DECLARATION

I hereby declare that the Project Report titled “A Critical Analysis of Micro Finance in India” submitted
by me to submitted to the Registrar (SR and ED), IGNOU, MAIDAN GARHI, NEW DELHI- 110068 in
partial fulfillment of the requirement of MBA is a bona fide work done by me and it was not submitted to
any other university or institution previously.

The project work is original & the conclusions drawn are based on the data & information collected by me.

TANU GUPTA
 ACKNOWLEDGEMENT

On completing this project, it is my pleasure to thank all those who have helped me during the course of the
project.

I am thankful to Dr.Puneet Kumar , who allowed me to carry out the study and use their different officials
and important documents useful for my project and prepare a report on “A Critical Analysis of Micro
Finance in India”.

TANU GUPTA
 TABLE OF CONTENT

CHAPTERS PARTICULARS PAGE-NO

Preliminary index Executive Summary v-vi
Introduction
Chapter-1 Introduction about the project 1-3
Objective of the study
Literature Review
Chapter-2 4-6

Research Methodology
Chapter-3 Limitations 17-19

Data Collection and Data Analysis

20-48

Chapter-4

Findings and conclusion/Recommendation

Chapter-5 49-53

Bibliography

Chapter-6 Annexure

Executive Summary

Microfinance means providing very poor families with very small loans (micro credit) to help them
engage in productive activities /small businesses. Over time, microfinance has come to include a broader
range of services (credit, savings, insurance, etc.) as we have come to realize that the poor and the very
poor who lack access to traditional formal financial institutions require a variety of financial products.

India’s population is more than 1000 million, and it’s the second largest in term of population after
China. India’s GDP ranks among the top 15 economies of the world. However, around 300 million
people or about 80 million households, are living below the poverty line, i.e. less than $2 per day
according to the World Bank and the poorest are which earns $1 per day. It is further estimated that of
these households, only about 20% have access to credit from the formal sector. Out of these 80 million
house hold, 80% takes credit from the informal sources i.e. local Zamidars, Chit Funds etc. With about
80 million households below poverty line and 80% out of this is access from informal sector, so it’s
obvious to solve this problem and this gave birth to Micro Finance Institutions (MFI’s). MFIs include
non-governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even a
few commercial banks.

India has about 153,000 retail outlets of the formal banking infrastructure—commercial bank. There are
about 33,000 banks in rural areas, and also have special category of banks called regional rural banks, in
the abbreviated form, RRBs. There are about 14,500 branches and the cooperatives. The cooperatives—
about 100,000 retail outlets. The population for the regional outlet comes down to as low as 4,700.
Annual credit demand by the poor in the country is estimated to be about Rs 60,000 crores.

In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically
weaker sections" have been used to broadly define micro-finance customers. Women constitute a vast
majority of users of micro-credit and savings services. In short, Micro Finance means providing very
poor families with very small loans to help them engage in productive activities or grow their very small
businesses.

It is firstly (and this is essential) a tool in the fight against poverty. It is not for poor people in general but
for poor people who are considered to be economically active, in other words, those who carry out
activities which generate revenues which in turn allow them to cover their needs and those of their
families, even if these revenues are low and precarious. Microfinance offers to help them get started by
giving them access to financial services from which they are generally excluded (including savings and
credit facilities, insurance and fund transfers), and in ways that are suited to their economic and
management skills.

Ultimately, the goal of microfinance is to give low income people an opportunity to become self-
sufficient by providing a means of saving money, borrowing money and insurance.

Micro financing is not a new concept. Small microcredit operations have existed since the mid 1700s.
Although most modern microfinance institutions operate in developing countries, the rate of payment
default for loans is surprisingly low - more than 90% of loans are repaid. It is not just a financing
system, but a tool for social change, specially for women - it does not spring from market forces alone -
it is potentially welfare enhancing - there is a public interest in promoting the growth of micro finance -
this is what makes it acceptable as a valid goal for public policy.

The Eleventh Five Year Plan aims at inclusive growth and faster reduction of poverty. Micro Finance
can contribute immensely to the financial inclusion of the poor without which it will be difficult for them
to come out of the vicious cycle of poverty. There is a need to strengthen all the available channels of
providing credit to the poor such as SHG- Bank Linkage programmes, Micro Finance Institutions,
Cooperative Banks, State financial corporations, Regional Rural Banks and Primary Agricultural Credit
Societies. The strength of the micro finance industry lies in its informality and flexibility which should
be protected and encouraged.

Landlords, local shopkeepers, traders, suppliers and professional money lenders, and relatives are the
informal sources of micro-credit for the poor, both in rural and urban areas.

The sector which is still in its infancy faces shortage of experienced consultants/manpower/experts.
There is a need to have good quality professionals, trained in best practices in governance for effective
corporate governance. A need-based capacity building programme to meet the requirements of all
categories of Micro Finance Organisations (MFOs) is essential to bring about sustainability in the sector.
Some of the important areas where capacity building is needed are transformation, best practices,
interest rate management, delivery management, managing growth, risk mitigation, product designing,
market research etc.

The microfinance sector in India has developed a successful and sustainable business model which has
been able to overcome challenges traditionally faced by the financial services sector in servicing the low
income population by catering to its specific needs, capacities and leveraging pre-existing community
support networks. As of March 2009, microfinance institutions (“MFIs”) in India reached over 22
million borrowers and had a portfolio outstanding in excess of $2.3 billion.

The microfinance business model in India typically generates a Return on Equity (“ROE”) of between
20% and 30%, driven by financing from commercial banks, strong operating efficiency and high
portfolio quality.

Despite achieving rapid growth with a CAGR of 86% in loan portfolio outstanding and 96% in
borrowers over the last five years, the microfinance sector still faces a large unmet demand which means
that it still has great potential for continued growth.

The microfinance sector is maturing and beginning to diversify its product and service base to address
other unmet financial and non-financial needs of the low income population either directly or by acting
as a conduit for third-party providers – savings, insurance, remittance and low cost education and
healthcare services being some of the key examples.
Given this growth and maturity dynamic, the Indian microfinance sector is increasingly becoming a
viable investment sector with commercial investors joining social investors who have been nurturing the
industry thus far.

Equity valuations in the Indian microfinance sector are higher than the financial sector due to the high
growth expectations and substantial availability of debt to fuel its rapid expansion. This availability of
debt to support expansion is expected to grow as more domestic banks take exposure to the industry and
alternative debt providers enter the market.

Over the short and medium term, MFI shares are expected to trade at significant premia to book value as
they realign their business models to capitalize on unsatisfied demand, and cool down over the longer
term as the industry matures and begins to consolidate.

Currently, several exit opportunities exist including secondary and trade sales which are increasing as
more mainstream investors enter the market. Another likely exit scenario is M&A, as larger MFIs seek
to acquire players with product or geographical niches and banks also seek to enter the sector by forming
alliances with existing MFIs. Larger MFIs may also consider IPOs although that may be a less likely exit
option for most MFIs in the short to medium term.
 Chapter-1

Introduction
1.1) Introduction to Micro Finance
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 founding of the Grameen Bank in Bangladesh, various actors have
endeavored to provide access to financial services to the poor in creative ways.

Governments 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 concept of micro finance was popularized by Muhammad Yunus tremendously in India. The growing
understanding of achieving self sustainability among the rural and urban poor has led to the acceptance and
implementation of this idea across India.

Microfinance loans serve the low-income population in multiple ways by:

1) Providing working capital to build businesses;

2) Infusing credit to smooth cash flows and mitigate irregularity in accessing food, clothing, shelter, or
education;
3) Cushioning the economic impact of shocks such as illness, theft, or natural disasters.

Moreover, by providing an alternative to the loans offered by the local moneylender priced at 60% to 100%
annual interest, microfinance prevents the borrower from remaining trapped in a debt trap which exacerbates
poverty.

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 loans in India range in size from $100 to $500 per loan with interest rates typically between
25% and 35% annually.

1.2) The History of Modern Microfinance

In the late 1970s the concept of microfinance had evolved. Although, microfinance have a long history from
the beginning of the 20th century we will concentrate mainly on the period after 1960.

Many credit groups have been operating in many countries for several years, for example, the "chit funds"
(India), tontines" (West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides, many formal saving
and credit institutions have been working for a long time throughout the world.

During the early and mid 1990s various credit institutions had been formed in Europe by some organized
poor people from both the rural and urban areas. These institutions were named Credit Unions, People's
Bank etc.

The main aim of these institutions was to provide easy access to credit to the poor people who were
neglected by the big financial institutions and banks. In the early 1970s, few experimental programs had
started in Bangladesh, Brazil and some other countries. The poor people had been given some small loans to
invest in micro-business. This kind of micro credit was given on the basis of solidarity group lending, that is,
each and every member of that group guaranteed the repayment of the loan of all the members.

1.3) Microfinance Definition

According to International Labour 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.

1.4) 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

1.5) Role of Microfinance

The micro credit of microfinance pre-name 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
endeavour of the poor people. Microfinance impact studies have demonstrated that:-

 Microfinance helps poor households meet basic needs and protects them against risks.
 The use of financial services by low-income households leads to improvements in household
economic welfare and enterprise stability and growth.
 By supporting women’s economic participation, microfinance empowers women, thereby promoting
gender equity and improving household well being.
 The level of impact relates to the length of time clients have had access to financial services.

1.6) Difference between microcredit & 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.

1.7) Clients of Micro Finance

The typical micro finance clients are low-income persons that do not have access to formal financial
institutions. They 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, microfinance 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.

9,086 branches        
60,721 employees        
2,44,38,087 clients        
Rs 212.45 billion gross loan portfolio    
Rs 232.09 billion loan amount disbursed (during FY 12-13)

Microfinance institutions (MFIs) would grow at an annual pace of 30%-35% over the next three years on the
back of improved fund availability, ratings agency ICRA has said. The large untapped potential would
propel growth for MFIs, which had business of about Rs. 22000 crore as on March 31, 2013, it said. 
"As growth is likely to exceed internal capital generation (12%-15%) for most MFIs, access to external
equity will remain critical for the maintenance of prudent leveraging," the agency said. 

The potential microfinance market size (served primarily by MFIs and self-help groups (SHGs) bank
linkage programme) is pegged at Rs. 1.4-2.5 lakh crore against the current size of Rs. 60000 crore as on
March 31, 2013. 

1.8) State analysis number of MFIs

Chart: Top States | Number of MFIs, as of 31st March, 2013

J&K
D&N Haveli
Sikkim
Chandigarh
Meghalaya
Goa
Tripura
Punjab
Pondicherry
Kerala
Chhattisgarh
Assam
Jharkhand
Delhi
Haryana
AP
Uttarakhand
Rajasthan
Odisha
West Bengal
UP
Bihar
Karnataka
Gujarat
MP
Maharashtra
TN
0 5 10 15 20 25

Explanation:
 Tamil Nadu has the presence of largest number of MFIs.
  Maharashtra, Madhya Pradesh, Gujarat, Karnataka, Bihar, Uttar Pradesh are other major states in
terms of number of MFIs.

 During Q4 FY 12-13 first branch of an MFI was opened in J&K.

1.9) Legal and Regulatory Framework for the Microfinance

Institutions in India
 SOCIETIES REGISTRATION ACT, 1860: -NGOs are mostly registered under the Societies
Registration Act, 1860. Since these entities were established as voluntary, not-for-profit
development organizations, their microfinance activities were also established under the same legal
umbrella.
This act is applicable to the NGO’s and the main purpose is:
a) Relief of poverty
b) Advancement of education
c) Advancement of religion
d) Purposes beneficial to the community or a section of the community.

 INDIAN TRUSTS ACT, 1882: - Some MFIs are registered under the Indian Trust Act, 1882 either
as public charitable trusts or as private, determinable trusts with specified beneficiaries/members.

 NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF COMPANIES

ACT, 1956: - An organization given a license under Section 25 of the Companies Act 1956 is
allowed to be registered as a company with limited liability without the addition of the words
Limited or Private Limited to its name. It is also eligible for exemption from some of the provisions
of the Companies Act, 1956. For companies that are already registered under the Companies Act,
1956, if the central government is satisfied that the objects of that company are restricted to the
promotion of commerce, science, art, religion, charity or any other useful purpose; and the
constitution of such company provides for the application of funds or other income in promoting
these objects and prohibits payment of any dividend to its members, then it may allow such a
company to register under Section 25 of the Companies Act.

1.10) Activities in Microfinance

 Microcredit: It is a small amount of money loaned to a client by a bank or other institution.
Microcredit 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.
1.10) CHALLENGES AND OPPORTUNITIES OF MICRO
FINANCING
The Government has indicated its willingness to speed up the pace of structural reforms to meet the major
challenges of:-

1. REDUCING POVERTY:- The basic motto of the government to eliminate the poverty and bring
prosperity in the country. MFI providing small loans and other credit facilities to the poor and low-
income groups; which are beginning positive changing like their standard of living group and earning
have increased.
2. IMPROVING SOCIAL INDICATORS:-Inadequate access to productive resources and social
services has resulted low social indicators and low employment opportunities. This situation is
compounded in rural areas; where access is more difficult. So, by providing small loans and credit
facilities they can overcome this issue and can improve social indicators.
3. IMPROVING THE FISCAL AND BALANCE OF PAYMENTS POSITIONS:- Pakistan is a
poor country whose balance of payment always in deficit, because of low productivity, lack of
resources and lack of productive men’s power. If MIF provide loans new business can be established.
And export of Pakistan can be improved which create balance of payments.
4. RESTORING INVESTOR CONFIEDENCE:- Due to poor economy of Pakistan investors are
hesitating to invest their money in Pakistan but MFI‘s can boost up. Because provide loans to local
people new business will stable. Economy will go up and this situation may motivate to them for
investing their funds.

1.11) SWOT Analysis of Micro Finance

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
unserved 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.

1.12) Issues in Microfinance

 Sustainability: The first challenge relates to sustainability. MFI model is comparatively costlier in
terms of delivery of financial services. An analysis of 36 leading MFIs 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.
The book value multiple is currently the dominant valuation methodology in microfinance
investments.
In the case of start up MFIs, using a book value multiple does not do justice to the underlying value
of the business. Typically, start ups are loss making and hence the book value continually reduces
over time until they hit breakeven point. A book value multiplier to value start ups would decrease
the value as the organization uses up capital to build its business, thus accentuating the negative
rather than the positive.
 Financial service delivery: Another challenge faced by MFIs is the inability to access supply chain.
This challenge can be overcome by exploring synergies between microfinance institutions with
expertise in credit delivery and community mobilization and businesses operating with production
supply chains such as agriculture. The latter players who bring with them an understanding of similar
client segments, ability to create microenterprise opportunities and willingness to nurture them,
would be keen on directing microfinance to such opportunities.
This enables MFIs to increase their client base at no additional costs. Those businesses that procure
from rural India such as agriculture and dairy often identify finance as a constraint to value creation.
Such businesses may find complementarities between an MFI’s skills in management of credit
processes and their own strengths in supply chain management.
 HR Issues: Recruitment and retention is the major challenge faced by MFIs as they strive to reach
more clients and expand their geographical scope. Attracting the right talent proves difficult because
candidates must have, as a prerequisite, a mindset that fits with the organization’s mission.
Many mainstream commercial banks are now entering microfinance, who are poaching staff from
MFIs and MFIs are unable to retain them for other job opportunities. 85% of the poorest clients
served by microfinance are women. However, women make up less than half of all microfinance
staff members, and fill even fewer of the senior management roles.
The challenge in most countries stems from cultural notions of women’s roles, for example, while
women are single there might be a greater willingness on the part of women’s families to let them
work as front line staff, but as soon as they marry and certainly once they start having children, it
becomes unacceptable. Long distances and long hours away from the family are difficult for women
to accommodate and for their families to understand.
 Micro insurance: First big issue in the micro insurance sector is developing products that really
respond to the needs of clients and in a way that is commercially viable. Secondly, there is strong
need to enhance delivery channels. These delivery channels have been relatively weak so far. Micro
insurance companies offer minimal products and do not want to go forward and offer complex
products that may respond better.
Micro insurance needs a delivery channel that has easy access to the low-income market, and
preferably one that has been engaged in financial transactions so that they have controls for
managing cash and the ability to track different individuals.
Thirdly, there is a need for market education. People either have no information about micro
insurance or they have a negative attitude towards it. We have to counter that. We have to somehow
get people - without having to sit down at a table - to understand what insurance is, and why it
benefits them. That will help to demystify micro insurance so that when agents come, people are
willing to engage with them.
 Adverse selection and moral hazard: The joint liability mechanism has been relied upon to
overcome the twin issues of adverse selection and moral hazard. The group lending models are
contingent on the availability of skilled resources for group promotion and entail a gestation period
of six months to one year.
However, there is not sufficient understanding of the drivers of default and credit risk at the level of
the individual. This has constrained the development of individual models of micro finance.
The group model was an innovation to overcome the specific issue of the quality of the portfolio,
given the inability of the poor to offer collateral.
However, from the perspective of scaling up micro financial services, it is important to proactively
discover models that will enable direct finance to individuals.

1.13) Objectives of the Study

 To analyse financial structure of MFIs in India.
 To analyse Profitability and Efficiency of MFIs in India.
 To study and compare the financial performance of Top 5 MFIs in India.
 Chapter-2

Literature Review
2.1) Literature Review

Microfinance has proven to be an effective and powerful tool for poverty reduction. Microfinance is one of
those small ideas that turn out to have enormous implications. Sector of microfinance in India shown a
successful business model to solve number of challenges faced by financial services sector to provide
services to low income population. Micro Finance has become an important financial sub-sector in India.
Around the world, it has shown to be positively correlated with reducing poverty and improving welfare by
allowing the rural people to increase their sources of income. Micro-Finance is emerging as a powerful
instrument for poverty alleviation in the new economy. In India, micro-Finance scene is dominated by
Self Help Groups (SHGs) - Banks linkage Programme, aimed at providing a cost effective mechanism for
providing financial services to the ‘unreached poor’. Based on the philosophy of peer pressure and group
savings as collateral substitute, the SHG programme has been successful in not only designing financial
products meeting peculiar needs of the rural poor, but also in strengthening collective self-help capacities of
the poor at the local level, leading to their empowerment.

Microfinance in India can trace its origins back to the early 1970s when the Self Employed Women’s
Association (“SEWA”) of the state of Gujarat formed an urban cooperative bank, called the Shri Mahila
SEWA Sahakari Bank, with the objective of providing banking services to poor women employed in the
unorganised sector in Ahmedabad City, Gujarat. The microfinance sector went on to evolve in the 1980s
around the concept of SHGs, informal bodies that would provide their clients with much-needed savings and
credit services. From humble beginnings, the sector has grown significantly over the years to become a
multibillion dollar industry, with bodies such as the Small Industries Development Bank of India and the
National Bank for Agriculture and Rural Development devoting significant financial resources to
microfinance. Today, the top five private sector MFIs reach more than 20 million clients in nearly every
state in India and many Indian MFIs have been recognized as global leaders in the industry. The major
concern about development minded MFIs, however, was that many of them did not attach importance to
their financial soundness and sustainability within a reasonable period and became subsidy dependent. This
made continued funding difficult for donors and funders. Thus in the nineties, the emphasis was on ensuring
that MFIs were financially sound. Without self sufficient financial institutions, there is little hope for
reaching the large numbers of poor households.

The microfinance business model in India typically generates a Return on Equity (“ROE”) of between 20%
and 30%, driven by financing from commercial banks, strong operating efficiency and high portfolio
quality. Microfinance loans in India range in size from $100 to $500 per loan with interest rates typically
between 25% and 35% annually. The microfinance model is designed specifically to help the low income
population overcome typical challenges such as illiteracy, lack of financial knowledge and deficiency of
collateralizable assets. The Indian microfinance sector presents a strong growth story.

Its growth performance was impressively sustained through the liquidity crunch and continued at an
increased rate in the second half of 2009. As of March 2009, the MFIs in India reported a client base of 22.6
million with an outstanding portfolio of more than $2 billion. Over the past five years, the sector has
delivered a CAGR of 86% in the number of borrowers and 96% in portfolio outstanding. In the 12 months
from March 2008 to March 2009, the microfinance industry experienced a 59% growth in its client base
from 14.2 million to 22.6 million and 52% growth in its portfolio outstanding which increased from $1.5
billion to $2.3 billion.8 This reflects a 14% increase in the absolute growth in portfolio outstanding and 33%
increase in the absolute growth in the number of borrowers from 2008 to 2009.

Microfinance is one of those small ideas that turn out to have enormous implications. Microfinance is
considered to be a valuable tool for the alleviation of poverty around the globe. In order for microfinance to
realize its full potential, however, it must be sustainable and capable of expansion beyond the limitations
imposed by a reliance on development assistance. Both developing and developed nations are key actors in
this regard.
 Chapter-3
Research Methodology
3.1) Research Methodology
Data Sources:

The data collected for the study includes secondary data. The various sources used to collect secondary data
include research papers, journals, articles, annual reports of the company and various other websites.

Methods:

The methodology of study includes collection of secondary data from various research articles and journals.
The secondary data collected is further analyzed using statistical tools to draw conclusions based on the
results.

Techniques of data collection and analysis:

The secondary data collected is analyzed using statistical tool and techniques such as Ratios Analysis. The
ratio analysis is used to identify if there exist a significant difference in the performance of MFIs.
 Chapter-4

Data Collection and Data

Analysis
4.1) Microfinance in India
At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores
in the Indian banks’ credit outstanding. As against this, according to even the most conservative estimates,
the total demand for credit requirements for this part of Indian society is somewhere around Rs 2,00,000
crores.

Microfinance changing the face of poor India

Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In India,
micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme, aimed at
providing a cost effective mechanism for providing financial services to the 'unreached poor'. In the Indian
context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have
been used to broadly define micro-finance customers. Research across the globe has shown that, over time,
microfinance clients increase their income and assets, increase the number of years of schooling their
children receive, and improve the health and nutrition of their families.

A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined delivery
of financial services along with technical assistance, and agricultural business development services. When
compared to the wider SHG bank linkage movement in India, private MFIs have had limited outreach.
However, we have seen a recent trend of larger microfinance institutions transforming into Non-Bank
Financial Institutions (NBFCs). This changing face of microfinance in India appears to be positive in terms
of the ability of microfinance to attract more funds and therefore increase outreach.

In terms of demand for micro-credit or micro-finance, there are three segments, which demand funds. They
are:

 At the very bottom in terms of income and assets, are those who are landless and engaged in
agricultural work on a seasonal basis, and manual labourers in forestry, mining, household industries,
construction and transport. This segment requires, first and foremost, consumption credit during
those months when they do not get labour work, and for contingencies such as illness. They also
need credit for acquiring small productive assets, such as livestock, using which they can generate
additional income.
 The next market segment is small and marginal farmers and rural artisans, weavers and those self-
employed in the urban informal sector as hawkers, vendors, and workers in household micro-
enterprises. This segment mainly needs credit for working capital, a small part of which also serves
consumption needs. This segment also needs term credit for acquiring additional productive assets,
such as irrigation pumpsets, borewells and livestock in case of farmers, and equipment (looms,
machinery) and worksheds in case of non-farm workers.
  The third market segment is of small and medium farmers who have gone in for commercial crops
such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery,
etc. Among non-farm activities, this segment includes those in villages and slums, engaged in
processing or manufacturing activity, running provision stores, repair workshops, tea shops, and
various service enterprises. These persons are not always poor, though they live barely above the
poverty line and also suffer from inadequate access to formal credit.

Well these are the people who require money and with Microfinance it is possible. Right now the problem is
that, it is SHGs' which are doing this and efforts should be made so that the big financial institutions also
turn up and start supplying funds to these people.
Today India is facing major problem in reducing poverty. About 25 million people in India are under below
poverty line. With low per capita income, heavy population pressure, prevalence of massive unemployment
and underemployment, low rate of capital formation, misdistribution of wealth and assets , prevalence of
low technology and poor economics organization and instability of output of agriculture production and
related sectors have made India one of the poor countries of the world.

Present Scenario of India

India falls under low income class according to World Bank. It is second populated country in the world and
around 70 % of its population lives in rural area. 60% of people depend on agriculture, as a result there is
chronic underemployment and per capita income is only $3262. This is not enough to provide food to more
than one individual. The obvious result is abject poverty, low rate of education, low sex ratio, and
exploitation. The major factor account for high incidence of rural poverty is the low asset base. According to
Reserve Bank of India, about 51 % of people house possess only 10% of the total asset of India .This has
resulted low production capacity both in agriculture (which contribute around 22-25% of GDP) and
Manufacturing sector. Rural people have very low access to institutionalized credit (from commercial bank).

Poverty alleviation programmes and concepualisation of Microfinance:

There have been continuous efforts of planners of India in addressing the poverty. They have come up with
development programmes like Integrated Rural Development progamme (IRDP), National Rural
Employment Programme (NREP), Rural Labour Employment Guarantee Programme (RLEGP) etc. But
these progamme have not been able to create massive impact in poverty alleviation. The production oriented
approach of planning without altering the mode of production could not but result of the gains of
development by owners of instrument of production. The mode of production does remain same as the
owner of the instrument has low access to credit which is the major factor of production. Thus in Nineties
National bank for agriculture and rural development (NABARD) launches pilot projects of Microfinance to
bridge the gap between demand and supply of funds in the lower rungs of rural economy. Microfinance, the
buzzing word of this decade was meant to cure the illness of rural economy. With this concept of Self
Reliance, Self Sufficiency and Self Help gained momentum. The Indian microfinance is dominated by Self
Help Groups (SHGs) and their linkage to Banks.

Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on informal
financing intermediaries like money lenders, family members, friends etc.

Banking Expansion

Starting in the late 1960s, India was the home to one of the largest state interventions in the rural credit
market. This phase is known as the ―Social Banking‖ phase.

It witnessed the nationalization of existing private commercial banks, massive expansion of branch network
in rural areas, mandatory directed credit to priority sectors of the economy, subsidized rates of interest and
creation of a new set of regional rural banks (RRBs) at the district level and a specialized apex bank for
agriculture and rural development (NABARD) at the national level.

The Net State Domestic Product (NSDP) is a measure of the economic activity in the state and comparing it
with the utilization of bank credit or bank deposits indicates how much economic activity is being financed
by the banks and whether there exists untapped potential for increasing deposits in that state.

Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and women‘s empowerment as well
as pro 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.

India to-day has an extensive banking infrastructure comprising over 30,000 rural and semi urban branches
of commercial banks, over 14,000 branches of Regional Rural banks (RRBs), around 12,000 branches of
District Cooperative Credit Banks (DCCBs) and 1,12,000 Primary Agricultural Credit Societies (PACS) at
the village level (around 66,000 PACS are stated to be functional; the remaining are dormant).

Availability of finance, moreover, tilts the employment scenario in favour of self-employment vis-à-vis
wage employment. An added dimension is the empowerment of women with easier availability of micro-
finance to them. Going by the estimates provided earlier, the demand for production credit in the country
today is equal to Rs.17000 crore per annum whereas the total credit outstanding under micro-finance is
merely Rs.5000 crore. Thus, there is definitely a need to increase the flow of credit, both for consumption
and Production to the rural sector.
4.2) CHANNELS OF MICRO FINANCE

In India microfinance operates through two channels:

1) SHG – Bank Linkage Programme (SBLP)

2) Micro Finance Institutions (MFIs)

1) SHG – Bank Linkage Programme

This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under the SHG model
the members, usually women in villages are encouraged to form groups of around 10-15. The members
contribute their savings in the group periodically and from these savings small loans are provided to the
members. In the later period these SHGs are provided with bank loans generally for income generation
purpose. The group’s members meet periodically when the new savings come in, recovery of past loans are
made from the members and also new loans are disbursed. This model has been very much successful in the
past and with time it is becoming more popular. The SHGs are self-sustaining and once the group becomes
stable it starts working on its own with some support from NGOs and institutions like NABARD and SIDBI.

2) Micro Finance Institutions

Those institutions which have microfinance as their main operation are known as micro finance institutions.
A number of organizations with varied size and legal forms offer microfinance service. These institutions
lend through the concept of Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10
individual members who come together for the purpose of availing bank loans either individually or through
the group mechanism against a mutual guarantee. The reason for existence of separate institutions i.e. MFIs
for offering microfinance are as follows:

 High transaction cost – generally micro credits fall below the break-even point of providing loans by
banks
 Absence of collaterals – the poor usually are not in a state to offer collaterals to secure the credit
 Loans are generally taken for very short duration periods
 Higher frequency of repayment of instalments and higher rate of Default

Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25 companies, Societies and
Trusts, all such institutions operating in microfinance sector constitute MFIs and together they account for
about 42 percent of the microfinance sector in terms of loan portfolio. The MFI channel is dominated by
NBFCs which cover more than 80 percent of the total loan portfolio through the MFI channel.

Sl. No. Type of MFI Number Legal Registration

Not-for Profit MFIs
1 NGOs 400-500 Society Registration Act, 1860
Indian Trust Act, 1882
2 Non-Profit companies 20 Section-25 of Indian Companies Act,
1956
Mutual Benefit MFIs
3 Mutual benefit MFIs – Mutually 200-250 Mutually Aided Co-operative societies,
Aided Cooperative Societies (MACS) Act enacted by State Governments
For Profit MFIs
4 Non-Banking Financial Companies 45 Indian companies Act, 1956
(NBFCs) Reserve Bank of India Act, 1934

Source: NABARD ISSUES RELATED TO MICROFINANCE

4.3) List of Top 20 Microfinance Institutions in India

1) SKS Microfinance Ltd (SKSMPL)
2) Spandana Sphoorty Financial Ltd (SSFL)
3) Share Microfin Limited (SML)
4) Asmitha Microfin Ltd (AML)
5) Shri Kshetra Dharmasthala Rural Development Project(SKDRDP)
6) Bhartiya Samruddhi Finance Limited (BSFL)
7) Bandhan Society
8) Cashpor Micro Credit (CMC)
9) Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)
10) Grameen FinancialServices Pvt Ltd (GFSPL)
11) Madura Micro Finance Ltd (MMFL)
12) BSS Microfinance Bangalore Pvt Ltd (BMPL)
13) Equitas Micro Finance India P Ltd (Equitas)
14) Bandhan Financial Services Pvt Ltd (BFSPL)
15) Sarvodaya Nano Finance Ltd (SNFL)
16) BWDA Finance Limited (BFL)
17) Ujjivan FinancialServices Pvt Ltd (UFSPL)
18) Futures Financial Services ChittoorLtd (FFSL)
 19) ESAF Microfinance & Investments Pvt. Ltd (EMFIL)

20) S.M.I.L.E Microfinance Limited.

4.4) Critical Analysis

Global GDP growth is set to remain steady at 3% for the fifth consecutive year in 2016.However, the low-
income population often gets neglected in this growth story. Around 2 billion people lack access to even a
savings account and more than 200 million micro, small and medium-sized enterprises (MSME) lack access
to adequate financing; these numbers highlight the extent of financial exclusion.2 Banks seem to have taken
note of these realities and are adopting new technologies and leveraging partners to tap the underserved.
This has resulted in increased financial inclusion in rural areas, especially among those who are opening
bank accounts for the first time. Still, despite the best efforts of banks, many are yet to be included in the
formal financial system through access to formal credit.

Microfinance institutions (MFIs) have taken centre stage in addressing the gap. The microfinance sector
has seen a paradigm shift in the last few decades. It is currently very complex and involves scores of
MFIs and microfinance investment vehicles, which is a staggering shift from its inception as microcredit
offered to customers with zero banking access across the world. Thus, the sector is in a position to
address the financial inclusion agenda.

Global growth trajectory of MFIs

It is difficult to encapsulate the global microfinance market in a single phrase as the challenges and
opportunities vary substantially across regions. For instance, while markets in Latin America and Central
Asia have driven industry growth in the past, they are expected to slow down in 2016. Prospects are,
however, observed to be stronger for markets in Asia Pacific and Sub-Saharan Africa, as they are expected
to register above-average rates of growth in 2016. A series of macroeconomic events which have posed a
threat to the general economy could be responsible for this slowdown. In some countries, this has led to
weaker currencies and lower remittance inflows, which has in turn impacted local borrowers’ demand for
funds and repayment capacity. The fall in remittances has been particularly difficult on micro-entrepreneurs
as it has curtailed an important source of supplementary income. From a structural perspective, however, the
potential for growth across most microfinance markets is vast as financial exclusion remains widespread. In
spite of the rate of financial inclusion progressing rapidly in the last decade, a large gap is observed between
developing and developed countries. For instance, while the ratio of private credit to GDP in countries with
large microfinance markets (developing and underdeveloped countries) hovers at around 40%, in developed
countries, this indicator lies well above 100%.3 This gap implies that the microfinance sector still has plenty
of room to ‘catch up’, allowing it to outpace growth levels in more mature segments of the economy for the
foreseeable future. However, this is not true of all microfinance markets. In some countries—for instance,
Peru—financial markets have expanded at an impressive pace and access to basic financial services is now
relatively extensive. While these microfinance markets are expected to register lower growth rates going
forward, it does not imply that the demand for financial services is now fully met. There has been a meteoric
shift in the demand for innovative and advanced segments such as MSME financing or leasing, which
remain thoroughly underserved.Private credit to GDP in countries with large microfinance markets
(developing and underdeveloped countries) hovers at around 40%, in developed countries, this indicator lies
well above 100%.3 This gap implies that the microfinance sector still has plenty of room to ‘catch up’,
allowing it to outpace growth levels in more mature segments of the economy for the foreseeable future.
However, this is not true of all microfinance markets. In some countries—for instance, Peru—financial
markets have expanded at an impressive pace and access to basic financial services is now relatively
extensive. While these microfinance markets are expected to register lower growth rates going forward, it
does not imply that the demand for financial services is now fully met. There has been a meteoric shift in the
demand for innovative and advanced segments such as MSME financing or leasing, which remain
thoroughly underserved.To address this market failure and to provide financial services to low-income
clients, MFIs have emerged, although their role in the financial ecosystem has undergone a shift from the
time that they commenced operations. The pioneer MFIs operated as non-profit, non-governmental
organisations with a strong social focus. They developed new credit techniques; instead of requiring
collateral, they reduced risk through group guarantees, appraisals of household cash flow and small initial
loans to test clients. Today, however, MFIs have changed from non-government organisations to
nonbanking finance companies (NBFCs), and there has been a modification in how they raise finance. Once
primarily donor-led, MFIs are now increasingly funded by banks and private and shareholder equity

The government has undertaken a number of initiatives to enhance the credit lines for individuals from
lower income groups. In 2015, Micro Units Development & Refinance Agency Limited (MUDRA) and
Pradhan Mantri MUDRA Yojana (PMMY) were launched, which guided the banks to lend to
microenterprises, with a total target of 1,22,188 crore INR credit disbursal. The Union Cabinet also
approved the creation of a credit guarantee fund for MUDRA loans, which is expected to provide guarantee
to loans worth more than 1 lakh crore INR to microenterprises.
Evolution of MFIs

MFIs emerged in India in the late 1980s. Their business proliferated in the 1990s under the open economy
regime. In India, microfinance operates through two main channels:

• MFIs

• Self-help groups (SHGs)

Number of
E
 Chapter-5

Findings and Recommendation

5.1) Findings & Conclusion
The strength and sustainability of the Indian microfinance business model lies in the fact that it is serving
a large unmet need for financial inclusion. It has thus far successfully tackled challenges that have faced
other financial service providers in meeting the demands of this sector through creative product
innovation with awareness of the segment’s particular needs and capacities and use of the joint liability
group mechanism to manage risk.

The model has been successful in maintaining excellent portfolio quality even with extremely rapid
expansion over the last few years. The large size of the currently unbanked population in India and
diversity of geography means that the microfinance sector has great potential for continued high growth.
Moreover, as the sector approaches maturity, there will be increasing attention focused toward client and
geographical diversification and product innovation, financial and nonfinancial. Besides expanding their
own services, MFIs are also being viewed as potential channels for delivery of other products and
services to low income and rural populations. Since the scale of the Indian MFI industry has exceeded 20
million clients, other consumer product and service providers are beginning to attach greater value to the
microfinance distribution network.

Given this growth and maturity dynamic, the Indian microfinance sector is increasingly seen as a viable
investment target with commercial investors joining the social investors who have been nurturing the
industry thus far. Equity valuations in the Indian microfinance sector are higher than the financial sector
in general and global MFIs in particular due to the high growth expectations and substantial availability
of debt to fuel its rapid expansion.

MFI shares are expected to trade at significant premium to book over the short and medium term as MFIs
realign their business models to capitalize on unsatisfied demand, and cool down over the longer term as
the industry matures and begins to consolidate.

As more investors enter the market, exit opportunities are also increasing in the form of secondary and
trade sales. Larger MFIs may also consider IPOs, although that may not be a realistic exit option for most
MFIs in the short to medium term. Another likely exit scenario is M&A, as larger MFIs seek to acquire
players with product or geographical niches.

The industry is in its initial stage and its development could take many forms, but we expect growth,
innovation and financial performance to continue on an encouraging path.
5.2) Recommendation

For Managing for Profitability and Sustainability:

 The primary focus in a young MFI is to achieve break-even and ensure that financial revenues
exceed all operating expenses, include financial costs and the provision for loan losses. A high
quality portfolio that generates high yields but operates with low financial expenses and
efficient operations is the priority. Each one of the variables in Operating Self-Sufficiency
should be monitored on a monthly basis.
 MFIs that receive high levels of donations and grants (as NGOs) need to maximize that
opportunity by investing primarily in a productive portfolio that generates high levels of
revenues. As they break-even and become more profitable, their Return on Assets and Return
on Equity may be as high, or higher than commercial or for-profit MFIs.

For Managing for Asset/Liability Management:

 Interest rate management: The interest rate set by the MFI must generate enough revenue to
cover the cost of funds, operational costs and the provision for loan losses. The margin
between the yield on portfolio and the cost of funds is the amount available for other
operational expenses. Rates that are intentionally subsidized or unintentionally too low, do not
sustain services in the long term for clients.
 Asset management: Assets should be invested and put to their most productive means in
order to produce the most revenue as possible.
 Leverage: Finding the right balance between debt and equity funding is not always
straightforward. Borrowing funds for growth and expansion may be recommended, provided
that more revenue is generated than the cost and use of borrowing.
 Liquidity Management: The MFI needs to manage its liquidity to ensure that it has sufficient
funds on hand to meet any short-term obligations, including operational expenses, interest and
principal payable.
 Foreign Currency Management: Some MFI’s borrow in funds in foreign currency because
local currency borrowings are unavailable. If the MFI also has assets in foreign currency,
some of the risk of exchange rate fluctuations, particularly losses can be minimized. However,
the risk can be significant in places where the local currency fluctuates highly.

For Managing for Portfolio Quality:

  Loan recovery begins with providing services that client’s value, through efficient and
effective loan administration.
 Loan recovery is possible through good, thorough loan assessment that looks at the
willingness and capacity of the client to repay.
 Effective loan recovery is strengthened through good management information systems that
provide relevant, timely and accurate information about the loan’s status.
 Immediate late loan follow up and effective delinquency management that uses incentives as
well as dis-incentives is critical for preventing chronic problems or high write-offs.
 The MFI needs to establish clear accounting policies to account for portfolio aging, the
provision for loan losses, and write-offs for loans that are considered uncollectible.
 The MFI should provide clear and transparent disclosure of financial information related to its
portfolio quality, its accounting policies for the portfolio, and actual performance for the
reporting period.

For Managing for Efficiency and Productivity:

 Take advantage of any technology that will decrease your operating and transaction costs –
for your institution and for your clients.
 Implement effective incentive systems for strong staff performance – your financial services
team and your support and administrative staff. Staff working together toward common goals
will think “win / win” rather than compete against one another.
 Continually monitor portfolio quality to ensure that efficiency is not compromised by
increasing delinquency.
 Chapter 6

Bibliography
6.1) Bibliography
Research Papers and journals:

 Sen, Mitali (2008), “Assessing Social Performance of Microfinance in India”, The ICFAI Journal
of Applied Finance, Vol.14, No.86, pp.77-86.
 Crabb, Peter (2008), “Economic Freedom and Success of Microfinance Institutions”, Journal of
Developmental Entrepreneurship, Vol.13, No.2, pp.205-219.
 Pankaj K Agarwal and S.K.Sinha (2010), “ the financial performance of microfinance institutions
in India”, Vol.11, No.2

Websites:

 www.google.com
 www.scribd.com
 www.mfinindia.org
 www.investopedia.com
 www.seepnetwork.org
 www.authorstream.com
 www.mixmarket.org

Links:

 http://timesofindia.indiatimes.com/business/india-business/MFIs-to-clock-30-35-annual-growth-ICRA/
articleshow/24552665.cms
 www.mixmarket.org/mfi/sks/report
 www.mixmarket.org/mfi/country/India?gclid=CMLf_LyHgL4CFYqIfgodAooAsg
 http://www.microfinancegateway.org/gm/document-1.9.43423/05.pdf