ON “A critical analysis of Micro finance in India”





I Rahul Patel student of MBA IV semester of Technocrats Institution of Technology MBA Bhopal hereby declare that the project report entitled “A critical analysis of Micro finance in India” is own original based on survey undertaken by me. Also declare that this Report has not been submitted to any University/ Institute for the award of any degree or any professional diploma.


Rahul Patel MBA IV semester



This is to certified that miss Rahul Patel has completed her Project work on the subject entitled “A critical analysis of Micro finance in India”which is based on research study undertaken by her. The project report is completed by the candidate under my supervision. It is an original unaided research study completed under my supervision to meet the partial requirement of MBA (F.T.) degree of Burkatullah University Bhopal.


………………… (Supervision)


Chapter 1-Introduction…………………………………………………………….....................5
1.1 Definition…………………………………………………………………….5 1.2 Strategic Policy Microfinance

Initiatives…………………………………………………………………12 1.3 Activities in

Microfinance…………………………………………………………………13 1.4 Regulations……………………………………………………………………………13 Legal

Chapter 2-Micro-Finance in India.............................................................................................16
2.1 Distribution of Indebted Rural Households: Agency wise…………………………………...19 2.2 Relative share of Borrowing of Cultivator Households………………………………………21 2.3 Distribution based on Asset size of Rural Households……………………………………….22 2.4 Banking Expansion ..…………………………………………………………………………23 2.5 Microfinance Social Aspects ……………………………………...........................................23

Chapter 3- Self Help Groups ………………………………………………………………….24
3.1 How self-help groups work…………………………………………………………………24 3.2 Sources of capital and links between SHGs and Banks……………………………………...25 3.3 How SHGs save……………………………………………………………………………...25 3.4 SHGs-Bank Linkage Model………………………………………………………………….26 3.5 Life insurances for self-help group members…………………………………………….28

Chapter 4-Microfinance Models……………………………………………………………….29 Chapter 5- Role, Functions and Working Mechanism of Financial Institutions…………..32
5.1 ICICI Bank………………………………………………………………………………….32 5.2 Bandhan…………………………………………………………………………………….39 5.3 Grameen Bank…………………………………………………………………………….41 5.4 SKS Microfinance…………………………………………………………………………42

Chapter 6- Marketing of Microfinance Products…………………………………………….45 Chapter 7- Success Factors of Microfinance in India………………………………………..47

Chapter 8- Issues related to Microfinance in India…………………………………………..52 Bibliography ……………………………………………………………………………………56

Chapter 1: Introduction
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 the 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 in India, using a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have endeavored to provide access to financial services to the poor in creative ways. Governments also have piloted national programs, NGOs have undertaken the activity of raising donor funds for onlending, 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 value. 1.1 Microfinance Definition According to International Labor Organization (ILO), “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients”. In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and

" The dictionary meaning of ‘finance’ is management of money. religion or otherwise. but extending credit to those who require most for their and family’s survival. just like anyone else. not because they are lazy but because they have no access to capital. Micro Finance is buzzing word. semi-urban or urban areas for enabling them to raise their income levels and improve living standards”. The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality. Thus. Traditionally micro finance was focused on providing a very standardized credit product. In urban areas. used when financing for micro entrepreneurs. but due weightage to quality measurement. they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. women. often household-based entrepreneurs. creed. Micro Finance is not merely extending credit. stabilize consumption and protect themselves against risks. and poor. (in fact need like thirst) need a diverse range of financial instruments to be able to build assets. Who are the clients of micro finance? The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class of society. "The poor stay poor. The poor. 6 . equity and mutual self-help. we see a broadening of the concept of micro finance--. service providers. 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.products of very small amounts to the poor in rural. How credit availed is used to survive and grow with limited means. micro finance activities are more diverse and include shopkeepers. In rural areas. Micro finance clients are typically self-employed.our current challenge is to find efficient and reliable ways of providing a richer menu of micro finance products. It cannot be measured in term of quantity. The management of money denotes acquiring & using money. caste. downtrodden by natural reasons or men made.

For instance. state. 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. and various insurance products. the potential market of micro finance clients also expands. many very poor farmers may not really wish to borrow. the supply is less than $2. It depends on local conditions and political climate. district and village level. The Need in India • India is said to be the home of one third of the world’s poor. activeness of cooperatives. State Cooperative Bank. Central government in India has established a strong & extensive link between NABARD (National Bank for Agriculture & Rural Development). Over the last 7 . Individuals in this excluded and under-served market segment are the clients of micro finance. informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world’s poverty by 2015. For example. District Cooperative Banks. Moreover. the more expensive or onerous informal financial arrangements. which includes various types of savings products. Micro finance clients are poor and vulnerable non-poor who have a relatively unstable source of income. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. street vendors. etc. Access to conventional formal financial institutions. is inversely related to income: the poorer you are. the chances are that.artisans. micro credit might have a far more limited market scope than say a more diversified range of financial services. official estimates range from 26 to 50 percent of the more than one billion population. SHG & NGOs and support mechanism. for many reasons. • • Due to the sheer size of the population living in poverty. About 87 percent of the poorest households do not have access to credit. the poorer you are. payment and remittance services. but rather. The demand for microcredit has been estimated at up to $30 billion. Primary Agriculture & Marketing Societies at national. As we broaden the notion of the types of services micro finance encompasses. On the other hand. the less likely that you have access.2 billion combined by all involved in the sector.

” “Donor funds should complement private capital. 2004: • • • Poor people need not just loans but also savings. Microfinance must be useful to poor households: helping them raise income. Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system. the poverty situation in India continues to be challenging.” Subsidies from donors and government are scarce and uncertain. Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10. “The job of government is to enable financial services. microfinance must pay for itself. and so to reach large numbers of poor people. Despite this growth.five years. the microfinance industry has achieved significant growth in part due to the participation of commercial banks.” “The key bottleneck is the shortage of strong institutions and managers. build up assets and/or cushion themselves against external shocks. Microfinance can also be distinguished from charity. Microfinance institutions should measure and disclose their performance – both financially and socially. “Microfinance can pay for itself. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs. insurance and money transfer services. not to provide them. or so poor they are unlikely to be able to generate the cash flow 8 . It is better to provide grants to families who are destitute. • • • • • • • Microfinance means building permanent local institutions. not compete with it. which chokes off the supply of credit.” Donors should focus on capacity building.

Almost by definition. In the 2000s. Common substitutes for cash vary from country to country but typically include livestock. But circumstances often arise in their lives in which they need money or the things money can buy. many activities that would be classified in the developed world as financial are not monetized: that is. • • • primarily through creating and exchanging different forms of non-cash value. poor people have very little money. education. the 1980s demonstrated that “microfinance could provide large-scale outreach profitably. improving housing. Financial needs and Financial services In developing economies and particularly in the rural areas. homebuilding. in a war zone or after a natural disaster. unemployment. childbirth. grains. widowhood. old age. securing a job (which often requires paying a large bribe). buying land or equipment. This situation can occur for example.” and in the 1990s. theft. In Stuart Rutherford’s recent book The Poor and Their Money. “microfinance began to develop as an industry”. cyclones and man-made events like war or bulldozing of dwellings. etc. floods. Personal Emergencies: such as sickness. Investment Opportunities: expanding a business. Disasters: such as fires. Poor people find creative and often collaborative ways to meet these needs. jewellery and precious metals. injury. As Marguerite Robinson describes in The Microfinance Revolution.required to repay a loan. funerals. the microfinance industry’s 9 . money is not used to carry them out. he cites several types of needs: • Lifecycle Needs: such as weddings. harassment or death.

and to play a role in reducing poverty. alleviating poverty and unleashing human creativity and endeavor of the poor people. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. thereby promoting gender-equity and improving household well being. agricultural microfinance methodologies Role of Microfinance: The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral . The obstacles or challenges to building a sound commercial microfinance industry include: • • • • • • Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural.objective is to satisfy the unmet demand on a much larger scale. commercial microfinance sector in the last few decades. Microfinance impact studies have demonstrated that: • • • • Microfinance helps poor households meet basic needs and protects them against risks. By supporting womens economic participation. While much progress has been made in developing a viable. several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. microfinance empowers women. The level of impact relates to the length of time clients have had access to financial services. The Origin of Microfinance 10 .

4 million people by 1910. The credit cooperatives created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1. and to improve the moral and physical values of people and also. the concept of providing financial services to low income people is much older. their will to act by themselves. At this time. it still can be seen as a turning point with an ever increasing impact on the view of politicians and development aid practitioners throughout the world.Although neither of the terms microcredit or microfinance were used in the academic literature nor by development aid practitioners before the 1980s or 1990s. In 1720 the first loan fund targeting poor people was founded in Ireland by the author Jonathan Swift. Some of the most prominent ones are presented below. they provided financial services to almost 20% of Irish households. During this same time the Dutch colonial administrators constructed a cooperative rural banking system in Indonesia based on the Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI). The failure of subsidized government or donor driven institutions to meet the demand for financial services in developing countries let to several new approaches. In 1973 ACCION International. a United States of America (USA) based non governmental 11 .” In the 1880s the British controlled government of Madras in South India. Microfinance Today In the 1970s a paradigm shift started to take place. Their outreach peaked just before the government introduced a cap on interest rates in 1843. which allowed charity institutions to become formal financial intermediaries a loan fund board was established in 1836 and a big boom was initiated. Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia without any subsidies and is now “well-known as the earliest bank to institute commercial microfinance”. they were first established in Europe during the 18th century as a response to the enormous increase in poverty since the end of the extended European wars (1618 – 1648). While this is not true with regard to the achievements made in Europe during the 19th century. While the emergence of informal financial institutions in Nigeria dates back to the 15 th century. respectively. After a special law was passed in 1823. tried to use the German experience to address poverty which resulted in more than nine million poor Indians belonging to credit cooperatives by 1946. He stated that the main objectives of these cooperatives “should be to control the use made of money for economic improvements. now known as the largest MFI in the world.

1999 12 . microfinance practitioners and representatives of various educational institutions and donor agencies from 137 different countries gathered in Washington D.C. they used a more business oriented approach and showed the world that poor people can be good credit risks with repayment rates exceeding 95%. Another milestone was the transformation of BRI starting in 1984.778 of them being amongst the poorest before they took their first loan. 1. NGOs. providing financial services to 100 million of the poorest households means helping as many as 500 – 600 million poor people. for the first Micro Credit Summit. 1995  The National Microfinance Taskforce. even if the interest rate charged is higher than that of traditional banks.2 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. Once a loss making institution channeling government subsidized credits to inhabitants of rural Indonesia it is now the largest MFI in the world.606. If it has continued at that speed more than 100 million people will have access to microcredit by now and by the end of 2005 the goal of the microcredit summit campaign would be reached. One year later the Self-Employed Women’s Association started to provide loans of about $1. According to the Microcredit Summit Campaign Report 67. with 41. Since the campaign started the average annual growth rate in reaching clients has been almost 40 percent. Although the latter examples still were subsidized projects.5 to poor women in India.900 policymakers. This was the start of a nine year long campaign to reach 100 million of the world poorest households with credit for self employment by 2005.organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus started what later became known as the Grameen Bank by lending a total of $27 to 42 people in Bangladesh. As the president of the World Bank James Wolfensohn has pointed out.594.080 clients have been reached through 2527 MFIs by the end of 2002. NABARD. In February 1997 more than 2. being profitable even during the Asian financial crisis of 1997 – 1998.

NABARD. Remittances: These are transfer of funds from people in one place to people in another. to an individual or through group lending. 1. Banking Regulation Act. Microcredit can be offered.3 Activities in Microfinance Microcredit: It is a small amount of money loaned to a client by a bank or other institution. 2005  Working group on Financing NBFCs by Banks. or the relevant state acts. There is no specific law catering to NGOs although they can be registered under the Societies Registration Act. health or the ability to work. 1860. 1956 and are governed under the RBI 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. Regional Rural Banks Act. remittances are a relatively steady source of funds. 1. and the Cooperative Societies Acts of the respective state governments for cooperative banks. the Indian Trust Act. Compared with other sources of capital that can fluctuate depending on the political or economic climate.4 Legal Regulations Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of 1934. 1882. Micro savings: These are deposit services that allow one to save small amounts of money for future use. usually across borders to family and friends. businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property. 2002  Microfinance Development and Equity Fund. Often without minimum balance requirements. Working Group on Financial Flows to the Informal Sector (set up by PMO). these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses.RBI. often without collateral. NBFCs are registered under the Companies Act. This tendency is a concern due to enforcement problems 13 . Micro insurance: It is a system by which people.

In January 2000.that tend to arise with self-regulatory organizations. Absence of liquidity requirements is concern to the safety of the sector. 14 . 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.

15 .

16 .

Banks linkage Programmed. first and foremost. which demand funds. aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'. Microfinance changing the face of poor India Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. over time. In the Indian context terms like "small and marginal farmers". are those who are landless and engaged in agricultural work on a seasonal basis. They are: • At the very bottom in terms of income and assets. construction and transport. microfinance clients increase their income and assets. household industries. When compared to the wider SHG bank linkage movement in India.000 crores. and improve the health and nutrition of their families. there are three segments. private MFIs have had limited outreach. As against this.00. mining. A more refined model of micro-credit delivery has evolved lately. according to even the most conservative estimates.Chapter 2: Microfinance in India At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores in the Indian banks’ credit outstanding. and agricultural business development services. we have seen a recent trend of larger microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This segment requires. " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. This changing face of microfinance in India appears to be positive in terms of the ability of microfinance to attract more funds and therefore increase outreach. Research across the globe has shown that. which emphasizes the combined delivery of financial services along with technical assistance. In terms of demand for micro-credit or micro-finance. consumption credit during those months when they do not get labour work. and manual laborers in forestry. In India. micro-Finance scene is dominated by Self Help Groups (SHGs) . 17 . the total demand for credit requirements for this part of Indian society is somewhere around Rs 2. increase the number of years of schooling their children receive. However.

Mrs. such as livestock. prevalence of massive unemployment and underemployment. Indira Gandhi. The great difficulty is to get that little.and for contingencies such as illness. Among non-farm activities. machinery) and work sheds in case of non-farm workers. Right now the problem is that. vendors. running provision stores. cotton. it is SHGs' which are doing this and efforts should be made so that the big financial institutions also turn up and start supplying funds to these people. poultry. such as irrigation pump sets. it is often easy to get more. low rate of capital 18 . • The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat. etc. i. • The next market segment is small and marginal farmers and rural artisans. weavers and those self-employed in the urban informal sector as hawkers. bore wells and livestock in case of farmers. tea shops. Poverty. One of the statements is really appropriate here. and others engaged in dairying. repair workshops. a small part of which also serves consumption needs. and various service enterprises. This will lead to a better India and will definitely fulfill the dream of our late Prime Minister. engaged in processing or manufacturing activity. Today India is facing major problem in reducing poverty. heavy population pressure. and workers in household micro-enterprises. using which they can generate additional income. These persons are not always poor. groundnut. About 25 million people in India are under below poverty line. which is as: “Money. With low per capita income. When you have got a little. This segment mainly needs credit for working capital. this segment includes those in villages and slums. They also need credit for acquiring small productive assets.”Adams Smith. Well these are the people who require money and with Microfinance it is possible.e. says the proverb makes money. though they live barely above the poverty line and also suffer from inadequate access to formal credit. fishery. This segment also needs term credit for acquiring additional productive assets. and equipment (looms.

Rural Labour Employment Guarantee Programme (RLEGP) etc. about 51 % of people house possess only 10% of the total asset of India . National Rural Employment Programme (NREP). The production oriented approach of planning without altering the mode of production could not but result of the gains of development by owners of instrument of production. Poverty alleviation programmes and conceptualization of Microfinance: There has been a continuous effort of planners of India in addressing the poverty. as a result there is chronic underemployment and per capita income is only $ 3262. misdistribution of wealth and assets. The major factor account for high incidence of rural poverty is the low asset base. 60% of people depend on agriculture. With this concept of Self Reliance.formation. prevalence of low technology and poor economics organization and instability of output of agriculture production and related sectors have made India one of the poor countries of the world. Microfinance the buzzing word of this decade was meant to cure the illness of rural economy. This is not enough to provide food to more than one individual. But these progamme have not been able to create massive impact in poverty alleviation. The Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks. They have come up with development programmes like Integrated Rural Development progamme (IRDP). Present Scenario of India: India falls under low income class according to World Bank. The mode of production does remain same as the owners of the instrument have low access to credit which is the major factor of production.This has resulted low production capacity both in agriculture (which contribute around 22-25% of GDP) and Manufacturing sector. Self Sufficiency and Self Help gained momentum. 19 . According to Reserve Bank of India. The obvious result is abject poverty. and exploitation. low rate of education. It is second populated country in the world and around 70 % of its population lives in rural area. Thus in Nineties National bank for agriculture and rural development (NABARD) launches pilot projects of Microfinance to bridge the gap between demand and supply of funds in the lower rungs of rural economy. Rural people have very low access to institutionalized credit (from commercial bank). low sex ratio.

Percentage distribution of debt among indebted Rural Labor Households by source of debt Sr.37 13.35 5.1 Distribution of Indebted Rural Households: Agency wise Credit Agency Government Cooperative Societies Commercial banks and RRBs Insurance Provident Fund Other Institutional Sources All Institutional Agencies Landlord Agricultural Moneylenders Professional Moneylenders Relatives and Friends Others All Non Institutional Agencies All Agencies Percentage of Rural Households 6.0 7.55 8.76 9.09 17. The above survey result shows that till 1991.19 6.0 100.78 19.91 5.Deprived of the basic banking facilities. GoI 1992 Seeing the figures from the above table.99 16.5 9. institutional credit accounted for around two-thirds of the credit requirement of rural households. 2.6 33.86 . Source of debt Households With cultivated 1 2 3 4 20 Without cultivated land 5. family members.1 21. it is evident that the share of institutional credit is much more now.5 5.0 36. the rural and semi urban Indian masses are still relying on informal financing intermediaries like money lenders.33 All Government Co-operative Societies Banks Employers land 4.0 Source: Debt and Investment Survey.0 4. No.46 14. This shows a comparatively better penetration of the banking and financial institutions in rural India.3 0.7 0.6 64. friends etc.0 10.7 1.

00 31.7 22.6 17. in the case of the banks and the government agencies it decreased marginally from 18.13 15.3 1961 81.8 61.1 31.23 7. Among the institutional sources of debt.47 15.1 63.2 . During 1999-2000 as much as 13% of the debt was raised from this source as against 8% in 1993-94.6 1971 68.27% to 17.S.5 6 7 8 Money lenders Shop-keepers Relatives/Friends Other Sources Total Round of N.1918) to the tune of 32% of the total debt of these households as against 28% during 199394. the dependence on co-operative societies has increased considerably in 1999-2000. Money lenders alone provided debt (Rs.19% and 5.5 66.2 18.7 2.52 100. Relatives and friends and shopkeepers have been two other sources which together accounted for about 22% of the total debt at all-India level.S.2 Relative share of Borrowing of Cultivator Households (in per cent) Sources of Credit Non Institutional Of which: Moneylenders Institutional Of which: Cooperative Societies.37% respectively during 1999-2000 survey.1 30.7 69.7 7. In comparison to the previous enquiry.12 6.0 1981 36. However. The institutional sources could meet only 36% of the total credit requirement of the rural labour households during 1999-2000 with only one percent increase over the previous survey in 1993-94.) 1999-2000 28.3 3.00 35.etc 21 1951 92.51 100.88% and 8.0 2002* 38.3 49.68 3.8 1991 30.2 29. the banks continued to be the single largest source of debt meeting about 17 percent of the total debt requirement of these households.00 Source: Rural labor enquiry report on indebtedness among rural labor households (55th The table above reveals that most of the rural labour households prefer to raise loan from the non-institutional sources.8 16.3 30. 2.14 3. About 64% of the total debt requirement of these households was met by the non-institutional sources during 1999-2000.70 7.9 26.3 36.52 100.58 3.76 14.

2.6 100. 1992 The households with a lower asset size were unable to find financing options from formal credit disbursement sources.2 3. NSSO. For households with less than Rs 20.0 28.000 22 .0 35. the growth has flattened during the last three decades. the share of cooperative societies is increasing continuously.1 100.0 26.8 100.0 0. 59th round. The share of moneylenders in the total non institutional credit was declining till 1981. At the same time the share of commercial banks in institutional credit has come down by almost the same percentage points during this period. 2003 Source: All India Debt and Investment Surveys Table shows the increasing influence of moneylenders in the last decade.0 * All India Debt and Investment Survey.0 2. GoI.3 Distribution based on Asset size of Rural Households (in per cent) Household Assets (Rs ‘000) Less than 5 5-10 10-20 20-30 30-50 50-70 70-100 100-150 150-250 250 and above All classes Institutional Agency 42 47 44 68 55 53 61 61 68 81 66 Non-Institutional Agency 58 53 56 32 45 47 39 39 32 19 34 All 100 100 100 100 100 100 100 100 100 100 100 Source: Debt and Investment Survey. started picking up from the 1990s and reached 27 per cent in 2001. This was due to the requirement of physical collateral by banking and financial institutions for disbursing credit.3 100.4 100.9 100. Though.Commercial banks Unspecified Total 0.

Almost entire demand for the consumption credit was met by informal sources at high to exploitive interest rates that varied from 30 to 90 per cent per annum. relatives. This phase is known as the “Social Banking” phase. E. Looking at the findings of the study commissioned by Asia technical Department of the World Bank (1995). subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the district level and a specialized apex bank for agriculture and rural development (NABARD) at the national level. The Net State Domestic Product (NSDP) is a measure of the economic activity in the state and comparing it with the utilization of bank credit or bank deposits indicates how much economic activity is being financed by the banks and whether there exists untapped potential for increasing deposits in that state. friends. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at around 75%-80% in Bihar and Jharkhand or these states are not as under banked as thought to be. Consumption credit constituted two-thirds of the credit usage within which almost three-fourths of the demand was for short periods to meeting emergent needs such as illness and household expenses during the lean season. mandatory directed credit to priority sectors of the economy. massive expansion of branch network in rural areas. 23 . mainly banks and cooperatives. etc. Almost 75 per cent of the production credit (which accounted for about one-third of the total credit availed of by the rural masses) was met by the formal sector. moneylenders. production credit and insurance. India was the home to one of the largest state interventions in the rural credit market. 2.4 Banking Expansion Starting in the late 1960s.g. savings.worth of physical assets. the most convenient source of credit was non institutional agencies like landlords. It witnessed the nationalization of existing private commercial banks. the purpose or the reason behind taking credit by the rural poor was consumption credit.

Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the groups (SHGs) play today a major role in poverty alleviation in rural India. 3. child care and nutrition. literacy. voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per the group members' decision". albeit in very small amounts. or only women. or only youth. etc. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation. 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). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital.5 Microfinance Social Aspects Micro financing institutions significantly contributed to gender equality and women’s empowerment as well as poor development and civil society strengthening. as well as in other activities (income generation. they now make up 90% of all SHGs. natural resources management. Contribution to women’s ability to earn an income led to their economic empowerment.). increased well being of women and their families and wider social and political empowerment. economically homogenous affinity groups of rural poor.1 How self-help groups work NABARD (1997) defines SHGs as "small. Increasing evidence of the centrality of gender equality to poverty reduction and women’s higher credit repayment rates led to a general consensus on the desirability of targeting women.2.governmental agencies. Chapter 3: Self Help Groups (SHGs) Self. 24 . or a mix of these. who can be either only men. Most SHGs in India have 10 to 25 members. As women's SHGs or sangha have been promoted by a wide range of government and non.

3. and to mitigate any conflicts that might arise. a treasurer.g. Only those SHGs that have utilized their own funds well are assisted with external funds through linkages with banks and other financial intermediaries. their aim is often to link up with financial institutions in order to obtain further loans for investments in rural 25 . 10 Rs per week). thus making group membership difficult). and sometimes other office holders.The rules and regulations of SHGs vary according to the preferences of the members and those facilitating their formation.g. they are often the ones who migrate during the lean season. Most SHGs have an elected chairperson. discuss joint activities (such as training. 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. However. decide to which member to give a loan. (b) Economic factors (the poorest often do not have the financial resources to contribute to the savings and pay membership fees. etc. a deputy. implementing agencies tend to leave them out. for reasons such as: (a) Social factors (the poorest are often those who are socially marginalized because of caste affiliation and those who are most skeptical of the potential benefits of collective action). While the groups initially generate their own savings through thrift (whereby thrift implies savings created by postponing almost necessary consumption. while savings imply the existence of surplus wealth).). running of a communal business. it is generally accepted that SHGs often do not include the poorest of the poor.2 Sources of capital and links between SHGs and Banks SHGs can only fulfill a role in the rural economy if group members have access to financial capital and markets for their products and services. preferring to focus on the next wealth category). 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 consumption. Most SHGs start without any external financial capital by saving regular contributions by the members. (c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the most difficult to reach and motivate. These contributions can be very small (e. After a period of consistent savings (e.

demand from SHGs is not price-sensitive. and may then onlend these funds to one another. recommendations by group facilitators.5% or to augment their own fund. Any bank branch can have a small or a large number of such accounts. 1997. If the members’ need for funds exceeds the group’s accumulated savings. 26 . and the even higher cost of funds from money lenders. Illiterate village women are sometimes better bankers than some with more professional qualifications. even though they might not be able to calculate the figures. whose total business and transactions are probably similar in amount to the average for his normal customers. or from ‘new generation’ institutions such as Basix Finance at 18. but once he has done this he need not concern himself with the individual loans made by the group to its members. He can treat the group as a single customer. but they are also willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%. collaterals provided. etc. such as a microfinance non-government organization. Unlike many customers.3 How SHGs save Self-help groups mobilize savings from their members. 3. they may deposit it in a bank. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the loan amount is proportionate to the group's savings) or as fixed amounts. usually at apparently high rates of interest which reflect the members’ understanding of the high returns they can earn on the small sums invested in their micro-enterprises. depending on the group's record of repayment. without having to change its methods of operation. and the bank needs only to maintain one account for the group as a single entity. M. If they do not wish to use the money. because they represent the combined banking business of some twenty ‘micro-customers’. or the uses to which these loans are put. they are happy to take advantage of the generous spread that the NABARD subsidized bank lending rate of 12% allows them. p. The system is very flexible. and they also know. The group aggregates the small individual saving and borrowing requirements of its members. The groups thus charge themselves high rates of interest. 15). that the typical micro-enterprise earns well over 500% return on the small sum invested in it (Harper. They know that rapid access to funds is more important than their cost. they may borrow from a bank or other organization. The banker must assess the competence and integrity of the group as a micro-bank.

they promote the groups.3. Model – 2: In this model. Model – 3: Due to various reasons. groups are formed by NGOs (in most of the cases) or by government agencies. This model has also been popular and more acceptable to banks. the bank itself acts as a Self Help Group Promoting Institution (SHPI). the NGOs act as both facilitators and micro. Most linkage experiences begin with this model with NGOs playing a major intermediaries. About 16% of SHGs and 13% of loan amounts are using this model (as of March 2002). While the bank provides loans to the groups directly. nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. The groups are nurtured and trained by these agencies. In such cases. banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies. First. as some of the difficult functions of social dynamics are externalized. after observing their operations and maturity to absorb credit. The bank then provides credit directly to the SHGs. the facilitating agencies continue their interactions with the SHGs. About 75% of SHGs and 78% of loan amounts are using this model. Comparative Analysis of Micro-finance Services offered to the poor 27 . About 9% of SHGs and 13% of loan amounts are using this model. nurture and train them and then approach banks for bulk loans for on-lending to the SHGs. It takes initiatives in forming the groups.4 SHGs-Bank Linkage Model NABARD is presently operating three models of linkage of banks with SHGs and NGOs: Model – 1: In this model.

Source: R. The two policies are (1) the Mother Teresa Women & Children Policy.Alternative Technologies in the Indian Micro. The company will be targeting self-help groups.5 Life insurances for self-help group members The United India Insurance Company has designed two PLLIs (personal line life insurances) for women in rural areas. giving personal accident and hospitalization covers besides cover for damage to dwelling due to fire and allied Industry 3. Arunachalam .000 in the country. of which there are around 200. with 15-20 women in a group. with the aim of giving to the woman in the event of accidental death of her husband and to support her minor children in the event of her death. and (2) The Unimicro Health Scheme. 28 .

their numbers have increased considerably today. societies. trusts and cooperatives. SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK). Legal Forms of MFIs in India 29 . commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. only a handful of NGOs were “into” financial intermediation using a variety of delivery methods. While there is no published data on private MFIs operating in the country. the number of MFIs is estimated to be around 800.Chapter 4: Micro Finance Models 1. Since 2000. Though initially. Micro Finance Institutions (MFIs): MFIs are an extremely heterogeneous group comprising NBFCs.

as an NBFC. 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.) Non-Banking Financial 700 . Bank Partnership Model This model is an innovative way of financing MFIs. Such refinancing through securitization enables the MFI enlarged funding access. Banking Correspondents 30 . Not for Profit MFIs a. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative Societies a. supervision and recovery. 3. 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. the MFI acts as an agent and takes care of all relationships with the client. 1860 or similar Provincial Acts Indian Trust Act. 1956 Reserve Bank of India Act. 1882 b.variation of this model is where the MFI.Types of MFIs 1. For Profit MFIs a. 1956 2. 1934 Act enacted by State Government Companies (NBFCs) Total Source: NABARD website 2.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. A sub .) Non-profit Companies 10 Section 25 of the Companies Act. holds the individual loans on its books for a while before securitizing them and selling them to the bank. In other words.MFIs Estimated Legal Acts under which Registered Number* 400 to 500 Societies Registration Act. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base.) NGO .800 6 Indian Companies Act. If the MFI fulfils the “true sale” criteria.

It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse. this model has two very different and interesting operational features: (a) The MFI uses the branch network of the bank as its outlets to reach clients. In the service company model. 31 . the model is similar to the partnership model: the MFI originates the loans and the bank books them. MFIs may contract with many banks in an arms length relationship. (b) The Partnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth. perhaps as an NBFC. On paper. But in fact. and then works hand in hand with that MFI to extend loans and other services. In the partnership model. it also allows rapid scale up. such as individual loans for SHG graduates. remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance. the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage. This allows the client to be reached at lower cost than in the case of a stand–alone MFI. In case of banks which have large branch networks. Service Company Model Under this model. 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. 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. the bank forms its own MFI. 4. 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.The proposal of “banking correspondents” could take this model a step further extending it to savings.

and its outstanding portfolio has increased from Rs.5 million) to Rs.Haruhiko Kuroda. and ICICI believes grant money should be limited to the creation of 32 .20 billion (US$4. A few years ago. President. 9. There is an increasing shift in the microfinance sector from grant-giving to investment in the form of debt or equity. Functions and Working Mechanism of Financial Institutions 5. ICICI’s microfinance portfolio has been increasing at an impressive speed. ICICI Bank is now (2007) lending to 1.98 billion (US$227 million).Chapter 5: Role. From 10. Asian Development Bank. 0. these clients had never been served by a formal lending institution.8 million clients through its partner microfinance institutions.1 ICICI Bank “ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity” .000 microfinance clients in 2001.

In addition. Executive Director of ICICI Bank. few MFIs have been able to grow beyond a certain point. which had significant presence in the rural areas of South India. especially Tamil Nadu. MFIs are unable to provide risk capital in large quantities. “We need to stop sending government and funding agencies the signal that microfinance is not a commercially viable system”. “There is no dearth of funds today. By 2000.facilitative infrastructure. which limits its risk-taking. Bank of Madura's SHG development program was initiated in 1995.9 million and 87 branches. Spandana. Under this model. says Nachiket Mor. the risk is being entirely borne by the MFI. banks financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies. as banks are looking into MFIs favorably. ICICI Bank announced merger of Bank of Madura (BoM). Bank Led Model The bank led model was derived from the SHG-Bank linkage program of NABARD. it had created around 1200 SHGs across Tamil Nadu and provided credit to them. As a result of banks entering the game. However. Through this program. Through 33 . says Padmaja Reddy. unlike a few years ago”. 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. it had formed. ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. the sector has changed rapidly. saving and lending. Through this program. trained and initiated small groups of women to undertake financial activities like banking. which limits the advances from banks. in 2000. rather than spending time in developing rural infrastructure of its own. with a customer base of 1. mobilization power and infrastructure of MFIs and NGOs. This model aimed at synergizing the comparative advantages and financial strength of the bank with social intermediation. the CEO of one of ICICI Bank’s major MFI partners.

Initially. dairy companies. FSCs provided them with services like advice on seeds. Another plan to increase the reach in rural areas is to launch mobile ATM services. micro-credit institutions and food processing industries. ICICI Bank developed Farmer Service Centers (FSC).this model. pest control. while the bank met the financial requirements of the borrowers. Working in close association with farmers. ICICI Bank came up with a plan where the NGO/MFI continued to promote their microfinance schemes. SIG has been involved in a project in the southern state of Tamil Nadu to find out how wireless technology can be applied in the development of low cost models of banking. pesticides and fertilizers and other services associated with agriculture. 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. ICICI Bank plans to provide farmers credit from sugar companies. The FSCs also provided crop-related information and services to farmers. NGOs. The FSCs arranged to procure the produce through agents and sold it in organized agricultural markets thus getting better realization. Other Microfinance Initiatives As a part of microfinance initiatives in the agriculture sector. usage and dosage of herbicides. ICICI Bank branded trucks have started carrying ATMs through a number of villages 34 . Taking the FSC initiative further. weed control. Later. apart from facilitating the sale of agricultural produce. An FSC was managed by an agricultural input supply company which supplied inputs like seeds and technical knowhow to the farmers. sowing techniques. thus expanding the reach of ICICI Bank at a low cost. seed companies. The Future These agents contact several borrowers. FSCs were also managed by an extension service organization which provided inputs. ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary financial support to their activities. credit and technology or by an NGO that provided all the services that farmers needed for their agricultural needs.

Source: (Press Trust of India) Posted online: Wednesday. Deputy Managing Director. an NGO working for the welfare of around 65. the bank has tieups with 100 MFIs. FINO is an initiative in the micro-finance sector. which was launched on Thursday. he said.Some Articles of News Paper: 1. etc would directly or indirectly tie up with FINO to use its services. According to Mr Nachiket Mor. the bank plans to launch the programme in Kolkata by entering into a tie-up with Durbar Mahila Samwanaya Samitee. ICICI Bank is planning to offer financial assistance to them though the micro-finance route. he said. For starters. FINO would provide technological solutions as well as services to finance providers to reach the underserved in the country. NBFCs. co-operative banks. "We would reduce our stake in the company when required. At present." he said. FINO is an independent entity. FINO.000 sexworkers in and around the city. RRBs. said Mr Manish Khera. 2007 at 20:54 hours IST 2. ICICI Bank to offer micro-finance to sex-workers Mumbai. July 13. 35 . speaking on the sidelines of the press conference to launch FINO. CEO. ICICI Bank launches new initiative in micro-finance ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and Operations Private Ltd (FINO). 2001. FINO would charge Rs 25-30 per account every year. MFIs. ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2007. ICICI Bank. March 14: In a novel way to help sex-workers to live more meaningfully. ICICI Bank is the lead facilitator. It would target 300-400 million people who do not have access to basic financial services. The company has an authorised capital of Rs 50 crore. country's largest private sector bank. March 14.

The bank had extended advances to the tune of Rs. therefore there was a need for an intervention like FINO. loans. said Mr Khera. fixed deposits and remittances.Core banking products FINO has partnered with IBM and i-flex to offer core banking products. said Mr Khera. especially the health insurance sector to the under-privileged. It is interacting with Nabard." said Mr Mor. The bank had acquired a network of self-help groups (SHGs) developed by the erstwhile Bank of Madura after its merger with ICICI Bank. the partnership model would provide assured source of funding to NGOs and MFIs. ICICI Bank. 150 crores as on February 29. SIDBI and other banks to give shape to what FINO does. FINO aims bringing scale to "micro" business leading to lowering of costs for the local financial institutions (LFIs) and act as an internal technology department for the LFIs. MARCH 9. "There was a need for automated structured data system like FINO. The company would also build-up customer database. today. The card would also offer multiple products including savings. Mr." he said. "Essential pieces of infrastructure are missing in India. Nachiket Mor. It would also provide credit bureau services. ICICI Bank's thrust on micro-finance CHENNAI. 3. We lack credit-tracking mechanism. The company is working on providing technological solutions in insurance. Addressing presspersons here. Since then the SHG programme had grown 36 . It also launched biometric cards for customers. insurance. this year. said. Executive Director." The company expects to reach 25 million customers in five years and two million customers by the end of 2007. Mor said. recurring deposits. under this scheme. ICICI Bank has entered into partnerships with various microfinance institutions (MFI) and non-Government organisations (NGOs) to scale up its micro lending business. which would be a proof of identity and give collateral to them. which includes individual customer credit rating and analytics based on transaction history. thus bringing them into mainstream banking.

This model is therefore likely to have very high leveraging capacity. This model is unique in that it combines debt as mezzanine finance to the MFI (Mezzanine finance combines debt and equity financing: it is debt that can be converted by the lender into equity in the event of a default. This source of financing is advantageous for MFIs because it is treated like equity in the balancesheet and enables it to raise money without additional equity. Technical assistance and the collateral deposit of US$325. Securitization Another way to enter into partnership with MFIs is to securitize microfinance portfolios. ICICI Bank initiated a partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary. The MFI as Collection Agent To address these constraints. ICICI chose this model because it expands the retail operations of the bank by leveraging comparative advantages of MFIs. which is an expensive financing source. had initiated a programme for microcredit through self-help groups. Thiagarajan. credit linkage and recovery of loans. M. `Microcredit Foundation of India'. One of the micro finance institutions.substantially and 10.175 groups had been promoted reaching out to 2. while avoiding costs associated with entering the market directly. established by K. maintenance of groups.03 lakh women spread across 2. as the MFI has an assured source of funds for expanding and deepening credit. the Executive Director said.398 villages. In 2004.000 (93% of the guarantee required by ICICI) 37 . ICICI Bank has entered into a memorandum of understanding with Microcredit Foundation to outsource SHG development. a large MFI operating in rural areas of the state of Andra Pradesh. former Chairman of Bank of Madura in 2002. so that the risk for the MFI is separated from the risk inherent in the portfolio.).The loans are contracted directly between the bank and the borrower. the largest ever securitization deal in microfinance was signed between ICICI Bank and SHARE Microfinance Ltd.

subject to a maximum of the sum insured. Wipro and Infosys. The interest paid by SHARE is almost 4% less than the rate paid in commercial loans. have developed India’s first index-based insurance product. To maximize the benefits of these innovations. The insurance policy is linked to a rainfall index. Under this agreement. and ICICI does not limit itself to lending. The Indian context. The use of technologies such as kiosks and smart cards will considerably reduce transaction costs while improving access. allowing SHARE to scale up its lending. in which 70% of the population lives in rural areas. The ICICI Bank technology team is developing a series of innovative products that can help reduce transaction costs considerably. This deal frees up equity capital. the development of a high quality shared banking technology platform which can be used by MFIs as well as by cooperatives banks and regional rural banks is needed. requires new. it allows ICICI Bank to reach new markets. For example. Technology One of the main challenges to the growth of the microfinance sector is accessibility. inventive channels of delivery.were supplied by Grameen Foundation USA. ICICI purchased a part of SHARE’s microfinance portfolio against a consideration calculated by computing the Net Present Value of receivables amounting to Rs. 3iInfotech. the insurance company set up by ICICI and Canada Lombard. it is piloting the usage of smart cards with Sewa Bank in Ahmedabad. And by trading this high quality asset in capital markets. the bank can hedge its own risks. 215 million (US$4. some of the best Indian information technology companies specialized in financial services. This insurance policy compensates the insured against the likelihood of diminished agricultural output/yield resulting from a shortfall in the anticipated normal rainfall within the district. and others. 38 . On the other hand. along with the World Bank and ICICI Lombard. I-Flex. by way of a lien on fixed deposit.9 million) at an agreed discount rate. ICICI’s Social Initiative Group. Beyond Microcredit Microfinance does not only mean microcredit. Partial credit provision was provided by SHARE in the form of a guarantee amounting to 8% of the receivables under the portfolio. ICICI is strongly encouraging such an effort to take place.

These have implications in terms of the scale and profitability of client enterprises and efficiency of household budget allocation. health.are in the process of developing exactly such a platform. the ICICI Bank Alternate Channels Team presented the benefits of investing in a common technology platform similar to those used in mainstream banking to some of the most promising MFIs. such as healthcare. high level training and strategy building. research-based advocacy. economics of micro-enterprises. combination of microfinance and other development interventions. contract and product designs. It started as a Capacity Building Institution (CBI) in November 2000 39 . Through research. it aims to systematically establish the links between increased access to financial services and the participation of poor people in the larger economy. The latter will bring to the table knowledge of best practices in their specific areas. the CMFR recognizes that while MFIs aim to meet the credit needs of poor households. people’s behavior and psychology with respect to financial services. At a recent technology workshop at the Institute for Financial Management Research in Chennai. and each consultation workshop will result in long-term collaboration between with MFIs for implementing specific pilots. etc). there are other missing markets and constraints facing households. 5. water. and the effect of regulations. and gaps in knowledge. roads. impact of MFI policies and strategies.2 Bandhan (Ranked 2nd by Forbes Magazine in December 2007) Bandhan is working towards the twin objective of poverty alleviation and women empowerment. evidence of credit constraints. infrastructure. Finally. which in turn impacts household well-being. The Centre for Microfinance Research ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute for Financial Management Research (IFMR) in Chennai. costs and profitability of microfinance organizations. constraints to household productivity. The CMFR Microfinance Strategy Unit will address these issues through a series of workshops which will bring together MFI practitioners and sectoral experts (in energy. The CMFR Research Unit supports initiatives aimed at understanding and analyzing the following issues: impact of access to financial services.

under the leadership of Mr. Till date. 2 weeks hence. 417 crores Bandhan follows a group formation.99%.182. Bandhan opened its first microfinance branch at Bagnan in Howrah district of West Bengal in July 2002. individual lending approach.741 : 3.500 in rural and Rs. of states No. As on July 2009 Column1 Column2 No.1. The repayment rate is recorded at 99.249 crores : Rs. The clients have to attend the group meetings for 2 successive weeks. Bandhan has staff strength of more than 2130 employees. Economic and Social Background of Clients   Landless and asset less women Family of 5 members with monthly income less than Rs. of members No. 3. it has disbursed a total of Rs. 587 crores among almost 7 lakh poor women. During such time.500 in urban Those who do not own more than 50 decimal (1/2acre) of land or capital of its equivalent value  40 . of staff Cumulative loan disbursed Loan outstanding Operational Methodology :8 : 528 : 1.191 : Rs. they are entitled to receive loans. Loan outstanding stands at Rs. Bandhan started with 2 branches in the year 2002-03 only in the state of West Bengal and today it has grown as strong as 412 branches across 6 states of the country! The organization had recorded a growth rate of 500% in the year 2003-04 and 611% in the year 2004-05. 221 crores. it was giving capacity building support to local microfinance institutions working in West Bengal. Chandra Shekhar Ghosh. The loans are disbursed individually and directly to the members. A group of 10-25 members are formed. of branches No. 2.

it has slashed down its lending rate to 15.000 – Rs. Then it was further reduced to 12. Two members of the group along with the member’s husband have to sign as guarantors in her loan application form.50%. Monitoring System The various features of the monitoring system are:      A 3 tier monitoring system – Region. she at first has to get inducted into a group.000 for the rural areas and between Rs.checking at all the levels The management team of Bandhan spends 90. the entire group proposes her name for a loan in the Resolution Book.3 Grameen Bank 41 . 7.50% flat on loan amount. After she gets inducted into the group.50% in May 2006. 1. However from 1st July 2005. being a non profit organization wanted the benefit of low costs to ultimately trickle down to the poor.000 . The sole purpose of the above structure is simply to create peer pressure.00%. After the repayment.000 more than the previous loan. the group inserts peer pressure on her. 5.Loan Size The first loan is between Rs.00% of time at the field Liability structure for Loans When a member wants to join Bandhan. Bandhan. 10. Division and Head Office Easy reporting system with a prescribed checklist format Accountability at all levels post monitoring phase Cross. Bandhan initially charged 17. operational costs decreased. If she fails to pay her weekly installment. they are entitled to receive a subsequent loan which is Rs 1.5. Service Charge Bandhan charges a service charge of 12. 1. The reason is obvious.000 for the urban areas. As overall productivity increased.000 – Rs.

The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen Bank is perhaps the most well known. The repayment of 42 . has also made the model a favourite among the donor community. the Grameen model works only under certain assumptions. but that can now be done more cost effectively using computers. it assumes that all the poor want to be self-employed. The process of delivery is scalable and the model could be replicated widely. As all the loans are only for enterprise promotion. which is a value attribute of Grameen. 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. However. The group members tend to be selected or at least strongly vetted by the bank. admired and practised model in the world. It is very cost intensive as it involves building capacity of the groups and the customers passing a test before the lending could start. The model involves the following elements. 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. usually early morning or late in the evening. • • • • • • • 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 instalments The Grameen model follows a fairly regimented routine. The greatness of the Grameen model is in the simplicity of design of products and delivery.

SKS converted itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to be a founding investor. Very few actually sit in dirt with them. 2. training. it was able to attract multimillion dollar lines of credit from Citibank. SIDBI. Its borrowers include agricultural laborers. flowers.It could not find the software that suited its requirements. Later. 3. They participate in theory classes on Saturdays and practice what they have learned in the field during the week. sticks. and others. They enroll about 500 loan officers every month. and technology entrepreneur Vinod Khosla. they have factory style training models. Use Technology to reduce costs and limit errors. 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. home based artisans. ABN Amro. With this approach. and other processes in order to boost capacity.Starting with the pitch that there is a high entrepreneurial spirit amongst the poor to raise the funds. Then it secured money from parties such as Unitus. using stones.4 SKS Microfinance (CEO-Vikram Akula) Many companies say they protect the interests of their customers. street vendors. so it they built their own simple and user friendly applications 43 . and chalk powder to figure out if they will be able to repay a $20 loan at $1 a starts the week after the loan is disbursed – the inherent assumption being that the borrowers can service their loan from the ex-ante income. this company has created its own loyal gang of over 2 million customers. and small scale producers. mom-and-pop entrepreneurs. Its model is based on 3 principles1. 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. 5. a Seattle based NGO that helps promote micro-finance.They collect standard repayments in round numbers of 25 or 30 rupees. Standardize products. each living on less than $2 a day. Adopt a profit-oriented approach in order to access commercial capital.

They are also using their deep distribution channels for selling soap. which areas were lorded over by which loan sharks. Scaling up Customer Loyalty Instead of asking illiterate villagers to describe their seasonal pattern of cash flows.M. 44 . 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. 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.that a computer-illiterate loan officer with a 12th grade education can easily understand. The system is also internet enabled.60.00 A. They are growing at 200% annually. Given that electricity is unreliable in many areas they have installed car batteries or gas powered generators as back-ups in many areas. etc. clothes. 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. Leveraging the SKS brand Its payoff comes from high volumes. adding 50 branches and 1. what kind of financial products they needed.000 new customers a month. consumer electronics and other packaged goods.5%. Deep customer loyalty ultimately results in a repayment rate of 99.

crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided – and only. Besides providing storage facilities. sells other services and provides a forum for farmers to market their products. arranges credit. this is a doable model. set up to enhance credit. provided – the price setting mechanism for the farmer is appropriate and fair. Contract Farming and Credit Bundling Banks and financial institutions have been partners in contract farming schemes. Agri Service Centre – Rabo India Rabo India Finance Pvt Ltd. The services provided are similar to those in contract farming. Under such an arrangement. but with additional flexibility and a wider range of products including inventory finance. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. Basically. 3. Non Traditional Markets 45 .Chapter 6: Marketing of Microfinance Products 1. provides agricultural inputs and information to farmers. each centre rents out farm machinery. 2.

which has experimented with a ‘farmers’ market’ to provide small farmers located in proximity to urban areas. 4.2 lakh is spent for providing plastic crates to 1000 farmers. 5. Apni Mandi scheme provides selfemployment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce. extension services of different agencies are pooled in. the Board provides basic infrastructure facilities. At the farm level.Similarly. Mother Dairy Foods Processing. a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in Bangalore. These include inputs subsidies. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates. At the mandi site. The project. covers 200 horticultural farmers associations with 50.15 lakh. Under this arrangement a sum of Rs. with an outlay of Rs. Each farmer gets 5 crates at a subsidized rate. Apni Mandi Another innovation is that of The Punjab Mandi Board. This experiment known as "Apni Mandi" belongs to both farmers and consumers. better quality seeds and loans from Banks. 46 .000 grower members for wholesale marketing. The operations and maintenance of the market is done by NDDB. who mutually help each other. direct access to consumers by elimination of middlemen.

For NGOs 1. entry and exit are easy. especially if the resources required are small. Rashtriya Gramin Vikas Nidhi (RGVN). This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. repay their loans and use the proceeds to increase their income and assets. various donor funded programmes especially by the International 47 . Council for Advancement of People’s Action and Rural Technologies (CAPART). Small Industries Development Bank of India (SIDBI). Rashtriya Mahila Kosh (RMK). successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people. The field of development itself expands and shifts emphasis with the pull of ideas. when given access to responsive and timely financial services at market rates. NGOs and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders. making microfinance one of the most effective poverty reducing strategies. Friends of Women’s World Banking (FWWB). 2. including the National Bank for Agriculture and Rural Development (NABARD). Community banks. tasks are (perceived to be) simple and people’s acceptance is high – all characteristics (real or presumed) of microfinance.Chapter 7: Success Factors of Micro-Finance in India Over the last ten years. Canvassing by various actors. A. and NGOs perhaps more readily adopt new ideas.

UK (DFID)]. microfinance is a way to financial sustainability. for example from SIDBI. Induced by the worldwide focus on microfinance. external resources are not needed as SHGs begin with their own savings. Besides. donor NGOs too have been funding microfinance projects. One might call it the supply push. has greatly added to the idea pull. The idea appears simple to implement. 5. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending. It is implicitly assumed that no ‘technical skill’ is involved. World Bank and Department for International Development. 48 For Financial Institutions and banks . 3. Most NGO-led microfinance is with poor women. it seems all so easy. For many NGOs the idea of ‘organising’ – forming a samuha – has inherent appeal. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. 6. quick and high ‘customer satisfaction’ is the USP that has attracted NGOs to this trade. United Nations Development Programme (UNDP). Thus. the interest rate spread could be an attractive source of revenue than an uncertain. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. 4. The most common route followed by NGOs is promotion of SHGs. highly competitive and increasingly difficult-to-raise donor funding. to many NGOs. B. The chickens will eventually come home to roost but in the first flush. Finally.Fund for Agricultural Development (IFAD). for whom access to small loans to meet dire emergencies is a valued outcome. Groups connote empowerment and organising women is a double bonus. and lately commercial banks.

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

Moreover. for they are using channels which were built at a significant cost to NGOs. both agri-input and processing companies such as EID Parry. the economic attractiveness of microfinance as a business is getting established and this is a sure step towards mainstreaming. it becomes imperative for them to expand their distribution channels as far and deep as possible. business. A real life Examples : Lakshmi. remittances and eventually mutual funds. trade. a 22-year-old school dropout. Finally. Lakshmi started an Internet kiosk in her village. Internet chat and 50 .It does not take much analysis to figure out that the market for financial services for the 50-60 million poor households of India. and one tends to exchange scale at the cost of objectives. bank-groups are motivated by a number of cross-selling opportunities in the market. Instead of getting married and starting a family like any other village girl of her age in India. So it needs to be watched carefully. fast-moving consumer goods (FMCG) companies such as Hindustan Levers. though the perceived risks are higher. offering services like e-mail. The traditional commercial markets of corporates. We know that mainstreaming is a mixed blessing. is a very large one. as in any emerging market. she wanted to set up on her own business. and now even housing and consumer finance are being sought by all the banks. coupled with about the same number who are technically above the poverty line but are severely under-served by the financial sector. funding agencies and/or the government. leading to price competition and wafer thin spreads. in the hope of capturing the entire financial services business of a household. and consumer durable companies such as Philips have realised the potential of this big market and are actively using SHGs as entry points. Since the larger banks are offering all these services now through their group companies. insurance. the spreads are much greater. for deposits. Some amount of free-riding is taking place here by companies. Further. lived in a remote village of Tamil Nadu. On the whole.

she started earning Rs. in the north of Andhra Pradesh. several rural women were able to move out of poverty.3500 a month from the store. a 29-year-old married woman with three children borrowed Rs. Apart from financial benefits. improve their communication skills and raise their position in society. 51 . Within a year. the initiatives helped the women to develop self confidence. The kiosk was partially financed by ICICI Bank and was set up in association with n-Logue Communications. With this money. a small village. She was a part of a self help group in Andhra Pradesh which received financial assistance from ICICI Bank.18. By becoming a part of self-help groups.000 to set up a small provision store in Kothaipalli. Apart from financial benefits. the initiatives helped the women to develop self confidence. By becoming a part of self-help groups. These are real-life examples to illustrate how the micro-lending initiatives of ICICI Bank affected the lives of poor women in on health and education. she was able to provide her children a good education at a local private school. several rural women were able to move out of poverty. Latha. improve their communication skills and raise their position in society.

the loan volumes and loan size is low. there is no reliable mechanism in the country for meeting the equity requirements of MFIs. An analysis of 36 leading MFIs by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. It has also been commented that MFIs pass on the higher cost of credit to their clients who are ‘interest insensitive’ for small loans but may not be so as loan sizes increase. As a result they have high debt equity ratios. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital.Chapter 8: Issues in Microfinance 1. is that they face a paucity of owned funds. It is. 2. which are on the growth path. Sustainability The first challenge relates to sustainability. therefore. This is partly explained by the fact that while the cost of supervision of credit is high. Presently. This is a critical constraint in their being able to scale up. necessary for MFIs to develop strategies for increasing the range and volume of their financial services. Lack of Capital The second area of concern for MFIs. MFI model is comparatively costlier in terms of delivery of financial services. The IPO issue by Mexico based ‘Compartamos’ was not accepted by purists as they thought it defied the mission of an MFI. 52 . The IPO also brought forth the issue of valuation of an MFI.

In the case of start up MFIs. with its strong supply chain logistics. using a book value multiple does not do justice to the underlying value of the business. ability to create microenterprise opportunities and willingness to nurture them. the e-choupal. This enables MFIs to increase their client base at no additional costs. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. would be keen on directing microfinance to such opportunities. BASIX extends working capital loans of 53 . The latter players who bring with them an understanding of similar client segments. ITC Limited.15 kgs per day. Such businesses may find complementarities between an MFI’s skills in management of credit processes and their own strengths in supply chain management. thus accentuating the negative rather than the positive. A book value multiplier to value start ups would decrease the value as the organization uses up capital to build its business. large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer. has started exploring synergies with financial service providers including MFIs through pilots with vegetable vendors and farmers.The book value multiple is currently the dominant valuation methodology in microfinance investments. Under this pilot. ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a microfinance organization in Hyderabad). 3. it works with twenty women head load vendors selling vegetables of around 10. Financial service delivery Another challenge faced by MFIs is the inability to access supply chain. Similarly. rural presence and an innovative transaction platform. Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation. start ups are loss making and hence the book value continually reduces over time until they hit break even point. Typically.

2. capacity building and business development support to the women.150 per day. However. 85% of the poorest clients served by microfinance are women. Making the Choupal Fresh stores available to the vendors. to design user-friendly pushcarts that can reduce the physical burden. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. Attracting the right talent proves difficult because candidates must have. this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets). women make up less than half of all microfinance staff members. a mindset that fits with the organization’s mission. while women are single there might be a greater willingness on the part of 54 . 4.. a pioneer in the field of design education and research.Rs. HR Issues Recruitment and retention is the major challenge faced by MFIs as they strive to reach more clients and expand their geographical scope. This has positive implications for quality of the produce sold to the end consumer. 3. For instance. augmenting incomes and reducing energy usage across the value chain. Many mainstream commercial banks are now entering microfinance. it has forged a partnership with National Institute of Design (NID). as a prerequisite.000/. ITC provides support through supply chain innovations by: 1.30-40 per day to an average of Rs. who are poaching staff from MFIs and MFIs are unable to retain them for other job opportunities. The women are able to replenish the stock from the stores as many times in the day as required. From an environmental point of view. Continuously experimenting to increase efficiency. for example. and fill even fewer of the senior management roles.10. The model augments the incomes of the vendors from around Rs. push carts are much more energy efficient as opposed to fixed format retail outlets. The challenge in most countries stems from cultural notions of women’s roles.

We have to somehow get people . it becomes unacceptable.without having to sit down at a table . Long distances and long hours away from the family are difficult for women to accommodate and for their families to understand. there is not sufficient understanding of the drivers of default and credit risk at the level of the individual. understand what insurance is.women’s families to let them work as front line staff. 5. and preferably one that has been engaged in financial transactions so that they have controls for managing cash and the ability to track different individuals. but as soon as they marry and certainly once they start having children. This has constrained the development of individual models of micro finance. Micro insurance companies offer minimal products and do not want to go forward and offer complex products that may respond better. there is strong need to enhance delivery channels. there is a need for market education. We have to counter that. people are willing to engage with them. The group lending models are contingent on the availability of skilled resources for group promotion and entail a gestation period of six months to one year. and why it benefits them. However. These delivery channels have been relatively weak so far. Micro insurance First big issue in the micro insurance sector is developing products that really respond to the needs of clients and in a way that is commercially viable. Micro insurance needs a delivery channel that has easy access to the low-income market. That will help to demystify micro insurance so that when agents come. Adverse selection and moral hazard The joint liability mechanism has been relied upon to overcome the twin issues of adverse selection and moral hazard. Secondly. The group model was an innovation to overcome the 55 . People either have no information about micro insurance or they have a negative attitude towards it. Thirdly.

Moving microfinance Forward: Ownership. Maria. Mas. Massachusetts.” In Craig Churchill. ed.specific issue of the quality of the portfolio. July. The Economics of Microfinance. “Types of Owners for microfinance Institutions. 8.P. Ignacio and Kabir Kumar. Toronto: Calmeadow. given the inability of the poor to offer collateral. 56 . Competition and Control of microfinance Institutions. 2008. 10. Banking on mobiles: why. 2006. Individual Micro lending Case Studies. Moving microfinance Forward: Ownership. 6. Creating a World Without Poverty: Social Business and the Future of Capitalism. it is important to proactively discover models that will enable direct finance to individuals. Joanna and Victoria White. Cambridge.. References 1. 9. 1998. Public Affairs. 5. Churchill. Beatriz Armendáriz & Jonathan Morduch. Strategies for poverty alleviation through dovetailing the potential of microfinance practices with non-timber forest products from dipterocarps: Lessons from India by B. 2008. The Future of microfinance in India: By Sukhwinder Singh Arora. What’s Wrong with Microfinance? Practical Action.” In Craig Churchill. New York. how and for whom? CGAP Focus Note #48. 2007. 2005. Competition and Control of microfinance Institutions.. Yunus. 1998. Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. from the perspective of scaling up micro financial services. ed. De Aghion. Dichter. Thomas and Malcolm Harper (eds). DFID. Craig. 3. Policy Division. Ledgerwood. The MIT Press. Otero. However. 4. 7. World Bank. “Private Equity Capital in the microfinance Industry. Muhammad. 2. Connell. Washington DC: microfinance Network. Forthcoming 1998. Washington DC: microfinance Network. Financial Sector Team. Martin. Pethiya.

Microfinance Institutions in India” 19. 2005 22. Managing Director.DFID. 2007 14. Annie Duflo. May. Centre for Micro Finance Research. Economic and Political Weekly. Microfinance Matters. 2005 23. 12. “Status of Microfinance in India 2006-2007”. Harvard Business Review. Genevieve Melford. February. Bindu Ananth and Soju Annie George. “Microfinance in India: Sectoral Issues and Challenges”. Piyush Tiwari and S M Fahad. “Microfinance Development Strategy for India”. Page 13. Economic Advisory Council to the Prime Minister. June. Managing Director. May. Microfinancial Services Team of Social Initiatives Group. Chairman. 2003 20. Report. NABARD. Shri Y S P Thorat. “Microfinance and its Future Directions”. NABARD. “Microfinance in India. Nathanael Goldberg.Discussion” 18.A Study of the Light and Shades” 16. August. “Business Basics at the Base of the Pyramid”. Nachiket Mor.Some Design Principles and a case study”. “Self Help Groups in India. “Rural Non Farm Economy: Access Factors”. Dr. 2007 13. Bindu Ananth. C Rangarajan. R Srinivasan and M S Sriram. October 2005 57 . 2006 17. 2008 15. EDA Rural Syatems Pvt Ltd in association with APMAS. Issue 17. “Inclusive Financial Systems. Shri Y S P Thorat. NABARD 24. Barbara Adolph. HDFC.The costs and benefits of transforming from an NGO to a NBFC”. Economic and Political Weekly. March 31. “Scaling up Microfinancial Services: An overview of challenges and Opportunities”. “ICICI Banks the poor in India”. Anil K Khandelwal. Raven Smith. 2005 21. November. “Innovation in Product Design. “ The Changing Face of Microfinance in India. “Concept paper. Vikram Akula. 2003 25. India microfinance Investment Environment Profile by Slavea Chankova.11. Credit Delivery and Technology to reach small farmers”. March 31. ICICI Bank. Hind Tazi and Shane Tomlonson. Research Co-ordinator.

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