“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
EXECUTIVE SUMMARY
Microfinance is defined as any activity that inc...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
OBJECTIVES OF PROJECT

 Microfinance Regulation in India.
 Micro...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”

RESARCH METHODOLOGY

Method of data collection:-

Secondary sourc...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
INTRODUCTION
About Microfinance: Microfinance is a general term to...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
The History of Modern Microfinance
ABSTRACT:
In the late 1970s the...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
GRAMEEN Bank: Credit unions and lending cooperatives have been aro...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
OVERVIEW
Microfinance Definition:
According to International Labor...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
to save. Perhaps most importantly, the poor are more likely to los...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
business purposes. The remainder supports a wide range of househol...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
their clients be willing to pay more for greater benefits? From pr...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
The micro-credits model:
*The model is fairly straightforward and ...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
GOVERNMENT’S ROLE IN SUPPORTING MICRO FINANCE
Government’s most im...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
RBI data shows that informal sources provide a significant part of...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
when one needs a small amount of cash. Poor people want secure, co...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
THE NEED IN INDIA
India is said to be the home of one third of the...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
MICRO-FINANCING REGULATION IN INDIA
Advantage of Regulation:
Follo...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
ranging Between 500 to 1500 per MFI. The geographical distribution...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Recommendation by RBI Micro Credit Institutions
• Company Law Boar...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
MICRO FINANCE MODELS
Microfinance Providers
Microfinance Instituti...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
financial intermediation using a variety of delivery methods, thei...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
is a valued outcome. Thus, quick and high ‗customer satisfaction‘ ...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
specific and focused skill-building programme ‗Micro Enterprise De...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
MFIs availing Capital Support and/or Revolving Fund Assistance fro...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
MICRO FINANCE STRATEGIC
Strategic Management: Strategic management...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Product-market matrix:
A market penetration strategy is a business...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”

BCG Growth-Share Matrix

This framework assumes that an increase ...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
when the market growth declines. Question marks must be analyzed c...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Microfinance business unit that is a "dog" may be helping other bu...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Capacity building must be tailored to meet the differing needs of ...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
MICRO FINANCE MANAGEMENT
Objectives: The programmer aims at enabli...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
work issues? These are some of the questions that the ILO intends ...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
difficult because candidates must have, as a prerequisite, a minds...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
WEAKNESSES
1. Limited resources.
2. Micro managing.
3. Start up or...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
micro-finance initiatives at a faster pace, a special effort is re...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Institutions/ MFIs with minimum fund requirement of Rs. 25 lakh p....
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
k. Branch Manager Leadership Training: Managing, Controlling, and ...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
5. Mechanisms for Redress of Grievances: Providers will have in pl...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
CRITICAL ANALYSIS
MFIs Critical Issues: MFIs can play a vital role...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Top 14 Microfinance Institutions in India by Growth of Number of a...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
3. Lack of proper governance and accountability.
4. Isolated and s...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
institutions, 80 to 90 million are from India only. So there is st...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Major Risks to Microfinance Institutions:
Financial Risks

Operati...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Liquidity risk: Liquidity risk is the ―risk that an MFI cannot mee...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
more MFIs offer additional financial products, including savings a...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
and savers tend to lose confidence in the organization and funds b...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
social and economic impact on poor clients. Since most MFIs have l...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
India are below the poverty and for them the Micro Finance is more...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
to meet the demand of that unsaved customers and Micro Finance sho...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Micro-Finance Accounting and Management Information Systems
The ba...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Accounting System and Client Portfolio System (MIS) Microfinance

...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
reflecting a period of activity is used to calculate a ratio, the ...
“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
Basic Financial Management and Ratio Analysis for MFIs
MFI stakeho...
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
Hardik savla micro finance
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Hardik savla micro finance

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Micro finance

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Hardik savla micro finance

  1. 1. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” EXECUTIVE SUMMARY Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have endeavored to provide access to financial services to the poor in creative ways. Governments also have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 1
  2. 2. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” OBJECTIVES OF PROJECT  Microfinance Regulation in India.  Micro Finance Model.  Microfinance Management, Critical Analysis.  The History of Modern Microfinance. I learnt in detail the process of Micro Finance, from its need at the grass root level.  Functioning of various Govt:, Semi Govt: & various other delivery channels.  Learning of how SHGs are formed.  Learning of how the MFIs work.  Most important learning, how it can change the life of the Economic disadvantaged people. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 2
  3. 3. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” RESARCH METHODOLOGY Method of data collection:- Secondary sources:It is the data which has already been collected by some one or an organization for some other purpose or research study .The data for study has been collected from various sources:  Books  Journals  Magazines  Internet sources Time: 2 months Statistical Tools Used: Simple tools like tabulation, pie charts have been used. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 3
  4. 4. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” INTRODUCTION About Microfinance: Microfinance is a general term to describe financial services to lowincome individuals or to those who do not have access to typical banking services. Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that is not always the appropriate method, and that it should never be seen as the only tool for ending poverty. Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have endeavored to provide access to financial services to the poor in creative ways. Governments also have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. ‗Microfinance refers to small scale financial services for both credits and deposits- that are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas‘. Marguerite S. Robinson. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 4
  5. 5. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” The History of Modern Microfinance ABSTRACT: In the late 1970s the concept of microfinance had evolved. Although, microfinance have a long history from the beginning of the 20th century we will concentrate mainly on the period after 1960. Many credit groups have been operating in many countries for several years, for example, the "chit funds" (India), tontines" (West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides, many formal saving and credit institutions have been working for a long time throughout the world. During the early and mid 1990s various credit institutions had been formed in Europe by some organized poor people from both the rural and urban areas. These institutions were named Credit Unions, People's Bank etc. The main aim of these institutions was to provide easy access to credit to the poor people who were neglected by the big financial institutions and banks. In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other countries. The poor people had been given some small loans to invest in microbusiness. This kind of micro credit was given on the basis of solidarity group lending, that is, each and every member of that group guaranteed the repayment of the loan of all the members. Many banks and financial institutions have been pioneering the microfinance program after 1970. These are listed below. ACCION International:This institution had been established by a law student of Latin America to help the poor people residing in the rural and urban areas of the Latin American countries. Today, in 2008, it is one of the most important microfinance institutions of the world. Its network of lending partner comprises not only Latin America but also US and Africa. SEWA Bank: In 1973, the Self Employed Women's Association (SEWA) of Gujarat (in India) formed a bank, named as Mahila SEWA Cooperative Bank, to access certain financial services easily. Almost 4 thousand women contributed their share capital to form the bank. Today the number of the SEWA Bank's active client is more than 30,000. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 5
  6. 6. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” GRAMEEN Bank: Credit unions and lending cooperatives have been around hundreds of years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Price in 2006. Since then, innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Today, the World Bank estimates that about 160 million people in developing countries are served by microfinance. Grameen Bank (Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in 1983. This bank is now serving almost 400, 0000 poor people of Bangladesh. Not only that, but also the success of Grameen Bank has stimulated the formation of other several microfinance institutions like, ASA, BRAC and PROSHIKA. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 6
  7. 7. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” OVERVIEW Microfinance Definition: According to International Labor Organization (ILO), ―Microfinance is an economic development approach that involves providing financial services through institutions to low income clients‖. In India, Microfinance has been defined by ―The National Microfinance Taskforce, 1999‖ as ―provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards‖. "The poor stay poor, not because they are lazy but because they have no access to capital. "Microfinance is the supply of loans, savings, and other basic financial services to the poor." As these financial services usually involve small amounts of money - small loans, small savings, etc. - the term "microfinance" helps to differentiate these services from those which formal banks provide It's easy to imagine poor people don't need financial services, but when you think about it they are using these services already, although they might look a little different. "Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe. "However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members' ability Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 7
  8. 8. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions. ―Poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal." Role of Microfinance: The micro credit of microfinance prename was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral , alleviating poverty and unleashing human creativity and endeavor of the poor people. Microfinance impact studies have demonstrated that 1. Microfinance helps poor households meet basic needs and protects them against risks. 2. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. 3. By supporting women‘s economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well being. 4. The level of impact relates to the length of time clients have had access to financial services. Difference between micro credit and microfinance: Micro credit refers to very small loans for unsalaried borrowers with little or no collateral, provided by legally registered institutions. Currently, consumer credit provided to salaried workers based on automated credit scoring is usually not included in the definition of micro credit, although this may change. Microfinance typically refers to micro credit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people. Borrowers: Most micro credit borrowers have micro enterprises—unsalaried, informal income-generating activities. However, micro loans may not predominantly be used to start or finance micro enterprises. Scattered research suggests that only half or less of loan proceeds are used for Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 8
  9. 9. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” business purposes. The remainder supports a wide range of household cash management needs, including stabilizing consumption and spreading out large, lumpy cash needs like education fees, medical expenses, or lifecycle events such as weddings and funerals. Some MFIs provide non-financial products, such as business development or health services. Commercial and government-owned banks that offer microfinance services are frequently referred to as MFIs, even though only a portion of their assets may be committed to financial services to the poor. Activities in Microfinance: Micro credit: It is a small amount of money loaned to a client by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending. Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses Micro insurance: It is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work. Remittances: These are transfer of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds. Product Design: The starting point is: how do MFIs decide what product s to offer? The actual loan products need to be designed according to the demand of the target market. Besides the important question of what risks to cover, organizations also have to decide whether they want to bundle many different benefits into one basket policy, or whether it is more appropriate to keep the product simple. For marketing purposes, MFI‗s sometimes prefer the basket cover, since it can make the policies sound comprehensive, but is that the right approach for the low-income market? After picking products, one must also understand how they are priced. What assumptions do the organizations make with regard to operating costs, risk premiums, and reinsurance, and how did they come to those conclusions? Would Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 9
  10. 10. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” their clients be willing to pay more for greater benefits? From price, the logical next set of questions involves efficiency. Indeed, given the relative high costs of delivering large volumes of small policies, maximizing efficiency is a critical strategy to ensuring that the products are affordable to the low-income market. One way is to make the products mandatory, which increases volumes, reduces transaction costs and minimizes adverse selection. What does an organization lose by offering mandatory insurance, and how does it overcome the disadvantages? MFI‗s can combine a mandatory product with some voluntary features to make the service more us to mar-oriented while. Techniques of Product Design: To design a loan product to meet borrower needs it is important to understand the cash pattern of the borrowers. Cash pattern is important so far as they affect the debt capacity of the borrowers. Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments when they are due efficiency depends less on the delivery model than on the simplicity of the product or product menu. Simple products work best because they are easier to administer and easier for clients to understand. Another efficiency strategy is to use technology to reduce paperwork, manual processing and errors. MFIs need to conduct a costing analysis to determine how much they need to earn in commission to cover their administrative expenses. MFI’s Products and its Management: Product & services of Microfinance Financial Services Other Financial Services Non Financial Services 1. Credit Services-i Small Micro-insurance, Life Family Health and Sanitation Credit, Small Business Insurance , Health Insurance Education, Financial Credit. , Loan for Housing, Education, Micro- Education, Health. entrepreneur Training. 2. Deposit Services Voluntari Savings Services, Manda tory Savings. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 10
  11. 11. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” The micro-credits model: *The model is fairly straightforward and simple. *Focus on jump-starting self-employment, providing the capital for poor women to use their innate "survival skills" to pull themselves out of poverty. *Lend to women in small groups (credit circles), say of five or seven. * Make loans of small amounts to two out of five. * The three who have not received loans will be eligible only when this first round of loans has been repaid. * Draw up a weekly or bi-weekly repayment schedule. * In case any member defaults the entire circle is denied access to credit. * Banks have been given freedom to formulate their own lending norms keeping in view ground realities. They have been asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 11
  12. 12. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” GOVERNMENT’S ROLE IN SUPPORTING MICRO FINANCE Government’s most important role is not provision of retail credit services, for reasons mentioned in Government can contribute most effectively by: *Setting sound macroeconomic policy that provides stability and low inflation. *Avoiding interest rate ceilings - when governments set interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costs—such as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit. *Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with sustainable microfinance delivery. *Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs. *Promote microfinance as a key vehicle in tackling poverty, and as vital part of the financial system. *Create policies, regulations and legal structures that *encourage responsive, sustainable microfinance. *Encourage a range of regulated and unregulated institutions that meet performance standards. *Encourage competition, capacity building and innovation to lower costs and interest rates in microfinance. *Support autonomous, wholesale structures. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 12
  13. 13. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” RBI data shows that informal sources provide a significant part of the total credit needs of the rural population. The magnitude of the dependence of the rural poor on informal sources of credit can be observed from the findings of the All India Debt and Investment Survey, 1992, which shows that the share of the Non-institutional agencies (informal sector) in the outstanding cash dues of the rural households were 36 percent. However, the dependence of rural households on such informal sources had reduced of their total outstanding dues steadily from 83.7 percent in 1961 to 36 percent in 1991. Microfinance Social Aspects Micro financing institutions significantly contributed to gender equality and women‘s empowerment as well as poor development and civil society strengthening. Contribution to women‘s ability to earn an income led to their economic empowerment, increased well being of women and their families and wider social and political empowerment. Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to poverty reduction and women‘s higher credit repayment rates led to a general consensus on the desirability of targeting women. Self Help Groups (SHGs): Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation. Savings services help poor people:Savings has been called the ―forgotten half of microfinance.‖ Most poor people now use informal mechanisms to save because they lack access to good formal deposit services,. They may tuck cash under the mattress; buy animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be risky—cash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well – one cannot sell just the cow‘s leg Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 13
  14. 14. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers. Women’s indicators of empowerment through microfinance: *Ability to save and access loans *Opportunity to undertake an economic activity *Mobility-Opportunity to visit nearby towns *Awareness- local issues, MFI procedures, banking transactions *Skills for income generation *Decision making within the household * Group mobilization in support of individual clients- action on. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 14
  15. 15. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” THE NEED IN INDIA India is said to be the home of one third of the world‘s poor; official estimates range from 26 to 50 percent of the more than one billion population. • About 87 percent of the poorest households do not have access to credit. • The demand for micro credit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector. Due to the sheer size of the population living in poverty, India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world‘s poverty by 2015. Microfinance can also be distinguished from charity. It is better to provide grants to families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This situation can occur for example, in a war zone or after a natural disaster. While India is one of the fastest growing economies in the world, poverty runs deep throughout country. About two thirds of India‘s more than 1billion people live in rural areas and almost 170 million of them are poor. For more than 21 percent of them, poverty is a chronic condition. Three out of four of India‘s poor live in rural areas of the country. Poverty is deepest among scheduled castes and tribes in the country‘s rural areas. The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks linkage program for over a decade now. As the formal banking system already has a vast branch network in rural areas, it was perhaps wise to find ways and means to improve the access of rural poor to the existing banking network. This was tried by routing financial. Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and opportunities that—left unaddressed—could negatively impact the long-term future of the industry. The industry needs to move past a single-minded focus on scale, expand the depth and breadth of products and services offered, and focus on the double bottom line and over indebtedness to effectively address the risks facing the industry. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 15
  16. 16. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” MICRO-FINANCING REGULATION IN INDIA Advantage of Regulation: Following are the advantages and benefits of regulation and supervision of /MFIs: i. Protects the interest of the depositors; ii. Put in place prudential norms, standards and practices; iii. Provides sufficient information about the true risks faced by the banks/MFIs; iv. Promoters systemic stability and thereby sustains public confidence in the banks/MFIs; v. Prevents a bank‘s/MFI‘s failure/potential dangers through timely interventions; vi. Penalizes the violations, misconducts, non-compliance to the norms of behavior; vii. Provides invaluable advisory inputs for problem-solving and overall improvement of the banks/MFIs; viii. Promoters safe, strong and sound banking/MF system and effective banking/MF policy and ix. Promotes and enhances orderly economic growth and development. Unified Regulation System 8.18 at present, all the regulatory aspects of microfinance are not centralized. For example, while the Rural Planning and Credit Department (RPCD) in RBI looks after Rural lending, MF-NBFCs are under the control of the Department of Non-Banking Supervision (DNBS) and External Commercial Borrowings are looked after by the Foreign Exchange Department. The Committee feels that RBI may consider bringing all regulatory aspects of microfinance under a single, mechanism. Further, supervision Of MF-NBFCs could be delegated to NABARD by RBI. Legal forms of MFIs in India MFIs and Legal Forms: With the current phase of expansion of the SHG – Bank linkage programmed and other MF initiatives in the country, the informal micro finance sector in India is now beginning to evolve. The MFIs in India can be broadly sub-divided into three categories of organizational forms as given in Table 1. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. However, not more than 10 MFIs are reported to have an outreach of 100,000 micro finance clients. An overwhelming majority of MFIs are operating on a smaller scale with clients Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 16
  17. 17. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” ranging Between 500 to 1500 per MFI. The geographical distribution of MFIs is very much lopsided with concentration in the southern India where the rural branch network of formal banks is excellent. It is estimated that the share of MFIs in the total micro credit portfolio of formal & informal institutions is about 8 per cent. *Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act 1882 *Non profit companies governed by section 25 of the companies act, 1956 *For profit MFIs regulated by Indian companies act, 1956 *NBFC governed by RBI act, 1934. *Cooperative societies by cooperative societies act enacted by state government. Legal Forms of MFIs in India: Types of MFIs Estimated Legal Acts under which Registered Number* 1. Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or similar Provincial a.) NGO - MFIs Indian Trust Act, 1882 b.) Non-profit Companies 2. Mutual Benefit Acts 10 MFIs 200 to 250 a.) Mutually Aided Cooperative Section 25 of the Companies Act, 1956 Mutually Aided Cooperative Societies Act enacted by State Government Societies (MACS) and similarly set up institutions 3. For Profit MFIs a.) Non-Banking 6 Financial Indian Companies Act, 1956 Reserve Bank of India Act, 1934 Companies (NBFCs) Total 700 - 800 * The estimated number includes only those MFIs, which are actually undertaking lending activity. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 17
  18. 18. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Recommendation by RBI Micro Credit Institutions • Company Law Board to allow SHGs to be members of Section 25 of the companies act. • There will be no ceiling in respect of loan amount extended by Section 25 companies to SHGs; however SHGs, to provide credit not exceeding Rs. 50000/- per member of the SHG. RBI may consider issuing revised instructions. • As regards capital, to encourage more flow of donations/ contributions, donors to be exempted from income tax under Section 11C of the IT Act. • As regards capital adequacy, since there is no mandatory capital requirement, minimum standards need not be considered. • Savings of SHGs promoted by Section 25 companies be maintained with permitted organizations. • Complete income tax exemption for Section 25 companies purveying micro cred it (to the donor and to the receiver). Government to consider complete exemption from IT for income earned, as the main purpose of the organization is to empower the poor. 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. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 18
  19. 19. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” MICRO FINANCE MODELS Microfinance Providers Microfinance Institutions: A microfinance institution (MFI) is an organization that provides microfinance services. MFIs range from small non-profit organizations to large commercial banks. Most MFIs started as not-for-profit organizations like NGOs (non-governmental organizations), credit unions and other financial cooperatives, and state-owned development and postal savings banks. An increasing number of MFIs are now organized as for-profit entities, often because it is a requirement to obtaining a license from banking authorities to offer savings services. For-profit MFIs may be organized as Non-Banking Financial Companies (NBFCs), commercial banks that specialize in microfinance, or microfinance departments of fullservice banks. The micro finance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide micro finance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks besides almost 90,000 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 5,000 rural people. This physical reaching out to the far-flung areas of the country to provide savings, credit and other banking services to the rural society is an unparalleled achievement of the Indian banking system. In the this paper an attempt is made to deal with various aspects relating to emergence of private micro finance industry in the context of prevailing legal and regulatory environment for private sector rural and micro finance operators. MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. Since 2000, commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were ―into‖ Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 19
  20. 20. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. Since 2000, commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were ―into‖ financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. For NGOs 1. The field of development itself expands and shifts emphasis with the pull of ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are (perceived to be) simple and people‘s acceptance is high – all characteristics (real or presumed) of microfinance. 2. Canvassing by various actors, including the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of Women‘s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of People‘s Action and Rural Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP), World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been funding microfinance projects. One might call it the supply push. 3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women, for whom access to small loans to meet dire emergencies Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 20
  21. 21. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” is a valued outcome. Thus, quick and high ‗customer satisfaction‘ is the USP that has attracted NGOs to this trade. 4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It is implicitly assumed that no ‗technical skill‘ is involved. Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy. 5. For many NGOs the idea of ‗organizing‘ – forming a samuha – has inherent appeal. Groups connote empowerment and organizing women is a double bonus. 6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding. Service Company Model: In this context, the Service Company Model developed by ACCION and used in some of the Latin American Countries is interesting. The model may hold significant interest for state owned banks and private banks with large branch networks. Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in hand with that MFI to extend loans and other services. On paper, the model is similar to the partnership model: the MFI originates. Coordinating Microfinance Efforts in India NABARD coordinates the microfinance activities in India at international/ national/ state / district levels. These include organizing international/national Workshops, Seminars, etc for experience sharing, Organizing National and State level Meets of Bankers and NGOs etc .Dissemination of best practices in SHG / microfinance. Other Initiatives: Micro enterprise Development Programmer (MEDP) for Matured SHGs The progression of SHG members to take up micro enterprise involves intensive training and hand holding on various aspects including understanding market, potential mapping and ultimately fine tuning skills and entrepreneurship to manage the enterprise. Hence, a separate, Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 21
  22. 22. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” specific and focused skill-building programme ‗Micro Enterprise Development Programmed (MEDP)‘ has been formulated. This involves organizing short duration, location specific programmers on skill up gradation / development for setting up sustainable micro-enterprises by matured SHG members. The duration of training programme can vary between 3 to 13 days, depending upon the objective and nature of training. The training may be conducted by agencies that have background and professional competency in the field of micro enterprise Development with an expertise in skill development. Scheme for Capital/ Equity Support to Micro-Finance Institutions (MFIs) from MFDEF: The scheme attempts to provide capital/equity support to Micro Finance Institutions (MFIs) so as to enable them to leverage capital/equity for accessing commercial and other funds from banks, for providing financial services at an affordable cost to the poor, and to enable MFIs to achieve sustainability in their credit operations over a period of 3-5 years. Scheme for financial assistance to banks/ MFIs for rating of Micro Finance Institutions (MFIs): In order to identify MFIs, classify and rate such institutions and empower them to intermediate between the lending banks and the clients, NABARD has decided to extend financial assistance to Commercial Banks and Regional Rural Banks by way of grant. The banks can avail the services of credit rating agencies, M-CRIL, ICRA, CARE and Planet Finance in addition to CRISIL for rating of MFIs. The financial assistance by way of grant for meeting the cost of rating of MFIs would be met by NABARD to the extent of 100% of the total professional fees subject to a maximum of Rs.3,00,000/-/-. The remaining cost would be borne by the concerned MFI. The cost of local hospitality (including boarding and lodging) towards field visit of the team from the credit rating Agency, as a part of the rating exercise, would also be borne by the MFI. Those MFIs which have a minimum loan outstanding of more than Rs. 50.00 lakh (Rupees fifty lakh only) and maximum of Rs 10 crore (Rupees Ten crore only) would be considered for rating and support under the scheme. Financial assistance by way of grant would be available only for the first rating of the MFI. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 22
  23. 23. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” MFIs availing Capital Support and/or Revolving Fund Assistance from NABARD are also eligible for re-imbursement of 50% of the cost of professional fee charged by Credit Rating Agency for second rating subject to a maximum of Rs.1.50 lakh (i.e 50% of Rs.3 lakh). This will be in addition to the re-imbursement of professional fee for first rating of the MFI. Refinance support to banks for financing MFIs: The scheme is to provide 100% refinance to banks for financing MFIs. Interest rate on refinance to Commercial Banks and Regional Rural Banks on their loans to MFIs for on lending to clients will be at 3% less than that charged by banks subject to minimum interest rate of 7.5% for all regions and all eligible purposes. The revised rate of interest is applicable to refinance disbursed on or after 01 March 2010. Source: NABARD website Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 23
  24. 24. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” MICRO FINANCE STRATEGIC Strategic Management: Strategic management is a field that deals with the major intended and emergent initiatives taken by general manager on behalf of owners, involving utilization of resources, to enhance the performance of rams in their external environments. It entails. Understanding microfinance strategies: This report explores strategic issues shaping the future of the MFI sector in India. The study approached CEOs of select MFIs with a set of issues ranging from concerns to competition and sought their opinions about future strategies. The report draws from their responses, and states that: Future strategy is about being strong on processes and being overtly client-centric; Success is a prudential combination of three factors, namely, culture, beliefs and aspirations; Culture is about the degree of trust rather than the rate of interest; Risk management systems of economically weaker families are built on their beliefs about dependability and access; Micro credit stories have revealed ingenious ways that clients have used their loans for purposes that satisfied their aspirations. Finally, the sector, at about Rs. 14,000 crore (approximately US$3 bn) looks large, but is small by any business scale. Competition and unhealthy practices are overshadowing the good work and reputation earned over many years. MFIs in India need to overcome these challenges in the future. Strategic Policy Initiatives: Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are: Working group on credit to the poor through SHGs, NGOs, NABARD, 1995. The National Microfinance Taskforce, 1999.Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002.Microfinance Development and Equity Fund, NABARD, 2005.Working group on Financing NBFCs by Banks- RBI. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 24
  25. 25. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Product-market matrix: A market penetration strategy is a business-as-usual strategy, where the MFI focuses on achieving growth by selling existing products in existing markets. This can be done through more competitive pricing strategies, increased promotional activities, and more liberal terms and conditions. For example, the MFI may develop strategic alliances to begin *Adapted from Ansoff 1957. The BCG Growth-Share Matrix The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competit or, hence the name "growth-share". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 25
  26. 26. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” BCG Growth-Share Matrix This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption often is true because of the experience curve; increased relative market share implies that the firm is moving forward on the experience curve relative to its competitors, thus developing a cost advantage. A second assumption is that a growing market requires investment in assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indication of its cash generation and its cash consumption. Henderson reasoned that the cash required by rapidly growing business units could be obtained from the firm's other business units that were at a more mature stage and generating significant cash. By investing to become the market share leader in a rapidly growing market, the business unit could move along the experience curve and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix was born. The four categories are Dogs - Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture. Question marks - Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is large net cash consumption. A question mark (also known as a "problem child") has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 26
  27. 27. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. Stars - Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. If a star can maintain its large market share, it will become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation. Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. Such business units should be "milked", extracting the profits and investing as litt le cash as possible. Cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders. Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis. Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined solely by whether it had become the market leader during the period of high growth. While originally developed as a model for resource allocation amon g the microfinance business units in a corporation, the growth-share matrix also can be used for resource allocation among products within a single business unit. Its simplicity is its strength - the relative positions of the firm's entire business portfolio can be displayed in a single diagram. Limitations The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are: Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability. The framework assumes that each business unit is independent of the others. In some cases, Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 27
  28. 28. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Microfinance business unit that is a "dog" may be helping other business units gain a competitive advantage. The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow. While its importance has diminished, the BCG matrix still can serve as a simple tool or viewing a corporation's business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units. Overall Strategy *Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of the poor has today emerged as a potent tool for human development. This process enables the poor, especially the women from the poor households, to collectively identify and analyses the problems they face in the perspective of their social and economic environment. It helps them to pool their meager resources, human and financial, and priorities their use for solving their own problems. *The emphasis on regular thrift collection and its use to solve immediate problems of consumption and production not only helps to meet their most urgent needs, but also trains them to handle larger financial resources more skillfully, prudently and with a more lasting impact. *Encourage SHGs to become a forum for many social sector interventions. SHG-Bank Linkage Programmer A Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage Programmer has proved to be the major supplementary credit delivery system with wide acceptance by banks, NGOs and various government departments. Capacity Building Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 28
  29. 29. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Capacity building must be tailored to meet the differing needs of the nascent/emerging MFIs and of the expanding/mature MFIs. There is a pressing need to develop comprehensive, relevant and integrated training modules on a wide range of topics to professionalize Indian microfinance – thus building the much sought-after second tier management in MFIs. The industry continues to grow, and so does the demand for competent middle management. Currently, these are typically sourced by MFIs from the rural institutes of management. But these rural institutes are using curricula largely based on the one developed by SIDBI nearly a decade ago – and it is high time to revisit this curriculum, to update it both in terms of content (to reflect the new realities in India microfinance) and in terms of its delivery (to use multi-media/practical examples, and thus bring the courses to life with video clips, case studies and field-based exercises that take the students out into the field). Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 29
  30. 30. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” MICRO FINANCE MANAGEMENT Objectives: The programmer aims at enabling the participants to gain a clear understanding of various policies, conceptual, and operational issues involved in developing effective and successful microfinance interventions. Innovative Methodologies: Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. Cost reduction is also an essential element in microfinance operation. Reducing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly. The essences of innovative management are as follows: 1. Specialized operation. 2. Documentation of essential information only. 3. Simple product, simple loan application and verification process. 4. Absence of grant guarantee. 5. Staff recruitment in no conventional manner. 6. On the job training (each one teaches one). 7. Simple standard loan register along with ledger and cash book abandoning the bookkeeper/cashier. 8. Standard furniture, fixture and collective use of facilities in the office. 9. Decentralized branch structure. 10. Branch level financial planning. 11. Strong monitoring from mid and head office. 12. Written Manual. Microfinance Working Environment: How can microfinance institutions (MFIs) help improve working conditions? How can they contribute to job creation? And how can MFIs help reduce child labor? Should MFIs have an interest in addressing these and other decent Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 30
  31. 31. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” work issues? These are some of the questions that the ILO intends to address through an experimental global action research programmer (2008-2011) in partnership with microfinance Institutions interested in promoting decent work. Access to micro credit or other financial services can help improve the decent work status. Conditional loans, credit with education, incentives like interest rate rebates, linkages with social partners and NGOs as well as the provision of micro insurance, conditional cash transfers or health care can be effective ways to reduce child labor, decrease vulnerabilities, raise awareness and create incentives to improve working conditions. Enabling Environment Favorable environment for microfinance in different manners are prevailing in most developing countries. Favorable environment is not only among Government but also among general public, civil society, media and various institutions within the country needed for favorable growth of microfinance for poverty reduction. Though Government is favorable in general to microfinance in many countries but specific modalities of NGOs/ MFIs determine the nature of favorable. Current Challenging Issues 1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to achieve operational, financial and institutional sustainability. 2. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. Cost reduction is also an essential element in microfinance operation. Reducing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly. 3. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds. 4. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds. HR Issues: Recruitment and retention is the major challenge faced by MFIs as they strive to reach more clients and expand their geographical scope. Attracting the right talent proves Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 31
  32. 32. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” difficult because candidates must have, as a prerequisite, a mindset that fits with the organization‘s mission. Many mainstream commercial banks are now entering microfinance, who are poaching staff from MFIs and MFIs are unable to retain them for other job opportunities. 85% of the poorest clients served by microfinance are women. However, women make up less than half of all microfinance staff members, and fill even fewer of the senior management roles. The challenge in most countries stems from cultural notions of women‘s roles, for example, while women are single there might be a greater willingness on the part of women‘s families to let them work as front line staff, but as soon as they marry and certainly once they start having children, it becomes unacceptable. Long distances and long hours away from the family are difficult for women to accommodate and for their families to understand. Microfinance Training & Capacity Building Methods: 1. Microfinance Training Methodology and How to Build Efficient Workforce? 2. Staff Motivation & Built in Cost effective Training Component. 3. Human Resource Planning and Development. 4. Good Governance. SWOT MATRIX for Microfinance Management: STRENGTHS 1. Experienced senior management Team. 2. Robust IT system. 3. Clear and well defined HR policy. 4. Infusion of own equity - commitment from promoters. 5. Process innovation. 6. Clarity and good understanding of vision. 7. Transparency at all levels. 8. Plans for value added and livelihood support services (LDS). 9. Shared ownership. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 32
  33. 33. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” WEAKNESSES 1. Limited resources. 2. Micro managing. 3. Start up organisation; therefore, yet to institutionalise the standard processes. 4. Attracting/Holding on to the staff till the time we become established players. 5. Refine the processes for growth. OPPORTUNITIES 1. Huge Potential Market. 2. Scope of introducing livelihood related services. 3. Financial crunch is helping organisation to be cost conscious and effective. 4. IT systems. THREATS 1. Financial crisis. 2. Increasing competition. 3. Increasing competition. 4. Poor banking infrastructure. 5. Political instability. Microfinance Operation management 1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to achieve operational, financial and institutional sustainability. The constraints and challenges vary with the different types and development stage of MFIs. Most MFIs are currently operating below operational viability and use grant funds from donors for financing up-front costs of establishing new groups and covering initial losses incurred until the lending volume builds up to a break-even level. The MFIs are generally constrained in reaching a break-even level and finally achieving sustainability, primarily due to a narrow client and product base, high operational and administrative costs for delivering credit to the poor, and their inability to mobilize requisite resources. Moreover, lack of technical manpower, operational systems, infrastructure and MIS are prevalent. In view of the above, to scale up Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 33
  34. 34. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” micro-finance initiatives at a faster pace, a special effort is required for capacity building of the Micro Finance Institutions. In this background, SFMC has in the past under the DFID collaboration (which has since come to an end on March 31,2009) provided need based capacity building support to the partner MFIs, in the initial years, to enable them to expand their operations, cover their managerial, administrative and operational costs besides helping them achieve self-sufficiency in due course. 2. Liquidity Management: In view of the fact that liquidity is a major concern of many of the middle level MFIs and a small working capital support can go a long way in their better liquidity management and thus pave way for faster growth, SFMC has introduced a special short term loan scheme, Liquidity Management Support (LMS) for the long term partners. 3. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging requirement of the micro finance sector in India. SIDBI provides equity capital to eligible institutions not only to enable them to meet the capital adequacy requirements but also to help them leverage debt funds. Keeping in tune with the sect oral requirements, the bank has also introduced quasi-equity products viz., optionally convertible Preference share capital; optionally convertible debt and optionally convertible Subordinate debt for new generation MFIs which are generally in the pre-breakeven stage requiring special dispensation for capital support by way of a mix of Tier I and Tier II capital. 4. Transformation Loan:The Transformation Loan (TL) product is envisaged as a quasiequity type support to partner MFIs that are in the process of transforming themselves / their existing structure into a more formal and regulated set-up for exclusively handling micro finance operations in a focused manner. Being quasi-equity in nature, TL helps the MFIs not only in enhancing their equity base but also in leveraging loan funds and expanding their micro credit operations on a sustainable basis. The product has the feature of conversion into equity after a specified period of time subject to the MFI attaining certain structural, operational and financial benchmarks. This non-interest bearing support facilitates the young but well performing MFIs to make long term institutional investments and acts as a constant incentive to transform themselves into formal and regulated entities. 5. Micro Enterprise Loans: In order to build and strengthen new set of intermediaries for Micro Enterprise Loans, the Bank has formulated new scheme for Micro Enterprise Loans. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 34
  35. 35. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Institutions/ MFIs with minimum fund requirement of Rs. 25 lakh p.a. and having considerable experience in financial intermediation/ facilitating or setting up of enterprises/ providing escort services to SSI/ tiny units/ networking or active interface with SSIs etc. and having professional expertise and capability to handle on-lending transactions shall be eligible under the dispensation. The institutions would be selected based on their relevant experience, potential to expand, professional management, transparency in operations and well laid-out systems besides qualified/ trained manpower. Lending to be based strictly on an intensive in-house appraisal supplemented with the credit rating by an independent professional agency. Relaxed security norms more or less on line with micro credit dispensation to be adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements. 6. Loan Syndication: Keeping in view the increased fund requirement of major partner MFIs, the Bank has also undertaken fee based syndication arrangement where loan requirement is comparatively higher. 7. Microfinance Operations: a. Marketing Strategy and Microfinance Clients Targeting Methodology. b. Microfinance Products, Services and Lending Procedures. c. Microfinance Lending Methodology: Individual and Group Lending. d. Micro finance Indian Lending Methodology. e. Institutional Business Planning for Microfinance Program6. Financial Planning & Analysais. f. Savings and Credit Management. g. Program Operational Policies and Procedures. h. Accounting and Record Keeping. i. Auditing for Microfinance Operation. j. Management Information System. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 35
  36. 36. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” k. Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools. l. Detection of Fraud and Internal Control. m. Monitoring and Supervision System. n. Delinquencies and its Management. Clients of micro finance The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Micro finance clients are typically self-employed, often householdbased entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, micro finance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients are poor and vulnerable nonpoor who have a relatively unstable source of income. The six principles of client protection are: 1. Avoidance of Over-Indebtedness: Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that non-credit, financial products, such as insurance, provided to low-income clients are appropriate. 2. Transparent and Reasonable Pricing: The pricing, terms and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) are transparent and will be adequately disclosed in a form understandable to clients. 3. Appropriate Collections Practices: Debt collection practices of providers will not be abusive or coercive. 4. Ethical Staff Behavior: Staff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 36
  37. 37. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” 5. Mechanisms for Redress of Grievances: Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients. 6. Privacy of Client Data: The privacy of individual client data will be respected, and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories). Social performance measurement The Social Performance Task Force defines social performance as: "The effective translation of an institution's social mission into practice in line with accepted social values that relate to serving larger numbers of poor and excluded people; improving the quality and appropriateness of financial services; creating benefits for clients; and improving social responsibility of an MFI.‖Most MFIs have a social mission that they see as more basic than their financial objective, or at least co-equal with it. There is a great deal of truth in the adage that institutions manage what they measure. Social performance measurement helps MFIs and their stakeholders focus on their social goals and judge how well they are meeting them. Social indicators are often less straightforward to measure, and less commonly used than financial indicators that have been developed over centuries. Today‘s increasing use of social measures reflects an awareness that good financial performance by an MFI does not automatically guarantee client interests are being appropriately advanced. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 37
  38. 38. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” CRITICAL ANALYSIS MFIs Critical Issues: MFIs can play a vital role in bridging the gap between demand & supply of financial services if the critical challenges confronting them are addressed. Sustainability: The first challenge relates to sustainability. It has been reported in literature that the MFI model is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs2 by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. It has also been commented that MFIs pass on the higher cost of credit to their clients who are ‗interest insensitive‘ for small loans but may not be so as loan sizes increase. It is, therefore, necessary for MFIs to develop strategies for increasing the range and volume of their financial services. Lack of Capital: The second area of concern for MFIs, which are on the growth path, is that they face a paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism in the country for meeting the equity requirements of MFIs. As you know, the Micro Finance Development Fund (MFDF), set up with NABARD, has been augmented and re-designated as the Micro Finance Development Equity Fund (MFDEF). This fund is expected to play a vital role in meeting the equity needs of MFIs. Borrowings: In comparison with earlier years, MFIs are now finding it relatively easier to raise loan funds from banks. This change came after the year 2000, when RBI allowed banks to lend to MFIs and treat such lending as part of their priority sector-funding obligations. Private sector banks have since designed innovative products such as the Bank Partnership Model to fund. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 38
  39. 39. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Top 14 Microfinance Institutions in India by Growth of Number of active Borrowers. Problems for Alternative Micro-Finance Institutions: The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. A vast majority of them set up as NGOs for getting access to funds as, the existing practices of mainstream financing institutions such as SIDBI and NABARD and even of the institutions specially funding alternatives, such RMK and FWWB, is to fund only NGOs, or NGO promoted SHGs. As a result, the largest incentive to enter such services remains through the nonprofit route. The alternative finance institutions also have not been fully successful in reaching the needy. There are many reasons for this: 1. Financial problems leading to setting up of inappropriate legal structures. 2. Lack of commercial orientation. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 39
  40. 40. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” 3. Lack of proper governance and accountability. 4. Isolated and scattered. Risk: This looks at the quality of their loan portfolio measured as the percent of the portfolio at risk greater than 30 days. And return, which is measured as a combination of return on equity and return on assets. From this above table we can notice that the Risk of companies is measured as the percentage of Portfolio at Risk (PAR) which means and returns is measured as a combination of ROA and ROE. Return on Assets (ROA): A Return on Assets is an indication of how well an MFI is managing its asset base to maximize its profits. The ratio does not evaluate the source of the asset base – whether through debt or equity, but simply the return of the portfolio and other revenue generated from investments and operations. A return on assets should be positive. There is a positive relationship between Return on Assets and the Portfolio to Assets ratio discussed in the next section. MFIs that maintain most of their assets in the loan portfolio tend to break even sooner, and generate higher returns on their assets; provided the loan portfolio performs well and other costs are also controlled. Return on Assets = Net Operating Income – Taxes____ Average Assets Trend: An increasing Return on Assets is positive. Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its profitability. The ratio includes not only the return on the portfolio, but also all other revenue generated from investments and other operating activities. From the above list we can notice that, there are seven companies of India in top 50 companies in the world. There is a huge potential for India to grow in this sector, because out of total 500 million poor people from all over the world, who is getting beneficial from the micro finance Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 40
  41. 41. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” institutions, 80 to 90 million are from India only. So there is still a huge market and opportunities in this segment. The total loan that the MFI‗s had provided to the poor people in India crosses Rs 24 billion till October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see the new face of India. Return on Equity: A Return on Equity is probably one of the most important profitability indicators for commercial banks and MFIs, particularly in comparison with other institutions. The return is measured only in relation to what the MFI has built from operating surpluses, or what it has generated through donations or other contributed sources. The shareholders of a for-profit MFI or bank, is very interested in this ratio, as it is a measure of their investment choice, and its ability to pay dividends. Increasing equity also strengthens the MFI‘s capital structure and its ability to leverage debt financing. As markets mature and competition increases, Return on Equity may level off and maintain a positive position without increasing dramatically or at all. Return on Equity = Net Operating Income – Taxes____ Average Equity Trend: An increasing Return on Equity is positive. Risk Management: Risk management is a discipline for dealing with the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk management may be as uncomplicated as asking and answering three basic questions: Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 41
  42. 42. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Major Risks to Microfinance Institutions: Financial Risks Operational Risks Strategic Risk Credit Risk Transaction Risk Governance Risk Transaction risk Human Portfolio risk resources Information Liquidity Risk & Risk Ineffective technology Poor Risk Market Risk Interest rate risk Foreign exchange risk Investment portfolio risk oversight governance structure Fraud (Integrity) Legal & Risk Reputation Risk Compliance External Business Risk Risks Event risk Sources: - www. Scribd.com This are the most significant risks (with the most potentially damaging consequences for the MFI), how they interact, and current challenges faced by MFIs. Financial Risks: Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks. Mentioned under are the risks which are very critical for the MFI‗s. Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or capital due to borrowers‘ late and non-payment of loan obligations. Credit risk encompasses both the loss of income resulting from the MFI‗s inability to collect anticipated interest earnings as well as the loss of principle resulting from loan defaults. Credit risk includes both transaction risk and portfolio risk. Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigate transaction risk through borrower screening techniques, underwriting criteria, and quality procedure for loan disbursement, monitoring, and collection. Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the overall loan portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures lessen the portfolio risk. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 42
  43. 43. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Liquidity risk: Liquidity risk is the ―risk that an MFI cannot meet its obligations on a timely basis Liquidity risk usually arises from management‗s inability to adequately anticipate and plan for changes in funding sources and cash needs. Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to meet client withdrawals, disburse loans and fund unexpected cash shortages) while also investing as many funds as possible to maximize earnings. Liquidity management is an ongoing effort to strike a balance between having too much cash and too little cash. Interest rate risk: Interest rate risk is the risk of financial loss from changes in market interest rates. The greatest interest rate risk occurs when the cost of funds goes up faster than the financial institution can or is willing to adjust its lending rates. Manage interest rate risk: To reduce the mismatch between short-term variable rate liabilities and long-term fixed rate loans, managers may refinance some of the short-term borrowings with long-term fixed rate borrowings. This might include offering one and twoyear term deposits as a product and borrowing five to 10 year funds from other sources. Such a step reduces interest rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those funding sources. To boost profitability, MFIs may purposely ―mismatch assets and liabilities in anticipation of changes in interest rates. If the asset liability managers think interest rates will fall in the near future, they may decide to make more long-term loans at existing fixed rates, and shorten the term of the MFI‗s liabilities. By lending long and borrowing short, the MFI can take advantage of the cheaper funding in the future, while locking in the higher interest rates on the asset side. In this case, the MFI has increased the interest rate risk in the hope of improving the profitability of the bank. Operational Risks: Operational risk arises from human or computer error within daily service or product delivery. This risk includes the potential that inadequate technology and information systems, operational problems, insufficient human resources, or breaches of integrity (i.e. fraud) will result in unexpected losses. Two types of operational risk: transaction risk and fraud risk: Transaction risk: Transaction risk is particularly high for MFIs that handle a high volume of small transactions daily. Since MFIs make many small, short-term loans, this same degree of cross-checking is not cost-effective, so there are more opportunities for error and fraud. As Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 43
  44. 44. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” more MFIs offer additional financial products, including savings and insurance, the risks multiply and should be carefully analyzed as MFIs expand those activities Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional deception by an employee or client. The most common type of fraud in an MFI is the direct theft of funds by loan officers or other branch staff. Other forms of fraudulent activities include the creation of misleading financial statements, bribes etc. Minimize fraud risk: To introduced an education campaign to encourage clients to speak out against corrupt staff and group leaders. This standardized all loan policies and procedures so that the staff cannot make any decision outside the regulations. To Established an inspection unit that performs random operational checks. Strategic Risks: Strategic risks include internal risks like those from adverse business decisions or improper implementation of those decisions, poor leadership, or ineffective governance and oversight, as well as external risks, such as changes in the business or competitive environment. This section focuses on two critical strategic risks: Governance Risk, Business Environment Risk. Governance risk: Governance risk is the risk of having an inadequate structure or body to make effective decisions. The Financial crisis, described above illustrates the dangers of poor governance that nearly resulted in the failure of that institution. External business environment risk: Business environment risk refers to the inherent risks of the MFI‗s business activity and the external business environment. To minimize business risk, the microfinance institution must react to changes in the external business environment to take advantage of opportunities, to respond to competition, and to maintain a good public reputation. MFI manage their repayment and risk management: Risk is an integral part of financial services. When financial institutions issue loans, there is a risk of borrower default. When banks collect deposits and on-lend them to other clients (i.e. conduct financial intermediation), they put clients‘ savings at risk. Most MFIS‗s provides the loans without or with smaller portion of deposit or, so for them repayment of interest or principal is very risky. All MFI‗s face risks that they must manage efficiently and effectively to be successful. When poorly managed risks begin to result in financial losses, donors, investors, lenders, borrowers Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 44
  45. 45. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” and savers tend to lose confidence in the organization and funds begin to dry up. When funds dry up, an MFI is not able to meet its social objective of providing services to the poor and quickly goes out of business. Benefit of Risk Management: Early warning system for potential problems: A systematic process for evaluating and measuring risk identifies problems early on, before they become larger problems or drain management time and resources. Less time fixing problems means more time for production and growth. Better information on potential consequences, both positive and negative. A proactive and forward-thinking organizational culture will help managers identify and assess new market opportunities, foster continuous improvement of existing operations, and more effectively performance incentives with the organization‗s strategic goals. Encourages cost-effective decision-making and more efficient use of resources. Interest Rates: Most MFI‘s financially sustainable by charging interest rates that are high enough to cover all their costs. Four key factors determine these rates: •The cost of funds. •The MFI's operating expenses. •Loan losses. •And profits needed to expand their capital base and fund expected future growth. There are three kinds of costs the MFI has to cover when it makes micro loans: •The cost of the money that it lends. •The cost of loan defaults. •Transaction and Operating cost. For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount lent, then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost i.e. transaction cost. The interest rates are deregulated not only for private MFIs but also for formal baking sector. In the context of softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 24 per cent 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 rates too high could undermine the Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 45
  46. 46. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” 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. MFI being criticized because of high interest rate: Most MFI‗s financially sustainable by charging interest rates that are high enough to cover all their costs. The problem is that the administrative costs are inevitably higher for tiny micro lending than for normal bank lending. As a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans. Four key factors determine these rates: 1. The cost of funds, 2. the MFI's operating expenses, 3. Loan losses, 4. And profits needed to expand their capital base and fund expected future growth. Formula to decide the interest rate is: R = AE + LL + CF + K - II 1– LL Where AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired Capitalization rate and II is investment income. Example: Suppose that the transaction cost is Rs 15 per loan and that the loans are for one year. To break even on the Rs 500 loan, the MFI would need to collect interest of Rs 50 + Rs 5 + Rs 15 = Rs 70, which represents an annual interest rate of 13 percent. To break even on the Rs 100 loan, the MFI would need to collect interest of Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an interest rate of 26 percent. SWOT Analysis: SWOT stands for Strength, Weakness, Opportunity, and Threat. Strength Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the individuals who are below the poverty line and cannot able to access from the commercial banks. As we know that Indian, more than 350 million people in Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 46
  47. 47. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” India are below the poverty and for them the Micro Finance is more than the life. By providing small loans to this people Micro finance helps in reducing the poverty. Huge networking available: For MFIs and for borrower, both the huge network is there. In India there are many more than 350 million who are below the poverty line, so for MFIs there is a huge demand and network of people. And for borrower there are many small and medium size MFIs are available in even remote areas. Weakness • Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated properly. In the absent of the rules and regulation there would be high case of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can function properly and efficiently. • High number of people access to informal sources: According to the World Bank report 80% of the Indian poor can‗t access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p.a. • Concentrating on few people only: India is considered as the second fastest developing country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few people. India‗s 70% of the population lives in rural area, and that portion is not fully touched. Opportunity Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and issuers. In India around 350 million of the people are poor and only few MFIs there to serving them. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower.( April 09) Employment Opportunity: Micro Finance helps the poor people by not only providing them with loan but also helps them in their business; educate them and their children etc. So in this Micro Finance helping in increase the employment opportunity for them and for the society. Huge Untapped Market: India‗s total population is more than 1000 million and out of 350 million is living below poverty line. So there is a huge opportunity for the MFIs Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 47
  48. 48. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” to meet the demand of that unsaved customers and Micro Finance should not leave any stones unturned to grab the untapped market. Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment. Threat High Competition: This is a serious threat for the Micro Finance industry, because as the more players will come in the market, their competition will rise , and we know that the MFIs has the high transaction cost and after entrant of the new players there transaction cost will rise further, so this would be serious threat. Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by informal sources. But the formal source of finance through Micro Finance is novice, and the rules are also not properly placed for it. Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because the excess of anything is injurious, so in the same way the excess involvement of Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans, make new rules for their personal benefit etc. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 48
  49. 49. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Micro-Finance Accounting and Management Information Systems The basic components of an accounting system are fairly universal and applicable to all org Source documents form the basis of all transactions. A Chart of Accounts is a numbered system that is structured to Classify and organize transactions by account. The journals cash journals, general journals, or bank journals record each and every transactions or adjustment. They are summarized monthly, cross-totaled and posted to the general ledger. The general ledger holds a record for each account in the Chart of Accounts. It accumulates the totals posted from the journals to provide monthly and annual revenue and expenses for reporting periods. It accumulates all the accounts of the Balance Sheet. These accounting records and processes form the basis of all accounting systems. Most MFIs choose computerized. The following diagram illustrates a ―generic‖ financial management information system in a microfinance institution, whether its clients are individuals, Self Help Groups, Solidarity Groups, or Joint Liability Groups, and regardless of its legal structure or registration. The accounting system follows the usual flow from transaction to the parathion of financial statements. One of the most distinctive aspects of the accounting system for microfinance institutions is that financial and operational activity must be tracked by Branch. Loan information should also be tracked by Credit Officer, by product and by area if needed. This is critical for internal management & monitoring. Another distinctive aspect of accounting for MFIs is that the loan tracking system for client transactions acts as a subsidiary ledger. Client transactions must be entered into both systems, but can be summarized in the accounting general ledger. Some loan tracking systems are manual, but it is a huge challenge to handle a large number of clients, produce reports &age loans with great efficiency in a manual system. Most MFIs prefer automated systems, particularly loan tracking systems that are integrated with, and linked to a general ledger. The following diagram shows the connection between the two systems. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 49
  50. 50. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Accounting System and Client Portfolio System (MIS) Microfinance The MFI financial management systems illustrated dose not operates in a vacuum. There are four distinct areas that guide & govern a well-managed & effective financial system. Portfolio Report: Is it a number reflecting a period of time (e.g. the Income Statement, and some numbers from the Portfolio Report)? Is the number reflective of information from a point in time – as from the Balance Sheet? When Income Statement numbers or any number Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 50
  51. 51. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” reflecting a period of activity is used to calculate a ratio, the second component of the ratio must also reflect a period of activity. Therefore, some of the ratio components take the average of Balance Sheet numbers. Remember to note these distinctions in the ratio calculations. MFI in India Growth of Gross Loan Portfolio Asset and Liability Management Yield = Cash Received from Interest, Fees and Commissions on Loan Portfolio___ Average Gross Loan Portfolio Trend: An increasing yield is positive although it will level off as it nears the effective interest rate. Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 51
  52. 52. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA” Basic Financial Management and Ratio Analysis for MFIs MFI stakeholders expect MFI senior managers to ensure that strong and adequate financial systems are in place in the MFI. Therefore, it is essential that MFI managers have a solid understanding and appreciation of the financial and accounting systems. The Basic Financial Management and Ratio Analysis for MFIs offer a practical training in basic financial management and ratio analysis for MFIs. It provides an overview of the key aspects of accounting in microfinance institutions describes the primary financial statements and portfolio reports of MFIs and describes the commonly accepted financial ratios used for monitoring, reporting and measuring MFI performance. Performance ratios cover four general areas of MFI operations: sustainability or profitability, asset and liability management, portfolio quality and productivity and efficiency. Its helps develop clarity on the need of the different financial statements, the relation between them. The training helps develop skills to analyze these statements and calculate different ratios which will give the correct picture on the financial health of the organization. This is done through supporting documents, diagrammatic representations, and exercises. Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. List of MFI’s and their key Ratios Liquidity Ratios These ratios actually show the relationship of a firm‗s cash and other current assets to its current liabilities. Two ratios are discussed under Liquidity ratios. They are: 1. Current ratio 2. Quick/ Acid Test ratio. 1. Current ratio: This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities Department of Management Studies, Shah and Anchor Kutchhi Engineering College, Chembur, Mumbai Page 52

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