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Submitted By

In partial fulfillment for the award of the degree




I, Prashin Patel student of PGD Accounting and Finance, Faculty of Commerce, M.S. University
of Baroda, declare that the present dissertation is an original study and is based entirely on the
work carried on by me for the partial fulfillment of Post Graduate Diploma in Accounting &
Finance Program, M.S. University of Baroda.
The present work has been published neither in part nor in full, nor has any degree been awarded
to me for it either by this University or by any other University. I hereby also testify that the
present project report is not based on the work of any other person.

Mr. Prashin Patel
Roll No. – PGDAF 36


Certified that this project report “MICRO FINANCE- A CASE STUDY OF
MFI’’ is the bonafide work of “PRASHIN PATEL’’ who carried out the project
work under my supervision.














History of Microfinance


Definitions of Microfinance


Evolution Of Microfinance in India



Preparing the ground work


Microfinance Bill


Malegam Committee


Product Offering Of Microfinance


Credit Lending Models


Government And Microfinance


Case study

Chapter I

It is truly said that Knowledge Is Power to do Things systematically. In addition, this knowledge
can be acquired through experience only. It is right to say that, “Experience is the best teacher”
Practice makes man perfect. In order to achieve excellence and success theoretical knowledge of
any subject is with Practical knowledge and experience. Research study is helpful in gaining
practical experience and to clear the theoretical concept and ideas, which are acquired in
So being a finance student i undertook this topic as it is one way of fighting poverty in rural
areas, where most of the world’s poorest people live. It puts credit, savings, insurance and other
basic financial services within the reach of poor people. Through microfinance institutions such
as credit unions, financial non-governmental organizations and even commercial banks, poor
people can obtain small loans, receive money from relatives working abroad and safeguard their
Moreover In today’s world the demand for microfinance has increased to a great extent. All the
major banks target this sector for their expansion. So i took this topic to understand the
importance of microfinance in today’s world and its benefits.

1.2 Objective of the project
The objective of the project was to study the present condition of the city and the condition after
availing them with the micro credit.
The poor people rarely access services through the formal financial sector – the channel of
banks. They address their need for financial services through a variety of financial relationships,
mostly informal sectors i.e. through money lenders, friends, relatives and likes usually at very
high rate of interest. Or many of times they don’t have any access pertaining to fund their needs.
So for this reason I undertook this topic and to know the importance of microfinance in today’s






History of Microfinance


Definitions of Microfinance


Evolution Of Microfinance in India



Preparing the ground work


Microfinance Bill


Malegam Committee


Product Offering Of Microfinance


Credit Lending Models


Government And Microfinance


Poor who constitute almost one third of the population, have the inclination to save and they are
proving to be “the Best Business Opportunity” for banks rather than “High Risk Clients”, as they
are normally perceived to be. Thanks to self-help group – bank linkage program introduced by
NABARD a decade ago, with the main objective of cashing in on the saving and thrifts habits of
the poor especially women through institutional finance and fostering “ group approach” for their
mainstreaming. The linkage banking program is forging ahead across the length and breadth of
the country through partners such as government, banks, NGO’s, micro finance institutions
(MFIs) and other self- help promoting institutions (SHPIs).
Microfinance is defined as any activity that includes the provision of financial services such as
credit, savings, and insurance to low income individuals which fall just above the nationally
defined poverty line, and poor individuals which fall below that poverty line, with the goal of
creating social value. The creation of social value includes poverty alleviation and broader
impact of improving livelihood opportunities through the provision of capital for micro
enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large
variety of actors provide microfinance, using a range of microfinance delivery methods. In India,
various actors have endeavored to provide access to financial services to the poor in a creative
ways. Governments also have piloted national programs, NGOs have undertaken the activity of
raising donor funds for on-lending, and some banks have partnered with public organizations or
made small inroads themselves in providing such services. This has resulted in a rather broad
definition of microfinance as any activity that targets poor and low-income individuals for the
provision of financial services. The range of activities undertaken in microfinance include group
lending, individual lending, the provision of savings and insurance, capacity building and
agricultural business development services. Whatever the form of activity however, the
overarching goal that unifies all actors in the provision of microfinance is the creation of social
Microfinance is the provision of financial services to low-income clients, including consumers
and the self-employed, who traditionally lack access to banking and related services.

More broadly, it is a movement whose object is "a world in which as many poor and near-poor
households as possible have permanent access to an appropriate range of high quality financial
services, including not just credit but also savings, insurance, and fund transfers." Those who
promote microfinance generally believe that such access will help poor people out of poverty.
Only employment of funds is not important, employment of funds in right
place and in right time is more important in today’s world. Microfinance is a
link through which the financial institutions target the poor people in
providing financial services and create a social value. The aim of these
institutions is not only to provide funds but is also to create value along with
the financial aid. Microfinance helps the poor people to back their dreams
with these resources provided and turn them into reality.
Thus microfinance is nothing but A platform to deliver financial products and
complementary services reaching the poor in order to get them out of
poverty. By providing capital, trust, social esteem, information, knowledge,
competences, empowerment, networking, social capital, technology and
market access, microfinance institutions and other sources of microfinance
become active subject in the fight against poverty in all its dimensions and
The integral development of the human potential of the client and of her/his
family, neighborhood, and social networks is fostered by both wellestablished and innovative financial products, whose high repayment ratio,
remunerative interest rate (or price) and low administrative cost guarantee
the economic sustainability of a well-managed institution.

In the late 1970s the concept of microfinance had evolved.
Many credit groups have been operating in many countries for several years, for example, the
"chit funds" (India), tontines" (West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides,
many formal saving and credit institutions have been working for a long time throughout the
In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other
countries. The poor people had been given some small loans to invest in micro-business. This
kind of microcredit was given on the basis of solidarity group lending, that is, each and every
member of that group guaranteed the repayment of the loan of all the members
Micro financing is not a new concept. Small microcredit operations have existed since the mid1700s. Although most modern microfinance institutions operate in developing countries, the rate
of payment default for loans is surprisingly low - more than 90% of loans are repaid.
Like conventional banking operations, microfinance institutions must charge their lenders
interests on loans. While these interest rates are generally lower than those offered by normal
banks, some opponents of this concept condemn microfinance operations for making profits off
of the poor
The World Bank estimates that there are more than 500 million people who have directly or
indirectly benefited from microfinance-related operations.

According to International Labor Organization (ILO),
“Microfinance is an economic development approach that involves providing financial services
through institutions to low income clients”
Microfinance has been defined by The National Microfinance Taskforce 1999 as,
” Provision of thrift, credit and other financial services and products of very small amounts to
poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards.”

A definition of microfinance as provided by Robinson is, “ Microfinance refers to small-scale
financial services for both credits and deposits – that are provided to people who farm or fish or
herd; operate small or micro enterprise where goods are produced, recycled, repaired or traded;
provide services; work for wages or commissions; gain income from renting out small amounts
of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups
in developing countries, in both rural and urban areas.”

The genesis of microcredit, and therefore microfinance is credited to Dr. Muhammad Yunus,
who founded the Grameen Bank in 1983. In India, however, financial services especially for the
rural poor also had a parallel evolution, starting from the earliest cooperative societies in 1890 to
the burgeoning microfinance sector of today, dominated by Self Help Groups (SHGs), which
have emerged as micro level financial intermediaries.


The role prescribed for financial sector in India to achieve developmental goals dates to pre
independence days. The agriculture credit department was set up in 1935 by the Reserve Bank of
India to promote rural credit. In its early days, the government of India sought to promote rural
credit by strengthening the cooperative institutions. The need to replace costly informal credit
with institutional credit was strongly felt as the All India Rural Credit Survey report of 1954
found that informal sources accounted for 70% of rural credit usage, followed by cooperatives
(6.4%) and commercial banks (0.9%).
The “Lead Bank Scheme” was introduced in 1969, thereby starting a process of district credit
plans and coordination among the different financial intermediaries. The same year also saw the
nationalization of fourteen commercial banks. As a result of these initiatives, the share of formal
financial sector in total rural credit usage rose to 30% in 1971. The Regional Rural Banks
(RRBs) were conceptualized in 1975 to augment the delivery of financial services in rural areas.
This resulted in the creation of a network of banks which is one of the largest in the world even
today. Not surprisingly, the All India Survey Debt and Investment Survey of 1981 found that the
share of formal financial sector in total credit had risen to over sixty percent.


The government initiated the Integrated Rural Development Programme (IRDP) in 1980-81. The
objective of IRDP was to direct subsidized loans to poor self-employed people through the
banking sector. The National Bank for Agriculture and Rural Development (NABARD) was
established in 1982. In the same year the government established Development of Women and
Children in Rural Areas (DWARCA) scheme as a part of IRDP. It was around this time that the
first Self Help Groups (SHGs) started emerging in the country mostly as a result of NGO
activities. The NGO MYRADA was one of the pioneers of the concept of SHGs in India. It was
in 1984-85, when MYRADA started linking SHGs to banks. These SHGs were large enough for
the bank to have transactions.
The SHGs in turn were also very responsive and flexible to the needs of their members. While
MYRADA did not directly intervene in the credit market for the poor, it facilitated “banking
with micro institutions established and controlled by the poor”. The SHGs were a step in that
direction. Thus, seeds were sown for the modern microfinance sector in India to emerge.
IRDP is estimated to have reached over 55 million poor families until 1999, when it was
transformed into Swarnajyanti Gram Swarozgar Yojna (SGSY). The IRDP, in spite of its
immense outreach, experienced very low repayment rates and created 40 million defaulters,
which coupled with the subsidy component ruled out long term sustainability of the programme.
The formal financial sector has been criticized to be supply driven during this phase (Sriram and
Fisher, 2002). The formal financial sector was characterized by:
• A large network of banks including cooperative banks and innovations such as


• Focused approach on credit,
• Lending targeted at the “priority sector” such as agriculture and weaker sections of the
• Interest rates ceiling,
• Subsidies.

Financial services, were thus, viewed as a social obligation. Given the high rates of default, a
formal loan waiver was announced by the government in the year 1989. This had a negative
impact on credit discipline, and reinforced the view that lending to the poor was not a profitable
business among the mainstream financial institutions.

The draft bill came at a time when there were differing opinions on the cost efficiency of the
MFO model for reaching credit to the poor. Moreover, the bill itself contains some perplexing
ideas - such as the choice of NABARD, itself an MFO, as a regulator of others such

The Micro Financial Sector (Development and Regulation) Bill, 2007 seeks to promote
the sector and regulate micro financial organisations (MFO).

National Bank for Agriculture and Rural Development (NABARD) shall regulate the
micro financial sector.

Every MFO that accepts deposits needs to be registered with NABARD. Conditions for
registration include (a) net owned funds of at least Rs 5 lakh; and (b) at least three years
in existence as an MFO. All MFOs, whether registered or not, shall submit annual
financial statements to NABARD.

Every MFO that accepts deposits has to create a reserve fund by transferring a minimum
of 15% of its net profit realised out of its thrift and micro finance services every year.

The central government may establish a Micro Finance Development Council to advise
NABARD on formulation of policies related to the micro financial sector.

NABARD shall constitute a Micro Finance Development and Equity Fund to be utilised
for the development of the sector


The Bill has two broad objectives: (a) to promote and regulate the micro finance sector;
and (b) to permit MFOs to collect deposits from eligible clients.

The major issues that arise out of these objectives are as follows: (i) whether MFOs are
the appropriate vehicle to address credit needs of the poor; (ii) whether NABARD is the
appropriate body to regulate the sector; and (iii) whether there are adequate safeguards to
protect depositors' funds.

Microfinance in India: A Sector evolves

Year 1992 Launching of Pilot project of linking 500 SHGs with the banking system.

1993 Introduction of bulk lending scheme to NGOs by NABARD. Studies on
Transaction Cost conducted by external experts.

1994 Extension of policy Support by RBI — beyond the Pilot phase. Unleashing the
concepts of banking with poor.

1995 Setting up Credit and Financial Services Fund (CFSF) within NABARD - to
support expansion of the programme. Setting up a working group on NGOs & SHGs - to
assess ground realities and identify operational issues in implementation of the

1996 Mainstreaming SHG-Bank Linkage by banks - RBI and NABARD notifications.
Tackling operational issues
o Documentation
o Defaulters
o Size of group
o Service Area etc

1997 Organizing National level Training consultation meet - thrust on trainers training.
First experiment of RRB as Self Help Promoting Institution (SHPI). Up scaling training and
awareness programmes by NABARD and the banking system.
Emphasis on interventions winning in cooperative banks.

1998 Recognition of potential of government intervention.
Extension RRB as SHPI to other 10 other RRB5.
Documentation of rating/grading practices for SHGs’ appraisal.

1999 Recognition of potential of SHGs by GOl. Setting up task force on supportive regulatory
& policy framework.

2001 Crossing 2,00,000 mark of credit linked SHGs. Thrust on backward States & districts.

2002 Intensifying training interventions through exposure visits. Focus on backward
states/provinces Encouraging and facilitating internalization of rating and self-rating

The Sub-Committee has recommended creation of a separate category of NBFCs operating in the
microfinance sector to be designated as NBFC-MFIs. To qualify as a NBFC-MFI, the SubCommittee has stated that the NBFC should be “a company which provides financial services
pre-dominantly to low-income borrowers, with loans of small amounts, for short-terms, on
unsecured basis, mainly for income-generating activities, with repayment schedules which are
more frequent than those normally stipulated by commercial banks” and which further satisfies
the regulations specified in that behalf.
The Sub-Committee has also recommended some additional qualifications for NBFC to be
classified as NBFC-MFI. These are:
a. The NBFC-MFI will hold not less than 90% of its total assets (other than cash and bank
balances and money market instruments) in the form of qualifying assets.
b. There are limits of an annual family income of Rs.50,000 and an individual ceiling on loans
to a single borrower of Rs.25,000
c. Not less than 75% of the loans given by the MFI should be for income-generating purposes.
d. There is a restriction on the other services to be provided by the MFI which has to be in
accordance with the type of service and the maximum percentage of total income as may be

The Sub-Committee has recommended that bank lending to NBFCs which qualify as NBFCMFIs will be entitled to “priority lending” status. With regard to the interest chargeable to the
borrower, the Sub-Committee has recommended an average “margin cap” of 10 per cent for
MFIs having a loan portfolio of Rs. 100crore and of 12 per cent for smaller MFIs and a cap of
24% for interest on individual loans. It has also proposed that, in the interest of transparency,
an MFI can levy only three charges, namely, (a) processing fee (b) interest and (c) insurance

The Sub-committee has made a number of recommendations to mitigate the problems of
multiple-lending, over borrowing, ghost borrowers and coercive methods of recovery. These
include :
a. A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability
Group (JLG)
b. Not more than two MFIs can lend to a single borrower
c. There should be a minimum period of moratorium between the disbursement of loan and
the commencement of recovery
d. The tenure of the loan must vary with its amount
e. A Credit Information Bureau has to be established
f. The primary responsibility for avoidance of coercive methods of recovery must lie with the
MFI and its management
g. The Reserve Bank must prepare a draft Customer Protection Code to be adopted by all
h. There must be grievance redressal procedures and establishment of ombudsmen
i. All MFIs must observe a specified Code of Corporate Governance
For monitoring compliance with regulations, the Sub-Committee has proposed a four-pillar
approach with the responsibility being shared by (a) MFI (b) industry associations (c) banks
and (d) the Reserve Bank.
While reviewing the proposed Micro Finance (Development and Regulation) Bill 2010, the
Sub- Committee has recommended that entities governed by the proposed Act should not be
allowed to do business of providing thrift services.
It has also suggested that NBFC-MFIs should be exempted from the State Money Lending
Acts and also that if the recommendations of the Sub-Committee are accepted, the need for
the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will not

Reach Of Micro Finance In India

Despite the rapid expansion of microfinance, large areas of India continue to be underserved. It is
estimated that the penetration potential of the existing microfinance model is between approximately
43 million and 52 million households, out of which 22.6 million are existing customers. This implies
an unaddressed demand of 20million to 29 million customers.
Currently, as many as 54% of all microfinance clients are concentrated in the Southern States:
Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. Alternatively, there is an extremely limited
microfinance presence in the North and North-east. MFIs are beginning to realize, however, that the
South is becoming overly saturated and there is a commercial need to expand to newer geographies
to ensure continued growth and maintain the quality of their portfolio. It has become imperative that
MFIs diversify their operational base and limit overexposure to heavily serviced areas and clients.
The Karnataka episode (detailed below) has demonstrated the urgent need to re-engineer expansion
strategies to avoid over-lending to a cluster of clients and hedge against regional disturbances,
economic, political and social.

Thus far, microfinance institutions have largely limited their product and service offering even
within the confines of financial inclusion. In fact, their product innovation has been limited to credit
which is intended to serve a variety of needs as shown by the box below. The limited product
innovation is understandable given the sector’s primary focus has been on refining its business
model and gaining scale to become financially sustainable. Despite following a single-product
model, the sector has experienced remarkable growth. This growth can only be expected to continue
as product innovation and diversified service offerings attract and retain greater number of
customers with a variety of needs.
The very same clients that the sector currently serves have a plethora of alternate needs for basic
products and services, financial and non-financial which can affect sustainable, long-term
achievements in their quality of life. Fortunately, recognizing this pent-up demand, mature MFIs are
beginning to take concrete steps toward expanding their product basket, at least within the context of
financial services. Along with credit, MFIs are heavily exploring the possibility of providing
savings/deposit services, micro-insurance and remittance services

Access to a savings mechanism like that which is available through commercial banks, is usually
held by the microfinance industry to be the most urgent need to enhance the economic security of
the poor. Due to RBI regulations, Non-Banking Microfinance Company (“NBFC”) MFIs cannot
currently accept interest-bearing deposits, unless they provide the service through a Section 25
Business Correspondent conduit. This structure prohibits the conduit from charging any fees to
execute this function and limits its reach within a limited radius of the bank branch. MFIs are
lobbying theRBI to relax these regulations to allow NBFCs to operate as business correspondents,
charge an extra fee for the deposit-taking service and delimit the geographical reach of their
operations. These changes would not only make deposits a viable commercial product, but also
allow MFIs to offer it to a broader set of clients.

While credit can serve to enhance a household’s income, insurance can serve to cushion the negative
economic impact in the event of an emergency. Without insurance, a single incident can often
impoverish a household, even with access to micro-credit, especially if the emergency affects the
main earning members. A number of MFIs already offer micro-insurance products to their clients.
The most basic products insure against health and accidental death. Companies such as Satin and
BASIX usually tie the insurance products to their credit products, which makes the availability of
credit contingent on the client availing insurance. The rationale behind packaging the loan and
insurance together is that often clients do not understand the importance or benefit of insurance until
they face an emergency. From a commercial viewpoint, the MFI is in effect insuring its loan against
a crisis in the client’s household, since insurance hedges against total financial collapse and thus
ensures repayment of the loan, albeit in a delayed fashion. Similar to customers, BASIX also links
livestock loans to livestock insurance for a similar reason – it cushions the financial blow and
increases the likelihood of a successful loan recovery. We can expect the number of insurance
products available to increase as MFIs expand beyond their core credit product and clients become
more aware of the benefits of insurance.
Domestic labor migration has a long history in India and is on the rise given disparities in growth
across states – migrants need a fast, low-cost, convenient,safe and widely accessible money transfer
service. In India, remittance services can be enabled by the provision of savings and thus need to be
provided in tieups with banks and post offices. In some cases, MFIs provide remittance services by
establishing their presence in a migrant destination to channel remittances back to the community in
the migrants’ area of origin or by establishing a tie-up with another MFI, bank or money transfer
company in the area of origin. Going forward, the role of technology will become more important in
facilitating the development of alternative channels and payment mechanisms.


Within product offerings, MFIs are considering expanding their activities beyond the realm of
financial services since this can provide synergies linked to future expansion. Microfinance clients
have myriads of unmet needs such as healthcare and education as well as livelihood requirements
which can enhance their income, employment potential or quality of life. Given MFIs’ existing
relationships with this population segment, they would be an ideal channel to provide these services.
While MFIs may not want to delve into product lines that are fundamentally different from their
core business, they could easily act as conduits to allow other agents to deliver these services to their
customers. The microfinance industry as a whole is now experimenting with a wide variety of
potential models that could be used to deliver non-financial services.
For example, BASIX offers a host of alternative services to its clients. Beyond the basket of credit
and other financial products and services, BASIX also provides low income customers with
livelihood services, including agricultural and business development consulting services, to help
microfinance clients use their loans more effectively. BASIX offers these alternative services to its
clients through different entities housed under one umbrella. These groups have tremendous synergy
and contribute to each other’s growth and prosperity. The credit business enables customer
acquisition, while the insurance business mitigates risk, and agricultural and business development
service enables customer retention. The consulting and IT business enhances BASIX’s revenues,
while the social businesses enable research and development which contribute to BASIX’s strategy
In addition to livelihood services, several MFIs are examining the feasibility of providing critical
basic services to deliver low cost healthcare, education and vocational training. For example,
Spandana is currently developing a comprehensive low cost healthcare delivery model focused on
the healthcare needs of women and children. BASIX has launched a vocational training academy to
impart education in rural development and management to potential job seekers from low income
communities. These participants would be deployed in the rural/semi urban areas with BASIX or
other organizations offering financial services to the poor. In addition to being important avenues for
productive utilization of credit by MFI clients, these types of services have a strong potential to
reinforce long-term client relationships. Most importantly, the evolving delivery model for low cost
education and healthcare has similar operational elements as the highly successful microfinance

model including efficient distribution, high throughput and para-skilling of low cost resources to
address the last mile inclusion challenge


Microfinance institutions are using various Credit Lending Models throughout the world.
Some of the models are listed below.
This is where the target community forms an 'association' through which various microfinance (and
other) activities are initiated. Such activities may include savings. Associations or groups can be
composed of youth, or women; they can form around political/religious/cultural issues; can create
support structures for microenterprises and other work-based issues
In some countries, an 'association' can be a legal body that has certain advantages such as collection
of fees, insurance, tax breaks and other protective measures. Distinction is made between
associations, community groups, peoples organizations, etc. on one hand (which are mass,
community based) and NGOs, etc. which are essentially external organizations.
As the name suggests, a bank guarantee is used to obtain a loan from a commercial bank. This
guarantee may be arranged externally (through a donor/donation, government agency etc.) or
internally (using member savings). Loans obtained may be given directly to an individual, or they
may be given to a self-formed group.

Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds may be used for various
purposes, including loan recovery and insurance claims. Several international and UN organizations
have been creating international guarantee funds that banks and NGOs can subscribe to, to onlend or
start microcredit programmes.


The Community Banking model essentially treats the whole community as one unit, and establishes
semi-formal or formal institutions through which microfinance is dispensed. Such institutions are
usually formed by extensive help from NGOs and other organizations, who also train the community
members in various financial activities of the community bank. These institutions may have savings
components and other income-generating projects included in their structure. In many cases,
community banks are also part of larger community development programmes which use finance as
an inducement for action
A co-operative is an autonomous association of persons united voluntarily to meet their common
economic, social, and cultural needs and aspirations through a jointly-owned and democraticallycontrolled enterprise. Some cooperatives include member-financing and savings activities in their
A credit union is a unique member-driven, self-help financial institution. It is organized by and
comprised of members of a particular group or organization, who agree to save their money together
and to make loans to each other at reasonable rates of interest.
The members are people of some common bond: working for the same employer; belonging to the
same church, labor union, social fraternity, etc.; or living/working in the same community. A credit
union's membership is open to all who belong to the group, regardless of race, religion, color or
A credit union is a democratic, not-for-profit financial cooperative. Each is owned and governed by
its members, with members having a vote in the election of directors and committee representatives


The Grameen model emerged from the poor-focussed grassroots institution,Grameen Bank, started
by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the following methodology:
A bank unit is set up with a Field Manager and a number of bank workers, covering an area of about
15 to 22 villages. The manager and workers start by visiting villages to familiarise themselves with
the local milieu in which they will be operating and identify prospective clientele, as well as explain
the purpose, functions, and mode of operation of the bank to the local population. Groups of five
prospective borrowers are formed; in the first stage, only two of them are eligible for, and receive, a
loan. The group is observed for a month to see if the members are conforming to rules of the bank.
Only if the first two borrowers repay the principal plus interest over a period of fifty weeks do other
members of the group become eligible themselves for a loan. Because of these restrictions, there is
substantial group pressure to keep individual records clear. In this sense, collective responsibility of
the group serves as collateral on the loan.
The Group Model's basic philosophy lies in the fact that shortcomings and weaknesses at the
individual level are overcome by the collective responsibility and security afforded by the formation
of a group of such individuals. The collective coming together of individual members is used for a
number of purposes: educating and awareness building, collective bargaining power, peer pressure
This is a straight forward credit lending model where micro loans are given directly to the borrower.
It does not include the formation of groups, or generating peer pressures to ensure repayment. The
individual model is, in many cases, a part of a larger 'credit plus' programme, where other socioeconomic services such as skill development, education, and other outreach services are provided.


Intermediary model of credit lending position is a 'go-between' organization between the lenders and
borrowers. The intermediary plays a critical role of generating credit awareness and education
among the borrowers (including, in some cases, starting savings programmes. These activities are
geared towards raising the 'credit worthiness' of the borrowers to a level sufficient enough to make
them attractive to the lenders.
The links developed by the intermediaries could cover funding, programme links, training and
education, and research. Such activities can take place at various levels from international and
national to regional, local and individual levels.
Intermediaries could be individual lenders, NGOs, microenterprise/microcredit programmes, and
commercial banks (for government financed programmes). Lenders could be government agencies,
commercial banks, international donors, etc.

NGOs have emerged as a key player in the field of microcredit. They have played the role of
intermediary in various dimensions. NGOs have been active in starting and participating in
microcredit programmes. This includes creating awareness of the importance of microcredit within
the community, as well as various national and international donor agencies. They have developed
resources and tools for communities and microcredit organizations to monitor progress and identify
good practices. They have also created opportunities to learn about the principles and practice of
microcredit. This includes publications, workshops and seminars, and training programmes.

Peer pressure uses moral and other linkages between borrowers and project participants to ensure
participation and repayment in microcredit programmes. Peers could be other members in a
borrowers group (where, unless the initial borrowers in a group repay, the other members do not
receive loans. Hence pressure is put on the initial members to repay); community leaders (usually
idetified, nurtured and trained by external NGOs); NGOs themselves and their field officers; banks

etc. The 'pressure' applied can be in the form of frequent visits to the defaulter, community meetings
where they are identified and requested to comply etc.
Rotating Savings and Credit Associations (ROSCAs) are essentially a group of individuals who
come together and make regular cyclical contributions to a common fund, which is then given as a
lump sum to one member in each cycle. For example, a group of 12 persons may contribute Rs. 100
(US$33) per month for 12 months. The Rs. 1,200 collected each month is given to one member.
Thus, a member will 'lend' money to other members through his regular monthly contributions.
After having received the lump sum amount when it is his turn (i.e. 'borrow' from the group), he
then pays back the amount in regular/further monthly contributions. Deciding who receives the lump
sum is done by consensus, by lottery, by bidding or other agreed methods.

The prevailing vision of the 'informal sector' is one of survival, low productivity and very little value
added. But this has been changing, as more and more importance is placed on small and medium
enterprises (SMEs) - for generating employment, for increasing income and providing services
which are lacking.
Policies have generally focussed on direct interventions in the form of supporting systems such as
training, technical advice, management principles etc.; and indirect interventions in the form of an
enabling policy and market environment.
A key component that is always incorporated as a sort of common denominator has been finance,
specifically microcredit - in different forms and for different uses. Microcredit has been provided to
SMEs directly, or as a part of a larger enterprise development programme, along with other inputs.


Village banks are community-based credit and savings associations. They typically consist of 25 to
50 low-income individuals who are seeking to improve their lives through self-employment
activities. Initial loan capital for the village bank may come from an external source, but the
members themselves run the bank: they choose their members, elect their own officers, establish
their own by-laws, distribute loans to individuals, collect payments and savings. Their loans are
backed, not by goods or property, but by moral collateral: the promise that the group stands behind
each individual loan.


More than 50 suicides have been reported in Andhra Pradesh alone. They are all clients of some or
the other MFI. And a conclusion has been drawn – rightly or wrongly – that due to wrong lending
practices, these people had over-borrowed (from multiple MFIs) and hence were in no position to
repay the various loans. The MFIs started putting pressure for recovery, and many committed
suicides. These suicides by the poor suddenly attracted mainstream media attention, and of course,
presented a great opportunity to various political parties to strengthen their mass appeal with Grassroot voters. Hence, the whole situation turned volatile suddenly. To be fair and honest to the MFIs, it
would be rash and impulsive to think that they played any active role in abetting these suicides!
The MFIs were doing their job – recovering outstanding dues in a competitive local
environment. The factors that led to the suicides must have been partly systemic, partly personal.
Basically, 6 things have gone wrong in tandem. Some may be the cause, and others the effect. Or
it could be the other way.
1. The fundamental structure of formal banking is not flexible enough or deep enough to
reach to those living on the fringes of society, quickly and effectively –this has led to the rise
of the MFIs in the first place. Because Banks have to work under the government’s priority
sector lending obligations, at times they find it better (provided the local situations allow) to
lend to one MFI rather than to thousands of tiny businesses, and that makes it easy for MFIs to
raise funds.
2. Excessive and quick success of SKS bred tremendous motivation in other players to
enter this field of fundamental social service–Many players entered in a competitive
corporate manner. This was matched in ferocity only by the IPO scandal, the firing of the
SKS CEO and gave strength to all industry detractors – “yes, they can be attacked”. In less
than 100 days, the messiahs turned into pariahs!

3. Aggressive loan-giving, without creating adequate personal relationships, leading to
the drop in realizations, and the subsequent tearing apart of the delicate fabric of
community prestige and esteem, which is the underlying premise of the working and
the basic pillar of MFI’s long termsuccess– When they give the microloans,they ensure
that the group of women whom they lend the money to, forces any defaulter to pay up in
time, for fear of inviting community shame. This keeps the system accountable and
operationally stable. But as more players entered, everyone pushed loans onto the poor
people by compromising with the basic tenets.
4. Changing attitude and thinking of the ‘poor’ when they realise that multiple MFIs are
competing to offer loans – to put it crudely, beggars suddenly become choosers and can play
one MFI against the others

5. Poor economic factors in some regions – leading to poor repayment capabilities, more
aggressive recovery tactics, culminating in suicides by the indebted.
6. Involvement of political parties to settle their mutual scores (especially in AP) this had
created suddenly an adverse environment for operational working of MFIs, and it
was topped by an extremely stringent ordinance regarding interest rate capping and loanrecovery practices of MFIs (in AP).
In recent years, Indian microfinance has been a lucrative business for investors, evidenced
by SKS Microfinance’s $358 million initial public offering in August 2010. Following in
the footsteps of SKS, other micro lenders found that it was easier to disperse loans to
borrowers who already knew how the game was played than to disperse loans to borrowers
who needed to be educated about the rules. What occurred was similar to the way that
college students in the U.S. rack up credit card debt; villagers in India were offered easy
access to capital, which piled on top of prior debts from village lenders, family members,
friends, etc.).
Eventually, the debt repayments became too high and families began to have trouble
meeting repayments. As reports of investors becoming wealthy from microfinance reached
villages and microlenders relentlessly sought repayments, villagers began to feel that they

were being taken advantage of. Last fall, encouraged by political leaders belonging to the
opposing party to the one in power, these villagers began to stop repaying their loans. To
further complicate matters, the Andhra Pradesh government issued an Ordinance on October
14, 2010. This Ordinance required MFIs to halt operations, register with the government,
and wait for those registrations to be processed before resuming operations. In addition, the
Indian government began to fear that it would not recoup its loans to microfinance
institutions, and it halted loans to MFIs. The government backstops nearly all the priority
capital lent to the microfinance industry, exposure valued at approximately $4 billion. With
their main line of credit turned off and the number of clients defaulting on loans climbing,
MFIs faced the threat of bankruptcy.

The Media Coverage
In response to the state of microfinance in India, the media ran articles covering the
developments. In articles such as these, the authors present stories of women and men who are
negatively impacted by microfinance. The stories range from a man who dropped dead from a
stress induced heart attack at the age of 40, to a woman who abandoned her family to escape the
pressure from lenders, to a woman with financial difficulties who hung herself in her home.
These articles implied that microfinance destroyed families and was the cause of suicides.
Though over-indebtedness adds to social pressure, it is difficult to suggest that microfinance
causes suicides.
Reports suggest that over 90% of Andhra Pradesh’s rural population have some sort of loan.
Therefore, there is an obvious correlation between those who are committing suicide with those
with microloans. However, the initial claim that one caused the other has gone through much
scrutiny in recent months. Studies done across Europe and Asia have tried to look deeper on
whether one could really accuse MFIs of being the reason behind the suicides.
Turns out, most of the rural population in Andhra Pradesh get their debt from numerous sources,
most of which are informal (money lenders, family members, and friends). To imply that people
killed themselves due to MFIs is a push since they were expected to pay back all the debt they
had from different sources. Furthermore, some smaller development organizations had since
gone back and interviewed the families of those cases which the Western media picked up on.

Most of the family members have tried to better explain their position and have admitted that the
loan sharks had created the majority of the problems and repayment pressures.
While a (weak) correlation is obvious, it is a stretch to link the growth of MFIs to a rise in
suicide rates. More likely, it is the high level of overall debt and the lack of regulatory oversight
that results in putting borrowers at a point of despair where they feel they have no other option.

In spite of the current crisis, many MFIs have approached banks for emergency funds amounting
to Rs 10,000 Cr, admitting to suffering a severe liquidity crisis. As some banks in some states
have stopped lending to MFIs, many are worried that the crisis could deepen and threaten a
collapse. As per Vijay Mahajan, one of the pioneers of the Indian microfinance industry in India
and the President of Microfinance Institutions Network (MFIN), the MFI industry will collapse
and will be finished as early as first quarter of the coming year in case the banks decline to
support and lend to the microfinance institutions because of the current environment in the MFI
market. Amid all the chaos, some of interesting developments in the economic and political
environment are:
The Union Finance Minister clearly indicating not to “strangulate” the industry and to
finalize the regulatory architecture for microfinance institutions and the ‘Microfinance Bill’ by
early next year

MFI bill introduced in Andhra Pradesh assembly and Karnataka government planning to
establish a state funded microfinance institution like Andhra Pradesh’s SHG-based
SERP programme

MFI regulation panel proposed by Orissa state government
Nation’s largest lender – State Bank of India announced its 750-million euro (about Rs.
4,650crore) five-year bond issue and also awaiting government’s nod to come out with a

Rs. 20,000-crore rights issue improve its capital base sometime in late December or
early next year Union Bank’s direct entry in the MFI business

Axis bank’s top management’s apprehension in relation to huge exposure to the MFI sector

Major PSU Banks – Bank of Baroda and Indian Bank sign contracts with MFIs to rein
interest rates, ensuring MFIs do not charge interest rates beyond a certain ceiling from their

Corporation bank management’s mooted thought of converting the debt from MFIs to
equity, for safeguarding risks in case of default

Indian Banks’ Association proposal for roping in “Bollywood” film stars for spreading the
message of financial inclusion – to educate rural masses about the benefits of bank accounts
and other financial services

One of the leading NBFC’s from the South, Muthoot Pappachan Group has tied up with
Accion of US to boost lending in microfinance sector and also in the final stages of acquiring
a leading MFI player in the North

The microfinance industry which was considered to be an instrument in realizing the goal of
financial inclusion, as they serve a segment of the population without access to banks, will
certainly face regulatory headwinds. The issue is primarily whether the proposed regulations
will be supportive of an industry that has emerged as a global frontrunner in combining social
and economic goals – or whether they will land up throttling the industry with unviable

Snapshot of the Microfinance


IndustryTime Line – PESTEL




Political (interference)




Economic (Interest)

Very High



Social (Objective)



Medium / High





Environment (to venture into this








Legal (Issues)

* Depending on nature of regulation that emerges
Going forward, the MFI promoters as well as for the Investors might not have the best news – at
least not to the extent they would have imagined couple of months back. In case the same
trend continues- borrowers defaulting, very limited access to capital, regulatory risks, ratings
with negative implications and political resistance, MFI’s would be faced with both solvency and
liquidity challenges. An IPO exit would remain a distant dream for the players, as well as their
private equity investors.




Case study

Baroda Citizens Council
About Baroda Citizens Council
To develop leadership, competence & faith of people in themselves through self-help approach.
To emerge as an Effective Service Provider, Change Agent & Community Development
Organization integrating voluntary spirit with professional competence.
Aims & Objectives

To develop leadership, competence & faith of people in themselves.

To activate social organization & enthuse members to work together.

To disseminate correct information & make effective use to available resources.

To provide a forum through which Voluntary & Government agencies can tackle city
level problems especially of the economically & social deprived section of the society.

To co-operate with the local body, voluntary and government agencies and public in
working for the further development and improvement of the District of

To encourage the development of responsible citizenship so that people may participate
more effectively in today’s society.

Legal Status











Gujaratl33O/’Vadodara, dated 25.05.1966

Bombay Public Trust Act, 1950 NO. F1861 Vadodara, dated 25.05.1G66

Foreign Contribution Regulation Act, 1976 No. 041960042, dated 19.031983

Under Section 52 of the Person With Disability Act, 1995 No. 112

Background & History
Baroda Citizens Council in Vadodara in Gujarat in India - established in 1966 as a voluntary,
non-profit, secular development organization. The council’s main objective is to improve the
quality of life of the urban poor in the city slums by initiating and facilitating community
development in the areas of education, health, vocational-training, infrastructure and shelter up
gradation programs

The essential elements of this type of development initiatives are:

Participation by the community in efforts to improve its standard of living with as much
reliance as possible on its own initiatives;

Provision of technical, managerial and other services in order to encourage self-help
initiatives and guided change.

In its early days, the Council recognized that inadequate access to financial credit was a major
constraint for the slum dwellers and in response to this need the Council encouraged the
formation of savings cooperatives. In 1989, the slum dwellers formally established the

Community Savings and Loan Association which was transformed into a separate legal entity
and registered as STHAPATI Credit Ltd in 1998.

Community Savings and Loan Association (CSLA)
Baroda Citizens Council Community Savings and Loan Association
(CSLA) works mainly in slum areas of Baroda like Atladara, Makarpura,
Kalali Fatak, Navayard, Nizampura, Gotri etc. The entire working is computer based and work is
not done manually. The organization uses Yavak software which is special software for their
work and is used by all the credit societies in Gujarat.

Types of loans

Jaat-jamin Loan — Jaat-jamin loan is a loan which is applied for the member within the
group and the other two members of the same group act as guarantors for the member
taking the loan. The member who takes the loan can also act as a guarantor for any other
member who borrows funds in the form of a loan.

KVP and LIC — Baroda Citizens Council (CSLA) also provide loan facility for KVP and LIC
investment made by its members. This is up to 75% of the policy amount.

Working :
A person has to be a member for at least one year and has to show regular savings in his account
before being eligible for a loan. The loan amount is minimum Rs.3000 and once repayment is
done the amount can be increased to a maximum of Rs.25000 (not directly but gradually). The
profit earned by the organization is given back to the members in various forms not taken by the
directors of the organization.

Project Aim
Baroda Citizens Council initiated the Ramdevnagar project in order to prove its belief that slum
dwellers are willing to contribute both physically and financially towards their own
development, provided appropriate financial and institutional mechanisms are set up to stimulate
Total number of households: 829
Location: Behind Gotri lake in Vadodara
Monthly average family income: Rs 2,000 to Rs 2,500
Ramdevnagar: Socio-economic Profile
Main occupation: Domestic helpers, small business or service provision
Average family size: Five members
Literacy rate: 70 percent male 50 percent female


residents of

baroda citizens



The role of STHAPATI Credit Ltd was crucial to the success of the Ramdevnagar project. 664
loans were given to residents by STHAPATI Credit Ltd in order to meet their individual cash
contributions. Of the 829 residents of Ramdevnagar, 664 families are members of STHAPATI
Credit Ltd and all of them have accessed loans of Rs 3,500 each in order to meet their cash
I also got to know that although around 40 percent of these project member beneficiaries also
have opened bank account in nationalized banks located in the area they have found it impossible
to access loans from these banks, despite several loan applications.
The community has collectively taken complete responsibility for ongoing, on-site maintenance
of services in Ramdevnagar. With the help of Baroda Citizens Council, they have formed a
formal ‘maintenance’ committee made up of local residents. This committee will initiate and
supervise future maintenance work. Finances to meet maintenance costs will be collected
through cash contributions from residents, whenever repairs are required.

SHARE is India’s largest MFI in terms of outreach or number of loans given. Thus, any comprehensive
study of MFIs in India will have to consider SHARE. SHARE provides a contrast to BASIX in both
lending methodology and organizational style. SHARE (Society for Helping, Awakening Rural poor
through Education) was originally registered under the Societies Act as a service organization in the
year 1989 by Mr. M. Udaja Kumar, Founder and Chairman. It then transformed into ‘SHARE Microfin
Ltd,’ a regulated Non-banking Financial Institution (NBFC) under the companies act in the year 2000.
SHARE operates mostly in the rural areas of the states of Andhra Pradesh and Karnataka. Its mission is
“the reduction of poverty by providing financial & support services to the poor, particularly women, for
viable productive income generation enterprises enabling them to use their skills and reduce their
poverty.” SHARE is one of the few Grameen Bank replicators in India, meaning that it uses the
Grameen methodology in its operations by focusing on loaning to groups of women. The focus on
women is to ensure that the benefits of increased income accrue to the general welfare of the family,
particularly children.
During the years 1991-1994 SHARE had started its microcredit operations as a two year action research
project with a US$25,000 recoverable grant from the Asia Pacific Development center and a soft loan of
US$35,788 from the Grameen Trust in Bangladesh. SHARE’s major expansion however, began in 1997
with the opening of six new branches to a total of ten branches with one branch achieving self
sufficiency. With this, SHARE felt it had a viable model that could be replicated all over India. Up until
this point, SHARE had been a non-profit organization registered as a charitable society.
SHARE decided to transform for several reasons, one of which was the legal constraints it faced as an
NGO. However, it also felt that transformation would allow it to attain financial self-sufficiency which

its NGO legal status did not permit. SHARE saw the profit motive as against the principles of charity.
We might expect then, to see an improvement in the financial sustainability of SHARE after

On the other hand, we might also expect to see a change in the social impact of SHARE if the profit
motive results in lending to clients that are more profitable, and thus, likely less poor. Of course, this
might not happen if SHARE is able to cross-subsidize its poorer clients with the larger returns it earns
from lending to better off clients. Also, we might see a loss of innovation and flexibility in product
development as an NBFC due to the requirements and restrictions placed on regulated organizations.
There was a recognition that the activities of SHARE needed to be transformed in order to achieve
financial sustainability. The legal status of SHARE at that time did not permit it due to a conflict of
interest between the profit motive and the notion of a charity embedded in the legal identity of NGOs.
According to SHARE, the two major limitations of being registered as a society were that the income
tax law in India does not recognize
haritable institutions carrying on microfinance activity and thus, the MFI loses its tax exemption.
Secondly, raising funds becomes a difficult task when financial leverages cannot be optimized
because the net worth and equity of the MFI do not work for profit. Recognizing these constraints,
SHARE transformed to a community owned and managed for-profit regulated financial institution
registered under the companies act in the year 2000. SHARE’s target clients are women whose per
capita income is less than Rs. 250 per month (Approx. US$5.80) and their asset holding is less than
Rs. 20,000 (Approx. US$465).

Our Vision

To improve the quality of life of the poor by providing access to financial and support services
and to be a viable financial institution developing sustainable communities.

Our Mission

To mobilise resources in order to provide financial and support services to the poor, particularly
women, for viable productive income-generating enterprises enabling them to reduce their


• To provide financial services predominantly for poor women.
• To create self-employment opportunities for the underprivileged.
• To train the rural poor in simple skills and enable them to utilise all available resources and
contribute to employment and income generation.

SHARE at a Glance as on 31 July 2010
Total States
Total Branches
Total Members ('000)
Amount Outstanding (INR Crore)
Total Staff


SHARE at a Glance as on 31 March 2012
Total States
Total Branches
Total Members ('000)
Amount Outstanding (INR
Total Staff


Key Indicators
No. of States
No. of Branches
No. of Staff
No. of JLGs
No. of Members ('000)
INR in Crore
USD in Mn
Loan Portfolio
INR in Crore
USD in Mn
Repayment Rate










Amount Disbursed(INRCrore)

Amount Disbursed(INR Crore)


The amount being given put for loan has been increasing this goes to show that the company has been
working very hard for providing loans to the needy and uplifting them.

SHARE currently serves more than 3.46 million members across 19 Indian states - Andhra Pradesh,
Chhattisgarh, Delhi, Karnataka, Maharashtra, Madhya Pradesh, Uttar Pradesh, Rajasthan, Bihar,
Uttarakhand, Gujarat, Haryana, Himachal Pradesh, Tamil Nadu, West Bengal, Jharkhand, Orissa ,Kerala
and Assam. SHARE caters to the needs of poor rural women through its 4,352 staff members spread
across 914 branches (as on 31 March 2012). The total outstanding portfolio is about Rs 2,110 crore (USD
384 million).
SHARE at a Glance as of 31 March 2012
No. of States
No. of Districts
No. of Branches
No. of Villages
No. of Groups
No. of Members ('000)
Amount Disbursed (Cumulative)
Loan Portfolio
Total No.of Staff

INR in Crore
USD in Mn
INR in Crore
USD in Mn


1 USD = 55 INR
Note: Loan portfolio Includes assigned portfolio of Rs. 34.01 crore (USD 6.18 Mn)

According to the data of past 3 years the performance of share microfin has been outstanding.
The repayment rate has been close to 90% on an average which is very good for the company.
Members have also increased at a steady pace which is good as it is increasing the coverage of
share microfin. In August 2009, Credit Analysis and Research Limited (CARE) assigned
SHARE the microfinance institutional grading of ‘MFI 1’, the highest grading (on a five-point
scale from ‘MFI 1’ to ‘MFI 5’ with ‘MFI 5’ being the lowest) ever issued to a microfinance
institution in the country. CARE assigned the rating after assessing the operational and financial
capability of SHARE to undertake and sustain the targeted level of operations under a four-point
framework of transparency, operational set-up, scale of operations and sustainability.
Being awarded MFI 1 rating is an exceptional thing.
After studying all the data and also taking into account the rating share Microfin has got I can
say it is one of the premier institution in the field of providing micro finance to the poor in India


BARODA CITIZENS COUNCIL website and information provided by the people

Share Microfin website

NABARD website