PROJECT REPORT

(Submitted for the Degree of B.Com. Honours in Accounting &Finance under the
University of Calcutta)

Title of the Project

Micro-finance Institutions in India

Submitted by

Name of the Candidate : SOUVIK GHOSAL

Registration no. : 141-1111-0458-20

Name of the College : ACHARYA GIRISH CHANDRA BOSE COLLEGE

(FORMELY BANGABASI COLLEGE OF COMMERCE)

College Roll No : 20210156

Supervised by

Name of the Supervisor : PROF. SUKANTA MUKHERJEE

Name of the College : ACHARYA GIRISH CHANDRA BOSE COLLEGE

(FORMELY BANGABASI COLLEGE OF COMMERCE)

Month & Year of Submission

MAY, 2023
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 ACKNOWLEDGEMENT

I convey my heartfelt appreciation to PROF. SUKANTA MUKHERJEE without whose cordial and
active supervision the project could not have come into light. I also extend my thanks to all other teachers of my
college for their commendable efforts to bring out this project in very short span of time.

Again I am thankful to to PROF. SUKANTA MUKHERJEE for reposing confidence on me to write on this
dynamic subject and share his vast knowledge for the completion of the project.

Moreover, I am also thankful to all other learned members of my college for valuable suggestion regarding the
project.

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 TABLE OF CONTENT
SUBJECT PAGE NO.
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY 6
1.2 HISTORY OF MICROFINANCE INSTITUTION 7-9

1.3 FUNCTIONS 10
1.4 STRUCTURES OF MICROFINANCE INSTITUTION 10

1.5 PRINCIPLES OF MICROFINANCE INSTITUTION 10-11

1.6 NEED OF THE PROJECT 12

1.7 LITERATURE REVIEW 13
1.8 OBJECTIVE OF THE STUDY 14
1.9 METHODOLOGY 14
1.10 LIMITATION OF THE STUDY 15
1.11 CHAPTER PLANNING 15

CHAPTER 2
CONCEPTUAL FRAMEWORK
2.1 CONCEPTUAL FRAMEWORK OF NATIONAL
AND INTERNATIONAL SCENARIO 16-19

CHAPTER 3
PRESENTATION, ANALYSIS AND FINDINGS
3.1 MODELS OF MICROFINANCE IN INDIA 21-26
3.2 WORKING OF MICROFINANCE IN INDIA 27
3.3 REGULATION OF INTEREST RATE 28
3.4 ISSUES RELATED TO MUCROFINANCE IN INDIA 28-32
3.5 MAJOR PLAYERS PARTICULARLY FINANCE 32
3.6 PROFILE OF FOUR BIGGEST MICRO FINANCE INSTITUTION
i. SKS MICROFINANCE LTD 33-34
ii. SPANDANA SPFOORTHY FINANCIAL LTD 35
iii. SHARE MICROFIN LTD 36
iv. BANDHAN MICROFINANCE LTD 37
3.7 SKS MICROFINANCE LTD-STORY 38
3.8 SKS MICROFINANCE AND ITS MODELS OF OPERATION 39-41

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 CHAPTER 4
CONCLUSION AND RECOMMENDATION
4.1 CONCLUSION AND RECOMMNENDATION 42-44

REFERENCES 45
ANNEXTURE 1A 46
ANNEXTURE 1B 47

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 CHAPTER 1

INTRODUCTION

5
1.1 BACKGROUND
Microfinance has been acknowledged as the only alternative mechanism for rural poor peopleto break
out the ‘vicious cycle’ of poverty, The reason that, it has; the potential to improve users' incomes and
savings, and accordingly, improve assets accumulation and reinforce far above the ground incomes
(Atieno, 2001). Although it is the main stream finance, institutions have a significantly helping the
poor to improve their well-being, poor people are excluded from formal financial systems. Such
exclusion ranges from partial keeping out in developed countries to frill or almost complete
elimination in less developed countries (LDCs) (Brau & Woller, 2004).
In India, the microfinance program has gained rapid momentum since 1992 when an innovative
bank linkage program of the National Bank For Agriculture and Rural Development (NABARD)
through self-help group (SHGs), showed positive result in the process for development through
microfinance in the rural areas and enabling the rural poorto establish a closer link with the bank in
the sector and to make an easy access to microfinance from various economic actives. Recently, the
year 2007 also witnessed the national debate on the proposed microfinance financial sector
(development and regulation)Bill' introduced in the Indian parliament indicating the significance
and values of microfinance in the development field in general and poverty reduction in particular.

Microfinance started with the recognition that poor people had the capability to lift themselves out
of poverty if they had access to affordable loans. High repayment rates in the industry have
changed the perception that he poor are not credit worthy. With the right opportunities, the poor
have proved themselves to be productive and capable of borrowings saving and repaying, even
without collateral.

Microfinance industry recorded a growth of 51 per cent year-on –year in the second quarter of 2018-
19 with total Gross Loan Portfolio(GLP) standing at Rs. 146,741 crore, said a report Monday.

Of the total, Non-Banking Finance Company-Microfinance Institutions (NBFC-MFIs) accounted for

significant chunk.

While the total number of active microfinance accounts for the overall industry was at 7.77 crorewith a
growth of 27 per cent, NBFC-MFIs witnessed a growth of 32.9 per cent with 3.43 crore accounts in the
period, said the report by Microfinance Institutions Network (MFIN)." (Economics Times)

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 1.2 HISTORY OF MICROFINANCE INSTITUION
Since Indian independence in 1947, successive governments have emphasized the link between
improving access to finance and reducing poverty. The creation of a nationwide network of rural
cooperative banks in the 1950s was an attempt to improve financial access for India's poor, 75% of
whom are concentrated in rural areas.
This was followed by further measures aimed at increasing financial access- the
nationalization of commercial banks in the late 1960s, and an aggressive drive through the 1970s
and 1980s to expand rural banking. In 1991, government reforms allowed for an increase in
commercial banking in India. The country now has a wide-spread and efficient banking set-up-
with around 100,000 bank branches nationwide.

The expansion of commercial banking has also led to a more favorable financial environment for the
poor in India. It was following these reforms that the "Self-Help Groups (SHGs)—Bank Linkage
"model grew to become a key part of finance for India's poor. Self Help Groups (SHGs) are informal
associations of up to 20 women. The groups provide an opportunity for individuals to pool money, and
then use these funds to lend small amounts to each other with interest. Through the SHG Bank
Linkage Program, established groups can apply for loans through their local bank branch, limited in
size to a ratio of the group's own funds. This limit may be increased over time as previous loans are
successfully repaid. This model of finance -- an Indian innovation -- has been very successful,
increasing just 500 SHGs linked to banks in the early 1990s, to over one million at present.

However, outreach of the SHG Bank Linkage Program remains limited. The program has
provided savings account facilities to about 12 million women, and credit accounts to an estimated two
to four million women.

The program remains concentrated in south India, with nearly 75% of funds flowing to SHGs in the
four southern states.
The SHG-Bank model has also had mixed success in targeting the poorest. For example, in Andhra
Pradesh — one of India's poorest states — less than half of SHG members are from the poorest groups
(as defined by size of land-holding).

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SHG Bank Linkage Model in India
On the sidelines of Microfinance India 2010 Summit in New Delhi, Dr.C.Rangarajan,
Chairman of The Economic Advisory Council to the Prime Minister said that greater linkagebetween
banks and Self Help Groups (SHGs) and expansion of the Business Correspondent (BC) model were
likely to bring a surge in the microfinance sector.' He added, “I believe the Bank-SHG linkage
programed has an important role to play with the addition of the BC model.”

Let us understand the SHG-Bank Linkage Model. SHGs are small, cohesive and
participative groups of the poor, who pool their thrift regularly and use it to make small
interest bearing loans to members and in the process learn the nuances of financial discipline.
Subsequently they graduate to access bank credit to augment their resources for lending to
their members in need of financial assistance for meeting their credit needs. Over the years the
pooled resources of the SHGs become a sizeable corpus, which complimented by higher
volume of bank loan enables them to take up livelihood activities which results in improving
their standard of living.

According to the Status of Micro Finance in India 2009-2010 released recently by National Bank for
Agriculture and Rural Development (NABARD) there are 69,53,000 SHGs in the country savings
linked with banks and 48,51 ,000 SHGs having loan outstanding as on 31 March 2010. The estimated
number of families covered under this model is about 970 lakhs.The total savings amount of all the
SHGs with banks as on 31 March 2010 amounts to.
Rs.6198.71 crore and the total amount of loans outstanding against SHGs as on 31 March 2010 is
Rs.28038.28 crore. The SHG-Bank Linkage Model is the largest financial inclusionprogram in the
world.

Self-Help group Bank Linkage Programme

(Amount in : Billion)
No. of SHGs
Financed Bank Loan Refinance
Year (end
March) BY BANKS

During the During Cumulat ive During

Cummulative the Cumulative
year the ear
year
1 2 3 4 5 6 7

8
2000-01 149050 263825 2.88 4.81 2.51 4.01
2001-02 197653 461478 5.45 10.26 3.96 7.97
2002-03
255882 717360 20.49 6.22 14.19
18.56
2003-04 361731 1079091 - 7.05 21.24
2004-05 539365 1618456 29.94 68.98 9.68 30.92
10.68
2005-06 620109 2238565 44.99 1 13.97 41.6

12.93
2006-07 - 65.7 - 54.53
105749
1227770 16.16
2007-08 - 88.49 - 70.68
1609586 122.54
2008-09 - - 26.2 96.88
1586822 144.53
2009-10 - - 31.74 128.62
2010-11 1196134 145.48
- - 31.74 128.62

1147878 165.35
2011-12 - - 30.73 184.8

2012-13 1219821
- 205.85 - 39.17 223.96
1366421
2013-14 - 240.17 - 37.46 261.42

2014-15 1626238
- 275.82 - 44.93 306.35

2015-16 1832323 372.87 69.06

- - 375.41

2016-17 1898120 387.81

_ _ 56.6 431.95

2017-18 2261132 471.86 69.81

_ _ 502.75

2018-19 2698400 583.18 128.86

_ _ 631.61

2019-20 3146002 776.59 154.34

_ _ 785.95

2020-21 2887394 580.71 122.27

_ _ 908.22

Notes:
Data relate to Commercial Banks, RRBs and Co-operative Banks.
From 2006-07 onwards, data on number of SHGs financed by banks and bank loans are inclusive of
'Swarnajayanti Gram Swarozgar Yojna' (SGSY) SHGs and existing groups receiving repeat loans.
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Owing to this change, NABARD discontinued the publication of data on a cumulative basis from 2006-
07. (Source: NABARD)

1.3 FUNCTIONS OF MICROFINANCE INDUSTRY

 TO improve the quality of life of the poor by providing access to financial and support services;
 To be a viable financial institution developing sustainable communities;
 To mobilize resources in order to provide financial and support services to the poor, particularly
women, for viable productive income generation enterprises enabling them toreduce their
poverty;
 Learn and evaluate what helps people to move out of poverty faster;
 To create opportunities for self-employment for the underprivileged;
 To train rural poor in simple skills and enable them to utilize the available resources and
contribute to employment and income generation in rural areas.

Examples of enterprises established included, buying a buffalo to sell its milk; starting a kirana store;
manufacturing sweets; selling soft drinks; grinding spices; sewing; candle making; collecting fallen
hair for wigs and extension; repairing watches; tea or petty shops; vegetable stands; bicycle repair;
carpentry and welding shop or an auto rickshaw.

1.4 STRUCTURES OF MICROFINANCE

Microfinance institutions broadly operate under a wide range of legal structures. They could be
registered as-

1. Trusts,
2. Sec 25 Companies,
3. Non-Banking Finance Companies,
4. Cooperative Societies,
5. NGO
6. Cooperative Banks,
7. Regional Rural Banks,
8. Local Area Banks,
9. Business Correspondents and
10. Public and Private Sector Banks.
For instance, SKS microfinance is registered with the RBI as a non-deposit taking NBFC and is
regulated by the RBI.

1.5 PRINCIPIE OF MICROFINANCE

Microfinance is a powerful Instrument against poverty. Access to sustainable financial services

enables the poor to increase incomes. build assets, and reduce their vulnerability to external shocks.
Microfinance allows poor households to move from everyday survival to planning for the future,
Investing in better nutrition, improved living conditions, and children's health and education.

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Financial sustainability is necessary to reach significant numbers of poor people. Most poor people are
not able to access financial services because of the lack of strong retail financial intermediaries.
Building financially sustainable institutions is not an end in itself. It is the only way to reach
significant scale and impact far beyond what donor agencies can fund. Sustainability is the ability of a
microfinance provider to cover all of its costs. It allows the continued operation of the microfinance
provider and the ongoing provision of financial services to the poor.

The poor need a variety of financial services, not just loans. Just like everyone else, poor people need
a wide range of financial services that are convenient, flexible, and reasonably priced.

The importance of financial and outreach transparency. Accurate, standardized, and comparable
information on the financial and social performance of financial institutions providing services to the
poor is imperative. Bank supervisors and regulators, donors, investors, and more importantly, the poor
who are clients of microfinance need this information to adequately assess risk and returns.

Interest rate ceilings can damage poor people's access to financial services. It costs much more to
make many small loans than a few large loans. Unless micro lenders can charge interest rates that are
well above average bank loan rates, they cannot cover their costs, and their growth and sustainability
will be limited by the scarce and uncertain supply of subsidized funding. At the same time, micro
lenders should not pass on operational inefficiencies to clients in the form of prices (interest rates and
other fees) that are far higher than they need to be.
"Donor funds should complement private capital, not compete with it."
Microfinance must be useful to poor households: helping them raise income, build up assets and /or
cushion themselves against external shocks.
The government's role is as an enabler, not as a direct provider of financial services. National
governments play an important role in setting a supportive policy environment that stimulates the
development of financial services while protecting poor people's savings.

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1.6 NEED OF THE PROJECT

 In India around 27 percent population living below the poverty line.

 About 60 percent of the poorest households do not have access to credit.

 Only 20% access loan from the formal sources.

 Annual credit demand by the poor is estimated to be about Rs. 60,000/- crores and only
Rs. 12,000/- crores are disbursed.

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.
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.
Central government in India has established a strong & extensive link between NABARD
(National Bank for Agriculture & Rural Development), State Cooperative Bank, District
Cooperative Banks, Primary Agriculture & Marketing Societies at national, state, district
and village level.

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1.7 LITERATURE REVIEW
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 enabling them to arise their income levels and
improve living standards".

"The poor stay poor, not because they are lazy but because they have no access to capital."
The dictionary meaning of 'finance' is management of money. The management of money
denotes acquiring & using money. Micro Finance is buzzing word, used when financing for
micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to
empower under-privileged class of society, women, and poor, downtrodden by natural reasons
or men made; caste, creed, religion or otherwise. The principles of Micro Finance are founded
on the philosophy of cooperation and its central values of equality, equity and mutual self-
help. At the heart of these principles are the concept of human development and the
brotherhood of man expressed through people working together to achieve a better life for
themselves and their children.
Microcredit or Microfinance is the process of granting small loans to poor people, primarily to
women, who have no collateral and are marginalized. These women tend to use their income
to benefit their households and children. The process is accomplished through a microfinance
institution.

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1.8 OBJECTIVES OF THE STUDY:
Microfinance is a term for financial services that are offered to individuals of lower
socioeconomic backgrounds or those who lack access to traditional financial services.
Microfinance includes a number of services, such as savings accounts, checking accounts, fund
transfers, micro insurance, and microcredit.
 This project is done to give a concrete idea about Microfinance industries.
 The models used in this project give a clear idea about the functions of such industries.
 Regulation of interest rate, Benefits to the society are also shown to give a clear vision about
India’s Microfinance sector.
 An descrptive study also has been prepared to show the workings of this sector towards the
poor households so that they can improve themselves and take part in capital generation
process by establishing small village based industries, handicrafts etc.

1.9 METHODOLOGY
 Area of Study: For the completion of this project, I have studied different micro finance
units, their models and working procedure in India. Besides, I have also studied different
newspapers and articles to know about their schemes and ways of giving loans and advances.

 Type of Study: The project has been done in a descriptive pattern.

 Tools of data collection: For the Completion of this study, secondary data is taken from
internet and RBI journal.

 Method of analysis: This project is mainly done in a descriptive pattern. In order to

represent some practical data, I have used bar diagram and tabular models.

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1.10 LIMITATIONS OF THE STUDY

• As the study is based on secondary data and information is taken from Internet
and RBI journals are faced for finding the exact data but it is somehow managed
to get the information.
• The figures and data analysis are based on examining, obtained through various
statistical records which is relevant today but can be irrelevant tomorrow.
• There are several time constraints.

1.11 CHAPTER PLANNING:

 Chapter 1 consists of background, need of the study, literature review, objectives,

methodology, limitations of the project.
 Chapter 2 consists of national and international scenario.
 Chapter 3 consists of models of microfinance in India, working of microfinance in India,
regulation of interest rate, issue related to microfinance, major players particularly finance,
profile of four biggest micro-finance institution, SKS Microfinance Ltd. Story and its
models of operations.
 Chapter 4 consist of conclusion and recommendations.

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 CHAPTER 2

CONCEPTUAL FRAMEWORK

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NATIONAl SCENARIO

The Government of India will setup Micro Units Development and Refinance Agency
(MUDRA) Bank with a capital of Rs core which would regulate and refinance all microfinance
institutions. The government proposes to set up MUDRA Bank through a statutory enactment.
This Bank would be responsible regulating and refinancing all Microfinance Institutions (MFI)
which are in the business of lending to micro/ small business entities engaged in manufacturing,
trading and services activities, The Bank would partner with state level / regional level
coordinators to provide finance to Last Mile Financer of small / micro business enterprises. The
MUDRA Bank would primarily be responsible for laying down policy guide lines for
micro/small enterprise financing business, registration of MFI entities, regulation of MFI
entities, rating of MFI entities, laying down responsible Financing practices to word of
indebtedness and ensure proper client protection principles and methods of recovery. It would
also be responsible for development of standardized set of covenants governing last mile
lending to micro / small enterprises promoting right technology solutions for the last mile,
formulating and running a credit guarantee scheme for providing guarantees to the loans which
are being extended to micro enterprises and creating a good architecture of Last Mile Credit
Delivery to micro business under the scheme of Pradhan Mantri Mudra Yojana, a sum of Rs
20,000 crores would be allocated to the MUDRA Bank from the money available from short
falls of priority sector lending for creating a refinance fund to provide refinance to the last mile
financers. Another Rs 3000 crores would be provided to the MUDRA Bank from the budget to
create a credit guarantee corpus for guarantying loans being provided to the micro enterprises.
The number of people microfinance borrowers have been reduced in the wake of the Andhra
Pradesh (AP) microfinance crisis of 2009-10, triggered by a series of borrowers suicides,
allegedly on account of unscrupulous MFI (micro finance institutions).

Evolving Landscape of Microfinance in India

Various initiatives taken in the past few years in respect of financial inclusion.
Pradhan Mantri Jan DhanYojana (PMJDY):- A major scheme aimed toward financial
inclusion ,Pradhan Mantri Jan Dhan Yojana was launched 28 august 2014, to provide every
house hold with a bank account and a basic insurance cover. These scheme received
considerable response and around 15m accounts were opened on the day of its launched. As of

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22 June 2016, 221.8 million accounts (with total balance of INR 391.53 billion) have been
opened under this scheme.

Launch of Specialized Banks: -The RBI granted licenses for I I payments banks in August
2015 and 10 small finance banks in Septembers 2015. These specialized banks are expected to
become operational during 2016-17. These banks will provided further push in terms of
accessibility of finance channels and in turn contribute inclusive growth.

Launch of MUDRA Banks: -Micro Unit Development and Refinance Agency (MUDRA) was
launched in April 2015 to fund and promoted micro financer institutions (MH), which will, in
turn, provide loans to small businesses. The MUDRA scheme refinances collateral free loans of
up to INR 1m given buy lending institutions to small, non-corporate borrowers, for income-
generating activates in the non-farm segment. As of December 2015, MUDRA loans amounted
to INR 713.12b, which had been disbursed to 17.3m borrowers.

With the continued need for financial inclusion, MFI, which have emerged as an
alternative role. Moreover MFI’s are taking their rightful places in the financial inclusion
scenario as is evidenced by the fact that of the 10 entities granted Small Finance Banks (SFC)
licenses in September 2015, 8 were MFI's.

INTERNATIONAL SCENARIO

Latin America has very good conditions for microfinance; the macroeconomic growth which
Latin America had shown in the recent year created favorable conditions for the microfinance
institutions' favorable conditions and its development. Profitability of the microfinance sector
presents an attractive market for the financial institutions which already have a have strong
position in the market. The purpose of this work is to focus on the current situation and
performance of the microfinance sector while identifying some of the reasons that affect the
microfinance institutions this region. The work also provides a view on the microfinance
industry development to get a better description of the sector. The microfinance intuitions are

earning an undeniable importance in the process of the regional development and represent an
important factor in the alleviation of poverty and insecurity for large segments of the
population. The work is based on information from relevant sources they allow us to identify
the current status of microfinance in Latin America, especially in these times when the crisis
affects also the region's economic dynamism.

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The microfinance sector in Latin America is composed by the diversity of institution that offer
a wide range of resources which have been successfully developed in the market. In Latin
America, the microfinance are more developed in the terms of coverage, sizes, products and
offered services. The MFIs play an important role in the economic development of the region
where millions of Latin America seek to overcome the exclusion through small productive
activities.

While an Asia and Africa the microfinance sector is directed primarily to rural areas, most
microfinance instructions in Latin America are operating in urban areas. Worldwide the
microfinance institutions in Latin America have more assets, lever up the capital and attract
more business investment than institutions in other regions. The average gross portfolio is
almost by 75% higher than the average of the microfinance institutions in Asia.

ANALYSIS OF THE MICRO FINANCE IN SOME COUNTRIES OF THE REGION

In the region, the Andean countries have a better and conducive environment for the
microfinance development. At the regional level, Peru had located in the first place in the
category of institutional development; however, due to changes in the regulatory framework and
investment climate, there is expected a slight decline. According to Mix (2010) in 2009, there
were showed mixed results which influenced slowing down of the dynamics of the sector in
Bolivia by 18% and in Peru by 25.3%, While Ecuador had a decrease of 7.8%. Also there was an
increase in the number of active borrowers (14.5%), while in deposits, there was an increase in
the number of the depositors' assets 26.4% and 30% in deposits. The growth of the total portfolio
was by 20.1%, higher than the growth shown in 2008, which was 15.2%. Between 2008 and
2009, the situation regarding the risk and profitability was more effected. Despite the efforts of
the IMF to stop impairing their portfolio of risk, profitability was negative and the risk levels
were increasing.

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 CHAPTER 3

PRESENTATION, ANALYSIS & FINDINGS

20
3.1 MODELS OF MICROFINANCE IN INDIA

The main six categories of micro finance models that are followed in India include:
l. Self-help group model
A self-help group (SHG) is described as a group of 5 to 20 individuals who belong to
the low-income class. Each group member typically contributes funds from their own savings
and then this money is pooled in together. These funds are then utilised to support their
common goal of improving their lifestyles and to make themselves financially secure.

They can use this money to obtain training to create superior-quality products. They
receive training not only to make products, they also get trained on how to market, promote,
and sell their products. Many of the poor people are not aware of how to reach out to
customers. Some of them may not know how to assess their creation and fix an appropriate
price for their product. Hence, many of them may fail to make profits when they sell products
without proper knowledge. Being a part of a self-help group will give them proper awareness
about how to make a product, price it, package it, promote it, market it, and sell it to the end
customer efficiently.

2. Grameen model
The Grameen model to distribute microfinance originated in Bangladesh. After seeing
the success of the model in Bangladesh, many institutions in India started to adopt it by
making some adjustments. A few of the institutions that acquired the principles of the
Grameen model are CASHPOR Financial and Technical Services Limited, SHARE
Microfinance Limited, Activists for Social Alternatives (ASA).

This particular model believes in providing a mandatory training course to the group members
for at least 7 days. The model will offer microfinance to an applicant without asking for any
collateral at low costs. The loan application process has minimum or zero paperwork and is
processed very quickly keeping in mind the urgency for funds. Some groups that apply the
Grameen model have a Group Recognition Test (GRT) that refers to a screening process to
divide group members into serious and non-serious groups. Every member must compulsorily
save some money every week.

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3. Co-operative credit union model
These organisations apply the co-operative model to offer microfinance in rural areas. The
Cooperative Development Forum (CDF), Hyderabad has applied the co-operative credit union
model successfully by giving primary importance to savings. The main entities in the CDF are
women's or men's thrift co-operatives (WTCs and MTCs). They have small groups of
individuals wherein each group has a particular leader who heads group meetings, accumulates
the savings of each group member, and looks into the repayment of loans. The group leader is
responsible for making sure all small loans are repaid promptly by each member

4. Federated self-help groups (SHGs) or SHG Federation model

A normal self-help group (SHG) is typically consistent of a few members with the aim of
making each member self-sufficient with adequate funds and high-quality equipment to produce
first-class output. It is usually small in size. Due to the success of these groups, there was a need
for a large-scale self-help group. This led to the establishment of federated self-help groups. A
federated self-help group refers to a large scale self-help group with a large number of members.
It is a federation of multiple self-help groups. A federation of self -help groups will have around
1000 to 2000 members whereas a single self-help group will have only up to 20 members.

22
5. Rotating Savings and Credit Associations (ROSCAs) model
Under this model, funds are offered to groups of individuals through unconventional
means. The members of such associations include individuals who have certain common
features such as ethnicity, community, language, professions, occupations, etc. These members
contribute funds on a regular basis and utilise them for attaining a common goal.

The whole model works according to a systematic way where every member receives funds within a
particular time frame and he or she is required to repay it before the deadline. After this member, another
member will start the whole micro loan process. It functions in the form of a cycle. Unless one member
completes the repayment cycle on time, a new member cannot procure a loan. Hence, with the help of peer
pressure and efficient monitoring skills from the association's leaders, each member will make sure that the
loan is repaid promptly without any delay. Due to fear if the loan cycle will stop because of any one person,
every member ensures that each loan is repaid on time. Chit fund companies in India carry out their lending
operations just like ROSCAs. They encourage the underprivileged people of the society to save money and
accumulate lump sums for the purpose of purchasing high value products.

23
6. Microfinance companies
In India, microfinance companies can be registered as a non-banking financial company
(NBFC) under Companies Act or Reserve Bank of India (RBI). An NBFC engages in
accumulating funds and using them for offering credit and other financial services to other
people. An NBFC generally provides personal loans, car loans, two-wheeler loans, crop loans,
agricultural loans, and lots more. Non-banking financial companies can offer both regular loans
as well as micro loans to the less fortunate people of the society. These NBFCs can be
regulated by the Reserve Bank of India (RBI) or the Companies Act.

Microfinance companies can be non-profit organisations, profit organisations, or mutual

benefit institutions. Non-profit organisations work solely for empowering the needy by
concentrating on their economic and societal conditions. Profit organisations work by
registering themselves as an investment trust, an association of persons, or a company that will
be a bank or an NBFC. Mutual benefit institutions function for the purpose of helping only its
members.

NABARD publishes its annual report on microfinance. In the report, two models of
microfinance are involved for credit linkage with viz. SHG - Bank Linkage Model and MFI Bank
Linkage Model. There are some other models related to SHGs, which are described here-

1. SHG - Bank Linkage model:

This model involves the SHGs financed directly by the banking agencies viz. Commercial
Banks (Public Sector and Private Sector), Regional Rural Banks (RRBs) and Co-
operative Banks. In this model, three bodies are working viz. members, SHG and Bank. On
the one hand, the saving of the members goes to SHGs which, in turn, credit their savings to
them at rates decided by members. On the other hand, these savings are deposited in banks in
the name of group where bank credit at the rates decided by the bank.
2. SHG-NGO Model:
Here, NGOs (Non-government Organizations) are introduced besides SHG, its members and
banks. Members saving go to group and in turn, group also lends to the members. At the
same time, SHG saving are deposited in bank and bank lends to the group. These all
activities are supported and linked by NGO. They actually provide their services to the both,
bank as well as SHG. Thus, NGOs plays the role of promoter and supporter for the bank and
group.

24
3. MFI- Bank Linkage Model:
This model covers financing of Micro Finance Institutions [(MFIs, that may be an NGO]
by banking agencies for on-lending to SHGs and others small borrowers covered under
microfinance sector. Member saves in a group and these saving are deposited in Banks
directly but banks, in turn, credit the SHGs indirectly. They provide credit (may be in
grant form) to NGOs and NGOs lend directly to the members and also tries to provide
raw material or job work. Thus, NGOs are playing the role of creditor and facilitator. A
good example of this type of model can be Bank of Baroda -SEWA, Lucknow.

4. SGSY Model:
The most important feature of this model is the addition of Monitoring authority
that is District Rural Development Authority (DRDA). It monitors for all the five like,
Members, Group, Bank, Department and NGO. Processing of the model is like this,
members saves and submitted their savings in the name of a Group then Group deposits
this amount of saving to banks where banks, in turn, lends to the group directly. Here
NGO and concerned department associated with SHG, Bank and DRDA and Members,
DRDA and Banks respectively with their promotional and support services.

LEAGAL FORMS OF MFI’S

Types of' MFI’s Estimated Legal Acts under which Registered

Number*

1. Not for MF1's 400 to 500 Societies Registration Act, 1860 or

similar Provincial Acts Indian
a NGO-MF1's Trust Act,1882

25
*The estimated number includes only those MFIs, which are actually undertaking lending activity.
Adapted from www.nabarcl.org

TYPE OF ENTITY NON-PROFIT MUTUAL BENEFIT FOR-PROFIT

Association Society under Societies Co-operative which can Association of persons.

Registration Act 1860 be just a savings and
credit cooperative or be
further licensed as co-
operative bank.

Trust under Indian Charitable trust Mutual benefit trust Investment Trusts
Trusts Act 1920

Company under Indian Section 25 Company Mutual benefit Company which is

Companies Act, 1956 further either an NBFC
or a bank.

26
3.2 WORKING OF MICROFINANCE IN INDIA

Working process of Microfinance Institution in India

Explanation for the above process:

1. Financial institution, Donors, private equity is provide funds to the various microfinance
institution in India. They provide loan at the fixed rate of interest to the institution.

2. Various Microfinance institution are the form a self-help group and provide loan tothe
group of 5 to 10 women at their stipulated rate of interest.

3. These self-help group then utilized the given amount of loan for their productive
purpose and then serve the society.

27
3.3 REGULATION OF INTEREST RATES
The interest rates are deregulated not only for private MFIs but also for formal banking
sector. In the context of softening of interest rates in the formal banking sector, the
comparatively higher interest rate (12 to 24 percent per annum) charged by the MFIs has
become a contentious issue. The high interest rate collected by the MFIs from their poor clients
is perceived as exploitative. It is argued that raising interest rate too high could undermine the
social and economic impact on poor clients. Since most MFIs have lower business volumes,
their transaction costs are far higher than that of the formal banking channels. The high cost
structure of MFIs would affect their sustainability in the long run.
Lending small amounts to the poor is expensive and is the reason so many rural poor have
been excluded from the mainstream financial system for so long. In order to operate in hard to
reach areas, provisioning such small loans, MFIs must charge higher interest rates, which
currently average 28% to 33%, to cover their costs. While higher than mainstreamed banks
loaning to richer customers, these rates are much lower than those levied by local
moneylenders — often the rural poor' only other option.

3.4 ISSUES RELATED OF MICROFINANCE IN INDIA

Problems facts by Borrowers
1. Coercion: - one of the most important moral issues being raised in relation to
microfinance is that of coercion. After 54 people killed themselves in the state of Andhra
Pradesh in October 2010, Indian authorities placed microfinance institution (MFI) under
a microscope, and drafter new rules the MFI companies must follow.
The farmers were reportedly deep in debt to microfinance institutions (MFIs).
"Microfinance institutions charge exorbitant interest rates. The poor are derived to take
their own lives because of their barded of debt and the brutal methods used to call in the
loans," the chief minister of Andhra Pradesh said.

2. Brutal and Aggressive Debt-Collection Tactic

"The people calling in the loans are often not aware of the code of conduct of the MFIs"
Many of the MFIs have been resort to brutal methods for collection of debt from these
borrowers. News item like the one below are quite common in India.

"Unable to repay Rs. 235, Farmer kills self

MFI Loan suicide, Hyderabad News
A farmer committed suicide by consuming pesticides, allegedly after being harassed by the
collection agents of a microfinance institution at in Nalgonda district, Andhra Pradesh."
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3. Joint Microfinance

Joint microloans are granted to a group of people who are jointly responsible for repaying the
loan. Individual failures to pay (due to illness or a "bad week") arc avoided and group pressure
serves as a strong incentive In ensuring responsible behavior by making loans to individuals
within lending circle. The individuals meet regularly, ostensibly creating a self- help group. In
reality all the borrowers in the group are responsible for making the loan repayment if a
member defaults, so peer pressure is a very strong factor.

However, in case of default either due to business failures, unproductive expenditure or geed to
consume more, all members is troubled.
4. High Interest Rates
Many in the urban centers would commit suicide if the bank start charging us 24 percent rate
of interest. Even at 8.5 percent rate of interest, those who have drawn housing loans, find it
difficult to make monthly EMI payments. Imagine the stress and threat under which the poor in
the rural areas are being made to borrow at 24 percent rate of interest.
Whatever the justification for charging 24 percent rate of interest, how can human beings
exploit a hungry stomach in the name of a successful business model?
5. Not aimed at lifting people out of poverty
Micro finance serves not to lift people out of poverty but, assist those near or slightly above
the poverty line. Money is given to those people who have a possibility of returning the
principle amount. This leads to the fact that lending money to these people is feasible and
sustainable, while lending to the poorest of the poor is not.

6. Poverty alleviation mission has now been reduced to a Money making tactic of MNCs
Micro finance has now, become a weapon for multinational companies to sell
their products, by collaborating with such institutions. This in turn, is destroying the spirit of
micro credit. For instance: Recently a mobile phone manufacturer offered a micro financing
scheme on a pilot basis in Andhra Pradesh and Karnataka, to sell their handset to the poorest.
Under this project, the company was offering an easy payment scheme of Rs. 100 per week
over a period of time.

29
Andhra Pradesh has promulgated an ordinance to check malpractices in microfinance
institution (MFIs). The state should not throw out the baby with the bathwater; it should
check malpractices without checking MFI growth.

Globally, MFIs have expanded at phenomenal rates largely because they lend without loan
scrutiny to groups of women, and peer pressure of the group keeps defaults below 2% despite
the absence of any collateral or legal procedures for loan recovery. MFIs are, in effect,
benevolent moneylenders, charging interest rates of around 30% to cover high operational
costs.

They are a great improvement on moneylenders charging 60% and using force to seize assets.
However the AP media accuse some MFIs of using force too, and claim that some suicide
have been caused by such coercion. proving the connection is difficult: Persons commit
suicide for several reasons, ranging from psychological to financial issues. The global suicide
rate is 14 per lakh persons; it is even higher in rich countries like b Finland and Japan which
have no MFls.

No rules or regulations can end suicides. But rules should certainly be framed to stop forcible
loan recovery. The top MFIs agree on the need to ensure there is no coercion. and have
adopted a code of conduct in this. But while bad apples among MFIs must be dealt with
firmly, care must be taken not to create new regulations that encourage corruption or crimp
legitimate and desirable MFI lending.

Proposals to prevent members of self-help group from borrowing from MFIs are terribly
wrong, and will penalize poor borrowers and hit financial inclusion. People should be free to
borrow all sources, and members of self-help groups should not require a no-objection
certificate applying an MFI loans it will be one more avenue for corruption and harassment.
The use of force is an issue that must not be mixed up with the separate question of how the
RBI should regulate MFIs.

MFIs have reached 20 million people in a few years, a success owing something to light
regulation that facilitated much innovation and experimentation. Some NIFIs have become
large institutions, and large ones need tougher regulation. But care should be taken to give
MFIs, especially smaller ones, continued scope for innovation and experimentation.

30
Problems faced by Lenders
1. Sustainability

The first challenge relates to sustainability. NIFI model is comparatively costlier in terms of
delivery of financial services. An analysis of 36 leading MFIs by Jindal & Sharma shows that
89% MFIs sample were subsidy dependent and only 9 were able to cover more than SO % 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.

2. Lack of Capital
The second area of concern for MFIs, which are on the youth path, is that they face a paucity
of owned funds. This is a critical constraint in their before able to scale up. Many of the MFIs
are socially oriented institution 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 IPO issue by Mexico Based “Compart Amos’’ was not accepted by purists as they
thought it defied the mission of an MFI. The IPO also brought forth the issue of valuation of
an MFI.

3. 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 supply chains such as agriculture. The later
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 a MFIs skill in management of credit processes and their own
strengths is supply chain management.
ITC Limited, with is strong supply chain logistics, rural presence and an innovative
transaction platform, the e-choupal, has started exploring synergies with financial service
providers including MFIs through pilots with venerable vendors and farmers. Similarly,
large FL's such as Spandana foresee a larger role for themselves in the rural economy ably
supported by value creating partnerships with players such as Mahindra and Western Union
Money Transfer.

31
 ITC has initiated a pilot project called 'pushcarts scheme' along with BASLX (a
microfinance organization in Hyderabad). Under this pilot, it works with twenty women
head loan vendors selling vegetables of around 10 15 kgs per day. BASIX extends working
capital loans of Rs. 10,000/-, capacity building and business development support to the
women. ITC provides support through supply chain innovations by:
1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of
bargaining and unreliability at the traditional mandis (local vegetable markets).
2. Continuously experimenting to increase efficiency, augmenting incomes and
reducing energy usage across the value chain. For instance, it has forged a partnership
with National Institute of Design (NID), a pioneer in the field of design education and
research, to design user-friendly pushcarts that can reduce the physical burden.
3. Taking lessons from the pharmaceutical and telecom sector to identify technologies
that can save energy and ensure temperature control in push carts in order to
maintain quality of the vegetables throughout the day. The model
augments the incomes of the vendors from around Rs. 30-40 per day to an average of
Rs. 150 per day. From anenvironmental point of view, push carts are much more
energy efficient as opposed to fixed format retail outlets.

3.5.MAJOR PLAYERS PARTICULARLY SKS FINANCE

In late 2009, CRISIL which is India's leading ratings, research and risk advisory company
released its list of top 50 microfinance institutions in India. The report titled India's Top 50
Microfinance Institutions presents an overview of leading players in India's microfinance institution
(MFI) space.
This is the first inaugural issue and includes additional commentary analysing the key
strengths and challenges of different microfinance players in the sector. The publication is part of
CRISIVs enabling role in the structured evolution of the MFI sector in India.
CRISIL launched MFI grading as early as in 2002 and has since then become the world's first
mainstream rating agency to develop a separate methodology and scale to assess MFIs. Currently
CRISIL has assessed more than 140 MFIs, and is currently the most preferred rating agency in the
Indian microfinance space.
In light of SKS Microfinances proposed IPO in the coming days the CRISIL report is presented below
for the benefit of the readers of this blog. Market sources reveal that some of these microfinance
institutions which figure in the top 50 are in talks with merchant bankers and investors to tap the
primary markets and want to gauge the response to SKS Microfinances IPO before they fast track their
own listing plans.

32
3.6 PROFILE OF FOUR BIGGEST MFI'S
SKS MICROFINANCE LTD.

SKS Microfinance Ltd (SKS) was incorporated as a private limited company in 2003 for taking
over the microfinance activities of Swayam Krishi Sangam, a society that was registered in 1997 and
began operations in 1998. After obtaining the NBFC license from the Reserve Bank of India in
January 2006, SKS took over the operations of Swayam Krishi Sangam.

SKS is the only listed MFI in India and had its operations spread across 15 states with no state
accounting for more than 20 per cent of its overall loan portfolio as on September
30, 2013. Having successfully survived the Andhra Pradesh crisis despite having a large exposure to
the state, SKS is the second largest NBFC-MFI with loan portfolio of Rs.2.34S crore as on September
30, 2013.

33
Performance on key parameters

Loan portfolio grew to Rs.2,359 crore as on March 31, 2013 from Rs.l,669 crore a year ago,
a year-on-year growth of around 41 per cent. The portfolio performance outside Andhra Pradesh
remains strong, with healthy collection efficiency of 99.8 per cent; however recovery in the Andhra
Pradesh portfolio remains low. Has relationship with nearly 20 banks and financial institutions. Also
raises funds through securitisation on a regular basis.

In 2007, SKS Microfinance raised $11.5 million through equity investments led by Sequoia
Capital. In 2008, it further raised $74.5 million through equity investments led by Sandstone Capital.
On 28 July 2010, SKS Microfinance debuted on the Bombay Stock Exchange with an IPO that was
oversubscribed 14 times. Muhammad Yunus expressed concern that going public would put the
demands of shareholders ahead of the poor.He added further, "If they do it, I cannot stop them but I
would encourage genuine Microcredit programme. ‘’SKS founder Vikram Akula resigned from the
board on 23 November 2011. In 2015 , P. H. Ravi Kumar became the non- executive chairman. The
company’s shares meanwhile lost 90% of their value from ahigh of Rs. 1304 in 2010.

In a 2012 cover story. The Hindu reported that a marked shill took place in the values and
incentives of SKS in 2008, after large scale investment began to flow from venture capitalists and
prospectors including Boston based Sandstone capital and Sequoia capital. In September, 2010
reports surfaced in the media of nearly 200 suicides by defaulters of a number of micro finance
institutions, including SRS finance. This led to an enquiry by the Andhra Pradesh government. In 2014
the investors in the SRS Microfinance. Mauritius Unites Corporation. Sequoia Capital India Growth
Investments and SKS Mutual Benefit Trust as well as its founder Vikram Akula relinquished their roles
as; promoters. In SKS Microfinance was renamed to Bharat Financial Inclusion Ltd. In 2017, the
company launched a loan approval system based on Adhaar to reduce the time and cost involved in
the loan approval process. In the same year, it also launched its Kirana store (general store) service
which its customers to do financial transactions by visiting its designated stores. Later in 2017, the
company entered into discussions of a possible merger with IndsInd Bank. This merger received
approvals from Reserve Bank of India, National Stock Exchange of India and Bombay Stock Exchange
later in 2018.

34
SPANDANA SPHOORTHY FINANCIAL LTD:

Spandana is a sankrit word and it means Response. As spandana was born in response to a problem, the
organization was named as spandana. Spandana is a public limited company registered
With Reserve Bank Of India (RBI) as a NBFC. MFI start in 1998, within five years, by 2003, it grew to
the largest Microfinance Institute in India and 6th largest across globe. In its peak, Spandana had 1856
branches with presence in 10 states and works force of over 13,500 employees.
Spandana was founded by Mrs. Padmaja Reddy in 1998 as a society which was later transformed into an
NBFC and subsequently as NBFC MFI. Mrs. Reddy, the promoter and Managing Director of Spandana
prior to founding Spandana used to work with an NGO in Andhra Pradesh.

Company Overview:
The operations of SSFL focus on women from low-income groups in Rural Areas who aspire to
improve their financial well-being. Abhilasha Loans: SSFL’s main lending product is ‘Abhilasha’
loans, which are income generation loans designed to empower women by enabling them to set up and
expand income generating activities. These loans are primarily given to women, who are willing to
borrow in a group and are agreeable to accept joint liability for the loans. Loans are provided togroups
without any collateral, with each group consisting of 8 to 10 women. Under the JLG model, loans are
provided to individual clients as well where the group guarantees the repayment of loans given to
individual members of the group. In FY20 Abhilasha accounted for 88% of the total loans. The SSFL
used to help poor people to build their houses, provide safe drinking water, sanitation, health
education etc.

35
SHARE MICROFIN LTD

OUTREACH OF OPERATION – MARCH 2018

Company Overview:
SHARE Microfin Limited, a non-banking financial company, provides financial and support
services to rural and semi urban women in India. The company offers income generating loans, such
as group and individual, general, and micro enterprise loans; business development services; and
credit life insurance services. It serves micro-entrepreneurs and their communities in Andhra
Pradesh, Assam, Bihar, Chhattisgarh, Delhi, Gujarat, Haryana, Jharkhand, Karnataka, Kerala,
Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, Uttaranchal, and
West Bengal. The company was founded in 1989 and is based in Hyderabad, India.

SHARE AT A GLANCE AS ON MARCH 31,

2020
TOTAL STATE 18
TOTAL BRANCHES 746
TOTAL VILLAGES 41,386
TOTAL EMPLOYEE 32,075
TOTAL CLIENT SERVICE 5.66M
TOTAL OF LOAN DISBRUSED 1.63 CR
AMOUNT OUTSTANDING 750CR

36
BANDHAN MICROFINANCE LTD

Bandhan (meaning togetherness) was born in 2001 under the leadership of Mr. Chandra
Shekhar Ghosh, a Senior Ashoka Fellow. The main thrust of Bandhan is to work with women who are
socially disadvantaged and economically exploited. Bandhan works for their social upliftment and
economic emancipation. To achieve the above objective, Bandhan is basically engaged in the delivery
of microfinance services to the poor women.
The microfinance operations started from Bagnan, a small village which is 60 kms away from the
city of Kolkata. In 13 years, Bandhan has travelled a wide geography of 22 States and Union
Territories with special focus on eastern and underdeveloped states of North East.

Bandhan's commitment towards triple bottom-line

values is strongly asserted by its intervention in
development activities. It believes that Microfinanceis
not the last word for development of the poor.
Aspiring to holistic development of the poor,
Bandhan offers development activities in crucial
fields of education, health, unemployment,
livelihood and the like through its not-for profit
entity. Besides, Bandhan also has a program
exclusively for the hard core poor (generally
believed to be bypassed by microfinance.

37
3.7 SKS MICROFINANCE LTD-STORY
It was merely a coincidence that the year after C K Prahalad's bestseller, The
Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits (2004), that Vikram Akula
returned to SKS Microfinance, leaving a consultancy job at McKinsey& company in Chicago that he
took a year earlier.
Akula, a Fulbright Scholar researching poverty and a student of art, had founded SKS Microfinance
as a non-profit venture in late 1997 with funding close to $52,000 raised from 357 people. He
converted it into a for-profit company in 2005 during his second stint. Success came rather swiftly. In
2006, Akula was named by Time magazine as one of the world's 100 most influential people.

In less than a decade, SRS emerged as the largest micro-finance institution (MFI) in the
country. Profits after tax (PAT) increased from Rs 2 crore in FY07 to Rs 80 crore in FY09, and Rs
174 crore in FYIO. Littlt wonder, then, that the company's recent initial public offering (IPO)
attracted high-profit investors like billionaire George Soros, and was oversubscribed 13.69 times,
even with price fixed at the highest band of Rs 985 a share.

After SKS success, more microfinance public issues are on the horizon
The country's second-largest MFI, SpandanaSphoorthy Financial, which will decide on whether to
go for an IPO in the next month, is not for behind SKS. In fact, as an NGO, both SKS and
Spandana Started in 1998 in Andhra Pradesh. As on july 31, Spandana had loan outstandings of Rs
4,205 crore, against SKS's Rs 4,321 crore as in March. Moreover, Spandana is the most profitable
MFI at Rs 203 crore the last financial year.

Along the lines of SKS, Spandana was started by NGO wotkerPadmaja Reddy at
Chilakalurpet in Guntur District of Andhra Pradesh. She was working on local development projects
funded predominantly by grants, when a women rag-picker inspired her to strike out on her own. In
the first two years (1998-2000), Spandana crossed the Rs 1 crore disbursement mark with around
2,000 clients.

38
 3.8 SKS MICROFINANCE AND ITS MODEL OF OPERATION
SKS Microfinance was started in 1998 as non-profit SKS Society. It was funded by individual and
institution donations and focused on markets within its home state of Andhra Pradesh. In 2005
SKS decided to pursue an aggressive growth plan and transformed by the
Non-Banking Financial Company (NBFC) named SKS Microfinance and regulated by the Reserve
Bank of India (RBI). Since transformation, SKS has been successful in creating a for-profit model of
microfinance using commercial funds is salable. Delivering services at the doorsteps of its members
and following clear-cut processes, SKS has been able to ensure a repayment rate of over 99% on its
loans.
SKS Microfinance is Indian's largest and one of the world's fastest-growing microfinance
organizations. Its mission is to empower the poor by providing them collateral-free loans for
income generation. SKS Microfinance has 5.8 million clients (2010) in I ,627 branches in 19 states
across Indian and total assets worth $897.9 million (Sep. '09.) SKS charges an annual effective
interest rate ranging from 26.7% to 31.4%.

Operations
Its borrowers include agricultural laborers, mom-and-pop entrepreneurs, street vendors, home based
artisans, and Small scale producers, each living on less than $2 a day. It works on a model that
would allow micro-finance institutions to scale up quickly so that they would never have to turn
poor away.

Borrowers (mostly women) take loans for a range of income-generating activities, including
livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to
pottery) and new age business (photography to beauty parlours). SKS also provides members with
interest-free loans for emergencies as well as life insurance and loan cover insurance to borrowers.

It leverages its equity to raise debt from public sector, private sector and multinational banks
operating in India. This capital has helped the organization scale up operations and reaches out to
millions of poor householders across the length and breadth of India.
In addition to rapid expansion, SKS leads the industry in technology innovation and transparency. It
is one of the first MFIs in the world to have a fully automated MIS that streamlines operations and
helps reduce transaction costs. It is setting up an ERP system that will ensure quick data transfers,
data mining, data recovery facilities which will improve operational efficiencies and response times.

39
Awards
SKS was ranked as the number 1 MFI in India and number 2 in the world by MIX market business
weekhasrated SKS asone of the most influential companies. SKS has received numerous awards
including the CGAP Pro-Poor innovation Award, the ABN-Ambro Planet Finance Process Excellence
Award, Citibank Information Integrity Award, the Digital Partners SEL Award, SHG Foundation
funding and the Garment Foundation USA Excellence Award. SKS is the only MFI in India to receive
the MIX Transparency Certification.

Models:
Its model is based on 3 principles-
1. Adopt a profit-oriented approach in order to access commercial capital — Starting with the
pitch that there is a high entrepreneurial spirit amongst the poor to raise the funds, SKS converted
itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to bed a
founding investor. Then it secured money from parties such as Unites, a Seattle based NGO that
helps promoted micro-finance; SIDBI; dollar lines of credit from Citibank, ABN Amro, and
others.

2. Standardize products, training and processes in order to boost capacity — They collect
standard repayments in round numbers of 25 or 30 rupees. Internally, they have factory style
training models. They enroll about 500 loan officers every month. They participate in theory
classes on Saturdays and practice what they have learned in the field during the week. They have
shortened the training time for a loan officer to 2 months though the average time taken by other
industry players is 4-6 months.

3. Use Technology to reduce costs and limit errors - It could not find the software that suited
itsrequirements, so it they built own simple and user friendly applications that a computer-illiterate
loan officer with a 12th grade education can easily understand. The system is also internet enable.
Given that electricity is unreliable in many areas they have installed car batteries or gas powers
generators as back-ups in many areas.

Scaling up Customer Loyalty

Instead of asking illiterate villages to describe their seasonal pattern of cash flows, they encourage
them to use colored chalk powder and flowers to map out the village on the ground and tell where
areas were the poorest people lived, what kind of financial products they needed, which areas were
lorded over by which loans sharks etc. They set people's tiny weekly repayments as low as $1 per
week and health and whole life insurance premiums to be $10 a year and 25 cents per week
respectively. They also offer interest free emergency loans. The salaries of loan officers are not tied
to repayment rates and they journey on mopeds to borrowers' villages and schedule loan meetings as
early as 7.00 A.M. Deep customer loyalty ultimately result in a repayment rate of 99.5%.

40
Leveraging the SKS brand
Its payoff comes from high volumes. They are growing at 200% annually, adding 50 branches
and 1,60,000 new customers a month. They are also using their deep distribution channels for
selling soap, clothes, consumer electronics and other package goods.

41
 CHAPTER 4

CONCLUSSION AND RECOMMENDATION

42
CONCLUSION
Microfinance refers to a movement that envision" a world in which many poor and near-
poor households. have permanent access to an appropriate range of high quality financial
services, including not just credit but also savings, insurance and fund transfers." The
microfinance sector in India has dcvelopcd 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.

The concept has grown over the past two decades. Over the years, major commercial
banks and multinational corporations have decided to sponsor it. However, this type of
financing has a darker side too. Most of studies are qualitative which tell that more than 90
percent of the people who receive micro credit are poor and most of them succeed in
businesses started with these loans. But the suicides committed by Indian farmers after being
harassed by the microfinance institutions (MFIs) for their inability to repay the debt have raised
serious moral and ethical issues against the institutions. The aggressive debt-collection tactics
of these MFIs have left us wondering if the government has been playing ignorant to the modus
operandi of MFIs. Moreover, the interest rates charged by micro financing institutions are
usurious.

Today, MFIs pay little attention to the core concerns of the poor. For them the critical
concern is to sustain services against emerging odds. We've seen a major mission drift in
micro finance, from being a social agency first, to being primarily a lending agency that
wants to maximize its profit. Thus, there is a great need to set out rules limiting interest
rates and stipulating legal consequences for the MFIs who badger/harass borrowers for
payments.

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RECOMMENDATION

First of all, microfinance donors should focus their support on (and encourage) MFIs
who operate in countries who are making consistent efforts to improve regulation, institutions,
and legal systems. If governments of developing countries are looking to lead their countries
out of poverty, perhaps this might create incentives for governments to increase transparency
and regulatory systems.
Secondly, MFIs need to rethink their target recipients. This is a more difficult way of
handling microfinance. Yes, at first glance it may seem unfair to stop lending to poorest people
who need it the most, but at a closer look it becomes clear that these people are not benefiting
from their loans long term, or making business ventures that are sustainable. The more well
off, who can still benefit from a microcredit loan to expand their business, buy more
equipment, and employ more people, should be the main recipients of loans. These types of
enterprises have the capacity for self sustainability and revenues. Business under this category
include (but is not limited to) those that have steady markets, some kind of office to operate
out of, and room for expansion.
Thirdly, using microfinance to increase access to public goods is an
innovative and new way of improving quality of life for people. For instance, MFIs could
offer low interest rates on village loans that will be used to build a well or a small school.
While these loans would be larger and probably riskier, the condition of group lending
makes it feasible. Arrangements could be made for urban districts interested in public good
improvements. Default would cause the village or district to forego monies for future
improvements. With this incentive, members of the group are keen on monitoring their
fellow members and ensuring that everyone involved makes their repayments.

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REFERENCE

Online

1. https://ccononictimes.indiatimes.com/markcts/stocks/ncws/rmcrofinancc-lndustry-clocks-
over-50-growth-in-q2/articleshow/66923949.cms
2. https://www.scribd.com/doc/48947731 /A- PROJECT-REPORT-ON-MICROFINANCE-IN-
INDIA

3. https://bizfluent.com/list-6654232-objectives-micro-finance.html
4. https://indiamicrofinance.com/shg-bank-linkage-model-2793u72k.html
5. https://m.rbi.org.in/scripts/PublicationsView.aspx?id= 17847
6. http://euroasia-science.ru/ekonomicheskie-nauki/importance-of-the-microfinanceinstitutions-
in-economy/
7. http://www.iibf.org.in/documents/reseach-repoWreport-24.pdf
8. https://www.nabard.org/auth/writereaddata/tender/1307174808status%200P/020.Micr
ofinance%20in%201ndia%202016-17.pdf
9. https://www.cgap.org/sites/default/files/researches/documents/CGAP-ConsensusGuidelines-
Key-Principles-of-Microfinance-Jan-2004.pdf
10. https://www.scribd.com/document/60825080/Different-Models-of-Micro-Finance-inIndia
11. https://www.bankbazaar.com/personal-loan/microfinance.html
12. https://www.topstockresearch.com/charts/OneMonth/OneMonthSKS Microfinanee_L td.png

Newspapers
l . Times of India
2. Business Standard
3. The Hindu
4. Economic Times

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 ANNEXURE- IA

SUPERVISOR'S CERTIFICATE

This is to certify that Mr.Souvik Ghosal. a student of B.Com. Honours in Accounting & Finance of Acharya
Girish Chandra Bose College (Formerly Bangabasi College of Commerce) under the University of Calcutta has worked
under my supervision and guidance for his Project Work and prepared a Project Report with the title MICROFINANCE
INSTITUTION IN INDIA which he is submitting, is his genuine and original work to the best of my knowledge.

Date: Signature:
Place: Name of the Supervisor: Prof. Sukanta Mukherjee
Designation:
College Name: Acharya Girish Chandra Bose
College (Formerly Bangabasi College of
Commerce)

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 ANNEXURE- 1B

STUDENT'S DECLARATION

I hereby declare that the Project Work with the title MICRO-FINANCE INSTITUTIONS IN INDIA submitted
by me for the partial fulfillment of the degree of B.Com. Honours in Accounting & Finance under the University of
Calcutta is my original work and has not been submitted earlier to any other University / for the fulfillment of the
requirement for any course of study.

I also declare that no chapter of this manuscript in whole or in part has been incorporated in this report from any
earlier work done by others or by me. However, extracts of any literature whichhas been used for this report has been
duly acknowledged providing details of such literature in the reference.

Place: Signature:

Date: Name: Souvik Ghosal

Address: 23/A/1 M.N Sarkar
Road,Budge Budge,South 24
Parganas,
Kolkata-700137

C.U Registration no: 141-1111-0458-20

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48