A project report by Group 6, FYBBA- C

Introduction
Ten years into the second millennium and sixty five years after our India
gained independence, more than 37% of our country’s population lives
below the poverty line. More than 22% of the entire rural population and
15% of the urban population of India exists in this terrible financial
predicament. It is important to note that 30% of the country’s poor take
loans from MICROFINANCE INSTITUTIONS. This project gives a
comprehensive view of the status and contribution of this sector to our
economic growth and development. After much research, we have
identified the strategic plans followed by these path-breaking institutions
and analyzed their success with respect to generic management
strategies. The Indian microfinance industry is the world’s largest
microfinance industry. The objectives of these firms range from poverty
alleviation, women empowerment, promoting gender equality and
developing an entrepreneurial spirit within the population. With such
multi-faceted goals, STRATEGIC PLANNING becomes the foundation
on which all the business activities can be connected and aligned. A
strategic plan for such a unique business model must challenge
assumptions, gather input from the internal as well as external
environment and effective implementation. To get further insight into
these plans, we interviewed several experts, collected information from
reliable sources and ultimately focused our study on the working of
Hindusthan Microfinance Private Limited.
Methodology
Our group did a lot of research on the importance of strategic planning,
the types of strategic plans and the entire structural framework on
microfinance and its penetration in our country. For this purpose, we
studied numerous research papers, journals, business magazines and data
from the Microfinance Information Exchange.

Upon identifying the various types of microfinance firms, we

interviewed senior managers and employees in firms dealing with
microfinance. For this, we prepared a detailed questionnaire that
included questions on growth, marketing and organizational strategies as
well as the challenges and opportunities in microfinance today. We
visited a Post Office to inquire about the Small Savings Schemes, spoke
at length with a Senior Analyst from ICICI Microfinance and
interviewed the Managing Director as well as Vice President-Operations
of Hindusthan Microfinance Private Limited.

We decided to focus our research project to the workings of the latter

firm. After collecting all the relevant data, we conducted a
comprehensive analysis of the firm’s strategies. A SWOT analysis as
well as a PESTEL analysis has been thoroughly done to identify the
gaps and strengths of the firm. Upon brainstorming, we have also given
a few recommendations to the firm for superior performance.
Theories and Past Studies

 Theories:
Microfinance theoreticians have advanced two theories regarding
their aims-an economic and a psychological. The economic theory
treats microfinance institutions (MFIs) as infant industries, while
the psychological theory differentiates microfinance entrepreneurs
from traditional money lenders by portraying them as "social
consciousness driven people."
 Past Studies:

Global Partnerships Theory and Credit Lending Model

Global Partnerships expands opportunity for people living in poverty by

investing affordable capital and management expertise in select MFI
institutions (MFIs) in Latin America.
European Fund for Southeast Europe (EFSE)

Consulting services in credit risk and delinquency management for

leading rural MFI, including crisis management and loan portfolio
restructuring – Eastern Europe, 2009-2010

Analysis of root causes of high delinquency; reengineering of credit risk

management and loan collection (including the design of delinquency
policies and an arrears committee); development of risk procedure and
risk management reports; recommendations regarding development of
MIS reports to allow for appropriate risk management and loan portfolio
tracking; and training of credit staff and branch managers.

Private International Investment Group

Development of Business Plan for the establishment of a greenfield

commercial bank providing MSE and (home-collected) retail loans –
Russian Federation, 2009

Market review and competitive analysis; design of business strategy and

roll-out plan; development of operating model; financial modelling and
development of financial projections; and preparation of business plan
document.
Global Microfinance Group (GMG)

Establishment and development of a greenfield MFI – Argentina,

2004 to date
Design and establishment of greenfield microfinance institution,
including the establishment of lending operations (credit methodology,
operating model, incentive systems, policies and procedures, credit
process, loan collection, information systems, and so on); recruitment
and training of staff; implementation of proprietary credit information
system of GMG; senior management roles.

European Fund for Southeast Europe (EFSE)

Consulting services in support of the transformation of a leading

MFI into a regulated commercial bank – Eastern Europe, 2009
Gap analysis for transformation with special emphasis on organisational,
legal and financial aspects; feasibility check including development of
strategy and action plan for transformation; assistance in the elaboration
of business plan.
Microfinance: An Overview

Microfinance refers to a movement that envisions a world in which low-

income households have permanent access to a range of high quality
financial services to finance their income-producing activities, build
assets, stabilize consumption, and protect against risks. These services
are not limited to credit, but include savings, insurance, and money
transfers. Microfinance has widely helped the poor and provided them
the opportunities for starting their own business or enterprise by lending
a loan at minimal collateral. Microfinance clients are usually self-
employed, household-based entrepreneurs. Their diverse
“microenterprises” include small retail shops, street vending, artisanal
manufacture, and service provision. In rural areas, micro-entrepreneurs
often have small income-generating activities such as food processing
and trade; some but far from all are farmers. They take financial
intermediation, like this, seriously and devote considerable effort to
finding workable solutions.
Microfinance is a development strategy that provides credit and savings
services to the poor, particularly rural women, for income-generating
projects. In addition to providing economic benefits, microfinance is
also an effective vehicle for women’s empowerment.
Micro-financing Institutions are of the following types:

Government based Profit making Institute, Government based non-Profit

making Institute, A Profit making NGO, A Non-profit NGO. Be it any
of these institutions, the basic strategies are similar.
The Case For Microfinance Firms in India

According to the World Bank, India is categorized as a “low-income”

country. 70% of the population resides in rural areas, of which 60% of
people depend on agriculture. Consequently, there is chronic under-
employment and per capita income is only $ 3262. The country is a
victim of abject poverty,low rate of education, low sex ratio, and
exploitation. The major factor for such high incidence of rural poverty is
the low asset base. Rural people have very limited access to
institutionalized credit. Microfinance, when strategically planned and
implemented, can be an important tool for economic growth. A recent
survey conducted showed that there are approximately 147 microfinance
firms functioning well in India that are able to satisfy the needs of
people.

To focus our study on the strategic plans followed by microfinance

firms, we approached a new microfinance institution, Hindustan
Microfinance Private Limited that operates in Mumbai and provides
various small loans to people unable to attain credit at larger banks.
This bank gives loans to those who want to expand their business, start a
business or use money for emergent matters and helps clients improve
their financial management skills.
Hindusthan Microfinance Private Limited: A Company Profile
Mission: To offer credit and other financial products to the urban poor
of India.

Vision: To provide financial services to 200,000 clients by 2013 and

500,00 clients by 2015

Type of MFI: Non Banking Financial Corporation

Founded In: March 2008

Founder: Mr. Anil Jadhav

Clientele: 100% women

Strategic Plans of Microfinance Firms

There are various kinds of strategies that are implemented by

organizations for efficient running and effective achievement of goals.
They can be for overall growth, marketing, finance, personnel, product
mix, organizational or price. Here, we take a look at the strategies
followed by MFIs and more specifically, whether Hindusthan
Microfinance Private Limited executes these plans.

Growth Strategies:

In growing and competitive markets MFIs are likely to take more risks
to acquire new customers and expand their product offerings.
Hindusthan Microfinance Private Limited(HMPL) has adopted
ingredients from the Grameen Bank model. Earlier, microfinance
concentrated on rural areas, but off late, there has been a significant
increase in the microfinance activities provided to the urban areas. Even
the involvement of females in microfinance has risen from 20% to 97%
over a period of 33 years. HMPL currently does not engage in non-
financial services but seeing a demand for the same, plans to introduce
them in the near future. While HMPL concentrates on providing
financial resources only to the urban poor as of now, it plans to diversify
into the rural sector in Maharashtra by the month of January, 2011.
For the year 2009, microfinance in India has registered a growth rate of
a whopping 30% and world wide 13%.One of the risks of high-powered
growth is that MFIs may neglect customer services and relationships,
even losing the face-to-face relationships with their clients that are
critical to credit quality.

Market Penetration of HMPL from 2009-2010; Estimated Market

Penetration by March 2011
Financial Strategies:
Microcredit refers to very small loans given to those
who lack financial collateral and steady employment
to spur entrepreneurship. It is a very important part
of every microfinance firm’s financial strategy and
aims bringing it into mainstream financial systems.
HMPL provides credit loans to a group of 5-6
women at a time. The interest rates on the loans are
very high (29%- 35%) mainly due to the high
operational costs, low primary lending rates and low
return on equity. As per company policy, if the
borrower dies, the firm collects Rs. 100 from everyone who is utilizing
the services and the dead person’s account is written off. The company
does not take any deposits from its customers.

Organization Strategies:
Over the past few years, with evolvement of Microfinance in our
country, there are various changes, which have taken place
organizationally. While earlier microfinance operated only with a social
objective, now more equity and funding is coming in that influences
their overall strategies. HMPL, primarily a microfinance institution has
sought “Non Banking Financial Company” status from RBI to get wide
access to funding, including bank finance. Partners include HDFC Bank,
Yes Bank, ABN Amro etc. However they still rely heavily on donations
from charities and trusts for adequate funding. The clientele is 100%
women who are known to be more responsible with money in rural
areas. The most sustainable strategy is to train the community in
leadership and managerial functions for them to become effective
participants. The organization is well-placed in terms of its reputation in
the industry as an organization with best practices.

Product Mix:
HMPL sells products ranging from a price of Rs. 5,000 to 50,000. The
ticket size is considerably low, considering there is limited financial
collateral provided by the clients. This also eases loan repayment.
HMPL follows a Joint Liability Group model like Grameen Bank, under

which, an average of 5 women form a group, and each of them take

liability for each other . Social collateral, is thus high and members
persuade the defaulter to repay the loan or the liability of the loan falls
on the group.
Personnel Strategies:

Human Resource has largely been a neglected area in the microfinance

institutions world-wide yet, the proper placement of right people in right
jobs is essential. HMPL selects field officers who have in-depth
knowledge of their neighboring areas and are trustworthy enough to
handle money and take up the responsibility of a few villages at a time.
Even individuals who have only passed their 10th Board Examination are
given specialized training to effectively carry out the work and cut costs.
High salaries are given to the top management for strategizing and
designing plans.

Marketing Strategies:

Microfinance firms adopt different market strategies depending on their

scale of business. While large scale operating MFI’s would use
newspapers, magazines and television, small-based firms cannot afford
such activities. HMPL, a relatively small firm, resorts to mass meetings
and personal marketing on a regular basis with its clients. They use
social media platforms such as Facebook to advertise, and also have a
regular newsletter Hindusthan Monthly coming out soon.
 Comprehensive Analysis:Strategic Plans of Microfinance Firm

S.W.O.T Analysis of Hindusthan Microfinance Private Ltd.

Strengths: Weaknesses:

 Good relationship with other local banks
for credit dependency
 No collateral security
 Variety of financial products
 Being a NBFC, easy access to funds.
 Greater accountability, transparency,
corporate governance
 High operational and human resource costs
 Heavy dependence on loans from donors and
charitable organizations-no financial stability
 Loan recovery from the destitute
 Lack of legal regulations
 Non-financial services unavailable

Opportunities: Threats:
 Suburban Areas provide a good potential  Political interference
for future growth of company(most
 Shortage of Liquidity
population below BPL)
 Fluctuations in foreign currency, if dependent
 Introduction of new savings and credit
on foreign aid
programs
 Increased foreign aid
 Raising money by listing shares in stock
market
 Expansion in the north east section of
India
 Linking bank with self-help groups
 PESTEL Analysis:

The Macroenvironmental factors Hindusthan Microfinance

Private Limited must take into account while strategic planning
Political Factors:
1) Even after 6 decades of independence, the government and the RBI
have not been efficient enough to make laws for MFIs so transparency is
still missing. On charges of coercion due to non-payment, Andhra
Pradesh Microfinance Ordinance was passed on October 15, 2010. The
Ordinance requires MFIs to register with the state government and gives
the state government the power to shut down MFI activity. A number of
NBFCs have been affected by the ordinance.
2) There is political stress from the parties in the neighborhood on MFIs
to loan individuals who are not qualified for the loans (financially well
off).
3) Government often intervenes with MFIs because of heavy interest
rates charged by MFIs.

Economic Factors:
A Micro finance Institution has more expenses compared to a normal
commercial bank. The same amount of money is being distributed
among a number of clients as compared to in a commercial bank. Thus
more space, stationery, efforts are required to store the data which in
turn increases the expense. To cover these expenses, the interest rates
charged are exorbitant.
Social Factors:
1) The clients that most of the NGOs focus on are women. Women
empowerment through Microfinance is the main mission of such firms.
They not only provide capital but also basic knowledge of starting any
business/ enterprise on their own. Later on these women can go and
consult other commercial banks for bigger loans.
2) Many times, the better halves of such deprived women use them as a
source of retrieving money from MFIs and use it for their own personal
whims and fancies.
3) Certain sectors of the Indian society are still not broad minded enough
to let women come forward and start their own business/enterprise. Thus
MFIs lose most of their clientele due to such social backwardness.
4) MFIs provide loans to people with very low collateral. There are
individuals who take loans from MFIs but do not utilize it for the stated
purpose or repay it on time with the proper interest rates turning into bad
debts and thus a loss for the Institution.
Technological Factors:
Technology can reduce transaction costs and improve transparency in
delivering financial services, both of which can translate into increased
access and lower costs for many lower-income clients. Challenges
include the high cost and limited availability of existing technological
solutions, lack of widely available local technical support to support
MIS software, consumer adoption rates of technology, lack of basic
communications infrastructure in many remote places etc. Despite the
appeal of advanced delivery technologies, relatively few financial
institutions have successfully deployed them to reach poor and low-
income clients. Developing a solid management information system still
remains one of the most important tasks facing microfinance institutions,
particularly those scaling up.

Environment Factors:
India has a history of highly innovative watershed projects in which
downstream landholders share benefits by compensating landless people
upstream for providing an environmental service. Most current projects,
however, take alternative measures that ignore the issue of
environmental services. Evidence from 70 villages in Maharashtra
suggests the presence of poverty alleviation trade-offs, highlighting the
potential value of more explicitly addressing compensation for
environmental services.

Legal Factors:
As of now no laws have been passed regarding MFIs. But two-three
months down the line, laws and amendments are prone to take place.
The Indian government proposes to introduce a bill to regulate
microfinance institutions. India's central bank currently does not regulate
interest rates charged by micro lenders, but issues a fair practice code on
interest rates to non-banking financial companies.The Department of
Financial Services proposes to introduce the Micro Finance
(Development & Regulation) Bill, 2010, after taking into account the
views of RBI (Reserve Bank of India) and the Malegam Committee
recommendations.

Comparison between Commercial Banks and Microfinance Banks

Microfinance is the provision

of financial services to low-
A commercial bank is a type
income clients or solidarity
of financial intermediary and a type
lending groups including consumers
of bank. Commercial banking is also
and the self-employed, who
known as business banking. It is a
traditionally lack access
bank that provides checking accounts,
to banking and related services.
savings accounts, and money market
accounts and that accepts time
deposits.
They give loans to self help groups
without taking a collateral.
They give loans only on collateral
basis.

Microfinance companies are scarce

and not readily available
Commercial banks are readily
available in all parts of country
They provide loans at nominal rate of
They provide loans at a high rate of
interest
interest

Ex-hindusthan microfinance
Ex-icicibank,hdfc bank etc.
pvtltd,grameen bank etc.
Recommendations for Hindusthan Microfinance Private Limited

 The firm must expand to rural and semi-rural areas in the state of
Maharashtra as soon as possible as over 20% of the population in
these areas lives below the poverty line.
 The firm must conduct market surveys on a regular basis to assess
the growing needs of clients. They must make an effort to deliver
non-financial services such as business training, management of
family budget, literacy training, health services, access to social
workers, gender sensitization to facilitate financial sustainability.
 With the number of mobile handsets increasing in India, they
should explore Credit Sms-the future of microfinance as a viable
option. By helping MFIs integrate mobile payments into their
business strategies, it will eliminate geographic barriers to
financial inclusion while simultaneously allowing users to generate
robust auditing trails and client credit histories.
Conclusion

We firmly believe that an integrated approach to servicing clients can

enhance microfinance’s effectiveness as a poverty alleviation tool. The
fight to alleviate poverty is too great a task for anyone or any one
discipline to combat it alone. As an entrenched and recognized leader in
this mission, microfinance can serve as a bridge beyond banking and
development. It can be the link that brings together the services and
products available today to the people who need them most. Only
through a collective effort will we have the best chance of succeeding.
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