A REPORT ON FORMAL AND INFORMAL MODELS OF MICROFINACE IN INDIA RECOMMENDING EXPORT TRADING GROUP - HOW TO ENABLE IT AS A RURAL BANK

By Ronak Dangi 12BSP1034

Export Trading Group, India

A REPORT ON FORMAL AND INFORMAL MODELS OF MICROFINACE IN INDIA RECOMMENDING EXPORT TRADING GROUP - HOW TO ENABLE IT AS A RURAL BANK

By Ronak Dangi 12BSP1034

Export Trading Group, India A report submitted in partial fulfillment of the requirements of PGPM Program of IBS Mumbai

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DECLARTION

I hereby declare that this research project report entitled " Study on Formal and Informal Models of Microfinancing in India ” submitted by me for the partial fulfillment of the degree of Post Graduate Program in Management, submitted to ICFAI Business School, Mumbai is an original work done by me. I also hereby declare that this project report has not been submitted at any time to any other university or institute for the award of any Degree or Diploma.

(Ronak Dangi) Batch 2012-14 12BSP1034

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DATE: Signature of the Supervisor 4|Page .It is for only academic purpose and is a bonafide work done by research. This report is completed under my supervision .CERTIFICATE This is to certify that Mr. Ronak Dangi has completed the project on the entitled "Formal and Informal Models of Microfinance" which is based on data collected by researcher.

Mr. Udaipur). Udaipur).S.ACKNOWLEDGEMENT I would like to express my gratitude to all those who gave me the possibility to complete this project.SIDBI. Anil Sharma(AGM. and Mr. to do the necessary research work and to use the available data. I would also like to thank Mr. Ashish Shah (company guide) for their help. I want to thank IBS Mumbai for giving me permission to commence this project in the first instance. I am deeply indebted to my supervisors Prof. I would like to give my special thanks to my parents and friends for their patient love and help in internship. Ronak Dangi 5|Page . Vijay Sharma. (director of Satat Seva Samiti. Mumbai) for their unconditional support throughout the project. Especially. stimulating suggestions and encouragement in all the time of internship. Desai (faculty-incharge) and Mr. Dinesh Chaudhary(Manager of Bank of Baroda Branch. S.

.36 6|Page ................10 1..................................1 2..............3......4...........................2 1...................................................................................................................................2 2...........................................................................................................4............................................................................................................................................11 2...................................................................... ii..................14 Legal Regulations...........1 2........3..........................................14 Activities in Microfinance...........27 Sa-Dhan.................................................29 Objectives...............................................................................15 Types of Organization........13 Strategic Policy Initiatives............................... 2.......... 1..............12 Financial Inclusion.............................. ...............................................................1 2...................................................................................................11 Clients of Microfinance....................................................................................................................................................................................................4 2.......07 Introduction Microfinance Definition..........5 1..........................................................35 NABARD Organizational Structure............05 Executive Summary............................27 MFIN......................29 Channels Of Assistance...29 Functions..............10 Concept and features of Microfinance...Table of Content i....... 1..................................12 Role of Microfinance................31 Subsidiaries...................................1.............................................................................3 2.........................................1 1...........................3 1..........5 2.......18 Microfinance Models................................................................6 1..........................................17 Indian Context of Institutional Arrangements.............................................................................3.........................................................27 Microfinance Laws................................................................................................................................3............................................4 1...................................3........2 Acknowledgement........................... SIDBI and NABARD Role of RBI.............................2 2..............................28 SIDBI.......................4 2....................36 Role and Functions.....................................8 1..................7 1.1...........................9 1..............................................30 Initiatives by SIDBI........2 2...........1 2.................................3 2.................23 Role of RBI...........................................................

..................................2 5..........................................................................1 5......75 Risk Management...............................................................7 4..................... 5..............................................................................................49 Bank of Baroda and Rural Banking..............................56 Joint Liability Groups.................................................1 4...............................................................2............. 4.....................................39 2............................. Learning and Limitations Objectives. Subsidiaries..............................................................................87 Limitations.........................3 5......................................... Design and Risk Management Product Development....................74 Product Design.. 7.............................................................3 Schemes of NABARD..........................................................64 Milaap Model of Microfinancing.................................2 4..........................78 Objectives.3 5..............................................................................................................................89 Appendix.91 7|Page .......4 5............................................................................................................................................................................... Models of Microfinancing Introduction...90 References...............................3 3..................... Methodology..................................6 3...................................58 Grameen Bank Model of Microfinancing.....................................................69 Product Development........................................................................................................................................................................................................ 3..................86 Methodology...................5 6...5 3.............................88 Conclusion....................................50 Self Help Groups and Model of Satat Seva Samiti.4...........2 3...................1 3..........60 SKS Model of Microfinancing........4............43 3.............................................86 Learning......................................................4..................................................4 3..............

SKS Microfinance and Milaap. etc. functioning. its structure. and the products of the banks are also examined in the study. encouraging micro financing through self helped groups in the rural areas of Rajasthan. The report also talks about the functioning of Joint Liability Group (another model prevailing in Micro financing industry). The study also aimed to understand the working of Grameen Bank. 8|Page . The report with give a fair idea about the working of NABARD and SIDBI(two apex Banks) working towards flourishing the Microfinancing Industry by providing all kinds of support and services through their state of art policies and procedures pioneered by them. The study shows how the products are designed.Executive Summary As of early 2012. is facing a moment of reckoning. The research paper also throws some light on the functioning of banks in rural India. and the structure of Micro Finance Industry in India. of India and the Central Bank (Reserve Bank of India) with the apex bodies working towards creating an sustainable environment and organizing the Microfinance industry in India. and the various types of risks faced by Microfinancing Institutions and how they manage their risks. The policies and procedures followed by them. India. the working for various entities. The research aims at gaining knowledge about formal and informal models prevailing in micro finance industry in India. It gives a in-depth study of role of Govt. the microfinance industry in India. one of the largest in the world. The methodology used in the project is descriptive research. The study focuses on functioning of a NGO (Satat Seva Samiti). The research paper also focuses on various entities involved in micro financing. with the help of primary and secondary sources of data. It is final report submitted in the lieu of partial fulfilment of the Summer Internship Program in PGPM Program (2012-14) for IBS Mumbai.

Chapter 1  INTRODUCTION 9|Page .

and agricultural business development services. and insurance and savings for risk mitigation and consumption smoothing. 1999‖ as ―provision of thrift. Traditionally micro finance was focused on providing a very standardized credit product. and poor. used when financing for micro entrepreneurs. The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality. The management of money denotes acquiring & using money. At the heart of these principles are the concept of human development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their children. downtrodden by natural reasons or men made. Whatever the form of activity however. religion or otherwise. women. 1. Micro Finance is buzzing word. The range of activities undertaken in microfinance include group lending. credit and other financial services and products of very small amounts to the poor in rural. just like anyone else. semi-urban or urban areas for enabling them to raise their income levels and improve living standards‖. the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. and some banks have partnered with public organizations or made small inroads themselves in providing such services. A large variety of sectors provide microfinance in India. capacity building. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise. In India.Introduction Microfinance is defined as any activity that includes the provision of financial services such as credit. "The poor stay poor. and insurance to low income individuals which fall just above the nationally defined poverty line. not because they are lazy but because they have no access to capital. creed. using a range of microfinance delivery methods. with the goal of creating social value. and poor individuals which fall below that poverty line. (in fact need like thirst) need a diverse range of financial instruments to be 10 | P a g e . savings. the provision of savings and insurance. NGOs have undertaken the activity of raising donor funds for on-lending. Microfinance has been defined by ―The National Microfinance Taskforce. Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class of society. Governments also have piloted national programs. individual lending.1 Microfinance Definition According to International Labor Organization (ILO)." The dictionary meaning of ‗finance‘ is management of money. caste. equity and mutual self-help. The poor. ―Microfinance is an economic development approach that involves providing financial services through institutions to low income clients‖. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services.

Microfinance approach is based on certain proven truths which are not always recognized. Thus. Because micro credit is aimed at the poorest. How credit availed is used to survive and grow with limited means. specially for women. have the inherent capacity to save small amounts regularly and are willing to save provided they are motivated and facilitated to do so. It is a tool for empowerment of the poorest. but can be treated as responsible people on business terms for mutual profit . but a tool for social change. That easy access to credit is more important than cheap subsidized credit which involves lengthy bureaucratic procedures . It is not just a financing system. generally used for: (a) Direct income generation (b) Rearrangement of assets and liabilities for the household to participate in future opportunities and (c) Consumption smoothing. 1. 2.able to build assets. It is essentially for promoting self-employment. even those who can borrow individually from banks).(some institutions in India are already lending to groups or SHGs at higher rates .2 Concept and Features of Micro-finance: 1. Delivery is normally through Self Help Groups (SHGs). 5. Micro Finance is not merely extending credit. These are:  That the poor are bankable.this may prevent the groups from enjoying a sufficient margin and rapidly accumulating their own funds. micro-finance lending technology needs to mimic the informal lenders rather than the formal sector lending. It has to: (a) Provide for seasonality (b) Allow repayment flexibility (c) Fix a ceiling on loan sizes.micro finance constitutes a statement that the borrowers are not ‗weaker sections‘ in need of charity.    11 | P a g e . but due weightage is given to quality measurement. stabilize consumption and protect themselves against risks. successful initiatives in micro finance demonstrate that there need not be a tradeoff between reaching the poor and profitability . but extending credit to those who require most for their and family‘s survival. It cannot be measured in term of quantity. 3. but members continue to borrow at these high rates.our current challenge is to find efficient and reliable ways of providing a richer menu of micro finance products. 4. we see a broadening of the concept of micro finance--. 'Peer pressure' in groups helps in improving recoveries. That almost all poor households need to save.

service providers. 12 | P a g e . micro credit might have a far more limited market scope than say a more diversified range of financial services. For instance. Microfinance impact studies have demonstrated that  Microfinance helps poor households meet basic needs and protects them against risks. Moreover. On the other hand. and various insurance products. State Cooperative Bank. they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. micro finance activities are more diverse and include shopkeepers. For example. payment and remittance services. etc. would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living.  The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. is inversely related to income: the poorer you are the less likely that you have access. many very poor farmers may not really wish to borrow. In urban areas. artisans.4 Role of Microfinance:The micro credit of microfinance programme was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral . Central government in India has established a strong & extensive link between NABARD (National Bank for Agriculture & Rural Development).3 Who are the clients of micro finance? The typical micro finance clients are low-income people that do not have access to formal financial institutions. District Cooperative Banks. street vendors. SHG & NGOs and support mechanism. informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. Access to conventional formal financial institutions. district and village level. the poorer you are. Primary Agriculture & Marketing Societies at national. activeness of cooperatives. As we broaden the notion of the types of services micro finance encompasses. the chances are that. It depends on local conditions and political climate. state. 1. Individuals in this excluded and under-served market segment are the clients of micro finance.1. In rural areas. which includes various types of savings products. the more expensive or onerous informal financial arrangements. for many reasons. alleviating poverty and unleashing human creativity and endeavour of the poor people. the potential market of micro finance clients also expands. often household-based entrepreneurs. Micro finance clients are poor and vulnerable non-poor who have a relatively unstable source of income. Micro finance clients are typically self-employed. but rather.

1.5 Financial Inclusion . the term financial inclusion is perceived in different ways under different contexts. we mean delivery of banking services and credit at an affordable cost to the vast sections of disadvantaged and low income groups. financial inclusion by banks and other institutions must target. Figure 1 However. An open and efficient society is always characterized by the unrestrained access to public goods and services. loans. insurance. apart from personal / private investment requirements of individuals and groups. That apart. As banking services are in the nature of public goods. There is a view that only access to credit is treated as financial inclusion whereas the other view includes all the services extended by the financial institutions. microfinance empowers women. the universal public investment 13 | P a g e . The various financial services include savings.  The level of impact relates to the length of time clients have had access to financial services. thereby promoting gender-equity and improving household well-being.Defined By financial inclusion. payments. financial inclusion should therefore be viewed as availability of banking and payment services to the entire population without discrimination of any type. remittance facilities and financial counselling / advisory services by the formal financial system. By supporting women‘s economic participation.

Micro savings: These are deposit services that allow one to save small amounts of money for future use. etc. 1.6 Strategic Policy Initiatives Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are:       Working group on credit to the poor through SHGs. NABARD. NGOs. Compared with other sources of capital that can fluctuate depending on the political or economic climate. Micro insurance: It is a system by which people. Microcredit can be offered. 14 | P a g e .requirements necessary for development of infrastructure. businesses and other organizations make a payment to share risk.7 Activities in Microfinance Microcredit: It is a small amount of money loaned to a client by a bank or other institution. Remittances: These are transfer of funds from people in one place to people in another. 1995 The National Microfinance Taskforce. 2002 Microfinance Development and Equity Fund. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property. often without collateral.RBI 1. 2005 Working group on Financing NBFCs by Banks. Often without minimum balance requirements. public utilities and productive forces / capacity building efforts. these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses. NABARD. 1999 Working Group on Financial Flows to the Informal Sector (set up by PMO). usually across borders to family and friends. remittances are a relatively steady source of funds. health or the ability to work. social sector services. to an individual or through group lending.

1882. There is no specific law catering to NGOs although they can be registered under the Societies Registration Act. NBFCs are registered under the Companies Act.8 Legal Regulations Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of 1934. In January 2000. Absence of liquidity requirements is concern to the safety of the sector. 1956 and are governed under the RBI Act.1. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory organizations. the RBI essentially created a new legal form for providing microfinance services for NBFCs registered under the Companies Act so that they are not subject to any capital or liquidity requirements if they do not go into the deposit taking business. Regional Rural Banks Act. 15 | P a g e . and the Cooperative Societies Acts of the respective state governments for cooperative banks. 1860. the Indian Trust Act. Banking Regulation Act. There has been a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also borrow. or the relevant state acts.

Development Process through Micro Finance Donors and Banks Micro-Finance Government and Banks Implementing Organizations Individual Awareness/Promotional Work Individual Promotion and Formation of SHGs Micro Enterprise Consolidation of SHGs Micro Enterprise Savings Consumption Needs Credit Delivery Production Needs Recovery Follow-up Monitoring Farm Related Income Generation (Sustainable & Growth Oriented) Non-Farm Related Self-Sustainability of SHGs Economic Empowerment through use of Micro-Credit as Figure 2 an entry point for overall Empowerment 16 | P a g e .

however. Organizations which directly lend to specific target groups and are carrying out all related activities like recovery.5% but if we include the transaction costs (number of visits to banks. moneylenders. semiformal. is not to "typecast" an organization. size.9 TYPES OF ORGANIZATION These organizations are classified in the following categories to indicate the functional aspects covered by them within the micro finance framework. or non-profit companies. While estimates of their importance vary significantly. these organizations greatly differ in philosophy. follow-up etc. SIDBI and other regional rural banks (RRBs). landlords.  Informal Sector In addition to friends and family.350 billion and of that. Organizations implementing micro-finance activities can be categorized into three basic groups. III. monitoring. around Rs. They primarily provide credit for assistance in agriculture and microenterprise development and primarily target the poor. and informal. Registered under a variety of legal acts.  Semi .250 billion has been given as advances.  Formal Sector The formal sector comprises of the banks such as NABARD. public trusts. II. as these have many other activities within their scope: Microfinance providers in India can be classified under three broad categories: formal. They charge an interest of 12-13. The aim. it is undeniable that 17 | P a g e . Organizations who only promote and provide linkages to SHGs and are not directly involved in micro lending operations. and traders constitute the informal sector. Organizations which are dealing with SHGs and plan to start micro-finance related activities.formal Sector The majority of institutional microfinance providers in India are semi-formal organizations broadly referred to as MFIs.) they come out to be as high as 21-24%. compulsory savings and costs incurred for payments to animators/staff/local leaders etc. Their deposit at around Rs. and capacity. I.1. There are over 500 non-government organizations (NGOs) registered as societies.

On the other hand MFIs are different types of financial institutions whose main financial activity is providing microfinance only. Some of these apex and retail level financial institutions have been discussed below: 1. They provide microfinance services in addition to their general banking activities and are referred to as microfinance service providers.10 Institutional Arrangement and Disbursement of Microfinance in India In India. and Rashtriya Gramin Vikas Nidhi (RGVN). many MFIs get funds from investors. The support may be in terms of resources or training for capacity building. Rashtriya Mahila Kosh (RMK). In addition to these apex financial institutions.1 Apex Financial Institutions The formal microfinance service providers include a number of apex financial institutions. These institutions can be broadly divided into two types. These financial institutions use a hierarchical network starting from the apex wholesale level to the retail level financial institutes. lenders and donors also. First type is the traditional formal financial institutions.10. Friends of Women World Banking (FWWB). Mutually Aided Co-operative Societies (MACS) and Non-Banking Financial Companies (NBFCs). regional rural banks and co-operative banks. while the second type is Microfinance Institutions (MFIs). The traditional financial institutions comprise of commercial banks. These are the organizations that provide support to implementing organizations. The features of some of these institutions have been highlighted in Table 1. Small Industries Development Bank of India (SIDBI). Housing and Urban Development Corporation Limited (HUDCO). networking.they continue to play a significant role in the financial lives of the poor. Some of them are like National Bank for Agriculture and Rural Development (NABARD). They may or may not be directly involved in micro-finance activities adopted by the associations/collectives to support implementing Organizations. The retail level banks and MFIs borrow funds from apex financial institutions and use their branch network to provide microfinance at the doorstep of poor people. 18 | P a g e . There are different terms and conditions associated with each apex financial institute. 1. Housing Development Finance Corporation (HDFC). They operate at state/regional or national level. In case of traditional financial institutions both private and public ownership are found but the MFIs are mainly in the private sector. etc. They provide bulk amount of funds to retail level banks and MFIs for on-lending to the poor. counseling. there is a wide variety of institutions in public as well as private sector which provide microfinance to the poor. Many of these institutions are NGOs.

Apex and Wholesale Financial Institutions in India 19 | P a g e Table 1 .

Co-operative Banks. In India. On an average.10. 14. there are almost 92. Regional Rural Banks. and different types of MFIs provide microfinance services.700 rural people. These banks used to provide loans directly to SHGs.283 semi-urban branches of commercial banks.142 branches of the Regional Rural Banks and 12.128 branches of district level co-operative banks. The commercial banks and regional rural banks also provide their credit facilities to MFIs for its on-lending to groups. there is at least one retail credit outlet for about 4.000 co-operative credit societies at the village level. Table 2 -The Indian Micro Financial Framework 20 | P a g e .1.2 Retail Level Banks At the retail level Commercial Banks.571 rural and 12.000 retail credit outlets of the formal banking sector in the rural areas comprising 20. Besides this. there are about 60. This is helpful in widening the range of lending institutions. The Summary of Legal Framework Institutions is attached in Annexure 6.

the MFIs in India 21 | P a g e . Figure 1 represents the hierarchy of financial institutions for the microfinance disbursement. outreach. societies. there is a wide range of such organisations with diverse legal forms. both public and private banks are extending considerable loans to MFIs at interest rate ranging from 8 to 11 per cent per annum. varying significantly in size. trusts and co-operatives.10. On the basis of their legal forms. mission and credit delivery methodologies. Figure 2: Institutional Arrangement for Microfinance Disbursement in India Following the guidelines of RBI all scheduled commercial banks including RRBs give bulk loans (classified as a priority sector) to MFIs for on-lending to groups and other small borrowers. At present.3 Microfinance Institutions Microfinance institutions (MFIs) are the organisations or associations of individuals that provide financial services to the poor. Legal Forms of MFIs The MFIs are an extremely heterogeneous group registered as Non-Banking Financial Companies (NBFCs). In India.1.

Mutual benefit making and profit making MFIs. These companies. These NGOs are not formally regulated and they are prohibited by RBI from taking collected savings of their clients or deposits from the public. along with Section-25 companies. (i) Non-profit Making MFIs The non-profit making MFIs include NGOs and non-profit making companies. The table provides that a large number of NGOs have undertaken the task of financial intermediation without any profit.. NBFCs. The MFIs in India which are larger in size belong to this category. (iii) For Profit MFIs For profit MFIs include Non-Banking Financial Companies (NBFCs). 1956. These companies can deposit the savings of their clients with them. Indian Association for Savings and Credit (IASC). BASIX. and are regulated by RBI. can not take group savings of their clients. Some of the large NBFCs in the field of microfinance are: Sanghamitra. account for about 80 per cent of microfinance outreach in India. The companies registered under Section-25 of the Companies Act are also non-profit companies. Cashpor. These are registered under the State Co-operative Societies Act and are not regulated by RBI. 22 | P a g e . being non-profit in character. These companies are registered under the Companies Act. SHARE Microfin Ltd. The activities of these companies are restricted to charity or other social purposes. The bye-laws of these institutions are generally restrictive in allowing any commercial operations. Majority of these are registered as trusts or societies. Section-25 companies are formally recognised and regulated by the RBI. etc. both in terms of clients served as well as loan portfolios.can be broadly subdivided into three categories: Nonprofit making. (ii) Mutual Benefit MFIs The mutual benefit MFIs are the Mutually Aided Co-operative Societies (MACS).

1. This allows the client to be reached at lower cost than in the case of a stand–alone MFI. In other words. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. the model is similar to the partnership model: the MFI originates the loans and the bank books them. This regulation evolved at a time when there were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people have confidence could mobilize savings of gullible public and then vanish with them. Such refinancing through securitization enables the MFI enlarged funding access. 1. from first contact to final repayment. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring. and then works hand in hand with that MFI to extend loans and other services. the MFI acts as an agent and takes care of all relationships with the client.11. perhaps as an NBFC. In case of 23 | P a g e . as an NBFC.variation of this model is where the MFI. this model has two very different and interesting operational features:  The MFI uses the branch network of the bank as its outlets to reach clients. the bank forms its own MFI. It remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse.1 Bank Partnership Model This model is an innovative way of financing MFIs. holds the individual loans on its books for a while before securitizing them and selling them to the bank. the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure. A sub .2 Banking Correspondents The proposal of ―banking correspondents‖ could take this model a step further extending it to savings.1. On paper.11. It would use the ability of the MFI to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits.11. supervision and recovery.3 Service Company Model Under this model. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. But in fact. If the MFI fulfills the ―true sale‖ criteria.11 Micro Finance Models 1.

such as individual loans for SHG graduates. Through this program. In the service company model. remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance. Through this program. Bank of Madura's SHG development program was initiated in 1995. which limits its risk-taking. mobilization power and infrastructure of MFIs and NGOs. the risk is being entirely borne by the MFI. it drew up aggressive plans to penetrate rural areas through its SHG program. By 2000. the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage. ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary financial support to their activities. Through this model. Initially. The Partnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth. 1. ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit distribution channels and could take advantage of the expertise of these institutions in rural areas. 1.11. it had formed. it also allows rapid scale up. Later. In addition. banks which have large branch networks. This model aimed at synergizing the comparative advantages and financial strength of the bank with social intermediation. Under this model. which had significant presence in the rural areas of South India. with a customer base of 1. A very example of it is shown by Bank of Baroda. saving and lending. 24 | P a g e . banks financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies. MFIs are unable to provide risk capital in large quantities. trained and initiated small groups of women to undertake financial activities like banking. which limits the advances from banks. MFIs may contract with many banks in an arm‘s length relationship.5 Partnership Models A model of microfinance has emerged in recent years in which a microfinance institution (MFI) borrows from banks and on-lends to clients.9 million and 87 branches. few MFIs have been able to grow beyond a certain point. it had created around 1200 SHGs across India and provided credit to them. In the partnership model.4 Bank Led Model The bank led model was derived from the SHG-Bank linkage program of NABARD. The Service Company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products. especially Tamil Nadu.11.

25 | P a g e . while the bank met the financial requirements of the borrowers.ICICI Bank came up with a plan where the NGO/MFI continued to promote their microfinance schemes.

Chapter 2  Reserve Bank Of India (RBI)  Small Industries Development Bank of India (SIDBI)  National Bank for Agricultural and Rural Bank 26 | P a g e .

Appendix 1 consist of latest guidelines issued by RBI on Fair Practices Code for NBFC's Within the microfinance sector.2.1. Currently MFIN member organizations consist of 46 of the leading NBFC/MFIs whose combined business constitutes over 80% of the Indian microfinance sector. Some of the initiatives undertaken by RBI include: Restructuring of the system of bank inspections. It was established in October 2009 with the sole purpose of promoting the key objectives of Microfinance in India and establishing guidelines for responsible lending and client protection in the Microfinance industry.1 RBI (Reserve Bank of India) and its role The Reserve Bank of India (RBI). India‘s central bank. community development financial institutions and government agencies like NABARD and serves as a forum and advisory body for organizations and individuals engaged in the field of community development and financial inclusion. establishes guidelines for fair collection practices promoting transparency and standardized recruitment and training practices for member MFIs. The key strategies that Sa-Dhan works on are as follows:    Encourage existing and new MFIs through financing and capacity building as well as a supportive regulatory framework Incentivize existing mainstream financial institutions to provide microfinance Building a strong demand system through community based development financial institutions (CFDI) In order to successfully execute its strategy. there are 2 main apex bodies which set the standards for microfinance institutions in India –Microfinance Institutions Network (MFIN) and SaDhan. which focus on fair practices with borrowers and among member organizations.     2. The MFIN code of conduct establishes limits on overall lending at the client level. Introduction of off-site surveillance. and Strengthening the internal defenses of supervised institutions. financial institutions and non-banking finance companies. Strengthening the role of statutory auditors.2 Sa-Dhan was established in 1998 to provide a common collaboration platform for MFIs. Sa-Dhan is working in the following three thematic areas: 27 | P a g e . NGOs. through its board.1 MFIN is the self-regulatory organization (SRO) for the Indian Microfinance industry. 2. MFIN has defined a code of conduct for its members. As a step towards more stringent self-regulation.1. undertakes consolidated supervision of the financial sector comprising commercial banks. MFIN seeks to work closely with regulators and other key stakeholders to achieve larger financial inclusions goals through microfinance.

Setup of state councils is proposed which would involve state governments and would be linked to the central government council.It aims to build sectoral capacity in microfinance. Some of the key provisions of the bill are as follows a) Registration for MFIs: every institution in microfinance should register with the regulator. 2011 is a major step towards the centralization of microfinance policies in India under the supervisory umbrella of the central bank. 2. Setting standards . More importantly. c) Pricing and interest rates: The RBI will have the authority to set interest rates and margin caps for pricing of loans. the Microfinance Institutions (Development and Regulations) Bill. recovery practices adopted by MFIs. Reserve Bank of India (RBI). transform into a company when they attain a significant size. All institutions will be required to register with the RBI. b) National and state level supervision: Proposal for regulation and supervision of MFIs at a state level in addition to the national level. d) Penalties: The bill proposes penalties for MFIs of a maximum of Rs 500.   Policy interventions . As for regulation of the sector itself. RBI is designated as the umbrella authority that will regulate microfinance institutions.000 for not following the rules set forth by the governing councils and facilitates the RBI to delegate powers and enforcement to NABARD. be subject to a variety of prudential and operational guidelines that are introduced by the regulator provide periodic information to the regulator and face penal action for violation of law or any rules framed. State councils would monitor lending activities undertaken by MFIs to check for over-indebtedness and defaults. the scope of the Bill largely covers the role of RBI in overseeing the sector in terms of its supervisory powers over various institutions carrying on microfinance activity. the draft legislation seeks to do away with the fragmentation that currently exists in regulating the sector.Its main function is to facilitate the adoption of best practices within the sector Capacity building . appropriate grievance redressal mechanisms in place and overall assessment of impact of measures for financial literacy and inclusion. 28 | P a g e .It looks at providing an enabling environment for the enhancement of microfinance activities. Under the new Bill.2 Microfinance Laws In the area of microfinance. This will facilitate many of the already developed consumer protection policies within the banking system to be applied to the microfinance sector. The Bill details the powers exercisable by RBI over the various types of institutions currently carrying on microfinance activity (which include non-banking finance companies and cooperatives).

such as. investment and financial institutions as its shareholders in addition to IDBI. In pursuance of the SIDBI (Amendment) Act.‖ SIDB I commenced its operations on April 2. State Industrial Development Corporations.3. GIC. especially in semi.2. 2. by taking over the outstanding portfolio and activities of IDBI pertaining to the small-scale sector. 1990. State Financial Corporations. the main purpose of the government was to ensure larger flow of assistance to the small-scale units.urban areas to create more employment opportunities and thereby checking migration of population to urban areas. To meet this objective. and other institutions owned and controlled by the central government. and Promotion of employment-oriented industries. It discounts and rediscounts bills arising from sale of machinery to and manufactured by small-scale industrial units. cooperative banks and RRBs. 1989.1 per cent equity shares of SIDBI held by IDBI have been transferred to public sectors banks. The major functions of SIDBI are given below: (i) It refinances loans and advances provided by the existing lending institutions to the small-scale units. which continues to hold 49 per cent share in SIDBI. etc. 29 | P a g e (ii) .3. 2. 51.the SIDBI Act. commercial banks. insurance companies. The charter establishing SIDBI envisaged SIDBI to be ―the principal financial institution for the promotion. LIC. 2000.3 Small Industries Development Bank of India (SIDBI) The Small Industries Development Bank of India (SIDBI) was set up in 1990 under an Act of Parliament.1 Objectives of SIDBI In the setting up of SIDBI. Expanding the channels for marketing the products of the small scale sector. financing and development and development of industries in the small scale sector and to coordinate the functions of other institutions engaged in similar activities.2 Functions of SIDBI SIDBI provides assistance to the small-scale industries sector in the country through the existing banking and other financial institutions. and as approved by the Government of India. the immediate thrust of the SIDBI was on the following measures:    Initiating steps for technological upgradation and modernisation of existing units. Presently SIDBI has 35 banks.

leasing. international agencies and industry associations to foster such programmers. hire purchase and marketing help to the small-scale units. Line of Credit (LoC) is granted in lieu of refinance. To commercial banks and co-operative banks. Direct Assistance . technology institutions. governmental organizations. 30 | P a g e . It provides services like factoring. It provides financial support to National Small Industries Corporation for providing. viz. management institutions. grants and corpus support are provided to NonGovernment Organizations. etc. also is provided against their non-refinanced outstanding portfolio relating to SSI sector.3.000 outlets in the country. etc.3 Channels of Assistance SIDBI's assistance to the small-scale sector is channelized through 3 routes. The number of eligible PLIs for refinance is 894. to small units.Loans.By way of providing refinance to and rediscounting of bills of Primary Lending Institutions (PLIs) including banks and State level institutions which together have about 65. through several tailor-made schemes targeting specific groups or activities benefiting SSIs. SIDBI has Memoranda of Understanding with research and development institutions. It grants direct assistance and refinance loans extended by primary lending institutions for financing exports of products manufactured by small-scale units.Dispensed through SIDBI's own branches numbering 38. leasing. to act as implementing agencies of the programmers of SIDBI. Indirect Assistance . It extends financial support to State Small Industries Corporations for providing scarce raw materials to and marketing the products of the small-scale units. In respect of some institutions. Financial Support (Short Term Loan) – a refinance product. Development and Support Services . Mahila Udyam Nidhi and Mahila Vikas Nidhi and seed capital schemes.(iii) It extends seed capital/soft loan assistance under National Equity Fund. (iv) (v) (vi) (vii) 2.

high growth potential. Lending is based strictly on an intensive in-house appraisal supplemented with the capacity assessment rating by an independent professional agency. In view of 31 | P a g e .3. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to achieve operational. nurtures and develops select potential MFIs as long term partners and provides credit support for their micro credit initiatives. and professional expertise and committed to viability are provided financial assistance for on lending. The MFIs are generally constrained in reaching a break-even level and finally achieving sustainability primarily due to a narrow client and product base. The constraints and challenges vary with the different types and development stage of MFIs. around 100-125 MFIs are planned to be developed as long term partners over the next 4 years. Under the present dispensation.2. comprise large and medium scale MFIs having minimum fund requirement of Rs. Moreover lack of technical manpower. high operational and administrative costs for delivering credit to the poor. infrastructure and MIS are prevalent. financial and institutional sustainability.4 In.itiatives by SIDBI On-lending: In keeping with its mission. Most MFIs are currently operating below operational viability and use grant funds from donors for financing up-front costs of establishing new groups and covering initial losses incurred until the lending volume builds up to a breakeven level. In all. and their inability to mobilise requisite resources. good track record. Relaxed security norms have also been adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements. The eligible partner institutions of SIDBI Foundation. SIDBI Foundation identifies. 10 lakh per annum. therefore. annual need based assistance is provided to enable MFIs to expand their scale of operations and achieve self-sufficiency at the earliest. Large and medium scales MFIs having considerable experience in managing micro credit programmes. operational systems.

effective financial and general management. efficient monitoring and control systems etc. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging requirement of the micro finance sector in India. Direct Credit to clients / members of MFIs: SFMC would be providing direct credit to SHGs/ solidarity groups/ individual clients of the select MFIs. MIS and internal control. training. Liquidity Management Support (LMS) for the long term partners. In this background. The scheme is targeted on larger MFIs. to scale up micro-finance initiatives at a fast pace. The product has the feature of conversion into equity after a specified period of time subject to the MFI attaining certain structural.above. SFMC has introduced a special short term loan scheme. to enable them to expand their operations. administrative and operational costs and provide technical support besides helping them achieve self-sufficiency in due course. Quasi equity: The Transformation Loan (TL) product is envisaged as a quasi-equity type support to partner MFIs that are in the process of transforming themselves their existing structure into a more formal and regulated set-up for exclusively handling micro finance operations in a focused manner. There would be no restriction on 32 | P a g e . Being quasi-equity in nature. The technical assistance component is directed at helping the MFIs to strengthen their micro finance programmes through inputs such as human resource development. Liquidity Management: In view of the fact that liquidity is a major concern of many of the middle level MFIs and a small working capital support can go a long way in their better liquidity management and thus pave way for faster growth. This non-interest bearing support facilitates young but well performing MFIs to make long term institutional investments and acts as a constant incentive to transform themselves into formal and regulated entities . whereas operational support is provided to the MFIs to meet a part of their operational deficit arising due to expansion of their programme. The grant support is being provided both as technical assistance as well as operational support. these borrowers would be supported/ supervised by the MFI. which have strong credit and recovery mechanism. operational and financial benchmarks. cover their managerial. MIS development. However. TL helps the MFIs not only in enhancing their equity base but also in leveraging loan funds and expanding their micro credit operations on a sustainable basis. in the initial years. SIDBI provides equity capital to eligible institutions not only to enable them to meet the capital adequacy requirements but also to help them leverage debt funds. Under the arrangement. SFMC has decided that need-based capacity building support in the form of grant be provided to the partner MFIs. SFMC would assess the MFIs ability to manage the projected micro credit portfolio and extend credit to the borrowers of MFI. a special effort is required for capacity building of the micro finance institutions.

The additional credit facilities sanctioned upto Rs. 100 lakh per borrower. Lending to be based strictly on an intensive in-house appraisal supplemented with the credit rating by an independent professional agency. Micro Enterprise Loans: In order to build and strengthen new set of intermediaries for Micro Enterprise Loans.50% of the credit facilities sanctioned and the"annual service fee" @0. SIDBI has set up : (1) Credit Guarantee Fund Trust for Small Industries. Guarantee Fee and Annual Service Fee The guarantee cover is available on payment of "one time guarantee fee" @1. (2) SIDBI Venture Capital Limited. professional management. subsequently without any collateral security and/or third party guarantees to such MSE unit for fund based and non fund based facilities.( Guarantee Fee is 0.00 lakh sanctioned by the MLIs. The MFIs may pass the assistance directly to SHGs / individuals or route it through their partner NGOs and MFIs. guarantee fee is 1. For loans upto Rs.00% and annual 33 | P a g e . 100 lakh per MSE unit for fund based and non-fund based facilities. Institutions/ MFIs with minimum fund requirement of Rs. potential to expand. transparency in operations and well laid-out systems besides qualified/-trained manpower. 25 lakh p.3.the MFIs as regards their methodology for credit dispensation. The institutions would be selected based on their relevant experience. and having professional expertise and capability to handle on-lending transactions shall be eligible under the dispensation. Relaxed security norms more or less on line with micro credit dispensation to be adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements. They may also adopt any other channel so as to effectively reach financial assistance to poor clients.a. 5. Loan Amount The maximum loan granted under the Scheme will be Rs. (3) Technology Bureau for Small Industries. (4) SIDBI Foundation for Micro Credit. the Bank has formulated new scheme for Micro Enterprise Loans.75% of the credit facility extended by the MLIs. 2.5 Subsidiaries:To facilitate the creation of an environment for self-sustaining and growing SSI units and to provide a complete range of services. The Credit Guarantee Fund Trust for Small Industries (CGTSI) All new or existing Micro and Small Enterprises (Manufacturing Sector and Service Sector) to which credit facility has been provided by the Bank without any collateral security and/or third party guarantees.75% for the loans to borrower in North Eastern Region including Sikkim). and having considerable experience in financial intermediation/ facilitating or setting up of enterprises/ providing escort services to SSI/ tiny units/ networking or active interface with SSIs etc.

viable. especially women. guarantee fee @ 1.00 lakh sanctioned by the Bank. State Financial Corporations have been brought under the ambit of SIDBI. 5. The Technology Bureau for Small Enterprises assists small enterprises in accessing the latest technologies in diverse industrial fields.25% is recovered from the following borrowers and the balance i. internet services. Annual Service Fee of 0. North-Eastern Development Financial Institutions (NEDFIs). product development.25% out of 0. SBI Factors. 2. and Asia Pacific Centre For Transfer of Technology (APCTT).75% as applicable to the borrowers shall be borne by the Bank in respect of guarantee cover: (a) All loans upto Rs.e. and sustainable micro-finance institutions from the informal financial sectors to provide micro-finance services to the poor.50% or 0. shall be borne by the Bank. Besides these. SIDBI’s Venture Capital Limited Provides venture funds for various activities such as software services and education. in excess of 0.00 lakh.service fee is 0. 34 | P a g e . both from within and outside India.. SIDBI is the co-promoter of IDBI Bank Ltd. SIDBI Foundation for Micro Credit (SFMC) is creating a national network of strong. The Technology Bureau for Small Enterprises has been set up in association with United Nations. (b) All eligible women Enterpreneurs. for setting up micro enterprises. (c) All eligible borrowers located in the North Eastern Region( including Sikkim) For loans upto Rs.00% and annual service fee @ 0. and so on.50%. and Canbank factors.50%. Consequent upon amendments to the State Financial Corporations (SFCs) Act.

the Reserve Bank of India and other organizations in matters relating to rural development • Offers training and research facilities for banks. cottage and village industries.2. promote integrated and sustainable rural development and secure prosperity of rural areas. handicrafts and other rural crafts. Providing refinance to lending institutions in rural areas Bringing about or promoting institutional development and Evaluating. 2. It also has the mandate to support all other allied economic activities in rural areas. cooperatives and organizations working in the field of rural development • Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development • Acts as regulator for cooperative banks and RRBs 35 | P a g e .NABARD NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture. small-scale industries. 3. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with 1.4 National Bank for Rural and Agricultural Development. monitoring and inspecting the client banks Besides this pivotal role. NABARD also: • Acts as a coordinator in the operations of rural credit institutions • Extends assistance to the government.

4.2. The main functions of NABARD can be classified into following: Role and Function’s of NABARD NABARD Credit Functions Training & Development Supervisory Functions Figure 4 36 | P a g e .2 Role and Functions of NABARD NABARD performs wide range of function to develop the financial market for the rural and agricultural development of the country directly or indirectly.4.1 NABARD’s Organizational Structure Figure 3 Source : nabard.org 2.

dispensation and monitoring of credit.2 Development and Promotional Functions Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological upgradation.2. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks.2.2. so that adequate and timely credit is made available to the needy. strengthening of rural financial institutions. In order to reinforce the credit functions and to make credit more productive. 2. Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated time frame. Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated time frame. Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical. Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs. monitoring and evaluations cells. This activity involves: • • • • Framing policy and guidelines for rural financial institutions Providing credit facilities to issuing organizations Preparation of potential-linked credit plans annually for all districts for identification of credit potential Monitoring the flow of ground level rural credit.4.4. Hence. has been identified by NABARD as a thrust area. • • 37 | P a g e . NABARD has been undertaking a number of developmental and promotional activities such as:• • • Help cooperative banks and Regional Rural Banks to prepare development action plans for themselves. which deliver credit to the sector.1 Credit Function of NABARD NABARD's credit functions cover planning.

• Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis • Undertakes portfolio inspections.in.nbsc. • • • • Provide financial support for the training institutes of cooperative bank. 38 | P a g e . systems study. Regional Rural Banks and cooperative banks. Provide financial assistance to cooperative banks for building improved management information system. Lucknow www.in and College of Agriculture Banking.2. besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs) • Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative Banks. it • Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act.3 Supervisory Functions of NABARD As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes. NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs). Pune. Provide training for senior and middle level executives of commercial banks. As part of these functions. National Bank Staff College. 2.4. etc. opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs) • Administering Credit Monitoring Arrangements (CMA) in SCBs and CCBs. Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmer‘s clubs. computerization of operations and development of human resources. 1949.birdlucknow.• Provide organization development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD). Lucknowwww.

forestry. It has set up ADFCs in Andhra Pradesh. belonging to the weaker sections and engaged in trade/ business/ service. fishery. NABARD provides short-term refinance for various types of production/ marketing/ procurement activities. storage and market yards. commercial banks (CBs) state agricultural development finance companies (SADFCs) and primary urban cooperative banks. biogas and other alternate sources of energy and so. 39 | P a g e . Long term investment for farm sector includes investment on agriculture and allied activities such as minor irrigation. Tamil Nadu and Karnataka for financing hi-tech/commercial ventures. NABARD extends automatic refinance facility for refinance limit upto Rs 20 lakh. state cooperative banks (SCBs). Apex Regional Weavers Societies. and State Handloom Development Corporations (SHDCs) to benefit the weavers outside the cooperative fold. NABARD provides refinance facilities to: (1) SCBs and RRBs for financing seasonal agricultural operations (SAOs). NABARD extends refinance for both farm and non-farm sector. and other. plantation/horticulture. Non-farm sector includes investment activities of artisans.3 Schemes of NABARD Refinance: NABARD‘s mission is accelerated capital formation to promote sustainable and equitable agriculture and rural prosperity with refinance as lever.4. (4) SCBs on behalf of District Central Cooperative Banks (DCCBs) for (a) Financing farmers to hold on to their produce till they get remuneration price of their production. its focus is on hi-tech and export-oriented projects. sheep rearing. handicrafts. Besides this. diary. village and cottage industries. NABARD is the chief promoter of these ADFC with a holding of 26 per cent equity. regional rural banks (RRBs). small scale industries tiny sector. The institutions eligible for refinance is state cooperative agricultural and rural development banks (SCARBs). It has issued guidelines for formation of hi-tech and export-oriented projects in farm and non-farm sectors. farm mechanization. and so on. which include plugging and preparing land for sowing and weeding. NABARD‘s special focus is on the removal of regional/sectorial imbalance and hence gives preference to the needs of north-eastern states in terms of allocation of resources. land development soil conversation. (3) RRBs for financing artisans and village/cottage/tiny sector industries as also for financing persons. and labour for all operations in the fields for raising and harvesting the crops. It also undertakes consultancy work for projects.2. poultry. handlooms. quantity of refinances. piggery. (2) SCBs/CBs for financing the requirements of Primary Weavers‘ Cooperative Societies (PWCS).

Long-term loans for equity participation in cooperatives. Primary Cooperative Agriculture and Rural Development Banks) Regional Rural Banks (RRBs)      State Governments Non-Governmental Organisations (NGOs) – Informal Credit Delivery System  Short-term (crop and other loans) Term loans for equity participation in cooperation. Rural Infrastructure Development Fund (RIDF) loans for infrastructure projects. Term Loans for investments purposes Short-term Cooperative Structure (State Cooperative banks. Types of Refinancing Provided By NABARD Agency Commercial banks   Credit Facilities Long-term credit for investment purposes Financing the working capital requirements of Weavers‘ Cooperative Societies (WCS) and State Handloom Development Corporations. Revolving Fund Assistance for various micro-credit delivery innovations and promotional projects under Credit and Financial Services Fund (CFSF) and Rural Promotion Corpus Fund (RPCF). Other refinance facilities include conversion assistance in case of natural calamity long-term loans to state governments financing of state handicrafts development corporations financing of industrial cooperative societies and forest labour cooperative societies. 40 | P a g e .(b) Procurement stocking. Short-term (crop and other loans) Medium-term (conversion) loans Term loans for investments purposes Financing WCS for production and marketing purposes Financing State Handloom Development Corporations for working capital by State Cooperative Banks. and medium-term credit limits to SCBs and RRBs. District Central Cooperative Banks. Primary Agricultural Credit Societies)      Long-term Cooperative Structure (State Cooperative Agriculture and Rural Development Banks. and wholesale distribution by apex societies and retail distribution of fertilizers to farmers.

Watershed development fund: -This fund was created in NABARD in 1999-2000 with a corpus of Rs 200 crore contributed equally by the Government of India and NABARD for implementing watershed projects in 100-priority district of 14 states.82 lakh cards were issued by cooperative banks. and conservation of soil and moisture.994 crore. Under the scheme.000 for death and Rs 25.44 crore were approved.This scheme was started in 1998-99 to grant credit to farmers. The state governments failed to develop and maintain rural infrastructure due to resource crunch. The Tranche-I was made up of contributions by way of deposits from scheduled commercial banks operating in India to extend of shortfall in their agriculture lending subject to a maximum of 1. NABARD formulated a scheme for financing agriculture graduates for setting up agriclinics and agribusiness centers.5 per cent of the net bank credit. Rural infrastructure includes irrigation structures. and facilitates and improves delivery of other rural services. bridges. 2002. 5. generates additional employment and income. RRBs and CBs. 119 Capacity Building Phase Projects have been sanctioned in 9 states.respectively. Scheme for financing farmers for purchase of land for agricultural purposes. and reducing vulnerability of rural power. Since inception up to the end of March 2012. Moreover. Investment in rural infrastructure declined in the eighth five-year plan period. contributes to the corpus fund of RIDF. the commercial banks which were to channelize at least 18 per cent of their totalling lending to agriculture were unable to fulfil their commitment. The scheme is operational by NABARD. groundwater recharge. Investment in rural infrastructure creates new economic opportunities and activities. During the year 2001-02 106 new projects involving a grant support of Rs. rural lands. the Union Budgets allocated Rs 2. Loans disbursed under KCCs have been brought under Rashtriya Krishi Bima Yojna of the General Insurance Corporation. sanitation. As on March 31.65 crore KCCs involving a credit limit of Rs 33.500. rural market yards. RIDF was set up in 1995-96 under the initiative of the Central Government. improving the quality of life. 83. KCC holders are also being provided personal accident insurance cover of Rs 50. (RIDFI). Kisan Credit Card (KCC) Scheme: . and education health communication and information technology. rural energy. Rural Infrastructure Development Fund: The development of a strong rural infrastructure is a prerequisite for increasing productivity of lands. capital and labour. the central government through budgetary outlays. To provide loans to state governments for the creation of rural infrastructure at reasonable rates. RIDF was set up with an initial amount of Rs 2.000 for disability. water supply. 41 | P a g e . This programme includes the improvement of productivity of land.000 crore.During the year 2001-02. During the year 2001-02.32 crore KCCs have been issued of which RRBs and cooperative banks issued 1. Scheme for setting up of agriclinic and agriculture centers: . 2. In the years 1996-97 and 1997-98.

000 crore as loans to about 4. 2002.454.6 lakh SHGs and availed of Rs 794 crore as refinance from NABARD. SHG Federations. Over 7. In 1998. NABARD and two Public Sector Commercial Banks. the GOI in collaboration with NABARD launched a central sector capital subsidy scheme (Investment Promotion Scheme) for development of privately owned non-forest wastelands in the country. On-time repayment of bank loans was above 95 per cent from SHG members. The Fund has received an initial contribution of Rs 100 crore contributed by the RBI. More than 90 per cent SHGs have exclusively women members. including supply of agri inputs. 42 | P a g e . Self-help groups (SHGs). SHG Bank linkage programme covered 488 districts in 30 states and union territories (UTs). NABARD has provided upto March 31. and credit unions for on-lending to SHGs and to build their financial intermediation capacities. Revolving Fund Assistance (RFA) of Rs 104 million to 26 NGOs.. Micro Finance Development fund: . in pursuance of the proposal contained in the Union Budget 200001.Scheme for ex-serviceman taking up self-employment activities under SEMFEX II. Refinance scheme for financing farmers‘ service centers set up in collaboration with Mahindra Shubhlabh Services Limited (MSSL) for providing various extension services to farmers. Cumulatively as on March 31.Finance Development Fund with an amount of Rs 100 crore. 2002 banks have disbursed more than Rs 1.NABARD has set up a Micro. NABARD has further contributed Rs 6 crore from its surpluses to the fund.59 million disbursed by banks as loans to SHGs. This fund helps in furthering the cause of banking with the poor. During the year 2001-02 Rs 5.9 million poor households have gained access to the formal banking system through 458 thousand.

4.75 million) and paid up capital of Rs 50 million (US $1.15 million). rural development and allied areas.. Investment surveys Turn around strategy for banks and restructuring of developmental institutions 43 | P a g e . NABARD and its Subsidiaries NABARD NABCONS NABFINS Figure 5 2. infrastructure. In tune with NABARD's mission to bring about rural prosperity. internalized for more than two decades. The Company is registered under the Company's Act. banking. institutional development.4. training. Nabcons has more than just commercial interest in the assignments it undertakes.NABARD Consultancy Services: NABARD Consultancy Services (Nabcons) is a wholly owned subsidiary promoted by National Bank for Agriculture and Rural Development (NABARD) and is engaged in providing consultancy in all spheres of agriculture. especially multidisciplinary projects. Services offered by NABARD Consultancy Services      Techno-economic feasibility studies and potential surveys Detailed project formulation Techno-economic appraisal of projects for bank financing.4.1 NABCONS. Nabcons leverages on the core competence of the NABARD in the areas of agricultural and rural development.2. etc. with an authorized capital of Rs 250 million (US $5. Debt restructuring Micro-developmental planning. 1956.4.

Each one incorporates different delivery systems. which are not affordable by the poor. documentation of agreements / contracts in development banking and service matters etc.2 NABFINS.NABARD Financial Services Pvt. expansion. It will provide competition to reduce the interest rates of moneylenders and financial institutions.      Conceptualization. Canara Bank. It is a non-deposit taking NBFC registered with the Reserve Bank of India and shall operate throughout India. It will invest in under banked areas even if it means higher transaction costs. Government of Karnataka. model laws. design and implementation of developmental programmes / projects Monitoring and Evaluation of the developmental projects and investments International Visitors' Programme/ International Exposure Visits Capacity building and human resource development Conduct Sectoral studies and identification of potentials and perspective plans. 2. commercialization and modernization of agriculture and allied activities. These four verticals are: 44 | P a g e . it has given risk management priority. Union Bank of India.4. NABFINS‘ business plan which is taking shape endeavors to cover all costs of maintenance and growth without raking in excessive profits. Ltd. Dhanalakshmi Bank and Federal Bank. NABFINS shall engage in the business of providing micro finance services (with or without thrift) and other facilities to needy and disadvantageous sections of the society for securing their prosperity in both rural and urban areas. Legislative drafting. different risks at various points of the process and different types of partnerships with people‘s institutions. To reduce the clients‘ risk. it will respect the diversity of several livelihood activities. when the manager of the financial institution pays 8% on a loan to buy a flat. It will endeavor to develop delivery systems and an organisational structure in order to meet its transaction costs that do not require it to charge 25% on a loan taken by a poor women to purchase a goat. The main objectives of the Company are to provide financial services in two broad areas of agriculture and microfinance. Business Model of NABFINS: The business model of NABINS has four verticals. NABFINS is a subsidiary of National Bank for Agriculture and Rural Development (NABARD) with equity participation from NABARD. NABFINS provides credit and other facilities for promotion. Appreciating the increase and diversity of risks to NABFINS in its efforts to cope with these features of its business model which has so far identified four verticals (which will be described later). which comprise a poor family‘s livelihood strategy and not reduce this strategy to a single large so-called viable activity (which the family finds it cannot manage) or to a standardized product to fit into pre-designed software.4.

They are not poor.i) Loans directly to Self Help Affinity groups using the Business Correspondent Model. grading and marketing agricultural commodities. If found to be suitable for investment. c. NABFINS directly lends one loan to the SHG which then decides on the size and purpose of individual loans to members – in keeping with the SHG-Bank Linkage model . The BC also can access grants from NABFINS to form new SHGs which NABARD has provided. fisheries. The major reason why NABFINS gives this vertical priority is that these second level institutions are starved of funds for infrastructure and working capital. This is the second vertical. This is the third vertical. ii) Loans to Second level institutions like Companies and Cooperatives largely for working capital. The BC collects the recoveries and credits them to NABFINS‘ account. However if it is found that existing SHGs are not moving ahead to invest in livelihood activities. Most of these institutions are supported by SHGs at the base and rely on an NGO for handholding. but are marginalized since they cannot access credit from formal financial institutions because they are far from Bank Branches. The clients under this vertical are small farmers and livestock owners. add value and provide market linkages for commodities – agriculture. This is the first vertical. The target group here is the poor. Briefly in this BC (Business Correspondents) model. The JLG should meet at least 5-10 times over 2-3 months to decide on its responsibilities. NABFINS‘ staff deals directly with these two institutions and not through the BC model. JLGs will be restricted to small farmers and livestock owners. handicrafts. iii) Loans to Joint Liability groups. the SHG members will not be able to increase/diversify their livelihood base and income. have no acceptable physical collateral and are therefore considered high risk by institutions.. functions etc. do not possess proper land records. b. d. charcoal and medicinal plants and the other adding value and scale to handlooms. Unless they are supported both by grants and long term low cost credit. NABFINS has extended loans to two institutions –one a Company aggregating. The size of the JLG is 5-10 members. These are the reasons why NABFINS intends to target this sector. They have to take loans from money lenders at high interest rates and hence cannot build capital or expand their occupations. etc. A group account should be opened and regular savings should be started which are credited to the group account. e. 45 | P a g e . Features of this vertical were agreed to: a. These institutions aggregate. NABFINS staff and the NGO/Federation assess the SHG together. additional grants can be mobilized for training and exposure. For this service it receives a commission. During this period some relevant modules of Institutional Capacity Building from the SHG training manual should be given including one on joint liability.

Products of NABFINS The activities of NABFINS focus predominantly on improving the lives of the disadvantaged and poorer sections of the society. Trainings envisaged comprise technical skills. Societies or other Organisations that support production/aggregation/marketing in sectors like agriculture. NABFINS intends to partner with programs like NRLM. Souharda & other Cooperative Societies. This is the fourth vertical. The sizes of loans to individual members depends on the different sizes of land holding. handicrafts. 46 | P a g e . non-farm activities mainly with focus on poor / disadvantaged sections of the population. Companies/corporate bodies/partnerships engaged in agriculture. Current Focus Presently NABFINS is focussing on lending to SHGs in Karnataka and a few districts in Tamil Nadu and Andhra Pradesh. Loans are extended either directly through Branches/Financial Service Officers or through agents. Only one loan will be given by NABFINS to the group. NABFINS' main aim is to support sustainable livelihoods of rural and urban poor in both agriculture and non-farm sectors. known as Business Correspondents (who handle cash) / Business Facilitators (who do not handle cash) engaged on commission basis for services rendered. Mutually Aided. NABFINS extends loans to farmers. Preparatory work to develop systems to identify and mentor youth and to reduce risk to the client and NABFINS has started.f. artisans & individuals. the size of which was decided in advance would be credited by the JLG to the personal account of each member. crops and livestock numbers. i. JLGs & small and marginal producers groups. loans in this vertical started in 2011. sericulture. The JLG members will decide on the management of repayments. We are also looking at second level institutions that support livelihoods in these districts. micro and small enterprises. handlooms. SHGs. SHG Federations. The loans to individuals. g. Producers' Companies (particularly those of the small and marginal segment). Trusts. h. Government and NGOs providing basic marketable skills through their own informal/formal technical training institutions. remote geographies etc. basic medical care etc. iv) Loans for basic skills training for youth and to set up small units.

2.e. 5 lakh Interest rate (%) 14.36% of processing fee 13.50% 1% of sanctioned amount subject to a ceiling of Rs. 50 lakh Table 3 12% 13% 12.5 lakh 12. 50 lakh Loans > Rs.20 lakh Loans>Rs. 2 lakh Loans > Rs.5% 47 | P a g e .f 1st April 2012 Borrower Category SHG/JLG/ Other groups Loan Amount Upto Rs. 2 lakh and upto Rs.00% 15.36% of processing fee Processing fees Service Tax 16.Interest rates on loans w. 5 lakh Loans > Rs. 2.75% Individuals/ Institutions Upto Rs. 20 lakh and upto Rs.5 lakh 1% of sanctioned amount subject to ceiling of Rs.

Chapter 3      Regional Rural Banks – Bank of Baroda Rural Banking Grameen Bank Model Self Help Groups – Satat Seva Samiti Model of SKS Microfinance Model of Milaap 48 | P a g e .

15% and 35% respectively. This document has been circulated among the scheduled commercial banks (including RRBs) with the approval of the Indian Banks‘ Association. in cooperation with a core group of bankers. the issued capital of a RRB is shared by the owners in the proportion of 50%.3. banks may use intermediaries such as NGOs. the concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State Cooperative Bank). farmers' clubs. a. it was being recommended that one branch of the lead bank or the bank having the largest presence at the block / taluka level may be identified as the nodal branch to address the issue of exclusion.   Simplifying Mortgage Requirements Saral Documentation for Agricultural Loans.NABARD. The area of operation of RRBs is limited to the area as notified by GoI covering one or more districts in the State.1 lakh.1 Introduction Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act. Guidelines for Commercial Banks NABARD. may prepare detailed guidelines based on consultations with commercial banks and technology service providers for operationalizing the Commercial Banks. 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. has prepared a one page document for agricultural loans up to Rs. Business Facilitators / Business Correspondents (BF/BC) Business Facilitators: Under the BF Model. agricultural labourers and rural artisans. in all districts identified as having the largest number of excluded people. Lead banks or banks having the largest presence may strengthen these nodal branches with technical staff to provide agricultural / business development services in the farm and non-farm sectors respectively. RRBs are jointly owned by GoI. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers. in consultation with RBI. The Committee recommends that this simplified document be adopted by all banks with a view to deepening credit outreach among the disadvantaged sections of the rural poor. IT-enabled 49 | P a g e   . community based organisations. Nodal Branches . As the services of the nodal branch would be available to all other branches in the vicinity.Taking cognizance of the fact that the marginal and sub-marginal farmers require credit plus services in the form of extension services. comprising of technical inputs and extension services to the banks / farmers. cooperatives. an appropriate cost sharing arrangement may be worked out between various banks. These could either be provided by regular officers of the bank or local consultants / practitioners / agri-business clinics on a retainer basis.

rural outlets of corporate entities, post offices, insurance agents, well-functioning Panchayats, village knowledge centres, agri-clinics / agri-business centres, Krishi Vigyan Kendras and KVIC / KVIB units for providing facilitation services. It has been clarified that such services may include :  Identification of borrowers and fitment of activities,  Collection and preliminary processing of loan applications,  Creation of awareness about savings and other products, education and advise on  managing money and debt counselling,  Processing and submission of application to banks,  Promotion and nurturing of SHGs / JLGs,  Post sanction monitoring,  Monitoring and hand holding of SHGs / JLGs / credit groups / others, and  Follow-up for recovery. Business Correspondents: Under the BC Model, NGOs / MFIs set up under the Societies / Trust Act, Societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States, Section 25 Companies, Registered NBFCs not accepting public deposits and post offices may act as BCs. Banks have been advised to conduct due diligence on such entities and ensure that they are well established, enjoy good reputation and have the confidence of local people. In addition to the activities listed under the BF Model, the scope and activities to be undertaken by BCs will include  Disbursal of small value credit,  Recovery of principal / collection of interest,  Collection of small value deposits,  Sale of micro-insurance / mutual fund products / pension products / other third party products, and  Receipt and delivery of small value remittances / other payment instruments. Bank of Baroda & Rural Banking

3.2

Bank of Baroda is an Indian state-owned banking and financial services company headquartered in Vadodara. It offers a range of banking products and financial services to corporate and retail customers through its branches and through its specialized subsidiaries and affiliates in the areas of retail banking, investment banking, credit cards and asset management. Its total global business was 7,003 billion as of 30 Sep 2012. In addition to its headquarters in its home state of Gujarat it has a corporate headquarter in the Bandra Kurla Complex in Mumbai. Based on 2012 data it is ranked 715 on Forbes Global 2000 list. BoB has total assets in excess of 3.58 trillion (short scale), 3,583 billion (long scale), a network of 4280 branches (out of which 4168 branches are in India) and offices, and over 2000 ATMs.

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The rural banking in Bank of Baroda includes:   Deposits Loans and Advances (Priority Sector Advances)

The products of Bank of Baroda can be classified broadly into:

Agriculture

Baroda General Criedit Card Scheme

Priority Sector Lending

MSME

Govt. Sponsered Schemes

Figure 6 Agricultural Finance Schemes Agriculture being the backbone of the Indian Economy, Bank of Baroda, is contributing significantly in accelerating the pace of rural development by providing finance to farmers by way of following agriculture products. 1. Baroda Kisan Credit Card (BKCC) - Empowering the farmer: The BKCC facility designed exclusively for the benefit of the farmers aims to provide them the opportunity to manage and utilise their funds in the manner they deem fit. BKCC provide adequate and timely support to farmers for their production needs e.g. purchase of quality inputs, investment requirements like purchase of agriculture implements/tractor etc, farming expenses towards farm maintenance, unforeseen family expenses (consumption) and maintenance of non-farm activities. 2. Purchase of agricultural implements including indigenous improved ones being utilised for field operations including harvesting/sorting/grading, for not only to farmers, but also for land-less labourers.

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3. Purchase of heavy agricultural machinery like tractors, power-tillers, etc. either by farmers having larger holdings with irrigation facilities or group of farmers with irrigation facilities. 4. Purchase of second hand tractors to provide opportunity to those interested farmers in dry land farming or having a small land holding who cannot afford to purchase new tractors. 5. Production credit for raising various crops from the point of preparatory tillage till harvesting, for land owners or permanent tenants or lease holders or share croppers. 6. Farm produce marketing loan / Financing against warehouse receipt against pledge of receipt of warehouse/ cold storages to the farmers. 7. Development of irrigation facilities, covering sinking of wells/bore wells, lifting of water by installation of pump sets, transporting of water through field channels, water saving system like drip irrigation/sprinkler irrigation etc. for farmers .Energising of pump sets through Non-conventional Energy Resources like wind mill, solar energy etc. or installation of generation sets is also covered. 8. Extending working capital needs to dealers of dealers/ distributors/traders of agricultural inputs like seeds, fertilisers etc. live stock inputs like cattle feed, medicine etc. and supply of agriculture machinery/ irrigation system. 9. Extending Custom services to farmers by way of machinery like tractor thresher etc. Equipment on rental basis and maintenance of cold storage /godowns for hiring, by individuals, institutions / organisations. 10. Providing employment to the unemployed technical personnel through Agro service Centre. 11. Setting up of Agri clinic and Agribusiness centre by agriculture graduates. 12. Construction farm building/structures like cattle shed, tractor shed, thrashing yards, fencing etc. by individual farmer or firms engaged in agricultural activity and is of long term nature. 13. Construction/Expansion/modernisation/Renovation of Rural Godown/Cold storage. 14. Development of horticulture including production, processing and marketing of various fruits, vegetables, plantation and flowers, which cover from nursery to the point of market, by individual farmers, firms, organisation like co-operative societies etc. and which covers both long term and short term requirement. 15. Development of land like bunding, terracing, levelling etc. and reclamation of saline, alkaline, ravine soils by farmer or organisation like co-operative societies etc. 16. Development of allied activities to agriculture like dairy, poultry , fisheries, sericulture, mushrooms, apiculture etc. by production , processing and marketing by farmer, land less labourers, firms, organisations, like co-operative societies etc .finance by way of long term nature and short term nature is being extended. 17. Financing Scheduled Caste & Scheduled tribe, who have been provided/allotted land by the State Govt, can be financed for purchase of farm implements irrigation pair of bullocks etc.

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business D.10% . Note & Hypothecation of crop for credit limit upto Rs 100000/D. Note & Hypothecation of moveable assets to be purchased out of loan upto cost of economic unit or Rs 1 lakhs whichever is lower.P. For Agri.Terms and Conditions: MARGIN Short Term Loans Upto Credit Limit Rs 100000/Above Credit Limit Rs 100000/Term Loans Upto Credit Limit Rs 100000/Above Credit Limit Rs 100000/.100. 000/Investment Loans wherever moveable assets are created D. D. Hypothecation of moveable assets & charge/mortgage of land or third party guarantee for credit limit above Rs 1 lakhs. Where subsidy is not available. Margin Nil 15% Margin Nil Margin . Note & Hypothecations of assets for credit limit upto Rs 5 lacs. Note & Hypothecation of crop and mortgage of land or third party guarantee for limit above Rs.15% Margin Nil 15% 53 | P a g e .P. 5% margin by borrower is required. Note.Tractors & Heavy Agriculture Machinery . SECURITY Crop Loan/short Term Loans D. agriculture labourer and other specified categories no margin money required by borrowers where subsidy is available under special development programme.Other Loans Agri Clinic Agri Business Upto Rs 5 Lacs Above Rs 5 Lacs Table 4 For small/marginal farmers.P.P.P. Clinic-agri.

D.P. Note, Hypothecations of assets & Mortgage of land/3rd party guarantee for credit limit above Rs 5 lakhs Investment Loans wherever moveable assets are not created Where moveable assets are not created, mortgage of land is required for limit above Rs.10,000/-.

Government Sponsored Schemes SRMS- Self Employment Scheme for Rehabilitation of Manual Scavengers' To rehabilitate manual scavengers. Key Benefits

Provides self-employment to scavengers.

Subsidy
 

Subsidy 50% of project cost for projects costing upto Rs.25,000/Projects costing more than Rs.25,000/- @ 25% of the Project Cost; with a minimum of Rs.12,500/- and maximum of Rs.20,000/-.

Terms & Conditions

Scavengers and their dependants both SC and non-SC sponsored by National Safai Karmacharis Finance & Development Corporation (NSKFDC) Maximum Limit Rs. 5.00 lacs (Micro Financing – upto a maximum of Rs.25, 000/-). The tenure period ranges from 3 – 5 years. ROI Project cost upto Rs.25,000/- @ 4% p.a. for women beneficiaries, for others @ 5% p.a. and for project cost above Rs.25,000/- @ 6% p.a.

  

Swarna Jayanti Shahari Rozgar Yojana (SJSRY)To provide gainful employment to the urban poor living below the poverty line. Key Benefits
 

Provides self-employment to urban poor. Subsidy 15% of project cost maximum Rs.7,500/-

Terms & Conditions

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   

All urban and semi-urban poor sponsored by urban local bodies are eligible. Maximum benefit Rs. 50,000/The tenure period = 9 years No collateral security

Swarna Jayanti Gram Swarozgar Yojana (SGSY)To bring every assisted poor family (Swarojgari) above poverty line in 3 years. Key Benefits
 

Provides provide income generating assets through a mix of bank credit and Govt. Subsidy Rs.7,500/- to Rs.10,000/-. SHGs maximum Rs. 1.25 lakhs.

Terms & Conditions

Individuals or groups below poverty line – sponsored by DRDA Reserve quota for SC/ST – 50%, Women – 40% & Disabled - 3%. Maximum Benefit (as per Project Cost). The tenure period ranges from 5 – 9 years. No collateral security upto a loan limit of Rs. 1.00 lac for individuals and Rs. 10 lacs for Groups (Assets created out of the bank loan would be hypothecated to the Bank as Primary Security). Loans exceeding the above limit collateral/s like third party guarantee/assignment of LIC policy required.

  

Khadi and Village Industries Commission (KVIC) To provide for rural industrialisation and employment generation. Key Benefits

Provides provide self-employment and subsidy.

Terms & Conditions
   

Rural artisans/entrepreneurs. Project cost = 10-25 lakhs. Repayment schedule will be based on cash accruals. Margin money subsidy will be 25% depending on project cost.
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  

Margin contribution by borrower will range from 5-10 % The tenure period = 9 years No collateral security

Documentation: Documentation Plays a very important role in record keeping and operations. Annexure 2 - 5 consist of the application for loan, demand promissory note, and General form of guarantee used by Bank of Baroda.

3.3

Self Help Groups (SHGs)
Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation. How self-help groups work

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural poor, voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per the group members' decision". Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of government and non- governmental agencies, they now make up 90% of all SHGs. The rules and regulations of SHGs vary according to the preferences of the members and those facilitating their formation. A common characteristic of the groups is that they meet regularly (typically once per week or once per fortnight) to collect the savings from members, decide to which member to give a loan, discuss joint activities (such as training, running of a communal business, etc.), and to mitigate any conflicts that might arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and sometimes other office holders. Most SHGs start without any external financial capital by saving regular contributions by the members. These contributions can be very small (e.g. Rs.10 per week). After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small internal loans for micro enterprise activities and

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is working towards the encouraging Self Help Groups through Micro Financing. Mission 'To provide financial services to the economically weak and disadvantaged groups for their livelihood enhancement. With this SSS shifted its focus towards economic empowerment of people and took up Micro Finance as its major area of activity.consumption. health. Only those SHGs that have utilized their own funds well are assisted external funds through linkages with banks and other financial intermediaries. A major part of the NGO now. assets less status of the poor and to achieve the goal of gender mainstreaming and thus linking it to the broader aim of sustainable development.stricken people. poverty. Since its inception SSS has endeavored to deal with critical issues like illiteracy. In 2008 SSS realized the importance of economic empowerment which can have a cascading effect on the overall development. Currently SSS is providing support to more the 10 SHGs and able to influence more than 200 families to achieve economic sustainability.‘ Organization Structure President Vice President Secretary Joint Secretary Cashier Members Members Figure 7 57 | P a g e . with Model of Satat Seva Samiti Satat Seva Samiti (SSS) is a friendly non-government development organization established in the year 2008 by a group of professional to address the issue of poverty.

For promoting entrepreneurship amongst the members.Working of Satat Seva Samiti: The meetings of the SHGs under SSS are held between 11th and 14th of every month. For personal requirements which are critical in nature (for eg.). depending on the purpose of the loan and the savings of the member (who is availing the loan facility).a. All the members are informed about the meeting one or two days prior to meeting. The remaining amount received in terms of deposits from the members and repayment of installments is being distributed amongst the applicants of the loan. A minimum of 15% of the total saving from the members is kept as a reserve from the corpus for catering urgent requirement from the members. i. Appointed Secretary of the SHG receives the applications from the members and documentation is done accordingly. however the allocation of the loans are done in the meeting. The Vice president helps the president in prioritizing the loan disbursement and sanctioning of the loan amount. Accidental insurance of Rs. the loan can be extended to 10 times of the savings. A processing fee of Rs. accidents etc. All the documentation of the SHG is being handled by Secretary only. 100000 is provided to every member. The JLG members 58 | P a g e . Health issues. 100-500 is charged on every loan.4 Joint Liability Group A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to 10 individuals but can be upto 20 members. Tenure of the loan is flexible to the members.e. The JLG members would offer a joint undertaking to the bank that enables them to avail loans. coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. they can avail loan upto 10 times of their saving at the minimum rate. The priority and the rate of interest are being decided by the president. Documentation of SSS in embedded in annexure 8. Basic guidelines for disbursement of loans are as follows:    A member can avail loan facility upto 3 times of saving at any given point of time under normal circumstances. The cashier take cares of accounting and maintenance of the funds. more the amount of loan higher the interest rates.       3. Normal interest rate charged against the loan varies from 12% to 20% p. The applications for the loan are entertained throughout the month. The interest rates for the personal purposes are charged on progressive basis.

but also for the loans borrowed by other members of their group. Model A – Financing Individuals in the Group: Model B – Financing the Group: 59 | P a g e .000) which can be borrowed with this form of security. marketing. The JLGs of such eligible farmers can also serve as a conduit for technology transfer. form themselves into groups of people who know and trust each other. facilitating common access to market information. health camps and assessing input requirements. Size of the JLG The group should be formed preferably with 4 to 10 members (upto 20 members) to enable the group members to offer mutual guarantee. processing. A basic requirement for joint-liability security for Bank loans is that the farmers concerned.) All the members of the JLG should be residing in the same village / compact area and not drawn from different / distant places. Formation of JLGs Banks may initially form JLGs by using their own staff wherever feasible. The loans are made by the bank to individual farmers or to the group collectively. JLG Models Banks can finance JLG by adopting any of the two models. These groups may vary in size from a minimum of 4 to a maximum of 10 farmers depending on the need and circumstances. training. etc. JLGs can be formed primarily consisting of tenant farmers and small farmers cultivating land without possessing proper title of their land / rural entrepreneurs engaged in non-farm activities. 50. The management of the JLG is to be kept simple with little or no financial administration within the group. subject to a maximum of certain prescribed amount in the policy (say Rs. Each year the group members who want to borrow for seasonal production costs sign a contract in which they accept liability not only for their own individual loans. State Government Departments like Agriculture Department also could form JLGs of tenant farmers and small farmers not having clear land title. The JLGs should necessarily comprise the farmers or entrepreneurs (undertaking production of the same crops or group of crops or undertaking non-farm activities to ensure cohesive functioning and facilitate procurement of inputs. The amounts borrowed by each person depend on his or her individual needs. Banks may also engage business facilitators like NGOs and other individual rural volunteers to assist banks in promoting the concept and formation of groups. for training and technology dissemination in activities like soil testing.are expected to engage in similar type of economic activities like crop production.

which is a value attribute of Grameen. marketing and other productive purposes. Banks may evolve simple loan application for this purpose. It is very cost intensive as it involves building capacity of the groups and the customers passing a test before the lending could start. 3. consumption. The process of delivery is scalable and the model could be replicated widely. Banks may consider cash credit. but that can now be done more cost effectively using computers. short-term loan or long term loan depending upon the purpose of loan.        Homogeneous affinity group of five Eight groups form a Centre Centre meets every week Regular savings by all members Loan proposals approved at Centre meeting Loan disbursed directly to individuals All loans repaid in 50 installments 60 | P a g e . The group members tend to be selected or at least strongly vetted by the bank. usually early morning or late in the evening. The greatness of the Grameen model is in the simplicity of design of products and delivery. The model is also rather meeting intensive which is fine as long as the members have no alternative use for their time but can be a problem as members go up the income ladder.5 Grameen Bank The Grameen model follows a fairly regimented routine. admired and practiced model in the world. The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen Bank is perhaps the most well-known. has also made the model a favorite among the donor community. Purposes of credit The finance to JLG is expected to be a flexible credit product addressing the credit requirements of its members including crop production. The focus on the poorest. One of the reasons for the high cost is that staff members can conduct only two meetings a day and thus are occupied for only a few hours. They were used additionally for accounting work.Credit Assessment The JLG would prepare a credit plan for its individual members and an aggregate of that is submitted to the banks. The individual members of JLG would be eligible for bank loan after the bank verifies the individual members‘ credentials. The model involves the following elements.

This loan giving approach placed Grameen Bank in a unique position in microfinance and approaches beyond the boundaries. education as well as treatment to their families. programs extend small loans to very poor people for self-employment projects that generate income. This small amount of loan can help people to come out the cycle of poverty by generating income. Interest rest is high because of Grameen giving door to door services and provides exclusive training program for the borrower‘s and all activities are handled by the Grameen field workers. Idea of Microcredit Micro-credit is a small amount of loan given to the poor to develop their standard of living. operations and credit cost. it is a financial innovation system that comes from Grameen banking system or procedure which is based on trust and collateral-free and opposite to conventional banking system. In order to get loan people go to the conventional bank but Grameen Bank approaches rootless or landless people‘s door steps. fund collection.Microcredit Summit. B. 61 | P a g e . Micro-credit summit was held at Washington DC on 2-4 February 1997. without guarantee any bank can allocate or sanction loan to the rootless or vulnerable people.Grameen Bank Concept A. It is incredible that. noun. Second step is to build up the society and arranging training program. Structure and Institutional Framework Figure 8 shows the structures of micro-credit. First step is to create motivation that everybody has a potentiality to do and receive. C.[*]Kro'kre-dit). General Features of Microcredit Grameen Bank allocates credits to the poor and uneducated women in rural places and created trouble-free loan method with easiest re-payment system without imposing any terms and condition because its main concern is to build social assets in order to achieve prosperity. returns. So. Defining micro-credit. food. Third step is to give credit proposal then distribute fund for personal investment. so that they can operate small-scale business and can afford shelter. ―Microcredit (mI. adopted microcredit that. micro-credit is an extension of extremely tiny loan given to the rural poor villagers to assist them to be identical human beings. In other way. Gradually comes rest of the work such as. Though interest is 20% but repayment is 98%.―Financial service where small amounts of money (usually around $50-$150) are loaned to poor people for use as a capital to start or expand small businesses‖ It is amazing how does the little amount of money gives strength to the poor to start a business and helping to break out the vicious cycle of poverty. it is a . This small amount of loan or financial supports to the needy people helps to encourage setting up free-businesses. allowing them to care for themselves and their families‖ .

After getting loans people are engaged different types of business such as pottery. After approving loan Grameen Bank arranges a training program. 3. 4. garment sewing. storage and marketing for self-development. Training program comes after the loan is because Grameen Bank assumes that if it starts first most of the borrower will be scared with the system and they will lose their interest to get loans. weaving. If the performances are reaching at the satisfactory level then next two borrowers can apply for loans. indicates how they distribute loans among the borrowers step by step.Figure 8 Gameen Bank Loan System Grameen bank adopted unique loan systems that are 1. 2. Consequently. Voluntary formation where people create groups. 62 | P a g e . Below Figure 9. fifth member can be selected for loan. Finally. it will not work. Only two members are allowed to take a loan at first time. paddy husking. Each and every group is consisting of five in numbers.

There are eight groups where each group is consisting with five members. Branch office is controlling fifty centres where five centres consisting of 2000 members. Area office is looking after five branch offices and zonal office is handling five area offices and finally general office is going to look after all these matters related to the loan giving and repayment process. 63 | P a g e . Figure 10 Micro-credit ascends over the time only for innovation and implementation of highly designed structure.Figure 9: Loan Distribution System of Grameen Bank at ground Level Organizational hierarchy of Grameen Bank Grameen Bank finance project which is working with a strong chain.

3. and others. The system is also internet enabled. a Seattle based NGO that helps promote micro-finance. Scaling up Customer Loyalty Instead of asking illiterate villagers to describe their seasonal pattern of cash flows. and chalk powder to figure out if they will be able to repay a $20 loan at $1 a month. They set people‘s tiny weekly repayments as low as $1 per week and health and whole life insurance premiums to be $10 a year and 25 cents per week respectively. They also offer interest free emergency loans. The salaries of loan officers are not tied to repayment rates and they journey on mopeds to borrowers‘ villages and schedule loan meetings as early as 7. 64 | P a g e . mom-and-pop entrepreneurs. Given that electricity is unreliable in many areas they have installed car batteries or gas powered generators as back-ups in many areas. training. they encourage them to use colored chalk powder and flowers to map out the village on the ground and tell where the poorest people lived.3. They participate in theory classes on Saturdays and practice what they have learned in the field during the week. Then it secured money from parties such as Unitus. Adopt a profit-oriented approach in order to access commercial capital. With this approach. it was able to attract multimillion dollar lines of credit from Citibank. SIDBI. which areas were lorded over by which loan sharks. each living on less than $2 a day. SKS converted itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to be a founding investor.It could not find the software that suited its requirements. It works on a model that would allow micro-finance institutions to scale up quickly so that they would never have to turn poor person away. Internally. Its borrowers include agricultural laborers. and technology entrepreneur Vinod Khosla. home based artisans. They have shortened the training time for a loan officer to 2 months though the average time taken by other industry players is 4-6 months. etc. they have factory style training models.They collect standard repayments in round numbers of 25 or 30 rupees. and other processes in order to boost capacity.M.Starting with the pitch that there is a high entrepreneurial spirit amongst the poor to raise the funds. Deep customer loyalty ultimately results in a repayment rate of 99. Use Technology to reduce costs and limit errors.5%. 2. ABN Amro. Its model is based on 3 principles1. street vendors. sticks. Very few actually sit in dirt with them. so it they built their own simple and user friendly applications that a computer-illiterate loan officer with a 12th grade education can easily understand. this company has created its own loyal gang of over 2 million customers. using stones. Standardize products.6 SKS Microfinance Many companies say they protect the interests of their customers. They enroll about 500 loan officers every month. Later. what kind of financial products they needed. and small scale producers.00 A. flowers.

clothes. Non Traditional Markets Similarly. Under this arrangement a sum of Rs.5. 4. provides agricultural inputs and information to farmers. Apni Mandi Another innovation is that of The Punjab Mandi Board. They are growing at 200% annually. a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in Bangalore. The services provided are similar to those in contract farming. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. At the mandi site. Besides providing storage facilities. Each farmer gets 5 crates at a subsidized rate. Basically. Marketing of Microfinance Products:1. 65 | P a g e . sells other services and provides a forum for farmers to market their products. This experiment known as "Apni Mandi" belongs to both farmers and consumers.Leveraging the SKS brand Its payoff comes from high volumes. adding 50 branches and 1. who mutually help each other. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates. direct access to consumers by elimination of middlemen. but with additional flexibility and a wider range of products including inventory finance. They are also using their deep distribution channels for selling soap. crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided – and only. At the farm level.60.000 grower members for wholesale marketing. 3. The project. set up to enhance credit. extension services of different agencies are pooled in. arranges credit. which has experimented with a ‗farmers‘ market‘ to provide small farmers located in proximity to urban areas. These include inputs subsidies. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce. this is a doable model. the Board provides basic infrastructure facilities. with an outlay of Rs. Mother Dairy Foods Processing. The operations and maintenance of the market is done by NDDB. each centre rents out farm machinery. 2. covers 200 horticultural farmers associations with 50.000 new customers a month. Under such an arrangement.15 lakh. Contract Farming and Credit Bundling Banks and financial institutions have been partners in contract farming schemes. better quality seeds and loans from Banks. Agri Service Centre – Rabo India Rabo India Finance Pvt. Ltd.2 lakh is spent for providing plastic crates to 1000 farmers. consumer electronics and other packaged goods. provided – the price setting mechanism for the farmer is appropriate and fair.

000 in each annual cycle. 2. providing tailoring and other assorted trades and services Mid-Term Loan (MTL) Vriddhi Provides self-employed women financial assistance to support their business enterprises.000 for the first loan.000 Term of the loan is 50 weeks with principal and interest payments due on a weekly basis 12. such as raising livestock. 2.000 to Rs. running local retail shops called kiranastores. 12.55% annual effective interest rate and processing fee of 1% Loan amounts range from Rs. running local retail shops called kirana stores. 66 | P a g e .000 to Rs. such as raising livestock. subsequent loan amounts determined by past credit history and increased Benefits Provides self-employed women financial assistance to support their business enterprises. 14.Products of SKS Microfinance Figure 11 Product Income Generation Loans (IGL) Aarambh Features Loans range from Rs. subsequent loan amounts determined by past credit history and increased each in set increments upto a maximum of Rs.5% flat interest rate / 24. 10.

000 providing tailoring and other assorted trades and services Available any time after the completion of 20 weeks & before 40 weeks of an IGL cycle Term of the loan is 50 weeks with principal and interest payments due on a weekly basis 12.each in set increments upto a maximum of Rs. 50. 1.0% annual effective interest rate and loan processing fee of 1% Sangam Store Loans Interest free The program allows these members to purchase their inventory of consumer goods and groceries from a national wholesaler at wholesale prices Provides financial access to women for construction of new houses or improvement & extension of existing houses Mobile Loans Provides financing for mobile phones and telephone services to our members Housing Loans Term of the loan is 7 days Loans range from Rs.000 to Rs.5% flat interest rate / 24.000 Members must have completed at least 3 IGL cycles to qualify or one ILP to be completed Term of loan is 3 to 5 years with principal and interest payments due on a monthly basis 67 | P a g e . 3. 14. 150.000 26.800 to Rs.55% annual effective interest rate and processing fee of 1% Financing of mobile phones and telephone services Loan amounts range from Rs.

11. Provides personal or business loans to our 100. 21% annual effective interest rate In addition.to Rs.000/members and non -members secured by gold jewelry to meet their short term liquidity Nature of loan can be either Bullet or requirements. depending on the % of disbursement opted to net weight of gold jewelry. Membership fee of 0.9% flat interest rate. 2. This amount is adjusted in the final payout of the principal amount." Loans range from Rs. loan processing fee of 2% collected upfront "A funeral assistance of Rs. and is provided to family of the member if information is received within 14 days death.1000 is applicable only for members who have paid insurance premium. EMI and tenure can be opted upto 12 months Annual effective interest rate ranges from 12% to 30%.5% on the first loan disbursed to non members SKS MICROFINANCE GOLD LOAN SCHEME CHART Scheme Rate of Loan Name Interest eligibility per (per gram of gold Annum) value 50%(Scheme available for one month A 12 only) B 18 60% C 21 70% 68 | P a g e Funeral Assistance Gold Loan .000/.

In the event the death is deemed an accidental death. and acts as an intermediary. the beneficiary receives Rs. This means you get your full loan amount back once your borrower repays it. 10. not a donation. Milaap prefers to work with organizations that have built good relationships with their borrower base and are exploring ways to lower their capital costs. eventually to pass on the benefits to the end borrowers. Milaap can track capital all the way through the value chain. most of whom cannot even access capital from traditional sources. 3. Milaap says it provides the capital at a cost less than half of the current financing costs of its field partners. if any. It‘s a loan.org Table 5. Characteristics of Milaap's model Milaap takes special care to design loan products that meet its clients' needs.D 24 80% E 27 82. 5. The capital Milaap raises is fed into a network of field partners who underwrite the risk of repayment and lend to the borrower. It focuses on microfranchise organizations with emerging business models.50% F 30 85% *Interest rate are in proportion to loan to value provided to the customer for the gold pledged Source: sksindia. 20 for the term of five years Upon death. we disburse to the policyholder the account value.000 plus the account value. Upon maturity in five years where no death has occurred. puts them to work. we disburse to the beneficiary the full sum assured of Rs. Thanks to this ecosystem. Milaap takes zero-percent interest loans from online users.000 plus the account value.7 Milaap Model Milaap is an online platform that enables you to lend to India's working poor so they can get access to education.Weekly payment of Rs.Products of SKS Microfinance Distributor Product Life InsuranceFeatures. clean water. which is equal to the aggregate of the premiums paid plus interest accrued. energy and more. less any charges for the administration of the policy.    69 | P a g e . specifically those between the post pilot and commercial funding phases of development.

70 | P a g e .Steps of Financing 1. which is half the existing interest rate offered. not only for income generation but also for access to basic facilities.     Working of Milaap model Following are the steps followed into Milaap's methodology.to ascertain the interest rates on a loan. Once the borrower begins to repay the loan.to develop the monthly repayment schedule that can spread from 12 to 24 months.  The regularity in cash flow .one that recognizes the lack of basic needs for any Indian citizen or community. The lender can decide to re-lend the money and thus make the same amount help multiple families over time. The seventh and final step is what gives your loans momentum . the lender gets credited with Milaap credits.  The access to market links . the loans are disbursed. Milaap design customized programs and raise capital for the loans. After identifying the challenge. 2. monitored and any support required is provided.to provide borrowers with the connections and safety nets essential for effectiveness. taking into consideration:  The borrower's ability to pay . Design Customized Credit Programs: Milaap and its field partners design customized loan programs. Then. Identify Recycle Design Repay Facilitate Support Disburse Figure 12 . depending on the need. It starts with identifying what we call a 'dignified life challenge' . from 12 to 18%. Identify the Challenge: Milaap partners with established organizations that have a strong presence at the grass roots and a deep understanding of the audience to identify key challenges and communities that face these challenges.the recycle step.

communications. Field Partners and Milaap Monitor and Support Loan Usage: Throughout the loan cycle. They are then reimbursed once the borrower's loan receives support on Milaap. assisting with tasks like social impact assessments and other field issues that at times are best managed with the double bottom-line in mind. This monitoring enables to ensure effective use of the loan amount.3. 5. Field partners also conduct social impact assessments to study if the loans provided help borrowers rise above the poverty index and to understand ways in which we can improve the quality of the outcome. backgrounds and photos of all borrowers for 30 days in the following five areas of focus:  Energy  Education & Vocational Training  Healthcare  Sustainable Farming  Water & Sanitation This online listing of borrower profiles enables the lender. including interest from the borrowers every month. 4. Recycle: If the lender want to re-loan the amount. to select the cause and the borrower of their choice and give a loan of minimum USD 50 or Rs 1000 or the amount required to complete a loan. thereby involving lenders at all stages of the loan cycle. field partners regularly monitor the progress of the borrowers. Milaap sends the total loan collected to its various field partners who are responsible for the relevant loans. A nonprofit arm provides capacity-building to field partners. 6.org shares requirements. and fundraising are managed through a forprofit arm to ensure operational efficiency. Field Partners Collect Repayments and Milaap Returns the Loans: The field partners collect repayments. The interest of 12 to 18% is charged to cover operational costs for Milaap and our field partners. Facilitate: Milaap Shares Loan Requests and Raises Capital at Milaap. Field Partners Disburse Loans: Every month. 71 | P a g e . 7. marketing. Milaap has launched a high-potential hybrid social enterprise model. the loans are funded in advance by the field partner. The field partners then check the loans pledged to a borrower and disburse the respective loan amount. Milaap makes monthly deposits of the repaid loan installments into your (the lender's) Milaap account. At times when a borrower has an immediate need. At the end of the loan cycle you can choose to withdraw the repaid loan amount or decide to relend it to another borrower on Milaap. The data gathered allows them to keep the lenders informed about the use and success of the loans. The web platform development. they can do it with the help of the portal and the whole cycle continues to get multiplied. It also helps us intervene with additional support if required and where possible.

Chapter 4  Product Development  Product Design  Risk Management 72 | P a g e .

deals with designing and developing a prototype (a representation of all or parts of a product) to be pilot tested. This phase requires two major steps: 1. Below figure shows the Product development cycle or how new product can get develop in market. staffing the cross-functional team. of extending the product line. This process involves mobilizing the interdepartmental collaboration necessary to undertake the development of the new product including identifying a product champion (its main proponent). Sources of information and approaches for gathering data can be pulled 73 | P a g e .1 Product Development The product development process is designed as a funnel into which an institution enters. Market research. or full acceptance.Once the desired product mix has been defined. the MFI undergoes a process of segmenting the market and forecasting demand through different methods of market research. starting broadly with a range of potential product opportunities and successively narrowing the new product choices as project feasibility is researched and analyzed through the various stages of development. 2.4. Internal setup-. and building institutional buy-in. Figure 13: Approach towards New Product Development The design and development phase.

the core involves security. many MFIs offer loans without flexible terms to match seasonality. savings products that offer only limited withdrawals or paltry returns. Pilot testing-The pilot test phase. incentives. or rolling out the product to the entire market. which includes the size of test group. location of test. The actual product includes the specific terms. methodological. and returns. the core is financing that matches the fluctuating cash flow needs of the microenterprise. 4. The process involves:  Selecting test sites.2 Product Design The product development team must translate the research into a product that will meet customer needs.  Establishing test duration by comparing the benefits of thorough field research with the costs involved. For loan products. including valuable customer feedback. eligibility requirements. Implementation of a new product also requires building up the institutional capacity of the organization in terms of staff training. Product launch.  Actual Product. identification of the target customers and finally positioning the MFI into the market.from both inside the organization and external sources. a product must offer the main benefits the customer expects from the product or fulfill a need. In 74 | P a g e . and insurance products with such cumbersome claims procedures that financing arrives after the crisis has passed. and institutional issues of adopting the new product. For insurance. and positioning (including both physical distribution and market positioning vis-à-vis competing products).Product scale-up. interest rates. starts with the four Ps of marketing—product (design). the core is a financial cushion during difficult times. At a minimum.  Setting landmarks during the pilot test to pause for analysis and product refinement. It is critical that the product fundamentals are in line prior to packaging or augmenting it with related services. For savings products. price. and other features that directly meet customer needs. promotion. and information systems. including direct cash outlays and the opportunity cost of time and market share. competitive. and target market. packaging. 4. which involves the introduction of the prototype into the market on a limited scale to provide a reality check on the research and to refine the product. Although these points seem obvious. liquidity. and  Analyzing the results of the pilot test by considering the financial. It should include the following: Product Product design takes into account the component parts of the product:  Core Product. Market research would be helpful in Segmentation of the current market. 3.

which are a common form of promotion. Loan turnaround time can be a competitive advantage. including how it is delivered and serviced. which determine the accessibility of the product. microfinance. hours of operation. a customer‘s need for financial return or liquidity must be balanced with an institution‘s desire to achieve self-sufficiency or manage risk. incurred to deliver a product. over and above the cost of capital. lotteries. and waiting room facilities. The augmented product includes such ancillary services as the application turnaround time. The total product must balance customer preferences with an MFI‘s financial. Price The main components for pricing are Pricing Cost Recovery Competetive Consideration Cost of Capital Cost of Product Delivery Fixed Cost Figure 14: Pricing Of a Product Cost Recovery: When pricing a product to recover costs. Credit products with more flexible repayment schedules may require system upgrades to track activity. All new product introductions will involve training costs. Simplicity in documentation can be another driving factor. savings mobilization introduces new costs including stepped-up security at the branch level. For example. is critical to ensure market acceptance. packaging includes the length and clarity of the loan application as well as the color of the savings passbook—and clients typically have strong preferences. and regulatory compliance. which not only include direct costs (such as instructor salary and class materials) but also the opportunity costs of not having loan officers deployed while 75 | P a g e . an MFI should take into consideration all related expenses. How the customer receives the product. physical. Augmented Product. and cultural capacity. For example.

 Spread: the difference between the price of its product and the cost of capital  Average Loan size: It is an estimate which a MFI has out of experience of self or competitor or through market share. making phone calls. Place place refers both to the physical location (or distribution) of the product. superior customer service. relative to competing products. a very basic version of which is provided below. to recover money. The MFI must decide if it will position itself as a full service intermediary where clients can have the convenience of one-stop shopping or the efficient provider of an undifferentiated product line.  Distribution: The physical distribution system for most MFIs is its branch network. A transforming MFI may decide to price its products in the higher ranges to give the impression that it is a sophisticated financial institution.Includes all the expenses incurred in marketing the product. The BEP analysis consider following to get the Break Even Sales volume which helps in determining feasibility of the new product:  Fixed Costs . Generally. sending reminders to them or any other cost incurred on account of interaction with them to recall as to account balance. Based on costs and risk. and to its positioning in the market. and professionalism. Follow-up debtors cost is called Delinquency Cost. Thus. if the MFI is striving for financial self-sufficiency. Break Even Point Analysis plays a important role in deciding the price of the product.  Position: The other aspect of product placement is its competitive position in the market.  Delinquency Cost .in class. The break-even formula. which may need to be upgraded to incorporate new products. it may be prudent for an MFI to enter into a partnership with an existing organization to provide access for its new product.e.Delinquency Cost refers to Debtors related cost i. High prices are often associated with better quality. also shows how changes in price impact the MFI‘s ability to recover its costs. The break-even point determines the volume of sales a product must generate to cover the fixed costs of delivering a product. once estimates of the delinquency costs and the average loan size have been made. This decision goes beyond the design of 76 | P a g e . salaries are one of the highest expenses in microfinance. Break Even Sales Volume = Competitive Consideration Price communicates messages to both customers and competitors regarding an MFI‘s marketing and positioning strategy. it must cover its most significant cost: salaries to loan officers and other MFI staff. Any sale over the break-even volume is profit.

77 | P a g e . Recent experiences of political interference bring out the vulnerability of MFIs to these risks: In 2006. At the institutional level. impact the livelihoods of a large numbers of clients simultaneously and cannot be eliminated. 50 branches of two major MFIs were closed by authorities in Krishna district of Andhra Pradesh.3 Risk Management Microfinance institutions (MFIs) essentially act as financial intermediaries. in 2009. Systematic Risks Systematic risks that face the entire sector. and jurisdiction of State governments vis-à-vis non-bank financial institutions is critical in mitigating political risk. The main instruments used for analyzing financials of a MFI are:  Return on Investment  Free Cash Flow  Time Value for Money a). and in 2010. but can be mitigated by purchasing insurance at a portfolio level. this can be managed by building a closer connect between the institution and customer groups so that there is resistance to local political interference that constrains the business activities of MFIs. such as rainfall failure. some MFIs define themselves by the breadth of their reach. a significant systematic risk that has emerged in recent times and which has impacted MFIs severely is political risk. bridging the gap between mainstream financial institutions and low-income households for a specific type of credit need that is short-term and unsecured. the net worth of the business. or diversifying across regions. As MFIs deal with low-income households. Financial Measures for Calculating Financial Risk The measures analyze the business health. in addition to formal regulators. Internal Rate of Return Annexure 7 shows the calculation of these ratios. However. Clarity on regulatory framework. the Andhra Pradesh Government introduced a law that reduced MFI repayments dramatically. preferring to reach many clients with one or two products rather than fewer people with a variety of products. 4. For example.the specific product to include how the institution wants to define itself. the strengths and weaknesses of the business. repayments almost came to a grinding halt in Karnataka‘s Kolar district. Net Present Value b). The concept of risk lies at the heart of any such financial intermediation. their operations are subject to scrutiny by State governments and local powers.

Operational Risks Microfinance is an operations-intensive model and weak processes affect internal control and manifest as fraud and other operational failures. and fidelity insurance. will result in positive selection of members. Increase in cost of funds severely squeezes margins. Changes in interest rates at which they borrow impact spreads. it can result in fraud. that the under-writing process be undertaken by the group and not by the MFI. especially in the short term. impacting profitability and operational self-sufficiency. Interest rate volatility Interest rate volatility is among the key risks MFIs face today. regularity of group meetings and attendance rates. The mechanism of group cross-guarantee. Dilution of group formation and meeting norms are early warning signs of process deterioration that should trigger concerns about credit quality. giving each branch a risk score. Detailed mapping of the processes and subprocesses will help MFIs identify risks. In microfinance. Most MFIs do not explicitly manage interest rate risk. This helps understand two key questions:  Which branch has poor portfolio quality?  Is the branch witnessing fraud? Cash movement As all MFI disbursements and collections are cash-based. the quality and robustness of the group formation process becomes crucial in credit risk management. typically followed by MFIs to disburse credit. 78 | P a g e . the model should be based on diverse parameters. In the Joint Liability Group (JLG) model. cash-in-safe and branch. Such fraud can be mitigated by MFIs setting cash retention limits for branches. as ―credit decisions‖ are taken by the group on the basis of its access to private information about each member. Reconciliation of cash through MIS in the branches‘ bank accounts is important in scrutinizing float and idle cash at each level. Risks such as burglary during cash movement can be mitigated through insurance for cash-in-transit. To detect fraud early and take action. Outstanding MFIs pay a great deal of attention to factors such as length of the group formation process.Idiosyncratic Risks Idiosyncratic risks are internal to an entity and comprise primarily operations and credit risk. these two are deeply intertwined and are potentially among the primary reasons why MFIs fail. the institutions face high risk due to movement of cash. MFIs should have a risk-scoring model. with deviations approved and recorded. if implemented as per the rules that govern group formation. It is important. Branches with history of fraud should be penalized in the risk-scoring model and the frequency of audit linked to the risk score. however. Taking a holistic view. as also the weak links that pose a greater threat of fraud. This is exacerbated for institutions operating in remote geographies. If movement of cash is not tracked and checked against demand and collections.

regulated or unregulated— should design a risk management system that is based on the institution‘s particular needs. an MFI can identify and prepare for the most common and expensive risks. All financial institutions—large or small.With increased competition and pressure to cut interest rates. their asset-liability management strategies have also to take into account scenarios arising from interest rate movements that impact profitability. Development of a Risk Management System To prepare for unexpected events and their costs. With proposed regulations on capping margins. The unique context of MFI operations that involve under-writing by client groups and dealing in large amounts of cash outside branch locations create specific risk management needs. 3. Measure the risks appropriately and evaluate the acceptable limits for that risk. Long-term borrowing. clients. and internal capacity. risk management is critical to the success of MFIs. ensuring that the right people receive accurate and relevant information. As with any other financial institution. will enable MFIs to mitigate interest rate risk. with hedging and diversification of funding sources. and 79 | P a g e . products. MFI boards. Given that MFIs typically have positive duration of equity (liabilities are longer dated than assets). MFIs are also not in a position to pass on interest rate increases to clients. legal status. lenders and investors should be cognizant of these features. Identify the risks facing the institution and assess their severity (either frequency or potential negative consequences) 2. Effective Risk Management Classic risk management requires an organization to take four key steps: 1. interest rate risk will continue to be one of the key threats for MFIs. Monitor the risks on a routine basis.

80 | P a g e . and asks several questions.  Identify. Weak).  Access Probability-The second step involved in risk assessment is to determine the probability of risks occurring and their potential severity. savings services. or Decreasing). and (4) The trend or direction of that risk (e. based on the potential severity and probability of occurrence (e. Low. For each risk. Low). (3) The aggregate risk profile for that risk.  Prioritize Risks. Strong.g. (2) The quality of existing risk management. Increasing. Acceptable. and operational procedures. or how well management currently measures. Moderate. a risk management chart or matrix. lending methodologies. and prioritize risks  The first step in risk assessment is to identify risks. combining the first two measures (e.A risk management matrix helps the risk managers assign ratings to different risks and prioritize those areas that need additional attention. Table 7: Steps in Risk Management Successful MFIs incorporate risk management into their organizational design. Moderate. assess.4. the MFI reviews its activities.g. controls. function by function.g. or High). Stable.g. To assess the probability and severity of risks. can be useful. High. such as the one presented in Table 8. and monitors the risk (e. To identify risks. the matrix assigns a rating of four different factors: (1) The quantity or severity of the risk. Manage the risks through close oversight and evaluation of performance is profitable and whether costs are adequately covered.

Business Risk or Activity Credit policy and underwriting Disbursement/ Funding Approvals Portfolio monitoring. Procedure High Moderate Moderate Low Moderate Acceptable Strong Week Acceptable Acceptable Savings Deposit & withdrawal Policies Reporting and record Keeping Liquidity and Branch Funding Cash and program Reconciliation Moderate Moderate High Acceptable Weak Strong Moderate Moderate Moderate Stable Stable Stable Stable High Moderate High Low Moderate Decreasing Stable Stable Stable Low Acceptable Low Table 8: Sample Risk Management Matrix 81 | P a g e . Collections Cash and program Reconciliation Member/Borrower Training Quality of Quantity of Risk Risk Management Group Lending Moderate Moderate Moderate Moderate Low Acceptable Acceptable Strong Acceptable Acceptable Aggregate Risk Profile Direction/ Trend Moderate Moderate Moderate Moderate Low Stable Stable Stable Stable Stable Individual Lending Credit policy and underwriting Disbursement/ Funding Approvals Portfolio monitoring. Collections Cash and program Reconciliation Loss Reserve Policies.

) Reserve requirements and reserve ratios Management Responsibility Detailed underwriting guidelines or procedures Portfolio monitoring and reporting on asset quality Operational procedures designed to mitigate transaction and credit risk Investment management guidelines and procedures Credit Policies % in cash or cash-equivalents Risk parameters for portfolio (e. Table 9 lists some sample policies that cover major risks to an MFI. equities. etc. staggering terms. Risk Category Policies By the Board Permitted lending activities Portfolio diversification (e. % in treasury bills. The board typically develops policies and sets the outer parameters for the business activities of an organization.g. credit risk of individual instruments) Maximum currency exposures Maximum asset and liability mismatch (usually as % of capital) Minimum cash reserves equal to a certain percentage of deposits (for client cash withdrawals) Maintain cash balances or lines of credit equal to cover new loan demand and potential cash losses from delinquency Test the portfolio’s sensitivity to interest rate changes Balance Risk of Principal with income Liquidity Policies Choose how cash management will be centralized or decentralized among Branch Offices Choose short-term investment instruments (treasury bills.g. maximum exposure to any borrower. management then develops guidelines and procedures for day-to-day operations.Develop strategies to measure risk After the board and management define priorities. etc) 82 | P a g e . bonds. % of capital to one product. they can develop strategies that guide the organization‘s management of those risks. Within those broad policies.

Test effectiveness and evaluate results Management must regularly check the operating results to ensure that risk management strategies are indeed minimizing the risks as desired. an MFI lives with certain risks and designs a lending methodology and system of controls and monitoring tools to ensure that a) risk does not exceed acceptable levels. The MFI evaluates whether the operational systems are working appropriately and having the intended outcomes. timely and relevant data so managers can track outputs and detect minor changes easily. dual signatures required on loans or disbursements of savings). speed data analysis and processing. In the implementation process. procedures and controls. and b) there is sufficient capital or liquidity to absorb the loss if it occurs. then management should speak with line staff to understand the potential repercussions.  Separate lines of information flow and reconciliation of portfolio management information and cash accounting in the field to identify discrepancies quickly. The MFI assesses whether it is managing risks in the most efficient and cost-effective manner. management should seek input from operational staff on the appropriateness of the selected policies.  Technology to reduce human error. staggering terms. Implement into operations and assign responsibility The next step is for management to integrate those policies.g. etc) Capital Adequacy Design operational policies and procedures to mitigate risk In most cases. By linking the internal audit 83 | P a g e . MFIs can use client surveys or interviews to understand clients‘ reactions to a new operational procedure or internal control measure.Maintain operating reserves equal to 2-3 months operating expenses Capital allocation to support risk of different business activities Minimum capital adequacy ratio (sufficient cushion if the loss occurs) Choose short-term investment instruments (treasury bills. In addition. Operational staff can offer insight into the potential implications of the controls in their specific areas of operation. These controls might include:  Policies and procedures at the branch level to minimize the frequency and scale of the risk (e. procedures and controls into operations and assign managers to oversee them.  Management information systems that provide accurate. If it is possible that the control measure will have an impact on clients.

84 | P a g e . To fully verify the accuracy of the MFI‘s accounts and reduce uncontrolled fraud and credit risks. the MFI can systematically address these questions.function to risk management. the MFI should incorporate client visits into the audit processes.

Chapter 5     Objectives of the Research Methodology Learning Limitations 85 | P a g e .

Research methodology is a framework for the study and is used as a guide in collecting and analyzing the data.  Understanding the Role of government agencies in promoting and controlling the micro financing industry.2 RESEARCH METHODOLOGY Research methodology is a way to systematically solve the problem.  Understanding the policies and procedures followed in the Industry. and their working. 5. Research Methodology is the conceptual structure within which research is conducted. Research methodology is the arrangement of condition for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research is an art of scientific and systematic investigation. formulating hypothesis or suggested solutions. organizing and evaluating data. It is a game plan for conducting research.  Understanding the risks involved in various models and its management. ―All progress is born of inquiry. 5. Thus research comprises defining and redefining problems. making deductions and reaching conclusions. for it leads to inquiry and inquiry leads to invention.  Recommending ETG on the best practices that can be implied in the Rural Bank of ETG. collecting. It light on the research problem. In this we describe various steps that are taken by the researcher.1 OBJECTIVES OF THE STUDY:  Understanding various entities involved in micro financing (both in formal and informal channels). Doubt is often better than overconfidence.INTRODUCTION This chapter focuses on the methodology & the techniques used for the collection. the objective of study & its limitations. It is a strategy specifying which approach will be used for gathering and analyzing the data.‖ Research in a common parlance is a search for knowledge. It constitutes the blueprint for the collection measurement and analysis of the data. classification & tabulation of data. it also includes time and cost budget since most studies are done under these 86 | P a g e .

the data collection method and analysis procedure.two constraints. The demand and trends can change amongst the communities. he can only report what has happened or what is happening Descriptive research designs are those design which are concerned with describing the characteristics of particular individual or of the group. 87 | P a g e     . There is a huge scope of diversification once a proper distribution channel is in the place. the policies and procedures needs to be simple to facilitate and encourage the products. As descriptive research design is the description of state of affairs. In descriptive and diagnostic study the researcher must be able to define clearly what he wants to measure and must find adequate method for measuring it. The ground level executives plays a great role in success of the organization. a constant feedback and monitoring is one of the key factors in the development of the brand in the rural market. The research methodology includes overall research design. as it exists at present. as the local demand for finance to the people can vary drastically even at the shorter change in distance. the sampling procedure. In this type of research the researcher has no control over the variables.3  Learning Financial inclusion in Microfinancing industry plays a great role in developing the rural market and one of the main factors helps in making the business sustainable and productive. As the target group generally doesn't have high educational level. The products has to be tailor made. In this study data have been taken from various secondary sources like:      Internet Books Magazines Newspapers Journals 5. TYPE OF RESEARCH USED:Descriptive Research In the study descriptive research design has been used.

for example in India.   5.Availability of data was a constraint due to which only secondary data is considered. therefore authenticity cannot be justified in some cases.All the information available was from secondary sources and data was very vast to analyze properly & accurately. The MFI providing products at a cheaper rate are experiencing a loyal customer base and less nonperforming assets as compare to industry average.Study being conducted was very wide & analysis require expertise knowledge & skills which was lacking.The information is collected from indirect sources also. In an unorganized market with less legal framework. Wide Area to Study . microfinance companies had faced obstacles from state governments to expand their businesses. and also there are some MFIs whose data was not available. NABARD and SIDBI are acting as backbone of microfinance industry. Resource Constrain . 88 | P a g e .  Indirect Sources of data Collection are also used .Shortage of time was a very big constraint due to which some area of micro finance has been included in the study. These bodies are acting as pioneers in the industry. which is available.4   Limitations Time Constrain .   Secondary Data . as in absence of a law. there is a huge political and economical risk.

5 Conclusion At the end I would conclude that. The main concentration of market players in Microfinance industry should be in bringing efficiency and effectiveness in the operations and optimally use the available resources while considering the needs of the customer base which are dynamic in nature. Micro Finance Industry has the huge potential to grow in future. From Business perspective there is still a huge scope to expand the wing and earn economic profit in the Industry. both in term of high living standard and happiness. 89 | P a g e . A good ground level staff can make a huge difference in creating or breaking an organization.5. if this industry grows then one day we'll all see the new face of India.

pdf DP Note for Bank of Baroda clients(Borrowers) Annexure 5 bob\Gar_BOB.pdf Application Form for loans to Micro and Small Enterprises Annexure 4 bob\DP note_BOB.docx Documentation of Satat Seva Samiti 90 | P a g e .pdf Guidelines from RBI Annexure 2 bob\BOB.pdf General Form of Guarantee (Bank of Baroda) Annexure 6 bob\Summary Legal Framework for Institutions.docx Summary of Legal Framework Annexure 7 bob\CALCULATION OF FINANCIAL MEASURES.docx Financial Measures Annexure 8 Annexures\ANNEXTURE 8 Documentation process of Satat Seva Samiti.ANNEXTURE Annexure 1 bob\Revised Fair Practice Grievance Redressal New Guide Line18012013.pdf Agreement for Agriculture Finance with Bank of Baroda Annexure 3 bob\canara bank microfinance.

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