Mumbai Education Trust (MET), Bandra (West) Project report on: Micro Financial Institutions in IndiaSUBMITTED TO: SUBMITTED BY:Prof. Ambdekar Nikita Vedak PGDM(ebusiness)- Finance Roll No- PG10055
INDEX:SR.NO. TOPIC1) Introduction to Micro financial Institution2) Report- objective and Need3) Methodology- Primary and secondary Data4) Business Models5) Case Study- SKS Microfinance Ltd.5) Status of the Sector2.1 Why India?
INTRODUCTION:The poor, like the rest of society, need financial products and services to build assets, stabilizeconsumption and protect themselves against risks. Microfinance serves as the last-mile bridge tothe low-income population excluded from the traditional financial services system and seeks tofill this gap and alleviate poverty.Microfinance loans serve the low-income population in multiple ways by: (1) providing working capital to build businesses; (2) infusing credit to smooth cash flows and mitigate irregularity in accessing food, clothing,shelter, or education; and (3) cushioning the economic impact of shocks such as illness, theft, or naturaldisasters.Moreover, by providing an alternative to the loans offered by the local moneylender priced at60% to 100% annual interest, microfinance prevents the borrower from remaining trapped in adebt trap which exacerbates poverty. The microfinance model is designed specifically to help thelow income population overcome typical challenges such as illiteracy, lack of financialknowledge and deficiency of collateralizable assets. At the same time, the model takes advantageof existing community support systems and networks to encourage financial discipline andensure high repayment rates.The basic idea of micro-finance is simple: if poor people are provided access to financialservices, including credit, they may very well be able to start or expand a micro-enterprise thatwill allow them to break out of poverty.
Definition of Microfinance and MFIsThe proposed Microfinance Services Regulation Bill defines microfinanceservices as ―providing financial assistance to an individual or an eligible client, eitherdirectly or through a group mechanism for : i) an amount, not exceeding rupees fifty thousand in aggregate per individual, for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual) or ii) an amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purposes, or iii) such other amounts, for any of the purposes mentioned at items (i) and (ii) above or other purposes, as may be prescribed.‖
The proposed regulations further define an MFI as ―an organisation orassociation of individuals including the following if it is established for the purpose ofcarrying on the business of extending microfinance services : i) a society registered under the Societies Registration Act, 1860, ii) a trust created under the Indian Trust Act,1880 or public trust registered under any State enactment governing trust or public, religious or charitable purposes, iii) a cooperative society / mutual benefit society / mutually aided society registered under any State enactment relating to such societies or any multistate cooperative society registered under the Multi State Cooperative Societies Act, 2002 but not including : �a cooperative bank as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949 or � a cooperative society engaged in agricultural operations or industrial activity or purchase or sale of any goods and services.‖Microfinance is increasingly being considered as one of the most effective tools of reducingpoverty. Microfinance has a significant role in bridging the gap between the formal financialinstitutions and the rural poor. The Micro Finance Institutions (MFIs) accesses financialresources from the Banks and other mainstream Financial Institutions and provide financial andsupport services to the poor.The microfinance sector is maturing and beginning to diversify its product and service base toaddress other unmet financial and non-financial needs of the low income population eitherdirectly or by acting as a conduit for third-party providers – savings, insurance, remittance andlow cost education and healthcare services being some of the key examples.Given this growth and maturity dynamic, the Indian microfinance sector is increasinglybecoming a viable investment sector with commercial investors joining social investors whohave been nurturing the industry thus far.The growth of Indian MFIs has been enhanced by the availability of debt financing from bothprivate and public sector banks, which have significantly increased their exposure tomicrofinance over the last five years. The priority sector lending (―PSL‖) requirements set by theRBI have encouraged banks to lend to MFIs as a way to satisfy their financial inclusion quotasfor lending to agriculture and weaker and more deprived sections of society. During the 2008liquidity crisis, some banks reduced on their exposure to microfinance, particularly to smallerMFIs. However, the Small Industries Development Bank of India (―SIDBI‖) played an importantcounter-cyclical role, and the new public sector banks such as Punjab National Bank and StateBank of India entered as significant debt providers to Indian MFIs. As liquidity conditions easedby early 2009, the market witnessed the entrance of non-bank debt entities such as IFMR Trust.The large private Indian banks such as HDFC Bank and ICICI Bank that have historically lent toIndian MFIs, have begun to increase their exposure to the microfinance sector.Emergence of MFIs
Various types of institutions offer microfinance: credit unions, commercial banks, NGOs (Non-governmental Organizations), cooperatives, and sectors of government banks. The emergence of―for-profit‖ MFIs is growing. In India , these ‗for-profit‘ MFIs are referred to as Non-BankingFinancial Companies (NBFC). NGOs mainly work in remote rural areas thereby providingfinancial services to the persons with no access to banking services.MFIs are an extremely heterogenous group comprising NBFCs, societies, trusts andcooperatives. They are provided financial support from external donors and apexinstitutions 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 foron lending to poor clients. Though initially, only a handful of NGOs were ―into‖ financial
intermediation using a variety of delivery methods, their numbers have increasedconsiderably today. While there is no published data on private MFIs operating in the country,the number of MFIs is estimated to be around 800. One set of data which I have indicate thatnot more than a dozen MFIs have an outreach of 1,00,000 microFinance clients. A largemajority of them operate on much smaller scale with clients ranging between 500 to 1,500 perMFI. It is estimated that the MFIs‘ share of the total institution-based micro-credit portfolio isabout 8%.Product Offering:Thus far, microfinance institutions have largely limited their product and service offering evenwithin the confines of financial inclusion. In fact, their product innovation has been limited tocredit which is intended to serve a variety of needs as shown by the box below. The limitedproduct innovation is understandable given the sector‘s primary focus has been on refining itsbusiness model and gaining scale to become financially sustainable. Despite following a single-product model, the sector has experienced remarkable growth. This growth can only be expectedto continue as product innovation and diversified service offerings attract and retain greaternumber of customers with a variety of needs. Product PurposeExisting Micro Business Enterprise/Business Working Capital/Business Start-upProducts Loan Agricultural Loan Crop Farm Related Livestock Dairy, Poultry General Loan ConsumptionNew/Niche Educational Loan Academic/ VocationalProducts Housing Loan Home Improvement/New HomeThe very same clients that the sector currently serves have a plethora of alternate needs for basicproducts and services, financial and non-financial which can affect sustainable, long-termachievements in their quality of life. Fortunately, recognizing this pent-up demand, mature MFIsare beginning to take concrete steps toward expanding their product basket, at least within thecontext of financial services. Along with credit, MFIs are heavily exploring the possibility ofproviding savings/deposit services, micro-insurance and remittance servicesWho is Funding Microfinance?
Many developing and transition economies receive cross-border, international funding formicrofinance. This funding has been provided by a broad range of donors and investors withdiverse institutional characteristics, business models, instruments, return expectations, riskappetites, and conceptions about the ultimate goal of microfinance. A myriad of new funders arevying to contribute to microfinance: 30 microfinance investment vehicles (MIVs) have beencreated just in the last two years for a total of 90 MIVs. Interest from foundations is alsoexpanding, with over 350 foundations funding microfinance, including 40 that have chosenmicrofinance as a key program area. Development finance institutions (DFIs) such as KfW,EBRD and IFC are stepping up their funding considerably-and are increasingly in demand giventhe current financial crisis—and public bi-and multilateral agencies continue to play a significantrole.Donors InvestorsBilateral Agencies Development Finance Institutions (DFIs)Aid agencies and ministries of governments in The private sector arms of government-owneddeveloped countries [e.g., Swedish bilateral and multilateral development agenciesInternational Development Agency (SIDA), [e.g., KfW (Germany), International FinanceUnited States Agency for International Corporation (IFC)]Development (USAID)]Multilateral Development Banks and UN Individual InvestorsAgencies Socially motivated individual ―retail‖ investorsAgencies owned by multiple governments of and high net worth individuals that act asthe industrialized and developing world [e.g., venture philanthropists. Individual investorsWorld Bank, the regional development banks], provide their capital through organizations likeand UN agencies [e.g., the United Nations Oikocredit, a Dutch cooperative society,Capital Development Fund (UNCDF), investment funds, and online, peer-to-peerInternational Fund for Agricultural platforms like Kiva.orgDevelopment (IFAD)]Foundations Institutional InvestorsNon-profit corporations or charitable trusts International retail banks, investment banks,typically funded by a private individual, a pension funds, and private equity funds thatfamily or a corporation, with a principal channel capital into microfinance, often withpurpose of making grants to unrelated an expectation of return that is below marketorganizations [e.g., Bill and Melinda Gates [e.g., Deutsche Bank, TIAA-CREF]Foundation, Ford Foundation]International NGOs Microfinance Investment Vehicles (MIVs)Non governmental organizations that can be Investment entities that have microfinance as aeither specialized in microfinance [e.g., core investment objective and mandate. MIVsACCION, FINCA] or work in multiple sectors, receive money from investors through theincluding microfinance [e.g., CARE, Concern issuance of shares, units, bonds, or otherWorldwide] financial instruments. They provide debt, equity, or guarantees to MFIs and non- specialized financial intermediaries. [e.g.,
European Fund for South East Europe (EFSE), BlueOrchard]Need of MFI:The fundamental reason behind the Indian microfinance industry‘s impressive growth is that it isfulfilling a critical need of its target audience, the low-income population, which has thus farremained unaddressed by the traditional financial services sector. Currently, a total population of1.1 billion is being served by 50,000 commercial banks, 12,000 co-operative bank offices,15,000 regional rural banks and 100,000 primary agriculture societies. This density of financialservices, however, belies the availability of financial services to low-income households, whichmake up a significant chunk of the Indian population. Before exploring why financial serviceshave failed to reach this segment of the population, it is necessary to first define their target TheIndian population can be divided into four categories based on householdincome levels. The Rich who make up 0.4% of the households have an annual household incomegreater than Rs.9,00,000. The Middle Class comprises 11 million households, or 5.9% of thetotal households, and has an annual household income between Rs.1,80,000 and Rs.9,00,000.The Aspirers make up nearly 22% of the households and have an annual household incomebetween Rs.81,000 and Rs.1,80,000. Lastly, the Deprived segment, the prime target of themicrofinance industry, comprises 135 million or 72% of the households and has an annualhousehold income below 81,000.Despite the density and robustness of the formal Indian financial system, it has failed to reach theDeprived segment, leaving approximately 135 million households entirely unbanked. The size ofIndias unbanked population is one of the highest in the world, second only to that of China. Themicrofinance sector targets the poorer portion of the Aspirer segment and the mid to richerportion of the Deprived segment. The industry has thus far been able to create a service modeland products that are suitable to these segments and these services and products have provensuccessful in affecting improvements in the clients‘ economic status.The reasons behind the formal financial sector‘s failure to reach such a large segment of theIndian population are manifold and operate in a self-reinforcing manner. The principalprohibiting factor is that banks face extremely high fixed and variable costs in servicing lowincome households, resulting in high delivery costs for relatively small transactions. Much of thelow income population is located in rural areas that are geographically remote and inaccessible.For this population, the cost of visiting a traditional bank branch is prohibitive due to the loss ofwages that would be incurred in the time required. Concurrently, from a bank‘s perspective, thecost of operating a branch in a remote location is financially unfeasible due to the low volumeand high cost dynamic. Moreover, low income households are not interested in the sameproducts that are usually utilized by the rest of the population because they have differentimmediate needs, lower financial capacities and variable income streams. The unsuitability ofexisting credit products for low income households is exacerbated by a general unavailability ofcollateralizable assets. Additionally, the low income population is often illiterate and lacks
financial knowledge, making it nearly impossible for it to even contemplate availing existingfinancial services, which provide no ancillary support to mitigate these challenges.In the absence of access to formal financial services, the low income segment has traditionallyrelied on local moneylenders to fulfill their financial needs. While this money is readilyavailable, it is often exorbitantly priced at 60%-100% annual yields and forces the borrower intoa classic debt trap, entrenching her in poverty. Credit from moneylenders has not traditionallyacted as a tool for business expansion or enhancement of quality of life, but rather as a lifelinefor immediate consumption or healthcare needs.The Goal for MFIs should be:• To improve the quality of life of the poor by providing access to financial and support services;• To be a viable financial institution developing sustainable communities;• To mobilize resources in order to provide financial and support services to the poor,particularly women, for viable productive income generation enterprises enabling them to reducetheir poverty;• Learn and evaluate what helps people to move out of poverty faster;• To create opportunities for self-employment for the underprivileged;• To train rural poor in simple skills and enable them to utilize the available resources andcontribute to employment and income generation in rural areas.Indian Microfinance in the Global ContextIt is critical to evaluate the progress of the Indian microfinance sector within the context ofglobal microfinance. With one of the highest growth rates globally since 2002, the Indianmicrofinance sector has emerged as one of the most socially conscious, commercially viable, andfinancially sustainable. According to a MIX market study, India has one of the lowest averageloan sizes of around Rs.6750 as well as the lowest yield on portfolio of 21.2%. The small loansize combined with the low interest rates testify to the social inclination of Indian MFIs,which seek to genuinely foster financial inclusion among the poor and alleviate poverty. Inconjunction with this goal, Indian MFIs have succeeded not only in comfortably covering costs,but also returning healthy profits and Return on Assets (ROA). This highlights Indian MFIs‘operational efficiency and ability to function on tight budgets. True, MFIs in other countries suchas Brazil and Mexico have higher profit margins, but they offer significantly larger loans withinterest rates typically between 40-65%. The inherent efficiency and resiliency of the Indianmicrofinance industry proved critical during the recent financial meltdown during which growthcontinued unabated despite a slowdown in the flow of funds which negatively affected growth inmicrofinance in other markets around the world. This demonstrated self-sustainability is
prognostic of the long term viability and potential of the sector. Moreover, the Indian financialsystem as a whole has demonstrated its long-term confidence in the industry through its owninvestment choices. Whereas the global average of domestic investment in microfinance hoversaround 65%, over 90% of the funding in India comes through domestic channels, highlightingconfidence in the underlying business model and expectations of high future growth and returns.REPORT:OBJECTIVE OF STUDY:To understand the basic practices in the field of Microfinance including the diverse approachesused in for-profit and non-profit sectors. The study basically covers 2 things- explores variousmodels of Microfinance available and later examines the developmental aspect of microfinanceactivity.NEED OF STUDY:The importance of microfinance for me lies in the fact that it provides a model of development.It promotes entrepreneurship and gives people the means to fight poverty. Currently, the steadilygrowing popularity of microfinance has reached a global audience. Also according to me is mostemerging model for fighting poverty in India. It has helped empowered women in India byproviding them source of employment. There are rapid changes in female/male relationship interms of increased freedom, autonomy and mobility. There are various models of MFI. Most MFIs use groups as intermediaries for financialtransactions, but there are different ways of working with groups. In each of these models, thegroup usually assumes joint liability for loans taken by its members, but there are significantdifferences in the services offered and in the extent of client responsibility in financialtransactions. To study each of this model well and find there pros and cons.In this sense the market for microfinance to a large extent is still untapped. There are very fewavenues for the poor to park their savings and get good returns.Though microfinance has evolved a lot from its early version, there still exists a lot of scope forcustomisation of microfinance instruments to suit specific needs of particular groups.This opens a large array of opportunities for further growth in this sector.
METHODOLOGY-PRIMARY DATA:So one major challenge has been addressed by youQuestionnaire: 1) How is MicroFinance as a concept relevant for you? 2) Do you think interest rate charged by Microfinance Institution‘s (MFI‘s) is appropriate? Yes No 3) Which according to you is the most efficient MFI model, which has contributed the most to Indian Rural Development? Why? 4) Which are the most important factors for rapid growth of Microfinance in India? a. Low interest rate b. Availability c. Processing & sanctioning of loan d. Method of Recovery 5) Do you think Microfinance has helped in Rural India? Yes No 6) Do you think Microfinance is a tool to eradicate poverty? Yes No 7) Microfinance Institutions can help unemployed urban youth? 8) Does women‘s role as clients for microfinance translate into empowerment for them? Or is this merely a pragmatic means of ensuring repayments and group discipline? 9) How well do the products on offer reflect the needs/preference of poorer clients? 10) How do you anticipate the future of Microfinance?
SECONDARY DATA:BUSINESS MODELS:In India there is a diversity of approaches to microfinance, involving banks, government agencies,NGOs. The focus of this study – is the specialized MFIs who provide financial services whilstbuilding their own financial sustainability. 1. Self Help Group Model (SHG) 2. Joint Liability Group Model (JLG) 3. Individual Lending Model (IL)Self Help Groups are autonomous social bodies comprising of 10 to 20Members. SHG generates a fund through its members or from a bank, and provides loans to itsmembers or others during needs based on the collective opinion of the group. The collateral hereis the borrower‘s societal status rather than physical property. Repayment of the loans is ensuredby the pressure exerted by the members of the group. SHG has a definite organizational structurewith the office bearers elected by the group members. Apart from the financial issues, the socialissues are also dealt by the group collectively.Joint Liability Group is a model of combined responsibility. Members are formed into groups,and the groups into a centre. Most favoured grouping is five members per group and 8 groupsper centre. It concentrates only on the financial matters and doesn‘t get involved in the socialissues. When a person in the group has defaulted in repaying the loan, the group should pay if ithas funds. Else, the centre has to pay from its funds. Frequent group meetings are held to avoidthe credit risks.Individual lending is lending the money to individual persons from the MicroFinanceInstitutions (MFIs). In this scenario, the person‘s ability to repay the loan is also verified.Collateral or surety is also required for higher amounts of loans.In the rapid growth of microfinance in India, what are the problems associated with it? First andforemost issue is the lack of a regulatory framework. For a sector which shows tremendousgrowth, a framework is required to regulate the policies. Lack of such regulatory body mighteven lead to disaster like the subprime crisis. Currently National Bank for Agriculture and RuralDevelopment (NABARD) is preparing a regulation for MFIs. But the process is so slow andtakes years to get implemented. Such processes should be sped up.The situation of Indian economy and society needs SHG to be the model of the MFIs, as SHG isa much better model for a country like India where there are more people below poverty line.But, in India JLG is the most prevalent model. This also isolates the social issues from thefinancial issues. But in India, they mostly are similar issues occurring together. Integrating socialvalues and financing, as in SHG, helps a lot to Indian society. NABARD‘s SHG-Bank linkageprogramme and RBI‘s advice to the banks to lend more to the SHG are some of the initiativesdirected towards this step.
The SHG ModelStructure of SHGA SHG is a group of about 10 to 20 people, usually women, from a similar class and region,who come together to form savings and credit organization. They pooled financial resourcesto make small interest bearing loans to their members. This process creates an ethic thatfocuses on savings first. The setting of terms and conditions and accounting of the loan aredone in the group by designated members.SHG FederationAs mentioned previously, SHGs have also federated into larger organizations. In Figure 1, agraphic illustration is shown of a SHG Federation. Typically, about 15 to 50 SHGs make upa Cluster / VO with either one or two representatives from each SHG. Depending ongeography, several clusters or VOs come together to form an apex body or an SHGFederation. In Andhra Pradesh, the Village Organizations, SHG Clusters and SHGFederations are registered under the Mutually Aided Co-operative Society (MACS) Act 1995.At the cluster and federation level, there are inter-group borrowings, exchange of ideas,sharing of costs and discussion of common interests. There are typically various subcommitteesthat deal with a variety of issues including loan collections, accounting and socialissues.As already described, SHG Federations have presented some key benefits to SHGs as a resultof their greater scale. Increasingly, SHG Federations are being seen as a key interface with
the SHG movement because of their formal registration under the MACS and recognitionfrom bankers. But, in addition to the benefits of SHG Federations, there are some drawbacks,or constraints, that should be noted.An SHG Federation is a formal group of informal common-interest groups. As a result of itsrather informal members, there are internal constraints that it faces. Namely, it has a poorcapacity for self-governance, average to low quality managers and systems and process arepoorly defined. Further, there is significant financial cost to organizing and registering aSHG Federation which has been estimated to be about Rs 7,000 per SHG member. To bridgethese internal constraints requires savvy external assistance and there are few good qualityNGOs to provide this assistance to a burgeoning number of SHG Federations.SHG Bank LinkageA most notable milestone in the SHG movement was when NABARD launched the pilotphase of the SHG Bank Linkage programme in February 1992. This was the first instance ofmature SHGs that were directly financed by a commercial bank. The informal thrift andcredit groups of poor were recognised as bankable clients. Soon after, the RBI advisedcommercial banks to consider lending to SHGs as part of their rural credit operations thuscreating SHG Bank Linkage.The linking of SHGs with the financial sector was good for both sides. The banks were ableto tap into a large market, namely the low-income households, transactions costs were lowand repayment rates were high. The SHGs were able to scale up their operations with morefinancing and they had access to more credit products.Grameen Bank ModelThe Grameen Bank is a microfinance organization and community development bank startedin Bangladesh that makes small loans (known as microcredit or "grameen credit") to theimpoverished without requiring collateral. The name Grameen is derived from the word gramwhich means "rural" or "village" in the Bengali language.Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problemfaced by the poor through a programme of action-research. With his graduate students inChittagong University in 1976, he designed an experimental credit programme to serve them. Itspread rapidly to hundreds of villages. Through a special relationship with rural banks, hedisbursed and recovered thousands of loans, but the bankers refused to take over the project atthe end of the pilot phase. They feared it was too expensive and risky in spite of his success.Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now
serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated theestablishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc.Through the 1980s, the policy of targeted, subsidized rural credit came under a slow butincreasing attack as evidence mounted of the disappointing performance of directed creditprograms, especially poor loan recovery, high administrative costs, agricultural developmentbank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit tolarger farmers. The basic tenets underlying the traditional directed credit approach weredebunked and supplanted by a new school of thought called the "financial systems approach",which viewed credit not as a productive input necessary for agricultural development but as justone type of financial service that should be freely priced to guarantee its permanent supply andeliminate rationing. The financial systems school held that the emphasis on interest rate ceilingsand credit subsidies retarded the development of financial intermediaries, discouragedintermediation between savers and investors, and benefited larger scale producers more thansmall scale, low-income producers.Meanwhile, microcredit programs throughout the world improved upon the originalmethodologies and defied conventional wisdom about financing the poor. First, they showed thatpoor people, especially women, had excellent repayment rates among the better programs, ratesthat were better than the formal financial sectors of most developing countries. Second, the poorwere willing and able to pay interest rates that allowed microfinance institutions (MFIs) to covertheir costs.1990s These two features - high repayment and cost-recovery interest rates - permitted someMFIs to achieve long-term sustainability and reach large numbers of clients.Another flagship of the microfinance movement is the village banking unit system of the BankRakyat Indonesia (BRI), the largest microfinance institution in developing countries. This state-owned bank serves about 22 million microsavers with autonomously managed microbanks. Themicrobanks of BRI are the product of a successful transformation by the state of a state-ownedagricultural bank during the mid-1980s.The 1990s saw growing enthusiasm for promoting microfinance as a strategy for povertyalleviation. The microfinance sector blossomed in many countries, leading to multiple financialservices firms serving the needs of microentrepreneurs and poor households. These gains,however, tended to concentrate in urban and densely populated rural areas.It was not until the mid-1990s that the term "microcredit" began to be replaced by a new termthat included not only credit, but also savings and other financial services. "Microfinance"emerged as the term of choice to refer to a range of financial services to the poor, that includednot only credit, but also savings and other services such as insurance and money transfers.ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicatedsolely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive rangeof financial services including savings accounts, credit cards and housing loans - products thatjust five years ago were only accessible to Bolivias upper classes. BancoSol is no longer unique:more than 15 ACCION-affiliated organizations are now regulated financial institutions.
Today, practitioners and donors are increasingly focusing on expanded financial services to thepoor in frontier markets and on the integration of microfinance in financial systemsdevelopment. The recent introduction by some donors of the financial systems approach inmicrofinance - which emphasizes favorable policy environment and institution-building - hasimproved the overall effectiveness of microfinance interventions. But numerous challengesremain, especially in rural and agricultural finance and other frontier markets. Today, themicrofinance industry and the greater development community share the view that permanentpoverty reduction requires addressing the multiple dimensions of poverty. For the internationalcommunity, this means reaching specific Millennium Development Goals (MDGs) in education,womens empowerment, and health, among others. For microfinance, this means viewingmicrofinance as an essential element in any countrys financial system.Village Phone ProgramAmong many different applications of microcredit by the bank, one is the Village Phoneprogram, through which women entrepreneurs can start a business providing wirelesspayphone service in rural areas of Bangladesh. This program earned the bank the 2004Petersburg Prize worth of EUR 100,000/-, for its contribution of Technology to Development. Inthe press release announcing the prize, the Development Gateway Foundation noted that throughthis program:Grameen has created a new class of women entrepreneurs who have raised themselves frompoverty. Moreover, it has improved the livelihoods of farmers and others who are providedaccess to critical market information and lifeline communications previously unattainable insome 28,000 villages of Bangladesh. More than 55,000 phones are currently in operation, withmore than 80 million people benefiting from access to market information, news from relatives,and more.Struggling members programIn 2003, Grameen Bank started a new program, different from its traditional group-basedlending, exclusively targeted to the beggars in Bangladesh. This program is focused ondistributing small loans to beggars. The existing rules of banking are not applied, the loans arecompletely interest-free, the repayment period can be arbitrarily long, for example, a beggartaking a small loan of around 100 taka (about US $1.50) can pay only 2.00 taka (about 3.4 UScents) per week and furthermore the borrower is covered under life insurance free of cost.CASE STUDY ON: 1) SKS Finance:Introduction-
SKS Microfinance Limited" (SKS) is a non-banking finance company (NBFC), regulated by theReserve Bank of India. SKS claims its mission is to eradicate poverty by providing financialservices to the poor. The company operates across these 19 states of India: Andhra Pradesh,Karnataka, Maharashtra, Orissa, Madhya Pradesh, Bihar, Uttar Pradesh, Rajasthan, Uttaranchal,Himachal Pradesh, Haryana, West Bengal, Jharkhand, Chhattisgarh, Gujarat, Kerala, TamilNadu, Punjab and Delhi.SKS has become India‘s largest and one of the world‘s fastestgrowing microfinance organizations. Founded in 1997 by the now chairperson Vikram Akula,SKS as of December 31 2010, has 7.7 million clients (2010) in 2,403 branches in the 19 statesacross India . The company charges an interest rate of 24.55%, per annum across India, arelatively low amount for microfinance interest, and hold a 99% repay rate.‖SKSs hopes "to serve 50 million households across India and other parts of the world and also tocreate a commercial microfinance model that delivers high value to our customers". Which isalong the lines of micro finance goals of eradicating poverty.SKS practices a standardised processes of delivering and recovering loans, which enables themto reach out to the most customers cost effectively. They are able to expand the business to reachfurther villages by charging a small interest rate, one that clients are willing to pay in order toavoid starvation, poor money management, or government loan sharks.The Case-ALITTLE more than 18 months later, SKS went on to become one of the most storied initialpublic offerings (IPOs) in recent history. The stock listed in August 2010 at Rs 1,036 (offer pricewas Rs 985); the roughly Rs 1,600-crore issue was oversubscribed more than 20 times.But just a few months later, in October 2010, the company was hit by a series of setbacks;murmurs about suicides of microfinance borrowers in rural Andhra Pradesh began to makeheadlines in the local press, and SKS featured prominently in them, along with other companies.Then, there was the unceremonious sacking of CEO Suresh Gurumani —Vikram Akula hadearlier become non-executive chairman — that raised a number of eyebrows.In October 2010, the Andhra Pradesh government issued the Andhra Pradesh MicrofinanceOrdinance — which was passed as an Act by the Legislative Assembly in December 2010 —that severely hampered the company‘s operations in the motherland of microfinance by puttingseveral restrictions and conditions on the conduct of business.SKS is not only India‘s most high-profile microfinance institution, but in public perception, it isalso the leader and the proxy for the microfinance industry in India — at least the avatar ofmicrofinance that we have currently. It has a charismatic leader who has been featured in Time
magazine; the firm was expected to change the nature of how the poor are financed.Some of the biggest and most professional investors have put money into it. The controversiesand the decline of SKS is a cautionary tale of how a great dream is on the verge of crumblingwhich brings us to the present.Bad PortentsIn May 2011, a report by equity analysts at JP Morgan Asia Pacific Equity Research downgradeda stock that was already under pressure and reduced its value to half the listing price ahead ofSKS‘s fourth quarter financial results. The report argued that most of the AP loans — the APbook, that is — was seriously impaired and that the company would have to take losses (thestate‘s ordinance said collections could be made monthly but not weekly, restricting the flow ofthe business‘s lifeblood).A similar report from Credit Suisse suggested that the performance in the fourth quarter — andthe losses — could stretch through 2011-12 (FY12). Other analysts went as far as to say it couldgo into FY13.Some say that a large part of the SKS story remains untold. ―The latest developments are anunfortunate confluence of circumstances, but perhaps inevitable,‖ says the head of a leadinginvestment banking firm. ―Reconciling the rhetoric of poverty alleviation through microfinancewith the commercial success and a few people getting very rich is going to be a mammoth task.‖The speed at which the SKS success story unravelled has raised several questions. First, wasAkula‘s revolving door entry and exit as chief executive sensible? Second, does his leadershipstyle — some people called it ―arrogant‖ — cause more harm than good? Third, will the AndhraPradesh Microfinance Institutions (Regulation of Moneylending) Act 2010 strike a body blowthat the company will take time to recover from? Fourth, what will the future be like for SKSMicrofinance?
Secondary Data: Status of MFI in India-Progress under Microfinance – Highlights 2010:Total MFIs: 1933Gross loan portfolio: 64.9 billion US dollarsDeposits: 27.0 billion US dollarsNumber of borrowers: 91.2 millionAverage loan balance per borrower: 534.5 US dollars Sl. No. Range ( Loan size) Number of loan Amount of loan Rs. Average accounts loan amount Rs. 1 Rs. 0 to Rs.500 46,687 (37.3%) 1,72,52,074 ( 9.7 %) 370 2 Rs. 500-Rs. 1000 37,125 (29.7%) 3,48,79,579 (19.5 %) 940 3 Rs.1000 to Rs. 3,0382 (24.3 %) 6,16,59,704 ( 34.5%) 2,029 3000 4 Rs. 3000 to Rs. 7591 (6.1 %) 3,39,40,225 ( 19.0%) 4,471 5000 5 Rs. 5000 to Rs. 1326 (1.1 %) 82,59,600 (4.6 %) 6,229 7000 6 Rs. 7000 to Rs. 1329 (1.1 %) 1,23,93,264 (6.9 %) 9,325 10000 7 Rs. 10,000 to Rs. 366 (0.3%) 48,61,456 (2.7 %) 13,283 15,000 8 Rs. 15,000 and 229 (0.2 %) 54,74,722 (3.1 %) 23,907 above Total 1,25,035 (100%) 17,87,20,624 (100%) 1,429
It can be seen that the size of loan accounts was very small as nearly about 91 % loan accountswere in the size class below Rs. 3000.( 60 US$). Even in the case of amount of loan taken,nearly 64 % of the loans were below Rs. 3000 indicating preponderance of small loans. Cateringto such ‗small‘ demand has been virtually impossible for the formal banking system in the past,mainly due to the high transaction and process costs involved.Utilization of borrowed funds: Purpose % share in number of loan % Share in loan amount accounts Consumption 35.27 28.99 Agricultural loans 53.37 57.41 Off-farm enterprises 7.98 10.95 Loans for education 3.38 2.65 100 100The data show that agricultural loans (crop cultivation expenses) was the most important purposehaving a share of about 53 % in the loan accounts and 57 % share in the loan amount. This wasfollowed by consumption loans which accounted for about 35 % in the loan accounts and about29% in the loan amount. Evidence of some diversification in terms of borrowing for enterprisesfor non agricultural purposes is also available. The purpose wise borrowing pattern for the BPLand Non BPL members remained more or less the same, indicating that such economicsegregation between the two categories is only illusory. In real life situations, money is fungible.Borrowing from the SHGs therefore, had given the borrowers the required flexibility to managetheir consumption and working capital needs simultaneously.source: http://www.nabard.orgDifferent Models of Microfinance- In this section, the data for the year 2009-10 alongwith a fewpreceding years have been presented and reviewed under two models of microfinance involvingcredit linkage with banks : (i) SHG - Bank Linkage Model : This model involves the SHGs financed directly by the banks viz., CBs (Public Sector and Private Sector), RRBs and Cooperative Banks.
(ii) MFI - Bank Linkage Model : This model covers financing of Micro Finance Institutions (MFIs) by banking agencies for on-lending to SHGs and other small borrowers.In addition, to the SHG-Bank linkage model and MFI-Bank linkage model, Small IndustriesDevelopment Bank of India (SIDBI) has also supported MFIs. The details for the year 2009-10are presented below:
Micro Finance India Summit 2010: The State of the Sector 2010 indicates abated growth compared to previous years. The sector grew at 18% in 2009- 10. But this growth came by focusing on outreach rather than the deepening of service offerings and this needs to be corrected. 2008-09 2009-10 Growth %No of borrowing members - 54 62.4 16SHGs -mnNo of MFI customers - mn 22.6 26.7 18Outstanding Bank loans to 222 280 26SHGs Rs bnOutstanding MFI loans to 117 183 * 36customers Rs bn* Does not include portfolio managed on behalf of other institutions Rs 42 bn • Total microfinance clients exceed 100 mn • MF outstanding as % of bank credit 1.4 • Total bank loans to MFIs – Rs 14 bn • Average per capita MFI loan – Rs 6060 • Average per capita SHG loan – Rs 4450 • Equity inflow through PE/VC – $ 209 mn Andhra Tamil Karnataka West Orissa Pradesh Nadu BengalNumber of poor 2.52 2.91 2.77 4.16 3.56families
No of microfinanceclients (SHG+MFI) 25.36 11.59 7.64 10.14 6.4MFI clients to poorhouseholds ratio 10.1 4.0 2.8 2.4 1.8MFI clients to totalhouseholds ratio 1.6 0.9 0.7 0.6 0.8Total MF loans o/s(SHG+MFI) 169.49 64.46 46.06 34.34 27.16Average loans perpoor household 67258 22151 16628 8255 7629 2) M-CRIL India Indices of Microfinance 2010, the growth of the largest Indian MFIs in 2009-10 continued to be stronger than is desirable. Growth in 2009-10 was 43% for borrowers and 76% for portfolio, only slightly reduced from the 53% average for the previous two years after adjusting for multiple lending. CRILEX which is the M-CRIL India MFI Growth Index has also reached 14, 799 mark in March 2010.The largest 24 institutions together serviced a portfolio of Rs 18,400 crore ($4 billion) throughabout 17 million clients (estimated after allowing for multiple lending) and while the Top5 MFIscontinued to grow strongly the Next10 made up for last year‘s slowdown, and the Following 9also gathered pace.The portfolio growth for top 5 MFIs stood at around 110%, slightly less than the portfoliogrowth of Following 9 which was 120%. The Next 10 MFIs have however reported an 80%growth in their numbers of borrowers which is the highest among the largest MFIs in India.
As might be expected, loan portfolios are growing more strongly than numbers of borrowers butthe extent of multiple borrowing is nevertheless increasing with a conservative 40% estimate (byM-CRIL) of the extent of multiple borrowing.The index shows that while in the past it was the largest MFIs that created competitive pressuresand grew aggressively now MFIs of all sizes have joined the race.2009:India‘s Microfinance institutions reached 76.6 million against last year‘s 59 million, according tothe ―State of the Sector Report‖Compiled by N. Srinivasan, the report was released as part of the annual Microfinance IndiaSummit 2009Some quick highlights of the report are:* MFI‘s have recorded about 8.5 million clients during the year 2008-09, a growth of 60% overthe previous year.* More than 50 percent of low income households are covered by some form of microfinanceproduct* The total outstanding microfinance loans posted a growth rate of 30% or 359.39 billion overthe last year‘s level of Rs 229.54 billion.* The overall coverage of the sector is estimated to have reached 76.6 million against 59 Millionlast year.* The SHG loan outstanding has increased by Rs. 71.5 billion with an addition of 6.9 millionclients.* At the current growth rates, MFIs might outstrip the SBLP in portfolio volumes soon.* Some parts in Karnataka faced entrenched default constituting a portfolio share of less than0.5%.* MFIs so far reached 234 of the 331 poorest districts identified by the government.* SBLP regstered a decline of number of women SHGs from 82.5% in March 2007 to 80.4% inMarch 2008.* The microfinance penetration index shows especially in Bihar, Madhya Pradesh, Rajasthan and
Uttar Pradesh compared to extraordinary levels reached in Andhra Pradesh, Karnataka and TamilNadu.While last year‘s report focused on the increased risk in the sector, this years‘ report takes stockof the uninterrupted growth rate of the sector despite several internal and external adversities.The 50 Top Microfinance Institutions: source- http://www.forbes.comRANK NAME COUNTRY SCALE EFFICIENCY RISK RETURNS 1 ASA Bangladesh 14 83 56 40 2 Bandhan (Society and NBFC) India 108 49 42 1 3 Banco do Nordeste Brazil 46 27 213 25 4 Fundación Mundial de la Mujer Colombia 58 72 193 1 Bucaramanga 5 FONDEP Micro-Crédit Morocco 119 26 196 1 6 Amhara Credit and Savings Institution Ethiopia 56 126 118 42 7 Banco Compartamos, S.A., Institución de Mexico 15 24 295 11 Banca Múltiple 8 Association Al Amana for the Promotion Morocco 17 212 133 1 of Micro-Enterprises Morocco 9 Fundación Mundo Mujer Popayán Colombia 53 181 141 1 10 Fundación WWB Colombia - Cali Colombia 27 206 155 4 11 Consumer Credit Union Economic Russia 82 300 19 1 Partnership 12 Fondation Banque Populaire pour le Morocco 59 126 219 1 Micro-Credit 13 Microcredit Foundation of India India 75 142 7 185 14 EKI Bosnia and 66 102 242 1 Herzegovina
15 Saadhana Microfin Society India 263 79 73 116 Jagorani Chakra Foundation Bangladesh 136 176 128 117 Grameen Bank Bangladesh 8 280 100 6218 Partner Bosnia and 64 169 230 1 Herzegovina19 Grameen Koota India 209 106 156 120 Caja Municipal de Ahorro y Crédito de Peru 48 99 222 119 Cusco21 Bangladesh Rural Advancement Bangladesh 10 159 126 205 Committee22 AgroInvest Serbia 84 195 222 123 Caja Municipal de Ahorro y Crédito de Peru 20 163 220 101 Trujillo23 Sharadas Womens Association for India 229 207 55 13 Weaker Section24 MIKROFIN Banja Luka Bosnia and 60 240 205 1 Herzegovina25 Khan Bank (Agricultural Bank of Mongolia 19 149 280 59 Mongolia LLP)26 INECO Bank Armenia 96 173 202 3927 Fondation Zakoura Morocco 51 268 194 128 Dakahlya Businessmens Association for Egypt 200 215 102 1 Community Development29 Asmitha Microfin Ltd. India 80 254 73 11130 Credi Fe Desarrollo Microempresarial Ecuador 28 252 206 34 S.A.31 Dedebit Credit and Savings Institution Ethiopia 50 246 80 15432 MI-BOSPO Tuzla Bosnia and 128 120 283 1 Herzegovina33 Fundacion Para La Promocion y el Nicaragua 173 89 171 100 Desarrollo
34 Kashf Foundation Pakistan 123 194 219 1 35 Shakti Foundation for Disadvantaged Bangladesh 170 221 151 1 Women 36 enda inter-arabe Tunisia 198 90 257 1 37 Kazakhstan Loan Fund Kazakhstan 120 118 320 1 38 Integrated Development Foundation Bangladesh 300 134 140 1 39 Microcredit Organization Sunrise Bosnia and 114 103 341 17 Herzegovina 40 FINCA – ECU Ecuador 125 138 264 54 41 Caja Municipal de Ahorro y Crédito de Peru 23 126 220 215 Arequipa 42 Crédito con Educación Rural Bolivia 135 152 298 1 43 BESA Fund Albania 109 135 345 1 44 SKS Microfinance Private Limited India 61 395 141 1 45 Development and Employment Fund Jordan 83 388 135 1 46 Programas para la Mujer - Peru Peru 292 82 242 1 47 Kreditimi Rural i Kosoves LLC (formerly Kosovo 213 158 247 1 Rural Finance Project of Kosovo) 48 BURO, formerly BURO Tangail Bangladesh 137 207 186 91 49 Opportunity Bank A.D. Podgorica Serbia 49 234 319 23 50 Sanasa Development Bank Sri Lanka 86 206 93 241Top 10 Biggest mFIs in India1 SHARE2 Spandana3 SKS4 SKDRDP5 MFI6 AML7 BASIX8 Bandhana9 Cashpor MC
10 GV List of Micro Finance Companies: 1. Basix 2. Spandana 3. SKS micro finance 4. Share Micro Finance 5. Birla Global Finance 6. Sriram Transport and Finance 7. India bulls Credit services 8. Cholamanadlam-Group 9. GE Money 10. Reliance Money 11. M & M finance 12. Sundaram Finance 13. Anagram Finance 14. VLS Finance 15. IDFC 16. BLB 17. India bulls financial services 18. Ratnabali Capital services 19. ACCESS Development Service 20. UTI 21. ING Vyasa 22. Met Life 23. ICICI bank
24. HDFC Bank25. ING Vysya Life insurance26. IDBI27. Standard Chartered28. Future Money29. Equinox30. GE Money31. IFC