Micro Finance- Lessons from

International Experience
Lecture_19811
 Scope and Assumptions of Micro Finance
• Definition of Micro Finance is perceived to be
– Emphasis on savings and other financial services apart from
loans.
– Professional management of small loans and savings
programmes as part of perceived need for sound accounting,
financial portfolio management and decision-making for an mF
institution.

– The Task Force on Supportive Policy

and Regulatory Framework for micro Finance has suggested a
working definition of microFinance 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"
 Test your self
• What is the name of the Committee that drafted
guidelines on Micro Finance?
• STANDING COMMITTEE ON FINANCE ( 2013-14)
• Shri Yashwant Sinha - Chairman
• The Task Force on Supportive Policy
and Regulatory Framework for micro Finance.
• What is the objective of Micro Finance as per the
guidelines of Committee on m Finance?
• To raise their income levels and improve living
standards.
• All India Democratic Women‘s Association (AIDWA)
• MFIDR Bill, 2012 (Development and Regulation)
• Micro Finance Institutions Network (MFIN)
• Indian Banks Association (IBA),
• National Bank for Agriculture and Rural Development
(NABARD),
• Small Industries Development Bank of India (SIDBI)
• International Network of Alternative Financial
Institutions (INAFI),
• Micro-Credit Ratings International Limited (M-CRIL)
• Dept. of financial Services (DFS)
• Direct Benefit Transfer (DBT)
 Micro Finance -International Experience
 Lesson One- The poor are bankable.
 Lesson Two- Micro-credit benefits the poor.
 Lesson Three- Penetration of the poorest of the poor is difficult.
 Lesson Four- A realistic interest rate is vital.
 Lesson Five- Savings Mobilization strengthens MFIs.
 Lesson Six- Governance and Financial systems require
strengthening.
 Lesson Seven- Strong regulatory framework
 Lesson Eight- No single model of MFI
 Lesson Nine- Most MFIs require outside funding
 Lesson Ten- Credit alone cannot achieve objectives
 Lesson One- The poor are bankable
• “The poor of India are bankable, the poor of India can be trusted, the poor of
India are good borrowers, the poor of India are honest borrowers and the poor of
India are much better borrowers than the rich because of their repayment”.

Pradhan Mantri Jan - Dhan Yojana (Accounts Opened As on 22.07.2015)

(All Figures in Crores)
S No Banks Number of Accounts
 % of
No Of
Zero
Rupay Balance In
Debit Accounts Balance
Rural Urban Total Account
Cards
s

1 Public Sector
7.31 6.03 13.34 12.32 15845.79 50.6
Banks
2 Regional Rural 2.6 0.45 3.05 2.21 3543.14 49.51
Banks
3 Private Banks 0.41 0.28 0.69 0.61 1084.89 47.83
₹20473.82
Total 10.32 6.76 17.08 15.15 crore 50.23
(US$3.2 billion)
 Lesson Two- Micro-credit benefits the poor
• Borrowers often increase their incomes and improve their
livelihood because of micro-credit.
 Assignment
• Punjab has total number of 560 villages and
nearly 24 district Quarters. Students are advised
to interact with the funding pattern of small
business men in your locality and find whether
they have been financed by any Micro Finance
Institution? If yes, what kind of benefits they
have received during the credit period? In
addition, find the problems they faced while
settling the loan from micro finance institutions?
Lesson Three: Penetration of the poorest of the poor is
difficult
 Lesson Four: A realistic Interest rate is vital
• Micro Credit should not be disbursed at below commercial rates
of interest.
• Interest rates of MFIs comparatively higher than the commercial
banks and other similar lending institutions receiving subsidies.
• Costs borne by MFIs during gestation period:
– Loan officers travelling expenses for Weekly meetings and
Collection of principal.
– Transportation expenses.
– Borrowing rates from Banks that range from 12 percent to 15
percent, then spend about 10 percent on high costs, 5
percent to protect against high risk of default, 2 percent to 5
percent for supplemental support products such as insurance,
and 5 percent to 10 percent for returns for investors.
 Lesson Five: Savings Mobilization strengthens MFIs
• How can microfinance institutions successfully
mobilize savings?
• Results of Project taken by Grameen Foundation and
the Livelihood School (part of BASIX (Basix krishi S
amruddi Ltd)
• group of companies), in Gaya District, Bihar, India
– Inter-lending of savings helps members see the tangible
benefits associated with savings, which made them
understand the value of regular savings;
– Immediate rewards for participating in the program
encourages members to save regularly;
– Socio-economic factors like income sources, unplanned
expenditures, and migration are a fact of life for the poor;
 Test your-self
• The founder of Grameen Foundation is
– Alex Counts
– Found it in 1997
– In Washington, USA
 Test yourself
• How savings of borrowers strengthen the
working of MFIs?
 Lesson Six- Governance and Financial Systems Require strengthening

• Microfinance is currently at the centre of intense

policy debate, especially in terms of governance
and regulatory issues.
• The legislation enacted by the Andhra Pradesh
Government has brought the customer protection
issues to the centre stage.
• The legislation stipulated mandatory registration
of MFIs, disclosure of effective interest rate to the
borrowers, ceilings on the interest rates and strict
penalties for coercive recovery practices.
Lesson Seven- Strong Regulatory Framework
Lesson Seven- Strong Regulatory Framework
 Lesson Eight- No single model of MFI
• The four most important Micro Finance models prevalent in India
are:
• Model I - individuals or group borrowers are financed directly by
banks without the intervention/facilitation of any Non-Government
Organization (NGO).
• Model II - borrowers are financed directly with the facilitation
extended by formal or informal agencies like Government,
Commercial Banks and Micro-Finance Institutions (MFIs) like NGOs,
Non Bank Financial Intermediaries and Co-operative Societies;
• Model III - financing takes place through NGOs and MFIs as
facilitators and financing agencies;
• Model IV - is the Grameen Bank Model, similar to the model
followed in Bangladesh.
 Lesson Nine- Most mFIs require outside funding
•Mutual Fund Investments worth
over Rs 1,000 crore have already
flown into microfinance papers
bearing 11.5-13% coupon rates.
•HDFC MF, SBI MF, Reliance Mutual,
Kotak MF, and ICICI Pru MF, among
others, have invested in papers
issued by SKS Microfinance,
Janalakshmi Financial Services,
Ujjivan Financial Services and
Equitas Micro Finance.
•All these papers yield 3-4% higher
than top-rated securities issued by
companies.
 Lesson Ten – Credit alone cannot achieve objectives

• Expansion and effectiveness of Micro- credit

requires certain pre-requisites.
– Macro economic policy framework.
– Improvements in physical and economic
infrastructure.
– Opportunity for education and skill development.
– Marketing opportunities for products of mFIs.
Financial Products and Services (Unit-1)
1. Minimalist Approach MFIs: they work purely as
financial intermediaries and believe that they should
focus on efficient and effective financial services.
They thought that involvement in too many activities
can affect their financial services.
2. Integrated Approach MFIs: they believe that
finance is only one of the components in development
but not sufficient condition to bring in development and
hence has to be coupled with other social interventions
to get desired results.
 Meaning
• Financial services are often packaged in the form of
specific products.
• Product means any thing that can satisfy client’s need.
• Products can be either services or goods.
1. Micro-credit: means financial service of providing
loans to the clients and is collected back with interest
in a fixed no. of instalments over a period of time.
It can be used in agriculture, meeting working capital
requirements , live stock or any other business
 Credit Principles
1. Timely Credit: If loan is not available when it is
required , it will be a loss of business opportunity.
2. Credit at Door-step: Provide credit as close to
the client as possible will reduce operational cost.
As for small amount of loan, clients cannot travel
to far off areas.
3. Collateral free Lending:
4. Simple Loan Procedures:
 Credit Delivery Methodologies
1. Group Method: SHGs and JLGs
2. Individual Method: clients’ personal credit
worthiness
• Comparatively bigger size loans
• Have the capacity to produce guarantee and
generate enough comfort to the MFIs.
• MFIs also ask for individual guarantors or take
post dated cheques from clients.
 2. Savings
1. Compulsory Savings: Members have to definitely save a
fixed amount at regular intervals with the MFIs.
• Frequency of savings can be weekly or monthly
depending on frequency of group meetings.
• It helps MFIs to ascertain the genuine interest of the
client in being associated with the MFIs.
• Thus in case of SHG-Bank linkages, 6-months of regular
saving is an essential condition.
• These savings are non-withdrawable during the terms
of the loan.
2. Voluntary Savings: Clients decide to make as they
have funds.
MFIs design various schemes like FDs, RDs, monthly
income scheme etc. to motivate them.
Liquidity management is required.
 Legal Framework for Savings
• MFIs are allowed to collect saving of poor
people as per MFIDR, 2012.
 3. Insurance
• Various uncertainties like illness, death, crop
failure, cattle loss etc.
• Insurance is a promise of compensation for
specific potential future losses in exchange for
a periodic payment.
• Insurance provided to low income clients is
known as micro-insurance.
• Supported by IRDA.
 Social sector as per IRDA
1. Unorganised sector: agricultural labourers,
brick workers, carpenters, cobblers, street
vendors etc.
2. Economically backward people
3. Persons with disability in rural and urban
areas
 Remittances
• It deals with the transfer of money from one
place to another place including payments
made in the case of commercial transactions.
• Formal bank/postal services are expensive for
the poors
• So MFIs provide them remittance services
• Adhikar an MFI in Orissa done it successfully.
 Difference b/w SHGs and JLGs
SHGs JLGs

Group Size of 10-20 members 5 members group, 5-8 such groups

form a centre which is the
operational unit for MFI
Monthly meetings Weekly meetings

No specified loan term Loan term is 50 weeks

Collect internal savings and rotate Savings are collected by MFIs

Get involved in social issues Formed specifically for financial

transactions
Carry out meetings on their own Meetings conducted by MFI staff
 Non-Financial services
1. Business Development services (BDS)
2. Social services
 Fundamentals of Designing Products

• Need identification
• Designing Products
• Pilot Testing
• Launching Products
 Factors must be considered before
developing the products are
• Own mission
• Livelihood context
• Loan purpose and cash-flow streams
• Opportunities
• Competitions
• Organisation System
 Credit Product
• Loan purpose
• Loan size
• Loan Tenure
• Interest rate
 Sustainable Interest Rate
1. Financial cost
2. Loan Losses
3. Operating Expenses
4. Capitalisation for Growth
5. Collateral and Security
 Unit-2
Current Debates and Challenges for Micro Finance

1. Poverty Focus of Micro-Finance

Milton Friedman once said that "the poor stay poor,
not because they're lazy, but because they have no
access to capital."
Till date, a huge section of population remains
outside the formal banking system.
Microfinance institutions are the only ones equipped
to reach the 'unbankable' or 'unbanked' masses, and
make financial services accessible to them.
 2. Gender and Empowerment
• Whether the methodology and process of MF
interventions genuinely empowering to
women.
• Clearly MF has given women voice and
visibility within the household and community.
• It is also claimed that women are effectively
being used as a debt collector for loans used
by men.
 3. Group Dynamics
• Lot of issues related to groups still await
answers.
• Functions and responsibilities of the group
• How can group members tackle the pressure
of loan recovery?

4. Savings and Insurance

State Interventions in Rural Credit in India

• In 1969 and in 1980 the banks were nationalised.

• Its objective was to increase the flow of credit to the
rural population.
• Integrated Rural Development Programme (IRDP) had
been established by GOI through its poverty alleviation
schemes.
• In 90’s GOI announced economic and financial reforms.
• It paved the way for new private sector banks and listing
of securities of PSU banks in the stock exchanges.
• International banks opened outlets in India.
 NABARD
and SHG Linkage Programmes
• National Bank for Agriculture and Rural Development is an
apex development financial institution in India,
• headquartered at Mumbai with branches all over India
• Founded: 12 July 1982
• Headquarters: Mumbai
• Agency executive: Harsh Kumar Bhanwala (Chairman)
• Subsidiaries: Nabcons, Nabard Financial Services Limited
Agri Business Finance Ltd., Nab kisan Finance Ltd.
• A major effort to provide banking services to
the weaker and unorganised sector was the
Bank Self Help Group Linkage Programme that
was launched in early 1990s.
• The programme was started at the initiative
of NABARD in 1992 to link the unorganised
sector with the formal banking sector.
 Working of the programme
• Under this programme, banks were allowed to open savings accounts
for Self-Help Groups (SHGs).
• SHGs are registered/unregistered entities which usually has a
membership of 15 to 20 members from very low income families,
usually women.
• They mobilize savings from members and uses the pooled funds to give
loans to the needy members.
• Under this programme, banks provide loans to the SHGs against group
guarantee and the quantum of loan could be several times the deposits
placed by such SHGs with the banks.
• Banks should consider entire credit requirements of SHG members,
namely, (a) income generation activities, (b) social needs like housing,
education, marriage, etc. and (c) debt swapping".
•  As per the RBI’s latest (May 2016) Priority
Sector Lending norms, bank credit to
members of SHGs is eligible for priority sector
advance under respective categories viz.,
Agriculture, Micro, Small and Medium
Enterprises, Social Infrastructure and Others.
• The self-help group–bank linkage programme
extending microfinance services such as micro
saving, micro credit, micro insurance, and
financial advice to the poor
• Considering that there has been a 20 per cent
increase in SHGs in the past, Nabard expects to
achieve the one crore target as early as 2013,
said Mr V.B. Mohanty, Chief General Manager,
Nabard.
• “Micro credit facilities are saturated in southern India and
we are now prioritising the northern and eastern belts for
growth,” Mr Mohanty said.
• NABARD has identified 13 focus States for the SHG-Banking
linkage programme which include Uttar Pradesh, Bihar,
Madhya Pradesh and Orissa.
• It covered under the programme through more than 61 lakh
savings-linked SHGs and over 42 lakh credit-linked SHGs, the
NABARD report said.
• Out of the total number of existing SHGs, incidentally, above
79 per cent of the groups have exclusively women members.
 Legal Forms of MFIs
• RBI Act 1934
Contains provisions for the establishment and
operations of NBFC (can be a company,
corporations or a cooperative societies)
All NBFCs are registered under this act.
NBFC is a non-banking institution which takes
deposits.
 Banking Regulation Act 1949
• It covers banking companies.
• It does not apply on primary agricultural credit societies and any
other cooperative society.
• It is not directly relevant to micro finance rather it covers local area
banks and commercial banks involved in linkage operations.
Key Features of the Local Area Banks
• Each local Area bank is registered as a public limited company
under the Companies Act, 2013. However, they are licensed under
the Banking Regulation Act, 1949.
• The Local Area Banks are the only type of Non-scheduled Banks of
India. However, they are eligible to be included in the Second
Schedule of the RBI Act 1934 subject to eligibility criteria of RBI.
 Cont…..
• Local Area Banks have jurisdiction over a maximum of
three contiguous districts, and their basic function is
to mobilise funds in rural and semi-urban areas.
• The minimum start-up capital of a LAB was fixed at
Rs.5 crore and the promoters were asked to bring
entire minimum share capital up-front. The promoters
could be individuals, firms or societies.
• The Local Area banks are subject to prudential norms,
accounting policies and other policies as stipulated by
the RBI. 
• Each Local Area Bank is allowed to open branch in only one
urban centre per District and rest of the branches were allowed
to be opened in the rural and semi urban centers subject to
requisite clearance in respect of rural branches from the District
Consultative Committee.
• The Local Area Banks can do all normal banking business but
their major function was to finance agriculture and allied
activities, small scale industries, agro-industries and trading /
non-farm activities in the rural and semi-urban areas.
• These banks had to give out 40% of total credit to priority sector,
of which 10% is to be given to weaker sections of the society.
 Current Functioning Local Area Banks in India
• Coastal Local Area Bank Ltd
This bank was established on 27th December 1999.
Its area of operation includes three contiguous
districts viz. Krishna, Guntur and West Godavari. Its
head office is located at Vijayawada in Andhra
Pradesh.
• Capital Local Area Bank Ltd
This bank was established on 14th January 2000. Its
area of operation includes three districts viz.
Jalandhar, Kapurthala and Hoshiarpur in Punjab.
The head office is at Phagwara (Punjab).
• Krishna Bhima Samruddhi Local Area Bank Ltd
This bank was established on 28th February 2001 with
an area of operation comprising three contiguous
districts of Mahbubnagar in Andhra Pradesh and
Raichur and Gulbarga in the state of Karnataka with
its head office at Mahbubnagar(Andhra Pradesh).
• Subhadra Local Area Bank Ltd., Kolhapur
This is smallest Local Area Bank with only 8 branches.
Its head office is in Kolhapur.
 Indian Companies Act, 2013
• It provides the basis for the incorporation of LAB,NBFC,
not-for –profit “section 25 companies” and Nidhis under
section 620.
• A “Section 25” company is registered under Section 25 of
the Companies Act, 2013.
• This section provides an alternative to those who want to
promote charity without creating a Trust or a Society for
the purpose.
• It allows the formation of a company, which will exist as a
legal entity in its own right, separate from the person
promoting it.
 Report On Nidhi Companies U/S 620A Of The Companies Act

• The Govt. is empowered to declare certain Non-Banking

Financial Companies as Nidhi Companies or Mutual
Benefit Societies.
• The number of such companies as on date is 257.
• In order to ensure the proper functioning and growth of
these companies and to provide the highest degree of
safety to the depositors investing in such companies, the
Govt. had set up an Expert Group.
• The report of the Group has been submitted and is
under consideration of the Ministry of corporate affairs..
• The crucial bit, however, is that any company
under this section must necessarily re-invest
any and all income towards promoting the
said object or charity.
Microfinance RoEs to turn negative in FY18:
ICRA
•   due to a drop in net interest margins
and as credit costs rise along with
operating expenses. 
• The rating agency expects net interest
margins for micro finance companies
to decline to 80 to 100 basis points.
• Operating expenses are also likely to
increase due to investments to be
made on information technology and
collections infrastructure by most
players. 
• The November 2016 demonetisation hit micro finance
companies very badly as loan repayments slowed down and
defaults increased.
• As a result the loan portfolio growth dropped to 26% in fiscal
2017 from 72% in fiscal 2016.
• The rating agency predicts a 25% to 30% growth in fiscal 2018
due to stress linked to demonetisation and as micro finance
companies are likely to focus on lower branch addition and
servicing of existing clients rather than adding new clients. 
 • Name of the Company: Spandana
From brink of bankruptcy to Rs 1,850 crore portfolio: Amazing story of Spandana Sphoorty Financial

Sphoorty Financial Limited 

Launch date: June 1998 
Founding team: Padmaja Reddy 
Location: Hyderabad 
Funding raised in 2017: $100 million 
Overall funding raised since starting
up: Rs 762 crore 
Strength of the company: 3500 
Industry: Micro-finance 
• When a small loan of Rs • Spandana has transformed
2,000 made an into a non-banking
immediate impact of financial company and a
around 150% in a leader in the microfinance
industry. On March 31, the
ragpicker's daily
company raised $270
earnings, Padmaja million out of which $170
Reddy had found her million was in debt and
calling.  the rest in equity. 
 Financial Inclusion by Extension of Banking Services

• With the objective of ensuring greater financial

inclusion and increasing the outreach of the banking
sector, it has been decided in public interest to enable
banks to use the services of Non-Governmental
Organisations/ Self Help Groups (NGOs/ SHGs), Micro
Finance Institutions (MFIs) and other Civil Society
Organisations (CSOs) as intermediaries in providing
financial and banking services through the use of
• Business Facilitator and
• Business Correspondent models 
  Business Facilitator Model: Eligible Entities
and Scope of Activities
• Under the "Business Facilitator" model, banks may
use intermediaries, such as, NGOs/ Farmers' Clubs,
cooperatives, community based organisations, IT
enabled rural outlets of corporate entities, Post
Offices, insurance agents, well functioning
Panchayats, Village Knowledge Centres, Agri Clinics/
Agri Business Centers, Krishi Vigyan Kendras and
KVIC/ KVIB units, depending on the comfort level of
the bank, for providing facilitation services.
• Such services may include
(i) identification of borrowers and fitment of activities;
(ii) collection and preliminary processing of loan
applications including verification of primary information/data; 
(iii) creating awareness about savings and other products and education
and advice on managing money and debt counselling; 
(iv) processing and submission of applications to banks; 
(v) promotion and nurturing Self Help Groups/ Joint Liability Groups;
(vi) post-sanction monitoring; 
(vii) monitoring and handholding of Self Help Groups/ Joint Liability
Groups/ Credit Groups/ others; and
(viii) follow-up for recovery.
• As these services are not intended to involve
the conduct of banking business by Business
Facilitators, no approval is required from RBI
for using the above intermediaries for
facilitation of the services indicated above
 Business Correspondent Model:  Eligible Entities and
Scope of Activities
• Under the 'Business Correspondent' Model, NGOs/ MFIs set up under
Societies/ Trust Acts, Societies registered under Mutually Aided
Cooperative Societies Acts or the Cooperative Societies Acts of States,
section 25 companies, registered NBFCs not accepting public deposits
and Post Offices may act as Business Correspondents.

• Banks may conduct thorough due diligence on such entities keeping

in view the indicative parameters given in Annex 3.2 of the Report of
the Internal Group appointed by Reserve Bank of India (
available on RBI website: www.rbi.org.in) to examine issues relating
to Rural Credit and Micro-Finance (July 2005).
•
• In engaging such intermediaries as Business
Correspondents, banks should ensure that
they are well established, enjoying good
reputation and having the confidence of the
local people.
• Banks may give wide publicity in the locality
about the intermediary engaged by them as
Business Correspondent and take measures to
avoid being misrepresented.
• In addition to activities listed under the Business
Facilitator Model, the scope of activities to be
undertaken by the Business Correspondents will include
(i) disbursal of small value credit, 
(ii) recovery of principal / collection of interest
 (iii) collection of small value deposits
(iv) sale of micro insurance/ mutual fund products/
pension products/ other third party products and 
(v) receipt and delivery of small value remittances/ other
payment instruments.
 Payment of commission/ fees for engagement of
Business Facilitators/ Correspondents

• Banks may pay reasonable commission/ fee to the

Business Facilitators/ Correspondents, the rate and
quantum of which may be reviewed periodically.
• RBI Master Circular may be treated as modified to
that extent.
• The agreement with the Business Facilitators/
Correspondents should specifically prohibit them
from charging any fee to the customers directly for
services rendered by them on behalf of the bank.
SECURITIZATION
 SECURITIZATION
• It stands for conversion of loans or loan recoveries
into marketable paper or securities by SPV.
• By pooling assets, it diversifies and reduces risks of
the portfolio and, with additional credit
enhancement arrangement, can produce highly
creditworthy instruments to market.
• Isolating and efficiently allocating the risk.
• It is selling the rights to cash flow from loans etc .
 SECURITIZATION PROCESS
• Selection of assets by the Originator
• Packaging of pool of loans and advances (assets)
• Underwriting by underwriters.
• Assigning or selling to of assets to SPV in return for cash
• Conversion of the assets into divisible securities
• SPV sells them to investors through private stock market in return for cash
• Investors receive income and return of capital from the assets over the
life time of the securities
• The risk on the securities owned by investors is minimized as the
securities are collateralized by assets
• The difference between the rate of the borrowers and the return
promised to investors is the servicing fee for originator and the SPV .
• Assets to be securitized to be homogeneous in terms of underlying
assets ,maturity period ,cash flow profile
STRUCTURE OF SECURITIZATION
PLAYERS INVOLVED IN SECURITIZATION
1. Originator: An entity making loans to borrowers or having
receivables from customers
2. Special Purpose Vehicle: The entity which buys assets from
Originator and packages them into security for further sale
3. Investment Bank : A body that is responsible for conducting
the documentation work.
4. Credit Rating Agency: To provide value addition to security
5. Insurance Company / Underwriters: To provide cover
against redemption risk to investor and / or under-
subscription
6. Obligors: Company that gives debt to other company as a
result of borrowing.( debtor)
7. Investor: The party to whom securities are sold .
 SPV AND ITS ROLE
• It is a legal entity created to fulfill the narrow, specific
or temporary objectives. ie funding the assets.
• SPV are typically used by companies to isolate the
firm from financial risk and allow other investors to
share the risk.
• Intermediary
• Helps in the pooling process
• Holding of pooled securities as a repository
• Bankruptcy remote transfer
 WHY ORIGINATOR SECURITIZE
• Off-balance sheet financing – remove illiquid
assets.
• Improves capital structure
• Extends credit pool
• Reduces credit concentration
• Risk management by risk transfers
• Avoids interest rate risk
• Improves accounting profits
 INVESTOR VIEW POINT
ADVANTAGE
• Opportunity to potentially earn a higher rate of return .
• Opportunity to invest in a specific pool of high quality credit-
enhanced assets .
• Portfolio diversification .
DISADVANTAGE
• Prepayment by borrowers can lessen the earning through interest.
• Currency interest rate fluctuations which affect the floating rates
on ABS.
• Maintenance obligations of the collateral are not met as given in
the prospectus.
 CATEGORY OF SECURITIZATION
• Assets backed securities :Those securities whose income
is derived from pool of underlying assets.
Example: payments from car loan, credit card.
• Mortgage backed securities: Mortgage loans are
purchased from banks and assembled into pools which
become securities.

• Credit debt obligation:

CBO: Those backed b corporate bonds.
CLO: Those backed by leveraged home loans.
 EXAMPLE OF SECURITIZATION IN INDIA
• First securitization deal in India between Citibank and GIC
Mutual Fund in 1991 for Rs 160 million.  
• L&T raised Rs 4,090 mln through the securitization of future
lease rentals to raise capital for its power plant in 1999.
• Securitization of aircraft receivables by Jet Airways for Rs
16,000 mn in 2001 through offshore SPV.
• India’s largest securitization deal by ICICI bank of Rs 19,299
mn in 2007. The underlying asset pool was auto loan
receivables
 WHAT CAN BE SECURITIZED
All sorts of assets are securitized:
• Auto loans
• Student loans
• Mortgages
• Credit card receivables
• Lease payments
• Accounts receivable.
 BENEFITS TO FINANCIAL ENVIRONMENT
• This bring the financial market and capital market together
and hence increase the power of capital market.
• The securitization reduces the risk for the creditor so it will
lead the lower cost of funding.
• Agency and intermediation cost is reduced.
• The rate of assets turnover in market increases. HFCs do
securitize due to this the volume of the resources increases.
• Component risk (credit ,liquidity, catastrophe) are segregated
and distributed to the market intermediaries which absorb
them and make market stable.
 The Subprime Mortgage Securitization
ProcessWarehouse
Lender Credit
(makes short term loans to Rating
Issuer for purchase of
mortgages) Agency

Requests loan

Mortgagor Bank/Financial Arranger/

Provides
Institution Loan sold
(Borrower) loan
Issuer Loans pooled
(Originator)
PUJYAPAD JAGADGURU
PUJYAPAD JAGADGURU SHANKARACHARYA and sold to Trust

Makes loan SHANKARACHARYA

MAHARAJ JI MAHARAJ JI
payments
Provides customer service
to borrower
SPV
(Trust)
Servicer
(is employed by Trust to issues
collect loan payments etc.) Remits loan payments to Trust and securities
advances unpaid interest payments.

Investors

Adapted from: “Understanding the Securitization of Subprime Mortgage Credit’” Ashcraft and Schuermann, Federal Reserve Bank of
New York Staff Report 318, March 2008.
 Constraints in Mainstreaming of MFIs
 Borrower-unfriendly Products and Procedures
 Inflexibility and Delay
 High transaction costs
 Social obligation and not a business opportunity
 Financing to alternative MFIs
 Legal and regulatory framework
 Lack of commercial orientation
 Isolated and scattered
 Lack of proper governance and accountability
 Micro Finance versus Informal Sources of
Lending
 Informal Sources of Lending
 Interest free loans from friends, neighbours and
relatives
 Wage advances
 Groceries credit
 Goods on credit
 Private loans taken on interest from relatives and
friends
 Loans from professional money lenders
 MUDRA Bank
• Micro Units Development and Refinance
Agency Bank (or MUDRA Bank) is a 
public sector financial institution in India.
• It provides loans at low rates to micro-finance
institutions and non-banking financial
institutions which then provide credit to
MSMEs.
• It was launched by Prime Minister Narendra
Modi on 8 April 2015
 Introduction
• The MUDRA banks were set up under the Pradhan
Mantri MUDRA Yojana scheme.
• It provide its services to small entrepreneurs outside
the service area of regular banks.
• About 5.77 crore (57.7 million) small business have
been identified as target clients using the NSSO survey
of 2013.
• Only 4% of these businesses get finance from regular
banks. The bank will also ensure that its clients do not
fall into indebtedness and will lend responsibly.
• The bank will have an initial capital of ₹200
billion (US$3.1 billion) and a credit guarantee fund
of ₹30 billion (US$470 million).
• The bank will initially function as a 
non-banking financial company and a subsidiary of
the Small Industries Development Bank of India
 (SIDBI).
• Later, it will be made into a separate company.
However, it will not regulate Micro Finance
institutions
• The bank classified its clients into three
categories and the maximum allowed loan
sums will be based on the category:
• Shishu (शिशु): Allowed loans up to ₹50,000 
• Kishore (किशोर): Allowed loans up to ₹5 lakh 
• Tarun (तरुण): Allowed loans up to ₹10 lakh 
Women and Microfinance
 Learning Goals
• Why are most microfinance borrowers women?
• Is targeting women efficient?
• Does targeting women help self-sustainability goals?
• Does microfinance help women achieve equality in
the home?
• How can microfinance help promote social capital
and women’s empowerment?
• Is the focus on women too restrictive for the future
of microfinance?
 History
• When Grameen Bank started, most borrowers were
men; just 44% of clients were women in Oct. 1983
• In 1986, the number was about 75%; in 2008, it was
95%.
• 100% of Grameen USA’s clients are women.
• Women’s roles have become more important in the
wake of other accompanying socioeconomic
transformations
– Female illiteracy rates have also dropped sharply
• These countries are heavily involved in microfinance.
• This implies that microfinance can extend and
develop these transformations.
 Commercialization and Gender
• Evidence shows that as the microfinance industry
commercializes, the number of female clients drops.
• Women tend to be among the poorest of an MFI’s clients.
• In Frank’s (2008) study, NGOs that converted to RFIs (regulated
financial institutions) tended to have a smaller proportion of
women borrowers.
• In their study, loan size also tended to increase after
conversion. There is evidence elsewhere also that loan sizes to
women borrowers are smaller.
• Bauchet and Morduch (2010) find a negative correlation
between operational self-sufficiency (i.e. profitability) and the
percentage of women borrowers served.
 Gender and repayment rates
• On the other hand, there is strong evidence (Armendariz and
Roome, 2008) that women are better about repaying loans.
• In the 1995 Khandker et al. study, 15.3% of male borrowers
struggled to repay loans, while only 1.3% of women were
having difficulties.
• Another study (Kevane and Wydick, 2001) found that female
borrowing groups misused funds less often.
• How do we explain these results? Is there something special
about women that leads to greater efficiency in the use of
capital and/or lower monitoring costs? Does this mean that
loans are better given to women than to men?
 Gender and Repayment Rates
• Women seem to take less risks. If so, the higher
repayment rates of women may simply reflect project risk.
• Women may have difficulty finding capital. Hence they
may be willing to borrow in environment such as joint
liability groups where monitoring costs are low, which may
lead to higher repayment rates.
• That is, women may be willing to pay an additional tax in
the form of unproductive time attending group meetings
etc. because their opportunity costs of time are lower and
their alternative sources of capital are fewer.
• For cultural reasons, women may also find it
difficult to find jobs; hence they may work around
the house rather than in other and varied locations;
this may make it easier to monitor them.
• The choice of investment projects, such as tending
to goats, sewing, baking goods or keeping a small
shop may be easier to monitor.
• If so, higher repayment rates may not be due to
gender.
Gender Differences in Rates of Return
• Although repayment rates are lower, there is some evidence
that average returns to investments by men are higher. This
may explain Bauchet and Morduch’s findings of negative
correlation between profitability and focus on women.
• De Mel, McKenzie and Woodruff (2009) find that mean returns
to capital are higher for men than for women in Srilanka.
• They find that this is due to the nature of investments made by
women, which tend to be less productive. Again, the reason
for such investments may be cultural.
• There is also evidence that even when men and women both
invest in the same activity, e.g. farming, men have higher
returns.
• However, the return for this is that men’s farms
have greater inputs. It seems that the woman’s
land is starved of required inputs relative to the
man’s. This is, obviously, economically inefficient.
• On the other hand, a Guatemalan study finds no
difference between men and women in economic
responses to credit access. They are both efficient
in generating employment. There may be cultural
differences that explain this geographical variation.
 Microfinance and female empowerment

• What we see, then, is that there may be inefficient allocation of

capital and other resources to women. They may also have
reduced (and inefficient) access to jobs.
• Microfinance might even the playing field in giving them more
access to such resources. If so, economic efficiency could be
increased.
• In addition, microfinance may help to reduce the cultural factors
that induce such inefficient resource allocation in the first place.
• Browing and Chippori (1998) suggest that bargaining power in a
household is driven by the abilty of women to credibly threaten
to leave the household. Access to microfinance can improve the
efficacy of their threats and thus improved access to resources.
• There is also evidence that women’s decisions tend
to be biased in favor of higher expenditure on
children’s health and education (Blumberg, 1968).
• Child survival probabilities are also tied to women’s
control of income. Thus microfinance could reduce
the prevalence of inefficient gender attitudes and
social norms.
• The evidence on whether microfinance actually
translates into greater women’s empowerment is
more mixed.
 Microfinance and female empowerment

• Rankin (2002) argues that microfinance may entrench gender roles.

• Some studies show that men, and not women control the
microenterprise investments and income.
• Even when women maintain control, they may be encouraged to take
up investments like sweater knitting that maintain traditional gender
roles.
• Increased income could lead to a decreased role for women. For
example, lower caste Muslim women in India tend to work with their
husbands in the fields; however, once they become richer, they tend to
go into seclusion in the house.
• Hence gender-separating practices have high income elasticity.
• Thus, many microfinance programs also include education about legal
and social rights and basic health practices as part of their
implementation.
 Gender focus in Microfinance
• Many microfinance programs focus entirely on
women because of various assumptions:
– Women are important in poverty alleviation and
hence for economic development
– Women form a large proportion of the poor
– Women spend more of their income on their
families and hence a focus on women improves
the welfare of the whole family
– A focus on women empowers women
• REVENUE MODEL OF MICRO-FINANCE
 INCOME
• Interest on Loan
• Membership fee and service charges
• Investment income
 Expenses
• Financial expenses
-Interest expense on debt
- Interest expense on savings
• Operating expenses
-salaries
-travel
-Depreciation
-other admin expenses