tool for financial inclusion the main focus of the XI Five Year Plan. Simultaneously, efforts were also on to experiment innovative initiatives in improving the efficacy and reach of the programme with the involvement of all microFinance practitioners facilitated by NABARD. A glimpse of the facilitator role played by NABARD.

Gaps in Financial system and Need for Microfinance:-

According to the latest research done by the World Bank, India is home to almost one third of the worlds poor (surviving on an equivalent of one dollar a day). Though many central government and state government poverty alleviation programs are currently active in India, microfinance plays a major contributor to financial inclusion. In the past few decades it has helped out remarkably in eradicating poverty. Reports show that people who have taken microfinance have been able to increase their income and hence the standard of living. About half of the Indian population still doesnt have a savings bank account and they are deprived of all banking services. Poor also need financial services to fulfill their needs like consumption, building of assets and protection against risk. Microfinance institutions serve as a supplement to banks and in some sense a better one too. These institutions not only offer micro credit but
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they also provide other financial services like savings, insurance, remittance and non-financial services like individual counselling, training and support to start own business and the most importantly in a convenient way. The borrower receives all these services at her/his door step and in most cases with a repayment schedule of borrowers convenience. But all this comes at a cost and the interest rates charged by these institutions are higher than commercial banks and vary widely from 10 to 30 percent. Some claim that the interest rates charged by some of these institutions are very high while others feel that considering the cost of capital and the cost incurred in giving the service, the high interest rates are justified

Channels of Micro finance:In India microfinance operates through two channels: 1. SHG Bank Linkage Programme (SBLP) 2. Micro Finance Institutions (MFIs)

SHG Bank Linkage Programme:-

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This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under the SHG model the members, usually women in villages are encouraged to form groups of around 10-15. The members contribute their savings in the group periodically and from these savings small loans are provided to the members. In the later period these SHGs are provided with bank loans generally for income generation purpose. The groups members meet periodically when the new savings come in, recovery of past loans are made from the members and also new loans are disbursed. This model has been very much successful in the past and with time it is becoming more popular. The SHGs are self-sustaining and once the group becomes stable it starts working on its own with some support from NGOs
NABARD and SIDBI. and institutions like

Micro Finance Institutions:Those institutions which have microfinance as their main operation are known as micro finance institutions. A number of organizations with varied size and legal forms offer microfinance service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members who come together for the purpose of availing bank loans either individually or through the group mechanism against a mutual guarantee. The reason for existence of separate institutions i.e. MFIs for offering microfinance are as follows: High transaction cost generally micro credits fall below the breakeven point of providing loans by banks Absence of collaterals the poor usually are not in a state to offer collaterals to secure the credit Loans are generally taken for very short duration periods Higher frequency of repayment of installments and higher rate of Default Non-Banking Financial Companies (NBFCs), Co-operative societies, Section25 companies, Societies and Trusts, all such institutions operating in microfinance sector constitute MFIs and together they account for about 42 percent of the microfinance sector in terms of loan portfolio. The MFI channel
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is dominated by NBFCs which cover more than 80 percent of the total loan portfolio through the MFI channel.
Sl. No. Type of MFI Not-for Profit MFIs 1 2 NGOs Non-Profit companies 400-500 20 Society Registration Act, 1860 Indian Trust Act, 1882 Section-25 of Indian Companies Act, 1956 Number Legal Registration

Mutual Benefit MFIs 3 Mutual benefit MFIs Mutually 200-250 Aided Cooperative Societies (MACS) Mutually Aided Co-operative societies, Act enacted by State Governments

For Profit MFIs 4 Non-Banking Financial Companies (NBFCs) 45 Indian companies Act, 1956 Reserve Bank of India Act, 1934

Legal structure and regulation:Although the SHG-Bank linkage model is well managed in India by NABARD, currently there is no proper regulatory body for the supervision of MFIs. The presence of institutions with a variety of legal forms makes it difficult for the regulation of all such institutions by a single regulatory body
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in the current Indian legal structure. Though NBFCs, which cover the major part of the outstanding loan portfolio by the microfinance channel, are regulated by Reserve Bank of India, other MFIs like societies, trusts, Section25 companies and cooperative societies fall outside the purview of RBIs regulation. The acceptance of the Malegam committee recommendations by the RBI is a big step forward in addressing the above concern but again it will cover only a section of the MFIs i.e. NBFCs. The microfinance bill which was introduced in the year 2007 is still pending. The most recent and the strongest step taken by the government, The Micro Finance Institutions (Development and regulation) Bill, 2011 is a major step in the microfinance sector. The proposed bill clarifies all doubts pertaining to regulation of the MFIs by appointing RBI as the sole regulator for all MFIs. Financial illiteracy:One of the major hindrances in the growth of the microfinance sector is the financial illiteracy of the people. This makes it difficult in creating awareness of microfinance and even more difficult to serve them as microfinance clients. Though most of the microfinance institutions claim to have educational trainings and programmes for the benefit of the people, according to some of the experts the first thing these SHG and JLG members are taught is to do their own signature. The worst part is that many MFIs think that this is what financial literacy means. We all know how dangerous it can be when one doesnt know how to read but he/she knows how to accept or approve it (by signing it).

Marketing of Microfinance Products:44

1. Contract Farming and Credit Bundling

Banks and financial institutions have been partners in contract farming schemes, set up to enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided and only, provided the price setting mechanism for the farmer is appropriate and fair. 2. Agri Service Centre Rabo India Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. The services provided are similar to those in contract farming, but with additional flexibility and a wider range of products including inventory finance. Besides providing storage facilities, each centre rents out farm machinery, provides agricultural inputs and information to farmers, arranges credit, sells other services and provides a forum for farmers to market their products. 3. Non Traditional Markets Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in Bangalore. The operations and maintenance of the market is done by NDDB. The project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with 50,000 grower members for wholesale marketing. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates. 4. Apni Mandi Another innovation is that of The Punjab Mandi Board, which has experimented with a farmers market to provide small farmers located in proximity to urban areas, direct access to consumers by elimination of middlemen. This experiment known as "Apni Mandi" belongs to both farmers and consumers, who mutually help each other. Under this arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm level, extension services of different agencies are pooled in. These include inputs subsidies, better quality seeds and loans from Banks. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce.
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Success Factors of Micro-Finance in India:Over the last ten years, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies.
A. For NGOs:1. The field of development itself expands and shifts emphasis with the pull of

ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are (perceived to be) simple and peoples acceptance is high all characteristics (real or presumed) of microfinance. 2. Canvassing by various actors, including the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of Womens World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of Peoples Action and Rural Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP), World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been funding microfinance projects. One might call it the supply push. 3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women, for whom
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access to small loans to meet dire emergencies is a valued outcome. Thus, quick and high customer satisfaction is the USP that has attracted NGOs to this trade. 4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It is implicitly assumed that no technical skill is involved. Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy. 5. For many NGOs the idea of organising forming a samuha has inherent appeal.Groups connote empowerment and organising women is a double bonus. 6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding.
B. For Financial Institutions and banks:-

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

Issues in Microfinance:1. Sustainability:-

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

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

Another challenge faced by MFIs is the inability to access supply chain. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. The latter players who bring with them an understanding of similar client segments, ability to create microenterprise opportunities and willingness to nurture them, would be keen on directing microfinance to such opportunities. This enables MFIs to increase their client base at no additional costs. Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation. Such businesses may find complementarities between an MFIs skills in management of credit processes and their own strengths in supply chain management. ITC Limited, with its strong supply chain logistics, rural presence and an innovative transaction platform, the e-choupal, has started exploring synergies with financial service providers including MFIs through pilots with vegetable vendors and farmers. Similarly, large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer. ITC has initiated a pilot project called pushcarts scheme along with BASIX (a microfinance organization in Hyderabad). Under this pilot, it works with twenty women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of Rs.10,000/- , capacity building and business development support to the women. ITC provides support through supply chain innovations by: 1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of
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bargaining and unreliability at the traditional mandis (local vegetable markets). The 51 women are able to replenish the stock from the stores as many times in the day as required. This has positive implications for quality of the produce sold to the end consumer. 2. Continuously experimenting to increase efficiency, augmenting incomes and reducing energy usage across the value chain. For instance, it has forged a partnership with National Institute of Design (NID), a pioneer in the field of design education and research, to design user-friendly pushcarts that can reduce the physical burden. 3. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. The model augments the incomes of the vendors from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental point of view, push carts are much more energy efficient as opposed to fixed format retail outlets.
4. HR Issues:-

Recruitment and retention is the major challenge faced by MFIs as they strive to reach more clients and expand their geographical scope. Attracting the right talent proves difficult because candidates must have, as a prerequisite, a mindset that fits with the organizations mission. Many mainstream commercial banks are now entering microfinance, who are poaching staff from MFIs and MFIs are unable to retain them for other job opportunities. 85% of the poorest clients served by microfinance are women. However, women make up less than half of all microfinance staff members, and fill even fewer of the senior management roles. The challenge in most countries stems from cultural notions of womens roles, for example, while women are single there might be a greater willingness on the part of womens families to let them work as front line staff, but as soon as they marry and certainly once they start having children, it becomes unacceptable. Long distances and long hours away from the family are difficult for women to accommodate and for their families to understand.
5. Microinsurance:50

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

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

Recommendations:1. Proper Regulation: The regulation was not a major concern when the microfinance was in its nascent stage and individual institutions were free to bring in innovative operational models. However, as the sector completes almost two decades of age with a high growth trajectory, an enabling
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regulatory environment that protects interest of stakeholders as well as promotes growth, is needed. 2. Field Supervision: In addition to proper regulation of the microfinance sector, field visits can be adopted as a medium for monitoring the conditions on ground and initiating corrective action if needed. This will keep a check on the performance of ground staff of various MFIs and their recovery practices. This will also encourage MFIs to abide by proper code of conduct and work more efficiently. However, the problem of feasibility and cost involved in physical monitoring of this vast sector remains an issue in this regard. 3. Encourage rural penetration: It has been seen that in lieu of reducing the initial cost, MFIs are opening their branches in places which already have a few MFIs operating. Encouraging MFIs for opening new branches in areas of low microfinance penetration by providing financial assistance will increase the outreach of the microfinance in the state and check multiple lending. This will also increase rural penetration of microfinance in the state. 4. Complete range of Products: MFIs should provide complete range of products including credit, savings, remittance, financial advice and also nonfinancial services like training and support. As MFIs are acting as a substitute to banks in areas where people dont have access to banks, providing a complete range of products will enable the poor to avail all services. 5. Transparency of Interest rates: As it has been observed that, MFIs are employing different patterns of charging interest rates and a few are also charging additional charges and interest free deposits (a part of the loan amount is kept as deposit on which no interest is paid). All this make the pricing very confusing and hence the borrower feels incompetent in terms of bargaining power. So a common practice for charging interest should be followed by all MFIs so that it makes the sector more competitive and the beneficiary gets the freedom to compare different financial products before buying. 6. Technology to reduce Operating Cost: MFIs should use new technologies and IT tools & applications to reduce their operating costs. Though most NBFCs are adopting such cost cutting measures, which is clearly evident from the low cost per unit money lent (9%-10%) of such institutions. NGOs and Section 25 companies are having a very high value of cost per unit money lent i.e. 15-35 percent and hence such institutions should be encouraged to adopt cost-cutting measures to reduce their operating costs. Also initiatives like development of common MIS and other software for all MFIs can be taken to make the operation more transparent and efficient. 7. Alternative sources of Fund: In absence of adequate funds the growth and the reach of MFIs become restricted and to overcome this problem MFIs
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should look for other sources for funding their loan portfolio. Some of the ways through which MFIs can raise their fund are: By getting converted to for-profit company i.e. NBFC: Without investment by outside investors, MFIs are limited to what they can borrow to a multiple of total profits and equity investment. To increase their borrowings further, MFIs need to raise their Equity through outside investors. The first and the most crucial step to receive equity investment are getting converted to for-profit NBFC. Along with the change in status the MFI should also develop strong board, a quality management information system (MIS) and obtain a credit rating to attract potential investors. Portfolio Buyout: It is when banks or other institutions purchase the rights to future payment stream from a set of outstanding loans granted by MFIs. In such transactions MFIs are responsible for making up any loss in repayment up to a certain percentage of the portfolio and this clause is known as first loss default guarantee. The above clause ensures that the MFI retains the correct incentive to collect these loans. To ensure security to the buying institution, MFIs are allowed to sell off as much of the outstanding portfolio as is financed by accumulated earnings or equity. Securitization of Loans: This refers to a transaction in which the repayments from a set of microloans from one or more MFIs are packaged into a special purpose vehicle, from which tradable securities are issued. As the loans from multiple MFIs can be pooled together the risk gets diversified. Though securitization of loans and portfolio buyout are similar in many ways like first loss default guarantee clause, limit to the amount of loans that can be sold off etc. The major difference between the two is that securitizations require a rating from a credit rating agency and that it can be re-sold, which makes securitized loans attract more potential buyers. Also unlike portfolio buyout, there can be multiple buyers and sellers for each transaction in case of securitization of loans as compared to single buyer and single seller in portfolio buyout. Through securitization, MFIs can tap new sources of investments because fund of certain types like mutual funds, which are barred from directly investing in MFIs, can invest through securitized loans.

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FUNDS FOR MICRO FINANCE INSTITUTIONS: A SUGGESTION

Micro Finance institutions (MFIs) are expanding rapidly their operations specially in the southern states in the recent years. It is reported that seven Indian microfinance companies are listed among the World's Top 50 Microfinance Institutions. However, one of the common complaints of most of these institutions is about the funds constraint, as they cannot raise deposits from the public. Consequently, the cost of funds, which they could procure, is invariably high and that is considered as the justification for their charging very high interest rates to their borrowers. The Report on Costs and Margin of Micro Finance Institutions, based on a study undertaken by College of Agriculture Banking, Pune has estimated the cost to the borrowers of MFIs varies from 12 percent to 40 percent in different states in India. Commenting on this high range of interest rates, the Report on Currency and Finance 2008 has concluded, From the experience of several pilot projects in India as well as in other countries, the operating cost of providing credit to small borrowers could be reduced significantly, implying that there is a large scope for reducing interest rates on small loans (RBI 2009). Perhaps, if the MFIs could get funds at relatively cheaper rates, they could lend at rates lower than what they charge now. Recognising the efforts made by MFIs in extending micro-credit to a steadily growing number of poor, I suggest that there is an imperative need for regulating the proliferation of these institutions. Financial inclusion, which the banks are now trying to achieve, would be operationally more meaningful if the credit delivery mechanism is modulated to reach the un-reached at a reasonable cost. Considering the diversities of rural India, the banking sector may take a long time to accomplish this task. Intermediary agencies like Self Help Groups and MFIs have to be strategically used to achieve the goal. They need the support of financial sector for augmenting their resources, so that they can reap the benefits of large scale operations.

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CONCLUSION:With the recognition of the Nobel Peace Prize in 2006, Muhammad Yunuss vision of extending credit to the poor has reached a global level. Microfinance is not a panacea for poverty alleviation; but, with committed practitioners, a wealth of theoretical work and a surging demand for both international and individual investment, microfinance is a poverty-alleviation tool that has proven to be both effective and adaptable. In this study, we have tried to give a picture and evaluate the importance of Micro financial Services for making an MFI sustainable while fulfilling the Poors needs In the chapters above we have discussed the poverty lending approach and financial systems approach and their benefits. The success of MFIs in other countries gives some important lessons for MFIs. It shows that poor people have diverse credit needs. MFIs have to provide different and flexible products to help poor get out of poverty. A good institutional set-up and carefully designed product that is flexible enhances the capabilities of MFI. It is recommended that the product design and development by the MFIs be done after understanding the existing financial service behaviour and the attributes of the poor During the last twenty years, there have been significant changes in both the understanding of the needs of the poor for financial services and of the provision of financial services for them. The poor has developed its needs for different financial services as he needs to maintain and improve his life style. The microfinance revolution during the 70s showed that the poor are bankable and now there is a time to show that these poor people are not just the people who need only credit to fulfil their living needs but they have a need for a set of financial services which can be offered by the MFIs that meet the complex livelihood needs of the poor.

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References:1. de Aghion, Beatriz Armendriz & Jonathan Morduch. The Economics of

Microfinance, The MIT Press, Cambridge, Massachusetts, 2005.

2. Dichter, Thomas and Malcolm Harper (eds). Whats Wrong with

Microfinance? Practical Action, 2007.

3. Ledgerwood, Joanna and Victoria White. Transforming Microfinance

Institutions: Providing Full Financial Services to the Poor. World Bank, 2006.
4. Mas, Ignacio and Kabir Kumar. Banking on mobiles: why, how and for

whom? CGAP Focus Note #48, July, 2008.

5. Yunus, Muhammad. Creating a World Without Poverty: Social Business

and the Future of Capitalism. Public Affairs, New York, 2008.

6. Churchill, Craig. Forthcoming 1998. Individual Micro lending Case

Studies. Toronto: Calmeadow.

7. Connell, Martin. 1998. Private Equity Capital in the microfinance

Industry. In Craig Churchill, ed., Moving microfinance Forward: Ownership, Competition and Control of microfinance Institutions. Washington DC: microfinance Network.
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8. Otero, Maria. 1998. Types of Owners for microfinance Institutions. In

Craig Churchill, ed., Moving microfinance Forward: Ownership, Competition and Control of microfinance Institutions. Washington DC: microfinance Network.

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