1.

Introduction

A. About Microfinance: Microfinance is a general term to describe financial services to

low-income individuals or to those who do not have access to typical banking services.

Microfinance is also the idea that low-income individuals are capable of lifting themselves out of
poverty if given access to financial services. While some studies indicate that microfinance can
play a role in the battle against poverty, it is also recognized that is not always the appropriate
method, and that it should never be seen as the only tool for ending poverty.

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 on-lending, and some banks have partnered
with public organizations or made small inroads themselves in providing such services. This has
resulted in a rather broad definition of microfinance as any activity that targets poor and low-
income individuals for the provision of financial services. The range of activities undertaken in
microfinance include group lending, individual lending, the provision of savings and insurance,
capacity building, and agricultural business development services. Whatever the form of activity
however, the overarching goal that unifies all actors in the provision of microfinance is the
creation of social value.

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

Marguerite S. Robinson.

Overview

A. 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 products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards”.

"The poor stay poor, not because they are lazy but because they have no access to capital.

"Microfinance is the supply of loans, savings, and other basic financial services to the poor."

As these financial services usually involve small amounts of money - small loans, small savings,
etc. - the term "microfinance" helps to differentiate these services from those which formal
banks provide

It's easy to imagine poor people don't need financial services, but when you think about it they
are using these services already, although they might look a little different.

"Poor people save all the time, although mostly in informal ways. They invest in assets such as
gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for
cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the
garden or stash it under the mattress. They participate in informal savings groups where
everyone contributes a small amount of cash each day, week, or month, and is successively
awarded the pot on a rotating basis. Some of these groups allow members to borrow from the
pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to
keep it safe.

"However widely used, informal savings mechanisms have serious limitations. It is not possible,
for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-
kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves,
or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate
limited amounts of money. Moreover, these groups often require rigid amounts of money at set
intervals and do not react to changes in their members' ability to save. Perhaps most
importantly, the poor are more likely to lose their money through fraud or mismanagement in
informal savings arrangements than are depositors in formal financial institutions.

“Poor rarely access services through the formal financial sector. They address their need for
financial services through a variety of financial relationships, mostly informal."

Role of Microfinance:

The micro credit of microfinance prename was first initiated in the year 1976 in Bangladesh with
promise of providing credit to the poor without collateral , alleviating poverty and unleashing
human creativity and endeavor of the poor people. Microfinance impact studies have
demonstrated that
1. Microfinance helps poor households meet basic needs and protects them against risks.

2. The use of financial services by low-income households leads to improvements in household

economic welfare and enterprise stability and growth.

3. By supporting women’s economic participation, microfinance empowers women, thereby

promoting gender-equity and improving household well being.

4. The level of impact relates to the length of time clients have had access to financial services.

Difference between micro credit and microfinance:

Micro credit refers to very small loans for unsalaried borrowers with little or no collateral,
provided by legally registered institutions. Currently, consumer credit provided to salaried
workers based on automated credit scoring is usually not included in the definition of micro
credit, although this may change.
Microfinance typically refers to micro credit, savings, insurance, money transfers, and other
financial products targeted at poor and low-income people.

Borrowers:

Most micro credit borrowers have micro enterprises—unsalaried, informal income-generating

activities. However, micro loans may not predominantly be used to start or finance micro
enterprises. Scattered research suggests that only half or less of loan proceeds are used for
business purposes. The remainder supports a wide range of household cash management
needs, including stabilizing consumption and spreading out large, lumpy cash needs like
education fees, medical expenses, or lifecycle events such as weddings and funerals.

Some MFIs provide non-financial products, such as business development or health services.
Commercial and government-owned banks that offer microfinance services are frequently
referred to as MFIs, even though only a portion of their assets may be committed to financial
services to the poor.

Activities in Microfinance:

Micro credit: It is a small amount of money loaned to a client by a bank or other institution.
Micro credit can be offered, often without collateral, to an individual or through group lending.
Micro savings: These are deposit services that allow one to save small amounts of money for
future use. Often without minimum balance requirements, these savings accounts allow
households to save in order to meet unexpected expenses and plan for future expenses Micro
insurance: It is a system by which people, 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, health or the ability to work.

Remittances: These are transfer of funds from people in one place to people in another,
usually across borders to family and friends. Compared with other sources of capital that can
fluctuate depending on the political or economic climate, remittances are a relatively steady
source of funds.

Product Design: The starting point is: how do MFIs decide what product s to offer? The actual
loan products need to be designed according to the demand of the target market. Besides the
important question of what risks to cover, organizations also have to decide whether they want
to bundle many different benefits into one basket policy, or whether it is more appropriate to
keep the product simple. For marketing purposes, MFI‘s sometimes prefer the basket cover,
since it can make the policies sound comprehensive, but is that the right approach for the low-
income market? After picking products, one must also understand how they are priced. What
assumptions do the organizations make with regard to operating costs, risk premiums, and
reinsurance, and how did they come to those conclusions? Would their clients be willing to pay
more for greater benefits? From price, the logical next set of questions involves efficiency.
Indeed, given the relative high costs of delivering large volumes of small policies, maximizing
efficiency is a critical strategy to ensuring that the products are affordable to the low-income
market. One way is to make the products mandatory, which increases volumes, reduces
transaction costs and minimizes adverse selection. What does an organization lose by offering
mandatory insurance, and how does it overcome the disadvantages? MFI‘s can combine a
mandatory product with some voluntary features to make the service more us to mar-oriented
while.

Techniques of Product Design: To design a loan product to meet borrower needs it is

important to understand the cash pattern of the borrowers. Cash pattern is important so far as
they affect the debt capacity of the borrowers. Lenders must ensure that borrowers have
sufficient cash inflow to cover loan payments when they are due efficiency depends less on the
delivery model than on the simplicity of the product or product menu. Simple products work best
because they are easier to administer and easier for clients to understand. Another efficiency
strategy is to use technology to reduce paperwork, manual processing and errors.

MFIs need to conduct a costing analysis to determine how much they need to earn in
commission to cover their administrative expenses.
 MFI’s Products and its Management:

Product & services of Microfinance

Financial Services Other Financial Services Non Financial Services

1. Credit Services-i Small Micro-insurance, Life Family Health and Sanitation

Credit, Small Business Credit. Insurance , Health Insurance , Education, Financial
Loan for Housing, Education, Education, Micro-entrepreneur
2. Deposit Services - Health. Training.
Voluntari Savings Services,
Manda tory Savings.

B. The micro-credits model:

*The model is fairly straightforward and simple.

*Focus on jump-starting self-employment, providing the capital for poor women to use their
innate "survival skills" to pull themselves out of poverty.
*Lend to women in small groups (credit circles), say of five or seven.
* Make loans of small amounts to two out of five.
* The three who have not received loans will be eligible only when this first round of loans has
been repaid.
* Draw up a weekly or bi-weekly repayment schedule.
* In case any member defaults the entire circle is denied access to credit.
* Banks have been given freedom to formulate their own lending norms keeping in view ground
realities. They have been asked to devise appropriate loan and savings products and the
related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace
period, margins, etc.

2. Government’s role supporting microfinance

Government’s most important role is not provision of retail credit services, for reasons
mentioned in Government can contribute most effectively by:

*Setting sound macroeconomic policy that provides stability and low inflation.

*Avoiding interest rate ceilings - when governments set interest rate limits, political factors
usually result in limits that are too low to permit sustainable delivery of credit that involves high
administrative costs—such as tiny loans for poor people. Such ceilings often have the
announced intention of protecting the poor, but are more likely to choke off the supply of credit.

*Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has
experience with sustainable microfinance delivery.
 *Creating government wholesale funds to support retail MFIs if funds can be insulated from
politics, and they can hire and protect strong technical management and avoid disbursement
pressure that force fund to support unpromising MFIs.

3. Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and women’s

empowerment as well as poor development and civil society strengthening. 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.

Microfinance programs targeting women became a major plank of poverty alleviation and
gender strategies in the 1990s. 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.

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

The SHG system has proven to be very relevant and effective in offering women the possibility
to break gradually away from exploitation and isolation.

Savings services help poor people: Savings has been called the “forgotten half of
microfinance.” Most poor people now use informal mechanisms to save because they lack
access to good formal deposit services,. They may tuck cash under the mattress; buy animals
or jewelry that can be sold off later, or stockpile inventory or building materials.

These savings methods tend to be risky—cash can be stolen, animals can get sick, and
neighbors can run off. Often they are illiquid as well – one cannot sell just the cow’s leg when
one needs a small amount of cash. Poor people want secure, convenient deposit services that
allow for small balances and easy access to funds. MFIs that offer good savings services
usually attract far more savers than borrowers.

Women’s indicators of empowerment through microfinance:

*Ability to save and access loans

*Opportunity to undertake an economic activity

*Mobility-Opportunity to visit nearby towns

*Awareness- local issues, MFI procedures, banking transactions

*Skills for income generation

*Decision making within the household

* Group mobilization in support of individual clients- action on.

The Need in India

India is said to be the home of one third of the world’s poor; official estimates range from 26 to
50 percent of the more than one billion population.

• About 87 percent of the poorest households do not have access to credit.

• The demand for micro credit has been estimated at up to $30 billion; the supply is less than
$2.2 billion combined by all involved in the sector. Due to the sheer size of the population living
in poverty, 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.

Microfinance can also be distinguished from charity. It is better to provide grants to families who
are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay
a loan. This situation can occur for example, in a war zone or after a natural disaster.

While India is one of the fastest growing economies in the world, poverty runs deep
throughout country. About two thirds of India’s more than 1billion people live in rural
areas and almost 170 million of them are poor.
For more than 21 percent of them, poverty is a chronic condition. Three out of four of
India’s poor live in rural areas of the country. Poverty is deepest among scheduled castes
and tribes in the country’s rural areas.

The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks
linkage program for over a decade now. As the formal banking system already has a vast
branch network in rural areas, it was perhaps wise to find ways and means to improve the
access of rural poor to the existing banking network. This was tried by routing financial.

Indian microfinance is poised for continued growth and high valuation but faces pressing
challenges and opportunities that—left unaddressed—could negatively impact the long-term
future of the industry.

The industry needs to move past a single-minded focus on scale, expand the depth and breadth
of products and services offered, and focus on the double bottom line and over indebtedness to
effectively address the risks facing the industry.

1 . Micro-Financing Regulation in India

Advantage of Regulation:
 Following are the advantages and benefits of regulation and supervision of
/MFIs:

i. Protects the interest of the depositors;

ii. Put in place prudential norms, standards and practices;
iii. Provides sufficient information about the true risks faced by the banks/MFIs;
iv. Promoters systemic stability and thereby sustains public confidence in the banks/MFIs;
v. Prevents a bank’s/MFI’s failure/potential dangers through timely interventions;
vi. Penalizes the violations, misconducts, non-compliance to the norms of behavior;
vii. Provides invaluable advisory inputs for problem-solving and overall improvement of
the banks/MFIs;
viii. Promoters safe, strong and sound banking/MF system and effective banking/MF
policy and
ix. Promotes and enhances orderly economic growth and development.

A. Unified Regulation System: 8.18 at present, all the regulatory aspects of

microfinance are not centralized. For example, while the Rural Planning and Credit
Department (RPCD) in RBI looks after Rural lending, MF-NBFCs are under the control of
the Department of Non-Banking Supervision (DNBS) and External Commercial
Borrowings are looked after by the Foreign Exchange Department. The Committee feels
that RBI may consider bringing all regulatory aspects of microfinance under a single,
mechanism. Further, supervision Of MF-NBFCs could be delegated to NABARD by RBI.

Legal forms of MFIs in India:

MFIs and Legal Forms: With the current phase of expansion of the SHG – Bank linkage
programmed and other MF initiatives in the country, the informal micro finance sector in India is
now beginning to evolve. The MFIs in India can be broadly sub-divided into three categories of
organizational forms as given in Table 1. While there is no published data on private MFIs
operating in the country, the number of MFIs is estimated to be around 800. However, not more
than 10 MFIs are reported to have an outreach of 100,000 micro finance clients. An
overwhelming majority of MFIs are operating on a smaller scale with clients ranging Between
500 to 1500 per MFI. The geographical distribution of MFIs is very much lopsided with
concentration in the southern India where the rural branch network of formal banks is excellent.
It is estimated that the share of MFIs in the total micro credit portfolio of formal & informal
institutions is about 8 per cent.

*Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act 1882
*Non profit companies governed by section 25 of the companies act, 1956
*For profit MFIs regulated by Indian companies act, 1956
*NBFC governed by RBI act, 1934.
*Cooperative societies by cooperative societies act enacted by state government.

Legal Forms of MFIs in India:

Types of MFIs Estimated Legal Acts under which Registered

Number*
1.  Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or similar
Provincial Acts
a.) NGO - MFIs Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956
2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative Societies Act
a.) Mutually Aided Cooperative enacted by State Government
Societies (MACS) and similarly set
up institutions
3.  For Profit MFIs 6 Indian Companies Act, 1956

a.) Non-Banking Financial Reserve Bank of India Act, 1934

Companies (NBFCs)
Total 700 - 800  
* The estimated number includes only those MFIs, which are actually undertaking lending
activity.

 
4. Micro Finance Models

A. Microfinance Providers:

a. Microfinance Institutions: A microfinance institution (MFI) is an

organization that provides microfinance services.
MFIs range from small non-profit organizations to large commercial banks. Most MFIs
started as not-for-profit organizations like NGOs (non-governmental organizations),
credit unions and other financial cooperatives, and state-owned development and postal
savings banks. An increasing number of MFIs are now organized as for-profit entities,
often because it is a requirement to obtaining a license from banking authorities to offer
savings services. For-profit MFIs may be organized as Non-Banking Financial
Companies (NBFCs), commercial banks that specialize in microfinance, or microfinance
departments of full-service banks.
The micro finance service providers include apex institutions like National Bank for Agriculture
and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and,
Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks,
and, Cooperative banks provide micro finance services. Today, there are about 60,000 retail
credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of
district level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs) and
over 30,000 rural and semi-urban branches of commercial banks besides almost 90,000
cooperatives credit societies at the village level. On an average, there is at least one retail credit
outlet for about 5,000 rural people. This physical reaching out to the far-flung areas of the
country to provide savings, credit and other banking services to the rural society is an
unparalleled achievement of the Indian banking system. In the this paper an attempt is made to
deal with various aspects relating to emergence of private micro finance industry in the context
of prevailing legal and regulatory environment for private sector rural and micro finance
operators.

b. For NGOs:1. The field of development itself expands and shifts emphasis with the
pull of ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources
required are small, entry and exit are easy, tasks are (perceived to be) simple and people’s
acceptance is high – all characteristics (real or presumed) of microfinance.

2. Canvassing by various actors, including the National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of
Women’s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of
People’s Action and Rural Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN),
various donor funded programmes especially by the International Fund for Agricultural
Development (IFAD), United Nations Development Programme (UNDP), World Bank and
Department for International Development, UK (DFID)], and lately commercial banks, has
greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too
have been funding microfinance projects. One might call it the supply push.

C. Service Company Model: In this context, the Service Company Model developed by
ACCION and used in some of the Latin American Countries is interesting. The model may hold
significant interest for state owned banks and private banks with large branch networks. Under
this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in hand with
that MFI to extend loans and other services. On paper, the model is similar to the partnership
model: the MFI originates.

5. Coordinating Microfinance Efforts in India

NABARD coordinates the microfinance activities in India at international/ national/ state / district
levels. These include organizing international/national Workshops, Seminars, etc for experience
sharing, Organizing National and State level Meets of Bankers and NGOs etc .Dissemination of
best practices in SHG / microfinance.

A. Other Initiatives: Micro enterprise Development Programmer (MEDP) for Matured

SHGs

The progression of SHG members to take up micro enterprise involves intensive training and
hand holding on various aspects including understanding market, potential mapping and
ultimately fine tuning skills and entrepreneurship to manage the enterprise. Hence, a separate,
specific and focused skill-building programme ‘Micro Enterprise Development Programmed
(MEDP)’ has been formulated.

This involves organizing short duration, location specific programmers on skill up gradation /
development for setting up sustainable micro-enterprises by matured SHG members. The
duration of training programme can vary between 3 to 13 days, depending upon the objective
and nature of training. The training may be conducted by agencies that have background and
professional competency in the field of micro enterprise Development with an expertise in skill
development.

B. Scheme for Capital/ Equity Support to Micro-Finance Institutions (MFIs) from

MFDEF: The scheme attempts to provide capital/equity support to Micro Finance
Institutions (MFIs) so as to enable them to leverage capital/equity for accessing
commercial and other funds from banks, for providing financial services at an affordable
cost to the poor, and to enable MFIs to achieve sustainability in their credit operations
over a period of 3-5 years.

C. Scheme for financial assistance to banks/ MFIs for rating of Micro Finance

Institutions (MFIs): In order to identify MFIs, classify and rate such institutions
and empower them to intermediate between the lending banks and the clients,
NABARD has decided to extend financial assistance to Commercial Banks and
Regional Rural Banks by way of grant. The banks can avail the services of credit
rating agencies, M-CRIL, ICRA, CARE and Planet Finance in addition to CRISIL
for rating of MFIs. The financial assistance by way of grant for meeting the cost
of rating of MFIs would be met by NABARD to the extent of 100% of the total
professional fees subject to a maximum of Rs.3,00,000/-/-. The remaining cost
would be borne by the concerned MFI. 

The cost of local hospitality (including boarding and lodging) towards field visit of the
team from the credit rating Agency, as a part of the rating exercise, would also be borne
by the MFI. Those MFIs which have a minimum loan outstanding of more than Rs.
50.00 lakh (Rupees fifty lakh only) and maximum of Rs 10 crore (Rupees Ten crore
only) would be considered for rating and support under the scheme. Financial
assistance by way of grant would be available only for the first rating of the MFI. 

MFIs availing Capital Support and/or Revolving Fund Assistance from NABARD are also eligible
for re-imbursement of 50% of the cost of professional fee charged by Credit Rating Agency for
second rating subject to a maximum of Rs.1.50 lakh (i.e 50% of Rs.3 lakh). This will be in
addition to the re-imbursement of professional fee for first rating of the MFI.

D. Refinance support to banks for financing MFIs: The scheme is to provide 100%
refinance to banks for financing MFIs. Interest rate on refinance to Commercial Banks
and Regional Rural Banks on their loans to MFIs for on lending to clients will be at 3%
less than that charged by banks subject to minimum interest rate of 7.5% for all regions
and all eligible purposes.  The revised rate of interest is applicable to refinance
disbursed on or after 01 March 2010.

Source: NABARD website

6. Microfinance Strategic

Strategic Management: Strategic management is a field that deals with the major intended and
emergent initiatives taken by general manager on behalf of owners, involving utilization of
resources, to enhance the performance of rams in their external environments. It entails.
Understanding microfinance strategies: This report explores strategic issues shaping the
future of the MFI sector in India.

The study approached CEOs of select MFIs with a set of issues ranging from concerns to
competition and sought their opinions about future strategies. The report draws from their
responses, and states that:

 Future strategy is about being strong on processes and being overtly client-centric;
 Success is a prudential combination of three factors, namely, culture, beliefs and
aspirations;
 Culture is about the degree of trust rather than the rate of interest;
 Risk management systems of economically weaker families are built on their beliefs
about dependability and access;
 Micro credit stories have revealed ingenious ways that clients have used their loans for
purposes that satisfied their aspirations.

Finally, the sector, at about Rs. 14,000 crore (approximately US$3 bn) looks large, but is small
by any business scale. Competition and unhealthy practices are overshadowing the good work
and reputation earned over many years. MFIs in India need to overcome these challenges in the
future.

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, NGOs, NABARD, 1995.

The National Microfinance Taskforce, 1999.Working Group on Financial Flows to the Informal
Sector (set up by PMO), 2002.Microfinance Development and Equity Fund, NABARD,
2005.Working group on Financing NBFCs by Banks- RBI.

A. Product-market matrix:

A market penetration strategy is a business-as-usual strategy, where the MFI focuses on

achieving growth by selling existing products in existing markets. This can be done through
more competitive pricing strategies, increased promotional activities, and more liberal terms and
conditions.

For example, the MFI may develop strategic alliances to begin

*Adapted from Ansoff 1957.

B. The BCG Growth-Share Matrix:

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce

Henderson of the Boston Consulting Group in the early 1970's. It is based on the
observation that a company's business units can be classified into four categories based on
combinations of market growth and market share relative to the largest competitor, hence
the name "growth-share". Market growth serves as a proxy for industry attractiveness, and
relative market share serves as a proxy for competitive advantage. The growth-share
matrix thus maps the business unit positions within these two important determinants of
profitability.
BCG Growth-Share Matrix

The four categories are:

Dogs - Dogs have low market share and a low growth rate and thus neither generate nor
consume a large amount of cash. However, dogs are cash traps because of the money tied
up in a business that has little potential. Such businesses are candidates for divestiture.

Question marks - Question marks are growing rapidly and thus consume large amounts of
cash, but because they have low market shares they do not generate much cash. The
result is large net cash consumption. A question mark (also known as a "problem child")
has the potential to gain market share and become a star, and eventually a cash cow when
the market growth slows. If the question mark does not succeed in becoming the market
leader, then after perhaps years of cash consumption it will degenerate into a dog when the
market growth declines. Question marks must be analyzed carefully in order to determine
whether they are worth the investment required to grow market share.

Stars - Stars generate large amounts of cash because of their strong relative market share,
but also consume large amounts of cash because of their high growth rate; therefore the
cash in each direction approximately nets out.
If a star can maintain its large market share, it will become a cash cow when the market
growth rate declines. The portfolio of a diversified company always should have stars that
will become the next cash cows and ensure future cash generation.

Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is
greater than the market growth rate, and thus generate more cash than they consume.
Such business units should be "milked", extracting the profits and investing as little cash as
possible. Cash cows provide the cash required to turn question marks into market leaders,
to cover the administrative costs of the company, to fund research and development, to
service the corporate debt, and to pay dividends to shareholders. Because the cash cow
generates a relatively stable cash flow, its value can be determined with reasonable
accuracy by calculating the present value of its cash stream using a discounted cash flow
analysis.

Limitations

The growth-share matrix once was used widely, but has since faded from popularity as
more comprehensive models have been developed. Some of its weaknesses are:
Market growth rate is only one factor in industry attractiveness, and relative market share is
only one factor in competitive advantage. The growth-share matrix overlooks many other
factors in these two important determinants of profitability. The framework assumes that
each business unit is independent of the others. In some cases, Microfinance business unit
that is a "dog" may be helping other business units gain a competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market. A business
unit may dominate its small niche, but have very low market share in the overall industry. In
such a case, the definition of the market can make the difference between a dog and a
cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool or
viewing a corporation's business portfolio at a glance, and may serve as a starting point for
discussing resource allocation among strategic business units.

Microfinance Management:

A. Objectives: The programmer aims at enabling the participants to gain a clear

understanding of various policies, conceptual, and operational issues involved in
developing effective and successful microfinance interventions.
 B. Innovative Methodologies: Tiny amount of loan to large number of borrowers at their
doorstep is a costly operation compared to revenue income. Cost reduction is also an
essential element in microfinance operation. Reducing cost can be possible either
offering larger loan size or by innovating no conventional Management which is less
costly.

The essences of innovative management are as follows:

1. Specialized operation.

2. Documentation of essential information only.

3. Simple product, simple loan application and verification process.

4. Absence of grant guarantee.

5. Staff recruitment in no conventional manner.

6. On the job training (each one teaches one).

7. Simple standard loan register along with ledger and cash book abandoning the
bookkeeper/cashier.

8. Standard furniture, fixture and collective use of facilities in the office.

9. Decentralized branch structure.

10. Branch level financial planning.

11. Strong monitoring from mid and head office.

12. Written Manual.

C. Microfinance Working Environment: How can microfinance institutions (MFIs) help

improve working conditions? How can they contribute to job creation? And how can MFIs help
reduce child labor? Should MFIs have an interest in addressing these and other decent work
issues? These are some of the questions that the ILO intends to address through an
experimental global action research programmer (2008-2011) in partnership with microfinance
Institutions interested in promoting decent work. Access to micro credit or other financial
services can help improve the decent work status. Conditional loans, credit with education,
incentives like interest rate rebates, linkages with social partners and NGOs as well as the
provision of micro insurance, conditional cash transfers or health care can be effective ways to
reduce child labor, decrease vulnerabilities, raise awareness and create incentives to improve
working conditions.

Enabling Environment:

Favorable environment for microfinance in different manners are prevailing in most developing
countries. Favorable environment is not only among Government but also among general
public, civil society, media and various institutions within the country needed for favorable
growth of microfinance for poverty reduction. Though Government is favorable in general to
microfinance in many countries but specific modalities of NGOs/ MFIs determine the nature of
favorable.

D. Current Challenging Issues:

1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being
able to achieve operational, financial and institutional sustainability.

2. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly
operation compared to revenue income. Cost reduction is also an essential element in
microfinance operation.

Reducing cost can be possible either offering larger loan size or by innovating no conventional
Management which is less costly.

3. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds.

4. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds

. Microfinance Operation management:

1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being
able to achieve operational, financial and institutional sustainability. The constraints and
challenges vary with the different types and development stage of MFIs. Most MFIs are
currently operating below operational viability and use grant funds from donors for financing up-
front costs of establishing new groups and covering initial losses incurred until the lending
volume builds up to a break-even level. The MFIs are generally constrained in reaching a break-
even level and finally achieving sustainability, primarily due to a narrow client and product base,
high operational and administrative costs for delivering credit to the poor, and their inability to
mobilize requisite resources. Moreover, lack of technical manpower, operational systems,
infrastructure and MIS are prevalent. In view of the above, to scale up micro-finance initiatives
at a faster pace, a special effort is required for capacity building of the Micro Finance
Institutions. In this background, SFMC has in the past under the DFID collaboration (which has
since come to an end on March 31,2009) provided need based capacity building support to the
partner MFIs, in the initial years, to enable them to expand their operations, cover their
managerial, administrative and operational costs besides helping them achieve self-sufficiency
in due course.

2. Liquidity Management: In view of the fact that liquidity is a major concern of many of the
middle level MFIs and a small working capital support can go a long way in their better liquidity
management and thus pave way for faster growth, SFMC has introduced a special short term
loan scheme, Liquidity Management Support (LMS) for the long term partners.

3. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging

requirement of the micro finance sector in India. SIDBI provides equity capital to eligible
institutions not only to enable them to meet the capital adequacy requirements but also to help
them leverage debt funds. Keeping in tune with the sect oral requirements, the bank has also
introduced quasi-equity products viz., optionally convertible Preference share capital; optionally
convertible debt and optionally convertible Subordinate debt for new generation MFIs which are
generally in the pre-breakeven stage requiring special dispensation for capital support by way of
a mix of Tier I and Tier II capital.
4. Transformation Loan:The Transformation Loan (TL) product is envisaged as a quasi-equity
type support to partner MFIs that are in the process of transforming themselves / their existing
structure into a more formal and regulated set-up for exclusively handling micro finance
operations in a focused manner.

Being quasi-equity in nature, TL helps the MFIs not only in enhancing their equity base but also
in leveraging loan funds and expanding their micro credit operations on a sustainable basis. The
product has the feature of conversion into equity after a specified period of time subject to the
MFI attaining certain structural, operational and financial benchmarks. This non-interest bearing
support facilitates the young but well performing MFIs to make long term institutional
investments and acts as a constant incentive to transform themselves into formal and regulated
entities.

5. Micro Enterprise Loans: In order to build and strengthen new set of intermediaries for Micro
Enterprise Loans, the Bank has formulated new scheme for Micro Enterprise Loans. Institutions/
MFIs with minimum fund requirement of Rs. 25 lakh p.a. and having considerable experience in
financial intermediation/ facilitating or setting up of enterprises/ providing escort services to SSI/
tiny units/ networking or active interface with SSIs etc. and having professional expertise and
capability to handle on-lending transactions shall be eligible under the dispensation. The
institutions would be selected based on their relevant experience, potential to expand,
professional management, transparency in operations and well laid-out systems besides
qualified/ trained manpower.

Lending to be based strictly on an intensive in-house appraisal supplemented with the credit
rating by an independent professional agency. Relaxed security norms more or less on line with
micro credit dispensation to be adopted to reduce procedural bottlenecks as well as to facilitate
easy disbursements.

6. Loan Syndication: Keeping in view the increased fund requirement of major partner MFIs,
the Bank has also undertaken fee based syndication arrangement where loan requirement is
comparatively higher.

7. Microfinance Operations:
a. Marketing Strategy and Microfinance Clients Targeting Methodology.

b. Microfinance Products, Services and Lending Procedures.

c. Microfinance Lending Methodology: Individual and Group Lending.

d. Micro finance Indian Lending Methodology.

e. Institutional Business Planning for Microfinance Program6. Financial Planning & Analysais.

f. Savings and Credit Management.

g. Program Operational Policies and Procedures.

h. Accounting and Record Keeping.

i. Auditing for Microfinance Operation.

j. Management Information System.

k. Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools.

l. Detection of Fraud and Internal Control.

m. Monitoring and Supervision System.

n. Delinquencies and its Management.

I. Clients of micro finance:

The typical micro finance clients are low-income persons that do not have access to
formal financial institutions. Micro finance clients are typically self-employed, often
household-based entrepreneurs. In rural areas, they are usually small farmers and
others who are engaged in small income-generating activities such as food processing
and petty trade. In urban areas, micro finance activities are more diverse and include
shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients are
poor and vulnerable non-poor who have a relatively unstable source of income.

a. The six principles of client protection are:

1. Avoidance of Over-Indebtedness: Providers will take reasonable steps to ensure that

credit will be extended only if borrowers have demonstrated an adequate ability to repay
and loans will not put the borrowers at significant risk of over-indebtedness. Similarly,
providers will take adequate care that non-credit, financial products, such as insurance,
provided to low-income clients are appropriate.

2. Transparent and Reasonable Pricing: The pricing, terms and conditions of financial
products (including interest charges, insurance premiums, all fees, etc.) are transparent
and will be adequately disclosed in a form understandable to clients. 
 3. Appropriate Collections Practices: Debt collection practices of providers will not be
abusive or coercive.

4. Ethical Staff Behavior: Staff of financial service providers will comply with high
ethical standards in their interaction with microfinance clients and such providers will
ensure that adequate safeguards are in place to detect and correct corruption or
mistreatment of clients. 

5. Mechanisms for Redress of Grievances: Providers will have in place timely and
responsive mechanisms for complaints and problem resolution for their clients. 

6. Privacy of Client Data: The privacy of individual client data will be respected, and
such data cannot be used for other purposes without the express permission of the client
(while recognizing that providers of financial services can play an important role in
helping clients achieve the benefits of establishing credit histories).

SWOT Analysis:

SWOT stands for Strength, Weakness, Opportunity, and Threat.

Strength

• Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the
individuals who are below the poverty line and cannot able to access from the commercial
banks. As we know that Indian, more than 350 million people in India are below the poverty and
for them the Micro Finance is more than the life. By providing
small loans to this people Micro finance helps in reducing the poverty.
• Huge networking available: For MFIs and for borrower, both the huge network is there. In
India there are many more than 350 million who are below the poverty line, so for MFIs there is
a huge demand and network of people. And for borrower there are many small and medium size
MFIs are available in even remote areas.

Weakness

• Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are
not regulated properly. In the absent of the rules and regulation there would be high case of
credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can
function properly and efficiently.
• High number of people access to informal sources: According to the World Bank report
80% of the Indian poor can‘t access to formal source and therefore they depend on the informal
sources for their borrowing and that informal charges 40 to 120% p.a.
• Concentrating on few people only: India is considered as the second fastest developing
country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures
are just because of few people. India‘s 70% of the population lives in rural area, and that portion
is not fully touched.
Opportunity

• Huge demand and supply gap: There is a huge demand and supply gap among the
borrowers and issuers. In India around 350 million of the people are poor and only few MFIs
there to serving them.
There is huge opportunity for the MFIs to serve the poor people and increase their living
standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are
disbursed to the borrower.( April 09) Employment Opportunity:
Micro Finance helps the poor people by not only providing them with loan but also helps them in
their business; educate them and their children etc.
So in this Micro Finance helping in increase the employment opportunity for them and for the
society.
• Huge Untapped Market: India‘s total population is more than 1000 million and out of 350
million is living below poverty line. So there is a huge opportunity for the MFIs to meet the
demand of that unsaved customers and Micro Finance should not leave any stones unturned to
grab the untapped market.
• Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people
are unable to access big loans, because of the high intervention of the Govt. but the door open
for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this
segment.

Threat

• High Competition: This is a serious threat for the Micro Finance industry, because as the
more players will come in the market, their competition will rise , and we know that the MFIs has
the high transaction cost and after entrant of the new players there transaction cost will rise
further, so this would be serious threat.
• Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all
by informal sources. But the formal source of finance through Micro Finance is novice, and the
rules are also not properly placed for it.
• Over involvement of Govt.: This is the biggest that threat that many MFIs are facing.
Because the excess of anything is injurious, so in the same way the excess involvement of
Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans, make
new rules for their personal benefit etc.

Critical Analysis

A. MFIs Critical Issues: MFIs can play a vital role in bridging the gap between
demand & supply of financial services if the critical challenges confronting them
are addressed.
Sustainability: The first challenge relates to sustainability. It has been reported in literature that
the MFI model is comparatively costlier in terms of delivery of financial services. An analysis of
36 leading MFIs2 by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent
and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact
that while the cost of supervision of credit is high, the loan volumes and loan size is low. It has
also been commented that MFIs pass on the higher cost of credit to their clients who are
‘interest insensitive’ for small loans but may not be so as loan sizes increase. It is, therefore,
necessary for MFIs to develop strategies for increasing the range and volume of their financial
services.

Lack of Capital: The second area of concern for MFIs, which are on the growth path, is that
they face a paucity of owned funds. This is a critical constraint in their being able to scale up.
Many of the MFIs are socially oriented institutions and do not have adequate access to financial
capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism
in the country for meeting the equity requirements of MFIs. As you know, the Micro Finance
Development Fund (MFDF), set up with NABARD, has been augmented and re-designated as
the Micro Finance Development Equity Fund (MFDEF). This fund is expected to play a vital role
in meeting the equity needs of MFIs.

Borrowings: In comparison with earlier years, MFIs are now finding it relatively easier to raise
loan funds from banks. This change came after the year 2000, when RBI allowed banks to lend
to MFIs and treat such lending as part of their priority sector-funding obligations. Private sector
banks have since designed innovative products such as the Bank Partnership Model to fund.

Source: Issues in Sustainability of MFIs, Jindal & Sharma.

Top 14 Microfinance Institutions in India by Growth of Number of active Borrowers.

 B. Problems for Alternative Micro-Finance Institutions: The main aim with which
the alternative MFIs have come up is to bridge the increasing gap between the
demand and supply. A vast majority of them set up as NGOs for getting access
to funds as, the existing practices of mainstream financing institutions such as
SIDBI and NABARD and even of the institutions specially funding alternatives,
such RMK and FWWB, is to fund only NGOs, or NGO promoted SHGs. As a
result, the largest incentive to enter such services remains through the nonprofit
route. The alternative finance institutions also have not been fully successful in
reaching the needy.
There are many reasons for this:

1. Financial problems leading to setting up of inappropriate legal structures.

2. Lack of commercial orientation.

3. Lack of proper governance and accountability.

4. Isolated and scattered.

C. Risk: This looks at the quality of their loan portfolio measured as the percent of the
portfolio at risk greater than 30 days. And return, which is measured as a combination of return
on equity and return on assets.

From this above table we can notice that the Risk of companies is measured as the percentage
of
Portfolio at Risk (PAR) which means and returns is measured as a combination of ROA and
ROE.

Return on Assets (ROA): A Return on Assets is an indication of how well an MFI is managing
its asset base to maximize its profits. The ratio does not evaluate the source of the asset base –
whether through debt or equity, but simply the return of the portfolio and other revenue
generated from investments and operations. A return on assets should be positive. There is a
positive relationship between Return on Assets and the Portfolio to Assets ratio discussed in the
next section. MFIs that maintain most of their assets in the loan portfolio tend to break even
sooner, and generate higher returns on their assets; provided the loan portfolio performs well
and other costs are also controlled.

Return on Assets = Net Operating Income – Taxes____

Average Assets

Trend: An increasing Return on Assets is positive.

Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its
profitability. The ratio includes not only the return on the portfolio, but also all other revenue
generated from investments and other operating activities.

From the above list we can notice that, there are seven companies of India in top 50 companies
in the world. There is a huge potential for India to grow in this sector, because out of total 500
million poor people from all over the world, who is getting beneficial from the micro finance
institutions, 80 to 90 million are from India only. So there is still a huge market and
opportunities in this segment.

The total loan that the MFI‘s had provided to the poor people in India crosses Rs 24 billion till
October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see the
new face of India.

Return on Equity: A Return on Equity is probably one of the most important profitability
indicators for commercial banks and MFIs, particularly in comparison with other institutions. The
return is measured only in relation to what the MFI has built from operating surpluses, or what it
has generated through donations or other contributed sources. The shareholders of a for-profit
MFI or bank, is very interested in this ratio, as it is a measure of their investment choice, and its
ability to pay dividends. Increasing equity also strengthens the MFI’s capital structure and its
ability to leverage debt financing. As markets mature and competition increases, Return on
Equity may level off and maintain a positive position without increasing dramatically or at all.
Return on Equity = Net Operating Income – Taxes____
Average Equity

Trend: An increasing Return on Equity is positive.

C. Risk Management: Risk management is a discipline for dealing with the

possibility that some future event will cause harm. It provides strategies,
techniques, and an approach to recognizing and confronting any threat faced
by an organization in fulfilling its mission. Risk management may be as
uncomplicated as asking and answering three basic questions:

Major Risks to Microfinance Institutions:

Financial Risks Operational Risks Strategic Risk

Credit Risk Transaction Risk Governance Risk

Transaction risk
Portfolio risk Human resources Risk Ineffective oversight
Liquidity Risk Information & technology Poor governance
Market Risk Risk structure

Interest rate risk Fraud (Integrity) Risk Reputation Risk

Foreign exchange risk Legal & Compliance External Business
Investment portfolio risk Risks
Risk
Event risk

Sources: - www. Scribd.com

This are the most significant risks (with the most potentially damaging consequences for the
MFI), how they interact, and current challenges faced by MFIs.

a. Financial Risks: Most MFIs focus on financial risks, including credit, liquidity, Interest
rate, and investment risks. Mentioned under are the risks which are very critical for the
MFI‘s.

1. Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to
earnings or capital due to borrowers’ late and non-payment of loan obligations.
Credit risk encompasses both the loss of income resulting from the MFI‘s inability
to collect anticipated interest earnings as well as the loss of principle resulting
from loan defaults. Credit risk includes both transaction risk and portfolio risk.

2. Transaction risk: Transaction risk refers to the risk within individual loans. MFIs
mitigate transaction risk through borrower screening techniques, underwriting
criteria, and quality procedure for loan disbursement, monitoring, and collection.
 3. Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the
overall loan portfolio. Policies on diversification, maximum loan size, types of
loans, and loan structures lessen the portfolio risk.
4. Liquidity risk: Liquidity risk is the ―risk that an MFI cannot meet its obligations
on a timely basis Liquidity risk usually arises from management‘s inability to
adequately anticipate and plan for changes in funding sources and cash needs.
Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to meet
client withdrawals, disburse loans and fund unexpected cash shortages) while also investing as
many funds as possible to maximize
earnings. Liquidity management is an ongoing effort to strike a balance between having too
much cash and too little cash.
5. Interest rate risk: Interest rate risk is the risk of financial loss from changes in
market interest rates. The greatest interest rate risk occurs when the cost of
funds goes up faster than the financial institution can or is willing to adjust its
lending rates.

Manage interest rate risk: To reduce the mismatch between short-term variable rate liabilities
and long-term fixed rate loans, managers may refinance some of the short-term borrowings with
long-term fixed rate borrowings. This might include offering one and two-year term deposits as a
product and borrowing five to 10 year funds from other sources. Such a step reduces interest
rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those funding sources.
To boost profitability, MFIs may purposely ―mismatch assets and liabilities in anticipation of
changes in interest rates. If the asset liability managers think interest rates will fall in the near
future, they may decide to make more long-term loans at existing fixed rates, and shorten the
term of the MFI‘s liabilities. By lending long and borrowing short, the MFI can take advantage of
the cheaper funding in the future, while locking in the higher interest rates on the asset side. In
this case, the MFI has increased the interest rate risk in the hope of improving the profitability of
the bank.

b. Operational Risks: Operational risk arises from human or computer error within daily
service or product delivery. This risk includes the potential that inadequate technology
and information systems, operational problems, insufficient human resources, or
breaches of integrity (i.e. fraud) will result in unexpected losses.

MFI being criticized because of high interest rate:Most MFI‘s financially sustainable by
charging interest rates that are high enough to cover all their costs. The problem is that the
administrative costs are inevitably higher for tiny micro lending than for normal bank lending. As
a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher
than the rates charged on normal bank loans.
Four key factors determine these rates:

1. The cost of funds,

2. the MFI's operating expenses,
3. Loan losses,
4. And profits needed to expand their capital base and fund expected future growth.
Formula to decide the interest rate is:
R = AE + LL + CF + K - II
1– LL
Where AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired
Capitalization rate and II is investment income.
Example:

Suppose that the transaction cost is Rs 15 per loan and that the loans are for one year. To
break even on the Rs 500 loan, the MFI would need to collect interest of Rs 50 + Rs 5 + Rs 15
= Rs 70, which represents an annual interest rate of 13 percent. To break even on the Rs 100
loan, the MFI would need to collect interest of Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an interest
rate of 26 percent.

NABARD's  Support to microfinance Institutions (MFIs)

Realizing the importance of MFIs in the delivery of financial services to the poor and their
potential for expansion of services in remote and lesser-banked areas, NABARD has been
extending technical and fund support to this sector.  Some of the concerns that necessitated
NABARD to commence this support in 1993 were: 1) the need to provide timely credit to the
poor in under banked regions and ii) to further improve the outreach of rural credit delivery
system through alternate credit delivery mechanisms.

NABARD's support is being provided to various forms of microfinance institutions covering

MFIs, second tier MF lending institutions, Grameen bank replicators, NGO-MFIs, SHG
Federations etc. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA)
to NGO-MFIs on a very selective basis. The RFA is generally provided for a period of 5 to 6
years and is necessarily to be used for on lending to mF clients (SHGs or individuals). In
addition, the agencies are also sanctioned, on a case-to-case basis, grant assistance for partly
meeting the salary of field level staff, infrastructure development and operational deficits during
the initial years.

Cumulatively, as at the end of June 2004, Rs 26.98 crore (Rs 269.80 million) has been
sanctioned as RFA to 31 NGO-MFIs and Rs. 0.58 crore (Rs 5.8 million) has been sanctioned as
grant to various NGOs.  The amount excludes Rs 3.4 million sanctioned under SHG Post Office
linkage programme in Tamilnadu.

During the year 2003-04, loan support of Rs. 84 million was sanctioned to two agencies
viz.

1) Friends of World Women Banking, India  (Rs. 74 million) for on-lending to small NGOs
&

2) Kalanjiam Development Financial Services-a section 25 company promoted by

DHAN Foundation  (Rs 10 million) for on lending to SHGs.     

NABARD also provides technical support in the form of capacity building of staff of MFIs and
also bankers in appraisal of MFIs for providing wholesale resource support. Since 2002, training
programmes on  "Appraisal of MFIs" are being conducted through Bankers Institute of Rural
Development (BIRD), Lucknow. These training programmes are intended to equip the
stakeholders to appreciate the nuances in financing NGO-MFIs and also enhance the flow of
loan able funds from mainstream financial Institutions like banks. Specially designed capacity
building programmes are also being organized for Chief Executives & other staff of NGOs on
promotion as well as managing of self help groups on a regular basis through our regional
offices, in association with reputed resource NGOs & training establishments
Microfinance India Summit 2010:

Over the last six years, the Microfinance India Summit, organized by ACCESS Development
Services, has established itself as an international conference dedicated to Indian microfinance.
It has become the single most important platform for sharing the Indian experience, unique as it
is, with a global audience. At the same time, it also provides an avenue to learn about
international trends and best practices for adaptation by the Indian community of practitioners.
Policy makers, practitioners, promoters, academics, researchers and thought leaders share
their experiences on various panels, and about 1000 delegates from both within and outside the
country participate in the Summit. It bridges the unnecessary hiatus between models and
methodologies and helps to build consensus on the critical challenges and issues. In the past,
the Summit themes have helped in focusing on key issues including "Inclusion, Innovation
and Impact" (2005), "Urban Microfinance" (2006), "Formal Financial Institutions - the
challenges of depth and breadth" (2007), "The Poor First" (2008) and "Doing good and
doing well- The need for balance" (2009).

The microfinance India Summit 2010 will be held on November 15-16, 2010 at Hotel Ashok,
New Delhi. The over-arching theme for this year's Summit is "Mission of Microfinance - Need
to Reflect and Reaffirm". The Summit sessions will focus on current trends and issues relating
to sustainability, transparency, social performance, commercialization of the sector, client
protection, among others.

.Introduction:

India is the fourth largest economy in the world on a purchasing power parity (PPP) basis and twelfth on
a nominal basis. With the real GDP forecasted to grow by 5.7% in the year 2009-10, the Indian economy
is marching ahead. This rapid expansion is expected to continue as growth in the services and high
technology manufacturing sector accelerates. Agriculture, which continues to support around 60% of
the population, has grown by a mere 2.7% in the second quarter of 2008-09. In addition, the organized
sector employment presently comprises less than 10% of the workforce, leaving the vast majority of the
working population with irregular income streams. Notwithstanding the rapid increase in overall GDP
and per capita income in recent years, a significant proportion of the population in both rural and urban
areas still experiences difficulties in accessing the formal financial system. There is currently a
perception that there are a large number of people, potential entrepreneurs, small enterprises and
others, who may not have adequate access to the financial sector, which could lead to their
marginalization and denial of opportunity to grow and prosper.
1.1Financial Exclusion:
Broadly defined, financial exclusion signifies the lack of access by certain segments of the society to
appropriate, low-cost, fair and safe financial products and services from mainstream providers.
Financial exclusion is thus a key policy concern, because the options for operating a household budget,
or a micro/small enterprise, without mainstream financial services can often be expensive. This process
becomes self-reinforcing and can often be an important factor in social exclusion.

Reserve Bank of India data shows that as many as 139 districts suffer from massive financial exclusion,
with the adult population per branch in these districts being above 20,000 and only 3% with borrowings
from banks. On the assumption that each adult has only one bank account (which does not hold good in
practice, so that actual coverage is likely to be worse) on an all India basis, 59 percent of the adult
population in the country has bank accounts. 41 percent of the population is, therefore, unbanked. In
rural areas the coverage is 39 percent against 60 percent in urban areas. The unbanked2 population is
higher in the poorer regions of the country, and is the worst in the North-Eastern and Eastern regions.

1.1.1Causes of Financial Exclusion

Demand-side Barriers: On demand constraints and opportunities, the following issues have a
significant bearing on the extent of financial exclusion/inclusion:

1. Cultural factors - Women are often disadvantaged by credit requirements such as collateral since in
most of the cases property is registered under their husband’s name and they are to seek male
guarantees to borrow.

2. Mistrust of financial institutions - The feeling that there is no point in applying for financial products
because he/she expects to be refused as banks are not interested to look into their cause has led to self-
exclusion for many of the low income groups.

3. Level of income - A higher share of population below the poverty line results in lower demand for
financial services as the poor may not have savings to place as deposit in savings banks.
4. Financial literacy and skills capacity – High information barriers, low awareness and limited literacy,
particularly financial literacy, i.e., basic mathematics, business finance skills as well as lack of
understanding often constrain demand for financial services.

Supply-side Barriers: The following issues on the supply side are major obstacles in providing an
adequate supply of financial services to the currently unbanked:

1. Locational constraints – Absence of physical infrastructure in interior-most parts of the country leads
to difficulties in accessing financial institutions (like banks, etc) resulting in a substantial proportion of
households in rural and remote areas being kept outside the ambit of the formal financial system.

2. Real and perceived risk in lending - The perceived risk of lending to the poor is higher than the real
risk, creating a supply barrier by triggering higher than necessary transactions costs due to stricter than
needed prudential requirements.

3. Approaches and products - Generally, financial services tend to be concentrated in urban areas,
allowing rural clients little access to services and information for making well grounded decisions.

4. Financial viability of MFIs - MFI practitioners encounter difficulties in having a “double bottom line”:
at the same time aiming to be profitable and stimulating local economic development.

1.2 Financial Inclusion:

The definitional emphasis of financial inclusion varies across countries and geographies, depending on
the level of social, economic and financial development; the structure of stake holding in the financial
sector; socioeconomic characteristics of the financially excluded segments; and also the extent of the
recognition of the problem by authorities or governments. The Report of the Committee on Financial
Inclusion in India (Chairman: C Rangarajan) (2008) defines financial inclusion as the “process of ensuring
access to financial services and timely and adequate credit where needed by vulnerable groups such as
weaker sections and low income groups at an affordable cost.”

Financial Inclusion does not merely mean access to credit for the poor, but also other financial services
such as Insurance. Financial Inclusion allows the state to have an easier access to its citizens, with an
inclusive population, for e.g.: the government could reduce the transaction cost of payments like
pensions, or unemployment benefits.

It could prove to be a boon in a situation like a natural disaster, a financially included population means
the government will have much less headaches in ensuring that all the people get the benefits. It allows
for more transparency leading to curtailing corruption and bureaucratic barriers in reaching out to the
poor and weaker sections. An intelligent banking population could go a long way by effectively securing
themselves a safer future.

1.2.1 The objective of Financial Inclusion

The access to various mainstream financial services e.g. saving bank account, credit, insurance,
payments and remittance and financial and credit advisory services.

The main objective is to provide the benefit of vast formal financial market, & protect them from
exploitation of informal credit market, so that they can be brought into the mainstream

1.2.2 WHAT IS CONSIDERED AS MAINSTREAM FINANCIAL SERVICES

NECESSARY FOR FINANCIAL INCLUSION OF HOUSEHOLD?
 Basic saving bank account- an account with all basic feature of saving account.
 Payment and remittances services –
 Immediate credit – in case of contingencies like accidents, medical treatment etc, they
should be provided immediate credit.
 Entrepreneurial credit – this means, to run/expand small scale business/shop or any
economic activity, easy credit should be provided, so that financial dependence can be
created amongst households.
 Housing finance- funding for purchasing new residential or reconstruction
 Insurance – life\healthcare- to plan future better
 Financial education\credit counseling centers – to guide them which product suits them
better, where to go credit needs, what are various services available to better their
personal financial planning.
Financial Inclusion therefore, is delivery of not only banking, but also other financial services like
insurance, pension, remittance, mutual funds, etc. delivered at affordable, though market driven costs.
Opening a no-frills account is just a beginning to a continuous process of providing banking and financial
services. Once the first step of safety of savings is achieved, the poor require access to schemes and
products which allow their savings to grow at rates which provide them growth beyond mere inflation
protection.

1.2.3 Benefits of Financial Inclusion:

Improvements in access to financial institutions accrue several benefits to the consumer, regulator and
the economy alike. Establishment of an account relationship can pave the way for the customer to avail
the benefits of a variety of financial products. The bank accounts can also be used for multiple purposes,
such as, making small value remittances at low cost and making purchases on credit. Furthermore, the
regulator benefits, as the audit trail is available and transactions are conducted transparently in a
medium that can be monitored. The economy benefits, as greater financial resources become
transparently available for efficient intermediation and allocation, for uses that have the highest returns.
Promoting financial inclusion can also help i in the regeneration of local areas if money saved by
increased access to financial services can be re-invested in the community.

Inclusive finance - safe savings, appropriately designed loans for poor and low income households and
for micro, small and medium sized enterprises, and appropriate insurance and payments services - can
help people help themselves to increase incomes, acquire capital, manage risk, and work their way out
of poverty. Increasing the inclusiveness of financial sectors, fuelled by domestic savings to the greatest
extent possible, will, over time, bolster the poorer segments of the population as well as those segments
of the economy that most affect the lives of poor people.

Holding a bank account itself confers a sense of identity, status and empowerment and provides access
to the national payment system. Therefore, having a bank account becomes a very important aspect of
financial inclusion. While financial inclusion, in the narrow sense, may be achieved to some extent by
offering a single financial service/product, the objective of “comprehensive financial inclusion” would be
to provide a holistic set of services encompassing all of the above.
 Learning from the project

* The History of Modern Microfinance. I learnt in detail the process of Micro Finance,
from its need at the grass root level.

*Functioning of various Govt:, Semi Govt: & various other delivery channels.

*Practical learning of how SHGs are formed.

*Practical learning of how the MFIs work.

*Most important learning, how it can change the life of the Economic disadvantaged
people.

* Microfinance Regulation in India.

*Micro Finance Model.

*Microfinance Management, Critical Analysis.

*Practical learning of Equity, Future & Options market by terminal trading.

*Various strategies of Market.

*Apart from Micro Finance, Nine mine projects, which helped to relate to the
Present Market conditions.

*Business Model.